Long Term Finance: Shares, Debentures and Term Loans

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

dividend on it.

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Ordinary Shares–Pros and Cons Advantages

1. Permanent Capital2. Borrowing Base3. Dividend Payment Discretion

Disadvantages1. Risk2. Earnings Dilution3. Ownership Dilution

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Right Issue of Equity Shares Selling of Ordinary Shares to the

existing shareholders of the company. Value of Right

x sp pr

n

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Right Shares – Pros and Cons Advantages

1. Control is maintained2. Less flotation cost3. Issue more likely to be successful

Disadvantages1. Shareholders lose if fail to exercise their right2. If shareholding concentrated in hands of FI

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Debentures–Features A bond or a debenture is the basic debt instrument which

may be issued by a borrowing company for a price which may be less than, equal to or more than the face value

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

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

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Debentures–Pros and Cons Advantages

1. Less Costly2. No ownership Dilution3. Fixed payment of interest

Disadvantages1. Obligatory Payment 2. Financial Risk3. Restricted Covenants

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Preference Shares Similarity to Ordinary Shares:

1. Non payment of dividends does not force company to insolvency.

2. In some cases it has no fixed maturity dates. Similarity to Debentures:

1. Dividend rate is fixed.2. Do not share in residual earnings.3. Usually do not have voting rights.

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

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Preference Shares–Pros and Cons Advantages

1. Risk less2. Dividend post-ponability3. Fixed dividend

Disadvantages1. Non-deductibility of Dividends 2. Commitment to pay dividends

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Term Loans–Features Maturity Direct Negotiations Security Restrictive Covenants

1. Asset related covenants2. Liability related covenants3. Cash flow related covenants4. Control related covenants

Convertibility Repayment Schedule

Short Term FinanceTrade Credit “credit extended in connection with the

goods purchased for resale by a retailer, or for raw materials used by manufacturer in producing its products is called the trade credit.

Accrued expenses The accrued expenses refer to the services

availed by the firm, but the payment for which has not yet been made.

Commercial Papers Commercial Paper (CP) is an unsecured

promissory note issued by a firm to raise funds for a short period, generally, varying from a few days to a few months

Inter-corporate Deposits (ICDs) Inter-corporate Deposits :companies borrow funds

for a short-term period, say up to six months, from other companies which have surplus liquidity for the time being

Short-term Unsecured Debentures Companies have raised short-term funds by

the issue of unsecured debentures for periods up to 17 months and 29 days. The rate of interest on these debentures may be higher than the rate on secured long-term debentures.

Bank Credit Credit facility provided by commercial

banks to meet the short-term and working capital requirements has been important short term sources of finance in India.

INTERNATIONAL SOURCESDepository Receipts (DR)

A DR means any instrument in the form of a depository receipt or certificate created by the Overseas Depository Bank outside India and issued to the non-resident investors against the issue of ordinary shares.

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