2. Balance Sheet: Sources of Long Term Fund
1. A : Paid up Equity : (Common and
Preference)
1. B: Reserve and Surplus
2. A: Secured Debt (L.T.)
2. B. Un-Secured Debt (L.T.) : e.g. Debentures
09/19/13
3. LOOKING FOR LONG TERM FINANCING
• What Amount do I need?
• How do I raise the Fund? Is it through Equity Or
Debt?
• What Information Do I Need To Provide The
Lender/Investor?
• If I finance it through Debt, what are the
Repayment Terms? Do I have to Pay Interest? If
so, will it vary over Time Or Fixed?
• How long will it take to acquire the Funds? What
will be the Floatation Cost?
09/19/13
4. FINANCING METHODS
• LONG TERM FINANCING: Equity and
Debt
• Framework for Business Organisations
raising various funds
09/19/13
5. Sources of Equity
• Promoter Contributing the entire Capital
• Private Placement (PE or VC Funding)
• Going to Public by an
IPO
FPO
Rights
QIP
09/19/13
6. Private Limited Companies
• They Cannot go to Public to Raise Equity
• Share Transfer and Issue is restricted and subject to
permission from RoC
• Promoter Contributing the entire Capital (Most Common)
• Private Placement (PE or VC Funding)
09/19/13
7. PRIVATE EQUITY FUNDS
• A fund that invests in companies and/or entire business
units with the intention of obtaining a controlling interest
(usually by becoming a majority shareholder, sometimes
by becoming the largest plurality shareholder) so as to
be in the position of restructuring the target company's
reserve capital, management, and organizational
infrastructure.
09/19/13
8. Public Limited Companies
• They can go to Public to raise Equity via Primary Market
Segment of Capital Market
• It can be new Public Ltd. Co Formation or conversion
from Pvt. Ltd
• Promoter Contributing substantial part of the equity
capital and hence, in most cases, have controlling stake
• Private Placement (PE or VC Funding)
• Going to Public by an
IPO
FPO
Rights
QIP
09/19/13
9. Initial Public Offer (IPO)
• Promoter initiating the formation of Public Ltd. Co
• The Team of Banker, Investment Banker, R&T Agent
• Role of SEBI
• Authorised Share Capital, Face Value of one share,
Authorised No of shares, Intended Share holding pattern
• Book Building Issue: Offer Price determination
• Issue of Prospectus
• Application: Lot size and Application Money
• Under, Par and Over-subscription
• Allocation for Over and Par Subscription
• 5 possibilities of Under-subscribed issue
09/19/13
10. Under-subscribed issue
5 possibilities of Under-subscribed issue
1. Issue is cancelled and IPO is re-launched after Cooling
Period
2. More time is sought from SEBI and cut off date extended
3. Promoter picks up the rest of the unsubscribed share
4. Underwriters pick up the rest or Underwriter-promoter
combined picks up the rest
5. Only shares which are subscribed are issued, thus
raising less than the required fund through Equity
09/19/13
11. FPO, Rights, QIP
• Follow-up Public Offer: Same steps as an IPO
• Cooling period needed after an IPO
• Offer Price is determined based on the market
Response
• Rights Issue is restricted to the existing
shareholder only
• Qualified Institutional Placement (QIP) is used
when Market response for FPO or Rights is
uncertain
09/19/13
12. Debt
• Loan or Debenture issue
• Loan taken from an Financial Institution (Bank, NBFC)
• Mortgage Security in case of secured loans
• Credit Rating in case of Debenture Issue (Investible
grade)
• Debenture can be Convertible or Non-Convertible to
Equity Share
• Fixed Coupon Payments
09/19/13
14. High Investment Grades
AAA - (Triple A) Highest Safety
• Debentures rated ‘AAA’ are judged to offer highest safety of
timely payment of interest and principal.
15. • AA - (Double A) High Safety
• Debentures rated ‘AA’ are judged to offer high safety of timely
payment of interest and principal. They differ in safety from
‘AAA’ issues only marginally.
16. Investment Grades
• A - Adequate Safety
• Bonds rated ‘A’ are judged to offer adequate safety of timely
payment of interest and principal. However, changes in
circumstances can adversely affect such issues more than
those in the higher rated categories.
17. BBB (Triple B) Moderate Safety
• Debentures rated ‘BBB’ are judged to offer moderate
safety of timely payment of interest and principal for the
present; however, changing circumstances are more likely to
lead to a weakened capacity to pay interest and repay principal
than for debentures in higher rated categories.
18. Speculative Grades
BB (Double B) Inadequate Safety
• Debentures rated ‘BB’ are judged to carry inadequate safety
and principal, the uncertainties that the issuer faces could lead
to inadequate capacity to make timely interest and
principal payments.
19. B - High Risk
• Debentures rated ‘B’ are judged to have greater susceptibility
to default; while currently interest and principal payments are
met, adverse economic conditions would lead to lack of
ability or willingness to pay, interest or principal.
20. C - Substantial Risk
• Debentures rated ‘C’ are judged to have factors present that
make them vulnerable to default; timely payment of interest
and principal is possible only if favourable circumstances
continue.
21. D - Default
• Debentures rated ‘D’ are in default and in arrears of interest or
principal payments or are expected to default on maturity.
Such debentures are extremely speculative and return from
these debentures may be realized only on liquidation.
• Rating agencies may apply ‘+’ (plus) or ‘-’ (minus) signs for
ratings from AA to C to reflect comparative standing within
the categories.
