The Corporate Chaiwala
Through Soma’s business expansion, the difference between a limited company, private limited company and public limited company is explained
- A limited company is a type of company, with liability limited to the capital invested. In other words, the shareholders’ personal assets are protected in the event of bankruptcy, but they might lose the capital they have invested.
- A limited company can be private or public. A private limited company’s shares are not available to the general public, but those of a public limited company are easily available.
An Uncertain Venture
Today’s story introduces terms like Venture Capital, Venture Capitalist and Venture Capital Fund
- Venture Capital is the capital typically provided by investors for financing of new, growing or struggling businesses.
- Venture capital investments generally are high risk investments but offer the potential for above average returns.
- A venture capitalist (VC) is a person who makes such investments.
- A venture capital fund is a pooled investment vehicle (often a partnership) that primarily invests in those companies that they feel have huge growth potential and are too risky for the standard capital markets or bank loans.
Through this story, you are introduced to Preference and Debenture Capitals, along with other related terms
- When several investors contribute to the capital of the business with the condition that every year they will get a fixed rate of return, subject to the company earning profits, then this capital is termed as Preference Capital.
- Preferential shareholders, as the name suggests, enjoy a preferential right over equity shareholders with regards to:
- Receipt of dividend which is fixed
- Receipt of residual funds after liquidation, i.e. in the event of the company closing down, the preference shareholders will first receive their capital.
- A Debenture is a contract where the company will pay the lender the initial amount (principal) and interest (rate of interest predefined at the beginning) after a pre-defined period of time (maturity date).
- Debentures can be convertible or non-convertible.
- Convertible Debentures can be converted into equity after a specified period of time. These debentures may or may not carry interest till the date of conversion.
- Non-convertible Debentures cannot be converted into equity shares and will be redeemed at the end of the maturity.
He wasn’t one of the brightest kids in school; in fact, he couldn’t clear his third grade even after three attempts. His father was a sugar cane farmer with reasonable means. His mother could prepare delicious tea, a skill Soma, her youngest child, picked up like a fish to water. ‘Soma ki chai’ soon became famous in his village. His parents, following the advise of his uncle, Gopi Kaka, decided to send Soma to Ahmedabad to let him set up his own business under Gopi Kaka’s supervision.
Soma ki Chai
His mother handed him Rs.1000 from her savings and told him that she had saved the money for him and it need not be returned.
His father also gave him Rs.1000, however, he said, “You will have to return the money after a year, with five per cent interest. In case you fail to pay me back, you will have to come back to the village and help me with the farm.” With Rs. 2000 safely tucked in a little bag that also carried his clothes and some snacks made lovingly by his anxious mother, Soma set off his journey, uncertain of his destination.
Dr. Solanki removed his glasses and wiped his tears. “What a long journey it has been, a journey called life,” he thought.
After a bumpy three-and-half hour journey, Soma had reached Ahmedabad. Roaming around on his first day, he came to the banks of the River Sabarmati.
Gopi kaka served Mumbai chat outside the Gujrat University campus, where he extended his table to provide Soma a 4×4 sq.ft. space to prepare tea. With some initial purchases under Gopi Kaka’s guidance, Soma commenced his business. The response for his tea, on the very first day, was positive; the students found his tea much tastier than the tea offered inside the campus.
Soma put in a lot of hard word in the following three months, and as the business grew, he hired a few boys to help him out. The hard work paid off; the business picked up and started gaining popularity. On Gopi Kaka’s advice, Soma made a small donation to the local municipal authorities, in return to which, they turned a blind eye to his stall and allowed him to extend his counter so that he could now place two more stoves, thereby doubling his capacity.
Types of capital
- When you start a business, you need money that is capital. This can be your own money – ‘Equity‘ or borrowed money – ‘Debt‘.
- If a business is started by more than one person in partnership, then can contribute and share profits and losses in agreed ratio, typically the ratio in which they have contributed capital.
- While on debt, you have to pay interest, there is no such obligation for equity money.
- Owners, when they make profits, can take part of it out of the business as their share of profits that is ‘dividend’.
- Debt can be secured by mortgage or pledge of movable or immovable property such as house, land, machinery, shares, fixed deposit receipt etc. If the lender has not taken any security, it is called unsecured debt.
Debt Equity Ratio
On the Banks of Sabarmati
Through Somnath’s rags to riches story, IIFL explains the various terms in Equity in an easy and simplified manner
Dr. Somnath Solanki stepped out of his Mercedes, instructed his chauffeur and security guard not to follow him, and the guard immediately removed his cellphone, leading to a series of phone calls. “Let the old man be on his own,” Vice Chairman, Mr. K.S. “Be out of his sight, but don’t let him be out of yours. Tomorrow is very important” he added. The guard couldn’t understand what this meant, but he didn’t need to. He simply followed the instructions given.
Dr. Solanki sat on the bank of the river. He could feel the cool breeze, see the banyan trees across the river and hear the birds chirping. He had been at the same place, 50 years ago. Nothing had changed – not the river, the breeze, the trees the birds; yet how everything had changed. Tomorrow is going to be a very important day in his life, very hectic as well, he thought. His company was planing the largest ever overseas acquisition and was going to announce quarterly results that were going to surprise the street. He also made plans to reveal the successor for the Soma Group of Industries, laying to rest months of speculation.
His mind drifted 50 years back in time, when he was lovingly called Soma in a little village near Ahmedabad…