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MODES OF GENERATING FUNDS BY CORPORATE SECTOR -- SOME THOUGHTS

Author: DR.R.SRINIVASAN

The two extensive sources of finance available to a business Undertakings are internal sources and external sources. The most important external sources of funds are shareholders' funds (Owners Residue) and loan funds (creditor ship security).

Equity capital represents ownership capital as equity shareholders collectively own the firm. Equity shareholders enjoy the rewards of dividend and capital appreciation and put up with the risk of possession.

The rights of equity shareholders consist of:

(1) Right to residual income,

(2) Right to control,

(3) Pre-emptive right to purchase additional equity shares issued by the firm, and

(4) Residual claim over assets in the event of liquidation.

When a company is formed, it first issues equity shares to the promoters in addition to the select group of investors. At the same time as the company grows, it may rely on the following methods of raising equity capital:

(i)Initial public offering seasoned offering,

(ii)Rights issue,

(iii)Private placement and preferential allotment.

The opening public offering of equity shares of a company, which is followed by a listing of its shares on the market, is called an initial public offering (IPO). A public issue by a listed company is called a seasoned offering. A rights issue involves selling securities in the primary market by issuing rights to the existing shareholders. Private placement and preferential allotment sale of securities to a limited number of sophisticated investors such as financial institutions, mutual funds, venture capital funds, banks and so on.

Preference capital represents a mixture form of financing - it takes some characteristics of equity and a few features of debentures.

For large firms debentures are a viable alternative to term loans. Debentures are instruments for raising debt finance Debentures often provide more flexibility than term loans and they offer greater choice with respect to maturity, interest rate, security, repayment and special features.

Show appreciations to the latitude enjoyed by companies, a variety of debt instruments like deep discount bonds, convertible debentures floating rate bonds, secured premium notes and indexed bonds have been employed.

Private placement of debentures has become very popular in India in recent years. The principal buyers of privately placed debentures are mutual funds financial institutions, insurance companies, Army Group insurance, Navy Group insurance, Air Force Group Insurance and so on.

The other sources of financing for the small and medium enterprises, large scale industrial undertakings are described below:

Internal accruals of a firm consist of deprecation charges and retained earnings. Terms loans represent a source of debt finance which is generally repayable in less than 10 years. They are employed to finance acquisition of fixed assets and working capital margin.

Financial institutions provide rupee term loans as well as foreign currency term loans. Term loans represent secured borrowing. Usually assets, which are financed with the term loan, provide the prime security. Other assets of the firm may serve as collateral security. The principal amount of a terms loan is generally repayable over a period of 4 to 7 years after an initial grace period of 1 to 2 years. In order to protect their interest, financial institutions impose restrictive covenants on the borrowers.

Financial institutions evaluate a project from the marketing technical, financial, economic and managerial angles.

Working capital advance by commercial banks represents the most important source of financing current assets. Working capital advance is providing by commercial banks in three primary ways: (1) cash credits /overdrafts, (2) loans and (3) purchase /discount of bills.

Apart from the principle sources like equity, internal accruals, terms loans, debentures, and working capital advance there are several other ways in which finance may be obtained. These include deferred credit, lease finance, hire purchase unsecured loans and deposits, special schemes of institutions. Subsidies, sales tax, deferments and exemptions, commercial paper, and factoring.

Many a times the suppliers of machinery offer deferred credit facility under which payment for the purchase of machinery is made over time. A lease represents a contractual arrangement whereby the lessor grants the lessee the right to use an asset in return for periodic lease rental payments. In a hire purchase arrangement the hiree (the counterpart of the lessor) purchase the asset and gives it on hire to the hirer (the counterpart of lesser). The hirer pays regular hire purchase installments over a specified period of time. When the hirer pays the last installment, the title of the asset is transferred from the hiree to the hirer. Unsecured loans are typically provided by the promoters. Deposits from public referred to as public deposits represent unsecured borrowing of one to three years (five years in the case of non-banking finance companies) duration. Financial institutions have designed special schemes like the bill rediscounting scheme of IDBI and the supplier's line of credit of ICICI to serve the varied needs of industry. Governments may grant subsidies for certain kinds of projects; provide sales tax deferments and exemptions.

Financial institutions provide short term loans to companies with good track record. Commercial paper represents short term unsecured promissory notes issued by firms which enjoy a fairly high credit rating. Factor is a financial institution which offers services relating to management and financing of debts arising from credit sales.

From the abve, it is felt that, the above modes of short term and long term financing help the corporate undertaking to expand their operations very effectively and improve their profitability in longrun, augument the company to justify the shareholders in terms of Earning per share.

About the Author:

Dr.R.SRINIVASAN is a Post graduate in commerce and Management. He received his doctoral degree from Alagappa University in 1997. He is now Working as an ASSOCIATE PROFESSORin Post graduate and Research Department of Corporate Secretaryship at Bharathidasan Government College for Women (Autonomous), Pondicherry University, Puducherry.He currently teaches Accounting ,financial management and Research Methodology Subjects. Before Joining BGCW, he was teaching in SNR College, Coimbatore, Sindhi college, Chennai& T.S.Narayanasamy College, Chennai for eight years. He was with the industry for a short term at Salzar Electronics Pvt. Ltd, Coimbatore. He has about 20 years of teaching experience and having research experience of 15 years. His interests are in Accounting and finance, Capital Market, Quantitative Methods. He underwent the Faculty Development Programme at Indian Institute of Management Ahmedabad during 2000-01. He has presented 20 papers in national and international conferences and has published twenty papers in the areas of Finance and Human resource Management in National Journals. Co-authored a book titled, 'Investors Protection, published by Raj Publications, New Delhi He has delivered lectures in contemporary finance topics at Pondicherry University. He is involved in consultancy projects for Godrej Saralee, Chennai in the areas of Statistical Applications. He has supervised a number of research projects in the area of corporate finance and Human Resource Management. He is the Board of examiner in corporate Secretaryship and Management for the past two decades. .

Article Source: ArticlesBase.com - MODES OF GENERATING FUNDS BY CORPORATE SECTOR -- SOME THOUGHTS

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