INTRODUCTION TO FINANCE

LONG TERM FINANCE

LONG TERM FINANCE

Required for New Project Expansion of Existing Project Modernization Long Term Investment Liquidity Matching

LONG TERM FINANACE

SOURECES
SHARES

DEBENTURES

LONG TERM LOAN

INTERNAL RESERVES

VENTURE CAPITAL

FOREIGN SOURCES

LONG TERM FINANCE

SHARE CAPITAL
What is Capital? ---Owners contribution/Investment in the Business or Profession Individual Business- Proprietors Capital Partnership Business- Partners Capital Company Form- Equity Share Capital

SHARE CAPITAL
Company Act Allows Equity Share Capital
Preference Share Capital

SHARE CAPITAL-TATA MOTORS

SHARE CAPITAL-TCS

SHARE CAPITAL-IDEA

EQUITY SHARE CAPITAL

Equity Share - Equity Interest in Company - Equity Share in Profits - Equity Share in Companys Assets Equity Shareholders are the owners of business. Equity Shareholders have the right to vote.

EQUITY SHARE CAPITAL

ADVANTAGES to Company No fixed charges attached to equity shares. Equity Shares carry no fixed maturity. Sale of Equity Shares increases the creditworthiness of the company. Sale of Equity Shares is easy.

EQUITY SHARE CAPITAL

DISADVANTAGES to Company Extend voting rights or Control to shareholders. The cost of underwriting and distribution is high. Dividend payable to equity shareholders is not allowed as expenses under Income Tax act.

EQUITY SHARE CAPITAL

Company pays dividend to equity shareholders from distributable profits after all other claims are met. Dividend rate is not fixed- vary year to year. Equity shareholders have right to vote on every resolution placed in AGMproportionate to share capital.

EQUITY SHARE CAPITAL

Section 86 of Company Act allows two types of Equity Share Capital

With voting Rights

With differential rights as to dividend , voting Or subject to other conditions.

PREFERENCE SHARE CAPITAL

Section 85 defines Preference Share Capital It is that part of Share Capital which fulfills both the following two conditionsa) that in respect of dividend it carries or will carry preferential right to be paid in fixed amount or an amount calculated at a fixed rate.

PREFERENCE SHARE CAPITAL

b) that as respect capital- it carries or will carry on a winding up or repayment of capital a preferential right to be repaid the amount of the paid up capital or deemed to have been paid up.

PREFERENCE SHARE CAPITAL

Preference Shareholders have preferential rights in respect of- Dividends - Companys Assets The dividend of Preference Shares is fixed.

PREFERENCE SHARE CAPITAL

Advantages to Company It permits company to avoid sharing control through participation in voting. If preference Shares are irredeemable they are flexible than debentures. Obligation to pay fixed rate of interest is not binding.

PREFERENCE SHARE CAPITAL

Disadvantage to Company Dividend is not allowed as an expenses under Income Tax Act. Cost is far greater than the cost of debentures. Non payment of dividends gives rights to preference shareholders to participate in voting.

PREFERENCE SHARE CAPITAL GENERAL TYPES

CUMULATIVE
Cumulative gives right to demand the unpaid dividend of any year during the year when profits are ample. It allows accumulation of dividend in case of loss to company.

NON-CUMULATIVE
Non Cumulative can not claim unpaid dividend. They carry a right to fixed dividend out of the profits of any year. It does not allow accumulation of dividend.

PARTICIPATING
These shares are entitled to fixed dividend and in addition carry a right to participate in the surplus profits along with equity shareholders after a dividend at a certain rate has been paid to equity shareholders. Also in case of winding up after paying both the preference and equity shareholders if any surplus left then get additional share in surplus assets of the company.

NON-PARTICIPATING
Additional rights are not available to these shareholders. Unless expressly provided either in memorandum or articles or in the term of issue preference shares are non participating.

REDEEMABLE
These shares are to be redeemed at a fixed date or after certain period of time.

NON-REDEEMABLE
The Company Act 1956 prohibits the issue of non redeemable or redeemable after the expiry of a period of twenty years from the date of issue of preference shares.

VOTING RIGHTS
Voting Rights provides Control on the Company.
Section 87 of Company Act 1956 allows voting rights to shareholders.

VOTING RIGHT
EQUITY SHAREHOLDERSection 87 (1) (a) Every member of a company limited by shares and holding any equity share capital therein shall have a right to vote on every resolution placed before the company; and (b) His voting on a poll shall be in proportion to his share of the paid up equity capital.

VOTING RIGHT
PREFERENCE SHAREHOLDERSSection 87 (2)(a) Every member of a company limited by shares and holding any preference share capital therein shall, have a right to vote only on resolutions placed before the company which directly affect the rights attached to his preference shares.

VOTING RIGHT
PREFERENCE SHAREHOLDERSSection 87 (2)(b) Every member of a company limited by shares and holding any preference share capital therein shall, be entitled to vote on every resolution placed before the company at any meeting, if dividend due on such capital or any part of such dividend has remained unpaid.

ISSUE OF SHARE CAPITAL METHODS

PRIVATE PLACEMENT RIGHTS ISSUE PREFERNTIAL ALLOTMENT INITIAL PUBLIC OFFER SECONDARY PUBLIC OFFER SWEAT EQUITY SHARES EMPLOYEE STOCK OPTIONS

ISSUE OF SHARE CAPITAL METHODS

RIGHT ISSUEIt is offer to existing shareholders the opportunity to subscribe further shares. Right of entitlement can be sold. Lower cost of issue. Shareholders are able to maintain their original proportion of share ownership.

ISSUE OF SHARE CAPITAL METHODS

SWEAT EQUITY SHARESSection 79 A of company Act permits to issue sweat equity shares to employees or directors of company at discount or for consideration other than cash- for providing know-how, making available rights of intellectual property or value additions etc.

ISSUE OF SHARE CAPITAL METHODS

STOCK OPTIONSThe right to buy a designated stock at the option of the holder at any time with a specified period at a determinable price. It can also represent the right to sell designated stocks within an agreed period at a determinable price. Options are granted to management and key employees.

ISSUE OF SHARE CAPITAL METHODS

INITIAL PUBLIC OFFER-IPOIPO is regulated byCompany Act 1956 Securities Contracts Act 1956 The Securities and Exchange Board of India. Listing Agreements of Stock Exchanges.

ISSUE OF SHARE CAPITAL METHODS

INITIAL PUBLIC OFFER-IPO It is new issue of shares in Primary Market by unlisted company. Through prospectus a company invites offers from public to subscribe its shares. It requires underwriting of issue High cost of issue.

ISSUE OF SHARE CAPITAL METHODS

SECONDARY MARKET & PUBLIC OFFER Securities that are already outstanding and owned by investors are usually purchased and sold through secondary market. In this market outstanding issues are permitted to trade through stock exchanges. Secondary Public Offer Issue by listed company.

DEBENTURES
Debenture includes debenture stock, bonds and any other securities of a company. Defined as-Acknowledgement of debt, given under the seal of the company and containing a contract for the repayment of the principal sum at a specified date and for payment of interest at fixed rate percent, and it may or may not give the charge on the assets to the company as security of loan.

DEBENTURES
COMMON FEATURES Credit Instrument- Debenture holder is creditor of the company. Interest Rate- Promise to pay fixed interest periodically. Collateral- Security may be offered. Maturity Date- Fixed Maturity date. Voting Rights- No voting rights Priority In Liquidation.

DEBENTURES
Advantages Fixed cost capital help increase in profits available for equity shareholders. Company can raise funds without diluting control of equity shareholders. After tax cost of capital of debenture is lower. Hedge against inflation as interest and principal repayment amount is fixed. Company can adjust it capital gearing debt equity ration by redemption or by raising debentures.

DEBENTURES
Disadvantages It increases financing risk- periodic fixed payment of interest and principal amount. The debenture trust deed may contain restrictive covenants which may not be favorable to management. Fixed repayment commitment should be met regardless of the liquidity position. If company earns rate of return less the cost of debentures then adverse effect on EPS.

DEBENTURES TYPES
Secured and Unsecured Convertible and Non Convertible Zero Interest Fully Convertible (ZFCD)-within three years. Zero Interest Bond (ZIB) Deep Discount Bond (DDB) i.e. Face value Rs.1 lakh- deep discount price
Rs.2700/- maturity period 25 years.

Debt for Equity Swap Multi-option (Redeemable/Convertible) Bonds Floating Rate Bonds- Periodical change in interest. Indexed Bonds- safeguard against inflation. Warrant attached bonds or Secured Premium Note (SPN)

DEBENTURES TYPES

TERM LOAN
From Financial Institutions such as SIDBI. From NBFC From various types of Banks Advantages and Disadvantages same as per Debt instruments. Industry Specific Term Loans are offered. Necessity of Credit Rating.

VENTURE CAPITAL
It is an investment of capital in relatively high risk enterprises- High Risk Capital. Financing /Funding to risky, unproven but sophisticated technologies. High risk involved in investment. Good return on investment may not be available. The investor known as Venture Capital Firm or Venture Capitalist. Enterprise involving risk known as Venture Capital Undertaking.

VENTURE CAPITAL
Subscriber Depositor Unit holders Of MF Govt.

Venture Capital Fund

Venture Capital Undertaking

VENTURE CAPITAL
SEBI GUIDELINES Set up by trust, company & shall not carry on
any other activity. May raise money from Indian or Foreign Investor- Minimum money Rs. 5 lacs. 80% of the funds shall be invested in the (a) Equity Shares or related securities of an unlisted company thru private placement. (b) In the financially weak or sick company

VENTURE CAPITAL
SEBI GUIDELINES Securities or units issued by VCF shall not be listed till expiry of 4 years. VCF shall not invest in the equity shares of any company or institutions providing financial services. VCF may raise fund thru private placement.

VENTURE CAPITAL
Section 10 (23F) of Income Tax Act provides exemption to VCF income by way of dividends or long term capital gains- if certain conditions are satisfied. Foreign Venture Capital Investors- Regulated by SEBI Foreign Capital Investors Regulation 2000.

VENTURE CAPITAL
Activities Eligible for Venture Capital Funda) Development of new product/process on a commercial scale. b) Commercial exploitation of laboratory proven technology. c) Adoption of foreign technical know-how to suit Indian conditions. d) Technology up gradation leading to efficiency in material/energy consumption, cost reduction etc.

VENTURE CAPITAL
Stages in VCF financingSeed Money to prove concept or develop a product. Start Up For marketing and product development. First Round Additional amount after start up for manufacturing and sales. Second Round For working capital. Third Round Expansion of project after break even. Fourth Round Bridge finance for firm likely to go public soon.

VENTURE CAPITAL
Criteria of Venture Capital Undertaking1. Technically Feasible. 2. Commercially Viable. 3. Technical and Managerial skill & Competence. 4. Long run competitive advantages over other units.

VENTURE CAPITAL
Types of Venture Capital FinancingA. Equity Financing
i) In the form of equity shares- up-to 49% of total share capital. ii) No dividend income iii) Return in the form of long term capital gain

B.

Debt Financingi) In the form of conditional loan ii) No interest payable on loan iii) Return in the form of Royalty

C.

Income Notesi) Return in the form of low interest rate ii) Royalty on production.

VENTURE CAPITAL
VCF INDIA Risk Capital Technology Finance Corporation Ltd. (RCTC) Venture Capital Fund (Govt. of India) Technology Development and Information Company of India (TDICI) Gujarat Venture Finance Ltd (GVFL) State Bank Venture Capital Fund CanBank Venture Capital Fund APIDC venture Capital Ltd.

FOREIGN CAPITAL
FOREIGN DIRECT INVESTMENT- FDI FOREIGN CURRENCY CONVERTIBLE BONDS- FCCB AMERICAN DEPOSITORY RECEIPTSADR GLOBAL DEPOSITORY RECEIPTSGDR EXTERNAL COMMERCIAL BORROWINGS - ECB

FDI
FDI represents investment made for setting up branches, units or subsidiaries in one country by the overseas bodies. RBI is regulatory authority for FDI through automatic route. - 100% Export Oriented Units - Free Trade Zones - Software Technology Park

FDI
Government approval through Foreign Investment Promotion Board- FIPB All other proposals which do not meet the parameters of automatic route need to be considered by central government for approval. Foreign Investment Implementation Authority FIIA set up to help investors for approval of FDI.

FCCB
Bonds issued in accordance with the relevant scheme and subscribed by a non resident in foreign currency, and convertible into depository receipts or ordinary shares of issuing company in any manner, on the basis of any equity related warrants attached to debt instrument.

FCCB
Unsecured Bonds Fixed rate of Interest Option for conversion into equity shares. Needs to be subscribed in foreign currency generally US$. Low interest rates. Projection of cash outflow cannot be made. Attracts capital gain tax, TDS etc.

ADR/GDR
A GDR or ADR means any instrument in the form of a Depository receipt or certificate by whatever name it is called, created by the Overseas Depository Bank (ODB) outside India and issued to non-resident investors against the issue of ordinary shares or foreign currency convertible bonds of issuing company.

ADR/GDR
Freely convertible foreign currency negotiable instruments generally US$. The issue of such instruments involves the delivery of ordinary shares of an Indian company to a domestic custodian bank in India, which in turn instructs an overseas depository bank to issue GDR/ADR on a predetermined ratio. The GDR/ADR can be sold outside India in their existing form. The underlying shares (arising after redemption of GDR/ADR) can also be sold in India. While ADRs are listed on the US stock exchanges, the GDRs are usually listed on a European stock exchange. Two way fungibility- re issue of ADR/GDR in place of shares which were issued earlier by way of conversion of ADR/GDR. RBI issued Guidelines in 2002 need to be complied.

External Commercial Borrowing

Raising of long term finance from international market. It includes loan from foreign banks, buyers credit, fixed rate bonds, etc. Government and RBI issued guidelines for ECB. ECB can be accessed through automatic route or approval route.

ECB
Minimum maturity 3 years for ECB upto $ 20 millions and 5 years for greater than $20 millions. ECB upto $100 million can be approved by RBI. ECB raised is not permitted for investment in stock exchange and real estate. Interest rate of ECB is tied with LIBOR

LONG TERM FINANCE

SHARE CAPITAL DEBENTURES LONG TERM LOANS VENTURE CAPITAL FOREIGN CAPITAL