Professional Documents
Culture Documents
Sources of Funds
Sources of Funds
Sources of Funds
Shreeya Rajpurohit
Meaning
It is required to acquire fixed assets.
Can be obtained from capital market.
Normally for the period of more than 10
years.
Required for investment in plant and
machinery,
land and building, patents goodwill and in
other
fixed assets.
Equity Shares
Ordinary shares or common shares.
One of the unit into which the capital of the
company is divided.
Contribute to the capital of the company.
Provides permanent capital.
Real owners of the company
Last one to get repayment in the event of
liquidation of the company.
variable income security
Definition
Sec.2(46) of Indian Companies Act, 1956
A share means share in share capital of a
company
and includes stock except stock and shares is
expressed or implied.
Pre-emptive right
If company wants to issue additional equity shares
it is under legal obligation to offer these shares to
existing shareholders first and then to go for public
offer. This right is called as Pre-emptive right.
Voting Rights
Voting rights are proportionate to their investments
in shares, however as per some recent amendment
in the Companies Act 1956, company may issue
shares with disproportionate voting rights.
Disadvantages of Equity
Shares
To Investors
Uncertainty of income
Irregular income
Capital loss
Less attractive to modest investors
Loss in case of liquidation
To Company
Difficult to remove overcapitalization
Centralization of control
Change in management policy
Speculation
Preference Shares
Meaning
Represents a hybrid form of financing. Have
features of equity shares and debentures.
Definition
Preference shares are those shares which have
preference in - Payment of dividend
- repayment of capital at the time of winding
up of the company
Features
Advantages of Preference
Shares
To Investors
Disadvantages of Preference
Shares
To Investors
Dividend at fixed rate
Uncertain position of redeemable
preference shares
No right to enjoy in excess income or
assets of the company
Limited voting rights
Disadvantages of Preference
Shares
To Company
Retained Earnings/
Ploughing back of Profits
Internal source of finance
Most suitable for an established firm for its
expansion, modernisation and
replacement etc.
It means the reinvestments by concern of
its surplus earnings in its business.
Costfree source of finance
Retained Earnings/
Ploughing back of Profits
Advantages
To Company
A cushion to absorb the shocks of economy like shocks of
trade cycles, uncertainty of the market with comfort, preparedness
Economical method of financing not dependent on outsiders
Aids in smooth and undistributed running of
business
Helps on following stable dividend policy means payment
of dividend regularly
Flexible financial structure no need to raise loans, adds
outsiders
Advantages
To investors
Increase in the value of shareholders due to
stable dividend, goodwill of the company
Safety of investments assurance of minimum rate of
dividend, renders safety
Enhanced earning capacity with re-enhancement,
increased earning capacity and real owners get benefited
No dilution of control no new issue of shares,
Ploughing back of profits provides an opportunity for Evasion
of super tax
Advantages
To Society or Nation
Increase the rate of capital formation
promotes economic development of the nation
Stimulates industrialization by providing self-finance.
Increases productivity as scarce resources can be
exploited fully
Decreases the rate of industrial failure as
assures strength and stability indispensible for smooth and
undisturbed running of business.
Higher standard of living due to increased
productivity, better quality goods at reduced prices, job security and
increased remunerarion due to smooth running and stable business.
Disadvantages
Overcapitalisation
Creation of monopolies
Depriving the freedom of the investors
Misuse of retained earnings
Manipulation in the value of shares
Evasion of taxes
Dissatisfaction among the shareholders
Debentures
Meaning:
An instrument executed by the company
under its common seal acknowledging
indebtedness to some person or persons to
secure the sum
advance.
A security issued by a company against the
debt .Public company is allowed to raise debt
capital.
Definition
Indian Companies Act, 1956
Debenture includes debenture stock, bonds and
any other security of a company whether
constituting a charge on the assets of the
company or not.
Prof. Naidu and Datta
A debenture is an instrument issued by the
company under this common seal acknowledging
debt and setting forth the terms under which they
are issued and are to be paid.
Features of Debentures
Types of Debentures
On the basis of security
Simple debentures
Debentures not secured on any asset.
Mortgage debentures
Secured either on a particular asset or on all the
assets of the company in general. In India, only
secured debentures are issued.
Types of Debentures
On the basis of registration
Bearer debentures
Not registered. Payable to the bearer. Can be
transferred merely by delivery. Interest is paid to the
persons who produces the interest coupon attached
to such debentures.
Registered debentures
Payable to the persons whose name appear in the
Register of Debentureholders. Can be transferred
only
by executing a transfer deed. Interest is paid to the
registered dealer.
Types of Debentures
On the basis of permanency
Redeemable debentures
Repayable after a specified period in lump sum
or by installments.
Irredeemable debentures
Not redeemable during the lifetime of the
company.
Types of Debentures
On the basis of priority
First debentures
Have first claim on assets
Second debentures
Have a second claim on the assets charged
On the basis of conversion
Convertible debentures
Non-convertible debentures
Advantages of Debenture
To Company
Consolidation of debts
Advantages of Debenture
To Investors
Fixed and stable income
Safety investment
Liquidity most liquid investment, ready market, used as
collateral security
Fixed maturity period
Conversion of loan
Disadvantages of Debenture
To Company
Fixed charge on assets
Fixed burden
Risk of winding up
To Investors
No control
No extra profits
Uncertainty
Bank Loans
The loans indicate liabilities accepted by the
enterprise for satisfying the short term & long
term requirements .
Banks & financial institutions have the
authority
to grant loans.
Term/Bank Loan
Most suitable to meet the medium-tem
demands of working capital.
Interest charges at a fixed rate
Amount of loan to be repaid by way of
installments in a number of years
Maturity
Purpose
Flexibility
Contractual in nature
Security
Interest payment and principal repayment
Lease Financing
Definition:
A contractual agreement (transaction) in which a
party owning an asset (equipment) (lessor)
provides the asset for use to another (transfer the
right to use the equipment to the user) (lessee)
over a certain (for an agreed period of time) for
consideration in form of (in return for) periodic
payments (rentals) with or without a further
payment (premium).
Lease Financing
An agreement that provides a firm with the
use and control over assets without
buying and owning the same.
A form of renting assets.
A contract between the owner of the asset
(lessor) and the user of the asset (lessee)
Lessor gives the right to use the asset to the
lessee over an agreed period of time for a
consideration. It is lease agreement.
Lease Financing
Regulated by the terms and conditions of
the agreement.
Lessee pays the lease rent periodically to
the lessor as regular fixed payments over a
period of time.
At the expiry of the lease period, the asset
reverts back to the lessor who is the legal
owner of the asset.
In long term lease contracts, the lessee is
generally given an option to buy or renew
the lease.
Types of Lease
1) Operation or service lease
The lessor doesnot transfer all the risks and rewards incidental to
the ownership of the asset and the cost of the asset is not fully
amortized.
Generally used for computers, office equipments, automobiles,
trucks, some other equipment, telephones
2) Financial lease
For longer period and non-cancellable.
similar to debt financing
Commonly used for leasing land, building, machinery and fixed
equipments
Types of Lease
3) Sale and lease back
Sell an asset already owns to another party and lease it back from
the buyer.
Lessor receives immediate cash for his assets and repays the
rentals over stipulated period
4) Single investor lease
Only two parties lessor and lessee. Lessor funds the entire
investment by an appropriate mix of debt and equity funds
Debt raised are without resource to the lessee
Default in servicing the debt, lender is not entitled to payment from
lessee.
Types of Lease
5) Direct lease
Owner of equipment are from two different entities
a)Bipartite lease(structured as operating lease)
2 parties equipment supplier-cum-lessor and lessee
b)Tripartite lease
Involves 3 parties equipment supplier, lessor and lessee
Said-aid lease: equipment financer arranges for in various forms
Providing reference about the customer
Negotiating the terms of the lease and completing all formalities
Writing the lease on own A/c and discounting the lease
receivables with the designated leasing co.
Types of Lease
6)Leveraged lease
3 parties involved lessor, lessee and the financer
Leasing co. contributes by way of equity capital, FI and/or banks by way of
term loans towards the purchase of an asset to be leased.
7) Domestic lease
All parties are domiciled in the same country.
8) International leaseParties located in 2 different nations.
a)Import lease
Lessor and lessee from same industry but equipment supplier in
different country.
b) Cross-border lease lessor and lessee from different
countries.
Disadvantages of Lease
Financing
To the Lessee
High cost
Loss of Moratorium period
No alteration or change in asset
Loss of ownership incentives
Penalties on Termination of lease
Loss of salvage value of the Asset
Disadvantages of Lease
Financing
To
the Lessor
Problem of Leasing
Resource constraint
Risk of obsolescence
Non-availability of sales tax considerations
Cut-throat competition
Lack of qualified personnel
Hire purchasing
Hiring of an asset for a period of time and
at the end of the period, purchasing the
same.
Time sharing of an asset
the person hiring the asset acquires its
possessions and the right to use it.
A legal device, being used for financing of
capital goods such as industrial finance,
financing of consumer goods and for selling
consumer goods on hire purchase.
Hire Purchasing
HP is A transaction where goods are purchased
and sold on the term that
1. Payment will be made in installments.
2. Possession of goods given to the buyer
immediately.
3. Property (ownership) in goods remains
with the vendor /owner till the payment
of last installments.
4. Seller can repossess the goods in case of
default in payment of any installments.
5. Each installment is treated as hire charges
till the payment of last installment.
Clauses
of
Agreement
Hire
Purchase
Disadvantages of Hire
Purchase
Encourages lavish expenditure due to easy
payment, go beyond capacity.
Future income is mortgaged due to installments
over the period of time
Higher installment price than cash down price.
Difficulty in resale of goods even though right to
repossess the goods, sale becomes difficult as they are second
hand goods.
Public Deposits
Fixed deposits accepted by a business
Directly from the public
Mainly to finance their working capital
requirement
Rules for Acceptance
1.No company shall accept any deposit which is
repayable on demand.
2.Minimum duration 6 months ,Maximum
duration 36 months.
Features:
Not secured
Available for a period ranging between 6
months and 3 years
Carry fixed rate of interest
Not require complicated legal formalities
Disadvantages of Public
Deposits
Uncertainty
Insecurity to invest in companies not very sound
Lack of attraction for professional investors no
capital appreciation, low ROR
Low ROR but commission and brokrage make uneconomical
Hindrance to growth of capital market
Overcapitalization easy, convenient and cheaper source
of raising money
Limited maturity period
Interest charged does not enjoy tax exemption.