A Project Report

On

CAPITAL STRUCTURE-(EBIT-EPS ANALYSIS)

OF

RAJ CLASSIC FOODS LIMITED

Project Report submitted to Osmania University, Hyderabad

In Partial fulfillment of the requirement for the award of Degree of

MASTER OF BUSINESS ADMINISTRATION

Submitted by

Mrs.B.SABITHA

HT.NO:228011672003

Under the guidance of

Mr. HARI KRISHNA

Asso. Professor

ST.FRANCIS INSTITITE OF TECHNOLOGY AND MANAGEMENT

(Affiliated to Osmania University)

HYDERABAD

(2011-13)

CERTIFICATE

This is to certify that the project work titled “Sources of Funds” is a bonofied work done

by Mrs.SABITHA (HT.NO.228011672003) of St.Francis Institute of Management .under

my supervision and guidance, and this project has been submitted for the award of the

“MASTER OF BUSINESS ADMINISTRATION”

(Mr. Hari Krishna)

Hyderabad

Date:

COMPANY CERTIFICATE

COLLEGE CERTIFICATE

DECLARATION

I hereby declare that the project report entitled “SOURCES OF FUNDS” with special

reference to R.C.F.L has been prepared by me as a part of the requirement for obtaining

the degree of “MASTER OF BUSINESS ADMINISTRATION”, submitted to the St.

Francis Institute of Technology & Management (Affiliated to OSMANIA UNIVERSITY)

is of my own and it is not submitted to any other University.

(B.SABITHA)

Place: HYDERABAD

Date:

ACKNOWLEDGEMENT

◊ I am thankful to Mr. Rajendar Kumar, Managing Director of M/S RAJ CLASSIC

FOODS LIMITED, Hyderabad for giving me an excellent opportunity to undertake this

project study. It has turned out to be an interesting, educating and rewarding experience.

◊ I would like to thank, Mr.Rajeshwar Rao Technical Director, for sparing his valuable

time in discussion with us regarding of my project work.

◊ I also thank Mr. Basavaiah the head of production department and Mrs. Sirisha

(Accountant) for extending their co-operation during the course of study for the project.

◊ I express my sincere thanks to principal of Institute of Technology and Management for

giving me the permission to carry out the project work.

◊ I would like to express my immense pleasure and satisfaction expressing thanks to my

guide & Associate Professor Mr. Hari Krishna giving me a proper guidance and co-

operation in completion of my project work within the time.

◊ I thank my lecturers for their valuable support and encouragement throughout the course of

the project work in its proper outcome.

(B.SABITHA)

Contents

CHAPTER

I INTRODUCTION

II REVIEW OF LITERATURE

THEORETICAL FRAMEWORK OF

CAPITAL STRUCTURE

III COMPANY PROFILE

IV DATA ANALYSIS and INTERPRETATION

V FINDINGS, SUGGGESTIONS, and

CONCLUSIONS

Bibliography

Annexure

CHAPTER-I

INTRODUCTION

SIGNIFINACE

OBJECTIVES OF STUDY

METHODOLOGY

Data Sources Tools and Techniques

SCOPE

LIMITATIONS

INTRODUCTION

Money, in broader terms funds, is one of the 7Ms of management. It is also one of the

factors of production without which we cannot assume any business whether it is small or

medium or big. The amount required by the firm in accounting terminology is called

capital, rather finance. It is life-blood of every business. Adequate funds are necessary for

formulation, expansion of business, without which it cannot achieve its objectives. The

required funds can be classified into two categories:

I. Long-term funds- required for an investment on fixed assets

II. Short-term funds-required to carry out day-to-day operations

SIGNIFICANCE:

In this ever-changing economic environment, money or fund or finance is the key factor to

establish an enterprise and to run the business. So finance is an essential and the basic

need of every business. Finance is one and only source to procure the other three

important factors of production. Finance manager is highly responsible for the

procurement of funds in order to keep the firm at optimum level. Therefore, he should be

very wary in selecting such a finance mix or capital structure which maximizes

shareholders wealth. Capital structure of a firm is a reflection of the overall investment

and financing strategy of the firm. Therefore every entrepreneur should be aware of all

existing and new sources in mobilizing the required funds.

OBJECTIVES OF THE STUDY:

This project is an attempt to seek an insight into the aspects that are involved in studying

the sources of funds and the fund mixing of RAJ CLASSIC FOODS LIMITED. This

project endeavors to achieve the following objectives:

Studying the various sources available to procure the funds for the new as well

as existing enterprises from the financial markets.

Scrutinizing different sources approached by R.C.F.L in obtaining the funds

required for fixed capital as well as working capital.

Examine the changes made in funding mix of R.C.F.L over the period of study.

Learning how financial leverage impacts the Earnings per Share of the firm

To analyze the trend position of the funds of R.C.F.L.

Finally, concluding the financial efficacy of the firm in terms earnings its.

RESEARCH METHODOLOGY:

Data relating to RCFL has been collected through primary sources as well as secondary

sources.

The primary source of data involves formal discussions with the company’s managing

director and other department heads.

The secondary source of data involves published documents pertaining to the

organization, textbooks, journals and information available in various websites.

Tools used: Tables and graphs showing the inclination in capital mix over the period of

study, and EBIT-EPS analytical tool.

SCOPE OF THE STUDY:

The project is a study of various aspects related with R.C.F.L particularly, pooling of

funds from for capital formation from different sources. In addition, the affect of funding

mix on earning per share through financial leverage tool. The study also continues by

making analysis of the funds required for its future expansion plan. Understanding results

of the study following a few suggestions. However, the scope of the study is confined to

the sources that R.C.F.L tapped over the years FY2007 to FY2011.

LIMITATIONS OF THE STUDY:

o As per the standing instructions and as the company norms the complete data is not

being disclosed for the individuals to look into.

o The study is limited to the financial statements provided by the company (Profit and

Loss account, Balance Sheet) with a short discussion with the management.

o Required additional information was not provided regarding the unsecured loans in the

annual reports of the company.

o Information about the interest percentages (%) on different loans taken by RCFL is not

given.

o Very few good previous project reports are available in the library for future reference.

o Couldn’t spend much time in speaking to the management, as they were busy in abroad

operations.

CHPATER-II

REVIEW OF LITERATURE

THEORETICAL FRAMEWORK OF SOURCES OF FUNDS

Review of Literature

A research study by Lisa A. Keister on Capital Structure in Transition:

Financial Strategy in China's Emerging Economy, The Ohio State University

published on October 2000.

During economic transition, firms must dramatically reduce their financial

dependence on the state and begin to borrow from non-state capital sources. This paper

draws on organizational theory to examine this fundamental transformation of firm capital

structure during China's transition. I propose that managers borrowed from external

sources even when internal funds were available because retained earnings were

considered state assets. Firms used retained earnings to signal financial health but

borrowed externally to reduce dependence on the state. The research also identified typical

trajectories followed by firms as they began to reduce their dependence on state capital

and to acquire finance from banks, other firms, public debt, and foreign sources. The

results suggested that firms used retained earnings to signal financial well-being to

creditors in order to increase autonomy from the state.

Contrary to research done almost exclusively in the West, retained earnings did

not decrease external borrowing, rather firms were more likely to borrow from all external

sources as retained earnings increased. The results also showed that firm financial strategy

was influenced in important ways by the strategies used by a firm's peers and by the level

of market development in a region. Firms imitated the behavior of other firms in their

regions, particularly if those firms were large or profitable. The results demonstrated that

market development shaped firm borrowing in the early stages of reform. Firms in less

developed areas borrowed more from banks, a relatively low risk source of credit, and less

from other external sources. Finally, the results demonstrated that the most typical firm

borrowed first from banks and then gradually made a transition to other forms of external

credit.

A study by Jan Bartholdy, Aarhus School of Business - Department of Business

Studies and Cesario Mateus University of Greenwich Business School, on Financing

of SME's: An Asset Side Story published on February 26, 2008.

This study explains that, the main sources of financing for small and medium

sized enterprises (SMEs) are equity (internally generated cash), trade credit paid on time,

long and short term bank credits, delayed payment on trade credit and other debt. The

marginal costs of each financing instrument are driven by asymmetric information (cost of

gathering and analyzing information) and transactions costs associated with nonpayment

(costs of collecting and selling collateral). In this paper, it was mentioned that the marginal

costs are dependent of the use of the funds, and the asset side of the balance sheet

primarily determines the financing source for an additional Euro. An empirical analysis on

a unique dataset of Portuguese SME’s confirms that the composition of the asset side of

the balance sheet has an impact of the type of financing used. So the main conclusion is

that the composition of the asset side of the balance sheet influences the composition of

the liability side of the balance sheet in terms of the different types of debt used to finance

the firm, or that the use of the funds is important in deciding the type of financing

available.

A research by Armen Hovakimian, Baruch College - Zicklin School of Business, Milos

Vulanovic, Western New England University; on Corporate Financing of Maturing

Long-Term Debt published on April 30, 2010.

The study tests the pecking order theory by examining how firms finance

maturing long-term debt. The results offer support for the predictions of the pecking order

theory regarding the use of internal funds and debt financing. Managers first finance their

maturing long-term debt with internal funds and then turn to new debt issuance. It found

that firms use internal funds before they issue new debt to refinance maturing long-term

debt. Firms with more cash on hand are less likely to issue new debt to refinance. On

average, each marginal dollar of maturing long-term debt is fully financed with new debt

issuance.

These findings are confirmed over different periods of time, across firms of

different sizes, with different access to credit markets, and with different levels of internal

funds. In contrast to the earlier literature, we find very strong support for the pecking order

theory among small high growth firms as well as among debt capacity constrained firms.

Our results also show that the fraction of new debt used to refinance the marginal dollar of

maturing debt declines with the extent to which the firm is close to its debt capacity.

However, regardless of their spare debt capacity, firms always prefer internal funds to

external debt.

A study by Colin Mayer Saïd Business School, University of Oxford and CEPR, Koen

Schoors University of Ghent, Yishay Yafeh Hebrew University of Jerusalem on

Sources of Funds and Investment Activities of Venture Capital Funds: Evidence

from Germany, Israel, Japan and the UK.

The purpose of this article has been to examine the financing of the Venture Capital (VC)

industry in four countries where VC funds are important or growing and to establish how

institutional differences in the financing of VC firms relate to the types of activities in

which they invest. The research explains that there are substantial differences across

countries in the sources of funds used to finance VC investment and substantial

differences in the activities in which they invest. It found that the sources of finance are

significantly related to the differences in VC activities within countries. In particular,

financial intermediary-backed funds are associated with late stage investments in

relatively low technology industries. In contrast, individual and corporate backed funds

invest in early stage, higher technology industries. Their investment is also more globally

focused than that of financial intermediary backed funds.

It is observed that these observations are consistent with theories that emphasize

the different information collected by financial intermediaries and market participants.

They are also in line with patterns of relations that would be expected of funds operating

in countries with different bank-firm relations and opportunities for risk spreading through

financial markets and instruments. Consistent with a role for government in correcting

market failures, public sector funding is associated with investment in domestic early stage

activities. However, it also found that sources of finance only account for a portion of the

differences in VC activities across countries. A range of other factors including demand

for funds (i.e. supply of entrepreneurs), alternative sources of entrepreneurial finance (for

example, business angels) and different corporate organization of entrepreneurial activities

may also be relevant.

A research by Brian M. Lucey, Trinity College, University of Dublin, Ciaran Mac an

Bhaird Dublin City University. on capital Structure and the Financing of Smes:

Empirical Evidence From an Irish Survey.

This paper presents an empirical description of the capital structures of a sample of 299

Irish small and medium sized enterprises (SMEs hereafter). The sources of finance used

by respondents are delineated by internal and external sources and viewed through a life

cycle model. Analysis emphasizes the role of the personal resources of the SME owner in

the early years of the firm, both in the supply of capital and the provision of personal

assets to secure debt financing for the firm. Over time, firms rely increasingly on retained

profits and short term debt financing for their investment needs. Long term debt financing

is positively related to asset structure, and negatively related to age. This result suggests

that small firms with a high level of fixed assets overcome the asymmetric information

problem by providing collateral for debt finance. The negative association of long term

debt and age is consistent with the life cycle model, whereby firms’ borrowing

requirements decline over time as retained earnings are accumulated.

Firms with more growth options use higher levels of external equity and lower levels of

internal equity. Provision of collateral to secure debt financing in our sample appears to

follow a life cycle pattern, as smaller and younger firms are more dependent on the

personal assets of the SME owner. This source of collateral also performs an important

signalling role for younger firms. Larger firms have a greater reliance on the fixed assets

of the enterprise to overcome the problem of information asymmetry and to secure their

debt financing. These findings suggest that the capital structures of Irish SMEs follow a

life cycle model as developed in the literature. A qualitative analysis reveals that the

underlying motives for these preferences are a desire for independence and control and a

perception of a lack of information asymmetries in debt markets.

SOURCES OF FINANCE

One of the most important considerations of an entrepreneur-company in implementing a

new project or undertaking expansion, diversification, and modernization and

rehabilitation scheme is ascertaining the cost and the means of finance. As finance is the

life blood of business, it is of vital significance for business which requires huge capital.

The business cannot run efficiently if it does not have adequate finance to meet its

requirements. So the financing decisions should have two components: (i) decide as to

how much of total funds are needed and (ii) process of procuring the decided combination

of sources of funds or the capital structure, as it helps in the process of wealth

maximization.

Capital structure refers to the mix of sources from where the long term funds

required in a business may be raised i.e., what should be the proportions of equity share

capital, preference share capital, internal sources, debentures, and other sources of funds in

the total amount of capital. It reflects the firm’s strategy. It acts as an indicator of the risk

profile of the firm and tax management tool. Capital structure is affected by the corporate

strategy, nature of the industry and previous capital structures. It helps in minimizing the

risk, maximizing the profit and maintains control of the firm. There are various sources

from where the different types of finance can be raised in India. Each and every source of

fund has some advantages as well as disadvantages. The different sources can be classified

according to period, ownership, source of generation etc.

All the sources of finance available for a business may be grouped into the following three

categories:

Long term financial needs: There are different sources of funds available to meet long

term financial needs of the business. These sources may be broadly classified into share

capital and debt. In recent times in India, many companies have raised long-term finance

by offering various instruments to public like deep discount bonds, fully convertible

debentures etc. These new instruments have characteristics of both equity and debt and it

is still difficult to categorize these either as debt or equity. These needs generally refer to

those requirements of funds which are for a period exceeding 5-10 years. All investments

in plants, machinery, land, buildings, etc., are considered as long term needs. They are

classified into:

1. Share Capital or Equity Share

2. Preference Shares

3. Retained Earnings

4. Debentures/Bonds of different types

5. Term Loans from Financial Institutions

6. Term Loans from Commercial Banks.

7. Venture Capital funding.

8. International Financing like Euro-Issues, Foreign currency loans.

Medium term financial needs: Such requirements refer to those funds which are

required for a period exceeding one year but not exceeding 5 years. Different types in this

section are:

1. Preference Shares

2. Debentures/Bonds

3. Public deposits/ fixed deposits for duration of three years.

4. Commercial banks

5. Financial institutions

6. State Financial corporations

7. Lease financing/ Hire-Purchase financing.

8. External commercial borrowings

9. Euro-issues.

10. Foreign Currency Bonds

Short-term financial needs: This type of financial needs arise to finance in current

assets. An investment in these assets is known as meeting of working capital requirements

of the concern. The main characteristic of short-term financial needs is that they arise for

a short period of time not exceeding the accounting period i.e., one year. These are:

1. Indigenous Bankers

2. Trade credit

3. Commercial Banks

4. Fixed deposits for a period of 1year or less.

5. Advances received from the customers.

6. Various short-term Provisions.

It is evident from the above that funds can be raised from the same source or from

different sources for meeting different types of financial requirements. The different

sources can now be discussed here:

SOURCES LONG-TERM FINANCIAL NEEDS

1. Owners Capital or Equity capital:

These are issued to the general public. The holders of these shares are the owners of the

business and undertake the risks of the business. Since equity shares can be paid off only

in the event of liquidation, this source has the least risk involved. Further, the dividend

payable on shares is an appropriation of profits and not a charge against profits.

Advantages of raising funds by issue of equity shares are:

It is a permanent source of finance

The issue of new equity shares increases flexibility of the company

The company can make further issue of share capital by making a right issue

There is no mandatory payments to shareholders of equity shares.

2. Preference Shares:

Preference shares are special kind of shares. The holders of such shares enjoy priority,

both as regards to the payment of fixed amount of dividend and repayment of capital on

winding up of the company. Most of the preference shares these days carry a stipulation of

period and the funds have to be repaid at the end of the stipulation period.

The advantages of taking the preference share capital route are:

No dilution in EPS on enlarged capital base

There is leveraging advantage as it bears a fixed charge.

There is no risk of takeover.

3. Retained earnings or Ploughing back of profits:

Companies set aside a part of their profits to meet future requirements of capital.

Companies keep these savings in various accounts such as General Reserve, Debenture

Redemption Reserve and Dividend Equalization Reserve etc. These reserves can be used

to meet long term financial requirements. The portion of the profit which is not distributed

among the shareholders is retained and is used in business is called retained earnings or

ploughing back of profits. Such funds belong to the ordinary shareholders and increase the

net worth of the company.

As per Indian Companies Act., companies are required to transfer a part of their profits in

reserves. The amount so kept in reserve may be used to buy fixed assets. This is called

internal financing.

4. Debentures/Bonds of different types:

These are also issued to the general public. The holders of debentures are the creditors of

the company. Normally, debentures are issued on the basis of a debenture trust deed which

lists the terms and conditions on which the debentures are floated. Debentures are

normally issued in different denominations ranging from Rs. 100 to Rs. 1000 and carry

different rates of interest. Debentures are generally secured against the assets of the

company. It has lower interest rate and also tax-deductible. Public issue of debentures and

private placement to mutual funds now require that the issue be rated by a credit rating

agency like CRISIL (Credit Rating and Information Services of India Ltd.) The credit

rating is given after evaluating factors like track record of the company, profitability, debt

servicing capacity, credit worthiness and the perceived risk of lending.

They do not result in dilution of control but they are obligatory payments and

increases the financial risk associated with the firm. Broadly there were 13 types of bonds,

such as:

a) Unsecured/simple-naked, b) Secured/ mortgage-debt, c) Registered, d) Bearer, e)

Redeemable, f) Irredeemable, g) Convertible, h) Zero interest bonds, i) Zero coupon

bonds, j) First debentures/ second debentures, k) Guaranteed, l) Collateral and other

innovative instruments.

5. Loans from Specialized financial institutions:

Term loans represent secured borrowing and at present it is the most important source of

finance for new projects. There are many specialized financial institutions established by

the Central and State governments which give long term loans at reasonable rate of

interest. Some of these institutions are: Industrial Finance Corporation of India (IFCI),

Industrial Development Bank of India (IDBI), Industrial Credit and Investment

Corporation of India (ICICI), Unit Trust of India (UTI), and State Finance Corporations

(SFC) etc.

Advantages of raising loans from the specialized financial institutions, such as:

Availability of finance for development schemes.

Reasonable security requirements.

Availability of finance during periods of depression

Easy repayment facility

Underwriting facility

Such institutions help in promoting new companies; expansion and development of

existing companies and meeting the financial requirements of companies during economic

depression.

INDUSTRIAL FINANCIAL CORPORATION OF INDIA (IFCI)

The corporation was setup in 1984 under the IFC Act to provide medium and long-term

financial assistance to industrial concerns in India, particularly in circumstances where

normal banking accommodation is inappropriate or recourse to capital issue methods is

impracticable. The financial assistance of the corporation is available to limited

companies or co-operative societies registered in India and engaged or proposing to

engage in

(a)Manufacture, preservation or processing of goods

(b)The mining Industry

(c)The shipping business

(d)The hotel industry; and

(e)The generation of distribution of electricity or any other form of power.

IFCI offers the following wide range of products to the target customer

segments to satisfy their specific financial needs.

Long-term Loans (more than eight years to up to 15 years) - Project Finance for new

industrial/infrastructure projects Takeout Finance, acquisition financing (as per extant RBI

guidelines / Board approved policy), Corporate Loan, Securitization of debt.

Medium-term Loans (more than two years to eight years) for business expansion,

technology up-gradation, R&D expenditure, implementing early retirement scheme,

Corporate Loan, supplementing working capital and repaying high cost debt.

Short-term Loans (up to two years) for different short term requirements including

bridge loan, Corporate Loan etc.

Structured Products: acquisition finance, pre-IPO investment, IPO finance, promoter

funding, etc.

Lease Financing

Takeover of accounts from Banks / Financial Institutions / NBFCs

Financing promoters contribution (private equity participation)/subscription to

convertible warrants

Purchase of Standard Assets and NPAs

INDUSTRIAL DEVELOPMENT BANK OF INDIA (IDBI)

The Industrial Development Bank of India was established under the Industrial

Development Bank of India Act, 1964 as a wholly owned subsidiary of the Reserve Bank

of India. The ownership of IDBI has since been transferred to Central Government from

February 16, 1976. IDBI provides direct financial assistance to industrial units also to

bring the gap between supply and demand of medium and long-term finance.

The financial assistance by IDBI:

To grant direct loans and advances to industrial concerns of Manufacture, preservation

or processing of goods (b) The mining Industry (c) fishing, shipping, and transport

business (d) The hotel industry; and (e) The generation and distribution of electricity or

any other form of power.

To co-ordinate the activities of other institutions providing terms finance to industry

and to act as an apex institution.

To provide refinance to financial institutions granting medium and long-term loans to

industry.

To provide refinance to scheduled banks or co-operative banks.

To provide refinance for export credits granted by banks and financial institutions.

To bank also assists research and development activities and it undertake market

surveys and techno-economic studies for the development of industry.

Recently, the bank has started MSME Finance, which takes care of the funding

needs of Micro, Small and Medium enterprises. The Bank has the products that cater to all

the stakeholders in a value-chain viz., the vendors, the manufacturers as well as the

dealers. In addition there are tailor-made products for special category of borrowers such

as Medical Practitioners, Transport Operators , Professionals & Self-employed, IT Service

Providers etc. With a view to make business easy for the Micro and Small Enterprises

(MSEs), the Bank has introduced collateral free loans . The Bank not only offers finance

to its MSME customers but also takes care of their all banking needs under one roof with

full range of other banking products and services.

IDBI Bank's total agriculture advance was Rs.1387 Cr for year ended March

2007. It has gone up by Rs.6924 Cr (around 500%) to Rs.8311 Cr as on March 31, 2009.

IDBI Bank constantly emphasizes on lending to Agricultural sector. Bank has several Agri

products viz. Loan against crop receivables, Warehouse receipt, Contract farming etc. to

uplift the socio–economic status of rural population.

INDUSTRIAL CREDIT AND INVESTMENT CORPORATION OF INDIA

(ICICI)

The ICICI was established in January 5 1995 for developing medium and small industries

of private sector. It provides term loans in Indian and foreign currencies, underwrites issue

of shares and debentures, make direct subscriptions to these issues and guarantees

payments of credit made by others.

Main financial assistance from ICICI to:

Power: ICICI Bank is the first Indian bank to finance large hydro-power projects and

thermal power plants being set-up by large infrastructure developers.

Roads: The Infrastructure sector is a priority for the Bank, and has financed the first

project for modernizing state border check posts.

Ports / Airports: ICICI Bank has provided assistance to a number of container &

liquid port terminals. The Bank has been a lead arranger for first private sector greenfield

international airport.

Manufacturing & Mining: The funding requirements of large brown field expansions

and green field projects in the manufacturing sector viz. Steel, Aluminum, Cement, Auto,

and Hotels have been arranged by the group.

Oil & Gas: It provides financial assistance to refineries in the country and has financed

the first oil securitization deal in the country. Additionally, funding of gas pipeline

projects remains a key area for bank.

Furthermore, it also assists the Government of India in formulating policies relating to

various segments of the infrastructure sector and funding of new vehicles, finance on used

vehicles, top up on existing loans, working capital loans & other banking products.

STATE FINANCIAL CORPORATIONS (SFCs):

The State Financial Corporations Act was passed by the Government of India in 1951 with

a view to provide financial assistance to small and medium scale industries which were

beyond the scope of IFCI. These corporations are expected to be complementary to the

IFCI. While IFCI provides financial assistance only to large industrial concerns owned by

public limited companies or co-operatives, the SFCs render assistance to all kinds of

industries, may be in the form of private limited companies, partnership firms or sole-

trading concerns.

However, SFC normally provide term loans to projects in the small scale sector,

while for the medium and large industries term-loans are provided by state developmental

institutions alone or in consortium with banks and state financial corporations.

Financial supporting by SFC:

Granting loans or advances to industrial concerns repayable within a period not

exceeding 20 years.

Guarantee loans raised by industrial concerns which are re- payable within a period not

exceeding 20 years and which are floated in the public market.

SFc’s provide loans in foreign currency for the import of machinery and technical

know – how, under the IDA (International development association) and world bank tie

up.

Underwriting the issue stocks, shares, bonds or debentures by the industrial concerns

subject to their being disposed off within seven years.

Acting an agent of Central Government or state government or IFCI in respect of any

business with an industrial concern in respect of loans sanctioned to them.

6. Loans from commercial banks:

Traditionally, commercial banks in India do not grant long-term loans. They grant loans

only for short period not extending one year. But recently they have started giving loans

for a long period. Commercial banks give term-loans i.e. for more than one year and even

can grant the loans for more than 5 years period. The period of repayment of short-term

loan is extended at intervals and in some cases loan is given directly for a long period.

Commercial banks provide long-term finance to small-scale units in the priority sector.

7. Venture capital funding:

The venture capital financing refers to financing of new high risky venture promoted by

qualified entrepreneurs who lack experience and funds to give shape to their ideas. In

broad sense, under venture capital financing venture capitalist make investment to

purchase equity or debt securities from inexperienced entrepreneurs who undertake highly

risky ventures with a potential of success. Some common methods of venture capital

financing are:

(i) Equity financing: The equity contribution of venture capital firm does not exceed 49%

of the total equity capital of venture capital undertakings so that the effective control and

ownership remains with the entrepreneur.

(ii) Conditional loan: A conditional loan is repayable in the form of a royalty after the

venture is able to generate sales. No interest is paid on such loans, and royalty in India

could be in the range of 2% and 15%; actual rate depends on other factors of the venture

such as gestation period, cash flow patterns, riskiness and other factors of the enterprise.

Some Venture Capital Financiers give a choice to the enterprise of paying high rate of

interest instead of royalty.

(iii) Income note: It is a hybrid security which combines the fatures of both conventional

loan and conditional loan. The entrepreneur has to pay both interest and royalty on sales

but at substantially lower rates.

(iv) Participating debenture: Such security carries charges in three phases:

In the start up phase no interest is charged.

Next stage a low rate of interest is charge up to a particular level of operation.

After that, a high rate of interest is required to be paid.

8. INTERNATIONAL FINANCING

The essence of financial management is to raise and utilize the funds raised effectively.

There are various avenues for organizations to raise funds either through internal or

external sources. The external sources include:

Commercial Banks: Like domestic loans, commercial banks all over the world extend

foreign currency loans also for international operations. These banks also provide to

overdraw over and above the loan amount.

Development Banks: Development banks offer long and medium term loans including

FC loans. Many agencies at the national level offer a number of concessions to foreign

companies to invest within their country and to finance exports from their countries.

International Agencies: A number of international agencies have emerged over the

years to finance international trade and business. The more notable among them include

The International Finance Corporation(IFC), The International Bank for Reconstruction

and Development (IBRD), The Asian Development Bank(ADB), The International

Monetary Fund(IMF) etc.

International Capital Markets: Today, modern organizations including MNC’s

depend upon sizeable borrowings in Rupees as well as Foreign Currency. In order to cater

to the needs of such organizations, international capital markets have spring all over the

globe such as in London.

Financial Instruments

Some of the various financial instruments dealt with in the international market are briefly

described below:

Euro bonds: Euro bonds are debt instruments denominated in a currency issued

outside the country of that currency.

Foreign bonds: These are debt instruments denominated in a currency which is foreign

to the borrower and is sold in the country of that currency.

Fully Hedged Bonds: In foreign bonds, the risk of currency fluctuations exists. Fully

hedged bonds eliminate the risk by selling in forward markets the entire stream of

principal and interest payments.

Floating Rate Notes: these are issued up to seven\years maturity. Interest rates are

adjusted to reflect the prevailing exchange rates. They provide cheaper money than the

foreign loans.

Euro Commercial Paper: ECP’s are short term money market instruments. They are

for maturities less than one year. They are usually designated in US Dollars.

Foreign Currency Option: A FC option is the right to buy or sell, spot, future, or

forward, a specified foreign currency. IT provides a hedge against financial and economic

risks.

Foreign Currency Futures: FC Futures are obligations to buy or sell a specified

currency in the present for settlement at a future date.

Euro Issues: The term Euro issue in the Indian context denotes that the issue is listed

on a European stock exchange. However, subscription can come from any part of the

world, except India. Finance can be raised by Global Depository Receipts (GDR’s),

Foreign Currency Convertible Bonds (FCCB) and the pure debt bonds. However GDR’s

and FCCB’s are more popular.

Global Depository Receipts (GDR’s): A bank certificate issued in more than one

country for shares in a foreign company. The shares are held by a foreign branch of an

international bank. The shares trade as domestic shares, but are offered for sale globally

through the various bank branches. A financial instrument used by private markets to raise

capital denominated in either U.S. dollars or Euros. GDR’s with warrants are more

attractive than plain GDR’s in view of additional value of attached warrants.

American Depository Receipts (ADR’s): A negotiable certificate issued by a U.S.

bank representing a specified number of shares (or one share) in a foreign stock that is

traded on a U.S. exchange. ADRs are denominated in U.S. dollars, with the underlying

security held by a U.S. financial institution overseas. ADRs help to reduce administration

and duty costs that would otherwise be levied on each transaction.

Foreign Currency Convertible Bonds (FCCB): The FCCB means bonds issued in

accordance with the relative scheme and subscribed by a non-resident in foreign currency

and convertible into depository receipts or ordinary shares of the issuing company in any

manner, either in whole or in part, on the basis of any equity related warrants attached to

debt instruments. FCCBs are generally denominated in U.S. $. FCCBs are unsecure; carry

a fixed rate of interest and an option for conversion into a fixed number of equity shares of

the issuer company. Essar Gujarat, Reliance, Jindal Strips, ICICI, and TISCO raised funds

by issue of Euro convertible bonds.

MEDIUM-TERM FINANCIAL NEEDS:

Most of the sources like funds raising for medium-term financial needs from banking

industry and financial institutions were already discussed along with long-term sources,

here we provided other medium-term sources.

1. External commercial borrowings (ECB).

2. Lease financing/ Hire-Purchase financing.

1. External commercial borrowings (ECB).

External commercial borrowings refer to raising of long-term as well as medium-term

finance by Indian companies from international market except by issue of FCCB or DR.

ECBs include commercial bank loans, buyer credit, seller credit, Floating Rate Notes,

Fixed Rate Bonds, Borrowing from multinational financial institutions such as ADB, IFC,

etc under the guidelines issued by the government. However, government review the

guidelines periodically for financing the real sector, including infrastructure projects,

which comes under Automatic Route, where RBI/Government approval is not required.

Under Approval Route, banks and financial institutions require RBI approval.

In yet another attempt to attract foreign capital into India and stem the fall of the

rupee, the country’s central bank, the Reserve Bank of India or RBI allowed external

commercial borrowings, or ECB, up to $500 million (Rs2,465 crore) per year under the

automatic route for rupee or foreign currency expenditure by local firms.

2. Lease financing/ Hire-Purchase financing.

A lease is a contractual arrangement whereby one party, i.e. the owner of an asset, grants

the other party the right to use the asset in return for a periodic payment. A lease is

essentially the renting of an asset for some specified period. The ownership and title to the

assets remains with the lessor. In case of hire-purchase, the seller hand over the assets to

the buyer but the title to goods is not transferred. The buyer becomes the owner of the

goods and acquires the title to the goods only when he makes the payments of all the

installments.

SHORT-TERM FINANCIAL NEEDS:

1. Indigenous Bankers:

Private Money-lenders and other country bankers used to be the only sources of finance

prior to the establishment of commercial banks, and used to charge very high rate of

interest. However, with the evolution of commercial banks, they lost their monopoly, but

even today, some business houses have to depend upon indigenous bankers for obtaining

loans to meet their working capital requirements.

2. Trade Credit

It represents credit granted by suppliers of goods, etc., as an incident of sale. The usual

duration of such credit is 15 to 90 days. It generates automatically in the course of

business and is common to almost all business operations. It can be in the form of open

account or bills payable. Trade credit is preferred as a source of finance because it is

without any explicit cost and till a business is a goring concern it keeps on rotating and

enhances automatically with the increase in the volume of business.

3. Advances from Customers

Manufacturers and contractors engaged in producing or constructing costly goods

involving considerable length of manufacturing or construction time usually demand

advance money from their customers at the time of accepting their orders for executing

their contracts or supplying goods. This is a cost free source of finance and really useful.

4. Inter corporate deposits

The companies can borrow funds for a short period say 6months from other companies

which have surplus liquidity. The interest rate on inter corporate deposits varies depending

upon the amount involved and time period.

5. Certificate of deposit

The certificate of deposit is a document of title similar to a time deposit receipt issued by a

bank except that there is no prescribed interest rate on such funds. The main advantage of

CD is that banker is not required to encash the deposit before maturity period and the

investor is assured of liquidity because he can sell the CD in secondary market.

6. Public Deposits

Public deposits are very important source of short-term and medium-term finances

particularly due to credit squeeze by the Reserve Bank of India. A company can accept

public deposits subject to the stipulation of Reserve Bank of India from time to time

maximum up to 35 percent of its paid up capital and reserves, from the public and

shareholders. These are unsecured loans and are accepted for a period of six months to

three years. These are mainly used to finance working capital requirements.

7. Various short term provisions/ accruals accounts

Accrual accounts are spontaneous source of financing as they are self-generating. The

most common accrual accounts are wages and taxes. In both the cases, the amount

becomes due but is not paid immediately.

OTHER INNOVATIVE SOURCES OF FINANCE:

1. Seed capital assistance

At the time of financing a project, financial institutions always insists that the promoter

should contribute a minimum amount called promoters contribution towards the project.

IDBI opened a scheme to provide such funds to the eligible entrepreneurs. There are two

schemes in the operations:

(i) Special seed capital assistance – This is means for smaller projects where assistance is

restricted to 20% of the project cost or 2,00,000 whichever is less. This scheme is

managed by S.F.C.

(ii) Seed capital assistance – In this category of projects the assistance is restricted to 50%

of the promoters’ contribution of Rs. 15,00,000 whichever is less. The total cost of the

project should not extend 2crores under this scheme. IDBI may provide assistance or may

be through SFC or SIDC.

2. Bridge financing:

Bridge finance refers to loans taken by a company normally from the commercial banks

for a short period, pending disbursement of loans sanctioned by financial institutions.

Normally, it takes time for financial institutions to disburse loans to companies. Bridge

loans are normally adjusted out of the term loans as and when disbursed by the concerned

institutions. Bridge loans are secured by hypothecating movable assets, personal

guarantees and demand promissory notes. Generally, the rate of interest on bridge finance

is higher as compared with that on term loans.

3. Bonds

The new instruments that have been introduced since early 1990’s as a source of finance is

staging in their nature and diversity. These new instruments are following:

Deep discount bonds

Deep discount bonds are a form of zero-interest bonds. These bonds are sold at a

discounted value and on maturity face value is paid to the investors. In such bonds, there is

no interest payout during lock in period.

Secured Premium Notes

These notes are issued along with a detachable warrant and are redeemable after a notified

period of say 4 to 7 years. The conversion of detachable warrant into equity shares will

have to be done within the time period notified by the company.

Zero interest fully convertible debentures

These are fully convertible debentures which do not carry any interest. The debentures are

compulsorily and automatically converted after a specified period of time and holders

thereof are entitled to new equity shares of the company at predetermined price. From the

point of view of the company this kind of instrument is beneficial in the sense that no

interest is to be paid on it, if the share price of the company in the market is very high then

investors tend to get equity shares of the company at a lower rate.

Zero coupon bonds

A zero coupon bond does not carry any interest but it is sold by the issuing company at a

discount. The difference between the discounted value and maturing or face value

represents the interest to be earned by the investor on such bonds.

Double option bonds

These have been recently issued by the IDBI. The face value of each bond is Rs. 5,000.

The bond carries interest at 15% per annum compounded half yearly from the date of

allotment. The bond has maturity period of 10 years. Each bond has two parts in the form

of two separate certificates, one for principal of Rs.5,000 and other for interest (including

redemption premium) of Rs.16,500. Both are listed on the stock exchange and the investor

has the facility of selling one or both parts anytime he likes.

Option bonds

These are cumulative and non-cumulative bonds where interest is payable on maturity or

periodically. Redemption premium is also offered to attract investors. These were recently

issued by IDBI, ICICI etc.

Inflation Bonds

In these bonds interest rate is adjusted for inflation. Thus, the investor gets an interest free

from the effects of inflation. For example, if the interest rate is 11 percent and the inflation

is 5 percent, the investor will earn 16percent meaning thereby that the investor is protected

against inflation.

Floating Rate Bonds

As the name suggests on these bonds the interest rate is not fixed and is allowed to float

depending upon the market conditions. This is an ideal instrument which can be resorted

to by the issuer to hedge themselves against the volatility in the interest rates. This has

become more popular as a money market instrument and has been successfully issued by

financial institutions like IDBI, ICICI.

Despite all the differences among companies, there are only a few sources of funds

available to all companies. They are:

Profit: They make profit by selling a product for more than it costs to produce. This is

the most basic source of funds for any company and hopefully the method that brings in

the most money.

Borrowings: Like individuals, companies can borrow money. This can be done

privately through bank loans, or it can be done publicly through a debt issue. The

drawback of borrowing money is the interest that must be paid to the lender.

Equity: A company can generate money by selling part of itself in the form of shares

to investors, which is known as ‘equity funding’. The benefit of this is that investors do

not require interest payments like bondholders do. The drawback is that further profits are

divided among all shareholders.

However, in an ideal world, a company would bring in all of its cash simply by selling

goods and services for a profit. But, every company has to raise funds at some point to

develop products and expand into new markets. When evaluating companies, it is most

important to look at the balance of the major sources of funding.

CHAPTER-III

COMPANY PROFILE

A CHOCOLATE manufacturer, “RAJ CLASSIC FOODS LIMITED” was established

in the year 1996 with an authorized capital of 60,00,000. The present paid up capital is 45,

23, 300. The land and building costed approximately 12 Lakhs. The company

manufactures about more 1000 kgs wafers per day. The unit is operated 10 hours a day.

Mr. K. Rajender Kumar – Executive director and Managing director, B. Rajeshwar Rao –

Technical director, Mr.Basavaiah – Production manager of the M/s. RAJCLASSIC

FOODS LIMITED. The directors themselves designed and developed the company and

modified as per the market requirement with new techniques and innovations.

RAJCLASSIC FOODS LIMITED is an industry mainly concerned with the

manufacturing of all chocolate products and fancy foods. The production, packaging the

quality analysis is done in the factory where as the sales distribution of the finished

product is done at secunderabad city. Raj classic foods ltd has a sister unit by name

DELTA FOODS where chocolate wrapping, filling of water are done whereas Raj Classic

Foods Ltd., dealt with the Wafer preparation, Creaming of wafers, Rice crisps; Khata

Meetha, and Namkeens with a good quality.

OBJECTIVES OF RAJCLASSIC FOODS LIMITED:

The main objective of the industry is to fulfill the demand of consumers by maintaining

quality, taste and cost of the products.

The objective of the RCFL is to produce products at less cost and change the products

according to tastes and preferences of consumers.

To increase the product sales, the management modified the facilities as per market

requirement with new techniques and innovations

LOCATION OF ORGANISATION:

The factory is situated at Jeedimetla Industrial Development Area. The address of factory

is 17-A, Phase-IV, IDA Jeedimetla, Hyderabad. The registered office is situtated at

Secunderabad. The address of Regd. Office is Plot No: 14, Krishna Nagar Colony, P.G

Road, Secunderabad.

PRODUCTS MANUFACTURED :

1) Cream wafers in different flavors.

2) Cocoa Crunches: Rice crispies coated with real chocolate

and sugar.

3) Khatti-meeti digestive pills.

4) Chocolife

5) Crash.

6) Tuffz

7) Choco rap

PROCUREMENT OF RAW MATERIALS:

Sr No. Ingredients Source of Procurement Quality analysis

Done

1 Flour Rajkumar fl.Mills,

Sanmati flour mills

1)Moisture content

2)Gluten content

3)Ash content

2 Vanaspathi Prestige Vanaspati Industries

Ruchi Soya Industries

1)Acidity/FFA

2)Iodine Value

3)Peroxide Value

4)Melting point

3 Sugar Bidar sahakari udyog 1)Moisture content

2)Color(visual

4 Malto dexrine

& strach

Ridhi sidhi starch Co 1)Moisture content

2)Color(visual

5 Cocoa powder Lotus Chocolate Co.

Champco Chocolate Co.

1)Moisture content

2)Ash content

6 Salt Local market 1)Moisture content

DETAILS OF MACHINERY:

S.No NAME OF

MACHINERY

COST

(In Lakhs)

MADE IN CAPACITY USE

1 FLOUR SIFTER 75 INDIA 500kg/hr Shifting of flour ,to

remove foreign

particles

2 SUGAR

GRINDER

1.0 INDIA 500kg/hr To grind the sugar

to 100 mesh size

3 ATCO Weighing

Balance

0.5 INDIA 150kg To weigh raw

materials

accurately

4 Batter mixers

(2 No’s)

0.75 INDIA 200kg For mixing all

ingredients and

preparation of

batter

5 Creaming Mixer 3.0 AUSTRIA 100kg For preparation of

different creams

6 Wafer oven-1 35.0 AUSTRIA 30 plates For baking of

wafer sheets

7 Wafer oven-2 18.0 AUSTRIA 18 plates For baking of

wafer sheets

8 Cream spreading

m/c-1

5.0 AUSTRIA To apply the cream

on sheet uniformly

to make sandwich

FACILITIES AVAILABLE AT RCFL:

Land:

The factory has a well spread out working area of about 4500 sq.yds.

Building:

5400sft. Asbestos shed for wafer plant and 4000 sft RCC building for packaging products

as per PFA procedures.

Laboratory:

Having equipment facilities required for testing samples, raw materials and finished

products as per PFA procedures.

Power:

Connected with 150HP of electrical power and a genset of 125 KVA for standby.

Water:

Adequate water source from the bore well. Water is softened to reduce hardness below

50ppm, then being used for the process.

LPG:

LPG is used as a fuel in heating and baking of wafer sheets on conveyor system. Two LPG

storage vessels each 10MT capacities are installed with all safety systems.

ORGANISATION CHART

CHAIRMAN

MANAGING DIRECTOR

EXECUTIVE DIRECTOR TECHNICAL MANAGER

PRODUCTION MANAGER

Supervisor Supervisor Supervisor Supervisor Supervisor Supervisor

(Prodn.) (Q.A) (Pckg) (Admn) (Account) (Stores) Technicians

Operator Operator

Worker

Worker Worker

Key initiatives:

Recently, the company entered into an agreement with Nutrine Confectionery

Company Ltd. Under which R.C.F.L makes Rice Crispies with chocolayer and deliver to

Godrej Hershey Ltd for marketing on behalf of Nutrine Confectioneries.It is a kind of job

work for R.C.F.L. The product name is CHOCOROCKO.

The company is expanding its production capacities following the increasing demand

for the products. Recently, the company took the initiative to buy the new machines and

constructing the new building floor for its expansion.

The company may soon enter into the local (Andhra Pradesh) market, as it is not tapped

yet, if it finds a good distributor. Its products are largely sold in Maharashtra, Delhi,

Bangalore, and Kolkata and exported to Arab, Dubai, Malasia, Srilanka and Oman.

OUTLOOK for FY 2011 and FY2012:

Raj Classic Foods limited is forecasting a 20% increase in its sales as well as in net

income for the next two financial years. The company is witnessing a sales growth

momentum for the last financial years.

CHAPTER-IV

DATA ANALYSIS AND INTERPRETATION

Raj Classic Foods Limited used two basic types of sources to meet its long term and short

term financial requirements. The Life Blood of Raj Classic Foods Limited is in the form

of Shareholder’s funds (Equity capital and Reserves & Surplus) and Loan funds

(Secured and Unsecured Loans). Broadly, the sources of funds of RCFL are as follows:

SHAREHOLDERS’FUNDS

Equity capital

Reserves & Surplus

LOAN FUNDS

Secured Loans

Unsecured Loans

In the mobilization of share capital RCFL procured all the owned capital through the

equity share capital only from the commencement of its business. Secondly, it has

acquired funds mostly from the loan funds in form of secured and unsecured loans.

Unsecured loan funds may be used for the working capital requirements.

The secured loans of RCFL are:

1. Cash Credits and Bills from S.B.H.

2. S.B.H Term loans.

3. Loan from Kotak Mahendra Limited (till FY05).

4. Loan from ICICI (vehicle loans).

5. Loan from HDFC (vehicle Loans).

All the above stated secured loans are secured by the way of hypothecation. The

hypothecation was made on current assets & fixed assets of RCFL, including the

personal guarantee of directors of the company.

HYPOTHECATION:

Under this agreement banks will provide working capital finance against the security of

moveable property, usually inventories. But RCFL has hypothecated by the security of

assets & guarantee of the directors. In this agreement the borrowers does not give any

possession of the property to the bank. They remain with the borrower only and the

hypothecation is merely a charge against property for the amount of debt. If the Borrower

fails to pay his dues to the bank, then the bank may file a case to realize his dues by the

sale of assets or stock.

FLOW CHART OF RCFL’s SOURCES OF FUNDS

SOURCES OF FUNDS

SHARE HOLDERS FUNDS LOANS FUNDS

EQUITY CAPITAL RESERVES & SURPLUS

SECURED LOANS UNSECURED LOANS

PROFIT&LOSS

ACCOUNT

INVESTMENT

SUBSIDY

1. CASH CREDIT and

BILLS from SBH

2. TERM LOAN from

SBH

3. VEHICLE LOANS

from ICICI/HDFC

SHAREHOLDERS FUNDS

Under the head shareholders fund we have two sources:

I. Share capital

II. Reserves and surplus.

(I) SHARE CAPITAL :

RCFL has Authorized Capital of Rs.60,00,000 i.e., 6,00,000 shares worth Rs. 10 each as

per schedule-1 of annual report of the company. It has Issued and Subscribed Capital of

Rs.45,23,300 i.e., 4,52,330 shares worth Rs. 10 each fully paid. RCFL has never issued

Preference shares for acquiring share capital from its inception. As per the observation it

has a fixed capital till today contributed by the directors of the company who initiated

RCFL. Presently, the company has no plans issue further capital for its expansion.

However, it may approach the banks for financial assistance.

(II) RESERVES &SURPLUS

As per the schedule-2 of Annual Reports of RCFL, under Reserves and Surplus we find

two options:

(i) Investment subsidy

(ii) Profit and loss Account. (An internal source of fund)

(i) Investment subsidy: It is the loan amount or a financial assistance provided by the

government or banks or financial institutions for the completion of production activity or

for successful completion of certain project for a particular company.

As per the information provided in the Balance Sheet this account showed an

invariable balance for all the five years from the financial year 2007-08 to 2011-12. The

balance in this account is Rs. 13,90,680.

(ii)Profit and loss Account: In the preparation of the company final accounts, R.C.F.L.

showed its profit and loss account under the head reserves and surplus in schedule-2. At

the same time we can know the profit balances of every accounting period from P&L

account along with the related expenses recorded in the schedules -8&9, which are

provided in its financial statements. As per schedule-10 Notes on Accounts, the company

said that previous year figures re-grouped to match current year’s figures. The cumulative

balances are presented in a table as well as in a graph.

YEAR Net profit % change: growth/(decline)

2006-2007 2045241 -

2007-2008 2057048 0.6%

2008-2009 2190163 6.5%

2009-2010 2907417 32.7%

2010-2011 3050820 5%

2011-2012 4164300 36.5%

As per the schedule-10: Notes on Accounts, the company showed the balance in P/L

account in a cumulative form. Consequently, it reported a growth trend in its accumulated

profits, as it adds current year profits to previous year balance. The graphical presentation

is as follows.

However, the actual funds generated for individual accounting periods of study in the form

of profits to survival and expansion of business are as follows.

YEAR Net profit % change: growth/(decline)

2006-2007 45477

2007-2008 11807 -74%

2008-2009 133115 1027%

2009-2010 717254 438%

2010-2011 143403 -80%

2011-2012 1113480 676%

Profits decreased by 74% in FY07 compared to last year. However, from FY08, the

company started reporting notable profits. Therefore, we can say that there is a fluctuating

trend in period of study.

In FY07, the turnover was very high compared with previous year, but higher tax

provision and huge payment of intern dividend compared to FY06, led to 74% decline in

the profits, which would have been used as funds for business purpose otherwise.

For FY08, despite of fall in top-line, the company’s internal fund source increased

more than 10 times to 133115 from 11807 in FY07, on the back of lower proposed

dividend.

The complete absence of dividend payment and tax on that led the company to report a

profit of 717254 for FY09. On the other hand, dividend is the cause for lower net profit for

FY010.

For FY11, the company’s net profit increased many folds to 1113480 against 143403 in

FY010, on the back of impressive sales growth, lower administration and selling expenses

coupled with lower interest chargers.

LOAN FUNDS

As a source of loan funds enterprises and business will meet Debentures/ Bonds and Term

Loans for the financial needs. RCFL don’t have any debentures or bonds in all the five

years of study, rather from the beginning itself. So RCFL took its debt funds in the form of

term loans and other loan sources only. Under this head it has:

i. Secured Loan

ii. Unsecured Loan

SECURED LOANS:

Under the head secured loans RCFL has five types of Loans. They are:

1. Cash Credits & Bills from SBH.

2. SBH Term Loans.

3. Loans from Kotak Mahendra Limited (till FY05).

4. Loans from ICICI.

5. Loans from HDFC.

1. CASH CREDIT & BILLS FROM SBH:

Under the cash credit facility a borrower is allowed to withdraw funds from the bank up to

the sanctioned credit limit. At the same time the borrower is not allowed to take the entire

sanctioned credit ones, rather he can draw periodically to the extent of his requirements

and repay by depositing surplus fund in his cash credit account. Therefore interest is

payable on the amount actually utilized by the borrower.

The discounting of bills (called hundis in Indian parlance) are a widely used

source of short-term finance in the Indian corporate sector. This facility is provided by

commercial banks as well as by private sector financial companies. The minimum charge

for bill discounting tends to vary according to the credit-worthiness of the companies. The

bill discounting limit for each company is part of its total working capital limit. Under the

purchase or discounting of bills, a borrower optioned credit from the bank against his bills,

which are deposited for discounting. The amount provided under this agreement is covered

with in all the overall cash credit.

RCFL has obtained this facility from STATE BANK OF HYDERABAD. The amounts for

the period of study are as follows as depicted in table and graph:

YEAR CASH CREDITS AND BILLS FROM SBH

2007-08 4211705

2008-09 5417838

2009-10 3609913

2010-11 3219653

2011-12 2125028

There are considerable changes in the cash credits and bills from SBH; we can say there is

a fluctuating trend from the above.

For FY07, the company’s Cash Credits and Bills from SBH account balance stood

at 421176.

In FY08, the credit increased 28.6% to $5417838, as the company bought plant &

machinery and electric equipment with these raised funds.

In FY09, the company repaid 1807925 and continued the repayment of credit in

next financial years. However, the balance by the end of FY10 is 2125028.

The repayment was done from the higher realization of sales proceeds as the

company witnessed in FY08.

2. SBH TERM LOAN:

Term loans are also referred to as term finance, which represents a source of debt finance,

generally payable in less than 10 years. They are employed to finance for acquisition of

fixed assets and working capital margin. Currently, SBH is providing minimum loan

amount of 50000, and maximum loan amount of 100 lacs, repayment to be made in 84

months, with an interest rate of 11.75%. However, as company is falling under MSME it

can avail the loan at 15% up to Rs25 lacs. SBH term loans in RCFL were as follows for

the following accounting periods:

YEAR TERM LOAN FROM SBH

2007-08 1578153

2008-09 1760019

2009-10 2075209

2010-11 746040

2011-12 0

There are notable changes in the term loan account.

In the year 2007 the company had amount of term loan from SBH equal to

1578153, showing 68% decline in from the year ago. This is because the company

has paid off term- loan taken from ICICI in this financial year, on the back of

higher cash inflow from sales proceeds.

Again in FY08, the company took an additional term- loan to support in funding

the acquisition of plant & machinery. However, the loan balance by the end of

financial year is 1760019.

Like-wise, in FY09 also the company raised some more funds for acquisition of

fixed assets.

However, it repaid the loan amount to the extent of 1329169 in FY010. The

repayment can be made from the impressive sales realization and amount raised by

the way of unsecured loans.

By the end of FY11, the company repaid whole amount and the balalnce was nil.

3.Vehicle Loans from ICICI and HDFC:

ICICI has extended its banking products like funding of new vehicles, finance on used

vehicles, top up on existing loans. Commercial Vehicle Loans by the banks are as folows

Funding for trucks, buses, tippers, light commercial vehicles and small commercial

vehicles.

Products including funding for new vehicles, finance on used vehicles and top up on

existing loans.

The vehicle loan pattern is as follows:

YEAR VEHICLE LOANS FROM ICICI & HDFC

2007-08 1054772

2008-09 585520

2009-10 491842

2010-11 1052380

2011-12 508713The company took commercial vehicles loan from ICICI and HDFC to purchase the Cars

and Two wheelers for its business purpose.

For FY07, the company’s vehicle loans account had balance of 1054772.

This loan has declined by 44% to 585520 in FY08, as the company repaid the

amount, by raising funds other loan sources. Similarly it has paid the loan in FY09

also.

On the other hand, in FY010 the company raised an additional vehicle loan of

560538, representing a more than 100% increase from the year ago loan amount.

They used this fund along with unsecured loan taken this year to buy the vehicles

worth of 1543000.

However, the company paid back 50% of loan amount in FY11, and the balance

stood at 508713.

UNSECURED LOANS:

Banks and other financial institutions will not require any security to provide some short-

term loans & advances regarding the unsecured loans. There were no unsecured loans are

recorded in the financial statements of the company till FY09-10. However, the company

started pooling the funds from unsecured loan source from FY010. These funds may be

used for working capital requirements, and to support the vehicle acquisition.

According to the information provided in the Balance sheet of RCFL the unsecured loans

are as follows:

YEAR UNSECURED LOANS

2007-08 0

2008-09 0

2009-10 0

2010-11 1832054

2011-12 1298421

For FY010, the company raised the funds to the extent of 1832054, which was declined

29% to 1298421 in FY11. The company might have repaid the loan from inflow of cash

from higher sales, as it witnessed sharp decline in cash account by 400000.

As shown in the above graph, unsecured loans were zero till FY09. But it raised in FY010

and has a decreasing trend from FY11. It has not provided complete details about

unsecured loans in its BalanceSheet.

FUNDING MIX AND IT’S IMPACT ON EARNINGS PER SHARE

Raj Classic Foods Limited has a funding mix with more of equity shares and fewer profits

along with secured loans. Company issued only equity shares and did not rely on

preference shares and debentures. This type of capital structure is preferred when a

company’s business is risky and its earnings are highly unstable. Of course, it can raise

additional capital through public deposits. All companies have to raise its basic capital by

issue of equity shares. The main advantages of capital structure consisting of equity

shares only are as follows:

It is simple and understandable to all investors. All the necessary information about

management of business can be easily obtained.

The directors of the company have greater discretion in declaration of dividends and

building up of reserve funds etc. This is because there are no fixed liabilities like

dividend on preference shares and interest on debentures. The directors are free to deal

with earnings as they like.

Since there are no fixed charges, there is no danger to the existence of the company

even in bad times. There is no possibility of the company being harassed by the

creditors and debentures holders by resorting to low-courts to press payment for

interest and principal.

The credit standing of the company is enhanced, as it bears no burden of payment of

fixed interest and dividends. The creditors are ready to lend money to companies

having this type of capital structure.

In the absence of debentures, there is no burden of fixed charges on the assets of the

company. This helps company to raise debt capital in future by mortgaging its fixed

assets, which it has done for taking secured loans.

Some constraints are imposed on the management of the company when preference

shares and debentures are issued. But when only equity shares are issued, management

enjoys full freedom of decisions making.

Long established companies can procure additional capital also through the issue of

right shares. They need not make arrangement for underwriting, nor is much publicity

needed for these equity shares. This reduces cost of raising capital.

It is not compulsory for the company to return the equity shares during it’s existence.

It has certain disadvantages such as:

Cost of financing is relatively more especially for the new or weak companies because

they will have to bear additional costs in from of underwriting commission and

brokerage, advertisement etc.

In weak companies, the interests of the existing shareholders are adversely affected if

additional capital is continuously obtained through the issue of equity shares only. The

dividend rate and market prices of shares may decline if profit of the company does not

increase in proportion to its equity capital.

When the company issues additional equity shares, it has to grant to the existing

shareholders a right to purchase them on a priority basis. Hence managerial control

may get concentrated into a few hands.

Of course, the existing shareholders will have to purchase majority of the additional

equity shares to strengthen their control over the company. But if additional capital is

raised through the issue of debentures, the can maintain their control without extra

investment.

A-Earnings Per Share

The profitability of a firm from the point of view of ordinary shareholders can be

measured in terms of earnings per share. It is calculated as follows: It is obvious that

higher the EPS volatility, greater would be the risk attached to the company. EPS

fluctuates with fluctuations is sales volume and the operating leverage. This effect may be

heightened by the financial leverage.

EPS = Net profit available to equity shareholders / number of ordinary shares

outstanding

Therefore the EPS of Raj classic foods limited can be seen in a table and graph

considering interest charges of loan funds:

YEAR NET INCOME NO OF EQUITY SHARES EPS

2007-2008 1301230 452330 2.876727

2008-2009 662318 452330 1.464236

2009-2010 717254 452330 1.585687

2010-2011 934568 452330 2.06612

2011-2012 2165187 452330 4.786742

RCFL’s EPS was showing a growing trend except for FY08, as the company

witnessed good profits for the period of study. In the year 2007 the company

earned huge profits, so the EPS of the company increased to 2.87 from 1.9 in last

year.

In the next year, EPS has decreased to 1.46, owing to lower profits and higher

interest charges, as the company raised more loan funds in this financial years.

Ahter that, the company started reporting growth in EPS to 1.58 and 2.06 for FY09

and FY010, rspectively. The growth was boosted by higher sales, despite of higher

interest charges. The growth in sales offset the increase in interest charges due to

increase in loan funds.

However, for FY11, the company reported EPS of 4.78 on the back of impressive

sales realization and lower interest charges. Lower interest charges were the result

of complete repayment SBH term loan during the year. Thus always composition

of funds will have mpact on the company’s earnings per share.

B-FINANCIAL LEVERAGE

Financial leverage is defined as the ability of a firm to use fixed financial charges to

magnify the effects of changes in E.B.I.T/Operating profits, on the firm’s earnings per

share. It helps in designing appropriae fundig sources to build a optimal capital structure.

One of the objectives of planning an appropriate capital structure is to maximise the return

on equity shareholdersfunds or maximise the earnings per share. On one hand it increases

earnings per share and on the other hand it increases financial risk. A high financial

leverage means high fixed financial costs and high financial risk i.e., as the debt

component in capital structure increases, the financial leverage increases and at the same

time the financial risk also increases i.e., risk of insolvency increases. Financial leverage is

calculated as follows:

Degree of Financial leverage = E.B.I.T/E.B.T

Calculation of EBIT & EBT:

EBIT= PAT+TAX+INTEREST CHARGES

EBT=PAT+TAX

YEAR-1 PAT-2 TAX-3 EBT-4=2+3INTEREST

CHARGES-5 EBIT-6=4+5

2007-2008 1301230 966613 2267843 785082 3052925

2008-2009 662318 568517 1230835 873807 2104642

2009-2010 717254 852005 1569259 741481 2310740

2010-2011 934568 578392 1512960 967905 2480865

2011-2012 2165187 1010182 3175369 774689 3950058

Therefore financial leverage equals to:

YEAR EBIT EBT F.L

2007-2008 3052925 2267843 1.35

2008-2009 2104642 1230835 1.71

2009-2010 2310740 1569259 1.47

2010-2011 2480865 1512960 1.64

2011-2012 3950058 3175369 1.24

There is a fluctuating trend in the financial leverage of RCFL in all-financial years of

study, due to variable profits and interest payments.

The F.L 1.35 indicates that for every one-rupee change in EBIT, there will be a 1.35

change in EBT for FY07.

On positive side, for FY08 and FY09, the company had a F.L of 1.71 and 1.64

representing a favorable trend compared to FY07. But in FY10, it has come down to

1.24, as the company paid the term-loan.

The company can gain good earnings for its shareholders by using the fixed cost funds

like debentures and preference capital, only when it has increasing operating profits,

because fixed charges remain fixed from one period to another.

However, the company is raising the loan funds as and when it requires, consequently

that led to pay higher interest payments, due to urgency for funds from banks. In

addition, higher interest rates due to inflation, changing RBI guidelines will further

deteriorate the fund rates.

This adhoc policy of raising loans will eat away the benefits from maintaining the fixed

cots funds, in maximizing the RCFL earnings to its shareholders, while the company is

experiencing growing trend in the operating profit or EBIT.

However, if the company is able to earn more than that of using fixed cost funds, it can

proceed with the present adhoc policy.

But now it has the business expansion plan on account of rising demand for the

products, it may require funds for next 3 to 5 years. Therefore, it would be better to opt

for fixed cost funds to maximize returns while sales/earnings are expected to augment.

Funds Composition in capital structure for FY2006 and FY2010 through a table and

pie diagram:

YEAR CAPITALRESERVES &

SURPLUSSECURED

LOANSUNSECURED

LOANS

2007-08 4523300 3447728 6844630 0

2011-12 4523300 5554980 2633741 1298421

For FY06-07:

The above diagrams represents the capital composition of RCFL from each sources

namely Equity capital, Reserves & Surplus, and Secured Loans for FY07. The Company

had equity capital base of 31% (i.e. 4523300), while Reserves & Surplus accounts for 23%

(i.e.3447728). Therefore, shareholders’ funds in total capital employed are equal to 54%,

i.e. 7971028 (i.e. share capital + reserves & surplus), and while secured loans from various

banks accounted for 46% (6844630). However, the unsecured loans were zero, as

company has not borrowed anything from this source of finance.

For FY2011-2012 the funding mix is as follows:

In FY11, the company raised the funds in the form of unsecured loans, so there is new

loan element in its capital composition. Similarly, the Company had equity capital base of

32% (i.e. 4523300), while Reserves & Surplus accounts for 40% (i.e. 5554980).

Therefore, shareholders’ funds in total capital employed is equal to 72% showing the

balance of 10078280, secured loans from various banks accounted for 19% representing

2633741, while unsecured loans represented 9% i.e. 1298421 of total funds composition.

However, this composition may change for FY2012-2013, as the company started its

expansion plan which requires additional funds. The company may opt for more debt

finance to support its expansion plan rather equity in coming years, as debt composition is

very less in the present period of study.

INTERPRETATION

SHAREHOLDERS FUNDS

1. Equity share capital

Raj Classic Foods Limited used two basic types of sources to meet its long term and

short term financial requirements. They are in the form of Shareholder’s funds and Loan

funds. Shareholders’ funds consist of Equity share capital and Reserves and Surplus. The

company has issued and Subscribed Capital of Rs.4523300 i.e., 452330 shares worth Rs.

10 each fully paid. RCFL has never issued Preference shares and debentures for acquiring

share capital from its establishment.

2. Reserves & Surplus:

Reserves and Surplus consists of Investment subsidy and Profit and loss Account. Here

P&L A/C used as an internal source of funds. Investment Subsidy is a low interest loan

given by the government at the time of starting a production unit, particularly for the

entrepreneurs in the SME (Small and Medium Enterprises) sector. Investment subsidy

account has the balance of Rs. 1390680, which is remain equal for all the five years of

period of study.

Profit & Loss account as an internal source of finance had a balance of 11807 in FY07.

This low profit transferred to balance sheet is because of higher tax provision and huge

payment of interim dividend, which led to 74% decline in the profits from FY06. Other-

wise, the funds would have been used for business purpose. However, after the

fluctuations in profits for the next three financial years, FY11 net profit increased many

folds to 1113480 following impressive sales growth, lower administration and selling

expenses and lower interest chargers.

LOAN FUNDS

1. Secured Loans:

RCFL raised loan funds in the form of Secured Loans and Unsecured Loans sources only.

Secured loans are in the form of Cash Credits & Bills from SBH, SBH Term Loans, Loans

from ICICI, and Loans from HDFC.

Cash Credits and Bills from SBH:

For FY07, the company’s Cash Credits and Bills from SBH account balance stood at

4211705. In FY08, RCFL further increased the loan by 28.6% to $5417838 to buy plant &

machinery. On positive side, in FY09, the company repaid 1807925 and continued the

repayment of credit in next financial years also. However, the balance by the end of FY11

stood at 2125028.

Term Loans from SBH:

The company’s another source of debt fund is Term loan from SBH, was 1578153 Again

in FY08, the company took an additional term- loan to support in funding the acquisition

of plant & machinery. However, the loan balance by the end of the financial year is

1760019. However, it repaid the loan amount to the extent of 1329169 in FY010, from the

impressive sales realization and amount raised by the way of unsecured loans.

Consequently, the by the end of FY11, the company repaid whole amount.

Vehicle Loans

The company took commercial vehicles loan from ICICI and HDFC to purchase the Cars

and Two wheelers for its business purpose. For FY07, the company’s vehicle loans

account had balance of 1054772. This loan has declined by 44% to 585520 in FY08, as the

company repaid the amount, by raising funds from other loan sources. On the other hand,

the company raised an additional vehicle loan of 560538 in FY010, representing a more

than 100% increase from the year ago loan amount. They used this fund along with

unsecured loan taken in this year to buy the vehicles worth of 1543000. However, the

company paid back 50% of loan amount in FY11.

2. Unsecured loans:

There were no funds in the form of unsecured loans till FY09-10. However, the

company started pooling the funds from unsecured loan source from FY010. These funds

may be used for working capital requirements, and to support the vehicle acquisition. For

FY010, the company raised the funds to the extent of 1832054, which was declined 29%

to 1298421 in FY11. The company might have repaid the loan from inflow of cash inflows

from higher sales, as it witnessed sharp decline in cash account by 400000.

Financial Leverage as a technique in measuring the funding mix impact on EPS:

The F.L 1.35 in FY07 indicates that for every one-rupee change in EBIT, there will be a

1.35 change in EBT. On positive side, for FY08 and FY09, the company had a F.L of 1.71

and 1.64 representing a favorable trend compared to FY07. But in FY11, it has come

down to 1.24, as the company repaid the term-loan. The company can gain good earnings

for its shareholders by using the fixed cost funds like debentures and preference capital,

when it has increasing operating profits, because fixed charges remain fixed from one

period to another. Although, the company’s operating profits were increasing, absence of

fixed cost funds couldn’t gain much to equity shareholders.

The composition of sources of funds through which the company pooled the funds is

as follows.

For FY07, the Company had equity capital base of 31% i.e. 4523300, while Reserves &

Surplus accounts for 23% (i.e.3447728) in total shareholders’ funds. Therefore,

shareholders’ funds in total capital employed are equal to 54%, i.e. 7971028 (i.e. share

capital + reserves & surplus), and while secured loans from various banks accounted for

46% (6844630). However, the unsecured loans were zero, as company has not borrowed

anything from this source of finance.

For FY11, the company raised the funds in the form of unsecured loans, so there is new

loan element in its capital composition. Similarly, the Company had equity capital base of

32% (i.e. 4523300), while Reserves & Surplus accounts for 40% (i.e. 5554980). Secured

loans from various banks accounted for 19% representing 2633741, while unsecured loans

represented 9% i.e. 1298421 of total funds composition. The company may opt for more

debt finance to support its expansion plan rather equity in coming years, as debt

composition is very less in the present course of study.

CHAPTER-V

FINDINGS, SUGGESTIONS, AND CONCLUSIONS

FINDINGS

R.C.F.L procured all the funds needed for its long-term and short-term capital needs in

the form of equity share capital, secured loans and unsecured loans. At the end of FY11,

the company held 4523300 in the form of equity share capital. The company did not raise

funds through preference share capital from its initiation.

The another source of finance, rather internal source of funds, Reserves & Surplus and

P&L account had a balance of 5554980 for FY11. Although, the investment subsidy is

showing constant balance for the period of study, impressive sales growth added huge

profits, which can be used for business expansion.

Being a public limited company, R.C.F.L neither issued debentures nor accepted any

public deposits, as a part of its debt capital in its capital formation. However, R.C.F.L’s

secured loans are secured by way of hypothecation of fixed assets as well as current assets

of the company including personal guarantee of Directors.

The company mobilized the funds through secured loans, which are in the form of Cash

Credit and Bills from SBH, Term-loans, and Vehicle Loans. Cash Credit and Bills from

SBH account has balance of 2125028 in FY10. On positive side, RCFL repaid the whole

Term-Loan, while Vehicle loans stood at 508713, after repaying a considerable amount

during FY10.

There were no funds in the form of unsecured loans till FY08-09. During, FY09 RCFL

raised the funds to the extent of 1832054. This loan proceeds may be used for the

acquisition of fixed assets. However, after repaying around 540000, unsecured balance

was 1298421.

For FY11, the company’s Earnings Per Share was 4.78 on account of impressive sales

realization and lower interest charges. Lower interest charges were the result of complete

repayment SBH term loan during the year. Thus always composition of different sources

funds will have impact on the company’s earnings per share.

FY11, Financial leverage stood at 1.24 which depicts that every one rupee change in

EBIT will bring 1.24 changes in EBT. This moderate FL was down from 1.64 in last year,

representing an unfavorable sign. Higher the risk, higher will be the reward; therefore

decline in FL downgraded the company’s efficacy in financial management.

The company could not enjoy synergy of using fixed cost funds like debentures and

preference capital while operating profits were growing. Because fixed charges are remain

fixed from one period to another, irrespective of profit earned, so that extra profit would

have been enjoyed by shareholders. The same is represented in financial leverage

analysis, where EBIT/operating profit was increasing but interest charges were

fluctuating.

For FY11, the Company’s equity capital base, Reserves & Surplus, Secured loans and

unsecured loans accounted for 32%, 40%, 19% and 9% out of total sources used in raising

funds. The company may opt for more debt finance to support its expansion plan rather

equity in coming years, as debt composition is very less in the present course of study.

Finally firm’s financial position in terms of its earnings and managing the funds is

found satisfactory.

SUGGESTIONS

▲ If the company is willing to raise debt capital in future, it would be better to take a

fixed cost bearing funds from financial institutions, banks or it can issue debentures.

Particularly, having cost of capital at fixed rate, when the company’s profits are improving

will maximize the shareholders wealth.

▲ The company has to control its manufacturing, administration and selling costs and it

should minimize its wastages in manufacturing process. Along with that, the company can

adopt new technology in manufacturing process and various marketing strategies in

promoting the production in to sales.

▲ The company’s products are marketed only for selected places like Delhi Chennai,

Bombay and Bangalore. They are not very much promoted in A.P and some other States.

Company can take initiative steps to launch its existing and new products in new markets.

As the products’ rates are reasonable, in a short period it can reach the consumer base.

▲ Instead of depending on the private transport agents to get the raw material and sending

finished goods, company can buy its own carriage vehicles. The company is almost

ordering the material once in 10days or a week, and need to deliver to customers.

Therefore, using own carrier will be a cost advantage and the products will reach the

customers on right time.

▲ Most of the company’s products were in reach of middle income and lower income

segment. It is not yet targeted rich segment, so it can make an attempt to produce high

range products with more nutritious contents, can compete with global brands.

CONCLUSIONS

A brief introduction about the concept SOURCES OF FUNDS, as it is a life blood of

any organization is written. Objectives of the study, Significance, Scope of study and the

limitations on fulfillment of project work were mentioned in first chapter. In addition, data

collection sources and tools used such as Financial Leverage in testing the impact of fixed

cost funds in earnings per share were discussed.

Various sources opened to get the required funds in this ever-changing economic

environment were studied. Along with the traditional methods for the infusion of funds

like equity, & preference capital, term loans and debentures, new innovative sources like

venture capital, seed financing, external commercial borrowings, and Euro issues were

also discussed.

The third chapter contains the company’s profile. Company profile consists of history

of company, its objectives, nature of business and its products; Machinery used in making

chocolates, structure of organization, present scenario, and key initiatives under taken in

enhancing its wings and its future plans also revealed.

Complete analysis and interpretation of the study that is sources of funds of R.C.F.L.

Analysis part contains different sources used by the company in pooling required funds,

and clear-cut changes in all the sources year-over-year along with the changes in fixed

assets were studied. Mainly, company used shareholders’ funds and loan funds used in

obtaining the funds.

In fifth chapter, the results of the study were made. Complete analysis is written in ten

points under the heading “Findings”. I have given some suggestions to improve its capital

base, profitability, and sales position. Finally, I made conclusion regarding of my contents

in every chapter of project work.

BIBILIOGRAPHY

1. MANAGEMENT ACCOUNTINGR.K. SHARMA & SHASHI K.GUPTA

2. FINANCIAL MANAGEMENTR.P. RUSTAGI

3. FINANCIAL MANAGEMENTG.SUDARSHAN REDDY

4. FINANCIAL MANAGEMENTI.M PANDEY

5. FINANCIAL ACCOUNTINGS.P. JAIN & K.L.NARANG

6. FINANCIAL MANAGEMENTICAI PUBLISHED

7. FINANCIAL MANAGEMNTS.N MAHESHWARI

SOME PREVIOUS PROJECT RECORDSwww.investopedia.com

www.ssrn.comwww.investorwords.com

ANNEXURE: