-Permanent capital-represents ownership-residual interest in income and assets-highest cost of capital-Security to other fund providers
Advantages-permanent and irredeemable capital-increase financial base & help facilitate additional borrowing-no obligation to pay dividend-rights issue
Disadvantages -dividend income is taxable in the hands of shareholders-risky investment-Reduction in EPS-dilution of ownership and control
-hybrid form of financing-rate of dividend higher then rate of interest-types are cumulative, non-cumulative, redeemable, participating, Nonparticipating, convertible
Advantages-no dilution in EPS-advantage of Leveridge-no risk of takeover-dividends are fixed and predecided-redeemed after specified period
Disadvantages -preference dividend not tax deductible-cumulative preference dividend
Retained Earnings
-accumulated profits ploughed by company back into business-belongs to ordinary shareholders and increases the net worth
GDR
negotiable certificates held in the bank of one country representing a specific number of shares of a stock traded on the exchange of another country
ADR
IDR
foreign companies can issue IDRs to raise funds from the Indian Capital Market in the same lines as an Indian company uses ADRs/GDRs to raise foreign capital
ADRs are issued by an approved New York bank or trust company against the deposit of the original shares of Non US company
The process of buying new, issued ADRs goes through US brokers, Helsinki Exchanges and DTC as well as Deutsche Bank
Wipro, MTNL, State Bank of India, Tata Motors, Dr. Reddy's Lab, Ranbaxy, Larsen & Toubro, ITC, ICICI Bank, Hindalco, HDFC Bank and Bajaj Auto
Always long term
International
LT/MT
Development Bank
offer a number of concessions to foreign companies to invest within their country and to finance exports from their countries e.g. EXIM Bank of USA
FRN
-Up to 7 years maturity-adjustable interest rates to reflect exchange rates-cheaper than foreign loans
Euro convertible bonds
-Provides an option to the holder to convert bonds into equity shares-May be callable or puttable
Euro convertible zero bones
-Issued at a discount and redeemed at premium-Usually five years maturity-Conversion to equity on maturity at predetermined price
Euro bonds with equity warrants
Regular bones with detachable warrants
International Commercial Banks
Extend foreign currency loans for international operations
Euro Bonds-Debt instruments which are not denominated in the currency of the country in which they are issued e.g. Rupee note issued in USA-generally issued in bearer form than as registered bonds
LT/ST/MT
External CommercialBorrowings (ECB)
-Commercial loans from non residents with minimum maturity of 3 years-lenders can be institutions like IFC, ADB,etc or export credit agencies or suppliers of equipments or foreign collaborators etc-Automatic route and approval route
International agencies
International finance CorporationInternational bank for Reconstruction and developmentAsian development bankInternational monitory fund
LT
Medium term notes
-Several lots of bonds can be issued all having different features W.R.T. coupon rates, Currencies etc-Entire documentation and regulatory approvals can be taken at one point of time
MT
Euro commercial papers our short-term money market instruments having a maturity less than one year usually denominated in USD
ST
Name
Currency
Issued in
Issuer
Yankee Bond
$
USA
non- US banks & corporations
Samurai Bond
JPY
Tokyo, Japan
Non- Japanese Company
Bulldog Bond
£
London, UK
Non- UK Company
Domestic
Seed Capital
Designed by IDBI for start-ups-interest-free but carries a service charge of 1% for first five years & then at an increasing rate-repayment and rate of interest charged depends on reaping capacity with the moratorium of up to 5 years
Zero Coupon bonds are no interest bond issued at discount and redeemed at par-deep discount bonds are a type of ZCB
Secured premium notes are redeemable notes issued along with detachable warrantsWarrants need to be converted within time period notified by the company (usually 4 to 7 years)
LT
Unsecured loans are provided by promoters ( quasi equity) to meet promoters contribution norm- ROI <=institutional rate & can be repaid only after repayment of institutional dues
Commercial bank loans can be raised for long-term medium-term or short-termLong-term loans for purchase of PPE, short-term loans for working capitalBridge finance is a loan for a short period till disbursement of sanctioned loan
Floating rate bonds are bonds on which the rate of coupon is fluctuating depending on market conditions.Used for hedging against interest-rate volatility and successfully issued by financial institutions like IDBI and ICICI
LT/ST/MT
Debentures
-Issued by public limited companies as loan from public-Denominations ranging from hundred2000-debenture trust deed lists the terms and conditions– maturity varies from 3 to 10 years-Low cost of capital due to tax benefit- can be nonconvertible or fully convertible or partly convertible-can be bearer or registered or mortgage or naked:
FCCB
Convertible FRN
Drop Lock Bond
Variable Rate demand obligation
Yield curve note
Masala bonds
Municipal bonds
Government/ Treasury bonds
a very low rate of interest
issuer can get foreign currency at a very low cost
an option to convert it into a longer term debt security with a specified coupon
Protection against falling interest rate
Capital gain is not applicable
This floating rate bond would be automatically converted into fixed rate bond if interest rate falls below a predetermined level which will stay till maturity
Holder of the floating rate note can sell the obligation back to the trustee at par plus accrued interest thus making it more liquid than normal FRN
It is a inverse floater in which yield increases when prevailing interest-rate declines and vice versa
bonds issued outside India but denominated in Indian Rupees
Municipal bonds are used to finance urban infrastructure are increasingly evident in India
Government or Treasury bonds are bonds issued by Government of India, Reserve Bank of India, any state Government or any other Government department
Inflation Bonds are the bonds in which interest rate is adjusted for inflation. For e.g. if the interest rate is 11 per cent and the inflation is 5 per cent, the investor will earn 16 per cent meaning thereby that the investor is protected against inflation
Zero Interest Fully Convertible Debentures are compulsorily and automatically converted after a specified period of time and holders thereof are entitled to new equity shares of the company at predetermined price
LT/MT
Trade Credit
Accrued Expenses and Deferred (Unearned) Income
Advances from Customers
Commercial Paper
-an unsecured money market instrument issued in the form of a promissory note-issued by high rated corporates, PDs & All India Financial Institutions-denomination of 5 lacs or multiples thereof & ROI linked to yield on 1 year gov bond-mandatory to obtain credit rating
T-Bill are short term gov securities with maturity ranging from 14 to 364 days
The certificate of deposit is a document of title similar to a time deposit receipt issued by a bank except that there is no prescribed interest rate on such funds. It is traded in the secondary market
A company can accept public deposits subject to the stipulations of Reserve Bank of India from time to time upto a maximum amount of 35 per cent of its paid up capital and reserves accepted for a period of six months to three years. They are unsecured loans used to finance working capital
Inter corporate deposits are short term borrowings from other corporates who have surplus liquidity
Overdraft
Customers are allowed to withdraw in excess of credit balance in current account up to a fixed limit. They are repayable on demand but generally continue for long periods by annual renewal of limit. Interest is charged on daily balances.
Clean OD are unsecured overdraft which are granted only to financially sound and firms having reputation and integrity. They are generally granted for a short period and must not be continued for long. As a safeguard, banks take guarantees from other persons who are credit worthy before granting this facility
Cash credit is an arrangement under which a customer is allowed an advance up to certain limit. The customer did not borrow the entire amount and he can only draw to the extent of his requirement. Interest is charged only on the amount withdrawn. Generally cash credits are sanctioned against pledge/hypothecation of tradable goods. Just like overdraft these limits are also renewed annually
Bills purchased or discounted is another Way of raising short-term funds. Even though bills are purchased by bank it can hold the owner of the bill liable in case of dishonour of bill
ST
Venture Capital Financing
These are equity finance to new companies which can be viewed as long-term investment in growth oriented small or medium firms. Venture capitalists also provide support in the form of sales strategy business networking and management expertise
Some common methods of venture capital financing are as follows-The start-up may not be able to provide returns during the initial stages and therefore venture capitallist provide equity financing for such firms. However the Ownership does not exceed 49%-conditional loan is repayable in the form of royalty after the firm is able to generate sales. No interest is paid on such loans. The rate of royalty ranges between 2% and 15% depending on gestation period cash flow pattern risk and other factors. A choice may be given to the firm to pay high rate of interest instead of royalty once it becomes commercially sound-income note is a hybrid security which combines features of both conventional loan and conditional loan but at a substantially low rate-participating debentures carries charges in three phases. In the initial phase no interest is charged, in the next stage lower rate of interest is charged up to a particular level of operation & after that higher rate of interest is required to be paid
Securitisation
Lease Financing
The asset is purchased initially by the lessor (leasing company) and thereafter leased to the user (lessee company) which pays a specified rent at periodical intervals
Particulars
Finance Lease
Operating Lease
Risk & Reward
Risk of obsolescence
lease cancellability
Cost of repairs and maintenance and operations
Full payout
Passed on to Leasee
Remains with lessor
Borne by Lessee
Borne by lessor
Non-cancellable
Cancellable
Borne by Lessee
Borne by lessor
lease is usually full payout, that is, the single lease repays the cost of the asset together with the interest
lease is usually non-payout, since the lessor expects to lease the same asset over and over again to several users
Other types of lease are-sales and leaseback-leveraged lease-sales aided lease-closed ended and open-ended lease
Export finance
Pre-shipment finance (packing credit)
Post-shipment finance
-packing credit is an advance extended by banks to an exporter for the purpose of buying, manufacturing, processing, packing, shipping goods to overseas buyers-An exporter having at hand a firm export order placed with him by his foreign buyer or an irrevocable letter of credit opened in his favour, can approach a bank for availing of packing credit-advance so taken by an exporter is required to be liquidated within 180 days from the date of its commencement by negotiation of export bills or receipt of export proceeds-Clean packing credit: This is an advance made available to an exporter only on production of a firm export order or a letter of credit without exercising any charge or control over raw material or finished goods. Export Credit Guarantee Corporation (ECGC) cover should be obtained by the bank-Packing credit against hypothecation of goods: Export finance is made available on certain terms and conditions where the exporter has pledge able interest and the goods are hypothecated to the bank as security with stipulated margin. At the time of utilising the advance, the exporter is required to submit, along with the firm export order or letter of credit relative stock statements and thereafter continue submitting them every fortnight and/or whenever there is any movement in stocks-Packing credit against pledge of goods: Export finance is made available on certain terms and conditions where the exportable finished goods are pledged to the banks with approved clearing agents who will ship the same from time to time as required by the exporter-E.C.G.C. guarantee: Any loan given to an exporter for the manufacture, processing, purchasing, or packing of goods meant for export against a firm order qualifies for the packing credit guarantee issued by Export Credit Guarantee Corporation-Forward exchange contract: Another requirement of packing credit facility is that if the export bill is to be drawn in a foreign currency, the exporter should enter into a forward exchange contact with the bank, thereby avoiding risk involved in a possible change in the rate of exchange
-Purchase/discounting of documentary export bills: Finance is provided to exporters by purchasing export bills drawn payable at sight or by discounting usance export bills covering confirmed sales and backed by documents including documents of the title of goods such as bill of lading, post parcel receipts, or air consignment notes. - E.C.G.C. Guarantee: Post-shipment finance, given to an exporter by a bank through purchase, negotiation or discount of an export bill against an order, qualifies for post-shipment export credit guarantee. It is necessary, however, that exporters should obtain a shipment or contracts risk policy of E.C.G.C. Banks insist on the exporters to take a contracts shipments (comprehensive risks) policy covering both political and commercial risks. The Corporation, on acceptance of the policy, will fix credit limits for individual exporters and the Corporation’s liability will be limited to the extent of the limit so fixed for the exporter concerned irrespective of the amount of the policy. -Advance against export bills sent for collection: Finance is provided by banks to exporters by way of advance against export bills forwarded through them for collection, taking into account the creditworthiness of the party, nature of goods exported, usance, standing of drawee, etc. -Advance against duty draw backs, cash subsidy, etc.: To finance export losses sustained by exporters, bank advance against duty draw-back, cash subsidy, etc., receivable by them against export performance. Such advances are of clean nature; hence necessary precaution should be exercised
