[By Saaransh Shukla & Isabel John]
The authors are the students of the Narsee Monjee Institute of Management Studies.
INTRODUCTION
As we all know, share capital is the main source of finance for companies. Since companies may need additional amounts of money periodically, they cannot issue shares every time. However, they can raise money from the public. Around the world, companies, organizations, corporations and other entities raise money from different sources for the purpose of financing.
As we all know, share capital is the primary source of funding for businesses. Since businesses may require additional funds on a regular basis, they cannot issue shares every time. They can, however, raise funds from the general public. Companies, organisations, businesses, and other entities all over the world raise funds from various sources in order to finance their operations.
In this article, one such means of raising capital, i.e., ‘Wimbledon Debentures’ is considered. With the elucidation of the concept of the Wimbledon Debentures, the proposition is further assessed in relation to the Indian debt market. The paper explores if the Wimbledon Debenture model could be inculcated in the different industries in India, whether such debt financing would be useful and the issues that may occur in its practical application.
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WHAT ARE WIMBLEDON DEBENTURES?
It’s Not A Bond, Not A Stock, Not A Ticket – It’s A “Wimbledon Debenture”
The word ‘debenture’ has been derived from the Latin word ‘debere’ which means to borrow. The debenture is a written instrument acknowledging a debt under the common seal of the company. The money raised from the public is a loan that is further divided into units of small denominations. Each unit is called a ‘debenture’ and the holder of such units is called a Debenture holder. Even though the cash raised by debentures turn into a part of the organization’s capital structure, it doesn’t get to be share capital. Therefore, debentures are a widely recognized type of long haul credit that can be taken out by a company. These credits are regularly repayable on a date and pay a fixed rate of interest. Generally, debentures are issued for starting new projects, expansion of the company, refurbishments or improvements of the company, mergers, acquisitions, etc.
Swen Lorenz, the author of the blog ‘Undervalued Shares’ claimed that the Wimbledon Debenture is a very quirky security and rightfully so. The Wimbledon Debentures are unsecured but still if we see the last trading price of one debenture was 110,600£, that is huge for an unsecured debt. The Wimbledon Debentures have played a significant role in the history of Wimbledon. The money raised from issuing these Debentures funds the improvements in and around the Wimbledon Grounds solely for the benefit of the esteemed guests. By the purchase of each Debenture, the holder is provided with a premium seat on Centre Court or No.1 Court for the Championships for a period of five years.
With the increasing popularity of the sport and the ever-burgeoning public demand, the AELTC raised funds via debentures to purchase and expand their grounds. Presently, the Championships from 2021-2025 are covered under the current series of the Centre Court Wimbledon Debentures.
Usually, subscribing to an issue of debentures or bonds requires coughing up a cash investment. But with Wimbledon Debentures, one can pay the cash in phases throughout the duration of the debentures and there is no interest rate payment. Technically speaking, the debentures are zero-coupon debt security that comes with the dividend in the form of ‘tickets’. Then the debenture holders receive access to the best sought-after seats for five years with no additional payment, access to exclusive restaurants and bars, car parking, transferable tickets, etc. As a holder, the daily tickets can either be sold privately or can be transferred to anyone at any price. In April 2018, the Centre Court Wimbledon Debentures (2016-2020) were trading at over £100,000 each.
The Wimbledon Debentures model is slightly distinct from the usual debt financing carried out by companies. In comparison to the way debentures are normally issued, the Wimbledon Debentures pay no interest over the life of the security, instead, they are entirely in the form of tickets. As per the prevailing laws, the Debentures are also exempt from the Capital Gains Tax.[1] Looking at the success rate of this form of raising funds, it will be interesting to see if some other companies or corporations engage in debt financing similar to the Wimbledon Debentures model.
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WIMBLEDON DEBENTURES MODEL – INDIAN PERSPECTIVE
According to the Companies Act (2013), the term debenture is defined under Section 2(30). Generally, debentures are issued for starting new projects, expansion of the company, refurbishments or improvements of the company, mergers, acquisitions, etc.
Firstly, the Wimbledon Debentures fall within the definition of Qualifying Corporate Bonds (QCBs). In layman terms QCBs are exempted from capital gain taxes. In many countries including India, bonds and debentures are used interchangeably but they have certain differences. Bonds are issued generally by government agencies/large corporations but debentures are issued by companies. Bonds are backed by assets and are thus, secured, unlike debentures which may or may not be backed by assets (secured or unsecured). In debentures, the rates of interest are generally higher when compared to bonds. Additionally, the risk factor is lower for bonds and during repayments, bondholders are given priority over debenture holders.
It is pertinent to note that the Wimbledon Debentures are unsecured, but people still purchase them. In the Indian market, the Securities and Exchange Board of India (“SEBI”) has made the process of buying and selling secured debentures difficult for the potential holders. Thus, it is assumed that companies may shift to issuing unsecured debentures in the market and making the technical process easier.
Under the provisions of the Companies Act (2013) of India, the power to issue debentures can be exercised on behalf of the Company with a meeting of the Board as per Section 179 (3). Section 71 is related to the issuance of debentures along with the penalties for non-compliance of the same. If the companies want to issue unsecured debentures, whether private or public if they properly comply with S. 71, they can issue the unsecured debentures.
Considering the companies want to issue unsecured debentures, even if a private company complies with Section 71, a private company can issue unsecured debentures too.
Further, Section 76 mentions that a company can accept deposits. Unless listed on any recognized Stock Exchange, the Companies (Accepting Deposits Rules), 2014 enable the companies to issue these unsecured debentures as deposits.[2]
SEBI has not specifically mentioned in its statutes, rules, or guidelines about where a company should use its money which is raised through accepting deposits from the public or by issuing debentures whether secured or unsecured. But in accordance with Section 26, the company has to mention what will they do with the money that they are raising in the prospectus.
Another instrument similar to the Wimbledon Debentures that can be implemented in India is Zero Interest bonds. Recently introduced in India, it is usually a convertible debenture that yields no interest. The company does not pay any interest on such debentures. But the investor in a zero-interest bond is compensated for the loss of interest through the conversion of such bond into equity shares at a specified future date. Issuing such debentures is beneficial to the companies as it helps to service its equity, no interest is paid and the conversion usually occurs once the project is underway. This also helps in reducing the costs to the extent of interest during the period of the project.
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APPLICATION OF THE WIMBLEDON DEBENTURE MODEL
Bearing in mind that the Wimbledon Debenture model can be exercised potentially under the provisions explained in the above section, it is important to look at which sectors of India can consider the Debenture model as a mode of financing. Countries around the world have introduced debenture in infrastructure, sports, education, etc. Herein, we attempt to introduce and explore if the application of the model is feasible in a country that is predominantly dependent on bank-based financing options.
- Sports
By introducing the concept of debentures identical to the Wimbledon debentures in India wherein sports, specifically cricket, is revered greatly, the model could reasonably be replicated. Sports companies and corporations can issue debentures or bonds under the applicable regulations and laws to the public. The capital raised from the debentures could be used as funding for stadiums. In exchange for a low rate of interest, the debentures could offer the holders premium tickets, along with other facilities. Drawing inspiration from the Wimbledon events, debentures issued for cricket games or any other major sports event could increase engagement and revenue creation, thus allowing the funding requirements to be settled.
- Education
Traditionally, the schools and institutions in India are funded by the Government or private entities. Debentures could be issued by the institutions and bought by the parents of the child. The interest raised from the amount could be used for any funding requirements of the institution. The principal amount could be refunded to the parents after the student leaves. Such a system already widely exists in schools and pre-schools of Hong Kong. Additionally, companies purchase debentures for their employees’ children that help in the process of allocation of seats. Some schools in Dubai have also followed suit.
- Infrastructure
The issuing of corporate bonds/debentures by private entities can pave the way for securing finance for infrastructure projects. In light of an environmentally conscious generation, green bonds are also financing options that must be employed in India. Taking the example of Brazil, infrastructure debentures are the financial instrument primarily dealing with the funding of infrastructural projects. Another example is the cities of Canada, Ottawa and Toronto, which have a ‘Green Debenture Program’. This program issues green bonds and raises funds from the public for projects that help the country achieve the environmental and sustainable goals that are envisioned by the United Nations.
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ANALYSIS
India’s corporate bond market is considerably less than developed economies. In Asia, India ranks lower than China and South Korea as well. In 2018, the Corporate Bonds to GDP ratio of developed countries like the USA was at 123% and India was at 17%. A deep-rooted corporate bond market has not found a firm footing in the country yet due to an increased reliance on the bank-based financial system in India. The fiscal burden on the government in India during the pandemic has also been overpowering. By adopting alternate means of financing, there would be confidence among investors to explore the corporate bond markets and bridge the expanding gap in financing methods between developed countries and India.
The Wimbledon Debentures are essentially corporate bonds that cannot be converted nor do the debenture holders receive any interest. It could be compared to the system of zero-coupon bonds that are extremely similar. Interestingly, the Government decided to issue zero-coupon bonds as an innovative financing tool to capitalize Punjab and Sind Bank, however, the RBI raised certain concerns regarding the nature of these bonds. These bonds were not transferable or tradable, did not carry interest and could only be issued by certain banks, which stands to be extremely restrained. Further, under Section 2(48) of the Income Tax Act (1961), zero-coupon bonds can only be issued by infrastructural companies and public sector companies. Thus, there is a noticeable difference in the way traditional bonds and these zero-coupon bonds operate.
CONCLUSION
In the emergence of a corporate bond/debenture-based financing system, the regulatory and legal bodies have to be better equipped to support a well-developed bond market. By doing so, it is ensured that the authorities can provide a form of framework whilst simultaneously trying to get accustomed to the changes in the bond market. Alternate forms of financing, like the Wimbledon Debentures, can prove to be quite advantageous once introduced and applied in the Indian landscape.
[1] Taxable of Chargeable Gains Act, 1992, Section 117. (UK)
[2] Companies (Accepting Deposits Rules) 2014, Section 2(1)(c).