Sources of Finance ICSE Class 10: Shares, Debentures and Bank Loans

What Sources of Finance is about

Weightage: CISCE publishes no chapter weightage. Section A (40 marks) is compulsory, with 1-mark MCQs and short 2-mark answers; in Section B you answer any four of six 10-mark questions.Source: CISCE ICSE Commercial Studies (631) specimen paper structure, 2025, retained for 2027 by the CISCE circular of 9 October 2026

Key concepts

Capital market: meaning and functions

The capital market is the market for long-term funds, where long-term securities such as shares and debentures (and long-term government bonds) are issued and traded. It brings together those who save (investors: households, banks, insurance companies, mutual funds) and those who need long-term capital (companies and the government). It is not a market for capital goods like machines.

It has two parts: the primary market (new issue market), where companies issue new securities to raise fresh capital; and the secondary market (stock exchange), where existing securities are bought and sold among investors. In India it is regulated by the Securities and Exchange Board of India (SEBI).

Functions: (1) mobilises the savings of the public; (2) channels them into productive long-term investment in industry; (3) provides liquidity, because investors can sell securities on the stock exchange whenever they need cash; (4) helps in price discovery (valuing securities by demand and supply); (5) offers investors a choice of securities with different risks and returns; (6) promotes economic growth and industrialisation; (7) protects investors through regulation and disclosure rules.

Worked example

(2 marks) What is a capital market?

Try it first, then show the solutionSolution

1. A market for long-term funds - 1 mark.
2. Where long-term securities such as shares and debentures are issued and traded, linking savers and companies - 1 mark.

Answer: The capital market is the market for long-term funds, in which long-term securities such as shares, debentures and government bonds are issued and traded, bringing the savings of investors to companies and the government.

Shares and equity shares

The capital of a company is divided into small units of equal value, each called a share (for example, ₹10 each). Those who buy shares are shareholders, part-owners of the company. Shares are owned capital: the company does not repay them during its life.

Equity (ordinary) shares are shares that carry no preferential rights. Features: (1) Ownership and control: equity shareholders are the real owners and have voting rights to elect directors. (2) Dividend is not fixed; it depends on profit and is paid only after preference dividend. (3) Capital is repaid last on winding up, after creditors and preference shareholders. (4) They bear the maximum risk, but gain most when profits are high. (5) Permanent capital: not refunded during the life of the company. (6) Usually low face value, so small investors can buy them.

Worked example

(2 marks) What are equity shares?

Try it first, then show the solutionSolution

1. Shares that carry no preferential right to dividend or return of capital - 1 mark.
2. Holders are real owners with voting rights; dividend varies with profit; maximum risk - 1 mark.

Answer: Equity shares are shares with no preferential rights; their holders are the real owners with full voting rights, receive a dividend that varies with profit after preference dividend is paid, and are repaid last, so they bear the maximum risk.

Preference shares

Preference shares are shares that carry two preferential rights over equity shares: (1) the right to receive dividend at a fixed rate before any dividend is paid to equity shareholders, and (2) the right to repayment of capital before equity shareholders when the company is wound up.

Other features: they generally do not carry voting rights (except on matters affecting their rights, or when their dividend is unpaid); risk and return are lower than equity; the dividend is still paid only out of profits.

Hybrid nature: preference shares combine features of equity shares (they are part of share capital and dividend is paid only from profits) and of debentures (fixed rate of return and priority in payment). Types include cumulative (unpaid dividend accumulates), non-cumulative, redeemable and convertible.

Worked example

(2 marks) What are preference shares?

Try it first, then show the solutionSolution

1. Shares with preferential right to a fixed-rate dividend before equity shareholders - 1 mark.
2. And preferential right to return of capital on winding up; usually no voting rights - 1 mark.

Answer: Preference shares are shares whose holders have a preferential right to a fixed rate of dividend before equity shareholders and to repayment of capital before them on winding up; they usually carry no voting rights.

Debentures and shares versus debentures

A debenture is a written instrument issued by a company under its common seal (or signature) acknowledging a debt and promising to pay a fixed rate of interest and to repay the principal on a fixed date. Debenture holders are creditors of the company, not owners. Debentures are borrowed capital, usually secured on the company's assets, carry no voting rights, and interest must be paid whether or not the company earns a profit.

Differences between shares and debentures:
(1) Status: shareholders are owners; debenture holders are creditors.
(2) Return: shares earn dividend, which depends on profit (fixed rate for preference); debentures earn fixed interest, payable even in a loss.
(3) Nature of capital: owned capital vs borrowed capital (a liability).
(4) Voting rights: equity shareholders vote; debenture holders do not.
(5) Repayment: share capital is not repaid during the life of the company (except redeemable preference); debentures are repaid after a fixed period.
(6) Security: shares are unsecured; debentures are usually secured by a charge on assets.
(7) Priority on winding up: debenture holders are paid before shareholders.
(8) Risk: shares carry more risk than debentures.

Worked example

(2 marks) Write any two differences between shares and debentures.

Try it first, then show the solutionSolution

1. Status: shareholders are owners; debenture holders are creditors - 1 mark.
2. Return: dividend depends on profit; debenture interest is fixed and payable even in loss - 1 mark.

Answer: (1) Shareholders are owners of the company, whereas debenture holders are its creditors. (2) Shareholders receive dividend only out of profits, whereas debenture holders receive interest at a fixed rate even if the company makes a loss.

Short-term loans from commercial banks

Commercial banks provide working capital (short-term finance) in several ways; the syllabus asks for the meaning of three:

Cash credit: the bank sanctions a borrowing limit to a business against the security of its current assets (stock of goods, debtors) or a pledge or hypothecation of goods. The borrower can withdraw money as and when needed, up to the limit, and repay it at any time. Interest is charged only on the amount actually withdrawn and for the period it is used, not on the whole limit.

Overdraft: a facility allowed to a current account holder to withdraw more than the balance in the account, up to an agreed limit, for a short period. Interest is charged only on the overdrawn amount for the days it is outstanding.

Discounting of bills of exchange: when a business holds a bill of exchange (a credit instrument) that will be paid by its customer on a future date, it can 'discount' it with a bank: the bank pays the face value of the bill immediately, less a charge (discount) for the remaining period, and itself collects the full amount from the customer on the due date.

Worked example

(2 marks) What is cash credit?

Try it first, then show the solutionSolution

1. Bank sanctions a borrowing limit against security of stock or other current assets; money is withdrawn as needed - 1 mark.
2. Interest is charged only on the amount actually used - 1 mark.

Answer: Cash credit is a short-term arrangement in which a bank sanctions a borrowing limit to a business against the security of its stock or other current assets; the business withdraws money as needed up to the limit and pays interest only on the amount actually withdrawn.

Sources of Finance in real life

Each concept, met in an everyday situation. Read the situation, answer the question in your own words, then compare with the model answer. The one-line hook is what to remember.

Topics in this chapter

• Equity Shares, Preference Shares and Debentures

Sources of Finance: key facts

Capital market

Market for long-term funds: primary (new issues) + secondary (stock exchange)

Regulated by SEBI; not a market for machines.

Equity shares

Owners + voting + variable dividend + repaid last + maximum risk

Low face value.

Preference shares

Fixed dividend first + capital first on winding up + usually no vote

Hybrid of equity and debenture.

Debentures

Creditors + fixed interest (even in loss) + secured + repaid on fixed date + no vote

Borrowed capital.

Bank short-term

Cash credit (limit against stock); Overdraft (beyond current account balance); Bill discounting (cash before due date)

Interest only on amount used for CC and OD.

How the board asks Sources of Finance

The question patterns to expect, and the method that works for each.

Tricks to remember Sources of Finance

Short memory aids. Say each one aloud once, then use it on a question the same day.

• Equity = VRMLP

  Voting rights, Residual (last) claim, Maximum risk, Low face value, Permanent capital.

  Use it when: A note on equity shares.

• Two P's of preference

  Preference shares are paid first twice: Profits (dividend) and Principal (capital on winding up).

  Use it when: Meaning of preference shares.

• C-O-D for bank finance

  Cash credit (limit on stock), Overdraft (over current account), Discounting (bills).

  Use it when: Three short-term bank loans.

Sources of Finance: board-level solved questions

Ordered from board level to HOTS. Cover the solution, write your own, then compare step by step.

Case-study practice (Section B style)

Read the situation, then answer every part. In the board paper this is a 10-mark question split into 2 + 3 + 5 marks.

Where the marks are

How a typical answer is split into step marks. Show every step: a right final answer alone rarely earns full marks.

Where students lose marks in Sources of Finance

The slips examiners see most often, and what to write instead.

• ✗Mistake: Calling cash credit a credit card or a simple loan

  The 2024 examiners reported both confusions.

  ✓Do this: Cash credit: limit against stock, draw as needed, interest only on amount used.

  Usually costs: Both marks.

• ✗Mistake: Taking the capital market as a market for machinery or land

  Reported by the 2024 examiners.

  ✓Do this: It deals in long-term funds and securities.

  Usually costs: Both marks.

• ✗Mistake: Writing about shares in general for 'equity shares'

  Reported in both 2024 and 2025 short notes.

  ✓Do this: Use the key words: full voting rights, variable dividend, maximum risk, no priority, low face value.

  Usually costs: Up to 3 of 5 marks.

• ✗Mistake: Confusing preference shares with debentures

  The 2024 examiners reported candidates confusing preference shares with debentures in the MCQ on a fixed-interest loan with repayment.

  ✓Do this: Interest + repayment date + creditor = debenture; dividend + owner = share.

  Usually costs: 1 mark.

• ✗Mistake: Not recognising bill discounting from a story

  The 2025 examiners found candidates did not understand credit instruments and maturity.

  ✓Do this: Paid now, less than face value, for a bill due later = discounting.

  Usually costs: 1 mark.

Practice questions on Sources of Finance

Write each answer on paper first. Open the hint only if you are stuck, and the answer only when you have finished.

1. Q1 · 1 mark · MCQBoard level

   Which of these is borrowed capital?
   (a) Equity shares
   (b) Preference shares
   (c) Debentures
   (d) Retained profits

   Hint

   Creditors.

   Answer

   (c) Debentures.

2. Q2 · 1 mark · MCQBoard level

   Suppose a trader takes a 3-month bill to his bank, which pays him less than its face value immediately. The bank has:
   (a) granted an overdraft
   (b) discounted the bill
   (c) granted cash credit
   (d) given a term loan

   Hint

   Before maturity.

   Answer

   (b) discounted the bill.

3. Q3 · 2 marks · Very short answerBoard level

   What is an overdraft?

   Hint

   Current account.

   Answer

   An overdraft is a facility allowed by a bank to a current account holder to withdraw more than the balance in the account, up to an agreed limit, for a short period; interest is charged only on the amount overdrawn.

4. Q4 · 2 marks · Very short answerHarder board level

   Distinguish between cash credit and overdraft.

   Hint

   Security; account.

   Answer

   (1) Cash credit is sanctioned against the security of stock or other current assets, whereas an overdraft is allowed on a current account, often against general creditworthiness or collateral. (2) Cash credit is a regular working-capital arrangement for larger sums, whereas an overdraft is usually a temporary facility for smaller sums.

5. Q5 · 2 marks · Very short answerHarder board level

   Why is the capital market not a market for 'capital goods'?

   Hint

   Securities.

   Answer

   Because it deals in long-term funds and financial securities such as shares and debentures, not in physical capital goods such as machinery or land; the funds raised may later be used to buy capital goods.

6. Q6 · 2 marks · Short answerHOTS / competency

   Why may an investor who wants a steady income and safety prefer debentures to equity shares?

   Hint

   Fixed interest, security.

   Answer

   Debentures pay fixed interest even when the company makes a loss, are usually secured on assets and are repaid on a fixed date and before shareholders on winding up, whereas equity dividend varies and equity bears the maximum risk.

7. Q7 · 5 marks · Long answerBoard level

   Explain five differences between shares and debentures.

   Hint

   Status, return, voting...

   Answer

   (1) Shareholders are owners; debenture holders are creditors. (2) Shares earn dividend out of profits; debentures earn fixed interest even in a loss. (3) Shareholders (equity) have voting rights; debenture holders do not. (4) Share capital is not repaid during the company's life; debentures are repaid on a fixed date. (5) Debentures are usually secured and repaid first on winding up; shares are unsecured and repaid after creditors.

8. Q8 · 5 marks · Long answerHOTS / competency

   'Equity shareholders bear the maximum risk but may earn the maximum return.' Explain.

   Hint

   Residual claim.

   Answer

   Equity shareholders are paid last: debenture interest and preference dividend come first, and on winding up creditors and preference shareholders are repaid before them. If profits are low they may get nothing, and they may lose their capital, so their risk is the highest. But all the profit left after fixed payments belongs to them, so in good years their dividend and the market value of their shares can rise far above the fixed returns of preference shareholders and debenture holders. They also control the company through voting rights.

9. Q9 · 2 marks · Very short answerHarder board level

   What is meant by 'cumulative' preference shares?

   Hint

   Arrears.

   Answer

   Preference shares on which unpaid dividend of a loss year accumulates and must be paid in a later profitable year before any dividend is paid to equity shareholders.

Test your recall

Answer in your head or on paper first, then open the card. Pulling an answer out of memory makes it stick far better than re-reading.

1. 1.Who regulates the capital market in India?Show answer

   SEBI.

2. 2.Do debenture holders vote?Show answer

   No.

3. 3.Which shares get dividend first?Show answer

   Preference shares.

4. 4.Interest on cash credit is charged on?Show answer

   The amount actually withdrawn.

5. 5.Name the two parts of the capital market.Show answer

   Primary (new issues) and secondary (stock exchange).

Quick revision checklist

The night before the exam: can you do each of these without looking?

• ☐Capital market: long-term funds; primary + secondary; functions: mobilise, channel, liquidity, price, growth.
• ☐Equity: owners, vote, variable dividend, last claim, maximum risk.
• ☐Preference: fixed dividend first, capital first, usually no vote; hybrid.
• ☐Debentures: creditors, fixed interest even in loss, secured, fixed repayment, no vote.
• ☐Bank: cash credit (limit on stock), overdraft (beyond current account), discounting (cash for bill before due date).

Sources of Finance: frequently asked questions