Documenti di Didattica
Documenti di Professioni
Documenti di Cultura
Equity capital is also a ownership capital. Equity shareholders enjoys the profit of
the firm on one hand and bears the risk on the other hand.
i) Authorized capital: It is the maximum capital which an organization can issue.
ii) Issued capital: It is that part of authorized capital which is actually issued by the
company.
iii) Subscribed capital: It is that capital which is subscribed by the public when it
was issued.
iv) Called up and paid up capital: It is the equity capital which is actually paid by
the investor.
Book value: It is the value of the equity shares, as shown in the balance sheet.
= Paid up equity capital + reserves and surplus / No. of equity shares.
Face value: It is the normal price of the shares to be issued by the company.
Issue price: It is the price at which the company issues the shares, usually its more than
face value.
Market price: When shares are traded in secondary market the prevailing price is a
market price.
Features of equity shares:
i) Residual claim on income:- After paying interest, tax, preference dividend, the
remaining profit can be distributed to equity share holder.
ii) Residual claim on asset: While repaying capital also equity shareholders stands
last.
iii) Right to control : the firm
iv) Voting rights are available to equity share holders
v) Pre-emptive rights: This rights of equity shareholders makes the company to
offer additional equity shares to existing equity holders before it is offered to
general public.
vi) Limit liability arises in case of equity capital.
Merits:
a) It is a permanent source – no maturity period
b) No compulsion to pay dividend
c) It provides cushion to lenders
d) Dividend on equity capital is tax exempted in the hands of investors.
Limitations:
i) Dilutes the control
ii) Floatation (issue cost) cost is very high
iii) Dividend on equity is not allowed as deduction for tax purpose, more over there
will be a additional tax on dividend declared.
Issue of equity shares:
Firm can raise finance by issuing equity shares in different forms like:
a) By going for IPO
b) By going for subsequent issue
c) By right issue
d) By private placement
e) By preferential allotment
A) Initial public offer of equity shares (IPO):-
If the firm is issuing the shares for the first time, it is referred to as initial public
offer. Initial public offer will be followed by listing of the equity shares in the stock
exchange.
Benefits of going public:
Access to capital
Respectability
Investors recognition
Liquidity to promoters
Signals from markets
Cost of going public (limitations):-
Dilution of control
Loss of flexibility
Disclosure
Accountability
Public pressure
Costs associated with issue
Steps involved in IPO
Approval of board of directors
Appointment of lead managers (merchant banker)
Appointment of other intermediaries like co-managers, underwriters,
registrar, bankers, brokers etc.
Filing of prospectus with SEBI
Filing of prospectus with Registrar of companies.
Printing and dispatch of prospectus
Statutory announcement of the issue
Promotion of the issue
Collection of application by lead manager
Processing of application by lead manager
Allotment of shares
Listing of the shares in stock exchange.
B) Subsequent issue/ public issue by listed companies:
A company whose shares are already listed in stock exchanges may think of
generating some more finance by issuing equity shares. this is referred to as subsequent
issue.
The company need to fulfill certain conditions before going for subsequent issue of
equity shares like:
a) Company should be listed in stock exchange for atleast 3 years.
b) Company need to have a track record of payment of dividend for atleast 3
years immediately proceeding the year of issue.
Procedure for issue of equity shares of a limited company is similar to that of an
IPO. The company is having a freehand in fixing the prices of subsequent issue. The
general practice in India is that 6 months average closing price is taken as issue price.
C) Right issue:
Right issue involves selling equity/securities in the primary market to existing
shareholders. This can be done after meeting some requirements specified by SEBI.
When company issues additional capital, it has to be first offered to existing
shareholders. The shareholders however may forfeit this right partially or fully to enable
the company to issue additional capital to public.
Characteristics of right issue:-
1) Number of rights that a shareholders gets is equal to the number of shares held by
him.
2) The number of rights required to subscribe an additional shares is determined by
issued company.
3) Price per share is determined by the company.
4) Existing shareholders can exercise right and can apply for the share.
5) Shareholders who renounce their rights are not entitled for additional shares.
6) Rights can be sold
7) Rights can be exercised only during a fixed period (usually 1 month)
Desired funds
Number of new shares = ---------------------------------
Subscription / offer price
Existing shares
Number of rights required to get an additional shares = ----------------------
New shares
Price of the share after right issue =
Existing shares x current M.P. + new shares x subscription price
= --------------------------------------------------------------------------------------
Total shares (existing + new shares)
Merits of right issue:
1) Less expensive as compared to direct public issue
2) Management of applications and allotment is less cumbersome.
Limitations:
i) Can be used by only existing company
ii) Cannot be used for large issues
iii) Wider ownership bare cannot be achieved.
D) Private placements
It involves allotment of shares (or other securities) by a company to few selected
sophisticated investors like mutual funds, insurance companies, banks etc.
Private placement of equity:- Usually unlisted companies who are not ready for IPOs
can go for this. Price can be freely determined by company as it is not regulated by SEBI.
Private placement of debt:- Companies can directly place their debentures, bonds etc.
In Indian context private placement of debt of listed companies and equity of
unlisted companies are popular.
Advantages of private performance:
1) Helpful in rising small size of funds
2) Less expensive as compared to other methods
3) Takes less time as compared to other type of issues.
E) Preferential allotment:
It is an issue of equity by a listed company to selected investors at a price which
may or may not be related to prevailing market price. It is not a public issue of shares.
This kind of preferential allotment is made mainly to promoter or their friends and
relative.
The company should pass special resolution to do preferential allotment. In case if
the government is having a state in the company., the central government permission is
necessary.
Pricing:- price of preferential allotment must not be lower than 6 months average closing
price.
Pricing regulations of preferential allotment to FII’s are more stringent.
Lock in period:- The shares allotted under preferential allotment process will attract a
lock in period. If it is allotted a promoter, the lock in period will be 3 years and to others,
it is 1 year.
Limitations of debentures:
i) Obligatory payment:- If the company fails to pay the interest on debentures the
investors can ask for the declaring company as bankrupt. Interest payment on
debenture is obligatory.
ii) Financial risk associated with debenture is higher than shares.
iii) Cash out flow on maturity is very high.
iv) The investors may put various restrictions/ covenants while investing in the
debentures.
COVENANTS:
There are different ways in which the equity holders can mismanage the funds belonging
to debenture holders. This leads to default risk to debentures. This possibility arises in the
following circumstances.
Excess dividend payment to equity shareholders.
By issuing more debentures diluting the claim.
Asset substitution where by funds may be used for higher risk projects.
Under investment of funds.
Therefore debt holders should try to protect their interest. Supplier of debt may
include several covenants (conditions) in the debt agreements to protect their interest.
Covenants are meant to protect the interest of debentures against dilution of
claim, asset depletion, asset substitution and under-investment.
Broad categories of covenants:
1) Positive covenants:
These covenants indicates what the firm should do in order to protect the interest
of the investors.
Example:
a) Submission of periodical returns
b) Maintaining minimum working capital
c) Maintaining sinking fund
d) Maintaining minimum networth etc.
2) Negative covenants:
There covenants restricts certain actions by borrowing firm without prior permission of
lender.
Not to issue additional debt and dilute the claim
Not to diversity the activity
Not to dispose or lease out the asset
Not to declare the dividend to shareholders beyond a given percentage.