Long term Finance Shares Debentures Term loans leasing Venture capital investing Private equity

Ordinary/Common/Equity Shares Ordinary shares represent the ownership position in a company. The holders of ordinary shares, called shareholders. Real owners of the company as they have voting rights and enjoy decision making authority. Return –dividend Enjoy-high return if company performs well

Ordinary Shares–Features Maturity –refund of capital at the time of liquidation Claim on Income – earnings available for ordinary shareholders. Claim on Assets- residual claim at the time of liquidation. Cost of equity – cost of equity is higher than any other source of finance. Risk taken by eq. shareholder is high and equity dividend are not tax deductable. Right to Control- able to control the management through voting rights. Voting Rights – election of directors, to change the objectives of business, it requires their approval Pre-Emptive Rights- the law grants shareholders the right to purchase new shares in the same proportion as their current ownership. Limited Liability- limited to the amt of their investment

Ordinary Shares–Pros and Cons Advantages to investors Permanent Capital- no outflow of cash Capital profit –capital gain-sell at high Interest in the company’s activities –owners Best for investment – the person who enjoys to take risks for them More Income – if company is progressive then it can be a good source of income Right to interfere in management – right to participate in management, they elect the board of directors. Borrowing Base – debt raised- lenders lend in proportion to eq. capital Dividend Payment Discretion – not obliged to pay dividend for the co. .

Advantages to company: No fixed burden of dividend No outflow of cash Bear the risk Simple source Increase in debt capacity Availability of fixed capital

Disadvantages Disadvantages to Investors Uncertainty of income Irregular income Capital loss Less attractive to modest investor Loss in the case of liquidation Earning Dilution Ownership Dilution

Disadvantages to company Difficult to remove over capitalization Centralization of control – can go in the hands of few people Change in management policy Speculation

Right Issue of Equity Shares Selling of Ordinary Shares to the existing shareholders of the company. Value of Right

Right Shares – Pros and Cons Advantages Control is maintained Less flotation cost Issue more likely to be successful Disadvantages Shareholders lose if fail to exercise their right If shareholding concentrated in hands of Financial institutions- they prefer public issue than right issue.

Preference Shares Preference shares represents a hybrid form of financing – it par takes some characteristics of equity and some attributes of debenture. Similarity to Ordinary Shares: Non payment of dividends does not force company to insolvency. Dividends are not deductible for tax purposes. In some cases it has no fixed maturity dates. Similarity to Debentures: Dividend rate is fixed. Do not share in residual earnings. Usually do not have voting rights.

Preference Shares–Features Claim on Income and Assets Fixed Dividend Cumulative Dividend Redemption Sinking Fund Call Feature-permits co to buy back the preference shares at a buy back price/call price Participation Feature-sometimes participate in extraordinary profit No Voting Rights Convertibility

Preference Shares–Pros and Cons Advantages to investors Risk less Leverage advantage Best security-during recession Dividend postponability Fixed dividend Safety of Interest Advantages to company No interference in management Economical financing Availability of wide capital market No change on assets

Disadvantages to investors Non-deductibility of Dividends Dividend at fixed rate Uncertain position of redeemable preference shares Commitment to pay dividends Disadvantages to company Disadvantage to equity shareholder Fixed economic burden High cost of capital Difficult to receive additional capital

Difference between preference and equity share basis Preference shares Equity shares dividend Preference in getting dividends No such preference Repayment of capital Preference over equity shareholder in repayment of capital After payment to the preference holder Right of management No right to participate Have voting rights Dividend rate fixed Higher than others redemption redeemed Cannot redeemed Issue expense More expenses as compared to equity cheap

Debentures A debenture is a long-term promissory note for raising loan capital. Promise to pay interest and principal. The purchaser of debentures called debenture holders.

Debentures–Features Interest Rate- fixed Maturity-specific period of time Redemption- redeemable Sinking Fund-cash set aside periodically for retiring debentures. Buy-back (call) provisions- redeemed at a specified price before the maturity date. Indenture-bank, financial institution-will be trustee appoint as trustee to protect the interest of debenture holder. Security- secured- lien on specific asset; unsecured-not protected. Yield – market price of the bond Claim on Assets and Income- prior to preference and equity holders

Types of Debentures Non – Convertible Debentures- repayment of interest and principal Fully – Convertible Debentures-less interest than NCD, but being converted into equity Partly – Convertible Debentures-A no. of debt issued by cos. in India have a convertible and non-convertible. Such debentures are known as PCDs.

Debentures Advantages to the company Lower rate of interest Trading on equity Freedom in management Tax benefits Certainty of finance Capital from moderate investor Boon during depression Controlling over-capitalization Consolidation of debt-short duration

Advantages to the Investor Fixed and stable income Safety investment Liquidity Fixed maturity period Conversion of loan

Disadvantage of debentures To the company Fixed charge on assets Fixed burden Risk of winding-up To the investors No control No extra profits Uncertainty

Debentures–Pros and Cons Advantages Less Costly No ownership Dilution Fixed payment of interest- no participation in extra earnings Reduced real obligation Disadvantages Obligatory Payment – if not –force the co into liquidation. Financial Risk Cash outflows Restricted Covenants- restrict co’s futureoperational flexibility

Difference between share & Debenture Basis Shares Debenture Capital Vs Loan Part of owned capital A loan Rewards dividend Fixed interest Fluctuations Rate of dividend - vary No change Charge Vs Appropriation Dividend cannot paid when there is no profit It should be paid even no profit Payment of dividend/interest No priority over the payment of interest Gets priority over the payment of dividend Repayment of principal Payment of share capital is made after the repayment of debentures Payment of debenture is made before the payment of share capital. Secured by charge Shares are not secured by any charge Debenture are usually secured by a charge Restriction on issue Restriction on issue of shares at discount No restriction is imposed on the purchase by the company.