ashtej
TRANSCRIPT
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INVESTMENT
ALTERNATIVE
By: Samriti Jain
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SOURCESOFLONG-TERMFINANCE
BORROWING DEBENTURES
SHARECAPITALPUBLIC DEPOSIT
Mutual Funds Bonds
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Share Capital Share Capital: Long term funds can be raised from
share capital. According to Section 86 of CompaniesAct, 1956, a company can issue only two types ofshares i.e. (a) Equity shares (b) Preference shares
Equity Shares Preference Shares
SHARES
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Shares
An instrument that signifiesan ownership position (called equity) in a corporation,and represents a claim on its proportional share inthe corporation's assets and profits. Ownership in
the company is determined by the number ofshares a person owns divided by the total numberof shares outstanding. Equity shareholders areknown as the real owners of the business.
Preference shares are those shares which duringthe life time of the company are entitled to a priorityin the payment of dividends at a fixed rate, and thereturn of the capital in the event of winding up of thecompany.
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shares
Cumulative Preference Shares
Non-cumulative Preference Shares
Participating Preference Shares
Non Participating Preference Shares
Redeemable Preference Shares
Irredeemable Preference Shares
Convertible Preference Shares
Non-convertible Preference Shares
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Debentures
A debenture is a document issued by the
company as an acknowledgement of debt. It
is a certificate issued by the company under
its seal acknowledging a debt due to itsholder.
On debentures a fixed rate of interest is paid
at regular intervals. Usually these are
secured by some asset of the company. A
debenture holder is a creditor of the
company.
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Types of Debentures
Simple or Naked or Unsecured Debentures:These debentures are not given any security ondebentures.
Secured or Mortgage Debentures: Thesedebentures are given security on assets of thecompany.
Bearer Debentures: These debentures are
easily transferable. Anybody who holds thesedebentures becomes the owner of suchdebentures.
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Registered Debentures: Registered debentures are those
debentures which are registered with the company. These
debentures can not be transferred by mere delivery but aproper procedure is to be followed for transfer. Both
transferor and transferee are expected to sign the transfer
deed.
Redeemable Debentures: These debentures are to be
redeemed on the expiry of a certain period. The interest on
debentures is paid periodically but the principle amount is
returned after a fixed period.
Irredeemable / Perpetual debentures : Those debentures
which can be repaid at the time of winding up.
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Convertible debentures: Those debentures which can be
converted into shares or other category of debentures.
Non-Convertible debentures: Those debentures which
cannot be converted. Partly Convertible debentures: When a part is
converted into shares and the remaining part is called non-
convertible portion.
Zero interest debentures: It is usually a convertibledebenture which yields no interest. The investor is
compensated for the loss of interest through conversion
into equity shares at a specified future date.
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Government Securities
Government Securities are securitiesissued by the Government for raisinga public loan or as notified in the
official Gazette. They consist ofGovernment Promissory Notes,Bearer Bonds, Stocks, Short-termTreasury bills, medium-term Treasury
notes, and long-term Treasury bondsand Government Securities.
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Government Securities are mostly
interest bearing dated securities issued
by RBI on behalf of the Government ofIndia.
GOI uses these funds to meet its
expenditure commitments. These securities are generally fixed
maturity and fixed coupon securities
carrying semi-annual coupon.
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Features of Government Securities
Issued at face value No default risk
Ample liquidity as the investor can sell
the security in the secondary market Interest payment on a half yearly basis
on face value.
No tax deducted at source Can be held in Demat form.
Tax exemptions
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Rate of interest and tenor of the security
is fixed at the time of issuance and is not
subject to change (unless intrinsic to thesecurity like FRBs - Floating Rate
Bonds).
Redeemed at face value on maturity Maturity ranges from of 2-30 years.
Securities qualify as SLR (Statutory
Liquidity Ratio) investments (unlessotherwise stated).
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Public deposits
"Public deposit is accepting deposits by a
company from the members of public(including shareholders and directors) forperiods ranging from six months to thirty sixmonths.
A company can accept deposits from thepublic to finance its medium and short-termrequirements of funds.
This source has become very popular
recently because, a company offers interestat a rate higher than offered by banks. Under this method, companies are able to
obtain funds directly from public without
financial intermediaries.
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ADVANTAGES
It is beneficial to the company acceptingdeposits since it receive finance at a lowerrates of interest than charged by the banksand special financial institutions on lending.
Interest paid on deposits is a deductible
expense for income tax purpose.Administrative cost of deposits is lower than
that involved in issuing shares anddebentures. The company has to fulfill lesser
formalities in accepting public deposits.As the rate of interest on public deposits is
fixed, it helps the company to play trading onequity, if the company is earning more than
the rate of interest paid on public deposits.
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Depositors have no interference in the
management and control of the affairs of the
company as they have no voting rights. Thus,
there is no dilution of control of shareholders.
Public deposits are not backed by any charge
on the assets of the company. The company
may accept charge on its assets while raisingloans from other sources like banks and
financial institutions.
Capital structure of the company remains
flexible by accepting public deposits. Company
can repay the deposits when they are not
required by the company.
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Disadvantages
Public deposits are fair weather friends'. It
is an uncertain and unrealistic from offinancing. When depositors feel that thecompany is in a shaky position, they maynot respond to fresh deposits or may start
withdrawing their existing deposits. Public deposits are available mainly for
short period.
The management may misuse the deposits
as such deposits are not secured. Public deposits are generally not available
to new companies or companies with
uncertain earnings.
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There are legal restrictions on the acceptance
and renewal of public deposits.
Receiving public deposits create unhealthy
trends in capital market. There are numerous
rates of interest offered by different
companies.
This source of raising finance is valid only forshort-term financial needs of the company.
Once a deposits is accepted, a company can
not repay the same before the expiry of six
months.
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Mutual Fund
A mutual fund is a professionally managed typeof collective investment scheme that pools money from
many investors to buy stocks, bonds, short-term money
market instruments, and/or other securities.
An open-ended fund operated by an investment
company
which raises money from shareholders and invests in a
group of assets, in accordance with a stated setof objectives.
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UTI
UTI is a public sector financialinstitution which mobilize savings
specially from the household sector
and reinvest the funds in to differentinvestments outlets. UTI is managed
by a competent board of trustees and
its chairman is appointed by theCentral Govt..Safety and liquidity are
the objectives of investing in UTI.
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PF The EPF is a scheme intended to help
employees from both private and non-pensionable public sectors save a fraction oftheir salary every month in a saving scheme,to be used in an event that the employee istemporarily or no longer fit to work or at
retirement. There are mainly four types ofprovident funds :-
Statutory Provident Fund
Recognized Provident Fund
Unrecognized Provident Fund Public Provident Fund
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National Savings Certificate
Scheme specially designed for Government
employees,Businessmen and other salaried classes who
are IncomeTax assesses.
No maximum limit for investment.No tax deduction at source.Certificates can be kept as collateral security to get
loanfrom banks.
Investment up to INR 1,00,000/- per annumqualifies for
Income TaxRebate under section 80C of IT Act.
Trust and HUF cannot invest.
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Bank deposits
The term bank deposits are termsgenerally used for the money which a
common person or a customer saves in
a bank for future financial security. Bank deposits are available in form of
schemes known as demand deposits.
These bank deposits sometimes mayeven be fixed.
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Post Office Schemes
Post office schemes are like thecommercial bank schemes. They have
a
Saving Account
Recurring account
Cumulative time deposit account