Long Term Finance: Shares,

Debentures and Term Loans

 Ordinary Shares–Features
 Claim on Income
 Claim on Assets
 Right to Control
 Voting Rights
 Pre-Emptive Rights
 Limited Liability : No compulsion to pay
dividend on it.

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Ordinary Shares–Pros and Cons
 Advantages
1. Permanent Capital
2. Borrowing Base
3. Dividend Payment Discretion
 Disadvantages
1. Risk
2. Earnings Dilution
3. Ownership Dilution

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Right Issue of Equity Shares
 Selling of Ordinary Shares to the
existing shareholders of the company.
 Value of Right

p x  ps
r
n
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Right Shares – Pros and Cons
 Advantages
1. Control is maintained
2. Less flotation cost
3. Issue more likely to be successful

 Disadvantages
1. Shareholders lose if fail to exercise their right
2. If shareholding concentrated in hands of FI

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 Debentures–Features
 A bond or a debenture is the basic debt instrument which
may be issued by a borrowing company for a price which
may be less than, equal to or more than the face value

 Interest Rate
 Maturity
 Redemption
 Buy-back (call) provisions
 Indenture
 Security
 Claim on Assets and Income

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Types of Debentures
 Non – Convertible Debentures
 Fully – Convertible Debentures
 Partly – Convertible Debentures

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Debentures–Pros and Cons
 Advantages
1. Less Costly
2. No ownership Dilution
3. Fixed payment of interest
 Disadvantages
1. Obligatory Payment
2. Financial Risk
3. Restricted Covenants

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Preference Shares
 Similarity to Ordinary Shares:
1. Non payment of dividends does not force company to
insolvency.
2. In some cases it has no fixed maturity dates.
 Similarity to Debentures:
1. Dividend rate is fixed.
2. Do not share in residual earnings.
3. Usually do not have voting rights.

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Preference Shares–Features
 Claim on Income and Assets
 Fixed Dividend
 Cumulative Dividend
 Redemption
 Convertibility

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Preference Shares–Pros and Cons
 Advantages
1. Risk less
2. Dividend post-ponability
3. Fixed dividend
 Disadvantages
1. Non-deductibility of Dividends
2. Commitment to pay dividends

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 Term Loans–Features
 Maturity
 Direct Negotiations
 Security
 Restrictive Covenants
1. Asset related covenants
2. Liability related covenants
3. Cash flow related covenants
4. Control related covenants
 Convertibility
 Repayment Schedule

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Short Term Finance
Trade Credit
 “credit extended in connection with the
goods purchased for resale by a retailer, or
for raw materials used by manufacturer in
producing its products is called the trade
credit.
Accrued expenses
 The accrued expenses refer to the services
availed by the firm, but the payment for
which has not yet been made.
Commercial Papers
 Commercial Paper (CP) is an unsecured
promissory note issued by a firm to raise
funds for a short period, generally, varying
from a few days to a few months
Inter-corporate Deposits
(ICDs)

Inter-corporate Deposits :companies
borrow funds
for a short-term period, say up to six
months, from other companies which have
surplus liquidity for the time being
Short-term Unsecured
Debentures
 Companies have raised short-term funds by
the issue of unsecured debentures for
periods up to 17 months and 29 days. The
rate of interest on these debentures may be
higher than the rate on secured long-term
debentures.
Bank Credit
 Credit facility provided by commercial
banks to meet the short-term and
working capital requirements has been
important short term sources of finance in
India.
INTERNATIONAL SOURCES
Depository Receipts (DR)
 A DR means any instrument in the form of
a depository receipt or certificate created
by the Overseas Depository Bank outside
India and issued to the non-resident
investors against the issue of ordinary
shares.
Thank you