Ordinary shares represent ownership in a company. Shareholders are the legal owners and have rights to profits, dividends, and assets. Preference shares have preferential rights over ordinary shares to dividends and assets. They have a fixed dividend rate and priority over ordinary shares in claims on income and assets. Types include participating, cumulative, redeemable, and convertible preference shares. Equity shares are the most common type and provide residual claims to income and assets as well as voting rights. Companies can raise capital through various methods including rights issues, private placements, and initial public offerings.

1. Shares

2. Definition
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.

3. 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
fixed rate
-On winding up or on repayment of capital a
preferential right to be repaid the amount .

4. Features of Preference Share
Claims on income and assets
Fixed Dividend
Cumulative dividend
Redemption
Sinking fund
Call feature
Participation feature

5. Hybrid Security
Ordinary share
• 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.
Debenture
•Dividend rate is fixed
•Pref shareholders do not share in
the residual earnings
•They have claim on income and
assets prior to ordinary
shareholders

6. Types of Preference
Shares
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.

7. Voting rights for preference
shareholders
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.

8. Pros
•Risk less leverage advantage
•Dividend postpondability
•Fixed dividend
•Limited voting right
Cons
•Non tax deductibility of dividend
•Commitment to pay dividend

9. Equity shares

10. Types of Equity Shares
Authorized share capital
Issued share capital
Subscribed share capital
Paid up share capital

11. Issue price of shares: the price at which share is issued in the
market.
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
particular.

12. Features of Equity Shares
Residual claim to income
Residual claim on assets
Right to control
Voting system
Pre-emptive right
Limited liability

13. Evaluation
Merits
-it is a permanent source of fund without any repayment
liability
-It does not involve any obligatory dividend payment
Demerits
-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

14. Method of Raising Capital
By issue of prospectus
Rights issue of equity shares.
Private placement of shares

15. 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
issued.

16. Issue of share at a discount
Issue of share at a premium
Call on shares: application, allotment and other
calls
Forfeiture of shares

17. Initial Public Offer
Benefits of going public
-Access to capital
-Respectability
-Investors recognition
-Liquidity
-Signals from the market
Costs of going public
-Adverse selection
-Dilution
-Disclosures
-Accountability
-Public pressure

19. ISSUE TYPE OFFER PRICE DEMAND PAYMENT RESERVATIONS
Fixed Price
Issues
Price at which the
securities are
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
issue
100 % advance
payment is required
to be made by the
investors at the
time of application.
50 % of the shares
offered are
reserved for
applications below
Rs. 1 lakh and the
balance for higher
amount
applications.
Book Building
Issues
A 20 % price band
is offered by the
issuer within which
investors are
allowed to bid and
the final price is
determined by the
issuer only after
closure of the
bidding.
Demand for the
securities offered ,
and at various
prices, is available
on a real time basis
on the BSE website
during the bidding
period..
10 % advance
payment is required
to be made by the
QIBs along with the
application, while
other categories of
investors have to
pay 100 % advance
along with the
application.
50 % of shares
offered are
reserved for QIBS,
35 % for small
investors and the
balance for all other
investors.

20. 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

21. Cost of Public Issue
Underwriting Expenses
Brokerage
Fees to the managers to the issue
Fees for registrars to the issue
Printing expenses
Postage expenses
Advertising and publicity expenses
Listing fees
Stamp duty

22. 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
over-allotment option.
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.

23. Allotment
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
S.N
o
No. of
shares
applied for
category
wise
No. of
applica
nts
Total no.
of shares
applied
Proporti
onate
allocatio
n
No. of
shares
allocate
d by
roundin
g
No of
successf
ul
applican
t
Total no
of
shares
allocate
d
1 100 1500 150000 50,000 100 500 50,000
+3300
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
6,00,000 2,00,00
0
2,00,00
0

24. Rights Issue of Equity Share
It involves selling of ordinary shares to the existing
shareholders.
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

25. 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.

26. Shareholder
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
company.
However, shareholder's rights to a company's assets are
subordinate to the rights of the company's creditors.

27. Preferential Allotment
, 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.

28. Regulations
Special resolution
- 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

29. Internal Accruals
Depreciation Charges
Retained earnings

30. Advantages & Disadvantages of Internal
Accruals
Advantages
Retained earnings are easily available internally.
It eliminates issue and transaction cost.
No dilution of control
Disadvantages
Amount that can be raised by way of retained
earning is limited.
Opportunity cost is quite high

31. Term Loan

32. Term Loan
Term loan is a loan made by
bank/financial institution to a
business having an initial maturity of
more than one year.

33. Features of a term loan
 Maturity
 Negotiated
 Security:
- primary security/secondary security
(collateral)
 Covenants
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
operation.

34. Covenants
 Asset-related covenants
-maintenance of working capital position in terms of
minimum current ratio
-ban on sale of fixed asset without the lenders
approval
 Liability related covenant
-restrain on incurrence of additional debt
-reduction in debt equity ratio by issue of additional
capital
 Cash flow related covenant
-limitation on dividend payment to a certain amount
or rate
-ceiling on managerial salary or perks
 Control related covenant
-appointment of nominee director to represent the
financial institution and safeguard their interest

35. Repayment schedule/Loan
Amortization
Year Beginnin
g loan
Payment
installme
nt
Interest
(0.14)
Principal
repayme
nt[3-4]
Ending
loan [2-5]
1 2 3 4 5 6
1 60,000 12,934 8,400 4,535 55,466
2 55,466 12,934 7,776 5,168 50,298
3 50,298 12,934 7,042 5,896 44,406
4 44,406 12,934 6,216 6,718 37,688
5 37,688 12,934 5,276 7,658 30,030
6 30,030 12,934 4,204 8,730 21,300
7 21,300 12,934 2,982 9,952 11,348
8 11,348 12,934 1,588 11,346 0

36. Obtaining a term loan
 An application form containing comprehensive
information about the project is submitted to the
financial institution
 It contains details like promoters background,
particulars of the industrial concern, particulars of the
industrial project, cost of the project, means of financing
etc.
 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
tested.
 If on appraisal is the project is found feasible then the
loan is sanctioned by the bank.

37. Debentures
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
terms.

38. Attributes
 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

39.  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.
 Security
 Convertibility
 Credit rating
 Claim on income and assets

40. 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

41.  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

42.  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
paid
- 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

43. 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
payments.
- 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

44. 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
mean:
"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
Authority (IRDA).
"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."

45. Factors affecting choice of financing
Sales stability
Asset structure
Profitability
Control
Taxes
Growth rate
Management attitude
Firm’s internal conditions
Financial flexibility
Market conditions
Prices