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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.
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
Cumulative and non-cumulative shares Redeemable preference shares Fully or partly convertible preference shares.
Pros Risk less leverage advantage Dividend postpondability Fixed dividend Limited voting right
Equity shares
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 Par value 1. Share premium 2. 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.
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
OFFER PRICE Price at which the securities are offered and would be allotted is made known in advance to the investors
DEMAND Demand for the securities offered is known only after the closure of the issue
PAYMENT 100 % advance payment is required to be made by the investors at the time of application.
RESERVATIONS 50 % of the shares offered are reserved for applications below Rs. 1 lakh and the balance for higher amount applications. 50 % of shares offered are reserved for QIBS, 35 % for small investors and the balance for all other investors.
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.
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 2 3 4 5 6
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.
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
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.
security/secondary
security
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
1 1 2 3 4 5 6 7 8
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
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.
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
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
Interest is linked to some benchmark rate such as treasury bill, bank rate etc
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