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INVESTMENT

ALTERNATIVE

By: Samriti Jain

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SOURCESOFLONG-TERMFINANCE

BORROWING DEBENTURES

SHARECAPITALPUBLIC DEPOSIT

Mutual Funds Bonds

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Share Capital Share Capital: Long term funds can be raised from

share capital. According to Section 86 of CompaniesAct, 1956, a company can issue only two types ofshares i.e. (a) Equity shares (b) Preference shares

Equity Shares Preference Shares

SHARES

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Shares

An instrument that signifiesan ownership position (called equity) in a corporation,and represents a claim on its proportional share inthe corporation's assets and profits. Ownership in

the company is determined by the number ofshares a person owns divided by the total numberof shares outstanding. Equity shareholders areknown as the real owners of the business.

Preference shares are those shares which duringthe life time of the company are entitled to a priorityin the payment of dividends at a fixed rate, and thereturn of the capital in the event of winding up of thecompany.

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shares

Cumulative Preference Shares

Non-cumulative Preference Shares

Participating Preference Shares

Non Participating Preference Shares

Redeemable Preference Shares

Irredeemable Preference Shares

Convertible Preference Shares

Non-convertible Preference Shares

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Debentures

A debenture is a document issued by the

company as an acknowledgement of debt. It

is a certificate issued by the company under

its seal acknowledging a debt due to itsholder.

On debentures a fixed rate of interest is paid

at regular intervals. Usually these are

secured by some asset of the company. A

debenture holder is a creditor of the

company.

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Types of Debentures

Simple or Naked or Unsecured Debentures:These debentures are not given any security ondebentures.

Secured or Mortgage Debentures: Thesedebentures are given security on assets of thecompany.

Bearer Debentures: These debentures are

easily transferable. Anybody who holds thesedebentures becomes the owner of suchdebentures.

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Registered Debentures: Registered debentures are those

debentures which are registered with the company. These

debentures can not be transferred by mere delivery but aproper procedure is to be followed for transfer. Both

transferor and transferee are expected to sign the transfer

deed.

Redeemable Debentures: These debentures are to be

redeemed on the expiry of a certain period. The interest on

debentures is paid periodically but the principle amount is

returned after a fixed period.

Irredeemable / Perpetual debentures : Those debentures

which can be repaid at the time of winding up.

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Convertible debentures: Those debentures which can be

converted into shares or other category of debentures.

Non-Convertible debentures: Those debentures which

cannot be converted. Partly Convertible debentures: When a part is

converted into shares and the remaining part is called non-

convertible portion.

Zero interest debentures: It is usually a convertibledebenture which yields no interest. The investor is

compensated for the loss of interest through conversion

into equity shares at a specified future date.

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Government Securities

Government Securities are securitiesissued by the Government for raisinga public loan or as notified in the

official Gazette. They consist ofGovernment Promissory Notes,Bearer Bonds, Stocks, Short-termTreasury bills, medium-term Treasury

notes, and long-term Treasury bondsand Government Securities.

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Government Securities are mostly

interest bearing dated securities issued

by RBI on behalf of the Government ofIndia.

GOI uses these funds to meet its

expenditure commitments. These securities are generally fixed

maturity and fixed coupon securities

carrying semi-annual coupon.

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Features of Government Securities

Issued at face value No default risk

Ample liquidity as the investor can sell

the security in the secondary market Interest payment on a half yearly basis

on face value.

No tax deducted at source Can be held in Demat form.

Tax exemptions

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Rate of interest and tenor of the security

is fixed at the time of issuance and is not

subject to change (unless intrinsic to thesecurity like FRBs - Floating Rate

Bonds).

Redeemed at face value on maturity Maturity ranges from of 2-30 years.

Securities qualify as SLR (Statutory

Liquidity Ratio) investments (unlessotherwise stated).

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Public deposits

"Public deposit is accepting deposits by a

company from the members of public(including shareholders and directors) forperiods ranging from six months to thirty sixmonths.

A company can accept deposits from thepublic to finance its medium and short-termrequirements of funds.

This source has become very popular

recently because, a company offers interestat a rate higher than offered by banks. Under this method, companies are able to

obtain funds directly from public without

financial intermediaries.

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ADVANTAGES

It is beneficial to the company acceptingdeposits since it receive finance at a lowerrates of interest than charged by the banksand special financial institutions on lending.

Interest paid on deposits is a deductible

expense for income tax purpose.Administrative cost of deposits is lower than

that involved in issuing shares anddebentures. The company has to fulfill lesser

formalities in accepting public deposits.As the rate of interest on public deposits is

fixed, it helps the company to play trading onequity, if the company is earning more than

the rate of interest paid on public deposits.

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Depositors have no interference in the

management and control of the affairs of the

company as they have no voting rights. Thus,

there is no dilution of control of shareholders.

Public deposits are not backed by any charge

on the assets of the company. The company

may accept charge on its assets while raisingloans from other sources like banks and

financial institutions.

Capital structure of the company remains

flexible by accepting public deposits. Company

can repay the deposits when they are not

required by the company.

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Disadvantages

Public deposits are fair weather friends'. It

is an uncertain and unrealistic from offinancing. When depositors feel that thecompany is in a shaky position, they maynot respond to fresh deposits or may start

withdrawing their existing deposits. Public deposits are available mainly for

short period.

The management may misuse the deposits

as such deposits are not secured. Public deposits are generally not available

to new companies or companies with

uncertain earnings.

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There are legal restrictions on the acceptance

and renewal of public deposits.

Receiving public deposits create unhealthy

trends in capital market. There are numerous

rates of interest offered by different

companies.

This source of raising finance is valid only forshort-term financial needs of the company.

Once a deposits is accepted, a company can

not repay the same before the expiry of six

months.

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Mutual Fund

A mutual fund is a professionally managed typeof collective investment scheme that pools money from

many investors to buy stocks, bonds, short-term money

market instruments, and/or other securities.

An open-ended fund operated by an investment

company

which raises money from shareholders and invests in a

group of assets, in accordance with a stated setof objectives.

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UTI

UTI is a public sector financialinstitution which mobilize savings

specially from the household sector

and reinvest the funds in to differentinvestments outlets. UTI is managed

by a competent board of trustees and

its chairman is appointed by theCentral Govt..Safety and liquidity are

the objectives of investing in UTI.

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PF The EPF is a scheme intended to help

employees from both private and non-pensionable public sectors save a fraction oftheir salary every month in a saving scheme,to be used in an event that the employee istemporarily or no longer fit to work or at

retirement. There are mainly four types ofprovident funds :-

Statutory Provident Fund

Recognized Provident Fund

Unrecognized Provident Fund Public Provident Fund

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National Savings Certificate

Scheme specially designed for Government

employees,Businessmen and other salaried classes who

are IncomeTax assesses.

No maximum limit for investment.No tax deduction at source.Certificates can be kept as collateral security to get

loanfrom banks.

Investment up to INR 1,00,000/- per annumqualifies for

Income TaxRebate under section 80C of IT Act.

Trust and HUF cannot invest.

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Bank deposits

The term bank deposits are termsgenerally used for the money which a

common person or a customer saves in

a bank for future financial security. Bank deposits are available in form of

schemes known as demand deposits.

These bank deposits sometimes mayeven be fixed.

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Post Office Schemes

Post office schemes are like thecommercial bank schemes. They have

a

Saving Account

Recurring account

Cumulative time deposit account