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SOURCES OF FINANCE

EQUITY:

Equity is a part of a company, also known as stock or share. When you buy shares of a
company, you basically own a part of that company. A company`s stockholders or
shareholders all have equity in the company, or own a fractional portion of the whole
company. They buy the shares because they expect to profit when the company profits. There
are two basic types of shares that any company issues: equity shares and preference shares.

EQUITY SHARES:

Both public and private corporations issue equity shares. Equity shareholders are the owners
of a company and initially provide the equity capital to start the business.
Equity share ownership in a public company offers many benefits to investors.

FEATURES OF EQUITY SHARES:

1. Those who invest in Equity share capital are known as equity shares holders.
2. It is considered to be the most risky investment, but at the same time it has the history of
generating superior returns when one compares it with other alternatives of investment
3. They have right to vote on all important matters relating to company which ranges from
decision on appointment of directors, declaration of dividend, acquisition of new
company and so on.
4. They are entitled to have profits shared with them in the form of dividend after company
has paid out all its expenses like depreciation, interest, administrative expense, selling
and distribution expenses etc…, and dividend to preference share holders.
5. The liability of equity share capital is limited in the sense that one who holds equity of the
company can lose only that amount which he or she has invested and the creditors of the
company cannot held the shareholder personally responsible for the debts of the
company.
6. If the company goes bankrupt than in that event in case of liquidation of assets of the
company equity share capital will be paid last after payment is made to creditors and
preference share holders.

ADVANTAGES OF EQUITY SHARES:

1. Potential for Profit :
The potential for profit is greater in equity share than in any other investment security.
Current dividend yield may be low but potential of capital gain is great. The total yield or
yields to maturity may be substantial over a period of time.

2. Limited Liability :

In corporate form of organisation, its owners have, generally, limited liability. Equity Share is
usually fully paid. Shareholders may lose their investment, but no more. They are not further
liable for any failure on the part of the corporation to meet its obligation.

3. Hedge against Inflation :

The equity share is a good hedge against inflation though it does not fully compensate for the
declining purchasing power as it is subject to the money-rate risk. But, when interest rates are
high, shares tend to be less attractive, and prices tend to be depressed.

4. Free Transferability :

The owner of shares has the right to transfer his interest to someone else. The buyer should
ensure that the issuing corporation transfers the ownership on its books so that dividends,
voting rights, and other privileges will accrue to the new owner.

5. Share in the Growth :

The major advantage of investment in equity shares is its ability to increase in value by
sharing in the growth of company profits over the long run.

6. Tax Advantages :

Equity shares also offer tax advantages to the investor. The larger yield on equity shares
results from an increase in principal or capital gains, which are taxed at lower rate than other
incomes in most of the countries.

RIGHTS OF EQUITY SHAREHOLDERS:

i. To elect directors and thus to participate in the management through them.

ii. To vote on resolutions at meeting of the company.

iii. To enjoy the profits of the Company in the shape of dividends.

iv. To apply to the Court for relief in the case of oppression.

v. To apply to the Court for relief in the case of mismanagement.

vi. To apply to the Court for winding up of the Company.

vii. To share in the surplus on winding up.

In these cases. 4. Sinking Fund Retirement: Preference share issue is often retired through sinking funds. the preference share that has a par value has no real advantage over preference share that has no par value. the provision is more advantageous to the corporation than to the investor. preference shares have no maturity date. The shares required for sinking fund purposes can be called by lot or purchased in the open market. the holders of the preference shares will be the first to be paid. as with equity shares. 3. FEATURES OF PREFERENCE SHARES: 1. It seems. therefore. should have no right to vote except in the special circumstances. a certain percentage of earnings (above minimum amounts) are allocated for redemption each year. therefore. The basis for not allowing the preference shareholder to vote is that the preference shareholder is in a relatively secure position and. Voting Rights: Preference shares do not normally confer voting rights. Redeemable or callable preference shares may be retired by the issuing company upon the payment of a definite price stated in the investment. . the dividend rights and call price are usually stated in terms of the par value. Redeemable or Callable Preference Shares: Typically. Although the “call price” provides for the payment of a premium. Par Value: Most preference shares have a par value. When it does. those rights would be specified even if there were no par value. In this respect it is similar to equity shares. However.PREFERENCE SHARES: Preference shares allow an investor to own a stake at the issuing company with a condition that whenever the company decides to pay dividends. 2.

Participating and Non-participating: Participating Preference Shares are entitled to a fixed preferential dividend and have the right to participate further in the surplus profits after payment of certain rate of dividend on equity shares.Types of Preference Shares: 1. 2. They do not have such rights to participate or claim for a part in the surplus profits of a company.Non-Convertible Preference Shares are those which do not have the option of their conversion into the equity shares. Cumulative and Non cumulative shares: Cumulative preference shares give the right to the preference shareholders to claim the dividends that are not paid in the previous year and they are paid in preference to ordinary dividends. 4. Redeemable and Non-redeemable: A redeemable preference share is issued on the terms where they are liable to be redeemed at either a fixed time. . 3. A non-participating share is entitled to fixed rate of dividend only. In other words. any dividends that are unpaid or accrued in the previous year cannot be carried forward to the subsequent year or years in respect of that year. and that is considered lost by the shareholders. or the company's option or at the shareholders option. Non-redeemable or Irredeemable preference shares need not be repaid by the company except on winding up of the company. Convertible and Non-convertible shares: Convertible Preference Shares are corporate fixed-income securities that the shareholders have the option of converting them into a certain number of ordinary shares after a predetermined time span or on a specific date. For non-cumulative or simple preference shares. The company is not offering to buy back the securities. the company can buy back preference shares at an agreed time and price.

but in India these are used interchangeably. 5) Debentures are very risky from company’s point of view for raising long term funds. Thus. 2) Capital raised by way of debentures is required to be repaid during the life time of the company at the time stipulated by the company.DEBENTURES: A debenture is a debt security issued by a corporation that is not secured by specific assets. unlike a debenture. 8) Debentures are a cheap source of funds from the company’s point of view. but rather by the general credit of the corporation. 3) Secured debentures or Unsesurced debentures 4) Redeemable debenture or Irredeemable debenture 5) Fully convertible debenture 6) Non convertible debenture 7) Partly convertible debenture 8) Equitable debenture 9) Legal debenture 10) Preferred debenture 11) Fixed rate debenture 12) Floating rate debenture 13) Zero coupon debenture 14) Foreign currency convertible debenture . 7) Debenture holders do not carry any voting rights. TYPES OF DEBENTURES: 1) Registered Debentures 2) Bearer debentures or Unregistered debentures. 6) Risk on the part of debenture holders is very less. it is not a source of permanent capital. Stated assets secure a corporate bond. 4) Return paid by the company is in the form of interest which is predetermined. 3) Debentures are generally secured. FEATURES OF DEBENTURES: 1) Debenture holders of the company are the creditors of the company and not the owners of the company.

The rights shares can also be sold in the open market. However. which can be bought at a given price (usually at a discount to current market price) for a fixed period of time. For example. among other things. interest rate. If not subscribed to. they are rescheduled to enable corporate borrowers tide over temporary financial exigencies. Term loans usually last between one and ten years. 100 per share. a loan is a debt provided by one entity (organization or individual) to another entity at an interest rate. and evidenced by a note which specifies. a company announcing bonus issue of 1:5. a company announcing rights issue of 2:3 at Rs. the principal amount. between the lender and the borrower. 100 per share (current share price Rs. the rights shares lapse on closure of the offer BONUS SHARES: Bonus shares means new shares given free of cost to all the existing shareholders of the company. in proportion to their holdings. FEATURES OF TERM LOAN: 1. For example. is issuing one (new) bonus share for every five shares held by the shareholders of the company. . 130 per share). A term loan usually involves an unfixed interest rate that will add additional balance to be repaid. MATURITY : The maturity period of term loans is typically longer in case of sanctions by financial institutions in the range of 6-10 years in comparison to 3-5 years of bank advances. TERM LOAN: A term loan is a monetary loan that is repaid in regular payments over a set period of time. LOAN: In finance. is issuing two (new) rights shares for every three shares held by the shareholders of the company at Rs. A loan entails the reallocation of the subject asset for a period of time. but may last as long as 30 years in some cases. and date of repayment.RIGHT SHARES: Rights issues are a proportionate number of shares available to all the existing shareholders of the company.

Mortgage Term Loan : A Term Loan can be availed by mortgaging a kind of security like home. This interest payment becomes a fixed monthly expenses and starts leaking the profit. Long term loans increase the flexibility of an investor’s limited capital by allowing for its distribution over multiple investments. Although keeping some cash on hand is important to mitigate unexpected expenses. The borrower may avail the revised rate of interest later and may be benefited by saving in interest. SECURITY : Term loans typically represent secured borrowing. which are financed with the proceeds of the term loan. 15 or 20 years. provide the prime security. saving large lump sums is inefficient. They are akin to private placement of debentures in contrast to their public offering to investors. Other assets of the firm may serve as collateral security. Switching of Higher Interest Loans : Many a time’s business owners opt to raise business loans at higher rate of interest. The repayment of the principal amount and interest may be fixed in nature or it may vary over the course of repayment. 3. NEGOTIATED : The term loans are negotiated loans between the borrowers and the lenders. office premises etc. Such loans are processes and sanctioned faster but result in heavy burden interest. Purchase of Fixed Assets : The term loan can be used to purchase fixed assets like premises. Even the term loan is settled the assets procured continue the productivity as asset life span is certainly longer than the term loan span. Cash Flow: Capital is a limited resource and investing large amounts into any asset or project limits the availability of capital for other investments. . The usage or performance of assets increases the business performance and hence the profit and makes the repayment of the loan easier. 2. and minimizing the immediate impact on operational cash flow. ADVANTAGES OF TERM LOAN: 1.2. Usually assets. This type of loan is borrowed for longer period of time that is 10. 3. TYPES OF TERM LOAN: 1. plant & machinery etc.

Leasing: Leasing. Build Credit: Generally. 3. For a business owner. Long term loans provide an opportunity to finance potential investments while maintaining control of the firm. For example. Leasing is beneficial for people or companies that either wish to have. The borrower pays to use the asset but is bound by the terms of the agreement. However. or that require. Therefore. these are also ways of dividing ownership of the company and therefore redistributing control. building a business’ credit is important to rely less on personal credit for future debt financing. long term loans have a very structured payment process that has been designed to meet the payment capability of the borrower. that asset can then be seized. which usually requires the borrower to offer collateral. on a car lease the car cannot exceed a certain amount of kilometres – this is to ensure that the lender can continue to use the asset should the borrower choose not to purchase it at a discounted rate after the maturity date. If the borrower defaults on their payments. 4. notwithstanding unforeseen events. or repossessed. Lower Interest Rates: Lending institutions assume a high degree of risk on long terms loans. 2. the asset for which the funds are being borrowed can act as that collateral. Minimize Investor Interference: Seeking private investors and issuing shares are common ways to raise money for potential investments. most often applied to car financing. . is a common form of a long term loan. continually updated versions of an asset. by the lender. Often. 5. making regular payments on a long term loan will allow an individual or a business to build their credit worthiness.

3. 3. B) To the shareholders: 1. Increases capital formation and can bring prosperity to the nation. Bonus shares issues. as the company need not advertise or pay underwriting commission or brokerage. 8. Company makes use of its own funds. accumulation of earnings. Helps expansion and diversification. Reduces the reliance of the firm on external borrowings. 9. Enhances creditworthiness and outsiders are willing to lend money to the firm. Increases the efficiency and productivity of the firm. .Cost of raising such funds is nil. Increases shareholders confidence. the cost of production comes down as the company need not pay any interest or installment. Banks may willingly accept the shares as a security in advancing loans to the shareholders as there is increase in security value of shares. 3. the company retains a part of its earnings for the purpose of. 12. investing in fixed assets and/ or to meet working capital needs.AS A SOURCE OF FINANCE: Also known as “Ploughing back of profits” or “Self-financing” or accumulation of earnings over a period of time” or “Internal financing” Instead of distributing the entire profits to shareholders in the form of dividend. Merits of Ploughing back of profits: A) To the Company: 1. 6. Regular dividends even in the year of crisis. 4. Helps automation and modernization 10. Used to meet working capital needs at the time of cash crunch and during recession. C) To the society: 1. 7. Following a stable dividend policy the company can even in the year of crisis declare a dividend to boost the confidence of shareholders. Less financial risk due to lack of pressure to pay interest and installments. Economical. 2. 2. Appreciation in share values because of huge reserves of the company. 11. This reduces consumer prices and makes the goods available at reasonable prices. 5. 2. Facilitates the repayment of debentures and term loans.INTERNAL FUNDS. 4. Helps speedy development of the industry and more employment opportunities are generated. if the need so arise. Freedom to management to take their own decisions and not subject to restrictive conditions of outside agencies.

Chances of over-capitalisation. Demerits of ploughing back of profits: 1. 4. donations to educational institutions. sponsoring sports and so on can be done out of retained earnings. The shareholders may not get their due share of dividends leading to their loss. Such a situation also arises when a company employs more funds than is actually needed. Overcapitalisation is a situation when a firm’s earning are comparatively less as compared to similar companies in the industry. It might lead to more demands from employees causing even industrial disputes. 5. It might lead to excessive speculation which is harmful in the interest of genuine investors. . Concentration of economic power in few hands due to small number of shareholders. 3. The company may not be in a position to make optimum use of its retained earnings. Danger of manipulation by the management by using it for their personal extravaganza or to manipulate the share prices on the stock exchange. 2. 7. gardens. 6. Social welfare activities such as maintaining roads. 4.

and builds a high credit rating.  Tradability of Commercial Paper provides investors with exit options.  It does not create any lien on asset of the company. Banks often charge fees for the amount of the line of the credit that does not have a balance. but are typically lower than banks' rates. A major benefit of commercial paper is that it does not need to be registered with the Securities and Exchange Commission (SEC) as long as it matures before nine months (270 days). reflecting prevailing market interest rates. the longer the maturity on a note. the higher the interest rate the issuing institution pays. short-term debt instrument issued by a corporation. many companies still maintain bank lines of credit as a "backup". Since it is not backed by collateral. so only firms with high- quality debt ratings will easily find buyers without having to offer a substantial discount (higher cost) for the debt issue. Interest rates fluctuate with market conditions. Typically. Maturities on commercial paper rarely range any longer than 270 days.  Wide range of maturity provides more flexibility.” Commercial paper is not usually backed by any form of collateral. in some cases companies in serious trouble may not be able to repay the loan resulting in a loss for the banks. Line of credit: Commercial paper is a lower-cost alternative to a line of credit with a bank. The debt is usually issued at a discount. Advantages:  High credit ratings fetch a lower cost of capital. inventories and meeting short-term liabilities. it is often cheaper to draw on a commercial paper than on a bank line of credit. making it a very cost-effective means of financing. only firms with excellent credit ratings from a recognized credit rating agency will be able to sell their commercial paper at a reasonable price. typically for the financing of accounts receivable. Once a business becomes established. such as a new plant. Commercial paper DEFINITION “An unsecured. . Nevertheless. While these fees may seem like pure profit for banks. without SEC involvement. The proceeds from this type of financing can only be used on current assets (inventories) and are not allowed to be used on fixed assets.

 Stand-by credit may become necessary Why it Matters: Commercial paper is issued by a wide variety of domestic and foreign firms.  Issuances of commercial paper bring down the bank credit limits.  A high degree of control is exercised on issue of Commercial Paper.Disadvantages:  Its usage is limited to only blue chip companies. banks. Major investors in commercial paper include money market mutual funds and commercial bank trust departments. and industrial firms. including financial companies. . These large institutional investors often prefer the cost savings inherent in using commercial paper instead of traditional bank loans.

Lease finance: Meaning: Leasing is the form of rental system which has been in practice as far as back as 2000 years ago. 2. and lease it to the business at an agreed lease rental. Cheaper than purchase. More burden when interest rates decline in market. Basic Concepts: Leasing: It involves use of an asset without the desire to assume and intend to assume ownership. Lessor: Is the owner of the asset. 3. 4. 7. 9. Leasing contract: It normally comprise of: a) Lease period b) Cancellation provisions c) Rental payment d) Additional rents e) Purchase options f) Other expenses. 8. Money rental: It is paid at regular intervals for use of an asset. under which the leasing company buys plant or equipment required and chosen by business . 2. Advantages: 1. Need for equipment in temporary. Lease finance is an important source of credit. Cheaper than other sources of finance. Income tax considerations. Disadvantages: 1. Relatively high cost of lease. . Conservation of working capital. Undisclosed sources of finance. 3. Miscellaneous expenses are owned by lessee. Assist in prediction of future cash requirements. while the ownership continues rest with the lesor who gives it on lease. 10. Lessee: A firm acquiring an asset on lease. 5. More easily accessible. 6. Flexibility in temporary. Leasing permits 100% financing.

2. Master lease: Master lease are structured for lesses who either will be leasing several pieces of equipments to be received over a period of time. lessee and the financial institution/bank who lends a major cost of asset leased. Cross border lease: It is the type of lease where the lessor and the lesse both belongs to different countries. No capital gains when asset prices are poorer. Ti is also called as transnational lease. the firm sells an asset that is already owned to another firm and get it on lease back from the buyer which is usually an financial institution or leasing company. Triple net lease: In case of triple net lease the lessee is obligated to pay certain typical executive cost in addition to separate from the basic lease rentals. Types of lease: 1. 3. 6. 4. Direct lease: The lessee acquires the equipment directly from the manufacturer or arranges the desired equipment to be purchased by leasing company. Depreciation cannot be claimed. Problem of shifting responsibility. The lessor. 4. 6. . Sale and lease back lease: In case of sale and lease back lease. 5. 7. Operating lease: In operating lease all the risk and rewards incidental to ownership are not transferred by lessor to lessee. Such costs are: a) Sales tax b) Property tax c) Repairs d) Parts and accessories e) Insurance f) Maintenance and servicing g) Licensing and registration 8. Leverage lease: There are leverage 3 parties. The lessor contributes 20% to 50% of the cost and the lender contributes 50% to 80% of the cost of asset. Finance lease: In finance lease the lessor transfers all the risk and rewards incidental to ownership of the asset to lessee. 5.

usually not interested in the asset. Known as: service lease Full payout lease Amortisation: The cost of amortisation The lessor enables to recover his is not fully amortised duting the primary investments in the asset leased plus to lease period. party during the lease period. derive the profit.Distinguish: operating and finance lease: Operating lease Finance lease Meaning: : In operating lease all the risk In finance lease the lessor transfers all and rewards incidental to ownership are the risk and rewards incidental to not transferred by lessor to lessee. Finance lease is multi user Residual value: lessor is always the lessor is only the financer and is interested in residual value of the asset. Hiring a taxi. . Cancellation: It is cancellable by either It is non cancellable. ownership of the asset to lessee. Risk and rewards: The lessor bears the The lessee bears the risk and benefit of risk and benefit of rewards rewards Examples: Aircraft. buildings. User: operating lease is single user.

till the of asset leased. Down payment: lease financing is In hire purchase cash downpayment is invariably 100% financing. Depreciation: The depreciation is The hirer is entitled to the depreciation. The ownership is never payment of last instalment. transferred to user. lessor. purchase is very low. Salvage value: The lessee does not Hirer enjoys the salvage value of the enjoys the salvage value of thee asset. in finance lease it is the lessee. .Distinguish between: lease finance and hire purchase: Lease finance Hire purchase Ownership: The lessor is the owner and The ownership of asset passes to the user. charged in the books of lessor. Magnitude: The magnitude of funds The magnitude of funds involved in hire involved in lease finance is very huge. Maintenance: In case of finance lease it The cost of maintenance is typically is lessee & in case of operating lease it is borne by the hirer himself. Tax benefits: In operating lease it is the The buyer is entitled for depreciation. the lessor. required. the lessee is entitled to the economic use in case of hire purchase finance . asset.

such as notes and stocks. Amount: The amount cannot exceed 60 % of paid up capital and 100% of free reserves. Features of Inter corporate deposits 1. and usually carry a term of six months. Companies purchase securities from other companies. are usually preferred for this type of investment. When companies buy inter corporate investments. dividend and interest revenue is reported on the income statement. Rates: Since it is an unsecured loan. Short-term investments that are expected to be turned into cash are considered current assets. The borrowing under ICD is restricted to 50% of the Net Owned Funds and the minimum tenor of borrowing is for 7 days. banks and governments in order to take advantage of the returns from these securities. Short term credit rating: The short term credit rating of the corporate would determine the rate at which the corporate would be able to borrow funds. 3. the rates in this market are higher than those in the other markets.INTERCORPORATE DEPOSITS When borrowing from banks. 6. Inter corporate investments are accounted for differently than other funds held by a company. These investments can also be used for strategic purposes like forming a joint ventures or making acquisitions. they are only entitled to borrow. *************************************************************** ***********************************************Types of inter corporate deposits: . while other investments are considered non-current assets. DEFINITION: Securities that are purchased by corporations rather than individual investors. the risk involved is higher. since the cost of funds(interest rates) are much higher for a corporate than a bank. Inter corporate investments allow a company to achieve higher growth rates compared to keeping all of its funds in cash. Risk involved: Since it is an unsecured loan. These deposits are made by corporate having surplus funds to cash starved companies. there are many formalities in terms of documentations to be adhered to. Inter-corporate deposits are deposits made by one company with another company. Primary dealers cannot lend in the ICD market. 5. the risk involved is higher. Also. Marketable securities that can readily be exchanged for cash. Information: The ICD market is not well organized with very little information available publicly about transaction details 4. 2. Further the credit spreads demanded even for the top rated corporate would be higher than similar rated banks and the rates on ICDs would be higher than those in the Certificate of Deposit (CD) market. All these formalities can be done away with when borrowing and lending short term funds with the aid of inter corporate deposits.

this deposit can be withdrawn by the lender. The annual interest rate assigned for this type of deposit is 15%.  Three month deposits These are the most popular type of inter-corporate deposits. The annual rate of interest given for three month deposits is 12%. The annual interest rate on call deposits is around 10%. These deposits are generally considered by the borrowers to solve problems of short-term capital inadequacy. This type of short-term cash problem may develop due to various issues.  Call Deposit The concept of call deposit is different from the previous two deposits. including tax payment. breakdown in production. . and excessive expenditure of capital. and the term for such deposits is six months. delay in collection. excessive raw material import.  Six month deposits These are usually made with first class borrowers. On giving a one day notice. payment of dividends.

While a borrower will strive to have the highest possible credit rating since it has a major impact on interest rates charged by lenders. Credit assessment and evaluation for companies and governments is generally done by a credit rating agency such as Standard & Poor’s or Moody’s. credit ratings are derived from the credit history maintained by credit-reporting agencies. The credit rating has an inverse relationship with the possibility of debt default. Definition: “credit rating is an expression though the use of alpha-numeric symbols of opinion about the credit quality of the issuer of securities with reference to a particular instrument. federal government by Standard & Poor’s on August 5. corporation. These rating agencies are paid by the entity that is seeking a credit rating for itself or for one of its debt issues. A credit rating can be assigned to any entity that seeks to borrow money – an individual.Credit rating: Meaning: An assessment of the credit worthiness of a borrower in general terms or with respect to a particular debt or financial obligation. In credit rating what is rated is the debt instrument and not the issuer company. For individuals. Global equity markets plunged for weeks following the downgrade. the credit rating is conveyed by means of a numerical credit scoreA high credit score indicates a stronger credit profile and will generally result in lower interest rates charged by lenders. the rating agencies must take a balanced and objective view of the borrower’s financial situation and capacity to service/repay the debt.S. or sovereign government. state or provincial authority. 2011. A prime example of this effect is the adverse market reaction to the credit rating downgrade of the U. debentures. Credit rating changes can have a significant impact on financial markets. For individuals. Credit rating has become necessary in the view of increasing number of cases of default in the payment of interest and repayment of principal amount by the companies by way of commercial papers.” . fixed deposits. Credit ratings for borrowers are based on substantial due diligence conducted by the rating agencies.

Credit rating agencies: A credit rating agency (CRA. Credit quality information: credit rating agencies inform the investors regarding the credit quality of the company which the investors are not aware of. which rate a debtor's ability to pay back debt by making timely interest payments and the likelihood of default. Ensures adequate disclosures: Credit rating agencies ensures that adequate information is disclosed to it and after assessing all the risk involved it decides on a credit rating symbol. The credit rating agencies continuously monitors the corporate and the rating is monitored till the life of instrument. Important credit rating agencies:  CRISIL  ICRA  CARE The credit rating agencies operating in india are registered with the reserve bank of india. 2. . Low cost funds : high credit rating indicates low risk which means companies with high credit rating can raise the required funds at low rates of returns. CDs. in making well informed investment decisions. and in some cases. 3. of the servicers of the underlying debt. Constant monitoring: once the rating has been assigned the credit rating agencies constantly monitor the degree of risk exposure of the firm and accordingly based on it. The debt instruments rated by CRAs include government bonds. preferred stock. of debt instruments. such as mortgage-backed securities and collateralized debt obligations. Easy understanding: the Credit rating symbols are easily understandable to the investors based on which they can take well informed investment decisions. Functions of credit rating agencies: 1. Assist investors: It assist investors both individual as well as institutional. it can upgrade or even down grade the assigned credit rating symbols. 4. 5. but not of individual consumers. 6. corporate bonds.[3] The most dominating factor is the reputation and analytical credibility of the credit rating agencies. municipal bonds. also called a ratings service) is a company that assigns credit ratings. An agency may rate the creditworthiness of issuers of debt obligations. and collateralized securities.

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Sources of international finance: Indian capital could raise global finance in following ways: Equity capital: foreign equity could be raised in the form of depository receipts or euro convertible bonds. An European bank holding the securities of the issuing company issues the depository receipts on the basis of it. The debt instrument includes syndicate loan. European depository receipts (EDR’s): EDR’s are issued and tradable only in Europe. The holder of GDR’s has a right to convert a GDR into underlying shares.A wherein U. American depository receipts(ADR’s): ADR’s are created in U. Depository receipts could be global depository receipts (GDR) or its variant in the form of American depository receipts (ADR) or international depository receipts (IDR) . The main categories. GDR is a foreign currency denominated negotiable certificate which trade in at least two countries outside the issuer home market. 6. 5. Global depository receipts(GDR’s): GDR’s are instruments of equity linked in nature which can be traded in multiple markets outside the domestic market of the issuer. International finance has now become an important source of both short term and long term funds for corporate in india. euro notes.  Fixed rate or straight bonds  Floating rate notes  Zero coupon bonds. Government subsidies . International bonds: Foreign bonds and Euro bonds are collectively known as international bonds. 1.S depository bank would hold a predetermined number of foreign securities and issue against them ADR’s it requires the clearance of the SEC in USA for which the issuing company has to furnish the required details. Euro bonds: Euro bonds are issued by a borrower who is of nationally different from the country of the capital market in which the securities are issued. issue of bonds. Debt capital: international financial markets also offer a varied range of facilities for raising finance by means of debt instruments. 3. 2. Foreign bonds: Foreign bonds are issued in domestic currency by foreign borrower in the country whose currency the bonds are dominated.S. 4.

Derived from the Latin Word ‘subsidium’ a subsidy literally implies coming to assistance from behind. at higher than market prices or if it sells as lower than market prices. by means of creating a wedge between consumer prices and producer costs. and  Generally low efficiency levels of governmental activities. is a potent welfare-augmenting instrument of fiscal policy. Objectives Subsidies. subsidies are implied). low interest government loans or government equity participation. Achievement of social policy objectives including redistribution of income Forms of subsidies  A cash payment to producers/ consumers is an easily recognizable form of a subsidy. even when this maybe desirable on economic grounds. stabilizing the price of essential good & services. Inducing higher consumption/ production 2. However. Subsidies will be targeted sharply at the poor and the truly needy like small and marginal farmers. Offsetting market imperfections including internalization of externalities . such as food grains. public body etc to keep down the prices of commodities etc” Subsidies bring out desired changes by effecting optimal allocation of resources. redistributing income in favor of poor people thus achieving the twin objective of growth & equity of nation. A subsidy. farm labour and urban poor. Subsidies are often aimed at : 1.3. If the government procures goods. often viewed as the converse of a tax. Definition The Oxford English Dictionary defines subsidy as “money granted by State.  Interest or credit subsidies  Taxsubsidies  In kind subsidies  Procurement subsidies  Regulatory subsidy  Equity subsidies CAUSE OF SUBSIDIES ‘SPROLIFERATING IN INDIA  The expansion of governmental activities  Relatively weak determination of governments to recover costs from the respective users of the subsidies.  It also has many invisible forms (It may be hidden in reduced tax-liability. well targeted. lead to changes in demand/ supply decisions. Different type of subsidy  Cash Subsidy: Providing food or fertilizer to consumer at lower price. . and suitably designed for practical implementation. their beneficial potential is at its best when they are transparent.

the credit risk of all tranches of structured debt improves. commercial mortgages. The growth in the Indian securitisation market has been largely fuelled by the repackaging of retail assets and residential mortgages of banks and FIs. the credit quality of securitised debt is non- stationary due to changes in volatility that are time. In order to meet this objective: • The SPV and the originator must be treated in an insolvency as separate entities. . auto loans or credit card debt obligations and selling said consolidated debt as bonds. Securities backed by mortgage receivables are called mortgage-backed securities while those backed by other types of receivables are asset- backed securities. The granularity of pools of securitized assets is a mitigant to the credit risk of individual borrowers.  Increase in explicit budgetary subsidies on food and fertilizer SECURITISATION Securitization is the financial practice of pooling various types of contractual debt such as residential mortgages. the affected tranches may experience dramatic credit deterioration and loss. Unlike general corporate debt. This market has been in existence since the early 1990s. is paid back to the various investors regularly. The mortgage backed securities (MBS) market has been rather slow in taking off despite a growing housing finance market due to the long maturity periods. and • The sale of assets to the SPV must be a ‘true sale’ – that is. if improperly structured. lack of secondary market liquidity and the risk arising from prepayment/repricing of the underlying loan. The law has evolved differently on each side of the Atlantic in relation to these issues. Objective: The objective of many securitisation structures is to isolate the SPV from the risks associated with an insolvency of the originator. If the transaction is properly structured and the pool performs as expected. pass-through securities. underlying the security. though has matured significantly only post-2000 with an established narrow band of investor community and regular issuers Asset backed securitisation (ABS) is the largest product class driven by the growing retail loan portfolio of banks and other FIs. investors’ familiarity with the underlying assets and the short maturity period of these loans.and structure-dependent. or collateralized mortgage obligation to various investors. The principal and interest on the debt. it should not be capable of being set aside by an insolvency officer of the originator or recharacterised as a secured loan of the purchase price.

a record level of nearly 40% of homes purchased were not intended as primary residences. Different tranches within the ABS are rated differently. During 2005. In other words. where creation of any form of security was rare and the portfolios simply got transferred from the balance sheet of the originator to that of another entity.In the early 1990s. Revolving assets such as working capital loans. National Association of Realtors's chief economist at the time. . respectively.[72] During 2006. credit card receivables are not permitted to be securitized Homeowners default: Speculative borrowing in residential real estate has been cited as a contributing factor to the subprime mortgage crisis. which doesn't encourage improvement of underwriting standards. A key indicator of a particular security’s default risk is its credit rating. David Lereah. stated that the 2006 decline in investment buying was expected: "Speculators left the market in 2006. which caused investment sales to fall much faster than the primary market. telecom receivables. the credit crisis of 2007–2008 has exposed a potential flaw in the securitization process – loan originators retain no residual risk for the loans they make. power receivables. securitisation was essentially a device of bilateral acquisitions of portfolios of finance companies. but collect substantial fees on loan issuance and securitization. lease receivables and medical equipment loan receivables. and subordinated classes receiving correspondingly lower credit ratings. 22% of homes purchased were for investment purposes. these figures were 28% and 12%. However. There were quasi-securitisations for sometime." Credit default swaps: Default risk is generally accepted as a borrower’s inability to meet interest payment obligations on time For ABS. Other types of receivables for which securitisation has been attempted in the past include property rental receivables. default may occur when maintenance obligations on the underlying collateral are not sufficiently met as detailed in its prospectus. with senior classes of most issues receiving the highest rating. with an additional 14% purchased as vacation homes.