Raising of funds

Corporations cannot grow unless they raise money from the public. They need money
for various puposes such as expansion, new projects, product development, research
and development, fixed assets like land , building , plant etc. There are various ways in
which they can raise funds, they are:

• Issue of bonds
• Issue of preference shares
• Issue of common shares( Equity Shares)
• Borrowing money from banks and financial institutions.

In todays world the parent company or the main company has many smaller
business or subsidiaries (A subsidiary, in business matters, is an entity that is
controlled by a separate higher entity). When they want money for expansion or a
new project, generally the parent company raises funds in the name of the
subsidiary, as we can see in the case of reliance.

The Reliance Anil Ambani group (ADA group) has subsidiaries like:

Reliance capital

Reliance communication

Reliance infrastructure

Reliance health

Reliance power etc

The question here is whether such a company will raise funds as a group financing or
should they go in for individual financing for its separate divisions.

When they want to raise funds for a particular project or purpose, as mentioned by
them in the prospectus they have to raise or utilize those funds for that particular
project only. And also it has to be in the name of that company itself.

Eg: Reliance power

When reliance power wanted funds for a project they came up with an IPO( initial
public offering) which fetched the company Rs 11,700 crore. Since the IPO, the
Tilaya project has been bagged by the company. Moreover, the company needs cash
to spend on more captive coal mines. They therefore are planning to raise more
funds, which will be raised in the name of Reliance power rather than Reliance.
Reliance Power has a fairly significant expansion programme lined up over the next
five-six years. So they need to raise some capital

The company is also seeking shareholders' approval to use the proceeds of its initial
public offer for purposes other than those mentioned in the prospectus for the IPO.
The management is seeking “special resolution that gives adequate flexibility and
discretion to the board.

Under the resolution the board would utilise the proceeds of the IPO for the purpose
other than those mentioned in its prospectus.

The reasons why we should go in for individual financing of the separate divisions
rather than group financing because:-

• All the companies i.e the separate divisions will have the need for funds at
different point of time.
• It will help the shareholders. When a company is raising funds in its
infrastructure division only those shareholders who are interested in this
sector will apply for the IPO.
• As mentioned earlier the company has to mention the purpose of raising
funds and the projects or way in which it will be utilized in the prospectus and
cannot be used for other purposes.
• The cost of raising funds in different sectors will be different
• The industry beta rate( beta is that company's risk compared to the risk of the
overall market) will be different for the various divisions.
• The different divisions are listed as different bodies on the stock exchange
• The fund requirement of the different division(subsidiaries) will be different.

BY: RAUNAK DOSHI(1021327)

3rd trim MBA M