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SOURCES

OF FINANCE
Sources of Finance
The sources from which a business meets its financial
requirements can be classified as follows:

I. According to period/ Time:

a) Long term sources, viz., shares, debentures, long term


loans etc.
b) Short term sources, viz., advances from commercial
banks, public deposits, advances from customers and
trade creditors, etc.
Sources of Finance: Contd
I. According to ownership:

a) Own capital, viz., share capital, retained earnings and


surpluses etc.
b) Borrowed capital, viz., debentures, public deposits and
loans, etc.

I. According to source of generation:

a) Internal sources, viz., retained earnings, depreciation


funds, etc.
b) External sources, viz., securities such as shares and
debentures, loans etc.
Sources of Finance

I Long Term Sources I

Equity Share Capital


Redeemable Preference
Share
Debentures / Bonds
Long Term Loans
Seed Capital
Retained Profits
Factoring & Forfaiting


I Medium Term Sources

Medium term loans


Deferred Credit
Public Fixed Deposit
Medium Term Loans from
Banks
Leasing & Hire Purchase

I Short Term Sources I

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.

Sweat Equity Shares


The term sweat equity shares means the equity shares issued by the
company to employees or directors at a discount for consideration other
than cash or for providing know-how or making available rights in the
nature of intellectual property rights or value additions, by whatever
name called.
Right Issue is made to give a prior advantage to existing shareholders
to subscribe to new equity shares of the company. The right issue price of
the share is usually lower than the market value. This provides confidence to
the shareholders. The company sends a letter of offer to its existing
shareholders to purchase shares of the company to be issued on pro-rata
basis. The letter of offer has two parts.

Bonus shares are issued by a company cost free to its existing


shareholders. These shares are issued out of reserves or retained profits or
share premium. The residual reserve after paying bonus dividend should be
40% of the increased paid up capital. The reason for issuing bonus' shares is
that the company issues its undistributed profits and use the same for
expansion of business activities. Bonus shares do not have an effect on the
volume of shareholders funds. After the bonus issue equity is increased and
in the same proportion reserves are decreased. Bonus shares are issued on
pro-rata basis, to the existing shareholders and do not affect their voting
rights. Bonus shares can only be issued if the articles of association of a
company permit it to do so. It increases the confidence level of the
shareholders in the company.
Merits of Equity Shares

1. Do not impose any burden on the company

2. Kind of perpetual loan

3. No charge against the assets

4. Less burden on financial statement as no provision for


repayment of equity shares is to be made.
deMerits of Equity Shares

1. Costly as compared to preference shares or debentures

2. Control of company can be easily manipulated by cornering the


shares by a group of shareholders

3. Conservative management avoid issuing additional equity shares

4. Reduces the capacity to trade on equity

5. Cost of underwriting and distributing equity shares is generally


higher as compared to preference shares and debentures.
Security Financing: Contd
Preference Shares

Preference shares are those shares which carry the following


preferential rights over other classes of shares:

1. A Preferential right in respect of a fixed dividend. It may


consist of a fixed amount (say Rs. 50,000 p.a.) or a fixed
rate.

2. A Preferential right as to repayment of capital in case of


winding up of the company in priority to other classes of
shares.
Preference shares: Contd
Preference shares can be of following types:

1. Cumulative or Non-Cumulative;

2. Participating or non-participating;

3. Redeemable or Irredeemable, etc.


Cumulative and Non-Cumulative Preference Shares

Cumulative preference shares have a right to
receive dividends even if the company does not
make a profit. When the company is at a loss they
do not receive dividends but in the year of
making profits the dividend is calculated and they
receive the dividends even for the years of loss.
In a non-cumulative preference share the
preference shareholder receives dividends only in
the year of profit.
Convertible and non-convertible
Convertible preference shares can at the time of
maturity be issued into equity shares or
debentures of a company. Non-convertible shares
have to be redeemed at the time of maturity on a
Redeemable and Irredeemable
Preference shares are usually redeemable. They have
a specified number of years with a fixed maturity
date and after which the principle sum have to be
return. Sometimes, companies issue irredeemable
preference shares. These are not popular.

Participating And Non-Participating


Participating preference shares are entitled to
receive an extra dividend after payment of
equity shareholders dues. It is also entitled to receive
an amount in the residual assets of the
company at the time of liquidation. Non-participating
preference shares do not have these rights but they
have a right to a fixed dividend.
Merits of Preference Shares

Irredeemable preference shares do not have a date of


maturity. They can be used by the company
continuously as a source of financing and they do not
have to pay dividends in
the years of loss.
Preference shares do not create a charge on the assets
of the company. The assets are freely available for the
company for raising additional funds from other sources.
Preference shares do not have an effect on the control
pattern of the company as they are not entitled to vote
except in the matters pertaining to their own interest.
Preference shares are cheaper in financing compared to
equity shares.
DeMerits of Preference Shares

Preference shares are not tax deductible


hence it affects the profits of the company.
Preference share are not more expensive
than issuing debentures. In fact their cost
becomes double because cumulative
preference shares have to be paid in the
year of profit even for year of loss.
Preference shares have a claim over the
equity shareholders on the assets of the
company so their control is diluted.
Issue of debentures
Meaning of Debenture

A debenture is a document issued by a company as an evidence of a


debt due from the company with or without a charge on the assets of
the company.

The certificate is issued by the company under its seal


acknowledging a debt due by it to its holders.

According to Companies Act, the term debenture includes


debenture stock, bonds and any other securities of a company
whether constituting a charge on the assets of the company or not.
Types of debentures
Debentures can be of following types:

1. Convertible or Non-Convertible Debentures;

2. Redeemable or Non-Redeemable Debentures;

3. Secured or Unsecured Debentures


Redeemable and Irredeemable Debentures/bonds

Irredeemable debentures continue till the lifetime


of the company. Once they are issued the holders
continue to get a fixed interest called coupon rate of
interest untiI the Iife time of the company. If the
company goes in for liquidation the debenture/bond
holders have a prior right over the preference and
equity share holders on the assets of the company.
Redeemable debentures/bonds are issued by a
company to meet its requirements of funds for
long term purposes. It does not intend to use the debt
beyond a specified time. It is usually to
purchase a long term asset.
Secured and Secured Bonds/Debentures

Secured bond/debentures are issued by a company


through a security in the form of a physical asset. It is a
lien on the company's specific assets. Lf the company
does not pay interest on the due date and continues to
make a default on its payments, the trustees can take
over the specific assets on behalf of the holders of the
bonds/debenture holders. Secured debentures
have a charge on the present as well as future
immovable assets of the company in India.
Unsecured bonds/debentures are not attractive
options for investors as they are not protected
by any property or assets of the company.
Tax Fee Bonds
Tax free bonds are issued by public sector financial Institutions,
Reserve Bank of India, banks and other public enterprises. These
bonds are issued for raising funds for projects that are of national
interest and importance. Rate of interest" on such bonds is lower
than the market rate but it is attractive because there is no tax
on it and the investor benefits by this feature.

Zero Coupon Bonds


These bonds sell at a discount and on the maturity date the face
value is paid to the investor, The investor gains by the difference
between the purchase price and face value of the bond. There is
no coupon rate of interest on this bond. However the purchase
price of the bond is so derived that its protects the loss in terms
of interest to the investor. The company issuing this bond does
not have to pay interest and the project for which this bond was
issued gets completed and the bonds are repaid on maturity to
the holder of the bond.
Merits of Debenture
1. Debenture provide funds for a specific period, hence company
can appropriately adjust its financial plan to suit its
requirement.

2. Provides finance without diluting the control.

3. Enables company to take advantages of trading on equity.

4. More suitable for investors who are cautious and conservative.


deMerits of Debenture

1. Risky affair for the company.

2. Not suitable for companies whose earnings fluctuate.

3. Every issue of debentures becomes more risky and costly on


account of higher expectation of debentureholders..
Loan Financing
Long Term loans are taken by industrial organization at the
time of starting a new business for expanding their business
activities. These loans are of periods between 5years and 10
years. In India such loans were being disbursed to Industry by
specialized financial institutions like Industrial Development
Bank of India (IDBI), Export Import Bank of India (EXIM
Bank), Industrial Investment Bank of India Ltd (IIBI),
Industrial Finance Corporation of India Ltd. (IFCI), ICICI Ltd,
Small Industrial Development Bank of India (SIDBI), State
Financial Corporations (SFCs)
Special features of loan financing
1. Security: Term loans are fully secured. The assets that are financed
through term loans become the primary security. The company also
provides collateral security on its immovable property as a first
equitable mortgage or a floating charge or its current assets.
2. Interest Rate :The long term loans have a fixed rate of interest. The
rate of interest depends on the prevailing
rate in the market but in India since long term loans were given for
development by government financial institutions, the rate of interest is
low.
3. Repayment of Loans/loan Amortization: The borrowers have to
return the loan in installments. The installment is calculated according
to the equated periodical payments which means that installments are
smaller initially and increase in later years. The common practice in India
was to give a payment holiday called the moratorium period in the first
few years of development.

4. Restrictive Provisions/covenants :Covenants are clauses or


provisions which are restrictions placed on the borrower. The borrower
has to furnish periodical financial statements, maintain a minimum
working capital, create sinking fund for redemption of debts and
maintain its net worth.
Merits-Loan Financing
1. Term loans taken by industry from financial
institutions are attractive because they have
a low rate of interest and have a low financial
burden on the resources of the company.
2. It has the advantage of a moratorium period
their by the company does not have to pay in
the beginning years of taking a loan. This
helps the company to setup its organization
and develop it before the loan return
instalments begin.
3. Interest charges are tax deductible.
De-Merits loan Financing
1. Term loans have restrictions on the working of
the company.
2. Some covenants are negative and the
functioning of the company becomes difficult
because permission has to be taken from the
lender for every small change it wants to
incorporate.
3. Flexibility in working is reduced and the
company has to work according to the rules and
4. regulations framed by the lender until the loan
is returned.
Project financing
Project financing is that scheme of financing of a particular economic
unit in which a lender is satisfied in looking at the cash flows and the
earnings of that economic unit as a source of funds, from which loan
can be repaid and to the assets of the economic unit as a collateral
for the loan.
Project financing refers to managing and financing the economic
activities of large infrastructural projects. High cost with large volume
of funds such as power stations, fertilizer plants, satellites,
oil, gas and hotel projects are some infrastructure related project.
Special techniques are required to manage its finances.

In the past, project financing was mostly used in oil exploration and
other mineral extraction through joint ventures with foreign firms.

The most recent use of project financing can be found in


infrastructure projects, particularly in power and telecommunication
projects.
Project financing
The traditional form of financing is the corporate financing or
the balance sheet financing.

Under Corporate financing / Balance Sheet Financing, the


lender looks at the cash flows and assets of the company as a
whole company in order to service the debt and provide
security.

In case of project financing the lender looks at the cash flows


and assets of the particular project in order to service the debt
and provide security.
Features of Project financing

1. Separate Project Entity (Special Purpose Vehicle/ Enterprise)

2. Leveraged Financing

3. Cash Flows Separated

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:

1. Finance large projects than the companys credit and financial


capabilities would permit;
2. Insulate the companys balance sheet from the impact of the
project; and
3. Use high degree of leverage to benefit the equity owners.
Main parties in Project finance

Project Sponsors Lenders


Government

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.

2. The borrower may approach a merchant bank to arrange for a


loan syndication for him. The merchant bank discusses the
matter with the financial institution interested in working as a
lead financial institution.
Loan Syndication: Contd..
Steps involved in a loan syndication arrangement can be put as
follows:
1. Preparation of the project report.
2. Preparation of loan application.
3. Selection of the financial institution for loan syndication.
4. Receipt of sanction letter or letter of intent from the financial
institution.
5. Compliance of the terms and conditions of the loan agreement
by the borrower.
6. Documentation, and
7. Disbursement of loan.
Book Building
Book building is a process wherein the issue price of the
security is determined by the demand and supply forces in the
capital market.

In case of ordinary type of issue of capital, the price is


determined and announced by the issuing capital, while in
case of book building the issue price depends upon responses
of the investors.

Book building has been in existence in the international capital


market, however, it is or recent origin for the Indian Captial
Market.
Book Building: Contd
Types of Book Building in India

An issuing company can make an issue of securities to the public


through a prospectus under the book building process in the
following manner:

1. 100% of the net offer to public through book building process,

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.

2) The book runner form a syndicate of brokers, merchant bankers and


other financial institutions who in turn procure bids from their client on
the basis of the draft prospectus.

3) The record of bids is then consolidated with reference to number of


securities, price and the list of bidders.

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.

2) The bids will be accepted for a minimum of 5 days.

3) Trading must commence within 6 days of close of the issue, other


wise interest at the rate of 15% shall be paid to investors.

4) Underwriting shall be mandatory to the extent of net offer to the


public, by the syndicate members or the book runner.

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).

.Depository is an organization where the securities of a shareholder are held in


the form of electronic accounts, in the same way as a bank holds money.

.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. '

4. Account Statement: The account statement is similar as in the


case of a bank since there is no physical transfer. Just like a pass
book the transactions are recorded and the client can ask for his
statement of account.
Advantages of Depository System

5. Stamp Duties: There is no stamp duty on transfer of


securities because there is no physical transfer of certificates.

6. Expenses: The Depositary Participant is like an agent of a


depository. who charges a yearly charge for maintaining the
member account. This reduces paper work for the member as
he may be interested in frequent transfers of securities. The
paper work wi II be done by the depository participant.

7. Sale of Odd Lot: The de-mat form of trade is of additional


advantage to investors. In ' the old system the Investors had
the problem of selling shares in Odd Lots but with' the new
depository system even one share can be sold.
Depositories: Contd
The script based system of securities transactions involves
enormous paper work involving certificates and transfer deeds.
The problems of script based securities are:

1. Bad deliveries due to signature difference


2. Mistakes in completion of transfer deeds,
3. Tearing and mutilation of certificates
4. Fake certificates
5. Cost of transfer stamps duty
6. Processing time taken by the company and
7. Postal delays and charges, etc.
Factoring
Many times sellers extend credit facilities to their clients in order
to attract more customers. But there is some cost associated with
it in terms of funds blocked in the receivables and the interest
paid on these funds.

While maintaining receivables, a firm may face two types of


problems:
1. The problem of raising funds to finance the receivables; and
2. The problem relating to collection, delays and defaults of the
receivables.
Factors of Factors
3. Collection of Receivables
4. Sales Ledger Management
5. Financing of Trade Debts
6. Credit Investigation and Undertaking of Credit.
Factoring
Factoring is a financial service for financing credit sales in which the
receivables are sold by a company to a specialized financial
intermediary called 'factor '. The factor provides several services to the
company that draws up an agreement, for managing its receivables.
These services pertain specially to protection of the company from
credit risks. In addition the factor also manages the finances of the
company, maintains its accounts, and collects its debts. For this service
the factor charges a fee or a commission for taking the responsibility of
realizing the receivables from the customers. Factoring involves 3
parties in the agreement. These are the seller, the buyer and the factor.

While factoring is a financial intermediary for credit sales within the


country Forfaiting is financing of receivables that arise out of
international trade. Banks and financial institutions-purchase trade bills
or promissory notes through discounting and cover the risk of non
payment at the time of collection of dues. The forfaiter / purchaser
becomes responsible for the risk. He pays cash to the seller on
discounting of the bills.
Factoring Service Providers in India

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

1. Save the administration costs;


2. Reduce working capital needs and save interest on capital;
3. Improved liquidity position enables the firm to repay its debt
without any delay;
4. Save time and energy to concentrate on managerial functions;
5. Factor on the basis of experience and specialization advises
the firm on critical areas;
6. Improvement in current ratio after factoring is done;
7. Seller is relieved from the botheration of collecting debt;
Types of Factoring

With Recourse Factoring: In with recourse factoring, the factor


does not take credit risk which is associated with receivables. The
factor still has the right to receive his commissions and his expenses
for maintaining a sales ledger and for any expeses that occur for
collection of dues.

Without Recourse Factoring: Without re-course factoring means


that the factor has to bear all losses that arise out of irrecoverable
receivables. For this service charges a higher commission which is a
premium for the higher risk and it is called credere commission. In
this type of factoring the factor takes a great interest in business
matters of the client. He makes a summary of the purchasers
credibility background and makes a rating before giving him goods
on credit. This precaution taken by the factor because in case the
purchaser does not pay the dues the factor the bear the loss as he
does not have the right of recourse.
Venture Capital
A Venture refers to an undertaking involving more than
normal business risk. The Venture Capital, therefore, refers to
investment of capital in relatively high-risk enterprises.

There are many business propositions where the risk involved


is more than the normal risk of the firm. In such cases, the
funds are not easily available as the common investors may
not be willing to participate in a high-risk situation. Venture
Capital as a source of financing has emerged as a necessity for
the potentially growth undertakings of new entrepreneurs.

Venture Capital, also known as high risk capital, is referred to


an early stage financing of new enterprises.
Features of Venture Capital
Finance : Venture capital is based on equity contributions made
in new small and medium sized companies. It is usually in the
form of equity investment but it can also be in the form of
convertible debt and loan finance.

Period: Venture capital covers long term period of investment in


small or medium firms which are growth oriented.

Capital Appreciation: Venture capitalists invest in companies to


get a capital appreciation on their contribution.

Involvement: Venture capitalists provide funds and business


skills to companies in which they invest their funds. They
participate in developing the firm and they take an active interest
in its working.

Controlling Interest: Venture capitalists do not interfere with the


management of the firm. They do not have a controlling interest in
the company in which they invest. Their prime interest is to earn a
capital gain at the time of exit from the company.
Examples:
IDBI Venture Capital Fund
ICICI Venture Funds Management
Company.
Small Industries Bank of India
Venture Capital Finance
IFCI Venture Capital Funds Limited
Can Bank Venture Capital Fund
Characteristics of Venture capital
1. Entrepreneurial Promoter

2. Innovative Technology

3. Longer Gestation Period

4. Long-Term investment with high degree of risk

5. Equity or quasi-equity investment

6. Nil liquidity of investment during early stages of financing


Credit Rating

Credit rating is a service provided by a credit rating


agency for evaluating a security and rating grading it
according to its quality. In India credit rating had its
inception in 1987 with the corporation of the first
service company named Credit Rating Information
Services ofIndia ited (CRISIL). There are four rating
agencies in India. These are CRISIL (Credit Rating
'Ormation Services of India), ICRA (Investment
Information and Credit Rating Agency of ia), CARE
(Credit Analysis and Research LTD.) and Duffand
Phleps. These rating agencies registered and regulated
by SEBI. CRISIL has about 42%market share and Care
36%.
Objectives of Credit Rating
To analyze the risks of the company
To provide information to the investor for selecting debt
securities.
To express an opinion of the company by grading of debt
securities with technical expertise.

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.

2. Intermediaries: Merchant bankers, brokers, traders, loan providing


agencies their own estimates of the company before dealing with it. The
credibility of the com
is reinforced by information provided by well known credit rating
agencies.

3. Company: The company whose credit rating has been done by an


agencies is repute is ranked as a safe option and its debt securities a
preferred by investors. The information provides the profile of the company
with credibility.

4. Analysis of Factors: The credit rating agencies analyze the macro


and micro fact and give symbols to show the type of safety and risk factors
of the security. They the earning capacity, liquidity position, funds position,
financial capability for raising fu and leverage factors of the company.
Commercial Paper

A commercial paper is an unsecured, short term


negotiable instrument with a fixed maturity. It is
used for raising short term debt. It is an obligation
of the issuer. It is an unsecured promissory note.

It doesnot have any collateral and it is issued for a


period between seven days and three months. In
India commercial papers are popularly used
between 91 to 180 days. It is a promise by the
borrowing company to return the loan on the
specified date of payment.
Advantages Commercial
Paper
1. Security : The commercial paper is made without
pledging any assets. It is a promise based on reputation
of the company.
2. Guarantee: The guarantee in the agreement is based on
credit worthiness, capacity and liquidity of the company.
3. Documentation : A commercial paper is a very useful
instrument for short requirements as no documentation is
required.
4. Flexible: The commercial paper can be designed
between the issuer and the ace and according to their
needs the maturity period can be fixed.
5. Transaction: It is not necessary to have any trading
transaction between the parties entering into an
agreement and making a commercial paper.
Certificate of Deposit
A certificate of deposit is a securitized short term deposit issued
by banks at high interest rates during period oflow liquidity. The
liquidity gap is met by banks by issuing CDs for short term
periods of time. Since the interest rate is attractive CDs are kept
till maturity. CDs are becoming popular because since 2004
there has been a reduction on their stamp duty, withdrawal of
tax deduction at source, opportunity for trading in the stock
market and requirement of closure of deposits only at maturity.
In India CDs are being issued by banks either directly or through
dealers. A CD is negotiable short term instrument in bearer
form. They are a part of bank deposits and are issued for 90
days but the maturity period can vary according to the
requirements of corporate organizations. The minimum issue of
CDs to single investor is rupees 10 lakhs arid can be further
issued in multiple of Rs. 5 lakhs, They can issue at a discount on
the face value and they are transferable after a lock in period of
30 days from the time of issue.
Advantages- Certificate of Deposit
Reliable: CD is financed by banks. It is a formal
financing method and it has a structured form
which is filled in by the bank. It is very reliable as a
source of funding.
Liquidity: It provides liquidity through funding to
small, medium and large companies during a
period when finance is filled in by the bank. It is
very reliable as a source of funding.
Flexible: The maturity date of the instrument can
be designed for a particular investor depending on
his requirement of funds..
Trading: CDs have the facility of being traded in
the stock exchange.
Global Depository Receipts

GDRs are an instrument for raising equity capital by


organizations which are in Asian e They are placed in USA,
Europe and Asia. They have a low cost and help in bringing
liquidity. A company usually raises capital simultaneously from
two countries. For example, may be issued in India and
simultaneously placed in USA and Europe through one see
The issuer deals with a single depository bank which facilitates
the secondary and inter trading amongst investors which are
situated in different counties. It is a fungible in and the issuer
does not have any exchange risk. He can freely use the foreign
ex collected from this issue. Government of India allowed Indian
companies to mobilize from foreign markets through Euro issues
of global depository receipts and foreign convertible bonds.
Companies with a good track record can issue GDRs for
developing infrastructure projects in power, telecommunications,
and petroleum and in construction, development of roads,
airports and ports in India
Features of Global
Depository Receipts
Financial Instrument: It is a financial instrument
in the form of a depository receipt. It has been
created by a depository bank outside the Indian
boundary. It deals with a fixed number of equity
shares of a company.
Trading: It is listed and traded in a foreign market.
Custodian Bank: The shares are issued in Indian
currency in the Indian market with an Indian bank as
its custodian.
Price: The price of the Global depository receipts are
quoted in U.S. dollars.
Voting Rights: The Global depository
receipts do not have any voting rights in the
issuing company.
Conversion: The instrument gives the right
of conversion to the holder from GDRs to
equity shares of the company. It also has the
right and option to convert the equity shares
into GDRs.
Share Holder: The issuing company has to
deal with the depository bank which is its
only customer. It does not have to deal with
multiple share holders.
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