Under the Industrial policy of 1991:a)The mandatory convertible clause...
A mandatory convertible is a security that automatically converts to common equity on or before a predetermined date. This hybrid security guarantees a certain return up to the conversion date, after which there is no guaranteed return but the possibility of a much higher return.
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Under the Industrial policy of 1991:a)The mandatory convertible clause...
**Explanation:**
The Industrial Policy of 1991 was a landmark policy that introduced significant changes in the Indian economy. It aimed to liberalize and deregulate various sectors, promote private investment, and open up the economy to international trade and investment. One of the key elements of this policy was the introduction of the mandatory convertible clause for term loans.
**1. Background of the Mandatory Convertible Clause:**
Before the Industrial Policy of 1991, term loans provided by financial institutions to industrial units were typically repayable over a long period, often exceeding 10 years. These loans were generally provided at subsidized interest rates and had a significant impact on the financial health of the lending institutions.
**2. Purpose of the Mandatory Convertible Clause:**
The mandatory convertible clause was introduced to address the issue of long-term loans and their impact on the financial institutions. It mandated that a certain portion of the term loan, typically 25-40%, should be converted into equity shares of the borrowing company within a specified period.
**3. Applicability of the Mandatory Convertible Clause:**
According to the question, under the Industrial Policy of 1991, the mandatory convertible clause is no longer applicable. This means that the clause is no longer a requirement for term loans provided by financial institutions.
**4. Rationale for the Removal of the Mandatory Convertible Clause:**
The decision to remove the mandatory convertible clause can be attributed to several factors:
a) **Liberalization of the Financial Sector:** The Industrial Policy of 1991 aimed to liberalize the financial sector, promote competition, and attract private investment. The removal of the mandatory convertible clause was part of this broader objective, as it reduced the regulatory burden on borrowers and provided greater flexibility in raising funds.
b) **Shift towards Market-oriented Policies:** The Industrial Policy of 1991 marked a shift towards market-oriented policies and reduced reliance on government intervention. The removal of the mandatory convertible clause was in line with this shift, as it allowed market forces to determine the terms and conditions of term loans.
c) **Emerging Capital Markets:** The 1990s witnessed the emergence of capital markets in India, with the establishment of stock exchanges and the increasing participation of institutional investors. This provided an alternative avenue for companies to raise capital, reducing the need for mandatory conversion of term loans.
**Conclusion:**
In conclusion, under the Industrial Policy of 1991, the mandatory convertible clause, which mandated the conversion of a portion of term loans into equity shares, is no longer applicable. This change was made to promote liberalization, reduce regulatory burden, and provide flexibility to borrowers in raising funds.
Under the Industrial policy of 1991:a)The mandatory convertible clause...
Its d
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