DIFFERENT METHODS

OF RAISING CAPITAL:
OWNED CAPITAL VS
BORROWED CAPITAL
BY: Afeefa Zubair 20021321006
COMPANY LAW Aditya Sonparote 20021321005

ASSESMENT 3
DIFFERENT METHODS OF RAISING
CAPITAL

Every business needs money to run. It is required for all

kinds of activities like manufacturing, service providing
etc. For this, capital is needed for various production
factors in any industry. Business activities happen on a
vast scale in today's world, and hence they need a lot of
capital for efficient working and functioning of
companies.
There are various ways in which capital can be generated.
There is long term, middle term and short term capital
needs which different methods of raising them.
The long term capital is needed by the company to make
different types of decisions and developing capital assets.
This capital is usually for more than three years and refers
to the needs for company to create long term assets like
land, equipment, building, types of machinery etc.

The method by which a company can raise such long term

capital is
Issue of shares- These issues of shares can be in 2 forms-
as equity shares and as for preference shares. These shares
can be easily transferred and are tradable and the liability
of the shareholders is limited to the actual value of the
shares
Issue of debentures- For acquiring long term capital a
company can also issue debentures. The debentures are
issued as debt instruments which are assets that need a
fixed payment to the holder and interest. Unlike equity
shares, the debentures do not provide the holder with any
voting rights and ensure a highly effective method of
raising capital from the public for the company
Loans from financial institutions- A company can also
obtain loans from banks or financial institutions for the
long term like ICICI or IDBI and many others. The
financial institutions usually study the company and their
works before providing loans. This persuades many
investors to subscribe to the shares of the company. In
this case, the investors can too lend money to the
company as shares, debentures etc. These banks/financial
institutions also have some control over the company's
management as they also appoint 1 or 2 of their directors
to board of directors of the company. The most beneficial
factor, however in this method is that the rate of interest
in this method for raising the capital is much lower the
market rate
There are also some capital needs of the company, which
may be between 1 to 3 years. This is required for
activities like expenses on advertisements, machinery,
renovation etc. These medium-term capital needs can be
satisfied by
Loans from commercial banks- The medium-term needs
can be satisfied by loans from commercial banks. Unlike
financial institutions, the commercial banks only act as
creditors and have no control in the management of the
company
Public deposits- A company can ask the public or
shareholders to invest in the company in return of a higher
rate of interest than the banks
Reinvestment of profits- After a company earns its gains,
it does not give it all to the shareholders instead adds it to
the company's reserves which can later be utilised for the
capital needs.

There are also capital needs for the day-to-day expenses

of the company. It is usually for less than a year. These
short term capital needs can be satisfied by
Trade credit- This is when the supplier provides a
company with machineries and raw materials on credit.
The company promises to pay back the due amount in a
specific period of time. This is purely done based on trust,
and there is no requirement for securities in such a case
Factoring- This is a deal between a company and the bank
where the bank collects money from the debtors on behalf
of the company. For example, when a customer buys from
a company on credit sale, the amount remains due and it
becomes a debt for the company. Such book debts are
recovered by the banks and are used for raising the short
term capital of a company. This is factoring
Discounting bills of exchange- Bills of exchange can be
used to raise short term capital. On payment of a charge,
these bills are discounted with a commercial bank which
can also be called a bank discount
Bank overdraft and cash credit- This is the arrangement of
a company with a commercial bank as cash credit and
bank overdraft. This provides a company with short term
capital needs and helps in the day to day functioning of
the company.

Capital is essential for every company to run its business.

Thus a company has to figure out its needs, the type of
 capital and the amount and use the different modes
accordingly.

Owned Capital VS Borrowed Capital

Owned capital:
This capital consist of the amount contributed by
owners of the business and also the profit which is
reinvested in the business. It remains permanently
invested and carries risk of business. Actions of the
company have an impact on the capital. However in most
cases the control rests with providers of owned capital
and the have a say in the decisions of the company. There
is no need for any asset as security. Reward is the
dividend or the profit gains on the investment. Reward is
paid after payment of interest on borrowed funds this
implies that the owners of this capital are not prioritized.
The rate of dividend is bound to fluctuate based on the
profits on the company.
Borrowed Capital:
This capital includes funds that are available in the
form of loans or credit. It is not permanent source of
investment and should not be used very frequently. The
 debts of company are secured but no control rests with
providers of borrowed funds in the decisions of the
company. It is backed by security of assets. Reward is
interest. Payment of interest gets priority over payment of
dividend. The rate of interest is fixed on funds.

BASIS OWNED CAPITAL BORROWED CAPITAL

Meaning This is the capital This is the capital which is

which is contributed borrowed from creditors and
by the owners is also known as Debt capital.
Source Accumulated in It is accumulated by way o
exchange of share, issue of fixed deposits,
equity or preference debentures loans or borrow
from financial institutions.

Return on Shareholders receive Here lenders receive intere

Investment (ROI)
dividend as part of as part of the profits on the
their profits on their investment. The borrowers
investments, however pay a fixed amount of inter
these profits fluctuate on the capital.
in case of equity
shares but a minimum
amount is fixed in
case of preference
 shares.

Status Shareholders become The lenders are merely the

the owners of a part creditors for the company.
of the organization.

Voting Rights Shareholders except The creditors do not have

preference any voting rights over any
shareholders enjoy decisions or general
voting rights at the meetings of the company.
general meetings of
the company.

Repayment of At the time of Since creditors are

Capital winding up, creditors prioritized over shareholders,
are subjected to They are eligible for full
repayment only after payment of the principle
the full payment of amount and the fixed interest
creditors. Creditors at the time of winding up of
enjoy preference over the company.
shareholders.

Redemption Complete redemption Borrowed capital is repaid

is made only when the or redeemed upon the
company is going maturity of the redemption
 under the process of date.
winding up.
Charge on assets The shareholders do The creditors/ debenture
not qualify for any holders do have a charge
charges on assets of when it comes to the assets
the company. of the company.