Globalization has helped Indian Companies to obtain funds from global capital.
Sources of Obtaining Funds:
Following are some of the international sources of obtaining funds:
1. Commercial Banks:
International financing provides foreign currency loans for business purposes all over the world. Non-trade international operations are mainly financed by this source.
For example, Standard Chartered Bank is an important source of providing foreign currency loans to In Industry.
2. International Agencies and Development Banks:
Many international agencies and development banks like EXIM Bank, Asian Development Bank, International Finance Corporation (IFC), etc play a very important in financing international trade and business.
International financing has the main aim is to provide long and medium-term loans and grants to promote the development of economiéally backward areas in d world.
The governments of developed countries of the world have set up these agencies banks at national, regional and international levels for providing finance for various projects.
3. International Capital Market:
It consists of various financial instruments used by multinational companies for sizeable borrowings in rupees as well as in foreign currency.
(a) Global Depositary Receipts!s (GDRs):
It is an instrument issued by an Indian Company abroad in order to raise funds in the same foreign currency and are tested and traded in foreign stock exchange GDR holders do not carry voting rights but are entitled to dividends and capital appreciation.
(b) American Depository Receipts (ADRs):
These receipts are issued by a company in the USA. In the American markets, they are bought and sold like regular stocks.
These and similar to GDR are can be listed and traded on a stock exchange of the USA and are issued only to American Citizens.
(c) Foreign Currency Convertible Bonds (FCCBs) These are equity-linked debt securities, which after a specific period of time are converted into equity or depository receipts.
Thus, the holders of these bonds can either convert his bonds into equity shares at a predetermined price or retain the bond. FCCB carries a fixed interest rate and is listed and in the foreign stock exchange.
Factors Affecting the International Financing:
1. Cost: Both the cost of acquiring funds and the cost of utilization of funds should be taken into consideration.
2. Financial strength and stability of the operations: Financially strong and stable enterprise can venture to obtain funds by issue of fixed charge securities, such as Debentures and bonds.
In case, the enterprise is financially weak it should prefer obtaining funds by issue of equity shares, wherein there is no fixed charge of interest.
3. Form of organization and legal status: It is the form of business, which also decides the source of funds.
The sole proprietorship and partnership can obtain funds by loans but cannot raise funds by issue of shares and debentures.
4. Purpose and time period: Short-term loans can be obtained at low rates through trade credit and commercial paper, etc. Long-term funds can be obtained by issue Of shares and debentures and by. institutional financing.
Long-term business expansion plans should not be financed by a bank Overdraft which is required to be paid within a short period.
5. Risk Profile: The risk involved in the source must also be taken into consideration.
In the case of equity shares, no risk is involved because the funds have to be repaid at the time of winding up and dividends need not be paid if there is no profit.
On the other hand, loans have repayment schedules for both the principal and interest. The interest on a loan has to be paid irrespective of profit.
6. Control: The business must decide in mind the extent to which it would like to share control of the business. Shares carry voting rights which may affect the control of the business.
In case the business does not desire to share control, it should obtain funds by issue of debentures and raising loans.
7. Effect on creditworthiness: The issue of secured debentures may affect the creditworthiness of the business.
It may adversely affect the interest of unsecured creditors and they can hesitate in extending loans to such an enterprise.
8. Flexibility and Ease: The preference of the source of funds is also affected by the considerations, such as restrictive provisions, detailed investigation, and documentation in case of borrowings from banks and financial institutions.
The source is preferred which has got more flexibility and ease.
9. Tax Benefit: The interest paid on debentures and loans is deductible for the assessment of tax. It is as such preferred by enterprises seeking tax advantages.
Preference shares may not be preferred because dividend paid on these shares is not deductible for the calculation of tax.