TYPES OF FINANCING

CA PRASHANT SARDA 1
 REGULAR SOURCES OF FINANCE

1.Equity share capital

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CA PRASHANT SARDA
 REGULAR SOURCES OF FINANCE

2. Preference share capital

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CA PRASHANT SARDA
 REGULAR SOURCES OF FINANCE

3. Retained earnings

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CA PRASHANT SARDA
 REGULAR SOURCES OF FINANCE

4. Debentures

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CA PRASHANT SARDA
 REGULAR SOURCES OF FINANCE

5. Term loan from financial

institutions

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CA PRASHANT SARDA
 REGULAR SOURCES OF FINANCE

6. Term loan from banks.

There are many other sources of finance having

different features & benefits
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CA PRASHANT SARDA
 VENTURE CAPITAL FINANCING

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CA PRASHANT SARDA
 VENTURE CAPITAL FINANCING

Entrepreneur

- Technically competent
- Has skill & knowledge
- No capital or Funds
- No Experience

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CA PRASHANT SARDA
 VENTURE CAPITAL FINANCING

Venture Capital
financer

-No technical competency

-No skill & knowledge
-Has capital or Funds
-No Experience

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CA PRASHANT SARDA
 VENTURE CAPITAL FINANCING

 Features:
1. V.C. Financing is a national priority especially
in sunrise sectors like: Telecom, non-
conventional energy, bio -technology,
Information Technology, etc.
2. There are various tax concessions & reliefs to
V.C. undertaking
3. The contribution for financing comes from
various domestic sources and international
sources

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CA PRASHANT SARDA
 VENTURE CAPITAL ARRANGEMENTS
The Possible arrangements that can be made between
Entrepreneur & V.C. financer
1. Equity Financing (Max equity to financer-49%)
2. Conditional Loan ( No interest on loan, but only
Royalty on sales)
3. Income Note or Hybrid note (Royalty on sales+
Interest on loan, but both at low rates)
4. Participating Debentures (Interest in 3 phases)
Start Phase – No Interest
Next Phase – Low rate of interest
Subsequent Phase – High rate of interest
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CA PRASHANT SARDA
 Factors that a venture capitalist should consider
before financing any risky project are as follows:
1) Level of expertise of company’s management
2) Level of expertise in production
3) Nature of new product or service (Technically
feasible)
4) Future prospects (detailed business plan)
5) Competition
6) Risk born by entrepreneur (should bear risk)
7) Exit route
8) Board membership for venture capitalist.
CA PRASHANT SARDA 13
 CAPITAL SUBSIDY/ INCENTIVES

 Subsidy or Incentives:
 To encourage dispersal of industries in less
developed areas & promoting high tech industries in
developed areas.
 The capital subsidy form a part of long term finance,
however one must not be dependent on availability of
incentives for viability of project.
 The incentives are sanctioned & released to units
only after they have complied initial & final effectives
steps respectively
 The promoters find it convenient to avail BRIDGE
FINANCE against the sanctioned capital subsidy.
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CA PRASHANT SARDA
 CAPITAL SUBSIDY/ INCENTIVES

 Industries:  Incentives:
a. Hotels
b. Poultry & agro industries
c. Bio technology
d. SSI industries
e. Industries listed in 1st
schedule of Industrial Act, 1951
f. Information Technology
g. Non-conventional energy
CA PRASHANT SARDA
a. Special capital incentives (as
% of project cost, with a
ceiling)
b. Interest subsidy (loan at less
interest)
c. Refund of octroi
d. Exemption of electricity
duty
e. Exemption or deferment
of sales tax
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 INTEREST FREE SALES TAX LOAN

 The state Govt. provides this incentive

 Existing unit – Interest free loan on the basis of past sales

tax paid

 New Unit – Loan in the form of deferment of sales tax

 This loan is generally repayable after 10/ 12/ 14 years

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CA PRASHANT SARDA
 ASSET/ DEBT SECURITISATION
Bank
Eg: Merchant Banker
Balance sheet Total: `.100 cr
Avg Maturity: 7 years
Avg interest: 14%
Asset Side Investors
All Loans: SPV/ Trust
1. Home loan Eg:
Credit Rating
2. Auto loan
3. Mortgage loan Third party support Total: `.96 cr
Maturity: 7 years
etc. Insurance cover Return: 11%
Pool of Assets Underwriting
Eg: 96 Cr Formation of
CA PRASHANT SARDA
instruments 17
 EURO ISSUES

 Euro Issues:
 The Govt. of India (GOI) in 1991 started a major
economic reform for integration of Indian economy
with Global economy.
 In 1992 GOI permitted Indian cos. To raise funds by
issue of equity or debt in international market
through ADRs, GDRs & FCCBs.
 Euro issues are outside the ambit of SEBI.
 There are many advantages to issuing co. &
investor in this regard.
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CA PRASHANT SARDA
 FINANCIAL INSTRUMENTS IN INTERNATIONAL MARKET
Some of the financial instruments in international
markets are:
1. EURO BONDS: Debt instrument denominated in a
foreign currency for the country where it is issued.

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CA PRASHANT SARDA
 FINANCIAL INSTRUMENTS IN INTERNATIONAL MARKET

2. FOREIGN BONDS: Debt instrument denominated in a currency

which is foreign to the borrower & is sold in local currency of that
country where it is issued.

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CA PRASHANT SARDA
 FINANCIAL INSTRUMENTS IN INTERNATIONAL MARKET
3. FLOATING RATE NOTES: Interest rate changes as per prevailing
exchange rates.

CA PRASHANT SARDA 21
 FINANCIAL INSTRUMENTS IN INTERNATIONAL MARKET
4. EURO COMMERCIAL PAPERS: Short term instruments denominated
in US Dollar.

CA PRASHANT SARDA 22
 FINANCIAL INSTRUMENTS IN INTERNATIONAL MARKET
5. FULLY HEDGED BONDS: The risk of foreign
currency fluctuation is fully protected by selling in
forward market the entire stream of principal & interest
payments

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CA PRASHANT SARDA
 FINANCIAL INSTRUMENTS IN INTERNATIONAL MARKET
5. FOREIGN CURRENCY OPTIONS: Is a RIGHT to buy
or sell a specified foreign currency in the present for
settlement at a future date.

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CA PRASHANT SARDA
 FINANCIAL INSTRUMENTS IN INTERNATIONAL MARKET
7. FOREIGN CURRENCY FUTURES: Is an OBLIGATION to buy
or sell a specified foreign currency in the present for settlement
at a future date.

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CA PRASHANT SARDA
 FINANCIAL INSTRUMENTS IN INTERNATIONAL MARKET

8. FOREIGN EURO BONDS: Covered in detailed later…

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 MEDIUM TERM NOTES (MTN)

 If the company requires frequent funds, it may not be

financially feasible for it to raise the funds through bond
issue every time.
 In such cases, the company may one time complete
various formalities including documentation & issue
bond in different lots having different features w.r.t.
coupon (interest) rate, currency, timing, etc.
 This will save company’s floatation cost of bond.

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CA PRASHANT SARDA
 EXTERNAL COMMERCIAL BORROWINGS (ECB)
MAY 2008
 Commercial loans availed from non-residents
with minimum average maturity of 3 years.
 ECB can be raised from internationally
recognised sources like international bank,
international capital markets, multilateral financial
institutions like IFC, ADB etc. Foreign
collaborators, foreign equity holders, suppliers of
 equipment.
ECB can be availed from 2 routes:

1) Automatic Route 2) Approval Route

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CA PRASHANT SARDA
 EXTERNAL COMMERCIAL BORROWINGS (ECB)

 Under Automatic route there is no need to take RBI/

Government approval, whereas the same is required
under Approval route.
 In India, two principal forms of international offering
are made by companies tapping the international
capital market :
a. Foreign Currency Convertible Bonds (FCCB).
b. Depository Receipts (DR). - American Depository
Receipts and Global Depository Receipts.

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CA PRASHANT SARDA
 FOREIGN CURRENCY CONVERTIBLE BONDS

 FCCB:
 FCCB is a bond subscribed by Non residents in a
foreign currency & convertible into equity shares of
issuing co., either in whole or in part on the basis of
detachable warrants attached with FCCBs
 FCCB are unsecured, carrying fixed rate of interest &
conversion option.
 Interest rates are low as compared to domestic market.
 FCCB are issued in freely convertible foreign currency
 The major drawback of FCCB is that the issuing co.
cannot plan its future capital structure
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CA PRASHANT SARDA
 FOREIGN CURRENCY CONVERTIBLE BONDS

CONTINUED…
 Moreover the projection of cash outflows cannot
be made
 FCCB are also subjected to foreign exchange
risk .
 It results in creation of external debt, that requires
foreign currency outflow from the country, if
conversion option is not exercised by the
investors.

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CA PRASHANT SARDA
 DEPOSITORY RECEIPTS (DR)

DR:
 DR is an instrument in the form of depository
receipt / certificate created by overseas depository
bank & issued to Non residents against the issue
of equity shares
 DR is a negotiable instrument evidencing fixed no.
of equity shares of the issuing co. generally
denominated in US dollars.
 DR are issued by co. who want to list their shares
outside India

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CA PRASHANT SARDA
 DEPOSITORY RECEIPTS (DR)
• DR:
Indian Overseas
Indian bank
bank Eg: Lead
co. Eg: Bank
SBI Manager
Eg: of
(Custodian
X Ltd. America
bank)

TARGETED
INVESTORS
Shares
deposited

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CA PRASHANT SARDA
 AMERICAN DEPOSITORY RECEIPTS (ADR)
ADR:
Indian Overseas
Indian bank
bank Eg: Lead
co. Eg: Bank
SBI Manager
Eg: of
(Custodian
X Ltd. America
bank)

ONLY IN USA
(only to
Shares retail
deposited investors)

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CA PRASHANT SARDA
 GLOBAL DEPOSITORY RECEIPTS (GDR)
GDR:
Indian
Indian Overseas
bank Eg: Lead
co. bank
SBI Manager
Eg: Eg: HSBC
(Custodian
X Ltd.
bank)

Globally
everywhere
Shares except USA
deposited retail
investors
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CA PRASHANT SARDA
 INDIAN DEPOSITORY RECEIPTS (IDR)

 The IDRs are useful to foreign companies who

wish to raise funds from Indian capital market.
 They can issue IDRs to raise funds from the Indian
Capital Market in the same lines as an Indian
company uses ADRs/GDRs to raise foreign capital.
 The IDRs are listed and traded in India in the same
way as other Indian securities are traded.

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CA PRASHANT SARDA
 PUBLIC DEPOSITS

PD:
 Is a short term or medium term sources of finance
& is useful during credit squeeze by RBI.
 A co. can accept PD upto maximum 35% of paid
up share capital & reserves
 Unsecured deposits generally accepted for 6
months to 3 years, can also be renewed on
maturity.
 Generally funds obtained are used for working
capital purpose
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CA PRASHANT SARDA
 LEASE FINANCING

 Two types of Lease financing:

1. Operating Lease: Is like normal lease of asset, till the
time asset is taken on lease, lease rental is paid &
after the term gets over asset is taken back by lessor
(owner of asset)

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CA PRASHANT SARDA
 LEASE FINANCING

2. Financial Lease: Is a type of purchase arrangement

in the form of lease, till the time asset is taken on
lease, lease rental is paid & after the term gets over
asset is transferred to the lessee (user of asset) at a
very nominal value.

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CA PRASHANT SARDA
 OTHER SOURCES ALREADY KNOWN

Some other sources, we are already

acquainted with are:
 Hire purchase / Installment scheme financing

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CA PRASHANT SARDA
 OTHER SOURCES ALREADY KNOWN

 Credit from trade & expense creditors

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CA PRASHANT SARDA
 OTHER SOURCES ALREADY KNOWN

 Overdraft

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CA PRASHANT SARDA
 OTHER SOURCES ALREADY KNOWN

 Cash credit (CC)

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CA PRASHANT SARDA
 OTHER SOURCES ALREADY KNOWN

 Bill discounting

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CA PRASHANT SARDA
 OTHER SOURCES ALREADY KNOWN

 Working capital term loan

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CA PRASHANT SARDA
 OTHER SOURCES ALREADY KNOWN

 Letter of credit

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CA PRASHANT SARDA
 PRE-SHIPMENT PACKING CREDIT FINANCE

 Advance given by banks to exporters for buying,

manufacturing or processing, packing & shipping the
goods to overseas buyer
 Exporter having firm order can avail the finance
 This finance have to be repaid within 6 months.
 Types of Packing credit:
a. Clean packing credit(each proposal separate)
b. Packing credit against hypothecation of goods
c. Packing credit against pledge of goods.
d. ECGC Guarantee
e. Forward Exchange Contract
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CA PRASHANT SARDA
 POST-SHIPMENT PACKING CREDIT FINANCE

 Finance provided to exporter against

purchasing of export bills
 This is backed by document of title like bill of
lading, air/ship consignment notes
 It is necessary that exporter should obtain a
shipment or contract risk policy of ECGC
 Finance is also given by banks by way of
advance against bill forwarded through them
for collection.

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CA PRASHANT SARDA
 COMMERCIAL PAPERS (CP)

Issue price Face Value

eg: RS. 95 eg: RS. 100

- Unsecured Promissory Note

- A debt instrument
- Maturity period may be 7 days to 1 year
- Investor can earn interest on their
temporary surplus
- The borrower has to bear stamp duty &
placement fees payable to dealer
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CA PRASHANT SARDA CA Prashant Sarda
 INTERCORPORATE DEPOSIT (ICD)

Borrower
Lender Co.
Co. Financer
Eg: Y LTD
Eg: X LTD.

- Short period Upto 6 months

- Unsecured, arranged by financer
- Common & popular, less legal formalities
- Convenient & no regulation to govern it
- Not covered by Sec. 58 A of co’s Act.

CA PRASHANT SARDA CA Prashant Sarda 50

 BRIDGE FINANCE

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CA PRASHANT SARDA CA Prashant Sarda
 BRIDGE FINANCE
Bank of India
Borrower Co. (Term loan
Eg: X LTD. lender)
Eg: 200 cr

- Bridge Finance is a temporary loan

which is secured.
- This loan is taken to avoid delay in
project implementation.
IDBI Bank - The rate of interest of this loan is
(Bridge
higher than term loan.
Financer) - Once term loan is disbursed,
Eg: 50 cr
bridge finance is closed.
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CA PRASHANT SARDA CA Prashant Sarda
 CERTIFICATE OF DEPOSIT (CD)

 Is a document of title like FD receipt with

bank
 But there is no interest rate specified on it
 Main advantage is that banker is not
required to encash it before maturity period
& investor are assured of liquidity since
they are sellable in secondary market.

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CA PRASHANT SARDA
 TREASURY BILLS

 These are a class of Central Government

Securities.
 Treasury bills, commonly referred to as T-
Bills are issued by Governments of India to
meet short term borrowing requirements with
maturities ranging between 14 to 364 days.

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CA PRASHANT SARDA
 DEFERRED PAYMENT GUARANTEE IN CASE OF FIXED ASSETS

 Suppliers of fixed assets may provide deferred

payment facility for purchase of fixed assets
 Sometime, initial down payment is made & balance is
paid in installments
 In some other cases, entire cost of asset is financed
 Normally suppliers ask for Bank Guarantee (BG)
 It does not have moratorium period for repayment &
hence it is advisable only for existing companies only.
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CA PRASHANT SARDA
 NEW DEBT INSTRUMENTS
New debt instruments with different features are:
1. Deep Discount bonds (DDB):
Issue Price Maturity value
in year Zero At the end of
Eg: Rs. 2,700 25 years
Eg: Rs.100,000
5 10 15 20 YEARS

 The investors can sell DDBs on stock exchange

 The difference between sale proceeds & cost
acquisition is treated as capital gain
 Indexation is also allowed on cost of
acquisition.
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CA PRASHANT SARDA
 ZERO INTEREST BONDS (ZIB)
2. Zero Interest Bonds (ZIB):
Issue Price Maturity value
in year Zero At the end of
Eg: Rs. 2,500 10 years
 ZIBs are same like DDBs exceptEg: Rs.20,000
maturity
period
 The difference between sale proceeds & cost
of acquisition is treated as
capital gain
Indexation is also allowed on cost of
acquisition
 In addition ZIBs may have conversion option. 57
CA PRASHANT SARDA
 3. SECURED PREMIUM NOTES(SPN)
SPN Eg: FV -
Rs.1000

From 4-7 years Rs.250 From 4-7 years Rs.250

each towards principal each towards Interest
 Tradable instrument with detachable warrant, which
entitles holders to apply for equity shares.
SPN is a medium or long term source.
 With each SPN, a warrant is attached which gives the
holder a right to apply for certain no of shares at
predetermined price at a definite point of time. 58
CA PRASHANT SARDA
 BONDS

4. OPTION BONDS
 These are cumulative or non cumulative
bonds
 It gives an option for receipt of interest either
periodically or on maturity
 Sometimes redemption premium is also
offered to attract investors.
5. INFLATION ADJUSTED BONDS (IAB)
 These are bonds which promise investors to repay
principal & interest both adjusted with inflation.
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CA PRASHANT SARDA
 6. FLOATING RATE BONDS
 The interest rate changes are as Gilt edged
securities i.e., GOI bonds
 These bonds are also called as “Adjustable
interest bonds” or “Variable rate bonds”.
7. ZERO INTEREST FULLY CONVERTIBLE BONDS
 These are fully convertible bonds with zero interest
 Benefit to co. – No interest is to be paid
 Benefit to Investor’s – Equity share at agreed price in future
date.
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CA PRASHANT SARDA
 8. EURO CONVERTIBLE BONDS
 A Euro bond which gives bondholder an option to
convert them into predetermined no of shares at pre
determined price
 Usually price will carry a premium element
 It carries fixed rate of interest
 It may include CALL OPTION (the issuer co have
RIGHT TO BUY prior to maturity)
 And PUT OPTION (the investors have RIGHT TO
SELL at predetermined date & rate)
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CA PRASHANT SARDA
 9. EURO BONDS WITH EQUITY WARRANT
 It carries a coupon (interest) rate determined by market
rate
 Warrants are detachable & pure bond are traded at
discount
10.Fixed
 EURO CONVERTIBLE
income ZERO BONDS
funds management may like these bonds.
 These bonds are structured as convertible
 No interest is payable on it
 Conversion of bonds at maturity at predetermined price,
therefore they are called as “deferred equity issue”.
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CA PRASHANT SARDA
 FOREIGN EURO BONDS

Type Yankee Bond Samurai Bond Bulldogs

Issued in US Tokyo(Japan) London (UK)

Denominated Japanese Great Britain
US Dollar
in Yen(JPY) Pound (GBP)
Non-US
Non-Japanese
Issuer Banks/Corporatio Non-UK company
Company
ns
To access
Us Market Japanese Market UK Market
capital in
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CA PRASHANT SARDA
 FOREIGN EURO BONDS

Type Yankee Bond Samurai Bond Bulldogs

Securities and
UK / Great
Applicable Exchange Japanese
Britain
Regulation Commission Regulations
Regulations
(SEC) of US
Issue Proceeds Issue Proceeds
Interest Rate is
can be used to can be used to
dollar LIBOR
finance Japanese finance UK or
Other Point (London
or other country other country
Interbank
operations of operation of the
Offered Rate)
Issuer. Issuer.
CA PRASHANT SARDA 64
  MASALA BOND
 Masala means Spice. So, Masala Bond is an Indian
name used for a Bond- Issued by Indian Corporate
Entity.
 Issued to Investors in overseas markets i.e. issued
outside India, and Denominated in Indian Rupees.

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CA PRASHANT SARDA
  MUNICIPAL BOND
 These are issued by Local Bodies / Municipalities/
Corporations, to finance Urban Infrastructure.

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CA PRASHANT SARDA
  CALLABLE BONDS
 It has call option which gives the issuer the
right to redeem the bond before maturity at a
pre-determined price known as ‘Call Price’.

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CA PRASHANT SARDA
  PUTTABLE BONDS
 It has put option which gives the investor the right to
sell the bonds to the company before maturity at a
pre-determined price known as ‘Putt Price’.

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CA PRASHANT SARDA
  PLAIN VANILLA BOND
 This type of bond would not have any options.
 The issuer would pay the principal amount
along with the interest rate.
 This bond can be issued in the form of
discounted bond or can be issued in the form
of coupon bearing bond.

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CA PRASHANT SARDA
 CONVERTIBLE FLOATING RATE NOTES (FRN)

 It has an option for the holder to convert it

into longer term debt security with a
specified coupon
 It protects an investor against falling interest
rate
 The long- term debt security can be sold in
the market and the investor can earn profit
 Capital gain is not applicable to FRN
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CA PRASHANT SARDA
 DROP LOCK BOND
 It is with a normal floating rate
 This bond rate bond would be automatically
converted into fixed rate bond if interest rate falls
below a predetermined level
 The new fixed rate stays till the drop lock bond
reaches its maturity
 The difference between the convertible floating
rate note and drop lock bond is that the earlier is
long option holder structure and the later one is
the short option structure

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CA PRASHANT SARDA
 VARIABLE RATE DEMAND OBLIGATIONS

 A normal floating rate note with a nominal maturity

 The holder of the floating rate note can sell the
obligation back to the trustee at: At par, Plus
accrued interest (Lender of fund can request
for repayment of the entire debt amount at its
discretion)
 It gives the investor an option to exit, so more
liquid than the normal FRN
 It is also known as low floater / variable rate
demand note / variable rate demand bond.
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CA PRASHANT SARDA
 YIELD CURVE NOTE (YCN)

 It is a structured debt security

 Yield increases when prevailing interest rate
declines
 Yield decreases when prevailing interest rate
increases
 This is used to hedge the interest rate
 This works like inverse floater, as its yield has
inverse relationship with the interest rate.

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CA PRASHANT SARDA
 SEED CAPITAL ASSISTANCE
 Applicability: This scheme is designed by IDBI for
professionally & technically qualified entrepreneurs or
persons possessing relevant experience, skill &
entrepreneurial traits
 Amount of finance: The project cost should be less than Rs.
2 crores, the max. amount of assistance will be (a) 50% of
required promoter’s contribution or (b) Rs. 15 lacs w.e. is
lower
 Interest & charges: The assistance is initially interest free
but carries only 1% p.a. service charge for first 5 years &
thereafter increasing interest looking at financial condition of
the concern
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CA PRASHANT SARDA
 SEED CAPITAL ASSISTANCE

CONTINUED….
 Repayment: It is fixed depending on repaying
capacity of the unit with an initial moratorium of upto 5
years
 Other agencies: For projects above Rs. 2 crores, the
assistance can be availed from Risk Capital &
Technology Corporation ltd (RCTC). For small
projects costing below Rs. 5 lacs, Nation Equity Fund
of SIDBI may be availed.

75
CA PRASHANT SARDA
 Environmental, Social & Governance linked Bonds (ESG)

76
CA PRASHANT SARDA
 Difference between Forfeiting V/s Export
factoring
Forfeiting Export Factoring
1. In a factoring arrangement the
1. A forfeiter discounts the entire
extent of financing available is 75-
value of the note/bill
80%
2. The forfeiter’s decision to
2. The export factor bases his
provide financing depends upon
credit decision on the credit
the financing standing of the
statement of the exporter
availing bank
3. It includes ledger
3.It is a pure financial agreement
administration, collection, etc.
4. It is a short term financial deal. 4. It spreads over 3-5 years

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CA PRASHANT SARDA
 Difference between factoring V/s Bill Discounting
Forfeiting Bills Discounting
1. Also called ‘Invoice Factoring’ 1. Also called ‘Invoice Discounting’
2. The parties are client, factor and 2.The parties are drawer, drawee
debtor and payee
3. It is sort of borrowing from
3. It is management of book debts.
commercial banks
4. Grace time is not given 4. Grace time is 3 days
5. Negotiable Instruments Act is
5. There is no specific Act
applicable
6. Provision of advance payment
6. No such provision to available
on book debts is available
78
CA PRASHANT SARDA
 Ra
tio
Calculation of Return on Equity Page no 100 An
aly
sis

Return on
Equity = (Net Profit Margin) (Asset Turnover) (Equity Multiplier)

Financial Leverage
EBIT Sales (Income)
X
Sales Net Assets
Financial Leverage
(Balance Sheet)
EBIT PAT Net Assets
X
Net Assets EBIT X Net Worth
∴ Return on PAT X 100
Equity = Net Worth 79
CA. PRASHANT SARDA