Chapter 1 Introduction To Corporate Finance

→ The term finance is related to money and money management

→ Finance = Inflow of Money + Outflow of Money
→ Corporate finance deals with the raising and using of finance by a corporation.
It also includes:
 Financial Planning
 Study of capital market, money market and share market
 Capital Formation
 Foreign capital
→ Corporate Finance is based on two decisions:
 Financing Decision
 Investment Decision
→ Capital Requirement is the funds required to start or run the business. Following points are to be taken into
consideration:
 Draft a financial plan
 Volume of capital required
Capital Required :
1. Fixed Capital
2. Working Capital
Fixed Capital:
 Investment in fixed assets
 Used for longer period of time
Working Capital
 Day-to-day transactions
 Used for short period of time

→ Capital Structure is the mix of securities

Owned Capital + Borrowed Capital = Capital Structure
→ Capital Structure is the mix of securities
Owned Capital + Borrowed Capital Capital Structure
→ Capital Structure is composed of:
(a) Owned Funds = Share Capital + Free Reserves and Surplus
(b) Borrowed Funds = Debentures + Bank Loan + Long Term Loan.
Chapter 2 Sources of Corporate Finance
→ No business activity can ever be pursued without financial support.
→ Finance is necessary throughout the activities of promotion, organization, and regular operations of the business.
→ The finance needed by a business organization is termed as ‘Capital’
→ Capital formation is a process of collection of capital from various sources according to the financial plan of the
company.
→ The various sources of finance can be divided into owned capital and borrowed capital which may be external or
internal.
→ When capital is made available from within the organization, it is an internal source of financing.
→ When capital is raised from outsiders, it is an external source of financing.
→ Owned capital is regarded as permanent capital and borrowed capital is regarded as the temporary capital.
→ The various requirements of finance can be divided into short term (maximum one year) and long term (more than
a year maybe 5,10,15 years).
→ There are various methods of raising finance namely shares, debentures, bonds, retained earnings/profits, public
deposits, trade credit, bank credit, ADR (American Deposit Receipts), and GDR (Global Depository Receipts)
→ A share is a small unit of the share capital of a company.
→ They may be issued at par, premium, or discount and redeemed at par or premium.
 → Equity shares do not enjoy a preference for dividends and do not have priority for payment of capital at the time of
winding up of a company.
→ Equity shareholders are risk-takers and hence they are the real owners of the company.
→ Preference shares have prior right to receive a fixed rate of dividend and return of capital in the event of winding up
of the company
→ Preference shareholders are cautious investors.
→ They neither take part in management nor attend the meetings and vote on resolutions.
→ They can have class meetings if their rights are to be altered or have not received dividends for more than two
consecutive years.
→ The debt acknowledged by a company by issuing a debenture certificate is called a debenture.
→ Debenture holders are creditors of the company.
→ They get fixed interest as a return on their investment.
→ A bond is an instrument issued by the government or business as evidence of debt.
→ Bondholders are creditors of the company.
→ They get fixed interest as returns on their investment regularly or as per terms agreed.
→ Retained earnings is the sum total of accumulated profit that is re-invested in the business.
→ It is a cost-effective method of raising funds and is also known as self-financing/ploughing back of profits/
capitalization of Reserves.
→ A public deposit is a collateral-free loan accepted by public companies for a short period of time ranging from 6
months to 36 months.
→ The company can raise loans from banks in the form of overdraft, cash credit, cash loans discounting of bills. etc.
→ Financial institutions provide financial aid and assistance to companies.
→ Trade credit is a credit extended by manufacturers and suppliers to follow businessmen for 15 days to a
month.
→ Discount is made available if payments are made early.
→ A Bill of exchange is a trade bill that is accepted by the bank and cash is advanced as a loan against it.
→ ADR (American Depository Receipt) and GDR ( Global Depository Receipt) are depository receipts through
which Indian Companies raise equity capital in international markets.
Chapter 3 Issue of Shares
→ A joint-stock company can raise its capital by issuing shares, debentures, inviting public deposits, taking loans etc.
→ Share Capital refers to the capital made up out of equity shares and preference shares.
Share Capital can be classified as –
 Authorised or Nominal or Registered Capital
 Issued and Unissued Capital
 Subscribed and Unsubscribed Capital
 Called up and uncalled Capital and Reserve Capital
 Paid up Capital and Calls in Arrears
Company can raise capital by selling shares in the market. Generally it issues –
 Equity shares
 Preference shares.
A company can use the following methods for issues of shares –
 Public Issue
 Fixed price issue method
 book building method
 Initial public offer
 Further public offer
 Rights issue
 Bonus issue
 Employee stock option scheme
 Employee stock purchase scheme
 Stock appreciation rights scheme
 Sweat equity shares
 Private placement
Preferential allotment-
Allotment of Shares:
The Supreme Court has defined allotment as “the appropriation out of the previously unappropriated capital of the
company of a certain number of shares to a person.
Thus allotment of shares means allotting shares to an applicant based on the application submitted.
Share Certificate:
It is a registered document issued by a company which is an evidence of ownership of specified number of shares of
the company. Share certificate should be issued by the company within two months.
Calls on shares:
Besides the application money and allotment money, if a company demands the balance unpaid amount on shares it
is called as calls on shares. It is unpaid money demanded by the company.
Forfeiture of Shares:
If a shareholder fails to pay calls on shares within a certain period, the Board of Directors can forfeit the ownership of a
member which is called forfeiture of shares. It is a forceful act by the company. Here membership is terminated by the
company.
Surrender of Shares:
Voluntary return of shares by the member to the company for cancellation of shares is called surrender of shares.
Transfer of shares:
Transfer of shares means voluntary transfer of shares by a member of a company in favour of another person against
consideration. It is a voluntary activity.
Transmission of shares:
When the shares of a member is automatically transferred to the nominee or legal heir on the death, insolvency or
insanity of a member, it is called transmission of shares. It is performed by operation of law.
Notes Chapter 5 Deposits
→ Company can raise funds by accepting deposits from public. It is a cheap source to raise funds. There is no dilution
of control.

→ Company can invite deposits:

→ Deposit can be secured or unsecured. For secured deposits, a charge on company’s tangible assets are created
Period / Tenure of Deposit-
 Minimum 6 months, maximum 36 months.
 Premature repayment – after minimum 3 months.
 Company can also renew deposit with same terms and conditions of issue.
 Company cannot accept deposits repayable on demand made by depositor.
→ Deposit Receipt has to be issued within 21 days from date of receipt of deposit money.
Deposit Trustee-
 Appointed when secured deposits are issued.
 The company can appoint one or more Deposit Trustees.
 Protect the interest of depositors.
Trust Deed-
 Company signs a contract with Deposit Trustees.
 Contains terms and conditions of the contract.
 Must be signed at least 7 days before issuing the circular or advertisement.
→ If Deposit Amount + Interest is more than Rs. 20,000, then Deposit Insurance must be taken.
Deposit Repayment Reserve Account-
 Opened in Scheduled Bank.
 On or before 30th April, the company deposits up to 15% amount in DRRA.
 used for repaying deposits.
 Private companies accepting deposits from members cannot open Deposit Repayment Reserve Account.