Shares, Debentures & Term Loans

Ordinary shares/Common shares represent

the ownership position in a company
Shareholders are holders of ordinary
shares
Ordinary shares are permanent capital
Entitled to dividends; amount not fixed
Also called variable income security
Shareholders bear risk: residual value
ownership after meeting claims of others

Authorised 250000000 equity shares of Rs.10

each
Rs.2500000000
Issued 148565000 equity shares of Rs10 each
1485650000
Subscribed & fully paid up 146476214 equity
shares of Rs.10 each
1464762140
Reserves & Surplus
5837739000
Net worth
7302501140

Authorised share capital is the maximum

amount of capital permitted by the Registrar
of Companies to be raised from shareholders
Issued share capital is the portion offered to
shareholders out of authorised share capital
Subscribed share capital is the portion
accepted by shareholders
Paid up capital is the amount of subscribed
share capital actually paid up by
shareholders

Issue price may include par value &

premium value
If issue price is in excess of par value, it is
shown separately as share premium
Undistributed earnings are called reserves &
surplus
Shareholder equity=Net Worth=paid up
share capital + share premium + reserves &
surplus
Book value/share=Net worth/Number of
ordinary shares

Residual ownership claim

Residual claim on assets upon liquidation
Right of control
Voting rights
Pre-emptive rights
Limited liabilty

Permanent capital
Borrowing base
Dividend payment discretion
Cost: dividends not tax deductible
Risk: uncertainty about dividends/capital
gain
Ownership dilution: follow up issue

Public issue: raising capital directly from

public
Underwriting: guarantee by underwriter
to buy shares not fully subscribed by
public
Private placement: sale to few selected
investors, esp. institutional investors.
Small size; less expensive than public
issue; is faster than public issue

Sale of ordinary shares to existing

shareholders
Value: No. of new shares=Desired funds
Subscription
price(Ps)
No. of rights=Existing shares/New shares
N=S0/s
Share price cum-rights =Pc=NxR+Ps
Share price ex-rights issue=Px=S0P0+sPs
S0 + s

Shareholder control maintained pro rata

Cheaper than public issue
Issue likely to succeed as subscription
price below market price
Shareholders not exercising rights lose
value
Shareholding concentration among
financial institutions thru conversion of
loans to shares

Hybrid security: features of ordinary

shares as well as debentures
Like shares: Non-payment of dividends
does not cause insolvency; dividends not
tax deductible; no fixed maturity dates in
some cases
Like debentures: Dividend fixed; no share
in residual earnings; claim on
assets/income prior to ordinary
shareholders; usually no voting rights

Claims on incomes/assets: senior security

Fixed dividend
Cumulative dividends
Redemption: maturity date; sinking fund
Call feature: buy-back at specific price
Participation feature: share in
extraordinary profit
Voting rights: contingent/conditional rights
Convertibility: fully/partly into shares;
debentures

Riskless leverage
Dividend postponabilty
Fixed dividend
Limited/no voting rights: dividend arrears
Dividends not tax deductible
Commitment to pay dividends

Long-term fixed-income financial security;

debenture holders creditors s/us of company
Fixed interest rate: contractual rate of interest
Fixed maturity: period specified
Redemption: mostly redeemable; buyback/call
Buyback: redemption before maturity at sp.pr.
Sinking fund: cash set aside for redemption
Indenture/Debenture trust deed
Yield = Annual interest/Market price
Prior claim on assets/income

Non-convertible debentures repayable on

maturity
Fully-convertible: converted into shares
as per terms of issue wrt price & time
Partly-convertible: features of both above

Less costly: less risky; lower ror acceptable

Interest payment tax deductible
Ownership not diluted
Fixed interest payment
Inflation reduces real cost of interest; but
Obligatory payment
Increases financial leverage
Must be paid on maturity
May contain restrictive terms & conditions

Non banking/non financial companies: up

to 25% of paid-up capital & free reserves
from public; up to 10% of paid-up capital
& free reserves from shareholders
Maximum 35% of paid-up capital & free
reserves from public and shareholders
Period: 6 months to 36 months; 3 months
up to 10% of paid-up capital & free
reserves

Liquid assets with banks: 15% of deposits

maturing by 31st March of following year
Annual return to Registrar of Companies
on/before 30th June
Payment before maturity after 6months
Tax deduction at source
Failure to repay deposit on maturity leads
to action by Company Law Board

Savings in economy: domestic savings;

remittances from abroad
Kinds of financial instruments:
ADR/GDR/FCCB apart from instruments
mentioned earlier
Kinds of financial intermediaries

Price discovery: time preference, risk

return trade-off
Liquidity: transferabilty & negotiability
Low transaction costs: search &
information, buying & selling, advertising
& marketing, time & effort, and
evaluation costs
Credit rating agency: Moodys, S&P,
CRISIL, CARE, FITCH

Allocate funds between savers &

borrowers
Primary & secondary, OTC, derivative
markets
SEBI
Merchant banks
Mutual funds

Development banks, commercial banks,

insurance companies, and pension funds
RBI & IRDA