lon term sources of finance

8/6/2019 Lon Term Sources of Finance

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CAPITAL MARKET EFFICIENCY AND CAPITAL

MARKET PRODUCT

Capital market perform two functions:

1. Liquidity

2. Fair pricing securities



FORMS OF CAPITAL MARKET EFFICIENCY

y W eak form of efficiency

y Semi-strong form of efficiency

y

Strong form of efficiency



CAPITAL MARKETS IN INDIA

PRIMARY MARKET IN INDIA INCLUDES-:

y IPOs

y Financial instruments

y Private placement

y Euro issues

y

Government securitiesy Book- building



Contd.

SECONDARY MARKETS IN INDIA INCLUDES:-

y SEBI

y Derivatives market

y Merchant banking

y Mutual funds

y Hedge funds



Long term sources of financing

Shares

T ypes of shares

1. Ordinary shares.

2. Preference shares.



Ordinary shares

R epresent the ownership position in a company.

Features of ordinary shares:-

1. Claim on income.

2. Claim on assets.

3. R ight to control.

4. Voting rights.5. Limited liability.



Preference shares

also known as hybrid security.

Features of preference shares :-

1. Claim on income & assets.

2. Fixed dividend.

3. Cumulative dividends.4. Sinking fund.

5. Convertibility.



DEBENTURES A Debenture is a long term promissory note for raising

loan capital. The firm promises to pay interest and

principal as stipulated. The purchasers of debenturesare called Debenture Holder.

An alternative form of debenture in India is BOND.

Mostly public sector companies in India issue bonds.

In USA, the term debenture is generally understood to

mean unsecured bond.



F eatures of Debentures Interest rate:-

� The interest rate on debenture is fixed and known. It is called the contractualrate of interest.

� Payment of interest is legally binding on a company.

�

Debenture interest tax is deductible for computing the company¶s corporate tax.However, companies in INDIA are sometimes allowed by the government toissue bonds with tax free interest.

Maturity:-� The maturity of debenture indicates the length of time until the company

redeems (returns) the par value to debenture holders and terminates the

debentures. In India, a debenture is typically redeemed after 7 to 10 years ininstallment.

R edemption:-

debentures are mostly redeemable; they are generally redeemedon maturity. R edemption of debentures can be accomplished either through a sinking fund or buy-back provision.



Sinking fund:-

A sinking fund is cash set aside periodically for retiring debentures. The fund is

under the control of the trustee who redeems the debentures either by purchasing

them in the market or calling them in an acceptable manner.

Buy ±back provision:-

Debenture issues include buy ±back provision. Buy ±back provisions enable the

company to redeem debentures at a specified price before the maturity date.

Indenture:-An indenture or debenture trust deed is a legal agreement between the company

issuing debentures and the debenture holders.

Security:-

Debentures are either secured or unsecured. A secured debenture is secured by thelien on the company¶s specific assets. If a company defaults, the trustee can seize the

security on behalf of the debenture holder.

When debentures are not protected by any security, they are known as unsecured or

naked debentures.



Types of Debenturesy Non ± convertible debentures (NCDs)

y Fully ± convertible debentures (FCDs)

y

Partlyconvertible debentures (P

CDs)

Non ±convertible debentures:- NCDs are pure debentures without a feature of

conversion.

Fully ±convertible debentures:- FCDs are converted into shares as per theterms of the issue with regard to price and time of conversion.

Partly ±convertible debentures:- A number of debentures issued by companies

in India have two parts: a convertible part and a non ±convertible part. Such

debentures are known as partly convertible debentures.



CO NVERTIBLE DEBENTURES

A convertible debenture is a debenture that can be changed into a specified number

of ordinary shares at the option of the owner.

The most important feature of this debenture is that it promises a fixed income

associated with debenture as well as chance of capital gains associated with equityshare after the owner has exercised his conversion option. Because of this

combination of fixed income and capital gains in the convertible debentures, it has

been called a hybrid security.

For example:- a company issues 8 lakh 15% convertible debentures of R s. 125 eachthat are convertible into two equity shares of R s. 62.50 each after two years from

the date of allotment but within 3 months company receives 8 lakh * 125 = 1000

lakh then debenture holders get their interest on debenture as fixed income. And

then after two year debentures get converted into two equity shares. And debenture

holders become share holders of the company.



V aluation of convertible debenturesThe market value of a convertible debenture will thus depend on: market price

of ordinary shares, conversion value, and the value of non ±convertible or

straight debenture, called investment value.

Conversion value = conversion ratio * share price

Conversion ratio is in the replacement of 1 debenture there is how manyequity shares provided by the company.

Like our last example there is 2 equity share on the behalf of 1 debenture«.

So the ratio is 1:2.



Venture Capital Financing :

Venture capital is the investment of long term equity finance

where the venture capitalist earns his return primarily in the formof capital gains .

Features Of Venture Capital :

� Equity participation� Long term investment� Participation in management



Venture Capital Investment Process :

1. Deal origination2. Screening

3. E valuation4. Deal structuring5. Post investment activity 6. Exit



Methods Of

Venture Financing :

1. Equity 2. Conditional Loan3. Income Note4. Participating Debenture



Disinvestment Mechanism :

� Buyback� Initial Public Offerings

� Secondary Stock Market

lon term sources of finance

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