INVESTMENT ALTERNATIVE

By: Samriti Jain

BORROWING DEBENTURES SHARE CAPITAL PUBLIC DEPOSIT SOURCES OF LONG -TERM FINANCE

Mutual Funds

Bonds

Share Capital

Share Capital: Long term funds can be raised from share capital. According to Section 86 of Companies Act, 1956, a company can issue only two types of shares i.e. (a) Equity shares (b) Preference shares
SHARES

Equity Shares

Preference Shares

Shares
An

instrument that signifies an ownership position (called equity) in a corporation, and represents a claim on its proportional share in the corporation's assets and profits. Ownership in the company is determined by the number of shares a person owns divided by the total number of shares outstanding. Equity shareholders are known as the real owners of the business. Preference shares are those shares which during the life time of the company are entitled to a priority in the payment of dividends at a fixed rate, and the return of the capital in the event of winding up of the company.

Types of Preference shares

Cumulative Preference Shares

Non-cumulative Preference Shares

Participating Preference Shares Non Participating Preference Shares

Redeemable Preference Shares

Irredeemable Preference Shares Convertible Preference Shares Non-convertible Preference Shares

Debentures
A debenture is a document issued by the company as an acknowledgement of debt. It is a certificate issued by the company under its seal acknowledging a debt due to its holder. On debentures a fixed rate of interest is paid at regular intervals. Usually these are secured by some asset of the company. A debenture holder is a creditor of the company.

Types of Debentures

Simple or Naked or Unsecured Debentures: These debentures are not given any security on debentures. Secured or Mortgage Debentures: These debentures are given security on assets of the company. Bearer Debentures: These debentures are easily transferable. Anybody who holds these debentures becomes the owner of such debentures.

Registered Debentures: Registered debentures are those debentures which are registered with the company. These debentures can not be transferred by mere delivery but a proper procedure is to be followed for transfer. Both transferor and transferee are expected to sign the transfer deed.
Redeemable Debentures: These debentures are to be redeemed on the expiry of a certain period. The interest on debentures is paid periodically but the principle amount is returned after a fixed period. Irredeemable / Perpetual debentures : Those debentures which can be repaid at the time of winding up.

Convertible debentures: Those debentures which can be converted into shares or other category of debentures. Non-Convertible debentures: Those debentures which cannot be converted. Partly Convertible debentures: When a part is converted into shares and the remaining part is called nonconvertible portion. Zero interest debentures: It is usually a convertible debenture which yields no interest. The investor is compensated for the loss of interest through conversion into equity shares at a specified future date.

Government Securities

Government Securities are securities issued by the Government for raising a public loan or as notified in the official Gazette. They consist of Government Promissory Notes, Bearer Bonds, Stocks, Short-term Treasury bills, medium-term Treasury notes, and long-term Treasury bonds and Government Securities.

Government Securities are mostly interest bearing dated securities issued by RBI on behalf of the Government of India. GOI uses these funds to meet its expenditure commitments. These securities are generally fixed maturity and fixed coupon securities carrying semi-annual coupon.

Features of Government Securities Issued at face value No default risk Ample liquidity as the investor can sell the security in the secondary market Interest payment on a half yearly basis on face value. No tax deducted at source Can be held in Demat form. Tax exemptions

Rate of interest and tenor of the security is fixed at the time of issuance and is not subject to change (unless intrinsic to the security like FRBs - Floating Rate Bonds). Redeemed at face value on maturity Maturity ranges from of 2-30 years. Securities qualify as SLR (Statutory Liquidity Ratio) investments (unless otherwise stated).

Public deposits

"Public deposit is accepting deposits by a company from the members of public (including shareholders and directors) for periods ranging from six months to thirty six months. A company can accept deposits from the public to finance its medium and short-term requirements of funds. This source has become very popular recently because, a company offers interest at a rate higher than offered by banks. Under this method, companies are able to obtain funds directly from public without financial intermediaries.

ADVANTAGES
It is beneficial to the company accepting deposits since it receive finance at a lower rates of interest than charged by the banks and special financial institutions on lending. Interest paid on deposits is a deductible expense for income tax purpose. Administrative cost of deposits is lower than that involved in issuing shares and debentures. The company has to fulfill lesser formalities in accepting public deposits. As the rate of interest on public deposits is fixed, it helps the company to play trading on equity, if the company is earning more than the rate of interest paid on public deposits.

Depositors have no interference in the management and control of the affairs of the company as they have no voting rights. Thus, there is no dilution of control of shareholders. Public deposits are not backed by any charge on the assets of the company. The company may accept charge on its assets while raising loans from other sources like banks and financial institutions. Capital structure of the company remains flexible by accepting public deposits. Company can repay the deposits when they are not required by the company.

Disadvantages
Public deposits are fair weather friends'. It is an uncertain and unrealistic from of financing. When depositors feel that the company is in a shaky position, they may not respond to fresh deposits or may start withdrawing their existing deposits. Public deposits are available mainly for short period. The management may misuse the deposits as such deposits are not secured. Public deposits are generally not available to new companies or companies with uncertain earnings.

There are legal restrictions on the acceptance and renewal of public deposits. Receiving public deposits create unhealthy trends in capital market. There are numerous rates of interest offered by different companies. This source of raising finance is valid only for short-term financial needs of the company. Once a deposits is accepted, a company can not repay the same before the expiry of six months.

Mutual Fund

A mutual fund is a professionally managed type of collective investment scheme that pools money from many investors to buy stocks, bonds, short-term money market instruments, and/or other securities.

An open-ended fund operated by an investment company which raises money from shareholders and invests in a group of assets, in accordance with a stated set of objectives.

UTI

UTI is a public sector financial institution which mobilize savings specially from the household sector and reinvest the funds in to different investments outlets. UTI is managed by a competent board of trustees and its chairman is appointed by the Central Govt..Safety and liquidity are the objectives of investing in UTI.

PF

The EPF is a scheme intended to help employees from both private and nonpensionable public sectors save a fraction of their salary every month in a saving scheme, to be used in an event that the employee is temporarily or no longer fit to work or at retirement. There are mainly four types of provident funds :Statutory Provident Fund Recognized Provident Fund Unrecognized Provident Fund Public Provident Fund

National Savings Certificate

Scheme specially designed for Government employees, Businessmen and other salaried classes who are Income Tax assesses. No maximum limit for investment. No tax deduction at source. Certificates can be kept as collateral security to get loan from banks. Investment up to INR 1,00,000/- per annum qualifies for Income Tax Rebate under section 80C of IT Act. Trust and HUF cannot invest.

Bank deposits
The term bank deposits are terms generally used for the money which a common person or a customer saves in a bank for future financial security. Bank deposits are available in form of schemes known as demand deposits. These bank deposits sometimes may even be fixed.

Post Office Schemes

Post office schemes are like the commercial bank schemes. They have a Saving Account Recurring account Cumulative time deposit account