Long Term Finance

Shares, Debentures and Term Loans

Ordinary Shares

Features

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

Advantages

1. Permanent Capital 2. Borrowing Base 3. Dividend Payment Discretion 1. 2. 3. 4. Cost Risk Earnings Dilution Ownership Dilution

Disadvantages

Public Issue of Equity

As per the existing norms, a company with a track record is free to determine the issue price for its share. However, a new company has to issue its share at par. It is legally obligatory to underwrite a public and a rights issue.

Private placement
It involves sale of shares by a company to few selected investors. Advantages It is helpful to issue small amount of funds It is less expensive It takes less time.

Right Issue of Equity Shares

The law in India requires that the new ordinary shares must be first issues to the existing shareholders on a pro rata basis.

1.
2. 3.

Advantages
Control is maintained through pro rate issues of shares. Less flotation cost Issue more likely to be successful in case of profitable companies.

1.

Disadvantages
Shareholders lose if fail to exercise their right

Preference SharesFeatures

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

Advantages 1. Risk less Leverage advantage 2. Dividend postponability 3. Fixed dividend 4. Limited Voting Rights Disadvantages 1. Non Tax Deductible 2. Commitment to pay dividends

Preference Shares

Similarity to Ordinary Shares:

1. Non payment of dividends does not force company to insolvency. 2. Dividends are not deductible for tax purposes. 3. In some cases it has no fixed maturity dates.

Similarity to Debentures:
1. Dividend rate is fixed. 2. Do not share in residual earnings. 3. Usually do not have voting rights.

Debentures

A debenture is a long term, fixed income, financial security.

Features

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

Types of Debentures

Non Convertible Debentures Fully Convertible Debentures Partly Convertible Debentures

Debentures PROS & CONS

Advantages 1. Less Costly 2. No ownership Dilution 3. Fixed payment of interest 4. Reduced real obligation limitations 1. Obligatory Payment 2. Financial Risk 3. Cash outflows 4. Restricted Covenants

Term LoansFeatures

Maturity Direct Negotiations Security Restrictive covenant 1. Asset related covenants 2. Liability related covenants 3. Cash flow related covenants 4. Control related covenants Convertibility Repayment Schedule