Engineering Econorr:ics and Financial Accounting

.iold re serves rna y pre 'lie n t pay men t 0 [ di v ideo ds Ii berall y, S i nee the reserves are essen ti al and i hes e can be built up only from profits. the finance manager has 10 judge the priorities and p!lon acco-dingly. Normally. the companies try to build reserves from their profits in the starting phase. Only when the company is in surplus even after f roviding necessary reserves, it goes for payment of dividends. In other words, build-

ing up reserves get top priority LO payment of dividends.

There are a number of cases where certain companies tried 10 satisfy their shareholders by paying liberal dividends, but they collapsed 300n whe:l they could no! borrow again from the market. The secre. is that 'reset 'lies' provide funds at zero c03t., Instead of building IIp reserves we WLn' to borrow from .he market, which means we should be prepared to pay interest on weI' borrowing. and this implies a cort'

16. Price level In times of rising prices, the prices of inputs .ncrease. The company has to arrange for higher volume of working capital. If there is scope to pass on this burden to t"e consumer by margin" ally increasing the seiling price, it is good, But in very few cases, IriS is possible. Cemlln companies with good reserves, good relations witb suppliers, strong customer base, ~C:equate amounts of working capital and soon .. alone can manage their operations smoothly during the times of mflauon.

17. Opt 'ratln 9 effici en cy The higher the degree of Ol'e rating effie ienc y, the lower could be the volume of working capital and vice versa. Operating effic.cncy can be attained by following strategies such as cost reduction 1nd costcontrol, waste eliraination. :m:'JToved layout. zcrong the idle time inventory control, highest capacity utilisation, minimising th,~ length of manufacturing cyt.le,_ evolving conduci ve policies for taxation, reserves. dividends and profits and so on.


Method of finance is the type of finance used-e-wch as a loan 01 a mortgage. The source of finance w01l1 d. be where the money was obtained frorn=-a loan may be obtain ~u from a bank while the mortgage may be obrained from a credit society. From a financial statement, we can readin what form the capital is tied L'P .fix ... d assets or current assets) and how thr.sea.e financed (from own capital r-rhorrowed funds). It is necessary to notice the difference bet we ~n methods and sources of finance tc identify which type of asset can be bought from .... hat source of funds. For example. fixed asset can ')e bought only from long-rerrn source of funds. If you buy a long-term asset utilising funds trom short-term sources, tie asset has to be sold off to repay the short-term loan, in rhe event of pressure to repay the loan.

The following are the common methods of f.nance:

(a) Long-term finance

(b) M eJi urn-tern, finance

(c, Shorl·term finance

The sources are discussed under each rneth xl.


V Long-term Finance

Long-term finance refers to that finance that is available for n long period say three years and above. The long-term methods outlined below are used to purchase fixed assets such as land and buildings, nlar-t anJ

so on.

i Own Capital Irrespective of the form of organisation such as soletrader, partnership or a company, the owners of the business h rve to invest their own finances to start with. Money hve.~ted by the owners, partners or promoters is permanent and will stay with the business throughout the life of the business,

Financial Ma,"1agemeM-VI: Sources and Methcv:J.~ of Raising Finance

~<Ha, '

------ __ .. ~i:JD_

·k •

Share CapltaJ Normally in the case of a company, the capital is raised by issue of shares. the

c.1pit~1 so raised is ca.led share capital. The liability of the shareholder is li mired to th.: extent of his contribution to the share capital of the company. The shareholder is entitled to dividend in case the companY:"(lakes profits and the directors announce dividend formally in the general bodymeetings, The share capital can be of two types: Preference share capital and equity share capital. The salient feature-s of preference share capital and ordinary share capital are di scussed below:

:* Preference share capitol Capital raised through issue of preference shares is caned preferenc.e. share capital. A p~ference shareholder enjoys two rights over equity shareholders: (a) right to receive fixed rate of dividend and (b) right to return of capital. After settling the claims of nrtsiders, preference shareholders are the first to gel their dividend and then the balance will go to the equ ity shareholders, However, the preference shareholders do not have any voting rights in the annual general body meetings of the company. This deprives them of the right to participate in the management of the

affairs of the company. .

~ Types of prefe,.,ence shares Preference shares are of five types. They are:

~!;t~ulative preference share A cumulative preference shareholder gets his right to the arrears of dividend cumulated over a period of time. If the company is not in a position to pay dividends during a particular year d~f '0 paucity of profits. it has [0 pay the same to the cumulative preference shar_eholdefs when II m.akes profits. In other words, the holders of cumulati ve preference shares enjoy the right to receive, when profits permit. the dividend missed in the years when tile profits were nil or inadequate,

2, Non-cumul~live preference shares The holders of these shares do not 'enjoy any right over the arrears of dividend, Hence the unpaid dividend in arrears cannot be claimed in future.

3. Parlicl~ating preference ShaTe~ ,The holder of these shares enjoys the dividend two times. They get theI: normal fixed rate of dl:ld~nd as per their entitlement. They participate again along with the equity shareholders in the distribution o~ profits.

4. Redeemable preference shares These shares are repaid at the end of a given period. The period of repa ymen tis s ti pulated 011 each share.

S. Non-redeemable preference shares These shares continue as long as the company continues.

They are repaid only st the end of the lifetime of the company.

, Eq.ulty sh_are capital Capital raised 'hl'Ough issue of equity share is called equity share capital. An eq~tty share IS also called ordinary share. An equity shareholder does not enjoy any priorities such as those enjoyed by t preference shareholder, But an equity shareholder is entitled to voting rights as many as the number of shares he holds. The profits after paying all the claims belong to the equity shareholders. In case of loss, rhey are I~e first to surfer I~e looses. Equity shareholders are the real riJk bearers of the company. But at thesame time, they are entitled for the whole surplus of the profits after payment of dividends to preference shareholders. Therefore, the rate of dividend on equity shares is not fixed,

t< Profits The retained profits are the profits remaining after all the claims. They form a very significant source of fi.nance. Retained profits form good source of working capital. Particularly in times of growth and expansron, retained profits can be advantageously utilised.

tLong~term Loan.s l~ere are specialised financial institutions offering long-term loans, provided the pu~mess ~roposalls feasible. The promoters should be able to offer assets of the business as security to av ailo f this source.

~--.~;,_' ----

-1i1l'O'=l'-"';~~~_. __ . ~ E_n_g_in_ee_ri_ng~ECOfJomiCS and Financi81 Accwntiny

,I( Debentures Del:entures are the loans taken by the company. It is a certificate or letter issued ?y the

der i mmon seal acknowledging the receipt of loan. A debenture holder IS the creditor of

company un er Its cor . . f

A d benture ho'der is entitled to a fixed rate of interest on the debenture amount, Paymen. to

the company. e"" -.... . . l' . .

- t deber ture is the first charge against profits. Apart from the loans from financia mstrtunons. a .

~~:e:[)~nmay raise loans through debentures. This is an additional source of long-term finaoc:e. The

p. f i t t and principal amounts OD these debentures is subjeci to the terms and coruunons ol

payment 0 III eres . ,

issue of debentures. _

The debentures are of different types based on the terms and conditions. There is no s;an~ard list. The

ss of the finance manager lies in designing an instrument suitable 10 the needs of the investors and which will pull in as much funds as possible, The foUowing are the common types of debentures:

1. Convert'fble debentUl"es These debe~tures are converteo into equity shares after the period mentioned in the terms ~nd conditions of issue. In terms of \,;051,. debent~[es are c~ea~r than we ~ulty

h - Where the company is not sure of good profits to sustain the Size of equity, It prefers to Issue

~o~~:~ible debentures. Th~se debentures continue' as loan for the defined pe.riod. are convert~ into equity shares on the specified date. Then .onwards, these sharehold~rs wlll be entitled todlVldena,

which will benonnally hlgher than the rate of interest on debentures. .

2. Partly .conver_tiblc debentures A portion of debentures is to be converted into e,:Juity

shares and the balance·portion-continl~oan. -

3. N~~-c~nvertlble debentures These debentures will nC't be_converied inta~!Y shares.

Theyc.Q!:!!i@e as I01!!Lt.ilL~he date ofpa~nt. '.

4 Secured debentures' These debentures are safe because the assets of thl!. co~pa!)y are O.f-

. - . d h t f the debentures. Newly promQ(!'d compames Issue se.::ur~

fered as security towar s I e paY:J?len a . -, . .

debenu.imjQ_geate..wnfidenc~_im9Jlg the investQ!§., 'I , ,

S"_-PartlY secu.ted d~bentures These debentures are partly ,,_overed by the SeCl\~ty. In other words the securit"valne·i_s lesse- thi!-!tlbs._!!!_\;_O;;__~IJ.l®-9f.m~-~~pent\.!res- ,s]_l,le_~.

6 U'-"-:"--~d- de~~~t;:;; There is fo;'these debentures. NC'noally,lhe camp_anies

. nsecure '.' -. . ..

ha vi n gag ood fi nan ci iiI J;tCQrd is $)1 e un seep red debtm II ire';. , '

;. Redeemable debentures These deber.uires are ~aidon a specifiep date·

S . Non-redeemable debentures These are repaid only at the end of the lifetime of Ite c~r.lpany.

:J< Government Grants and Loans Government may provide ~ong-telm finance directly to the business houses or by indirectly subscribing to the shares of the com~alll~. The govtmment gives loans only If the project satisfie-s certain condil~ons, such as s,euing up a project tn a notified (backward) area, or

ventures into projects which are beneficial for the society as a whole. .

I I I J 1

Medium-Term finance I

Medium-term finance refers to such sources of finance where the r~paym~nt is oormally over one year and Jess than three years, This is normally utilised to buy or lease m.otor-vehlcles, computer e{juIP:~nt, o~ machinery whose life is less than three years. The sources of medium-term finance are as folio s.

•• ~.~----~-.- y

Financial Managemem-VI. Sources ;;nn Me:horls of Raising Finance


~---~~ .. -y-- -- ~--.--~---- -----_----

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B ank Loans Bank loans are extended at a fixed rate of interest Repayment of the loan and interest are scheduled at the beginning and are usualty directly debited 10 the current accc .m of the borrower. These are seen red loans.

, ,

Hire-purchase It is a faci.ity to buv a fixed asset while paying the price over a long period of time. In other words. the possession of (he asset call be ta'cen by making a down payment of.J_ part of the price and th'~ balance will be repaid with a fixed rate of interest in agreed Lumber of instalments. The buyer becomes the ow icr of the asset only 011 payr_1( nt of the last instalment. The seller is the owner of the asset till the 13.< ( instalment is paid. III case mere is any default in payment, the seller can reserve tht: righ of collecting back the asset. Today. most of che consumer durables such as cars. refrigerators, 1 Vs IInJ so on, are sold on hi re-purchase basis .. It provides an opportu nity to keep using tile asset much before the full

price is paid. '

Leasinq or Renting When: there isa need for fixed assets, the asset need not be purchased, It can be taken c n lease or rent for specified nur iber of years .. Tne company who owns the asset is called lessor and the company which takes the asset on lease is called lessee. The agreement between 'h~ lessor and lessee is called a leas,' agreement, On the "xp'ry of the lease agreement, the owner truces the asset back into his custody. Under .ease agreement, ownership to the asset never passes. Only possession of the asset passes from lessor to the lessee. Lease is not a loan. But when the business wants a certain asset for a short! medium period, lease can significantly reouce the financial requirements of the cusiness to buy the ss.iet.

Venture Capital This form of finance is available only for limited companies, Venture capital is normally provided in such projects where there is relatively a higher degreeof risk. For such projects, . finance through the conventional sour-ces may not be available. Many banks offer Such finance through their merchant banking divisions, K specialist banks mal offer advice and financial assistance, The financial assistance may take the form of loans and venture capital. In the case of viable or feasible projects, the merchant banks nay participate in the equity also. In return, they expect one or two (depending up on tl.e volume (f lund, pumped in) director positions on thee board to exercise the control 00 the company mat.ers. The fi.nds, ,0 provided by the venture capital, can be used for acquiring another company or launching a new product or financing expansior, aad growth.

V~hor-t-Term Fl.aance

Short-term finance is that finance wrich is available fOJ a period of less than on" ye-ar. The following are the sources of short-term finance:

-I<. Commercial Paper (CP) It is a new money market instrument introduced in India in recent times. CPs are issued usually ir; large' denominations by the leading. nationally repute J, highly rated and credit worthy, large manufacturing and finaace companies in th~ublic [l_nd private sector. The proceeds of the issue of commercial paper are used to finance current transactions and seasonal and lnter..n needs for funds.!ries is one of th~o,npanies-:'bi~h'iss,,;;jComme;cial Pape- ----.------

.-----~.- - •. '," -;-.;=--..;;::;:::=--=---------_. ,

}. Bank Overdraft This is a special arrangcrnert with the barker where the customer can draw more than whai he has ill his savings/current account subject to <I maximum Limit. Interest is charged on a day-today basis O~ file actual .unount overdra wn, 1 his source is utilised l~ mee: tne temoorary shorta-ie of fui.ds.

''t< Trade ere C:Jt This is a short-term credit facility extended by the creditors to the debtors. Normally, it is comm,a for [he Iraders !O buy thr. OJ[t:Ii~ls and othC1BUpplics [,om the suppliers on mdilt:>a~is. After

~l:L .

£ Economics and Finar.cial j,ccuuming

....,eUing the stc.cks, the traders pay the cash and buy frr-sn stocks again on credi L Sonlcf; mes, the suppliers may insist on the buyer [0 sign a bill (uiU of exchange). This bill is called bill, payable,

/< Debt Factoring or Credit Fadoring

Debt FactQl:~!!g is the arrangement with factrr where the trader agr~es to sell i.s ag::Q\I_D.!u_~s;_;.Y~l~ or debtors 1t discount In the specialised dealer.' called factors. In the case of <;_:r",dlt _l"ar.lor~..r~2: the trader agrees to se II his accounts p~ables (at premium).

Examp,le ':!4.1 For example: X sells Y goods worth Rs 5,000. Y canno; pay cash imrr.ediately. f--ie agrees to pay after two months. X wants cash immediately, Here X enters into a debt factoring agreement with Z who agrees to pay 1<., 4,500 i mmediatel y to Y nndagrees to collect F.s 5,000 after rwo months fro-n Y. In this example. Z is called rheJaclor. III the same example, if Y enters into ,'n agreement with Ih.e factor, the facio. pays Rs 5,000 to X and collects Rs 5,500 from Y after two months, This is called credit [actoring,

Where the business finds Its financial resources tied up in the fan n 0; debtors .who arc nell pay ing on time, factori ng i: q gooo relief,

A factori ng company btl ys there debts and prov ides certain addi tional services, for example:

lL wi 11 lend up to 70-8C pe' cent of outstanding d~bts

It will deal with all th" paper work of collecring the debts

• It wi II insure against nun- paymen: of debtr ,

Factoring frees money due to the business and the same car. h" utilised for growth and expansion

i: Advance from Customers It is customary to collect f-ull 01 part of the order amount from the customers in advance. Such advances are useful to meet tr.e working capital needs.

/< Short-term Deposits from the Customers, Sister Companies and Outstdezs It is normal to find the supermarkets ~C: other irad ing organise ci ons inviting dep: .sits of six mouths to one year duration. As an incentive, such deposit holders may be §i vens-t 0 per cent discount on the purchases,

+- Internal Funds Internal funds are generated by the finn i:self by way of secret reserves.' depreciation provisions, taxation provisions retained profits and so on and these can be utilised to meet the urgencies,

Characteristics of Common Methods of Ftnanee

Tiere are various sources of raising finance for business and each of them has its own distinct characteristics; merits and demerits. The basic task of a finance manager is tc ensure that the right quantity of finance is available from appropriate source so that the average cost of capital is msm m ised.

I. Secret reserves are such reservcs whichare not disclosed in me Bal.·n~t.S:)eel(lhough it really exists).

They may be created by any of the following ways.

, by rnaki ng excessive provi sion for depreci atio r on fj xed a sset, or ou [stand i n g liabi I i ties by urrderval ui ng the curre nt assets

• by overstati ng me liabi I i ties

• by chargi ng capi tal expenditure to revenue,

Financial Management~VI: Sources and Methods of Raising Finance



The following are the most important points to consider when deciding on the method and source of finance.

1. Duration of the loan Short term loans tend to be proportionately more expensive than longterm loans. The type of finance must be matched with the expected life of the asset required as shown in Tobie 24.1.

2. Security of the loan All the long-and medium-term loans are fully secured. The amount of collateral security offered by the borrower, as security will affect the rate of interest charged on the loan, If the security is enough to cover the principal amount and interest, the rate of interest will be comparatively low. since the risk involved is low. The loan can be secured or unsecured depending upon the amount of loan, time and pmpose for which the joan is borrowed, the credit standing of the borrower.

IM§IJ£ Business Finance and the l1mePeriOd2!

(a) to purchase raw materials

(a) to replace machinery

(a) to buy fixed assets such as land and buildings and so on.


Equity capital


Retain~d prof ts

Grants and gifts Venture capi tal

3. Appropriateness of dlfferen t sources of finance to different assets A lot of care is to be observed while acquiring different assets. Sources of long-term finance can be utilised for acquiring fixed assets and sources of short-term finance should be utilised for financing the current assets .. But if the funds are borrowed, seldom is it possible to liquidate the fixed assets to repay the loan. In other words, short-term funds can never be deployed for acquiring long-term assets. Whereas the long term loans can. to some extent, be used to finance the current assets .. Table 24.] illustrates this point.

2. The duration of long term period and short term period may vary dependmg upon the nature of industry and rime of the bt isiness, However i, can be generalised as mentioned here.

I i





Eng.ineering E.:onomics and Financial Accounting



Capital market refers to primal)' market (where the new companies launch their public issues) and secondary market (where the shares of companies are bought and sold). It also includes (a) ihe mutual funds that raise resources from the investors for investment in the selected portfolio tha: is closely monitored from time 10 lime. (b) Development financial institution (much as Industrial Development Bank of India) which provide financial assistance to the corporate sector,

The main objective of most of the mutual funds is to maximise the annual yield/return and wealth for the investors. The main idea of capital markets is to mobilise the financial resources to the different sectors of the economy by attracting the savings of the investing public and institutions,

The scene of primary 'capital markets in India has been" subject to rapid changes particularly in the context of economic reforms with II focus on globalisation, privatisarioa rnd deregulation. Earlier.xhe Controller of Capital Issues (CCn was monitoring the terms and conditions relating to the public issues 10 raise financial resources for the companies. One of the capital marker reforms (a part of economic reforms) was to abolish the office of CCl and give freedom to the corporate sector to formulate their terms and conditions and design the financial instruments based on corporate an j investors' requir-ements, but, within the framework as stipulated by the Securities and Exchange Board of India (SEBl)


There is an institutional network created for Ihi~ purpose and the working results of these institutions have been encouraging. The following are the prominent institutions operating in this country for the last four decades. The main objectives of each of these institutions are outlined here.

Investment Tr1,lsts I


, . ,

Investment trusts collect savings from the individuals through the sale of its shares and invest the ,s3le proceeds in the securities. The objective of the investment trust is to supplement th.1:; efforts of the cornpany in mobilising the resources but not to cC'ntr:>1 the affail"l'. of the company, II purchases securities only for investment purposes.

V Unit Trust of India (UTI)

UTI is India's Iargest mutual fund organisation. Its main objective is to ensure its investors' safety, liquidity and attractive yield on their investments. The main activity of UTI is to encourage smal! saving campaign of the government. The sale proceeds of its schemes are invested in the ordinary shares of companies which have good grow.h prospects.

UTI was set up in 1\'64 by an Act of Parliament. UTI presently occupies a special position in Indian capital market. II endeavours to meet its investors' varying needs through its associated companies in the fields of banking (UTI Bank Limited), securities trading (UTI Securities Exchange Limited), investor servicing (UTI Investor Services Limited), investment advice and training ;UTI Institute of Capital Mar-

kets; UTI Investment Advisory Services Limited). .

UTI deploys large portion of its funds in equity investments and corporate debts, It also invests in government paper and call deposits. U'Tlentered insurance, pension fund and Cl edit rating busi nesses also.

On januhry 14, 2003, Unit Trust o~ India (UTI) bifurcated in two-UTI· I and UTI-II with a view to benefit the average Indian investor, The UTl-l wo ild continue to be managed by n governmem appointed administrator Illl the fund completes Its commitrner-ts to the investors of U~·64) lind over 20 assured return schemes. All the net asset value based schemes were handed over to UTI-II to a new asset management company floated by State Bank of India, Punjab National Bank, Bank of Baroda and Life Insurance Corporation with ar, initial paid up capital of ks 10 crore. UTI·II is a SEBl (Securities and Exchange Board of India) comphant mutual fund with a three-tier structure comprising of the board of trustees. sponsors and an asset managecien: r ompany.

V Insurance Companies

These offer insurance policies to the genera' publ.c anc institutions and the premia so collected are in. vested in tle securities such as government bonds, mortgages, Slate and local (municipal or zilla parishar) government c.aims, lind corporate bonds. The insurance companies can fairly predict when and what amounts of insurance or pension benefits need to be paid. So the main worry is not relating to liouidirv but investing these funds safely over a long period of time. The deployment pattern should satisfy the bes:

i nte teo " of th ~ policy holders and also that of the nation. . , '

The major inurance companies in India are the Life Insrrance Company of India (LlC), the General 1 ns urun ce Corporation of India (0r(;), me Oriental lrsurance Corporation of India and the United India !nsu.rance Corporation (Un.

Today the lr.dian economy is witnessing global players in insurance sector entering Indian market wit'} variety of insurance related products ai.d services, Companies such as Housing Development Finance Corporatici (Hi.'FC) and Industrial Credit Investment Corporation of India (ICICI) have already pro.moted subsidiary companies collaborating with foreign players and started their operations.

y/' National Small Industries Corporation (NSle) ,

NSIC was set up in 1955 with l'le main objective of promoting the growth of small stale industries. Its acti viti es i IIC III de:

to provide indigenous and imported tools, machinery snd equi . prnent to the entrepreneurs on hire pure h ase basi son eas y terms

to provide marketing support to small scale units for their products and services through government ~urcha5e programme

LO rlevelop prototype of machines tor commercial purpose by small units.

to train the entrepreneurs or nis representatives in various technical trades through its Prototype Development and Training ::'elltre

to provide fi lancia!, technica I and any othn assistance .iecessary to execute [he orcers

10 promote ancillarvunits for the :arge units by securing coordination between small scale and large scale units

to u n-ierwrire and guaraniee loans to slJ1~i I II nits from commercial hanks and 0 ther financial i nstitut' ons

(h) to provide Oil a continuing basis the rav materials, spures and components to small units.

>, (a)
(g) 3, US·64 was a scheme promoted by uTI duri"~ 1960, particu'arlv to prorr-ore thrift among the public and has the distincuon of'p .uviding gocd c!ividemls ahnost every year. UTI also promoted many assurer' return schemes w'le!~in

u nder iJTI assured cert.;n rate of returns M ~v~ry in ,r~~lm~~r



. ....,J\ '

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Engineerir>g "co~omics end Financial Ac~ountillg


mdustrial f'inance Corporation of India (IFCI)

lFcr was the firs! development r, nance i nstirution. II was set up in 1948 by C; overnrnent 0 r I ndia under the [FCI Act as a statu tory corpora.ion. I t was created to pioneer i nsli tunona I credi t to mcdi urn and large industries. The main objectives of Industrial Finance Corporation ;,i India include to

provide medium and long- term loans 10 large indusu io.! concerns in the cooperative, pubr.c ani pr'vate sectors

provide direct runee and foreign currency loans for setung up new industrir l projects imd for expansion, .iiversificr.tion, renovation and mor'ernisation and balancing of ex.sting units,

provide assistance tailor-made to meet spcci fie needs "f tne corporate sector thruugh various sp cially designed schemes such as equipment finance, equipment credit, equipment leasing. credit to suppliers/buyers, leasing and hire purchase concerns, corporate loans. sl.ort-tcrrn loans and working capital loans.

• provide g .iaranree for deferred payments and foreign loans

-mderwrite and directly subscribe to i ndustrial securi lies, provides financi ~I guaran lees, merchant banking and lease finance,

raise its resources th rough loans from the Reser .. e P nnk of : ndia, share capital, retained earnings, repayment of loans, isi.ue of bonds, loans from government, lines of credit from foreign lending agencies, commercial borrowings in mtemarional Ol,ital market.

It has been turned from a statutory corporation to a company under the Companies ACT in 1993 to or-sure greater flexibility to respond to tile needs of rapidly changing financial system an1 to have a direct access to the capital market, Presently it is a hoard-run company and its directors are elected by shareholders.

V State Financial Corporations (SFCs)

State Financial Corporations fire created under State Financial Corporations Act, \ ')51, Their main objectiv es were:

• to play an effective role in the development of small and medium enterprises and

• (0 bri n g abou t r,_: gi onall y ~al anced eco n o:n ic growth across the cou ntry,

As a part of strategy of balanced regional grow!", small and medium units within each state are dispersed widely. SFCs address the term-credit neeos of such units.

Presently there are 18 SFCs across our country, SFCs raise their resources thn:ugh share capital, reserves, bond issues, loans from RBI, Industrial Bank of India (IDBI), and State Government; refinance from the RBI and IDBJ; fixed deposits from tbe state governments, 10Gal autnorities and

the public and so on. '

\ , ..... /lndustrlal Development Bank of India (lOBI)

Fe BT W1<S established in 1964 by tht: Indian Governm ... nt under an Act of Parliamenr, Th ~ lnous zrial Development Bank of India Act, 196~. IDllI is the apex ius titution in the field of indi.s: rial finance,

The main objecti ve of IDBT is to address the needs of broad-based industrial development in the countr y through providi 19 tenn finance for fixed asset formation in industry. Development banking, since independence, was viewed as a strategy of realising the socio-economic objectives -rf Government of India,

~ !


.J 1.


1 I






Fr'n8ncial Management-V!.' Sources find Methods of Raising Finance



This is rile reason why the priorities of fDBl include balanced industrial growth through development of identified backward areas, modernisation of specified industries, employment creation, extension and support services in the fields of entrepreneurship and capita] market development,

The objectives of the rDl1[ are

to provide cr edit, tertr finance and financial services for the establishment of new projects as wr:11 as expansion, diversification. modernisation and technology upgradation of the existing industn al

enterprises, like that of IFCI. " , I

tnprovide indirect assistance in tr.e form of discounting, rediscounting long-term bills and promisory notes, refinancing of term loans given by state financial corporations, banks and so on.

• to act as a banker to all the existing financial institutions.

• to provife several diversified financial products of non-project nature such as equipment finance, asset credit and equipment leasing, merchant banking, debenture trusteeship and forex services to the corporate sector

to act as security agent and mortgage trustee in respect of loans granted by domestic iI,nd forei gn lenders to companies

• to function as a development financing agency in its own righ:

(0 coordinate, supplement, and monitor the operations of other term-lending institutions engaged in the financing, promotion or development of industry

• to undertake various promotional activities such as balanced regional development, entrepreneur-

ship development, technology development and so on, I

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IDBI today has functiona' autonomy in respect of granting loans, accepting .deposits, and foreign currency borrowings. ;t has been instrumental in developing various i.tstinnions such as. Small Industries Development Bank of India (SIDBI), Technical Consultancy Organisations (TeOs). Export-Import Bank (EXIMB), Entrepreneurship Development Institute (EDl), Stock Holding Corporation of India limited (SHCIL), Securities and Exchange Board of India (SEBl) and National Stock Exchange (NSE),

ID:'3I has been innovative in designing many schemes to provide project finance, equipment finance. asset credit, working capital loans, corporate loans, direct discounting of bill's, equipment lease. venture capital fund, technology upgradation, refinance for medium scale industries, bills rediscounting. and so on,



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Venture Capital Fund (yep) is mainly created to encourage commercial 'applications of indigenous technologies, adaptation of imported technologies, development of innovative products and services, holding substantial potential for growth and returns to encourage bankable ventures involving higher risk

including those in the Information Technology OT) sector. ' "

As a member of the Association of Development and Industrial Ban1:s' in Asia, IDBI strives to improve the economic relationship among the major Asian economies and to contribute to financial and economic development of Asia.

/state Industrial Development Corporations (SIDCs)/StClite Industrial Infrastructure Corporations (SHC)




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SIDCs act ~ catalyst fo~ industrial development in the given region, State industrial infrastructure corporaucns provide supportmg services such as providing necessary industrial infrastructure. The main ob, jectives of SIDCS/SUCs are to promote, improve and develop industries in the state by identifying and

Engineering Economics and Financial Accounring


assisting the backward areas in the state. They extend assistance to large, medium lind small industrial . units.

The main functions of SIDCs are:

(a) to provide risk capital through equity participation

(b) to provide seed capital for those entrepreneurs who have sound industrial projects but lad funds (c) to provide term loans, guarantees, and lease finance

(d) to administer incentive schemes of the central and state governments (e) to assess industrial potential and identify pro ject ideas throu gh s urv e ys (f) to prepare feasi biJjty reports, and identify and train entrepreneurs

(g) to develop industrial areas through promoting industrial estates

(h) to set up industrial projects in association with private .. entrepreneurs or as wholly owned

subsidiaries. I

SIDCs draw their resources from the state govemrnents, banks, bond issues, share capital, loans from RBI and IDBI and soon.

~Sma.lllndustTie~ Development Bank of India. (SIDBI)

5mB! is the apex financial institution for promotion, financing and development of small scale industries. in India, SIDB1 was set up in 1990 as a wholly owned subsidiary of Industrial Development Dank oi India, With t:'le enactment of SIDBr (Amendment) Act, 2000, it has been conferred operational fle""(ibility arid functional autonomy on the Board of SIDllI. mDBI endeavours to promote, finance and develop small scale sector that cor, tribute s about 40 per cent of India's total. industrial manufacture, about 35 per cent of total exports and provides employment to nearly 17 million people.

5IDB! oversees, coordinates and further strengthens various arrangements for providing financial and non- financial assistance to small scale industries. TIle thrust areas of the bank include technology development, modernisation pf small scale industries (S518) and marketing of 551 products. ,

SIDBI Charter outlines the following four basic objectives for orderly growth of industry in tile small

scale sector:' , I I

(a) Financing (c) Development

-To achieve these objectives, the bank

• initiates steps for technological upgradation and modernisation of existing units

• expands channels for marketing of SS! sector products in India and abroad and

• promotes employment-oriented industries in semi-urban areas and to check migration of populati on to big cities

(b) Promotion (d) Coordination

The functions of the bank include

To finance new small scale units or expansion, modernisation or diversification of existing units

• to provide both long-term loan for fixed assets and working capital through the same agency under its single window scheme

• to assist to meet the expenditure on technology development and modernisation

• discounting/rediscounting bills arising from t!le sale of machim:r.y to sm!:lllunits

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~:~nanci~1 Management-VI: SoU:::ES a,ld M__emods 01 AaiSinfj.F:nan:..e. ._. .• _._. __ "~

to exrend seed capital/soft loan assistance thro ... gh National Equity Fund and through d .

schemes of specialised lending institutions see capital

to offer services like facroung, leasing and SJ en

• to refinance loans ann pr-ovide services like leasing

to offer f~e-bas.ed c. onsulrancy to .dev. eloping nations on appropriate strategy and ap ~ ~

. g 0 tJ f II . d '. . . . . . . proaC'1 ,or

r w 1 0 srna rncustnes inciuding assistance for joint ventures with Indian SSIs

• io ~)~omOti ng and strengthemng small enterprises through micro-credit, rural inliustrialisll(ion human resource development, envu on rncnr management and so 00.

to rei rnburse IPe expenses incurred to acqui ~-e IS 0 9U\JI-2000 certification

• to offer assistance for rehabili.anon of potentially viable sick units

to assist tiny u:-tits in obtaining collateral-free loans from scheduled commercial banks and s I.

Region.n Rural Banks I . . '. e eel

SIDBr,toda>, address the needs of modem and technologically superior units (such as cottontnnm an.d pressing or sofrw Jfe-bas~d industrial units) and the traditional units (such as hand- based weavin; U11US and won) equally e !fe(.tlv~!y and efficiently.

This list of develop:oent and financial instirutions provides a glimpse of the insurutional frarneworja vailable in India io raise necessary financial inputs.





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.. Capital rerers to the total amount of finances the business requi res to meet its business operations both in the short-run ar.d long-run.

C~ pital .s defined as thewealth created over a period of time through abstinence to spend.

. ousin.ess :irn1S require capital for varied reasons. Some of them He to promote business, to

c~.n.duct business smoothly, to expand and diversify, to meet contingencies, to pay taxes, to pay . di V I ~end ~ and l.n te~es ts, .10 reF Ia c e t'le as se is. to support welfare prog rarnmes or even to wind 1 'p.

" Capital may be divided Into rwo types: filled capital ano working capital, .'

• r'J),~d ca~ltall~ 1 ~ ~at~r\.., J sed fOf. pr oflr genera non with the support of working capital, has low liqi idiry and It IS utilised ~'I-'romotl!lg Its sales and expanding its operations.

f ixed assets may be tangible. In~Lble or financial !O nature, '

• c.pital keeps the business running. ;t comprises of current assets. The form of current assets keeps changing from tin~ to time. TIle current assets have high degree of Jiq uidity. Working capital is the excess of current assets over and above current liabilities. The. current assets include cash, stock of raw materials, work in. progress lind finisher' goods, debtors, bills recei vable a-id other ,xepaid expenses. Current liabilities include creditors, accruals and bills payables

The, size of working capital is determined by a number 01 factors. They are: the stage of business (that is, prumolional/fonnationiexpansion/witlding), position of business cycles, nature of business, the lengrl, of manufacturing cycle, terms and conditions of transacuons, bottlenecks in the supply of n\\ materials, fluctuauons in the demand, policies of production, depreciation, reserves, taxation aud profit, growth and expansion plans. cegree J~ competition, price "level and operating

efficient y. ,

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