27-12-2012, 04:55 PM
Sources of Finance
Sources of Finance.ppt (Size: 401 KB / Downloads: 22)
Equity Share Capital
Permanent Source of Finance
Raised from common public or internal sources as per the goodwill of concern
Signifies part ownership & prime risk element in an enterprise
Merits:
A basic investment in business providing security to other investors and suppliers of money
Low risk element:
- Redemption only on the liquidation of the business entity
- Payment of dividend when sufficient profits are generated
Flexibility:
- Options of bonus and right issue
- Non- voting equity shares can also be issued
- Company can buyback its own shares from the market
Security to the Shareholders of maintaining control over company
More aggressive market dealings and high market price
Debentures
Derived from the latin word “Debre” meaning to owe
Serves as an acknowledgement of debt to the investor
Fixed rate of interest paid and redemption as per commitments
Enjoys priority in Dissolution of the Company
Generally secured against assets. Can be convertible into equity
Merits:
No dilution of control since Debenture holders are never given voting rights
Cost Effective:
- Tax Shield on the interest paid on debentures
Flexibility:
- Scheme of Debt can be framed as per the company’s needs
* Due consideration to the Paari Passu clause
- No complicated compliances serving the debt
- Own Debentures
Preference Share Capital
Special type of shares enjoying priority over payment of dividends and redemption
Should be redeemed in a period of maximum 20 years
A fixed rate of dividends paid before equity shareholders
A hybrid of both debt and equity mix
Merits:
A part of share capital of the company, hence a favorable debt equity ratio can be maintained
Preference Capital carries no voting rights
Payment of dividend only if sufficient profits are generated
An attractive investment scheme for the investors:
- A more secured investment
- A fixed rate of dividends is paid on priority basis
- Speculation tends to be generally less
Capital Financing
Seed Capital Assistance
Provided by all recognized banks
By means of loans and grants
Terms of loans sanction and repayments etc. are specified
Mainly for small and medium scale projects costing up to 1-2 Crores. A minimum 10% of promoter’s contribution is generally kept
A nominal interest along with a service charge varying with the volume of business
Capital Incentives
An economy promotion tool employed by the Government
Mainly for the promotion of the backward areas
Assistance is provided to the new undertakings either by way of a lumpsum subsidy or exemption from taxes
Mechanism is governed through State Finance Corporations and the provisions of the applicable tax laws
Normally takes 1-2 years for the release of revenue. So, bridge finances can be availed up to 85% of the sanction
Venture Capital Financing
Started in 1987-88 by creation of Technology Development Fund and guidelines for venture capital companies
To finance the upcoming modern and risky projects in sunrise sectors
Mainly in the fields of IT, Energy conservation, Quality up gradation
Main financing agencies are Asset Management Companies, FII, State Finance Corporations, banks and private companies
Common Methods of Financing:
- Equity Financing: Generally up to 49% of the total capital
- Conditional loans: Repayable as royalty ranging between 2-15%
- Income Note: Both Interest and Royalties are charged at lower rates
- Participating Debentures: Varying interest as per the operations
Venture Capital companies can claim income tax exemption under section 10(23FB) of the Income Tax Act, 1961
RB I and SEBI guidelines for registration and operations of venture capital companies to be observed