Source of Long Term Finance

Shares
Shares
• Shares are units of ownership in stocks and partnerships.

• The distribution of shares in a company indicates the distribution of ownership in the company. A share's value in
a company or an investment is based on the price at which a share is sold in the market.

• Companies issue different types of shares to generate funds from various investors.

• Only public limited companies can issue shares

• Types of Shares
1.Preference Shares
2.Equity Shares
Preference Shares
• A share which entitles the holder to a fixed dividend, whose payment takes priority over that of ordinary share
dividends.

• Preference shares which have a preferential right to

- Dividend and Return of Capital, in case of winding up of the company
- The rate of dividend on preference share is fixed
- The shares don’t have voting rights
Types of Preference Shares
1.Redeemable or Irredeemable Preference Shares

2.Convertible or Non-Convertible Preference Shares

3.Participating or Non-participating Preference Shares

4. Cumulative and Non-Cumulative Preference Shares

 Features
1.Preference in dividends
• Preference shareholders enjoy a priority over equity shareholders in payment of dividends. Only after paying
dividend on preference shares, the company shall pay dividend to equity shareholders.

2.Preference in refund of capital

• When the company is liquidated, preference shareholders are paid and the residue is available to the equity
shareholders. So, preference shareholders have a prior right to that of the equity shareholders.

3. Preference for Control

• It do not have any voting rights, so they do not have any say in the management or control of company.

4.Convertibility of preference shares

• Convertible preference share means that the owner has the right to exchange a preference share for equity share of
the same company.
Who Can Issue
As per Companies Act, 2013, an Indian Private Limited Company or Limited Company can issue preference shares,
if authorized by the articles of association of the company. All preference shares issued by a company in India must
be redeemable and should be redeemed within a period of 20 yearsfrom the date of its issue

Who Can Invest

• Financial Institution
• Lending Firms
• Other investors through brokerage firm
Advantages for the issuer

1. Absence of voting rights

2. Fixed return

3. Absence of charge on assets

4. Capital structure flexibility

5. Widening of the capital market

6. Absence of financial burden

Dis-advantages for the issuer
1. High rate of dividends

2. Dilution of claim over assets

3. Tax disadvantages

4. Effect on credit worthiness

5. Increase in financial burden

Advantages for the Investors

1. Fixed regular income

2. Safety of interest voting rights

3. Less capital losses

4. Proper security

5. Presence of preferential rights

6. Absence of voting rights

Dis-advantages for the Investors
1.No Voting Rights

2.Fixed Income

3.No Income Tax exemption:

4.Time of Redemption:

5.No Guarantee of assets:

Equity Shares
Introduction:

• Primary source
• It’s dividend paid after preference share
• Rate of dividend is not fixed
• Totally depends upon the profit
• Share holders control the affairs of company
• Share holders having voting rights
• Higher risk taker
• Also called risk capital
Features
• Claims/rights to income

• Voting rights

• Pre-emptive rights

• Rights to liquidation
Advantages to Company
• Long term and permanent capital

• No fixed burden

• Credit worthiness

• Risk capital

• Dividend policy
Disadvantages
• Dilution in control

• No flexibility in capital structure

• High cost

• Speculation
Advantages to Investors
• More income

• Right to participate in the control and management

• Capital appreciation

• An attractive investment for persons having limited income

Disadvantages to Investors
• Uncertain and irregular income

• Capital loss during depression period

• Loss on liquidation