corporate finance sources of finance

7/31/2019 Corporate Finance Sources of Finance

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SOURCESOFFINANCEBy Prof. Samie A Sayed


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SOURCESOFFINANCE

Traditionally, companies require capital for thepurpose of expansion ; companies buy newmachinery, build new buildings or warehouses orset up a completely new project.

In todays technology driven world, Mergers and

Acquisition has been used considered as quickalternative to the organic growth process.

Long term sources of finance focus on helping

organic and inorganic growth of a firm while shortterm sources of finance focus on working capitalmanagement.


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COMMONEQUITYORSHARES

Common equity represents ownership in a company,providing voting rights, and entitling the holder to ashare of the company's success through dividendsand/or capital appreciation.

Two very popular forms of equity issues include: Initial Public Offer

Rights Issue

Treehouse Education raised Rs. 114 crores through its

IPO in August 2011 primarily to open 120 new pre-schools by 2014 besides constructing the necessaryinfrastructure in Rajasthan and Gujarat.

East India Hotels raised Rs. 1178 crores in a 5:11 rightsissue primarily to retire debt.


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IPO AND RIGHTS ISSUE

IPO

The first public offering of equity shares of a company, which is followedby a listing of its shares on the stock market, is called the Initial PublicOffer.

Rights Issue

In a rights issue, existing shareholders have the privilege to buy a

specified number of new shares from the company at a specified pricewithin a specified time, usually at a discount.

A rights issue is offered to all existing shareholders individually and maybe rejected, accepted in full or accepted in part.


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RETAINEDEARNINGS

The net income earned by a company which is notpaid out as dividends, but retained by the companyto be reinvested in its core business or to pay debt.

It is recorded under shareholders' equity on thebalance sheet.

Primarily, companies retain earnings in order toinvest them into areas where the company cancreate growth opportunities, such as buying new

machinery or spending the money on moreresearch and development.


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BANKORTERMLOANS

Term Loans given by financial institutions and bankshave been a primary source of long-term debt for privateas well as listed companies.

The obligation of bond issuers is to pay interest and

principal at specified times as promised to the lenders. Term Loans are primarily employed to finance

acquisition of fixed assets and working capital marginand they are generally issued up to a maturity of 10years.

In December 2011, Tata Power tied up loans for Rs. 365crore solar power project at Mithapur in Gujarat, througha consortium consisting of State Bank of India andExport Import Bank of India


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BONDS

A bond represents a contract under which the borroweragrees to pay interest and principal on specific days to theholder of the bond.

The principal issuers of bonds in India are Central

Government, State Governments, Public Sector Units andPublicly listed companies.

In Dec 2011, NHAI (National Highways Authority of India)raised Rs. 10,000 crores from 15 year tax free bonds withinvestors promised a post tax return of 12%.

Tata Motors came out with an issue of Non-ConvertibleDebentures to LIC, India in 2009 and raised Rs. 1250crores : the NCDs would give a coupon of 10% and willmature in seven years.


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LEASING

A lease represents a contractual arrangementwhere by the lessor grants the lessee the right touse an asset in return for periodical lease rentalpayments.

While leasing of land and buildings has been ahistorical phenomenon, leasing of industrialequipments is a relatively recent phenomenon.

In May 2011, Air India has issued a tender forleasing 16 Airbus A-320 aircraft for a period of fiveyears to add capacity and the tender invited aircraftmanufacturers, airlines and lessors to bid for thecontract for supply of these planes in a phasedmanner.


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HIREPURCHASE

Hire purchase is a type of installment credit under whichthe hire purchaser, called the hirer, agrees to take thegoods on hire at a stated rental, which is inclusive of therepayment of principal as well as interest, with an optionto purchase.

Under this transaction, the hire purchaser acquires theproperty (goods) immediately on signing the hirepurchase agreement but the ownership or title of thesame is transferred only when the last installment ispaid.

Leasing and Hire Purchase have emerged as a

supplementary source of intermediate to long termfinance : RBI approval is needed to conduct hirepurchase activities in India.

Vijaya Bank is involved in hire purchase schemes fordistribution of agricultural machinery.


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GOVERNMENTSUBSIDIES

Government Subsidiary can be defined as monetaryassistance granted by a government to a person orgroup in support of an enterprise regarded as being inthe public interest.

The Ministry of Small Scale Industries (SSI) is operating

a 12% capital subsidy scheme for technologyupgradation of Small Scale Industries (SSI) called theCredit Linked Capital Subsidy Scheme (CLCSS).

The Scheme aims at facilitating technology upgradationby providing upfront capital subsidy to SSI units,including tiny, khadi, village and coir industrial units, on

institutional finance (credit) availed of by them formodernisation of their production equipment (plant andmachinery) and techniques.


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VENTURECAPITAL

A young private company that is not yet ready totap financial markets may seek venture capitalwhich is provided by funds which are prepared tofinance an untried concept that appears to have

promising prospects.

Venture capital is primarily provided in the form ofequity capital.

In July 2009, Just Dial raised US$12mn and

US$15mn from two venture capital investors.

Two years later in August 2011, Just Dial filed for anIPO and venture capital investors are expected toexit with handsome profits.


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WORKING CAPITAL FINANCING

Accruals accrued salaries and taxes

Trade Credit extended by suppliers of goods and services

Overdrafts a pre-determined credit limit specified by bank

Loans working capital loans provided by banks

Bill Discounting bank discounts bill and releases payment Letter Credit Issued by bank on behalf of buyer

Inter Corporate Deposit deposits made by one company toanother normally for a period of six months

Commercial Paper Issued by firms with good credit rating

Factoring involves sale of accounts receivables to a factor(financial institution) who charges a commission and may ormay not bear the credit risk.

Banks typically ask for hypothecation or pledge as security when providing working capital loans

corporate finance sources of finance

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