Scope and Objectives of Financial Management

Owned Funds Sources of Funds Borrowed Funds

Domestic International
GDR
Domestic
Internal International
negotiable certificates held
Retained Earnings Euro convertible bonds External Commercial
Preference Share Capital in the bank of one country FRN
-accumulated profits Development Bank Borrowings (ECB) Seed Capital
-Permanent capital -hybrid form of financing representing a specific -Provides an option to the holder
ploughed by company offer a number of -Up to 7 years maturity
-represents ownership -rate of dividend higher then rate of to convert bonds into equity shares Designed by IDBI for start-ups
number of shares of a concessions to foreign -adjustable interest rates -Commercial loans from non residents
back into business -May be callable or puttable -interest-free but carries a service charge of 1%
-residual interest in income and assets interest stock traded on the companies to invest to reflect exchange rates with minimum maturity of 3 years
-belongs to ordinary Euro convertible zero bonds for first five years & then at an increasing rate
-highest cost of capital -types are cumulative, non-cumulative, exchange of another country within their country -cheaper than foreign loans -lenders can be institutions like IFC,
shareholders and -Issued at a discount and -repayment and rate of interest charged depends
-Security to other fund providers redeemable, participating, and to finance ADB,etc or export credit agencies or
Advantages increases the net Euro bonds with equity warrants redeemed at premium on reaping capacity with the moratorium of up to
Nonparticipating, convertible exports from their suppliers of equipments or foreign
-permanent and irredeemable capital Advantages worth Regular bonds with -Usually five years maturity 5 years
countries e.g. EXIM collaborators etc
-increase financial base & help facilitate -no dilution in EPS detachable warrants -Conversion to equity on maturity
ADR IDR Bank of USA -Automatic route and approval route Zero Coupon bonds are no interest bond
additional borrowing -advantage of Leveridge at predetermined price issued at discount and redeemed at par
ADRs are issued by an approved
-no obligation to pay dividend -no risk of takeover foreign companies can
New York bank or trust company LT/MT -deep discount bonds are a type of ZCB
-rights issue -dividends are fixed and predecided issue IDRs to raise
against the deposit of the original
-redeemed after specified period funds from the Indian Secured premium notes are redeemable notes
Disadvantages shares of Non US company
Disadvantages Capital Market in the International agencies Medium term notes Euro commercial issued along with detachable warrants
-dividend income is taxable in the hands The process of buying new, International Commercial Banks
-preference dividend not tax deductible same lines as an Extend foreign currency loans for International finance Corporation -Several lots of bonds can be issued papers our Warrants need to be converted within time period
of shareholders issued ADRs goes through US
-cumulative preference dividend Indian company uses international operations International bank for Reconstruction all having different features W.R.T. short-term money notified by the company (usually 4 to 7 years)
-risky investment brokers, Helsinki Exchanges and
ADRs/GDRs to raise and development coupon rates, Currencies etc market instruments
-Reduction in EPS DTC as well as Deutsche Bank Euro Bonds Unsecured loans are provided by promoters ( quasi
foreign capital LT/ST/MT -Debt instruments which are not Asian development bank -Entire documentation and having a maturity
-dilution of ownership and control Wipro, MTNL, State Bank of India, equity) to meet promoters contribution norm
International monitory fund regulatory approvals can be taken at less than one year
Tata Motors, Dr. Reddy's Lab, denominated in the currency of the - ROI <=institutional rate & can be repaid only after
one point of time usually denominated
Ranbaxy, Larsen & Toubro, ITC, country in which they are issued repayment of institutional dues
LT MT in USD ST
ICICI Bank, Hindalco, HDFC Bank e.g. Rupee note issued in USA LT
and Bajaj Auto -generally issued in bearer form
than as registered bonds
Always long term
Name Currency Issued in Issuer
Commercial bank loans can be raised for Floating rate bonds are bonds on
non- US banks &
Venture Capital Financing Yankee Bond $ USA
corporations LT/ST/MT long-term medium-term or short-term
which the rate of coupon is
fluctuating depending on market
Non- Japanese Long-term loans for purchase of PPE,
These are equity finance to new companies which can be viewed as long-term investment in growth oriented small or medium firms. Venture capitalists Samurai Bond Tokyo, Japan
JPY short-term loans for working capital conditions.
Company
also provide support in the form of sales strategy business networking and management expertise Used for hedging against interest-rate
Bulldog Bond £ London, UK Non- UK Company Bridge finance is a loan for a short period
Some common methods of venture capital financing are as follows volatility and successfully issued by LT/MT
till disbursement of sanctioned loan
-The start-up may not be able to provide returns during the initial stages and therefore venture capitallist provide equity financing for such firms. financial institutions like IDBI and
However the Ownership does not exceed 49% ICICI Debentures
Variable Rate Government/
-conditional loan is repayable in the form of royalty after the firm is able to generate sales. No interest is paid on such loans. The rate of royalty FCCB Convertible FRN Drop Lock Bond Yield curve note Masala bonds Municipal bonds Treasury bonds
demand obligation -Issued by public limited companies as loan from public
ranges between 2% and 15% depending on gestation period cash flow pattern risk and other factors. A choice may be given to the firm to pay high a very low rate of an option to convert it This floating rate Municipal bonds Government or -Denominations ranging from hundred2000
Holder of the It is a inverse floater bonds issued
rate of interest instead of royalty once it becomes commercially sound interest into a longer term bond would be are used to -debenture trust deed lists the terms and conditions
floating rate note in which yield outside India Treasury bonds
-income note is a hybrid security which combines features of both conventional loan and conditional loan but at a substantially low rate issuer can get debt security with a automatically finance urban – maturity varies from 3 to 10 years
can sell the increases when but are bonds issued
-participating debentures carries charges in three phases. In the initial phase no interest is charged, in the next stage lower rate of interest is foreign currency at specified coupon converted into fixed infrastructure -Low cost of capital due to tax benefit
obligation back to prevailing denominated in by Government
charged up to a particular level of operation & after that higher rate of interest is required to be paid a very low cost Protection against rate bond if interest are increasingly of India, Reserve - can be nonconvertible or fully convertible or partly
the trustee at par interest-rate declines Indian Rupees
falling interest rate falls below a plus accrued and vice versa evident in India Bank of India, convertible
Export finance rate
Capital gain is not
predetermined level interest thus making any state -can be bearer or registered or mortgage or naked:
Inflation Bonds are the bonds in which interest rate is
which will stay till it more liquid than Government or
Pre-shipment finance (packing credit) applicable adjusted for inflation. For e.g. if the interest rate is 11
Post-shipment finance maturity normal FRN any other
per cent and the inflation is 5 per cent, the investor
-packing credit is an advance extended by banks to an exporter for the -Purchase/discounting of documentary export bills: Government
will earn 16 per cent meaning thereby that the investor
purpose of buying, manufacturing, processing, packing, shipping goods to Finance is provided to exporters by purchasing export bills department
is protected against inflation
overseas buyers drawn payable at sight or by discounting usance export Zero Interest Fully Convertible Debentures are
-An exporter having at hand a firm export order placed with him by his bills covering confirmed sales and backed by documents compulsorily and automatically converted after a specified
foreign buyer or an irrevocable letter of credit opened in his favour, can including documents of the title of goods such as bill of period of time and holders thereof are entitled to new
approach a bank for availing of packing credit lading, post parcel receipts, or air consignment notes. equity shares of the company at predetermined price

-advance so taken by an exporter is required to be liquidated within 180
days from the date of its commencement by negotiation of export bills or
receipt of export proceeds
-Clean packing credit: This is an advance made available to an exporter
only on production of a firm export order or a letter of credit without
exercising any charge or control over raw material or finished goods.
Export Credit Guarantee Corporation (ECGC) cover should be obtained by
the bank
-Packing credit against hypothecation of goods: Export finance is made
available on certain terms and conditions where the exporter has pledge
able interest and the goods are hypothecated to the bank as security
with stipulated margin. At the time of utilising the advance, the exporter
is required to submit, along with the firm export order or letter of
credit relative stock statements and thereafter continue submitting them
every fortnight and/or whenever there is any movement in stocks
-Packing credit against pledge of goods: Export finance is made available
on certain terms and conditions where the exportable finished goods are
pledged to the banks with approved clearing agents who will ship the
same from time to time as required by the exporter
-E.C.G.C. guarantee: Any loan given to an exporter for the manufacture,
processing, purchasing, or packing of goods meant for export against a
firm order qualifies for the packing credit guarantee issued by Export
Credit Guarantee Corporation
-Forward exchange contract: Another requirement of packing credit
facility is that if the export bill is to be drawn in a foreign currency, the
exporter should enter into a forward exchange contact with the bank,
thereby avoiding risk involved in a possible change in the rate of exchange
- E.C.G.C. Guarantee: Post-shipment finance, given to an
exporter by a bank through purchase, negotiation or
discount of an export bill against an order, qualifies for
post-shipment export credit guarantee. It is necessary,
however, that exporters should obtain a shipment or
contracts risk policy of E.C.G.C. Banks insist on the
exporters to take a contracts shipments (comprehensive
risks) policy covering both political and commercial risks.
The Corporation, on acceptance of the policy, will fix
credit limits for individual exporters and the Corporation’s
liability will be limited to the extent of the limit so fixed
for the exporter concerned irrespective of the amount of
the policy.
-Advance against export bills sent for collection: Finance
is provided by banks to exporters by way of advance
against export bills forwarded through them for
collection, taking into account the creditworthiness of the
party, nature of goods exported, usance, standing of
drawee, etc.
-Advance against duty draw backs, cash subsidy, etc.: To
finance export losses sustained by exporters, bank
advance against duty draw-back, cash subsidy, etc.,
receivable by them against export performance. Such
advances are of clean nature; hence necessary precaution
should be exercised
Lease Financing
Particulars
Risk & Reward
Risk of obsolescence
Securitisation
ST
Advances from Customers Trade Credit
Accrued Expenses and Deferred (Unearned) Income
Commercial Paper
-an unsecured money market instrument issued in the form of a promissory note
-issued by high rated corporates, PDs & All India Financial Institutions
-denomination of 5 lacs or multiples thereof & ROI linked to yield on 1 year gov bond
-mandatory to obtain credit rating
T-Bill are short term gov securities with maturity ranging from 14 to 364 days
The certificate of deposit is a document of title similar to a time deposit receipt
issued by a bank except that there is no prescribed interest rate on such funds.
It is traded in the secondary market
A company can accept public deposits subject to the stipulations of Reserve Bank
of India from time to time upto a maximum amount of 35 per cent of its paid up
capital and reserves accepted for a period of six months to three years. They are
unsecured loans used to finance working capital
Inter corporate deposits are short term borrowings from other corporates
who have surplus liquidity
Overdraft Customers are allowed to withdraw in excess of credit balance in
The asset is purchased initially by the lessor (leasing company) and thereafter leased to the user (lessee current account up to a fixed limit. They are repayable on demand but generally
company) which pays a specified rent at periodical intervals continue for long periods by annual renewal of limit. Interest is charged on daily
balances.
Clean OD are unsecured overdraft which are granted only to financially sound and
Finance Lease Operating Lease
firms having reputation and integrity. They are generally granted for a short period
Passed on to Leasee Remains with lessor
Other types of lease are and must not be continued for long. As a safeguard, banks take guarantees from
Borne by Lessee Borne by lessor -sales and leaseback other persons who are credit worthy before granting this facility

lease cancellability Non-cancellable Cancellable -leveraged lease Cash credit is an arrangement under which a customer is allowed an advance up to
certain limit. The customer did not borrow the entire amount and he can only draw

CA JAGABANDHU PADHY
-sales aided lease to the extent of his requirement. Interest is charged only on the amount withdrawn.
Cost of repairs Borne by lessor
Borne by Lessee
and maintenance -closed ended and open-ended Generally cash credits are sanctioned against pledge/hypothecation of tradable
goods. Just like overdraft these limits are also renewed annually
and operations
lease Bills purchased or discounted is another Way of raising short-term funds. Even
lease is usually full lease is usually though bills are purchased by bank it can hold the owner of the bill liable in case of
payout, that non-payout, since the dishonour of bill
is, the single lease lessor expects to lease
Full payout
repays the cost of the same asset over and
the asset together over again to several
with the interest users