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Ordinary Shares Public Issue of Equity Right Issue of Equity Shares Preference Shares
Claim on Income Claim on Assets Right to Control Voting Rights Limited Liability
Advantages
Permanent Capital Borrowing Base Dividend Payment Discretion
Disadvantages
Cost Risk Earnings Dilution Ownership Dilution
Public issue of equity means raising of share capital directly from the public. As per the existing norms, a company with a track record is free to determine the issue price for its shares.
Private placement involves sale of shares (or other securities) by the company to few selected investors, particularly the institutional investors.
Private placement advantages:
Size Cost Speed
has
the
following
Selling of Ordinary Shares to the existing shareholders of the company. The shareholder has three options:
(i) he exercises his rights,
(ii) he sells his rights, or (iii) he does not exercise or sell his rights.
Advantages
1. Control is maintained 2. Less flotation cost 3. Issue more likely to be successful
Disadvantages
1. Shareholders lose if fail to exercise their right 2. If shareholding concentrated in hands of FI
Non payment of dividends does not force company to insolvency. Dividends are not deductible for tax purposes. In some cases, it has no fixed maturity dates. Dividend rate is fixed. Do not share in residual earnings. Preference shareholders have claims on income and assets prior to ordinary shareholders. Usually do not have voting rights.
Similarity to Debentures:
1. 2. 3. 4.
1. 2. 3. 4. 5.
Claims on Income and Assets Fixed Dividend Redemption Voting Rights Convertibility
Advantages:
Risk less leverage advantage Dividend postponability Fixed dividend Limited Voting Rights
Disadvantages:
Non-deductibility of Dividends Commitment to pay dividends
A debenture is an instrument of debt executed by the company acknowledging its obligation to repay the sum at a specified rate and also carrying an interest. It is only one of the methods of raising the loan capital of the company.
A debenture is thus like a certificate of loan or a loan bond evidencing the fact that the company is liable to pay a specified amount with interest and although the money raised by the debentures becomes a part of the company's capital structure, it does not become share capital.
Convertible Debenture Secured Debenture Unsecured debenture Redeemable debentures Perpetual debentures Convertible debentures with options Debt-Equity swaps Deep discount bonds Floating rate bonds
Advantages
1. 2. 3. 4. Less Costly No ownership Dilution Fixed payment of interest Reduced real obligation Obligatory Payment Financial Risk Cash outflows Restricted Covenants
Disadvantages
1. 2. 3. 4.
Jan 20, 2011 L and T Infrastructure Finance Company Limited Jan 17, 2011 India Infrastructure Finance Company Limited
Short Term (About 3 years) Medium Term (Around 6 10 years) Long Term (Greater than 10 years)
Most of the business loans are short term Rates are variable or floating rate Overdraft, day to day variable rates
3 10 years Rate usually depends on the credit standing and riskiness of the borrower Rate of interest may be fixed or variable Variable rates reviewed after 3, 6, 9 & 12 months in line with the base lending rate
More than 10 years For purchase of property, business expansion, etc. Takes the form of a mortgage Usually to well established business Can be given to start ups if the business plan is promising
This is a source of finance that would only be available to a business that is already in existence. Profits from a business can be used by the owners for their own personal use or can be used to put back into the business. This is often called laughing back the profits'.
This finance can be used to buy new equipment and machinery as well as more stock or raw materials and hopefully make the business more efficient and profitable in future
Easily available to the business, requiring no need to consult its lenders or shareholders. Control of the business is not weakened. Unlike external equity, it eliminate losses on account of under pricing. Stock markets view retained earnings in a more positive light than equities.
Limitation to amount a firm can earn from retained earnings, as companies are engaged in a stable dividend policy (variable) Many do not fully support its opportunity cost Arguing ,since earnings are easily available, firm may invest in sub-marginal projects. The opportunity costs of retained earnings are quite high.
Rehabilitation of sick units. Assist small ancillary units to upgrade their technologies. Provide financial assistance to people coming out of universities etc.
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