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A Handbook on Private Equity Funding

Rajkumar Adukia 
on 07 March 2012

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INTRODUCTION

The private equity boom is breathtaking. It's not just making investors rich - the wave of deals is changing the mindset of corporate managers everywhere. The No. 1 reason private equity is on such a rise is the  availability of capital. It opens up a universe of possibilities. The good  news is that you don't have to wait for a Private Equity firm to swoop into your organization. By using private-equity strategies, any company  can improve results and maybe even become as successful as the private equity funded companies.

In finance, private equity is an asset class consisting of equity securities in operating companies that are not publicly traded on a stock exchange. There are a wide array of types and styles of private equity and the term private equity has different connotations in different countries. Private Equity is a part of the entire financial system of the Country, and therefore it becomes essential to first explain a little about the Financial  system and the major sources of finance.

Finance

The term "finance" in our simple understanding it is perceived as  equivalent to 'Money'. But finance exactly is not money, it is the source of providing funds for a particular activity. Thus public finance does not  mean the money with the Government, but it refers to sources of raising revenue for the activities and functions of a Government. Providing or securing finance by itself is a distinct activity or function,  which results in Financial Management, Financial Services and Financial  Institutions. Finance therefore represents the resources by way funds  are needed for a particular activity. We thus speak of 'finance' only in relation to a proposed activity. Finance goes with commerce, business, banking etc. Finance is also referred to as "Funds" or "Capital", when referring to the financial needs of a corporate body.

Financial System

A financial system or financial sector functions as an intermediary and  facilitates the flow of funds from the areas of surplus to the areas of  deficit. A Financial System is a composition of various institutions,  markets, regulations and laws, practices, money manager, analysts,  transactions and claims and liabilities. The word "system", in the term "financial system", implies a set of  complex and closely connected or interlined institutions, agents, practices, markets, transactions, claims, and liabilities in the economy. The financial system is concerned about money, credit and finance-the three terms are intimately related yet are somewhat different from each other.

Financial System of India (or any country) consists of financial markets, financial intermediation and financial instruments or financial products.

Finance Sectors

Total Finance sector in India can be divided into Formal and Informal  Finance. The informal sector of finance may be said to refer to all economic activities that fall outside the formal sector that is regulated  by economic and legal institutions. The Informal sector can be said to comprise of the money lenders, some channels of micro finance and the  other not necessarily regulated sectors.

The Formal sector can be said to comprise of the Formal and necessarily  regulated channels of financing like, finance provided by Banks, Financial Institutions, Non-Banking Financial Institutions, Micro finance institutions.

Sources of Finance

In the present days there exist several sources of finance. Keeping in view the type of requirement the finance sources are chosen. The sources of finance may be classified by four categories – Period; Type;

Source; Mode of Acquisition.

I. Sources of Finance classified as per the Period for which Finance is required:

Organizations need 3 different types of finance as per the period i.e. long-term, medium term and short-term, but the combination in which these are used differ from one organisation to another. Long term finance is generally needed for the purchase of fixed assets. On the other hand, medium term finance may be required to modernise  machinery and to improve other facilities. Short-term finance is generally required for meeting expenses on day-to-day operations.

1) Long-term Sources of finance

The long-term sources of finances can be raised from the following sources:

1. Share capital or Equity Share.

2. Preference shares.

3. Retained earnings.

4. Debentures/Bonds of different types.

5. Loans from financial institutions.

6. Loan from State Financial Corporation.

7. Loans from commercial banks.

8. Venture capital funding.

9. Asset securitisation.

10. International Funds.

2) Medium-term Sources of finance

The medium-term sources of finance can be raised from the following sources.

1. Preference shares.

2. Debentures/Bonds.

3. Public deposits/fixed deposits for duration of three years.

4. Commercial banks.

5. Financial institutions.

6. State financial corporations.

7. Lease financing / Hire Purchase financing.

8. External commercial borrowings.

9. Euro-issues.

10. Foreign Currency bonds.

3) Short term Sources of finance

1. Trade credit.

2. Commercial banks.

3. Fixed deposits for a period of 1 year or less.

4. Advances received from customers.

5. Various other short-term provisions.

To read the full article: Click here

CA Rajkumar S. Adukia

B.Com (Hons.), FCA, ACS, AICWA, LL.B,

M.B.A, Dip In IFRS(UK), Dip In LL & LW

Email: rajkumarfca@gmail.com/www.carajkumarradukia.com




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