Question

Discuss the sources from which a large industrial enterprise can raise capital for financing modernisation and expansion.

Answer 1

The following are some of the sources of long-term funds.

(a) Equity shares: These shares represent the ownership capital of a company. The holders of such shares are known as equity share holders and enjoy a say in the management and gain higher returns when the profits are higher. They are also called the owners of the company, or residual owners, since payments to them are made only after paying the external debts or claims.

(b) Retained earnings: Firms generally keep a certain fraction or part of their profits before distributing dividends to their shareholders. These undistributed profits are known as retained earnings because the funds are kept for future use.

(c) Preference shares: These types of shares provide the shareholders a preferential right regarding the repayment of capital and payment of earnings after a certain specified period of time. Such repayment to the preference share holders is made in accordance with the terms specified in Section 80 of the Companies Act, 1956.

(d) Debentures: Debentures are financial instruments used by companies to raise long-term debt capital. They imply that a company has borrowed a certain sum of money which it will repay later to the debenture holders. Just like loans, they carry a fixed rate of return and specify in advance the time for repayment of the debts.

(e) Loans from banks and other financial institutions: Business enterprises can borrow funds for a fixed period of time from banks and financial institutions in return for a fixed periodic payment called interest. The time for repayment of such a loan is fixed and is stated in advance at the time of granting the loan.