LONG TERM SOURCES OF

FINANCEGROUP 5

INTRODUCTION

MEANING AND PURPOSE

TO FINANCE FIXED ASSETS

TO FINANCE PERMANENT PART OF WORKING CAPITAL

TO FINANCE GROWTH AND EXPANSION OF BUSINESS

FACTORS DETERMINING LONG TERM SOURCES OF FINANCE

NATURE OF BUSINESS

NATURE OF GOODS PRODUCED

TECHNOLOGY USED

MEANING OF SHARE AND SHARE CAPITAL

A share is one unit into which the total share capital is divided. Share capital of the company can be explained as a fund or sum with which a company is formed to carry on the business and which is raised by the issue of shares.Investment in the shares of any company is a basis of ownership in the company and the person who invest in the shares of any company, is known as the shareholder, member and the owner of that company.

Types of shares As per the provision of section

85 of the Companies Act, 1956, the share capital of a company consists of two classes of shares, namely:

Preference Shares Equity Shares

Preference Shares According to Sec 85(1), of the Companies

Act, 1956, a preference share is one, which carries the following two preferential rights:

The payment of dividend at fixed rate before paying dividend to equity shareholders.

The return of capital at the time of winding up of the company, before the payment to the equity shareholder.

Types of preference shares

In addition to the aforesaid two rights, a preference shares may carry some other rights. On the basis of additional rights, preference shares can be classified as follows:

Cumulative /Non cumulative Participating/Non participating Convertible/Non convertible Redeemable/Non redeemable

Equity shares According to section 85 (2), of Companies

Act, 1956, Equity share can be defined as the share, which is not preference shares.

These shares are also known as ‘Risk Capital’

Features Residual claim to income Residual claim on assets Right to control Pre-emptive right Limited liability

Sub-division of share capital Authorised capital Issued capital Subscribed capital

Procedure of issue of shares

Issue of prospectusTo receive applicationsAllotment of sharesTo make call on shares

Distinction between Preference Shares and Equity Shares

Basis of difference Rate of dividend Payment of dividend Participation in management Winding up Arrears of dividend Voting rights

Advantages of preference share

From companies point of view Dividends do not have to be paid in a

year in which profits are poor. they do not carry voting rights does not restrict the company's

borrowing power

Merits of equity shares To management Long-term and Permanent Capital No Fixed Burden To shareholders More income Right to Participate in the Control and

Management Capital profits

Demerits of equity shares To the shareholders Uncertainly about payment of dividend Danger of over–capitalisation Ownership in name only Higher Risk To the management Conflict of interests

DEBENTURES/CORPORATE BONDS

Debenture holders/bondholders are long-term creditors of the company . Debentures/bonds are repayable after fixed period of time i.e. 5-10 yearsHolders do not carry voting rightsThey are secured. In case fail to pay interest or repay principal, can get the amount from the sale of assets of the company.

CLASSIFICATION of BONDS FIXED RATE BONDS- rate of interest is fixed

ZERO COUPON BONDS- no interest rate Return/yield=Maturity value – Acquisition value

DEEP DISCOUNT BONDS- issued at a deep discount over its maturity price. This bond appreciates to its maturity value over the maturity period.

FLOATING BONDS- rate of interest is not fixed. Changes according to Benchmark rates.

CLASSIFICATION of DEBENTURES

Redeemable Debentures- maturity date is specified.

Irredeemable Debentures- the company can repay the amount at any time but has to pay interest without fail.

Convertible Debentures- conversion from debt to equity.

Non-convertible Debentures- no conversion option

MERITS OF DEBENTURES Raising funds without

allowing control over the company.

Reliable source of long-term finance.

Tax-benefits Investor’s Safety

DEMERITS OF DEBENTURES Interest is a burden on companies. The company has to show the assets

before issuing debentures. Too much debenture-finance in a

company might lead to frustration in the minds of shareholders.

Burdensome for the company in times of depression.

BASIS SHARES DEBENTURE

Status Owners of the company.Provide ownership capital

Creditors of the company.Provide loan.

Nature of Return on

Investments

Dividends are paid.Not fixedHigh risks involved

Interests are paid.Fixed returnsLow risks involved

Rights Have the right to vote and question the management

Have no right to vote.Have no say in the management

Security No security is required to issue shares

Fixed assets are required to show before issuance.

Order of Payment

Secondary Primary

EARNING PROFITS The portion of the profits which is not

distributed among the shareholders but is retained and is used in business is called retained earnings or ploughing back of profits.

ADVANTAGES :- Cost is not involved in raising this kind of

fund. No obligation to pay back interest or loan

amount. Provides financial stability to business.

BANK LOAN AND MORTGAGES

Key: What are bank loans? Types of bank loans

General considerations for bank loan Bank lending policies

Mortgages Characteristics of mortgages

Bank loans

Definition: It is a loan which is made by the bank , to be repaid with interest on or before a fixed date . A loan is type of a debt.

It involves the redistribution of financial assets between the lender and the borrower over a period of time.

Types of bank loans Secured: it is a loan in which the

borrower pledges some asset(eg : car or property) as collateral for the loan.

.Unsecured: These are monetary loans that are not secured against the borrowers assets.

General consideration for bank loan

While lending money bank has to take into consideration:

Safety: the borrower is in a position to repay according to the terms of loan contract

Liquidity : the banker must ensure that the borrower is able to repay the loan on demand within a short period

Profitability : they must employ their funds profitably to earn sufficient income.

Purpose : banks do not grant loans for every purpose . they ensure the safety of their loan by giving it for productive purposes.

Bank lending policies Lending policies are essential for a bank

if it is to perform the function of credit creation effectively.

As the bank grows in size and the number of banking personnel involved in extending credit increase it becomes essential to put the lending policy on a formal footing.

Mortgages

It is a loan which is secured by real property through the use of a document that evidences the existence of the loan.

A mortgage occurs when an owner pledges his security as interest or collateral against the loan. Thus mortgage is a limitation on the right to property but because most mortgages occur as a condition for new loan money, the word mortgage has become the generic term for a loan secured by such real property.

Characteristics of mortgages

Interest: it may be fixed for the life of the loan or variable and change at certain pre defined periods the interest rate also changes being higher or lower.

Term: mortgage loans generally have a maximum term, that is, the number of years after which an amortizing loan will be repaid. Some mortgage loans may have no amortization, or require full repayment of any remaining balance at a certain date, or even negative amortization.

Payment amount and frequency: the amount paid per period and the frequency of payments; in some cases, the amount paid per period may change or the borrower may have the option to increase or decrease the amount paid.

Prepayment: some types of mortgages may limit or restrict prepayment of all or a portion of the loan, or require payment of a penalty to the lender for prepayment.

SELLING ASSET

OWNER’S CAPITAL

GOVERNMENT SECURIES These are one of the safest securities in

the market. Its available at primary and secondary

market of securities Any organization or an individual who

wish to invest in it can easily buy these securities.

There are no limits or impediments to invest in it.

Types Of Govt. Securities- Zero coupon bonds : It doesn’t make any kind of payment

during the period of the bond, and only at the end. Period- 5 to 6 years.

Treasury bills : It is the shortest govt. securities available. It consider a high risk investment. Period- a few months.

Treasury notes : Maturity period goes from 1 to 10 years. Payment is done six-monthly.

Treasury bonds : Maturity periods of this security goes from 10 years and onwards. The payments are made every six months.

VENTURE CAPITAL New type of financial intermediary. Emerged during the 1970s in US, in early

1980s in UK, in mid 1980s in Japan & around 1987 in India.

Important source of finance for small & medium sized firms.

Common investors are generally unwilling to invest their funds due to high risk involved.

VENTURE CAPITAL contd. Helps growth of innovative

entrepreneurship. VC is in form of equity/debt made in new

or untried concepts. VC means risk capital & carry

uncertainity.

APPLE, COMPAQ, SUN MICROSYSTEMS, INTEL, YAHOO,

AIRTEL, ETC.

Are some companies that received VC early in their development.

VC fund defined in Regulation 2(m) of SEBI Regulation, 1996.

Venture Capital fund means a fund established in the form of a company or trust which raises money through loans, donations, issue of securities or units as the case may be, and makes or proposes to make investments in accordance with these regulations.

FEATURES OF VC High risk – management risk, market risk,

production risk and operation risk. High technology Participation in management Length of investment Illiquid investment

VC ADVANTAGES Long term equity finance. Venture capitalist is a business partner. VC is able to provide practical advice &

assistance to company. VC also has a network of contacts. VC lends management support also.

WHERE ARE VCS INVESTING IN

INDIA???•IT and IT enabled services•Software products•Banking•Telecom•Pharmaceuticals•Media•Retail

WHAT A VC WANTS???• A business plan• Details of how much finance is needed & how

it will be used• The most recent trading figures of the

company• Details of management teams• Details of major shareholders• Details of other sources of finance

BUSINESS ANGELS Venture Capitalists in UK. Individuals looking for investment

opportunities. Could be an individual or a group of

individuals. Small investing amount. Usually have some say in the working of

the business.

IVCA Indian Venture Capital Association Member based national organisation Represent VC and private equity firms Promotes industry within India Comprise of VC firms, banks, angel

group, accountants, lawyers, government bodies, etc.

Provide capital for seed venture, early stage companies, later stage expansion, etc.