Sie sind auf Seite 1von 45

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 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.

Debenture Dividend rate is fixed 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 payment


Demerits

any

obligatory

dividend

- 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 Fixed Price Issues

OFFER PRICE DEMAND

PAYMENT

RESERVATION S

Price at which Demand for the 100 % advance 50 % of the the securities securities payment is shares offered are offered and offered is required to be are reserved for would be known only made by the applications allotted is made after the investors at the below Rs. 1 known in closure of the time of lakh and the advance to the issue application. balance for investors higher amount applications.

Book Building A 20 % price Issues band is offered by the issuer within which investors are allowed to bid and the final price is determined by the issuer only after closure of

Demand for the 10 % advance securities payment is offered , and at required to be various prices, made by the is available on aQIBs along with real time basis the application, on the BSE while other website during categories of the bidding investors have period.. to pay 100 % advance along

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

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 no. of times over subscribed: 3 times total no. of shares applied for: 6,00,000 equity shares S.No No. of shares No. of Total no. Proportio No. of applied for applican of shares nate shares category ts applied allocation allocated wise by rounding No of Total no successfu of shares l allocated applicant

1 2 3 4 5 6

100 200 300 400 500 600

1500 400 300 300 200 100

150000 80,000 90,000

50,000 100 26,700 100 30,000 100

500 267 300 300 200 100

50,000 +3300 26700 30,000 30,000 40,000 20,000 2,00,00

1,20,000 40,000 100 1,00,000 33,300 200 60,000 20,000 200

6,00,000 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

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 preidentified investors who may or may not be the existing shareholders of the company at a predetermined price is referred to as a preferential allotment.

Made to promoters, strategic investors, venture

capitalist, financial institutions and suppliers


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

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 (collateral)
Covenants

security/secondary

security

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 Beginning Payment Interest loan installmen (0.14) t 2 60,000 55,466 50,298 44,406 37,688 30,030 21,300 11,348 3 12,934 12,934 12,934 12,934 12,934 12,934 12,934 12,934 4 8,400 7,776 7,042 6,216 5,276 4,204 2,982 1,588 Principal Ending repaymen loan [2-5] t[3-4] 5 4,535 5,168 5,896 6,718 7,658 8,730 9,952 11,346 6 55,466 50,298 44,406 37,688 30,030 21,300 11,348 0

1 1 2 3 4 5 6 7 8

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. description of debenture, rights of debenture holder, rights of the issuing company and responsibilities of the trustees. third party to the bond to ensure that the issue does not default on its contractual responsibilities to the bond holders. payment of which is legally binding

It provides the specific terms of agreement such as

Trustees is a bank or financial institution that acts as a

Interest: the debenture carries a fixed rate of interest,

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. 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.

Call and put provision: the call/buyback provides

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. 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

- Hire purchase:- It is a type of financial

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

Factors affecting choice of financing


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