lt finance 1
TRANSCRIPT
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Shares
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Definition Ordinary share represent the ownership position in the
company. The holders of ordinary shares are called theshareholders and they are the legal owners of the company.
By a share it also means right to participate in the profitsmade by a company, while it is a going concern anddeclares dividend, and in the assets of the company when itis wound up.
A stock is defined as consolidated value of fully paid upshares of a member.
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Types of shares capital
Equity shares capital
Preference shares capital: Preference share is the onewhich 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 .
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Features of Preference Share
Claims on income and assets
Fixed Dividend
Cumulative dividend
Redemption
Sinking fund
Call feature
Participation feature
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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
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Types of Preference Shares
Participating preference shares.:- they carry a right toparticipate in the surplus profit along with equityshareholders after dividend at certain rate has been paid toequity shareholders.
Cumulative and non-cumulative shares
Redeemable preference shares
Fully or partly convertible preference shares.
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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.
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Pros
Risk less leverage advantage
Dividend postpondability
Fixed dividend
Limited voting right
Cons
Non tax deductibility of dividend
Commitment to pay dividend
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Equity shares
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Types of Equity Shares
Authorized share capital
Issued share capital
Subscribed share capital
Paid up share capital
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Issue price of shares: the price at which share is issued in themarket.
Paid up share capital = issue price * no. of ordinary shares.
Issue price has two components1. Par value2. Share premium
Par value is the price per ordinary share stated in thememorandum 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 theperformance of the economy in general and company inparticular.
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Features of Equity Shares
Residual claim to income
Residual claim on assets
Right to control
Voting system
Pre-emptive right
Limited liability
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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 ofinvestors as a compensation for higher risk
- High floatation cost in terms of underwriting, brokerage andother issue expenditure
- Dilution of control
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Method of Raising Capital
By issue of prospectus
Rights issue of equity shares.
Private placement of shares
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Issuing of securities
Filing of offer document
Application for listing
Issue of securities in dematerialized form
Book building: It is a process undertaken by whichdemand 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.
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Issue of share at a discount
Issue of share at a premium
Call on shares: application, allotment and other calls
Forfeiture of shares
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Initial Public OfferBenefits 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
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ISSUE TYPE OFFER PRICE DEMAND PAYMENT RESERVATIONS
Fixed PriceIssues
Price at which
the securities
are offered andwould be
allotted is made
known in
advance to the
investors
Demand for the
securities
offered isknown only
after the closure
of the issue
100 % advance
payment is
required to bemade by the
investors at the
time of
application.
50 % of the
shares offered
are reserved forapplications
below Rs. 1
lakh and the
balance for
higher amount
applications.
Book BuildingIssues
A 20 % price
band is offered
by the issuer
within which
investors areallowed to bid
and the final
price is
determined by
the issuer only
after closure ofthe bidding.
Demand for the
securities
offered , and at
various prices,
is available on areal time basis
on the BSE
website during
the bidding
period..
10 % advance
payment is
required to be
made by the
QIBs along withthe application,
while other
categories of
investors have
to pay 100 %
advance alongwith the
50 % of shares
offered are
reserved for
QIBS, 35 % for
small investorsand the balance
for all other
investors.
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Eligibility for an IPO
A company can make 100% retail issues provided itsatisfies 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 eachof 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-
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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
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Green Shoe option A provision contained in an underwriting agreement that gives the underwriter
the right to sell investors more shares than originally planned by the issuer. This
would normally be done if the demand for a security issue proves higher thanexpected. Legally referred to as an over-allotment option.
It provides additional price stability to a security issue because the underwriterhas the ability to increase supply and smooth out price fluctuations if demandsurges.
Greenshoe options typically allow underwriters to sell up to 15% more
shares than the original number set by the issuer.
However, some issuers prefer not to include greenshoe options in theirunderwriting agreements under certain circumstances, such as if the issuerwants to fund a specific project with a fixed amount of cost and does not wantmore capital than it originally sought.
The term is derived from the fact that the Green Shoe Company was the first toissue this type of option.
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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 sharesapplied for
category wise
No. ofapplican
ts
Total no. ofshares
applied
Proportionate
allocation
No. ofshares
allocated
by
rounding
No ofsuccessfu
l
applicant
Total noof shares
allocated
1 100 1500 150000 50,000 100 500 50,000+3300
2 200 400 80,000 26,700 100 267 26700
3 300 300 90,000 30,000 100 300 30,000
4 400 300 1,20,000 40,000 100 300 30,000
5 500 200 1,00,000 33,300 200 200 40,000
6 600 100 60,000 20,000 200 100 20,000
6,00,000 2,00,000 2,00,000
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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
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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 InsuranceCorporation 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.
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Shareholder A shareholder (or stockholder) is an individual or company
(including a corporation) that legally owns one or more shares ofstock 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 thecompany.
However, shareholder's rights to a company's assets are subordinateto the rights of the company's creditors.
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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, 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 market.
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Regulations
Special resolution- company must pass special resolution
- government must grant special approvalunder section 81(1A)
Pricing price should not be lower than thehigher of the average of the weekly high and lowof the closing price of the shares quoted on thestock exchange during six months before the
relevant date or two weeks before the relevantdate.
Open offer- a preferential allotment of more than15% of equity necessitates an open offer.
Lock-in-period one year lock-in-period
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Internal Accruals
Depreciation Charges
Retained earnings
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Advantages & Disadvantages of InternalAccruals
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 retainedearning is limited.
Opportunity cost is quite high
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Term Loan
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Term Loan
Term loan is a loan made by bank/financial
institution to a business having an initial
maturity of more than one year.
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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 operatingand financial constraints on the borrower.
these covenants are both positive as well asnegative in the sense of what borrowers shoulddo and should not do in the conduct of its
operation.
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Covenants
Asset-related covenants
-maintenance of working capital position in terms ofminimum current ratio
-ban on sale of fixed asset without the lendersapproval
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 amountor rate
-ceiling on managerial salary or perks
Control related covenant
-appointment of nominee director to represent the
financial institution and safeguard their interest
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Repayment schedule/Loan
Amortization
Year Beginnin
g loan
Payment
installme
nt
Interest
(0.14)
Principal
repayme
nt[3-4]
Ending
loan [2-5]
1 2 3 4 5 6
1 60,000 12,934 8,400 4,535 55,4662 55,466 12,934 7,776 5,168 50,298
3 50,298 12,934 7,042 5,896 44,406
4 44,406 12,934 6,216 6,718 37,688
5 37,688 12,934 5,276 7,658 30,0306 30,030 12,934 4,204 8,730 21,300
7 21,300 12,934 2,982 9,952 11,348
8 11,348 12,934 1,588 11,346 0
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Obtaining a term loan
An application form containing comprehensive
information about the project is submitted to the financialinstitution
It contains details like promoters background, particularsof 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 loanapplication. On the basis of this report detailed appraisalof the project is done.
In the detailed analysis marketing, technical, financial,management and economic feasibility of the project istested.
If on appraisal is the project is found feasible then the
loan is sanctioned by the bank.
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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.
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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 descriptionof debenture, rights of debenture holder, rights of the issuingcompany and responsibilities of the trustees.
Trustees is a bank or financial institution that acts as a thirdparty to the bond to ensure that the issue does not default onits contractual responsibilities to the bond holders.
Interest: the debenture carries a fixed rate of interest, paymentof which is legally binding
Maturity: It indicates the length of time for redemption
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Debenture redemption reserve: It is a requirement in thedebenture indenture to provide for systematic retirementof debenture on maturity.
Call and put provision: the call/buyback provides anoption to the issuing company to redeem the debentureat a specified price before maturity. The put option is theright to the debenture holder to seek redemption at a
specified time at a predetermined price.
Security
Convertibility
Credit rating
Claim on income and assets
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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
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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 maturityperiod 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 being16.12 and 15.71 respectively
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Secured premium notes
- It is a secured debenture redeemable at premium over
the face value/ purchase price- There is a lock in periodduring which no interestispaid
- 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
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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 aseries of contractual, periodic, tax-deductiblepayments.
- Hire purchase:- It is a type of financial transaction inwhich goods are let on hire with an option to the hirerto purchase them.
Venture capital financing: It is a type of financeavailable for investors looking for high potentialreturns and entrepreneurs who need capital as theyare yet to go to the public
Q lifi d I tit ti l B (QIB)
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Qualified Institutional Buyer (QIB)
The Securities and Exchange Board of India has defined a Qualified InstitutionalBuyer as follows
"Qualified Institutional Buyers are those institutional investors who are generallyperceived to possess expertise and the financial muscle to evaluate and invest in thecapital markets.
In terms of clause 2.2.2B (v) of DIP Guidelines, a Qualified Institutional Buyer shallmean:
"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 ofparticipating in primary issuance process."
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Factors affecting choice of financing
Sales stabilityAsset structure
Profitability
Control Taxes
Growth rate
Management attitude
Firms internal conditions
Financial flexibility
Market conditions