Do you know about it?

Can you tell me about the financial cycle of the business?

Earlier when the companies did not have the access to the primary market they had to borrow funds to raise the necessary money. But, after the popularization of the securities market (specially after 1980’s) the Initial Public Offering of equity shares or IPO has become the favourite method for financing. However, before a company approaches the securities market in order to raise money, it has to go through various stages of financing.

When an entrepreneur wishes to start a business, he raises money in the form of ‘seed capital’. For this he may offer certain shares in the business to the people who have contributed for this initial capital. Since at this stage the capital required is limited the entrepreneurs prefer the seed capital to be raised in the personal capacity. In general, at this stage the business entity is known as sole proprietorship or a partnership as the business is closely held and by a single person or a small group of persons.

When the business expands, the need for finance increases.

When the business is reasonably established the Venture Capitalists start to take interest in the entity and they look for the investment opportunities. In the return of money invested the venture capitalists usually are given shares or warrants. The company could remain a Private Limited Company at this stage as it is still closely held and owned by a few people. There should be at least two shareholders in a private limited company. The venture capitalists are those people who look for higher profit and are prepared to take higher risk for it.

Now if the business expands further the need for finance rises to the level where the company has to go to public in order to realise their expansion or diversification plans. At this juncture they take the IPO route.

How do shares come into being?

Any business is owned either by a single promoter or joint promoters with an unlimited liability, or a group of people (both promoters and non-promoters) with a limited liability. Limited liability means, in case of bankruptcy of the company, the owner's liability will be limited to the extent of their individual contribution towards capital. These three forms of the business organizations are called proprietorship, partnership firm and limited company respectively. Since each owner has his own share of contribution towards the owner's capital (also called equity), each of them is given his legal entitlement to share the ownership of the company in the form of document. These documents are rightly called shares and the owners are shareholders. A limited company is either called a public limited or a private limited company depending on its turnover and number of members in its board. Among public limited companies, the companies with their shares widely held are listed in the stock exchanges, and the shares of only these limited com panies are traded.

“T rifles make perfection and perfection is no trifle”

Michaelangelo,

1475 - 1564

Italian Artist