SOURCES OF FINANCE

PRESENTED BY:
Varun Gupta
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

Commission

Client Receivable
s

Cash
Receiva
Factor
Cash b-les

• Recourse and Non Recourse

 VENTURE CAPITAL
Venture 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
 Foreign Direct Investment (FDI) means a company or any
(FDI)
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.
Companies engaged in FDI may be involved in the
functional areas such as: Production, Marketing and R & D.

 For Example: British company investing directly in Indian

healthcare sector, is considered as FDI.
 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.
11
 STRATEGIES FOR FOREIGN
INVESTORS
 LIAISON TO INVEST
OFFICE / REPRESENTATIVE OFFICE IN INDIA
 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 INDIA
The 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 application

The 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  FII flies away at the
permanent nature. shortest political

• Entry and Exit is  Entry and Exit is

difficult for FDI. relatively very
easy.
• FDI helps in
increasing  FII does not affect
production and production and
employment. 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 centers
3. Providing water and electricity 
4. Fight disease
5. 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 • seeks to promote the economic
monetary system development of the world's poorer
countries

• promotes exchange stability and • assists developing countries

orderly exchange relations among through long-term financing of
its member countries development projects and
programs
• assists all members--both • provides to the poorest
industrial and developing developing countries whose
countries per capita GNP is less than
$865 a year
 IMF
• supplements the currency
reserves of its members
• draws its financial resources
principally from the quota
subscriptions of its member
countries
• has at its disposal fully paid-in
quotas now totaling SDR 145
billion (about $215 billion)
THE WORLD BANK
• encourages private enterprises in
developing countries through its
affiliate, the International Finance
Corporation (IFC)
• acquires most of its financial
resources by borrowing on the
international market
• 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.