FINANCE AND ITS NEED Finance is defined as the provision of money at the time when it required.

y NEED OF FINANCEFor day to day operations For creation of production facilities SOURCES OF FINANCE y Short term Bank credit Customer advances Trade credit y Medium term Issue of debentures Issue of preference shares Bank loan Fixed deposit y Long term Issue of shares Issue of debentures Ploughing back of profit Loans from specialized financial institution

SHARES The capital of a company is divided into a number of equal parts is called shares. y Type of sharesEquity or ordinary shares

Preference shares Along with this company can also issueBonus shares Right shares Sweat equity EQUITY OR ORDINARY SHARES y y y y Represents the ownership position in company Source of permanent capital Shareholders are entitled for dividend Rate of dividend is not fixed, therefore called variable income security.

REPORTING OF EQUITY SHARES y y Capital represented by equity shares is called equity capital. It appears on the left side of account form balance sheet, & on the top of source of capital in the step-form balance sheet. Table below showing the GNFC s share capital as on 31st march, 2003

(Rs in lakh) (a) Authorized 250,000,000 equity shares of Rs 10 each (b) Issued 148,565,000 equity shares of Rs 10 each (c) Subscribed and paid up 146,476,214 equity shares of Rs 10 each fully paid up (d) Reserve and surplus (e) Net worth(c+d) 25,000.00 14,865.00 14,647.62 58,377.39 73,025.01

FEATURES OF EQUITY SHARES y Claim on income Residual ownership claim No legal obligation to the company to pay dividend y Claim on asset Residual claim at the time of liquidation of company y Right to control Legal power to elect directors y Voting right Vote on important matters like x x y y Election of directors Change in memorandum of association

Pre-emptive right Limited liability

PROS AND CONS OF EQUITY FINANCING y AdvantagesPermanent capital Borrowing base Dividend payment discretion y DisadvantagesCost Risk Earning dilution Ownership dilution PUBLIC ISSUE OF EQUITY

y y y

Public issue of equity means raising of share capital directly from the public. Company can raise fund through IPO (initial public offer) or through FPO (follow on public offer). Underwriting of issuesIt is legally obligatory Underwriters are generally- banks, financial institutions, brokers etc. In underwriting, underwriter guarantee to buy shares if the issue is not fully subscribed by the public. Company has to pay an underwriting commission to underwriters .

PRIVATE PLACEMENT OF EQUITY Involves sale of shares to few selected investors, particularly the institutional investors like the UTI, LIC, IDBI etc. y Advantages of private placementCost x Speed x PREFERENCE SHARES Often considered to be a hybrid security since it has many features of both ordinary shares and debentures. y Similar to equity shares in thatDividends are not deductible for tax purposes Non payment of dividend does not force the company to insolvency In some cases, it has no maturity date y Similar to debenture in thatDividend rate is fixed Preference shareholders do not share in residual earning Take less time to raise funds It is less expensive

Have claim on income and asset prior to ordinary shareholders Usually do not have voting right TYPE OF PREFERENCE SHARES y y y y y y y y Cumulative preference shares Non-cumulative preference shares Redeemable preference shares Irredeemable preference shares Participating preference shares Non-participating preference shares Convertible preference shares Non-convertible preference shares

FEATURES OF PREFERENCE SHARES y Claim on income and assets Prior claim on company s income as compared to ordinary shares Prior claim on assets in the event of liquidation Usually cannot participate in extraordinary income y Fixed dividend Dividend rate is fixed Preference shares are called fixed-income security Payment of dividend is not a legal obligation y y Cumulative dividend Redemption Redeemable preference shares Irredeemable preference shares y Call feature

Permits company to buy back shares at a stipulated buy-back price or call price y Participating feature Participating preference shares Non-participating preference shares y Voting right Conditional voting right y Convertibility Convertible preference shares Non-convertible preference shares PROS AND CONS OF PREFERENCE SHARES y AdvantagesRiskless leverage advantage Dividend postponability Fixed dividend Limited voting right y DisadvantagesNon-deductibility of dividends Commitment to pay dividend RIGHT ISSUE OF EQUITY SHARES Right issue involves selling of ordinary shares to the existing shareholders of the company. y y Shares are issued on pro-rata (proportional ratio) basis. Shareholders through a special resolution can forfeit this pre-emptive right.

PROS AND CONS OF RIGHT ISSUE y AdvantagesShareholder s control is maintained

Less floatation cost Can be more successful in case of profitable companies, as subscription price is much below the current market price y DisadvantageMain disadvantage is to the shareholders who fails to exercise their rights BONUS SHARES y y They are additional shares issues given without any cost to existing shareholders. These shares are issued in a certain proportion to the existing holding. So, a 2 for 1 bonus would mean you get two additional shares -- free of cost -- for the one share you hold in the company. Bonus shares are issued by cashing in on the free reserves of the company. A company builds up its reserves by retaining part of its profit over the years (the part that is not paid out as dividend). After a while, these free reserves increase, and the company wanting to issue bonus shares converts part of the reserves into capital.

y y

SWEAT EQUITY y Sweat equity means equity shares issued by a company to its employees or directors at a discount. The idea behind the issue of sweat equity is that an employee or director works best when he has sense of belongingness and is amply rewarded. It is termed as sweat equity as it is earned by hardwork (sweat) of employees. Also referred to as sweet equity , as employee become happy on the issue of such shares.

y y

CONDITIONS FOR ISSUING SWEAT EQUITY SHARES y y y Must be of a class of shares already issued by the company Issue must be authorized by a special resolution passed by the company in general meeting. All the limitations, restrictions and provisions relating to equity shares shall be applicable to sweat equity shares. If company s equity shares are listed on recognized stock exchange, shares will be issued as per the regulations of SEBI. If company s shares is not listed, shares will be issued in accordance with guidelines prescribed by central govt.