Sources Of Finance 590

SOURCES OF FINANCE

Finance is the life-line of any organization, without which its working is impossible. However, finance always cannot be brought in or contributed by the owner. It depends and varies on the operation and the size of the organization. There are various sources that provide finance. Let us have a look at them:

The main sources of finances can be categorized into: 1) External Sources b) Owner’s Fund c) Outsider’s Fund 2) Internal Sources 

 In

addition to the mentioned sources, companies sometimes go in for overseas sources too.  The main instruments that comprise the overseas sources are traded and listed in the domestic as well as the international markets by these companies.

INSTUMENTS OF OVERSEAS FINANCE Some of the main instruments of overseas finance are: 1) Global Depository Receipts (GDRs) 2) American Depository Receipts (ADRs) 3) Foreign Currency Convertible Bonds (FCCB) and 4) External Commercial Borrowings (ECB)

1.Global Depository Receipts 1.

A bank certificate issued in more than one country for shares in a foreign company. The shares are held by a foreign branch of an international bank. The shares trade as domestic shares, but are offered for sale globally through the various bank branches.

2.

It is a financial instrument used by private markets to raise capital denominated in either U.S. dollars or euros.

3) Prices of GDRs are often close to values of related shares, but they are traded and settled independently of the underlying share. 4) Several international banks issue GDRs, such as JPMorgan Chase, Citigroup, Deutsche Bank, Bank of New York etc.

American Depository Receipts 1) A negotiable certificate issued by a U.S. bank representing a specified number of shares (or one share) in a foreign stock that is traded on a U.S. exchange. 2) ADRs are denominated in U.S. dollars, with the underlying security held by a U.S. financial institution overseas. ADRs help to reduce administration and duty costs that would otherwise be levied on each transaction.

3) This is an excellent way to buy shares in a foreign company while realizing any dividends and capital gains in U.S. dollars. However, ADRs do not eliminate the currency and economic risks for the underlying shares in another country. 4) For example, dividend payments in euros would be converted to U.S. dollars, net of conversion expenses and foreign taxes and in accordance with the deposit agreement. 5) ADRs are listed on either the NYSE, AMEX or Nasdaq.

Foreign Currency Convertible Bonds 1)

2)

A type of convertible bond issued in a currency different than the issuer's domestic currency. In other words, the money being raised by the issuing company is in the form of a foreign currency. A convertible bond is a mix between a debt and equity instrument. It acts like a bond by making regular coupon and principal payments, but these bonds also give the bondholder the option to convert the bond into stock.

3) These types of bonds are attractive to both investors and issuers. The investors receive the safety of guaranteed payments on the bond and are also able to take advantage of any large price appreciation in the company's stock. 4) Due to the equity side of the bond, which adds value, the coupon payments on the bond are lower for the company, thereby reducing its debt-financing costs.

External Commercial Borrowings External Commercial Borrowings (ECB) are defined to include  commercial bank loans,  buyer’s credit,  supplier’s credit,  securitized instruments such as floating rate notes, fixed rate bonds etc.,  credit from official export credit agencies,

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Commercial borrowings from the private sector. Investment by Foreign Institutional Investors (FIIs). Applicants are usually free to raise ECB from any internationally recognized source like banks, export credit agencies, suppliers of equipment, foreign collaborations, foreign equity - holders, international capital markets etc.

 Buyer’s

Credit : A financial arrangement in which a bank or financial institution, or an export credit agency in the exporting country, extends a loan directly to a foreign buyer or to a bank in the importing country to pay for the purchase of goods and services from the exporting country. Also known as financial credit.

Supplier’s Credit : A financing arrangement under which an exporter extends credit to the buyer.  Floating rate notes : 

Floating rate notes (FRNs) are bonds that have a variable coupon, equal to a money market reference rate, like LIBOR or federal funds rate, plus a spread. The spread is a rate that remains constant. Almost all FRNs have quarterly coupons, i.e. they pay out interest every three months.



Fixed Rate Bonds : In finance, a fixed rate bond is a bond with a fixed coupon (interest) rate, as opposed to a floating rate note. A fixed rate bond is a long term debt paper that carries a predetermined interest rate. The interest rate is known as coupon rate and interest is payable at specified dates before bond maturity.

 Hence,

the overseas sources of finance are quite popular too. The reason that these options are taken into consideration is, because the costs of receiving from them is cheaper than the domestic sources.

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