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Mezzanine financing is defined as a financial instrument which is a mix of ‘debt and equity’ finance. It is a debt capital that gives the lender the rights to convert to an ownership or equity interest in the company. It is listed as an asset on company’s balance sheet. As it is treated as equity in a company’s balance sheet, it allows the company to access other traditional sources of finance.
In the hierarchy of creditors, mezzanine finance is subordinate to senior debt but ranks higher than equity. The return on mezzanine finance is higher in relation to debt finance but lower than equity finance. It is also available quickly to the borrower with little or no collateral. The concept of mezzanine financing is just catching up in India. Mezzanine financing is used mainly for small and medium enterprises, infrastructure and real estate. ICICI Venture’s Mezzanine Fund was the first fund in India to focus on mezzanine finance opportunities.