DR.

SHAKUNTALA MISRA NATIONAL

REHABILITATION UNIVERSITY, LUCKNOW

PROJECT- ON

“sources of Long Term Finance”

SUBMITTED TO

SHAIL SHAKYA

ASSISTANT PROFFESOR

FACULTY OF LAW

D.S.M.N.R.U

SUBMITTED BY

PREETI SINGH

B.COM L.L.B (HONS)

VIII SEMESTER

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 Acknowledgement:

I Preeti Singh would like to express my deep gratitude to Prof. Shail shakya sir, for giving me
valuable input on the topic, which had made me competent enough to prepare my project.

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 INDEX

Introduction

Sources of Long Term Finance

Capital Market

(i)Primary Market

(ii) Secondary Market

Special Financial Institutions

Mutual Funds

(i)Types of Mutual fund

Leasing Companies

Foreign Sources

(i) external borrowings

(ii) foreign investments and;

(iii) deposits from NRIs.

Retained Earnings

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 INTRODUCTION

Finance is required for normally to start a business and for expansion of business and to pay for

the day to day running business. Although finance is needed on short term basis and long term

basis. Short term finance is term of finance which available for less than 1 year.

.and the long term financing is a form of financing that is provided for period of long term basis.

This project is only deal with sources of long term finance. The methods of raising finance are

also termed as the sources of finance. But, as a matter of fact the methods refer only to the forms

in which the funds are raised.

Sources of long term finance

The sources of long-term finance refer to the institutions or agencies from, or through which

finance for a long period can be procured., in case of sole proprietary concerns and partnership

firms, long-term funds are generally provided by the owners themselves and by the retained

profits. But, in case of companies whose financial requirement is rather large, the following are

the sources from, or through which long-term funds are raised.

(a) Capital Market

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(b) Special Financial Institutions

(c) Mutual Funds

(d) Leasing Companies

(e) Foreign Sources

(f) Retained Earnings

(1) CAPITAL MARKET

Capital market refers to the organisation and the mechanism through which the companies, other

institutions and the government raise long-term funds. So it constitutes all long-term borrowings

from banks and financial institutions, borrowings from foreign markets and raising of capital by

issuing various securities such as shares debentures, bonds, etc. For trading of securities there are

two different segments in capital market.

Primary market

Secondary market.

The primary market deals with new/fresh issue of securities and is, therefore, known as new

issue market.

The secondary market on the other hand, provides a place for purchase and sale of existing

securities and is known as stock market or stock exchange.

The new issue market primarily consists of the arrangements, which facilitates the procurement

of long-term finance by the companies in the form of shares, debentures and bonds. The

companies usually issue those securities at the initial stages of their formation and so also later

on for expansion and/or modernization of their activities. However, the selling of securities is not

an easy task, as the companies have to fulfill various legal requirements and decide upon the

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appropriate timing and the method of issue. Hence, they seek assistance of various intermediaries

such as merchant bankers, underwriters, stock brokers etc. to look after all these aspects. All

these intermediaries form an integral part of the primary market.1

The secondary market (stock exchange) is an association or organisation or a body of individuals

established for the purpose of assisting, regulating and controlling the business of buying, selling

and dealing in securities. It may noted that it is called a secondary market because only the

securities already issued can be traded on the floor of the stock exchange. This market is open

only to its members, most of whom are brokers acting as agents of the buyers and sellers of

securities. The main functions of this market lie in providing liquidity (ready encashment) to

securities and safety in dealing

SPECIAL FINACIAL INSTIUTIONS

A number of special financial institutions have been set up by the central and state governments

to provide long-term finance to the business organisations. They also offer support services in

launching of the new enterprises and so also for expansion and modernisation of existing

enterprises. Some of the important ones are Industrial Finance Corporation of India (IFCI),

Industrial Investment Bank of India (IIBI), Industrial Credit and Investment Corporation of India

(ICICI), Industrial Development Bank of India (IDBI), Infrastructure Development Finance

Company Ltd. (IDFC), Small Industries Development Bank of India (SIDBI), State Industrial

Development Corporations (SIDCs), and State Financial Corporations (SFCs), etc. Since these

institutions provide developmental finance, they are also known as Development Banks or

Development Financial Institutions (DFI). Besides these development banks there are a few other

1
https://www.nse-india.com/content/us/ismr2004ch2.pdf

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financial institutions such as life Insurance Corporation of India (LIC), General Insurance

Corporation of India (GIC) and Unit Trust of India (UTI) which provide long-term finance to

companies and subscribe to their share and debentures2.

The main functions of these institutions are: and Unit Trust of India (UTI) which provide long-

term finance to companies and subscribe to their share and debentures. The main functions of

these institutions are:

(i) to grant loans for a longer period to industrial establishment;

(ii) to help the establishment of business units that require large amount of funds and have long

gestation period;

(iii)to provide support for the speedy development of the economy in general and backward

regions in particular;

(iv) to offer specialized services operating in the areas of promotion, project assistance, technical

assistance services and training and development of entrepreneurs;

(v) to provide technical and professional management services and help in identification,

evaluation and execution of new projects.

2
http://financialservices.gov.in/banking-divisions/Financial-Institutions-and-others

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BANKS

Banks usually provide short-term finance to business firms in the form of loans and advances,

cash credit, overdraft etc. But now-a-days, most of the commercial banks have also started term

lending (long and medium term) and providing need based finance of different time periods to

firms of all sizes.

NON-BANKING FINANCIAL COMPANIES (NBFCS)

various housing finance companies, investment companies, vehicle finance companies etc.

operating in private sectors different parts of our country. These companies are categories under

Non-Banking Financial Companies, because they perform the twin functions of accepting

deposits from the public and providing loans. However they are not regarded as banking

companies as they do not carry on the normal banking activities. They raise funds from the public

by offering attractive rate of interest and give loans mainly to the wholesale and retail traders,

small-scale industries and self-employed persons. The loans granted by these finance companies

are generally unsecured and the interest charged by them ranges between 24 to 36 percent per

annum. Besides giving loans and advances, the NBFCs also have purchase and discount hundis,

undertaken merchant banking, housing finance, lease financing, hire purchase business etc. In

our country, NBFCs have emerged as an important financial intermediary due to simplified loan

sanction procedure, attractive rate of return on deposits, flexibility and timeliness in meeting the

credit needs of the customers.3

3
shodhganga.inflibnet.ac.in/bitstream/10603/8650/11/11_chapter%203.pdf

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MUTUAL FUNDS

Mutual fund refers to a fund established in the form of a trust by a sponsor to raise money through

one or more schemes for investing in securities. It is a special type of investment institution,

which acts as an investment intermediary that collects or pools the savings of a large number of

investors and invests them in a fairly large and well diversified portfolio of sound investments.

This minimizes their risk and ensures good returns to the investors. Thus, they act as an

investment agency for small investors and a good source for long-term finance for bussness.

Feature of Mutual Fund

The essential features of mutual funds are as follows:

(1) It is a trust into which a number of investors invest their money in the form of units to

form a large pool of funds.

2. The amount is invested in securities by the managers of the fund.

3. The amount is invested in different securities of reputed companies to ensure definite and

regular income. Thus, it helps in minimizing the risk.

4. The managers of the fund are obliged to redeem the units on demand or on the expiry of a

specified period.

(1) TYPES OF MUTUAL FUNDS

(a) Open Ended Funds: These funds have no fixed corpus and period. Such fund continuously

offer units for sale and is ready to buy back the units surrendered. In other words, investors are

free to buy from, or sell to, the trust any number of units at any point of time at prices which are

linked to the net asset value (NAV) of the units.

(b) Close Ended Funds: In case of these funds, subscriptions from the investors are collected

during a specified time period and have a fixed corpus. Not only that, the investors cannot redeem

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their units till the specified maturity date. However, to provide liquidity, these are listed on the

stock exchange and the investors can purchase and sell through the brokers at the market price

without any difficulty.

(c) Unit Trust of India was the first mutual fund started in India as early as 1964. Later, LIC,

GIC and some nationalised banks also launched their mutual funds with high degree of success.

However, during post liberalisation era, many private sector mutual funds have entered the fray.

To mention a few, these are: Birla Sun Life, HDFC, HSBC, ICICI Prudential, DSP Merrill Lynch,

DBS Chola Mutual Fund.

LEASING COMPANIES

leasing arrangement as a method of long-term finance in the previous unit. This method has

become quite common among the manufacturing companies. Leasing facility is usually provided

through the mediation of leasing companies who buy the required plant and machinery from its

manufacturer and lease it to the company that needs it for a specified period on payment of an

annual rent.

For this purpose a proper lease agreement is made between the lessor (leasing company) and

lessee (the company hiring the asset). Such agreement usually provides for the purchase of the

machinery by the lessee at the end of the lease period at a mutually agreed and specified price. It

may be noted that the ownership remains with the leasing company during the lease period.

Sometimes, a company, to meet its financial requirements, may sell its own existing fixed asset

(machinery or building) to a leasing company at the current market price on the condition that

the leasing company shall lease the asset back to selling company for a specified period. Such

an arrangement is known as ‘Sell and Lease Back’. The company in such arrangement gets the

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funds without having to part with the possession of the asset involved which it continues to use

on payment of annual rent for the lease.4

the lease rent includes an element of interest besides the expenses and profits of the leasing

company. the leasing company must earn a reasonable return on its investment in lease asset.

FOREIGN SOURCES

Foreign Sources also play an important part in meeting the long-term financial needs of the

business in India. These usually take the form of (1) external borrowings; (2) foreign investments

and; (3) deposits from NRIs.

1. External Borrowings: These include loans External Borrowings: These include loans obtained

at concessional rates of interest with long maturity period and commercial borrowings. The major

sources of concessional loans have been the International Monetary Fund (IMF), Aid India

Consortium (AIC), Asian Development Bank (ADB), World Bank (International Bank for

Reconstruction and Development) and International Financial Corporation. The World Bank

grants loans for specific industrial projects of high priority and given either directly to an

industrial concern or through a government agency. The International Finance Corporation, an

affiliate of the World Bank, grants loans to industrial units for a period of 8 to 10 years. Such

loans do not require government guarantee.

As for the external commercial borrowings, their major sources has been the export credit

agencies like US Exim Bank, the Japanese Exim Bank, Export Credit and Guarantee Corporation

4
download.nos.org/srsec319new/319EL16.pdf

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of U.K. and other government and multilateral agencies. The external commercial borrowings

are permitted by the 5government as an important source of finance for Indian firms for the

expansion investments.

2. Foreign Investments: The foreign investments in our country are generally done in the form

of foreign direct investment (FDI) or through foreign collaborations. The foreign direct

investment usually refers to the subscription by the foreigners to shares and debentures of the

Indian Companies. This is also known as portfolio investment and covers their subscription to

ADRs, GDRs and FCCBs (Foreign Currency Convertible Bonds).

Alternatively, some companies are formed with the specified purpose of operating in India or the

multinationals can set up their subsidiary or branch in India. As for the foreign collaborations,

these can be of financial collaborations involving foreign companies participation in equity

capital of an existing or new undertaking. The technical collaborations are by way of supply of

technical knowledge, patents and machineries.

The main advantage of foreign investment is that generally the foreign investor also brings with

him the technical expertise and the modern machinery. The disadvantage, however, is that a large

part of profits are transferred to the foreign investors.

3. Non-resident Indians (NRIs): Persons of Indian origin (PIO) living abroad commonly known

as Non-Resident Indians (NRIs) constitute an important source of long-term finance for industries

in India. The most common form of their contribution is in the form of deposits under Foreign

Currency Non-Resident Account (FCNRA) and Non-Resident (External) Rupee Account

(NRERA).

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RETAINED EARNINGS

Retained earnings refer to the undistributed profits of companies which is usually kept in the

form of general reserve. Primarily, it is a hedge against low profits in future and is used for the

issue of bonus shares by the company. But, in effect, it acts as an import source of long-term

finance for the companies with Zero cost of capital. The retained profits can be used for

expansion and modernization programmes by the companies. The amount of retained earnings is

determined by the quantum of profits, the dividend payout policy followed by the management,

the legal provisions for dividend payment, and the rate of corporate taxes etc.

It is an internal source, which does not involve any cost of floatation and the uncertainties of

external financing. In fact, it is regarded as the most dependable source of long-term finance. It

also strengthens the firm’s equity base, which enables to borrow at better terms and conditions.

The main drawbacks of this source are

(a) it is fully dependent on the accuracy of profits; and

(b) possibility of reckless use of funds by the management.

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 Conclusion

This project only deals with long term finance for sarting b business a finance is needed or where

the finance is come from so there is method given in this project where the fund can be raised by

short term finance and by long term fiancé. So in this project methods of raising long term fiannce

is given which is capital market, financial instution, banks, leasing, mutual fund etc.

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