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COMPANY LAW I SYNOPSIS

BONDS: SECURED INVESTMENT


BY: BHAGWAT SHARMA; BC0140019

INTRODUCTION

Bonds are instruments of finance that are used to gather huge sums of money by both
governmental and corporate bodies. Government needs funds for infrastructure projects to social
programmes and companies need money to expand their business since the requirement of
money cannot be met by banks. Therefore, money is raised by issuing bonds in public markets.
Interest are paid by the borrower of the bond to the investor at fixed rate, this interest rate is
called coupon. Bonds have a maturity date on which the issuer pays the borrowed amount to the
investor. This maturity rate can vary from 1 day to 40 years.
A person holding bonds is a creditor to the company, he does not enjoy any voting rights as in
the case of stocks, he has no share in the profits of the company but enjoys a fixed interest rate
(coupon), in case of a bankruptcy he will be given preference over the shareholder. Bonds are
preferred over stocks because in stock a huge amount of risk is involved. A retired person cannot
think to invest his money in risky ventures as now he does not have a fixed income. There are
different types of bonds like government bonds which are issues by the central government,
municipal bonds issued by the city municipalities, corporate bonds in which a company can issue
bonds just like it issues shares, though these bonds carry higher risks than bonds issued by the
government but this is compensated by the higher coupon rates offered by corporate to attract the
investors, zero coupon bonds in which no interest is paid. These bonds are issued on discount
and redeemed at par.
It is concluded that bonds are both a secured and a unsecured form of investment it all

depends on the type of bond that an investor goes for and from which issuer. The interest on
bond depends on whether the economy is going through an inflation phase or not. The rate of
interest is also dependent on the maturity period of the bond.

RESEARCH PROBLEM

/ STATEMENT OF PROBLEM

It is often said that bonds are a secured form of investment and there are no risks in bonds but it
is not so the present paper analysis and discusses the debate whether bonds are a secured form of
investment or not. Investors have the notion that interest paid on bonds are less in comparison to
stocks and once money is invested in bonds it can only be redeemed after the bonds get matured,
the paper also discusses about the various aspects of bonds that are not known to investors like
the regulators in the market and the role played by them.

REVIEW OF LITERATURE

Raghavan, S. and D. Sarwano (2012), "Development of the Corporate Bond Market in


India: an Empirical and Policy Analysis", International Conference on Economics and
Finance Research, IPEDR Vol. 32

The author tells that in case of India, unlike economies like Korea, the development of the
government bond market had a positive effect on the corporate bond market.

Hayne E. Leland, Corporate debt value, bond covenants, and optimal capital structure, 49:4 THE
JOURNAL OF FINANCE, 12131252(1994)

This article talks about the interest rate paid on debt security is tax deductible.

Bond investing Risk, CNN Money, (2014)


http://money.cnn.com/magazines/moneymag/money101/lesson7/index5.htm

This article talks about Credit risk. All bondholders are not able to make payments on time this
depends on their credit rating and their financial health, there are financial institutions like Standard
& Poor's and Moody's that evaluate the credit worthiness of corporations and governments and then

provide them with credit rating (AAA rating is provided to strongest issuer with high credit
worthiness)

Paul Conley, The Risk of bond Investing: understanding dangers in fixed income investing,
(2014)

http://bonds.about.com/od/bonds101/a/bondrisk.htm

This article deals with the call risk which are associated with corporate and municipal bonds
where the issuer of the bonds has an option to call back or redeem the bonds before its maturity
and they are paid at par.

http://sebiupdates.blogspot.in/2009_11_01 archive.html

This blog states that SEBI has amended the debt listing agreement for debt securities. As per
the amended circular the issuer has to maintain a 100% asset cover to discharge the principal
amount for the debt securities at all times. Earlier only those companies had to maintain a
100% security covers which issued secured debt securities.

Dr. G K Kapoor & Sanjay Dhamija, Company Law, ( 18 th edn, Taxmann Publication Pvt
Ltd 2015), the researcher chose this book:
(a) To know about meaning of bonds.
(b) To know about the rules regarding bonds.

Avtar Singh, Company Law, ( 16th edn, Eastern Book Company 2015), the researcher
chose this book:
(a) To know about the different types of bonds.
(b) To know advantages and disadvantages of bonds.
Dr. G K Kapoor & Sanjay Dhamija, Company Law and Practice, ( 20 th edn, Taxmann
Publication Pvt Ltd 2015), the researcher chose this work:
(a) To know about the Government Securities Act, 2006
(b) To know about the debt and equity.

RESEARCH METHODLOGY
SCOPE, OBJECTIVE AND SIGNIFICANCE

The following Project aims to study different aspects of bonds. The present study has condensed
the topic into why are bonds considered as secured investment option by the investor, the study
further discusses what bonds are and the risks associated with it and the protection of the
creditors with a comparative analysis between Debt and equity along with the advantages and
disadvantages of bonds.

RESEARCH QUESTIONS

1. Why are bonds considered as secured investment or a better investment option?


2. How are creditors protected?
3. What is the debate on Debt v. equity?
4. What are the various Advantages and risks involved with bonds?
5. How are bonds classified and their various types?

HYPOTHESIS
In order to conduct a research work, some important hypothesis are to be formulated. The focal
points and assumptions are normally available through the formulation of Hypothesis. The major
hypothesis developed on the basis of study of available literature and evaluation of primary as
well as secondary data and work done earlier including related studies is that that bonds are both
a secured and a unsecured form of investment it all depends on the type of bond that an investor
goes for and from which issuer.
TENTATIVE CHAPTERIZATION

CHAPTER-I

Introduction

CHAPTER-II

Meaning of Bonds
Variety of Bonds
Advantages and disadvantages of Bonds

CHAPTER- III

Protection of Creditors
Protection by means of regulation

CHAPTER- IV

Government Securities Act, 2006


Amendment for debt securities
SEBI: Protection of Investors Interest
Debt v. Equity

CHAPTER V
Conclusion
Bibliography

WORKING BIBLIOGRAPHY:

PRIMARY RESOURCE:
STATUTES:
SEBI Act, 1992
Government Securities Act, 2006

SECONDARY RESOURCES:

ARTICLES REFERRED:

Hayne E. Leland, Corporate debt value, bond covenants, and optimal capital structure, 49:4 THE
JOURNAL OF FINANCE, 12131252(1994)
Bond investing Risk, CNN Money, (2014)
http://money.cnn.com/magazines/moneymag/money101/lesson7/index5.htm
Paul Conley, The Risk of bond Investing: understanding dangers in fixed income investing,
(2014)
http://sebiupdates.blogspot.in/2009_11_01 archive.html

Raghavan, S. and D. Sarwano (2012), "Development of the Corporate Bond Market in

India: an Empirical and Policy Analysis", International Conference on Economics and


Finance Research, IPEDR Vol. 32
BOOKS REFERRED:
1. Dr. G K Kapoor & Sanjay Dhamija, Company Law and Practice, ( 20th edn, Taxmann
Publication Pvt Ltd 2015).
2. Avtar Singh, Company Law, ( 16th edn, Eastern Book Company 2015).
3. Dr. G K Kapoor & Sanjay Dhamija, Company Law, ( 18th edn, Taxmann Publication Pvt

Ltd 2015).