Top 4 Sources of Capital – Explained !

This article throws light upon the top four sources of capital. The sources are: 1. Outside Capital 2. Debentures 3. Fixed Deposits 4. Accommodation from Banks and Financial Institutions.

Capital Source # 1. Outside Capital:

A company can procure capital from outsiders in the forms of debentures, fixed deposits, accommo­dation from banks and other financial institutions, trade creditors, etc. The company has to repay the amounts after a short, medium or long period of time and until repayment has to pay interest at agreed rates.

The company shall go for loans when it has faith in its ability to repay and has sufficient assets to offer as collateral security.

Capital Source # 2. Debentures:

A company may raise funds by issuing debenture bonds with a promise to repay the amount after a period of time, say, 5 years, 10 years etc. and to pay a fixed rate of interest like 6%, 8 %, etc., until repayment.

The Companies Act provides Sees. 117 to 123 (and also Sees. 124 to 145 with regard to charges) applicable to debentures. Sec. 2(12) states that a debenture “includes debenture stock, bonds and any other securities of a company, whether constituting a charge of the property of the Company or not”.

Debenture bonds are trans­ferable like share certificates. All the rules related to transfer and transmission of shares is applicable to debenture bonds.

The major classification of debentures is as follows:

(1) Registered or Unregistered:

In the former case the name of the debenture holder is recorded on the bond and it is transferable by endorsement and delivery. In the latter case the name is not recorded and such a bond is transferable by mere delivery.

(2) Naked or Mortgage:

In the former case no property of the company is charged for the debentures issued. The company shall repay such debentures by raising funds subsequently. In the latter case some assets of the company are charged and in case the company is unable to repay the debentures-out of other sources, such charged assets will be sold for repayment.

The term charge means that the creditor will develop a right on the assets in case he does not get repayment.

This is called crystallization of charge. Charge may be of two types:

(a) Fixed— The charge is made on the fixed assets of the company,

(b) Floating— This charge is made on the floating assets of the company. A company generally appoints trustees to look after this interest of the debenture holders.

(3) Redeemable or Perpetual:

In the former case the debentures are re­payable after a certain period of time and in the latter case they are not repayable unless the company goes for liquidation.

(4) Conver­tible:

Such debentures entitle the holders to convert a part of his debenture holdings at an agreed point of time into equity or preference shares in the company at an agreed rate of exchange.

(5) Right:

According to an order and guidelines issued by the Central Govern­ment in February 1979, a company may offer ‘rights debentures’ to the shareholders, not exceeding some limits, repayable in installments and with interests at fixed rates payable six-monthly. Such debentures shall have face value of Rs. 100 and enlisted in a stock exchange.

Like shares, debentures are’ transferable and rules regarding transfer of shares are applicable. The Company Secretary has great responsibility of maintaining all records about holding and transfer as well as of payment of interest and repayment of debentures. When charge is created a Register of charges has to be prepared and maintained by him and a copy of it has to be filed with the Registrar of Companies.

The Company Secretary has to be aware of the date of repayment and accordingly apprise the Board of Directors of it.

There are different modes of repayment or redemption, like redemption on a fixed future date, redemption at any time after a certain period is over, redemption by annual installments, redemption by annual drawings (lottery) so that every year some debenture-holders are re­paid, redemption by re-purchase of debentures by the company from the market or by fresh issue of debentures.

The Company Secretary may have to advise what mode should be adopted and for that he has to prepare his arguments. He has to maintain all the records in connection with the issue, transfer and redemption of debentures.

Debenture Trust Deed:

Generally debentures are protected by creating a trust deed and appointing trustees in the interests of the debenture holders. Sec. 119 deals with the liabilities of the debenture trustees: The trust deed contains the rights of the debenture holders, the liability of the trustees, rules related to meetings of the debenture holders, etc. The Secretary has great responsibility in preparing the trust deed and its execution.

Capital Source # 3. Fixed Deposits:

Many companies to-day receive long term deposits from the public or the members of the company like fixed deposits in a bank but offering very high rate of interest.

The Com­panies Act provides Section 58A, 58Bfor dealing with Fixed Deposits and the Central Government has made very elaborate and strict rules called Companies (Acceptance of Deposits) Rules, 1975 (and subsequent amendments) for the purpose. Such Deposits are treated like debentures with regard to formalities and the said rules provide punishment for defaulting officers including the Company Secretary.

Capital Source # 4. Accommodation from Banks and Financial Institutions:

Banks offer short term while financial institutions offer medium to long term financial accommodations. After nationalisation, banks have become little liberal with regard to their terms of accommodation. It is the policy of the Government that public companies should take the assistance of financial institutions for their development.

Financial accommodation can be obtained against specific contracts containing precise terms and conditions of repayment and offering of security.

The Company Secretary who is expected to have knowledge of mercantile law and all the relevant Acts, renders very useful service in drafting such agreements or going through the drafts prepared by others. Very often the Company Secretary has to sign the documents on behalf of the company.

Submitted by : Dr. Camden, Category : Sources of Capital