Test: Sources Of Business Finance - 2 - Commerce MCQ

Sources of Finance
There are various sources of finance that can be categorized as follows:
1. Source of Generation Basis:
- Internal Sources: These are funds generated within the company itself.
- External Sources: These are funds obtained from outside the company.
2. Period Basis:
- Short-term Sources: These are funds borrowed or obtained for a period of less than one year.
- Long-term Sources: These are funds borrowed or obtained for a period of more than one year.
3. Ownership:
- Equity Financing: This involves raising funds by selling ownership shares in the company.
- Debt Financing: This involves raising funds by borrowing money and repaying it with interest.
4. All of these:
- This category includes all the above-mentioned sources of finance.
In conclusion, sources of finance can be categorized based on the generation basis, period basis, and ownership. It is important for businesses to consider these different sources in order to meet their financial needs effectively.

Why can commercial papers only be issued by large and creditworthy companies?
There are several reasons why commercial papers can only be issued by large and creditworthy companies:
1. Unsecured Debt: Commercial papers are unsecured debt instruments, which means that they are not backed by any collateral. Therefore, investors rely solely on the creditworthiness of the issuer to determine the risk associated with the investment. Large and creditworthy companies are considered to have a lower risk of defaulting on their debt obligations, making them more attractive to investors.
2. Creditworthiness: Commercial papers are typically short-term debt instruments with maturities ranging from a few days to a year. Since they have a shorter duration, investors require a high level of confidence in the issuer's ability to repay the debt. Large and creditworthy companies have a proven track record of financial stability and are therefore more likely to meet their repayment obligations.
3. Market Reputation: Large and creditworthy companies often have a strong market reputation and are well-known in the industry. This reputation helps to attract a larger pool of investors who are willing to invest in their commercial papers. Smaller or less creditworthy companies may find it challenging to generate sufficient investor interest in their commercial paper offerings.
4. Regulatory Requirements: Issuing commercial papers often involves complying with regulatory requirements. These requirements may include meeting specific credit rating criteria or providing financial disclosures to potential investors. Large and creditworthy companies typically have the resources and experience to meet these regulatory obligations.
In conclusion, commercial papers can only be issued by large and creditworthy companies due to their unsecured nature, the need for investor confidence in repayment, market reputation, and regulatory requirements.

Short term finance:
- Short term finance refers to the funds that are borrowed or invested for a period of less than one year. It is usually used to meet the immediate working capital needs of a business.
Examples of short term finance:
1. Trade Credit: This refers to the credit extended by suppliers to their customers. It allows businesses to purchase goods and services on credit and pay for them at a later date. Trade credit is a common form of short term finance.
2. Bank Overdraft: A bank overdraft is a facility provided by a bank that allows a business to withdraw more money from its bank account than it actually has. It provides businesses with a flexible source of short term finance to cover temporary cash flow shortages.
3. Short Term Loans: These are loans that are taken for a short period of time, usually less than a year. They are used to meet immediate cash flow needs and are repaid within a short period of time with interest.
4. Invoice Financing: This involves borrowing against the value of outstanding invoices. Businesses can receive immediate cash by selling their unpaid invoices to a finance company at a discount.
5. Commercial Paper: Commercial paper is an unsecured promissory note issued by a company to raise short term funds. It is usually issued to meet short term cash flow needs and is repaid within a few months.
Conclusion:
Trade credit is an example of short term finance. It allows businesses to purchase goods and services on credit and pay for them at a later date. Other examples of short term finance include bank overdrafts, short term loans, invoice financing, and commercial paper.

Expand GDR - Global Depository Receipts
Global Depository Receipts (GDR) are financial instruments that represent ownership in a foreign company's shares. They are created and traded on international stock exchanges, allowing investors to diversify their portfolio and invest in companies outside their home country.
Key Points:
- GDRs are issued by international banks and are denominated in a currency other than the company's domestic currency.
- They provide investors with an opportunity to invest in foreign companies without directly buying their shares on a foreign stock exchange.
- GDRs are typically listed on major international stock exchanges, such as the London Stock Exchange or the Luxembourg Stock Exchange.
- They are traded and settled in a similar way to ordinary shares, allowing investors to easily buy and sell them.
- GDRs are popular among global investors as they provide exposure to international markets and companies, diversifying their investment portfolio.
- Companies issue GDRs to raise capital from global investors, which can be used for expansion, acquisitions, or other corporate purposes.
- GDRs also enable companies to enhance their visibility and access a wider investor base.
- Investors in GDRs are entitled to dividends and capital gains, similar to shareholders of the underlying company.
- GDRs carry currency risk, as they are denominated in a foreign currency. Fluctuations in exchange rates can affect the returns for investors.
- GDRs are subject to regulations and disclosure requirements of the stock exchange where they are listed, as well as the regulatory authorities in the home country of the issuing company.
In conclusion, GDRs (Global Depository Receipts) are financial instruments that allow investors to gain exposure to foreign companies' shares. They provide an avenue for diversification and allow companies to raise capital from global investors. However, investors should be aware of the associated risks, such as currency fluctuations.

ADR stands for American Depository Receipts. It is a financial instrument that represents shares in a foreign company that are traded on a U.S. stock exchange. ADRs allow U.S. investors to invest in foreign companies without having to directly purchase the shares on a foreign stock exchange. Here is a detailed explanation of ADR:
1. Definition:
- ADRs are certificates issued by U.S. banks that represent a specific number of shares in a foreign company.
- They are denominated in U.S. dollars and trade on U.S. stock exchanges.
2. Purpose:
- ADRs provide U.S. investors with a way to invest in foreign companies without the need to open brokerage accounts in foreign markets.
- They allow investors to diversify their portfolios internationally and gain exposure to foreign markets.
3. Types of ADRs:
- Level 1 ADRs: These are the most common type and are traded over-the-counter (OTC). They do not require compliance with U.S. Securities and Exchange Commission (SEC) reporting requirements.
- Level 2 ADRs: These are listed on a U.S. stock exchange and require compliance with SEC reporting requirements.
- Level 3 ADRs: These are also listed on a U.S. stock exchange and can be used to raise capital through public offerings.
4. Benefits of ADRs:
- Increased liquidity: ADRs are traded on U.S. stock exchanges, which have higher trading volumes compared to some foreign markets.
- Currency risk mitigation: ADRs are denominated in U.S. dollars, reducing the risk of currency fluctuations for U.S. investors.
- Access to global markets: ADRs provide access to companies from various countries and sectors, allowing investors to diversify their portfolios.
5. Risks of ADRs:
- Political and economic risks: Investing in foreign companies exposes investors to political and economic risks specific to those countries.
- Currency risk: Although ADRs are denominated in U.S. dollars, changes in exchange rates can still impact their value.
- Regulatory risks: ADRs are subject to the regulations of both the U.S. and the foreign country, which may affect their trading and liquidity.
In conclusion, ADRs are a popular investment vehicle that allows U.S. investors to gain exposure to foreign companies. They provide benefits such as increased liquidity and access to global markets, but also come with risks associated with foreign investments.

ICICI stands for Industrial Credit and Investment Corporation of India.
Here is a detailed explanation of each option:
A: Indian Credit and Investment Corporation of India
- This option is incorrect because the actual expansion of ICICI does not include the word "Indian."
- Therefore, it does not accurately represent the full form of ICICI.
B: International Credit and Investment Corporation of India
- This option is incorrect because the actual expansion of ICICI does not include the word "International."
- Therefore, it does not accurately represent the full form of ICICI.
C: Industrial Credit and Investment Corporation of India
- This option is correct.
- ICICI is an Indian multinational banking and financial services company, and its full form is "Industrial Credit and Investment Corporation of India."
- The company was initially established in 1955 as a joint-venture between the World Bank, the Government of India, and Indian industry.
D: None of these
- This option is incorrect because ICICI does have an expansion, which is "Industrial Credit and Investment Corporation of India."
Therefore, the correct expansion of ICICI is "Industrial Credit and Investment Corporation of India."

Industrial Finance Corporation of India (IFCI) - Establishment
The Industrial Finance Corporation of India (IFCI) was established in July 1948.
Key Points:
- IFCI was established as a government-owned Development Finance Institution (DFI) to provide long-term financial assistance to industrial projects.
- It was founded under the Industrial Finance Corporation Act, 1948.
- The main objective of IFCI was to promote industrial development in India by providing financial support and assistance to various sectors.
- IFCI played a crucial role in channeling funds into the industrial sector, especially during the early years of India's independence.
- Over the years, IFCI has evolved and diversified its activities to cater to the changing needs of the industrial sector.
- It has provided financial assistance to a wide range of industries, including manufacturing, infrastructure, services, and technology sectors.
- IFCI has also played a significant role in supporting small and medium enterprises (SMEs) and promoting entrepreneurship in the country.
- The corporation has made strategic investments, offered advisory services, and facilitated various financial products to meet the evolving requirements of the industrial sector.
- Today, IFCI continues to be an important institution in India's financial landscape, contributing to the growth and development of industries across the country.
Conclusion:
The Industrial Finance Corporation of India (IFCI) was established in July 1948 to provide financial assistance and support for industrial development in India.

ICICI Establishment:

ICICI (Industrial Credit and Investment Corporation of India) was established in 1955.

Detailed

• ICICI: ICICI is a leading Indian multinational banking and financial services company headquartered in Mumbai, Maharashtra.


• Establishment: ICICI was established on January 5, 1955.


• Industrial Credit and Investment Corporation of India: ICICI was initially formed as a joint venture between the World Bank, the Government of India, and Indian industry.


• Transformation: Over the years, ICICI transformed into a diversified financial services group offering a wide range of products and services.


• Merger: In 2002, ICICI merged with ICICI Bank, which was a separate banking entity established in 1994.


• ICICI Bank: ICICI Bank is now a subsidiary of ICICI and operates as a retail banking giant in India.


• International Presence: ICICI has expanded its operations globally and serves customers across various countries.

Therefore, the correct answer is option D: 1955.

Life Insurance Corporation (LIC) - Establishment Year
LIC is one of the largest insurance companies in India, providing various life insurance products to individuals. It plays a crucial role in the Indian insurance sector. The establishment year of LIC is as follows:
Answer: C. 1956
Explanation:
- LIC was set up in the year 1956 under the Life Insurance Corporation Act passed by the Parliament of India.
- The act nationalized the private insurance industry in India and established a state-owned insurance company named Life Insurance Corporation of India (LIC).
- LIC was created by merging around 245 insurance companies and provident societies into a single entity.
- The primary objective of LIC is to provide life insurance coverage to individuals, promote savings, and mobilize funds for the nation's development.
- LIC operates through a wide network of branches and agents, providing life insurance policies and services to millions of customers across the country.
Key Points:
- LIC was established in 1956 under the Life Insurance Corporation Act.
- The act nationalized the private insurance industry in India.
- LIC is a state-owned insurance company.
- It was created by merging multiple insurance companies and provident societies.
- LIC's objective is to provide life insurance coverage and promote savings.
- It operates through a wide network of branches and agents.

Unit Trust of India was established by the Indian Government.
The detailed solution is as follows:
1. Unit Trust of India (UTI) is a financial institution that was established in 1964.
2. UTI was founded by the Indian Government as a public sector mutual fund.
3. The objective of UTI was to mobilize savings from the general public and invest them in the capital market to generate returns.
4. Initially, UTI operated as a sole entity in the mutual fund industry in India.
5. It played a crucial role in popularizing the concept of mutual funds and creating awareness among investors.
6. UTI launched its first scheme, Unit Scheme 1964 (US-64), which became immensely popular and attracted a large number of investors.
7. Over the years, UTI introduced various other schemes to cater to the diverse investment needs of investors.
8. In 2003, UTI was bifurcated into two separate entities - UTI Mutual Fund and UTI Asset Management Company (AMC).
9. UTI Mutual Fund is responsible for managing the mutual fund schemes, while UTI AMC acts as the investment manager.
10. Today, UTI Mutual Fund is one of the leading mutual fund houses in India, offering a wide range of investment options to investors.
In conclusion, Unit Trust of India was established by the Indian Government with the aim of mobilizing savings and investing them in the capital market to generate returns for the investors.

State Industrial Development Corporations were established by Different States.
State Industrial Development Corporations (SIDCs) were established by the respective state governments to promote industrial development and attract investments in their respective states. These corporations play a crucial role in facilitating industrial growth and economic development at the state level. Here are the key points explaining the establishment of SIDCs by different states:
1. Objective: The main objective of establishing State Industrial Development Corporations is to accelerate industrialization, create employment opportunities, and promote economic growth within the state.
2. State Government Initiatives: The decision to establish SIDCs is taken by the individual state governments based on their industrial development policies and strategies. Each state government forms its own corporation to cater to the specific needs and requirements of their respective states.
3. Autonomous Bodies: State Industrial Development Corporations are autonomous bodies that operate independently under the governance of the state government. They have their own board of directors and management structure to oversee the functioning and decision-making processes.
4. Functions and Responsibilities: SIDCs are responsible for various functions, including land acquisition and development of industrial estates, providing infrastructure facilities like roads, water, and power supply, promoting and attracting investments, facilitating industrial licensing and approvals, and providing financial assistance and incentives to industries.
5. State-Specific Industrial Policies: SIDCs align their strategies and initiatives with the state's industrial policies and priorities. They work closely with various government departments, industry associations, and stakeholders to implement industrial development plans and attract investments.
6. Collaborations and Partnerships: SIDCs collaborate with national and international organizations, financial institutions, and industry associations to promote industrial growth and attract investments. They also facilitate technology transfer, skill development, and knowledge sharing for the benefit of industries in their respective states.
7. Success Stories: Many states have witnessed significant industrial growth and development through the establishment of SIDCs. These corporations have played a crucial role in attracting investments, creating employment opportunities, and fostering entrepreneurship in their respective states.
In conclusion, State Industrial Development Corporations were established by different states to promote industrial development, attract investments, and boost economic growth. They operate as autonomous bodies under the governance of their respective state governments and have been instrumental in driving industrialization and creating a conducive business environment within their states.

The correct answer is option C: GDR (Global Depository Receipts).
Here is a detailed explanation:
Depository Receipts:
- Depository receipts are financial instruments that represent shares of a foreign company. They are traded on a stock exchange in a different country from where the company is based.
- These receipts are used by foreign companies to raise capital and expand their investor base globally.
Types of Depository Receipts:
There are two main types of depository receipts:
1. American Depository Receipts (ADR):
- ADRs are issued by non-U.S. companies and are listed on U.S. stock exchanges.
- They enable U.S. investors to hold shares of foreign companies without the need to directly purchase the shares on a foreign exchange.
- ADRs are denominated in U.S. dollars and trade like regular stocks.
2. Global Depository Receipts (GDR):
- GDRs are issued by non-U.S. companies and are listed on international stock exchanges, such as London or Luxembourg.
- They enable international investors to hold shares of foreign companies without the need to directly purchase the shares on a local exchange.
- GDRs are often denominated in U.S. dollars or euros and trade like regular stocks.
Relation to Ordinary Shares:
- When a company wants to list its shares on a foreign stock exchange, it delivers its ordinary shares to a depository bank.
- The depository bank then issues depository receipts, either ADRs or GDRs, in exchange for the ordinary shares.
- These depository receipts represent ownership in the underlying ordinary shares of the company.
- The depository receipts can then be traded on the respective stock exchanges, allowing investors to buy and sell shares without the complexities of cross-border transactions.
Therefore, in the given scenario, the ordinary shares of the company are delivered to the depository bank, which in turn issues the depository receipts known as Global Depository Receipts (GDR).

Explanation:
GDRs (Global Depository Receipts) are financial instruments that represent shares of a foreign company held by a depository bank outside the country where the company is based. GDRs can be converted into shares at any time by the investors. Here's a detailed explanation:
1. Definition of GDRs: Global Depository Receipts (GDRs) are negotiable certificates issued by depository banks that represent a specified number of shares in a foreign company. They are often used by companies to raise capital in international markets.
2. Purpose of GDRs: GDRs allow investors to invest in foreign companies without the need to directly purchase the shares in the local market. They provide a way for companies to access capital from international investors.
3. Convertibility of GDRs: GDRs can be converted into shares of the underlying foreign company. This conversion can take place at any time, allowing investors to switch from GDRs to the actual shares if they choose to do so.
4. Flexibility for Investors: The ability to convert GDRs into shares at any time provides flexibility for investors. They can choose to hold the GDRs for a certain period or convert them into shares when they believe it is advantageous.
5. Considerations for Conversion: Before converting GDRs into shares, investors should consider factors such as market conditions, potential dividends, voting rights, and any associated costs or fees.
In conclusion, GDRs can be converted into shares at any time, providing investors with flexibility and the option to switch from GDRs to the actual shares of the foreign company.

Commercial Bank:
A commercial bank is a financial institution that provides various services such as accepting deposits, granting loans, and offering basic banking services to individuals and businesses. They operate to make a profit and are regulated by the central bank of the country.
Options:
The options provided are Punjab National Bank, Canara Bank, and State Bank of India. Let's analyze each option to determine if they are commercial banks.
Punjab National Bank:
- Punjab National Bank (PNB) is one of the largest public sector banks in India.
- PNB offers a wide range of banking products and services.
- It provides various services such as savings accounts, current accounts, loans, and credit cards.
- PNB operates to generate profits and is regulated by the Reserve Bank of India (RBI).
- Therefore, Punjab National Bank is a commercial bank.
Canara Bank:
- Canara Bank is also a public sector bank in India.
- It provides banking services to individuals, businesses, and corporate customers.
- Canara Bank offers services such as deposits, loans, and insurance products.
- It operates to make a profit and is regulated by the RBI.
- Therefore, Canara Bank is a commercial bank.
State Bank of India:
- State Bank of India (SBI) is the largest public sector bank in India.
- SBI offers a comprehensive range of banking services to its customers.
- It provides services such as savings accounts, loans, investment products, and more.
- SBI operates to generate profits and is regulated by the RBI.
- Therefore, State Bank of India is a commercial bank.
Conclusion:
All the options provided in the question, Punjab National Bank, Canara Bank, and State Bank of India, are commercial banks. They offer various banking services, operate to make a profit, and are regulated by the Reserve Bank of India. Therefore, the correct answer is option D: All of these.

Borrowed funds refer to the funds raised with the help of loans or borrowings. This is the most common type of source of funds and is used the majority of the time. The sources for raising borrowed funds include loans from commercial banks, loans from financial institutions, issue of debentures, public deposits and trade credit.

The first company in India to issue convertible zero interest debentures in January 1990 was Mahindra and Mahindra.
Some important points to note about this are:
- Mahindra and Mahindra, a renowned Indian multinational automobile manufacturing corporation, made history by being the first company in India to issue convertible zero interest debentures in January 1990.
- This move was seen as a significant step in the Indian financial market as it introduced a unique financial instrument that allowed investors to convert their debentures into equity shares at a later stage.
- Convertible zero interest debentures are debt instruments that do not carry any interest component but provide an option to convert them into equity shares of the issuing company.
- By issuing these debentures, Mahindra and Mahindra offered investors an opportunity to benefit from potential future growth of the company while avoiding the burden of interest payments.
- This innovative financial instrument gained popularity in the Indian market and paved the way for other companies to explore similar funding options.
- Mahindra and Mahindra's decision to issue convertible zero interest debentures showcased their forward-thinking approach and willingness to embrace new financial strategies.
- The success of this issuance highlighted the company's strong financial position and investor confidence in its future prospects.
- Overall, Mahindra and Mahindra's introduction of convertible zero interest debentures marked a significant milestone in the Indian corporate finance landscape and set a precedent for future financial innovations in the country.

Dividend is paid only on Shares

The correct answer is D: Share Capital.
Explanation:
Money obtained by the issue of shares is known as share capital. Share capital represents the funds raised by a company through the sale of its shares to investors. This capital serves as a permanent source of financing for the company's operations and investments.
Here is a detailed explanation of the options:
A: Debts
- Debts refer to borrowed funds that need to be repaid with interest.
- Unlike debts, share capital does not have to be repaid to shareholders.
B: Loans
- Loans are also borrowed funds that need to be repaid with interest.
- Share capital is not a loan and does not require repayment to shareholders.
C: Reserve Funds
- Reserve funds are a portion of a company's profits that are set aside for future use.
- Share capital and reserve funds are different concepts. Share capital represents the initial funds raised, while reserve funds are accumulated from profits.
D: Share Capital
- Share capital represents the funds raised by a company through the sale of its shares to investors.
- It is a permanent source of financing for the company and does not have to be repaid.
In conclusion, money obtained by the issue of shares is known as share capital, which distinguishes it from debts, loans, and reserve funds.

Investors who want steady income may not prefer Equity Shares

Equity shares are ownership stakes in a company and provide investors with a share of the company's profits. While equity shares can offer the potential for high returns, they are not always the best option for investors seeking steady income. Here's why:

- Volatility: Equity shares are subject to market fluctuations and can be highly volatile. The value of equity shares can rise or fall depending on various factors such as market conditions, company performance, and investor sentiment. This volatility can make it challenging for investors to rely on equity shares for a consistent income stream.
- Dividend Payments: While some companies do pay regular dividends to their shareholders, the amount and frequency of these payments can vary. Unlike bonds or debentures, where fixed interest payments are made at regular intervals, equity shareholders are dependent on the company's decision to distribute profits as dividends. This uncertainty in dividend payments makes equity shares less attractive for investors seeking a steady income.
- Long-Term Growth Focus: Equity shares are typically held with a long-term investment horizon, with investors aiming to benefit from capital appreciation over time. Investors seeking steady income may prefer investments that prioritize regular income generation over long-term growth potential.
- Risk: Equity shares are considered riskier than bonds or debentures. Investors bear the risk of losing their investment if the company's financial performance deteriorates or if the stock market experiences a downturn. This higher level of risk may not be suitable for investors who prioritize stability and a steady income stream.
Overall, while equity shares can offer the potential for higher returns, they may not be the preferred choice for investors seeking a steady income. Bonds and debentures, on the other hand, are typically considered safer options for generating regular income.

Lease Financing:
- Lease financing refers to a situation where one party (the lessor) grants the other party (the lessee) the right to use an asset in return for a periodic payment.
- The lessor retains ownership of the asset while allowing the lessee to use it for a specific period.
- The lessee pays periodic lease payments to the lessor in exchange for the right to use the asset.
- Lease financing is commonly used for equipment, vehicles, and real estate.
- It provides the lessee with the benefits of using the asset without the need for a large upfront investment or ownership responsibilities.
- The lessor benefits from receiving regular lease payments and retaining ownership of the asset.
- Lease terms can vary in duration, and at the end of the lease term, the lessee may have the option to purchase the asset or return it to the lessor.
Public Deposits, Debts, and Factoring:
- Public deposits refer to funds deposited by the public, such as individuals or businesses, into financial institutions.
- Debts refer to borrowed funds that need to be repaid by a borrower to a lender.
- Factoring is a financial transaction where a company sells its accounts receivable to a third party (factor) at a discount.
- These terms do not directly relate to the situation described in the question.
Therefore, the correct answer is A: Lease Financing.