SOURCES OF LONG TERM FINANCE & RAISING LONG TERM FINANCE
1.
2. Equity Capital
Internal Accruals
Preference Capital
Term Loans
Debentures
Venture capital
Initial public offer
Secondary public offer
Right issue
Private placement
Preferential allotment
Dilution
Obtaining a term loan
3. It is rightly said that finance is the life-blood of
business.
No business can be carried on without source of
finance.
There are several sources of finance and as such the
finance has to be raised from the right kind of
source.
4. Long term sources of finance are those that are
needed over a longer period of time –generally over
a year.
Long term finance may be needed to fund expansion
projects
It’s types are:-
Share, Debenture, Venture Capital, Government Grant, Bank Loan.
5. Long term vs. short term funds requirements
For modernization, expansion, diversification, huge
quantities required.
Asset- liability mismatch, interest rate risk, liquidity
risk.
7. Equity Shares also known as
ordinary shares, which means,
other than preference shares.
Equity shareholders are the real
owners of the company. They
have a control over the
management of the company.
Equity shareholders are eligible
to get dividend if the company
earns profit.
Equity share capital cannot be
redeemed during the lifetime of
the company.
The liability of the equity
shareholders is the value of
unpaid value of shares.
12. It consist of depreciation charges and retained
earnings.
Depreciation represents the allocation of capital
expenditure to various periods over which the
capital expenditure is expected to benefit the firm.
13. Readily available, no talking to outsiders
Effectively additional equity capital, however
no issue costs of loss due to under-pricing
No dilution of control
The stock market generally views an equity with
skepticism, but retained earning doesn’t
15. The parts of corporate
securities are called as
preference shares. It is the
shares, which have
preferential right to get
dividend and get back the
initial investment at the
time ofwinding up of the
company.
Preference shareholders
are eligible to get fixed
rate of dividend and they
do not have voting rights.
20. Interest on debt is tax deductible
Does not result in dilution of control
Do not partake in value created by the firm
Issue costs of debt is lower
Interest cost is normally fixed, protection against high
unexpected inflation
Has a disciplining effect on management
21. Entitles fixed obligation for interest and principal,
non payment can even lead to bankruptcy/ legal
action.
Debt contracts impose restrictions on firm’s
financial and operational flexibility.
If inflation rate dips, cost of debt higher than
expected.
22. A Debenture is a document
issued by the company. It is a
certificate issued by the
company
under its seal acknowledging
a debt.
According to the Companies
Act 1956, “debenture
includes debenture stock,
bonds
and any other securities of a
company whether
constituting a charge of the
assets of the company or
not.”
25. Fixed rate of interest
No voting rights
Creditors of the company
High risk
Restrictions of further issues
26. What is long term financing?
Financial requirement of the business differs from
firm to firm and the nature of the
requirements on the basis of terms or period of
financial requirement, it may be long term
and short-term financial requirements.
27. Venture capital
Initial public offer
Secondary public offer
Rights issue
Private placement
Preferential allotment
Dilution
Obtaining a term loan
28. What Is Capital ?
Most important factor
of production.
No economic entity can
function without
capital.
Requires at every step
for set up, expansion,
growth, modernization,
diversification.
29. What is Venture
Capital???
It is type of private
equity capital typically
provided by
professional, outside
investor to buss.
Growth….
30. Initial Public Offer (IPO) 1st public offering of
equity shares Followed by a listing of shares on the
stock market Decision to go public
33. A company can make 100% retail issues provided it satisfies all the
following conditions
It has a net tangible asset of at least Rs 3 crore in each of the
preceding three years.
It has a track record of distributable profit for at least three out of
immediately proceeding 5 years.
It has a net worth of at least Rs1 crore in each of the preceding 3
financial years.
The issue size (offer through offer document + firm allotment +
promoters contribution through offer document) does not exceed
five times the pre-issue net worth
34. Approval of the MD
Approval of the share holders
Appointment of a merchant banker as LM
The LM carries out due diligence to check
Appointment of various intermediaries
The LM draws up the issue budget
The LM prepares the draft prospectus
The LM files the draft prospectus with SEBI, SEBI places
the same on its website
35. Listing application to the stock exchanges, the draft
prospectus is also hosted on the websites of the LM
and the underwriters.
Tripartite agreement with the registrar and all the
depositories
The LM makes the underwriting arrangements, if
the issue is proposed to be underwritten.
36. Within 21 days,
SEBI makes observations
Stock exchanges suggest changes
Company carries out modifications
Company files the prospectus with the ROC
Market the issue by press meetings, brokers’
meetings, investors’ meetings and so on
37. ‘Announcement advertisement’ – 10 days prior to
the opening the issue.
conform to Form 2A – abridged prospectus
Dispatch of the application forms to all stock
exchanges, SEBI collection centers, brokers
38. Underwriters and investor associations.
Accompanied by the abridged prospectus
open for min of 3 days and max of 21 days
After the issue is closed, the basis of allotment is
finalized
The LM ensures that the demat credit or dispatch of
share certificates and refund orders to the allottees is
completed within 2 working days after the basis of
allotment is finalized and the shares are listed within 7
days of the finalization of the basis of allotment.
39. Structure the issue
Submit the prospectus with the SEBI
Arrange underwriting
Finalize the prospectus
Coordinate the efforts of brokers, bankers,
advertising agencies, printers, and others
40. Develop the strategy for marketing the issue
Monitor the issue during the subscription period
Help in finalizing the basis of allotment
Assist in securing the stock exchange listing
41. Underwriting expenses
Brokerage
Fees to the managers to the issue
Fees for the registrars to the issue
Printing expenses
Postage expenses
Advertising and publicity expenses
Listing fees
Stamp duty
42. Every company can freely price its shares
Disclose the basis for the issue price in terms of
following
Adjusted EPS (for past 3 years)
P/E ratio in relation to issue price
Return on net worth
Minimum return on total net worth after the issue needed
to maintain EPS Net asset value
43. Winner’s Curse
Bait for Future Offerings
Informational Asymmetry
Regulatory Constraints
Political Goals
44. Secondary public offer Similar procedure to that of
an IPO
Subject to fewer regulations than an IPO
45. Aggregate size of the issue does not exceed 5 times
the pre-issue net worth
Promoters’ contribution
To the extent of 20% of the proposed issue
OR
At least 20% holding in the post-issue equity
capital
46. Excess contribution subject to preferential allotment
guidelines – locked in for 1 year period
Non-applicability of promoters’ contribution and
lock-in of excess contribution – if listed for
minimum of 3 years
47. No distinction between an IPO and secondary public
offers
Mechanics for secondary offer are much the same
as an IPO
Some differences
Retail route vs. book building
Security
Credit rating
Debenture redemption reserve Debenture trustees
Stable cash flows vs. growth prospects
48. Issue of a capital to the existing shareholders
Pro rata basis, This is required under Section 81 of
the Companies Act 1956.
The shareholders however, may by special
resolution forfeit this right, partially or fully, to
enable a company to issue additional capital to the
public
49. No. of rights shares to be issued
The rights entitlement
Subscription price
Rights are negotiable, holders can sell them
Can be exercised only during a fixed period
usually 30-60 days
50. Letter of Offer + composite application form
Form A ,Form B, Form C ,Form D
The composite application form must be mailed to
the company within a stipulated period, which is
usually about 30 days.
51. Exercise rights in full – can apply for additional
shares
Renounce rights, wholly or partially – can’t apply
for additional
Shares available due to non-exercise of rights –
allotted to shareholders who have applied for
additional shares
Balance shares left after meeting requests of
additional shares – disposed of at the ruling market
price or the issue price, whichever is higher
52. Market value per share
Value of a right
Earnings per share
Wealth of shareholders : -
( Right offering provided to the share holders are free to
exercise their right or sell )
53. Value of a share
NP 0 + S
N + 1
Value of a Right
N(P 0 – S)
N + 1
Where ,
N - no. of existing
shares required for a
rights share,
P 0 - cum-rights
market price per
share,
S - subscription price
54. Theoretically subscription price is irrelevant
practically
If S > P 0
Market value after issue < S
Existing shareholders – do not like the idea Non-
shareholders – no interest , suffer a loss
If S = P 0
Existing shareholders – not appealing Non-
shareholders – no opportunity of gain
Therefore S has to be set lower than P 0
55. Probability of the success of the offering
No. of rights shares to be issued to raise a given
amount of additional capital
Expectations of investors
The fluctuation of the share
The size of the rights issue Pattern of share holding
57. Private placement
Sale securities to a sophisticated investors.
Securities sale to only few institutions like mutual
funds, venture capital
Private placement of Equity
Unlisted company get funds from sophisticated
investors.
Free to choose qty. & price.
Private placement to Debt
Listing was not compulsory
Credit rating was not mandatory
58. In a private placement, funds are raised in the
primary market by issuing securities privately
To some investors without resorting to underwriting
(insurance against risk by a guarantor).
The investors in this case may by financial
institutions, commercial banks, other companies,
shareholders of promoting companies, and friends
and associates of the promoters.
59. PRIVATE PLACEMENT OF EQUITY PRIVATE PLACEMENT TO DEBT
Unlisted company get
funds from sophisticated
investors.
Free to choose qty. &
price.
Listing was not
compulsory
Credit rating was not
mandatory
60. Regulations
special resolution
pricing
open offer
Lock-in period
The discloser required for the private
placed debenture similar to public
offered debentures
Debt securities shall be compulsorily
listed
Debt securities shall be issued &
traded in Demat form
Preferential allotment is made to
promoters, venture capitalist,
suppliers.
Preferential allotment is not related to
a public issue
61. 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
63. Dilution is an option we can think it in terms of
proportionate ownership or market value or book
value or earning per share.
Dilution on proportionate ownership.
Dilution of value : book value v/s market value
64. Term loan procedure
Submission of Loan Application
Initial Processing of Application
Appraisal of the proposed project
Issue of the letter of sanction
Acceptance of term and conditions by the
borrowing unit
Execution of Loan agreement
Disbursement of loan
Creation of security
Monitoring
