Bridge Course

Forms of Business Organisation

• Sole Proprietorship
• Partnership (Indian Partnership Act, 1932)
• Cooperative Society (The Indian Cooperative Societies Act,
1912)
• Joint Stock Company (Indian Companies Act, 1956)
• Limited Liability Partnership (Limited Liability Partnership
Act, 2008)

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 Key Terms used in Financial Management
• Value • Income statement
• Agency problem • Statement of cash flows
• Exchange rates • Liquid asset
• Stake holders • Window-dressing
• Corporate governance • Risk (diversifiable & non-
• Annual Report diversifiable)
• Balance sheet • Nominal rate of interest
• Retained earnings • Inflation
• Book values • Real rate of interest
• Market values • Risk aversion
• Cost of capital • Risk premium
• Capital structure • Portfolio
• Working capital • Dividends
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 Financial Environment
• Financial system
 Indian Financial System
• Financial Markets
Financial Institutions
 Classification of Financial Markets
Nature of claim Debt Market
Equity Market
Maturity of claim Money Market
Capital Market
Seasoning of claim Primary Market
Secondary Market
Timing of delivery Cash or spot market
Forward or Futures Market
Organisational structure Exchange –traded market
Over-the –counter market
 Financial
Regulation
 Regulatory Environment
Reserve Bank of India
• RBI is the Central Bank.
• Regulates money market, government debt market,
foreign exchange markets and all banking and non –
banking financial institutions.
 Functions of RBI
• Monetary Authority
• Regulator and supervisor of the financial
system
• Manager of foreign exchange
• Issuer of currency
• Developmental role
• Related functions
 Securities and Exchange Board of India
• Regulate the business in stock exchanges
• Registering and regulating the players in stock
markets
• Registering and regulating the working of
depositories
• Registering and regulating the working of
venture capital funds
• Regulating SROs
 Securities and Exchange Board of India
• Prohibiting fraudulent and unfair trade
practices
• Promoting investors education
• Prohibiting insider trading in securities
• Regulating substantial acquisition of shares
• Compile information
• Conduct research
 Insurance regulatory and Development Authority
• Issue certificate of registration, renew, modify, withdraw,
suspend or cancel of such registration
• Protection of interests of policy holders
• Specifying requisite qualification, code of conduct
• Specifying code of conduct for surveyors and loss assessors
• Promoting efficiency in the conduct of insurance business
• Promoting and regulating professional organizations
• Calling for information
• Control and regulation of the rates
 Insurance Regulatory and Development Authority
• Specifying the form and manner in which boos of accounts
shall be maintained
• Regulating investment of funds
• Regulating maintenance of margin of solvency
• Adjudication of disputes
• Supervising the functioning of the Tariff Advisory Committee
• Specifying the percentage of business from rural and social
sector
• Exercising such powers as may be prescribed
Pension Fund Regulatory and Development Authority
• Development and regulation of Pension sector in India
Sources of Finance
 Equity Shares (or) Ordinary Shares
• Authorised Share • Features:
Capital • Claim on income
• Claim on assets
• Issued Share capital • Right to control
• Subscribed Share • Voting rights
Capital • Pre-emptive rights
• Limited liability
• Paid-up share capital
 Equity Shares (or) Ordinary Shares
Pros Cons
• Permanent capital • Cost
• Borrowing base • Risk
• Dividend payment • Earnings dilution
discretion • Ownership dilution
 Preference Shares
• Hybrid security
• Can be issued in different forms
 Preference Shares
• Features:
– Claims on income and assets
– Fixed Dividend
– Cumulative Dividends
– Redemption
– Sinking fund
– Call feature
– Participation feature
– Voting Rights
– Convertibility
 Preference Shares
Pros Cons
• Riskless leverage • Non-deductibility of
advantage dividends
• Dividend postponability • Commitment to pay
• Fixed Dividend dividends
• Limited voting rights
 Debentures
• A long term promissory note for raising loan
capital.
• Firm promises to pay interest and principal as
stipulated.
• Debenture holders are ______ to the firm.
• Debentures are issued in denominations.
 Debentures
• Features
– Interest Rate (Contractual rate of interest)
• If the market price of debenture changes, what interest
rate is to be obliged by the company?
• Taxation on interest- Double?
– Maturity
– Redemption
– Sinking Fund
– Buy-back provision (call provision)
– Indenture (debenture trust deed)
 Debentures
• Features
– Security: Secured or unsecured?
– Yield: Current yield vs yield on maturity
– Claims on assets and income
 Debentures
• Types
– Non-convertible
– Fully Convertible
– Partly Convertible
 Debentures
Pros Cons
• Less costly • Obligatory payments
• No ownership dilution • Financial risk
• Fixed Payment of interest • Cash outflows
• Reduced real obligations • Restricted covenants
 Debentures Vs Bonds
Points of Bonds Debentures
Comparison
Concept It is a financial instrument showing It is issued to raise the long
indebtedness of the issuing body term funds from the
towards its holders. investors.
Collateral Bonds are generally secured with May be secured or unsecured
collateral
Interest Rate Low High
Issued By Government agencies, financial Companies
institutions, Corporations
Payment Accrued Periodical
Owners Bondholders Debenture holders
Risk factor Low High
Priority in repayment First Second
at the time of
liquidation
 Project Finance
• Financing option available to large capital intensive
projects with huge capital requirements and
involving high risks.
• Risk identification and allocation is a key component
of project financing.
• Project financing may be done in BOT, BLT, or PPP
format.
 Venture Capital
• Venture capital is the initial capital infused in a new
venture/product to meet the needs of people with bright ideas
but limited financial resources.
• This is also called start-up financing
• A venture capitalist is expected to fulfill the gap in funding and
is characterized by:
– Sharing of risk of the new venture
– Compliment the financial needs by sharing of profits,
– Exiting from the firm once it reaches the self sustaining growth
with relatively less risk,
– Add strategic value to the firm,
– May participate in management .
 Venture Capital
Exit Options
• Venture capital is the risk bearing capital.
• When the risk of the projects is expected to come down to a
reasonable level to be assumed by normal investors, venture
capitalists needs to make an exit.
• Three exit routes available are:
– Buyback by promoters
– Selling to another investor
– Offer for sale in the IPO

• An important feature in all exit routes is the valuation of the firm

at the time of exit.
 Private Equity
• As the name implies it is non-public equity placed with select
investors who are willing to assume risk of the project for a
longer time.
• Private equity seeks greater returns than the normal investor in
the capital markets.
• Venture capital is a form of private equity.
• Private equity is the capital that bears lesser risk than venture
capital but higher risk than the what the project would have
once it matures to have steady cash flows.
 Differences between Private Equity and Venture
Capital
Points of Difference Private Equity Venture Capital
Concept These are the investments that are It refers to financing of small
made in those firms which are not business by the investors,
publicly listed on any stock exchange seeking high growth potential
Stage of investment Later Stage Initial Stage
Investments made Few firms Large number of firms
in
Type of Companies Funds are provided to matured Investments are made in
companies having good track record startup companies
Focus on Corporate Governance Management Capability
Type of industries Generally, all kinds of industries Which require heavy initial
investments like energy
conservation, high technology
Fund Requirement For growth and expansion For scaling up operations
Ownership of Generally, 100% Does not exceed 49%
investor
 Differences between Private Equity and Venture
Capital
Points of Difference Private Equity Venture Capital
Investment Size $100 million to $10 Billion Below $10 million
Structure Equity + Debt Equity only
Time Horizon Exit after 6 to 10 years 4 to 7 years
 International Capital markets
ECBs
• ECBs are the foreign currency denominated loans
raised by Indian firms.
• They are just like term loans or bond in the domestic
markets.
• Mobilization of loans from international markets is
governed by regulations by Reserve Bank of India
involving foreign exchange inflows and outflows.
 International Capital markets
FCCBs
• FCCBs are foreign currency denominated bonds issued
by Indian companies.
• Carry a fixed coupon rate and are convertible into a
fixed number of ordinary shares at a preferred price.
• Are listed and traded abroad and subscribed to by a
non-resident.
 Short Term Sources of Finance
DOMESTIC
• Lines of credit
• Commercial papers
• Factoring
• Bill Discounting
INTERNATIONAL
• Forfaiting
 Money Market
• Money market consists of players and
instruments related to working capital
financing
• Several non-conventional sources of short-
term financing such as Commercial Papers and
Factoring have evolved over the years.
 Line of Credit
• Line of credit is the source of meeting the working capital
requirements of businesses.
• Extended by firms’ banks with a preset credit limit.
• The interest paid is on the amount of credit availed and
not on the entire credit limit approved.
 MONEY MARKET:
Commercial Papers
• Commercial Paper is an unsecured money market
instrument with a fixed maturity period (7 days-1
year)
• Issued by highly rated corporate borrowers to meet
their working capital.
• Stringent requirements, as per the guidelines, in
terms of net worth and credit rating for issuing
companies.
 Factoring
• Factoring refers to sale of accounts receivables by the client (a
firm) to the factor (a bank).
• It unlocks firms’ cash that gets tied up in receivables.
• Factoring can be with recourse or without recourse.
Factoring
 Factoring
• Factoring, though similar to bill discounting, has some
distinguishing features
• While bill discounting is a pure fund based activity,
factoring has both, fee based and fund based features
• In addition to the funds provided, the factor offers
certain other services, such as collection of
receivables, sales ledger administration, etc., to the
client.
 Forfaiting
• Forfaiting is the discounting of international trade receivables
on a without recourse basis.
• It involves purchasing of an exporter's receivables (the
amount importers owe the exporter) by the forfaiter at a
discount.
• The forfaiter pays cash to the exporter, and the importer is
obliged to pay its debt to the forfaiter.
• What factoring is to a domestic credit sale transaction,
forfaiting is to an international transaction.