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Baba Farid College of management & technology

Submitted to;
Mrs. Rita Rani

Submitted by;
Jaspreet kaur (16128) Sukhveer kaur (16150) Ramandeep kaur (16178) Sandeep kaur (16179)
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( Lec. in FM)

Acknowledgement

I would like to thank to my college who gave me opportunity to give a presentation on sources of finance which really help to increase my confidence and overall development Then we would like to thank our teacher, Mrs.Rita (mam) for encouraging and guiding us throughout the project. We had some difficulties in doing this task, but she taught us patiently until we knew what to do. She tried and tried to teach us until we understand what we supposed to do with the project work. We are highly indebted to her for their guidance and constant supervision as well as providing useful information regarding this project and also for their support to complete this project. We would also like to express our special gratitude to all our friends for giving us such attention and time for helping us to complete this project. Last but not the least my parents who really helped me a lot during this project and also my friend who really helped me a lot during this project .I like to thankful everyone who helped and providing me very useful knowledge to complete this project.

Signature

Content

Topic

page no.

(1) Introduction . 4 (2) Long-term sources5 (3) Characteristic of equity shares . 7 - 8 (4) Preference shares 8 (5) Debentures ... 11 - 12 (6) Ploughing back of profit.. 13 (7) Short-term source of finance.. 13 - 14 (8) Meaning of IPO .. 14 (9) Coal India IPO .. 15 - 20 (10)Bibliography 21

Introduction
As you are aware finance is the life blood of business. It is of vital significance for modern business which requires huge capital. Funds required for a business may be classified as long term and short term.You have learnt about short term finance in the previous lesson. Finance is required for a long period also. It is required for purchasing fixed assets like land and building, machinery etc. Even a portion of working capital, which is required to meet day to day expenses, is of a permanent nature. To finance it we require long term capital. The amount of longterm capital depends upon the scale of business and nature of business Objectives After studying this lesson, you will be able to: y explain the meaning and purpose of long term finance; y y y identify the various sources of long term finance; define equity shares and preference shares; distinguish between equity shares and preference shares;

Long Term Finance Its meaning and purpose


A business requires funds to purchase fixed assets like land and building, plant and machinery, furniture etc. These assets may be regarded as the foundation of a business. The capital required for these assets is called fixed capital. A part of the working capital is also of a permanent nature.Funds required for this part of the working capital and for fixed capital is called long term finance. Purpose of long term finance: Long term finance is required for the following purposes: 1. To Finance fixed assets : Business requires fixed assets like machines, Building, furniture etc. Finance required to buy these assets is for a long period, because such assets can be used for a long period and are not for resale. (2) To finance the permanent part of working capital: Business is a continuing activity. It must have a certain amount of working capital which would be needed again and again. This part of working capital is of a fixed or permanent nature. This requirement is also met from long term funds. 3. To finance growth and expansion of business: Expansion of business requires investment of a huge amount of capital permanently or for a long period.
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Factors determining long-term financial requirements :


The amount required to meet the long term capital needs of a company depend upon many factors. These are : (a) Nature of Business:
The nature and character of a business determines the amount of fixed capital. A manufacturing company requires land, building, machines etc. So it has to invest a large amount of capital for a long period. But a trading concern dealing in, say, washing machines will require a smaller amount of long term fund because it does not have to buy building or machines.

(b) Nature of goods produced:


If a business is engaged in manufacturing small and simple articles it will require a smaller amount of fixed capital as compared to one manufacturing heavy machines or heavy consumer items like cars, refrigerators etc. which will require more fixed capital.

(c) Technology used:


In heavy industries like steel the fixed capital investment is larger than in the case of a business producing plastic jars using simple technology or producing goods using labour intensive technique.

Sources of long term finance


The main sources of long term finance are as follows:

1. Shares:
These are issued to the general public. These may be of two types:(i) Equity and (ii) Preference. The holders of shares are the owners of the business.

2. Debentures:
These are also issued to the general public. The holders of debentures are the creditors of the company.

3. Public Deposits :
General public also like to deposit their savings with a popular and well established company which can pay interest periodically and pay-back the deposit when due.

4. Retained earnings:
The company may not distribute the whole of its profits among its shareholders. It may retain a part of the profits and utilize it as capital.

5. Term loans from banks:


Many industrial development banks, cooperative banks and commercial banks grant medium term loans for a period of three to five years.
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6. Loan from financial institutions:


There are many specialised financial institutions established by the Central and State governments which give long term loans at reasonable rate of interest. Some of these institutions are: Industrial Finance Corporation of India ( IFCI), Industrial Development Bank of India (IDBI), Industrial Credit and Investment Corporation of India (ICICI), Unit Trust of India ( UTI ), State Finance Corporations etc. These sources of long term finance will be discussed in the next lesson.

Shares
Issue of shares is the main source of long term finance. Shares are issued by joint stock companies to the public. A company divides its capital into units of a definite face value, say of Rs. 10 each or Rs. 100 each. Each unit is called a share. A person holding shares is called a shareholder.

Characteristics of shares:
The main characteristics of shares are following 1. It is a unit of capital of the company. 2. Each share is of a definite face value. 3. A share certificate is issued to a shareholder indicating the number of shares and the amount. 4. Each share has a distinct number. 5. The face value of a share indicates the interest of a person in the company and the extent of his liability. 6. Shares are transferable units. Investors are of different habits and temperaments. Some want to take lesser risk and are interested in a regular income. There are others who may take greater risk in anticipation of huge profits in future. In order to tap the savings of different types of people, a company may issue different types of shares. These are: 1. Preference shares, and 2. Equity Shares.

Long term source of finance


Equity shares these are also known as ordinary or common shares. The holder of these shares are the real owners of the company. They have a voting right so have a control over working of the company. They are paid dividend after paying to the preference share holders. Their rate of dividend depends upon the profits of the company. They may be paid a higher rate of dividend and they may not get anything. Equity capital can not redeemed during the life time of the company. At the time of the liquidation also, equity capital is paid after meeting all other liabilities including that of preference shares. Equity shares are shares which do not enjoy any preferential right in the matter of payment of dividend or reppayment of capital. The equity shareholder gets dividend only after the payment of dividends to the preference shares. There is no fixed rate of dividend for equity shareholders.
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The rate of dividend depends upon the surplus profits. In case of winding up of a company, the equity share capital is refunded only after refunding the preference share capital. Equity shareholders have the right to take part in the management of the company. However, equity shares also carry more risk.

Characteristics of equity shares


Limited liability liability of equity shares is limited upto the face value of shares. If a shareholder has already fully paid, he can not be held responsible further for any losses of the company even at the time of liquidation. Voting right they have the voting right so have a control over the working of the company. They are the real owner of the company. Claim as assets equity shareholders have no claim over the assets of the company. In the event if the liquidation of company, the assets are first used to meet the claims of creditors and preference shareholders, after this anything is left , belongs to the equity shareholders. Maturity equity shares are the permanent source of capital and can not be redeemed during lifetime of company. They can demand refund of their capital only at the time of liquidation of company. Claims/rights to income the rate of dividend on equity shares is not fixed. They have a claim on income left after paying the dividend to preference shareholders. In case of insufficient profits they do not get any dividend. Pre-emptive right whenever a public limited company wants to increase its subscribed capital by the allotment of further shares, after the expiry of two years from the formation of the company or the expiry of one year from the first allotment of shares in the company, whichever is earlier, such shares must be first offered to existing euity shares. These shares are called right shares and thier prior right to such is known as pre-emptive right.

Advantages of equity shares


 Equity shares do not create any obligation to pay a fixed rate of dividend.  Equity shares can be issued without creating any charge over the assets of the company.  It is a permanent source of capital and the company is not required to repay them before liquidation.  Equity shareholders are the real owners of the company who have the voting right.  In case of profits, equity shareholders are the real gainers by the way of higher dividends and appreciation in the value of shares.

(a) Merits (A) To the shareholders:


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 In case there are good profits, the company pays dividend to the equity shareholders at a higher rate.  The value of equity shares goes up in the stock market with the increase in profits of the concern.  Equity shares can be easily sold in the stock market.  Equity shareholders have greater say in the management of a company as they are conferred voting rights by the Articles of Association.

(B) To the Management:


 A company can raise fixed capital by issuing equity shares without creating any charge on its fixed assets.  The capital raised by issuing equity shares is not required to be paid back during the life time of the company. It will be paid back only if the company is wound up.  There is no liability on the company regarding payment of dividend on equity shares. The company may declare dividend only if there are enough profits.  If a company raises more capital by issuing equity shares,it leads to greater confidence among the investors andcreditors. Disadvantages of equity shares      As the equity capital can not be redeemed, there is a danger of over capitalization During prosperous periods, they have to be paid higher dividends. Investors having desire of fixed income with safe investment do not like these shares Equity shareholders can put obstacles in management Equity share capital is not a safe investment as they do not get dividend in case of losses  Equity capital can be redeemed at the time of liquidation after satisfying all the claims

Demerits : (A) To the shareholders


 Uncertainly about payment of dividend: Equity share-holders get dividend only when the company is earning sufficient profits and the Board of Directors declare dividend If there are preference shareholders, equity shareholders get dividend only after payment of dividend to the preference shareholders

 Speculative: Often there is speculation on the prices of equity shares.This is particularly so in times of boom when dividend paid by the companies is high.  Danger of overcapitalisation:

In case the management miscalculates the long term financial requirements, it may raise more funds than required by issuing shares. This may amount to over-capitalization which in turn leads to low value of shares in the stock market.  Ownership in name only : Holding of equity shares in a company makes the holde one of the owners of the company. Such shareholders enjoy voting rights. They manage and control the company. But then it is all in theory. In practice, a handful of persons control the votes and manage the company. Moreover, the decision to declare dividend rests with the Board of Directors.  Higher Risk : Equity shareholders bear a very high degree of risk. In case of losses they do not get dividend. In case of winding up of a company, they are the very last to get refund of the money invested. Equity shares actually swim and sink with the company. B) To the Management No trading on equity :Trading on equity means ability of a company to raise funds through preference shares, debentures and bank loans etc. On such funds the company has to pay at a fixed rate. This enables equity shareholders to enjoy a higher rate of return when profits are large. The major part of the profit earned is paid to the equity shareholders because borrowed funds carry only a fixed rate of interest. But if a company has only equity shares and does not have either preference shares, debentures or loans, it cannot have the advantage of trading on equity. 2. Conflictof interests : As the equity shareholders carry voting rights, groups are formed to corner the votes and grab the control of the company. There develops conflict of interests which is harmful for the smooth functioning of a company.

Preference share
These shares have some preference over equity shares. Firstly they have prefence for the repayment of capital at the time of liquidation of company. A fixed rate of dividend is paid on these shares but of distributable profits. They have no voting right so they have not control over the working of the company. At the time of liquidation of company, prefernce share capital will be returnedd after paying outside liabilities but before repatment of equity capital.

Characteristics of prefernce shares


Maturity generally preference share capital is repaid at the time of liquidation of company. However, a company may issue redeemable prefernce chares with a limited life after which they can be repaid during lifetime of company. Control prefernce shareholders have not got the voting right sa that they dont have the control on the working the company. Claim on income a fixed rate of dividend is payable on prefernce shares. Prefernce shareholders have prior claim on the income over the equity shareholders whenever the company has distributable profits, the dividend is first paid on prefernce shareholders.
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Claim on assets prefernce shares have a prefernce in the repayment of the capital at the time of liquidation of the company. Their claims on assets are superior to those of equity shareholders. At the time of liuidation of company their capital is to be repaid first before making any payment to the euity shareholders. Hybrid form of security prefernce share capital represent a hybrid form of security as it includes features of equity and other of debentures. Like equity payment of dividend is not obligatory. Prefernce dividend is paid only out of distributable profits. Like debentures it carries a fixed rate of dividend like interest, it does not have voting right, it ahs priority over equity sharesholders.

Types of prefernce shares


Convertible equity shares the holders of these may be given a right to convert their shares into equity shares after a specific period. These are known as convertible prefernce shares. The right of conversion must be authorised by the artovles of association. Non-convertible prefernce shares the shares which can not be converted into equity shares are called non-convertible prefernce shares. Participating prefernce shares the shares which participate in the surplus profits are called participating prefernce shares. Firstly they are paid a fixed rate of dividend and then a reasonable rate of dividend is paid on equity shares. If some profits remain after paying the both dividends, then prefernce shareholders participate in the surplus profits. The mode for dividing surplus profits between prefernce and equity shareholders is given in the articles of association. Non-particiapating prerence shares - the shares which do not share in the surplus profits of the company are known as non-participating prefernce shares. They get only fixed rate of dividend. Redeemable prefernce shares normally, the capital of comapany is repaid only at the time of liquidation. The company, however, can issue redeemable preference shares if articles of association allow such an issue which can be repaid. The company act has provided some restriction on repayment of capital as (a) the shares to be redeemed should be fully paid up (b) the share can be reedemed either out of profits or out of fresh issue of capital. Irredeemable prefernce shares these shares can not be redeemed unless the company is liquidated. Cumulative prefernce shares these shares have a right to claim dividend for these years also where there are no profits. Whenever there are divisible profits , cumulative prefernce sharees are paid dividend for all the previous year in dividend could not be given . Non-cumulative prefernce shares these can not claim for arrears of dividend. They are paid dividend if there are sufficient profits only.

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Debentures
A debenture is an acknowledgement of debt. A debeture holder is the creditor of the company.a fixed rate of return is paid on debentures.Whenever a company wants to borrow a large amount of fund for a long but fixed period, it can borrow from the general public by issuing loan certificates called Debentures. The total amount to be borrowed is divided into units of fixed amount say of Rs.100 each. These units are called Debentures. These are offered to the public to subscribe in the same manner as is done in the case of shares. A debenture is issued under the common seal of the company. It is a written acknowledgement of money borrowed. It specifies the terms and conditions, such as rate of interest, time repayment, security offered, etc.

Characteristics of Debenture
Following are the characteristics of Debentures: i) Debentureholders are the creditors of the company. They are entitled to periodic payment of interest at a fixed rate. ii) Debentures are repayable after a fixed period of time, say five years or seven years as per agreed terms. iii) Debentureholders do not carry voting rights. iv) Ordinarily, debentures are secured. In case the company fails to pay interest on debentures or repay the principal amount, the debentureholders can recover it from the sale of the assets of the company. Types of Debentures : Debentures may be classified as: Simple, naked or unsecured debenture these debentures are not given any security on assets. They are similar to unsecured creditor. Secured or mortgaged debentures these debetures are given security on assets of the company. in case of default in the payment of interest or principle amout, debetureholders can sell the assets of the company in order to satisfy their claims. The sale proceeds of assets are first applied to pay debetures with a floating charge. Bearer debenture these debenture are easily transferable. These are not required to get regristered. These are given to purchaser by mere delivery only without any registration. The bearer can get interst from the companys bank when it becomes due. Registered debentures these are those whose names are registerd in the regieter of the company. these requires a procedure to be followed for their transfer. Both the transferer and tranferee are expected to sign a transfer voucher which is sent to the company along with the registration fees. Then name of the purchaser is enters in the register. Every transfer of debenture requires the same transfer procedure to be followed. Redeemable Debentures :
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These are debentures repayable on a pre-determined date or at any time prior to their maturity, provided the company so desires and gives a notice to that effect. Irredeemable Debentures : These are also called perpetual debentures. A company is not bound to repay the amount during its life time. If the issuing company fails to pay the interest, it has to redeem such debentures. Convertible Debentures : The holders of these debentures are given the option to convert their debentures into equity shares at a time and in a ratio as decided by the company. these are of two types (a) fully convertible debenture - which can be completly or fully converted into equity shares and balance is not converted into equity shares after a specific time of issueof such debentures. Partly convertible debentures a part of these shares are converted into equity shares and balance is not converted into equity shares. The unconvertable part of partable convertible share is repaid after specified period. Non-convertible debenture those shares which can not be converted into equity sahres and have to be redeemed at the end of maturity period. Interest payments are normally made semiannually with full redemption amout at maturity.

Merits of debentures :
Following are some of the advantages of debentures: 1) Raising funds without allowing control over the company: Debenture holders have no right either to vote or take part in the management of the company. 2) Reliable source of long term finance : Since debentures are ordinarily issued for a fixed period, the company can make the best use of the money. It helps long term planning. 3) Tax Benefits : Interest paid on debentures is treated as an expense and is charged to the profits of the company. The company thus saves incometax. 4) Investors Safety : Debentures are mostly secured. On winding up of the company, they are repayable before any payment is made to the shareholders.Interest on debentures is payable irrespective of profit or loss.

Demerits :
Following are the demerits of debentures: 1. As the interest on debentures have to be paid every year whether there are profits or not, it becomes burdensome in case the company incurs losses. 2. Usually the debentures are secured. The company creates a charge on its assets in favour of debentureholders. So a company which does not own enough fixed assets cannot borrow money
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by issuing debentures. Moreover, the assets of the company once mortgaged cannot be used for further borrowing. 3. Debenture-finance enables a company to trade on equity. But too much of such finance leaves little for shareholders, as most of the profits may be required to pay interest on debentures. This brings frustration in the minds of shareholders and the value of shares may fall in the securities markets. 4. Burdensome in times of depression : During depression the profits of the company decline. It may be difficult to pay interest on debentures. As interest goes on accumulating, it may lead to the closure of the company.

Ploughing back of profits ( internal finance )


Ploughing back of profit is a technique under which all the profits of a company are not distributed among the shareholders, but a part of the profits is retained which is reinvested in the company. this part of retaining profits year after year and to utilise it in the business is known as ploughing back of profits.it is regarded as the long-term source of finance for furthur expansion and growth of business. Under this profit a part of profits is transferred to various reserves such as general reserve, replacement fund, reserve for repairs and renewals etc.. sometimes secret reserve is also created without the knowledge of the shareholders.

Short-term source of finance


Indigeneous bankers private money lenders and other country were used as a source of finance before the establishment of commercial bankers. They used to charge very high rate of interest and exploites the customers. After the development of commercial banks they have lsot their monolpoly, but even today some small businesses have to depend upon those for raising fiance. Instalment credit in this method assets are purchased and possession of goods is taken immediately but payment is made in intalments. Interest is charged on the price or it may be adjusted in price. It provide funds for sometimes and is used ad short term working capital. Accrued expenses these the expenses which have been incurred but payment is not made. These are liability covering expenses. Accrued salary, wages, rent etc. these are only a small part of lisbilities, so its usefulness as a source of fianance is limited. Trade expenses these are also known as sundry creditors. It refers to the credit extended by the suppliers of goods in the normal course of the business. Trade credit helps in paying at the end of the credit period supplies goods purchased now and payment is made later. The credit-worthiness of a firm and confidence of its suppliers are the main basis of securing credit. It is easy method of finance and flexible as the credit increases with the growth of the firm. Advances some business houses get advancesfrom their customers and agents against orders and this source is a short term source of finance for them. It is a cheap source of finance.
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Provisions these are charges for an estimated expenses for example provision for dividend proviosion for taxation. As in case of accrued expenses, provisions do not create immediately payments of expenses, payment is made only when the actual amout of liability is known and paid for. Usefulness of this method of fianance is limited. Commercial paper - it represents unsecured short time promissiory notes mostly from 91 to 180 days. These are issued mostly by the reputed, well estab;lished and large companies with a very high credit rating. In india reserve bank of india introduces commercial papers in the indian market on the recommendation of the working group or money market (vaghul committee). Only a company which is listed on the stock market has a net worth atleast Rs. 10 crores and a maximum possible permissible bank finance of Rs.25 crores can issue coomercial papers. It is sold at a discount from its face value and redeemed at face valuue on its maturity.no interst is provided on these and discount is the benefit of rasing fianance. Factoring it is an arrangement between a factor and a seller ( who is the customer of financial intermediary ) of goods or services. A factor is a fiancial institution which offers services relating to management and financing of debts due to sales. Factors are generally subsidiaries of banks or private financial companies. Factors handles all the receivables arising out of cresit sales by the seller and not just same bills or invoices as in case of bills purchasing/discounting.

Commercial banks these are the most important source of share-capital. The major
portion of working capital are provided by the commercial banks. They provide a wide variety of loans to meet the specific requirements of a concern. The differnce forms in which the banks normally provise loans and advances as follows Loanes, Cash credit, Overdraft, Purchasing and discounting of bills

Intial public offer


An initial public offering (IPO), referred to simply as an "offering" or "flotation", is when a company (called the issuer) issues common stock or shares to the public for the first time. They are often issued by smaller, younger companies seeking capital to expand, but can also be done by large privately owned companies looking to become publicly traded. In an IPO the issuer may obtain the assistance of an underwriting firm, which helps it determine what type of security to issue (common or preferred), best offering price and time to bring it to market.An IPO can be a risky investment. For the individual investor it is tough to predict what the stock or shares will do on its initial day of trading and in the near future since there is often little historical data with which to analyze the company. Also, most IPOs are of companies going through a transitory growth period, and they are therefore subject to additional uncertainty regarding their future value.

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Coal India IPO subscribed 15.28 times


The initial public offer (IPO) of India's largest coal producing company Coal India (CIL) has seen huge response from investors and has received bids for more than USD 53 billion worth of equity shares as against issue size of USD 3.5 billion on last day. The issue has been subscribed more than 15.28 times, including major contribution from qualified institutional buyers (QIBs) followed by non-institutional investors (NIIs) and retail investors.

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For the reserved portion of QIBs (which closed on Wednesday and was subscribed 24.7 times), foreign institutional investors put in bids for USD 27.5 billion worth of equity shares followed by domestic financial institutions and mutual funds with USD 10 billion and USD 1.4 billion, respectively. (USD 1 = Rs 44) The reserved portion of non-institutional investors was subscribed 25.4 times and retail 2.31 times while employees' portion was subscribed just 0.1 times. Institutional investors have gone all out for Coal India with the IPO getting highest-ever demand received by an Indian issue. QIB generated demand for CIL was at Rs 1,73,398 crore with 100% margin while Rs 1,88,923 crore with 10% margin in case of Reliance Power IPO, which launched in 2008. In case of Reliance Power, QIBs' portion had subscribed 30.68 times. A price band of the issue is at Rs 225-245 a share. Prasad Baji of Edelweiss Securities said that the market needs to treat CIL as an utility play. According to him, CILs fair value is at Rs 316 per share as coal prices are unlikely to come down in India. "Our assessment of fair value is Rs 316 based on a DCF valuation. Even on EV/EBITDA basis we are getting at Rs 300 price so there is some amount left on the table in this issue," he said. However, Paresh Jain of Angel Broking differs. According to Jain, CILs fair value is at Rs 294 per share, which is based on the DCF valuation methodology. "We feel that the downside from the issue price is capped. There are no anchor investors in this particular issue. Most of the long only issue funds that need a good chunk of the stock would have to come and purchase it from the open market. That would give a boost to your stock price. I would advice investors to hold on to the stock because clearly our country is deficit in coal. Going forward as you see the washeries coming in, you will see earnings growth much faster 2013 onwards," he reasoned. It would be the largest ever IPO by an Indian company. All issue proceeds will be received by the selling shareholder (GoI), which stake will be 89.99% post the issue. The offer shall constitute 10% of the post offer paid-up equity share capital of company. However, Baji says, 26% mining profit share is a key risk, not just for Coal India but for the entire mining space. "In case of Coal India, there are certain mitigating factors. They spend 4% of their revenues on social activity. There is some case here that the management has been speaking to set it off against any kind of distribution of profits." he explained. Book running lead mangers to the issue are Citigroup Global Markets India Private Limited, Deutsche Equities (India) Private Limited, DSP Merrill Lynch Limited, ENAM Securities Private Limited, Kotak Mahindra Capital Company Limited and Morgan Stanley India Company Private Limited.

Coal India IPO Mother of all IPOs!


It is a known fact that the Primary market exuberance feeds on secondary market sentiment. And, the prevailing positive rub-off from secondary markets can be clearly sensed from the way the corporate India is hitting markets with their public issues to latch-on to the momentum in the liquidity wave.
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Moreover, when the system is aflush with ample liquidity, a giant-sized IPO can put to test the integrity of the markets and the prevailing market sentiment. In such a scenario, the worlds largest coal producer, Coal India Ltd, plans to raise around $3.4 billion (Rs.15,000 crore) through IPO by offering 631.6 million equity shares by the government. The mega-issue will open on October 18 and will close on October 21.

Thus, the offering of the Navratna public sector company which accounts for about 82% of the coal output of the country - will be Indias biggest ever IPO till date. Further, when an IPO of such huge magnitude hits the market, the secondary market remains sub-dued under the fear that investors will liquidate shares to subscribe to the mega-sized public offering.

The Coal India IPO could go a long way in determining the success of the Indian governments efforts to raise billions of dollars through disinvestment this fiscal year. Last few PSU follow-on offerings (NMDC and NTPC) of 2010 were met with cold response, especially from the retail investors, on account of being over priced and had to be bailed out by big-daddy LIC. Coming back to Coal India IPO, the government has fixed the price band of Rs.225-245 through a 100% book building process. Analysts are expecting Coal India which is the best bet on Indias rising coal deficit scenario - to report EPS at 15% CAGR over FY10-13. As per the observers of the IPO market, the stock could list positively with 15-20% premium, valuing the stock at 15-16 times the companys FY11 earnings, which is cheaper than some of the listed companies in the power utility sector. Further, the government has indicated that domestic coal prices could see an increase if profitsharing arrangements in the proposed Mines and Minerals Development and Regulation Act were implemented. In my opinion, Coal India deserves to trade at a premium to global coal peers with a price target anywhere between Rs.300 to Rs.325 on listing. The coal-major has substantial headroom to increase prices in coming years and will provide a linear earnings trajectory and impressive returns on the capital employed.

As part of its divestment programme to raise about 9 Billion$, the Government of India has put up 10% of Coal India Ltd. in an IPO conducted this week. If priced at the top of its 225-245 rupee price range, the IPO would swell Government coffers by about 3.5 Billion$ and Coal India would have a market value of $35 billion, ranking it seventh among listed Indian firms. As the Economic Times puts it The response to the Coal India (CIL) initial public offering (IPO) that
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finally closed early Friday morning, after lead managers were forced to extend the time limit to deal with a deluge of applications, has been phenomenal. Against the issue amount of Rs 150 billion, bids came in for Rs 2.54 trillion and the final total could be higher. While retail investors seem to have been relatively circumspect the retail portion was oversubscribed only 2.32 times and employees even more so the employee portion was not fully subscribed both institutional and highnet-worth buyers seem to have participated with gusto.

Open cast coal mine in India: Image via Wikipedia

While a portion of the shares were held for employees the mining unions discouraged their members from applying. But with the opening price when the shares list on November 4th expected to be around Rs 300 320 there is a backlash among the union members who are going to have lost out. The institutional portion was oversubscribed 25 times. Coal India has reserves of about 277 billion tonnes of which around 60 billions tonnes are currently recoverable by open cast mining. Current annual production is about 400 million tonnes and expected to rise to about 650 million tonnes in 5 years. India currently imports about 100 million tonnes of high grade coal mainly for steel making. Coal India has a major investment programme ongoing for the installation of coal washeries to improve the notoriously poor quality (high levels of abrasive ash) of Indian coals. Most Indian coals have very low values of Sulphur content so that sulphur dioxide emission is not a major concern. The enormous interest of the institutional investors both from within and from outside India is a healthy indicator that simple business considerations rather than pseudo-environmentalism is still the governing factor. Coal India IPO is likely to be the biggest Indian IPO when it opens on the 18th of October this year. The IPO is expected to fetch the government $3 billion, by divesting about 10% of its stake in this Navratna. The big numbers are not surprising given that Coal India is the biggest coal producer in the world with a production of 431.26 million tons in 2010. Coal India also holds the highest coal reserves in the world, and produced 81.9% of total coal production in
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India. They had revenues of Rs. 525,922.92 million in 2010, with a profit after tax of Rs. 98,294.09 million in 2010. The Networth was Rs. 258,437.73 million, cash and bank balances of Rs. 390,777.60 million, and total debt of Rs. 20,868.51 million, and had 397,158 employees. With numbers such as these, it is easy to see why CARE assigned a grade of 5 out of 5 to the Coal India IPO. Point worth repeating is that IPO grades dont take pricing into account, and only consider the fundamental strength of the company.Coal India operates 471 mines in 21 major coal fields across 8 states in India. They produce non coking coal, and coking coal, but the majority of raw coal production is non coking coal with 91.6%. Despite the big numbers, Coal India continues to expand with 45 projects lined up as of March 2010. Of these 22 projects are capacity expansion projects and 23 are new mine projects. The company sells to power generation, steel and cement companies among other industrial companies. NTPC was their biggest customer, and the top 5 customers are all public sector power utilities. The company prices its high grade quality coal 15% below the landed cost of comparative imported coal in India.

Financials of Coal India IPO


The company has grown its revenues consistently over the last few years, and they were Rs. 525,922.92 million for 2009 10, Rs. 460,640.65 million for 2008-09, and Rs. 386,166.97 million for 2007-08. The profit after tax was Rs. 96,224.47 million for 2010, Rs. 20,786.92 million for 2008-09, and Rs. 52,432.72 million for 2007-08.The dip in profits in between is due to an increased expense on employee remuneration. The employee remuneration charge was Rs. 166,555.22 million in 2010, Rs. 197,420.85 million in 2009, and Rs. 126, 351.59 million in 2008. This increase was due to the provision for retroactive increase in remuneration. What this means is that they had a salary increase for executive, non executive employees, and in the amount of gratuity as well, and this amount was increased retrospectively due to which the company had to create provisions for increased remuneration in 2008, 2009 and 2010, with 2009 being the biggest number at Rs. 41,157.80 million for salaries and wages, and Rs. 39,997.01 million for increased liability towards gratuity.The total workforce size reduced from 2007 to 2010, but the productivity as measured by output per manshift increased from 2.54 tons in 2007 to 4.47 tons in 2010. Coal India had an EPS of Rs. 15.56 in 2010, Rs. 6.43 in 2009, and Rs. 6.78 in 2008. The Return on Net Worth (RONW) was 38.03% for 2010, 21.37% for 2009 and 24.91% for 2008.

Coal India IPO Grading Rationale


Its not often that an IPO gets graded 5 out of 5, but its not very hard to see why Coal India got graded that based on their near monopolistic position, and their huge size. Here are some points from the ICRA grading report about the Coal India IPO.
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y y y y y

Coal India is the largest coal company in the world with access to vast reserves. Highly favorable demand supply situation in the domestic coal industry. Coal Indias near monopolistic position in this industry. Continuous labor productivity due to the use of technology, and high share of production from open cast mines. Deregulated coal pricing regime gives them the power to price their coal along with other factors like favorable demand supply, and cost competitiveness.

Coal India IPO Price and Dates - The price for this IPO hasnt been fixed yet, and I will
update this section once it is done. The IPO will most likely open on the 18th October, and close on the 21st October.These were some of the more interesting things I found in the prospectus that Coal India has filed for its IPO, and this is no way is a comprehensive review, but I hope you will find this useful in deciding how well Coal India fits in your portfolio. I will update this post with more information as and when I find it.Update: The price band has been fixed between Rs. 225 and Rs. 245, and there is a 5% discount for retail investors.

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Bibliography

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en.wikipedia.org/wiki/Finance www.fao.org/docrep/ I.M.Pandey ; fianancial management Jain Anad and Singh ; financial management economictimes.indiatimes.com www.smctradeonline.com/ipo-online.aspx www.economywatch.com www.smctradeonline.com/ipo-online.aspx

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Another IPO is set to hit the primary stock markets pretty soon. The IPO belongs to Coal India Limited Company, which is a thermal power generation company promoted by the government of India and it has now come out with the Initial Public Offering or IPO. In this article, we will look at the Review, Analysis and Details of the Coal India IPO and try to do the Review and analysis of Coal India IPO.

Coal India IPO: Review Analysis & Details


Some basic details first about the Coal India IPO, which are available as of now: - The size of Coal India IPO is expected to be between Rs 140,000 crore and Rs 153,000 crore. - This is the first IPO in India which has received 5 out of 5 ratings from all three rating agencies - CARE, ICRA and other - This is the first IPO in India which will have the listed company direct entry into Nifty 50 and Sensex 30 indices - This is the first IPO for which there will be a direct entry into the derivatives (futures & options) segment What is the issue size of the Coal India IPO? Around between Rs 140,000 crore and Rs 153,000 crore is the size of the IPO. In USD it will be around

$32-34 billion What is the price band of Coal India IPO? The price band details are precisely not available at the moment - However, it is known that the recommended price band for Coal India IPO is Rs. 220 to Rs. 240 per share. Final price to be decided through 100% book building process. How many shares will be sold in the Coal India IPO? The total no. of shares to be sold through this IPO is 632 million shares. What is the trading symbol & exchange for the Coal India IPO No info about that

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What are the IPO dates for Coal India IPO The IPO for Coal India will open on dates 18 October and will close on 21 October 2010. Any ratings given to Coal India IPO? No information about that. What are the analysts recommendations for Coal India IPO? Coal India is owned by the government of India which is planning to raise around 15,000 Crore Rs. through this IPO of Coal India. It has 63 billion tonnes of coal which makes Coal India the world s largest reserves of coal. After Reliance Power IPO, this IPO is expected to be the largest. The power needs for the country are increasing day by day. Hence Power companies are expected to benefit. Infrastructure developments are on the rise with a stable government at the center. However, one needs to look at the valuations of the company and how well it is placed with regard to the competitors. Being a government controlled Navratna company, this is found to be having strong fundamentals. The government is also expected to offer the shares of coal india limited at 5% discount to retail investors, hence they will benefit. Majority of the market experts and analysts say that this IPO should be subscribed to, and it is even being cited that due to this IPO there might be a fall in the market. The reason is that this is much awaited IPO and investors will take out money by selling their existing shares in the market to apply for this IPO. Hence this IPO should be definitely subscribed to. However, one must not go only with the recommendations. Remember Reliance Power IPO and what happened to it on the day of listing? (See Reliance Power IPO: What went wrong?. Market experts are pretty hopeful about this IPO and the returns - See news: Expect 30% Returns on listing Day: Market Experts. Investors should take their own call on this IPO as per their own risk appetite

oal India IPO the biggest primary market raising company in the history of the markets has raised a huge amount of investor interest.The investor is barraged with news,opinions,analysis,reviews,overview about the Rs 15,000 crore ( $3.5bb) money raising IPO.Coal India Limited (CIL) will become the largest Coal Company to be listed in the world and the 7th largest in the Indian market with a market cap of $35 Billion.The Analysis of the Company shows it to be a very safe investment at a cheap valuation.While Risks and Negatives exist for Coal India like any other investment,the substantial discount over global peers makes it a must buy.Here is some of the best news,analysis and facts about the IPO

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