1Long Term Fund 2

7/30/2019 1Long Term Fund 2

1/37


2/37

Anjali Nair

Ketan Navapara

Nirav Parmar

Anamika Patel

Jaydeep Hirpara

Milan Patel

Nirav Patel

Jaimin Gor


3/37

Long Term Funds

Venture Capital

Initial Public Offer

Secondary Public Offer

Right IssuePrivate Placement

Preferential Allotment

Dilution

Obtaining a Term Loan


4/37

Venture Capital

Venture Capital represent financial investment

in a highly risky proposition made in the hope ofearning a high rate of return. It is provided mainly

in the form of equity capital.


5/37

1. The Venture capitalist is inclined to assume a highdegree 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.


6/37

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.


7/37

1. Access to Capital

2. Respectability

3. Investor Recognition4. Window of Opportunity

5. Liquidity

6. Benefits of Diversification7. Signals from the Market


8/37

1. Adverse Selection

2. Dilution

3. Loss of Flexibility

4. Disclosures

5. Accountability

6. Public Pressure7. Costs


9/37

The board of directors approves the proposal to

raise capital from the public and authorizes the

managing directors to do all the tasks relating to the

public issue.

The company convenes a meeting to seek the

approval of shareholders .

The company appoints a merchant banker as the

lead manager to the issue.


10/37

The LM carries out due diligence to check all

relevant information ,document and certificates for

the issue.

The LM prepares the draft prospectus in consultation

with management and seeks the approval of the board.

The company makes listing application to all the stock

exchange.


11/37

The company enters into a tripartite agreement with

the registrar and all the depositories for providing the

facility of offering the shares in dematerialized mode.

If the issue is proposed to be underwritten, the LM

Makes underwriting arrangements.

Within 21 days, SEBI makes its observation on thedraft prospectus. The stock exchanges also suggest

changes, if any.


12/37

The company files the prospectus with the Registrar

of Companies(ROC).

The LM and the company market the issue using acombination of press meetings, brokers meeting, investors

meetings and so on.

The company releases a mandatory advertisement, called

the announcement advertisement 10 days prior to the

opening of the issue.


13/37

The issue is kept open for a minimum of 3 days and

maximum of 21 days.

After the issue is closed, the basis of allotment is

finalized by the stock exchange, the LM, and the

registrar ,in conformity with SEBI-prescribed rules.


14/37

Structure the issue, taking into account the funds requi-

rement of the company, the expectations of the investors,

and other relevant factors.

Submit the prospectus to SEBI.

Arrange underwriting by financial institution, commercialbanks and brokers.


15/37

Finalize the prospectus in consultation with solicitors,

stock exchange authorities, and others.

Coordinate the efforts of brokers, registrars, advertising

agencies, printers, and others.

Develop the strategy for marketing the issue by usingthe judicious mix of conferences, advertisement ,mailing,

etc.


16/37

Monitor the issue during the subscription period.

Help in finalizing the basis of allotment.

Assist in securing stock exchange listing.


17/37

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 issueare :

1. Underwriting Expenses

2. Brokerage

3. Fees to Manager and for registrars to theissue

4. Printing and Postage Expenses

5. Advertising and Publicity Expenses

6. Listing fees and Stamp duty


18/37

Underpricing of IPOs appears to be a universal

phenomenon, though the degree of under pricing varies

widely across countries. Why does such under pricing

happen? Financial economists offer the following

explanations.

1. Winners Curse

2. Bait for Future Offerings3. Informational Asymmetry

4. Regulatory Constraints

5. Political Goals


19/37

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 doesnt 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%.


20/37

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 allotmentguidelines.

4. The requirement of minimum promoters contributionshall 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.


21/37

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 ofthe close of the issue of debentures.


22/37

A debt issue cannot be made unless credit rating from a

credit rating agency is obtained and disclosed in the offerdocument.

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

It is necessary for a company to appoint one or more

debenture trustees before a debenture issue.


23/37

RIGHT ISSUE

Characteristics:

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

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

3. The price per share for additional equity, called the subscriptionprice, 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 usuallyabout 30 days.

P d f i ht i


24/37

Procedure for r ight issue:

A company making a rights issue sends a letter of offer,

along with a composite application form consisting of 4forms (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.


25/37

Consequences of the r ight issue:

Market value per share

Value of a right

Earning per share

Wealth of the shareholders

Ill t ti d t f th Ri ht d L ft C


26/37

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 5,000,000Profit 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


27/37

Value of Shares:

NP0 + SN + 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:

P0S

N + 1

WEALTH OF SHAREHOLDERS


28/37

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


29/37

Private placement of equity

Private placement of Debt

Mutual funds , banks, Insurance Org. ,Provident fund

Rules and Regulation for the privateplacement(2003)

Disclosure

Bank should not invest unrated non SLR security.


30/37

Debt securities traded in demat form

Credit rating

Debt security listed

Bank should not invest in non SLR security.


31/37

Definition:- When a listed company issues share ordebenture to select group of person in terms of

provisions of chapter VII of SEBI regulation ,it isreferred to as preferential allotment.

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

Regulation

1)Special resolution

2)pricing

3)Open offer

4) Lock in period


32/37

1. Submission of Loan Application

2. Initial Processing of Loan Application

3. Appraisal of the Proposed Project

4. Issue of the Letter of Sanction5. Acceptance of the Term and Conditions by the

Borrowing Unit

6. Execution of Loan Agreement

7. Disbursement of Loans

8. Creation of Security

9. Monitoring


33/37

Submission of Loan Application: Borrower submits anapplication 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


34/37

Appraisal of the Proposed Project: The detail appraisalcovers 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 estimationand cost projections that distinguish between fixed and variable costs

Economic Appraisal: It looks at the project from larger social point

of view, its approach is called Partial Little Mirrlees

Managerial Appraisal: It judges managerial capabilities ofpromoters as Understanding & Commitment


35/37

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

Acceptance of the T&C by the Borrowing Unit :Onreceiving LOS, borrowing unit organize its board meeting

and appropriate resolution is passed

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

Disbursement of Loans : Periodically as borrowerssubmits information on physical progress of project , term

loan is disbursed from time to time


36/37

Creation of Security: Term Loans are secured by FIsthrough 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


37/37

1Long Term Fund 2

Documents

Transcript of 1Long Term Fund 2