Page 46 - DMGT405_FINANCIAL%20MANAGEMENT

Financial Management

Notes 3.2.7 Internal Accruals

This basically means what is being ploughed back in business i.e., retained earnings and the
depreciation charge. While depreciation is used for replacing an old machinery, etc., retained
earnings can be used, for finding other long-term requirements of the business. The major
advantage of using this as a source of long-term finance are its easy availability, elimination of
issue expenses and avoiding the problem of dilution of control (with equity source of fund). The
disadvantage of this source is limited funds from this source, plus foregoing of dividends
receipts may lead to higher opportunity costs for the firm.

Task Which of the following do you think is costliest of long-term sources of finance?
Give reasons to support your answer.

1. Preference Share Capital
2. Retained Earnings
3. Equity Share Capital
4. Debentures
5. Capital raised through private placement.

Self Assessment

Fill in the blanks:
3. Ordinary shareholders are owners of the company and they undertake the ……….inherent
in business.
4. Long-term funds from preference shares can be raised through a ……………..of shares.
5. A Zero Coupon Convertible Note (ZCCN) converts into………………...

3.3 Issue of Securities

A firm can raise capital from the primary market (both domestic and foreign) by using securities
in the following ways:
 Public issue
 Rights issue
 Private placement
 Bought out deals
 Euro issues
The apex body regulating the Indian securities market and the companies raising finance from
it is the Securities and Exchange Board of India (SEBI). After the repeal of Capital Issues Control
Act, 1947 in May 1992, SEBI was given the statutory powers to regulate the securities market.

3.3.1 Public Issue
Companies issue securities in the public in the primary market and get them listed in the stock
exchange. The major activities in making a public issue of securities are as below:
 The firm should appoint a SEBI registered category I Merchant Banker to manage the
issues. The lead manager will be responsible for all the pre and post issue activities,

40 LOVELY PROFESSIONAL UNIVERSITY