A Presentation On Sources of

Long Term Finance &

Raising Long Term Finance

Prepared by :~

Madhuri Bhatt ( 04 )Ankita Chaniyara (08 )Bhumika Fuletra ( 15 )Kailash Naghera ( 33 )Palak Sukhanandi ( 52 )Mamta Zankat ( 60 )

Presentation Flow

Sources of long term finance Raising long term financeEquity CapitalInternal AccrualsPreference CapitalTerm LoansDebentures

Venture capitalInitial public offerSecondary public offerRight issuePrivate placementPreferential allotmentDilutionObtaining a term loan

Introduction

It is rightly said that finance is the life-blood of business.

No business can be carried on without source of finance.

There are several sources of finance and as such the finance has to be raised from the right kind of source.

Long Term Source of Finance

Long term sources of finance are those that are needed over a longer period of time –generally over a year.

Long term finance may be needed to fund expansion projects

It’s types are:-Share, Debenture, Venture Capital, Government Grant, Bank Loan.

Need For Long Term Finance

Long term vs. short term funds requirements

For modernization, expansion, diversification, huge quantities required.

Asset- liability mismatch, interest rate risk, liquidity risk.

Sources of Long Term Finance

Equity Capital

Internal Accruals

Preference Capital

Term Loans

Debentures

Equity CapitalEquity Shares also known as ordinary shares, which means, other than preference shares.

Equity shareholders are the real owners of the company. They have a control over the management of the company.

Equity shareholders are eligible to get dividend if the company earns profit.

Equity share capital cannot be redeemed during the lifetime of the company.

The liability of the equity shareholders is the value of unpaid value of shares.

Some Terms

Authorized capital

Issued capital

Subscribed capital

Paid –up capital

Par value

Issue price

Book value

Market value

Rights & Position of Equity Share Holders

Right to Income

Right to Control

Pre- Emptive Right

Right in Liquidation

Advantages of Equity Capital

Permanent sources of finance

Voting rights

No fixed dividend

Less cost of capital

Retained earnings

Dis Advantages of Equity Capital

Irredeemable

Obstacles in management

Leads to speculation

Limited income to investor

No trading on equity

Internal accruals

It consist of depreciation charges and retained earnings.

Depreciation represents the allocation of capital expenditure to various periods over which the capital expenditure is expected to benefit the firm.

Advantages

Readily available, no talking to outsiders

Effectively additional equity capital, however no issue costs of loss due to under-pricing

No dilution of control

The stock market generally views an equity with skepticism, but retained earning doesn’t

Quantum very limited

High opportunity costs: dividends forgone by equity holders

Disadvantages

Preference Capital

The parts of corporate securities are called as preference shares. It is the shares, which have preferential right to get dividend and get back the initial investment at the time ofwinding up of the company. Preference shareholders are eligible to get fixed rate of dividend and they do not have voting rights.

Advantages

Fixed dividend

Cumulative dividends

Redemption

Participation

Convertibility

Disadvantages

Expensive sources of finance

No voting right

Fixed dividend only

Permanent burden

Taxation

Term Loan

Term loan is a loan made by bank/financial institution to a business having an initial maturity of more than one year.

Features of Term Loans

Currency

Security

Interest payment and principal repayment

Restrictive covenants

Advantages

Interest on debt is tax deductible

Does not result in dilution of control

Do not partake in value created by the firm

Issue costs of debt is lower

Interest cost is normally fixed, protection against high unexpected inflation

Has a disciplining effect on management

Disadvantages

Entitles fixed obligation for interest and principal, non payment can even lead to bankruptcy/ legal action.

Debt contracts impose restrictions on firm’s financial and operational flexibility.

If inflation rate dips, cost of debt higher than expected.

Debenture

A Debenture is a document issued by the company. It is a certificate issued by the company

under its seal acknowledging a debt.According to the Companies Act 1956, “debenture includes debenture stock, bonds

and any other securities of a company whether constituting a charge of the assets of the company or not.”

Features

Trustee

Security

Interest rate

Maturity and redemption

Call and put feature

convertibility

Advantages

Long-term sources

Fixed rate of interest

Trade on equity

Income tax deduction

Protection

Disadvantages

Fixed rate of interest

No voting rights

Creditors of the company

High risk

Restrictions of further issues

Raising Long Term Finance

What is long term financing?

Financial requirement of the business differs from firm to firm and the nature of the

requirements on the basis of terms or period of financial requirement, it may be long term

and short-term financial requirements.

Securities Issued To Raise The Long Term Finance

Venture capital

Initial public offer

Secondary public offer

Rights issue

Private placement

Preferential allotment

Dilution

Obtaining a term loan

Venture capital What Is Capital ? Most important factor

of production. No economic entity can

function without capital.

Requires at every step for set up, expansion, growth, modernization,

diversification.

Question of Concern

What is Venture Capital???

It is type of private equity capital typically provided by professional, outside investor to buss. Growth…. ?

Initial Public Offer

Initial Public Offer (IPO) 1st public offering of

equity shares Followed by a listing of shares on the

stock market Decision to go public

Benefits of Going Public

Access to capital

Respectability

Investor recognition

Window of opportunity

Liquidity

Benefit of diversification

Signals from the market

Costs of Going Public

Adverse Selection

Dilution

Loss Of Flexibility

Disclosures

Accountability

Public

Pressure

Costs

Eligibility for an IPO A company can make 100% retail issues provided it satisfies all the following

conditionsIt has a net tangible asset of at least Rs 3 crore in each of the preceding three years.

It has a track record of distributable profit for at least three out of immediately proceeding 5 years.

It has a net worth of at least Rs1 crore in each of the preceding 3 financial years.

The issue size (offer through offer document + firm allotment + promoters contribution through offer document) does not exceed five times the pre-issue net worth

Principal steps in an IPO

Approval of the MD Approval of the share holders Appointment of a merchant banker as LM The LM carries out due diligence to check Appointment of various intermediaries  The LM draws up the issue budget The LM prepares the draft prospectus The LM files the draft prospectus with SEBI, SEBI places

the same on its website

Conti. Listing application to the stock exchanges, the draft

prospectus is also hosted on the websites of the LM and the underwriters.

Tripartite agreement with the registrar and all the depositories

The LM makes the underwriting arrangements, if the issue is proposed to be underwritten.

 

Conti .

Within 21 days, SEBI makes observations Stock exchanges suggest changes Company carries out modifications

Company files the prospectus with the ROC Market the issue by press meetings, brokers’

meetings, investors’ meetings and so on

Conti .

‘Announcement advertisement’ – 10 days prior to the opening the issue.

conform to Form 2A – abridged prospectus

Dispatch of the application forms to all stock exchanges, SEBI collection centers, brokers

Conti. Underwriters and investor associations.

Accompanied by the abridged prospectus open for min of 3 days and max of 21 days

After the issue is closed, the basis of allotment is finalized

The LM ensures that the demat credit or dispatch of share certificates and refund orders to the allottees is completed within 2 working days after the basis of allotment is finalized and the shares are listed within 7 days of the finalization of the basis of allotment.

Role Of The Lead Manager of The Issue

Structure the issue

Submit the prospectus with the SEBI

Arrange underwriting

Finalize the prospectus

Coordinate the efforts of brokers, bankers, advertising agencies, printers, and others

Conti .

Develop the strategy for marketing the issue

Monitor the issue during the subscription period

Help in finalizing the basis of allotment

Assist in securing the stock exchange listing

Cost of Public Issue

Underwriting expenses

Brokerage

Fees to the managers to the issue

Fees for the registrars to the issue

Printing expenses

Postage expenses

Advertising and publicity expenses

Listing fees

Stamp duty

Issue Pricing SEBI ( DIP ) Guidelines

Every company can freely price its shares

Disclose the basis for the issue price in terms of following Adjusted EPS (for past 3 years)

P/E ratio in relation to issue price

Return on net worth

Minimum return on total net worth after the issue needed to

maintain EPS Net asset value

Under-pricing of IPOs

Winner’s Curse

Bait for Future Offerings

Informational Asymmetry

Regulatory Constraints

Political Goals

Secondary public offer:

Secondary public offer Similar procedure to that of an IPO

Subject to fewer regulations than an IPO

Key Provisions For Secondary Public Offer

Aggregate size of the issue does not exceed 5 times the pre-issue net worth

Promoters’ contribution To the extent of 20% of the proposed

issue OR At least 20% holding in the post-issue

equity capital

Conti .

Excess contribution subject to preferential allotment guidelines – locked in for 1 year period

Non-applicability of promoters’ contribution and lock-in of excess contribution – if listed for minimum of 3 years

Public Offer of Debts

No distinction between an IPO and secondary public offers Mechanics for secondary offer are much the same as an IPO Some differences Retail route vs. book building Security Credit rating Debenture redemption reserve Debenture

trustees Stable cash flows vs. growth prospects 

Rights Issue

Issue of a capital to the existing shareholders

Pro rata basis, This is required under Section 81 of the Companies Act 1956.

The shareholders however, may by special resolution forfeit this right, partially or fully, to enable a company to issue additional capital to the public

Characteristics of a Rights Issue

No. of rights shares to be issued

The rights entitlement

Subscription price

Rights are negotiable, holders can sell them

Can be exercised only during a fixed period usually 30-60 days

Procedure for a Rights Issue

Letter of Offer + composite application form Form A ,Form B, Form C ,Form D

The composite application form must be mailed to the company within a stipulated period, which is usually about 30 days.

Conditions

Exercise rights in full – can apply for additional shares Renounce rights, wholly or partially – can’t apply for additional Shares available due to non-exercise of rights – allotted to shareholders who have applied for additional shares Balance shares left after meeting requests of additional shares – disposed of at the ruling market price or the issue price, whichever is higher

Consequences of a Rights Issue

Market value per share

Value of a right

Earnings per share

Wealth of shareholders : -

( Right offering provided to the share holders are free to

exercise their right or sell )

Continue.

Value of a share NP 0 + S N + 1 Value of a Right N(P 0 – S) N + 1

Where , N - no. of existing

shares required for a rights share,

P 0 - cum-rights market price per share,

S - subscription price

 

Setting the subscription price

Theoretically subscription price is irrelevant practically

If S > P 0 Market value after issue < S Existing shareholders – do not like the idea Non-

shareholders – no interest , suffer a loss If S = P 0 Existing shareholders – not appealing Non-shareholders – no opportunity of gain

Therefore S has to be set lower than P 0

Following points to be considered while setting S

Probability of the success of the offering

No. of rights shares to be issued to raise a given amount of additional capital

Expectations of investors

The fluctuation of the share

The size of the rights issue Pattern of share holding

Comparison Between A Rights Issue And A Public Issue

Familiarity and success

Floatation costs of a rights issue

Price dilution of earnings per share

 

Private placement

Private placementSale securities to a sophisticated investors.Securities sale to only few institutions like mutual funds, venture capital Private placement of Equity Unlisted company get funds from sophisticated investors. Free to choose qty. & price. Private placement to Debt Listing was not compulsory Credit rating was not mandatory

Conti .In a private placement, funds are raised in the primary market by issuing securities privatelyTo some investors without resorting to underwriting (insurance against risk by a guarantor).The investors in this case may by financial institutions, commercial banks, other companies,shareholders of promoting companies, and friends and associates of the promoters.

PRIVATE PLACEMENT OF EQUITY PRIVATE PLACEMENT TO DEBT

Unlisted company get funds from sophisticated investors.

Free to choose qty. & price.

Listing was not compulsory

Credit rating was not mandatory

The Key Features of New Regulatory

Dispensation In Late 2003

Regulations special resolution pricing open offer Lock-in period

The discloser required for the private placed debenture similar to public offered debentures

Debt securities shall be compulsorily listed

Debt securities shall be issued & traded in Demat form

Preferential allotment is made to promoters, venture capitalist, suppliers.

Preferential allotment is not related to a public issue

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

Pricing

Open offer-

Lock-in-period

Dilution

Dilution is an option we can think it in terms of proportionate ownership or market value or book value or earning per share.

Dilution on proportionate ownership. Dilution of value : book value v/s market value

Term loan

Term loan procedure Submission of Loan Application Initial Processing of Application Appraisal of the proposed project Issue of the letter of sanction Acceptance of term and conditions by the

borrowing unit Execution of Loan agreement Disbursement of loan Creation of security Monitoring

Project Appraisal

Market appraisalTechnical appraisalFinancial appraisalEconomic appraisalManagerial appraisal :

Resourcefulness Understanding Coommitment