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LT Finance 1
LT Finance 1
LT Finance 1
Definition
Ordinary share represent the ownership position in the
company. The holders of ordinary shares are called the shareholders and they are the legal owners of the company.
By a share it also means right to participate in the profits
made by a company, while it is a going concern and declares dividend, and in the assets of the company when it is wound up.
A stock is defined as consolidated value of fully paid up
shares of a member.
which satisfies the following criteria - With respect to dividend it carries a preferential right to be paid which may be a fixed amount or a fixed rate - On winding up or on repayment of capital a preferential right to be repaid the amount .
Fixed Dividend
Cumulative dividend Redemption
Sinking fund
Call feature Participation feature
Hybrid Security
Ordinary share Non payment of dividend does not force the company to insolvency Dividends are not deductible for tax purpose In some cases there is no fixed maturity date.
has a right to vote only on resolutions placed before the company which directly affect attached to his preference shares
Apart from this preference shareholders are entitled to vote
if dividend has remain unpaid in case of cumulative as well as non cumulative for two years.
Fixed dividend
Limited voting right
Equity shares
Issue price of shares: the price at which share is issued in the market. Paid up share capital = issue price * no. of ordinary shares. Issue price has two components 1. Par value 2. Share premium Par value is the price per ordinary share stated in the memorandum of association. Generally they are in the denomination of 10 or 100. Any amount in excess of par value is called the share premium. Shareholders equity = paid up share capital + share premium + reserves and surplus = Net worth Book value per share = Net worth / no. of ordinary shares Market value of a share is the price at which it trades in the market. It is generally based upon the expectations about the performance of the economy in general and company in particular.
Evaluation
Merits - it is a permanent source of fund without any repayment liability - It does not involve any obligatory dividend payment Demerits - high cost of fund reflecting the high required rate of return of
investors as a compensation for higher risk - High floatation cost in terms of underwriting, brokerage and other issue expenditure - Dilution of control
Issuing of securities
Filing of offer document Application for listing Issue of securities in dematerialized form Book building: It is a process undertaken by which demand for securities proposed to be issued is elicited and built up and price for such issue is assessed for determination of quantum of such securities to be issued.
Issue of share at a discount Issue of share at a premium Call on shares: application, allotment and other calls Forfeiture of shares
OFFER PRICE Price at which the securities are offered and would be allotted is made known in advance to the investors
DEMAND Demand for the securities offered is known only after the closure of the issue
PAYMENT 100 % advance payment is required to be made by the investors at the time of application.
RESERVATION S 50 % of the shares offered are reserved for applications below Rs. 1 lakh and the balance for higher amount applications. 50 % of shares offered are reserved for QIBS, 35 % for small investors and the balance for all other investors.
A 20 % price band is offered by the issuer within which investors are allowed to bid and the final price is determined by the issuer only after closure of the bidding.
Demand for the securities offered , and at various prices, is available on a real time basis on the BSE website during the bidding period..
10 % advance payment is required to be made by the QIBs along with the application, while other categories of investors have to pay 100 % advance along with the application.
Brokerage
Fees to the managers to the issue Fees for registrars to the issue
Printing expenses
Postage expenses Advertising and publicity expenses
Listing fees
Stamp duty
the right to sell investors more shares than originally planned by the issuer. This would normally be done if the demand for a security issue proves higher than expected. Legally referred to as an over-allotment option.
It provides additional price stability to a security issue because the underwriter
has the ability to increase supply and smooth out price fluctuations if demand surges.
Greenshoe options typically allow underwriters to sell up to 15% more
underwriting agreements under certain circumstances, such as if the issuer wants to fund a specific project with a fixed amount of cost and does not want more capital than it originally sought. The term is derived from the fact that the Green Shoe Company was the first to issue this type of option.
no. of times over subscribed: 3 times total no. of shares applied for: 6,00,000 equity shares
S.N o
No. of shares No. of Total no. applied for applica of shares category nts applied wise
1 2
100 200
1500 400
150000 80,000
50,000 26,700
100 100
500 267
3
4 5 6
300
400 500 600
300
300 200 100
90,000
30,000
100
100 200 200
300
300 200 100
30,000
30,000 40,000 20,000 2,00,00
existing shareholders.
Law in India requires that the new ordinary
by a company to few selected investors, particularly the Institutional Investors like the Unit Trust of India (UTI), the Life Insurance Corporation of India (LIC), IDBI etc.
Private
placement has the following advantages - It is helpful to raise small amount of fund - It is less expensive - It is a much faster way of raising fund.
Shareholder
A shareholder (or stockholder) is an individual or company
(including a corporation) that legally owns one or more shares of stock in a joint stock company.
Shareholders are granted special privileges depending on the class of
stock, including the right to vote (usually one vote per share owned) on matters such as elections to the board of directors, the right to share in distributions of the company's income, the right to purchase new shares issued by the company, and the right to a company's assets during a liquidation of the company. However, shareholder's rights to a company's assets are subordinate to the rights of the company's creditors.
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
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
- company must pass special resolution - government must grant special approval under section 81(1A) Pricing price should not be lower than the higher of the average of the weekly high and low of the closing price of the shares quoted on the stock exchange during six months before the relevant date or two weeks before the relevant date. Open offer- a preferential allotment of more than 15% of equity necessitates an open offer. Lock-in-period one year lock-in-period
Internal Accruals
Depreciation Charges
Retained earnings
Disadvantages
Amount that can be raised by way of retained
Term Loan
Term Loan
Term loan is a loan made by bank/financial institution to a business having an initial maturity of more than one year.
restrictive covenants are contractual clauses in the loan agreement that place certain operating and financial constraints on the borrower. these covenants are both positive as well as negative in the sense of what borrowers should do and should not do in the conduct of its operation.
Covenants
Asset-related covenants
-maintenance of working capital position in terms of minimum current ratio -ban on sale of fixed asset without the lenders approval Liability related covenant -restrain on incurrence of additional debt -reduction in debt equity ratio by issue of additional capital Cash flow related covenant -limitation on dividend payment to a certain amount or rate -ceiling on managerial salary or perks Control related covenant -appointment of nominee director to represent the financial institution and safeguard their interest
1 1 2 3
4
5 6 7 8
44,406
37,688 30,030 21,300 11,348
12,934
12,934 12,934 12,934 12,934
6,216
5,276 4,204 2,982 1,588
6,718
7,658 8,730 9,952 11,346
37,688
30,030 21,300 11,348 0
application form containing comprehensive information about the project is submitted to the financial institution It contains details like promoters background, particulars of the industrial concern, particulars of the industrial project, cost of the project, means of financing etc. After the application is received a flash report is generated which is a summarization of the loan application. On the basis of this report detailed appraisal of the project is done. In the detailed analysis marketing, technical, financial, management and economic feasibility of the project is tested. If on appraisal is the project is found feasible then the loan is sanctioned by the bank.
Debentures
Debenture/bond is a debt instrument indicating that a company has borrowed certain sum of money and promises to repay it in future under clearly defined terms.
Attributes
Trust indenture: it is a complex and lengthy legal document
of debenture, rights of debenture holder, rights of the issuing company and responsibilities of the trustees.
Trustees is a bank or financial institution that acts as a third
party to the bond to ensure that the issue does not default on its contractual responsibilities to the bond holders.
Interest: the debenture carries a fixed rate of interest, payment
option to the issuing company to redeem the debenture at a specified price before maturity. The put option is the right to the debenture holder to seek redemption at a specified time at a predetermined price.
Security Convertibility Credit rating Claim on income and assets
bond of face value Rs 1,00,000 at a deep discount price of Rs 2,700 with a maturity period of 25 years. If the investors hold it for 25 years the annualized return comes out to be 15.54%. The investor had the option to withdraw at the end of every five years with a specified maturity and face value ranging between Rs 5,700 (after 5 years) and Rs 50,000 after 20 years, the implicit annual rate of interest being 16.12 and 15.71 respectively
use of certain fixed assets for which it must make a series of contractual, periodic, tax-deductible payments.
- Hire purchase:- It is a type of financial transaction in
which goods are let on hire with an option to the hirer to purchase them. Venture capital financing: It is a type of finance available for investors looking for high potential returns and entrepreneurs who need capital as they are yet to go to the public
Buyer as follows "Qualified Institutional Buyers are those institutional investors who are generally perceived to possess expertise and the financial muscle to evaluate and invest in the capital markets. In terms of clause 2.2.2B (v) of DIP Guidelines, a Qualified Institutional Buyer shall mean: "a) Public financial institution as defined in section 4A of the Companies Act, 1956; "b) Scheduled commercial banks; "c) Mutual funds; "d) Foreign institutional investor registered with SEBI; "e) Multilateral and bilateral development financial institutions; "f) Venture capital funds registered with SEBI. "g) Foreign Venture capital investors registered with SEBI. "h) State Industrial Development Corporations. "i) Insurance Companies registered with the Insurance Regulatory and Development Authority (IRDA). "j) Provident Funds with minimum corpus of Rs.25 crores "k) Pension Funds with minimum corpus of Rs. 25 crores "These entities are not required to be registered with SEBI as QIBs. Any entities falling under the categories specified above are considered as QIBs for the purpose of participating in primary issuance process."
Asset structure
Profitability Control Taxes Growth rate Management attitude Firms internal conditions Financial flexibility Market conditions Prices