Long Term Finance: Shares, Debentures and Term Loans

Ordinary SharesFeatures

Claim on Income Claim on Assets Right to Control Voting Rights Pre-Emptive Rights Limited Liability : No compulsion to pay dividend on it.

Ordinary SharesPros and Cons

Advantages
1. 2. 3.

Permanent Capital Borrowing Base Dividend Payment Discretion Risk Earnings Dilution Ownership Dilution

Disadvantages
1. 2. 3.

Right Issue of Equity Shares

Selling of Ordinary Shares to the existing shareholders of the company. Value of Right

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Right Shares Pros and Cons

Advantages
1. 2. 3.

Control is maintained Less flotation cost Issue more likely to be successful

Disadvantages
1. 2.

Shareholders lose if fail to exercise their right If shareholding concentrated in hands of FI

DebenturesFeatures

A bond or a debenture is the basic debt instrument which may be issued by a borrowing company for a price which may be less than, equal to or more than the face value
Interest Rate Maturity Redemption Buy-back (call) provisions Indenture Security Claim on Assets and Income

Types of Debentures

Non Convertible Debentures Fully Convertible Debentures Partly Convertible Debentures

DebenturesPros and Cons

Advantages
1.

2.
3.

Less Costly No ownership Dilution Fixed payment of interest

Disadvantages
1.
2. 3.

Obligatory Payment Financial Risk Restricted Covenants

Preference Shares

Similarity to Ordinary Shares:

1.

2.

Non payment of dividends does not force company to insolvency. In some cases it has no fixed maturity dates.

Similarity to Debentures:
1. 2. 3.

Dividend rate is fixed. Do not share in residual earnings. Usually do not have voting rights.

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Preference SharesFeatures

Claim on Income and Assets Fixed Dividend Cumulative Dividend Redemption Convertibility

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Preference SharesPros and Cons

Advantages
1. 2. 3.

Risk less Dividend post-ponability Fixed dividend

Non-deductibility of Dividends Commitment to pay dividends

Disadvantages
1. 2.

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Term LoansFeatures

Maturity Direct Negotiations Security Restrictive Covenants

1. 2. 3.

4.

Asset related covenants Liability related covenants Cash flow related covenants Control related covenants

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Convertibility Repayment Schedule

Short Term Finance

Trade Credit credit extended in connection with the goods purchased for resale by a retailer, or for raw materials used by manufacturer in producing its products is called the trade credit.

Accrued expenses

The accrued expenses refer to the services availed by the firm, but the payment for which has not yet been made.

Commercial Papers

Commercial Paper (CP) is an unsecured promissory note issued by a firm to raise funds for a short period, generally, varying from a few days to a few months

Inter-corporate Deposits (ICDs)

companies borrow funds for a short-term period, say up to six months, from other companies which have surplus liquidity for the time being
Inter-corporate Deposits :

Short-term Unsecured Debentures

Companies have raised short-term funds by the issue of unsecured debentures for periods up to 17 months and 29 days. The rate of interest on these debentures may be higher than the rate on secured long-term debentures.

Bank Credit

Credit facility provided by commercial banks to meet the short-term and working capital requirements has been important short term sources of finance in India.

INTERNATIONAL SOURCES

Depository Receipts (DR) A DR means any instrument in the form of a depository receipt or certificate created by the Overseas Depository Bank outside India and issued to the non-resident investors against the issue of ordinary shares.

Thank you