Sehaj joined his father’s business of Organic masalas, near Baddi in Himachal after completing his MBA. In order to capture a major share of the market, he decided to sell the product in small attractive packages by using the latest packaging technology and machinery. He believed that this project has huge financial potential in terms of sales and cash flows. Father asked Sehaj to prepare a financial blueprint for the organization’s future operations. His father suggested that they hire financial consultants to help them with various sources of funds. The consultant enlisted various sources of finance and their associated costs of public issue to determine the optimal source(s) of finance. The consultant also referred to certain guidelines issued by SEBI.
"The consultant also referred to certain guidelines issued by SEBI" Identify the factor affecting capital structure decision referred to here.
Answer & explanation
Correct answer: option 2
The correct answer is Option (2) → Regulatory framework
Option (1) Control — Incorrect. This factor concerns the owners’ hold on the company when new shares are issued.
Option (2) Regulatory framework — Correct. Every issue of shares or debentures must follow the SEBI guidelines, and loans must follow the rules of the RBI and other bodies. Where these rules make a source easier or harder to use, they shape the capital structure. The consultant referring to SEBI’s guidelines is this factor.
Option (3) Stock market conditions — Incorrect. This factor is about whether the market is rising or falling, which makes shares easier or harder to sell.
Option (4) Flexibility — Incorrect. This factor is about keeping some borrowing power unused, so that the firm can raise more debt when needed.
NCERT (2026-27 Edition): “Factors affecting the Choice of Capital Structure … 12. Regulatory Framework: Every company operates within a regulatory framework provided by the law e.g., public issue of shares and debentures have to be made under SEBI guidelines. Raising funds from banks and other financial institutions require fulfillment of other norms. …” |