Professional Documents
Culture Documents
OF FINANCE
Sources of Finance
The sources from which a business meets its financial
requirements can be classified as follows:
I Medium Term Sources
Cash credit
Overdraft
Bill Discounting
Commercial Paper
Trade credit
Advances from Customers
SECURITY
FINANCING
Security financing is a method of getting external source of
financing for the company. The important securities which help in
raising funds for a company are the following:
1. Equity shares
Bonus issues
Rights issues.
Sweat equity share
2. Preference shares
Redeemable and irredeemable
Cumulative and non-cumulative
Participating and non-participating
Convertible and non-convertible
3. Debentures / Bonds
Redeemable and irredeemable
Secured and unsecured debentures/bonds
Warrants
Tax free bonds
Zero coupon bonds
Equity shares are called ownership shares because the holder of the
shares participates in earnings of the company by receiving dividends
from it. The ownership rights are exercised through voting in important
decision making areas of the company. Equity shares are called high
risk securities because its return varies with the profitability of a
company. Dividend is declared by the company onIy when there is a
profit. The company is legally allowed to declare dividends only after
making a provision for reserves, depreciation and taxation. However,
equity shares have the benefit of being traded in a secondary market if
its shares are listed on the stock markets.
1. Cumulative or Non-Cumulative;
2. Participating or non-participating;
In the past, project financing was mostly used in oil exploration and
other mineral extraction through joint ventures with foreign firms.
2. Leveraged Financing
4. Collateral
5. Sponsors Guarantee
Project financing: Contd
Project financing is most appropriate for those projects which
require large amount of capital expenditure and involve high
risk. It is used by companies to reduce their own risk by
allocating risk to a number of parties. It allows sponsors to:
Others
Project Company
Contractors
Suppliers Customers
Loan Syndication
Loan syndication is a service provided by merchant
bankers for financing a project or for working capital
requirements of a company. Loan syndication involves
commitments for term loans from the financial
institutions and banks for financing a particular project.
In other words, in loan syndication, two or more
financial institutions/ banks agree to finance a particular
project. One of the institutions may become a lead
institution and bring about coordination in the financing
arrangements of different financial institutions/ banks.
Loan Syndication: Contd..
A loan syndication arrangement may be made in any of the
following ways:
1. The borrower may directly make the loan application to a lead
financial institution, which in turn gets in touch with other
financial institutions/ banks interested in participating in the
financial assistance to the borrower.
or
2. 75% of the net offer through book building and 25% at the price
determined through book building.
Process of Book Building
1) In case of book building process, the issuing company appoints one of
the lead merchant bankers as the book runner who prepares and submits
a draft prospectus with the SEBI for approval. The prospectus includes
full details relating to the issue except the price of the securities.
4) The issue price is determined by the book runner and the issuing
company on the basis of bids received from the investors and the careful
evaluation of demand at various levels of prices.
SEBI Guidelines related to Book Building
1) Book Building method can be used only when the issue exceeds Rs.
100 crores and one of the lead managers to issue has been appointed
as the book-runner to the issue.
5) The lead merchant banker shall prepare and file the offer document
with SEBI.
New Financial Institutions and Instruments
1. Depositories
2. Factoring
3. Venture Capital
4. Credit Rating
5. Commercial Paper
6. Certificate of Deposit
7. Stock Invest; and
8. Global Depository Receipt (GDR)
Depositories
The term depository is defined as a place where something is deposited for safe
keeping. Dematerialization of securities for electronic trading of shares is one
of the major steps for improving and modernizing the stock market and
enhancing the level of investor protection. At present two players are
rendering depositories services in India as follows:
1. National Securities Depositories Limited (NSDL); and
2. Central Depositories Services Limited (CDSL).
.The depository holds electronic custody of securities and also arranges for
transfer of ownership of securities on the settlement dates. This system is
known as Scripless Trading System.
Advantages of Depository System
1. Paperless Transaction : Transactions carried out through the
depository system eliminate risks, as it does not have physical
certificates. The problems 'regarding bad deliveries or fake
certificates are avoided.
2. Electronic Transfer: The transfer of securities is done
electronically. As soon as the transaction is carried out securities
are transferred immediately
3. De-mat Account: A depository provides a de-mat account with a
client identification number and a depository identification number.
Every member thus has a special identification through a given
number. Through this number he carries out his sale and purchase.
The depository also provides him with a trading account which
enables him with an identity and immediate transfer. '
RBI has authorised only four below listed public sector banks to
do factoring in India:
1. State Bank of India through its subsidiary SBI Factoring and
Commercial Services Limited (Western Region);
2. Canara Bank through its subsidiary Canbank Factoring Ltd
(Southern Region);
3. Punjab National Bank (Northern Region); and
4. Bank of Allahabad (Eastern Region).
Benefits of factoring
2. Innovative Technology
Grading System
The grading system is the opinion of the rating agency
depending on their analysis of financial and risk factors of the
company. Every factor assigns a scope to the security. CRISIL is t
only rating agency to operate on the basis of a sectoral
specialization, which analyses and disseminates information to a
large number of investors. The grading system of CRISIL is
based on for grades and many sub-grades according to the
descending order of the quality 0 the security. The grades are
given as their grades are AAA, AA, A, BBB, BB, B, C, D. To give
an example the following table with symbols given by CRISIL is
depicted to explain the rating method.
Importance of credit Rating
1. Investors: The information provided by rating agencies is like a ready
reference for investors. They do not have to look into the books of account
of the company.