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Introduction To Financial Management: Sources of Finance

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11 views32 pages

Introduction To Financial Management: Sources of Finance

Uploaded by

Akash Deria
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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INTRODUCTION TO

FINANCIAL
MANAGEMENT
SOURCES OF FINANCE
INTRODUCTION TO
FINANCIAL
MANAGEMENT
Ordinary Equity Shares
Introduction

• Equity shares are issued to the owners of the company


• They have a “Nominal” or “Face” value
• There is no relationship between the market value of the quoted shares and their nominal value
• When ordinary shares are issued for cash, the issue price must not be less than the nominal value
of shares
Methods of issue of new shares

• Public issue through prospectus


• Tender/ book building
• Placement
• Rights issue
• Preferential issues
• Qualified Institutional Placement
1 Prospectus
Public Issue through prospectus

• Securities are issued by means of prospectus inviting subscription from the investing public
• Company itself offers directly to the general public a fixed number of shares at a stated price (which
could be at a premium)
• Issues are generally underwritten to ensure success out of unsatisfactory public response
• Underwriting is a process by which institutions undertake guarantee that the new issue would be sold
• High floatation costs and therefore beneficial for large issues
2 Tender/Book Building
method
2.1 Tender/Book Building method

• The pricing of the issues is left to the investors


• The offer document includes the minimum price or reserve price
• Investors quote the number of shares and the price at which they wish to acquire
• Issuer sets a base price (floor price) and a band within which the Investor is allowed to bid for the
shares
• The upper price of the band can be a maximum of 1.2 times the floor price
2.1 Tender/Book Building method

• Company appoints a Book Running Lead Manager, a merchant banker, who manages the issue
• An order book is built where investors state the quantity of the stock they are willing to buy, at a price
within the band
• Issue remains open for a period of 3 to 7 days (extension of 3 days if issuer decides to revise the floor
price and the band)
2.2 Cut-off Price

• It is the price derived by the market


• It is the price at which the shares are issued to the investors
• Investors who apply at a price higher than the cut-off price have higher chance of getting the shares
• The cut-off price is arrived at by the method of Dutch auction
2.3 Types of Investors

Qualified Institutional Buyers


QIB •• Possess expertise and financial muscle to invest in securities
•• QIBs are not issued more than 50% of total issue
•• Ex- Mutual Funds, Financial Institutions

Retail Individual Investor


•• Applies for shares for a value not more than Rs. 2,00,000
RII •• Allotment to RII has to be at least 35% of the total issue
•• Have an option to apply at cut-off price

Non-Institutional Investor
NII •• Any bid made by an Investor exceeding Rs. 2,00,000 is NII
•• At least 15% of the total issue is to be given
•• Referred as High Net-worth Individuals
2.4 Oversubscription

• Oversubscription occurs when demand for shares is more than what the issuer plans to issue
• Proportionate allotment method is used (Pro-rata)
2.5 Green-shoe option

• In case the issue has been oversubscribed, green-shoe option is exercised to stabilize the post-listing price
• In case of oversubscription the appetite of investor is not satisfied and they tend to buy the stock from the
secondary market once it gets listed.
• The price increases since the demand is greater than supply
• In order to stabilize the post-listing price, the issuer issues more shares in case of oversubscription
• These shares are taken from promoters or pre-issue shareholders and offered to investors ( who came
through public offer) on a pro-rata basis.
• Green-shoe option can be a maximum of 15% of the public offer
3 Placement method
Introduction

• Securities are acquired by the issue houses


• Instead of being sold to the public, the shares are placed with the clients of the issue houses – private and
institutional investors
• Remuneration is paid to the issuing houses
Private Placement

• Securities are sold to a relatively small number of select investors


• Investors can be Banks, mutual funds, insurance companies etc.
• Offer or invitation is not made to more than 50 persons (excluding QIB’s and ESOP)
4 Rights issue
Rights issue

• It is an invitation to existing shareholders to purchase additional new shares in the company


• It gives shareholders the right to purchase shares at a discounted price
• Until the date of purchase of right shares, shareholders can sell their rights on the market in the same way
as shares
• The rights issued to a shareholder have a value, thus compensating current shareholders for the future
dilution of their existing shares’ value
• Shareholder has three options- Subscribe the right issue in full, ignore the rights (lapse), sell the rights
5 Preferential issue
Preferential issue

• It is neither a public issue nor a rights issue


• It is issue of shares or convertible securities to selected group of persons
• It is a faster way to raise equity share capital
6 Qualified Institutional
Placement
Qualified Institutional Placement

• Securities are issued to Qualified Institutional Buyers (QIBs)


• QIBs are those institutional investors who are generally perceived to possess expertise and financial muscle
to evaluate and invest in the capital markets
• Securities can be equity shares, fully and partly convertible debentures, or any other convertible securities
other than warrants
• Apart from preferential allotment, this is the only other speedy method of private placement
INTRODUCTION TO
FINANCIAL
MANAGEMENT
VENTURE CAPITAL
Introduction

• Financing to start-up companies and small businesses having long term growth potential
• “Venture Capital” is putting money, in return for an Equity stake, into a new business, a management
buy-out or a major expansion scheme
• The Venture Capitalist Organization will only give funds to a company that it believes will succeed
Risk & Reward

• Serious risk of losing the entire investment or long time before profit generation. But, there is also a
prospect of high profits and substantial returns.
• Venture capitalist will require a high expected rate of return on Investments, to compensate against
the high risk
Venture Capitalist

• The Venture Capitalist Institution will want an Equity Stake in the company
• They have to be convinced that the company can be successful
• It would want a representative to be appointed to the Company’s board, to look after its interest
• SoftBank Group is one of the biggest venture capital funding in India.
Investments by SoftBank Group
INTRODUCTION TO
FINANCIAL
MANAGEMENT
ANGEL INVESTORS
Introduction

• Invest in small start ups or entrepreneurs


• They may provide a one-time investment to help the business propel or an ongoing injection of money
to support and carry the company through its difficult early stages
• One of the prominent Angel Investors is Mr. Anupam Mittal
Angel Investors vs Venture Capitalist

• Angel Investors typically use their own money where as Venture Capitalists use money pooled from
various Investors and invest them strategically
• Angel Investors focus on helping start ups take their first steps whereas Venture Capitalists focus on
the profit potential of the business
• Angel Investors are the opposite of Venture Capitalists
Questions
Thank You

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