Prepared by : Maitreyee Jadav

Chirag Raval
Chirag Jani
Utsav Sutaria
Long Term Funds
Venture Capital
Initial Public Offer
Secondary Public Offer
Right Issue
Private Placement
Preferential Allotment
Dilution
Obtaining a Term Loan
 Venture Capital

Venture Capital represent financial investment

in a highly risky proposition made in the hope of
earning a high rate of return. It is provided mainly
in the form of equity capital.
1. The Venture capitalist is inclined to assume a high
degree 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.
 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.
1. Access to Capital
2. Respectability
3. Investor Recognition
4. Window of Opportunity
5. Liquidity
6. Benefits of Diversification
7. Signals from the Market
1. Adverse Selection
2. Dilution
3. Loss of Flexibility
4. Disclosures
5. Accountability
6. Public Pressure
7. Costs
 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 issue are :
1. Underwriting Expenses
2. Brokerage
3. Fees to Manager and for registrars to the issue
4. Printing and Postage Expenses
5. Advertising and Publicity Expenses
6. Listing fees and Stamp duty
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 doesn’t 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%.
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 allotment
guidelines.

4. The requirement of minimum promoters’ contribution

shall 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.
 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 of
the close of the issue of debentures.
 A debt issue cannot be made unless credit rating from a
credit rating agency is obtained and disclosed in the offer
document.

 It is mandatory to create a debenture redemption reserve

for every issue of debentures.

 It is necessary for a company to appoint one or more

debenture trustees before a debenture issue.
 RIGHT ISSUE

Characteristics:

1 The no. of rights that a shareholder gets is equal to the number of

shares held by him.
2 The no. of rights required to subscribe to an additional share is
determined by the issuing company.
3 The price per share for additional equity, called the subscription
price, 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 usually
about 30 days.
 Procedure for right issue:

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

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

Consequences of the right issue:

 Market value per share

 Value of a right

 Earning per share

 Wealth of the shareholders

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 5,000,000
Profit 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
 Value of Shares:

NP0 + S
N+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:

P0 – S
N+1
 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
  Private placement of equity
 Private placement of Debt
 Mutual funds , banks, Insurance Org. ,Provident fund
 Rules and Regulation for the private
placement(2003)
 Disclosure
 Credit rating
 Debt securities traded in demat form
 Debt securities traded in demat form

 Credit rating

 Debt securities traded in demat form

 Debt security listed

 Bank should not invest in non SLR security.

 Definition

 Promoters, strategic investors, venture capitalist,

Financial Institute, supplier

 Regulation
1)Special resolution
2)pricing
3)Open offer
4) Lock in period
 Dilution is an issue that often comes up when firm
plans to sell securities.
 Dilution can be in terms of proportionate
ownership, book value, market value or earning per
share.
 Dilution may occur if a firm sells shares to the
general public
 It can be avoided, if firm makes a rights issue.
Rights issue enables existing shareholders to
maintain their proportionate
1. Submission of Loan Application
2. Initial Processing of Loan Application
3. Appraisal of the Proposed Project
4. Issue of the Letter of Sanction
5. 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
 Submission of Loan Application: Borrower submits an
application 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
 Appraisal of the Proposed Project: The detail appraisal
covers 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 estimation

and cost projections that distinguish between fixed and variable costs

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

of view, it’s approach is called “Partial Little Mirrlees”

 Managerial Appraisal: It judges managerial capabilities of

promoters as Understanding & Commitment
 Issue of the Letter of Sanction: If project is accepted it
is issued to borrowers

 Acceptance of the T&C by the Borrowing Unit : On

receiving LOS, borrowing unit organize its board meeting
and appropriate resolution is passed

 Execution of Loan Agreement : Process of

documentation and stamped is done and agreement is signed

 Disbursement of Loans : Periodically as borrowers

submits information on physical progress of project , term
loan is disbursed from time to time
 Creation of Security: Term Loans are secured by FI’s
through 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