Raising Long-term Finance

CHINMAY SHIRSAT (M1212) ASHWYN RAO (M1209)

Sources of Long-term Finance

Initial Public Offer (IPO) Rights Issue Private Placement Preferential Allotment

INITIAL PUBLIC OFFER(IPO)

The first sale of stock by a company to the public The first public offering of equity shares of a company, which is followed by a listing of its shares on the stock market.

IPO cont.

Advantages of going public

Access to capital Greater respect Investor recognition Window of opportunity Liquidity Benefit of diversification Signals from the market

IPO cont.

Costs of Going Public

Adverse Selection Dilution Loss of Flexibility Disclosures Accountability Public Pressure Costs

Eligibility for an IPO

Net tangible assets of at least 3 crore in each of the preceding 3 years. A track record of distributable profits for at least 3 out of the immediately preceding 5 years. Net worth of at least 1 crore in each of the preceding 3 financial years. Issue size does not exceed 5 times the pre-issue net worth.

Book Building

Book building involves inviting subscriptions to public offer of securities

through a process of tendering.

Merchant banker fixes floor price in consultation with the issuer, which is the minimum bid price.

Eligible investors can fill the bid-cum-application form and submit to lead
manager, running through the book during the period.

At the end of this period, the LM assesses the response to the issue, and

fixes the highest price at which demand is sufficient.

And in this way, the final subscription price is decided in consultation with the issuer and allotment pattern is worked out.

Principal Steps in an IPO

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The board of directors approves the proposal to raise capital from the public and authorizes the managing director (or a board committee) to do all the tasks relating to the public issue. The company convenes a meeting to seek the approval of shareholders and the shareholders pass a special resolution under section 81(1A) of the Companies Act authorizing the company to make the public issue. The company appoints a merchant banker as the lead manager (LM) to the issue. The LM carries out due diligence to check all relevant information , documents, and certificates for the issue.

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The company, advised by the LM, appoints various intermediaries such as the registrar to the issue, the bankers to the issue, the printers, and advertiser. The LM draws up the issue budget, keeping in mind the guidelines issued by the Ministry of Finance on issue expenses, and the company approves the same (The main components of the issue expenses are fees for LM, underwriters, registrar and bankers, brokerage, postage , stationery, issue marketing expenses, etc.) The LM prepares the Draft Red Herring Prospectus (DRHP) in consultation with management and seeks the approval of the Board.

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The LM files the DRHP approved by the board, with SEBI for its observation along with a soft copy. SEBI places the same on its website for comments from the public. The company makes listing application to all the stock exchanges where the shares are proposed to be listed along with copies of the draft red herring prospectus. The DRHP is also hosted on the websites of the LM and the underwriters. The company enters into a tripartite agreement with the registrar and all the depositories for providing the facility of offering the shares in a dematerialized mode.

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If the issue is proposed to be underwritten (it is optional in a retail issue and mandatory in a book built issue to the extent of the net public offer), the LM makes underwriting arrangements Within 21 days, SEBI makes its observations on the DRHP. The stock exchanges also suggest changes, if any. The company carries out the modifications to the satisfaction of these authorities. The company files the prospectus with the Registrar of Companies(ROC). The LM and the company market the issue using a combination of press meetings, brokers' meetings, investors' meeting and so on.

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The company releases a mandatory advertisement, called the announcement advertisement' 10 days prior to the opening of the issue. This has to conform to Form 2A, also called the abridged prospectus. The LM and the printer dispatch the application forms to all stock exchanges, SEBI; collection centre's brokers, underwriters, and investor associations. Every application form is accompanied by the abridged prospectus. The issue is kept open for a minimum of 3 days and a maximum of 10days.

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After the issue is closed, the basis of allotment is finalized by the stock exchange, LM, and the registrar, in
conformity with certain SEBI-prescribed rules. The LM ensures that the demat credit or dispatch of share certificates and refund orders to the allotees is completed within two working days after the basis of allotment is finalized and the shares are listed within 7days of the finalization of the basis of allotment

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Public Issue

Public issue by listed companies Cost of Public Issue

Rights Issue

Defn: Issue of capital to the existing shareholders of the company on a pro rata basis

Rights Issue

Characteristics features:

The number of rights that a shareholder gets is equal to the number of shares held by him The number of rights required to subscribe to an additional share is determined by the issuing company The price per share for additional equity, the subscription price is left to the discretion of the company Rights are negotiable. The holder of rights can sell them Rights can be exercised only during a fixed period which is usually about 30 days.

Preferential Allotment

Defn: An issue of equity shares by a listed company to pre-determined persons, who may or may not be the existing shareholders of the company at a predetermined price is referred to as preferential allotment. Pref. allotment is made to promoters, strategic investors, venture capitalists, financial institutions and suppliers. Pref. allotment is made to secure the equity participation of those, the company considers desirable.

Private Placement

Defn: Direct selling of securities to a limited number of institutional or high net worth investors. This avoids the delay involved in going public and also reduces the expenses involved in a public issue The company appoints a merchant banker to network with the institutional investors and negotiate the price of the issue Advantages Easy access to finance Fewer procedural formalities Lower issue cost Access to funds is faster

Term Loans

Major source of debt finance for long-term projects 1-10 years of repayment period All India Financial institutions and State financial corporations Interest rate will be fixed on the term loans after assessing the credit risk

Term Loans

Contents of loan application

Promoter's background Particulars of the industrial concern Particulars of the project (capacity, technical arrangement, land & building, p & m, location etc.) Cot of project Means of financing Marketing and selling arrangements Profitability and cash flow Government consents

Term Loans

Term loan procedure

Initial processing of Loan Application Appraisal of the proposed project (marketing, technical, financial, managerial, and economic aspects) Issue of the letter of sanction Acceptance of the terms and conditions by the borrowing unit Execution of loan agreement Disbursement of loans Creation of security Monitoring

Project Appraisal

Market appraisal Technical appraisal Financial appraisal Economic appraisal Managerial appraisal