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Long term financing decisions 1


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Long term financing decisions 1

  1. 1. LONG TERM FINANCING DECISIONS -External Financing
  2. 2. EQUITY SHARES……  An equity share, commonly referred to as ordinary share  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
  3. 3. 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 are settled
  4. 4.  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 partnership firm  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 exchanges.
  5. 5. 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 outstanding shares 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 traded enterprises. 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)
  6. 6.  Private placements: 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.
  7. 7.  Direct offerings: 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 or broker-dealer. 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.
  8. 8. BOOK BUILDING..  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
  9. 9. 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 levels.  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
  10. 10. PRESENT SCENARIO OF EQUITY MARKET  BSE Sensex touched its all-time high crossing 27,300 levels this last week  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 fundamentals.  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 equities  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
  11. 11.  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 (REER) basis.
  12. 12. PRIVATE EQUITY  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.
  13. 13. 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.
  14. 14. 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 4 Kohlberg Kravis Roberts New York $ 54.50 5 Apollo Management New York $ 48.00 6 Goldman Sachs Capital Partners 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
  15. 15. 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
  17. 17. 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.
  18. 18. 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
  19. 19. THANKING YOU….