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NIOS Class 12 Business Studies Chapter 16 Sources of Long Term Finance
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Sources of Long Term Finance
Chapter: 16
Module – 6 : BUSINESS FINANCE
INTEXT QUESTIONS 16.1
Q. 1. Distinguish between new issue market and stock exchange. (Give one point)
Ans: In new issue market deals with new issue of securities, where as in stock exchange existing securities are traded.
Q. 2. Give the full form of the following abbreviation:
(a) DFI
Ans: Development Financial Institutions.
(b) IIBI
Ans: Industrial Investment Bank of India.
(c) SIDBI
Ans: Small Industries Development Bank of India.
(d) SFI
Ans: Special Financial Institutions.
(e) IFCI
Ans: Industrial Finance Corporation of India.
INTEXT QUESTIONS 16.2
Q. 1. State the meaning of Venture Capital.
Ans: Venture capital is a form of equity finance designed specially for funding high risk and high reward projects of young entrepreneurs.
Q. 2. Mention the year in which following financial institutions were established:
(a) IIBI
Ans: 1997
(b) LIC
Ans: 1956
(c) EXIM Bank
Ans: 1982
(d) GIC
Ans: 1973
(e) SIDBI
Ans: 1990.
INTEXT QUESTIONS 16.3
Q. 1. Mention the source of finance of NBFCs.
Ans: Public Deposits.
Q. 2. What is Net Asset Value?
Ans: The price at which a unit of mutual fund is bought and sold.
Q. 3. List the advantages of Mutual funds.
Ans: (a) High return.
(b) Easy liquidity.
(c) Safety.
(d) Tax benefits.
INTEXT QUESTIONS 16.4
Q. 1. Name the two parties of lease agreement.
Ans: (a) Lessor. and
(b) Lessee.
Q. 2. Categorise the following under three headings of foreign sources of finance:
(a) ADB
(b) ADR
(c) FCNRA
(d) AIC
(e) PIO
(f) NRERA
(g) FCCB
Ans:
TERMINAL EXERCISE
Very Short Answer Type Questions:
Q. 1. What is meant by Stock Market?
Ans: The secondary market, provides a place for purchase and sale of existing securities and is known as stock market or stock exchange.
Q. 2. Name any two special financial institutions.
Ans: Special financial institution (SFI) have been set up by central and state governments some of the important SFIs are:
(i) Industrial Finance Corporation of India (IFCI).
(ii) Industrial Development Bank of India (IDBI).
(iii) State Financial corporations (SFCs).
Q. 3. Mention any two features of Mutual Funds.
Ans: Features of Mutual Funds: The essential features of mutual funds are as follows:
1. It is a trust into which a number of investors invest their money in the form of units to form a large pool of funds.
2. The amount is invested in securities by the managers of the fund.
Q. 4. Distinguish between Open ended and close ended types of Mutual Funds.
Ans: Open Ended Funds: These funds have no fixed corpus and period. Such fund continuously offer units for sale and is ready to buy back the units surrendered. In other words, investors are free to buy from, or sell to, the trust any number of units at any point of time at prices which are linked to the net asset value (NAV) of the units.
Close Ended Funds: In case of these funds, subscriptions from the investors are collected during a specified time period and have a fixed corpus. Not only that, the investors can not redeem their units till the specified maturity date. However, to provide liquidity, these are listed on the stock exchange and the investors can purchase and sell through the brokers at the market price without any difficulty.
Q. 5. State the meaning of ‘Foreign Direct Investment’.
Ans: The foreign investments in our country are generally done in the form of foreign direct investment (FDI) or through foreign collaborations. The foreign direct investment usually refers to the subscription by the foreigners to shares and debentures of the Indian Companies. This is also known as portfolio investment and covers their subscription to ADRs, GDRs and FCCBs (Foreign Currency Convertible Bonds).
Short Answer Type Questions:
Q. 6. State any two functions of EXIM bank.
Ans: The main functions of the EXIM Bank are:
(i) Financing of export and import of goods and services.
(ii) Granting deferred payment credit for medium and long term duration.
(iii) Providing loans to Indian parties to enable them to contribute to share capital of joint ventures in foreign countries. and
(iv) Extending refinance facilities to commercial banks in respect of export credit.
Q. 7. What are the main functions of special financial institutions? State.
Ans: The main functions of special financial institutions are:
(i) to grant loans for a longer period to industrial establishment.
(ii) to help the establishment of business units that require large amount of funds and have long gestation period.
(iii) to provide support for the speedy development of the economy in general and backward regions in particular.
(iv) to offer specialized services operating in the areas of promotion, project assistance, technical assistance services and training and development of entrepreneurs. and
(v) to provide technical and professional management services and help in identification, evaluation and execution of new projects.
Q. 8. Explain, how LIC of India provides support to business sectors in solving long-term requirement of funds.
Ans: LIC was set up in 1956 on nationalisation of life insurance business in India. Primarily it carries on the business of life insurance and deploys the funds in accordance with national priorities and objectives. It invests mainly in government securities and shares, debentures and bonds of companies. It also extends financial assistance to banks and other institutions for social development and infrastructure facilities. It also underwrites new issues of shares and grant loans to the corporate sectors. Its performance with regard to assistance to corporate sector has been significant both in terms of sanctions and disbursements.
Q. 9. Explain the role of NBFCs in providing long-term finance.
Ans: Various housing finance companies, investment companies, vehicle finance companies etc. operating in private sectors different parts of our country. These companies are categories under Non-Banking Financial Companies, because they perform the twin functions of accepting deposits from the public and providing loans. However they are not regarded as banking companies as they do not carry on the normal banking activities. They raise funds from the public by offering attractive rate of interest and give loans mainly to the wholesale and retail traders, small-scale industries and self-employed persons.
The loans granted by these finance companies are generally unsecured and the interest charged by them ranges between 24 to 36 percent per annum. Besides giving loans and advances, the NBFCs also have purchase and discount hundis, undertaken merchant banking, housing finance, lease financing, hire purchase business etc. In our country, NBFCs have emerged as an important financial intermediary due to simplified loan sanction procedure, attractive rate of return on deposits, flexibility and timeliness in meeting the credit needs of the customers.
Q. 10. Mention the merits and demerits of ‘Retained Earnings’ as a source of long-term finance.
Ans: Following are the merits of retained earnings:
(a) It is a hedge against low profits in future and is used for the issue of bonus shares by the company.
(b) It acts as an important source of long-term finance for the companies with Zero cost of capital.
(c) The retained profits can be used for expansion and modernization programmes by the companies.
(d) The amount of retained earnings is determined by the quantum of profits, the dividend payout policy followed by the management, the legal provisions for dividend payment, and the rate of corporate taxes etc.
(e) It is an internal source, which does not involve any cost of floatation and the uncertainties of external financing.
Following are demerits of retained earnings:
(a) It is fully dependent on the accuracy of profits.
(b) Possibility of reckless use of funds by the management.
(c) Retained earnings is subject to opportunity cost.
Long Answer Type Questions:
Q. 11. Explain ‘Capital Market’ as a source of Long-term finance.
Ans: Capital market refers to the organisation and the mechanism through which the companies, other institutions and the government raise long-term funds. So it constitutes all long-term borrowings from banks and financial institutions, borrowings from foreign markets and raising of capital by issuing various securities such as shares, debentures, bonds, etc. For trading of securities there are two different segments in capital market. One is primary market and the other is, secondary market.
The primary market deals with new/fresh issue of securities and is, therefore, known as new issue market. The secondary market on the other hand, provides a place for purchase and sale of existing securities and is known as stock market or stock exchange.
The new issue market primarily consists of the arrangements, which facilitate the procurement of long-term finance by the companies in the form of shares, debentures and bonds. The companies usually issue those securities at the initial stages of their< formation and so also later on for expansion and/or modernization of their activities. However, the selling of securities is not an easy task, as the companies have to fulfill various legal requirements and decide upon the appropriate timing and the method of issue. Hence, they seek assistance of various intermediaries such as merchant bankers, underwriters, stock brokers etc. to look after all these aspects. All these intermediaries form an integral part of the primary market.
The secondary market (stock exchange) is an association or organisation or a body of individuals established for the purpose of assisting, regulating and controlling the business of buying, selling and dealing in securities. It may be noted that it is called a secondary market because only the securities already issued can be traded on the floor of the stock exchange. This market is open only to its members, most of whom are brokers acting as agents of the buyers and sellers of securities. The main functions of this market lie in providing liquidity (ready encashment) to securities and safety in dealings.
Q. 12. Name any three special financial institutions and state their objectives.
Ans: Some of the Special Financial Institutions are:
1. Industrial Finance Corporation of India (IFCI): It is the oldest SFI set up in 1948 with the primary objective of providing long-term and medium-term finance to large industrial enterprises. It provides financial assistance for setting up of new industrial enterprises and for expansion or diversification of activities. It also provides support to modernisation and renovation of plant and equipment in existing industrial units.
2. Industrial Credit and Investment Corporation of India (ICICI): It was setup in 1955 for providing long-term loans to companies for a period upto 15 years and subscribe to their shares and debentures. However, the proprietary and partnership firms were also entitled to secure loans from ICICI. Like IFCI, the ICICI also guarantees loans raised by companies from other sources besides underwriting their issue of shares and debentures.
3. Industrial Development Bank of India (IDBI): It was set up in 1964 as a subsidiary of Reserve Bank of India for providing financial assistance to all types of industrial enterprises without any restriction on the type of finance and the amount of funds. It could also refinance loans granted by other financial institutions and offer guarantees for the loans raised from the capital market or scheduled banks.
Q. 13. Describe the role of venture capital institutions in providing long term finance to business.
Ans: Venture Capital is a form of equity finance designed specially for funding high risk and high reward projects of young entrepreneurs. It helps them to turn their research and development projects into commercial ventures by providing them the initial capital and managerial assistance. The initial capital is provided in the form of equity participation through direct purchase of the shares and debentures of the enterprise set up for the purpose. The institutions providing venture capital also actively participate in the management of the entrepreneurs business. By actively involving and supporting the enterprises, they are able to protect and enhance the value of their investment.
