Saturday, September 12, 2020

TYPES OF FINANCING /LONG TERM SOURCE OF FINANCING PART 1

 

  • TYPES OF FINANCING


  • FINANCIAL MANAGEMENT
  • FINANCIAL NEEDS OF THE BUSINESS

  • BASIC PRINCIPLES
  • STAGE OF DEVELOPMENT


  • SOURCES OF FINANCE



  • LONG TERM SOURCES
  1. SHARE CAPITAL
  2. PREFERENCE SHARES
  3. RETAINED EARNING
  4. DEBENTURES
  5. LOANS FROM FINANCIAL INSTITUTIONS
  6. LOANS FROM COMMERCIAL BANKS
  7. VENTURE CAPITAL FUNDING
  8. ASSETS SECURITISATION
  9. INTERNATIONAL FINANCING
  • EQUITY SHARES ( ORDINARY SHARES)
  • THE CAPITAL REPRESENTED BY THE ORDINARY SHARES IS CALLED SHARE CAPITAL OR EQUITY CAPITAL. IS ALSO KNOWN AS VARIABLE INCOME SECURITY. THE HOLDERS OF EQUITY ARE THE LEGAL OWNERS OF THE COMPANY. THEY ARE ENTITLED TO DIVIDENDS AFTER THE INCOME CLAIMS OF OTHERS HAVE BEEN SATISFIED. SIMILARLY WHEN THE COMPANY IS WOUND UP THEY CAN EXERCISE THEIR CLAIMS ON ASSETS AFTERS THE SATISFACTION OF OTHER’S CLAIMS.
  • EQUITY SHARES FEATURES

1.     SOURCE OF PERMANENT CAPITAL

2.     PRACTICALLY THEY ARE THE OWNERS AS THEY TAKE THE HIGH RISK

3.     ENTITLED TO DIVIDEND AFTER THE INCOME CLAIMS OF OTHER STOCK HOLDERS ARE SATISFIED

4.     DIVIDEND PAYABLE  TO THEM IS AN APPROPRIATION OF PROFITS AND NOT A CHARGE AGAINST  PROFITS

5.     IN THE EVENT OF WINDING : CAN EXERCISE THEIR CLAIMS ON ASSETS AFTER THE CLAIMS OF  OTHER SUPPLIERS OF CAPITAL HAVE BEEN MET

6.     THE COST OF EQUITY IS THE HIGHEST

7.     ORDINARY SHARE CAPITAL ALSO PROVIDES A SECURITY TO OTHER SUPPLIER OF FUNDS. DEBT EQUITY RATIO IS EXAMINED BY THE FINANCIAL INSTITUTIONS

  • PRO AND CONS OF EQUITY FINANCING
  • ADVANTAGES
  1. PERMANENT CAPITAL
  2. BORROWING BASE
  3. DIVIDEND PAYMENT DISCRETION
  4. CAN MAKE FURTHER ISSUE OF CAPITAL

 

  • CONS
  1. COST
  2. RISK
  3. EARNING DILUTION
  4. OWNERSHIP DILUTION
  • PREFERENCE SHARES

 

  1.  SPECIAL KIND OF SHARES
  2. THE HOLDERS OF SUCH SHARES ENJOY PRIORITY BOTH AS REGARDS TO REPAYMENT OF FIXED AMOUNT OF DIVIDEND AND ALSO TOWARDS REPAYMENT OF  CAPITAL ON WINDING UP OF THE COMPANY
  3. HYBRID SECURITY BECAUSE IT HAS MANY FEATURES OF BOTH ORDINARY AND DEBENTURES.
  • SIMILAR TO EQUITY IN THAT:-

a)    THE NON PAYMENT OF DIVIDENDS DOES NOT FORCE THE COMPANY TO INSOLVENCY

b)    NOT DEDUCTIBLE FOR TAX

  • PREFERENCE SHARES
  1. SIMILAR TO DEBENTURES
  2. DIVIDEND RATE IS FIXED
  3. DO NOT SHARE IN THE RESIDUAL EARNING
  4. HAVE CLAIMS ON INCOME AND ASSETS PRIOR TO ORDINARY SHAREHOLDERS
  5. DO NOT HAVE VOTING RIGHTS
  • FEATURES OF PREFERENCE SHARES
  1. CAN BE RAISED THROUGH A PUBLIC ISSUE
  2. SUCH SHARES ARE CUMULATIVE ( THE DIVIDEND PAYABLE IN A YEAR OF LOSS GETS CARRIED OVER THE NEXT YEAR)
  3. RATE OF DIVIDEND IS HIGHER THAN DEBT
  4. FUNDS HAVE TO REPAID AT THE END OF STIPULATION PERIOD
  5. VOTING RIGHT IN EXCEPTIONAL CASES
  • TYPES OF PREFERENCE SHARES
  1. REDEEMABLE PREFERENCE SHARES
  2. IRREDEEMABLE PREFERENCE SHARES
  3. CUMULATIVE PREFERENCE SHARES
  4. NON CUMULATIVE PREFERENCE SHARES
  5. PARTICIPATE PREFERENCE SHARES
  6. CONVERTIBLE PREFERENCE SHARES
  7. NON CONVERTIBLE PREFERENCE SHARES
  8. NON PARTICIPATING PREFERENCE SHARES
  • PRO CONS OF PREFERENCE SHARES
  • PRO OF PREFERENCE SHARES
  1. MORE FLEXIBILITY AND LESSER TO BURDEN ON THE COMPANY
  2. RISK LESS LEVERAGE ADVANTAGE
  3. FIXED DIVIDEND
  4. LIMITED VOTING RIGHTS
  5. NO DILUTION OF EPS ON ENLARGED CAPITAL BASE

 

 

  • CONS OF SHARES
  1. NO DEDUCITBILITY OF DIVIDEND
  2. COMMITMENT TO PAY DIVIDEND
  3. CUMULATIVE IN NATURE
  • RETAINED EARNING
  1. PROVIDED BY ACCUMULATING THE PROFITS OF THE COMPANY
  2. BY PLOUGHING THEM BACK INTO BUSINESS
  3. SUCH FUNDS BELONG TO THE ORDINARY SHAREHOLDERS
  4. INCREASE THE NET WORTH OF THE COMPANY
  5. SUCH FUNDS ENTAILS NO RISK
  6. CONTROL IS NOT DILUTED
  • MEANING OF DEBENTURES
  • IF A COMPANY NEEDS FUND FOR EXPANSION AND DEVELOPMENT PURPOSE WITHOUT INCREASING ITS SHARE CAPITAL, CAN BORROW FROM THE GENERAL PUBLIC BY ISSUING CERTIFICATES FOR A FIXED PERIOD OF TIME AND A FIXED PERIOD OF TIME AND AT A FIXED RATE OF INTEREST. THIS LOAN CERTIFICATE IS CALLED DEBENTURE. DEBENTURE IS ISSUED UNDER THE COMMON SEAL OF THE COMPANY ACKNOWLEDGING THE RECEIPT OF MONEY.
  • DEFINITION
  • SEC 2(30)  OF THE COMPANY ACT DEFINES” DEBENTURE INCLUDES DEBENTURE STOCK, BONDS AND ANY OTHER SECURITIES OF A COMPANY WHETHER CONSTITUTING A CHARGE ON THE ASSETS OF THE COMPANY OR NOT.”
  • DEBENTURE MEANS A DOCUMENT WHICH EITHER CREATES A DEBT OR ACKNOWLEDGES IT AND ANY DOCUMENT WHICH FULFILLS EITHER OF THOSE CONDITIONS IS DEBENTURE”
  • FEATURES
  1. DEBENTURES ARE ISSUED ON THE BASIS OF DEBENTURE TRUST DEED WHICH LISTS THE TERMS AND CONDITIONS ON WHICH DEBENTURES ARE FLOATED
  2. DEBENTURE ARE EITHER UNSECURED OR SECURED
  3. MAY OR MAY NOT BE LISTED ON THE STOCK EXCHANGE
  4. COST IS VERY LOW
  5. INTEREST PAYABLE ON DEBENTURES CAN BE CHARGED AS AN EXPENSE BEFORE TAX
  6. FEATURES
  7. FROM THE INVESTOR’S POINT OF VIEW :
  • MORE ATTRACTIVE PROSPECT
  • AS INTEREST IS MANDATORY

o    DEBENTURES ARE INSTRUMENTS FOR RAISING LON TERM DEBT CAPITAL

o    PERIOD OF MATURITY FROM 3 TO 10 YEARS

  • KINDS OF DEBENTURES
  • REGISTERED DEBENTURES:- ONE WHICH IS REGISTERED  IN THE NAME OF A HOLDER IN THE BOOKS OF THE COMPANY. THESE ARE NOT NEGOTIABLE INSTRUMENT.
  • BEARER DEBENTURES:- THESE ARE NEGOTIABLE INSTRUMENTS AND CAN BE EASILY TRANSFERRED.
  • SECURED DEBENTURES:- THEY ARE SECURED BY HAVING CHARGE ON THE ASSETS OR PROPERTY OF THE COMPANY.
  • UNSECURED OR NAKED DEBENTURES
  • REDEEMABLE DEBENTURES:- ONE UNDER WHICH THE PRINCIPAL MONEY IS REPAYABLE AFTER A FIXED PERIOD.
  • PERPETUAL DEBENTURES:-IRREDEEMABLE
  • CLASSIFICATION OF DEBENTURES ACCORDING TO CONVERTIBILITY
  • CONVERTIBLE DEBENTURES : : CONVERTED INTO EQUITY SHARES AS PER THE TERMS OF ISSUE IN RELATION TO PRICE AND TIME OF CONVERSION.INTEREST RATES ON SUCH DEBENTURES ARE GENERALLY LESS THAN NON CONVERTIBLE DEBENTURES BECAUSE OF CONVERSION OF GETTING IN SHARES
  • PARTLY CONVERTIBLES DEBENTURES: CARRY FEATURES OF BOTH CONVERTIBLE AND NON CONVERTIBLE .
  • NON CONVERTIBLE DEBENTURES : DO NOT HAVE ANY FEATURE OF CONVERSION AND REPAYABLE ON MATURITY.
  • NOMINATION OF DEBENTURES( SEC 72)
  • NOMINEE IN CASE OF DEATH OF DEBENTURE HOLDER
  • IN CASE OF JOINT HOLDERS MAY NOMINATE TOGETHER IN THE PRESCRIBED MANNER, ANY PERSON
  • NOMINEE CAN BE A MINOR
  • DEBENTURE CERTIFICATE
  • EVERY COMPANY SHALL WITH IN THREE MONTH AFTER THE ALLOTMENT OF ANY DEBENTURES OR DEBENTURES STOCK  AND WITH IN TWO MONTHS AFTER THE APPLICATION FOR THE REGISTRATION OF THE TRANSFER HAS BEEN RECEIVED. THE  CENTRAL GOVT MAY EXTEND THE PERIOD UPTO 9 MONTHS.
  • DIFFERENCE BETWEEN SHARE AND DEBENTURES
  • SHARE
  1. A SHAREHOLDER IS THE MEMBER OF THE COMPANY
  2. HAS VOTING RIGHTS
  3. DISCRETIONARY
  4. NOT REDEEMABLE
  5. NOT SECURED
  6. PAID AFTER SATISFACTION OF ALL CLAIMS
  • DEBENTURES
  1. BUT DEBENTURE HOLDER IS NOT
  2. NO VOTING RIGHTS
  3. COMPULSORY PAYMENT
  4. NORMALLY REDEEMABLE
  5. GENERALLY SECURED
  6. PRIORITY IN PAYMENT DURING WINDING
  • DIFFERENCE BETWEEN  PREFERENCE SHARE AND DEBENTURES
  • PREFERENCE SHARES
  1. SPEICAL KIND OF SHARES
  2. PRIORITY OF DIVIDEND AND TOWARDS REPAYMENT OF CAPITAL IN CASE OF WINDING UP OF THE COMPANY
  3. HYBRID FROM OF FINANCING
  4. HAVING FEATURES OF BOTH EQUITY AND DEBT
  • DEBENTURES
  1. KIND OF DEBT RAISED THROUGH PUBLIC
  2. FIXED INTEREST AND CHARGE AGAINST PROFIT
  3. INSTRUMENT OF RAISING FUNDS FOR LONG DURATION FOR SPECIFIED TIME PERIOD
  • BONDS
  • BOND IS FIXED INCOME SECURITY CREATED TO RAISE FUND
  • BONDS CAN BE RAISED THROUGH PUBLIC ISSUE AND PRIVATE PLACEMENT
  • TYPES OF BOND :
  1. CALLABLE BONDS
  2. PUT TABLE BONDS
  • CALLABLE BONDS : A CALLABLE BONDS HAS A CALL OPTION WHICH GIVES THE ISSUER THE RIGHT TO REDEEEM THE BOND BEFORE MATURITY AT A PREDETERMINED PRICE KNOWN AS CALL PRICE GENERALLY AT PREMIUM
  • PUTTABLE BONDS : GIVE THE INVESTOR A PUT OPTION THE RIGHT TO SELL THE BOND BACK TO THE COMPANY BEFORE MATURITY
  •  FOREIGN BONDS
  • FOREIGN CURRENCY CONVERTIBLE BONDS :
  1. VERY LOW RATE OF INTEREST
  2. THE ADVANTAGE TO THE ISSUER IS THAT ISSUER CAN GET FOREIGN CURRENCY AT VERY LOW COST
  3. RISK IS THAT IN CASE THE BOND HAS TO BE REDEEMED ON THE DATE OF MATURITY. ISSUER HAS TO MAKE THE PAYMENTS AND AT THAT TIME THE ISSUER MAY NOT HAVE THE MONEY.
  •  
  • PLAIN VANILLA : THE ISSUER WOULD PAY THE PRINCIPAL WITH THE INTEREST RATE
  • THIS TYPE OF BOND WOULD NOT HAVE ANY OPTIONS
  • BOND CAN BE ISSUED IN THE FORM OF DISCOUNTED BOND OR CAN BE ISSUED IN THE FORM OF COUPON BEARING BOND
  •  CONVERTIBLE FLOATING RATE NOTES
    ( FRN)
  • A CONVERTIBLE FRN WITH AN OPTION FOR THE HOLDER TO CONVERT IT INTO LONGER TERM DEBT SECURITY WITH A SPECIFIED COUPON
  • PROTECT AN INVESTOR AGAINST FALLING INTEREST RATES
  • THE LONG TERM DEBT SECURITY CAN BE SOLD IN THE MARKET AND INVESTOR CAN EARN PROFIT
  • CAPITAL GAIN IS NOT APPLICABLE TO FRN
  •  DROP LOCK BOND
  •  A FLOATING RATE NOTE WITH NORMAL FLOATING RATE
  • FLOATING RATE BOND WOULD BE AUTOMATICALLY CONVERTED INTO FIXED RATE BOND IF INTEREST RATE FALLS BELOW A PREDETERMINED LEVEL
  • THE NEW FIXED RATE STAYS TILL THE  DROP LOCK BOND REACHES ITS MATURITY
  1. VARIABLE RATE DEMAND OBLIGATIONS
  •  A NORMAL FLOATING RATE NOTE WITH A NOMINAL MATURITY
  • THE HOLDER OF THE FLOATING RATE NOTE CAN SELL THE OBLIGATION BACK TO THE TRUSTEE AT AT PAR PLUS ACCURED INTEREST
  • IT GIVES THE INVESTOR AN OPTION TO EXIT SO MORE LIQUID THAN NORMAL FRN
  •  

 

 

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