Maharashtra Board Class 12 Secretarial Practice Chapter 2 Sources Of Corporate Finance PDF Download

Sources Of Corporate Finance

Finance holds the key to all business activities. No business activity can ever be pursued without financial support. Finance is necessary throughout the activities of promotion, organisation and regular operations of business. All functions of business are ultimately dependent on finance.

The Finance needed by business organisation is termed as 'Capital'. Every business organisation needs certain capital for its activities. A joint stock company, which is a modern form of business organisation and being a large undertaking, requires huge capital for business. This huge capital collection or capital formation has special significance in the management of joint stock company.

Capital formation is a process of collection of capital from various sources according to financial plan of company.

A joint stock company collects huge funds through different sources. These various sources of finance available to business may be explained with the following chart.

The above sources of finance may be external or internal.

External Source: When capital is raised from outsiders.

Internal Source: When capital is made available from within the organisation.

Teacher's Note

Finance is like the blood of a business. Just like you need money to buy food and clothes, companies need capital to buy machines and build factories. In India, big companies raise money from the public by selling shares.

Exam Trick

Remember: Owned capital = shares and profits kept in company. Borrowed capital = loans and debentures. Think of it like your pocket money versus money borrowed from your friend.

Points to Remember

Finance is money needed by business to work and grow.
Capital means the total amount of money a company has.
Sources of finance are divided into two types: owned capital and borrowed capital.
Owned capital comes from owners and kept profits.
Borrowed capital is money taken as loans that must be repaid.

2.1 Sources Of Owned Capital

The capital raised by company with the help of owners (shareholders) is called owned capital or ownership capital. The shareholders purchase shares of the company and supply necessary capital. It is one form of owned capital.

Another form of owned capital is retained earnings. It is also known as ploughing back of profit. It is reinvestment of profit in the business by the company itself. Retained earning is an internal source of finance.

Owned capital is regarded as a permanent capital, as it is returned only at the time of winding up of the company.

Owned capital in the form of share capital provides initial source of capital for a new company. It can be raised any time later to satisfy additional capital needs of a company. However, retained earnings cannot be an initial source of capital but it can be important source of capital when company runs it's business profitably during it's existence.

Promoters decide the share capital required by a company. This amount of share capital is known as authorised capital. It is stated in the Capital clause of Memorandum of Association of the company. Let us learn in detail the various sources of owned capital.

2.1.1 Shares

The term share is defined by Section 2(84) of the Companies Act 2013, 'Share means a share in the share capital of a company and includes stock'.

Share is a unit by which the share capital is divided. The total capital of company is divided into small parts and each part is called share and the value of each part / unit is known as face value. Share is a small unit of capital of a company. It facilitates the public to subscribe to the capital in smaller amount.

A person can purchase any number of shares as he wishes. A person who purchases shares of a company is known as a shareholder or a member of that company.

Features Of Shares:

1. Meaning: Share is a smallest unit in the total share capital of a company.

2. Ownership: The owner of share is called as shareholder. It shows the ownership of a shareholder in the company.

3. Distinctive Number: Unless dematerialised, each share has distinct number for identification. It is mentioned in the Share Certificate.

4. Evidence of title: A share certificate is issued by a company under it's common seal. It is a document of title of ownership of shares. A share is not any visible thing. It is shown by share certificate or in the form of Demat share.

5. Value of a Share: Each share has a value expressed in terms of money. There may be:

a) Face value: This value is written on the share certificate and mentioned in the Memorandum of Association.

b) Issue price: It is the price at which company sells it's shares.

c) Market Value: This value of share is determined by demand and supply forces in the share market.

6. Rights: A share confers certain rights on its holder such as right to receive dividend, right to inspect statutory books, right to attend shareholders' meetings, and right to vote at such meetings, etc.

7. Income: A shareholder is entitled to get a share in the net profit of the company. It is called dividend.

8. Transferability: The shares of public limited company are freely transferable in the manner provided in the Articles of Association.

9. Property of Shareholder: Share is a movable property of a shareholder.

10. Kinds of Shares: A company can issue two kinds of shares:

a) Equity shares

b) Preference shares

Kinds Of Shares (As Per Section 43 Of The Companies Act 2013)

A company can issue different types of shares depending upon right to control, income and risk. The following chart shows different kinds of shares.

A. Equity Shares: Equity shares are also known as ordinary shares. Companies Act defines equity shares as 'those shares which are not preference shares'.

The above definition reveals that:

a) The equity shares do not enjoy preference for dividend.

b) The equity shares do not have priority for repayment of capital at the time of winding up of the company.

Equity shares are fundamental source of financing business activities. Equity share holders own the company and bear ultimate risk associated with the ownership.

Teacher's Note

Equity shares are like owning a piece of the company. If you buy equity shares of TCS or Reliance, you own a small part of that company. This is why shareholders get voting rights.

Exam Trick

Remember: Equity = no fixed dividend + control of company. Think of equity shareholders as real owners. They get whatever is left after paying everyone else.

Points to Remember

Shares are small units of company capital that people can buy.
Equity shares do not have fixed dividends.
Equity shareholders have voting rights in the company.
Share owners are called shareholders or members.
Each share has a face value written on the certificate.

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