Raising Long-term Finance

Raising Long-term Finance

Sources of Long-term Finance       

Venture Capital Initial Public Offer (IPO) Public Issue by Listed Companies Rights Issue Preferential Allotment Private Placement Term Loans

Venture Capital 

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Defn: Mutual funds or institutional investors that provide equity finance or risk capital to little known, unregistered, highly risky, young, small private business, especially in technology oriented and knowledge intensive business or industries. Focused on computer & Network technology, Telecom technology and Biotechnology

Venture Capital cont…. 

Features: 

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VC is inclined to assume high degree of risk in expectation of earning high rate of return. The VC subscribes to equity financing instruments, which enable it to share the risks and rewards of the investee firm. In addition to providing funds, the VC takes active interest in guiding the assisted firm The VC normally plans to liquidate its investment in the assisted firm after 3-7 years. In such a case, the promoter of the assisted firm is given the first priority to acquire the equity investment held by the VC.

Venture Capital cont…. 

VC Industry in India   

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ICICI ventures was the first VC institution in India promoted as a joint venture of ICICI Ltd. and UTI in 1988. Commercial Banks and DFIs with their own VC subsidiaries. Deregulation of foreign investment into Indian Companies facilitated international investors to play a major role in the Indian VC industry Foreign VC investors introduced the western investment philosophy and contract Before economic reform: Financing technology and entrepreneurship development. After economic reform: shift towards financing of innovative and growth oriented businesses that could sustain in an economy and increasingly opening up to international competition.

Venture Capital cont… 

Preparing a Business Plan for approaching a venture capitalist  

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Use simple and clear language in presentation. Focus on basic elements such as people, product, market and competition. Projection of cash flows for two years. Identify the underlying risks and develop a strategy to cope with the same. Convince that the management team is talented, committed, and determined.

Venture Capital cont… 

Risks in Venture Capital Financing      

Lack of company history Lack of market history Lack of market! Company hyperbole Inflated projections Changing economy

INITIAL PUBLIC OFFER(IPO) 

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The first sale of stock by a company to the public The first public offering of equity shares of a company, which is followed by a listing of its shares on the stock market.

IPO cont…. 

Advantages of going public       

Access to capital Greater respect Investor recognition Window of opportunity Liquidity Benefit of diversification Signals from the market

IPO cont…. 

Costs of Going Public       

Adverse Selection Dilution Loss of Flexibility Disclosures Accountability Public Pressure Costs

Public Issue  

Public issue by listed companies Cost of Public Issue

Rights Issue 

Defn: Issue of capital to the existing shareholders of the company on a pro rata basis

Rights Issue 

Characteristics features: 

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The number of rights that a shareholder gets is equal to the number of shares held by him The number of rights required to subscribe to an additional share is determined by the issuing company The price per share for additional equity, the subscription price is left to the discretion of the company Rights are negotiable. The holder of rights can sell them Rights can be exercised only during a fixed period which is usually about 30 days.

Preferential Allotment 

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Defn: An issue of equity shares by a listed company to pre-determined persons, who may or may not be the existing shareholders of the company at a predetermined price is referred to as preferential allotment. Pref. allotment is made to – promoters, strategic investors, venture capitalists, financial institutions and suppliers. Pref. allotment is made to secure the equity participation of those, the company considers desirable.

Private Placement    

Defn: Direct selling of securities to a limited number of institutional or high net worth investors. This avoids the delay involved in going public and also reduces the expenses involved in a public issue The company appoints a merchant banker to network with the institutional investors and negotiate the price of the issue Advantages  Easy access to finance  Fewer procedural formalities  Lower issue cost  Access to funds is faster

Term Loans 

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Major source of debt finance for long-term projects 1-10 years of repayment period All India Financial institutions and State financial corporations Interest rate will be fixed on the term loans after assessing the credit risk

Term Loans 

Contents of loan application   

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Promoter's background Particulars of the industrial concern Particulars of the project (capacity, technical arrangement, land & building, p & m, location etc.) Cot of project Means of financing Marketing and selling arrangements Profitability and cash flow Government consents

Term Loans 

Term loan procedure  

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Initial processing of Loan Application Appraisal of the proposed project (marketing, technical, financial, managerial, and economic aspects) Issue of the letter of sanction Acceptance of the terms and conditions by the borrowing unit Execution of loan agreement Disbursement of loans Creation of security Monitoring

Project Appraisal     

Market appraisal Technical appraisal Financial appraisal Economic appraisal Managerial appraisal