means of project finance

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LONG TERM FINANCE: SHARES,LONG TERM FINANCE: SHARES,LONG TERM FINANCE: SHARES,LONG TERM FINANCE: SHARES,

DEBENTURES AND TERM LOANSDEBENTURES AND TERM LOANSDEBENTURES AND TERM LOANSDEBENTURES AND TERM LOANS


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LEARNING OBJECTIVES

Explain the features of ordinary shares

Focus on the benefits and valuation ofrights shares

Discuss the pros and cons of debenturesand preference shares

Highlight the features of term loans

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INTRODUCTION

Ordinary shares provide ownership rightsto investors.

Debentures or bonds provide loan capital

to the company, and investors get thestatus of lenders.

Loan capital is also directly available fromthe financial institutions to the companies.

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Ordinary SharesFeatures

Claim on Income

Claim on Assets

Right to Control

Voting Rights

Pre-Emptive Rights

Limited Liability

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Reporting of Ordinary Shares5

Tata Motors' Share Capital as on 31 March 2008


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Ordinary SharesPros andCons

Advantages Permanent Capital

Borrowing Base

Dividend Payment Discretion

Disadvantages Cost

Risk

Earnings Dilution Ownership Dilution

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Public Issue of Equity

Public issue of equity means raising ofshare capital directly from the public.

As per the existing norms, a company with

a track record is free to determine theissue price for its shares.

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Underwriting of Issues

It is legally obligatory to underwrite a publicand a rights issue.

In an underwriting, the underwritersgenerally

banks, financial institution, brokers, etc.guarantee to buy the shares if the issue is notfully subscribed by the public.

The agreement may provide for a firm buying

by the underwriters.The company has to pay an underwriting

commission to the underwriter for theirservices.

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Private Placement

Private placement involves sale of shares(or other securities) by the company to fewselected investors, particularly the

institutional investors.

Private placement has the followingadvantages:

Size

Cost

Speed

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Right Issue of Equity Shares

Selling of Ordinary Shares to the existingshareholders of the company.

Value of Right

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Effect on ShareholdersWealth

The shareholder has three options:

(i) he exercises his rights,

(ii) he sells his rights, or

(iii) he does not exercise or sell his rights.

He will lose under the third option.

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Is the Subscription Price of anySignificance?

It is irrelevant in terms of the impact on theshareholders wealth.

It can be fixed at any level below the currentmarket price.

The primary objective in setting the subscriptionprice low is that after the rights offering, the marketprice should not fall below it.

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Right Shares Pros and Cons

Advantages1. Control is maintained

2. Less flotation cost

3. Issue more likely to be successful

Disadvantages1. Shareholders lose if fail to exercise their right

2. If shareholding concentrated in hands of FI

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Preference Shares

Similarity to Ordinary Shares:1. Non payment of dividends does not force

company to insolvency.

2. Dividends are not deductible for tax purposes.

3. In some cases, it has no fixed maturity dates.

Similarity to Debentures:1. Dividend rate is fixed.

2. Do not share in residual earnings.

3. Preference shareholders have claims on incomeand assets prior to ordinary shareholders.

4. Usually do not have voting rights.

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Preference SharesFeatures

1. Claims on Income and Assets

2. Fixed Dividend

3. Cumulative Dividend

4. Redemption5. Sinking Fund

6. Call Feature

7. Participation Feature8. Voting Rights

9. Convertibility

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Preference SharesPros andCons

Advantages: Risk less leverage advantage

Dividend postponability

Fixed dividend

Limited Voting Rights

Disadvantages: Non-deductibility of Dividends

Commitment to pay dividends

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DEBENTURES

A debenture is a long-term promissory notefor raising loan capital.

The firm promises to pay interest and

principal as stipulated.The purchasers of debentures are called

debenture holders.

An alternative form of debenture in India is a

bond. Mostly public sector companies in India issue

bonds.

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DebenturesFeatures

Interest Rate

Maturity

Redemption

Sinking FundBuy-back (call) provisions

Indenture

SecurityYield

Claims on Assets and Income

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Types of Debentures

1. Non Convertible Debentures

2. Fully Convertible Debentures

3. Partly Convertible Debentures

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DebenturesPros and Cons

Advantages: Less Costly

No ownership Dilution

Fixed payment of interest

Reduced real obligation

Disadvantages: Obligatory Payment

Financial Risk Cash outflows

Restricted Covenants

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Term LoansFeatures

Maturity Direct Negotiations Security

Restrictive Covenants1. Asset related covenants2. Liability related covenants3. Cash flow related covenants4. Control related covenants

Convertibility Repayment Schedule

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