Market Study: Mezzanine Financing

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Mezzanine in India – Market Study Mezzanine Financing Mezzanine is a type of financing which allows companies to obtain loans for expansion without offering any collateral. However if the business defaults on the loan the lender can convert the loan into an ownership stake, thus making it a hybrid of debt and equity financing. Through mezzanine financing business owners can quickly generate capital without the need to issue the shares of the company. In case of default the outstanding amount is converted into appropriate ownership share which can be sold or transferred depending on the lenders discretion. It is usually a subordinate to debt provided by senior lenders such as venture capital companies and banks. However the interest rates are quite high in mezzanine financing to account for the minimal due diligence, no collateral and low priority given to mezzanine financing with respect to repayments of the company’s loan obligations (senior debts). Mezzanine financing is treated as equity in the company’s balance sheet and hence makes it easier for the company to obtain financing from banks. To obtain mezzanine financing a company must be a reputed player in the industry with a history of profitability and viable expansion plans. Indian Market Mezzanine products have grown increasingly popular in the recent years. Since it does not involve any collateral it emphasizes on legal terms, contracts etc. It was originally developed in the North American markets but now is an established financial instrument in European markets as well. Indian sub-debt market has three main players: a) SIDBI : has given generous debts to top MFIs b) FIIs: subscribe to sub debt of the company where they already have a stake. c) IFMR : support ... ... middle of paper ... ...lauses • Subordinated debt instruments shall not be issued with a ‘put option’. Call option may be exercised after the instrument has run for at least five years Conclusion: Mezzanine products earlier found competition from banks but contraction of global credit risk have made mezzanine financing more appealing. The market for Mezzanine funds are not developed in India, some sort of financing is available but to the upper strata of enterprises. Though it is difficult to find Mezzanine investment deals due to lack of knowledge, Mezzanine financing is steadily rising to plug the gap between growth capital supply and demand and the trend shows that mezzanine loans will appear more frequently as a financing option in the next two years. Due to the flexibility and its structure, in a growing economy like India, Mezzanine financing is an extremely useful financing option.

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