Discuss briefly various sources of long term finance of Indian companies?

Answer 1

Long-term sources or funds are required to create production facilities through purchases of fixed assets such as plant,machinery,land,building,furniture,e.t.c. Investments in these assets represent that part of firm`s capital which is blocked on a permanent or fixed basis and is called fixed capital.

The long-term sources of finance are:

1. Ownership securities: These securities represents shares. Share are the most common form of raising long-term funds from the market.Every company,except a company limited by a guarantee,has a statutory right to issue shares. The capital of a company is divided into a number of equal parts called shares.

a. Equity shares: Represents the owner`s capital in a company.The holders of these shares have full control over the working of the company and have voting rights.Equity shareholders are paid dividends from the remaining income of a company. The rate of dividend depends upon the profit of the company.

b. Preference Shares: As the name suggests,these shares have certain preferences. There is a preference for payment of dividend.they have fixed rate of dividend,but they don`t have any voting rights and control over the management of a company.

2. Creditorship securities: It is also known as debt-capital,and it represnts debenture and bondsThe use of such securities along with shares in financing of a business generally tends to reduce the cost of capital and helps to improve the earnings of the shareholders.

a. Debentures or Bonds: A debenture is an acknowledgement of debt.It is a form of loan on which a company has to pay a fixed amount of interest to debenture-holders.they are the creditors of the company. There are many type of debentures i.e. unsecured,secured,registered,reedemable.irredeemable,convertible,zero coupon bonds,deep discount bonds,e.t.c.

3. Loan financing: A business can also finance through loans from specialised financial institutions and development banks or from commercial banks.

4. Internal financing: A new company can raise funds only through external sources,such as shares,debentures,loans,public deposits,e.t.c. But an existing firm which needs finaance for it`s future growth and expansion can generate funds through retained earnings.

5. Public deposits.