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Finance > Corporate Finance > Instruments of fund-raising


These are ownership securities. Shares bestow certain advantages to both the issuing companies and the investors. Investment in this financial instrument is of long term nature. This, however, does not mean loss of liquidity for the investor. Depending upon availability of investors' interest in the company, shares can be easily converted into cash in the secondary market.

A shareholder bears the highest risk in the company's operations (but within the limit of his/her stake in the equity of the limited liability company) . Conversely, he/she is also entitled to participate in the earning and wealth of the company (but without any limit). Issue of shares is of advantage to the company, as payment of dividend is discretionary. Equity is not required to be refunded. This instrument is quite popular with individual investors in India.

Face value of ordinary shares in India can be any amount from Re. 1 to Rs. 1,000 but the most common denomination of shares is Rs 10.

A preference share (PS) is said to be a hybrid financial instrument. Companies have issued preference shares with a large number of innovations. PS, as its name suggests, is an ownership security, but unlike an ordinary share where dividend is discretionary, PS carries a fixed rate of return (dividend) like a debenture. In order of preference, PS holders rank below the claims of creditors of the company, but above those of ordinary shareholders.

Following types of preference shares are normally available in the market:

(a) Cumulative and non-cumulative
(b) Convertible and non-convertible
(c) Redeemable and non-redeemable
(d) Participating and non-participating

In case of Cumulative PS, the dividend(s), if not paid in any period/periods are accumulated as a liability of the company and has to be paid subsequently.

Convertible PS can be converted into ordinary share on terms and condition fixed at the time of issue of such shares.

Redeemable preference shares have fixed period of maturity and are repayable at the end of that period. It is because of this property. Such PS are regarded more as a debt instrument than an ownership security

Participating preference shareholders have the best of both the world in as much as they are not only entitled to a fixed rate of dividend, but can also expect to earn a higher dividend in case the company makes good profits.

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