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Finance
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
INITIAL PUBLIC OFFER(IPO)
The first sale of stock by a company to the
public
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
basis
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
allotment.
Pref. allotment is made to – promoters, strategic
investors, venture capitalists, financial institutions and
suppliers.
Pref. allotment is made to secure the equity
participation of those, the company considers
desirable.
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
projects
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
unit
Execution of loan agreement
Disbursement of loans
Creation of security
Monitoring
Project Appraisal
Market appraisal
Technical appraisal
Financial appraisal
Economic appraisal
Managerial appraisal