Description
TYBMS project of finance management on
"sources of funds"
INTRODUCTION
As Financial Management two main aspects involves procurement of funds & effective utilisation of those funds it becomes crucial to understand the means from which we can procure funds and that is what we call it as “Sources of Funds”
PARAMETERS TO SELECT SOURCE OF FUNDS
? Cost of sources of fund ? Tenure ? Leverage planned by the company ? Financial conditions prevalent in the economy ? Risk profile of both company as well as the industry in which the company operates. ? Each source of fund have some advantages as well as disadvantages.
FINANCIAL SOURCES OF BUSINESS CAN BE CLASSIFIED BY USING DIFFERENT BASIS
1. According to period • long term source • medium term sources • short term sources
2. According to ownership generation • Owners capital or equity capital, retained earnings etc. • Borrowed capital such as debentures, public deposits, loans etc 3. According to source of • Internal sources e.g Retained earnings and depreciation funds. • External sources e.g. debentures, loans etc
FINANCIAL NEEDS OF A BUSINESS
Business enterprises need funds to meet their different types of requirements. All the financial needs of a business may be grouped into the following three categories: I. Long term financial needs. II. Medium term financial needs. III. Short term financial needs.
What is meant by SHORT TERM FUNDS
SHORT TERM SOURCE
SHORT TERM
TRADE CREDIT
CUSTOMER ADVANCE COMMERCIAL BANK FIXED DEPOSIT FOR LESS THAN A YEAR
DEFERRED INCOME
Accrued Expenses
Deferred Income
Goods enters
Cash enters
Comparative Chart
Types of finance
LONG
Period of repayment
MORE THAN 5 YEARS
Purpose
•LAND •BUILDING •MACHINERY •RENOVATION •MODERNIZATION •MOTOR VEHICLES •COMPUTER •HEAVY ADVERTISING •PURCHASE OF RAW MATERIALS •PAYMENT OF WAGES •RENT, INSURANCE •TELEPHONE/ELECTRICITY
MEDIUM
1-5 YEAR
SHORT
LESS THAN A YEAR
International Finance
INTERNATIONAL SOURCES IS AN EXTERNAL SOURCE OF PROCUREMENT OF FUNDS IN THE BUSINESS… SUCH EXTERNAL SOURCES INCLUDES: • • • • • COMMERCIAL BANKS DEVELOPMENT BANKS DISCOUNTING OF TRADE BILLS INTERNATIONAL AGENCIES INTERNATIONAL CAPITAL MARKETS
External Commercial Borrowing FOREIGN (ECB)
CURENCY
FUTURE
EURO BONDS
FOREIGN
CURENCY OPTION
FINANCIAL INSTRUMENTS
FOREIGN BONDS
EURO COMMER CIAL PAPERS
FULLY HEDGED BONDS
FLOATING RATE NOTES
MEDIUM TERM NOTES
EXTERNAL COMMERCIAL BORROWINGS (ECB)
? ECBs could be raised through: • International banks • Multilateral financial institutions: IFC, ADB • Export Credit Agencies • Suppliers of equipments • Foreign collaborators and Foreign equity holders
? ECB can be accessed under 2 routes: Automatic route and Approval route
EURO BONDS
FULLY HEDGED BONDS
FOREIGN BONDS
These are debt instruments issued by foreign govt. and are exposed to default risk
These are debt They eliminate risk of instruments which currency fluctuations are not denominated by selling forward in the currency of the markets the entire country in which stream of interest they are issued. payment
E.g.: yen note floated in Germany
E.g.: a British firm placing dollar denominated bonds in USA
?Medium Term Notes ?Floating Rate Notes
?Euro Commercial Papers (ECP) ?Foreign Currency Option ?Foreign Currency Futures
American depository receipts
• An American depositary receipt (ADR) is a negotiable security that represents securities of a non-US company that trade in the US financial markets. Securities of a foreign company that are represented by an ADR are called American depositary shares (ADSs).
• Shares of many non-US companies trade on US stock exchanges through ADRs. ADRs are denominated and pay dividends in US dollars and may be traded like regular shares of stock • The first ADR was introduced by J.P. Morgan in 1927 for the British retailer Selfridges.
Global Depository Receipts
• A global depository receipt or global depositary receipt (GDR) is a certificate issued by a depository bank, which purchases shares of foreign companies and deposits it on the account. GDRs represent ownership of an underlying number of shares. • Global depository receipts facilitate trade of shares, and are commonly used to invest in companies from developing or emerging markets.
• Prices of global depositary receipt are often close to values of related shares, but they are traded and settled independently of the underlying share.
• Several international banks issue GDRs, such as JPMorgan Chase, Citigroup, Deutsche Bank, Bank of New York.
Indian Depository Receipts
• An Indian Depository Receipt is an instrument denominated in Indian Rupees in the form of a depository receipt created by a Domestic Depository (custodian of securities registered with the (Securities and Exchange Board of India) against the underlying equity of issuing company to enable foreign companies to raise funds from the Indian securities Markets.
The foreign company IDRs will deposit shares to an Indian depository. The depository would issue receipts to investors in India against these shares. The benefit of the underlying shares (like bonus, dividends etc) would accrue to the depository receipt holders in India. The Ministry of Corporate Affairs of the Government of India, in exercise of powers available with it under section 642 read with section 605A had prescribed the Companies (Issue of Indian Depository Receipts) Rules, 2004 (IDR Rules) vide notification number GSR 131(E) dated February 23, 2004. Standard Chartered PLC became the first global company to file for an issue of Indian depository receipts in India.
•
•
•
Other Types of International Issues
• • • • • Foreign euro bond Euro convertible bond Euro bond Euro convertible zero bond Euro bond with equity warrant
Commercial Paper
A commercial paper is an unsecured money market instrument issued in the form of a promissory note.
Bank Advances
Banks receive deposits from public for different periods at varying rates of interest , these funds are invested and lent in such a manner that when required, they may be called back.
Facilities provided by bank
•Short term loans •Overdraft •Clean overdrafts •Cash credits •Advances against goods
•Bills purchased/discounted
•Advance against documents of title to goods
Financing of export trade by banks
The advances lend by commercial banks for export financing
Pre-shipment finance
Shipment finance
Post-shipment finance
Inter-corporate deposits
The companies can borrow funds for a short period say 6 months from other companies which have surplus liquidity. The rate of interest on inter corporate deposits varies depending upon the amount involved and the time period.
Certificate of Deposit
The certificate of deposit is a document of title similar to a time deposit receipt issued by a bank except that there is no prescribed interest rate on such fund.
Public Deposits
Public deposits are unsecured loans, they should not be used for acquiring fixed assets since they are to be repaid within a period of 3 years. These are mainly used to finance working capital requirements.
Other Sources of Finance
Seed Capital Assistance
Capital Incentives
Internal Cash Accruals
Deferred Payment Guarantee
Unsecured Loans
New Instruments
• Deep Discount bonds • Secured Premium Notes • Zero Interest Fully Convertible Debentures • Zero Coupon Bonds
• Double Option Bonds
• Option Bonds • Inflation Bonds
• Floating Rate Bonds
doc_472541993.pptx
TYBMS project of finance management on
"sources of funds"
INTRODUCTION
As Financial Management two main aspects involves procurement of funds & effective utilisation of those funds it becomes crucial to understand the means from which we can procure funds and that is what we call it as “Sources of Funds”
PARAMETERS TO SELECT SOURCE OF FUNDS
? Cost of sources of fund ? Tenure ? Leverage planned by the company ? Financial conditions prevalent in the economy ? Risk profile of both company as well as the industry in which the company operates. ? Each source of fund have some advantages as well as disadvantages.
FINANCIAL SOURCES OF BUSINESS CAN BE CLASSIFIED BY USING DIFFERENT BASIS
1. According to period • long term source • medium term sources • short term sources
2. According to ownership generation • Owners capital or equity capital, retained earnings etc. • Borrowed capital such as debentures, public deposits, loans etc 3. According to source of • Internal sources e.g Retained earnings and depreciation funds. • External sources e.g. debentures, loans etc
FINANCIAL NEEDS OF A BUSINESS
Business enterprises need funds to meet their different types of requirements. All the financial needs of a business may be grouped into the following three categories: I. Long term financial needs. II. Medium term financial needs. III. Short term financial needs.
What is meant by SHORT TERM FUNDS
SHORT TERM SOURCE
SHORT TERM
TRADE CREDIT
CUSTOMER ADVANCE COMMERCIAL BANK FIXED DEPOSIT FOR LESS THAN A YEAR
DEFERRED INCOME
Accrued Expenses
Deferred Income
Goods enters
Cash enters
Comparative Chart
Types of finance
LONG
Period of repayment
MORE THAN 5 YEARS
Purpose
•LAND •BUILDING •MACHINERY •RENOVATION •MODERNIZATION •MOTOR VEHICLES •COMPUTER •HEAVY ADVERTISING •PURCHASE OF RAW MATERIALS •PAYMENT OF WAGES •RENT, INSURANCE •TELEPHONE/ELECTRICITY
MEDIUM
1-5 YEAR
SHORT
LESS THAN A YEAR
International Finance
INTERNATIONAL SOURCES IS AN EXTERNAL SOURCE OF PROCUREMENT OF FUNDS IN THE BUSINESS… SUCH EXTERNAL SOURCES INCLUDES: • • • • • COMMERCIAL BANKS DEVELOPMENT BANKS DISCOUNTING OF TRADE BILLS INTERNATIONAL AGENCIES INTERNATIONAL CAPITAL MARKETS
External Commercial Borrowing FOREIGN (ECB)
CURENCY
FUTURE
EURO BONDS
FOREIGN
CURENCY OPTION
FINANCIAL INSTRUMENTS
FOREIGN BONDS
EURO COMMER CIAL PAPERS
FULLY HEDGED BONDS
FLOATING RATE NOTES
MEDIUM TERM NOTES
EXTERNAL COMMERCIAL BORROWINGS (ECB)
? ECBs could be raised through: • International banks • Multilateral financial institutions: IFC, ADB • Export Credit Agencies • Suppliers of equipments • Foreign collaborators and Foreign equity holders
? ECB can be accessed under 2 routes: Automatic route and Approval route
EURO BONDS
FULLY HEDGED BONDS
FOREIGN BONDS
These are debt instruments issued by foreign govt. and are exposed to default risk
These are debt They eliminate risk of instruments which currency fluctuations are not denominated by selling forward in the currency of the markets the entire country in which stream of interest they are issued. payment
E.g.: yen note floated in Germany
E.g.: a British firm placing dollar denominated bonds in USA
?Medium Term Notes ?Floating Rate Notes
?Euro Commercial Papers (ECP) ?Foreign Currency Option ?Foreign Currency Futures
American depository receipts
• An American depositary receipt (ADR) is a negotiable security that represents securities of a non-US company that trade in the US financial markets. Securities of a foreign company that are represented by an ADR are called American depositary shares (ADSs).
• Shares of many non-US companies trade on US stock exchanges through ADRs. ADRs are denominated and pay dividends in US dollars and may be traded like regular shares of stock • The first ADR was introduced by J.P. Morgan in 1927 for the British retailer Selfridges.
Global Depository Receipts
• A global depository receipt or global depositary receipt (GDR) is a certificate issued by a depository bank, which purchases shares of foreign companies and deposits it on the account. GDRs represent ownership of an underlying number of shares. • Global depository receipts facilitate trade of shares, and are commonly used to invest in companies from developing or emerging markets.
• Prices of global depositary receipt are often close to values of related shares, but they are traded and settled independently of the underlying share.
• Several international banks issue GDRs, such as JPMorgan Chase, Citigroup, Deutsche Bank, Bank of New York.
Indian Depository Receipts
• An Indian Depository Receipt is an instrument denominated in Indian Rupees in the form of a depository receipt created by a Domestic Depository (custodian of securities registered with the (Securities and Exchange Board of India) against the underlying equity of issuing company to enable foreign companies to raise funds from the Indian securities Markets.
The foreign company IDRs will deposit shares to an Indian depository. The depository would issue receipts to investors in India against these shares. The benefit of the underlying shares (like bonus, dividends etc) would accrue to the depository receipt holders in India. The Ministry of Corporate Affairs of the Government of India, in exercise of powers available with it under section 642 read with section 605A had prescribed the Companies (Issue of Indian Depository Receipts) Rules, 2004 (IDR Rules) vide notification number GSR 131(E) dated February 23, 2004. Standard Chartered PLC became the first global company to file for an issue of Indian depository receipts in India.
•
•
•
Other Types of International Issues
• • • • • Foreign euro bond Euro convertible bond Euro bond Euro convertible zero bond Euro bond with equity warrant
Commercial Paper
A commercial paper is an unsecured money market instrument issued in the form of a promissory note.
Bank Advances
Banks receive deposits from public for different periods at varying rates of interest , these funds are invested and lent in such a manner that when required, they may be called back.
Facilities provided by bank
•Short term loans •Overdraft •Clean overdrafts •Cash credits •Advances against goods
•Bills purchased/discounted
•Advance against documents of title to goods
Financing of export trade by banks
The advances lend by commercial banks for export financing
Pre-shipment finance
Shipment finance
Post-shipment finance
Inter-corporate deposits
The companies can borrow funds for a short period say 6 months from other companies which have surplus liquidity. The rate of interest on inter corporate deposits varies depending upon the amount involved and the time period.
Certificate of Deposit
The certificate of deposit is a document of title similar to a time deposit receipt issued by a bank except that there is no prescribed interest rate on such fund.
Public Deposits
Public deposits are unsecured loans, they should not be used for acquiring fixed assets since they are to be repaid within a period of 3 years. These are mainly used to finance working capital requirements.
Other Sources of Finance
Seed Capital Assistance
Capital Incentives
Internal Cash Accruals
Deferred Payment Guarantee
Unsecured Loans
New Instruments
• Deep Discount bonds • Secured Premium Notes • Zero Interest Fully Convertible Debentures • Zero Coupon Bonds
• Double Option Bonds
• Option Bonds • Inflation Bonds
• Floating Rate Bonds
doc_472541993.pptx