Q.Discuss the sources from which a large industrial enterprise can raise capital for financing modernisation and expansion.

Modernisation and expansion are long-term needs, so a large enterprise must draw on funds that can stay invested for a long period, generally through a mix of owned and borrowed sources.

Why long-term sources: Modernisation, reorganisation and expansion are long-term needs that call for long-term funds, which may be owned or borrowed. Since no single source is free of limitations, a large enterprise typically uses a combination. The main options:

Owned (ownership) capital

• Equity shares: The most important source of long-term capital — permanent, ownership capital with no compulsion to pay dividend and no charge on assets; but it can dilute control and involves more formalities.
• Preference shares: Fixed-dividend capital that gives a steady return to investors and does not dilute equity shareholders' control (no voting rights).
• Retained earnings: Ploughing back of profits — a permanent, internally generated source with no explicit cost and greater operational freedom; but it is an uncertain source that depends on profits and dividend policy.

Borrowed (loan) capital

• Debentures: Long-term loan capital at a fixed rate of interest; interest is tax-deductible, so it is less costly than equity/preference, and it does not dilute control — suitable when sales and earnings are relatively stable.
• Loans from financial institutions (development banks): Provide long- and medium-term finance for expansion, reorganisation and modernisation, plus technical and managerial advice; repayable in easy instalments and available even during a depression; but they follow rigid criteria and may place nominees on the Board.
• Commercial banks: Term loans and other facilities for medium/short periods — timely and flexible, but usually not permanent and requiring security.

Other supporting sources

• Public deposits (medium-/short-term) and lease financing (a key means of modernisation and diversification, especially for fast-obsolescing assets like computers) supplement the above.
• International sources: Global capital markets offer GDRs, ADRs, IDRs and FCCBs, plus foreign-currency loans from commercial banks and international agencies/development banks (IFC, EXIM Bank, Asian Development Bank) for large, long-term needs.

The guiding idea: The firm matches each rupee to its purpose, time period, cost, risk and desired control, and blends owned and borrowed, domestic and international sources into a balanced combination rather than relying on one.