Venture capital is a type of private equity capital typically provided for early-stage, high-potential, and growth companies in the interest of generating a return through an eventual realization event such as an IPO or trade sale of the company. Venture capital typically comes from institutional investors and high net worth individuals and is pooled together by dedicated investment firms.

There are several types of venture capital that are extremely crucial in the context of the modern day business world. The types of venture capital are classified as per the purpose and time of their application.

The 3 principal types of venture capital are early stage financing, expansion financing and acquisition/buyout financing.

Types of Venture Capital:

There are several different types of venture capital.

These distinctions refer to the timing of the investment or its specific purpose within the life of the target company, but the need for a high return in exchange for the risk remains constant. There are three major types of venture capital - early stage financing, expansion financing and acquisition or buyout financing. The various types of venture capital are classified as per their applications at various stages of a business.

Early Stage Financing:

Early stage financing has three sub divisions � seed financing, start up financing and first stage financing. Seed financing is basically a small amount that an entrepreneur receives for the purpose of being eligible for a start up loan.

Start up financing is given to companies for the purpose of finishing the development of products and services. However, this type of venture capital may also be used for initial marketing as well. Companies that have spent all their starting capital and need finance for beginning business activities at the full-scale are the major beneficiaries of the First Stage Financing.

Expansion Financing:

Expansion financing may be categorized into second-stage financing, bridge financing and third stage financing or mezzanine financing. Second-stage financing is provided to companies for the purpose of beginning their expansion.

Second-stage financing is also known as mezzanine financing. It is provided basically for the purpose of assisting a particular company to expand in a major way. Bridge financing is useful in many ways. It may be provided as a short term interest only finance option as well as a form of monetary assistance to companies that employ the Initial Public Offers as a major business strategy.

Acquisition or Buyout Financing:

Acquisition or buyout financing is categorized into acquisition finance and management or leveraged buyout financing. Acquisition financing assists a company to acquire certain parts or an entire company. Management or leveraged buyout financing helps a particular management group to obtain a particular product of another company

Features of Venture Capital:

Venture capital has the following features:

1. Venture capital investments are made in innovative projects.

2. Benefits from such investments may be realized in the long run.

3. Suppliers of venture capital invest money in the form of equity capital.

4. As investment is made through equity capital, the suppliers of venture capital participate in the management of the company.

Advantages of Venture Capital:

The advantages of venture capital are as follows:

i. New innovative projects are financed through venture capital which generally offers high profitability in long run.

ii. In addition to capital, venture capital provides valuable information, resources, technical assistance, etc., to make a business successful.

Disadvantages of Venture Capital:

The disadvantages of venture capital are:

i. It is an uncertain form of financing.

ii. Benefit from such financing can be realized in long run only.

Corporate Restructuring, Mergers & Acquisitions Introduction Corporate Restructuring is the process of redesigning one or more aspects of a company. The process of reorganizing a company may be implemented due to a number of different factors, such as positioning the company to be more competitive, surviving a currently adverse economic climate, or acting on the self-confidence of the corporation to move in an entirely new direction.

In other words, restructuring could be considered as making alterations to some extent to the existing structure. Corporate Restructuring may have a single objective or multiple objectives; amongst them, there must be a dominant objective in addition to other important objectives for a successful corporate restructuring. Hence, Corporate Restructuring is a comprehensive process by which a company can consolidate its business operations and strengthen its position for achieving its short-term and long-term corporate objectives. Corporate Restructuring is vital for the survival of a company in a competitive environment.

. Objectives of Corporate Restructuring: • Growth • Technology • Government policy • To reduce dependency on others • Economic stability

Needs of Corporate Restructuring: 1) To expand the business or operations of the company. 2) To carry on the business of the company more economically or more efficiently www.esupportkpo.com 3) To focus on its core strength 4) Cost Reduction, by deriving the benefits of economies of scale.

5) To obtain tax advantages by merging a loss-making company with a profit-making company. 6) To have access to better technology. 7) To improve the debt-equity ratio. 8) To have a better market share. 9) To overcome significant problems in a company. 10) To become globally competitive. 11) To eliminate competition between the companies.

Corporate Restructuring Tools: There are many tools and strategies by which or through which Corporate Restructuring can be processed such as amalgamations, mergers, demergers, reverse mergers, takeovers, acquisitions, joint ventures, disinvestments, buyback of shares etc.

• By Amalgamation:

It is the process of combining or uniting multiple entities into one form. The term amalgamation is not defined under the Companies’ Act, 1956. Generally speaking, amalgamation is a legal process by which two or more companies are joined together to form a new entity or one or more companies are to be absorbed or blended with another. As a consequence, the amalgamating company loses its existence and its shareholder become the shareholder of the new or amalgamated company • By Reverse Merger:

It is when a private company purchases control of a public company and then carries out a merger with a private company. With a reverse merger, the private company shareholders receive most of the shares of the public company and control of the Board. A reverse merger is a quick way of going public with the time-table being only a couple of weeks. The reason a reverse merger is so quick is that the public company has already completed all the necessary paper-work and reviews in order to become public. • By Normal merger:

Merger is an arrangement whereby the assets of two or more companies become vested in or under the control of one company, which may or may not be one of the original two companies, which has as its shareholders, all or substantially all, the shareholders of the two companies. • By Demerger:

The act of splitting off a part of an existing company to become a new company, which operates completely separately from the original company. Shareholders of the original company are usually given an equivalent stake of ownership in the new company. A demerger is often done to help each of the segments operate more smoothly, as they can now focus on a more specific task. • By Take-over:

It is the purchase of one company by another. The term refers to the acquisition of a public company whose shares are listed on the Stock Exchange, in contrast to the acquisition of a private company. • By Joint Venture:

Two parties, (individuals or companies), incorporate a company in India. The business of one party is transferred to the company and, as a consideration for such a transfer; shares are issued by the company and subscribed by that party. The other party subscribes to the shares in cash. The parties subscribe to the shares of the joint-venture company in agreed proportion, in cash, and start a new business. • By Disinvestment:

It means to sell off certain assets, such as a manufacturing plant, a division or subsidiary, or product line. www.rga-india.com Page | 3

• By Buyback:

The repurchase of outstanding shares by a company, in order to reduce the number of shares on the market. Companies will buy back shares either to increase the value of shares still available or to eliminate any threats by shareholders who may be looking for controlling powers. In other words, Buyback is the reverse of issue of shares by a company where it offers to take back its shares owned by the investors at a specified price; this offer can be binding or optional to the investors. Reduction of entities • By striking off of the name from the Register of Companies. • By dissolution without winding up. • By mergers or absorptions. Conclusion: The restructuring usually takes place when a business is struggling and losing money. A third party will be brought in to assess the way that the business is being run, and then make recommendations based on what they found that will help make the business run more efficiently. A strong corporate restructuring firm will have experts in a wide variety of areas that can examine all aspects of a business to help find solutions. A good corporate restructuring firm will not just identify problems of where money is being lost, but also offer solutions that a company can implement in order to solve those problems. They will also help a company through the process of restructuring by developing forecasts of what to expect and making sure the company is able to secure the capital available to make those changes. Corporate restructuring can help restore, preserve and enhance the value of an organisation.

Underwriting

Underwriting is the nature of an insurance against the adverse situation in the timing of the public issue. It can be defined as “bearing the risk of not being able to sell a security at the established price by virtue of purchasing the security for resale to the public; also known as firm commitment underwriting”.[2] The person who assures is called as “Underwriter”; and the consideration for the assurance is known as “Underwriting Commission”. The Underwriters give guarantee for the public subscription and in turn they receive the commission. In public issues, after the merchant bankers, the next position goes to the Underwriters, where they play a very major role. The SEBI has defined the Underwriting as “an agreement with or without conditions tot subscribe to the securities of a body corporate where the existing shareholders of such body corporate or the public do not subscribe to securities offered to them”.[3] The Underwriter has been defined as “a person who engages in the business of Underwriting of an issue of securities of a body corporate”.[4] The Underwriting is mandatory for the public issue. The stock exchange regulations clearly specify that no stock broker is allowed to underwrite more than 5 per cent of the public issue and the concerned stock exchange should approve the appointment of broker underwriters. Usually the bankers can underwrite upto 10 per cent of the public issue. The Underwriting Commission cannot be paid on the amounts contributed by promoters, directors, employees and

business associates. It is an important element of the primary market. It is appointed by the issuing company in consultation with the merchant bankers. The name of the Underwriter and his obligations should be disclosed in the prospectus. There are a number of financial institutions, commercial banks, insurance companies as well as a number of private companies which provide underwriting. An Underwriter issue is the safe way of marketing securities and the investors are influenced by the prestige of the underwriters. The issuing companies may appoint one or more of the following parties: (A) Financial Institutions, (B) Brokers, (C) Bankers, (D) Investment Companies, and (E) Trusts.

Objectives Of The Underwriting

The objectives of the Underwriting are presented below:

·It guarantees the sale of securities at a given price.

·It facilitates the provision of money during the financial crisis of the company.

·The Underwriter helps the new company in its reorganization.

The following are the salient features of an underwriting agreement:

·The Underwriter may not be able to sell the issues in some situations. The unsold securities are distributed among the underwriters in the agreed proportion.

·The offering price must be maintained for the successful distribution of the securities.

·The company makes a delivery of the securities to the manager and receives the payment on the closing date

·At the termination of the underwriting, the manager must make the final accounting for each underwriter. He should also remit the commissions and accounts for the expenditure incurred.

Underwriting is insurance for the new securities of the public. It is one of the methods of marketing securities. The other methods are:

·Prospectus method, where the capital is raised by this method is very prevalent in India. The distribution expenses may be substantially saved.

·Offer for sale, where the sales are sold largely to the brokers/issue houses. The issue house/brokers again sell the shares to the public at a fixed price. This method saves the company the cost and the trouble of selling the shares to the public. Here a Third party takes over the responsibility.

·Private placement, where the funds are raised in the primary market by selling the security issue to one investor or a small group of investors without resorting to underwriting. The cost of the issue is minimal. It is the most effective way of procuring the long term funds. There is no need to follow the statutory formalities. The offer is made to select a group of known persons.

Kinds Of Underwriting

The following are the various kinds of underwriting agreements:

·The Purchase Contract

·Agreement between Underwriters and Representatives

·The selling agreement

The Purchase Contract: Here the sale of shares is made to the underwriters at an accepted level of proportion. There will be an agreement among several underwriters to purchase the securities from the company.

Agreement between Underwriters and Representatives: This is an agreement between the Underwriters and the Representatives or Managers. The agreement includes all the aspects of the issue of securities:

§ To fix the time of offering;

§ To reserve a proportion of securities for the selected dealers and institutions;

§ Place, date and delivery of securities;

§ Provisions regarding the termination and settlement of the underwriters’ account;

§ Underwriters’ responsibility.

The selling agreement: In this method, the issuer company will make an agreement with the dealers to subscribe the new securities. The agreement includes the offering price, selling concession and provisions for delivery and payment.

Underwriters

An Underwriter is a financial intermediary in the primary market. The Underwriter has been defined as “a person who engages in the business of Underwriting of an issue of securities of a body corporate”[5]. The Underwriters give guarantee for the public subscription and in turn they receive the commission.

Classification Of Underwriters

Underwriters in India may be classified into:

·Institutional Underwriters

·Non-Institutional Underwriters

Institutional Underwriters:

The following are the Institutional Underwriters:

§ Development Banks

§ Commercial Banks

§ Insurance Companies

§ State Finance Corporations

§ Unit Trust of India

The Development Banks are also known as Industrial Banks. They have got long term deposits and are in a position to enter into long term investments. The Industrial banks help the industries by underwriting their shares and debentures. When an Industrial Unit approaches for underwriting the shares and for direct financial aid, the industrial banks investigate the prospects of the industry, the soundness of the financial requirements, the feasibilities and the utilities of the schemes. If the shares and debentures are not fully subscribed or the minimum subscription is not taken up by the public within a specified period, the Development Banks come to the rescue and take up the residual amount of shares and debentures. The Underwriting facilitates the direct financial aids to the new industrial set up. Some of the Development banks are Industrial Finance Corporation of India (IFCI), Industrial Development Bank of India (IDBI), Industrial Credit and Investment Corporation of India (ICICI) among others.

The Commercial Banks, also known as Public banks, perform the routine banking. Lending and underwriting are their main objectives. A few of them have been rendering services as syndicators of loans and managers to the issue. The Commercial Banks normally act as passive agents by supplying the forms only on request rather than on their own initiative and earn brokerage.

The Insurance Companies are basically investment institution and not development institutions. Life Insurance Corporation (LIC) and General Insurance Corporation (GIC) are the premier institutions in the country which are involved in the insurance sector. These two conventional investment institutions supply funds mainly to provide the liquidity to the investments for developing the corporate sector. The objectives of these corporations are direct lending to industry, subscription to shares and bonds to special industrial financial institution, and purchase of securities of the Joint stock companies from the capital market. The Government corporations also are involved in underwriting business.

The State Financial Corporations are also involved in underwriting business for stimulating the capital market.

The Unit Trust of India is the other conventional investment institution which enjoys superiority as an organizational device because of some activities. It is involved in continuous sale of units, redemption of units at Net Asset Value (NAV), convenience to the small investors of small amount.

Non-Institutional Underwriters

There are two types of non-institutional underwriters in India:

§ Stock brokers

§ Individuals

The Stock brokers act as intermediaries in the purchase and sale of securities in the primary and secondary markets. These persons have a network of brokers, working under them, who spread throughout the length and breadth of the country. They are known as sub-brokers. These people spread message and give publicity about various issues in the offering. They rapidly supply application forms or even go to the extent of collecting money from the investors. They play a very crucial role in the area of underwriting. The brokers can influence their clients by persuasion.

The Individuals/Investment Companies obtain funds from a large number of investors by selling the shares. The pooled funds are placed before the experts to deploy the purchase of financial assets. The benefits derived from the capital market will surpass that of the shareholders. There are two types of investment companies namely: (a) Fixed Investment Trusts, and (b) Management Investment Trusts.

Registration

Underwriters are appointed by the issuing companies after consulting the merchant bankers. To act as an Underwriter, a certificate of registration must be obtained from the SEBI. The SEBI has the full authority to grant the certificate of registration. No person should act as an underwriter unless he holds

a certificate granted by the SEBI. The stock broker or the merchant banker should hold a valid certificate or registration u/s 12 of the Act.

According to SEBI (UNDERWRITERS) RULES AND REGULATIONS, 1993, section 30, the prospecting person should apply for the grant of the certificate in a particular format (FORM A as per regulation). The board takes into account all the matters that are relevant to underwriting and particularly regarding the below facilities before granting the certificate:

·The applicant has the necessary infrastructure.

·The applicant should have the experience otherwise he should appoint two experienced members.

·The underwriter should satisfy the capital adequacy requirement of net worth of Rs 20.00 Lakhs

·The purpose of net worth means, the applicant might be a proprietary concern or a firm or an association of persons or any body of individuals, the value of capital plus free reserves of business.

·In the case of a body corporate, the value of the paid up capital plus free reserves should be disclosed in the looks of account of the applicant.

If the SEBI believes that the applicant is eligible, then it sends intimation to the applicant that he/she is eligible for the grant of certificate; and thus it grants the certificate in FORM B after the payment of the prescribed fee.

Fee

Underwriters had to pay Rs. 5 lakhs as registration fee and Rs. 2 lakhs as renewal fee every three years from the fourth year from the date of initial registration. Failure to pay renewal fee leads to cancellation of certificate of registration.

General Obligations And Responsibilities

Code of Conduct:

Every underwriter has at all times to abide by the code of conduct; he has to maintain a high standard of integrity, dignity and fairness in all his dealings. He must not make any written or oral statement to misrepresent (a) the services that he is capable of performing for the issuer or has rendered to other issues or (b) his underwriting commitment.

Agreements with clients:

Every underwriter has to enter into an agreement with the issuing company. The agreement, among others, provides for the period during which the agreement is in force, the amount of underwriting obligations, the period within which the underwriter has to subscribe to the issue after being intimated by/on behalf of the issuer, the amount of commission/brokerage, and details of arrangements, if any, made by the underwriter for fulfilling the underwriting obligations.

General responsibilities:

An underwriter cannot derive any direct or indirect benefit from underwriting the issue other than by the underwriting commission. The maximum obligation under all underwriting agreements of an underwriter cannot exceed twenty times his net worth. Underwriters have to subscribe for securities under the agreement within 45 days of the receipt of intimation from the issuers.

Every Underwriter should maintain the following accounts, namely:

·If the Underwriter belongs to a body corporate-

§ A copy of the balance sheet, profit and loss account as specified in the Sections 211 and 212 of the Companies Act, 1956;

§ A copy of the auditor’s report referred in Section 227 of the Companies Act, 1956.

·If the Underwriter belongs to a body corporate-

§ The records in respect of all the sums of money received and expended by them; and the matters in respect of the receipt and expenditure

§ Their assets and liabilities

Commission Of Underwriters

The underwriting commission is paid only in accordance with the Section 76 of the Companies Act, 1956. The statutory regulations and other obligations regarding the commission are:

·The underwriting commission should be paid only with the acceptance of the article of association of the company

·The underwriting commission should be paid in accordance with the rules and regulations as prescribed by the Government.

·In case of shares, the amount or rate of commission which is not offered to the public should be disclosed in the statement in lieu of prospectus.

·The number of underwriters and their proposition should be indicated in the statement.

·An underwriting agreement copy should be submitted to the Registrar of Companies at the time of delivery of the prospectus.