souces of longfinr-rk

8/6/2019 Souces of LongFinr-Rk

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Business firms need finance mainly for two

purpose

1.To fund the long term decisions

2.To meet the working capital requirements

Types of capital

1.Equity Capital

2.Preferemce capital

3.Debenture capital


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They are the real owners of the company

They enjoy the residual profits of the companyafter having paid the preference shareholdersand other creditors

Dividend is optional

They enjoy voting rights


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They have preference over the equity

Dividend is not compulsory

Types 1.Cumulative or Non cumulative 2.Redeemable or perpetual preference share

Convertible or non convertible preferenceshares


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A debenture is a marketable legal contractwhereby the company promises to pay itsowner, a specified rate of interest for a definite

period of time and to repay the principal at thespecified date of maturity.

Debentures are usually secured by a charge onthe immovable properties of the company.


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Non voting shares: Useful for companies seeking to bolsternet worth without losing management control. Similar in

every aspect to equity the only difference is the absence ofvoting rights.

Detachable Equity Warrants: Issuable with non convertibledebentures or other debt or equity instruments. Ideal forfirms with growth prospects

Participating debentures: These are unsecured corporate debtsecurities which participate in the profits of a company.

Potential issuers will be existing dividend paying companies.

Participating preference shares: Quasi equity instrument tobolster net worth without loss of management control

Payouts linked to equity dividend , and also eligible for bonus .


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Mortgage-backed Securities: A synthetic instrument ,

otherwise known as the asset backed security, for securitization of debt.

Debt Equity swaps: An offer from an issuer of debt to swap itfor common stock (equity) The risks: It may dilute earnings

per share in the case of the issuer, the expected capitalappreciation may not materialize in the case of the investor.

Zero coupon Convertible Note: a zero coupon convertiblenote converts into common stock. If investors choose to

convert , they forgo all accrued and unpaid interest. The risk:ZCCNprices are sensitive to interest rates


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A firm can raise capital from the primary market(both domestic and foreign) by issuing securities inthe following ways:

1.Public Issue: companies issue securities to thepublic in the primary market and get them listed onthe stock exchanges. These securities are then tradedin the secondary market.

Process is as follows: 1.appointment of lead manger

2.Preperation of the prospectus

3.Appointment of intermediaries


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Rights issues: Issuing additional shares to theexisting share holders.

Private placement: Direct selling of securities to alimited number of institutional or high net worth

investors.

The major advantage of privately placing thesecurities are:

Easy access to any company

Fewer procedural formalities Lower issue cost Access to funds is faster


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Bought-out deals: It is a process whereby aninvestor or group of investors buy out a significantportion of an unlisted company with a view to sellthe equity to public within an agreed time frame.

Euro Issues: the govt. has allowed Indian companiesto float their stocks in foreign capital markets. TheIndian corporate which faces high rates of interestin the domestic market are now free to tap the globalcapital markets for meeting the resource

requirements at less costs and admin. Problems. Eg.GDR


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But what about Non Resident Indians (NRIs) andforeign nationals?

Considering the many restrictions on NRIs andforeign nationals investing in India, how can they

benefit from the potential that India offers?

There are some very good proxies to investingdirectly in India andADRs and GDRs are a greatoption.


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ADRs and GDRs are not for investors in India they can

invest directly in the shares of various Indian companies. But the ADRs and GDRs are an excellent means of

investment forNRIs and foreign nationals wanting to invest

in India.

By buying these, they can invest directly in Indiancompanies without going through the hassle of

understanding the rules and working of the Indian financial

market since ADRs and GDRs are traded like any other

stock, NRIs and foreigners can buy these using their regular

equity trading accounts!


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Both ADRand GDRare depository receipts, and represent a

claim on the underlying shares. The only difference is the

location where they are traded.

If the depository receipt is traded in the United States ofAmerica (USA), it is called anAmerican Depository

Receipt, or an ADR.

If the depository receipt is traded in a country other than

USA, it is called a GlobalDepository Receipt, or a GDR.


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This is not only the case. Some large companies can also

invest huge sums of money in order to gain more publicity.

IPO can be a risky investment and it is very risky to predict

what will and will not happen to the stock that has already

been invested.

Companies that are going through transitory growth periodrequire IPO for their future development and reputation.

The basic difference between the IPO and the FPO is the fact

that the latter involves a contribution of supplementary

shares subsequent an initial public offering by the company. This occasionally signifies that the company is impecunious

of currency.

So they call for issuing extra shares to reimburse bills or

funding a new project.

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