Sources of Long Term

Financing
Traditional Sources of Funding
• Equity Share Capital
• Initial Capital/ Additional Contributions/ESOPS
• Retained Earnings/ Internal Accruals / Reserves and Surplus
• Debt
• Term Loans – Bank Loans
• Debentures – Non Convertible
• Convertible Debentures
• Non – Convertible Debentures
• Preference Shares
Understanding IPOs
• Initial Public Offers refers to listing in the security market.
• Both profit and loss making companies can be listed in the stock
market.
• Companies have to be profitable to a tune of INR 15 cr. for 3 years out
of 5 years.
• However Loss making companies can also list, provide they must float
three fourths of their net public offer to only qualified institutional
buyers (QIBs), including insurance, mutual fund companies, and
alternative investment funds.
Benefits of Going Public
• Access to Capital
• Respectability
• Investor Recognition
• Windows of Opportunity
• Liquidity
• Benefit of Diversification
• Signals for the market
Costs of Going Public
• Adverse Selection
• Dilution
• Loss of Flexibility
• Disclosures
• Accountability
• Public Pressure
• Cost
 Rights Issue
• Under Section 81 of the Companies Act, 1956, when a firm issues additional equity
capital, it has to first offer such securities to the existing shareholders on a pro rata
basis.
• The rights offer should be kept open for a period of 60 days and should be
announced within one month of the closure of the books.
• The shareholders can also renounce their rights in favor of any other person at
market determined rate.
• The cost of floating of rights issue will be comparatively less than the public issue,
since these securities are issued to the existing shareholders, thereby eliminating the
marketing costs and other relevant public issue expenses.
• The rights issue will also be priced lower than the public issue since it will be offered
to the existing shareholders.
 Ex-rights Value of a Share

• The value of a share, after the rights issue, is

NP0 + S
N+1
• Where
• N = number of existing shares required for a rights share
• P0 = cum-rights price per share
• S = subscription price at which rights shares are issued.
• If a company issues one share for every 3 shares held at a price of Rs.25 per share, and the existing price is Rs.30
per share, the ex-rights price of the share would be
3 x 30 + 25 = 28.75
3+1
• Value of a right
• The theoretical value of a right is
=(P0 - S)/(N+1)
In the above example, it would be
= (30 – 25) / 4 = Rs.1.25
 PRIVATE PLACEMENT

• The private placement method of financing involves 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.
• The major advantage of privately placing the securities are:
• Easy access to any company
• Fewer procedural formalities
• Lower issue cost
• Access to funds is faster.
 BOUGHT OUT DEAL

• Buy-out is a process whereby an investor or a group of investors buy-out a significant

portion of the equity of an unlisted company with a view to sell the equity to public
within an agreed time frame.
• The company places the equity shares, to be offered to the public, with a sponsor.
• At the right time, the shares will be off loaded to the public through the OTCEI route
or by way of a public issue.
• The bought-out deal route is relatively inexpensive, funds accrue without much delay
(in a public issue funds reach the company only after a period of 2-3 months from the
date of closure of the subscription list).
• In addition to this, it affords greater flexibility in terms of the issue and matters
relating to off-loading with proper negotiations with the sponsor or the Merchant
Banker involved. Major advantages of entering into a bought-out deal are:
 BOUGHT OUT DEAL

• Buy-out is a process whereby an investor or a group of investors buy-out a significant

portion of the equity of an unlisted company with a view to sell the equity to public
within an agreed time frame.
• The company places the equity shares, to be offered to the public, with a sponsor.
• At the right time, the shares will be off loaded to the public through the OTCEI route
or by way of a public issue.
• The bought-out deal route is relatively inexpensive, funds accrue without much delay
(in a public issue funds reach the company only after a period of 2-3 months from the
date of closure of the subscription list).
• In addition to this, it affords greater flexibility in terms of the issue and matters
relating to off-loading with proper negotiations with the sponsor or the Merchant
Banker involved. Major advantages of entering into a bought-out deal are:
 BOUGHT OUT DEAL

• Buy-out is a process whereby an investor or a group of investors buy-out a significant

portion of the equity of an unlisted company with a view to sell the equity to public
within an agreed time frame.
• The company places the equity shares, to be offered to the public, with a sponsor.
• At the right time, the shares will be off loaded to the public through the OTCEI route
or by way of a public issue.
• The bought-out deal route is relatively inexpensive, funds accrue without much delay
(in a public issue funds reach the company only after a period of 2-3 months from the
date of closure of the subscription list).
• In addition to this, it affords greater flexibility in terms of the issue and matters
relating to off-loading with proper negotiations with the sponsor or the Merchant
Banker involved. Major advantages of entering into a bought-out deal are:
EURO-ISSUES

• The Government has allowed Indian companies to float their stocks in foreign capital markets.
• The Indian corporates, which face high rates of interest in the domestic markets are now free to tap
the global capital markets for meeting resource requirements at less costs and administrative
problems.
• The instruments which the company can issue are Global Depository Receipts (GDRs), Euro-
Convertible Bonds (ECBs), Foreign Currency Convertible Bonds (FCCBs).
• These instruments are issued abroad and listed and traded on a foreign stock exchange. Once they
are converted into equity, the underlying shares are listed and traded on the domestic exchange.
Deferred Credit

• The deferred credit facility is offered by the supplier of machinery, whereby the buyer can pay
the purchase price in installments spread over a period of time.
• The interest and the repayment period are negotiated between the supplier and the buyer and
there are no uniform norms.
• Bill Rediscounting Scheme, Supplier’s Line of Credit, Seed Capital Assistance and Risk Capital
Foundation Schemes offered by financial institutions are examples of deferred credit schemes.
Deferred Credit

• The deferred credit facility is offered by the supplier of machinery, whereby the buyer can pay
the purchase price in installments spread over a period of time.
• The interest and the repayment period are negotiated between the supplier and the buyer and
there are no uniform norms.
• Bill Rediscounting Scheme, Supplier’s Line of Credit, Seed Capital Assistance and Risk Capital
Foundation Schemes offered by financial institutions are examples of deferred credit schemes.
Leasing and Hire Purchase

• The other sources of finance for companies are the leasing and hire purchase of assets.
• These two types of financing options, which are supplementary to the actual long-term sources, are offered by
financial institutions, Non- Banking Finance Companies, Banks and manufacturers of equipment/assets.
• Leasing is a contractual agreement between the lessor and the lessee, wherein companies (lessee) can enter into a
lease deal with the manufacturer of the equipment (lessor) or through some other intermediary.
• This deal will give the company the right to use the asset till the maturity of the lease deal and can later return
the asset or buy it from the manufacturer.
• During the lease period the company will have to pay lease rentals, which will generally be at negotiated rate
and payable every month.
• Very similar to leasing is hire purchase, except that in hire purchase the ownership will be transferred to the
buyer after all the hire purchase installments are paid-up.
• With the mushrooming of non-banking finance companies offering the leasing and hire purchase of equipments,
many companies are opting for this route to finance their assets.
• The cost of such financing generally lies between 20 -25%.
Venture Capital
• A risky business where future cash flows are uncertain use venture
capital funding
• In Agriculture
• Skymet Weather designs web and mobile based climate, weather, and crop analytics
platform that measures and predicts climate risk for agriculture insurance companies,
banks, and public sector institutions in India
• In Logistics
• Zymet Electric – Last Mile Delivery
• In Education
• Teachmint – Free Classroom App
Venture Capital
• A risky business where future cash flows are uncertain use venture
capital funding
• In Agriculture
• Skymet Weather designs web and mobile based climate, weather, and crop analytics
platform that measures and predicts climate risk for agriculture insurance companies,
banks, and public sector institutions in India
• In Logistics
• Zymet Electric – Last Mile Delivery
• In Education
• Teachmint – Free Classroom App
Features of Venture Capital
• Assume a high degree of risk
• Equity instruments preferred
• Guide the firms
• Investment Horizon 3-7 years
Trends in Venture Capital Funding
• From Unicorns To Camels
• Startups, It’s Time to Think Like Camels — Not Unicorns (hbr.org)