Shares, Debentures & Term Loans

8/6/2019 Shares, Debentures & Term Loans

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A

PRESENTATION

ON

PRESENTED TO:

Prof. Mobin Sheikh

PRESENTED BY:

Pathan Haiyumkhan

Jivani Dhanesh

Nutan kumari


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Ordinary shares represent the ownership position in a company,

so shareholders are legal owners of the company.

They do not have a maturity date.

Dividend rate is not fixed, companys board of directors decides it.

They have residual claims on the companys assets.

Issue price of ordinary share includes par value and share

premium.


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Authorized share capital: It represents the maximum amount of

capital, which a company can raise from shareholders.

Issued share capital: The portion of the authorized share capital,

which has been offered to shareholders, is called issuedshareholders.

Subscribed share capital: It represents that part of the issued

share capital which has been accepted by shareholders.

Paid-up share capital: The amount of subscribed share capital

actually paid up by shareholders to the company is called paid-up

share capital.


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Total Shareholders Equity = Paid up share capital +

Share premium +

Reserves & surplus

Total shareholders equity or share capital is also called Net

Worth.

Book value per ordinary share= Net worth

No. of ordinary shares


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Claim On Income: Shareholders have residual claim on income after paying

expenses, interest charges, taxes and preference dividend.

Claim on Assets: Shareholders have residual claim on assets in case of liquidation,

after claims of debt holders and preference shareholders.

Right to Control: Control in the sense of a legal right for appointing directors or

replacing current director.

Voting Rights: Shareholders have voting right in case of election of director or any

new policy. Each ordinary share carries one vote. Shareholders may vote in person

or by proxy.

Pre-emptive Rights: If company want to issue new shares, than the shareholder has

this pre-emptive right to buy new shares in proportion to current shareholding.

Limited Liability: Shareholders liability is limited their investment in shares only.

Though they are owners of the company but they are not liable for any losses the

company made or in liquidation.


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Permanent Capital: Ordinary shares are not with maturity date,

hence it is a permanent capital

Borrowing Base: Equity capital increases the companys financialbase and thus its borrowing limit. Lenders generally lend in

proportion to the companys equity capital.

Dividend payment Discretion: As per the companys point of view

the company is not obliged to pay dividend. The company has to

decide how much % of dividend to be given.


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Cost: Shares have a higher cost at least for two reasons: Dividends

are not deductible as are interest payment and floatation costs on

ordinary shares are higher than those on debt.

Risk: Ordinary shares are riskier from investors point of view asthere is uncertainty regarding dividends and capital gain.

Earnings dilution: Issue of new shares dilutes the existing

shareholders EPS if profits do not increase in proportion of

increased shares.

Ownership Dilution: Issue of new ordinary shares may dilute the

ownership and control of the existing shareholders.


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Public Issue: Public issue of equity means raising of share

capital directly from the public. A company with a track record

is free to determine the issue price for its share, thus it can

issue shares at premium. A new company has to issue itsshares at par.

Private Placement: It involves sale of shares by a company to

few selected investors, like UTI, LIC, IDBI etc. This is helpful to

issue small amount of funds, it is less expensive and speedy ascompared to public issue.


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The right issue involves selling of ordinary shares to the existing

shareholders of the company. Law in India requires that the new

ordinary shares must be first issued to the existing shareholders.

Thus the shareholder has three options:

1) He can exercise his right,

2) He sells his rights,

3) He does not exercise or sell his rights.


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The no. of rights required to buy new share will be equal to the no. of existing

share outstanding divided by new share to be sold.

e.g. Suppose a company has 9 lakh shares existing and issues new 3 lakh

shares, so the existing shareholder should have at least 3 rights to buy one

new share.

Price of the share after right issue (Px) =

(Existing shares * Current market price + New shares * subscription price)

--------------------------------------------------------------------------------------------------

(Existing shares + New shares)

Px - subscription price of new share

Value of single right (R) = ------------------------------------------------

No. of rights required to buy new share


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It is also considered as hybrid security, because they

have some features of both ordinary shares and

debentures.


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Claims on income and assets-

Preference share claim is honored after that of a

debenture and before that of ordinary share.

Thus they are less risky as compared to ordinary

shares.

PARTICIPATIVE PREFERENCE SHARES are shares issuedwith voting rights.


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FIXED DIVIDEND It is expressed as % of par value.

It is a fixed income security.

Although payment of dividend is not a legalobligation.

CUMULATIVE DIVIDENDS-

It means that to pay all past unpaid dividends

before any ordinary dividends are paid.


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REDEMPTION

SINKING FUND

They may be created either to purchase preference

share or buy back pref. share.

CALL FEATURE

It permits the buyback of preferece share at astipulated call price.


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PARTICIPATION FEATURE

Participation in extra ordinary profits earned bycompany.

VOTING RIGHTS

If pref. divi. Is outstanding for two or moreconsecutive years in the past six years pref.shareholder can nominate a member on the boardof company.

CONVERTIBILITY


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Riskless leverage advantage

Dividend postponability

Fixed dividend

Limited voting rights

Non tax deductibility of dividends


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FEATURES

Interest rates are

fixed

Maturity Sinking fund

Buy back provision

It is a long term promissory note for raising loan capital.

Indenture

Security

Yield

Claims on assets and

income.


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Non Convertible Debentures

Fully Convertible Debentures

Partly Convertible Debentures


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Advantages

1. Less Costly

2. No ownership Dilution

3. Fixed payment of interest

4. Reduced real obligation

Disadvantages

1. Obligatory Payment

2. Financial Risk

3. Cash outflows

4. Restricted Covenants


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Term loans are sources of long-term debt.

Term loans are obtained directly from the banks and

financial institutions.

Generally obtained for financing large expansions,modernization or diversification projects.

This financing is also called PROJECT FINANCING.


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Maturity

Direct Negotiations

Security

Restrictive Covenants1. Asset related covenants

2. Liability related covenants

3. Cash flow related covenants

4. Control related covenants

Convertibility

Repayment Schedule


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MATURITY:FIIs are the main sources of term loans in india.

Provide generally for a pd of 6 to 10 years.

DIRECT NEGOTIATION:

Term loan is a private placement.

Advantage is the ease of negotiation and low cost of

raising loan.


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SECURITY:

Primary security

Secondary security

Floating charges ---- general mortgage

Fixed charges ---- legal mortgage

CONVERTIBILITY:

FIs in India insist on the option of converting loansinto assets.


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RESTRICTIVE COVENANTS:

Asset related covenants

Liability related covenants

Cash flow related covenants

Control related covenants

REPAYMENT SCHEDULE:

Repayment of loan in installments saves the

company from repaying huge amount at the endof loan maturity known as BALLOON PAYMENTS.


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Shares, Debentures & Term Loans

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