Raising Long-Term Finance

(Equity) Ordinary Shares–Features

• Claim on Income • Claim on Assets• Right to Control• Voting Rights• Pre-Emptive Rights• Limited Liability

Reporting of Ordinary SharesLiabilities  

Tata Steel Ltd. Mar 2007

Mar 2008

Mar 2009

Mar 2010

Rs. Crore (Non-Annualised) 12 mths 12 mths 12 mths 12 mths-        

Net worth 13949.09 27300.73 30176.26 37168.75 Authorised capital 1750 1750 1750 1750 Issued equity capital 581.07 731.37 731.37 888.13 Paid up equity capital 580.47 730.58 730.59 887.21 Forfeited equity capital 0.2 0.2 0.2 0.2 Paid up preference capital 0 5472.52 5472.66 0

          Reserves & surplus 13368.42 21097.43 23972.81 36281.34 Free Reserves 12580.26 20264.34 23165.43 34865.94 Security premium reserves 2201.46 6391.92 6112.92 14032.8 Other free reserves 10378.8 13872.42 17052.51 20833.14 Specific Reserves 788.16 833.09 807.38 1415.4

Equity Shares–Pros and Cons

• Advantages– Permanent Capital– Borrowing Base– Dividend Payment Discretion

• Disadvantages– Cost– Risk– Earnings Dilution– Ownership Dilution

Public Issue of Equity

• Public issue of equity means raising of share capital directly from the public.

• As per the existing norms, a company with a track record is free to determine the issue price for its shares.

Underwriting of Issues

• It is legally obligatory to underwrite a public and a rights issue.

• In an underwriting, the underwriters—generally banks, financial institution, brokers, etc.—guarantee to buy the shares if the issue is not fully subscribed by the public.

• The agreement may provide for a firm buying by the underwriters.

• The company has to pay an underwriting commission to the underwriter for their services.

Private Placement

• Private placement involves sale of shares(or other securities) by the company to few selected investors, particularly the institutional investors.

• Private placement has the following advantages:

• Size• Cost• Speed

Preference Shares

• Similarity to Ordinary Shares:– Non payment of dividends does not force company to

insolvency.– Dividends are not deductible for tax purposes.– In some cases, it has no fixed maturity dates.

• Similarity to Debentures:– Dividend rate is fixed.– Do not share in residual earnings.– Preference shareholders have claims on income and assets

prior to ordinary shareholders.– Usually do not have voting rights.

Preference Shares–Features

• Claims on Income and Assets• Fixed Dividend• Cumulative Dividend• Redemption• Sinking Fund• Call Feature• Participation Feature• Voting Rights• Convertibility

Preference Shares–Pros and Cons

• Advantages:– Risk less leverage advantage– Dividend postponability– Fixed dividend– Limited Voting Rights

• Disadvantages:– Commitment to pay dividends

DEBENTURES

• A debenture is a long-term promissory note for raising loan capital.

• The firm promises to pay interest and principal as stipulated.

• The purchasers of debentures are called debenture holders.

• An alternative form of debenture in India is a bond.• Mostly public sector companies in India issue

bonds.

Debentures–Features

• Interest Rate• Maturity• Redemption• Sinking Fund• Buy-back (call) provisions• Indenture• Security• Yield• Claims on Assets and Income

Types of Debentures

• Non –Convertible Debentures• Fully –Convertible Debentures• Partly –Convertible Debentures

Debentures–Pros and Cons

• Advantages:– Less Costly– No ownership Dilution– Fixed payment of interest– Reduced real obligation

• Disadvantages:– Obligatory Payment – Financial Risk– Cash outflows– Restricted Covenants

Term Loans–Features

• Maturity• Direct Negotiations• Security• Restrictive Covenants

– Asset related covenants– Liability related covenants– Cash flow related covenants– Control related covenants

• Convertibility• Repayment Schedule

VENTURE CAPITAL

• Venture capital(VC) is a significant financial innovation of the twentieth century.

• Venture capital is the investment of long-term equity finance where the venture capitalist earns his return primarily in the form of capital gains.

• The underlying assumption is that the entrepreneur and the venture capitalist would act together in the interest of the enterprise as ‘partners’.

Features of Venture Capital

• Equity Participation• Long-term Investments• Participation in Management

Stages in Venture Financing

THE BUSINESS PLAN• The first step for a company (or an entrepreneur) proposing a new

venture in obtaining venture capital is to prepare a business plan for the consideration of a venture capitalist.

• Essential Elements of a Business plan– Executive summary– Background on the venture– The product or service– Market analysis– Marketing– Business operations– The management team– Financial projections– Amount and use of finance required and exit opportunities

Methods of Venture Financing

• Equity• Conditional Loan• Income Note• Other Financing Methods

– Participating Debentures– Partially Convertible Debentures– Cumulative Convertible Preference Shares– Deferred Shares– Convertible Loan Stock– Special Ordinary Shares– Preferred Ordinary Shares

Disinvestment Mechanisms

• Buyback by Promoters• Initial Public Offerings• Secondary Stock Market• Management Buyouts