Sources of long term finance — conventional and innovative sources — Leasing — Factoring — securitization Dividend theories — Walter’s model — Gordens model — MM approach — legal aspects of dividend — formulation of dividend policy. Corporate governance Financial engineering

1. University of Calicut
2nd Sem MBA
Financial Management
Module 5
Prepared By:
Mohammed Jasir PV
Assist. Professor
MIIMS, Puthanangadi

2. Syllabus
A. Sources of long term finance — conventional and innovative
sources — Leasing — Factoring — securitization
Dividend theories — Walter’s model — Gordens model —
MM approach — legal aspects of dividend — formulation of
dividend policy.
B. Corporate governance
C. Financial engineering

3. INTRODUCTION
• Various sources from which the required finance can be raised.
• At present, finance is defined as the provision of money at the time
when it is required.
• Every enterprise, whether big, medium or small, needs finance to
carry on its operations and to achieve its targets.
• Capital required for a business can be classified under two main
categories, viz.,
(i) Fixed Capital, and
(ii) Working capital.

4. Why Finance is required?
• Start a business.
• Expansions to production capacity.
• To develop and market new products.
• To enter new markets.
• To pay for the day to day running of business

5. Sources of Finance
• Short Term Finance
• Long Term Finance

6. The various sources of finance have been classified in
many ways
• According to Period
– Short-term
– Medium-term sources
– Long term sources
• According to Ownership
– Internal sources
– External sources
• According to Source of Finance
– Borrowed capital
– Owned capital
• According to Mode of Financing
– Security financing or External
Financing
– Internal financing
– Loan financing

7. Purpose of long term finance
1. Finance fixed assets.
2. To finance the permanent part of working capital.
3. To finance growth and expansion of business.

8. Factors determining long-term
financial requirements
• Nature of Business.
• Nature of goods produced.
• Technology used.

9. Major Source of Long Term Finance
• Shares
• Debentures
• Retain Earning
• Deferred Credit
• Term Loans

10. Shares
• Issue of shares is the main source of long term finance.
• Shares are issued to the public.
• A company divides its capital into units of a definite face value
• Each unit is called a share.
• A person holding shares is called a shareholder.

11. Contd
• Investors are of different habits.
• Some want to take lesser risk and are interested in a regular
income.
• There are others who may take greater risking anticipation of
huge profits in future.
• In order to tap the savings of different types of people, a
company may issue different types of shares.

12. Characteristics of shares
The main characteristics of shares are following:
1. It is a unit of capital of the company.
2. Each share is a definite face value.
3. A share certificate is issued to a shareholder indicating the number
of shares and the amount.
4. The face value of a share indicates the interest of a person in the
company and the extent of his liability.
5. Shares are transferable units.

13. • These are two types of shares:
1.Preference shares
2. Equity Shares.

14. Preference Shares
• Preference Shares are the shares which carry preferential
rights over the equity shares.
• These rights are
– (a) receiving dividends at a fixed rate,
– (b) getting back the capital in case the company is wound-up.
• Investment in these shares are safe, and a preference
shareholder also gets dividend regularly.

15. Types of Preference Shares
1. Cumulative or non- cumulative
2. Redeemable or irredeemable
3. Participating or non- participating
4. Convertible or non- convertible

16. • Cumulative & Non- Cumulative
The holder of cumulative preference shares are entitled to
recover the arrears of preference dividend before any dividend
is paid on equity shares.
• In case of non- cumulative preference shares, arrears of
dividend do not accumulate and hence, if dividend is to be
paid on equity shareholders in any year, dividend at the fixed
rate for only one year will have to be paid to preference
shareholders before equity dividend is paid.

17. Redeemable & Irredeemable
• Redeemable preference shares are those preference shares
whose amount can be returned by the company to their
holder within the life time of the company subject to the terms
of the issue and the fulfillment of certain legal conditions
• The amount of irredeemable preference shares can be
returned only when the company is wound up.

18. Participating & Nonparticipating
• Participating preference shares are entitled not only to fixed rate of
dividend but also to a share in surplus profits which remain after
dividend has been paid at a certain rate to equity shareholders.
• The surplus profits are distributed in a certain agreed ratio
between the participating preference shareholder and equity
shareholder
• Non- participating preference shares are entitled to only the fixed
rate of dividend.

19. Convertible & Non- convertible
• The holder of convertible preference shares enjoy the right
to get the preference shares converted into equity shares
according to the terms of issue.
• The holder of non- convertible preference share do not
enjoy this right.

20. Equity Shares
• Equity shares are shares which do not enjoy any preferential right
in the matter of payment of dividend or repayment of capital.
• The equity shareholder gets dividend only after the payment of
dividends to the preference shares.
• There is no fixed rate of dividend for equity shareholders.
• The rate of dividend depends upon the surplus profits.
• High Risk
• Voting rate
• Managerial roles

21. Contd
• In case of winding up of a company, the equity share capital
is refunded only after refunding the preference share
capital.
• Equity shareholders have the right to take part in the
management of the company.
• Equity shares also carry more risk.

22. Merits : To the shareholders
1. High profit – high return
2. The value of equity shares goes up in the stock market with the
increase in profits of the concern.
3. Easily trade in the stock market
4. Greater role in the management
5. Voting rights

23. To the Management
1. Raise fixed capital without creating any charge on its fixed assets.
2. Not required to be paid back during the life time of the company. It will
be paid back only if the company is wound up.
3. There is no liability on the company regarding payment of dividend on
equity shares. The company may declare dividend only if there are
enough profits.
4. If a company raises more capital by issuing equity shares, it leads to
greater confidence among the investors and creditors.

24. Debenture
• Debenture is a medium - to long-term debt instrument used by
a large companies to borrow money, at a fixed rate of interest.
• Issue of Loan Certificate given to public.
• Debenture holders have no rights to vote in the company's
general meetings.
• Issued under the common seal of the company.

25. Debentures
• Whenever a company wants to borrow a large amount of fund for a long but fixed
period, it can borrow from the general public by issuing loan certificates called
Debentures.
• It is a written acknowledgement of money borrowed.
• It specifies the terms and conditions, such as rate of interest, time repayment,
security offered, etc.
• The total amount to be borrowed is divided into units of fixed amount. these units
are called Debentures.
• These are offered to the public to subscribe in the same manner as is done in the
case of shares.
• A debenture is issued under the common seal of the company.

27. Characteristics of Debenture
Following are the characteristics of Debentures
– Holders are the creditors of the company
– Holders do not carry voting rights
– Debentures are secured
– Debentures are repayable after a fixed period of time

28. Types of Debentures
Debentures may be classified as:
a) Redeemable Debentures and Irredeemable Debentures
b) Convertible Debentures and Non-convertible Debentures.
• Redeemable Debentures :
These are debentures repayable on a pre-determined date or at any time prior to
their maturity, provided the company so desires and gives a notice to that effect.
• Irredeemable Debentures :
These are also called perpetual debentures. Accompany is not bound to repay the
amount during its life time. If the issuing company fails to pay the interest, it has
to redeem such debentures.

29. Contd.
Convertible Debentures :
The holders of these debentures are given the option to
convert their debentures into equity shares at a time and in a ratio
as decided by the company.
Non-convertible Debentures:
These debentures cannot be converted into shares.

30. Other types
– (a) Simple, Naked or Unsecured Debentures. These debentures are
not given any security on assets. They have no priority as compared
to other creditors.
– (b) Secured or Mortgaged Debentures. These debentures are given
security on assets of the company. In case of default in the payment
of interest or principal amount, debenture holders can sell the assets
in order to satisfy their claims.

31. Retained Earnings
• The portion of the profits which is not distributed among the
shareholders but is retained and is used in business is called
retained earnings.
• As per Indian Companies Act., companies are required to transfer
a part of their profits in reserves.
• The amount so kept in reserve may be used to buy fixed assets.
• This is called internal financing.
• Ploughing back of profits

32. Retained Earnings
• Like an individual, companies also set aside a part of their profits to meet
future requirements of capital.
• Companies keep these savings in various accounts such as General
Reserve, Debenture Redemption Reserve and Dividend Equalization
Reserve etc.
• These reserves can be used to meet long term financial requirements.
• The portion of the profits which is not distributed among the
shareholders but is retained and is used in business is called retained
earnings or ploughing back of profits.

33. Merits
Following are the benefits of retained earnings:
• 1. Cheap Source of Capital : No expenses are incurred when capital is
available from this source. There is no obligation on the part of the
company either to pay interest or pay back the money. It can safely be
used for expansion and modernization of business.
• 2. Financial stability : A company which has enough reserves can face
ups and downs in business. Such companies can continue with their
business even in depression, thus building up its goodwill.

34. 3. Benefits to the shareholders
Shareholders may get dividend from reserves even if the company does
not earn enough profit.
Due to reserves, there is capital appreciation, i.e. the value of shares go
up in the share market .

35. Limitation
1. Huge Profit : This method of financing is possible only when there are
huge profits and that too for many years.
2. Dissatisfaction among shareholders : When funds accumulate in
reserves, bonus shares are issued to the shareholders to capitalize such
funds.
Hence the company has to pay more dividends.
In case bonus shares are not issued, it may create a situation of under –
capitalisation because the rate of dividend will be much higher as
compared to other companies.

36. 3. Fear of monopoly : Through ploughing back of profits, companies
increase their financial strength. Companies may throw out their
competitors from the market and monopolize their position.
4. Mismanagement of funds : Capital accumulated through retained
earnings encourages management to spend carelessly.

37. Deferred Credit
• A deferred credit could mean money received in advance of it being
earned, such as deferred revenue, unearned revenue, or customer
advances.
• A deferred credit could also result from complicated transactions where
a credit amount arises, but the amount is not revenue.
• A deferred credit is reported as a liability on the balance sheet.
Depending on the specifics, the deferred credit might be a current
liability or a noncurrent liability.

38. Term Loans
• A term loan is a monetary loan that is repaid in regular payments over a
set period of time.
• Term loans usually last between one and ten years, but may last as long
as 30 years in some cases.
• Term loan is a loan made by bank/financial institution to a business
having an initial maturity of more than one year.

39. SOME OTHER INNOVATIVE SOURCES OF FINANCE
1. Venture Capital
2. Seed Capital
3. Bridge Finance
4. Lease Financing
5. Hire Purchase Finance
6. Euro Issues

40. 1. Venture Capital
• Financial investment in a highly risky project with the objective
of earning a high rate of return.
• They provide the necessary risk capital to the entrepreneurs so
as to meet the amount required by the financial institutions.
• In addition to providing capital, these VCFs (Venture capital
firms) take an active interest in guiding the assisted firm.

41. 2. Seed Capital
• Its simply means financing promoter's contribution
• At the time of financing a project, financial institutions always insist
that the promoter should contribute a minimum amount, called
promoter's contribution, towards the project.
• But there are number of technically qualified entrepreneurs who
lack financial capability to provide the required amount of
contribution.
• IDBI has opened schemes to provide such funds to the 'eligible'
entrepreneurs.

42. 3. Bridge Finance
• Commercial banks proving short-term loans for the period of delay
may occur when approach for
– Time gap b/w the date of sanctioning of a loan and its disbursement by the
financial institution or banks
– Time gap between the sanctioning of a grant or subsidy and release by the
Govt.
– Delay in public issue of shares and its receipt of public subscription.
• Therefore, to avoid delay in implementation of the project, the firms
approach Commercial banks and they proving short-term loans

43. Bridge Finance – In Detail
• There is usually a time gap between the date of sanctioning of a term
loan and its disbursement by the financial institution to the concerned
borrowing firm.
• In the same manner, there may be a time gap between the sanctioning
of a grant or subsidy and its actual release by the Government or the
institution. The same delay may occur in case of public issue of shares
with regard to receipt of public subscription.
• Therefore, to avoid delay in implementation of the project, the firms
approach commercial banks for short-term loans for the period for
which delay may otherwise occur. Such a loan is called 'Bridge Finance'.

44. 4. Lease Financing
A lease is an agreement under which a firm acquires a right to make use of a
capital asset like machinery etc. on payment of an agreed fee called lease
rentals.
The person (or the company) which acquires the right is known as lessee.
He does not get the ownership of the asset.
He acquires only the right to use the asset.
The person (or the company) who gives the right is known as lessor.
Lease financing is based on the observation made by Donald B. Grant:
“Why own a cow when the milk is so cheap? All you really need is milk and not the
cow.”

45. Lease can be defined as the following ways:
1. A contract by which one party (lessor) gives to another
(lessee) the use and possession of equipment for a
specified time and for fixed payments.
2. The document in which this contract is written.
3. A great way companies can conserve capital.
4. An easy way vendors can increase sales.

46. Lease Financing
• Leasing is an arrangement that provides a firm with the use and control
over assets without buying, the cost of leasing the asset should be
compared with the cost of financing the asset through normal sources of
financing, i.e., debt and equity.
• Since payment of lease rentals is similar to payment of interest on
borrowings and lease financing is equivalent to debt financing, financial
analysts argue that the only appropriate comparison is to compare the
cost of leasing with that of cost of borrowing.
• Hence, lease financing decisions relating to leasing or buying options
primarily involve comparison between the cost of debt-financing and
lease financing.

47. The advantages of leasing
• To possess and use a new piece of machinery or equipment
without huge investment.
• Help to preserve precious cash reserves
• Helps the businesses to deal with limited capital to manage their
cash flow more effectively (smaller, regular payments)
• Leasing also allows businesses to upgrade assets more frequently
• Latest equipment without having to make further capital outlays.

48. Contd.
• It offers the flexibility of the repayment period being matched to the
useful life of the equipment
• It gives businesses certainty (finance agreements cannot be cancelled
by the lenders and repayments are generally fixed.)
• Can include additional benefits such as servicing of equipment or
variable monthly payments depending on a business’s needs.
• It is easy to access because it is secured (asset being financed, rather
than on other personal or business assets.)

49. Limitation of leasing
• It is not a suitable mode of project financing because rental is
payable soon after entering into lease agreement while new project
generate cash only after long gestation period.
• Certain tax benefits/ incentives/subsidies etc. may not be
available to leased equipments.
• The value of real assets (land and building) may increase during
lease period. In this case lessee may lose potential capital gain.
• The cost of financing is generally higher than debt financing.

50. Contd.
• A manufacturer(lessee) who want to discontinue business
need to pay huge penalty to lessor for pre-closing lease
agreement
• There is no exclusive law for regulating leasing transaction.
• In undeveloped legal systems, lease arrangements can result in
inequality between the parties due to the lessor's economic
dominance, which may lead to the lessee signing an
unfavourable contract

51. Types of Leasing
There are two basic kinds of leases:
1. Operating or Service Lease
2. Financial Lease

52. TYPES OF LEASE
(a) Financial lease
(b) Operating lease.
(c) Sale and lease back
(d) Leveraged leasing and
(e) Direct leasing.
(e) Other types
(First Amendment Lease, Full Payout Lease, Guideline
Lease, Net Lease, Open-end Lease, Sales-type Lease,
Synthetic Lease, Tax Lease, True Lease)

53. 1) Financial lease / capital lease
• Long-term, non-cancellable lease contracts ( Irrevocable )
• Lessor agrees to transfer the title for the asset at the end of the lease
period at a nominal cost.
• At lease it must give an option to the lessee to purchase the asset he has
used at the expiry of the lease.
• Under this lease the lessor recovers 90% of the fair value of the asset as
lease rentals and the lease period is 75% of the economic life of the
asset.
• Only title deeds remain with the lessor. (lessee bear risk, cost,
maintenance, insurance and repairs etc)

54. 2) Operational / operating lease
• It is contrast to the financial lease in almost all aspects.
• For a short period and even otherwise is revocable at a short notice.
• Gives the lessee only a limited right to use the asset.
• The lessor is responsible for the maintenance of the asset.
• The lessee is not given any uplift to purchase the asset at the end of
the lease period.
• Eg. Mines, Computers hardware, trucks and automobiles are found
suitable for operating lease because the rate of obsolescence is very
high in this kind of assets.

55. Differences between financial lease and operating
lease
Financial Leasing Operational Leasing
long term Short term
Expenses such as taxes,
insurance are paid by the lessee
All expenses are paid by the
owner of the asset.
It covers the entire economic life
of the asset
Not covers the entire economic
life of the asset
lessee cannot terminate lessee can end the lease anytime
before expiration date of lease.
Financial lease is enough to fully
amortize the asset
Which is not the case under
operating lease.

56. 3) Sale and lease back
• It is a sub-part of finance lease.
• The owner of an asset sells the asset to a party (the buyer), who in turn
leases back the same asset to the owner in consideration of lease rentals.
• Under this arrangement, the assets are not physically exchanged but it all
happens in records only.
• This is nothing but a paper transaction. Sale and lease back transaction is
suitable for those assets, which are not subjected depreciation but
appreciation, Eg. land.
• The advantage of this method is that the lessee can satisfy himself completely
regarding the quality of the asset and after possession of the asset convert
the sale into a lease arrangement.

57. 4) Leveraged leasing
• Under leveraged leasing arrangement, a third party is involved beside
lessor and lessee.
• The lessor borrows a part of the purchase cost (say 80%) of the asset
from the third party i.e., lender and the asset so purchased is held as
security against the loan.
• The lender is paid off from the lease rentals directly by the lessee and
the surplus after meeting the claims of the lender goes to the lessor.
• The lessor, the owner of the asset is entitled to depreciation allowance
associated with the asset.

58. 5) Direct leasing
• Under direct leasing, a firm acquires the right to use an asset
from the manufacture directly.
• The ownership of the asset leased out remains with the
manufacturer itself.
• The major types of direct lessor include manufacturers, finance
companies, independent lease companies, special purpose
leasing companies etc

59. Differences between financial lease and operating
lease
1. While financial lease is a long term arrangement between the
lessee (user of the asset) and the owner of the asset, whereas
operating lease is a relatively short term arrangement between
the lessee and the owner of asset.
2. Under financial lease all expenses such as taxes, insurance are
paid by the lessee while under operating lease all expenses are
paid by the owner of the asset.

60. Cont…
3. The lease term under financial lease covers the entire economic life of
the asset which is not the case under operating lease.
4. Under financial lease the lessee cannot terminate or end the lease
unless otherwise provided in the contract which is not the case with
operating lease where lessee can end the lease anytime before
expiration date of lease.
5. While the rent which is paid by the lessee under financial lease is
enough to fully amortize the asset, which is not the case under
operating lease.

61. Problems of leasing in India
1. Unhealthy Competition
2. Lack Of Quality Process
3. Tax Consideration
4. Stamp Duty
5. Delayed Payment And Bad Debts

62. Primary and Secondary Lease (Front-ended and Back-ended Lease).
• Under primary and secondary lease, the lease rentals are changed in
such a manner that the lesser recovers the cost of the asset and
acceptable profit during the initial period of the lease.
• Then a secondary lease is provided at nominal rentals.
• In simple words, the rentals charged in the primary period are much
more than that of the secondary period.
• This form of lease arrangement is also known as front-ended and back-
ended lease.

63. 5. Hire purchase
• HP is an alternative to leasing.
• HP is a transaction where goods are purchased and sold on
the condition that payment is made in instalments.
• The buyer gets only possession of goods.
• He does not get ownership at first payment
• He gets ownership only after the payment of the last
instalment.
• If the buyer fails to pay any instalment, the seller can
repossess the goods.
• Each instalment includes interest also.

64. Concept and Meaning of Hire Purchase
Hire purchase is a type of instalment credit under which the hire
purchaser, called the hirer, agrees to take the goods on hire at a
stated rental, which is inclusive of the repayment of principal as well as
interest, with an option to purchase.
Under this transaction, the hire purchaser acquires the property (goods)
immediately on signing the hire purchase agreement but the ownership
or title of the same is transferred only when the last instalment is paid.

65. Leasing Versus Hire Purchase

66. Rights of the hirer
The hirer usually has the following rights:
1. To buy the goods at any time by giving notice to the owner and paying the
balance of the HP price less a rebate
2. To return the goods to the owner —this is subject to the payment of a
penalty.
3. With the consent of the owner, to assign both the benefit and the burden of
the contract to a third person. Where the owner wrongfully repossesses the
goods, either to recover the goods plus damages for loss of quiet possession
or to damages representing the value of the goods lost.

67. Obligations of hirer
The hirer usually has following obligations:
1. To pay hire installments,
2. To take reasonable care of the goods
3. To inform the owner where goods will be kept.

68. Owner’s rights
The owner usually has the right to terminate agreement where hirer
defaults in paying the installments or breaches any of the other
terms in agreement.
This entitles the owner:
1. To forfeit the deposit.
2. To retain the installments already paid and recover the balance
due.
3. To repossess the goods
4. To claim damages for any loss suffered.

69. Features of Hire Purchase
1. Immediate possession-under HP
2. Hire Charges
3. Property in goods
4. Down payment
5. Repossession
6. Return of goods
7. Depreciation

70. Features of Hire Purchase
1. Immediate possession-under HP, the buyer takes immediate
possession of goods by paying only a portion of its price.
2. Hire Charges- Each instalment is treated as hire charges.
3. Property in goods - ownership is passed to the hirer only
after paying last or specified number of instalments
4. Down payment- hirer has to pay 20 to 25% of asset price to
the vendor as down payment.

71. Contd.
5. Repossession- Hire vendor, if default in payment of instalment
made by hirer, can reposes the goods and he can resell the
goods.
6. Return of goods- hirer is free to return the goods without
being required to pay further instalment falling due after the
return.
7. Depreciation- depreciation and investment allowances can be
claimed by the hirer even though he is not an exact owner.

72. Differences between lease and Hire purchase
1. Ownership
2. Method of financing
3. Depreciation
4. Tax benefits
5. Salvage value
6. Deposit
7. Nature of deal

73. Differences between lease and Hire purchase
1. Ownership- in lease, ownership rests with the lessor
throughout and the hirer of the goods not becomes owner till
the payment of specified installments.
2. Method of financing- leasing is a method of financing
business assets whereas HP is financing both business and
non-business assets.
3. Depreciation- in leasing, depreciation and investment
allowances cannot be claimed by the lessee, in HP,
depreciation can be claimed by the hirer.

74. Contd.
4. Tax benefits- the entire lease rental (some types of lease) is tax deductible
expense. Only the interest component of the HP installment is tax deductible.
5. Salvage value- the lessee, not being the owner of the asset, doesn’t enjoy the
salvage value of the asset. The hirer, in HP, being the owner of the asset, enjoys
salvage value of the asset.
6. Deposit- lessee is not required to make any deposit whereas 20% deposit is
required in HP.
7. Nature of deal - with lease we rent and with HP we buy the goods.

75. Conti..
8. Extent of Finance- in lease financing is 100 % financing since it is not
required a down payment, whereas HP requires 20 to 25% down
payment.
9. Maintenance- cost of maintenance hired assets is carry by hirer and
the leased asset (other than financial lease) is carry by the lessor.
10. Reporting- HP assets is a balance sheet item in the books of hirer
where as leased assets are shown as off- balance sheet item (shown as
Foot note to BS)

76. Advantages of HP:
1. Spread the cost of finance – A hire purchase agreement allows a
consumer to make monthly repayments over a pre-specified period
of time
2. Interest-free credit – Some merchants offer customers the
opportunity to pay for goods and services on interest free credit.
3. Higher acceptance rates – The rate of acceptance on hire purchase
agreements is higher than other forms of unsecured borrowing

77. Conti…
4. Sales – A hire purchase agreement allows a consumer to purchase
sale items when they aren’t in a position to pay in cash.
5. Debt solutions - Consumers that buy on credit can pursue a debt
solution, such as debt engagement plan, should they experience
money problems further down the line.

78. 6. Euro Issues
• Euro issue is a method of raising funds required by a company in foreign
exchange.
• It provides greater flexibility to the issuers for raising finance and allows
room for controlling their cost of capital.
• The term 'Euro issue' means an issue made abroad through instruments
denominated in foreign currency and listed on an European stock
exchange, the subscription for which may come from any part of the
world.
• The idea behind Euro issues is that any one capital market can absorb
only a limited amount of company's stock at any given time and cost.

79. Factoring
• Client
• Client’s Debtor
• Receivables
• Factor
• Factorage
• Risk

80. Factoring
• Factoring is an arrangement under which the factor purchases the account
receivables (arising out of credit sale of goods/services) and makes immediate cash
payment to the supplier or creditor.
• Thus, it is an arrangement in which the account receivables of a firm (client) are
purchased by a financial institution or banker. Thus, the factor provides finance to
the client (supplier) in respect of account receivables.
• The factor undertakes the responsibility of collecting the account receivables.
• The financial institution (factor) undertakes the risk. For this type of service as well as
for the interest, the factor charges a fee for the intervening period. This fee or charge
is called factorage.

81. Meaning and Definition of Factoring
Thus factoring may be defined as selling the receivables of a firm at a
discount to a financial organisation (factor). The cash from the sale of
the receivables provides finance to the selling company (client). Out of
the difference between the face value of the receivables and what the
factor pays the selling company (i.e. discount), it meets its expenses
(collection, accounting etc.). The balance is the profit of the factor for
the factoring services.

82. Features (Nature) of Factoring
• It is a service of financial nature.
• It is a technique of receivables mgt.
• Factor purchases the receivables and collects them on the due date.
• The risks associated with credit are assumed by the factor.
• A factor is a financial institution. (Commercial bank or a finance Co etc..)
• A factor specialises in handling and collecting receivables in an efficient
manner
• Factor is responsible for sales accounting, debt collection, credit (credit
monitoring), protection from bad debts and rendering of advisory services to
its clients.

83. Parties in Factoring
There are three parties to the factoring. They are
• The buyers of the goods (client’s debtors),
• The seller of the goods (client firm i.e. seller of receivables) and
• The factor. Factoring is a financial intermediary between the buyer
and the seller.

84. Objectives of Factoring
• To avoid the trouble of collecting receivables so as to concentrate in sales
and other major areas of business.
• To minimize the risk of bad debts
• To adopt better credit control policy.
• To carry on business smoothly and not to rely on external sources to
meet working capital requirements
• To get information about market, customers’ credit worthiness etc. so as
to make necessary changes in the marketing policies or strategies

85. Types of Factoring
1. Recourse Factoring
2. Non-Recourse Factoring
3. Advance Factoring
4. Invoice Discounting
5. Maturity Factoring
6. Undisclosed Factoring

86. Recourse Factoring:- The factor only manages the receivables
• Without taking any risk like bad debt etc.
• Full risk is borne by the firm (client) itself.
Non-Recourse Factoring:- Here the firm gets total credit protection
• Complete risk of total receivables is carry by the factor.
• The client gets 100% cash for the invoices even bad debts occur.
• The client pays a commission to the factor.
• This is also called full factoring.

87. 3. Advance Factoring: Here the factor makes advance payment of
about 80% of the invoice value to the client.
4. Invoice Discounting: Under this arrangement the factor gives
advance to the client against receivables and collects interest
(service charge) for the period extending from the date of advance
to the date of collection.

88. Conti..
5. Maturity Factoring: The factor does not pay any cash in advance.
• The factor pays clients only when he receives funds (collection of credit
sales) from the customers or when the customers guarantee full
payment.

89. Conti…
6. Undisclosed Factoring: In this case the customers (debtors of the
client) are not at all informed about the factoring agreement between
the factor and the client.
• The factor performs all its usual factoring services in the name of the
client or a sales company
• Through this company the factor deals with the customers.
• This type of factoring is found in UK.

90. Process of Factoring (Factoring Mechanism)
1. The firm (client) having book debts enters into an agreement with a
factoring agency/institution.
2. The client delivers all orders and invoices and the invoice copy (arising
from the credit sales) to the factor.
3. The factor pays around 80% of the invoice value (depends on the price of
factoring agreement), as advance.
4. The balance amount is paid when factor collects complete amount of
money due from customers (client’s debtors).
5. Against all these services, the factor charges some amounts as service
charges.

91. Conti…
• In certain cases the client sells its receivables at discount, say, 10%.
• This means the factor collects the full amount of receivables and pays
90% (in this case) of the receivables to the client.
• From the discount (10%), the factor meets its expenses and losses. The
balance is the profit or service charge of the factor.

92. Functions of a Factor
1. Provision of finance
2. Administration of sales ledger
3. Collection of receivables
4. Protection against risk
5. Credit management
6. Advisory services

93. Functions of a Factor
1. Provision of finance
– Receivables or book debts is the subject matter of factoring.
– A factor buys the book debts of his client.
– Generally a factor gives about 80% of the value of receivables as advance to
the client.
– The nonproductive and inactive current assets i.e. receivables are converted
into productive and active assets i.e. cash.

94. Conti…
2. Administration of sales ledger
– The factor maintains the sales ledger of every client.
– When the credit sales take place, the firm prepares the invoice in two copies.
– One copy to the customers. The other copy to the factor.
– Entries are made in the ledger under open-item method. In this method each receipt is matched
against the specific invoice.
– The customer’s account clearly shows the open invoices outstanding on any given date.
– The factor also gives periodic reports to the client on the current status of his receivables and the
amount received from customers.
– Thus the factor undertakes the responsibility of entire sales administration of the client.

95. Continued..
3. Collection of receivables
– The main function of a factor is to collect the credit or receivables on behalf of
the client and to relieve him from all tensions/problems associated with the
credit collection.
– This enables the client to concentrate on other important areas of business.
– This also helps the client to reduce cost of collection.

96. 4. Protection against risk
– If the debts are factored without resource, all risks
relating to receivables will be assumed by the factor.
– The factor relieves the client from the trouble of credit
collection.
– It also advises the client on the creditworthiness of
potential customers.
– In short, the factor protects the clients from risks such
as defaults and bad debts.

97. 5. Credit management
– The factor in consultation with the client fixes credit limits for
approved customers.
– Within these limits, the factor undertakes to buy all trade debts
of the customer.
– Factor assesses the credit standing of the customer.
– This is done on the basis of information collected from credit
relating reports, bank reports etc.
– In this way the factor advocates the best credit and collection
policies suitable for the firm (client).
– In short, it helps the client in efficient credit management.

98. 6. Advisory services
– These services arise out of the close relationship between a
factor and a client.
– The factor has better knowledge and wide experience in the
field of finance.
– It is a specialized institution for managing account
receivables.
– It possesses extensive credit information about customer’s
creditworthiness and track record.
– With all these, a factor can provide various advisory
services to the client.
– Besides, the factor helps the client in raising finance from
banks/financial institutions.

99. Limitations of Factoring
• Factoring may lead to over-confidence
• There are chances of fraudulent acts
• Lack of professionalism and competence, resistance to change
• Not suitable for small companies with lesser turnover
• Factoring may impose constraints on the way to do business

100. Limitations of Factoring
1. Factoring may lead to over-confidence in the behaviour of the
client. This results in overtrading or mismanagement.
2. There are chances of fraudulent acts on the part of the client.
Invoicing against non-existent goods, duplicate invoicing etc. are
some commonly found frauds. These would create problems to the
factors.
3. Lack of professionalism and competence, resistance to change etc.
are some of the problems which have made factoring services
unpopular.

101. 4. Factoring is not suitable for small companies with lesser
turnover, companies with speculative business, companies
having large number of debtors for small amounts etc.
5. Factoring may impose constraints on the way to do business.
For non - recourse factoring most factors will want to pre-
approve customers. This may cause delays. Further ,the factor
will apply credit limits to individual customers.

102. 6. Securitisation (of debt)
• Loans given to customers are assets for the bank.
• They are called loan assets.
• Unlike investment assets, loan assets are not tradable and
transferable.
• Thus loan assets are not liquid.
• The problem is how to make the loan of a bank liquid.
• This problem can be solved by transforming the loans into
marketable securities. Now loans become liquid. They get the
characteristic of marketability. This is done through the process of
securitization

103. Cont..
• Securitisation is a financial innovation.
• It is conversion of existing or future cash flows into marketable
securities that can be sold to investors.
• It is the process by which financial assets such as loan
receivables, credit card balances, hire purchase debtors, lease
receivables, trade debtors etc. are transformed into securities.
• Thus, any asset with predictable cash flows can be securitised.

104. Cont...
• Securitisation is defined as a process of transformation of
illiquid asset into security which may be traded later in the
opening market.
• In short, securitization is the transformation of illiquid, non-
marketable assets into securities which are liquid and
marketable assets.
• It is a process of transformation of assets of a lending
institution into negotiable instruments

105. The advantages of securitisation
• Additional source of fund
• Greater profitability
• Enhancement of CAR
• Spreading Credit Risks
• Lower cost of funding
• Provision of multiple instruments
• Higher rate of return
• Prevention of idle capital

106. The advantages of securitisation
1. Additional source of fund – by converting illiquid assets to liquid and
marketable assets.
2. Greater profitability- securitisation leads to faster recycling of fund and
thus leads to higher business turn over and profitability.
3. Enhancement of CAR- Securitisation enables banks and financial
institutions to enhance their capital adequacy ratio(CAR) by reducing their
risky assets.
4. Spreading Credit Risks- securitisation facilitates the spreading of credit
risks to different parties involved in the process of securitisation such as
SPV, insurance companies(credit enhancer) etc.

107. 5. Lower cost of funding- originator can raise funds immediately without much
cost of borrowing
6. Provision of multiple instruments – from investors point of view, securitisation
provides multiple instruments so as to meet the varying requirements of the
investing public.
7. Higher rate of return- when compared to traditional debt securities like bonds
and debentures, securitised assets provides higher rates of return along with
better liquidity.
8. Prevention of idle capital- in the absence of securitisation, capital would
remain idle in the form of illiquid assets like mortgages, term loans etc.

108. Securitisation V/S Factoring
• Securitisation is different from factoring.
• Factoring involves transfer of debts without transforming
debts into marketable securities.
• But securitisation always involves transformation of
illiquid assets into liquid assets that can be sold to
investors.

109. Thank You.

110. Syllabus
A. Sources of long term finance — conventional and
innovative sources — Leasing — Factoring —
securitization
Dividend theories — Walter’s model — Gordens model —
MM approach — legal aspects of dividend — formulation of
dividend policy.
B. Corporate governance
C. Financial engineering

111. • What is Dividend?
• What is dividend policy?
• Theories of Dividend Policy
–Relevant Theory
• Walter’s Model
• Gordon’s Model
–Irrelevant Theory
• MM’s Approach

112. What is Dividend?
“A dividend is a distribution to shareholders out of profit
or reserve available for this purpose”.
- Institute of CA of India

113. What is Dividend Policy?
“ Dividend policy determines the division of earnings between
payments to shareholders and retained earnings”.
- Weston and Bringham

114. • Dividend Policies involve the decisions, whether-
– To retain earnings for investment and other purposes; or
– To distribute earnings as dividend to shareholders; or
– To retain some earning and to distribute remaining earnings to
shareholders.

115. Factors Affecting Dividend Policy
• Legal Restrictions
• Magnitude and trend of earnings
• Desire and type of Shareholders
• Nature of Industry
• Age of the company
• Future Financial Requirements
• Taxation Policy
• Stage of Business cycle

117. Dividend Theories
Relevance Theories
(which consider dividend decision to be
relevant as it affects the value of the firm)
Walter’s Model
Gordon’s Model
Irrelevance Theories
(which consider dividend decision to be irrelevant
& doesn't affects the value of the firm)
Modigliani and
Miller’s Model

118. Walter’s Model
• Introduced by Prof. James E Walter
• He argued that in the long run the share prices reflect only the
present value of expected dividends.
• Retentions influence stock price only through their effect on
future dividends.
• Walter has formulated this and used the dividend to optimize
the wealth of the equity shareholders.

119. • He says that the dividend policy always effect the value of firm
as well as market price.
• No role of overall cost in dividend decision
• According to Walter’s Approach there are 3 firms
Firms
Rate of return and
Cost of equity
D/P or Retention
Growth Firm r > k 100% Retention (ie. No dividend)
Normal Firm r = k Any policy is Optimum. No impact
Declining Firm r < k 100% Dividend (ie. No Retention)

120. • Optimum dividend policy for a Growth firm (D/P Ratio)
is 0% (100% Retention), Because growth firm have so
many investment opportunities in future. So firm need
to retain more money.
• For a Normal Firm, any dividend policy is optimum.
Dividend decision will not have any impact on value of
firm and price if shares.
• For a declining firm, 100% D/P ratio or 0% Retention.

121. Assumptions of Walter’s Model:
• Internal Financing
• Constant Return in Cost of Capital
• 100% payout or Retention
• Constant EPS and DPS
• Infinite time

122. • Internal financing :- all the investments are financed by the firm through
retained earnings. No new equity is issued for the same.
• Constant IRR and cost of capital:- the internal rate of return (r) and the
cost of capital (k) of the firm are constant. The business risks remain
same for all the investment decisions.
• The firm will look for 100% retention or 100% dividend.
• Constant EPS and DPS:- beginning earnings and dividends of the firm
never change. Though different values of EPS and DPS may be used in
the model, but they are assumed to remain constant while determining
a value.
• Infinite life:- the company has an infinite or a very long life.

123. Formula under Walter’s Model
P = Mkt price of equity shares
D = Dividend per share
r = Rate of return
E = EPS (Earning Per Share)
Ke = Cost of equity
Market value of a share is the sum of expected dividends & capital gain
D + (E-D)
Ke
r
Ke
P =

124. Problem 1
Following are details of 3 Companies
Calculate the value of an equity of each companies by applying
Walter’s formula, when
i. D/P is 50%
ii. D/P is 75%
iii. D/P is 25%
“A” Ltd “B” Ltd “C” Ltd
r 15 % 5 % 10 %
Ke 10 % 10 % 10 %
E Rs. 8 Rs. 8 Rs. 8

125. D + (E-D)
Ke
r
Ke
P =
(50% of 8) + (8 - 50% of 8 )
0.10
0.15
0.10
P =r = 15%
Ke = 10%
E = Rs.8
D/P is 50%
i. D/P is 50%
ii. D/P is 75%
iii. D/P is 25%
4 + (8 - 4 )
0.10
0.15
0.10
P = P = 100

126. (75% of 8) + (8 - 75% of 8 )
0.10
0.15
0.10
P =
D/P is 75%
6 + (8 - 6 )
0.10
0.15
0.10
P = P = 90
(25% of 8) + (8 - 25% of 8 )
0.10
0.15
0.10
P =
D/P is 25%
2 + (8 - 2 )
0.10
0.15
0.10
P = P = 110

127. • The following information is available in respect of ABC Ltd.
– Earning per share (EPS or E) = 10 (Constant)
– Cost of Capital (Ke) = 0.10 (Constant)
• Find out the market price of the share under
– Different rate of returns, r= 8%, 10% and 15%
– Different payout ratios of 0%, 40%, 80% and 100%
Problem 2

128. Criticisms of Walter’s Model
• No External Financing
• Firm’s internal rate of return does not always remain
constant. In fact, “r” decreases as more and more
investment in made.
• Firm’s cost of capital does not always remain constant.
• In fact, “k” changes directly with the firm’s risk.

129. Gordon’s Model
• According to Prof. Gordon, Dividend Policy almost always affects the
value of the firm.
• He Showed how dividend policy can be used to maximize the wealth of
the shareholders.
• The main proposition of the model is that the value of a share reflects
the value of the future dividends accruing to that share.
• Hence, the dividend payment and its growth are relevant in valuation of
shares.
• The model holds that the share’s market price is equal to the sum of
share’s discounted future dividend payment.

130. Assumptions
• All equity firm
• No external Financing
• Constant Returns
• Constant Cost of Capital
• Perpetual Earnings
• No taxes
• Constant Retention
• Cost of Capital is greater then growth rate (k>br=g)

131. • Criticisms of Gordon’s model
– As the assumptions of Walter’s Model and Gordon’s Model are same
so the Gordon’s model suffers from the same limitations as the
Walter’s Model

132. Modigliani & Miller’s Irrelevance Model
Value of Firm (i.e. Wealth of Shareholders)
Firm’s Earnings
Firm’s Investment Policy and not on dividend policy
Depends on
Depends on

133. MM’s Argument
• If a company retains earnings instead of giving it out as
dividends, the shareholder enjoy capital appreciation equal to
the amount of earnings retained.
• If it distributes earnings by the way of dividends instead of
retaining it, shareholder enjoys dividends equal in value to the
amount by which his capital would have appreciated had the
company chosen to retain its earning.

134. • Hence, the division of earnings between dividends and
retained earnings is IRRELEVANT from the point of view of
shareholders

135. Assumption
• Capital Markets are Perfect and people are Rational
• No taxes
• Free and easy flow of information
• Floating Costs are nil
• Fraction investment is possible
• Investment opportunities and future profits of firms are
known with certainty (This assumption was dropped later)
• Investment and Dividend Decisions are independent

136. Formulas
Po= Prevailing Mkt Price of share
P1= Mkt Price of share at the end of period one
D1= Dividend to be received at the end of period one
Ke= Cost of equity capital
P1 + D1
1 + Ke
Po = P1 = Po (1+Ke) – D1

137. Criticism of MM Model
• No perfect Capital Market
• Existence of Transaction Cost
• Existence of Floatation Cost
• Lack of Relevant Information
• Differential rates of Taxes
• No fixed investment Policy
• Investor’s desire to obtain current income

138. Conclusion
• Dividend is the part of profit paid to Shareholders.
• Firm decide, depending on the profit, the percentage of
paying dividend.
• Walter and Gordon says that a Dividend Decision affects
the valuation of the firm.
• While MM’s Approach says that Value of the Firm is
irrelevant to Dividend we pay.

139. Legal and Procedural Aspects of Payment
of Dividend

140. Legal and Procedural Aspects of Payment of Dividend
1. Source of Declaring Dividend
2. Transfer to Reserves
3. Declaration of Dividend out of Past Profits or Reserves
4. Other Provisions and Aspects of Payment of Dividend

141. 1. Source of Declaring Dividend
Sources
• Out of current profits
• Out of past profits
• Out of moneys provided by the Govt.
No dividend can be declared
• Depreciation
• Arrears of depreciation
• Losses

142. • It may, however, be noted that no dividend can be declared or paid by a
company unless:
• Depreciation has been provided for in respect of the current financial
year.
• Arrears of depreciation in respect of the previous year’s falling after the
commencement of the companies (Amendment) Act, 1960 have been set
off against profits of the company.
• Losses, if any incurred by the company in previous years falling after 28th
December, 1960 have been written off against profits of the company for
which dividend is proposed to be declared.

143. 2. Transfer to Reserves
% of the current year’s profits
(Proposed Dividend)
Min % Reserve
Less than 10% No minimum %
10% to 12.5% 2.5%.
12.5% to 15% 5%.
15% to 20% 7.5%
More than 20% 10%

144. Transfer to Reserves
• The companies (Transfer of Profits to Reserves) Rules, 1975 require a
company providing more than 10 per cent dividend to transfer a certain
percentage of the current year’s profits to reserves as specified below:
– If dividend proposed exceeds 10% and does not exceeds 12.5%, the amount to
be transferred to reserve should not be less than 2.5%.
– If dividend proposed exceeds 12.5% and does not exceeds 15%, the amount to
be transferred to reserve should not be less than 5%.
– If dividend proposed exceeds 15% and does not exceeds 20%, the amount to be
transferred to reserve should not be less than 7.5%.
– If dividend proposed exceeds 20%, the amount to be transferred to reserve
should not be less than 10%.

145. 3. Declaration of Dividend out of Past Profits or Reserves
• % of dividend not exceed the avg. rates of dividend for last five
years or ten per cent of its paid up capital
• Amount of dividend from past profits should not exceed to 1/10 of
paid up capital and free reserves and the amount first to utilised for
set-off the losses incurred in the financial year.
• The balance of reserves after such drawl should not fall below
fifteen per cent of its paid up capital.

146. Declaration of Dividend out of Past Profits or Reserves
• If a company wants to declare dividend out of accumulated profits
or reserves, it has to comply with the following conditions:
(a) The rate of dividend should not exceed the average of the rates at which
dividend was declared by it in five years immediately preceding that year
or ten per cent of its paid up capital, whichever is less.
(b) The total amount to be drawn for the declaration of dividend from the
accumulated profits should not exceed an amount equal to one-tenth of
the sum of its paid up capital and free reserves and the amount so drawn
should first be utilised to set-off the losses incurred in the financial year.
(c) The balance of reserves after such drawl should not fall below fifteen per
cent of its paid up capital.

147. 4. Other Provisions and Aspects of Payment of Dividend
• The decision of dividend - annual general meeting by
recommendation of the directors. (The shareholders themselves
cannot declare dividend. )
• Dividend on E/S can be paid only after preference shares.
• Paid by the company within 30 days of declaration of dividend.
• Payment mode (cash or bonus)
• Cash (Cheque or warrant)
• No dividend can be paid on calls in advance.
• subject to corporate dividend tax

148. 4. Other Provisions and Aspects of Payment of Dividend
• a) The decision in regard to the payment of final dividend is taken
at the annual general meeting of the shareholders only on the
recommendation of the directors. The shareholders themselves
cannot declare dividend. However, interim dividend is declared by
the directors and there is no need for a meeting of the
shareholders to sanction the payment of such a dividend.
• (b) Dividend on equity shares can be paid only after declaration of
dividend on preference shares.
• (c) When dividend is declared by a company, it must be paid by the
company within 30 days of declaration of dividend.

149. • d) According to section 205 of the Companies Act, no dividend
shall be payable except in cash: Provided that nothing in this
section prohibits the capitalisation of profits or reserves of a
company for the purpose of issuing fully paid up bonus shares.
• (e) Any dividend payable in cash may be paid by cheque or
warrant sent through the post directed to the registered
address of the shareholder entitled to the payment of the
dividend.

150. • (f) In the absence of any specific provision in the Articles of
Association of the company, dividend is paid on the paid up
capital of the company. If there are calls in arrears, dividend is
paid on the amount actually paid by the shareholders.
• (g) No dividend can be paid on calls in advance.
• (h) As per Finance Act, 1997 dividends paid or declared are
subject to corporate dividend tax. At present (Assessment Year
2012-13) the rate of corporate dividend tax is 15% plus 7.5%
surcharge and 3% education cess.

151. Financial Engineering

152. Finance
• Finance is about the bottom line of business activities
– Every business is a process of acquiring and disposing assets
– Real asset – tangible and intangible
– Financial assets
• Objectives of business
– Valuation of assets
– Management of assets
• • Valuation is the central issue of finance

153. What is Financial Engineering?
• Financial Engineering refers to the bundling and unbundling
of securities.
– This is done in order to maximize profits using different
combinations of equity, futures, options, fixed income, swaps.
• They apply theoretical finance and computer modeling skills
to make pricing, hedging, trading and portfolio management
decisions

154. Definition - Financial Engineering
• Generalizing: Financial Engineering involves the design, the
development, and the implementation of innovative financial
instruments and processes, and the formulation of creative
solutions to problems in finance.
– John Finnerty
• Specializing: Financial Engineering is risk management via
creative structural tools

155. Financial engineering
• Financial engineering is a discipline which deals with the creation
of new and improved financial products through innovative design
or repackaging of existing financial instruments.
• Financial engineering and innovations are seen in bonds, equity,
derivatives and in fields like mergers, acquisitions and corporate
restructuring.
• Some of the innovations in the Indian financial market are debt-
oriented schemes of mutual funds, interest rate futures, interest
rate swaps, currency swaps, floating rate bonds, money market
mutual funds, etc.

156. Examples
• Non-Voting Shares
• Differential Voting Rights (DVRs)
• Employee Stock Option Plan
• Sweat Equity Shares
• Puttable Common Stock
• Zero Coupon Bonds
• Dual Currency Bonds
• Floating Rate Bonds
• Dual Rate Loans
• Convertible Debentures (CDs)

157. Financial engineering
• Financial engineering is the use of mathematical techniques to
solve financial problems.
• Financial engineering uses tools and knowledge from the fields
of computer science, statistics, economics, and applied
mathematics to address current financial issues as well as to
devise new and innovative financial products.
• Financial engineering is sometimes referred to as quantitative
analysis and is used by regular commercial banks, investment
banks, insurance agencies, and hedge funds.

158. Financial Engineering - Applications

159. Corporate governance

160. Contents
Corporate Governance – Overview
Corporate Governance – Pillars
Corporate Governance - Elements

161. Corporate Governance - Overview

162. What is Corporate Governance?
• If management is about running the business, corporate
governance is about seeing that it is run properly.
• All companies need managing and governing.

163. Definition
• “Corporate governance involves a set of relationships between
a company’s management, its board, its shareholders and
other stakeholders. Corporate governance also provides the
structure through which the objectives of the company are set,
and the means of attaining those objectives and monitoring
performance are determined.”

164. Corporate Governance
• Corporate Governance refers to the way a corporation is
governed.
• It is the technique by which companies are directed and
managed.
• It means carrying the business as per the stakeholders’ desires.
• It is actually conducted by the board of Directors and the
concerned committees for the company’s stakeholder’s
benefit.
• It is all about balancing individual and societal goals, as well as,
economic and social goals.

165. Why Corporate Governance?
• Better access to external finance
• Lower costs of capital – interest rates on loans
• Improved company performance – sustainability
• Higher firm valuation and share performance
• Reduced risk of corporate crisis

166. Corporate Governance - Parties

167. Corporate Governance - Parties
• Share holders – Those that own the company
• Manager - Guardians of the Company’s assets for the
Shareholders
• Directors - Who use the Company’s assets

168. Owner
Board of Directors
CEO
Executives
Employees

170. Corporate Governance is NOT
• Corporate governance ≠ corporate / financial management
• Corporate governance ≠ corporate social responsibility or
business ethics

171. Corporate Governance - Pillars

172. Pillars of Corporate Governance
Fairness
Accountability
Transparency
Independence
Corporate
Governance

173. • Accountability
– Ensure that management is accountable to the Board
– Ensure that the Board is accountable to shareholders
• Fairness
– Protect Shareholders rights
– Treat all shareholders including minorities, equitably
– Provide effective redress for violations

174. • Transparency
– Ensure timely, accurate disclosure on all material
matters, including the financial situation, performance,
ownership and corporate governance
• Independence
– Procedures and structures are in place so as to minimise,
or avoid completely conflicts of interest
– Independent Directors and Advisers i.e. free from the
influence of others

175. Corporate Governance - Elements

176. Corporate Governance - Elements
Elements
Well Defined
share holders
rights
Board
Commitment
Control
Environment
Transparent
Disclosure
Good Board
Practice

177. Good Board Practices
• Clearly defined roles and authorities
• Duties and responsibilities of Directors understood
• Board is well structured
• Appropriate composition and mix of skills
• Appropriate Board procedures
• Director Remuneration in line with best practice
• Board self-evaluation and training conducted

178. Control Environment
• Internal control procedures
• Independent audit committee established
• Risk management framework present
• Internal Audit Function
• Disaster recovery systems in place
• Management Information systems established
• Media management techniques in use
• Compliance Function established
• Business continuity procedures in place
• Independent external auditor e conducts audit

179. Transparent Disclosure
• Financial Information disclosed
• Non-Financial Information disclosed
• Financials prepared according to International Financial
Reporting Standards (IFRS)
• Companies Registry filings up to date
• High-Quality annual report published
• Web-based disclosure

180. Well-Defined Shareholder Rights
• Minority shareholder rights formalised
• Well-organised shareholder meetings conducted
• Policy on related party transactions
• Policy on extraordinary transactions
• Clearly defined and explicit dividend policy

181. Board Commitment
• The Board discusses corporate governance issues and has created a corporate
governance committee
• The company has a corporate governance champion
• A corporate governance improvement plan has been created
• Appropriate resources are committed to corporate governance initiatives
• Policies and procedures have been formalised and distributed to relevant staff
• A corporate governance code has been developed
• A code of ethics has been developed
• The company is recognised as a corporate governance leader

182. Syllabus
A. Sources of long term finance — conventional and innovative
sources — Leasing — Factoring — securitization
Dividend theories — Walter’s model — Gordens model —
MM approach — legal aspects of dividend — formulation of
dividend policy.
B. Corporate governance
C. Financial engineering

183. All The Best
Thank You