raising of equity from international markets (module 4 mine) (1)

7/29/2019 Raising of Equity From International Markets (Module 4 Mine) (1)

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Raising of Equity from

International Markets


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Loan Syndication

Syndicated lending is a form of lending in whicha group of lenders collectively extend a loan to asingle borrower. The group of lenders is called asyndicate and the loan is called a syndicated

loan. Syndicate members play different roles. Somejust lend money. Others also facilitate theprocess. It is common to speak of an arranger,

lead bank or lead lender that originates theloan, forms the syndicate and processespayments. But several syndicate members mayshare these tasks.


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Loan Syndication is the process ofinvolving several different lenders inproviding various portions of a loan.

Syndicated Loans are credits grantedby a group of banks to a singleborrower.

Syndication can be a means of

avoiding excessive exposure by asingle lender.


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Institutions for Syndicated Loans Industrial Finance Corporation of India (IFCI)

Industrial Development Bank of India (IDBI)

Industrial Credit and Investment Corporation of India (ICICI) Industrial Reconstruction Bank of India (IRBI)

Shipping Credit and Investment Company of India (SCICI)

State Financial Corporations (SFCs)

State Industrial Development Corporation (SIDC)

State Industrial & Investment Corporation (SIIC) Unit Trust of India (UTI)

Life Insurance Corporation of India (LIC)

General Insurance Corporation of India (GIC)

Commercial Banks, Mutual Funds and Venture Capital Funds.


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Structure of Syndicated Loan

The mandated arranger (Administrative agent)structures & syndicates the transaction. He alsoarranges the syndicated loan from foreigncountries.

Book runner issues invitation to participate inthe syndication, disseminates information tobanks and informs the borrower about theprogress of the syndication.

Participants are banks providing funds.


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Type of Syndicated Loans

1. Loans for setting up new projects

2. Loans for expansion, modernization,diversification, rehabilitation of projects.

3. Loans for making investment in corporatesecurities

4. Refinancing loans

5. Rediscounting loans


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Credit syndication services

1. Ascertaining promoter details2. Ascertainment of cost details

3. Comparison of cost details

4. Identification of funding sources

5. Ascertainment of loan details6. Furnishing beneficiary details

7. Making application

8. Project appraisal

9. Compliance for loan disbursement10. Documentation and creation of security

11. Pre disbursement compliance


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Depository Receipts

A receipt issued by a depository of a country against thedeposit of shares issued by a domestic company which is

eligible for issue to foreign investors and is eligible fortrading on overseas stock exchange is known as aDepository Receipt.

A Depository Receipt is a type of negotiable financial

security that is traded on a local stock exchange, butrepresents a security, usually in the form of equity that isissued by a foreign publicly listed company. The DR,which is a physical certificate, allows investors to holdshares in equity of other countries.


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Types of Depository Receipts

Depending on the place of existence of thedepository bank, DRs are called by differentnames. They are:

American Depository Receipt (ADR)

Global Depository Receipt (GDR)

Indian Depository Receipt (IDR)


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American Depository Receipts (ADRs)

Introduced to the financial markets in 1927. ADR is astock that trades in the US but represents a specifiednumber of shares in a foreign corporation. ADRs are

bought and sold on American markets just like regularstock and are issued/ sponsored in the US by a bank orbrokerage.

Types of ADRs:

Level 1 ADRs (Not listed, least regulated by SEC) Level 2 ADRs (Listed, slightly more requirements)

Level 3 ADRs (Floated with IPO on US exchange,

most prestigious and highly regulated)


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Global Depository Receipts (GDRs)

A bank certificate issued in more than onecountry for shares in a foreign company isknown as Global Depository Receipt (GDR).The shares are traded as domestic shares, butare offered globally through the various bank

branches.


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Indian Depository Receipts (IDRs)

Depository Receipts that are issued by foreign corporateentities to raise funds from the Indian financial markets

are known as Indian Depository Receipts.

Eligibility for Issue: Good track record with complianceto security market regulations.

Investors: Qualified Institutional Buyers who investRs.5,00,000 or more.

Minimum Issue Size: Rs. 50 crore

Minimum Subscription: 90% of issue amount


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PRICING OF ISSUES

The security prices will be fixed as per the relevantguidelines given by SEBI, in consultation with themerchant bankers.

The following factors should be considered: Qualitative factors: Prospects of the industry, track

record of the promoters, competitive advantage & growthof the company

Quantitative factors: Earnings per share, book value,average market price(2-3 yrs), dividend payment record,profit margins etc.

With the abolition of office of CCI, companies can adopt freepricing.


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Pricing of issues A listed company can freely price equity share /

convertible securities through a public / rights issue.

An unlisted company eligible to make a public issue anddesirous of getting its securities listed on a recognizedstock exchange can also freely price shares andconvertible securities.

The free pricing of equity shares by an infrastructurecompany is subject to the compliance with disclosurenorms as specified by the SEBI from time to time.

All banks require approval by RBI while freely pricingtheir initial public issue of shares / convertibles.


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Differential PricingDifferential pricing is the issue of shares at different prices

in (i) public / rights issues (ii) firm allotment category

and net offer to public. Listed / unlisted companies may issue shares /

convertible securities to applicants in the firm allotmentcategory at a price different from the price at which the

net offer to the public is made, provided the price atwhich the security is offered to the applicants in firmallotment category is higher than the price at whichsecurities are offered to the public.


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Firm allotment category consists of Indian &multilateral development finance institutions, Indianmutual funds, FIIs, NRIs, overseas corporate bodies &permanent/ regular employees of the issuing company.

A listed company making a composite issue of capital(publiccum-rights basis) may issue securities atdifferential prices in its public and rights issue.

In the public issue, which is a part of composite issue

differential pricing in the firm allotment category &individual retail investors is also permissible.

However ,justification for the price differential should begiven in the offer document in all cases.


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Price Band

The issuer can mention a price band of 20% (cap in theprice band should not exceed 20% of the floor price) inthe offer document filed with the SEBI & the actual pricecan be determined at a later date before filing it with theROCs.

If the BOD of the issuing company has been authorized todetermine the offer price within a specified price band, aresolution would have to be passed by them to determinesuch a price.

In case of public issue/ right issue, the issue price / priceband may not be disclosed in the draft letter of offer filedwith the SEBI.

The final offer document should contain only one price.


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CCI Model

The fair value of the share is calculated on the

basis of

NAV of the share,

Profit earning capacity value and

Average market priceA) Net Asset Value

NAV = Total net worth / Total number of sharesoutstanding

Where total net worth = (equity capital + freereserves contingent liability) + fresh capital


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B) PECV (Profit Earning Capacity Value):

Share Price = (EPS x 100) / Capitalization rateWhere EPS = (Average profit before tax provision

for tax + contribution to profits by fresh issue) /Total number of shares outstanding

C) Average Market Price:

The fair price of the share is determined as anaverage of the NAV and PECV.


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Stock Exchange

Stock exchanges are organized market places in which

existing shares & other securities are traded by members ofthe exchange, acting as both agents(brokers ) and principals(dealers / traders).

Section 2 (j) of the securities contracts (Regulation) Act,

1956 defines a stock exchange as Any body of individuals,whether incorporated or not, constituted for the purpose ofassisting, regulating or controlling the business of buyingselling or dealing in securities.

Stock exchanges have a physical location where brokers &dealers meet to execute orders from institutional andindividual investors to buy & sell securities. Here onlymembers are allowed to buy or sell securities.


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Functions of stock exchange

Central trading place

Settlement of transaction

Continuous market Supply of long term funds

Setting up of rules & regulations

Evaluation of securities

Control over company management Helps capital formation

Facilitates speculation

Directs the flow of savings


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Eligibility criteria for membership

Completed 21 years of age

Citizen of India

Not adjudicated as a bankrupt/insolvent Not convicted of an offence involved in fraud or

dishonesty

Not engaged in any other business or employment

Sponsored by two members, of five years experience At least two years of experience as an apprentice,

partner, authorized assistant, authorized clerk of amember


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1. Commission Broker

A stock broker is a commission agent whotransacts business in securities on behalf of the

non-members. He is an independent dealer insecurities. He acts as an agent in buying andselling securities for earning commission.

A sub broker is a person who acts on behalf of astock broker as an agent or otherwise forassisting the investors in buying and selling ordealing in securities through such brokers.


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2. Jobbers A jobber is an independent dealer in securities. He buys

and sells securities in his own name. He is not allowed todeal with non members directly. A Jobber can deal witha broke or another jobber. He does not work oncommission basis, but for a profits called turn.

Brokers Jobbers

Buy & sell securities onbehalf of clients as agents.

Buy & sell securities in theirown names.

Deals with non members. Deals with brokers / otherjobbers

Only a link between the

general public & jobber

Dealer in their own right

Negotiate terms &conditions of purchase /sale

Quote two prices one tobuy and other to sell

Their commission is fixed

by the exchange

Their profit is fixed by

competition.


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3. Arbitrageur

An arbitrageur is a specialist in dealing withsecurities in different stock exchange centers atthe same time. He makes profit from thedifference in prices between the two markets.

The success of an arbitrageur depends on thenumber of securities simultaneously listed ondifferent stock exchanges and the availability offast means of communication systems.


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4. Speculators

Bull Tejiwala

Bear Mandiwala

Lame duck

Stag


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Securities Available for Trading The Capital Market segment of NSE facilitates trading in the

following instruments:

A. Shares Equity Shares

Preference Shares

B. Debentures Partly Convertible Debentures

Fully Convertible Debentures

Non Convertible Debentures

Warrants / Coupons / Secured Premium Notes/ other Hybrids

Bonds

C. Units of Mutual Funds


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Types of Orders

Order - Time conditions

DAY - Day Order GTC - Good Till Cancelled (GTC) Order

GTD - Good Till Days/Date (GTD) Order

IOC - Immediate or Cancel (IOC) Order

Order - Price conditions Limit Price Order

Market Price Order

Stop Loss (SL) Price Order

Order - Quantity Conditions

Disclosed Quantity (DQ) Order Minimum Fill (MF) Order

All or None (AON) Order


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Trading System - Order Matching Rules

The best buy order is matched with the best sell order. Anorder may match partially with another order resulting inmultiple trades. For order matching, the best buy order is theone with the highest price and the best sell order is the one

with the lowest price. This is because the system views all buyorders available from the point of view of a seller and all sellorders from the point of view of the buyers in the market. So,of all buy orders available in the market at any point of time, aseller would obviously like to sell at the highest possible buy

price that is offered. Hence, the best buy order is the orderwith the highest price and the best sell order is the order withthe lowest price.


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CLEARING & SETTLEMENT

Clearing is the process of determination of obligations, after whichthe obligations are discharged by settlement.

A multilateral netting procedure is adopted to determine the netsettlement obligations (delivery/receipt positions) of the clearingmembers. Accordingly, a clearing member would have either pay-inor pay-out obligations for funds and securities separately.

Members pay-in and pay-out obligations for funds and securitiesare determined by 2.30 p.m. on T + 1 day and are downloaded tothem so that they can settle their obligations on the settlement day(T+2).


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Settlement Cycle

NSCCL (National Securities ClearingCorporation Ltd.) follows a T+2 rolling

settlement cycle. For all trades executed on the Tday, NSCCL determines the cumulativeobligations of each member on the T+1 day andelectronically transfers the data to ClearingMembers (CMs). All trades concluded during aparticular trading day are settled on adesignated settlement day i.e. T+2 day.


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Funds Settlement

NSCCL has empanelled 13 clearing banks namely Axis

Bank Ltd., Bank of India, Canara Bank, Citibank, HDFCBank, HSBC, ICICI Bank, IDBI Bank, IndusInd Bank,Kotak Mahindra Bank, Standard Chartered Bank, StateBank of India and Union Bank of India.

Every Clearing Member is required to maintain andoperate clearing accounts with any of the empanelledclearing banks at the designated clearing bank branches.The clearing accounts are to be used exclusively for

clearing & settlement operations.


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Rolling Settlement

In a rolling settlement, each trading day is considered as

a trading period and trades executed during the day aresettled based on the net obligations for the day.

At NSE, trades in rolling settlement are settled on a T+2

basis i.e. on the 2nd working day. For arriving at thesettlement day all intervening holidays, which includebank holidays, NSE holidays, Saturdays and Sundays areexcluded. Typically trades taking place on Monday are

settled on Wednesday, Tuesday's trades settled onThursday and so on.


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Securities Settlement

The final obligation for securities pay-in is downloaded to themembers and custodians on the T+1 day. The members / custodiansmake available the required securities in the settlement poolaccounts with the depository participants on the pay-in day by 10.30

a. m. To facilitate this members are required to open pool accountswith depository participants of both the depositories, NSDL andCDSL.

Subsequent to receipt of pay-in instructions from the depositories,NSCCL determines the shortages after which pay-out files aregenerated and released to the depositories by 1.30 p.m. Membershave a facility of direct delivery of securities to the investorsaccounts wherein payout receivable by members can be directlycredited to the beneficial owners accounts as instructed by them.


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Closing Out by Buying-in:

If the selling member fails to deliver the securitieson the due date of the contract, the buying membershall be entitled to buy-in the same or theundelivered portion there of as provided in the Bye-laws and Regulations relating to closing-out.

Closing Out by Selling-out:

If the buying members fails to take up or pay for thesecurities delivered on the due date of contract the

selling member shall be entitled to sell-out the sameas provided in the Bye-laws and Regulations relatingto closing-out.

raising of equity from international markets (module 4 mine) (1)

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