UNIT -6
SOURCES OF LONG-TERM FINANCE AND UNDERWRTITING
6.2 NATURE AND IMPORTANCE OF LONG-TERM FINANCE :-
→ Long-term finance is associated with long-temr return on the investment.
→ The Improtance of long-term fincance, therefore, lies in its necessity for investment in fixed assets which is essential particularly for manufacturing activites.
→ Long term finance involves long-term commitment of funds which cannot be withdrawn at short notice.
→ And larger the business greater is the need for long-term finance
6.3 SOURCES OF LONG-TERM FINANCE :-
• Sources are :-
(1) Captial market which cosists of individual investors, financial institutions and investment companies.
(2) Special financial instituations consistign of development banks and institutional investors.
(3) Leasing companies
(4) Foregin sources
(5) Retained profits.
• Capital Markets :-
→ Capital market actually denotes the arrangements whereby transactions of money capial (not capital goods) are facilitated.
→ In other words, the transactions through which long-term funds are procured by companies and supplied by investors.
→ This is the market for long-term capital.
• Special Financial Institutions :-
→ Some financial institutions or ivestment companies are :-
-
(1) Development Banks :-
(a) Industrial Finance Corporation of India (IFCI).
(b) Industrial Credit and Ivestment Corporation of India (ICICI).
(c) Industrial Development Bank of India (IDBI).
(d) State Financial Corporations (SFCs).
(2) Investment Institutions are :-
(a) Investment Corporations
Eq. LIC of India.
(b) Investment Companies
(c) Investment Trusts.
• Foreign Sources :-
→ Funds can also be collected from foreign sources which usually consist :-
(1) Foreign Collaborator :-
→ If approved by the government of india, larger companies may be able to secure long term finace on the basis of collaboration agreement with copanies abroad.
(2) Internationl Financial Institutions :-
→ Internationl financaial instituations provide long-term funds for industrial development all over the world.
→ The most important among them are :-
(a) The World Bank
(b) Internationl Finance Corporation.
(3) Non-resident Indians (NRI) :-
→ Underwriting refers to an agreements between the promoters or directors of a company on the one hand, and an individaul, firm or institution (know as underwiter) on the other.
→ Whereby the latter agrees to take up the whole or part orf the shares or debentures issued which may not be subscribed by the public.
• Terms and Conditions of Underwriting :-
(1) The number of shares of debentures which are agreed to be underwitten.
(2) An undertaking by underwiters to take up such of the shares or debentures as are not subscribed by the public.
(3) An undertaking by the company that the tems of issue given in the prospectus will not be changed without the consent of underwiters.
(4) Authority of the underwiters to the company to allot them the balance of shares or debentures not taken up by the publci.
(5) The rate of commission to be paid to the underwiters and the mode of payment.
