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
-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
• 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.
•Dividend rate is fixed
•Pref shareholders do not share in
the residual earnings
•They have claim on income and
assets prior to ordinary
Types of Preference
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
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.
•Risk less leverage advantage
•Limited voting right
•Non tax deductibility of dividend
•Commitment to pay dividend
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
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
Features of Equity Shares
Residual claim to income
Residual claim on assets
Right to control
-it is a permanent source of fund without any repayment
-It does not involve any obligatory dividend payment
-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
Issue of share at a discount
Issue of share at a premium
Call on shares: application, allotment and other
Forfeiture of shares
Initial Public Offer
Benefits of going public
-Access to capital
-Signals from the market
Costs of going public
ISSUE TYPE OFFER PRICE DEMAND PAYMENT RESERVATIONS
Price at which the
offered and would
be allotted is made
known in advance
to the investors
Demand for the
securities offered is
known only after
the closure of the
100 % advance
payment is required
to be made by the
investors at the
time of application.
50 % of the shares
Rs. 1 lakh and the
balance for higher
A 20 % price band
is offered by the
issuer within which
allowed to bid and
the final price is
determined by the
issuer only after
closure of the
Demand for the
securities offered ,
and at various
prices, is available
on a real time basis
on the BSE website
during the bidding
10 % advance
payment is required
to be made by the
QIBs along with the
other categories of
investors have to
pay 100 % advance
along with the
50 % of shares
reserved for QIBS,
35 % for small
investors and the
balance for all other
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 contribution through
offer document) does not exceed five times the pre-
issue net worth
Cost of Public Issue
Fees to the managers to the issue
Fees for registrars to the issue
Advertising and publicity expenses
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 than expected. Legally referred to as an
It provides additional price stability to a security issue because 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
shares than the original number set by the issuer.
However, some issuers prefer not to include greenshoe options in their
underwriting agreements under certain circumstances, such as if
the issuer 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 from the fact that the Green Shoe Company was
the first to issue this type of option.
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
1 100 1500 150000 50,000 100 500 50,000
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
Rights Issue of Equity Share
It involves selling of ordinary shares to the existing
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
-It is a much faster way of raising fund.
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
However, shareholder's rights to a company's assets are
subordinate to the rights of the company's creditors.
, 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
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.
- 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
Advantages & Disadvantages of Internal
Retained earnings are easily available internally.
It eliminates issue and transaction cost.
No dilution of control
Amount that can be raised by way of retained
earning is limited.
Opportunity cost is quite high
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
- primary 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
-maintenance of working capital position in terms of
minimum current ratio
-ban on sale of fixed asset without the lenders
Liability related covenant
-restrain on incurrence of additional debt
-reduction in debt equity ratio by issue of additional
Cash flow related covenant
-limitation on dividend payment to a certain amount
-ceiling on managerial salary or perks
Control related covenant
-appointment of nominee director to represent the
financial institution and safeguard their interest
Obtaining a term loan
An application form containing comprehensive
information about the project is submitted to the
It contains details like promoters background,
particulars of the industrial concern, particulars of the
industrial project, cost of the project, means of financing
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
If on appraisal is the project is found feasible then the
loan is sanctioned by the bank.
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
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
description of debenture, rights of debenture holder, rights of
the issuing company and responsibilities of the trustees.
Trustees is a bank or financial institution that acts as a third
party to the bond to ensure that the issue does not default on
its contractual responsibilities to the bond holders.
Interest: the debenture carries a fixed rate of interest,
payment of which is legally binding
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.
Call and put provision: the call/buyback provides 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.
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
- 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
- Hire purchase:- It is a type of financial 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
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
"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
"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 of
participating in primary issuance process."