Period Ownership Source

Short Owners
Internal
term funds

Medium Borrowed External

term funds

Long
term
 For a period not exceeding 1 year.
 To meet working capital requirements
 Examples :-
› Short term bank loans in the form of
CC/OD/LC/Bills discounting.
› Trade credit from suppliers in form of Bills
Payable
› Public Deposits / Commercial Papers /
Certificates of Deposit
 Finance available for 1 to 3/5 yrs.
 To meet medium term expenses.
 Examples :-
› Public Deposits
› Medium term loans
 Funds for more than 5yrs.
 To meet long term requirement of funds
like purchasing Fixed assets / Expansion
/Diversification., etc.
 Examples:-
› Equity capital
› Preference capital
› Debentures
› Term loans from banks/financail instituions
› Retained Earnings
› Lease finance
› Venture Capital financing
 Equity share capital
 Preference share capital
 Retained earnings
 Debentures
 Loans from financial institutions & banks.
 Commercial papers
 Certificates of deposit
 Retained profits
 Depreciation fund
 All other sources of finance
 Hire Purchase / Installments
 Advances from Directors
 Indegenous bankers / money lenders
 Factoring
 Zero coupon bonds
 Deep discount bonds
 Secured Premiuim Notes
 Commercial Papers/ Certificates of Deposit
 Govt subsidy
 The Indian Companies Act, 1956 defines
shares as ‘a share in the share capital of the
company.’
 Shares represent ownership capital &
shareholders are paid dividend out of
profits.
 Concepts – Authorised capital / Issued &
Unissued capital / Subscribed capital /
Called-up capital / Paid-up capital / Calls-
in-arrears / Par value / Market value.
 TO THE COMPANY
› Permanent source of capital
› Dividend paid only when Co earns profits.
› Increases creditworthiness of the company in the
market
› No charge on assets of the Co like in case of debt
capital
 TO THE SHARE-HOLDERS
› Benefit through Dividend/Bonus/Rights shares
› Have a say in the company management
› Limited liability on liquidation
 TO THE COMPANY
› Cost of equity capital is high since dividend is not
a tax-deductible expenditure.
› Floatation cost is high (underwriting, advertising,
etc)
› Over capitalisation may hamper benefits of
trading on equity.
› Dilutes ownership & control.
 TO THE SHAREHOLERS
› In case of bankruptcy, shareholders may lose their
investment.
› Fluctuations in stock market prices increase risk.
 Share buy back is a mechanism used by
companies to re-engineer their capital
structure.
 The companies offer to buy the shares of
the company from its existing
shareholders for a compensation.
 Share buy-back helps in raising the EPS of
the company & thus maximising value to
shareholders.
• Redeemable
• Irredeemable

• Participating
• Non-participating

• Cumulative
• Non-cumulative

• Convertible
• Non-convertible
 They have no voting rights
 They have preference over equity
holders in terms of dividend & also on
assets at the time of liquidation.
 They are paid fixed dividends every year
irrespective of whether the company
makes profits or not.
 ‘An acknowledgement of debt, given under
the seal of the company & containing a
contract for the repayment of principal at a
specified date & interest at a fixed rate with
or without creating a charge on the assets of
the company.’
 Features :-
› Creditors of the company
› Mandatory payment of interest every year.
› No voting rights
› Benefit of trading on equity
› Interest is a tax-deductible expenditure.
• Redeemable
• Irredeemable

• Convertible
• Non-convertible

• Secured
• Unsecured

• Bearer
• Registered
 TO THE COMPANY
› Long-term source of finance
› Benefit of Trading on Equity
› No loss of control over management, since
no voting rights.
› Low cost of capital compared to equity.
 TO THE INVESTORS
› Fixedd income in form of interest
 Term loans is capital borrowed by the
company from banks or financial institutions
in return for fixed interest payments regularly
& secured against assets of the company.
 They maybe short/medium/long term loans.
 Banks conduct a project appraisal before
sanctioning a loan.
 The bank may create a Fixed charge or a
Floating charge against the firms assets.
Also, First or Second charge.
 ADVANTAGES
› Kd is lower than ke or kp.
› There is no dilution of control
› Term loans are backed by security.
DISADVANTAGES
› No voting rights
› mandatory to pay interest irrespective of
profits/losses
› Restrictive covenants
 When a company wants to mop-up
more capital, it may first offer shares to its
existing share-holders at a special offer
price which is below the market price.
 The shareholders may exercise their right
to buy such shares during the
designated period.
 ADVANTAGES
› Existing share-holders feel rewarded.
› Cost of capital is less.
› Easy & quick way to collect funds.
› Control remains in the hands of existing share-
holders.
 DISADVANTAGES
› Share-holders may not be interested if the market
value & dividends of the company are low.
 When additional shares are issued to existing
share-holders in the proportion of their share-
holding, for absolutely no compensation, it is
termed as Bonus issue.
 Advantages
› Managing liquidity by conserving cash dividend.
› Increases share-holders wealth
› Increases goodwill of the company.
 Disadvantages
› More liability to the company in respect of future
dividends.
› Market price per share reduces .
 Also known as Ploughing Back of Profits.
 FACTORS DETERMINING RE:-
› Earnings of the company.
› Economic environment in the country.
› Dividend policy of the company.
› Taxation & other Govt policies.
› Industry norms.
› Management philosophy.
 TO THE COMPANY
› No additional cost of capital incurred.
› Increases goodwill
› Useful during recession
› Management need not follow any restrictions from
banks/ fin institutions.
› Company gets a better bargaining power for loans.
 TO THE SHAREHOLDERS
› Maximises share-holders wealth due to huge reserves,
regular dividends, issue bonus shares.
 TO THE SOCIETY
› Increases capital formation
› Employment opportunities generated.
› Cost of production is reduced. Hence, cost of product
reduced.
› Companies can spend on CSR activities.
 Misuse by management.
 Over-capitalisation
 Loss of dividend to share-holders.
 CPs are unsecured promissory notes issued for
a period of less than 1 year by companies to
obtain short –term funds.
 Min. denomination of Rs.5 lakhs & multiples.
 Min credit rating of P2/ equivalent required.
 Eligibility for issuance of CP by companies :-
› Tangible net worth should not be less than Rs.4 cr.
› Sanctioned working capital limits by banks/ fin inst
› Borrowal accounts should be Standard assets.
 A transaction in which goods are lent on
hire with an option to the hirer to
purchase them on the payment of the
last installment.
 Possession is transferred immediately, but
ownership is transferred only on payment
of last installment.
 Leasing involves using an asset by paying
lease rentals without the desire to own
the asset.
 Parties to a leasing agreement are :-
› Lessor – owner
› Lessee – uses asset by paying rent.
 Financial lease(for the entire economic
life of the asset)
 Operating lease (for short-term periods)
 Direct lease (directly from the
manufacturer)
 Sale & lease back
 Domestic & international lease (depends
on the domicile of the parties)
 Leveraged lease (3 parties: lessor, lessee,
lender. Lessor& lender finance the asset
proportionately)
 Additional source of finance
 Tax benefits
 No threat o ftechnological obsolence
 Less costly & less restrictive source of finance
 Helps to maintain flexibility in business
 Permits 100% financing
 Off-balance sheet financing. Does not disturb
the debt-equity ratio.
DISADVANTAGES OF LEASING
 No capital gains if value of asset appreciates.
 Depreciation cannot be claimed.
 Termed as SERVICE LEASE. Termed FULL PAYOUT LEASE.
 Asset leased for a SHORT  Asset leased for ENTIRE
TIME-PERIOD. ECONOMIC LIFE of asset.
 Lessor pays for  Lessee pays for
MAINTENANCE. MAINTENANCE.
 OBSOLENCE RISK – lessor  OBSOLENCE RISK – lessee.
 Ex – hiring taxis, buses,  Ex – chartering airplanes,
buildings. heavy construction machines
 All RISK & REWARDS  All RISK & REWARDS
incidental to ownership r incidental to ownership r
not transferred from lessee transferred from lessee to
to lessor. lessor.
 CANCELLABLE by either  NON-CANCELLABLE.
prty
 No option of purchase  Option of purchase available
available in the end. in the end.
 OWNERSHIP never
transferred to the user.
 DEPRECIATION claimed by 
lessor.
 MAGNITUDE OF FUNDS is 
very huge.
 NO DOWN PAYMENT
required since 100% finance.
 MAINTENANCE paid by
Lessee – financial lease &
Lessor – operating lease.
 TAX BENEFIT
lessor claims depri &
lessee claims rentals.
 SALVAGE VALUE – lessor
 OBSOLENCE RISK - lessor. 
 OWNERSHIP transferred on
payment of last installment.
DEPRECIATION claimed by
hirer.
MAGNITUDE OF FUNDS is
comparatively low.
 DOWN PAYMENT is to be
made in the beginning.
 MAINTENANCE paid by
hirer.
 TAX BENEFITS to hirer.
 SALVAGE VALUE – hirer.
OBSOLENCE RISK – hirer.
 Credit rating is a financial service wherein the
rating agency upon request from the client gives
ratings to the client based on the credit-standing
& risk-taking ability of the client.
 TYPES OF RATINGS include Equity & Debt
instruments, Corporate rating, Individual rating,
Sovereign rating.
 CRAs include CARE, CRISIL, ICRA, MOODY’S, S&P.
 RATING CRITERIAs include Operational efficiency
, Profitability, use of Leverage(financial viability),
Managemt profile, future outlook of business &
industry.
 ADVANTAGES – helps Co to collect finance from
different sources, helps investors in decision-
making,
 Letter of credit is an undertaking given
by the importer’s bank to pay or honour
the bill, provided the exporter fulfills the
terms & conditions of sale.
 It is done in case of international
transactions where the exporter &
importer are not known to each other. It
is a guarantee of payment provided by
the importer’s bank.
 EQUITY
› IDR
› ADR
› GDR
 DEBT
› Syndicated loans
› Euro bonds
› External Commercial Borrowings
› Foreign Currency Convertible Bonds
 Global Depositary Receipts (GDRs) are
negotiable certificates issued by depository
banks in international markets which
represent ownership of a given number of a
company’s shares which are listed and
traded separately on a foreign stock
exchange.
 It is an instrument in the form of a depository
receipt or certificate created by the Overseas
Depository Bank outside India and issued to
Non- resident investor against the issue of
ordinary shares of Issuing Company
TO THE ISSUERS
• Access capital in international markets
• Conduct a securities offering in an efficient and
cost-effective manner
• Expand market for shares, potentially enhancing
overall liquidity
• Broaden and diversify shareholder base
TO THE INVESTORS
• Globalize/diversify investment portfolio
• Trade, clear and settle according to home market
conventions
• Eliminate cross-border custody/safekeeping
charges
• Receive dividend payments in U.S. dollars
FEMA guidelines provide Indian companies to access
funds from abroad by following methods:-
a) External Commercial Borrowings (ECB):- It refers to
commercial loans in the form of bank loans, buyers’
credit, suppliers’ credit, securitized instruments (e.g.
floating rate notes and fixed rate bonds, non-
convertible, optionally convertible or partially
convertible preference shares) availed of from non-
resident lenders with a minimum average maturity of
3 years.
b) Foreign Currency Convertible Bonds (FCCBs):- It
refers to a bond issued by an Indian company
expressed in foreign currency, and the principal and
interest in respect of which is payable in foreign
currency.
 c) Foreign Currency Exchangeable Bond
(FCEB):- FCEB is a bond expressed in foreign
currency, the principal and interest in
respect of which is payable in foreign
currency, issued by an Issuing Company
and subscribed to by a person who is a
resident outside India, in foreign currency
and exchangeable into equity share of
another company, to be called the Offered
Company. The FCEB may be denominated
in any freely convertible foreign currency.
 SECURITISATION is the process of pooling and
repackaging of homogenous illiquid financial
assets into marketable securities that can be
sold to investors. The process leads to the
creation of financial instruments that
represent ownership interest in, or are secured
by a segregated income producing asset or
pool of assets. The pool of assets collateralises
securities. These assets are generally secured
by personal or real property (e.g.
automobiles, real estate, or equipment loans),
but in some cases are unsecured (e.g. credit
card debt, consumer loans).
 FOUR STEPS IN A SECURITISATION:
 (i) SPV is created to hold title to assets
underlying securities;
 (ii) the originator or holder of assets sells the
assets (existing or future) to the SPV;
 (iii) the SPV, with the help of an investment
banker, issues securities which are
distributed to investors; and
 (iv) the SPV pays the originator for the assets
with the proceeds from the sale of
securities.
 For more ambitious projects, some
companies need more funds, some
ventures have access to rare funding
resources called angel investors. These
are private investors who are using their
own capital to finance a ventures’ need.
Venture capitalist firms (VC-firms) are
specialized in financing new ventures
against a lucrative return.
 Venture capital (VC) is financial capital
provided to early-stage, high-potential, high
risk, growth startup companies. The venture
capital fund makes money by owning equity
in the companies it invests in, which usually
have a novel technology or business model in
high technology industries, such as
biotechnology, IT, software, etc. The typical
venture capital investment occurs after the
seed funding round as growth funding round
in the interest of generating a return through
an eventual realization event, such as an IPO
or trade sale of the company.
Financing stages
There are typically six stages of venture financing that roughly
correspond to these stages of a company's development :-
 Seed Money: Low level financing needed to prove a new
idea,
 Start-up: Early stage firms that need funding for expenses
associated with marketing and product development
 First-Round (Series A round): Early sales and manufacturing
funds
 Second-Round: Working capital for early stage companies
that are selling product, but not yet turning a profit
 Third-Round: Also called Mezzanine financing, this is
expansion money for a newly profitable company
 Fourth-Round: Also called bridge financing, 4th round is
intended to finance the "going public" process
In general, the venture capital financing
process can be distinguished into five
stages;
 The Seed stage
 The Start-up stage
 The Second stage
 The Third stage
 The Bridge/Pre-public stage