1. Venture capital isatype of private equitycapital typicallyprovidedforearly-stage,high-potential,and
growthcompaniesinthe interestof generatingareturnthroughan eventual realizationeventsuchas
an IPOor trade sale of the company.Venture capital typicallycomesfrominstitutional investorsand
highnetworth individualsandispooledtogetherbydedicatedinvestmentfirms.
There are several typesof venture capital thatare extremelycrucial inthe contextof the modernday
businessworld. The typesof venturecapital are classifiedasperthe purpose andtime of their
application.
The 3 principal typesof venture capital are earlystage financing,expansionfinancingand
acquisition/buyoutfinancing.
Typesof Venture Capital:
There are several differenttypesof venturecapital.
These distinctionsrefertothe timingof the investmentoritsspecificpurposewithinthe lifeof the
target company,butthe needfora highreturn inexchange forthe riskremainsconstant.There are
three majortypesof venture capital - earlystage financing,expansionfinancingandacquisitionor
buyoutfinancing.The varioustypesof venture capitalare classifiedaspertheirapplicationsatvarious
stagesof a business.
Early Stage Financing:
Early stage financinghasthree subdivisions � seedfinancing,startupfinancingandfirststage
financing.Seedfinancingisbasicallyasmall amountthatan entrepreneurreceivesforthe purpose of
beingeligibleforastart up loan.
Start up financingisgiventocompaniesforthe purpose of finishingthe developmentof productsand
services.However,thistype of venture capital mayalsobe usedforinitial marketingaswell.Companies
that have spentall theirstartingcapital andneedfinance forbeginningbusinessactivitiesatthe full-
scale are the majorbeneficiariesof the FirstStage Financing.
ExpansionFinancing:
Expansionfinancingmaybe categorizedintosecond-stage financing,bridgefinancingandthirdstage
financingormezzanine financing.Second-stage financingisprovidedtocompaniesforthe purpose of
beginningtheirexpansion.
2. Second-stage financingisalsoknownasmezzaninefinancing.Itisprovidedbasicallyforthe purpose of
assistingaparticularcompany to expandina majorway. Bridge financingisuseful inmanyways.Itmay
be providedasa short terminterestonlyfinance optionaswell asa formof monetaryassistance to
companiesthatemploythe Initial PublicOffersasamajor businessstrategy.
AcquisitionorBuyoutFinancing:
Acquisitionorbuyoutfinancingiscategorizedintoacquisitionfinance andmanagementorleveraged
buyoutfinancing.Acquisitionfinancingassistsacompanyto acquire certainpartsor an entire company.
Managementor leveragedbuyoutfinancinghelpsaparticularmanagementgrouptoobtaina particular
productof anothercompany
Featuresof Venture Capital:
Venture capital hasthe followingfeatures:
1. Venture capital investmentsare made ininnovativeprojects.
2. Benefitsfromsuchinvestmentsmaybe realizedinthe longrun.
3. Suppliersof venture capital investmoneyinthe formof equitycapital.
4. As investmentismade throughequitycapital,the suppliersof venture capital participate inthe
managementof the company.
Advantagesof Venture Capital:
The advantagesof venture capital are as follows:
3. i.Newinnovative projectsare financedthroughventure capital whichgenerallyoffershighprofit-ability
inlongrun.
ii.Inadditiontocapital,venture capital providesvaluable information,resources,technical assistance,
etc.,to make a businesssuccessful.
Disadvantagesof Venture Capital:
The disadvantagesof venture capital are:
i.It is an uncertainformof financing.
ii.Benefitfromsuchfinancing canbe realizedinlongrunonly.
Corporate Restructuring, Mergers&Acquisitions Introduction Corporate Restructuringis
the processof redesigningone ormore aspectsof a company.The processof reorganizingacompany
may be implementeddue toa numberof differentfactors,suchas positioningthe companytobe more
competitive,survivingacurrentlyadverse economicclimate,oractingonthe self-confidence of the
corporationto move inan entirelynew direction.
In otherwords,restructuringcould be consideredasmakingalterationstosome extenttothe existing
structure.Corporate Restructuringmayhave a single objectiveormultipleobjectives;amongstthem,
there mustbe a dominantobjective inadditiontootherimportantobjectivesfora successful corporate
restructuring.
Hence,Corporate Restructuringisacomprehensive processbywhichacompanycan consolidate its
businessoperationsandstrengthenitspositionforachievingitsshort-termandlong-termcorporate
objectives.Corporate Restructuringisvital forthe survival of acompanyina competitiveenvironment.
. ObjectivesofCorporate Restructuring:
• Growth• Technology• Governmentpolicy•To reduce dependencyonothers•Economicstability
NeedsofCorporate Restructuring: 1) To expandthe businessoroperationsof the company.
2) To carry on the businessof the companymore economicallyormore efficiently
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3) To focus onits core strength
4) CostReduction,byderivingthe benefitsof economiesof scale.
4. 5) To obtaintax advantagesbymergingaloss-makingcompanywithaprofit-makingcompany.
6) To have accessto bettertechnology.
7) To improve the debt-equityratio.
8) To have a bettermarketshare.
9) To overcome significantproblemsinacompany.
10) To become globallycompetitive.
11) To eliminatecompetitionbetweenthe companies.
5. Corporate Restructuring Tools: There are many toolsandstrategiesbywhichor throughwhich
Corporate Restructuring canbe processedsuchas amalgamations,mergers,demergers,reverse
mergers,takeovers,acquisitions,jointventures,disinvestments,buybackof sharesetc.
6. • By Amalgamation:
It isthe processof combiningorunitingmultiple entitiesintoone form.The termamalgamationisnot
definedunderthe Companies’Act,1956. Generallyspeaking,amalgamationisalegal processbywhich
twoor more companiesare joinedtogethertoforma new entityorone or more companiesare tobe
absorbedor blendedwithanother.Asaconsequence,the amalgamatingcompanylosesitsexistence
and itsshareholderbecome the shareholderof the new oramalgamatedcompany
• By Reverse Merger:
It iswhen a private companypurchasescontrol of a publiccompanyandthencarries outa mergerwith
a private company.Witha reverse merger,the private companyshareholdersreceive mostof the shares
of the publiccompanyandcontrol of the Board.A reverse mergerisa quickwayof goingpublicwiththe
time-tablebeingonlyacouple of weeks.The reasonareverse mergerissoquickisthat the public
companyhas alreadycompletedall the necessarypaper-workandreviewsinordertobecome public.
• By Normal merger:
Merger isan arrangementwherebythe assetsof twoormore companiesbecome vestedinorunderthe
control of one company,whichmayor may not be one of the original twocompanies,whichhasasits
shareholders,all orsubstantiallyall,the shareholdersof the twocompanies.
• By Demerger:
The act of splittingoff apart of an existingcompanytobecome anew company,whichoperates
completelyseparatelyfromthe original company.Shareholdersof the original companyare usually
givenanequivalentstake of ownershipinthe new company.A demergerisoftendone tohelpeachof
the segmentsoperate more smoothly,astheycannow focuson a more specifictask.
• By Take-over:
It isthe purchase of one companyby another.The termrefersto the acquisitionof apubliccompany
whose sharesare listedonthe StockExchange,incontrast to the acquisitionof aprivate company.
• By JointVenture:
Two parties,(individualsorcompanies),incorporate acompanyinIndia.The businessof one partyis
transferredtothe companyand, as a considerationforsucha transfer;sharesare issuedbythe
companyand subscribedbythatparty.The otherparty subscribestothe sharesincash. The parties
subscribe tothe sharesof the joint-venture companyinagreedproportion,incash,andstarta new
business.
• By Disinvestment:
It meansto sell off certainassets,suchasa manufacturingplant,adivisionorsubsidiary,orproductline.
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7. • By Buyback:
The repurchase of outstandingsharesbya company,inorderto reduce the numberof shareson the
market.Companieswill buybackshareseithertoincrease the value of sharesstill available orto
eliminateanythreatsbyshareholderswhomaybe lookingforcontrollingpowers.Inotherwords,
Buybackis the reverse of issue of sharesbya companywhere itofferstotake back its sharesownedby
the investorsata specifiedprice;thisoffercanbe bindingoroptional tothe investors. Reductionof
entities• By strikingoff of the name fromthe Registerof Companies.•By dissolutionwithoutwinding
up.• By mergersor absorptions. Conclusion: The restructuringusuallytakesplace whenabusinessis
strugglingandlosingmoney.A thirdpartywill be broughtintoassessthe way that the businessisbeing
run, andthenmake recommendationsbasedonwhattheyfoundthatwill helpmake the businessrun
more efficiently.A strongcorporate restructuringfirmwill have expertsinawide varietyof areasthat
can examine all aspectsof abusinesstohelpfindsolutions.A goodcorporate restructuringfirmwill not
justidentifyproblemsof wheremoneyisbeinglost,butalsooffersolutions thatacompanycan
implementinordertosolve those problems.Theywillalsohelpacompanythroughthe processof
restructuringbydevelopingforecastsof whattoexpectandmakingsure the company isable to secure
the capital available tomake those changes.Corporate restructuringcanhelprestore,preserve and
enhance the value of anorganisation.
Underwriting
Underwritingisthe nature of an insurance againstthe adverse situationinthe timingof the publicissue.
It can be definedas“bearingthe riskof not beingable tosell asecurityat the establishedprice byvirtue
of purchasingthe securityforresale tothe public;alsoknownasfirmcommitmentunderwriting”.[2]
The personwhoassuresiscalledas “Underwriter”;andthe considerationforthe assurance isknownas
“UnderwritingCommission”.The Underwritersgive guaranteeforthe publicsubscriptionandinturn
theyreceive the commission.Inpublicissues,afterthe merchantbankers,the nextpositiongoestothe
Underwriters,where they playaverymajorrole.The SEBI has definedthe Underwritingas“an
agreementwithorwithoutconditionstotsubscribe tothe securitiesof abodycorporate where the
existingshareholdersof suchbodycorporate or the publicdonot subscribe tosecuritiesofferedto
them”.[3] The Underwriterhasbeendefinedas“apersonwhoengagesinthe businessof Underwriting
of an issue of securitiesof abodycorporate”.[4] The Underwritingismandatoryforthe publicissue.The
stock exchange regulationsclearly specifythatnostockbrokerisallowedtounderwrite more than5per
centof the publicissue andthe concernedstockexchange shouldapprovethe appointmentof broker
underwriters.Usuallythe bankerscanunderwriteupto10 percent of the publicissue. The Underwriting
Commissioncannotbe paidonthe amountscontributedbypromoters,directors,employeesand
8. businessassociates.Itisan importantelementof the primarymarket.Itisappointedbythe issuing
companyinconsultationwiththe merchantbankers.The name of the Underwriterandhisobligations
shouldbe disclosedinthe prospectus.There are anumberof financial institutions,commercialbanks,
insurance companiesaswell asanumberof private companieswhichprovideunderwriting.An
Underwriterissue isthe safe wayof marketingsecuritiesandthe investorsare influencedbythe
prestige of the underwriters.The issuingcompaniesmayappointone ormore of the followingparties:
(A) Financial Institutions,(B) Brokers,(C) Bankers,(D) InvestmentCompanies,and(E) Trusts.
ObjectivesOf The Underwriting
The objectivesof the Underwritingare presentedbelow:
·It guaranteesthe sale of securitiesata givenprice.
·It facilitatesthe provisionof moneyduringthe financial crisisof the company.
·The Underwriterhelpsthe newcompanyinitsreorganization.
The followingare the salientfeaturesof anunderwritingagreement:
·The Underwritermaynotbe able tosell the issuesinsome situations.The unsoldsecuritiesare
distributed amongthe underwritersinthe agreedproportion.
·The offeringprice mustbe maintainedforthe successful distributionof the securities.
·The companymakesa deliveryof the securitiestothe managerandreceivesthe paymentonthe
closingdate
·Atthe terminationof the underwriting,the managermustmake the final accountingforeach
underwriter.He shouldalsoremitthe commissionsandaccountsforthe expenditureincurred.
9. Underwritingisinsurance forthe newsecuritiesof the public.Itisone of the methodsof marketing
securities.The othermethodsare:
·Prospectusmethod,where the capital israisedbythismethodisveryprevalentinIndia.The
distributionexpensesmaybe substantiallysaved.
·Offerforsale,where the salesare soldlargelytothe brokers/issuehouses.The issue house/brokers
againsell the sharesto the publicat a fixedprice.Thismethodsavesthe companythe costand the
trouble of sellingthe sharestothe public.Here aThirdparty takesoverthe responsibility.
·Private placement,wherethe fundsare raisedinthe primarymarketbysellingthe securityissue toone
investorora small groupof investorswithoutresortingtounderwriting.The costof the issue isminimal.
It isthe mosteffectivewayof procuringthe longtermfunds.There isnoneedto follow the statutory
formalities.The offerismade toselectagroup of knownpersons.
KindsOf Underwriting
The followingare the variouskindsof underwritingagreements:
·The Purchase Contract
·AgreementbetweenUnderwritersandRepresentatives
·The sellingagreement
The Purchase Contract: Here the sale of sharesismade to the underwritersatanacceptedlevel of
proportion.There will be anagreementamongseveral underwriterstopurchase the securitiesfromthe
company.
10. AgreementbetweenUnderwritersandRepresentatives:Thisisanagreementbetweenthe Underwriters
and the RepresentativesorManagers.The agreementincludesall the aspectsof the issue of securities:
§ To fix the time of offering;
§ To reserve aproportionof securitiesforthe selecteddealersandinstitutions;
§ Place,date anddeliveryof securities;
§ Provisionsregardingthe terminationandsettlementof the underwriters’account;
§ Underwriters’responsibility.
The sellingagreement:Inthismethod,the issuercompanywillmake anagreementwiththe dealersto
subscribe the newsecurities.The agreementincludesthe offeringprice,sellingconcessionand
provisionsfordeliveryandpayment.
Underwriters
An Underwriterisafinancial intermediaryinthe primarymarket.The Underwriterhasbeendefinedas
“a personwhoengagesinthe businessof Underwritingof anissue of securitiesof abodycorporate”[5].
The Underwritersgive guarantee forthe publicsubscriptionandinturntheyreceive the commission.
ClassificationOf Underwriters
UnderwritersinIndiamaybe classifiedinto:
·Institutional Underwriters
·Non-Institutional Underwriters
11. InstitutionalUnderwriters:
The followingare the InstitutionalUnderwriters:
§ DevelopmentBanks
§ Commercial Banks
§ Insurance Companies
§ State Finance Corporations
§ UnitTrust of India
The DevelopmentBanksare alsoknownas Industrial Banks.Theyhave gotlongtermdepositsandare in
a positiontoenterintolongterminvestments. The Industrialbankshelpthe industriesbyunderwriting
theirsharesanddebentures.WhenanIndustrial Unitapproachesforunderwritingthe sharesandfor
directfinancial aid,the industrial banksinvestigate the prospectsof the industry,the soundness of the
financial requirements,the feasibilitiesandthe utilitiesof the schemes.If the sharesanddebenturesare
not fullysubscribedorthe minimumsubscriptionisnottakenupbythe publicwithinaspecifiedperiod,
the DevelopmentBankscome tothe rescue and take up the residual amountof sharesanddebentures.
The Underwritingfacilitatesthe directfinancial aidstothe new industrialsetup.Some of the
Developmentbanksare Industrial Finance Corporationof India(IFCI),IndustrialDevelopment Bankof
India(IDBI),Industrial CreditandInvestmentCorporationof India(ICICI) amongothers.
The Commercial Banks,alsoknownasPublicbanks,performthe routine banking.Lendingand
underwritingare theirmainobjectives.A few of themhave beenrenderingservicesassyndicatorsof
loansand managersto the issue.The Commercial Banksnormallyactas passive agentsbysupplyingthe
formsonlyon requestratherthanon theirowninitiative andearnbrokerage.
The Insurance Companiesare basicallyinvestmentinstitutionandnotdevelopmentinstitutions.Life
Insurance Corporation(LIC) andGeneral Insurance Corporation(GIC) are the premierinstitutionsinthe
countrywhichare involvedinthe insurance sector.These twoconventionalinvestmentinstitutions
supplyfundsmainlytoprovide the liquiditytothe investmentsfordevelopingthe corporate sector.The
objectivesof these corporationsare directlendingtoindustry,subscriptiontosharesandbondsto
special industrialfinancial institution,andpurchase of securitiesof the Jointstockcompaniesfromthe
capital market.The Governmentcorporationsalsoare involvedinunderwritingbusiness.
12. The State Financial Corporationsare alsoinvolvedinunderwritingbusinessforstimulatingthe capital
market.
The Unit Trust of Indiaisthe otherconventional investmentinstitutionwhichenjoyssuperiorityasan
organizational device becauseof some activities.Itisinvolvedincontinuoussale of units,redemptionof
unitsat NetAssetValue (NAV),convenience tothe small investorsof small amount.
Non-Institutional Underwriters
There are twotypesof non-institutional underwritersinIndia:
§ Stockbrokers
§ Individuals
The Stock brokersact as intermediariesinthe purchase andsale of securitiesinthe primaryand
secondarymarkets.These personshave anetworkof brokers,workingunderthem, whospread
throughoutthe lengthandbreadthof the country.Theyare knownas sub-brokers.These people spread
message andgive publicityaboutvariousissuesinthe offering.Theyrapidlysupplyapplicationformsor
evengoto the extentof collectingmoneyfromthe investors.Theyplayaverycrucial role in the area of
underwriting.The brokerscaninfluencetheirclientsbypersuasion.
The Individuals/InvestmentCompaniesobtainfundsfromalarge numberof investorsbysellingthe
shares.The pooledfundsare placedbefore the expertstodeploythe purchase of financial assets.The
benefitsderivedfromthe capital marketwill surpassthatof the shareholders.There are twotypesof
investmentcompaniesnamely:(a) FixedInvestmentTrusts,and(b) ManagementInvestmentTrusts.
Registration
Underwritersare appointedbythe issuingcompaniesafterconsultingthe merchantbankers.Toact as
an Underwriter,acertificate of registrationmustbe obtainedfromthe SEBI.The SEBI hasthe full
authoritytogrant the certificate of registration.Nopersonshouldactas an underwriterunlesshe holds
13. a certificate grantedbythe SEBI.The stockbrokeror the merchantbankershouldholdavalidcertificate
or registrationu/s12 of the Act.
Accordingto SEBI (UNDERWRITERS) RULES AND REGULATIONS,1993, section30, the prospectingperson
shouldapplyforthe grant of the certificate inaparticularformat(FORMA as perregulation).The board
takesintoaccount all the mattersthat are relevanttounderwritingandparticularlyregardingthe below
facilitiesbeforegrantingthe certificate:
·The applicanthasthe necessaryinfrastructure.
·The applicantshouldhave the experience otherwise he shouldappointtwoexperiencedmembers.
·The underwritershouldsatisfythe capital adequacyrequirementof networthof Rs 20.00 Lakhs
·The purpose of networth means,the applicantmightbe aproprietaryconcernor a firm or an
associationof personsorany bodyof individuals,the value of capital plusfreereservesof business.
·Inthe case of a bodycorporate,the value of the paid upcapital plusfree reservesshouldbe disclosedin
the looksof account of the applicant.
If the SEBI believesthatthe applicantiseligible,thenitsendsintimationtothe applicantthathe/she is
eligible forthe grantof certificate;andthusit grantsthe certificate inFORMB afterthe paymentof the
prescribedfee.
Fee
Underwritershadtopay Rs. 5 lakhsasregistrationfee andRs.2 lakhsas renewal fee everythree years
fromthe fourthyearfromthe date of initial registration.Failure topayrenewal fee leadstocancellation
of certificate of registration.
14. General Obligations AndResponsibilities
Code of Conduct:
Everyunderwriterhasatall timesto abide bythe code of conduct;he has tomaintaina highstandardof
integrity,dignityandfairnessinall hisdealings.He mustnotmake any writtenororal statementto
misrepresent(a) the servicesthathe iscapable of performingforthe issuerorhas renderedtoother
issuesor(b) hisunderwritingcommitment.
Agreementswithclients:
Everyunderwriterhastoenterintoan agreementwiththe issuingcompany.The agreement,among
others,providesforthe periodduringwhichthe agreementisinforce,the amountof underwriting
obligations,the periodwithinwhichthe underwriterhastosubscribe tothe issue afterbeingintimated
by/onbehalf of the issuer,the amountof commission/brokerage,anddetailsof arrangements,if any,
made by the underwriterforfulfillingthe underwritingobligations.
General responsibilities:
An underwritercannotderive anydirectorindirectbenefitfromunderwritingthe issueotherthanby
the underwritingcommission.The maximumobligationunderall underwritingagreementsof an
underwritercannotexceedtwentytimeshisnetworth.Underwritershave tosubscribe forsecurities
underthe agreementwithin45daysof the receiptof intimationfrom the issuers.
EveryUnderwritershouldmaintainthe followingaccounts,namely:
·If the Underwriterbelongstoabody corporate-
§ A copy of the balance sheet,profitandlossaccountas specifiedinthe Sections211and 212 of the
CompaniesAct,1956;
§ A copy of the auditor’sreportreferredinSection227of the CompaniesAct,1956.
·If the Underwriterbelongstoabody corporate-
15. § The recordsin respectof all the sumsof moneyreceivedandexpendedbythem;andthe mattersin
respectof the receiptandexpenditure
§ Theirassetsandliabilities
CommissionOf Underwriters
The underwritingcommissionispaidonlyinaccordance withthe Section76of the CompaniesAct,1956.
The statutory regulationsandotherobligationsregardingthe commissionare:
·The underwritingcommissionshouldbe paidonlywiththe acceptance of the article of associationof
the company
·The underwritingcommissionshouldbe paidinaccordance withthe rulesandregulationsasprescribed
by the Government.
·Incase of shares,the amountor rate of commissionwhichisnotofferedtothe publicshouldbe
disclosedinthe statementinlieuof prospectus.
·The numberof underwritersandtheirpropositionshouldbe indicatedinthe statement.
·Anunderwritingagreement copyshouldbe submittedtothe Registrarof Companiesatthe time of
deliveryof the prospectus.
