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Ordinary share represent the ownership position in the
company. The holders of ordinary shares are called the shareholders and they are the legal owners of the company.
By a share it also means right to participate in the profits
made by a company, while it is a going concern and declares dividend, and in the assets of the company when it is wound up.
A stock is defined as consolidated value of fully paid up
shares of a member.
Types of shares capital
Equity shares capital Preference shares capital: Preference share is the one
which satisfies the following criteria - With respect to dividend it carries a preferential right to be paid which may be a fixed amount or a fixed rate - On winding up or on repayment of capital a preferential right to be repaid the amount .
Features of Preference Share
Claims on income and assets
Cumulative dividend Redemption
Call feature Participation feature
Hybrid Security Ordinary share • Non payment of dividend does not force the company to insolvency Dividends are not deductible for tax purpose In some cases there is no fixed maturity date. Debenture •Dividend rate is fixed •Pref shareholders do not share in the residual earnings •They have claim on income and assets prior to ordinary shareholders • • .
they carry a right to participate in the surplus profit along with equity shareholders after dividend at certain rate has been paid to equity shareholders. . Cumulative and non-cumulative shares Redeemable preference shares Fully or partly convertible preference shares.Types of Preference Shares Participating preference shares.:.
.Voting rights for preference shareholders Every member of a company holding any preference shares has a right to vote only on resolutions placed before the company which directly affect attached to his preference shares Apart from this preference shareholders are entitled to vote if dividend has remain unpaid in case of cumulative as well as non cumulative for two years.
Pros •Risk less leverage advantage •Dividend postpondability •Fixed dividend •Limited voting right Cons •Non tax deductibility of dividend •Commitment to pay dividend .
Equity shares .
Types of Equity Shares Authorized share capital Issued share capital Subscribed share capital Paid up share capital .
Any amount in excess of par value is called the share premium. Issue price has two components 1. . Issue price of shares: the price at which share is issued in the market. Paid up share capital = issue price * no. It is generally based upon the expectations about the performance of the economy in general and company in particular. Shareholders equity = paid up share capital + share premium + reserves and surplus = Net worth Book value per share = Net worth / no. of ordinary shares. Par value 2. Generally they are in the denomination of 10 or 100. of ordinary shares Market value of a share is the price at which it trades in the market. Share premium Par value is the price per ordinary share stated in the memorandum of association.
Features of Equity Shares Residual claim to income Residual claim on assets Right to control Voting system Pre-emptive right Limited liability .
It does not involve any obligatory dividend payment Demerits .high cost of fund reflecting the high required rate of return of investors as a compensation for higher risk .Dilution of control .High floatation cost in terms of underwriting.Evaluation Merits . brokerage and other issue expenditure .it is a permanent source of fund without any repayment liability .
Method of Raising Capital By issue of prospectus Rights issue of equity shares. Private placement of shares .
Issuing of securities Filing of offer document Application for listing Issue of securities in dematerialized form Book building: It is a process undertaken by which demand for securities proposed to be issued is elicited and built up and price for such issue is assessed for determination of quantum of such securities to be issued. .
Issue of share at a discount Issue of share at a premium Call on shares: application. allotment and other calls Forfeiture of shares .
Initial Public Offer Benefits of going public .Liquidity .Adverse selection .Access to capital .Dilution .Public pressure .Respectability .Disclosures .Accountability .Signals from the market Costs of going public .Investors recognition .
35 % for small investors and the balance for all other investors. .ISSUE TYPE Fixed Price Issues OFFER PRICE Price at which the securities are offered and would be allotted is made known in advance to the investors DEMAND Demand for the securities offered is known only after the closure of the issue PAYMENT 100 % advance payment is required to be made by the investors at the time of application.. 50 % of shares offered are reserved for QIBS. while other categories of investors have to pay 100 % advance along with the application. RESERVATION S 50 % of the shares offered are reserved for applications below Rs. Book Building Issues A 20 % price band is offered by the issuer within which investors are allowed to bid and the final price is determined by the issuer only after closure of the bidding. Demand for the securities offered . is available on a real time basis on the BSE website during the bidding period. 10 % advance payment is required to be made by the QIBs along with the application. and at various prices. 1 lakh and the balance for higher amount applications.
The issue size (offer through offer document + firm allotment + promoters contribution through offer document) does not exceed five times the . It has a net worth of at least Rs1 crore in each of the preceding 3 financial years. It has a net tangible asset of at least Rs 3 crore in each of the preceding three years. 3. 2. It has a track record of distributable profit for at least three out of immediately proceeding 5 years.Eligibility for an IPO A company can make 100% retail issues provided it satisfies all the following conditions 1. 4.
Cost of Public Issue Underwriting Expenses Brokerage Fees to the managers to the issue Fees for registrars to the issue Printing expenses Postage expenses Advertising and publicity expenses Listing fees Stamp duty .
. It provides additional price stability to a security issue because the underwriter has the ability to increase supply and smooth out price fluctuations if demand surges. such as if the issuer wants to fund a specific project with a fixed amount of cost and does not want more capital than it originally sought.Green Shoe option A provision contained in an underwriting agreement that gives the underwriter the right to sell investors more shares than originally planned by the issuer. The term is derived from the fact that the Green Shoe Company was the first to issue this type of option. some issuers prefer not to include greenshoe options in their underwriting agreements under certain circumstances. Legally referred to as an over-allotment option. Greenshoe options typically allow underwriters to sell up to 15% more shares than the original number set by the issuer. However. This would normally be done if the demand for a security issue proves higher than expected.
Allotment size of public offer: 2. of shares allocated by rounding No of Total no successf of shares ul allocated applicant 1 2 100 200 1500 400 150000 80.000 6. of shares applied for: 6.00.000 1.000 100 100 200 200 300 300 200 100 30.000 26.700 100 100 500 267 50.00 .00.00.000 40. applied for applica of shares category nts applied wise Proporti onate allocatio n No.000 equity shares S.00.000 20.300 60.000 equity shares of Rs 10 each no.000 +3300 26700 3 4 5 6 300 400 500 600 300 300 200 100 90.000 2. of Total no.000 20.000 40. of times over subscribed: 3 times total no.N o No.00.00.20.000 50.000 30.000 2.000 30.00 1.000 33. of shares No.
of rights = existing share/ new share . Law in India requires that the new ordinary shares must be first issued to the existing shareholders on a prorata basis No.Rights Issue of Equity Share It involves selling of ordinary shares to the existing shareholders.
It is less expensive . .It is helpful to raise small amount of fund . Private placement has the following advantages . IDBI etc. particularly the Institutional Investors like the Unit Trust of India (UTI). the Life Insurance Corporation of India (LIC).Private placement of shares It involves sale of shares (or other securities) by a company to few selected investors.It is a much faster way of raising fund.
the right to share in distributions of the company's income. shareholder's rights to a company's assets are subordinate to the rights of the company's creditors. and the right to a company's assets during a liquidation of the company. However. including the right to vote (usually one vote per share owned) on matters such as elections to the board of directors.Shareholder A shareholder (or stockholder) is an individual or company (including a corporation) that legally owns one or more shares of stock in a joint stock company. the right to purchase new shares issued by the company. Shareholders are granted special privileges depending on the class of stock. .
Preferential Allotment . strategic investors. . venture capitalist. Made to promoters. An issue of equity or equity related instruments by a listed company to pre-identified investors who may or may not be the existing shareholders of the company at a pre-determined price is referred to as a preferential allotment. but who may otherwise find it very costly or impractical to buy large chunk of shares in the market. financial institutions and suppliers Rationale.to secure equity participation of those that the company considers desirable.
Regulations Special resolution .government must grant special approval under section 81(1A) Pricing – price should not be lower than the higher of the average of the weekly high and low of the closing price of the shares quoted on the stock exchange during six months before the relevant date or two weeks before the relevant date. Open offer. Lock-in-period – one year lock-in-period .company must pass special resolution .a preferential allotment of more than 15% of equity necessitates an open offer.
Internal Accruals Depreciation Charges Retained earnings .
No dilution of control Disadvantages Amount that can be raised by way of retained earning is limited. Opportunity cost is quite high .Advantages & Disadvantages of Internal Accruals Advantages Retained earnings are easily available internally. It eliminates issue and transaction cost.
Term Loan .
Term Loan Term loan is a loan made by bank/financial institution to a business having an initial maturity of more than one year. .
these covenants are both positive as well as negative in the sense of what borrowers should do and should not do in the conduct of its operation.Features of a term loan Maturity Negotiated Security: . .primary security/secondary security (collateral) Covenants restrictive covenants are contractual clauses in the loan agreement that place certain operating and financial constraints on the borrower.
Covenants Asset-related covenants -maintenance of working capital position in terms of minimum current ratio -ban on sale of fixed asset without the lenders approval Liability related covenant -restrain on incurrence of additional debt -reduction in debt equity ratio by issue of additional capital Cash flow related covenant -limitation on dividend payment to a certain amount or rate -ceiling on managerial salary or perks Control related covenant -appointment of nominee director to represent the financial institution and safeguard their interest .
030 21.204 2.14) nt 3 12.348 0 .300 11.276 4.030 21.718 7.934 12.300 11.934 12.934 6.982 1.934 12.934 4 8.406 37.688 30.216 5.Repayment schedule/Loan Amortization Year Beginnin g loan 2 60.346 37.934 12.934 12.952 11.535 5.000 55.466 50.406 1 1 2 3 4 5 6 7 8 44.042 Principal repayme nt[3-4] 5 4.400 7.348 12.588 6.298 44.298 Payment Interest installme (0.466 50.896 Ending loan [2-5] 6 55.934 12.168 5.688 30.658 8.776 7.730 9.
. In the detailed analysis marketing.Obtaining a term loan An application form containing comprehensive information about the project is submitted to the financial institution It contains details like promoters background. If on appraisal is the project is found feasible then the loan is sanctioned by the bank. management and economic feasibility of the project is tested. After the application is received a flash report is generated which is a summarization of the loan application. On the basis of this report detailed appraisal of the project is done. financial. particulars of the industrial concern. means of financing etc. particulars of the industrial project. cost of the project. technical.
Debentures Debenture/bond is a debt instrument indicating that a company has borrowed certain sum of money and promises to repay it in future under clearly defined terms. .
payment of which is legally binding Maturity: It indicates the length of time for redemption . rights of the issuing company and responsibilities of the trustees. rights of debenture holder.Attributes Trust indenture: it is a complex and lengthy legal document stating the conditions under which a bond has been issued. Interest: the debenture carries a fixed rate of interest. It provides the specific terms of agreement such as description of debenture. Trustees is a bank or financial institution that acts as a third party to the bond to ensure that the issue does not default on its contractual responsibilities to the bond holders.
Debenture redemption reserve: It is a requirement in the debenture indenture to provide for systematic retirement of debenture on maturity. The put option is the right to the debenture holder to seek redemption at a specified time at a predetermined price. Call and put provision: the call/buyback provides an option to the issuing company to redeem the debenture at a specified price before maturity. Security Convertibility Credit rating Claim on income and assets .
Innovative debt Instruments Zero Interest Bond .They are sold at a discount from their maturity value .The difference between face value of the bond and the acquisition cost is the gain.It appreciates to its face value during the maturity period .It is issued at a deep/steep discount at its face value .They do not carry any explicit rate of interest . Deep Discount bond .
00.000 after 20 years. If the investors hold it for 25 years the annualized return comes out to be 15. the implicit annual rate of interest being 16.000 at a deep discount price of Rs 2.71 respectively .700 with a maturity period of 25 years. The investor had the option to withdraw at the end of every five years with a specified maturity and face value ranging between Rs 5.54%.700 (after 5 years) and Rs 50.12 and 15. IDBI in 1992 had come up with a deep discount bond of face value Rs 1.
Interest is linked to some benchmark rate such as treasury bill. Secured premium notes .The redemption is made in installment Floating rate bond .There is a lock in period during which no interest is paid .It is a secured debenture redeemable at premium over the face value/ purchase price . bank rate etc Callable and puttable bonds .
.leasing: It is a process by which a firm can obtain the use of certain fixed assets for which it must make a series of contractual.It is a type of financial transaction in which goods are let on hire with an option to the hirer to purchase them.Hire purchase:.Other new sources of finance Leasing and hire purchase . Venture capital financing: It is a type of finance available for investors looking for high potential returns and entrepreneurs who need capital as they are yet to go to the public . tax-deductible payments. periodic.
"g) Foreign Venture capital investors registered with SEBI. "i) Insurance Companies registered with the Insurance Regulatory and Development Authority (IRDA). "e) Multilateral and bilateral development financial institutions.25 crores "k) Pension Funds with minimum corpus of Rs. 1956." .Qualified Institutional Buyer (QIB) The Securities and Exchange Board of India has defined a Qualified Institutional Buyer as follows "Qualified Institutional Buyers are those institutional investors who are generally perceived to possess expertise and the financial muscle to evaluate and invest in the capital markets. In terms of clause 2. 25 crores "These entities are not required to be registered with SEBI as QIBs.2B (v) of DIP Guidelines. "j) Provident Funds with minimum corpus of Rs. "c) Mutual funds.2. "b) Scheduled commercial banks. a ‘Qualified Institutional Buyer’ shall mean: "a) Public financial institution as defined in section 4A of the Companies Act. "h) State Industrial Development Corporations. "d) Foreign institutional investor registered with SEBI. "f) Venture capital funds registered with SEBI. Any entities falling under the categories specified above are considered as QIBs for the purpose of participating in primary issuance process.
Factors affecting choice of financing Sales stability Asset structure Profitability Control Taxes Growth rate Management attitude Firm’s internal conditions Financial flexibility Market conditions Prices .
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