Finance for Non Finance

Professionals
Unit-1
• Unit-1
• Means of financing: Share Capital, Term Loans, Debentures, Leasing, and Other forms of Funding.
• Unit-2
• Financial markets and Instruments: Types of Financial Markets: Primary and Secondary, Indices - NIFTY & SENSEX (meaning &
composition)Financial Instruments: Shares, Debt Instruments, Money Market Instruments, Long Term Financial Instruments,
Derivatives (Future, Forward, option, swaps),Fundamental and Technical Analysis, SEBI.
• Unit-3
• Banking & Financial Institutions: Types of Banks, Types of A/C in Banks, Banks various Rates, Digital Banking, Functions of
Central Bank (RBI).NBFCs.
• Unit-4
• Insurance: Basic characteristics of insurance, Types of Insurance & its features, Indemnity, Insurable Interest, Subrogation,
Utmost good Faith, IRDA.
• Unit-5:
• Mutual Funds: Introduction to mutual funds, Benefits of mutual funds, Types of mutual fund-open-ended close-ended. Risk in
mutual funds, Alternative investment market, hedge funds and Pension funds.
Unit 1 Means Of Financing

• Financing is the process of providing funds for business activities, making purchases, or investing.
• Financial institutions, such as banks, are in the business of providing capital to businesses,
consumers, and investors to help them achieve their goals.
• The use of financing is vital in any economic system, as it allows companies to purchase products out of
their immediate reach.
• Financing is a way to leverage the time value of money (TVM) to put future expected money flows to use
for projects .
• There are two types of financing: equity financing and debt financing.
• The main advantage of equity financing is that there is no obligation to repay the money acquired through
it. Equity financing places no additional financial burden on the company, though the downside is quite large.
• Debt financing tends to be cheaper and comes with tax breaks. However, large
debt burdens can lead to default and credit risk.
• The weighted average cost of capital (WACC) gives a clear picture of a firm's total
cost of financing.
• Types of Financing

• 1.Equity
• 2. Debt
• 3.Combination of Debt and Equity
 SHARE CAPITAL

• Share capital is the money a company raises by issuing common or preferred

stock. The amount of share capital or equity financing a company has can change
over time with additional public offerings.
• What are shares?
• The capital of a company is divided into shares. Each share forms a unit of ownership of a
company and is offered for sale so as to raise capital for the company. Shares can be
broadly divided into two categories - equity and preference shares.
• Equity shares give their holders the power to share the earnings/profits in the company
as well as a vote in the AGMs of the company. Such a shareholder has to share the profits
and also bear the losses incurred by the company.
 Equity shareholders are regarded as
the real owners of the company. When
Preference shares earn their holders the shares are offered for sale directly
only dividends, which are fixed, giving by the company for the first time, they
no voting rights. are offered in the primary market,
whereas the trading of shares takes
place in the secondary market.
 Types of Share Capital

Authorized Share Capital

Before a company can raise equity capital, it must obtain permission to execute the sale of stock. The company must
specify the total amount of equity it wants to raise and the base value of its shares, called the par value.

The maximum amount of share capital a company is allowed to raise is called its authorized capital.

This does not limit the number of shares a company may issue but it puts a ceiling on the total amount of money that can
be raised by the sale of the shares.
Issued Share Capital
• The total value of the shares a company elects to sell to investors is called its
issued share capital.
• The par value of the issued share capital cannot exceed the value of the
authorized share capital.
• Some companies—depending on where they are located—can issue
investor called-up shares with the promise to be paid in full at a later date.
• A company that wants to raise more equity and increase its share capital can do so
by obtaining authorization (from its Board of Directors and shareholders) to issue
and sell additional shares.
 Term Loans

• Term Loans are short-term loans offered to businesses for capital expenditure and
expansion, among others. Generally having a tenure up to 96 months, these loans
are tailor-made to suit the various financial needs of businesses.
• Minimum Documentation , Quick Disbursal of funds and repayment flexibility are
some of the major benefits of these loans.
• Term loan is also called as demand loan. A term loan is a funding from a bank for
an amount that is to be repaid as per EMI (Equated Monthly Instalment) schedule.
The interest rate can be either fixed or floating rate as per the choice of the
borrower.
 Types Of term Loans

Term loans are available to suit a borrower’s funding requirement based on factors like:
• Amount of funding required
• Repayment capacity of the borrower
• Regular cash flow and in -hand availability of the funds

• Based on this there are 3 types of term loan

• Short term Loan
• Intermediate Term Loan
• Long term Loan
• Short-term loans: These types of term loans are usually offered to firms that don't
qualify for a line of credit. They generally run less than a year, though they can
also refer to a loan of up to 18 months.
• Intermediate-term loans: These loans generally run between one to three years
and are paid in monthly installments from a company’s cash flow.
• Long-term loans: These loans last anywhere between three to 25 years. They
use company assets as collateral and require monthly or quarterly payments from
profits or cash flow. They limit other financial commitments the company may take
on, including other debts, dividends, or principals' salaries, and can require an
amount of profit set aside specifically for loan repayment.
 Common Attributes of Term Loans
Term loans carry a fixed or variable interest rate, a monthly or
quarterly repayment schedule, and a set maturity date.

If the loan is used to finance an asset purchase, the useful life of

that asset can impact the repayment schedule.

The loan requires collateral and a rigorous approval process to

reduce the risk of default or failure to make payments.

However, term loans generally carry no penalties if they are paid

off ahead of schedule.
 Debentures

• A debenture is a type of debt instrument that is not backed by any collateral and
usually has a term greater than 10 years.
• Debentures are backed only by the creditworthiness and reputation of the issuer.
• Both corporations and governments frequently issue debentures to raise capital or
funds.
• Some debentures can convert to equity shares while others cannot.
 Features of Debentures

• Debentures may pay periodic interest payments called coupon payments.

• Like other types of bonds, debentures are documented in an indenture.
• An indenture is a legal and binding contract between bond issuers and bondholders.
• The contract specifies features of a debt offering, such as the maturity date, the timing of interest
or coupon payments, the method of interest calculation, and other features. Corporations and
governments can issue debentures.
• Governments typically issue long-term bonds—those with maturities of longer than 10 years.
Considered low-risk investments, these government bonds have the backing of the government
issuer.
• Corporations also use debentures as long-term loans. Debentures are advantageous for
companies since they carry lower interest rates and longer repayment dates as compared to
other types of loans and debt instruments.
• Interest Rate The coupon rate is determined, which is the rate of interest that the company will
pay the debenture holder or investor. This coupon rate can be either fixed or floating. A floating
rate might be tied to a benchmark such as the yield of the 10-year Treasury bond and will change
as the benchmark changes.
• Credit Rating The company's credit rating and ultimately the debenture's credit rating impacts
the interest rate that investors will receive. Credit-rating agencies measure the creditworthiness
of corporate and government issues. These entities provide investors with an overview of the
risks involved in investing in debt.
• Maturity Date For nonconvertible debentures the date of maturity is also an important feature.
This date dictates when the company must pay back the debenture holders. The company has
options on the form the repayment will take. It is as redemption from the capital, where the issuer
pays a lump sum amount on the maturity of the debt. Alternatively, the payment may use a
redemption reserve, where the company pays specific amounts each year until full repayment at
the date of maturity.
 Types of Debentures

• Registered vs. Bearer

• When debts are issued as debentures, they may be registered to the issuer. In this
case, the transfer or trading in these securities must be organized through a
clearing facility that alerts the issuer to changes in ownership so that they can pay
interest to the correct bondholder.
• A bearer debenture, in contrast, is not registered with the issuer. The owner
(bearer) of the debenture is entitled to interest simply by holding the bond.
 Redeemable vs. Irredeemable

Redeemable debentures clearly spell out the exact terms and date by which the issuer of the bond must
repay their debt in full.

Irredeemable (non-redeemable) debentures, on the other hand, do not hold the issuer liable to repay in full
by a certain date. Because of this, irredeemable debentures are also known as perpetual debentures.
Convertible vs. Nonconvertible

Convertible debentures are bonds that can convert into equity shares of the issuing corporation after a specific period. Convertible debentures are
hybrid financial products with the benefits of both debt and equity. Companies use debentures as fixed-rate loans and pay fixed interest payments.
However, the holders of the debenture have the option of holding the loan until maturity and receiving the interest payments or converting the loan
into equity shares.

Convertible debentures are attractive to investors that want to convert to equity if they believe the company's stock will rise in the long term.
However, the ability to convert to equity comes at a price since convertible debentures pay a lower interest rate compared to other fixed-
rate investments.

Nonconvertible debentures are traditional debentures that cannot be converted into equity of the issuing corporation. To compensate for the lack of
convertibility investors are rewarded with a higher interest rate when compared to convertible debentures.
 Pros And Cons of Debentures

• Pros A debenture pays a regular interest rate or coupon rate return to investors.
• Convertible debentures can be converted to equity shares after a specified period,
making them more appealing to investors.
• In the event of a corporation's bankruptcy, the debenture is paid before common stock
shareholders.
• Cons Fixed-rate debentures may have interest rate risk exposure in environments
where the market interest rate is rising.
• Creditworthiness is important when considering the chance of default risk from the
underlying issuer's financial viability.
• Debentures may have inflationary risk if the coupon paid does not keep up with the
rate of inflation.
 LEASING

• A lease refers to a contract where one party grants a right to use

a property or land to another party in return for consideration and for a specific
period. Both the parties enter into a lease agreement specifying the terms and
conditions of the agreement. The party who owns the leased premises or property
is the lessor. The party accepting the leased property is the lessee.
• A lease is a contractual arrangement calling for the user (referred to as the lessee)
to pay the owner (referred to as the lessor) for the use of an asset. Property,
buildings and vehicles are common assets that are leased. Industrial or business
equipment are also leased.
 Types of Leasing

• Finance Lease
• A finance lease is a lease in which the lessor passes nearly all the risks & benefits of asset holding to the lessee
in exchange for lease rents. In other terms, it places the lessee in a similar position as if they have bought the
asset.
• Operating Lease
• The lessee utilises the property for a specified time under an operational lease. After providing notice, any party
has the opportunity to cancel the lease. In this kind of lease:
• The lessor bears all costs.
• The lessor would not be able to recover the entire item cost.
• The lessor provides specialised services.
• It is preferable when the equipment is expected to become obsolete.
• Leveraged Lease
• A leveraged lease is one in which the lessor loans a part of the purchase cost from lenders or financial firms. The
assets and lease rents serve as collateral for this loan, and the debt is paid straight from lease rents by either a lessee
or a lessor.
• Conveyance Lease
• The lease under a conveyance kind would be for a lengthy period with the explicit goal of transmitting property
ownership to the lessee.

• Sale and Leaseback

• A corporation that owns the property sells it all to the lessor in such a sale & leaseback transaction the lessor pays for
the property instantly but leases it to the seller. As a result, the asset's seller turns to the lessee. The investment is
retained by the seller, who seems to be a lessee, while ownership is owned by the lessor, who is the purchaser. This
agreement is made so that the owning firm may acquire financing to manage the company and the asset.
• Specialised Service Lease
• The lessor or holder of the property is an expert in the asset he is renting out. He not
just leases out but provides the tenant with customised personal attention. Electronics,
autos, air conditioners, and other such items are examples.
• Net and Non-Net Lease
• The lessor is responsible for maintenance, insuring, plus other incidental expenditures
under a non-net lease. As mentioned earlier, the lessor is unconcerned with the
upkeep costs under a net lease. The lessor solely provides financial services.
• Cross Border Lease
• Cross-border leasing refers to leasing across national borders. Shipping, aviation
service, and other services fall within this category.
 Forms Of Funding

• Funding is the money that a company receives from various investors. When someone
wants to create a new company, they often need funding to start business operations and
keep the company running until there is a positive cash flow. A new business needs funds
to develop its model and products, hire employees, build a customer base, spread into
new offices, expand its operations, create an advantage over competitors or grow from a
private company to a public one.
• The various types of Funding are-
• Venture Capital
• Venture capital is a form of private equity financing that is provided by firms or funds to
startup, early-stage, and emerging companies that have been deemed to have high
growth potential or which have demonstrated high growth.
• Grants are a form of funding that does not require you to pay back to allocated funds. Like
R&D tax credits . Government grants. Grants can be obtained from different levels of the
government for a variety of purposes and industries.
• Angel investors are typically considered part of the seed round of funding, meaning they
provide funding for businesses in their early stages. Angel investors are high-net-worth
individuals who get an equity stake in return for their financing. They expect to make a
profit
• Small Business Loans. One can avail of business loans from banks for the funding of a
startup. the most commonly known funding source is a small business loan. These are
relatively easy to obtain and can be a great source
• Bootstrapping. This is when you use your own personal savings to finance your business. It's
often the cheapest and quickest way to get started.
• Seed Funding As the name suggests, 'Seed funding' is the funding for a startup when it is at the
seedling stage i.e., inception, ideation, or the beginning stage. It is essential for every
entrepreneur to understand what constitutes seed funding and why it is essential for building
their businesses.
• Business Incubator A business incubator is a program that gives very early-stage companies
access to mentorship, investors and other support to help them get established.
• Crowd Funding represents a process of raising funds to fulfill a certain project or
undertake a venture by obtaining small amounts of money from a large number of
individuals. The crowdfunding process usually takes place online.