Sources of Business Finance Owner’s Fund Owner’s funds means funds that are provided by the owners of an enterprise, which may be a sole trader or partners or shareholders of a company. Apart from capital, it also includes profits reinvested in the business. The owner’s capital remains invested in the business for a longer duration and is not required to be refunded during the life period of the business. Owners Fund Equity Shares Retained Earnings Preference Shares IDR,ADR&GDR

Owner’s Fund Share Capital Share capital is the major source of finance for a company form of business organization. It is the amount collected from the public through the issue of different units of shares. The shareholder will become one of the owners of the company. Share Capital Share A Share B Share C Share D

Owner’s Fund Share Capital Share Capital Equity Shares Preference Shares

Owner’s Fund Equity Shares Equity shares are the ordinary share capital of a business. The Investors of  the Equity shares are the owners of the company. They are the real risk takers of the business. Equity shares are considered to be long term internal source of business finance. Equity share holders are considered to be the owners of the business Remuneration/Dividend to the Equity share holders are not fixed High risk takers, but better rate of return in case of prosperity Enjoys Voting right and participation in the management Gets the dividend only after meeting the claims of other parties including creditors and govt.

Advantages of Equity Shares Owner’s Fund Advantages of Equity Shares Equity shares Permanent capital No charge on assets Higher returns No burden on the company Control

Advantages of Equity Shares No refund of capital up to liquidation Owner’s Fund Advantages of Equity Shares Equity shares Permanent capital Equity capital is the permanent capital and is repaid only on the liquidation of the company. No charge on assets No refund of capital up to liquidation Higher returns No burden on the company Control

Advantages of Equity Shares No mortgage of company property Owner’s Fund Advantages of Equity Shares Equity shares Permanent capital For raising the fund through the issue of equity shares the company does not need to mortgage its property to its equity share holders No charge on assets No mortgage of company property Higher returns No burden on the company Control

Advantages of Equity Shares Owner’s Fund Advantages of Equity Shares Equity shares Permanent capital The rate of return on equity shares is made on the basis of the profitability of the business. Hence when the business is having No charge on assets Higher returns Better profit, that will be distributed among the equity share holders on the basis of the number of shares they held. Besides if there is any surplus in the company, the same will also be distributed to equity share holders. No burden on the company Control

Advantages of Equity Shares Owner’s Fund Advantages of Equity Shares Equity shares Permanent capital No charge on assets No Profit, No Dividend Higher returns Payment of dividend to the equity will be on the basis of the companies profitability. Hence it is not mandatory to issue dividend to equity share holders at all times if there is no profit to the company. Therefore, the dividend on equity shares will not be a burden. No burden on the company Control

Advantages of Equity Shares Owner’s Fund Advantages of Equity Shares Equity shares Permanent capital Voting Right No charge on assets Higher returns Equity share holders are having the right to participate in the meetings of the company and to vote. This enables the equity share holders to have a democratic control over management of the company. No burden on the company Control

Owner’s Fund Preference Shares Preference shares are those shares which having the preferential right to accept the dividend at the time of declaration and for the repayment of capital on winding up of the business. They have no special rights and privileges in the company. Capital raised through the issue of preference shares Preferential right to receive the dividend and for repayment of capital. Fixed rate of return No voting right and special privileges Less risk and less rate of return as compared to equity share holders.

Advantages of Preference Shares Owner’s Fund Advantages of Preference Shares Preference shares Steady Income Low Risk Preference shares Absolute Control to Equity share holders Preferential Rights No Charge against property

Advantages of Preference Shares Owner’s Fund Advantages of Preference Shares Preference shares Steady Income Preference shares provide reasonably steady income in the form of fixed rate of return and safety of investment Low Risk Absolute Control to Equity share holders Preferential Rights No charge against property

Advantages of Preference Shares Owner’s Fund Advantages of Preference Shares Preference shares Steady Income Preference shares are useful for those investors who want fixed rate of return with comparatively low risk as it provides fixed return. Low Risk Fixed and Stable Return Absolute Control to Equity share holders Preferential Rights No charge against property

Advantages of Preference Shares Owner’s Fund Advantages of Preference Shares Preference shares Steady Income It does not affect the control of equity shareholders over the management as preference shareholders don’t have voting Rights. Low Risk Absolute Control to Equity share holders No Voting Right Preferential Rights No charge against property

Advantages of Preference Shares Owner’s Fund Advantages of Preference Shares Preference shares Steady Income Low Risk Fixed Dividend Priority in capital refund Absolute Control to Equity share holders Preference shareholders have a Preferential right of repayment over equity shareholders in the event of liquidation of a company and for getting the dividend at the time of declaration. Preferential Rights No charge against property

Advantages of Preference Shares No mortgage of company property Owner’s Fund Advantages of Preference Shares Preference shares Steady Income No mortgage of company property Low Risk Absolute Control to Equity share holders Preference capital does not create any sort of charge against the assets of a company. These shares can be repaid after a specified period of time. Preferential Rights No Charge against Property

Global Depository Receipt(GDR) Negotiable instrument issued by an Owner’s Fund Global Depository Receipt(GDR) The local currency shares of a company are delivered to the depository bank. The depository bank issues depository receipts against these shares. These receipts are called GDR. GDR is an instrument issued abroad by an Indian company to raise funds in some foreign currency and is listed and traded on a foreign stock exchange. Negotiable instrument issued by an Indian Company abroad GDR is a negotiable instrument and can be traded freely like any other security. A holder of GDR can at any time convert it into the number of shares it represents. The holders of GDRs do not carry any voting rights

American Depository Receipt(ADR) Owner’s Fund American Depository Receipt(ADR) The depository receipts issued by a company in the USA are known as American Depository Receipts. ADRs are bought and sold in American markets like regular stocks. Depository receipts by a U S Company It is similar to a GDR except that it can be issued only to American citizens. ADR can be listed and traded on a stock exchange of USA The holders of GDRs do not carry any voting rights

R E = Net Profit – Dividend Owner’s Fund Retained Earnings A company generally does not distribute all its earnings amongst the shareholders as dividends. A portion of the net earnings may be retained in the business for use in the future. This is known as retained earnings. It is a source of internal financing or self financing or ‘ploughing back of profits’. Retained earnings is a permanent source of funds available to an organisation R E = Net Profit – Dividend It does not involve any explicit cost in the form of interest, dividend or floatation cost As the funds are generated internally, there is a greater degree of operational freedom and flexibility