RAISING OF FINANCE
Finance for a Project in India can be raised by way of
(A) Share Capital
(B) Long term borrowings
(C) Short term borrowings
Both share capital and long term borrowings are used to finance fixed assets plus the margin money required to obtain bank borrowings for working capital. Working capital is financed mainly from bank borrowings and from unsecured loans and deposits.
Share Capital consists of two broad categories of capital namely equity and preference. Equity shares have a fixed par value and can be issued at par or at a premium on the par value. Shares cannot normally be issued at a discount. However, in exceptional circumstances issue of shares at a discount is permitted provided (a) the shares are of a class already existing, (b) the discount is authorised by the shareholders, and (c) the issue .is sanctioned by the Central Government. Normally the Central Government will not sanction a discount exceeding 10%.
The corporates are now allowed to raise resources for expansion plans. by issuing equity shares with differential voting rights. The main advantages of such category of shares are :
1. Equity can be raised without diluting stake of the promoters.
2. Companies can reduce gearing ratios.
3. The risk of hostile takeovers is reduced to a considerable extent.
4. The passing of yield in the form of high dividends to the investors can be ensured.
The following are the general disadvantages
1. The cost of servicing equity capital will increase.
2. Poor corporate governance may be encouraged.
3. If issued at discount, they may raise the equity burden.
Preference shares carry a fixed rate of dividend (which can be cumulative). These shares carry a preferential right to be paid on winding up of the company. Preference shares can be made convertible into equity shares. Issue of preference is not a popular form of capital issue.
The issue of capital by companies is governed by guidelines issued by the Securities and Exchange Board of India (SEBI) and the listing requirements of the stock exchanges.
Apart, from equity, there can also be various forms of pseudo equity. The most common forms are fully or partly convertible debentures and debentures, issued with warrants entitling the holder to subscribe for equity. There can also be an issue of non convertible debentures.
Term finance is mainly provided by the various All India Development Banks (IDBI, IFCI, SIDBI, IIBI etc.), specialised financial institutions (RCTC, TDICI, TFCI) and investment institutions (LIC, UTI and GIC). In addition, term finance is also provided by the State financial corporations, the State industrial development corporations and commercial banks. Debt instruments issued by companies are also subscribed for by mutual funds and financing activities are also done by finance companies.
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