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SOURCES OF FINANCE

EQUITY:
Equity is a part of a company, also known as stock or share. When you buy shares of a
company, you basically own a part of that company. A company`s stockholders or
shareholders all have equity in the company, or own a fractional portion of the whole
company. They buy the shares because they expect to profit when the company profits. There
are two basic types of shares that any company issues: equity shares and preference shares.
EQUITY SHARES:
Both public and private corporations issue equity shares. Equity shareholders are the owners
of a company and initially provide the equity capital to start the business.
Equity share ownership in a public company offers many benefits to investors.
FEATURES OF EQUITY SHARES:
1. Those who invest in Equity share capital are known as equity shares holders.
2. It is considered to be the most risky investment, but at the same time it has the history of
generating superior returns when one compares it with other alternatives of investment
3. They have right to vote on all important matters relating to company which ranges from
decision on appointment of directors, declaration of dividend, acquisition of new
company and so on.
4. They are entitled to have profits shared with them in the form of dividend after company
has paid out all its expenses like depreciation, interest, administrative expense, selling
and distribution expenses etc, and dividend to preference share holders.
5. The liability of equity share capital is limited in the sense that one who holds equity of the
company can lose only that amount which he or she has invested and the creditors of the
company cannot held the shareholder personally responsible for the debts of the
company.
6. If the company goes bankrupt than in that event in case of liquidation of assets of the
company equity share capital will be paid last after payment is made to creditors and
preference share holders.

ADVANTAGES OF EQUITY SHARES:

1. Potential for Profit :
The potential for profit is greater in equity share than in any other investment security.
Current dividend yield may be low but potential of capital gain is great. The total yield or
yields to maturity may be substantial over a period of time.

2. Limited Liability :
In corporate form of organisation, its owners have, generally, limited liability. Equity Share is
usually fully paid. Shareholders may lose their investment, but no more. They are not further
liable for any failure on the part of the corporation to meet its obligation.
3. Hedge against Inflation :

The equity share is a good hedge against inflation though it does not fully compensate for the
declining purchasing power as it is subject to the money-rate risk. But, when interest rates are
high, shares tend to be less attractive, and prices tend to be depressed.
4. Free Transferability :

The owner of shares has the right to transfer his interest to someone else. The buyer should
ensure that the issuing corporation transfers the ownership on its books so that dividends,
voting rights, and other privileges will accrue to the new owner.
5. Share in the Growth :

The major advantage of investment in equity shares is its ability to increase in value by
sharing in the growth of company profits over the long run.
6. Tax Advantages :

Equity shares also offer tax advantages to the investor. The larger yield on equity shares
results from an increase in principal or capital gains, which are taxed at lower rate than other
incomes in most of the countries.
RIGHTS OF EQUITY SHAREHOLDERS:
i. To elect directors and thus to participate in the management through them.
ii. To vote on resolutions at meeting of the company.
iii. To enjoy the profits of the Company in the shape of dividends.
iv. To apply to the Court for relief in the case of oppression.
v. To apply to the Court for relief in the case of mismanagement.
vi. To apply to the Court for winding up of the Company.
vii. To share in the surplus on winding up.


PREFERENCE SHARES:
Preference shares allow an investor to own a stake at the issuing company with a condition
that whenever the company decides to pay dividends, the holders of the preference shares
will be the first to be paid.
FEATURES OF PREFERENCE SHARES:
1. Voting Rights:

Preference shares do not normally confer voting rights. The basis for not allowing the
preference shareholder to vote is that the preference shareholder is in a relatively secure
position and, therefore, should have no right to vote except in the special circumstances.
2. Par Value:
Most preference shares have a par value. When it does, the dividend rights and call price
are usually stated in terms of the par value. However, those rights would be specified
even if there were no par value. It seems, therefore, as with equity shares, the preference
share that has a par value has no real advantage over preference share that has no par
value.
3. Redeemable or Callable Preference Shares:

Typically, preference shares have no maturity date. In this respect it is similar to equity
shares. Redeemable or callable preference shares may be retired by the issuing company upon
the payment of a definite price stated in the investment. Although the call price provides
for the payment of a premium, the provision is more advantageous to the corporation than to
the investor.
4. Sinking Fund Retirement:
Preference share issue is often retired through sinking funds. In these cases, a certain
percentage of earnings (above minimum amounts) are allocated for redemption each year.
The shares required for sinking fund purposes can be called by lot or purchased in the open
market.


Types of Preference Shares:
1. Cumulative and Non cumulative shares:
Cumulative preference shares give the right to the preference shareholders to claim the
dividends that are not paid in the previous year and they are paid in preference to
ordinary dividends. For non-cumulative or simple preference shares, any dividends that
are unpaid or accrued in the previous year cannot be carried forward to the subsequent
year or years in respect of that year, and that is considered lost by the shareholders.

2. Redeemable and Non-redeemable:
A redeemable preference share is issued on the terms where they are liable to be
redeemed at either a fixed time, or the company's option or at the shareholders option. In
other words, the company can buy back preference shares at an agreed time and price.
Non-redeemable or Irredeemable preference shares need not be repaid by the company
except on winding up of the company. The company is not offering to buy back the
securities.

3. Convertible and Non-convertible shares:

Convertible Preference Shares are corporate fixed-income securities that the
shareholders have the option of converting them into a certain number of ordinary shares
after a predetermined time span or on a specific date.Non-Convertible Preference Shares
are those which do not have the option of their conversion into the equity shares.

4. Participating and Non-participating:

Participating Preference Shares are entitled to a fixed preferential dividend and have the
right to participate further in the surplus profits after payment of certain rate of dividend
on equity shares. A non-participating share is entitled to fixed rate of dividend only.
They do not have such rights to participate or claim for a part in the surplus profits of a
company.


DEBENTURES:
A debenture is a debt security issued by a corporation that is not secured by specific assets,
but rather by the general credit of the corporation. Stated assets secure a corporate bond,
unlike a debenture, but in India these are used interchangeably.
FEATURES OF DEBENTURES:
1) Debenture holders of the company are the creditors of the company and not the owners of
the company.
2) Capital raised by way of debentures is required to be repaid during the life time of the
company at the time stipulated by the company. Thus, it is not a source of permanent capital.

3) Debentures are generally secured.

4) Return paid by the company is in the form of interest which is predetermined.

5) Debentures are very risky from companys point of view for raising long term funds.

6) Risk on the part of debenture holders is very less.

7) Debenture holders do not carry any voting rights.

8) Debentures are a cheap source of funds from the companys point of view.
TYPES OF DEBENTURES:
1) Registered Debentures
2) Bearer debentures or Unregistered debentures.
3) Secured debentures or Unsesurced debentures
4) Redeemable debenture or Irredeemable debenture
5) Fully convertible debenture
6) Non convertible debenture
7) Partly convertible debenture
8) Equitable debenture
9) Legal debenture
10) Preferred debenture
11) Fixed rate debenture
12) Floating rate debenture
13) Zero coupon debenture
14) Foreign currency convertible debenture

RIGHT SHARES:
Rights issues are a proportionate number of shares available to all the existing shareholders of
the company, which can be bought at a given price (usually at a discount to current market
price) for a fixed period of time. For example, a company announcing rights issue of 2:3 at
Rs. 100 per share (current share price Rs. 130 per share), is issuing two (new) rights shares
for every three shares held by the shareholders of the company at Rs. 100 per share. The
rights shares can also be sold in the open market. If not subscribed to, the rights shares lapse
on closure of the offer
BONUS SHARES:
Bonus shares means new shares given free of cost to all the existing shareholders of the
company, in proportion to their holdings. For example, a company announcing bonus issue of
1:5, is issuing one (new) bonus share for every five shares held by the shareholders of the
company.
LOAN:
In finance, a loan is a debt provided by one entity (organization or individual) to another
entity at an interest rate, and evidenced by a note which specifies, among other things, the
principal amount, interest rate, and date of repayment. A loan entails the reallocation of the
subject asset for a period of time, between the lender and the borrower.
TERM LOAN:
A term loan is a monetary loan that is repaid in regular payments over a set period of time.
Term loans usually last between one and ten years, but may last as long as 30 years in some
cases. A term loan usually involves an unfixed interest rate that will add additional balance to
be repaid.
FEATURES OF TERM LOAN:
1. MATURITY :
The maturity period of term loans is typically longer in case of sanctions by financial
institutions in the range of 6-10 years in comparison to 3-5 years of bank advances.
However, they are rescheduled to enable corporate borrowers tide over temporary
financial exigencies.



2. NEGOTIATED :
The term loans are negotiated loans between the borrowers and the lenders. They are
akin to private placement of debentures in contrast to their public offering to investors.
3. SECURITY :
Term loans typically represent secured borrowing. Usually assets, which are financed
with the proceeds of the term loan, provide the prime security. Other assets of the firm
may serve as collateral security.
TYPES OF TERM LOAN:
1. Purchase of Fixed Assets :
The term loan can be used to purchase fixed assets like premises, plant & machinery etc. The
usage or performance of assets increases the business performance and hence the profit and
makes the repayment of the loan easier. Even the term loan is settled the assets procured
continue the productivity as asset life span is certainly longer than the term loan span.
2. Switching of Higher Interest Loans :
Many a times business owners opt to raise business loans at higher rate of interest. Such
loans are processes and sanctioned faster but result in heavy burden interest. This interest
payment becomes a fixed monthly expenses and starts leaking the profit.
3. Mortgage Term Loan :
A Term Loan can be availed by mortgaging a kind of security like home, office premises etc.
This type of loan is borrowed for longer period of time that is 10, 15 or 20 years. The
repayment of the principal amount and interest may be fixed in nature or it may vary over the
course of repayment. The borrower may avail the revised rate of interest later and may be
benefited by saving in interest.
ADVANTAGES OF TERM LOAN:
1. Cash Flow:
Capital is a limited resource and investing large amounts into any asset or project limits the
availability of capital for other investments. Although keeping some cash on hand is
important to mitigate unexpected expenses, saving large lump sums is inefficient. Long term
loans increase the flexibility of an investors limited capital by allowing for its distribution
over multiple investments, and minimizing the immediate impact on operational cash flow.
2. Lower Interest Rates:
Lending institutions assume a high degree of risk on long terms loans, which usually requires
the borrower to offer collateral. Often, the asset for which the funds are being borrowed can
act as that collateral. If the borrower defaults on their payments, that asset can then be seized,
or repossessed, by the lender.
3. Minimize Investor Interference:
Seeking private investors and issuing shares are common ways to raise money for potential
investments. However, these are also ways of dividing ownership of the company and
therefore redistributing control. Long term loans provide an opportunity to finance potential
investments while maintaining control of the firm.
4. Build Credit:
Generally, long term loans have a very structured payment process that has been designed to
meet the payment capability of the borrower, notwithstanding unforeseen events. Therefore,
making regular payments on a long term loan will allow an individual or a business to build
their credit worthiness. For a business owner, building a business credit is important to rely
less on personal credit for future debt financing.
5. Leasing:
Leasing, most often applied to car financing, is a common form of a long term loan. The
borrower pays to use the asset but is bound by the terms of the agreement. For example, on a
car lease the car cannot exceed a certain amount of kilometres this is to ensure that the
lender can continue to use the asset should the borrower choose not to purchase it at a
discounted rate after the maturity date. Leasing is beneficial for people or companies that
either wish to have, or that require, continually updated versions of an asset.








INTERNAL FUNDS- AS A SOURCE OF FINANCE:
Also known as Ploughing back of profits or Self-financing or accumulation of earnings
over a period of time or Internal financing
Instead of distributing the entire profits to shareholders in the form of dividend, the company
retains a part of its earnings for the purpose of, accumulation of earnings, investing in fixed
assets and/ or to meet working capital needs, if the need so arise.
Merits of Ploughing back of profits:
A) To the Company:

1. Economical- Cost of raising such funds is nil, as the company need not advertise or
pay underwriting commission or brokerage.
2. Increases the efficiency and productivity of the firm.
3. Increases shareholders confidence.
4. Enhances creditworthiness and outsiders are willing to lend money to the firm.
5. Less financial risk due to lack of pressure to pay interest and installments.
6. Facilitates the repayment of debentures and term loans.
7. Reduces the reliance of the firm on external borrowings.
8. Helps expansion and diversification.
9. Helps automation and modernization
10. Used to meet working capital needs at the time of cash crunch and during recession.
11. Following a stable dividend policy the company can even in the year of crisis declare
a dividend to boost the confidence of shareholders.
12. Freedom to management to take their own decisions and not subject to restrictive
conditions of outside agencies.

B) To the shareholders:

1. Appreciation in share values because of huge reserves of the company.
2. Bonus shares issues.
3. Regular dividends even in the year of crisis.
4. Banks may willingly accept the shares as a security in advancing loans to the
shareholders as there is increase in security value of shares.

C) To the society:

1. Increases capital formation and can bring prosperity to the nation.
2. Helps speedy development of the industry and more employment opportunities are
generated.
3. Company makes use of its own funds, the cost of production comes down as the
company need not pay any interest or installment. This reduces consumer prices
and makes the goods available at reasonable prices.
4. Social welfare activities such as maintaining roads, gardens, donations to
educational institutions, sponsoring sports and so on can be done out of retained
earnings.
Demerits of ploughing back of profits:
1. Danger of manipulation by the management by using it for their personal extravaganza
or to manipulate the share prices on the stock exchange.
2. Chances of over-capitalisation. Overcapitalisation is a situation when a firms earning
are comparatively less as compared to similar companies in the industry. Such a situation
also arises when a company employs more funds than is actually needed.
3. The company may not be in a position to make optimum use of its retained earnings.
4. The shareholders may not get their due share of dividends leading to their loss.
5. It might lead to excessive speculation which is harmful in the interest of genuine
investors.
6. It might lead to more demands from employees causing even industrial disputes.
7. Concentration of economic power in few hands due to small number of shareholders.













Commercial paper
DEFINITION

An unsecured, short-term debt instrument issued by a corporation, typically for the
financing of accounts receivable, inventories and meeting short-term liabilities. Maturities on
commercial paper rarely range any longer than 270 days. The debt is usually issued at a
discount, reflecting prevailing market interest rates.

Commercial paper is not usually backed by any form of collateral, so only firms with high-
quality debt ratings will easily find buyers without having to offer a substantial discount
(higher cost) for the debt issue.

A major benefit of commercial paper is that it does not need to be registered with the
Securities and Exchange Commission (SEC) as long as it matures before nine months (270
days), making it a very cost-effective means of financing. The proceeds from this type of
financing can only be used on current assets (inventories) and are not allowed to be used on
fixed assets, such as a new plant, without SEC involvement.
Since it is not backed by collateral, only firms with excellent credit ratings from a
recognized credit rating agency will be able to sell their commercial paper at a reasonable
price. Typically, the longer the maturity on a note, the higher the interest rate the issuing
institution pays. Interest rates fluctuate with market conditions, but are typically lower than
banks' rates.
Line of credit:
Commercial paper is a lower-cost alternative to a line of credit with a bank. Once a business
becomes established, and builds a high credit rating, it is often cheaper to draw on a
commercial paper than on a bank line of credit. Nevertheless, many companies still maintain
bank lines of credit as a "backup". Banks often charge fees for the amount of the line of the
credit that does not have a balance. While these fees may seem like pure profit for banks, in
some cases companies in serious trouble may not be able to repay the loan resulting in a loss
for the banks.
Advantages:
High credit ratings fetch a lower cost of capital.
Wide range of maturity provides more flexibility.
It does not create any lien on asset of the company.
Tradability of Commercial Paper provides investors with exit options.

Disadvantages:
Its usage is limited to only blue chip companies.
Issuances of commercial paper bring down the bank credit limits.
A high degree of control is exercised on issue of Commercial Paper.
Stand-by credit may become necessary
Why it Matters:
Commercial paper is issued by a wide variety of domestic and foreign firms, including
financial companies, banks, and industrial firms.
Major investors in commercial paper include money market mutual funds and commercial
bank trust departments. These large institutional investors often prefer the
cost savings inherent in using commercial paper instead of traditional bank loans.

Lease finance:
Meaning:
Leasing is the form of rental system which has been in practice as far as back as 2000 years
ago. Lease finance is an important source of credit, under which the leasing company buys
plant or equipment required and chosen by business , and lease it to the business at an agreed
lease rental, while the ownership continues rest with the lesor who gives it on lease.
Basic Concepts:
Leasing: It involves use of an asset without the desire to assume and intend to assume
ownership.
Lessee: A firm acquiring an asset on lease.
Lessor: Is the owner of the asset.
Money rental: It is paid at regular intervals for use of an asset.
Leasing contract: It normally comprise of:
a) Lease period
b) Cancellation provisions
c) Rental payment
d) Additional rents
e) Purchase options
f) Other expenses.
Advantages:
1. Conservation of working capital.
2. Income tax considerations.
3. Leasing permits 100% financing.
4. More easily accessible.
5. Cheaper than other sources of finance.
6. Need for equipment in temporary.
7. Flexibility in temporary.
8. Undisclosed sources of finance.
9. Cheaper than purchase.
10. Assist in prediction of future cash requirements.
Disadvantages:
1. Relatively high cost of lease.
2. More burden when interest rates decline in market.
3. Miscellaneous expenses are owned by lessee.
4. Problem of shifting responsibility.
5. No capital gains when asset prices are poorer.
6. Depreciation cannot be claimed.
Types of lease:
1. Operating lease: In operating lease all the risk and rewards incidental to ownership
are not transferred by lessor to lessee.

2. Finance lease: In finance lease the lessor transfers all the risk and rewards incidental
to ownership of the asset to lessee.

3. Leverage lease: There are leverage 3 parties. The lessor, lessee and the financial
institution/bank who lends a major cost of asset leased. The lessor contributes 20% to
50% of the cost and the lender contributes 50% to 80% of the cost of asset.

4. Sale and lease back lease: In case of sale and lease back lease, the firm sells an asset
that is already owned to another firm and get it on lease back from the buyer which is
usually an financial institution or leasing company.

5. Direct lease: The lessee acquires the equipment directly from the manufacturer or
arranges the desired equipment to be purchased by leasing company.

6. Cross border lease: It is the type of lease where the lessor and the lesse both belongs
to different countries. Ti is also called as transnational lease.

7. Triple net lease: In case of triple net lease the lessee is obligated to pay certain
typical executive cost in addition to separate from the basic lease rentals.
Such costs are:
a) Sales tax
b) Property tax
c) Repairs
d) Parts and accessories
e) Insurance
f) Maintenance and servicing
g) Licensing and registration

8. Master lease: Master lease are structured for lesses who either will be leasing several
pieces of equipments to be received over a period of time.






Distinguish: operating and finance lease:

Operating lease Finance lease
Meaning: : In operating lease all the risk
and rewards incidental to ownership are
not transferred by lessor to lessee.
In finance lease the lessor transfers all
the risk and rewards incidental to
ownership of the asset to lessee.
Cancellation: It is cancellable by either
party during the lease period.
It is non cancellable.
User: operating lease is single user. Finance lease is multi user
Residual value: lessor is always
interested in residual value of the asset.
the lessor is only the financer and is
usually not interested in the asset.
Known as: service lease Full payout lease
Amortisation: The cost of amortisation
is not fully amortised duting the primary
lease period.
The lessor enables to recover his
investments in the asset leased plus to
derive the profit.
Risk and rewards: The lessor bears the
risk and benefit of rewards
The lessee bears the risk and benefit of
rewards
Examples: Aircraft, buildings. Hiring a taxi.



















Distinguish between: lease finance and hire purchase:

Lease finance Hire purchase
Ownership: The lessor is the owner and
the lessee is entitled to the economic use
of asset leased. The ownership is never
transferred to user.
The ownership of asset passes to the user,
in case of hire purchase finance , till the
payment of last instalment.
Depreciation: The depreciation is
charged in the books of lessor.
The hirer is entitled to the depreciation.
Magnitude: The magnitude of funds
involved in lease finance is very huge.
The magnitude of funds involved in hire
purchase is very low.
Down payment: lease financing is
invariably 100% financing.
In hire purchase cash downpayment is
required.
Maintenance: In case of finance lease it
is lessee & in case of operating lease it is
the lessor.
The cost of maintenance is typically
borne by the hirer himself.
Tax benefits: In operating lease it is the
lessor, in finance lease it is the lessee.
The buyer is entitled for depreciation.
Salvage value: The lessee does not
enjoys the salvage value of thee asset.
Hirer enjoys the salvage value of the
asset.















INTERCORPORATE DEPOSITS
When borrowing from banks, there are many formalities in terms of documentations to be
adhered to. All these formalities can be done away with when borrowing and lending short
term funds with the aid of inter corporate deposits. Inter-corporate deposits are deposits made
by one company with another company, and usually carry a term of six months. These
deposits are made by corporate having surplus funds to cash starved companies.
Inter corporate investments are accounted for differently than other funds held by a company.
Short-term investments that are expected to be turned into cash are considered current assets,
while other investments are considered non-current assets. When companies buy inter
corporate investments, dividend and interest revenue is reported on the income statement.
DEFINITION:
Securities that are purchased by corporations rather than individual investors. Inter corporate
investments allow a company to achieve higher growth rates compared to keeping all of its
funds in cash. These investments can also be used for strategic purposes like forming a joint
ventures or making acquisitions. Companies purchase securities from other companies, banks
and governments in order to take advantage of the returns from these securities. Marketable
securities that can readily be exchanged for cash, such as notes and stocks, are usually
preferred for this type of investment.
Features of Inter corporate deposits
1. Rates: Since it is an unsecured loan, the risk involved is higher. Also, since the cost of
funds(interest rates) are much higher for a corporate than a bank, the rates in this market
are higher than those in the other markets.
2. Short term credit rating: The short term credit rating of the corporate would determine
the rate at which the corporate would be able to borrow funds. Further the credit spreads
demanded even for the top rated corporate would be higher than similar rated banks and
the rates on ICDs would be higher than those in the Certificate of Deposit (CD) market.
3. Information: The ICD market is not well organized with very little information
available publicly about transaction details
4. Risk involved: Since it is an unsecured loan, the risk involved is higher. Primary dealers
cannot lend in the ICD market, they are only entitled to borrow. The borrowing
under ICD is restricted to 50% of the Net Owned Funds and the minimum tenor of
borrowing is for 7 days.
5. Amount: The amount cannot exceed 60 % of paid up capital and 100% of free reserves.
6.
***************************************************************
***********************************************Types of inter
corporate deposits:

Three month deposits
These are the most popular type of inter-corporate deposits. These deposits are generally
considered by the borrowers to solve problems of short-term capital inadequacy. This type of
short-term cash problem may develop due to various issues, including tax payment, excessive
raw material import, breakdown in production, payment of dividends, delay in collection, and
excessive expenditure of capital. The annual rate of interest given for three month deposits is
12%.
Six month deposits
These are usually made with first class borrowers, and the term for such deposits is six
months. The annual interest rate assigned for this type of deposit is 15%.
Call Deposit
The concept of call deposit is different from the previous two deposits. On giving a one day
notice, this deposit can be withdrawn by the lender. The annual interest rate on call deposits
is around 10%.














Credit rating:
Meaning:
An assessment of the credit worthiness of a borrower in general terms or with respect to a
particular debt or financial obligation. A credit rating can be assigned to any entity that seeks
to borrow money an individual, corporation, state or provincial authority, or sovereign
government. Credit assessment and evaluation for companies and governments is generally
done by a credit rating agency such as Standard & Poors or Moodys. These rating agencies
are paid by the entity that is seeking a credit rating for itself or for one of its debt issues. For
individuals, credit ratings are derived from the credit history maintained by credit-reporting
agencies.
Credit ratings for borrowers are based on substantial due diligence conducted by the rating
agencies. While a borrower will strive to have the highest possible credit rating since it has a
major impact on interest rates charged by lenders, the rating agencies must take a balanced
and objective view of the borrowers financial situation and capacity to service/repay the
debt.
The credit rating has an inverse relationship with the possibility of debt default.
Credit rating changes can have a significant impact on financial markets.
A prime example of this effect is the adverse market reaction to the credit rating
downgrade of the U.S. federal government by Standard & Poors on August 5, 2011.
Global equity markets plunged for weeks following the downgrade.
For individuals, the credit rating is conveyed by means of a numerical credit scoreA high
credit score indicates a stronger credit profile and will generally result in lower interest rates
charged by lenders.
Definition:
credit rating is an expression though the use of alpha-numeric symbols of opinion about the
credit quality of the issuer of securities with reference to a particular instrument. In credit
rating what is rated is the debt instrument and not the issuer company. Credit rating has
become necessary in the view of increasing number of cases of default in the payment of
interest and repayment of principal amount by the companies by way of commercial papers,
fixed deposits, debentures.


Credit rating agencies:
A credit rating agency (CRA, also called a ratings service) is a company that assigns credit
ratings, which rate a debtor's ability to pay back debt by making timely interest payments and
the likelihood of default. An agency may rate the creditworthiness of issuers of debt
obligations, of debt instruments, and in some cases, of the servicers of the underlying debt,

but not of individual consumers.
The debt instruments rated by CRAs include government bonds, corporate
bonds, CDs, municipal bonds, preferred stock, and collateralized securities, such
as mortgage-backed securities and collateralized debt obligations.
[3]
The most dominating factor is the reputation and analytical credibility of the credit rating
agencies. The credit rating agencies continuously monitors the corporate and the rating is
monitored till the life of instrument.
Important credit rating agencies:
CRISIL
ICRA
CARE
The credit rating agencies operating in india are registered with the reserve bank of india.
Functions of credit rating agencies:
1. Assist investors: It assist investors both individual as well as institutional, in making
well informed investment decisions.
2. Ensures adequate disclosures: Credit rating agencies ensures that adequate information
is disclosed to it and after assessing all the risk involved it decides on a credit rating
symbol.
3. Easy understanding: the Credit rating symbols are easily understandable to the
investors based on which they can take well informed investment decisions.
4. Low cost funds : high credit rating indicates low risk which means companies with high
credit rating can raise the required funds at low rates of returns.
5. Constant monitoring: once the rating has been assigned the credit rating agencies
constantly monitor the degree of risk exposure of the firm and accordingly based on it, it
can upgrade or even down grade the assigned credit rating symbols.
6. Credit quality information: credit rating agencies inform the investors regarding the
credit quality of the company which the investors are not aware of.





Sources of international finance:
Indian capital could raise global finance in following ways:
Equity capital: foreign equity could be raised in the form of depository receipts or
euro convertible bonds. Depository receipts could be global depository receipts
(GDR) or its variant in the form of American depository receipts (ADR) or
international depository receipts (IDR) . GDR is a foreign currency denominated
negotiable certificate which trade in at least two countries outside the issuer home
market.
Debt capital: international financial markets also offer a varied range of facilities for
raising finance by means of debt instruments. The debt instrument includes syndicate
loan, issue of bonds, euro notes.
International finance has now become an important source of both short term and long
term funds for corporate in india.
1. American depository receipts(ADRs): ADRs are created in U.S.A wherein
U.S depository bank would hold a predetermined number of foreign securities
and issue against them ADRs it requires the clearance of the SEC in USA for
which the issuing company has to furnish the required details.
2. Global depository receipts(GDRs): GDRs are instruments of equity linked in
nature which can be traded in multiple markets outside the domestic market of
the issuer. The holder of GDRs has a right to convert a GDR into underlying
shares.
3. European depository receipts (EDRs): EDRs are issued and tradable only in
Europe. An European bank holding the securities of the issuing company
issues the depository receipts on the basis of it.
4. Foreign bonds: Foreign bonds are issued in domestic currency by foreign
borrower in the country whose currency the bonds are dominated.
5. Euro bonds: Euro bonds are issued by a borrower who is of nationally
different from the country of the capital market in which the securities are
issued.
6. International bonds: Foreign bonds and Euro bonds are collectively known as
international bonds.
The main categories;
Fixed rate or straight bonds
Floating rate notes
Zero coupon bonds.

Government subsidies
A subsidy, often viewed as the converse of a tax, is a potent welfare-augmenting instrument
of fiscal policy. Derived from the Latin Word subsidium a subsidy literally implies
coming to assistance from behind. However, their beneficial potential is at its best
when they are transparent, well targeted, and suitably designed for practical
implementation.

Definition
The Oxford English Dictionary defines subsidy as money granted by State, public body etc
to keep down the prices of commodities etc Subsidies bring out desired changes by effecting
optimal allocation of resources, stabilizing the price of essential good & services,
redistributing income in favor of poor people thus achieving the twin objective of growth &
equity of nation.

Subsidies will be targeted sharply at the poor and the truly needy like small and marginal
farmers, farm labour and urban poor.
Objectives
Subsidies, by means of creating a wedge between consumer prices and producer costs, lead to
changes in demand/ supply decisions. Subsidies are often aimed at :
1. Inducing higher consumption/ production
2. Offsetting market imperfections including internalization of externalities
;3. Achievement of social policy objectives including redistribution of income
Forms of subsidies
A cash payment to producers/ consumers is an easily recognizable form of a subsidy.
It also has many invisible forms
(It may be hidden in reduced tax-liability, low interest government loans or government
equity participation. If the government procures goods, such as food grains, at higher than
market prices or if it sells as lower than market prices, subsidies are implied).
Different type of subsidy
Cash Subsidy: Providing food or fertilizer to consumer at lower price.
Interest or credit subsidies
Tax subsidies
In kind subsidies
Procurement subsidies
Regulatory subsidy
Equity subsidies
CAUSE OF SUBSIDIES SPROLIFERATING IN INDIA

The expansion of governmental activities
Relatively weak determination of governments to recover costs from the respective
users of the subsidies, even when this maybe desirable on economic grounds, and
Generally low efficiency levels of governmental activities.
Increase in explicit budgetary subsidies on food and fertilizer

SECURITISATION
Securitization is the financial practice of pooling various types of contractual debt such as
residential mortgages, commercial mortgages, auto loans or credit card debt obligations and
selling said consolidated debt as bonds, pass-through securities, or collateralized mortgage
obligation to various investors. The principal and interest on the debt, underlying the security,
is paid back to the various investors regularly. Securities backed by mortgage receivables are
called mortgage-backed securities while those backed by other types of receivables are asset-
backed securities.
The granularity of pools of securitized assets is a mitigant to the credit risk of individual
borrowers. Unlike general corporate debt, the credit quality of securitised debt is non-
stationary due to changes in volatility that are time- and structure-dependent. If the
transaction is properly structured and the pool performs as expected, the credit risk of all
tranches of structured debt improves; if improperly structured, the affected tranches may
experience dramatic credit deterioration and loss.
Objective:
The objective of many securitisation structures is to isolate the SPV from the risks associated
with an insolvency of the originator. In order to meet this objective:
The SPV and the originator must be treated in an insolvency as separate entities; and
The sale of assets to the SPV must be a true sale that is, it should not be capable of being
set aside by an insolvency officer of the originator or recharacterised as a secured loan of the
purchase price.
The law has evolved differently on each side of the Atlantic in relation to these issues.
The growth in the Indian securitisation market has been largely fuelled by the repackaging of
retail assets and residential mortgages of banks and FIs. This market has been in existence
since the early 1990s, though has matured significantly only post-2000 with an established
narrow band of investor community and regular issuers
Asset backed securitisation (ABS) is the largest product class driven by the growing retail
loan portfolio of banks and other FIs, investors familiarity with the underlying assets and the
short maturity period of these loans. The mortgage backed securities (MBS) market has been
rather slow in taking off despite a growing housing finance market due to the long maturity
periods, lack of secondary market liquidity and the risk arising from prepayment/repricing of
the underlying loan.
In the early 1990s, securitisation was essentially a device of bilateral acquisitions of
portfolios of finance companies. There were quasi-securitisations for sometime, where
creation of any form of security was rare and the portfolios simply got transferred from the
balance sheet of the originator to that of another entity.
Other types of receivables for which securitisation has been attempted in the past include
property rental receivables, power receivables, telecom receivables, lease receivables and
medical equipment loan receivables. Revolving assets such as working capital loans, credit
card receivables are not permitted to be securitized
Homeowners default:
Speculative borrowing in residential real estate has been cited as a contributing factor to the
subprime mortgage crisis.
[72]
During 2006, 22% of homes purchased were for investment
purposes, with an additional 14% purchased as vacation homes. During 2005, these figures
were 28% and 12%, respectively. In other words, a record level of nearly 40% of homes
purchased were not intended as primary residences. David Lereah, National Association of
Realtors's chief economist at the time, stated that the 2006 decline in investment buying was
expected: "Speculators left the market in 2006, which caused investment sales to fall much
faster than the primary market."
Credit default swaps:
Default risk is generally accepted as a borrowers inability to meet interest payment
obligations on time For ABS, default may occur when maintenance obligations on the
underlying collateral are not sufficiently met as detailed in its prospectus. A key indicator of a
particular securitys default risk is its credit rating. Different tranches within the ABS are
rated differently, with senior classes of most issues receiving the highest rating, and
subordinated classes receiving correspondingly lower credit ratings.
However, the credit crisis of 20072008 has exposed a potential flaw in the securitization
process loan originators retain no residual risk for the loans they make, but collect
substantial fees on loan issuance and securitization, which doesn't encourage improvement of
underwriting standards.

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