Hybrid Financing

Equity enjoys the claim on Residual income and has management control over the firm.


Debt enjoys fixed claim and not associated with control over the firm.


Hybrid sources share some features of Equity and some features of Debt.


Forms are hybrid financing are Preference shares, Warrants, Convertible Debentures and Innovative hybrids.

after the commencement of Companies act 1956.Hybrid Financing Preference Capital: Features Cumulation of Dividends (Will be paid once dividend resumes) Callability (Issuer enjoys the right to call back issued shares) Convertibility (into equity shares as per covenant) Redeemability (Not exceeding 8 years) Participation in surplus profits (Entitle to participate in surplus profits. . PS doesn t carry voting rights). Voting rights (Before Companies act 1956. They entitle to vote i) The preference dividend is in arrears for 2 years in case of cumulative PS ii) Preference dividend has not been paid for 2 years or more.

(Normally attached with some instruments TATA Iron & Steel 1992 Secured Premium notes ) The holder has only the right to subscribe but does not have any obligation to acquire the equity shares Exercise price Exercise ratio (1:1) Expiry date (5-10 years although perpetual warrants can also be issued) - .Hybrid Financing Warrants: Features Entitles the holder to subscribe to the equity capital of a company during a specified period at certain price.

Conversion after 36 months but which carry Call and Put features.Hybrid Financing Convertible Debentures: Features Right to convert them into equity shares on certain terms. Holder entitle to receive fixed income till the conversion option exercised. .Conversion ratio.Compulsorily convertible debentures which provide for conversion within 18 months. As per SEBI guidelines. . .optionally convertible (Conversion within 36 months) . Conversion price .

.Hybrid Financing Warrants Vs Convertible Debentures: Both give the same option on equity. Debenture and option are inseparable but Warrants can be detachable. Warrants can be exercisable for cash. In Convertible debenture.

Angels are individual who include professional investors. retired executives with business experience and money to invest. There is a wide array of types and styles of private equity and the term private equity has different connotations in different countries.Hybrid Financing Private Equity: private equity is an asset class consisting of equity securities in operating companies that are not publicly traded on a stock exchange. Angel Financing: Capital raised for a startup company from angel (Affluent) investors. Capital for private equity is raised primarily from institutional investors. or high net worth individuals looking for investment opportunities. . The capital is generally used as seed money.

for the launch. new marketing concepts and new products that have yet to be proven. or expansion of a business.Hybrid Financing Venture Funds: It is a broad subcategory of private equity that refers to equity investments made. . Venture investment is most often found in the application of new technology. typically in less mature companies. early development.

Biotechnology. Human Capital and Brand equity. .FM in Intangible intensive companies Organisations employ tangibles assets like Land. Intangible assets are Technical Know-how. Automobiles are tangible assets intensive. Building and Plant and Machinery etc. Pharmaceuticals are more intangible intensive whereas sectors such as Oil. Firms in sectors such as IT.

FM in Intangible intensive companies Characteristics or Features of Intangibles: Intangibles are non-rival because they involve a large fixed cost and very negligible variable cost. - . Usage of Licensed Genuine Microsoft OS Bajaj Vs TVS (Twin spark plug) Investments in Intangibles are very risky. non-owners can derive the benefits. The discovery of Drug and developing a software often requires huge initial investments but the cost of producing pills are negligible. Physical assets have well defined property rights but intangible assets have hazy property rights. Thus. Though invention is patented. some products turnout to be strategically very successful but some may be duds. referred to Spillovers . Protection of Intangible assets may require expenditure of significant financial and managerial resources.

It imposes the high cost of capital. sometimes they overvalue and sometimes they undervalue. The results of R&D can be manufactured and sold directly but R&D by and large can not be sold directly. The returns of R & D are substantially high than the returns of physical assets. Managers have vague idea of returns from the intangibles. (MIG-35. Fighter Aircraft) Value of intangible intensive firms is accounted by future growth value. Investors misprice the shares.FM in Intangible intensive companies Characteristics or Features of Intangibles: Intangibles do not have organised and competitive markets. leading to underinvestment in Intangibles. Very few companies are only having clear idea about should we increase or decrease the spending on Intangibles? - - .

copyrights of the organisation is relatively challenging task. talent of employees.FM in Intangible intensive companies Implications for Financial Management: Risk Return profile of Intangible intensive firms are very high. Investors find difficulty in figuring the real value of firm. hence investor communication should be important. Intangible intensive firms are rely primarily on equity financing. (The fundamental economic process) - - . Thus the managers are constantly strive to convert the future growth value into actual value. Managing physical assets are relatively easy proportion but managing the knowledge. Intangible intensive firms are valued on future growth value.

2. Brands FM in Intangible intensive companies .Patent is an invention that has commercial potential which has granted legal protection.The owner of an IP is legally protected against its unauthorised use. or combination of them which is intended to identify the goods & services. A) Copyrights (Books. It gives monopoly rights to manufacturer.) b) Trademarks (Titles of magazines) 3. .Types of Intangible Assets: 1. Term. Symbol.Brand enable the customers to identify the products that promise specific benefits .A Name. Publishing Rights . Articles etc. . Intellectual Property .Commercially exploiting creative and knowledge based materials.

It is an agreement through which a licensor assigns certain rights to a licensee in return for considerations. Economic Approach: . Licenses: FM in Intangible intensive companies . making comparison rather difficult. Intangible assets are unique. Approaches to Valuing intangible assets: 1.Value of an asset may be obtained by aggregating the costs (Historical costs and replacements cost) 2.Estimating the cash flows expected to be generated by the intangibles. Market Approach: . 3. Cost Approach: .Types of Intangible Assets: 4.Value of intangible assets may be established with reference to the prices at which comparable assets have been traded recently in the market. .

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