Mobilisation of

Funds
CF Unit 4
Public Deposit
• Public deposits refer to the unsecured deposits invited by companies
from the public mainly to finance working capital needs. A company
wishing to invite public deposits makes an advertisement in the
newspapers.
• Any member of the public can fill up the prescribed form and deposit
the money with the company. The company in return issues a deposit
receipt. This receipt is an acknowledgement of debt by the company.
• The terms and conditions of the deposit are printed on the back of the
receipt. The rate of interest on public deposits depends on the period
of deposit and reputation of the company.
• Public deposits of a company cannot exceed 25 per cent of its share
capital and free reserves.
• A company soliciting and accepting the public deposits from the public
is required to disclose true, fair, vital and relevant facts in regard to its
financial position and performance.
• As these deposits are unsecured, the company having public
deposits is required to set aside 10 per cent of deposits
maturing by the end of the year. The amount so set aside can
be used only for paying such deposits.
• Thus, public deposits refer to the deposits received by a
company from the public as unsecured debt. Companies
prefer public deposits because these deposits are cheaper
than bank loans.
• The public prefers to deposit money with well-established
companies because the rate of interest on public deposits is
higher than on bank deposits. Now public sector companies
also invite public deposits. Public deposits have become a
popular source of industrial finance in India.
Merits of public Deposit
1. Simplicity: Public deposits are a very convenient source of
business finance. No cumbersome legal formalities are involved.
The company raising deposits has to simply give an
advertisement and issue a receipt to each depositor.
2. Economy: Interest paid on public deposits is lower than that
paid on debentures and bank loans. Moreover, no underwriting
commission, brokerage, etc. has to be paid. Interest paid on
public deposits is tax deductible which reduces tax liability.
Therefore, public deposits are a cheaper source of finance.
3. No Charge on Assets : Public deposits are unsecured and,
therefore, do not create any charge or mortgage on the
company’s assets. The company can raise loans in future against
the security of its assets.
4. Flexibility: Public deposits can be raised during the season to
buy raw materials in bulk and for other short-term needs. They
can be returned when the need is over. Therefore, public deposits
introduce flexibility in the company’s financial structure.
5. Trading on Equity: Interest on public deposits is paid at a fixed
rate. This enables a company to declare higher rates of dividend
to equity shareholders during periods of good earnings.
6. No Dilution of Control : There is no dilution of shareholders’
control because the depositors have no voting rights.
7. Wide Contacts : Public deposits enable a company to build up
contacts with a wider public. These contacts prove helpful in the
sale of shares and debentures in future.
Demerits of Public Deposits:

1. Uncertainty : Public deposits are an uncertain and unreliable

source of finance. The depositors may not respond when
economic conditions are uncertain. Moreover, they may
withdraw their deposits whenever they feel shaky about the
financial health of the company.
2. Limited Funds: A limited amount of funds can be raised
through public deposits due to legal restrictions.
3. Temporary Finance : The maturity period of public deposits is
short. The company cannot depend upon public deposits for
meeting long-term financial needs.

4. Speculation : As public deposits can be raised easily and

quickly, a company may be tempted to raise more funds than it
can profitably use. It may keep idle money to meet future
contingencies. The management of the company may indulge in
over-trading and speculation which exercise harmful effects on
the business.
5. Hindrance to Growth of Capital Market : Public deposits
hamper the growth of a healthy capital market in the country.
Widespread use of public deposits creates a shortage of
industrial securities.

6. Limited Appeal : Public deposits do not appeal as a mode of

investment to bold investors who want capital gains.
Conservative investors may also not like these deposits in the
absence of proper security.

7. Unsuitable for New Concerns : New companies lacking in

sound credit standing cannot depend upon public deposits.
Investors do not like to deposit money with such companies.
SEBI regulations on public
Deposit
• Ceiling on Deposit: Public deposits of a company cannot
exceed 25 per cent of its share capital and free
reserves.Company can accept public deposits from existing
shareholders or debenture holders upto 10% of total payable
capital and free reserves.
• Maturity of Deposits: Company has to accept deposits from
public minimum for 6 months and maximum for 3 years
• Form and particulars of Advertisement: Company must publish
its advertisement in English newspaper and in local language
newspaper
• Form of application for Deposits: Public deposits must be
accepted on given application by depositor
• Register of Deposits: Company should record every persons
name, address, deposit cash date, maturity date, rate of
interest in register of deposits
• Interest on Deposits: company can fix the rate of interest on
public deposits according to the regulation of RBI
Types of Non Banking Financial
Institutions
• Equipment Leasing Company: The Equipment Leasing Company is
a non-banking finance company which is primarily engaged in the
business of leasing of equipment or financing of such activity.
• The term “lease” refers to the contractual agreement between
the lessor (owner) and the lessee (hirer) wherein the lessor grants
right to the lessee to use the equipment in exchange for the
periodical rent payments. The equipment leasing company leases
the asset to other companies either on the operating lease or
finance lease.
• The Finance Lease also called as Capital Lease is the long term
arrangement wherein the lessee is obligated to pay the lease rent
until the expiry of the lease contract. 
• The Operating Lease is for a shorter period duration and is often
cancelable at the option of the lessee with a prior notice.
• Hire Purchase finance Company: The Hire-
Purchase Company is yet another non-banking finance
company that principally deals in the business of hire-
purchase transactions and the financing of such activities.
• The Hire-Purchase means buying the goods on an installment
plan.
• This means the hirer can buy commodities in exchange for the
regular installment payments (principal amount+ interest)
over a period of time.
• The main sources of funds of the hire purchase company are
retailers and wholesalers, hire-purchase finance companies
and banks and financial institutions.
• Housing finance Companies: The Housing Finance Company is
yet another form of non-banking financial company which is
engaged in the principal business of financing of acquisition or
construction of houses that includes the development of plots
of lands for the construction of new houses.
• The Housing Finance Company is regulated by the National
Housing Bank. Any non-banking finance company can operate
as a housing finance company, subject to the fulfillment of
basic requirements as specified in the Companies Act, 1956.
• An investment company is a corporation or trust engaged in
the business of investing the pooled capital of investors in
financial securities. ... An investment company is also known
as "fund company" or "fund sponsor." They often partner with
third-party distributors to sell mutual fund
• Loan Company is a type of Non-Banking
Financial Company (NBFC) registered under Companies Act,
2013. Loan company means any company which is a financial
institution carrying on as its principal business the providing of
finance whether by making loans or advances or otherwise for
any activity other than its own.
• The Mutual Benefit Finance Companies also called as “Nidhis”,
are the non-banking finance companies that enable its
members to pool their money with a predetermined
investment objective. The main sources of funds are share
capital, deposits from its members, deposits from the general
public.
• In other words, any company which has been notified by the
Central Government as Nidhis under the section 620A of
Companies Act, 1956 work as a mutual benefit finance
company. These are one of the oldest forms of non-banking
finance companies wherein the owners of the company are
also its clients and pool their resources with the intent to
secure loans at a low interest rate at the time the funds are
required.
• Chit fund is defined as per the Section 2(b) of the Chit Fund Act,
1982. According to this act; A chit fund is a type of rotating
savings and agreement among different persons i.e. friends,
relatives, neighbours and family members to subscribe a certain
sum of money for a specified period of time. Chit funds are
often microfinance organizations. Chit Funds are also known as
the Chitty, Kuree, chit.
• It is worth to mention that there are over 10,000 registered chit
funds in India.
• Under the chit fund agreement; a certain amount is deposited
on regular basis by the different persons; and after the gap of a
specified period of time the amount is returned to the
subscribers with interest. Chit fund helps in collecting the small
savings of the individuals which turns into a big amount.
Foreign capital
• For economic and industrial development, capital is the most
important factor. Such capital may be front within the country
or from outside the country. When capital available within the
country is not sufficient, capital from abroad is made use of.
• For less developed countries, capital has been provided by
international organizations like World Bank and International
Monetary Fund (IMF) all government led.
• The term 'foreign capital' is a comprehensive term and
includes any inflow of capital in home country from abroad. It
may be in the form of foreign aid or loans and grants from the
host country or an institution at the government level as well
as foreign investment and commercial borrowings at the
enterprise level or both.
• Foreign capital may flow in any country with technological
collaboration as well
• since July 1991, there has been a tremendous change in
government's policy (commonly called liberalization policy)
about foreign investments.
Role of foreign capital
• 1. Increase in Resources:- Foreign capital not only provide an
addition to the domestic savings and resources, but also an
addition to the productive assets of the country. The country
gets foreign exchange through FDI. It helps to increase the
investment level and thereby income and employment in the
recipient country.

• 2. Risk Taking:- Foreign capital undertakes the initial risk of

developing new lines of production. It has with it experience,
initiative, resources to explore new lines. If a concern fails,
losses are borne by the foreign investor.
• 3. Technical Know-how:- Foreign investor brings with him the
technical and managerial know how. This helps the recipient
country to organize its resources in most efficient ways, i.e.,
the least costs of production methods are adopted. They
provide training facilities to the local personnel they employ

• 4. High Standards:- Foreign capital brings with it the tradition

of keeping high standards in respect of quality of goods,
higher real wages to labour and business practices. Such
things not only serve the interest of investors, but they act as
an important factor in raising the quality of product of other
native concerns
• 5. Marketing Facilities:- Foreign capital provides marketing
outlets. It helps exports and imports among the units located
in different countries financed by the same firm

• 6. Reduces Trade Deficit:- Foreign capital by helping the host

country to increase exports reduce trade deficit. The exports
are increased by raising the quality and quantity of products
and by lower prices.
• 7. Increases Competition:- Foreign capital may help to increase
competition and break domestic monopoly. Foreign capital is a
good barometer of world's perception of a country's
potential. 
Foreign Collaboration
• Foreign collaboration is a mutual co-operation between one or
more resident and non-resident entities. In other words, for
example, an alliance (a union or an association) between an
abroad based company and a domestic company forms a
foreign collaboration.
Objectives of Foreign
collaboration
What are Types of Foreign Collaboration?
1. Financial collaboration

• In case of financial collaboration, the inflow of foreign 

investment takes place in the domestic (host) country.
 • 2. Technical collaboration
In case of technical collaboration, the inflow of foreign
technology takes place in the domestic (host) country.
3. Marketing collaboration
In case of marketing collaboration, the inflow of foreign goods
and services take place in the domestic (host) country
4. Management consultancy collaboration In case
of management consultancy collaboration, the inflow of foreign
management consultancy takes place in the domestic (host)
country.
Advantages of Foreign collaboration
1. Optimal use of natural resources: Foreign trade helps each
country to make optimum use of its natural resources. Each
country can concentrate on production of those goods for
which its resources are best suited. Wastage of resources is
avoided.
2. Availability of all type of goods: It enables a country to
obtain goods, which it cannot produce or which it is not
producing due to higher costs, by importing from other
countries at lower costs.
3. Specialisation : Foreign trade leads to specialization and
encourages production of different good in different countries.
Goods can be produced at comparatively low cost due to
advantages of division of labour.
4. Advantages of large-scale production : Due to foreign trade, goods are
produced not only for home consumption but for exports to other
countries also. Nations of the world can dispose of goods which they
have in surplus in the foreign markets. This leads to production at large-
scale and the advantages of large-scale production can be obtained by all
the countries of the world.
5. Stability in prices : Foreign trade irons out wild, fluctuations in prices.
It equalizes the prices of goods throughout the world (ignoring cost of
transportation etc.).

6. Exchange of technical know-how and establishment of new industries

: Underdeveloped countries can establish and develop new industries
with the machinery equipment and technical know-how imported from
developed countries. This helps in the development of these countries
and the economy of the world at large.
7. Increase in efficiency : Due to the foreign competition the
producers in a country attempt to produce better quality of goods
and at the minimum possible cost. This increases the efficiency and
benefits the consumers all over the world.
8. Development of the means of transport and communications:
Foreign trade requires the best means of transport and
communication. For the advantages of foreign trade development
in the means of transport and communication is also made
possible.
9. International co-operation and understanding : The people of
different countries come in contact with each other. Commercial
intercourse amongst nations of the world encourages exchange of
ideas and culture. It creates co-operation, understanding and
cordial relations amongst various nations.
Disadvantages of Foreign Collaboration
1. Impediment in the Development of Home Industries : Foreign trade has
an adverse effect on the development of home industries. It poses a
threat to the survival of infant industries at home. Due to foreign
competition and unrestricted imports the upcoming industries in the
country may collapse.

2. Economic Dependence : The underdeveloped countries have to depend

upon the developed ones for their economic development. Such reliance
often-leads to economic exploitation. For, instance most of the
underdeveloped countries in Africa and Asia have been exploited by
European countries.

3. Political Dependence : Foreign trade often encourages subjugation and

slavery. It impairs economic independence which endangers political
dependence. For example, the Britishers came to India as traders and
ultimately ruled over India for a very long time.
4. Mis-utilisation of Natural resources : Excessive exports may
exhaust the natural resources of a country in a shorter span of time
than it would have been otherwise. This will cause economic
downfall of the country in the long run.

5. Import of Harmful Goods : Import of spurious drugs, Luxury

articles, etc. adversely affects the economy and well being of the
people.

6. Storage of Goods : Sometimes the essential commodities required

in a country and in short supply are also exported to earn foreign
exchange. This results in shortage of these goods at home and cause
inflation. For example, India has been exporting sugar to earn foreign
exchange; hence the exalting prices of sugar in the country.
7. Danger to Internal Peace : Foreign trade gives an opportunity
to foreign agents to settle down in the country which ultimately
endangers its internal peace.

8. World Wars : trade breeds rivalries amongst nations due to

competition in the foreign markets. This may event fully lead to
wars and disturbs world peace.

9. Hardships in times of wars : Foreign trade promotes lopsided

development of a country as only those goods which have
comparative cost advantage are produced in a country. During
wars or when good relations do not prevail between nations,
many hardships may follow.
Global depository Receipt
• A global depositary receipt (GDR) is a bank certificate issued in
more than one country for shareholders
•  It is a type of bank certificate that represents shares in a
foreign company, such that a foreign branch of an
international bank then holds the shares. The shares
themselves trade as domestic shares, but, globally, various
bank branches offer the shares for sale. areas in a foreign
company
• Private markets use GDRs to raise capital denominated in
either U.S. dollars or euros. When private markets attempt to
obtain euros instead of U.S. dollars, GDRs are referred to as
EDRs.
Foreign Direct Investment
• A foreign direct investment (FDI) is an investment made by a
firm or individual in one country into business interests
located in another country.
• Generally, FDI takes place when an investor establishes foreign
business operations or acquires foreign business assets in a
foreign company.
• However, FDIs are distinguished from portfolio investments in
which an investor merely purchases equities of foreign-based
companies.
• Foreign direct investments (FDI) are investments made by one
company into another located in another country.
• FDIs are actively utilized in open markets rather than closed
markets for investors.
• Horizontal, vertical, and conglomerate are types of FDI’s.
Horizontal is establishing the same type of business in another
country, while vertical is related but different, and
conglomerate is an unrelated business venture. 
• FDI equity inflows to India FY 2020 by leading investing
country. In financial year 2020, Singapore had the highest FDI
equity inflow to India, which was valued at over 1036 billion
Indian rupees, followed by Mauritius valued at over 577
billion Indian rupees.
Short term Sources of Finance
• Short-term financing is aimed to meet the demand of current
assets and pay the current liabilities of the organization.
• In other words, it helps in minimizing the gap between current
assets and current liabilities. There are different means to raise
capital from the market for small duration. Various agencies,
such as commercial banks, co-operative banks, financial
institutions, and NABARD provide the financial assistance to
organizations.
Trade Credit:
• Trade credit refers to the credit extended by the supplier of goods or services
to his/her customer in the normal course of business.
• It occupies a very important position in short-term financing due to the
competition.
• Almost all the traders and manufacturers are required to extend credit facility
(a portion), without which there is no business.
• Trade credit is a spontaneous source of finance that arises in the normal
business transactions without specific negotiation, (automatic source of
finance).
• In order to get this source of finance, the buyer should have acceptable and
dependable creditworthiness and reputation in the market.
• Trade credit is generally extended in the form of open account or bills of
exchange. Open account is the form of trade credit, where supplier sends
goods to the buyer and the payment to be received in future as per terms of
the sales invoice.
Bills payable
• A bill payable is a document which shows the amount owed
for goods or services received on credit (meaning not paid at
the time that the goods or services were received). The
provider of the goods or services is referred to as the supplier
or vendor. Hence, a bill payable is also known as an unpaid
vendor invoice.
• Examples of Bills Payable-Examples of a bill payable include a
monthly telephone bill, the monthly bill for the electricity
used, a bill for repairs that were completed, the bill for
merchandise purchased by a retailer on credit, etc.
Accrued Expenses
• An accrued expense is an accounting term that refers to an
expense that is recognized on the books before it has been
paid;
• the expense is recorded in the accounting period in which it is
incurred. Because accrued expenses represent a company's
obligation to make future cash payments, they are shown on a
company's balance sheet as current liabilities;
• accrued expenses are also known as accrued liabilities. An
accrued expense is only an estimate, and will likely differ from
the supplier’s invoice that will arrive at a later date.
 • Example of Accrued Expenses
A company pays its employees' salaries on the first day of the
following month for services received in the prior month. So,
employees that worked all of November will be paid in
December. If on December 31, the company’s income statement
recognizes only the salary payments that have been made, the
accrued expenses from the employees’ services for December
will be omitted.
Bank Finance for Working
Capital
• Cash Credit
Cash credit is a facility to withdraw money from a current bank
account without having credit balance but limited to the extent
of borrowing limit, which is fixed by the commercial bank. The
interest in this facility is not charged on the borrowing limit,
which is given by the bank but on the daily closing balance.
Bank Overdraft
• An overdraft is an extension of credit from a lending
institution that is granted when an account reaches zero.
• The overdraft allows the account holder to continue
withdrawing money even when the account has no funds in it
or has insufficient funds to cover the amount of the
withdrawal.
• Basically, an overdraft means that the bank allows customers
to borrow a set amount of money. There is interest on the
loan, and there is typically a fee per overdraft
• Overdraft is extension of credit when the salary or saving
account balance is zero.
• Overdraft facility depends on the customer and bank
relationship.
• There are two types of overdraft- secured overdraft and
unsecured overdraft.
• Overdraft loan can be taken against salary accounts, savings
account, or term deposits.
• Bank overdraft allows you to meet short term funds
requirements with a flexible repayment option.
• In case of loans, overdraft is the deposit of surplus funds to
save interest on loans.
Invoice or Bill Discounting or Purchasing Bills

• Bill or invoice discounting is a trade activity in which the seller

gets amount in advance at discounted rates from the lender.
• This makes buyers contribute in the form of interest rate in
increasing the revenue of the financial institutions, banks or
NBFCs in form of interest paid and from monthly fee.
• Bills that come under bill discounting are termed as ‘bills of
exchange’. Bill discounting feature can be used to avail loans
up to approximately 90% of the raised invoices.
• The credit period majorly depends on the buyer’s
creditworthiness. Once the bank is convinced, it provides
discount on the amount that is required to be paid at the end
of credit period.
Example of Bill Discounting
• You have sold goods to Mr. X, he has given you letter of credit
from bank of 30 days, if you want to get money from bank
before 30 days, the bank will charge some interest rate from
you, which in return will be called as discount for the seller.
Let’s assume if the amount which you were supposed to get
was Rs. 1 lakh on or after 30 days, by bank’s discount or
interest rate of Rs. 50,000 you now get Rs. 95,000 in return
form the bank. The buyer will anyhow deposit Rs. 1 lakh to the
respective bank on 30th day only.
Letter of Credit
• A letter of credit, or "credit letter" is a letter from a bank
guaranteeing that a buyer's payment to a seller will be
received on time and for the correct amount.
• In the event that the buyer is unable to make a payment on
the purchase, the bank will be required to cover the full or
remaining amount of the purchase. It may be offered as
a facility.
• Due to the nature of international dealings, including factors
such as distance, differing laws in each country, and difficulty
in knowing each party personally, the use of letters of credit
has become a very important aspect of international trade.
• A letter of credit is a document sent from a bank or financial
institute that guarantees that a seller will receive a buyer's
payment on time and for the full amount.
• Letters of credit are often used within the international trade
industry.
• There are many different letters of credit including one called
a revolving letter of credit.
• Banks collect a fee for issuing a letter of credit.
Working Capital Loan
• A working capital loan is a loan that is taken to finance a
company's everyday operations.
• These loans are not used to buy long-term assets or
investments and are, instead, used to provide the working
capital that covers a company's short-term operational needs.
• Those needs can include costs such as payroll, rent, and debt
payments. In this way, working capital loans are simply
corporate debt borrowings that are used by a company to
finance its daily operations.
• A working capital loan is a loan taken to finance a company's
everyday operations.
• Working capital loans are not used to buy long-term assets or
investments; they are used to provide working capital to
covers a company's short-term operational needs.
• Companies with high seasonality or cyclical sales may rely on
working capital loans to help with periods of reduced business
activity.
• Working capital loans are often tied to a business owner's
personal credit, so missed payments or defaults may hurt their
credit score.
Commercial papers
• Commercial paper is a commonly used type of unsecured,
short-term debt instrument issued by corporations, typically
used for the financing of payroll, accounts payable and
inventories, and meeting other short-term liabilities.
• Maturities on commercial paper typically last several days, and
rarely range longer than 270 days.
• Commercial paper is usually issued at a discount from face
value and reflects prevailing market interest rates.
Factoring
• A factor is an intermediary agent that provides cash or
financing to companies by purchasing their accounts
receivables.
• A factor is essentially a funding source that agrees to pay the
company the value of an invoice less a discount for
commission and fees.
• Factoring can help companies improve their short-term cash
needs by selling their receivables in return for an injection of
cash from the factoring company.
• The practice is also known as factoring, factoring finance,
and accounts receivable financing.
• A factor is essentially a funding source that agrees to pay a
company the value of an invoice less a discount for
commission and fees.
• The terms and conditions set by a factor may vary depending
on its internal practices.
• The factor is more concerned with the creditworthiness of the
invoiced party than the company from which it has purchased
the receivable.