Prepared by : Jadav Maitreyee

Chirag Raval Chirag Jani Utsav

Sutaria

Long Term FundsLong Term Funds

Venture Capital Initial Public Offer Secondary Public Offer Right Issue Private Placement Preferential Allotment Dilution Obtaining a Term Loan

Venture CapitalVenture Capital

Venture Capital represent financial investment in a highly risky proposition made in the hope of earning a high rate of return. It is provided mainly in the form of equity capital.

1. The Venture capitalist is inclined to assume a high degree of risk in the expectation of earning a high rate of return.

2. The VC typically subscribe to equity, which enable it to share the risks and rewards of the investee firm.

3. The VC also takes an active interest in guiding the assisted firm.

4. The VC normally plans to liquidate its investments in the assisted firm after 3 to 7 years.

The first public offering of equity shares of a company, which is followed by a listing of its shares on the stock market, is called the Initial Public Offer (IPO). It is also initiate as decision to go public.

1. Access to Capital

2. Respectability

3. Investor Recognition

4. Window of Opportunity

5. Liquidity

6. Benefits of Diversification

7. Signals from the Market

1. Adverse Selection

2. Dilution

3. Loss of Flexibility

4. Disclosures

5. Accountability

6. Public Pressure

7. Costs

The cost of public issue is normally between 8 to 12%, depending on the size of the issue and the level of marketing effort. The important expenses incurred for public issue are :

1. Underwriting Expenses

2. Brokerage

3. Fees to Manager and for registrars to the issue

4. Printing and Postage Expenses

5. Advertising and Publicity Expenses

6. Listing fees and Stamp duty

Key provisions for secondary public offer

1. A listed company is eligible to a public offer of equity shares or a convertible provided that the aggregate size of the proposed issue and all previous issues made in the same financial year by the company doesn’t exceed 5 times its pre-issue net worth as per the audited balance sheet of the last financial year.

2. The promoters shall participate either to the extent of 20% of the proposed issue o ensure that their holding in the post-issue equity capital is at least 20%.

3. If the promoter wish to subscribe in the secondary market offer beyond the required minimum of 20%, such excess contribution shall be subject to preferential allotment guidelines.

4. The requirement of minimum promoters’ contribution shall not be applicable in case of a secondary offer by a company that has been listed on a stock exchange for a minimum of 3 years and has a track record of dividend payment for the immediately preceding 3 years.

Mechanics for the public offer of debt security:

Pure debt securities are typically offered through

The 100% retail route because the book building route is not appropriate for them.

Debt security are generally secured against assets of the issuing company and that security should be created within 6 months of the close of the issue of debentures.

A debt issue cannot be made unless credit rating from a credit rating agency is obtained and disclosed in the offer document.

It is mandatory to create a debenture redemption reserve for every issue of debentures.

It is necessary for a company to appoint one or more debenture trustees before a debenture issue.

RIGHT ISSUE

Characteristics:

1 The no. of rights that a shareholder gets is equal to the number of shares held by him.

2 The no. of rights required to subscribe to an additional share is determined by the issuing company.

3 The price per share for additional equity, called the subscription price, is left to the discretion of the company.

4 The rights are negotiable. The holder of rights can sell them.5 Rights can be exercised only during a fixed period which is usually

about 30 days.

Procedure for right issue:

A company making a rights issue sends a letter of offer, along with a composite application form consisting of 4 forms (A,B,C and D) to the shareholders.

A: Acceptance of rights and application for additional shares.

B: Renouncing the rights in favor of someone.

C: Application by the renounce

D: To make a request for split forms.

Consequences of the right issue:

Market value per share

Value of a right

Earning per share

Wealth of the shareholders

Illustrative data of the Right and Left Company

Paid up equity capital(1,000,000 shares of Rs. 10 each Rs. 10,000,000

Retained earnings 20,000.000

Earning before interests and taxes 12,000,000

Interest 2,000,000

Profit before tax 10,000,000

Taxes 5,000,000

Profit after taxes 5,000,000

Earning Per Share Rs. 5

Market Price per share Rs. 40

(Price-earning ratio of 8 is assumed)

No. of additional equity shares proposed to be issued as

Right shares 200,000

Proposed subscription price Rs. 20

No. of right shares required for a rights share

(1,000,000 / 200,000) 5

Value of Shares:

NP0 + S

N + 1

Where N = No. of existing shares required for a right issue

P0 = cum-rights market price per share

S = Subscription price at which the rights shares are issued.

VALUE OF RIGHT:

P0 – S

N + 1

WEALTH OF SHAREHOLDERS:

1 He exercise his rights

2 He sells his rights

3 He allows his rights to expire

SETTING THE SUBSCRIPITION PRICE:

(N+1) * (NP0 + S) = NP0 + S

(N + 1) COMPARISON BETWEEN RIGHTS AND PUBLIC

ISSUE

Private placement of equity Private placement of Debt Mutual funds , banks, Insurance Org. ,Provident fund

Rules and Regulation for the private placement(2003)

Disclosure

Bank should not invest unrated non SLR security.

Debt securities traded in demat form

Credit rating

Debt security listed

Bank should not invest in non SLR security.

Definition

Promoters, strategic investors, venture capitalist, Financial Institute, supplier

Regulation1)Special resolution2)pricing3)Open offer4) Lock in period

Dilution is an issue that often comes up when firm plans to sell securities.

Dilution can be in terms of proportionate ownership, book value, market value or earning per share.

Dilution may occur if a firm sells shares to the general public

It can be avoided, if firm makes a rights issue. Rights issue enables existing shareholders to maintain their proportionate

1. Submission of Loan Application2. Initial Processing of Loan Application3. Appraisal of the Proposed Project4. Issue of the Letter of Sanction5. Acceptance of the Term and Conditions by the

Borrowing Unit6. Execution of Loan Agreement7. Disbursement of Loans8. Creation of Security9. Monitoring

Submission of Loan Application: Borrower submits an application form which covers aspects as:

Promoters’ background Particulars of industrial concerns Particulars of project Cost of project Marketing & selling arrangements

Initial Processing of Loan Application : Review by officer of Financial Institution. If it is

complete FI prepares “Flash Report” which is summarization of the loan application.

Flash report decides whether the project justifies a detailed appraisal or not

Appraisal of the Proposed Project: The detail appraisal covers the Market Appraisal: Concerned with judging marketing infrastructure,

knowledge & experience of marketing personnel

Technical Appraisal: Type of review which covers aspects as: engineering knowledge, technical collaboration

Financial Appraisal: Concerned with judging capital cost estimation and cost projections that distinguish between fixed and variable costs

Economic Appraisal: It looks at the project from larger social point of view, it’s approach is called “Partial Little Mirrlees”

Managerial Appraisal: It judges managerial capabilities of promoters as Understanding & Commitment

Issue of the Letter of Sanction: If project is accepted it is issued to borrowers

Acceptance of the T&C by the Borrowing Unit : On receiving LOS, borrowing unit organize its board meeting and appropriate resolution is passed

Execution of Loan Agreement : Process of documentation and stamped is done and agreement is signed

Disbursement of Loans : Periodically as borrowers submits information on physical progress of project , term loan is disbursed from time to time

Creation of Security: Term Loans are secured by FI’s through first mortgage of immovable properties

Monitoring : It is done in different forms as Regular reports furnished by promoters Periodic site visits Progress Reports submitted by nominee directors Comparing performance with promise