Venture capitalist,Shares,Deep discount bond,Retained earning, Commercial Paper

1. SOURCES OF FINANCE

2. TOPICS COVERED
 Venture Capital Financing
 Retained Earning
 Equity Share
 Preference Share
 Deep Discount Bond
 Certificate of Deposit
 Trade Credit
 Debenture
 Commercial Paper
 Bank Advances

3. VENTURE CAPITAL
A risky
undertaking
Money/asset
to run a
business

4. Meaning
 A venture capital financing facilitates funds for startup and
highly risky venture promoted by entrepreneurs who lack
experience and funds to give a shape to their ideas.
 VC Firms
IDBI
ICICI
SBI Capital market etc.

5. Methods of VC Financing
 Equity Financing
 Conditional Loan
 Income Note
 Participating Debenture

6. Factors Influencing VC Finan…
 Level of expertise of company’s management
 Level of expertise in production
 Nature of new product/service
 Future prospects
 Competition
 Risk borne by entrepreneur

8. RETAINED-EARNINGS
DEFINITION
 Retained earnings refer to the percentage of net
earnings not paid out as dividends, but retained
by the company
 A debit balance in retained earnings is called
deficit

9. FEATURES
 Source of internal financing
 Net income increases retained earnings and net loss decreases
it
 No compulsory maturity like term loans and debentures.
 It is taxed under income tax

10. CALCULATION
 Retained Earnings (RE) = Beginning RE + Net Income -
Dividends

11. PROS-CONS
 No cost of investment
 No dilution of control and
ownership
 No fixed obligation of
interest or installment
payments.
 They are very flexible
 Negative balance
 Opportunity cost of these
earnings is high
 The earnings made will be
taxed
 Management can misuse
the retained earnings.
Advantages Dis-advantages

13. SHARES
 Meaning: The capital of a company is divided into shares.
Each share forms a unit of ownership of a company
 Shares can be broadly divided into two categories - equity and
preference shares

14. EQUITY SHARES
 An equity share represents the form of ownership in which a
shareholder, as a fractional owner, undertakes the maximum
risk associated with a business venture.
 Equity shares give their holders the power to share and vote.
 They are also called ordinary shares.

15. FEATURES
1. They are permanent in nature.
2. Equity shareholders are the actual owners and they bear the
highest risk.
3. Equity shares are transferable.
4. Equity shareholders do not get fixed rate of dividend.
5. The liability of equity shareholders is limited to the extent of
their investment.

16. MERITS
 Company need not have the forced obligation to pay
dividend to equity shareholders.
 The obligation to repay the equity capital arises only at the
time of liquidation of the company.
 The shareholders can participate in the management of the
company through voting rights.
 Equity shares can be issued without creating any charge
over the assets.

17. DEMERITS
 Equity shares always associated with the expectations of the
investors. It is practically a difficult task to fulfill the
expectations of the investors.
 Equity shareholders have to bear all the losses at the time of
liquidation.
 Original investment is not guaranteed.
 Investors who have a desire to invest in safe or fixed returns
have no attraction of such shares.

18. PREFERENCE SHARES
 Preference shares earn their holders only dividends, which are
fixed, giving no voting rights.
 Preference shares carries certain priority rights.
 At the time of winding up of the company, capital is paid to
preference shareholders prior to the return of equity capital.

19. FEATURES
 Preference shares are long-term source of finance
 The dividend payable on preference shares is generally higher
than debenture interest
 Preference shareholders get fixed rate of dividend irrespective
of the volume of profit.
 Preference shareholders do not have any voting rights
 Preference shareholders have the preferential right for
repayment of capital in case of winding up of the company.

20. TYPES
 Cumulative and Non cumulative.
 Participating and Non Participating.
 Convertible and Non Convertible.
 Redeemable and Non Redeemable.

21. ADVANTAGES
 The earnings per share of existing preference shareholders
are not diluted if fresh preference shares are issued.
 Preference shareholders do not have any voting rights and
hence do not affect the decision making of the company.
 Preference dividend is payable only if there is profit.
 It can be redeemed after a specified period.

22. DISADVANTAGES
 Preference dividend is not tax deductible and hence it is costlier
than a debenture.
 In case of cumulative preference share, arrear dividend is
payable when the company earns profit, which creates a huge
financial burden on the company.
 Redemption of preference share again creates financial burden
on the company.
 Preference shareholders get dividend at a constant rate and it
will not increase even if the company earns a huge profit.
 Preference shareholders do not enjoy the voting rights.

24. DEEP DISCOUNT BOND
 Deep Discount Bond is technically called a Zero Coupon Bond. This
means the deposit does not give any interest payouts.
 Instead the interest is accumulated and paid out at the time of
maturity.
 Deep discount bonds were a rage India during the early 1990s.
 Example 1:- There was the Narmada bond, which on an investment of
Rs 3600 promised to give Rs 1.10 lakhs, 20 years after 1993. The ICICI
Children's Bond promised Rs 1 lakh on an investment of Rs 7,000/-,
18 years after 1995. These bonds were at very attractive interest rates
of 18% and 16% respectively.

25. CONT…..
 The Deep Discount Bond is however different from a
cumulative deposit in the much longer tenure.
 Example 2:- The deep discount bond issued by NABARD is a
first of sorts for this decade. The bond is being issued at Rs
9,750/- for a maturity value of Rs 20,000/- after 10 years.
This gives it a return of 7.45%. The bond issue opens on
March 23rd 2010. The bond can be traded on the BSE. This
means that the bond holder can also make some capital
gains in case the interest rate during the period drops below
7.45%.

26. ADVANTAGES
 One can invest upto Rs. 20,000 per annum
 One can get a tax exemption in addition to
1,00,000 u/s 80C.
 Compared to the regular bonds, the interest
rates are linked to the rise and fall of the
interest rates in the market.
 Recently Indian Railway Finance Corporation
(IRFC) and the National Bank of Agriculture &
Rural Development(NABARD) were issued these
kind of bonds.

27. DISADVANTAGES
 A company or government issuing zero coupon
bonds is at a high risk of repayment because
the amount to be paid is very huge.
 Market prices of zero coupon bonds are prone
to higher fluctuation compared to other coupon
paying bonds.
 Conservation of Cash: Company can preserve
the cash with them in the case of ZCBs. If they
would have issued normal bonds, interest
payment every year would have been
compulsory

29. CERTIFICATE OF DEPOSIT
 The Certificate of Deposit indicates that the investor has
deposited a sum of money for specified period of time and at a
specified rate of interest.
 Certificate of Deposit is beneficial for a risk averse investor
who is looking to save and will not need funds until the
instrument reaches maturity.

30. MERITS AND DEMERITS
 MERITS
 Safe and Secure
 Easy to get
 DEMERITS
 Funds tied up
 Price of Safety

33. MEANING
 Trade credit is the credit extended by one business firm to
another as incidental to sale or purchase of goods and
services.
 It is also known as mercantile credit.
 DEFINITION- It may be defined as credit extended by sellers
to buyers at all levels of the production and distribution
process down to the seller.

34. Features
 It does not include consumer credit or installment credit
 Arises out of transfer of goods
 Is unsecured
 Granted for periods ranging from 15 days to 3 months
 Buying firm receives supplies without paying immediately

35. Features Cont....
 Reflects the buyer’s power to purchase now and pay later
 Indicates the seller’s faith in the buyer
 Is available in the ordinary course of business
 No securities required for getting trade credit

37. DEBENTURES / BONDS
DEFINITION
 It is a promissory note for raising long term loan capital
 It is a long term, fixed income, financial asset
 It is a type of debt instrument
 They are the most common form of long-term loans
 These loans are normally repayable on a fixed date and pay a
fixed rate of interest

38. FEATURES
 Contractual rate of interest
 Specific maturity
 Debenture interest is tax deductible
 Availability of indenture
 Security: Can be secured or unsecured
 Rated by rating companies
 Interest is paid before dividends
 Can be traded in secondary capital markets

39. TYPES
 Convertible debentures; which can be converted in to shares
1. Fully convertible
2. Partially convertible
 Non-convertible debentures; which can not

40. PROS-CONS
 Less costly than equity
financing
 No ownership dilution
 Fixed payment
 Reduced real obligations
 Obligatory payments
 Financially risky
 Indenture may contain
restricted covenants
Advantages Dis-advantages

42. COMMERCIAL PAPER
 Commercial Paper is an unsecured money measurement
instrument issued in form of a promissory note.
 The Reserve Bank Of India introduced the commercial paper
scheme in the year 1989.
 Subsequently, in addition to Corporate, Primary dealers and
All India Financial Institutions have also been allowed to
issue commercial paper.
 Commercial Papers are issued in denominations of Rs 5
lakhs or above.

43. CONT….
 All eligible issuers are required to get the credit rating from
Credit Rating Information Services of India Ltd (CRISIL).
 Investment Information and Credit Rating Agency of India
Ltd (ICRA), (CARE) or FITCH Ratings India Pvt Ltd or any
other credit rating agency as if specified by Reserve Bank of
India (RBI).

44. ADVANTAGES OF COMMER…
 It is quick and cost effective way of raising working capital.
 It provides the exit option to the investors to quit the
investment.
 They are cheaper than a bank loan.
 The companies which issue commercial paper get two benefits
out of it.

45. DISADVANTAGES
 It is available only to a few selected blue chip
and profitable companies.
 By issuing commercial paper, the credit
available from the banks may get reduced.
 Issue of commercial paper is very closely
regulated by the RBI guidelines.
 Commercial papers are expensive for general
public to buy

47. BANK ADVANCES
Amount that is lent as a limit for a running account is generally
termed as Bank Advances.

49. MERITS AND DEMERITS
 MERITS
 Flexibility
 Speed
 DEMERITS
 Difficulty
 Credit