Ans 1 : Methods of Raising Capital

A company may raise funds for different purposes depending on the time periods ranging from very short to fairly long duration. The total amount of financial needs of a company depends on the nature and size of the business. The scope of raising funds depends on the sources from which funds may be available. The business forms of sole proprietor and partnership have limited opportunities for raising funds. They can finance their business by the following means :Investment of own savings Raising loans from friends and relatives Arranging advances from commercial banks Borrowing from finance companies Companies can Raise Finance by a Number of Methods. To Raise Long-Term and MediumTerm Capital, they have the following options:Issue of Shares It is the most important method. The liability of shareholders is limited to the face value of shares, and they are also easily transferable. A private company cannot invite the general public to subscribe for its share capital and its shares are also not freely transferable. But for public limited companies there are no such restrictions. There are two types of shares :Equity shares :- the rate of dividend on these shares depends on the profits available and the discretion of directors. Hence, there is no fixed burden on the company. Each share carries one vote.

Preference shares :- dividend is payable on these shares at a fixed rate and is payable only if there are profits. Hence, there is no compulsory burden on the company's finances. Such shares do not give voting rights. Issue of Debentures Companies generally have powers to borrow and raise loans by issuing debentures. The rate of interest payable on debentures is fixed at the time of issue and are recovered by a charge on the property or assets of the company, which provide the necessary security for payment. The company is liable to pay interest even if there are no profits. Debentures are

Public Deposits Companies often raise funds by inviting their shareholders. The increasing popularity of public deposits is due to :The rate of interest the companies have to pay on them is lower than the interest on bank loans. etc. This method of financing does not require any legal formality except that of creating a mortgage on the assets. these are treated as a part of ownership capital. Loans agreed to be sanctioned must be covered by securities by way of mortgage of the company's property or assignment of stocks. The Companies Act permits such deposits to be received for a period up to 3 years at a time. shares. They are unsecured. the company does not need to satisfy credit-worthiness for securing loans. This may be regarded as reinvestment of profits or ploughing back of profits. State level Industrial Development Corporations. employees and the general public to deposit their savings with the company. As these retained profits actually belong to the shareholders of the company. Loans from Financial Institutions Long-term and medium-term loans can be secured by companies from financial institutions like the Industrial Finance Corporation of India. especially during periods of credit squeeze. etc. Public deposits can be raised by companies to meet their medium-term as well as short-term financial needs. These financial institutions grant loans for a maximum period of 25 years against approved schemes or projects. Reinvestment of Profits Profitable companies do not generally distribute the whole amount of profits as dividend but. Unlike commercial banks. Retention of profits is a sort . transfer certain proportion to reserves.mostly issued to finance the long-term requirements of business and do not carry any voting rights. Loans from Commercial Banks Medium-term loans can be raised by companies from commercial banks against the security of properties and assets. gold. These are easier methods of mobilising funds than banks. Funds required for modernisation and renovation of assets can be borrowed from banks. Industrial Credit and Investment Corporation of India (ICICI) .

on account of credit sale generally remains outstanding during the period of credit allowed i. When the production and sale of goods increase. components. Generally suppliers grant credit for a period of 3 to 6 months. It enables the company to withstand difficult situations. till the dues are collected from the debtors. there is automatic increase in the volume of purchases. and more of trade credit is available. The reserves built up over the years by ploughing back of profits may be utilised by the company for the following purposes :Expansion of the undertaking Replacement of obsolete assets and modernisation. Meeting permanent or special working capital requirement. companies can discount them . The benefits of this source of finance to the company are :It reduces the dependence on external sources of finance. Availability of this type of finance is connected with the volume of business. The bank charges payable for the purpose is treated as the cost of raising funds. Instead of holding the bills till the date of maturity. bills of exchange are generally drawn for acceptance by the buyers of goods. and thus provide short-term finance to the company. Companies can use the following Methods :Trade Credit Companies buy raw materials. This method of raising short-term capital is known as factoring. It increases the credit worthiness of the company. To Finance Short-Term Capital. The book debts may be assigned to a bank and cash realised in advance from the bank. Redemption of old debts. Discounting Bills of Exchange This method is widely used by companies for raising short-term finance.of self financing of business. stores and spare parts on credit from different suppliers. Thus. Factoring The amounts due to a company from customers.e. It enables the company to adopt a stable dividend policy. the responsibility of collecting the debtors' balance is taken over by the bank on payment of specified charges by the company. When the goods are sold on credit.

or promissory notes bearing a second signature. it has a perpetual existence. public deposits. The overdraft facility is also granted against securities. It helps the company to raise huge capital. (b) Limited Liability: In a joint stock company the liability of its members is limited to the extent of shares held by them. a company is also able to take larger risks. Thus.with commercial banks on payment of a charge known as bank discount. This attracts a large number of small investors to invest in the company. Because of limited liability. The cost of raising finance by this method is the discount charged by the bank. (d) Benefits of Large-scale Operation: The joint stock company is the only form of . The amount of discount is deducted from the value of bills at the time of discounting. (c) Continuity of Existence: A company is an artificial person created by law and possesses independent legal status. It is not affected by the death. It has the following merits (a) Large Resources: A joint stock company can raise large financial resources because of its large number of members and it can raise funds through debentures. or other marketable instruments like Government bonds. Cash credit refers to an arrangement whereby the commercial bank allows money to be drawn as advances from time to time within a specified limit. insolvency etc. The rate of discount to be charged by banks is prescribed by the Reserve Bank of India from time to time. The rate of interest charged on cash credit and overdraft is relatively much higher than the rate of interest on bank deposits Ans 2 : A company form of business organisation is very popular for undertaking big business. Overdraft is a temporary arrangement with the bank which permits the company to overdraw from its current deposit account with the bank up to a certain limit. This helps in making investment decisions easily. This facility is granted against the security of goods in stock. of its members. Bank Overdraft and Cash Credit It is a common method adopted by companies for meeting short-term financial requirements. loans from financial institutions without much difficulty.

securities are offered to public for subscription for the purpose of raising capital or fund. Secondary market is an equity trading venue in which already existing/pre-issued securities are traded among investors. (f) Professional Management: Companies. because of the complex nature of their activities and large volume of business. Ans 3 b . require professional managers at every level of organisation. Over-theCounter (OTC) is a part of the dealer market. This leads to efficiency in management of their affairs. Because of the size of their business and the financial strength they can afford to appoint such managers. etc. new ways of training its staff. It results in large-scale production consequently leading to increase in efficiency and reduction in the cost of operation. While stock exchange is the part of an auction market. Secondary market could be either auction or dealer market. ANS 3a in the primary market. (e) Liquidity: The transferability of shares acts as an added incentive to investors as the shares of a public company can be traded easily in the stock exchange. in effect their tax burden is low as they enjoy many tax exemptions under Income Tax Act. The public can buy shares when they have money to invest and convert shares into cash when they need organisation which can provide capital for large-scale operations. (h) Tax Benefits: Although the companies are required to pay tax at a high rate. designing and innovating new products. improving quality of product. (g) Research and Development: A company generally invests a lot of money on research and development for improved processes of production. It further opens the scope for expansion.

ability to gather financial and motivational resources ability to build a sound organization. purposed to earn profits or bring a difference to the market .A public limited company is one that is listed on the stock exchange and where any member of the public can buy and sell shares.ENTREPRENEURSHIP i..e it involves innovation of products and techniques by keeping in mind the market.. For example. keeps in mind changing external environment.e.e entrepreneurial decisions are vast and can not be reverted easily and involve great deal of investments.e. raises capital to finance it or a major portion of the risk. Rolls Royce. The characteristics of entrepreneurship can be recognized as CREATIVE ACTIVITY i. PURPOSEFUL ACTIVITY i. For example. ANS 4a In mail (listing of securities) ANS 4b Whenever we talk about a business term it is essential to analyse its meaning. INVOLVES RISK i. technical knowledge about production techniques and marketing.e trying to identify market opportunities. DYNAMIC PROCESS i. it is very common for farming communities to operate this way so that small farmers can buy tractors or bulk-buy fertilizer and help each other out generally. The dictionary defines an entrepreneur as a person who undertakes a commercial venture organizes it. arranging resources to bring an imaginative idea to a practical situation and investing these resources in order to attain long term gains. Also the are various TYPES of ENTREPRENEURS that constitute of .. Characteristics of an entrepreneur include ability to bear risk. A co-operative organization is a gathering of individuals or small companies where they pool their resources and try to get the benefits of a large company that way..

one who adopts a method of production or technology already adopted by someone else and may not be able to afford resources for entrepreneurial research. IMITATING i. using them as if all three were the same thing. risk is the measure of financial uncertainty inherent in business operations. information security risk is defined by the following equation: Risk = Threat x Vulnerability x Impact Where threat is a frequency. Most people interchange threat. FABIAN i. those who resist changes and continue to use old or traditional methods of production. not just security people. vulnerability and risk. As such. it must be interpreted consistently across the organization and be explained clearly to all business units. Simply stated.e. the elements or risk are all very similar: The frequency of some negative event occurring The potential for that event to be successful The financial impact of that successful event Utilizing these elements. I find that risk is one of the most commonly misunderstood concepts in information security. Risk is the art/science of balancing the potential for financial loss with effective countermeasures to reduce or prevent that loss.g: Dhirubhai Ambani. that if any of these numbers are 0. there is no Risk.INNOVATIVEi. the answer to risk is zero (which is also very important when explaining information security risk). Indian entrepreneur). vulnerability is binary (yes/no) and impact is a dollar amount. but if the organization is a Microsoft shop (i. vulnerability is 0). For example. we (as security professionals) must present risk in a way that makes sense to the business. This is because risk is a difficult and abstract notion.e. but it can lead to organizational dysfunction . No matter if the subject is project risk. legal risk or information security risk. ANS 5a . This confusion may seem to be a semantic mix-up at first. Risk is also a business issue..e those who are cautious in adopting any changes and are shy and lazy to adopt new methods DRONE i.e. Note.e introduction of something new to the nation (e. To effectively communicate risk. an organization may be constantly bombarded by the latest Unix vulnerability.

executive. For the same reason:- Should own a bank account that must be in active use Age should be more than 18 years . you can acquire the provision of short term business loans. in this regard. By availing these loans. As for short term loans. this statement is something we think about every day. the funds derived can be utilized to serve various short term expenses. with which you can tackle your business needs. However. So what is the best way to explain abstract ideas such as risk? Risk isn’t vulnerability.when performing risk assessments and making business decisions based on those assessments. while availing. Moreover.. Here is an example: A malicious attacker compromises the confidentiality of a database by performing an SQL injection attack against an internet facing web application resulting in a loss of data and a public disclosure of the theft. then you will have to get hold of the funds through other viable means. is the backbone of any risk analysis. Well. But for the rest of the enterprise (e. it is rather important to have ready mad cash available. Remember. For a risk-minded security person .g. when you might be completely out of funds. everyone outside the security group) it is an imperative that we explain each aspect to effectively communicate risk. without any apparent interference from the lender. If you are not having the funds. the processing is rather quick and this in turn will result in quick approval of the funds. the loans will be made available to you only if you are in a position to meet the desired preconditions. However. manager or technologist? The easiest way I’ve found is by using something we’re all familiar with: a sentence. nor is it threat. our formula calls for threat. A risk sentence. So how do you explain this to a director. In the absence of collateral. A fairly straight forward picture is painted of a situation in which we account for all aspects of risk. or statement of risk. there comes a time. you are never asked to place any asset as collateral. you will at least have an opportunity to avail the funds. ANS 5b In order to support your immediate business needs and demands. vulnerability and impact to be part of risk.

still the difference between the two is maintained with reference to the time-period covered by the transactions. you are in need of. Further. the loans do come with a flexible repayment option. Money market and capital market can be differentiated as follows : The subject matter of capital market is long-term financial instruments having maturity of more than one year. the thrust of MM is on short-term instruments only. debentures or mutual fund units. Even with serious credit problems. you will never be required to follow the complicated formalities. mutual fund units and government debt instruments. Though both types of markets facilitate the transfer of funds from savers to deficit-users. Money market is a wholesale market and the participants in money market are large institutional investors. you can prefer to use the online mode. etc. However. without much of any hassle. On the other hand’ money market facilitates dealings in short-term financial instruments such as inter-corporate deposits. commercial bills. and corporate bodies. IVA. While the rate of interest levied on the amount sourced can be marginally high. Further to acquire the funds. Short term business loans thus provide you the funds. Just fill in the online form and once the details are verified. viable terms can be acquired by undertaking a detailed and proper research. ANS 5c Difference and demarcation between money market and capital market is made on the basis of maturity period of instruments and claims. commercial banks. in case of capital market even a small individual investor can deal by sale/purchase of shares. pertaining to CCJs. arrears and defaults can acquire the service of these loans. Besides having a clear idea of the amount you are in need of will enable you to source the exact amount. commercial papers. certificate of deposits. short-term instruments maturing within a period of one year are traded in money market whereas the capital market deals with longer maturity financial assets and claims. on the other hand. it then gets deposited in to your bank account. which then can be used to resolve your immediate business needs and demands. .As for these loans. treasury bonds. the amount sanctioned is based on your repaying ability. Capital market includes trading in securities. On making use of the online mode. mutual funds.

The best approach is to gather information from managers and other key employees at all levels of the organization. Securities emerge in primary segment and their subsequent dealings take place in secondary market. the two common segments are primary market and secondary market. and the health and well being of their employees.debentures (a large variety). money market has different financial instruments such as treasury bills. secondary market transactions may also take place. In reality. What you will learn can save your business significant money. The approach should also include the assessment of both the potential impact and likelihood of occurrence of each risk type. most businesses either are not aware of or are ignoring a wide range of risks that can significantly hurt their bottom line. call money. business executives and Board members should consider conducting an online risk mitigation survey annually. in case of money market. Total volume of trade occur per day in money market is many fold that of the volume per day taking place in capital market. It may also save your company from bankruptcy or failure due to a catastrophic incident. customers and community. Some companies also gather input about risk from .In capital market. a significant number focus on a small number of the obvious risks including the typical insurable risks. Of those companies that do have a risk assessment program. avoid a hit to your company’s reputation and strengthen your sustainability. Many businesses have little or no resources focusing on identifying and assessing the risks facing them. certificate of deposits. In efficient money market. etc. the financial instruments being dealt with are shares (equity as well as preference). or at least some emphasis on risk management. On the other hand. commercial papers. However. In capital market. reputation. ANS 5 d Conducting an online risk survey is a low-cost and highly effective way to identify and assess business risks. there is no such sub-division in general. Both these segments are interrelated. assessing. A robust approach to identifying. public sector bonds and units of mutual funds. managing and mitigating risk should include the ongoing assessment of a broad list of at least 50 – 75 potential types of risks. In our highly competitive and fast changing economy.

and it will definitely require strong visible support from your company’s senior management. contracts and regulations. .their Board members. Include all managers and supervisors in your organization and other employees that are in key positions with the knowledge about customers. suppliers. It is beneficial to use a survey company with significant knowledge and experience in this area. and other risk-related points. Three to four weeks is typically an appropriate response period. insight and suggestions about risks from many people. communicating the assessment and implementation plan with all appropriate people and then focusing on effective implementation. Give people enough time to send in their responses. The starting point is to design a comprehensive online risk mitigation survey. responders to an online risk survey should not be anonymous. it is useful to conduct online risk reduction surveys annually to track progress and trends. This is another area in which an experienced survey company can add significant value. It is important to thoroughly and objectively analyze the responses. Responders can also make suggestions about what can be done to mitigate risks. Comments enable responders to say why they believe specific types of risks are or are not likely to occur and why their impact is potentially high or low. business processes. It is important to be able to follow up with responders to get additional information and to clarify their answers where needed. each question should include a comments fields. Implementation may require financial and other resources. Unlike many other types of employee surveys which should guarantee that responses are anonymous. Given the fast-changing pace of most businesses. They will save you time and provide useful reports without the need to spend days using Excel to create your own useful reports. To that end. An online risk management survey is the fastest and best way to gather information. including the ratings and comments. and to identify new risks that surfaced in the past year. Make sure to include enough of the right people as participants in the survey. The final steps include to creating an action plan to manage and mitigate the key risks.

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