PRESENTED BY:

Varun Gupta

SOURCES OF FINANCE

Sources of Finance

INTERNAL SOURCES OF FINANCE

MEANING Internal sources refers to money they can raise

from within the firm. They may include profit, or perhaps better management of existing resources.

DEFINITION “These are sources of finance that comes

from the business assets and activities.”

INTERNAL SOURCES OF FINANCE

TYPES:- Personal savings Retained profits Sale of assets Working capital

Personal savings

This is the amount of personal money an owner ,partner or a shareholder has at his disposal to do whatever he wants .

When the business seeks to borrow the personal money of a shareholder , partner or the owner for the business financial needs , source of finance is known as personal savings.

Retained profits These are the undistributed profits of the

company . Not all the profits earned by the company are distributed as dividends to its shareholders . Remainder of the profits after all the payments made for the trading year known as retained profits.

This remainder is saved by the business as a back up in in times of financial needs and may be later used for company development and expansion.

Sale of assets

The business can finance new activities or pay-off debts by selling its assets such as property, fixtures & fittings, machinery, vehicles etc.

It is often used as a short term source of finance (e.g. selling a vehicle to pay debts) but could provide more longer term finance if the assets being sold are valuable (e.g. land or buildings).

Working capital

• It refers to the sum of money that business uses for its daily activities.

• Working capital is the difference between current assets and current liabilities.

• Proper working capital management is vital as its one of the important source of finance.

External Sources of Finance

Loans• Bank lending is still mainly short term,

although medium-term lending is quite common these days.

• Can be from financial institutions, state financial corporation, commercial banks

• Short term lending and middle term lending

Leasing

• A lease is an agreement between two parties, the "lessor" and the "lessee". The lessor owns a capital asset, but allows the lessee to use it.

• Basic forms of lease: “Operating leases" and “Finance leases".

Government assistance

• In form of cash grants and other forms of direct assistance, as part of its policy of helping to develop the national economy

•For example, the Indigenous Business Development Corporation of Zimbabwe (IBDC) was set up by the government to assist small indigenous businesses in that country.

• Special Financial Institutions In India are:• Industrial Finance Corporation of India (IFCI)• Industrial Development Bank of India (IDBI)• Industrial Investment Bank of India Ltd.

Share Issue

• A company can raise substantial funds through an IPO (initial public offering). These funds are usually used for large expenses, such as new product development, expansion into a new market and setting up a new plant.

• Ordinary shares• Preference Shares

• Companies that are already listed on a stock exchange can opt for a rights issue, which seeks additional investment from existing shareholders. They could also opt for deferred ordinary shares, wherein the issuing company is not required to pay dividends until a specified date or before the profits reach a certain level

Debentures

• This is a form of long term loan that can be taken out by a public limited company for a large sum and it will be paid back over several years. It is usually borrowed from specialist financial institutions.

• Public issue of debentures requires that the issue be rated by a credit rating agency like CRISIL (Credit Rating and Information Services of India Ltd.)

Factoring Services

• Recourse and Non Recourse

Client

Factor Receivab-lesCash

Cash

Commission

Receivables

VENTURE CAPITALVenture capital (also known as VC or Venture) is a type of private equity capital typically provided for early-stage, high-potential growing companies.

•Venture capital typically comes from institutional investors and high net worth individuals and is pooled together by dedicated investment firms.

•As a consequence, most venture capital investments are done in a pool format where several investors combine their investments into one large fund that invests in many different startup companies.

Six stages of financing offered in Venture Capital

• Seed Money: Low level financing needed to provide a new idea

• Start-up: firms that need funding for marketing and product development

• First-Round: Early sales and manufacturing funds

• Second-Round: Working capital for early stage companies that are selling product, but not yet turning a profit

• Third-Round: Also called this is expansion money for a newly profitable company

• Fourth-Round: Also called bridge financing, 4th round is intended to finance the "going public" process

• The following graph indicates the growth of venture capital and angel investments in India's IT software and services sector:

• It must be noted that during 1999, approximately 80 percent of the estimated US$ 30 billion worth of venture capital invested in United States, went to technology firms.

• India too, with its strengths in innovation and IT technology has attracted several Venture Capital firms.

Examples Many state governments have

already set up venture capital funds for the different sector partnership with local state financial institutions and SIDBI.

• These states include: Andhra Pradesh,

• Karnataka, • Delhi• Kerala• Gujarat• Tamil Nadu among others.

FOREIGN DIRECT INVESTMENT

FOREIGN DIRECT INVESTMENT (FDI) Foreign Direct Investment (FDI) means a company or any

other entity in one country making a physical investment in

other country.

FDI includes investments made to acquire a lasting interest in

enterprises that are operating outside the economy &

national borders of an investor.

FDI (for a country) represents foreign assets in domestic

structures, equipments & organizations.

For Example: British company investing directly in Indian

healthcare sector, is considered as FDI.

Companies engaged in FDI may be involved in the functional areas such as: Production, Marketing and R & D.

TYPES OF FDI

BY DIRECTION BY TARGET

BY DIRECTION

INWARD: Inward FDI or Inbound FDI is a form of inward

investment where foreign capital is invested in local

resources of home country.

OUTWARD: Outward FDI or direct investment abroad is

when local capital is invested in foreign resources.

BY TARGET

GREENFIELD INVESTMENT: Investments in new facilities

or expansion of existing facilities. Results are: New jobs, new

technology & know-how, enhanced R&D, etc.

HORIZONTAL FDI: It occurs when a multinational company

makes investments in other countries but in the same industry

to which it belongs.

VERTICAL FDI: It occurs when a MNC acquires a stake in a

foreign company that either uses its output or provides it the

inputs. The foreign company can be a supplier or a customer.

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STRATEGIES FOR FOREIGN INVESTORS TO INVEST IN INDIA LIAISON OFFICE / REPRESENTATIVE OFFICE

A foreign company can set up liaison office in India to test the

Indian market.

Once it is convinced of the potentiality of Indian market, it can

then bring in greater investment.

A liaison office is not allowed to undertake any business activities

in India & therefore cannot earn any income in India.

The Foreign Investment Promotion Board (FIPB) of RBI is the

regulatory body.

PROJECT OFFICE

Foreign companies planning to execute specific projects in India

can set up temporary project offices.

Special approval from RBI is required for setting up a project

office.

A project office can be set up only till the completion of project.

BRANCH OFFICE

GOI has allowed foreign companies engaged in manufacturing &

trading activities to set up branch offices in India for purposes

like trading activities, research work, import & export activities.

FDI POLICY IN INDIAThe Government of India has put in place a liberal, transparent and investor – friendly FDI Policy, wherein FDI up to 100% is allowed on the automatic route in most of the sectors, except in:

Activities that attract industrial licensing

Proposals where foreign investors have existing ventures in India

Proposals for acquisition of shares in an existing Indian company

by a non-resident investor

Activities where automated route is not available

FOREIGN INSTITUTIONAL INVESTORS, ADR & GDR.

WHAT IS FII?

• Foreign institutional investor means “an institution established or incorporated outside India which proposes to make investment in India in securities.

Cont..

• It is used most commonly in India to refer to outside companies investing in the financial markets of India.

• International institutional investors must register with the Securities and Exchange Board of India (SEBI) to participate in the market.

WHO CAN BE REGISTERED AS AN FII?

• Pension Funds • Mutual Funds • Investment Trust • Insurance or reinsurance companies • University Funds • Foundations or Charitable Trusts • Asset Management Companies • Nominee Companies • Trustees • Power of Attorney Holders • Bank

HOW TO APPLY

• An application for registration has to be made in Form A, the format of which is provided in the SEBI(FII) Regulations, 1995 and submitted with under mentioned documents in duplicate addressed to SEBI as well as to Reserve Bank of India (RBI) and sent to the following address within 10 to 12 days of receipt of application.

Address for applicationThe Division Chief FII Division Securities and Exchange Board of India, 224, Mittal Court, 'B' Wing, 1st Floor, Nariman Point, Mumbai - 400 021. INDIA.

Registration process

The eligibility criteria for applicant As per Regulation of SEBI (FII)

• Applicant should have track record, professional competence, financial soundness, experience, general reputation of fairness and integrity.

• The applicant is required to have the permission under the provisions of the Foreign Exchange Management Act, 1999 from the Reserve Bank of India.

• Applicant must be legally permitted to invest in securities outside the country or its in-corporation / establishment.

Where FII can invest?

• Securities in primary and secondary markets including shares, debentures and warrants of companies.

• Units of mutual funds• Government Securities– Commercial papers – Security receipts

FDI v/s FII • FDI is a bit of a

permanent nature.

• Entry and Exit is difficult for FDI.

• FDI helps in increasing production and employment.

FII flies away at the shortest political

Entry and Exit is relatively very easy.

FII does not affect production and employment .

GDR(Global Depositary Receipt)

• It is 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.

ADR(American Depositary Receipt)

• 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.

• It also helps to reduce administration and duty costs that would otherwise be levied on each transaction.

IMF & THE WORLD BANK

IMF

The International Monetary Fund (IMF) is the international organization that oversees the global financial system by following the macroeconomic policies of its member countries. Main objective is to stabilize International exchange rates and facilitate development

IMF & INDIA

• Through IMF, India formulated a consistent approach to expand domestic and global assistance for economic reforms.

• Recently, India purchased IMF gold to lend money to developing countries. This proved that India has finally started gaining momentum, transforming India from fiscal borrower to major lender.

THE WORLD BANK• The World Bank is one of the world’s largest sources of

funding and knowledge to support governments of member countries in their efforts to invest in:

1. Schools 2. Health centers3. Providing water and electricity 4. Fight disease5. Protect the environment

• The World Bank is not a "bank" in the common sense but an international organization

• The World Bank often lends at little or no interest to countries that are unable to raise money for development.

• Countries have a much longer period to repay their loans

• Supporting SMEs in India for creation of more jobs

• Basically, the World Bank borrows the money it lends.

Latest projects funded by The World Bank

• Tamil Nadu Road Sector Project• Rajasthan Water Sector Restructuring

Project- Additional Financing• Additional Financing for Second Elementary

Education Project• Tech Engr Educ Quality Improvement II

IMF THE WORLD BANK

• oversees the international monetary system

• seeks to promote the economic development of the world's poorer countries

• promotes exchange stability and orderly exchange relations among its member countries

• assists developing countries through long-term financing of development projects and programs

• assists all members--both industrial and developing countries

• provides to the poorest developing countries whose per capita GNP is less than $865 a year

IMF THE WORLD BANK

• supplements the currency reserves of its members

• encourages private enterprises in developing countries through its affiliate, the International Finance Corporation (IFC)

• draws its financial resources principally from the quota subscriptions of its member countries

• acquires most of its financial resources by borrowing on the international market

• has at its disposal fully paid-in quotas now totaling SDR 145 billion (about $215 billion)

• has an authorized capital of $184 billion, of which members pay in about 10 percent

EURO BOND

• A Eurobond is a debt contract, which records the borrower’s obligation to pay interest at a given rate and the principal amount of the bond on specified dates. The issue has a specific structure and is defined in the EU Prospectus Directive (89/298) as transferable securities

• As for Eurobonds, they can be classified in five types.

Trading

Eurobond is a treadable instrument: it is intended to be bought and sold during the period up to it maturity. It is usually launched through a public offering and is listed on a stock exchange.

• Payments

It’s important to notice that there is no central register where holders of the issue are named. So Eurobond is in this sense a bearer instrument: interests are paid upon presentation of detachable coupons, while the principal amount is repaired on presentation of the Eurobond itself.

Listing

Although Eurobonds are listed in several stock exchanges, the London and Luxemburg stock exchanges are those most frequently used.