Shares

Definition
Ordinary share represent the ownership position in

the company. The holders of ordinary shares are

called the shareholders and they are the legal
owners of the company.

By a share it also means right to participate in the

profits made by a company, while it is a going

concern and declares dividend, and in the assets of
the company when it is wound up.

A stock is defined as consolidated value of fully paid

up shares of a member.

Types of shares capital

Equity shares capital
Preference shares capital: Preference share is the

one which satisfies the following criteria

- With respect to dividend it carries a preferential
right to be paid which may be a fixed amount or a
fixed rate
- On winding up or on repayment of capital a
preferential right to be repaid the amount .

Features of Preference
Share
Claims on income and assets
Fixed Dividend
Cumulative dividend
Redemption
Sinking fund
Call feature
Participation feature

Hybrid Security

Ordinary share

Debenture

Dividend rate is fixed

Non payment of dividend

does not force the
company to insolvency

Dividends are not

deductible for tax purpose

In some cases there is no

fixed maturity date.

Pref shareholders do not share in

the residual earnings
They have claim on income and
assets prior to ordinary
shareholders

Types of Preference Shares

Participating preference shares.:- they carry a
right to participate in the surplus profit along with
equity shareholders after dividend at certain rate
has been paid to equity shareholders.
Cumulative and non-cumulative shares
Redeemable preference shares
Fully or partly convertible preference shares.

Voting rights for preference

shareholders
Every member of a company holding any preference

shares has a right to vote only on resolutions placed

before the company which directly affect attached to
his preference shares

Apart

from this preference shareholders are

entitled to vote if dividend has remain unpaid in
case of cumulative as well as non cumulative for
two years.

Pros
Risk less leverage advantage
Dividend postpondability
Fixed dividend
Limited voting right

Cons
Non tax deductibility of dividend
Commitment to pay dividend

Equity shares

Types of Equity Shares

Authorized share capital
Issued share capital
Subscribed share capital
Paid up share capital

Issue price of shares: the price at which share is issued

in the market.
Paid up share capital = issue price * no. of ordinary
shares.
Issue price has two components
1. Par value
2. Share premium
Par value is the price per ordinary share stated in the
memorandum of association.
Generally they are in the denomination of 10 or 100.
Any amount in excess of par value is called the share
premium.
Shareholders equity = paid up share capital + share
premium + reserves and surplus = Net worth
Book value per share = Net worth / no. of ordinary
shares
Market value of a share is the price at which it trades in
the market. It is generally based upon the expectations
about the performance of the economy in general and
company in particular.

Features of Equity Shares

Residual claim to income
Residual claim on assets
Right to control
Voting system
Pre-emptive right
Limited liability

Evaluation
Merits
- it

is a permanent source of fund without any

repayment liability
- It does not involve any obligatory dividend payment
Demerits

- high cost of fund reflecting the high required rate of

return of investors as a compensation for higher risk

- High floatation cost in terms of underwriting,
brokerage and other issue expenditure
- Dilution of control

Method of Raising Capital

By issue of prospectus
Rights issue of equity shares.
Private placement of shares

Issuing of securities
Filing of offer document
Application for listing

Issue of securities in dematerialized form

Book building: It is a process undertaken by
which demand for securities proposed to be issued
is elicited and built up and price for such issue is
assessed for determination of quantum of such
securities to be issued.

Issue of share at a discount

Issue of share at a premium
Call on shares: application, allotment and other

calls

Forfeiture of shares

Initial Public Offer

Benefits of going public
- Access to capital
- Respectability
- Investors recognition
- Liquidity
- Signals from the market
Costs of going public
- Adverse selection
- Dilution
- Disclosures
- Accountability
- Public pressure

ISSUE TYPE

OFFER
PRICE

DEMAND

PAYMENT

RESERVATIO
NS

Fixed Price
Issues

Price at which
the securities
are offered
and would be
allotted is
made known
in advance to
the investors

Demand for
the securities
offered is
known only
after the
closure of the
issue

100 %
advance
payment is
required to be
made by the
investors at
the time of
application.

50 % of the
shares offered
are reserved
for
applications
below Rs. 1
lakh and the
balance for
higher
amount
applications.

Book
Building
Issues

A 20 % price
band is
offered by the
issuer within
which
investors are
allowed to bid
and the final
price is
determined

Demand for
the securities
offered , and
at various
prices, is
available on a
real time
basis on the
BSE website
during the

10 % advance
payment is
required to be
made by the
QIBs along
with the
application,
while other
categories of
investors

50 % of
shares offered
are reserved
for QIBS, 35
% for small
investors and
the balance
for all other
investors.

Eligibility for an IPO

A company can make 100% retail issues provided
it satisfies all the following conditions
1.It has a net tangible asset of at least Rs 3 crore
in each of the preceding three years.
2.It has a track record of distributable profit for at
least three out of immediately proceeding 5
years.
3.It has a net worth of at least Rs1 crore in each of
the preceding 3 financial years.
4.The issue size (offer through offer document +
firm allotment + promoters contribution through
offer document) does not exceed five times the
pre-issue net worth

Cost of Public Issue

Underwriting Expenses
Brokerage
Fees to the managers to the issue
Fees for registrars to the issue
Printing expenses
Postage expenses
Advertising and publicity expenses
Listing fees
Stamp duty

Green Shoe option

A provision contained in an underwriting agreementthat gives the

underwriter the right to sell investors more shares than originally

plannedbythe issuer. This wouldnormally be done if the demand for
a security issue proves higher than expected. Legally referred to as an
over-allotment option.

It provides additional price stability to a security issuebecause the

underwriter has the ability to increase supply and smooth out price
fluctuations if demand surges.

Greenshoe options typically allow underwriters to sell up to 15% more

sharesthanthe originalnumber set by the issuer.
However, some issuers prefer not to include greenshoe options in their

underwriting agreements under certain circumstances, such as if

theissuer wants to fund a specific project with a fixed amount of cost
and does not want more capital than it originally sought.
The term is derived fromthe fact that the Green Shoe Company was
the first to issue this type of option.

Allotment
size of public offer: 2,00,000 equity shares of Rs 10 each
S.No No. of
No. of
Total no. Proporti No. of
no. of times over subscribed: 3 times
shares
applica of shares onate
shares
total no. of shares applied for: 6,00,000 equity shares
applied for
nts
applied
allocatio allocate
category
n
d by
wise
roundin
1
100
1500
150000
50,000 g100

No of
successf
ul
applican
t

Total no
of
shares
allocate
d

500

50,000

200

400

80,000

26,700

100

267

+3300
26700

300

300

90,000

30,000

100

300

30,000

400

300

1,20,000

40,000

100

300

30,000

500

200

1,00,000

33,300

200

200

40,000

600

100

60,000

20,000

200

100

20,000

6,00,000

2,00,00

2,00,00

Rights Issue of Equity

Share
It involves selling of ordinary shares to the

existing shareholders.
Law in India requires that the new ordinary

shares must be first issued to the existing

shareholders on a prorata basis
No. of rights = existing share/ new share

Private placement of
shares
It involves sale of shares (or other securities)

by a company to few selected investors,

particularly the Institutional Investors like the
Unit Trust of India (UTI), the Life Insurance
Corporation of India (LIC), IDBI etc.

Private

placement
has
the
following
advantages
- It is helpful to raise small amount of fund
- It is less expensive
- It is a much faster way of raising fund.

Shareholder
A shareholder (or stockholder) is an individual or company

(including a corporation) that legally owns one or more

shares of stock in a joint stock company.

Shareholders are granted special privileges depending on

the class of stock, including

the right to vote (usually one vote per share owned) on
matters such as elections to the board of directors,
the right to share in distributions of the company's income,
the right to purchase new shares issued by the company,
and the right to a company's assets during a liquidation of
the company.
However, shareholder's rights to a company's assets are
subordinate to the rights of the company's creditors.

Preferential Allotment
, An issue of equity or equity related instruments by a

listed company to pre-identified investors who may or

may not be the existing shareholders of the company
at a pre-determined price is referred to as a
preferential allotment.
Made

to promoters, strategic investors,

capitalist, financial institutions and suppliers

venture

Rationale- to secure equity participation of those that

the company considers desirable, but who may

otherwise find it very costly or impractical to buy large
chunk of shares in the market.

Regulations
Special resolution

- company must pass special resolution

- government must grant special approval
under section 81(1A)
Pricing price should not be lower than the
higher of the average of the weekly high and
low of the closing price of the shares quoted
on the stock exchange during six months
before the relevant date or two weeks before
the relevant date.
Open offer- a preferential allotment of more
than 15% of equity necessitates an open offer.
Lock-in-period one year lock-in-period

Internal Accruals
Depreciation Charges
Retained earnings

Advantages & Disadvantages of

Internal Accruals
Advantages
Retained earnings are easily available

internally.
It eliminates issue and transaction cost.
No dilution of control

Disadvantages
Amount that can be raised by way of

retained earning is limited.

Opportunity cost is quite high

Term Loan

Term Loan
Term loan is a loan made by bank/financial
institution to a business having an initial
maturity of more than one year.

Features of a term loan

Maturity
Negotiated
Security:

- primary security/secondary security (collateral)

Covenants

restrictive covenants are contractual clauses in the

loan agreement that place certain operating and
financial constraints on the borrower.
these covenants are both positive as well as negative
in the sense of what borrowers should do and should
not do in the conduct of its operation.

Covenants
Asset-related covenants

-maintenance of working capital position in terms of

minimum current ratio
-ban on sale of fixed asset without the lenders approval
Liability related covenant
-restrain on incurrence of additional debt
-reduction in debt equity ratio by issue of additional capital
Cash flow related covenant
-limitation on dividend payment to a certain amount or rate
-ceiling on managerial salary or perks
Control related covenant
-appointment of nominee director to represent the financial
institution and safeguard their interest

Repayment schedule/Loan
Amortization
Year

Interest
(0.14)

Beginnin Payment
g loan
installme
nt
2
3

Principal Ending
repayme loan [2-5]
nt[3-4]
5
6

60,000

12,934

8,400

4,535

55,466

55,466

12,934

7,776

5,168

50,298

50,298

12,934

7,042

5,896

44,406

44,406

12,934

6,216

6,718

37,688

37,688

12,934

5,276

7,658

30,030

30,030

12,934

4,204

8,730

21,300

21,300

12,934

2,982

9,952

11,348

11,348

12,934

1,588

11,346

Obtaining a term loan

An

application
form
containing
comprehensive
information about the project is submitted to the
financial institution
It contains details like promoters background, particulars
of the industrial concern, particulars of the industrial
project, cost of the project, means of financing etc.
After the application is received a flash report is
generated which is a summarization of the loan
application. On the basis of this report detailed appraisal
of the project is done.
In the detailed analysis marketing, technical, financial,
management and economic feasibility of the project is
tested.
If on appraisal is the project is found feasible then the
loan is sanctioned by the bank.

Debentures
Debenture/bond is a debt instrument indicating
that a company has borrowed certain sum of
money and promises to repay it in future
under clearly defined terms.

Attributes
Trust

indenture: it is a complex and lengthy legal

document stating the conditions under which a bond has
been issued.

It provides the specific terms of agreement such as

description of debenture, rights of debenture holder,

rights of the issuing company and responsibilities of the
trustees.

Trustees is a bank or financial institution that acts as a

third party to the bond to ensure that the issue does not
default on its contractual responsibilities to the bond
holders.

Interest: the debenture carries a fixed rate of interest,

payment of which is legally binding

Maturity: It indicates the length of time for redemption

 Debenture redemption reserve: It is a requirement in the debenture

indenture to provide for systematic retirement of debenture on

maturity.

Call and put provision: the call/buyback provides an option to the

issuing company to redeem the debenture at a specified price

before maturity. The put option is the right to the debenture holder
to seek redemption at a specified time at a predetermined price.

Security
Convertibility
Credit rating
Claim on income and assets

Innovative debt Instruments

Zero Interest Bond
- They do not carry any explicit rate of interest
- They are sold at a discount from their maturity value
- The difference between face value of the bond and the
acquisition cost is the gain.
Deep Discount bond
- It is issued at a deep/steep discount at its face value
- It appreciates to its face value during the maturity
period

IDBI in 1992 had come up with a deep

discount bond of face value Rs 1,00,000

at a deep discount price of Rs 2,700
with a maturity period of 25 years. If the
investors hold it for 25 years the annualized
return comes out to be 15.54%. The
investor had the option to withdraw at the
end of every five years with a specified
maturity and face value ranging between Rs
5,700 (after 5 years) and Rs 50,000 after 20
years, the implicit annual rate of interest
being 16.12 and 15.71 respectively

Secured premium notes

- It is a secured debenture redeemable at premium

over the face value/ purchase price

- There is a lock in period during which no interest

is paid
- The redemption is made in installment
Floating rate bond
- Interest is linked to some benchmark rate such as

treasury bill, bank rate etc

Callable and puttable bonds

Other new sources of finance

Leasing and hire purchase
- leasing: It is a process by which a firm can

obtain the use of certain fixed assets for which

it must make a series of contractual, periodic,
tax-deductible payments.

- Hire purchase:- It is a type of financial

transaction in which goods are let on hire with

an option to the hirer to purchase them.
Venture capital financing: It is a type of finance
available for investors looking for high potential
returns and entrepreneurs who need capital as
they are yet to go to the public

Qualified Institutional Buyer (QIB)

The Securities and Exchange Board of India has defined a Qualified

Institutional Buyer as follows

"Qualified Institutional Buyers are those institutional investors who are
generally perceived to possess expertise and the financial muscle to evaluate
and invest in the capital markets.
In terms of clause 2.2.2B (v) of DIP Guidelines, a Qualified Institutional Buyer
shall mean:
"a) Public financial institution as defined in section 4A of the Companies Act,
1956;
"b) Scheduled commercial banks;
"c) Mutual funds;
"d) Foreign institutional investor registered with SEBI;
"e) Multilateral and bilateral development financial institutions;
"f) Venture capital funds registered with SEBI.
"g) Foreign Venture capital investors registered with SEBI.
"h) State Industrial Development Corporations.
"i) Insurance Companies registered with the Insurance Regulatory and
Development Authority (IRDA).
"j) Provident Funds with minimum corpus of Rs.25 crores
"k) Pension Funds with minimum corpus of Rs. 25 crores
"These entities are not required to be registered with SEBI as QIBs. Any entities
falling under the categories specified above are considered as QIBs for the
purpose of participating in primary issuance process."

Factors affecting choice of

financing
Sales stability
Asset structure
Profitability
Control
Taxes
Growth rate
Management attitude
Firms internal conditions
Financial flexibility
Market conditions
Prices