Business Finance ig the funds required do establish, oberate, dusiness activities and expande in the future. funds ore. shecifically required various purchase type of Jongible assels such ag fumiftite , machinery , building, offices , factories, oF intangible assets tke patents, -lechnical exbertige and trademarks , ele Apart from the assets mentioned above, other things hak aequire faneling are the day, 4o- day, oferational qativilies of q business “TRS achivity inelude purchasing, row materials, paying salaries , bills , collecting money) on liens ele. th ig. essential to have cufficient otaount of money fo survive and grow he business - 4 Bosed on ferlod [Time , sources of finance funds may be divided into - —> Jong. term- This lng term fund ts atiligedl for more than Five years. tong-ferm tequirements for finance related do the fixed assets like plant and machiney , tnd , building, furniture , patent ete. The fund is arrangect through preference and equity shares ancl debentures ete. —> Medium4erm— These are hort Jerm funds that tsb more sthann one year but lesS than -five yearS- The source incluctes borrowings from a public deposit aommercial banks, commercial baber , loans from a financia) institute ancl tease financing, ete. Shorl- ferm— ghort-term implies a period! ubto one year ond ig requived purely for doy -to-dey part of investment fn current assets -© | Shove Cobital Share Copila? refers 4o the fons raised by a | company through Mhe isstiance of shares 4. Aushoriged shave capital R. Jesuecl Shave capital 3. subscribed Share Cabital 4. foid-up Capital & Authorized shave Cabited — maximum shares 4 Company oan isoue- \ssuieel achare Capital — Issued share copitel refers bo the portion of authorized share. Capital thot the combany has actually issued CF allecatect do charchololerS- This figure. can e be \ess thon or qquat 4o the authorized share eabitol . 2. Subscribed sinve Capital — Subscvibed share cabital is the portion of Issued share cabifal that shareholders have agreed te furchase or cubsenbe to. MW vebresents have cotmmitlcal the value of Shares that shareholders have committed do buly or have alveacty bought » Paideub Cobitel — feid-up capital refers do the portion of cubseriGeel share cabital thet share- elders have olreacty paid fof> Amount e shareholders have baid for subscribed ghares- « Rutterised or Registered ved or Nominal Capital _» tonooo Shares of E 10 each =%tin.00,000 « [issued capital) — 209000 shares © {&% joeach = FE 2900000 | Subseribedl Share capital “arise eatitel -+ Js0,000 Shares of 10 each= ZF 1509002 “onebscribedk share. (See) Jonas copital (1sep00% 2) = y20000 Uncalled-ulp capital (\sqx0xz) = 390000| r Peid-up Cobital > 160,000 shares of T 10 each = 1500000 foid ub capital — 14,00,00° Cals iW Ayreat~ 109.009 he sources of business finance ore shares, Equity Shaves, Debentures , Term Joans , letler oF credit, Preference Shaved , 4 and venture funding etc. euro issue , working, capital lean %_ Shaves A company capital is divided into Small equal units of @ finite umber: Each unit 1s knevoh ag a ‘Share. In eile Ferme, o Shave je a percentage of ownership in a company oT o financial asset: \nvestors who hold shares of any company oFe known) 0S shareholders - Jong - term financing means raising of funds for long cderm wa ig requived +o jo. a perio exceeding five years execute, several projects Felating, do impravernent and dewiopment of existng industries end ostablishing nev? industry, “The moin sources pf tong: erm finance. for & eombany are grouped in +0 eq he gored , he Ww) Capital based and ti) Assets based Fineneing, as shown aiven below Sources of Long-term finance Lease. Financing Hire Purchase Praject France FecBs GDR FoL AR Non-converHble, Innovad reauly Share Ciel | eqiiby shave cabidal is o baste pea! ae oe oF ordinary shaves are hose oe which cary no preferential tight in dhe. bagment ° indent and vefanel of ental relly shares jrchich called ' common Steck’ in US» Featuves of Equity Share capil 1. Risk Capital ( Real ovonets of ahe company) 2. Unstable Oividend ( get dividend aftey the dividend on pref shove 3. Variable Markel Price (No ‘elationshi face or slurp 1 meres on te Refund of Capital (4 is permanent in nature which 33 not, refundable duving Hs hfe Hme> Yes, iF any shareheldey kes, he cam get back ~ @ Wis cobilad by selling his shares in the market. Gut at present a comfany can buy-back HS equity shares os per provision’ © section 17 A of Combanies Amendment Act, 1999 eure of rnnce for 9n4 and datenluves) Chims on Assets Right do contre! + Right do vote Right to Proxy ( right 4o obpei ‘ ing Ce aaa st en a eet 5. Gimidecl Bobility to. Sweat Sha: Equity Shave (iF as an embloyee of the combany, ‘you hove made a Significent contribution , the combany can Teword you by issuing sweat equity shares. @ Hie Right 42 farticibate in Management | rae Right of pre- ewbiion eace | Disadvantages of guilty Share cabite! pilulion In contre! High Gost over Capitalisation - . chenge ih management Potiery Oncertaindy ef Income: . loss in depression Jess on Uquidation Right! 4 control tsa myth, ewan yg eRe‘aonership in ocompany, with le with’ voting Fights) bh Ordinary, Shave ( Gasic R. Preference Shave & Right shave. 4G, BonuS Shave 5. Suacat Equity Shave Emilee Stock ehiions (ESPs) + Ovetinary Shere — Common silock representing, cwnership in a Gombanyy With voling rights and podential dividends - Be oaee heck with priority for dividends and assels over 9 shaves, often without voting Wahts- Right share — Shares offered to existing shareholders before being offered do athe public- Gonus share— Additonal shares giveh do existing sharehe| toitheut cost | Aybieally from accurmulated profits or reserves weal share — Equity given to founders OF early employees oF Combensation fer she conribation fo the combanys growth: Employee stock options - kights granted to employees te buy cembanyy shares at a predetermined price wah. ebecifiedd peried- Iders Ag Ahe name suggests these shaves have cerlein preferences 93 t Compared to other type of chore - gection gs (1) of Indien Companies Act, 1956 cefines.” a prefewmce Shove Ye a grave wahich carries preferential rights as to Mhe payment «f aiwidend af a ved rote, Gidher free or subject to. income Ae nd ag 48 the boyment ¢ capital at the dime of Tiquidation prior te equily ghaveholder features of Preference share cabi 1. Priority Oividonds ( Freference ghaucholders ordinary ghareholders, often af a fred rate + 2. Preference in Assets Cin the event of Liquidation , preforonee chavchold ers are gniifled to veceive Mheiy enbidal back before exdinary sharehstlers « 3, Nen= voltng Rights No - Controlling Powey receive dividends before, a8 6 We & | Fixed dividend (ike, oye Preference Share, ag ys Probes Risk mitigation ocr) SAability Hybrid nature po vf, Preference Shares c tel 1. Comulative Preference Shores 2, Nonecomuladive Fre ference Shaves 2. Redeemable Preference Shaves us \rrecemable Preference ghaves $. Parhelpating Preference shares 4. None far Neipating Preference Shares (usditit9) sh CanVerHible Preference Shaves uh @ g, fen-convertible Preference gnares Ww) , oy ya 9. ctrmulative Convertible Preferonce Shaves era _— hd é ase 67 “ To. Aujuslable- vate preference, Shaves 29 aan vous + comulative, Preference shave— Get unfald di dends {ror pr Years before common ghaveholdets - (Secon &3 of dhe companies Act, 2013) © stoneomulative Greferente Shares flo accumulation of wnboid dividends, no future claims dividends af missed - wh ty XK uh " A 4 e [see-13) ‘ 4 or 273 “ s b a ot Lebility, ce Shaves — The company ean buy shareholders at a pre-determined Aedeemable Preferen bok Shege shaves from ice qfiey a sbecified period. iy t, (Redeemable alley years) companies Act, 201%) These shares do not have o igakeel fo buy them back, Dividend - (sechion U3 of she Vrredeemable Preference shares majurily dake, ard she combang 1s net ob! from shareholders . [sec US of the combarie® fet, 2013, Snel) oividond = 14% Nore redeemable] Wwredemable | fe rpetuat a fedderedie Prelorence shares not allowed ih Inclicr erence shaves must be redeemed within 20 years.| Participating Preference shares — sharcholders receive preferential chvidends ond also have the right +e participate in additional dividends distributed to common skareholders > (section unt of the companies Act, 2013) Dividend tt “fe . Addie’ Benelils Liquidation Genk (Gols Wnidial Cobitat + Pro-rale shave ihe Common Equil' + Non- farticipaling, freference shares — shavcholders only receive fixed Preforentiat aividends anal ae not pardicipale in ockitional dividends dishibuled 40 common sharehelders + (sector tary of the combarhes Act.2013) Dividend - ter fixed no additional benolits he option to convert vaholders hare of common shares: pecifiedt number nda) + Convertible Preference Shares ~ sh heir preference shares inte 0 6 (section ss of the companies Act, 202% Dividend 14 Jo convertible after © years reference shares - These shares connect be converted (section 43 of the companies Act, 2015) dend - 1 fo seo HAT maturity date, « Non-Gorvertible inte common shares Preference shares Combine dhe feodures of Able. preference shares, allowing, ghareholders accumutaking unpaid divielends- + Cumulative convertible Cumulative and corel fo convert fhely shares chile alse (secon ss of the companies Act , 2013) + Adjustable rate preference shares OWidends rates are adjusted periedically based on specified riferia, sush es changes im market interest rates: pividends nol fixed Dividends + SBL_meLR4SH ete. « Callable Preference Shares - The issuing company 1 ‘ eserves the right 4o buy back these shares at meal price after a a shecifted period , cimiloy to redeemable preference shares. Dividend ~ 14 +f call option on ov aller s Years company can buy back eh oF afk " © pre-defined Rite pre-defined date* Regular fixed Income, + Safely of capital + Increased fuchacing, Power Bshontass a Preference chare i of + fixed Qurden + More Costly + lo voting Rights + No claim ever Surplus + Mo capital Gain @ “The woorel ‘debenture’ iS derived from the latin word " debere which means ‘taking loan - Debentures refer to long-derm deb} instruments issued by 7 gowrnment or corporation +e meet its financial requirements: tn velutn, investors are compensated caith an interest inceme for being @ creditor +o the issuer. Debenture holders ore the credifors of the issuing combang unlike a shareholder whe is the owher: footures I debentures e@ «fixed interest (debenures bay a fixed tate of snterest Jo investors. + Creditor Status (Oebentuve holders are credifors fo the combany and have priority ver shareholders in case of liquidation. + Transferability (Generally, clobenfures ate freely Avans{erable bebweeh investors.) + Interest fogment Crequenoy (Interest payments on debentures can be made annually semi-annually quarterly or at other intervals as shecifed in the derms of the dbenture issue. + claims on Assets (Debontureholders have first priory of claim on assets of the combanyy « + No ight do contro!| ins of deber eres | Gleront Aypes = They are classiffed according Debentures are of ai i do safely , refund ef capital and facili hy of Ararsfer , based on Fegistration , guarantee and fedemption- ‘The most pobular 4ybe ef debentures are being, discussed below © Secured and Unsecured debentures ( Based on safely | security) secured Debentures — these debentures are secured by specific asets of jhe issuing company. In case of default , debenturehold ers have a alaim on athe assets pjedged a8 collateral a enema] R debenture hold — _ eee YE you ‘people (cemban's) wort make dhe talgments 4 will sell the companys agsels- > Unsecured Debentures — Also known a3 ' Neked Oebentures’ ot ‘simble Debentures, Jhese debentures are nol backed by any Shecifie collateral They rel"Gotelyy on the general creditworthiness of jhe iesuing company. To Oebenture hokler company | He cont sell the Componyys assets a reeover his at. ® corvertible and won- convertible Debentures > convertible Debentures — Sometiines converkible debentures ave issued bya ecombany in which dsbentuveheldets are given an abtion to exchang the doboniures into equity shares after the exbiry of © Shecified periods HW has shoo dyes - 4) fally Converible. debentures (FCDs) — entirely converted into equi sho ‘iy avlly Conerfble debendutes (PCD's)~ Only » besten of the deb. con be cohvedled inte Emily sharesy oma Right novo Vom a Later Twill become debenturcholder o shareholder [Rew Varo creditor] (hen feail become owner > Non convertible debentures — Non-corvertible debentures cannet be converted nto cquily shares: ® Fish ond second Debendure > A cbbenluve which is febaidl before the other debenture is known as the first debenture - > The second debenture 1S that which is oid alter she first debenture has been paid back. @® Registered and geaver Ooben ture. — A vegistered debenture is recorded in the register of debentureholders of she combany. A, regular ee ‘ pas is pepived or stheiy Srarcfer- In contrast, e@ debenture uahich 16 frans{erab) F . is called bearer debenture, lerabie by mere detivery © Porbetual Debentures — a , Wese bonds dont have a mal arity a and the issuet need hot rececin sthem. Instead the ler can a teried ob} 40 bay a regular interest for a lifelong exombles; war loan Bonds, Consols | consolidated Annuities (issued by Brikish Government in gtk Century with po maturity, dete and paid interest inaofinidely) © Inrevative debenture — Now-a-days companies have comeforward Jo issue a debF security with different alternative and {nhovelive features Here | oben ture ~~ - are Somea) Zero interest Bonds (Z18) ~ Zero interes! bond docs nol carry any intoresl but Ft is sold by issuing combany af 145 eventual maturity values (Zero Coupon Bonds) exomble: a bene witha face | par value of £20,000 maturing in 10 Years with issue price E5000. 4 Secured Promium Notes (SPN) — sccuyed premium notes (SPs) are Finarciat instruments eshich ave jasued with detachable unyrants and are redeemable offer eeriain period. + SPM is a kind ef non-covertible dobonture (Neb atachedl with woarrant- Tt can be issued by the companies with the Nock-in- botiod of sou uy do seve Years. T SPN holders will get princibal amount with interest on installment basis after lock th period of cad period. However, during the teck in bovod no interest is paid - + SPN iso hybrid sccuily ie. it combines both features of equity and debt producds. ©) Deeb discount Bond (DOB) - HH is also like cere interest bond tshich is sold by the issuing combany af i4S eventual maturity values The TOI (Yrdustrial Development Bank of Indic In Vanuary, 1992 issued p98 with face value of E 100000 at an issue price of & 2700 per bond witha maturity Ferlod of 25 years from the date of allotment. ‘These Bonds were eilletted on 31F march 1992 with Gond certificate. + Ablor 26 years, 31 March, LOU" Investors usill be poi rupees | one lakh ber bond but no inieresd is being paid 4o bond: holders . aut In dem of section 193 of the tneome-fax Act, 1961 tax is fequired to be deducted at source Wn ease interest income, exceeds Rs, 2500]. duying the Financlal year: * 006 is safe , solid and Liquid invecdments + The main advantage of DOG 1S Shat Ihe aifference between the sale price and the ovigihal cost (facevale) of acquisition will be dyeated as cabital gain.4 Floating Rate Conds (FRGs)— The inevest on such bonds is not fixed. tt is Floating and is linked to b enchmatk fate such ag tiered on Areasury bills , bank r i ank rade , coll rade, maximum rate on detm deposits. His bypioally a cottat etkain percentage poi , Ahem the benchmark rate - 9¢ boint higher ©) Retirement Bonds these are issued at o discount and offer annuity also do investors who are plenning for tetirement. Investors get a monthly income fora shecified Period (normally, 40 years) after the exbivy ofa unit Period which can be chose by the investor once. of Oebenture, mi tations of Debentuve Oebenture vis. Equilyy- sas faye “[ sam tage Pogl- $07 . loan for . vs. Secured oe Les yrs Maximum upto loY a- ingta\l ment S- hI uartly Half earl in instel 6. mon Jy , Quartlys , a {- Yearly in (ncome producing assets Land , wilds cons kre renovator, plant & snven bor! : nicles , ver 4) kinesy , oauspment, vericle Assets to generate cash Flos for fepayment of loch Assets ag securiby > raditvenal security may be = Asse requived by the interest rate fF + Tenure + Payoble + To acquire oF create ehion , bon: ced oF floating both Joan Shak gives fora fixed be repaid in Fegular EMI (Equated — A form toan is a duration of dime and must installments alse knowh 8 monthly instalmendg.) “Thes¢ loans are usually extended for a longer duration of dime, which can be jong as gover The rate of interest chatged under Hare loans is not fited and\ | she, |dabonds on dhe market conditions. “These leant ean be availed of by both pusiness and fndtviduals - (Pebenteres| I) | Bonds + Socuved + Gist Priovity « Non-convertible » Secuved or Onsecwed + Second Prjoritty » Convertible & non- conver Hble + Generally isstecl — Corporates Corivake Combanies) + Generally, Issued H Anmeial Instbtions = Government = Corporates + Higher risk 2 Jower Fisk shorter maturity periods + tonger malurihy periods Bonds Debentures Preference Shaves Equiley shares