4. raising long-term finance
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Financial Management I
4. Raising Long-Term Finance
Dr. Suresh
Phone: 40434399, 25783850
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Course Content - Syllabus
*Book reference
Sr Title ICMR Ch. PC Ch. IMP Ch.
1 Introduction to Financial Management 1* 1 1
2 Overview of Financial Markets 2* 2 -
3 Sources of Long-Term Finance 10* 17 20, 21
4 Raising Long-term Finance - 18* 20, 21, 23
5 Introduction to Risk and Return6 Time Value of Money
7 Valuation of Securities
8 Cost of Capital
9 Basics of Capital ExpenditureDecisions
10 Analysis of Project Cash Flows
11 Risk Analysis and Optimal Capital
Expenditure Decision2 / 22
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Raising Long-Term Finance
Reference Books
1. Financial Management, Prasanna Chandra, 7th Edition,
Chapter 18
2. Financial Management, I. M. Pandey, 9th Edition,
Chapter 20, 21, 23
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SyllabusRaising Long-Term Finance
1. Venture Capital
2. Initial Public Offering
3. Public Issue by Listed Companies
4. Rights Issue
5. Preferential Allotment
6. Private Placement
7. Term Loans
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Introduction
Typical Balance Sheet
Liabilities Assets
Share Capital 30 Fixed assets (net) 50Equity 25 Gross Block 80
Preference 5 Acc. depreciation 20
Reserves and Surplus 20 Investments 15
Secured Loans 25 Current assets, loans and advances 35
Term loans 15 Cash at hand 5Cash Credit 10 Debtors 12
Unsecured loans 10 Inventories 13
Bank Credit 4 Advances 3
Inter-corporate 5 Misc. exp. and losses 2
Deposits 1Current Liabilities and Provisions 15
Trade Credit 10
Advances 3
Provisions 2
Total Liabilities 100 Total Assets 100
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1. Venture Capital
Venture capital, as name suggests is for new ventures.
New company not yet ready to get bank loans or IPOs,
seek venture capital (VC). Such capital is provided by
venture capital funds, which are prepared to finance an
untried concept that appears to have promisingprospects.
VC funds support growing firms during their initial
stages, before they are ready to make IPO.
VC is provided mainly in the form of equity capital, to
share the risk and rewards.
VC represents financial investments in highly risky
venture made in the hope of high returns.
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1. Venture Capital
VC, in addition to providing funds, takes an active
interest in guiding the firm.
VC normally invest for 3 to 7 years in a firm. Generally
the promoter of the firm is given first option to acquire
the investments held by VC.
Indian VC Industry:
Indian VC industry is relatively recent origin. Since mid
1990s, with economic reforms in India, international VC
emerged as a significant player, in addition to domestic
VCs such as ICICI Bank VC, SIDBI VC etc.
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1. Venture Capital
Preparing Business Plan
If you are approaching a VC to finance your project, you
need to prepare your business plan. It should include
Executive Summary
Details about people (team), product, market andcompetition.
Financial projections for about two years with
emphasis on cash flows
Identify risks and strategy to cope with the same.
PE and VC
PE and VC have some common features. PE invest
mostly in later stage with substantial operating history.
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2. Initial Public Offering
IPO is the first public offering of equity shares of a
company and shares are listed and traded on the stock
exchange.
Benefits of Going Public (IPO)
Access to Capital: to access large capital. Respectability: Exposure, growth potential, attract talent
Investor Recognition: more stock prices
Window of Opportunity: to tap capital when overpriced
Liquidity: due to more investors
Benefit of Diversification: for promoters and investors
Signals from the Market: stock prices represents
information.
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2. Initial Public Offering
Costs of Going Public
Adverse selection: Investors know less w.r.t. issuers.
Investors need under pricing
Dilution
Loss of Flexibility: due to regulations
Disclosures
Accountability: to investors
Public Pressure: to do things, that it may not otherwise
do.
Costs: issuing IPO, reports, AGMs, communicating with
FIs and financial analysts and statutory obligations.
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2. Initial Public Offering
Eligibility for an IPO Company has net tangible assets of at least Rs. 3 crores
in each of the preceding 3 years
It has track record of distributable profits for at least 3
out of the immediately proceeding 5 years
It has a new worth of at least Rs. 1 crore in each of thepreceding 3 financial years
The issue size does not exceed five times the pre-issue net
worth
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2. Initial Public Offering
In case a company does not satisfy any of the above
conditions, it can make an IPO of equity or convertibles
only if it meets following two conditions
IPO is made through the book building process, with at
least 50% allotted to QIBs
Minimum post issue equity capital shall be 10 crores.
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2. Initial Public Offering
Steps in IPO
Lead Manager of the Issue
Cost of Capital Issue
Issue Pricing
3 P bli I b Li d C i
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3. Public Issue by Listed Companies
As companies grow, they need more finance and
approach capital market for equity and debt. These
issues may be right issues to the existing shareholders or
to the public investors at large. These issues are called
secondary public offer or follow on public offers (FPOs).
The procedure for secondary public offer is similar to
that of IPO. However these are subject to some
regulations as follows
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3. Public Issue by Listed Companies
1. The aggregate size of the proposed issue and all
previous issues made in the same financial year doesnot exceed five times its pre-issue net worth.
2. Promoter shall participate 20 % of the issue or ensure
that their holding post-issue equity is at least 20%3. Promoters wish to subscribe beyond 20%, it shall be
subject to preferential allotment and shall be locked in
for one year.
4. Requirement of minimum promoters contribution andlock-in of excess contribution shall not be applicable if
the company is listed on stock exchange for minimum 3
years and dividend payments for preceding 3 years.
Public Offer of Debt
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4. Rights Issue
Rights issue is an issue of capital to the existing
shareholders of the company on a pro rata basis. This isrequired under section 81 of the Companies Act, 1956.
The company may issue additional capital to the public.
Characteristics of a Rights Issue
Issuing firm decides on the number of rights shares to be
issued.
Based on the number of rights shares issued, shares
entitlement of existing shareholders is determined. Price per share is left to the discretion of the company
Rights are negotiable. The holders of rights can sell them
Rights can be exercised only during fixed period, usually
30 to 60 da s.
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4. Rights Issue
Procedure for Rights Issue
Consequences of Rights Issue
Value of Shares and value of Rights
Wealth of Shareholders
Setting the Subscription Price
5 P f ti l All t t
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5. Preferential Allotment
Issue of equity or equity-related instruments by a listed
company to pre-identified investors, who may or may
not be the existing shareholders of the company at a
predetermined price is referred as a preferential
allotment. Generally preferential allotment is made to promoters,
strategic investors, VCs, FIs and suppliers.
Rationale for the preferential allotment is to secure the
equity participation of those the company considers
desirable.
5 P f ti l All t t
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5. Preferential Allotment
Regulations
Special Resolution: Shareholders must pass a special
resolution for.
Pricing: guidelines
Open Offer: to existing shareholders id more than 15%
of equity
Lock-in Period: 1 year
6 P i t Pl t
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6. Private Placement
Private placement and preferential allotment involve sale
of securities to a limited number of important investors
such as FIs, mutual funds, VCs, banks and so on.
In a private placement, the identity of investors may not
be known when the offer document is prepared.
In India, private placement refers to sale of equity or
equity related instruments of an unlisted company or
sale of debentures. Private placement of Equity: Such issues are not
regulated by SEBI.
Private placement of debt: Regulated by SEBI and RBI.
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7. Term Loans
Term Loan is generally a long term source of finance
Term Loan Procedure
Submission of Loan Application
Initial Processing of Loan Application
Appraisal of the Proposed Project Issue of the Letter of Sanction
Acceptance of the Terms and Conditions by the
Borrowing Unit
Execution of Loan Agreement
Disbursement of Loans
Creation of Security
Monitoring
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7. Term Loans
Project Appraisal
Market Appraisal
Technical Appraisal
Financial Appraisal
Economic Appraisal
Managerial Appraisal