Source of Finance

[Link]' Fund
The shareholders' funds is the excess of the assets over the liabilities or is the shareholders'
investment in the company. It is the total of share capital and all retained profits of the company.
A. Financing through Equity Shares
Equity shares are also known as ordinary shares. According to Sec. 43 of the Companies Act,
2013 "Equity shares are those shares which are not preference shares". It is the main source of
finance to any company.
Characteristics of equity shares
[Link]: Equity shares provide permanent capital to the company and cannot be redeemed
during the lifetime of the company.
[Link] on income: Equity shareholders have a residual claim on the income of the company.
[Link] on assets: Equity shareholders have a residual claim on ownership of company's
assets.
[Link] to control or voting right: Equity shareholders are the real owners of the company.
[Link]-emptive right: When a company makes subsequent issue of capital, it must be first offered
to the existing shareholders.
[Link] liability: Limited liability is the most important feature of equity shares.
Advantages of Equity Capital
[Link] Liability: Limited liability is the most important advantage of equity shares.
[Link] to control or voting right: Equity shareholders are the real owners of the company.
[Link] Transferability: Equity shares are freely transferable. The owners of equity shares have
the right to transfer their interest to someone else.
[Link] in the Growth: The major advantage of investment in equity shares is its ability to
increase in value by sharing in the growth of company profits over the long run
[Link] Advantages: Equity shares also offer tax advantages to the investor.
[Link] on assets: Equity shareholders have a residual claim on ownership of company's
assets.
[Link] against Inflation: The equity share is a good hedge against inflation, though it does not
fully compensate for the declining purchasing power
[Link] sales: Equity shares can be sold more easily than other instruments.
Disadvantages of using Equity Capital
[Link] of equity capital is the highest of all sources.
2. Payment of dividend will attract Corporate Dividend Tax,
[Link] issue of equity shares will reduce the earning per share.
[Link] only equity shares are issued, the company cannot take the advantage of trading on equity.
[Link] is a danger of over capitalisation as equity share capital cannot be redeemed.
[Link] periods of prosperity, equity shareholders will get high dividend which will lead to
speculation.
[Link] control of the company can be easily manipulated by a group of shareholders for their
personal interest.
[Link] who desire to invest in safe securities with a fixed income will not prefer equity
shares.
B. Financing through Preference Shares
 These are the shares which enjoy preferential rights as to the payment of dividend at a fixed
rate during the life of the company and as to the return of capital on winding up of the company
over the equity shares.
Features of Preference Shares
[Link] shares are long-term source of finance
[Link] dividend payable on preference shares is generally higher than debenture interest.
[Link] shareholders get fixed rate of dividend irrespective of the volume of profit.
[Link] is known as hybrid security because it also bears some characteristics of debentures.
[Link] dividend is not tax deductible expenditure.
[Link] shareholders do not have any voting rights.
[Link] shareholders have the preferential right for repayment of capital in case of winding
up of the company.
[Link] shareholders also enjoy preferential right to receive dividend.
Types of Preference Shares
[Link] the basis of right of cumulation of dividend:
a. Cumulative Preference Shares: Cumulative Preference Shares are those shares which carry
the right to cumulative dividends.
B. Non-Cumulative Preference Shares: These are the Preference Shares which do not carry the
right to receive arrears of dividend.
[Link] the basis of right to surplus profits:
[Link] Preference Shares: Preference Shares having right to participate in the surplus
profits and assets of the company after paying off the equity shareholders is known as
Participating Preference Shares.
[Link]-participating Preference Shares: Preference shares which have no right to participate on
the surplus profits and assets of the company are called Non-participating Preference Shares.
[Link] the basis of redemption.
A. Redeemable Preference Shares: These are shares which a company may issue on the
stipulation that they may be repaid either after a fixed period or even earlier at the company's
option.
[Link] Preference Shares: These are shares which are redeemed (repaid) only on
winding up of the company
[Link] the basis of conversion:
A. Convertible Preference Shares These are the shares which enjoy the right to get converted
into equity shares at a later date.
b. Non-convertible Preference Shares. Preference Shares which are not convertible into equity
shares are called Non-convertible Preference Shares.
Advantages of preference capital
[Link] legal obligation: Payment of dividend to preference shares is not a legal obligation of the
company. It is paid only if there is profit.
[Link] maturity date: Preference shares have no final maturity date, except in the case of
redeemable preference shares.
[Link] to the equity base: Preference shares add to the equity base of the company and
therefore, strengthens the financial position of the company.
[Link] the company: Preference shares save the company from paying higher rate of interest
[Link] charge on assets: Issue of preference shares does not create any sort of charge against
assets of the company
[Link] equity shareholders: As preference holders get only a fixed rate of dividend, the equity
share holders get a high rate of dividend.
[Link] not affect existing control: Issue of preference shares will not affect existing control of the
company, as they have voting rights only on the matters affecting their interest
[Link]: Financing through preference shares is cheaper than that of equity financing
[Link] return with low risk: It is useful to investors who want to get higher rate of return with low
risk.
[Link] to utilise surplus fund: The company can utilise its surplus funds for redeeming
preference shares as per the provisions of the Company's Act.
Disadvantages of using preference capital
[Link] considered for taxation purposes: Preference dividend is not deductible as an expense
for taxation purposes, out of the profits of the company.
[Link] of arrears of dividend: In case of cumulative preference shares, arrears of
dividend have to be declared before anything can be paid to the equity shareholders of the
company.
[Link] the claim of equity shareholder: Preference shares dilute the claim of equity
shareholder over the assets of the company.
[Link] the way for insolvency: Preference shares may pave the way for insolvency of the
company.
C. Financing through Reserves and Surplus / Retained Earnings
Retained Earnings (RE) are the portion of a business's profits that are not distributed as
dividends to shareholders, but are reserved for reinvestment back into the business.
Reserves and surplus include:
[Link] Reserves: Reserve created out of capital profits such as profit prior to incorporation,
profit on acquisition of business, etc.
[Link] Redemption Reserve: A reserve created out of profit on redeeming redeemable
preference shares.
[Link] Premium (Reserve): If a company issues its securities at a price higher than its face
value, it is said to be issue of shares at a premium.
iv. Debenture Redemption Reserve: It is the reserve created for the purpose of redemption of
debentures.
v. Revaluation Reserve: It is the reserve created on revaluing fixed assets such as land and
building, plant and machinery, etc
[Link] Reserves such as (a) General Reserve (b) Tax Reserve (c) Subsidy Reserve (d)
Amalgamation Reserve, etc.
viii. Surplus: It is the balance in Statement of Profit and Loss.
II. Debt Capital
Debt capital is the part of the total capital invested in the business through raising loans. The
company has to repay the loan in the future date as per the agreement with the investors.
1. Financing through Debentures
A debenture is "an instrument in writing acknowledging a debt under the seal of the company,
usually secured by a fixed or floating charge on the assets of the company, If bearing a fixed
rate of interest and repayable within or after a specified period or irredeemable during the
existence of the company"
Kinds of Debentures
i. On the basis of Transferability
a. Registered Debentures: These are debentures registered in the books of the company. In
other words they are made out in the names of particular persons who are registered as
debenture holders, with their full details, in the books of the company.
b. Bearer Debentures: The names and other details of bearer debentures are not recorded in
the 'Register of Debentures' of the company. They can be freely transferred.
[Link] the basis of Security
[Link] or Mortgage Debentures: These are debentures which are secured by a fixed or
floating charge on the assets of the company. Repayment of principal and interest on such
debentures is secured.
[Link] or Unsecured Debentures: These debentures carry no security with regard to
repayment of principal and interest. They are also called "naked debentures"
[Link] the basis of permanence (Redeemability)
a. Redeemable Debentures: Debentures, the principal amount of which is repayable after a
specified period of time are called redeemable debentures.
[Link] Debentures: Debentures, which are not repayable during the life time of the
company are called irredeemable debentures. They are also called perpetual debentures.
iv. On the basis of convertibility
a. Convertible debentures: A convertible debenture can be converted into shares of the same
company at the option of the holders.
b. Non-convertible Debentures: Debentures which are not convertible into shares of a company
are called non-convertible debentures.
v. Priority
a. First Mortgage Debentures: These debentures are payable first out of the property charged.
b. Second Mortgage Debentures: These debentures are payable after satisfying the first
mortgage debentures.
Features of Debentures
[Link]: Generally, debentures are to be repaid at a definite time as stipulated the issue.
[Link] on income: A fixed rate of interest is payable on debentures. A company has a legal
obligation to pay the interest on due dates, irrespective of its level of earnings
[Link] on assets: Debenture holders have priority to claim on assets of the company
[Link]: Debenture holders are the creditors of the company. They do not have control over
the management of the company.
Advantages of Debenture Capital
[Link] provides long term finance to a company.
[Link] rate of interest payable is less than the rate of dividend on shares.
[Link] on debenture is a tax deductible expense.
[Link] financing does not dilute control.
[Link] enhances trading on equity.
[Link] debentures provide flexibility in the capital structure of a company.
Disadvantages of Debenture Capital
[Link] is a permanent burden on the company to repay the principal on maturity.
[Link] on assets of the company restrict it from the use of Debenture financing
[Link] use of Debt financing usually increases the risk.
[Link] of raising finance through debentures is high because of high stamp duty..
[Link] is not desirable to issue debentures by a company having irregular earnings.
2. Financing through Bonds
A bond is an instrument, whereby, one person binds himself to another for payment of a
specified sum of money on a specified date.
Types of Corporate Bonds
[Link] Bonds: In this type of bonds, the amount is payable to the holders of the instruments at
the time of maturity.
[Link] bonds: In this case, the amount is payable to the person whose name is
mentioned in the register of the company.
[Link] coupon bonds or deep discount bonds: This is a new type of bond which has no periodic
interest payment.
[Link] fund bonds: In the case of sinking fund bonds, the issuing company redeems a
fraction of the issue every year.
[Link] bonds: Junk bonds are high risk and high yield bonds developed in USA. They are
normally issued in connection with mergers, acquisitions, etc.
[Link] placed bonds: These are privately placed bonds and are not negotiable.
[Link] bonds: These are the bonds issued with the right to reinvest the income into the bonds
with the same terms and conditions of the host bond.
[Link] Premium Notes (SPN): These instruments are issued with detachable warrants and
are redeemable after a notified period, normally 4 to 7 years.
3. Financing through Long term loans / Institutional Finance
Commercial banks and specialised financial institutions provide long term funds to
corporations. The banks which provide financial assistance to the industry for the economic
development of the country are known as Development Banks.
The following are the some of the development banks
i. The Industrial Finance Corporation of India (IFCI)
The IFCI was established in 1948 under an Act of Parliament with the basic object of providing
industrial finance (medium and long-term credit) to industrial concerns especially to small scale
industries in India.
ii. The Industrial Credit and Investment Corporation of India (ICICI)
ICICI was established in 1955, as a private sector Development Bank with the primary objective
to provide development finance to enterprises in the private sector The main purpose for which
financial assistance is extended by ICICI is for the purchase of capital assets such as land
building and machinery.
iii. Industrial Development Bank of India (IDBI)
The Industrial Development Bank of India (IDBI) was established on 1st July, 1964 under the
Industrial Development Bank of India Act, 1964 as a wholly owned subsidiary of the Reserve
Bank of India.
iv. Small Industries Development Bank of India (SIDBI)
 In order to ensure larger flow of financial and non-financial assistance to the small scale sector,
the Government of India set up the Small Industries Development Bank of India (SIDBI) under a
special Act of the Parliament in October 1989 as a wholly owned subsidiary of the IDBI The
Bank commenced its operations from April 2, 1990 with its head office in Lucknow.
v. National Bank for Agriculture and Rural Development (NABARD)
NABARD is an apex institution that provides all types of credit to various sectors in the rural
economy such as agriculture, small scale industries, tiny and cottage industries, handicrafts, in
an integrated way for rural development. It came into existence on July 12, 1982.
4. Innovative sources
i. Hire purchase financing: It is a new development of finance mechanism in certain selected
sectors of Indian Industries. Under the hire purchase financing, the organisations are able to
use high value assets with minimum capital.
ii. Seed Capital: It is the new technique of financing system developed by the IDBI to the new
entrepreneurs. Whenever the financial institutions are funding a project, it should insist the
promoter's contribution towards the projects.
iii. Indian Depository Receipts (IDR): An Indian Depository Receipt (IDR) enables foreign
companies to raise funds from the Indian securities market. IDR is an instrument denominated
in Indian Rupees in the form of a domestic depository receipt against the underlying equity of
issuing company.
iv. Euro Issues: Euro issues means an issue listed on European Stock Exchange, the
subscriptions for which may come from any part of the world other than India.
a. Global Depository Receipts (GDR): It is a dollar denominated instrument tradable on stock
exchanges in Europe or US or both.
b. European Deposit Receipts (EDR): These are financial instruments in the form of deposit
receipts issued to non resident investors, represented by the equity shares of the issuing
company.
c. Foreign Currency Convertible Bonds (FCCB): These are bonds issued to and subscribed
by non resident investors in foreign currency and are convertible into ordinary shares of the
issuing company at a fixed price.
V. Lease Financing: Leasing is an agreement between the owner of the property and the user of
the property. It provides a firm with use and control over the assets without buying and owning
the same. It is one of the ways of renting assets.
vi. Venture Capital: Venture capital financing is of recent origin in Indian capital market. It is an
equity financing specifically for funding high risk and high reward projects It is also concentrating
research and development projects into commercial production.
5. Deferred Credits
A deferred credit means money received in advance of it being earned. It is in the form of
unearned revenue or customer advances. It is income that is received by a busine but not
immediately reported as income because it has not yet been earned. It is als known as deferred
income or unearned income.
III. Government Grants and Subsidy
A government grant is a financial help given by the Central, State, or Local Governments to
some notified beneficial projects. It is in effect a gift to such organisation. But getting a
government grant is an extremely difficult process. The paperwork is complet and the applicants
must explain as to how the awarded funds will benefit the local community or the public at large.

PROJECT FINANCING
Project financing refers to financing of a legal entity, whose future cash flow or revenues are
expected as a source of repayment to the lender
Features of Project Financing
[Link] or Limited Recourse: A typical project financing involves a loan to enable the sponsor to
complete a project, where the loan is completely non-recourse" to the sponsor.
[Link] Intensive Financing: Project financing is a capital intensive financing scheme This
scheme is required for projects requiring huge amount of equity and debt.
[Link] Allocation: Under this scheme, some of the risks associated with the project are shifted
towards the lender.
[Link] Participants: One of the features of project financing is that numerous participants are
involved in it.
[Link] Ownership: Asset ownership of the project is decided at the completion of the project.
Once the project is completed, the project ownership goes to the concerned entity as
determined by the terms of the loan.
[Link] Repayment from cash inflow: According to the terms of the loan, the excess cash inflow
generated from the project should be used to pay off the outstanding debt
[Link] Tax Treatment: Project financing should be structured to maximize the tax benefits and
to assure that all available tax benefits are used by the sponsor.
[Link]-Balance-Sheet Treatment: Depending upon the structure of project financing. the project
sponsor may not be required to report any of the project debt on its balance sheet because such
debt is non-recourse or of limited recourse to the sponsor.
[Link] Leverage: In project financing, the sponsor typically seeks to finance the costs of
development and construction of the project on a highly leveraged basis.
Stages of Project Financing
1. Pre-Financing Stage
[Link] of the Project Plan: This process includes identifying the strategic plan of the
project for analysing its feasibility.
[Link] and Minimising the Risk: Risk management is one of the key steps that should be
focused before the project financing venture begins. Before investing, the lender has every right
to check if the project has enough available resources.
[Link] Project Feasibility: Before a lender decides to invest on a project, it is important to
check, if the concerned project is financially and technically feasible.
2. Financing Stage
i. Arrangement of Finances: In order to take care of the finances related to the project, the
sponsor has to acquire equity or loan from financial services organisations, whose goals are
aligned to that of the project.
[Link] or Equity Negotiation: During this stage, the borrower and lender negotiate the loan
amount and come to a unanimous decision regarding the same
iii. Documentation: In this step, the terms of the loan are mutually decided and documented,
keeping the policies of the project in mind.
iv. Payment: Once the loan documentation is done, the borrower receives the funds as agreed
previously to carry out the operations of the project.
3. Post-Financing Stage
[Link] Monitoring: As the project commences, the project manager has to monitor the
progress of the project at regular intervals.
ii. Project Closure: Once the project is completed, the project manager has to announce that the
project is completed.
iii. Loan Repayment: After the project has completed and has brought into operation, repayment
of the debt should be started from cash inflows.

Models of Project Finance

[Link] Model
PPP Model Public-Private Partnership (PPP) is a funding model for a public infrastructure
project such as a new telecommunications system, airport or power plant. The public partner in
presented by the government at a local, state and/or national level. Public-private partnership
involve collaboration between a government agency and a private-sector company.
Features
[Link] are related to high priority Government planned projects
[Link]'s main objective is to combine the skills, expertise and experience of both public and
private sectors to deliver high quality services.
[Link] divide the risk between public and private sector.
[Link] Government remains accountable for the quality and costs of the services.
[Link] are used in the Government projects which aims at social benefit
Advantages of PPP
[Link] resource management: PPP model ensures the necessary investments into public
sector and more effective public resources management.
[Link] quality: PPP model ensures higher quality work and timely provision of public services
[Link] the private sector: PPP model helps to incentivize the private secre to deliver
projects on time and within the budget.
[Link] development: PPP model provides better infrastructure solutions than an
initiative that is wholly public or wholly private.
[Link] the country more competitive: PPP models makes the country more competitive in
terms of its facilitating infrastructure.
[Link] completion of project: PPP model results in faster project completions and reduced
delays on infrastructure projects by including time to completion as a measure of performance.
[Link] of private sector expertise: Private sector expertise and experience are utilized in
PPP projects implementation.
Disadvantages
[Link] or services delivered could be more expensive.
[Link] project public sector payment obligations postponed for the later periods can negatively
reflect future public sector fiscal indicators.
[Link] service procurement procedure is longer and more costly in comparison with traditional
public procurement.
[Link] project agreements are long-term, complicated and comparatively inflexible.
[Link] Public Private Partnership (CPPP) Model:
CPPP provides a unique opportunity to private entrepreneurs, government and local
communities to collaborate themselves in achieving key policy objectives of project. It results in
benefits like job creation, generation of revenue and socio-economic development.
Features of CPPP
[Link] are related to high priority, socially beneficial to the people of the area planned by the
Government with the support of private
[Link]'s main objective is to combine the skills, expertise and experience of public sector,
private sector and local community to deliver high quality services.
[Link] CPPP model local community also shoulder the risk connected with the project along with
the public and private sectors.
[Link] local community also initiates to maintain and improve the quality of the services of the
projects.
[Link] capital investments mainly comes from the government and the private sectors where the
local community contributes only a very meagre portion.
[Link] is applicable to special sectors such as tourism promotion, environmental protection,
communication network, infrastructure development, etc.
Merits of CPPP
[Link] develops healthy working relationship among government, communities and the industry.
[Link] brings about economic development at community level.
[Link] helps to conserve the culture of local areas and to develop respect for cultural differences
and human dignity
[Link] enhances standard of living of the community of local area and helps to promote cultural
exchanges.
[Link] of local community as an integral part of development through promotion of different
projects.
[Link], support and promote community ownership of projects like that of tourism.
Demerits of CPPP
[Link] is not applicable to all projects: It can be applied in projects like tourism development,
environment protection, etc.
[Link] time consuming and expensive: Making the local community a part of the project needs
more time.
[Link] in nature: As it is a consotium of local community, private sector and public sector,
the project once designed cannot be altered easily.