Finance can be divided broadly into two, viz. equity capital and loans. Equity capital is obtained by ploughing back profits into new shares or by selling existing shares. Except for well-established and fairly large companies, the former is unlikely to provide sufficient capital to purchase developed properties of high value.

On the other hand, raising capital through the sale of shares is really open only to a public company and usually a minimum of 10 crore rupees must be raised to make an issue through a public offer an economic proposition. While this sum may not be an obstacle to a successful developer, equity financing has two main disadvantages.

First, the cost of this type of finance depends largely upon the current popularity of property-company shares on the Stock Exchange. If such shares are wanted, e.g., because they are regarded as an excellent inflation-hedge, they will sell on a low-yield basis relative to fixed-interest-bearing bonds. It means there will be a reverse yield gap. New capital from the sale of shares can therefore be obtained on favorable terms, giving owners of existing shares a capital gain.

Thus a number of property development companies came to the market in 1970–72. The merchant banks have already held a major proportion of their equity as a condition for issuing the loans. On the other hand if property shares are in much demand then they have to be sold on a high-yield basis. In such circumstances few companies would seek to raise capital by selling shares through a rights issue.

Secondly, in India Property companies prefer to be highly sophisticated in their operations. Holding first-class property entails little risk since rents are regular, fairly certain and, with inflation, is likely to rise. It is thus possible to raise finance by borrowing.