7/29/2019 China Sh

1/22

Raising Long-term

FinanceCHINMAY SHIRSAT (M1212)

ASHWYN RAO (M1209)

7/29/2019 China Sh

2/22

Sources of Long-term Finance

Initial Public Offer (IPO)

Rights Issue

Private Placement

Preferential Allotment

7/29/2019 China Sh

3/22

INITIAL PUBLIC OFFER(IPO) The first sale of stock by a company to the

public

The first public offering of equity shares of acompany, which is followed by a listing of its

shares on the stock market.

7/29/2019 China Sh

4/22

IPO cont. Advantages of going public

Access to capital

Greater respect Investor recognition

Window of opportunity

Liquidity Benefit of diversification

Signals from the market

7/29/2019 China Sh

5/22

IPO cont. Costs of Going Public

Adverse Selection

Dilution Loss of Flexibility

Disclosures

Accountability Public Pressure

Costs

7/29/2019 China Sh

6/22

Eligibility for an IPO Net tangible assets of at least 3 crore in each of

the preceding 3 years.

A track record of distributable profits for at least 3out of the immediately preceding 5 years.

Net worth of at least 1 crore in each of the

preceding 3 financial years.

Issue size does not exceed 5 times the pre-issue networth.

7/29/2019 China Sh

7/22

Book Building

Book building involves inviting subscriptions to public offer of securities

through a process of tendering.

Merchant banker fixes floor price in consultation with the issuer, which is

the minimum bid price.

Eligible investors can fill the bid-cum-application form and submit to lead

manager, running through the book during the period.

At the end of this period, the LM assesses the response to the issue, and

fixes the highest price at which demand is sufficient.

And in this way, the final subscription price is decided in consultation

with the issuer and allotment pattern is worked out.

7/29/2019 China Sh

8/22

Principal Steps in an IPO1. The board of directors approves the proposal to raise capitalfrom the public and authorizes the managing director (or a

board committee) to do all the tasks relating to the public

issue.

2. The company convenes a meeting to seek the approval of

shareholders and the shareholders pass a special resolution

under section 81(1A) of the Companies Act authorizing the

company to make the public issue.

3. The company appoints a merchant banker as the lead

manager (LM) to the issue.

4. The LM carries out due diligence to check all relevant

information , documents, and certificates for the issue.

7/29/2019 China Sh

9/22

5. The company, advised by the LM, appoints various

intermediaries such as the registrar to the issue, the bankers to

the issue, the printers, and advertiser.

6. The LM draws up the issue budget, keeping in mind theguidelines issued by the Ministry of Finance on issue

expenses, and the company approves the same (The main

components of the issue expenses are fees for LM,

underwriters, registrar and bankers, brokerage, postage ,stationery, issue marketing expenses, etc.)

7. The LM prepares the Draft Red Herring Prospectus (DRHP)

in consultation with management and seeks the approval of

the Board.

7/29/2019 China Sh

10/22

8. The LM files the DRHP approved by the board, with SEBI

for its observation along with a soft copy. SEBI places the

same on its website for comments from the public.

9. The company makes listing application to all the stockexchanges where the shares are proposed to be listed along

with copies of the draft red herring prospectus. The DRHP is

also hosted on the websites of the LM and the underwriters.

10. The company enters into a tripartite agreement with theregistrar and all the depositories for providing the facility of

offering the shares in a dematerialized mode.

7/29/2019 China Sh

11/22

11. If the issue is proposed to be underwritten (it is optional in a

retail issue and mandatory in a book built issue to the extent

of the net public offer), the LM makes underwriting

arrangements

12. Within 21 days, SEBI makes its observations on the DRHP.

The stock exchanges also suggest changes, if any. The

company carries out the modifications to the satisfaction of

these authorities.

13. The company files the prospectus with the Registrar of

Companies(ROC).

14. The LM and the company market the issue using a

combination of press meetings, brokers' meetings, investors'

meeting and so on.

7/29/2019 China Sh

12/22

15. The company releases a mandatory advertisement, called

the announcement advertisement' 10 days prior to the

opening of the issue. This has to conform to Form 2A, also

called the abridged prospectus.16. The LM and the printer dispatch the application forms to all

stock exchanges, SEBI; collection centre's brokers,

underwriters, and investor associations. Every application

form is accompanied by the abridged prospectus.17. The issue is kept open for a minimum of 3 days and a

maximum of 10days.

7/29/2019 China Sh

13/22

18. After the issue is closed, the basis of allotment is finalized

by the stock exchange, LM, and the registrar, in

conformity with certain SEBI-prescribed rules.19. The LM ensures that the demat credit or dispatch of share

certificates and refund orders to the allotees is completed

within two working days after the basis of allotment is

finalized and the shares are listed within 7days of the

finalization of the basis of allotment

7/29/2019 China Sh

14/22

Public Issue

Public issue by listed companies

Cost of Public Issue

7/29/2019 China Sh

15/22

Rights Issue

Defn: Issue of capital to the existing

shareholders of the company on a pro rata

basis

7/29/2019 China Sh

16/22

Rights Issue

Characteristics features: The number of rights that a shareholder gets is equal to the

number of shares held by him

The number of rights required to subscribe to an additional

share is determined by the issuing company

The price per share for additional equity, the subscription price

is left to the discretion of the company

Rights are negotiable. The holder of rights can sell them Rights can be exercised only during a fixed period which is

usually about 30 days.

7/29/2019 China Sh

17/22

Preferential Allotment Defn: An issue of equity shares by a listed company to

pre-determined persons, who may or may not be theexisting shareholders of the company at a pre-determined price is referred to as preferentialallotment.

Pref. allotment is made topromoters, strategicinvestors, venture capitalists, financial institutions andsuppliers.

Pref. allotment is made to secure the equityparticipation of those, the company considersdesirable.

7/29/2019 China Sh

18/22

Private Placement Defn: Direct selling of securities to a limited number of

institutional or high net worth investors.

This avoids the delay involved in going public and also reducesthe expenses involved in a public issue

The company appoints a merchant banker to network with theinstitutional investors and negotiate the price of the issue

Advantages

Easy access to finance

Fewer procedural formalities Lower issue cost

Access to funds is faster

7/29/2019 China Sh

19/22

Term Loans

Major source of debt finance for long-term

projects

1-10 years of repayment period All India Financial institutions and State

financial corporations

Interest rate will be fixed on the term loansafter assessing the credit risk

7/29/2019 China Sh

20/22

Term Loans

Contents of loan application Promoter's background

Particulars of the industrial concern

Particulars of the project (capacity, technical arrangement,

land & building, p & m, location etc.)

Cot of project

Means of financing Marketing and selling arrangements

Profitability and cash flow

Government consents

7/29/2019 China Sh

21/22

Term Loans

Term loan procedure Initial processing of Loan Application

Appraisal of the proposed project (marketing, technical,

financial, managerial, and economic aspects)

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

7/29/2019 China Sh

22/22

Project Appraisal

Market appraisal

Technical appraisal

Financial appraisal

Economic appraisal

Managerial appraisal