What are the sources of fixed capital ?

The sources of fixed capital are :

(i) Equity Shares:

Equity shareholders are the owners of the company and their contribution constitute the main source of finance. The promoters are the first to contribute towards share capital of the company and the remaining mount of funds are raised through sale of shares to general public. Equity shareholders are the risk bearers of the company and are going to absorb all stress and strains of the business.

Financial structure of the company is strengthened by equity capital. Equity shareholders have limited liability and they enjoy voting rights. They can increase their stake in the firm or can keep full control over the company through issue of right and bonus shares. Equity capital is permanent capital of the firm and their is no liability for repayment and even dividend payment to the equity shareholders is not obligatory.

(ii) Preference Shares:

These shareholders enjoy preference w.r.t. dividend and return of capital. Those investors who opt for limited but steady return on their investment prefer preference shares. Preference share capital possesses certain features of both equity and debt capital. Preference shareholders receive dividend like equity shareholders. Similarly it is like debt capital since the rate of dividend is predetermined.

Preference shares are not a permanent liability on the firm as dividend is payable only when there are profits. A company can introduce flexibility in its capital structure by issuing redeemable preference shares which can be redeemed when the company has sufficient profits. These are not very popular in India and can be made more popular by issuing cumulative convertible preference shares.

(iii) Debentures:

Debenture provides the firm with another option of raising term loans from the public. Debentures are normally secured and yield a fixed percentage of interest. Thus they are less risky and give regular return to debenture holders. With the issue of debentures shareholders can retain control and earn more return on their investment.

Debenture capital add more financial burden on the firm during hard times and increase risk of insolvency of the firm. Many companies in India in recent years have issued convertible or partly convertible debentures with the discretion to convert them into equity shares of the company.

(iv) Term Loans:

These are the loans obtained from banks and financial institutions and constitute the most important source of finance. Term loans are normally repayable within a period of ten years or more and carry a fixed rate of interest.

Lending institutes insist on margin money from promoters and are ready to defer repayment till gestation period is over. Term loans are raised for meeting fixed and working capital needs. Term loans provide - the advantage of trading on equity and at the same time allow owners to have control over the business.

(v) Retained Earnings:

Retained earnings reer to the surplus or reserve accumulated over years. This amount can be re-invested in the enterprise for upgradation and expansion. The cost of employment of this capital is practically nil and at the same time no liability worth the name is created.

(vi) Capital Subsidy:

In order to tempt entrepreneurs towards backward areas the Central Government provides capital subsidy. Similarly certain state governments too grant development loans to entrepreneurs for setting up industries in exclusively notified areas in their states.