Debentures are similar to shares, however, debenture holders do not have voting rights on how the business is run.
Debentures have certain merits and demerits from business as well as debenture holders point of view. These are explained below:
Advantages to Debenture Holders
1. They receive annual interest benefits (VIP status or free passes) regardless of whether or not the business is making money.
Disadvantages to Debenture Holders
1. No say in how the business will run.
2. Greatly depends on the business' success to raise it's value.
Advantages to Business
1. Provides good long-term finance without losing control of the business.
Disadvantages to Business.
1. Firm increases the amount of long-term liabilities raising the amount of interest payments to the lenders.

Equity shareholders get a return only when profits are left after giving interest to debenture holders and preferential dividend to preference shareholders. In case, no profits are left after it, they do not get a return. Therefore, it is unreasonable to transfer funds to general reserves which are called retained profits if there are exceptionally good profits. They took the risk of uncertain returns. Then it is their right to get exceptional returns in good times. But in good times, it is being retained to plough back into the business. Therefore, it is right to say that retained earnings are not a good source from the values point of view as it is the right of equity shareholders.

Yes, we agree. Retained earnings are better than other sources of finance because:
(a) Retained earnings is a permanent source of funds which an organization can avail of.
(b) It enhances capacity of the business to absorb unexpected losses.
(c) It does not involve any explicit cost in the form of interest, dividend or flotation cost.
(d) It may increase the process of equity shares of a company.
(e) There is a greater degree of operational freedom and flexibility as the funds are generated internally.

John's investment depends on many factors:
(a) If he wants control in the company or participation in management of the company, he should invest in equity shares.
(b) If he wants some certainty in returns and also wants something extra in case of huge profits, he should invest in preference shares. .
(c) If he wants perfect certainty, he should invest in public deposits lor debentures as rate of return is prefixed.
(d) He also needs to see if he wants to invest for short term or long term. If he is interested in short term investment, then he should choose public deposits.
(e) If he is interested in middle term investment, he should invest in preference shares or debentures.
(f) If he is interested in long term investment, he should invest in equity shares.

GDRs have following features:
1. A bank certificate issued in more than one country for shares in a foreign company. The shares are held by a foreign branch of an international bank. The shares trade as domestic shares, but are offered for sale globally through the various bank branches.
2. A financial instrument used by private markets to raise capital denominated in either U.S. dollars or Euros.
3. Holders of GDR are eligible only for capital appreciation and dividend but no voting rights.
4. These instruments are called EDRs when private markets are attempting to obtain Euros.
5. It is a negotiable instrument and can be traded freely like any other security.
6. A holder of GDR can convert it into any other security at any time.

Preference shares have a fixed percentage dividend before any dividend is paid to the ordinary shareholders. As with ordinary shares a preference dividend can only be paid if sufficient distributable profits are available, although with 'cumulative' preference shares the right to an unpaid dividend is carried forward to later years. The arrears of dividend on cumulative preference shares must be paid before any dividend is paid to the ordinary shareholders. From the company's point of view, preference shares are advantageous in the following ways:
1. Dividends do not have to be paid in a year in which profits are poor, while this is not the case with interest payments on long term debt (loans or debentures).
2. Since they do not carry voting rights, preference shares avoid diluting the control of existing shareholders while an issue of equity shares would not.
3. Unless they are redeemable, issuing preference shares will lower the company's gearing. Redeemable preference shares are normally treated as debt when gearing is calculated.
4. The issue of preference shares does not restrict the company's borrowing power, at least in the sense that preference share capital is not secured against assets in the business.
5. The non-payment of dividend does not give the preference shareholders the right to appoint a receiver, a right which is normally given to debenture holders.
However, dividend payments on preference shares are not tax deductible in the way that interest payments on debt are. Furthermore, for preference shares to be attractive to investors, the level of payment needs to be higher than for interest on debt to compensate for the additional risks.
For the investor, preference shares are less attractive than loan stock because:
1. They cannot be secured on the company's assets.
2. The dividend yield traditionally offered on preference dividends has been too low to provide an attractive investment compared with the interest yields on loan stock in view of the additional risk involved.

A business needs finance because:
1. Business is concerned with production and distribution of goods and services for the satisfaction of needs of society. There are four factors required for any production: land, labour, capital and entrepreneur. All these factors need to be paid for their services.
2. No business can be carried without availability of adequate funds.
3. As soon as a decision is taken to start a business, requirement of funds initiates.
4. Finance is called 'life blood of a business'.
5. It is very important to assess financial needs of the organization and the identification of various sources of finance.

SEBI has issued guidelines for foreign companies who wish to raise capital in India by issuing Indian Depository Receipts. Thus, IDRs will be transferable securities to be listed on Indian stock exchanges in the form of depository receipts. Such IDRs will be created by a Domestic Depositories in India against the underlying equity shares of the issuing company which is incorporated outside India.
1. Though IDRs will be freely priced, yet in the prospectus the issue price has to be justified. Each IDR will represent a certain number of shares of the foreign company. The shares will not be listed in India, but have to be listed in the home country.
2. The IDRs will allow the Indian investors to tap the opportunities in stocks of foreign companies and that too without the risk of investing directly which may not be too friendly. Thus, now Indian investors will have easy access to international capital market.

Given below are three financial institutions along with their objectives:
(a) Industrial Credit and Investment Corporation of India (ICICI): It came into existence in 1955 as a public limited company under the Companies Act, 1956.
Objective: ICICI assists the expansion and modernisation of industrial enterprises exclusively in the private sector. The corporation has also encouraged the participation of foreign capital in the country.
(b) Industrial Development Bank of India (IDBI): It came into existence in 1964 under the Industrial Development Bank of India Act, 1964. Objective: Its objective was to coordinate the activities of other financial institutions including commercial banks. The bank performed three types of functions namely, assistance to other financial institutions, direct assistance to industrial concerns and promotion and coordination of financial technique service.
(c) Life Insurance Corporation of India (LIC): It came into existence in 1956 under the LIC Act 1956 after nationalising 245 existing insurance companies.
Objective: It mobilises the community saving in the form of insurance premia and makes it available to industrial concerns. Both public as well as private, in the form of direct loan and underwriting of an subscription to shares and debentures.

The differences between internal and external sources of raising funds are summarized in the table given as follows:

Business is concerned with production and distribution of goods and services for the satisfaction of need of society. A business cannot function unless adequate funds are made available to it. The need of fund arises from the stage when an entrepreneur makes a decision to start a business. Some funds are needed immediately. The financial need of a business can be categorized in the following ways:
(a) Fixed Capital Requirements: In order to start business, funds are required to purchase fixed assets like land and building, plant and machinery, and furniture and fixures. This is known as fixed capital requirement of an enterprise.
(b) Working Capital Requirements: The financial requirements of an enterprise do not end with the procurement of fixed assets. No matter how small or large business, it need funds for its day-to-day operations. This is known as working capital of an enterprise which is used for holding current assets like stock, bill receivable, current expenses etc. Therefore, a business needs funds to meet its fixed as well as working capital requirements.