SOURCES OF FUNDS

FINANCE
Business finance is the money needed to start or set up business,
operate day to day activities and to expand in future.
Money is also required to finance the daily operations of the business
CLASSIFICATION OF SOURCES OF FUNDS
On the basis of period
• Long term
• Medium Term
• Short Term
On the basis of sources of generation
• Internal sources
• External sources
On the basis of ownership
• Owners fund
• Borrowed fund
On the basis of financing
• Loan Financing
• Internal Financing
• External financing
EQUITY SHARE
EQUITY SHARE
Owners or shareholders of a company.
Equity shareholders are paid at the time of winding.
The company pays dividend to equity shareholders.
Consider as financial indicator
FEATURES OF EQUITY SHARES
Maturity
Claims/ Right to Income
Claim on Assets
Right to control or voting rights
Limited liability
Advantages and
limitations
Equity Shares
MERITS OR ADVANTAGES OF EQUITY
SHARE
Permanent capital
No charge on assets
Control/ voting rights
No obligation to pay fixed dividend
Higher return
No burden on company
LIMITATION OF EQUITY SHARES
Chance of over capitalisation
Higher cost
Dilution of ownership
Risk
Issue depends on market condition
Delays
Not preferred by investors
PREFERENCE SHARE
MEANING OF PREFERENCE SHARE
Preference shares have preferential rights.
The preferred shares takes precedence over equity shares
FEATURES
Maturity
No security
Fixed dividend
Voting rights
Hybrid Security
TYPES OF PREFERENCE SHARES
Participation
 Participative
 Non Participative

Convertibility
 Convertible
 Non-convertible

Dividend
 Cumulative
 Non-cumulative

Redemption
 Redeemable
 Non-Redeemable
MERITS OF PREFERENCE SHARES
No Preferential
intervention rights

Appeal to No charge
cautious on assets
investors

No Flexibility
obligation
DEMERITS OF PREFERENCE SHARES

Fixed No voting
Obligation rights

Dividend is
not treated
as expense
Difference between Equity shares
and Preference shares
DIFFERENCE BETWEEN EQUITY AND
PREFERENCE SHARE
Rate of dividend
Capital repayment
Voting rights
Redemption
Convertibility
Arrears of dividend
Types
Mandate to issue
DEBENTURES
DEBENTURES
Borrowed fund capital
Fix rate of interest
FEATURES OF DEBENTURES
Borrowed fund Fixed rate of
interest

Compulsory No voting rights

payment of interest

Redeemable Appointment of
Trustee
TYPES OF DEBENTURES
Based on Registration
• Registered debenture
• Bearer debenture
Based on time
• Redeemable debenture
• Irredeemable debenture
Based on convertibility
• Convertible debenture
• Non convertible debenture
Based on Priority
• First debentures
• Second debentures
Based on Security
• Secured debenture
• Unsecured debentures
ADVANTAGES OF DEBENTURES

Meet long Interest

term expense is less
requirements than dividend

Tax deductible Does not dilute

control
DISADVANTAGES OF DEBENTURES

Payment of Issue against

interest is of assets
compulsory

Reduces
borrowing
capacity
DIFFERENCE BETWEEN EQUITY AND
DEBENTURES
Meaning
Signify
Holder
Status of holders
Form of return
Allowable deduction
WHAT IS FINANCIAL MARKET
Institution deals in financial assets and credit instruments.
FINANCIAL MARKET
Financial Market is a market for creation and exchange of financial
assets. It helps in mobilisation and channelising the savings into most
productive uses.
Financial markets also helps in price discovery and provide liquidity to
financial assets.
FINANCIAL MARKET
Efficient transfer of resources from those having idle resources to
others who have a pressing need for them is achieved through
financial markets.
Financial markets provide channels for allocation of savings to
investment. These provide a variety of assets to savers as well as
various forms in which the investors can raise funds and thereby
decouple the acts of saving and investment.
FUNCTIONS OF FINANCIAL MARKET
To cater to the various credit needs of the business houses or
companies.
To provide financial convenience.
To assist the process of balanced economic growth.
To serve as intermediaries for mobilisation of savings.
To facilitate creation and allocation of credit and liquidity.
CLASSIFICATION OF FINANCIAL MARKET
Money Market
Capital market
 Money Market
Deals in short term securities, having maturity period
one year or less than one year
Capital
Market
Deals with long term securities
which have a maturity period of
above one year

Equity shares or ordinary shares

Preference shares and
Debentures or bonds
CLASSIFICATION OF CAPITAL MARKET
Primary Market
Secondary market
Primary Market
New securities are issued.
FUNCTION OF PRIMARY MARKET
New Issue Offer
Underwriting Services
Distribution of New Issue
TYPES OF PRIMARY MARKET
ISSUANCE
Public issue
Rights issue
Private placement
Preferential issue
Public Issue
• Initial public offer
• Follow-on public offer
 Right Issue
Securities are first offered to the existing investors at pre-
determined price
RIGHT ISSUE
A rights issue is a primary market offer to the existing shareholders
to buy additional shares of the company on a pro-rata basis within
a specified date at a discounted price than the current market price.
It is important to note that the rights issue offer is an invitation that
provides an opportunity for existing shareholders to increase their
shareholding. It is a right that a shareholder may or may not choose to
exercise and not an obligation to buy the shares.
A company announces a record date in case of a rights issue. To be
eligible to qualify as an existing shareholder for the rights issue, one
must own the shares of the company as on the record date.
RIGHTS ISSUE DATE
Record Date
Issue Opening Date
Issue Closure Date
Allotment Date
Date of credit
Date of commencement of trading or Listing date
RIGHTS ISSUE PROCEDURE

Recently in January 2020, SEBI has issued new guidelines to

streamline the rights issue process and reduce the timeframe for rights
issue completion to 31 days by cutting on the timelines for various
processes and introducing the dematerialization of RE.
Steps in a Rights Issue Process:
Dispatch/Upload of application forms by the issuer, registrar,
exchanges on their website.
The credit of RE in Demat account of eligible shareholders.
Interested investors/renounces to submit the application form to apply
for rights issues.
Allotment and credit of rights issue shares in Demat account post
reconciliation of RE Demat holding list and applications received.
RIGHTS ISSUE BENEFITS

Benefits for the company

Rights issue is the fastest mode of raising capital for the company.
It is a low-cost affair for the company as company can save on the underwriters
fees, advertisement expenses.
The confidence of the existing shareholders is retained by making the discounted
offer to existing owners as payback for being part of the company.
The company can raise additional funds without increasing the debt burden.
Benefits for the Shareholders
Rights issues provide an opportunity for existing shareholders to increase their
stake in the company at a lesser price than the current market price.
The rights issue retains the control of the company with existing shareholders when
subscribed by the existing shareholders without renouncing their rights to outsiders.
RIGHTS ISSUE DISADVANTAGES

The rights issue would result in dilution in the value of holdings of the
existing shareholders.
One of the reasons, the company looks to issue rights share is the need
for cash on account of being cash strapped. This may sometimes give
a wrong signal to investors that a company is struggling which may
impact the reputation of the company and the share price.
The rights issue would increase the number of shares of a company
spreading the profit across that many shares impacting earning per
share (EPS).
Private Placement
Securities are offered privately to small group of
investors (Individual & institutional)

Less cost and time and remains private

Suitable for start-ups or companies

PRIVATE PLACEMENT
Private placement by companies means offering its securities or
inviting to subscribe its securities for a select group of persons other
than by way of a public issue.
A company making a private placement cannot offer its securities
through any public advertisements or utilise any marketing, media, or
distribution agents or channels to inform the public about such an
offer. If the offer is advertised or marketed, it will be considered a
public offer and not a private placement by the company.
PRIVATE PLACEMENT OFFER LETTER

ule 14 of the Companies (Prospectus and Allotment of Securities) Rules,

2014 (‘Rules’) provides the regulations relating to the private placement
by companies. The Rules state that the company should offer or invite to
subscribe its securities through a private placement offer letter in Form
PAS-4.
All private placement offers should be made only to those persons whose
names are recorded by the company before sending the invitation to
subscribe. The persons whose names are recorded will receive the offer,
and the company should maintain a complete record of the offers in Form
PAS-5.
Special Resolution for Making Private Placement
The company can make a private placement of its securities after
approval of shareholders of the company for the proposed offer or
invitation to subscribe to securities by passing a Special Resolution for
every offer or invitation.
MAXIMUM LIMIT OF PRIVATE
PLACEMENT
The Rules state that the offer or invitation of private placement should not
be more than two hundred persons in the aggregate financial year. The
limit of two hundred persons will exclude the qualified institutional buyers
and employees of the company offered securities in the financial year
under a scheme of employees stock option as per Section 62 of the Act.
The value of the private placement offer or invitation for each person
should be of an investment size of Rs.20,000 of the face value of the
securities. However, the limit of the maximum number of select persons
and value of private placement does not apply to the following:
Non-banking financial companies registered under the Reserve Bank of
India Act, 1934.
Housing finance companies registered with the National Housing Bank
under National Housing Bank Act, 1987.
MODE OF PAYMENT OF PRIVATE
PLACEMENT
The subscribers should make the securities subscription payment from
their bank account to the securities. The company must keep a record
of bank accounts from where they receive the subscription payments.
Allotment of Private Placement
Company making an invitation or offer of private placement should
allot its securities within sixty days from the receipt of the application
monies for the securities.
The company should repay the application money to the subscribers
within fifteen days from the completion date of sixty days if the
company is unable to allot securities within sixty days, it is liable to
repay the subscription money with an interest rate of 12% per annum
from the expiry of the sixtieth day.
RECORD OF PRIVATE PLACEMENT
OFFERS

The company should maintain a complete record of private placement

offers in Form PAS-5. The copy of the record of offers and the
private placement offer letter in Form PAS-4 should be filed with the
ROC with the fees as provided in the Companies (Registration Offices
and Fees) Rules, 2014 within thirty days of the circulation of the
private placement offer letter.
When the company is a listed company, it should file the record of
private placement offers along with the private placement offer letter
with the Securities and Exchange Board within thirty days of
circulating the private placement offer letter.
PENALTY FOR NON-COMPLIANCE
OF PRIVATE PLACEMENT
A company, its directors and promoters will be liable for a penalty if
the company accepts monies or makes an offer in contravention of the
Act and Rules. The penalty may extend to the amount involved in the
invitation or offer or Rs.2 crore, whichever is higher. The company
should also refund all monies to the subscribers within thirty days of
the order imposing the penalty.
Preferential Issue
Whole allotment of shares is made to
a pre-identified person
https://taxguru.in/company-law/difference-issue-private-
placement-preferential-allotment.html
INITIAL PUBLIC OFFER
INITIAL PUBLIC OFFER
Offering company shares for the first time to the general
public and institutional investors
Change in the ownership structure
Listed on stock exchange
SOME JARGONS
Managers to issue/ Lead Manager
Underwriters
Red Herring prospectus (RHP)
BID
IPO Eligibility criteria
IPO ELIGIBILITY CRITERIA
Net tangible assets worth at least Rs 3 crore.
Each of the previous three years, the company should have had a net
worth of at least one crore rupees.
In any three of the previous five years, the company should have
generated an operating profit of at least fifteen crore rupees (pre-
tax) on average.
The activity carried out by the company after adopting the new name
must account for 50% of the total income generated in the previous
year if the company has changed its name. The company should have
an average operating profit of at least fifteen crore rupees (pre-tax)
in each of any three years among the previous 5 years.
The IPO size of the company should not be more than 5 times of the
newt worth of the company before the IPO issue.
Mandatory Requirements
 MANDATORY REQUIREMENTS
The company shouldn't have been sent to the NCLAT (National Company Law
Appellate Tribunal) or NCLT (National Company Law Tribunal).
The company's losses shouldn't have wiped out its net value, leaving it with a
negative net worth.
The company must have at least Rs. 10 crores in paid-up equity capital. The
equity being issued shall have a minimum capitalization of Rs. 25 crores.
IPO PROCESS
STEP 1

Hire an Investment
Bank/ underwriters
• Based on reputation of the
company
• Research quality
• Prior relationship
 STEP 2 REGISTRATION WITH SEBI
Prepares the red herring prospectus
Red herring prospectus contains all the important information.
Prospectus is to be submitted to registrar of companies after that the
company can make application for IPO to SEBI.
STEP 3: VERIFICATION BY SEBI

SEBI verifies the document and ensures that the document covers all the
important information about the company
STEP 4: MAKING AN APPLICATION
TO THE STOCK EXCHANGE

The company then submits the application to the stock exchange where it
plans to float the issue.
STEP 5: ROADSHOWS

IPO marketing
STEP 6: PRICING OF IPO
Fixed Price Issue
Book Building issue
 Book Building Issue

price range of 20% is announced

Floor Price Cap Price

Minimum price Maximum Price
STEP 7: ALLOTMENT OF SHARES

Company and underwriters work together to finalize

how many shares is to be allotted to the investors
STEP 8: LISTING ON STOCK
EXCHANGE

Company securities will get listed on a stock

exchange.
Advantages and
Limitations of
IPO
Advantages of IPO Disadvantages of
IPO
Change in status of
Company
Financial statement
Platform to raise open for public
Capital

Listed Costly Process

Opportunities for
investment
SECONDARY MARKET
The securities which are already issued in primary
market are now traded in secondary market
Buying and selling of securities takes place among
investors
Stock market or stock exchange.
Active place for trading securities
SEBI is the regulator of secondary market in India
 FEATURES OF SECONDARY MARKET

Securities market
Operates as per rules
Measuring device
Transaction
Dealings only in registered securities
Second-hand securities
Functions of Secondary
Market
 FUNCTIONS OF SECONDARY MARKET

Economic barometer
Price determination
Maintains Active Trading and liquidity
Transactions Safety
Contribution to economic growth
Dissemination of Information
Performance Induced
ADVANTAGES OF SECONDARY
MARKET
Holding into cash
Determines the company's present fair value
Price adjustments for securities happen quickly
Heavily regulated
LIMITATIONS OF SECONDARY
MARKET
High volatility
Takes a lot of time
Brokerage, commissions
External factors
DIFFERENCE BETWEEN PRIMARY AND
SECONDARY MARKET
Meaning
Regulatory bodies
Price determination
Price fluctuation
Involvement of company
Type of company
Transaction between
Intermediaries
Funds raising
STOCK EXCHANGE
NSE
Established in 1992 in Mumbai
First stock exchange in India offered screen based trading system
HISTORY OF NSE
Established
Important investors like Life Insurance Corporation of India, IFCI
Limited, IDFC Limited, and Stock Holding Corporation of India.
Recognised as a stock exchange
SHARE MARKET INDICES IN NSE
CNX Nifty 50
Others are
 Nifty 100, nifty midcap 100, Nifty bank, nifty auto, nifty FMCG, Nifty MNC and
etc.
BOMBAY STOCK EXCHANGE
Established in 1875
BSE has helped expand the Indian corporate sector
Provides platform for equities trading for small to medium sized
companies
1st listed stock exchange of India
INDICES
INDEX

Indicator
Group of few securities
Industry, size market capitalization
Value of the underlying stocks are used to determine the overall index
value
DIFFERENCE BETWEEN BSE AND
NSE
BSE NSE

Incorporation 1875 1992

Trading system BOLT NEAT

Companies listed More than 5000 More than 1700

companies companies

Listed exchange Listed on NSE Not yet listed

Benchmark SENSEX NIFTY 50

Trading volume Less than NSE High trading volume

COMMODITY MARKET
 COMMODITY MARKET
A commodity market is a place where trading of primary product or
raw material take place.
Types of commodities
 Soft commodities - livestock or agricultural products, etc
 Hard commodities – gold, rubber, etc
CHARACTERISTICS OF COMMODITY
MARKET
Commodities must be homogeneous
The supply of any commodity should not be monopolized
Commodities must be durable
Price continuity exists
Transaction costs remain as minimum
TYPES OF COMMODITY TRADED
Metal - Gold, silver, and copper
Energy - crude oil, gasoline
Agriculture - wheat, soybeans, coffee
Live stock - live cattle, feeder cattle, etc.
TYPES OF COMMODITY MARKETS

Spot markets – physical or cash market

Derivatives markets - options, forwards & futures contract
COMMODITY TRADING EXCHANGE

Multi Commodity Exchange of India, MCX

National Commodities and Derivatives Exchange Limited, NCDEX
Indian Commodity Exchange, ICEX
National Multi Commodity Exchange of India, NMCX
 MAIN COMMODITY
EXCHANGE

National Commodities and Derivatives

Exchange Limited

Multi Commodity Exchange

of India
INVESTMENT AND TRADING
INVESTMENT
Buying of stock of company for long term
Passive income
Investment is like test match
Regular dividend and growing portfolio
TRADING IN STOCK
MARKET
 TRADING IN STOCK MARKET
Buying and selling stocks for short-term profit
Art of finding short-term mispricing’s in the market prices and
capitalising
Stock trading is like T20 matches
 Difference between
Investing and Trading
DIFFERENCE BETWEEN INVESTING
AND TRADING

Investment Trading
Approach Grow the capital Capitalise on mispricing
Risk involved Less Highly unpredictable
Period of investment long term Short term
Capital growth Passive income and Short term profit
capital gain
Effort involved Huge effort while making Continuously huge effort
investment than less
effort is required for
tracking
Style of analysis Fundamental analysis Technical Analysis
OBJECTIVES OF INTERMEDIARIES
Facilitate the investing process
Link between the issuer and investors
Intermediaries represent or market the securities
Intermediaries help the investors for investment
Provide important infrastructure services to both primary and secondary markets.
Capital Market
Intermediaries
CAPITAL MARKET INTERMEDIARIES

Merchant Bankers Underwriters

Registrars and Share Bankers to an issue
Transfer Agents

Intermediaries

Stock-brokers Credit Rating Agencies

Depository Participant Clearing Corporation
CAPITAL MARKET INTERMEDIARIES
SEBI has issued rules and regulations
SEBI to inspect the functioning, collect fees and impose
penalties
SEBI to register and regulate the working of
intermediaries.
MERCHANT BANKERS
Assist the company in every aspects of public issue.

It is also called as investment bankers.

COMPANY APPOINTS MERCHANT
BANKERS FOR
Managing the public issue of securities
For private placement of securities
For syndication of rupee term loans
Advisory services for projects
Corporate advisory services- mergers, takeovers
MERCHANT BANKERS
RESPONSIBILITIES
Financial, marketing, legal activity
Appoints Underwriters and registrar, bankers to issue
REGISTRAR

Register and maintain the records of transaction of investors.

 REGISTRAR ACTIVITIES
Collecting the issue application from investor
Keeping the record of the application and money received from the investors
Assisting the company for finalising the list of investors entitled for allotment
of securities in consultation with merchant bankers, or stock exchange
Uploading data to the Depositories for crediting of securities electronically
Dispatch of share certificates /Refund orders / Share Certificates
Submitting the Periodic Report to Regulatory Authorities
Attending to post issue Investor queries
 REGISTRAR
SEBI (Registrars to an Issue) Regulations, 1993
Net worth required for registrar is Rs. 25,00,000.
 SHARE TRANSFER AGENT
Maintains records of the shareholders of securities issued by companies.
Transfer and redemption of securities.
SEBI (Share Transfer Agents) Regulations, 1993.
UNDERWRITERS
Underwrites the issue of securities of the corporate body.
Provides support for the adequate subscription of the securities.
Underwriting is compulsory for public issue.
Commission is charge for underwriting service.
Appointment of underwriters
 Financial Strength

Commercial banks, financial institution or export import banks, etc.

SEBI (Underwriters) Regulations, 2021.
Net worth less than 20 lakhs
Bankers to an issue
 ACTIVITIES OF
BANKERS TO AN ISSUE
Acceptance of application and application monies.
Refund of application monies
Payment of dividend
Ensures the funds are collected and transfer to escrow account.
They report the collections to the lead managers
They banker have to furnish the details asked by SEBI.
SEBI (Bankers to issue) regulations, 1994.
Stock Brokers
 STOCK BROKERS
Buy and sell security on behalf of investors
Member of stock exchange
Mandatory to have certificate of registration by SEBI
Trades on stock exchanges performed through registered brokers.
SEBI (Stock Brokers) Regulations, 1992
Zerodha, Grow, Sherkhan, Paytm Money and etc
 CREDIT
RATING
AGENCIES
 CREDIT RATING AGENCIES
SEBI (Credit Rating Agencies) Regulations, 1999
Minimum net worth of Rs. 25 crores
CRISIL, CARE etc
Depository and
Depository
Participants
 DEPOSITORY AND DEPOSITORY
PARTICIPANTS
Holds securities in dematerialised form.
The securities certificates of investors are recorded in demat account of the
investor
The listed company become member of depositories
SEBI (Depositories and Participants) Regulations, 2018
Depositories in India
 NSDL stands for National Securities Depository Ltd
 CDSL stands for Central Depository Services Ltd.
 Clearing
Corporations
 CLEARING CORPORATION
Also called as clearing members
Responsible for completion of trade
Confirms transparency in buying and selling of securities
 CLEARING CORPORATION IN
INDIA
The Indian clearing corporation (ICCL)
The National Security Clearing Corporation Ltd (NSCCL)
The Multi Commodity Exchange Clearing Corporation Ltd. (MCXCCL)
 INTERMEDIARIES ARE GOVERNED
BY FOLLOWING REGULATIONS
SEBI {KYC (Know Your Client) Registration Agency (KRA)}, Regulations, 2011
SEBI (Intermediaries) Regulations, 2008
Prevention of Money Laundering Act, 2002
SEBI
Security Exchange Board of India
Regulatory body
12th April, 1988
Statutory status – January, 1992
Headquarters- Mumbai
SEBI
Formulating policies
Watchdog
Ensures financial market participants
 Investors
 Issuer of securities
 Financial intermediaries
FUNCTIONS OF SEBI

Protective functions
Regulatory Functions
Development functions
PROTECTIVE FUNCTIONS OF SEBI
Check price rigging
Prohibits insider trading
Promoting fair practices
Financial education power
REGULATORY FUNCTIONS OF SEBI
Designing Guidelines and code of conduct
Regulate acquiring of shares and take-over
Regulate stock exchanges
Registration of financial intermediaries
Levying of fees
Registering and regulating credit rating agencies
DEVELOPMENT FUNCTION OF SEBI
Training to intermediaries
Promoting fair practices
Research project
Encouraging self-regulating organizations
ORGANISATION STRUCTURE OF SEBI

Members/ Chairman Appointed by

One chairman Government of India

Two members Union Finance Ministry

One member Reserve Bank

Five member Government of India