INVESTMENT DECISIONS ASSIGNMENT group 8

8/7/2019 INVESTMENT DECISIONS ASSIGNMENT group 8

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ASSIGNMENT

CORPORATE FINANACE

INVESTMENT DECISIONSUNDER THE GUIDANCE OF DR. REKHAKALA A.M

GROUP 8

VAIBHAV SRIVASTAVA

ANKIT SHARMA

RAMJI SIMHADRI

VAIBHAV JOSHI

D S SHRIHARI

SHARANYA V

ABS


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SHARES

Issue of shares is the main source of long term finance. Shares are issued by joint

stock companies to the public. A company divides its capital into units of a definite

face value, say of Rs. 10 each or Rs. 100 each. Each unit is called a share. A personholding shares is called a shareholder.

FEATURES OF SHARES:

The main characteristics of shares are following:

1. It is a unit of capital of the company.

2. Each share is of a definite face value.

3. A share certificate is issued to a shareholder indicating the number of shares

and the amount.

4. Each share has a distinct number.

5. The face value of a share indicates the interest of a person in the company and

the extent of his liability.

6. Shares are transferable units.

Investors are of different habits and temperaments. Some want to take lesser risk

and are interested in a regular income. There are others who may take greater risk in

anticipation of huge profits in future. In order to tap the savings of different types of

people, a company may issue different types of shares. These are :

1. Equity shares, and

2. Preference Shares


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EQUITY SHARES

Equity shares represent the risk capital of an entity, that is, they have no right to

fixed dividends but have management control over the company through voting

rights.

Following are the merits and demerits of equity shares:

MERITS

(A) To the shareholders:

1. In case there are good profits, the company pays dividend to the equity

shareholders at a higher rate.

2. The value of equity shares goes up in the stock market with the increase in profits

of the concern.

3. Equity shares can be easily sold in the stock market.

4. Equity shareholders have greater say in the management of a company as they are

conferred voting rights by the Articles of Association.

(B) To the Management:

1. A company can raise fixed capital by issuing equity shares without creating any

charge on its fixed assets.

2. The capital raised by issuing equity shares is not required to be paid back during

the life time of the company. It will be paid back only if the com pany is wound up.

3. There is no liability on the company regarding payment of dividend on equity

shares. The company may declare dividend only if there is enough profits.

4. If a company raises more capital by issuing equity shares, it leads to greater

confidence among the investors and creditors .

DEMERITS

(A) To the shareholders:

1. Uncertainly about payment of dividend:

Equity share-holders get dividend only when the company is earning sufficient profits

and the Board of Directors declare dividend. If there are preference shareholders,

equity shareholders get dividend only after payment of dividend to the preference

shareholders.


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2. Speculative:

Often there is speculation on the prices of equity shares. This is particularly so in

times of boom when dividend paid by the companies is high.

3. Danger of overcapitalisation:

In case the management miscalculates the long term financial requirements, it mayraise more funds than required by issuing shares. This may amount to over-

capitalization which in turn leads to low value of shares in the stock market.

4. Ownership in name only:

Holding of equity shares in a company makes the holder one of the owners of the

company. Such shareholders enjoy voting rights. They manage and control the

company. But then it is all in theory. In practice, a handful of persons control the

votes and manage the company. Moreover, the decision to declare dividend rests

with the Board of Directors.

5. Higher Risk:

Equity shareholders bear a very high degree of risk. In case of losses they do not get

dividend. In case of winding up of a company, they are the very last to get refund of

the money invested. Equity shares actually swim and sink with the company.

B) To the Management

1. No trading on equity:

Trading on equity means ability of a company to raise funds through preference

shares, debentures and bank loans etc. On such funds the company has to pay at a

fixed rate. This enables equity shareholders to enjoy a higher rate of return when

profits are large. The major part of the profit earned is paid to the equity

shareholders because borrowed funds carry only a fixed rate of interest. But if a

company has only equity shares and does not have either preference shares,

debentures or loans, it cannot have the advantage of trading on equity.

2. Conflict of interests:

As the equity shareholders carry voting rights, groups are formed to corner the votes

and grab the control of the company. There develops conflict of interests which is

harmful for the smooth functioning of a company.


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Guidelines for Listing

Minimum Listing Requirements for New Companies

The following eligibility criteria have been prescribed effective August 1, 2006 for listing of

companies on BSE, through Initial Public Offerings (IPOs) & Follow-on Public Offerings

(FPOs):

Companies have been classified as large cap companies and small cap companies. A large

cap company is a company with a minimum issue size of Rs. 10 crore and market

capitalization of not less than Rs. 25 crore. A small cap company is a company other than a

large cap company.

1. Companies have been classified as large cap companies and small cap companies. A

large cap company is a company with a minimum issue size of Rs. 10 crore and

market capitalization of not less than Rs. 25 crore. A small cap company is a company

other than a large cap company.

a. In respect of Large Cap Companies

i. The minimum post-issue paid-up capital of the applicant company

(hereinafter referred to as "the Company") shall be Rs. 3 crore; and

ii. The minimum issue size shall be Rs. 10 crore; and

iii. The minimum market capitalization of the Company shall be Rs. 25

crore (market capitalization shall be calculated by multiplying the post-

issue paid-up number of equity shares with the issue price).

b. In respect of Small Cap Companies

i. The minimum post-issue paid-up capital of the Company shall be Rs. 3

crore; andii. The minimum issue size shall be Rs. 3 crore; and

iii. The minimum market capitalization of the Company shall be Rs. 5

crore (market capitalization shall be calculated by multiplying the post-issue paid-up number of equity shares with the issue price); and

iv. The minimum income/turnover of the Company shall be Rs. 3 crore in

each of the preceding three 12-months period; and

v. The minimum number of public shareholders after the issue shall be

1000.

vi. A due diligence study may be conducted by an independent team of

Chartered Accountants or Merchant Bankers appointed by BSE, the

cost of which will be borne by the company. The requirement of a due

diligence study may be waived if a financial institution or a scheduled

commercial bank has appraised the project in the preceding 12 months.


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2. For all companies :

a. In respect of the requirement of paid-up capital and market capitalization, the

issuers shall be required to include in the disclaimer clause forming a part of

the offer document that in the event of the market capitalization (product ofissue price and the post issue number of shares) requirement of BSE not being

met, the securities of the issuer would not be listed on BSE.b. The applicant, promoters and/or group companies, shall not be in default in

compliance of the listing agreement.c. The above eligibility criteria would be in addition to the conditions prescribed

under SEBI (Disclosure and Investor Protection) Guidelines, 2000.

[II] Minimum Listing Requirements for Companies already Listed on Other Stock

Exchanges

The listing norms for companies already listed on other stock exchanges and seeking listing

at BSE, made effective from August 6, 2002, are as under:

1.

The company shall have a minimum issued and paid up equity capital of Rs. 3 crore.2. The company shall have a profit making track record for the preceding last three

years. The revenues/profits arising out of extra ordinary items or income from any

source of non-recurring nature shall be excluded while calculating the profit makingtrack record.

3. Minimum net worth shall be Rs. 20 crore (net worth includes equity capital and freereserves excluding revaluation reserves).

4. Minimum market capitalisation of the listed capital shall be at least two times of the

paid up capital.

5. The company shall have a dividend paying track record for at least the last 3

consecutive years and the dividend should be at least 10% in each year.

6. Minimum 25% of the company's issued capital shall be with Non-Promoter

shareholders as per Clause 35 of the Listing Agreement. Out of above Non-Promoter

holding, no single shareholder shall hold more than 0.5% of the paid-up capital of the

company individually or jointly with others except in case of Banks/Financial

Institutions/Foreign Institutional Investors/Overseas Corporate Bodies and Non-

Resident Indians.

7. The company shall have at least two years listing record with any of the Regional

Stock Exchanges.

8. The company shall sign an agreement with CDSL and NSDL for demat trading.


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PREFERENCE SHARES

Preferential rights with respect to payment of a fixed dividend and repayment of

capital at the time of liquidation characterise preference equity shares. Additional

rights can be granted to preference shares by virtue of provisions contained in the

memorandum and articles of the company.

Preference shares are classified into different classes, depending on the rights

attached to them:

1. CUMULATIVE PREFERENCE SHARES

The holders of this class of shares are entitled to unpaid dividends in

the past, that is, the unpaid dividends are to be paid to the

cumulative preference shareholders before any profit can be

distributed among classes of shares.

2. NON- CUMULATIVE PREFERENCE SHARES

In this case, the shareholders do not carry any right to unpaid

dividends. Unless otherwise mentioned, preference shares are

cumulative in character.

3. PARTICIPATING PREFERENCE SHARES

These shares carry a right to a share in the profit after a fi xed rate is

paid to the equity shareholders, in addition to the fixed rate of

dividend. Unless specifically mentioned, preference shares are non -

participating in character.

4. REDEEMABLE PREFERENCE SHARES

These shares will be repaid on or after a certain data, as per the

terms of the issue. Unless otherwise mentioned, preference shares

are non-redeemable, except in the event of the winding up of a

company.


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SHARE CAPITAL TYPES

While we all know that the share capital of a company means the amount raised by a

company by the issue of shares, we also need to understand that a company lists

many types of share capital. The various types of share capital of a company are:

1. AUTHORISED OR REGISTERED SHARE CAPITAL

This is the maximum amount of capital which a company is allowed to

raise during its lifetime. The amount is usually based on the mentioned

amount in the memorandum of association by the company. This

capital is shown under the liabilities side, but the amount is not added

to the total under the liabilities.

2. ISSUED CAPITAL

The portion of authorised capital that has been issued to all the

investors, including the public, is known as the issued capital. The

remaining portion of the authorised capital is called the un -issued

capital. The amount of issued capital is taken in the balance sheet only

if the total amount of issued capital has been subscribed, called up by

the company and paid by the shareholders. In all the other cases, the

total of issued capital is presented in the same way as the authorised

capital.

3. SUBSCRIBED CAPITAL

The portion of the issued capital that has been subscribed by all the

investors, including the public, and also the portion allowed to the

directors, is known as the subscribed capital. More often than not,

issued capital and subscribed capital are equal.

4. CALLED UP CAPITAL

The portion of the subscribed capital that has been called up by the

company for payments is called up capital and the remaining amount

becomes the un-called capital. Hence, one can make out that issued

capital, subscribed capital and called up capital would typically be

different for companies at various stages of raising capital through

issue of common equity shares.


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5. PAID-UP CAPITAL

It is the part of called up capital that has been paid up by the

subscribers of the share capital. The amount that is due but yet to be

received is known as calls in arrears.

DIFFERENCE BETWEEN PREFERENCE SHARES AND EQUITY SHARES


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DEBENTURES

A debenture is an acknowledgment under seal of a debt or loan. A debenture is a

large amount of loan raised by a company. The basic distinction between shares and

debentures is that former represents ownership, whereas the latter represents long

term creditors, looking forward to a fixed rate of return on their invest ment. Hence,

the interest on debenture is a charge against profits.

FEATURES OF DEBENTURE

i) Debenture holders are the creditors of the company. They are entitled to periodic

payment of interest at a fixed rate.

ii) Debentures are repayable after a fixed period of time, say five years or seven

years as per agreed terms.

iii) Debenture holders do not carry voting rights.iv) Ordinarily, debentures are secured. In case the company fails to pay interest on

debentures or repay the principal amount, the d ebenture holders can recover it from

the sale of the assets of the company .

Debentures can be of different classes which are stated as follows:

1. REDEEMABLE DEBENTURES

These are repaid at the end of a specified period or by instalments

during the existence of the company.

2. IRREDEEMABLE DEBENTURES

These are of the nature of a permanent loan to the company and are

repayable only on the liquidation of the company.

3. SECURED OR MORTAGE DEBENTURES

Debentures that are secured by a fixed charge (by some specific as sets,

usually a tangible long term assets such as plant and machinery) or by a

floating charge (by any class of assets of the company of any class, in

general, it would be accounts receivable or inventory).

4. SIMPLE OR NAKED DEBENTURES

These are unsecured debentures, that is, in case of a default, there is

no asset that backs them as security.


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5. REGISTERED DEBENTURES

These debentures are registered in the names of their holders and only

executing a regular transfer deed can affect transfers.

6. BEARER DEBENTURES

These debentures are not registered in the names of their holders and

are transferable by mere delivery.

7. FIRST AND SECOND DEBENTURES

The terms first and second denote priority in repayment, sometimes;

these are also known as senior and junior debentures.

MERITS

1) Raising funds without allowing control over the company:

Debenture holders have no right either to vote or take part in the management of

the company.

2) Reliable source of long term finance:

Since debentures are ordinarily issued for a fixed period, the company can make the

best use of the money. It helps long term planning.

3) Tax Benefits:Interest paid on debentures is treated as an expense and is charged to the profits of

the company. The company thus saves income tax.

4) Investors Safety:

Debentures are mostly secured. On winding up of the company, they are repayable

before any payment is made to the shareholders. Interest on debentures is payable

irrespective of profit or loss.

DEMERITS :

1. As the interest on debentures has to be paid every year whether there are profits

or not, it becomes burdensome in case the company incurs losses.

2. Usually the debentures are secured. The company creates a charge on its assets in

favour of debenture holders. So a company which does not own enough fixed assets

cannot borrow money by issuing debentures. Moreover, the assets of the company

once mortgaged cannot be used for further borrowing.


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3. Debenture-finance enables a company to trade on equity. But too much of such

finance leaves little for shareholders, as most of the profits may be required to pay

interest on debentures. This brings frustration in the minds of shareholders and the

value of shares may fall in the securities markets.

4. Burdensome in times of depression: During depression the profits of the companydecline. It may be difficult to pay interest on debentures. As interest goes on

accumulating, it may lead to the closure of the company.

DIFFERENCE BETWEEN SHARES AND DEBENTURES


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Guidelines for issuance of Non-Convertible Debentures

(NCDs) of maturity less than one year

Eligible Issuers

Any corporate that fulfills the following criteria are eligible to issue the NCDs of less than one year:

i. Having a tangible net worth as per the latest audited balance sheet, of not less than Rs.4 crore;

ii. The company has been sanctioned working capital limit by bank/s or all-India financial

institution/s; andiii. The borrowal account of the company is classified as a Standard Asset by the financing

bank/s/ institution/s.

3. Rating Requirement

An eligible corporate intending to issue NCDs shall obtain credit rating for issuance of theNCDs from one of the rating agencies, viz., the Credit Rating Information Services of India

Ltd. (CRISIL) or the Investment Information and Credit Rating Agency of India Ltd. (ICRA)or the Credit Analysis and Research Ltd. (CARE) or the FITCH Ratings India Pvt. Ltd. or

such other credit rating agencies as may be specified by the Reserve Bank of India from time

to time, for the purpose. The minimum credit rating shall be P-2 of CRISIL or such

equivalent rating by other agencies. The issuers shall ensure at the time of issuance of NCDs

that the rating so obtained is current and has not fallen due for review.

4. Maturity

4.1 NCDs shall not be issued for maturities of less than 90 days from the date of issue.

4.2 The exercise date of option (put/call), if any, attached to the NCDs shall not fall within 90

days period from the date of issue.

4.3 The maturity date of the NCD shall co-terminate with the date up to which the creditrating of the issuer is valid.

5. Denominations

NCDs may be issued in denominations of Rs.5 lakh or multiples thereof. Amount invested by

a single investor should not be less than Rs.5 lakh (face value).

6. Limits and the Amount of Issue of NCDs

6.1 The aggregate amount of the NCDs from an issuer shall be within the limit as approved

by the Board of Directors of the corporate or the quantum indicated by the Credit Rating

Agency for the specified rating, whichever is lower.

6.2 The total amount of the NCDs proposed to be issued should be raised within a period of

two weeks from the date on which the issuer opens the issue for subscription.


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7. Procedure for Issuance

7.1 The issuer shall disclose to the prospective investors its financial position as per the

standard market practice.

7.2 All the provisions contained in the Companies Act, 1956 and the Securities and Exchange

Board of India (Issue and Listing of Debt Securities) Regulations, 2008, wherever applicable,

shall be followed by the issuers.

7.3 The debentures shall be allotted in the form of letter of allotment followed by Debenture

Certificate within the time frame prescribed by the Companies Act, 1956.

7.4 NCDs shall be issued at face value and will carry a coupon rate as determined by the

issuer.

8. Debenture Trustee

8.1 Every issuer of NCDs shall appoint a Debenture Trustee for each issuance of the NCDs.

8.2 Only commercial banks that are registered as debenture trustees with the SEBI shall be

eligible to act as debenture trustees for issue of the NCDs.

9. Investment in NCD

9.1 NCDs may be issued to and held by individuals, banking companies, Primary Dealers

(PDs) other corporate bodies registered or incorporated in India and unincorporated bodies,

Non-Resident Indians (NRIs) and Foreign Institutional Investors (FIIs).

9.2 Investment by FIIs shall be within the limits set for their investments by the Securities

and Exchange Board of India (SEBI).

10. Preference for Dematerialisation

While option is available to both issuers and subscribers to issue/hold NCDs in

dematerialised or physical form, issuers and subscribers should be encouraged to issue/ hold

NCDs in dematerialised form. However, banks, FIs and PDs are required to make fresh

investments in NCDs only in dematerialised form.


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11. Roles and Responsibilities

11.1 The role and responsibilities of issuer, Debenture Trustee and the credit rating agency

(CRA) are set out below:

(a) Issuer

11.2 Issuers shall ensure that the guidelines and procedures laid down for issuance of NCD

are strictly adhered to.

(b) Debenture Trustee

11.3 The roles, responsibilities, duties and functions of the debenture trustees shall be guided

by these regulations, the Securities and Exchange Board of India (Debenture Trustees)

regulations,1993, the trust deed and offer document.

(c) Credit Rating Agency (CRA)

11.4 Code of Conduct prescribed by the SEBI for the CRAs for undertaking rating of capital

market instruments shall be applicable to them (CRAs) for rating the NCDs.

11.5 The CRA shall have the discretion to determine the validity period of the rating

depending upon its perception about the strength of the issuer. Accordingly, CRA shall, at the

time of rating, clearly indicate the date when the rating is due for review.

11.6 While the CRAs may decide the validity period of credit rating, they shall closely

monitor the rating assigned to issuers vis--vis their track record at regular intervals and maketheir revision in the ratings public through their publications and website.


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INSTRUMENT TO FINANCE A NEW COMPANY

The company can raise funds different ways like

y

Equityy Debuntures

y Loan

Since the company is just a start up company without previous experience the company

cannot issue shares or equity.

Rules As Per SEBI

a. In respect of Large Cap Companies

i.

The minimum post-issue paid-up capital of the applicant company(hereinafter referred to as "the Company") shall be Rs. 3 crore; and


iii. The minimum market capitalization of the Company shall be Rs. 25crore (market capitalization shall be calculated by multiplying the post-

issue paid-up number of equity shares with the issue price).

b. In respect of Small Cap Companies

i. The minimum post-issue paid-up capital of the Company shall be Rs. 3crore; and


iii.

The minimum market capitalization of the Company shall be Rs. 5crore (market capitalization shall be calculated by multiplying the post-

issue paid-up number of equity shares with the issue price); and

iv. The minimum income/turnover of the Company shall be Rs. 3 crore in

each of the preceding three 12-months period; and

v. The minimum number of public shareholders after the issue shall be

1000.

vi. A due diligence study may be conducted by an independent team of

Chartered Accountants or Merchant Bankers appointed by BSE, the

cost of which will be borne by the company. The requirement of a due

diligence study may be waived if a financial institution or a scheduled

commercial bank has appraised the project in the preceding 12 months.

Since the company doesnt follow these rules it cant raise money through Equity.


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The Second way of raising money for the company is debentures.

Rules for raising money through Debentures (RBI Norms)

Any corporate that fulfils the following criteria are eligible to issue the NCDs of less than oneyear:

i. Having a tangible net worth as per the latest audited balance sheet, of not less than

Rs.4 crore;

ii. The company has been sanctioned working capital limit by bank/s or all-Indiafinancial institution/s; and

iii. The borrowal account of the company is classified as a Standard Asset by thefinancing bank/s/ institution/s.

If the company follows these parameters it can issue debentures to raise the money.

If the company fails to issue debentures then there is only one way of raising money i.e. is

through loan.

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INVESTMENT DECISIONS ASSIGNMENT group 8