Fund raising - Possible ways
The company can raise funds if they need for expansion of business operations or to create new products or due to loss of funds. They can raise funds through various means such as debt financing, corporate bonds, debentures or through shares, Initial Public Offer or book building process. There are two types of financing for the company, they are debt financing and equity financing.
A. Debt Financing
Debt financing means that the company raise their funds by borrowing money from the investors or creditors and that the company have to pay within a reasonable time along with the interest. The company borrow money from the banks or moneylenders in order to increase the capital, leading to innovations, entering into new markets and for expansion of businesses. There are various types of debt financing instruments for raising funds for the companies.
1. Corporate Bonds
Corporate bonds are issued by the companies for many reasons including merger and acquisition and expansion of business. The company issue bonds from the existing investors and sell it to public. Investors invest with the believe that the money will be refunded with interest over a period. The corporate bonds also actively traded on the secondary market.
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 issued by the corporations in order to raise their capital or funds for expansion and growth of businesses.
Under Section 2(30) of the Companies Act, 2013 explains that debentures include instruments such as bonds, securities are the proof of debt financing.
Loans are the borrowings which are taken from the banks for the business requirement. It is a contract in which the lenders give money to the company for a limited period of time. The lender sets the interest for repayment of loan and it also specifies that it should be paid within a limited period of time.
4. Commercial paper
Commercial papers are also known as promissory notes. It is a short-term financing which is issued by the company to raise their funds for their business operations and it also provides an opportunity for the investors to invest their money.
B. Equity Financing
Equity financing means that the company can raise their funds by selling their shares in the business. An organization requires funds for expansion of businesses, to create innovations and entrance into new markets. It sells their shares to the public so that they can also invest the money in their business operations.
There are different types of equity financing.
1. Angel investors -
2. Venture capital market
3. Institutional Investor
4. Company investors
Types of equity finance
There are two types of equity finance
1. Initial public offer
An initial public offering refers to the process of offering new shares of private companies to the public. It allows the company to raise funds from the public. In order to make private companies sell their shares to public it should follow the Initial public offer procedure.
2. Voluntary book building process
Voluntary book building process provides solution to companies with ambitious expansion plan. It enables the issuer to sell its issues to the investors on the floor price or above the floor price. The issuer under guidance of an underwriter explores suitable price to be determined on issuance of shares. This process is an enhancer to determination of issue prices.
3. Without IPO (Initial Public Offer)
It is subdivided into three parts
1. Right issue
Rights issues are dividend of subscription rights to buy additional securities in a company made to company’s existing shareholder. This can be done after the process of IPO. It is governed by section 62 of the Companies Act, 2013.
2. Private placement
Private placement means that the companies take a small amount of capital from a limited number of investors. It offers the securities that are not registered within the securities and exchange commission. It is governed under section 42 of Companies Act, 2013.
3. Preferential Allotment
The preferential allotment is a process.in which the allotment of shares is done on preferential basis by group of investors. In preferential allotment the company gives its shares to particular group or sector. The procedure is very fast in raising the funds for the company. It is governed by section 62 of the Companies Act, 2013.