Meaning, Types, Advantages and Disadvantages

1. CAPITAL RATIONING
TYBMS
SEM VI
RACHANA K. CHAWDA

2. MEANING
 Capital rationing is essentially a management approach
to allocating available funds across multiple investment
opportunities, increasing a company's bottom line. The
combination of projects with the highest total net present
value (NPV) is accepted by the company.
 The number one goal of capital rationing is to ensure that
a company does not over-invest in assets. Without
adequate rationing, a company might start realizing
decreasingly low returns on investments, and may even
face financial insolvency.

3.  Capital rationing is the strategy of picking up the
most profitable projects to invest the available funds
 There are two situations which may lead to capital
rationing, namely Hard and Soft capital rationing.

4. HARD CAPITAL RATIONING.
 Hard capital rationing or “external” rationing occurs
when the company faces problems in raising funds
in the external equity markets. This can lead to the
shortage of capital to finance the new projects in
the company.

5. SOFT CAPITAL RATIONING.
 soft capital rationing or “internal” rationing is caused
due to the internal policies of the company. The
company may voluntarily have certain restrictions
that limit the amount of funds available for
investments in projects. However, these restrictions
can be modified in the future; hence, the term ‘soft’
is used for it

6. DISTINCTION
Reasons for Hard
Capital Rationing
Reasons for Soft
Capital Rationing
•Start-up Firms
•Poor
Management /
Track record
•Lender’s
Restrictions
•Industry Specific
Factors
•Promoters’
Decision
•An increase in
Opportunity Cost
of Capital
• Future
Scenarios

7. ADVANTAGES OF CAPITAL RATIONING
 Budget
 No Wastage
 Fewer Projects
 Higher Returns
 More Stability

8. DISADVANTAGES OF CAPITAL RATIONING
 Efficient Capital Markets
 The cost of Capital
 Un-Maximising Value
 Small Projects
 Intermediate Cash Flows:

9. THANK YOU