Sources of Finance main

Category: Education

Presentation Description

No description available.


Presentation Transcript

Sources of Finance:

Sources of Finance

Equity Capital:

Equity Capital IPOs/FPOs Rights Issue Preferential Issue Private Equity QIPs Warrants

Why do firms go public? :

Why do firms go public? Raise capital Achieve liquidity Investors can be more diversified Stock can be used for M&A activity Entrepreneurs regain control from venture capitalists when shares are distributed Signals stability and dependability to customers and suppliers

Costs of going public:

Costs of going public IPO creates substantial fees Greater degree of disclosure and scrutiny First day under-pricing Market cycles in IPOs valuations

Funds Raised through IPOs in India (Rs Cr):

Funds Raised through IPOs in India (Rs Cr)

Funds raised in IPOs and FPOs in 2007 (Rs Cr):

Funds raised in IPOs and FPOs in 2007 (Rs Cr)

Slide 7:

2007 has been a landmark year for public issues. Highest ever mobilisation in a single year.

IPOs around the world:

IPOs around the world In the largest IPO in 2007, Russia’s VTB Bank raised USD 8 billion.

Slide 9:

Largest IPO in 2006 was that of Industrial and Commercial Bank of China (ICBC) that raised USD 22 Billion.

Rights Issue:

Rights Issue With the issued rights, existing shareholders have the privilege to buy a specified number of new shares from the firm at a specified attractive price within a specified time A rights issue is offered to all existing shareholders individually and may be rejected, accepted in full or (in a typical rights issue) accepted in part by each shareholder

Slide 11:

Rights are often transferable, allowing the holder to sell them on the open market. Rights issue as a route for raising capital appears to be gaining favour with promoters. Tata Steel plans to raise around Rs 10,000 crore and SBI around Rs 15,000 crore

Why is the importance of rights issue growing?:

Why is the importance of rights issue growing? “Of late we have started to see a lot of Indian companies becoming more and more aggressive in terms of growth. The need to raise money while not diluting promoter shareholding is prompting a lot of them to take this route,” says Crisil Research senior director Arun Panicker. “The very fact that there has been a rise in the quantum of capital raised via rights issuances is a clear sign that promoters want to invest in their own companies. It signals a confidence in their company’s growth and the underlying India Inc growth story, which is very positive,” said an investment banker who has been involved in a rights issue.

Slide 14:

Some issuers see it as a way to reward their shareholders as the issue of new share to the existing shareholders is made at a price which is normally lower than the current market price


Disadvantage Typically a rights issue is the least preferred option by the promoter as it takes 6 months to complete from the time the prospectus is issued. The offside is that a rights issue does not allow companies to derive the price they deserve


Examples Exide Industries Ltd announced on Tuesday its plans to raise Rs 150 crore through a 1:15 rights issue (that is one rights share for every 15 shares held). The issue is priced at Rs 30 per equity share of Re 1 face value. Dunlop India Ltd has decided to raise funds through a rights issue. Shares would be issued in the ratio of six new shares for every 10 held in the company. By this, Dunlop India would raise a maximum of Rs 27 crore. Rights would be issued at par.

Private Equity:

Private Equity Private equity is medium to long-term finance provided in return for an equity stake in potentially high growth unquoted companies. The private equity manager actively helps the company to develop, normally by taking a seat on the board and providing strategic advice on capital markets and financing, market analysis, networking and sourcing other key executives.

Slide 18:

When the company has developed sufficiently to attract other investors, it may be sold to a larger company, floated on the stockmarket or sold to another private equity firm, which might be able to bring some other form of expertise to the party - surprisingly, 40% are sold on to other private equity firms.

Private equity/Venture Capital :

Private equity/Venture Capital Private Equity deals are not available for public participation. Venture capital is a subset of a larger private equity asset class which includes venture capital, LBO's, MBO's, MBI's, bridge and mezzanine investments Historically venture capital investors have provided high risk equity capital to start-up and early stage companies whereas private equity firms have provided secondary traunches of equity and mezzanine investments to companies that are more mature in their corporate lifecycle

Lines between VC and PE investments have blurred..:

Lines between VC and PE investments have blurred.. By increased competition in the capital markets over the last 18 - 24 months. With the robust, if not frothy state of the capital markets today there is far too much capital chasing too few quality deals This increased competition among investors has forced both venture capital and private equity firms to expand their respective horizons in order to continue to capture new opportunities

Private Equity Deals in India ($ bn):

Private Equity Deals in India ($ bn)

PE deals in India lead by:

PE deals in India lead by $ mn)

Flavour of the season…:

Flavour of the season… PE deals in Infrastructure companies and brokerages and financial services firms

PE/VC Funds In India:

PE/VC Funds In India ICICI Ventures UTI Ventures CVC International JM Financial Carlyle Blackstone Warbug Pincus Temasek Holdings 3i Chrys Capital Actis Baring Oak Hill Capital IFC Intel Capital SIDBI GVFL Siemens Venture Capital

Preferential Offers:

Preferential Offers An issue of fresh shares or convertible debentures allotted to a select set of people, whether promoters, their relatives, or institutional investors. Promoters have used preferential allotments as a means for raising their stake in their companies -- whether through shares or equity warrants, which can be converted at a later date.

Slide 26:

Misuse of preferential offers Lock-in period and stringent guidelines. Advantages One advantage of raising money via a preferential issue is that it helps save costs and time involved in a public issue. More important, if the concerned company is not doing too well at that point in time but requires capital, then retail investors may not want to participate in an issue.

Slide 27:

The other issue relating to preferential issues currently being debated is how these issues should be priced. Currently, the price for a preferential issue is the higher of the average of the weekly high and low of the closing prices in past six months, or the average for two weeks. This formula, it is being suggested, should be changed slightly and the average of the daily weighted average of 130 trading sessions or the last 10 trading sessions, whichever is higher, should be the issue price.

Slide 28:

The new formula is better simply because it takes into account a daily weighted average and not closing prices that can, to some extent, be manipulated in infrequently traded counters.

Sums raised/proposed through preferential offers to promoters group:

Sums raised/proposed through preferential offers to promoters group

Qualified Institutional Placements:

Qualified Institutional Placements A Qualified Institutions Placement is a private placement of equity shares or securities convertible in to equity shares by a listed company to Qualified Institutions Buyers With no pre-issue filings are required with the regulator. This move is to encourage Indian companies to raise funds from domestic markets instead of tapping overseas markets.

Slide 31:

The fund raising plans of companies is undergoing a sea change with various avenues opening up in the last couple of years Among them, qualified institutional placement (QIP) is turning out to be a major attraction.

QIPs in India (Rs Cr):

QIPs in India (Rs Cr)

Slide 33:

SEBI allowed listed companies to use the QIP route in May 2006 to lessen the excess use of foreign issues like global depository receipts (GDR), American depository receipts (ADR) and foreign currency convertible bonds (FCCBs). QIPs are cheaper to issue and are flexible in nature, which makes them more attractive to mid and small-cap companies

Slide 34:

QIPs are cheaper to issue and are flexible in nature, which makes them more attractive to mid and small-cap companies QIPs are also a better alternative to private placements as in the latter the institutional investor has to comply with a mandatory lock-in period QIPs also allows participation of retail investors through mutual fund route, an option not permitted in GDR FCCB issues.

Slide 35:

As per the guidelines, issuers will have to allocate a minimum of 10 per cent of such placements to mutual funds. For each QIPs, there shall be at least two allottees for an issue size of up to Rs 250 crore and at least five allottees for an issue size in excess of Rs 250 crore. no single allottee shall be allotted in excess of 50 per cent of the issue size

Qualified Institutional Buyers:

Qualified Institutional Buyers Those institutional investors who are generally perceived to possess expertise and the financial muscle to evaluate and invest in the capital markets. Scheduled Comercial Banks Mutual funds FIIs registered with SEBI Venture Capital Funds registered with SEBI State industrial Development Corporations


Warrants Holders receive the right to buy shares in the company at a fixed price in the future. Since the value of warrant is derived from the price of the underlying common stock, warrants have to be treated as another form of equity.

Alternative Investment Market (LSE):

Alternative Investment Market (LSE) Small and medium sized Indian companies have raised $2.7 billion from the London Stock Exchange's Alternative Investment Market in 2006 and are likely to raise a similar amount this year. As many as 21 Indian companies including Hirco, Unitech Corporate Parks, Noida Toll Bridge and Eros International have tapped the AIM AIM launched in 1995, raised GBP 24 billion for 2,200 companies.

Slide 40:

Ample demand for funds in Indian economy coupled with lenient eligibility criteria at AIM contributed to the beeline for Indian firms seeking London listing. Noida Toll Bridge, which was reporting net losses raised $50 million at AIM, thereby becoming the first Indian-listed company to raise additional funds there.


REITs A Reit helps developers securitise their rental yields - lease income - from their commercial properties by issuing shares to financial institutions or retail investors. Currently, many Indian developers are working to bring their income generating commercial properties under a special purpose vehicle (SPV) or a subsidiary company, which will then be listed in the overseas market in the form of a Reit.

Slide 42:

Reits, a popular fund-raising avenue in several developed countries, use funds raised from investors to purchase and manage properties. They are traded on major exchanges just like stocks. Unitech, India’s second-largest real estate firm by market cap, would be among the first lot of Indian developers to float a Reit in the overseas market to raise about Rs 10,000 crore to meet expansion plans.

Slide 43:

Unitech plans to sell a stake in its six SPVs that currently own six commercial properties after listing in the form of Reits in Singapore or DIFX, said the official.

Other examples :

Other examples DLF Hiranandani Developers Housing Development and Infrastructure DS Kulkarni Developers Orbit Corporation Embassy group Nitesh Estates


ADRs An American Depositary Receipt (or ADR) represents ownership in the shares of a foreign company trading on US financial markets. ADRs carry prices in US dollars, pay dividends in US dollars, and can be traded like the shares of US-based companies.

Slide 46:

Each ADR is issued by a US Depository bank and can represent a fraction of a share, a single share, or multiple shares of foreign stock. The price of an ADR is often close to the price of the foreign stock in its home market, adjusted for the ratio of ADRs to foreign company shares.

Slide 47:

The first ADR was introduced by JPMorgan in 1927, for the British retailer Selfridges&Co. The largest depositary bank is the Bank of New York Mellon. Indian ADRs: ICICI Bank, Satyam, Infosys, Rediff etc.


GDRs Global Depository Receipts means any instrument in the form of a depository receipt or certificate (by whatever name it is called) created by the Overseas Depository Bank outside India and issued to non-resident investors against the issue of ordinary shares or Foreign Currency Convertible Bonds of issuing company. India has the distinction of having the largest number of GDR issues by any country. Since then, the depositary receipt concept developed considerably in India with a total of 60 Indian companies raising over US$ 6.5 billion.

Slide 49:

Among the Indian Companies Reliance Industries Limited was the first company to raise funds through a GDR issue ($ 150 mn) in May 1992.

Slide 50:

The holder of a GDR does not have voting rights. The proceeds are collected in foreign currency thus enabling the issuer to utilize the same for meeting the foreign exchange component of project cost, repayment of foreign currency loans, meeting overseas commitments and for similar other purposes.

Slide 51:

The GDR's are usually listed at the Luxembourg Stock Exchange as also traded at two other places besides the place of listing e.g. on the OTC market in London and on the private placement market in U.S.A. Other, Ranbaxy, MTNL, VSNL, ITC, Infosys, Bajaj Auto etc.

Funds Raised by Indian companies through ADRs and GDRs:

Funds Raised by Indian companies through ADRs and GDRs

Debt Financing:

Debt Financing

Slide 54:

When a firm raises money for working capital or capital expenditures by selling bonds, bills, or notes to individual and/or institutional investors. In return for lending the money, the individuals or institutions become creditors and receive a promise that the principal and interest on the debt will be repaid.


Bonds A bond is a deby security, in which the authorized issuer owes the holders a debt and is obliged to repay the principal and interest (the coupon) at a later date, termed maturity.

Choices of maturity:

Choices of maturity Maturities range from 5 to 15 years.

Choices on Coupon/Interest Payments:

Choices on Coupon/Interest Payments Fixed Rate Bond Original-issue Deep Discount Bonds Floating Rate Bonds

Choices on Security:

Choices on Security Secured debt Asset-backed borrowing Mortgage bonds Collateral Bonds Unsecured bonds with maturity greater than 15 years – debentures. Subordinated debentures Income bonds

Bank Debt:

Bank Debt Primary source, historically Interest rate charged by a bank is based on the perceived risk of the borrower.


Advantages Can borrow relatively small amounts of money Protection of information. No need to be rated by rating agencies.

Types of Bonds:

Types of Bonds Fixed Rate Bonds Floating Rate Notes High Yield Bonds Zero Coupon Bonds Inflation Linked Bonds Subordinated Bonds Perpetual Bonds Bearer Bonds

Corporate bond market remains lacklustre…:

Corporate bond market remains lacklustre…

Comprehensive Corporate Bond Market essential:

Comprehensive Corporate Bond Market essential The overall growth of the Indian financial sector in recent years has of course been quite impressive. But a more vibrant corporate bond market will complement the already well developed and active equity and gilts markets. At present the corporate bond market remains a poor cousin. Most of the financial sector reforms including technology absorption can easily be extended to transform the bond market but attempts so far made have been in fits and starts. Some market watchers point to the absence of proactive regulation of the type that has led the sweeping changes in the equity and government securities markets. There may be some substance to the comment that bond market regulation has fallen between the two stools of the Reserve Bank of India and SEBI but too much need not be made of it.

Foreign Currency Convertible Bonds (FCCBs):

Foreign Currency Convertible Bonds (FCCBs) A type of convertible bond issued in a currency different than the issuer’s domestic currency. A convertible bond is a mix between a debt and equity instrument. It acts like a bond by making regular payments Only companies investing overseas can raise more funds through FCCBS

FCCB Proceeds (Rs Cr):

FCCB Proceeds (Rs Cr)


Advantages The process takes much lesser time, wherein a company could potentially raise funds in less than two months and, Secondly, it also brings some global investors, providing provide additional visibility in the process One of the fastest ways to raise funds from overseas markets and even postpone dilution of equity

Slide 68:

Both M&M ($200 million) and Ranbaxy ($400 million) issued FCCBs of five year maturity at 4.8% and 5 % respectively in 2006. In comparison, companies borrowing from the domestic market offered as much as 8.5-9% interest for 10-year bonds. Overall the foreign loans are cheaper by 3% on average

Slide 69:

Indian banks want companies to begin repayment immediately. It is not so in the case of debt raised in a foreign country.

Hybrid Instruments:

Hybrid Instruments '"Hybrid securities"', often referred to as "hybrids", are a broad group of securities that combine the elements of the two broader groups of securities Debt and Equity. Compulsory Convertible Preference shares Convertible bonds Bonds with warrants

authorStream Live Help