Somaiya Classes

DEFERED SHARES

Introduction : A deferred share is a share that does not have any rights to the
assets of a company undergoing bankruptcy until all common and preferred
shareholders are paid. It may also be a share that is issued to company
founders that restricts their receipt of dividends until dividends have been
distributed to all other classes of shareholder. Deferred shares can also be
awarded to venture capital and other private investor groups as part of a long-
term investment in a company.

Definition : These shares are issued Promoters of Founders of the company for
services rendered to the enterprise. These shares were known as founder
share because these were normally issued to founders. These shares rank last
as far as dividend payment and return of capital are concerned.

First of all dividends on preference shares is paid then comes the turn of equity
shares to get the dividend. Whatever is left of the total profit after preference
and equity shareholders have been paid is distributed among the deferred
shareholders. According to Companies Act 1956 no public limited company or
which is a subsidiary of a public company can issue deferred shares.

Key Features :

1. Deferred shares are the last in line in credit or bankruptcy proceedings,

following preferred stock and common stock holders.
2. Deferred shares are usually reserved for company insiders and investors,
with various term stipulations about when the shares vest and may be
convertible to common stock or another class of stock.

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3. The idea is to keep company management and investors intact through a
company’s evolution, from a start-up to a publicly traded company.
4. Deferred shares are less common, with restricted stock units (RSU’s)
becoming increasingly common due to their shorter vesting period.
5. Either way, deferred shares represent a long-term compensation award
for company founders, executives, and initial investors.

Deferred shares – a method of stock payment to directors and executives of a

company – are deposited into a locked account. The value of these shares
fluctuates with the market and cannot be accessed by the beneficiary for the
purpose of liquidation until they are no longer employees of the company or a
particular date has past and the employee is considered fully vested with the
company. Subordinate to all other classes of common and preferred stock,
these shares are last in line when a company goes bankrupt and liquidates all
assets.

Examples : Deferred shares are mostly used as a method of compensation for

executives and founders of a company or a means to induce investors to invest
in a company. Deferred shares come with many restrictions, such as vesting
periods, company performance, market price of the stock, and others.
Traditionally, deferred shares are just part of a larger compensation plan.
Employees being issued deferred stock may also receive more traditional stock
options, which may be subject to certain vesting periods, as well as other
investment or retirement options. No longer commonly used, deferred shares
provided its holders with large dividend payouts, typically higher than the
average rate offered on other forms of shares, but are only paid after all other
classes of shareholders have received their distributions. Holders of deferred

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shares have access to all the remaining profits after all of the other
obligations are met.

CREDIT RATING AGENCY

A credit rating agency (CRA, also called a rating service) is a company that

assigns credit ratings, which rate a debtor’s ability to pay back debt by making
timely interest payments and the likelihood of default.

An agency may rate the creditworthiness of issuers of debt obligations, of debt

instruments, and in some cases, of the servicers of the underlying debt, but not
of individual consumers.

Debt instruments rated by CRAs include government bonds, corporate bonds,

CDs, municipal bonds, preferred stock, and collateralized securities, such as
mortgage-backed securities and collateralized debt obligations. Credit Rating
Agencies assess the relative credit risk of spefic debt securities or structured
Finance instruments and borrowing entities (issuers of debt) and in some cases
the creditworthiness of governments and their securities.
Major Functions of Credit Rating Agencies
 Provide low cost information
 The basis for risk and return
 Gives superior information
 Helps in public policy formulation
 Enhances corporate image
 Business analysis
 Evaluation of industrial risks
 Market position of the company within the industry
 Operating efficiency

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 The legal position in terms of the prospectus
 Financial analysis based on accounting quality

CRISIL : CRISIL stands for Credit Rating Information Services of India Limited
and it was the first credit rating agency set up in India in 1987. Today, CRISIL
has become a global analytical company that rates companies, researches the
markets and provides risk and policy advisory services to its clients. At the time
of incorporation, the agency was promoted by ICICI Limited, UTI and many
such financial institutions. The agency started operations in 1988.
CRISIL is headquartered in Mumbai. CRISIL provides independent opinion and
efficient solutions by performing data analysis and research. It has a strong
track record of growth and innovation. CRISIL has expanded its business
operation to USA, UK, Poland, Argentina, Hong Kong, China and Singapore
apart from India. The majority shareholder of CRISIL is Standard & Poor’s, one
of the biggest credit rating agencies of the world.

CRISIL works with various governments and policy-makers in India and other
developing nations to enhance and improve the infrastructure and meet the
demands of the region. The agency has rated around 5180 SMEs in India and
has issued in excess of 10,000 SME ratings overall. CRISIL commands revenue
of Rs 1,110 Crores with a net income of Rs 298 Crores and an operating income
of Rs 320 Crores.

CARE : Credit Analysis and Research limited was established in 1993 and since
then it has gone on to become India’s second largest credit rating agency. It
was promoted by Industrial Development Bank of India (IDBI), Unit Trust of
India (UTI) Bank, Canara Bank and other financial institutions. CARE has its
headquarters in Mumbai and regional offices in New Delhi, Bangalore,
Chennai, Hyderabad, Ahmedabad and Kolkata. CARE has the primary function

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to perform rating of debt instruments, credit analysis rating, loan rating,
corporate governance rating, claims-paying ability of insurance companies, etc.
It also grades construction entities and courses undertaken by maritime
training institutions. Ratings provided by CARE include financial institutions,
state governments and municipal bodies, public utilities and special purpose
vehicles.

The Information and Advisory Service Department of CARE prepares credit

rating and reports on requests from business partners, banks and other
financial entities. It also conducts sector-based studies and provides necessary
advisories for valuation, financial restructuring and credit appraisal systems.
CARE conducts an extensive research and rates SMEs based on their financial
health. These ratings are provided under 8 levels where CARE SME 1 signifies
excellent financial health with negligible risks and CARE SME 8 rank signifies
lowest credit quality with highest credit

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ICRA : Originally named as Investment Information and Credit Rating Agency,
the organisation was set up in 1991. It was a joint venture of Moody’s and
Indian financial and banking service organisations. It was renamed to ICRA
Limited and was listed in the Bombay Stock Exchange and National Stock
Exchange in April 2007. ICRA, which is an independent professional corporate
investment information and credit rating and advisory agency, is
headquartered in Gurugram, Haryana. ICRA assigns corporate governance
rating, performance ratings, grading and provides ranking to mutual funds,
hospitals and construction and real estate companies. The agency generates
revenue of Rs 2.28 Billion. ICRA has a major focus on the MSME sector. To
cater to its clients, the dedicated team of professionals have developed a linear
scale for the concerned sector. It helps the agency to benchmark peers quite
easily. ICRA ratings are used to analyse the credit risk in India. It does not cater
to the international companies and organisations.

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