V Every business needs funds for two purposes

² for it·s establishment and to carry out it·s day

to day operations

V The various sources of raising funds for

creating production facilities through purchase
of fixed assets and funds needed for short
term purposes for the purchase of raw
materials and payment of wages and other
day-to-day expenses are known as the long
term and short term finances.
V áERIOD

V OWNERSHIá

V SOURCESOF FINANCE
V MODE OF FINANCING
j
   



ðANK CREDIT ISSUE OF ISSUE OF SHARES

DEðENTURES

CUSTOMER ISSUE OF áREFERENCE ISSUE OF

ADVANCES SHARES DEðENTURES

TRADE CREDIT ðANK LOANS áLOUGHING-ðACK OF

áROFITS

ACCRUALS FIXED DEáOSITS LOANS FROM

SáECIALISED
FINANCIAL
INSTITUTIONS

DEFERRED INCOMES LOANS FROM

FINANCIAL
INSTITUTIONS
V EXTERNAL FINANCING
V INTERNAL FINANCING
V LOAN FINANCING

j j j 
j 
j j
EQUITY SHARES DEðENTURES

áREFERENCE SHARES

SWEAT EQUITY SHARES

NO áAR STOCK

DEFERRED STOCK
V Represent the owner·s capital
V The holders have a control over the working of
the company
V These are paid dividend after paying to the
preference shareholders
V The rate of dividend depends upon the profits
of the company which means they may be paid
higher than preference share holders «or
«not paid at all
V They take risk both regarding payment of
dividends and return on capital
V As the name suggests these are given
preference over other shares-@ preferences
V áreference of payment of dividend
V Repayment of the capital at the time of the
liquidation of companies
V They do not have voting rights but they can
vote if their interests are affected
V CUMULATIVE
V NON ²CUMULATIVE
V REDEEMAðLE
V IREDEEMAðLE
V áARTICIáATING
V NON áARTICIáATING
V CONVERTIðLE
V NON CONVERTIðLE
V ISSUED TO áROMOTERS AND FOUNDERS
FOR SERVICES RENDERED TO THE
COMáANY
V These rank last in case of payment of dividend
and return of capital
V No face value
V Capital is divided without any denominations
V Value of shares is calculated by dividing the
net worth by the total number of shares
V DIVIDEND is paid per share
V Issued to employees
V For out performing
V To create a sense of belongingness among
employees for organization
V UNSECURED/NAKED/SIMáLE DEðENTURES
V SECURED /MORTGAGED DEðENTURES
V ðEARER DEðENTURES
V REGISTERED DEðENTURES
V REDEEMAðLE DEðENTURES
V IRREDEEMAðLE DEðENTURES
V CONVERTIðLE DEðENTURES
V ZERO INTEREST ðONDS
V ZERO COUáON ðONDS
V FIRST DEðENTURES AND SECOND DEðENTURES
GUARANTEED DEðENTURES
COLLATERAL DEðENTURES
The ploughing back of profits is a technique of
financial management under which all profits
of accompany not distributed amongst the
shareholders as dividends, but a part of the
profits is retained or reinvested in the
company. This process of retaining profits year
after year and their utilization in the business is
known as ploughing back of profits.
V Replacement of old assets which have become
obsolete.
V Expansion and growth of the business
V Contributing towards the fixed and working
capital needs of the company
V Improving the efficiency of the plant and the
equipment
V Making the company self dependent
V Redemption of loans and debentures
V Earning capacity
V Desire and type of shareholders
V Future financial requirement
V Divined policy
V Taxation policy
a. advantages to the company:

± A cushion to absorb the shock of the company

± Economical methods of financing
± Aids in smooth and undisturbed running of the
business
± Helps on following stable dividend policy
± Flexible financing structure
± Makes the company self -dependent
± Increase in the value of shares
± Safety of investments
± Enhanced earning capacity
± Evasion of super tax
± Increase in the rate of capital formation
± Stimulates industrialization
± Increase productivity
± Decrease the rate of industrial failure
± Higher standard of living
V Over ²capitalization
V Creation of monopolies
V Depriving the freedom of investors
V Misuse of retained earnings
V Manipulation in the value of shares
V Evasion of taxes
Depreciation may be regarded as the capital cost
of assets allocated over the life of the assets.
Depreciation directly at least does not amount
to the source of funds. ðut under certain
circumstances depreciation helps a business
concern to effect saying in payment of tax and
dividends and mount to withholding a part of
funds generated through normal trading
operations. In this sense depreciation can be
regarded as indirect source of funds.
± Indigenous bankers
± Trade credit
± Installment credit
± Advances
± Accounts receivable credit
± Accured expenses
± Deferred incomes
± Commercial papers
± Commercial banks public deposits
 It·s the most important source of short term
capital. The major portions of working capital
loan is provided by commercial banks. The
different forms in which banks provide loans
and advances are as follows:
a) Loans

b) Cash credits

c) Overdrafts

d) áurchasing and discounting of bills

A letter of credit popularly known as L/C is an
undertaking by the bank to honor the obligation
of customer up to a specified amount, should the
customer fail to do so. It can be of many types:
± Clean letter of credit

± Documentary letter of credit

± Revocable letter of credit

± Irrevocable letter of credit

± Revolving letter of credit

± Fixed letter of credit

± Hypothecation
± áledge
± Mortgage
Acceptance of fixed deposits from the public by
all types of manufacturing and non-bank
financial companies in the private sector is
known as public deposits.
The important features of government regulation on
public deposits by the non-banking corporate sector
are as below:
± Ceiling on deposits
± Maturity of deposits
± Forms and particulars of advertisements
± Forms of application on deposits
± Register of deposits
± Interest on deposits
± Ceiling on brokerage
± Repayment on deposits
± Maintenance of liquid deposits
± Return of deposits
V As a source of corporate finance
V Costs of funds
V Availability of alternative sources of finance
V Convenience in raising funds
± Less costly method of raising short and
medium term funds
± árocedure of raising funds is simple
± Company·s mortgage able assets are conserved
± Advantage of trading on equity

± Maturity period is very short

± Not reliable and definite source of finance
± Ceiling on rates of interest
± Quantum of funds that can be raised is limited
to 35%
± Rate of interest
± Maturity period

A deposit made by one company with another

company usually, for a period up to six months
,is called inter-company deposits. These are of
three types:-
a) Call deposits

b) Three months deposit

c) Six months deposits

Firms may also raise loans for meeting their medium-term and long ²
term financial needs. Medium-term loans are for periods ranging from
one to five years and long-term loans are granted for periods beyond
five years. A term loan is granted on the basis of a formal agreement
between the borrower and the lending institution. The major advantage
of a term loan is that it is for a fixed period and I is to be paid back out
of the cash generations from the operations. Term loans do not cause
dilution of control, as lending institutions do not have the right to vote.
Another advantage of term loan financing is savings in income-tax as
interest on term-loans is a deductible expense under income-tax. In our
country there are two major sources of term lending, (a) specialized
financial institutions or development banks; and (b) commercial banks.
 These specialized financial institutions are also called
Development ðanks because they provide not only
finances but also help in promotion of new
enterprises. These institutions have to play a very
significant role in the industrial development of
our country for the following reasons:
i. Absence of organized capital markets,
ii. Lack of entrepreneurial talent,
iii. Low capital formation,
iv. álanned economic development to achieve the
socio-economic objectives.
V At present there are four important financial
institutions at the national level i.e., the
INDUSTRIAL FINANCE CORáORATION OF
INDIA (IFCI), INDUSTRIAL DEVELOáMENT
ðANK OF INDIA (IDðI), INDUSTRIAL
CREDIT AND INVESTMENT CORáORATION
OF INDIA (ICICI), and INDUSTRIAL
RECONSTRUCTION CORáORATION OF
INDIA(IRCI). In addition, there are 19 State
Financial Corporations (SFCs) and 24 State
Industrial Development Investment
Corporations.
IFCI was established in 1948 under the IFC Act,1948. The
main objective of the corporation has been to provide
medium and long-term credit to industrial concerns in
India. The financial assistance of the corporation is
available to limited companies or co-operative societies
registered in India. Initially the authorized capital of
the corporation was Rs. 10 crore which was divided in
equities of Rs. 5000 each. Later on the authorized
capital was increased to Rs.20 crore. Since July 1, 1993
this corporation has been converted into a company
and it has been given the status of a limited company
with the name Industrial Finance Corporation of India
ltd. IFCI has got its registration under Companies Act
1956.
 The functions of IFCI can be broadly classified into :
1. Financial Assistance
2. áromotional Activities
Financial Assistance : The IFCI is authorized to render financial assistance
in one or more of the following forms:
i. Granting loans or advances to or subscribing to debentures of industrial
concerns repayable within 25 years.
ii. Subscribing directly to the shares and debentures of public limited
companies.
iii. Underwriting the issue of industrial securities i.e. shares, bonds, or
debentures to be disposed off within 7 years.
iv. Acting as an agent of the Central Government or the World ðank In
respect of loans sanctioned to the industrial concerns.
Financial assistance is available from IFCI for the following purposes:
i. For the setting up of new industrial undertakings.
ii. For expansion of the existing concerns.
iii. For the modernization and renovation of the existing concerns.
iv. For meeting existing liabilities or working capital requirement of
industrial concerns in exceptional cases.

áromotional Activities : The IFCI has been playing very important

role as a financial institution in providing financial assistance to
eligible industrial concerns. The corporation discovers the
opportunities for promoting new enterprises. It acts an instrument
of accelerating the industrial growth and reducing regional
industrial and income disparities.
ICICI was established in 1955 as a public limited company
under the Indian Companies Act for developing
medium and small industries of private sector. Initially
its equity capital was owned by companies, institutions
and individuals but at present its equity capital is
owned by public sector institutions like banks, LIC and
GIC etc. it provides term loans in Indian and foreign
currencies, underwrites issues of shares and
debentures, makes direct subscription to these issues.
 The corporation has been established for the purpose of
assisting industries in the private sector by
undertaking the following functions:-
i. Assisting in the creation, expansion and modernization
of such industries.
ii. Encouraging and promoting the participation of
private capital, both internal and external.
iii. Expansion of investment market.

iv. Making funds available for re-investment.

v. ároviding finance in the form of long or medium-term

loans.
Commercial banks normally concentrated on providing
short-term assistance to industrial sector. The working
capital needs of industrial enterprises were met. A
massive investment in industrial during second plan
and after changed the priority of bank lending. The
industrial sector required huge funds for long-term
financing. The financial institutions could not cope
with this demand. The commercial banks came into the
picture for filling the gap between demand and supply
of long term requirements. The banks started giving
loans to meet long-term needs of the industry.
VENTURE CAáITAL-
The term ¶venture capital· represents financial
investment in a highly risky project with the objective of earning a high rate of
return. While the concept of venture capital is very old, the recent liberlisation
policy of the government appears to have given a filip to the venture capital
movement in India. In the real sense, venture capital financing is one of the
most recent entrants in the Indian capital market. There is a significant scope
for venture capital companies in our country because of increasing emergence
of technocrat entrepreneurs who lack capital to be risked. Venture capital
financing involves a high risk. In addition to to the venture capital companies,
the Government of India has been instrumental in setting up a number of new
financial agencies to serve the increasing needs of the entrepreneurs in the
area of venture capital. These include:
V Venture Capital Scheme of IDðI
V Venture Capital Scheme of ICICI
V Risk Capital and Technology Corporation ltd.(RCTC)
V Infrastructure Leasing and Financial Services Ltd.
In addition to debt and equity financing, leasing has emerged
as another important source of intermediate and long-term
financing of corporate enterprises during the recent few
decades. In India, leasing is a recent development and
equipment leasing was introduced by First Leasing
Company of India Limited in 1973 only. Since then, a
number of medium to large-scale companies have entered
the field of leasing. Leasing is an arrangement that provides
a firm with the use and control over assets without buying
and owning the same. It is a form of renting assets. The firm
may consider leasing of asset rather than buying it. In
comparing leasing with buying, the cost of leasing the asset
should be compared with the cost of financing the asset
through normal sources of financing ,i.e. debt and equity.