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Raising Long-term

Sources of Long-term Finance
 Venture Capital
 Initial Public Offer (IPO)
 Public Issue by Listed Companies
 Rights Issue
 Preferential Allotment
 Private Placement
 Term Loans
Venture Capital
 Defn: Mutual funds or institutional investors that
provide equity finance or risk capital to little known,
unregistered, highly risky, young, small private
business, especially in technology oriented and
knowledge intensive business or industries.
 Focused on computer & Network technology,
Telecom technology and Biotechnology
Venture Capital cont….
 Features:
 VC is inclined to assume high degree of risk in expectation of
earning high rate of return.
 The VC subscribes to equity financing instruments, which enable
it to share the risks and rewards of the investee firm.
 In addition to providing funds, the VC takes active interest in
guiding the assisted firm
 The VC normally plans to liquidate its investment in the assisted
firm after 3-7 years. In such a case, the promoter of the assisted
firm is given the first priority to acquire the equity investment
held by the VC.
Venture Capital cont….
 VC Industry in India
 ICICI ventures was the first VC institution in India promoted as a
joint venture of ICICI Ltd. and UTI in 1988.
 Commercial Banks and DFIs with their own VC subsidiaries.
 Deregulation of foreign investment into Indian Companies
facilitated international investors to play a major role in the Indian
VC industry
 Foreign VC investors introduced the western investment
philosophy and contract
 Before economic reform: Financing technology and
entrepreneurship development.
 After economic reform: shift towards financing of innovative and
growth oriented businesses that could sustain in an economy and
increasingly opening up to international competition.
Venture Capital cont…
 Preparing a Business Plan for approaching a
venture capitalist
 Use simple and clear language in presentation.
 Focus on basic elements such as people, product, market
and competition.
 Projection of cash flows for two years.
 Identify the underlying risks and develop a strategy to
cope with the same.
 Convince that the management team is talented,
committed, and determined.
Venture Capital cont…
 Risks in Venture Capital Financing
 Lack of company history
 Lack of market history
 Lack of market!
 Company hyperbole
 Inflated projections
 Changing economy
 The first sale of stock by a company to the
 The first public offering of equity shares of a
company, which is followed by a listing of its
shares on the stock market.
IPO cont….
 Advantages of going public
 Access to capital
 Greater respect
 Investor recognition
 Window of opportunity
 Liquidity
 Benefit of diversification
 Signals from the market
IPO cont….
 Costs of Going Public
 Adverse Selection
 Dilution
 Loss of Flexibility
 Disclosures
 Accountability
 Public Pressure
 Costs
Public Issue
 Public issue by listed companies
 Cost of Public Issue
Rights Issue
 Defn: Issue of capital to the existing
shareholders of the company on a pro rata
Rights Issue
 Characteristics features:
 The number of rights that a shareholder gets is equal to the
number of shares held by him
 The number of rights required to subscribe to an additional
share is determined by the issuing company
 The price per share for additional equity, the subscription price
is left to the discretion of the company
 Rights are negotiable. The holder of rights can sell them
 Rights can be exercised only during a fixed period which is
usually about 30 days.
Preferential Allotment
 Defn: An issue of equity shares by a listed company to
pre-determined persons, who may or may not be the
existing shareholders of the company at a pre-
determined price is referred to as preferential
 Pref. allotment is made to – promoters, strategic
investors, venture capitalists, financial institutions and
 Pref. allotment is made to secure the equity
participation of those, the company considers
Private Placement
 Defn: Direct selling of securities to a limited number of
institutional or high net worth investors.
 This avoids the delay involved in going public and also reduces
the expenses involved in a public issue
 The company appoints a merchant banker to network with the
institutional investors and negotiate the price of the issue
 Advantages
 Easy access to finance
 Fewer procedural formalities
 Lower issue cost
 Access to funds is faster
Term Loans
 Major source of debt finance for long-term
 1-10 years of repayment period
 All India Financial institutions and State
financial corporations
 Interest rate will be fixed on the term loans
after assessing the credit risk
Term Loans
 Contents of loan application
 Promoter's background
 Particulars of the industrial concern
 Particulars of the project (capacity, technical
arrangement, land & building, p & m, location etc.)
 Cot of project
 Means of financing
 Marketing and selling arrangements
 Profitability and cash flow
 Government consents
Term Loans
 Term loan procedure
 Initial processing of Loan Application
 Appraisal of the proposed project (marketing, technical,
financial, managerial, and economic aspects)
 Issue of the letter of sanction
 Acceptance of the terms and conditions by the borrowing
 Execution of loan agreement
 Disbursement of loans
 Creation of security
 Monitoring
Project Appraisal
 Market appraisal
 Technical appraisal
 Financial appraisal
 Economic appraisal
 Managerial appraisal