Shares
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.
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 .
Features of Preference Share
 Claims on income and assets
 Fixed Dividend
 Cumulative dividend
 Redemption
 Sinking fund
 Call feature
 Participation feature
Hybrid Security
Ordinary share
Debenture
•
•Dividend rate is fixed
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.
•Pref shareholders do not share in
the residual earnings
•They have claim on income and
assets prior to ordinary
shareholders
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.
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.
Pros
•Risk less leverage advantage
•Dividend postpondability
•Fixed dividend
•Limited voting right
Cons
•Non tax deductibility of dividend
•Commitment to pay dividend
Equity shares
Types of Equity Shares
 Authorized share capital
 Issued share capital
 Subscribed share capital
 Paid up share capital
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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.
Features of Equity Shares
 Residual claim to income
 Residual claim on assets
 Right to control
 Voting system
 Pre-emptive right
 Limited liability
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
Method of Raising Capital
 By issue of prospectus
 Rights issue of equity shares.
 Private placement of shares
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.
 Issue of share at a discount
 Issue of share at a premium
 Call on shares: application, allotment and other
calls
 Forfeiture of shares
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
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.
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
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
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.
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 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.
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
Total no.
applica of shares
nts
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
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
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.
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
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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.
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.
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
Internal Accruals
 Depreciation Charges
 Retained earnings
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
Term Loan
Term Loan
Term loan is a loan made by bank/financial
institution to a business having an initial
maturity of more than one year.
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.
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
Repayment schedule/Loan
Amortization
Year
Beginnin
g loan
Payment Interest
installme (0.14)
nt
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
Obtaining a term loan
 An application form containing comprehensive information about the
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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.
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.
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
 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
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
 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
 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
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
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."
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