4. raising long-term finance

8/3/2019 4. Raising Long-Term Finance

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Financial Management I

4. Raising Long-Term Finance

Dr. Suresh

[email protected]

Phone: 40434399, 25783850


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Course Content - Syllabus

*Book reference

Sr Title ICMR Ch. PC Ch. IMP Ch.

1 Introduction to Financial Management 1* 1 1

2 Overview of Financial Markets 2* 2 -

3 Sources of Long-Term Finance 10* 17 20, 21

4 Raising Long-term Finance - 18* 20, 21, 23

5 Introduction to Risk and Return6 Time Value of Money

7 Valuation of Securities

8 Cost of Capital

9 Basics of Capital ExpenditureDecisions

10 Analysis of Project Cash Flows

11 Risk Analysis and Optimal Capital

Expenditure Decision2 / 22


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Raising Long-Term Finance

Reference Books

1. Financial Management, Prasanna Chandra, 7th Edition,

Chapter 18

2. Financial Management, I. M. Pandey, 9th Edition,

Chapter 20, 21, 23


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SyllabusRaising Long-Term Finance

1. Venture Capital

2. Initial Public Offering

3. Public Issue by Listed Companies

4. Rights Issue

5. Preferential Allotment

6. Private Placement

7. Term Loans


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Introduction

Typical Balance Sheet

Liabilities Assets

Share Capital 30 Fixed assets (net) 50Equity 25 Gross Block 80

Preference 5 Acc. depreciation 20

Reserves and Surplus 20 Investments 15

Secured Loans 25 Current assets, loans and advances 35

Term loans 15 Cash at hand 5Cash Credit 10 Debtors 12

Unsecured loans 10 Inventories 13

Bank Credit 4 Advances 3

Inter-corporate 5 Misc. exp. and losses 2

Deposits 1Current Liabilities and Provisions 15

Trade Credit 10

Advances 3

Provisions 2

Total Liabilities 100 Total Assets 100


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1. Venture Capital

Venture capital, as name suggests is for new ventures.

New company not yet ready to get bank loans or IPOs,

seek venture capital (VC). Such capital is provided by

venture capital funds, which are prepared to finance an

untried concept that appears to have promisingprospects.

VC funds support growing firms during their initial

stages, before they are ready to make IPO.

VC is provided mainly in the form of equity capital, to

share the risk and rewards.

VC represents financial investments in highly risky

venture made in the hope of high returns.


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1. Venture Capital

VC, in addition to providing funds, takes an active

interest in guiding the firm.

VC normally invest for 3 to 7 years in a firm. Generally

the promoter of the firm is given first option to acquire

the investments held by VC.

Indian VC Industry:

Indian VC industry is relatively recent origin. Since mid

1990s, with economic reforms in India, international VC

emerged as a significant player, in addition to domestic

VCs such as ICICI Bank VC, SIDBI VC etc.


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1. Venture Capital

Preparing Business Plan

If you are approaching a VC to finance your project, you

need to prepare your business plan. It should include

Executive Summary

Details about people (team), product, market andcompetition.

Financial projections for about two years with

emphasis on cash flows

Identify risks and strategy to cope with the same.

PE and VC

PE and VC have some common features. PE invest

mostly in later stage with substantial operating history.


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IPO is the first public offering of equity shares of a

company and shares are listed and traded on the stock

exchange.

Benefits of Going Public (IPO)

Access to Capital: to access large capital. Respectability: Exposure, growth potential, attract talent

Investor Recognition: more stock prices

Window of Opportunity: to tap capital when overpriced

Liquidity: due to more investors

Benefit of Diversification: for promoters and investors

Signals from the Market: stock prices represents

information.


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Costs of Going Public

Adverse selection: Investors know less w.r.t. issuers.

Investors need under pricing

Dilution

Loss of Flexibility: due to regulations

Disclosures

Accountability: to investors

Public Pressure: to do things, that it may not otherwise

do.

Costs: issuing IPO, reports, AGMs, communicating with

FIs and financial analysts and statutory obligations.


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Eligibility for an IPO Company has net tangible assets of at least Rs. 3 crores

in each of the preceding 3 years

It has track record of distributable profits for at least 3

out of the immediately proceeding 5 years

It has a new worth of at least Rs. 1 crore in each of thepreceding 3 financial years

The issue size does not exceed five times the pre-issue net

worth


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In case a company does not satisfy any of the above

conditions, it can make an IPO of equity or convertibles

only if it meets following two conditions

IPO is made through the book building process, with at

least 50% allotted to QIBs

Minimum post issue equity capital shall be 10 crores.


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Steps in IPO

Lead Manager of the Issue

Cost of Capital Issue

Issue Pricing

3 P bli I b Li d C i


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As companies grow, they need more finance and

approach capital market for equity and debt. These

issues may be right issues to the existing shareholders or

to the public investors at large. These issues are called

secondary public offer or follow on public offers (FPOs).

The procedure for secondary public offer is similar to

that of IPO. However these are subject to some

regulations as follows

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1. The aggregate size of the proposed issue and all

previous issues made in the same financial year doesnot exceed five times its pre-issue net worth.

2. Promoter shall participate 20 % of the issue or ensure

that their holding post-issue equity is at least 20%3. Promoters wish to subscribe beyond 20%, it shall be

subject to preferential allotment and shall be locked in

for one year.

4. Requirement of minimum promoters contribution andlock-in of excess contribution shall not be applicable if

the company is listed on stock exchange for minimum 3

years and dividend payments for preceding 3 years.

Public Offer of Debt

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4. Rights Issue

Rights issue is an issue of capital to the existing

shareholders of the company on a pro rata basis. This isrequired under section 81 of the Companies Act, 1956.

The company may issue additional capital to the public.

Characteristics of a Rights Issue

Issuing firm decides on the number of rights shares to be

issued.

Based on the number of rights shares issued, shares

entitlement of existing shareholders is determined. Price per share is left to the discretion of the company

Rights are negotiable. The holders of rights can sell them

Rights can be exercised only during fixed period, usually

30 to 60 da s.

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4. Rights Issue

Procedure for Rights Issue

Consequences of Rights Issue

Value of Shares and value of Rights

Wealth of Shareholders

Setting the Subscription Price

5 P f ti l All t t


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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

predetermined price is referred as a preferential

allotment. Generally preferential allotment is made to promoters,

strategic investors, VCs, FIs and suppliers.

Rationale for the preferential allotment is to secure the

equity participation of those the company considers

desirable.

5 P f ti l All t t


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Regulations

Special Resolution: Shareholders must pass a special

resolution for.

Pricing: guidelines

Open Offer: to existing shareholders id more than 15%

of equity

Lock-in Period: 1 year

6 P i t Pl t


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6. Private Placement

Private placement and preferential allotment involve sale

of securities to a limited number of important investors

such as FIs, mutual funds, VCs, banks and so on.

In a private placement, the identity of investors may not

be known when the offer document is prepared.

In India, private placement refers to sale of equity or

equity related instruments of an unlisted company or

sale of debentures. Private placement of Equity: Such issues are not

regulated by SEBI.

Private placement of debt: Regulated by SEBI and RBI.

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7. Term Loans

Term Loan is generally a long term source of finance

Term Loan Procedure

Submission of Loan Application

Initial Processing of Loan Application

Appraisal of the Proposed Project Issue of the Letter of Sanction

Acceptance of the Terms and Conditions by the

Borrowing Unit

Execution of Loan Agreement

Disbursement of Loans

Creation of Security

Monitoring

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7. Term Loans

Project Appraisal

Market Appraisal

Technical Appraisal

Financial Appraisal

Economic Appraisal

Managerial Appraisal

4. raising long-term finance

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