1
Financial Management
• Ruchi Gandhi (49)
• Faizan Sayed (59)
• Nikhil Solanki (39)
• Shruti Desai (9)
• Rashmi Sahoo (29)
• Nitin Kondi (19)
2
SOURCES OF FINANCE
3
IMPORTANCE OF FINANCE
4
What are the options available..??
The “Secrets” to Successful Financing
1. Choosing the right sources of capital is a decision that
will influence a company for a lifetime.
2. The money is out there; the key is knowing where to
look.
3. Raising money takes time and effort.
4. Creativity counts. Entrepreneurs have to be as creative
in their searches for capital as they are in developing
their business ideas.
Classification of funds
EQUITY FINANCING
8
Sources of Equity Financing
• Personal savings
• Friends and family members
• Angels/Private Equity
• Venture capital companies
• Public Offer (IPO & FPO)
9
Equity Shares
• Ownership of the Company
• It is know as ordinary share
• Holder has voting right
• Important proposal can be passed
only after the approval by Equity
shareholder
PREFERENCE SHARES
• Preference over the payment of dividend
• Preference in the payment of capital at the time
of liquidity
PREFERENCE SHARES
• Cumulative preference share
• Non-cumulative preference shares
• Convertible preference shares
• Non-Convertible preference shares
Bonds
• A bond is a formal contract to repay borrowed
money with interest at fixed intervals.
Types of bonds
• SECURED BONDS
• FIXED RATE BONDS
• BEARER BOND
• PREMIUM BONDS – PAR BONDS
• CONVERTIBLE BONDS (CB)
14
DEBENTURES
• Whenever a company wants to borrow a large
amount of fund for a long but fixed period, it can
borrow from the general public by issuing loan
certificates called Debentures.
Characteristics of Debenture.
• Debenture holders are the creditors of the
company.
• Debentures are repayable after a fixed period of
time.
• Debenture holders do not carry voting rights.
• Ordinarily, debentures are secured.
Types of Debentures
• a) Redeemable Debentures and Irredeemable
Debentures
• b) Convertible Debentures and Non-convertible
Debentures.
Merits
• Following are some of the advantages of
debentures:
1) Raising funds without allowing control over the
company.
2) Reliable source of long term finance.
3) Tax Benefits
4) Investors’ Safety
Demerits
• Following are the demerits of debentures:
1. Interest on debentures have to be paid every
year
2. Usually the debentures are secured
3. Debenture-finance enables a company to trade
on equity.
4. Burdensome in times of depression
Retained Earnings
• 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.
Merits
• Following are the benefits of retained earnings:
1. Cheap Source of Capital
2. Financial stability
3. Benefits to the shareholders
Limitation
• Following are the limitations of Retained
Earnings
1. Huge Profit
2. Dissatisfaction among shareholders
3. Fear of monopoly
4. Mis-management of funds
LOAN FROM FINANCIAL INSTITUTIONS
• Established by Central as well as State
Governments.
• Provide both owned and loan capital for medium
and long term.
LOAN FROM COMMERCIAL BANKS
• Generally gives Loans for Short and Medium
term, though they have started it for long term
as well.
• Provides loan to firm of all sizes
• Provides funds in manny ways such as
▫ Cash Credit, overdrafts, term loans, purchase or
discounting of bills.
INTERNATIONAL FINANCING
• American Depository Receipt (ADR)
• Global Depository Receipt (GDR)
• Foreign Currency Convertible Bonds (FCCB)
AMERICAN DEPOSITORY RECEIPT
The depository receipts issued by a company in
the USA are known as American Depository
Receipts. ADRs are bought and sold in American
markets like regular stocks
GLOBAL DEPOSITORY RECEIPT
In the Indian context, a GDR is an instrument
issued abroad by an Indian company to raise
funds in some foreign currency and is listed and
traded on a foreign stock exchange.
Company ADR GDR
Bajaj Auto No Yes
Dr. Reddys Yes Yes
HDFC Bank Yes Yes
Hindalco No Yes
ICICI Bank Yes Yes
Infosys Technologies Yes Yes
ITC No Yes
L&T No Yes
MTNL Yes Yes
Ranbaxy Laboratories No Yes
Tata Motors Yes No
State Bank of India No Yes
WIPRO Yes Yes
SATYAM - ADR
• Due to Late SEC Filling
• Unable to submit its annual report on Form
20-F
FOREIGN CURRENCY CONVERTIBLE
BONDS (FCCBs)
They are issued as a bond by an Indian company
which is expressed in foreign currency and the
principal and interest too are payable in foreign
currency.
LEASE FINANCING
Introduction
• Lease is a contract between the owner of an
asset (the lessor) and its user (the lessee) for the
right to use the asset, during a specified period
in return for a mutually agreed periodic payment
• The important feature of a lease contract is
separation of the ownership of the asset from its
usage
• “Why own a cow when the milk is so cheap? All
you really need is milk and not the cow.”
ADVANTAGES OF LEASING
(1)SAVING OF CAPITAL:
(2) FLEXIBILITY AND CONVENIENCE:
TYPES OF LEASES
FINANCIAL LEASE
• Long-term, non-cancellable lease contracts are known
as financial leases
• It contains a condition whereby the lessor agrees to
transfer the title for the asset at the end of the lease
period at a nominal cost.
• Under this lease the lessor recovers 90% of the fair
value of the asset as lease rentals and the lease period
is 75% of the economic life of the asset.
• Agreement is irrevocable
• In India, financial leases are very popular with high-
cost and high technology equipment
OPERATING LEASE
• An operating lease stands in contrast to the
financial lease in almost all aspects
• only a limited right to use the asset
• The lessor is responsible for the upkeep and
maintenance of the asset. The lessee is not given
any uplift to purchase the asset at the end of the
lease period.
• Normally the lease is for a short period and even
otherwise is revocable
• Mines, Computers hardware, trucks and
automobiles
SALE AND LEASE BACK
• It is a sub-part of finance lease
• Under this, the owner of an asset sells the asset
to a party (the buyer), who in turn leases back
the same asset to the owner in consideration of
lease rentals
• Assets are not physically exchanged but it all
happens in records only. This is nothing but a
paper transaction.
• Suitable for those assets, which are not subjected
depreciation but appreciation, say land
LEVERAGED LEASING
• Under leveraged leasing arrangement, a third
party is involved beside lessor and lessee.
• The lessor borrows a part of the purchase cost
(say 80%) of the asset from the lender and the
asset so purchased is held as security against the
loan.
• The lender is paid off from the lease rentals
directly by the lessee and the surplus after
meeting the claims of the lender goes to the lessor.
DIRECT LEASING
• Under direct leasing, a firm acquires the right to
use an asset from the manufacturer directly.
• The ownership of the asset leased out remains
with the manufacturer itself.
• The major types of direct lessor include
manufacturers, finance companies, independent
lease companies, special purpose leasing
companies etc
TRADE CREDIT
TRADE CREDIT
• SHORT – TERM FINANCING
• Suppliers of goods & services allow customers credit
for a specified period to make payment.
Open Account Credit
Arrangement
• Credit can be
Acceptance Credit Arrangement
Volume of trade credit & its popularity depends
on:
• The terms of trade credit
• Reputation of the purchasing firm
• Financial position of the seller
• Volume of purchases to be made by the buyer
MERITS
• Ready availability
• No need to arrange finance formally
• No charge against firm’s assets
• Flexible means of financing
DEMERITS
• Cost of trade credit may be very high
• Availability of liberal trade facilities may induce
overtrading
FACTORING
WHAT IS FACTORING?
• Financial service designed to help firms to
manage their receivables better
• Converts non-productive assets(receivables) into
productive assets(cash)
FUNCTIONS
• To finance the assigned receivables.
• To maintain account relating to receivables.
• To provide protection against default in payment
by debtors.
• Credit analysis of the customer.
PROCESS
1. Seller sells the goods to the buyer.
2. Seller transfers the trade debts to the
factor.
3. Seller informs the buyer to pay the
proceeds to the factor.
4. Factor after deducting Commission,
interest on the value of trade debts,
pays the balance to the seller.
5. On due date buyer will pay money
to the factor.
TYPES OF FACTORING
Recourse Factoring
Non-recourse Factoring
Maturity Factoring
Advance Factoring
Factoring companies in India
• Canara bank Factors Limited
• SBI Factors and Commercial Services Pvt. Ltd
• Global Trade Finance Limited
• Export Credit Guarantee Corporation of India
Ltd
• Citibank NA, India
• Small Industries Development Bank of India
(SIDBI)
• Standard Chartered Bank
COMMERCIAL PAPER
• An Unsecured Promissory Note Issued by a firm
to raise funds for short period
• Amount raised by Commercial Paper is
generally very large.
• Debt is totally unsecured.
Eligibility Criteria
1. Minimum Tangible Asset
2. Minimum Current Ratio
3. Minimum Credit Rating
4. Listed Requirements
5. Issue Expenses
MERITS
• No Restrictive Conditions
• High Liquidity
• Cost of Commercial Paper to issuing firm is
lower than Cost of Commercial Bank Loan
• Provides Continuous source of funds
LIMITATIONS
• New and Moderately rated firms are not able to
raise finance by this method.
• Size of the money that can be raised, depends on
the excess liquidity available with the supplier of
funds at a particular time.
• It is an impersonal method of financing.
CERTIFICATE OF DEPOSIT
• In exchange of keeping money
• Has a specific, fixed term and fixed interest rate
• Heavy penalties on the early withdrawal of the
amount deposited in a CD
LETTER OF CREDIT
“A LETTER OF CREDIT IS A COMMERCIAL
INSTRUMENT USED AS A MEANS OF FINANCING
INTERNATIONAL BUSINESS TRANSACTIONS”
FOUR PARTIES ARE INVOLVED IN THIS
TRANSACTION
• THE BUYER (THE APPLICANT)
• THE ISSUING BANK
• THE ADVISING BANK (MAY ALSO BE THE
CORRESPONDENT, CONFIRMING BANK)
• THE SELLER (THE BENEFICIARY)
How does a letter of credit operate?
57
