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Raising Long Term Finance

Chinmay Shirsat (M12

Ashwyn Rao (M1209)

Raising Long Term Finance

Venture Capital

Initial Public Offer Secondary Public Offer Rights Issue Private Placement Preferential Allotment Dilution Obtaining a Term Loan

Venture Capital
Features of Venture Capital
High risk, high return Subscribes to equity or quasi-equity financing instruments Takes active interest in guiding the assisted firm Financial burden for the assisted firm tends to be negligible in the initial years. VC normally plans to liquidate its investment after 3 to 7 years.

Private Equity v/s Venture Capital

PE investors invest mostly in later stage operations with a substantial operating history. PE investment may be used for financial or operational restructuring. PE investment package may include debt. PE investor puts more emphasis on corporate governance, whereas VC investor focusses more on management capability.

Initial Public Offer (IPO)

Benefits of Going Public
Access to Capital Respectability Investor Recognition Window of Opportunity Liquidity Benefit of Diversification Signals from the Market

Costs of Going Public Adverse Selection Dilution Loss of Flexibility Disclosures Accountability Costs

Eligibility for an IPO Net tangible assets of at least 3 crore in each of the preceding 3 years. A track record of distributable profits for at least 3 out of the immediately preceding 5 years. Net worth of at least 1 crore in each of the preceding 3 financial years. Issue size does not exceed 5 times the pre-issue net worth.

If above mentioned conditions are unsatisfied Company can make an IPO of equity shares or convertibles only if
The issue is made through book-building process, with at least 50% of the issue size being allotted to the Qualified Institutional Buyers (QIBs) OR The project has at least 15% participation by the Financial Institutions/ Scheduled Banks and at least 10% of the issue size shall be allotted to QIBs The minimum post-issue nominal value of equity capital of the company shall be 10 crore or there shall be a compulsory market making for at least 2 years from the date of listing of the shares.

Principal Steps in an IPO

Board of Directors approval to raise capital from the public. Shareholders approval by way of a special resolution under Sec 81(A) of the Companies Act, 1956. Appointment of a Merchant Banker as the Lead Manager (LM) to the issue. Companies enter into a tripartite agreement with the registrar and all the depositories. LM prepares draft prospectus and files it with SEBI Within 21 days SEBI makes its observations on the draft prospectus & company carries out the necessary modifications, if any.

Company files the prospectus with Registrar of Companies (ROC). Company releases a mandatory advertisement, called announcement advertisement 10 days prior to the opening of the issue. This has to conform to Form 2A, also called the abridged prospectus.