Answer in brief.
1. What is public deposit ?
Public deposits are an important source of financing short term requirements of a company. When companies generally receive deposits from the public for the period ranging from 6 months to 36 months, it is known as Public Deposits’.
Under this method, the general public is invited to deposit their savings with the company for a varied period. Interest is paid by companies on such deposits. The rate of interest is higher than those allowed by commercial banks.
The company issues ‘Deposit Receipt to the depositor. The term deposit is mentioned in the Deposit Receipt’. A deposit Receipt is an acknowledgement of the debt by the company.
Deposits are unsecured loans offered to the company. It is considered a risky investment but investors can earn a high return on public deposits. Deposits are either secured or unsecured loans offered by the company.
2. What is Global Depository Receipt ?
Global Depository Receipt (GDR) is an instrument in which a company located in a domestic country issues one or more of its shares or convertible bonds outside the domestic country.
The issue of Global Depository Receipt is one of the most popular ways to tap the global equity markets. A company can raise foreign currency funds by issuing equity shares in a foreign country.
Indian company issues shares to an intermediary called Depository’. This depository bank issues GDR to investors against these shares.
The GDR represents a fixed number of shares. This GDR is then sold to people in a foreign country. The GDR is traded like regular shares. The prices fluctuate depending upon demand and supply and it is listed on a stock exchange.
The exchange on which GDR is traded are as follows:
• London Stock Exchange
• Luxembourg Stock Exchange
• Singapore Stock Exchange
• Hong Kong Stock Exchange
Following are the advantages of GDRs:
(a) GDR provides access to foreign capital markets.
(b) A company can get itself registered on an overseas stock exchange or over the counter and its shares can be traded in more than one currency.
(c) GDR increases the shareholders base of the company,
(d) With GDR, the non-residents can invest in shares of the foreign company. It can be freely transferred.
Following are the disadvantages of GDRs:
(a) Violating any regulation can lead to serious consequences against the company.
(b) Dividends are paid in domestic countries’ currency which is subject to volatility in the forex market.
(c) It is mostly beneficial to High Net Worth Individual (HNI) investors due to their capacity to invest a high amount in GDR.
(d) GDR is one of the expensive sources of finance.
3. What is trade credit ?
Trade Credit refers to the facilities or credit extended by the manufacturer, wholesalers, and suppliers of goods to the purchaser but receives payment after the credit period from the date of purchase.
Trade credit is not a cash loan. It results from a credit sale of goods/services, which has to be paid at a future date after the sales take place.
This practice is done by a business concern with an intention to increase its sales or turnover, generate additional business and maintain a good relationship with the purchasers.
Suppliers sell the goods and allow 30 days or more for the bill to be paid. They even offer a discount, if bills are cleared with 30 days.
Following are the advantages of Trade Credit:
It is the cheapest and easiest method of raising short term finance. The terms and conditions are not rigid, i.e, they are flexible.
The supplier (creditor) is able to generate a higher volume of sales. The flexibility in purchasing encourages customers to make larger purchases when prices are right.
Trade credit allows the purchasers to place purchase orders without the need to pay upfront. This allows purchasers to use funds to pay long term debts and other critical payments.
Trade credit has no cost involved, no interest is payable for using the credit.
Due to the business relationship involved, the terms and conditions attached to trade credit are simple and not rigid. Also, there is no need for an agreement for trade credit.
4. What are the schemes for disbursement of credit by bank ?
(a) Commercial banks play an important role in providing short term finance to business concerns. They have become the primary source of financing working capital of the business.
(b) In India, the primary source of financing working capital is bank credit and trade credit.
(c) Commercial bank assists corporate enterprises:
• By granting term loans to companies
• By underwriting the issue of securities of the company.
• By subscribing to shares and debentures of the company.
Disbursement of credit by bank
Discounting of Bills of Exchange
The above disbursement of credit by commercial banks are as follows:
(a) Overdraft: An overdraft implies only to the existing current account holder. Therefore, it is a credit facility granted by a bank to current account holders. Under an overdraft facility, the bank allows its customers to overdraw an amount, up to a particular limit, i.e. to withdraw more than the amount of credit balance in his current account.
Generally, a low rate of interest is charged by a bank, and collateral securities usually accepted for an overdraft facility.
(b) Cash credit: It is an important form of providing finance to business organisations. Cash Credit is given against the pledge of goods or by providing alternative securities. A cash Credit account is operated on similar lines as the overdraft facility. On the security margin, the amount of cash credit is sanctioned by the bank and the borrower can withdraw the amount from his current account up to this limit as and when the company needs. Interest is charged on the actual amount outstanding and not the amount of credit limit sanctioned by the bank.
(c) Cash loans: Commercial Banks credit the account of the borrower with the amount of loan. The borrower has to pay interest on the entire amount sanctioned by the bank as a loan. If the amount of loan is paid in installments, the interest to be paid will be on the actual balance outstanding.
(d) Discounting of Bills of Exchange: Bills of Exchange is an acknowledgment received by the seller (drawer) from the buyer (drawee) promising to pay him a certain amount on a specific date. The drawer of the bill can receive money from drawee on the due date. The drawer can receive money before the due date by discounting bills. This is nothing but selling the bills to the bank.
The drawer gets money immediately from the bank against the bill. The bank gives money to the drawer less than the face value of the bill. The amount received less is called a discount. They are accepted by banks and cash is advanced against them. Thus, the Bill of Exchange is Trade Bills.
5. State the features of Bonds.
Meaning: A bond is a debt security. It is a loan. A bond is a formal contract to repay the borrowed money with interest. It is an interest bearing certificate issued by the government, semi-government, or business firms to raise capital. The person holding such an instrument is known as a bondholder. He becomes the creditor of the company.
Definition: According to Webster Dictionary, “A bond is an interest bearing certificate issued by the government or business firms, promising to pay the holder a specific sum at a specified date”.
Features of Bonds are as follows:
(a) Nature of finances: A bond is a debt or loan finance. It represents long term finance of the company. Generally, the bonds are issued for a long period. For instance, 5 years, 10 years, and so on.
(b) Status of investor: The bond holders are the creditors of the company. Being creditors and non-owners, they do not enjoy any voting rights.
They are not entitled to participate in general meetings and in the management of the company.
(c) Return on bonds: Bonds are issued bearing a fixed rate of interest. So, the bondholders get a fixed rate of interest. It is payable at regular intervals, but it may be paid on maturity also.
(d) Repayment: Bonds have a specific maturity date because a bond is a formal contract to pay the borrowed money. Thus, the repayment of the principal amount is due on the maturity date.