LONG TERM FINANCING DECISIONS
An equity share, commonly referred to as ordinary
represents the form of fractional or part ownership
in which a shareholder, as a fractional owner,
undertakes the maximum entrepreneurial risk
associated with a business venture.
The holders of such shares are members of the
company and have voting rights
FEATURES OF EQUITY SHARES….
No fixed rate of return-The rate of dividend of these
shares depends upon the profits to the company. They may b
paid a higher rate of dividend or they may not get anything.
No obligation to pay dividend- The company has no
obligations to pay dividend to equity share holders even
though the company get profits. Whether dividend should be
paid or not, even if it is to be paid what should be the rate of
dividend, etc. would be decided by the board of directors in
general body meetings
Residual Claim to assets- At the liquidation of the
company, the equity shareholders will be paid only if any
amount is left after all the other claims against the company
Right to Control- Equity share holders have voting rights and they
elect board of directors who controls the affairs of the company. Thus
the equity shareholders are collectively responsible for efficient
management of the company
Form the basis for loans
Speculation- Investing public purchase equity shares with
speculative motive. This is possible because the market value of
shares fluctuates depending upon the good will of the firm, rate of
dividend is declared.
Limited Liability- In the case of companies where the liability is
limited by shares the liability of the share holders is limited only upto
the unpaid value of shares. He is not personally responsible for the
liability of the company as in the case of sole trading concern and
Permanent Capital- The capital procured by issue of equity
shares is a permanent source of funds to the company. At the same
time shareholders can get money by sale of shares in the stock
METHOD OF FLOTATION OF EQUITY SHARES
Float refers to the total number of shares available for trading. Float is
calculated by subtracting closely-held shares from the total number of
Initial public offering:
IPO is a type of public offering where shares of stock in a company are sold to
the general public, on a securities exchange, for the first time. Through this
process, a private company transforms into a public company. Initial public
offerings are used by companies to raise expansion capital, to possibly
monetize the investments of early private investors, and to become publicly
Most companies undertake an IPO with the assistance of an investment
banking firm acting in the capacity of an underwriter. Underwriters provide
several services, including help with correctly assessing the value of shares
(share price) and establishing a public market for shares (initial sale)
Private placement (or non-public offering) is a funding
round of securities which are sold not through a public offering, but rather
through a private offering, mostly to a small number of chosen investors.
The sale of securities to a relatively small number of select investors as a way
of raising capital.
Investors involved in private placements are usually large banks, mutual funds,
insurance companies and pension funds.
Private placement is the opposite of a public issue, in which securities are
made available for sale on the open market.
A Direct Public Offering (DPO) is a method by which a business can
offer stock directly to the public.
A DPO is similar to an initial public offering (IPO) in that stock is sold to
investors, but unlike an IPO, a company uses a DPO to raise capital
directly and without a firm underwriting from an investment banking firm
Direct public offerings are primarily utilized by small to medium size
companies who are unable to attract the interest of an investment
banking firm to represent them in a traditional initial public offering.
Book building refers to the process of generating, capturing, and
recording investor demand for shares during an Initial Public Offering
(IPO), or other securities during their issuance process, in order to
support efficient price discovery
the issuer appoints a major investment bank to act as a
major securities underwriter or bookrunner. The “book” is the off-market
collation of investor demand by the bookrunner and is
confidential to the bookrunner, issuer, and underwriter.
It is a mechanism where, during the period for which the book for the
offer is open, the bids are collected from investors at various prices,
which are within the price band specified by the issuer.
The process is directed towards both the institutional as well as the
retail investors. The issue price is determined after the bid closure
based on the demand generated in the process
The Issuer who is planning an offer nominates lead merchant
banker(s) as 'book runners'.
The Issuer specifies the number of securities to be issued and
the price band for the bids.
The Issuer also appoints syndicate members with whom orders
are to be placed by the investors.
The syndicate members input the orders into an 'electronic book'.
This process is called 'bidding' and is similar to open auction.
The book normally remains open for a period of 5 days.
Bids have to be entered within the specified price band.
Bids can be revised by the bidders before the book closes.
On the close of the book building period, the book runners
evaluate the bids on the basis of the demand at various price
The book runners and the Issuer decide the final price at which
the securities shall be issued.
Generally, the number of shares are fixed, the issue size gets
frozen based on the final price per share.
Allocation of securities is made to the successful bidders. The
rest get refund orders
PRESENT SCENARIO OF EQUITY MARKET
BSE Sensex touched its all-time high crossing 27,300 levels this last
The Sensex has surged continuously and now it's in a zone which has
not been explored till date so it would be an assumption that the market
should correct on regular intervals or at least consolidate after regular
intervals to continue its upward journey.
More than the Narendra Modi impact, the market is rising on liquidity.
Sentiment is positive and it could make the market run ahead of
Until interest rates remain low in developed economies, FII money will
continue to find its way into markets like India.
With equities under-owned and other asset classes like gold
underperforming, there is a high possibility that investors may rush into
the budget was pragmatic and the focus was clearly on execution.
Fiscal consolidation (lowering fiscal deficit), containing inflation, reviving
the investment cycle, attracting foreign capital (through FDI), and
recapitalization of state owned banks were some of the key takeaways
from the budget
It is strongly believed that the Indian economy is on the cusp of a strong
growth uptrend that could herald 6-7% GDP growth per annum over the
next 5-10 years
Infrastructure, both private and government and Outsourcing, led by
automobiles and pharmaceuticals export are key themes that will drive
India’s growth story for the next decade.
A weaker growth outlook coupled with a rising current account deficit
(CAD) had led to weakness in the rupee. However, with the FY14 CAD
coming at just 1.7% of GDP (versus 4.7% in FY13), the rupee has now
stabilized and is near its fair value on a real effective exchange rate
Equity capital that is not quoted on a public exchange.
Private equity consists of investors and funds that make investments
directly into private companies.
Capital for private equity is raised from retail and institutional
investors, and can be used to fund new technologies, expand working
capital within an owned company, make acquisitions, or to strengthen
a balance sheet.
The majority of private equity consists of institutional investors and
accredited investors who can commit large sums of money for long
periods of time.
Private equity investments often demand long holding periods to allow
for a turnaround of a distressed company or a liquidity event such as
an IPO or sale to a public company.
FEATURES OF PRIVATE EQUITY
private equity investments generally are liquid, because when
there is a possibility of a secondary sale of fund shares,
investors can expect a substantial discount on the net asset
value if selling in the secondary market
When participating in a limited partnership, the investor needs
a minimum amount of capital commitment. This minimum
differs from fund to fund, but it is a small fraction of the wealth
of an investor.
The private equity market is not transparent. One of the key
characteristics in this market is that there is little publicly
available information. The lacking of transparency is seen as a
necessity for achieving the results, because substantial part of
the returns, private equity experiences, is due to the ability to
exploit inside information.
LIST OF MAJOR PLAYERS OF PRIVATE EQUITY
Rank Name of the firm Headquarters
Capital Raised as of 2014
(billions of USD)
1 The Blackstone Group New York $ 65.70
2 Carlyle Group Washington, D.C. $ 62.90
3 TPG Capital Fort Worth $ 59.00
New York $ 54.50
5 Apollo Management New York $ 48.00
Goldman Sachs Capital
New York $ 39.90
7 Warburg Pincus New York $ 37.00
8 Bain Capital Boston $ 35.00
9 Advent International Boston $ 32.00
10 CVC Capital Partners London $ 18.08
TOP PRIVATE EQUITY FIRMS IN INDIA….
• ICICI Venture
• Chrys Capital
• Sequoia Capital
• India Value Fund
• Kotak Private Equity Group
• Baring Private Equity Partners
• Ascent Capital
• Everstone Capital
• Blackstone Group
SECTOR-WISE PRIVATE EQUITY INVESTMENTS IN INDIA
MERITS OF PRIVATE EQUITY
By definition, private equity firms work outside the public eye and do
not have to follow the same transparency standards that public firms
and funds must adhere to. This allows private equity firms to reform
the companies without the constraint
Private equity firms have active involvement of investors and lenders,
and will help to re-evaluate every aspect of your business to see how
you can maximize its value.
India is one of the fastest growing economies in the world, with
enormous growth potential in many industries. This means that
capital requirements are high, translating into an ideal hunting ground
for PE funds
PE helps those companies which cannot raise money from the
market. By private equity company get money from the investors,
which help in the growth of the company
By utilizing a team of researchers the private equity firm is able to
identify most risks that would not otherwise be found.
DEMERITS OF PRIVATE EQUITY…
India, being divided into a number of states, causes an investment
decision to be affected by politics. Changes in regulation and
infrastructure development are often sidelined due to friction and
conflict between the state and the federal government
It is a lengthy process since private equity managers conduct detailed
market, financial, legal, environmental and management research
Private Equity funds normally invest in a unlisted space and they find it
difficult to exit the investment at their wish, since it require concentrated
efforts to find a suitable investor for unlisted company
With private equity, one gets much more money, but usually have to
give up a much larger share of the business. Private equity firms often
demand a majority stake, and sometimes one will be left with little or
nothing of your ownership.
Beyond the money, one can also lose control of the direction of the
business. The private equity firm will want to be actively involved