Sourcesof Long Term Finance
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Transcript of Sourcesof Long Term Finance
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7/24/2019 Sourcesof Long Term Finance
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SOURCESSOURCESOF LONG TERMOF LONG TERM
FINANCEFINANCE
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Need for long term FinanceNeed for long term Finance
Long term vs. sort term!"or#ingLong term vs. sort term!"or#ing
ca$ital% f&nds re'&irementsca$ital% f&nds re'&irements
For modernisation( e)$ansion(For modernisation( e)$ansion(diversi*cation+ &ge '&antities re'd.(diversi*cation+ &ge '&antities re'd.(
irreversi,le decisionirreversi,le decision
Asset-lia,ilit mismatc( interest rateAsset-lia,ilit mismatc( interest rateris#( li'&idit ris#( if LT re'ts.met , STris#( li'&idit ris#( if LT re'ts.met , ST
f&ndsf&nds
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E'&it Ca$italE'&it Ca$ital
A&torised( Iss&ed( S&,scri,ed and /aid &$A&torised( Iss&ed( S&,scri,ed and /aid &$ca$italca$ital
/ar0face val&e( Iss&e /rice( 1oo# val&e and/ar0face val&e( Iss&e /rice( 1oo# val&e andMar#et 2al&eMar#et 2al&e
Rigts of e'&it sareoldersRigts of e'&it sareolders
--Right to IncomeRight to Income3/AT less $referred dividends3/AT less $referred dividends
--Right to ControlRight to Control3 voting rigts3 voting rigts
--Pre-emptive RightPre-emptive Right3 for additional iss&es(3 for additional iss&es(rigts iss&e in te same $ro$ortionrigts iss&e in te same $ro$ortion
--Right in liquidationRight in liquidation3 resid&al claim over assets3 resid&al claim over assets
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/ros and cons of e'&it/ros and cons of e'&it
Ca$italCa$italAdvantagesAdvan
tages No *)ed mat&rit( noNo *)ed mat&rit( no
o,ligation to redeemo,ligation to redeem No com$&lsion toNo com$&lsion to$a dividends$a dividends
/rovides leverage/rovides leverage
ca$acitca$acit 4ividends ta)4ividends ta)e)em$t for investorse)em$t for investors
DisadvantagesDisadvanta
ges 4il&tion of control of4il&tion of control of
e)isting o"nerse)isting o"ners 5ig Cost3 rate of ret&rn5ig Cost3 rate of ret&rn
e)$ected , e'&itolderse)$ected , e'&itoldersiger tan de,toldersiger tan de,tolders
4ividends are not ta)4ividends are not ta)ded&cti,le3 ence cost isded&cti,le3 ence cost isigeriger
Iss&e costs iger3Iss&e costs iger3&nder"riting( ,ro#erage(&nder"riting( ,ro#erage(oter iss&e e)$ensesoter iss&e e)$enses
5iger servicing costs3 old5iger servicing costs3 oldAGMs( $ost ann&al re$ortsAGMs( $ost ann&al re$ortsetc.etc.
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Internal Accr&alsInternal Accr&als
/ros/ros
Readil availa,le( noReadil availa,le( no
tal#ing to o&tsiderstal#ing to o&tsiders
E6ectivel additionalE6ectivel additionale'&it ca$ital( o"evere'&it ca$ital( o"ever
no iss&e costs of lossno iss&e costs of loss
d&e to &nder$ricingd&e to &nder$ricing
No dil&tion of controlNo dil&tion of control No e)$ansion in e'&itNo e)$ansion in e'&it
,ase( ence no dil&tion,ase( ence no dil&tion
of E/S( 12 $er sareof E/S( 12 $er sare
etc.etc.
ConsCons
7&ant&m ver limited7&ant&m ver limited
5ig O$$ort&nit5ig O$$ort&nit
costs3 dividendscosts3 dividendsforgone , e'&itforgone , e'&it
oldersolders
Re'&ires caref&lRe'&ires caref&l
attention to N/2 ofattention to N/2 of$ro8ects$ro8ects
Consists of retained earnings and depreciation charges
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/reference Ca$ital/reference Ca$ital
Is a ,rid form of *nancingIs a ,rid form of *nancing( $ament after de,t ,&t ,efore( $ament after de,t ,&t ,eforee'&ite'&it
E'&it feat&resE'&it feat&res33
-o&t of distri,&ta,le $ro*ts-o&t of distri,&ta,le $ro*ts
-not an o,ligator $ament-not an o,ligator $ament
-dividends not ta) ded&cti,le-dividends not ta) ded&cti,le 4e,t feat&res4e,t feat&res33
-dividend rate is *)ed-dividend rate is *)ed
-ca$ital is redeema,le-ca$ital is redeema,le
-normall no rigt to vote-normall no rigt to vote Can ave oter feat&resCan ave oter feat&resli#e c&m&lative( converti,le(li#e c&m&lative( converti,le(
$artici$ating9..$artici$ating9..
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/reference Ca$ital/reference Ca$ital
/ros/ros No o,ligation to $aNo o,ligation to $a
dividend( no ,an#r&$tc ordividend( no ,an#r&$tc orlegal action for non $amentlegal action for non $ament
Financial distress ofFinancial distress ofredem$tion o,ligation notredem$tion o,ligation notver igver ig
/art of net "ort( ence/art of net "ort( enceincreases itsincreases its
credit"ortiness0 leveragecredit"ortiness0 leverageca$acitca$acit No dil&tion of controlNo dil&tion of control No $ledging of assetsNo $ledging of assets
re'&iredre'&ired
ConsCons E)$ensive so&rce sinceE)$ensive so&rce since
dividends not ta)dividends not ta)
ded&cti,leded&cti,le To&g no legalTo&g no legalconse'&ences( lia,ilit toconse'&ences( lia,ilit to$a dividends stands( can$a dividends stands( cans$oil com$an:s images$oil com$an:s image
Can ac'&ire voting rigtsCan ac'&ire voting rigts
in some casesin some cases 5ave claim $rior to e'&it5ave claim $rior to e'&it
oldersolders
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Term LoansTerm Loans
/rovided ,/rovided ,FIs0,an#sFIs0,an#s Can ,e in domestic0foreign c&rrencCan ,e in domestic0foreign c&rrenc( lia,ilit on FC( lia,ilit on FC
loans translated to r&$ees for $amentloans translated to r&$ees for $ament
Are t$icall sec&redAre t$icall sec&redagainst *)ed assets0against *)ed assets0$otecation of mova,le $ro$erties( $rime sec&rit0$otecation of mova,le $ro$erties( $rime sec&rit0collateral sec&ritcollateral sec&rit
4e*nite o,ligations4e*nite o,ligationson interest and $rinci$alon interest and $rinci$alre$ament+ interest $aid $eriodicall+ ,ased on creditre$ament+ interest $aid $eriodicall+ ,ased on credit
ris# and $egged to a ;oor rateris# and $egged to a ;oor rate Carr restrictive covenantsCarr restrictive covenantsfor f&t&re *nancial andfor f&t&re *nancial and
o$erational decisions of te com$an( its management(o$erational decisions of te com$an( its management(f&t&re f&nd raising( $ro8ects( $eriodic re$orts called forf&t&re f&nd raising( $ro8ects( $eriodic re$orts called for
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Term LoansTerm Loans
/ros/ros Interest on de,t is ta)Interest on de,t is ta)
ded&cti,leded&cti,le
4oes not res< in dil&tion4oes not res< in dil&tionof controlof control 4o not $arta#e in val&e4o not $arta#e in val&e
created , te *rmcreated , te *rm Iss&e costs of de,t is lo"erIss&e costs of de,t is lo"er
Interest cost is normallInterest cost is normall*)ed( $rotection against*)ed( $rotection againstig &ne)$ected in;ationig &ne)$ected in;ation
5as a disci$lining e6ect on5as a disci$lining e6ect onmanagementmanagement
ConsCons Entails *)ed o,ligation forEntails *)ed o,ligation for
interest and $rinci$al( noninterest and $rinci$al( non$ament can even lead to$ament can even lead to,an#r&$tc0 legal action,an#r&$tc0 legal action
4e,t contracts im$ose4e,t contracts im$oserestrictions on *rm:srestrictions on *rm:s*nancial and o$erational*nancial and o$erational;e)i,ilit;e)i,ilit
Increases *nancialIncreases *nancialleverage( e)cess raises costleverage( e)cess raises costof e'&it to te *rmof e'&it to te *rm
If in;ation rate di$s( cost ofIf in;ation rate di$s( cost ofde,t iger tan e)$ectedde,t iger tan e)$ected
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4e,ent&res4e,ent&res
Li#e $romissor notesLi#e $romissor notes( are instr&ments for raising LT de,t( are instr&ments for raising LT de,t More ;e)i,leMore ;e)i,lecom$ared to term loans as te o6er variet of coicescom$ared to term loans as te o6er variet of coices
as regards mat&rit( interest rate( sec&rit( re$ament and oteras regards mat&rit( interest rate( sec&rit( re$ament and oters$ecial feat&ress$ecial feat&res
Interest rateInterest ratecan ,e *)ed0;oating0dee$ disco&ntcan ,e *)ed0;oating0dee$ disco&nt Converti,ilit 3Converti,ilit 3Can ,e FC4s( NC4s( /C4sCan ,e FC4s( NC4s( /C4s
montsmonts
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Oter forms of FinanceOter forms of Finance
Leasing3Leasing3asset leased o&t in lie& of lease rentals( title notasset leased o&t in lie& of lease rentals( title nottransferred( onl economic &se of assets given+ can ,e *nancialtransferred( onl economic &se of assets given+ can ,e *nanciallease or o$erating !service% leaselease or o$erating !service% lease
5ire /&rcase5ire /&rcase3 o"nersi$ transferred to te ,&er after all te3 o"nersi$ transferred to te ,&er after all te
installments $aid &$installments $aid &$ Sec&ritisation3Sec&ritisation3assets involving *nancial claims $ooled andassets involving *nancial claims $ooled and*nancial instr&ments created( t&s creating cas o&t of*nancial instr&ments created( t&s creating cas o&t ofreceiva,lesreceiva,les
Government S&,sidiesGovernment S&,sidies3 central and state govts o6er cas3 central and state govts o6er cass&,sidies to &nits in ,ac#"ard areas( classi*ed in tree categoriess&,sidies to &nits in ,ac#"ard areas( classi*ed in tree categories
Sales ta) deferments and e)em$tionsSales ta) deferments and e)em$tions3 $ament deferred for a3 $ament deferred for a
*)ed $eriod( li#e interest free loan+ or e)em$tions given for certain*)ed $eriod( li#e interest free loan+ or e)em$tions given for certainno. of earsno. of ears
S&$$liers creditS&$$liers credit3 availa,le from s&$$liers of maciner( oter *)ed3 availa,le from s&$$liers of maciner( oter *)edassets( terms devised to defer $ament( or $a in installmentsassets( terms devised to defer $ament( or $a in installmentsover a $eriod of timeover a $eriod of time
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Leasing vs. 5ire /&rcaseLeasing vs. 5ire /&rcase
LeasingLeasing O"nersi$ not transferred toO"nersi$ not transferred to
lesseelessee 4e$reciation ,ene*t to lessor4e$reciation ,ene*t to lessor
Magnit&de of f&nds ig( for ,igMagnit&de of f&nds ig( for ,igtic#et itemstic#et items
No margin mone0do"n $amentNo margin mone0do"n $amentre'&iredre'&ired
Maintenance of asset , lessor inMaintenance of asset , lessor ino$erating leaseo$erating lease
Ta) ,ene*ts of de$reciation ta#enTa) ,ene*ts of de$reciation ta#en
, lessor+ lessee gets ta) sield, lessor+ lessee gets ta) sieldon lease rentalson lease rentals
Considered o6 ,alance seetConsidered o6 ,alance seetmode of *nancing( as no asset ormode of *nancing( as no asset orlia,ilit *g&res in ,alance seetlia,ilit *g&res in ,alance seet
Hire-PurchaseHire-Purchase O"nersi$ transferred to irer onO"nersi$ transferred to irer on
$ament of all instalments$ament of all instalments 4e$reciation sield availa,le to4e$reciation sield availa,le to
irerirer Ma,e for smaller val&e ca$italMa,e for smaller val&e ca$ital
goodsgoods Some do"n $ament re'dSome do"n $ament re'd
Maintenance cost ,orne , irerMaintenance cost ,orne , irer
5irer allo"ed de$reciation claim5irer allo"ed de$reciation claimand *nance carge for ta)ation+and *nance carge for ta)ation+seller ma claim interest onseller ma claim interest onamo&nt ,orro"ed to ac'&ire assetamo&nt ,orro"ed to ac'&ire asset
Asset *g&res in ,alance seet onAsset *g&res in ,alance seet oncom$lete of $&rcasecom$lete of $&rcase
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Raising Long Term FinanceRaising Long Term Finance
Initial /&,lic O6er !I/O%Initial /&,lic O6er !I/O% Secondar /&,lic o6erSecondar /&,lic o6er
Rigts Iss&eRigts Iss&e 1o> o&t deals1o> o&t deals E&ro Iss&esE&ro Iss&es /rivate /lacement/rivate /lacement
/referential allotment/referential allotment 2ent&re Ca$ital0 /rivate E'&it transactions2ent&re Ca$ital0 /rivate E'&it transactions O,taining a term loanO,taining a term loan
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Initial /&,lic O6erInitial /&,lic O6er
/ros/ros Access to larger amo&nt ofAccess to larger amo&nt of
f&ndsf&nds F&rter gro"t limitedF&rter gro"t limited
com$anies not &sing tis ro&tecom$anies not &sing tis ro&te Listing3 $rovides e)it ro&te toListing3 $rovides e)it ro&te to$romoters+ ens&res$romoters+ ens&resmar#eta,ilit of e)isting saresmar#eta,ilit of e)isting sares
Encas on val&e created in teEncas on val&e created in te*rm*rm
Recognition in mar#etRecognition in mar#et
Stoc# $rices $rovide &sef&lStoc# $rices $rovide &sef&lindicators to managementindicators to management
Sometimes sti$&lated ,Sometimes sti$&lated ,$rivate investors in te$rivate investors in tecom$ancom$an
ConsCons /ricing ma ave to ,e/ricing ma ave to ,e
attractive to l&reattractive to l&re
investorsinvestors Loss of ;e)i,ilitLoss of ;e)i,ilit 5iger acco&nta,ilit5iger acco&nta,ilit More disclos&reMore disclos&re
re'&irements to ,ere'&irements to ,e
metmet 2isi,ilit in mar#et2isi,ilit in mar#et Cost of ma#ing aCost of ma#ing a
$&,lic iss&e '&ite ig$&,lic iss&e '&ite ig
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Ste$s in an I/OSte$s in an I/O
A$$roval of 1O4A$$roval of 1O4 Sareolders: a$$rovalSareolders: a$$roval A$$ointment of lead manager!s%A$$ointment of lead manager!s% 4&e diligence , LM4&e diligence , LM A$$ointment of intermediaries li#e registrars( $rinters( ,an#ers( advertisersA$$ointment of intermediaries li#e registrars( $rinters( ,an#ers( advertisers
/re$are draft $ros$ect&s/re$are draft $ros$ect&s Filing "it SE1IFiling "it SE1I Listing a$$lications *led along"it draft $ros$ect&sListing a$$lications *led along"it draft $ros$ect&s Agreement "it registrars and de$ositoriesAgreement "it registrars and de$ositories A$$oint &nder"riters !if re'd.%A$$oint &nder"riters !if re'd.% Ma#e canges in draft $ros$ect&s as $er SE1I o,servations( SE s&ggestionsMa#e canges in draft $ros$ect&s as $er SE1I o,servations( SE s&ggestions File $ros$ect&s "it ROCFile $ros$ect&s "it ROC
Iss&e mar#eting e)ercise commencesIss&e mar#eting e)ercise commences A$$lication forms dis$atcedA$$lication forms dis$atced Iss&e o$enedIss&e o$ened 1asis of allotment *nalised1asis of allotment *nalised Allotments made( ref&nds $osted( sares listed on SEsAllotments made( ref&nds $osted( sares listed on SEs
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Oter as$ects of a $&,licOter as$ects of a $&,lic
iss&eiss&e Eligi,ilit criteria de*nedEligi,ilit criteria de*ned3 net "ort( trac# record of3 net "ort( trac# record of
$ro*ta,ilit( iss&e in same ear+ secondar iss&es$ro*ta,ilit( iss&e in same ear+ secondar iss&esave no s&c restrictionsave no s&c restrictions
1oo# 1&ilding $rocess1oo# 1&ilding $rocess
3 $rocess of tendering '&antities3 $rocess of tendering '&antities
at $rices "itin a ,andat $rices "itin a ,and Iss&e e)$ensesIss&e e)$enses3 &nder"riting( ,ro#erage commissions(3 &nder"riting( ,ro#erage commissions(
fees to managers to te iss&e( registrars( $rinters(fees to managers to te iss&e( registrars( $rinters(advertisers( listing fees( stam$ d&tadvertisers( listing fees( stam$ d&t
Iss&e $ricingIss&e $ricing3 free $ricing( disclose ,asis for iss&e $rice3 free $ricing( disclose ,asis for iss&e $rice /&,lic iss&e of de,t/&,lic iss&e of de,t3 a$$ointment of de,ent&re3 a$$ointment of de,ent&re
tr&stee( creation of 4RR( credit rating re'd.( sec&rit totr&stee( creation of 4RR( credit rating re'd.( sec&rit to,e created,e created
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Rigts Iss&eRigts Iss&e
? Iss&e of ca$ital toIss&e of ca$ital to e)isting sareolderse)isting sareolders? O6er made on a $ro rata ,asisO6er made on a $ro rata ,asis? O6er doc&ment calledO6er doc&ment called Letter of O6erLetter of O6er? O$tion given to a$$l forO$tion given to a$$l for additional saresadditional sares? Rigts ren&nciationRigts ren&nciation3 are tradea,le( ma ,e sold o6 in te3 are tradea,le( ma ,e sold o6 in te
mar#etmar#et? 2al&e of a sare after rigts32al&e of a sare after rigts3
!N/!N/@@S%0!N=%+ NBno. of e)isting sares re'&ired for rigts+ /S%0!N=%+ NBno. of e)isting sares re'&ired for rigts+ /@@Bc&m rigts M/ $er sare+ SB s&,scri$tion $rice of rigts iss&eBc&m rigts M/ $er sare+ SB s&,scri$tion $rice of rigts iss&e
? 2al&e of a rigt2al&e of a rigtB !/B !/@@S%0!N=%S%0!N=%? Com$arison "it /&,lic iss&eCom$arison "it /&,lic iss&e3 "it familiar investors( ence3 "it familiar investors( ence
li#el to ,e more s&ccessf&l+ less ;oatation costs since noli#el to ,e more s&ccessf&l+ less ;oatation costs since no&nder"riting+ ,&t lo"er $ricing to ,ene*t sareolders&nder"riting+ ,&t lo"er $ricing to ,ene*t sareolders
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/rivate /lacement/rivate /lacement
Sale of sec&ritiesSale of sec&rities directl to "olesale investorsdirectl to "olesale investorsli#e FIs(li#e FIs(,an#s( MFs( FIIs(/E f&nds etc.,an#s( MFs( FIIs(/E f&nds etc.
CalledCalled $rivate $lacement$rivate $lacementin e'&it0e'&it relatedin e'&it0e'&it relatedinstr&ments( in &nlisted com$anies and in all cases of de,tinstr&ments( in &nlisted com$anies and in all cases of de,t
CalledCalled $referential allotment$referential allotmentin case of &nlisted com$aniesin case of &nlisted com$aniesfor e'&it0e'&it related instr&mentsfor e'&it0e'&it related instr&ments
4i6erent from reservations4i6erent from reservationsmade for s&c 7I1s o&t of amade for s&c 7I1s o&t of a$&,lic iss&e$&,lic iss&e
S&,8ect to SE1I reg&lationsS&,8ect to SE1I reg&lationson $ricing( loc# in $eriod( o$enon $ricing( loc# in $eriod( o$eno6er to ,e made to $&,lico6er to ,e made to $&,lic
7I1 $lacement g&idelines7I1 $lacement g&idelinesrecentl iss&ed , SE1I forrecentl iss&ed , SE1I forcom$liance and disclos&rescom$liance and disclos&res
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/rivate /lacement/rivate /lacement
/ros/ros Less e)$ensive modeLess e)$ensive mode Lesser SE1I and oterLesser SE1I and oter
reg&lationsreg&lations Easier to mar#et te iss&e toEasier to mar#et te iss&e to
a fe" investorsa fe" investors Entr of "olesale *nanciallEntr of "olesale *nanciall
so$isticated investors inso$isticated investors incom$an:s $ro*lecom$an:s $ro*le
Ma &se tis ro&te &ntil I/OMa &se tis ro&te &ntil I/Odecision ta#endecision ta#en
Less administrativeLess administrativemaintenancemaintenance
ConsCons 4oes not '&alif for listing4oes not '&alif for listing
in an &nlisted com$anin an &nlisted com$an
Restrictive covenants maRestrictive covenants ma,e im$osed , te,e im$osed , teinvestorsinvestors
Ma call for managementMa call for management$artici$ation$artici$ation
Iss&e $ricing more tigtIss&e $ricing more tigt
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2ent&re Ca$ital0/rivate2ent&re Ca$ital0/rivate
E'&itE'&it E'&it *nanceE'&it *nanceto $otentiall ig gro"t com$aniesto $otentiall ig gro"t com$anies Reasona,l longReasona,l longto medi&m term commitmentto medi&m term commitment 5ands on management5ands on managementa$$roac( active $artici$ation in managementa$$roac( active $artici$ation in management ConsideredConsidered val&e add investorval&e add investor
2C3 $rimaril ig ris# ig ret&rn2C3 $rimaril ig ris# ig ret&rninvestment es$. in tecnolog oriented0investment es$. in tecnolog oriented0#no"ledge intensive ,&sinesses "it long develo$ment ccles( green*eld#no"ledge intensive ,&sinesses "it long develo$ment ccles( green*eldvent&resvent&res
Can ,e inCan ,e in &nlisted or listed&nlisted or listed!/I/ES% Com$anies!/I/ES% Com$anies E)it ro&teE)it ro&teto ,e de*ned at te time of investmentto ,e de*ned at te time of investment Restrictive cla&sesRestrictive cla&seson $romoters: olding sell o6 and oteron $romoters: olding sell o6 and oter
*nancial0o$erational iss&es*nancial0o$erational iss&es 4etailed memorand&m0,&siness4etailed memorand&m0,&siness$lan on com$an( its *nancials to ,e$lan on com$an( its *nancials to ,e
$re$ared$re$ared Sareolders agreementSareolders agreementto ,e signed , ,ot $artiesto ,e signed , ,ot $arties 2al&ation of Com$an2al&ation of Com$an#e iss&e#e iss&e Leads toLeads to dil&tion of controldil&tion of control, e)isting $romoters, e)isting $romoters
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O,taining a Term LoanO,taining a Term Loan
Submission of loan applicationSubmission of loan application::a $ro8ect re$ort containinga $ro8ect re$ort containingcom$lete details of te $ro8ect given to te FI01an#com$lete details of te $ro8ect given to te FI01an#
Initial processing of loan applicationInitial processing of loan application::$re$are ;as re$ort to$re$are ;as re$ort todecide if $ro8ect "ort an a$$raisal or notdecide if $ro8ect "ort an a$$raisal or not
Project Appraisal:Project Appraisal:4etailed a$$raisal done to decide if $ro8ect ta#en4etailed a$$raisal done to decide if $ro8ect ta#enor not( in terms of mar#et( tecnical( *nancial( managerial a$$raisalor not( in terms of mar#et( tecnical( *nancial( managerial a$$raisal
Issue of Letter of Sanction:Issue of Letter of Sanction: to te ,orro"er containing amo&ntto te ,orro"er containing amo&ntsanctioned and terms and conditions teretosanctioned and terms and conditions tereto
Acceptance of terms and conditions by the borroing unit:Acceptance of terms and conditions by the borroing unit: tr&tr&a ,oard meeting and conveed to te FI01an#a ,oard meeting and conveed to te FI01an#
!"ecution of loan agreement:!"ecution of loan agreement: signed , ,ot $artiessigned , ,ot $arties
Disbursement of loan:Disbursement of loan:in trances ,ased on $rogress of te $ro8ect(in trances ,ased on $rogress of te $ro8ect(tie &$ of means of *nancetie &$ of means of *nance #reation of security:#reation of security:formalities to ,e com$leted "itin a timeframeformalities to ,e com$leted "itin a timeframe $onitoring:$onitoring:at im$lementation and o$erational stage tr& $eriodicat im$lementation and o$erational stage tr& $eriodic
$rogress re$orts( site visits etc.$rogress re$orts( site visits etc.