Long term financing decisions 1

LONG TERM FINANCING DECISIONS

-External

Financing

EQUITY SHARES……

An equity share, commonly referred to as ordinary share

represents the form of fractional or part ownership

in which a shareholder, as a fractional owner,

undertakes the maximum entrepreneurial risk

associated with a business venture.

The holders of such shares are members of the

company and have voting rights

FEATURES OF EQUITY SHARES….

No fixed rate of return-The rate of dividend of these

shares depends upon the profits to the company. They may b

paid a higher rate of dividend or they may not get anything.

No obligation to pay dividend- The company has no

obligations to pay dividend to equity share holders even

though the company get profits. Whether dividend should be

paid or not, even if it is to be paid what should be the rate of

dividend, etc. would be decided by the board of directors in

general body meetings

Residual Claim to assets- At the liquidation of the

company, the equity shareholders will be paid only if any

amount is left after all the other claims against the company

are settled

Right to Control- Equity share holders have voting rights and they elect board of directors who controls the affairs of the company. Thus the equity shareholders are collectively responsible for efficient management of the company

Form the basis for loans

Speculation- Investing public purchase equity shares with speculative motive. This is possible because the market value of shares fluctuates depending upon the good will of the firm, rate of dividend is declared.

Limited Liability- In the case of companies where the liability is limited by shares the liability of the share holders is limited only uptothe unpaid value of shares. He is not personally responsible for the liability of the company as in the case of sole trading concern and partnership firm

Permanent Capital- The capital procured by issue of equity shares is a permanent source of funds to the company. At the same time shareholders can get money by sale of shares in the stock exchanges.

METHOD OF FLOTATION OF EQUITY SHARES

Float refers to the total number of shares available for trading. Float is

calculated by subtracting closely-held shares from the total number of

outstanding shares

Initial public offering:

IPO is a type of public offering where shares of stock in a company are sold to

the general public, on a securities exchange, for the first time. Through this

process, a private company transforms into a public company. Initial public

offerings are used by companies to raise expansion capital, to possibly

monetize the investments of early private investors, and to become publicly

traded enterprises.

Most companies undertake an IPO with the assistance of an investment

banking firm acting in the capacity of an underwriter. Underwriters provide

several services, including help with correctly assessing the value of shares

(share price) and establishing a public market for shares (initial sale)

Private placements:

Private placement (or non-public offering) is a funding

round of securities which are sold not through a public offering, but rather

through a private offering, mostly to a small number of chosen investors.

The sale of securities to a relatively small number of select investors as a way

of raising capital.

Investors involved in private placements are usually large banks, mutual funds,

insurance companies and pension funds.

Private placement is the opposite of a public issue, in which securities are

made available for sale on the open market.

Direct offerings:

A Direct Public Offering (DPO) is a method by which a business can

offer stock directly to the public.

A DPO is similar to an initial public offering (IPO) in that stock is sold to

investors, but unlike an IPO, a company uses a DPO to raise capital

directly and without a firm underwriting from an investment banking firm

or broker-dealer.

Direct public offerings are primarily utilized by small to medium size

companies who are unable to attract the interest of an investment

banking firm to represent them in a traditional initial public offering.

BOOK BUILDING..

Book building refers to the process of generating, capturing, and

recording investor demand for shares during an Initial Public Offering

(IPO), or other securities during their issuance process, in order to

support efficient price discovery

the issuer appoints a major investment bank to act as a

major securities underwriter or bookrunner. The “book” is the off-

market collation of investor demand by the bookrunner and is

confidential to the bookrunner, issuer, and underwriter.

It is a mechanism where, during the period for which the book for the

offer is open, the bids are collected from investors at various prices,

which are within the price band specified by the issuer.

The process is directed towards both the institutional as well as the

retail investors. The issue price is determined after the bid closure

based on the demand generated in the process

THE PROCESS…… The Issuer who is planning an offer nominates lead merchant

banker(s) as 'book runners'. The Issuer specifies the number of securities to be issued and

the price band for the bids. The Issuer also appoints syndicate members with whom orders

are to be placed by the investors. The syndicate members input the orders into an 'electronic book'.

This process is called 'bidding' and is similar to open auction. The book normally remains open for a period of 5 days. Bids have to be entered within the specified price band. Bids can be revised by the bidders before the book closes. On the close of the book building period, the book runners

evaluate the bids on the basis of the demand at various price levels.

The book runners and the Issuer decide the final price at which the securities shall be issued.

Generally, the number of shares are fixed, the issue size gets frozen based on the final price per share.

Allocation of securities is made to the successful bidders. The rest get refund orders

PRESENT SCENARIO OF EQUITY MARKET

BSE Sensex touched its all-time high crossing 27,300 levels this lastweek

The Sensex has surged continuously and now it's in a zone which hasnot been explored till date so it would be an assumption that the marketshould correct on regular intervals or at least consolidate after regularintervals to continue its upward journey.

More than the Narendra Modi impact, the market is rising on liquidity.Sentiment is positive and it could make the market run ahead offundamentals.

Until interest rates remain low in developed economies, FII money willcontinue to find its way into markets like India.

With equities under-owned and other asset classes like goldunderperforming, there is a high possibility that investors may rush intoequities

the budget was pragmatic and the focus was clearly on execution.Fiscal consolidation (lowering fiscal deficit), containing inflation, revivingthe investment cycle, attracting foreign capital (through FDI), andrecapitalization of state owned banks were some of the key takeawaysfrom the budget

It is strongly believed that the Indian economy is on the cusp of a strong

growth uptrend that could herald 6-7% GDP growth per annum over the

next 5-10 years

Infrastructure, both private and government and Outsourcing, led by

automobiles and pharmaceuticals export are key themes that will drive

India’s growth story for the next decade.

A weaker growth outlook coupled with a rising current account deficit

(CAD) had led to weakness in the rupee. However, with the FY14 CAD

coming at just 1.7% of GDP (versus 4.7% in FY13), the rupee has now

stabilized and is near its fair value on a real effective exchange rate

(REER) basis.

PRIVATE EQUITY

Equity capital that is not quoted on a public exchange.

Private equity consists of investors and funds that make investments

directly into private companies.

Capital for private equity is raised from retail and institutional

investors, and can be used to fund new technologies, expand working

capital within an owned company, make acquisitions, or to strengthen

a balance sheet.

The majority of private equity consists of institutional investors and

accredited investors who can commit large sums of money for long

periods of time.

Private equity investments often demand long holding periods to allow

for a turnaround of a distressed company or a liquidity event such as

an IPO or sale to a public company.

FEATURES OF PRIVATE EQUITY

private equity investments generally are liquid, because when

there is a possibility of a secondary sale of fund shares,

investors can expect a substantial discount on the net asset

value if selling in the secondary market

When participating in a limited partnership, the investor needs

a minimum amount of capital commitment. This minimum

differs from fund to fund, but it is a small fraction of the wealth

of an investor.

The private equity market is not transparent. One of the key

characteristics in this market is that there is little publicly

available information. The lacking of transparency is seen as a

necessity for achieving the results, because substantial part of

the returns, private equity experiences, is due to the ability to

exploit inside information.

LIST OF MAJOR PLAYERS OF PRIVATE EQUITY

Rank Name of the firm HeadquartersCapital Raised as of 2014

(billions of USD)

1 The Blackstone Group New York $ 65.70

2 Carlyle Group Washington, D.C. $ 62.90

3 TPG Capital Fort Worth $ 59.00

4Kohlberg Kravis

RobertsNew York $ 54.50

5 Apollo Management New York $ 48.00

6Goldman Sachs Capital

PartnersNew York $ 39.90

7 Warburg Pincus New York $ 37.00

8 Bain Capital Boston $ 35.00

9 Advent International Boston $ 32.00

10 CVC Capital Partners London $ 18.08

TOP PRIVATE EQUITY FIRMS IN INDIA….

• ICICI Venture

• Chrys Capital

• Sequoia Capital

• India Value Fund

• Kotak Private Equity Group

• Baring Private Equity Partners

• Ascent Capital

• Everstone Capital

• Blackstone Group

SECTOR-WISE PRIVATE EQUITY INVESTMENTS IN INDIA

MERITS OF PRIVATE EQUITY

By definition, private equity firms work outside the public eye and do

not have to follow the same transparency standards that public firms

and funds must adhere to. This allows private equity firms to reform

the companies without the constraint

Private equity firms have active involvement of investors and lenders,

and will help to re-evaluate every aspect of your business to see how

you can maximize its value.

India is one of the fastest growing economies in the world, with

enormous growth potential in many industries. This means that

capital requirements are high, translating into an ideal hunting ground

for PE funds

PE helps those companies which cannot raise money from the

market. By private equity company get money from the investors,

which help in the growth of the company

By utilizing a team of researchers the private equity firm is able to

identify most risks that would not otherwise be found.

DEMERITS OF PRIVATE EQUITY…

India, being divided into a number of states, causes an investment

decision to be affected by politics. Changes in regulation and

infrastructure development are often sidelined due to friction and

conflict between the state and the federal government

It is a lengthy process since private equity managers conduct detailed

market, financial, legal, environmental and management research

Private Equity funds normally invest in a unlisted space and they find it

difficult to exit the investment at their wish, since it require concentrated

efforts to find a suitable investor for unlisted company

With private equity, one gets much more money, but usually have to

give up a much larger share of the business. Private equity firms often

demand a majority stake, and sometimes one will be left with little or

nothing of your ownership.

Beyond the money, one can also lose control of the direction of the

business. The private equity firm will want to be actively involved

THANKING YOU….