PREPARED BY:Aditya Paul Sharma Akhil Gour Akhil Gupta Aman Talla

THE BUSINESS SCHOOL , UNIVERSITY OF JAMMU

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A share is one unit into which the total share capital is divided. Share capital of the company can be explained as a fund or sum with which a company is formed to carry on the business and which is raised by the issue of shares.
Shares are the marketable instruments issued by the companies in order to raise the required capital. These are very popular investments which are traded every day in the stock market and the value of the share at the end of the day decides the value of the firm.
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 The

shares which are issued by companies are of two types: Equity Shares Preference Shares

Equity Shares are issued and are traded everyday in the stock market.
Equity share holders only get dividend after preference shareholders & debenture holders. The returns on the equity shares are not at all fixed. It depends on the amount of profits made by the company. The board of directors decides on how much of the dividends will be given to equity share holders. Share holders can accept to it or reject the offer during the annual general meeting. Equity shareholders have the right to vote on any resolution placed before the company.
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The Equity share is a common name, some of the types of equity shares are: Blue Chip Shares Income Shares Growth shares Cyclical Shares Defensive shares Speculative shares

 One

more classification of shares is given by one of the most successful and respected investor all around the world Peter Lynch. According to him the shares can be classified into 6 types:
Slow Growers Fast Growers Stalwarts Cyclical Turn-around Asset plays

ADVANTAGES

DISADVANTAGES

High Return

High Risk

Easily Transferable.
These can be easily liquidated. Right to vote Right to choose the board of directors. Equity share holders have the right to oppose any of the decisions taken by the board of directors. ( for e.g. This is what happened when Mr. Ramalinga Raju tried to buy Maytas company)

In worst cases less privilege given to equity share holders.

 It

involves selling of ordinary shares to the existing shareholders.

in India requires that the new ordinary shares must be first issued to the existing shareholders on a priority basis.

Law

No.

of rights = existing share/ new share

These are other type of shares. The preference shares are market instrument issued by the companies to raise the capital. Preference shares have the characteristics of both equity shares and debentures. Fixed rate of dividends are paid to the preference share holder as in case of debentures, irrespective of the profits earned company is liable to pay interest to preference share holders.

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 Preference

shares are divided into:

Cumulative & Non cumulative shares Redeemable & Non-redeemable Convertible & Non-convertible shares Participating and non-participating

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ADVANTAGES

DISADVANTAGES

These yield fixed rate of returns Its a hybrid instrument having some of the characteristics of debentures and equity shares.

They do not provide the investor with any of the voting rights. If the company gets huge profits then they wont get any extra bonus.

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 Every

member of a company holding any preference shares has a right to vote only on resolutions placed before the company which directly affect attached to his preference shares Apart from this preference shareholders are entitled to vote if dividend has remained unpaid in case of cumulative as well as non cumulative for two years.

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A shareholder (or stockholder) is an individual or company (including a corporation) that legally owns one or more shares of stock in a joint stock company. Shareholders are granted special privileges depending on the class of stock, including the right to vote (usually one vote per share owned) on matters such as elections to the board of directors, the right to share in distributions of the company's income, the right to purchase new shares issued by the company and the right to a company's assets during a liquidation of the company. However, shareholder's rights to a company's assets are subordinate to the rights of the company's creditors.
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Prospectus

Detail of a Company & Shares in Prospectus.

90 % application is necessary If access application received then company issue shares by pro rata basis full amount can be called up by company at the time of application or it can be paid up in installments also (calls)

Application

Allotment

share of the company may be issued in any of the following three ways:
At par; At premium; and At discount.

Repayment/ dividend

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Issue of shares for consideration other than cash (For example: issue of shares to vendors, to promoters etc.) Forfeiture of shares Buy Back of Shares Right Shares Redemption of preference shares/ Debenture

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A provision contained in an underwriting agreement that gives the underwriter the right to sell investors more shares than originally planned by the issuer. This would normally be done if the demand for a security issue proves higher than expected. Legally referred to as an over-allotment option.
It provides additional price stability to a security issue because the underwriter has the ability to increase supply and smooth out price fluctuations if demand surges. Green Shoe options typically allow underwriters to sell up to 15% more shares than the original number set by the issuer.

However, some issuers prefer not to include green shoe options in their underwriting agreements under certain circumstances, such as if the issuer wants to fund a specific project with a fixed amount of cost and does not want more capital than it originally sought. The term is derived from the fact that the Green Shoe Company was the first to issue this type of option.
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Issue price of shares: the price at which share is issued in the market. Paid up share capital = issue price * no. of ordinary shares. Issue price has two components

Par value Share premium Par value is the price per ordinary share stated in the memorandum of association. Generally they are in the denomination of 10 or 100. Any amount in excess of par value is called the share premium.

Shareholders equity = paid up share capital + share premium + reserves and surplus = Net worth Book value per share = Net worth / no. of ordinary shares Market value of a share is the price at which it trades in the market. It is generally based upon the expectations about the performance of the economy in general and company in particular.
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 Instrument

of debt executed by the company A certificate of loan Company pays pre specified percentage of interest Part of the company's capital structure Debentures are generally secured against the companys assets Convertible debentures can be either fully or partly converted into Shares Convertible debentures may carry a lower rate of interest
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 Security

Point of View

Secured Debentures Unsecured Debentures

Tenure

Point of View

Redeemable Debentures Perpetual Debentures

Mode

of Redemption Point of View

Convertible Debentures Non-Convertible Debentures

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 Control

of company is not surrendered to debenture holders because they do not have any voting rights. Interest on debenture is an allowable expenditure under income tax act, hence incidence of tax on the company is decreased. Debenture can be redeemed when company has surplus funds.

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 Cost

of raising capital through debentures is high of high stamps duty. Common people cannot buy debenture as they are of high denominations. They are not meant for companies earning greater than the rate of interest which they are paying on the debentures.

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It is a document which evidences a loan made to a company. It is a fixed interest bearing security where interest falls due on specific dates. Interest is payable at a predetermined fixed rate, regardless of the level of the profit. The original sum is repaid at a specified future date or it is converted into shares or other debentures. It may or may not create a charge on the assets of a company as security. It can generally be bought or sold through the stock exchange at a rice above or below its face value.

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 Issue

of redeemable debentures can be categorized into the following:

Debenture issued at a par and redeemable at par or at discount. Debenture issued at a discount and redeemable at par or at discount. Debenture issued at a premium and redeemable at par or at discount. Debenture issued at par and redeemable at premium. Debenture issued at a discount and redeemable at premium.
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A person having the debentures is called debenture holder whereas a person holding the shares is called shareholder. Debenture holder is a creditor of the company and cannot take part in the management of the company while a shareholder is the owner of the company. It is the basic distinction between a debenture and a share. Debenture holders will get interest on debentures and will be paid in all circumstances, whether there is profit or loss will not affect the payment of interest on debentures. Shareholder will get a portion of the profits called dividend which is dependent on the profits of the company. It can be declared by the directors of the company out of profits only.
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Shares cannot be converted into debentures whereas debentures can be converted into shares. Debentures will get priority is getting the money back as compared to shareholder in case of liquidation of a company. There are no restriction on issue of debentures at a discount, whereas shares at discount can be issued only after observing certain legal formalities. Convertible debentures which can be converted into shares at the option of debenture holder can be issued whereas shares convertible into debentures cannot be issued. There can be mortgage debentures i.e. assets of the company can be mortgaged in favor of debenture holders. But there can be no mortgage shares. Assets of the company cannot be mortgaged in favor of shareholders.
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IPO EXAMPLE
Jaypee Infratech Ltd. Sector 128, , District Gautam Budh Nagar , Noida , Uttar Pradesh - 201304 Phone: 4609000 Fax: 4609783 Public Issue of 224799496 Equity Shares of Rs 10 each for Cash at a Premium of Rs 92 per share.
Issue Open Date 29/04/2010 Issue Closing Date 04/05/2010 Application Money 102 Allotment Money -

Object of the issue

.

The Issue comprises a Fresh Issue and an Offer for Sale. The Proceeds of Fresh Issue The activities for which funds are being raised by our Company through this Issue, after deducting the proceeds from the Offer for Sale: (i) to partially finance the Yamuna Expressway Project; and (ii) general corporate purposes. (collectively referred to herein as the "Objects"). In addition, our Company expects to receive the benefits of listing of the Equity Shares on the Stock Exchanges.
Listed at BSE, NSE
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FPO EXAMPLE
NTPC Limited (Company) enter market with FPO
FPO opens on February 03' 10

Indias largest power generation company NTPC Limited (Company) will enter the capital markets on February 3, 2010 with its further public offer (FPO) of 412,273,220 equity shares of Rs 10 at prices to be determined through an alternative book building process under part D of Schedule XI of the SEBI (Issue of Capital and Disclosure Requirements) Regulations 2009. The FPO will close on February 5, 2010.

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A company can make 100% retail issues provided it satisfies all the following conditions It has a net tangible asset of at least Rs 3 crore in each of the preceding three years. It has a track record of distributable profit for at least three out of immediately proceeding 5 years. It has a net worth of at least Rs1 crore in each of the preceding 3 financial years. The issue size (offer through offer document + firm allotment + promoters contribution through offer document) does not exceed five times the pre-issue net worth
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 Typically,

it means mobilizing and allocating SAVINGS. It includes all activities involved in the transformation of SAVINGS into INVESTMENTS. Financial Services can also be called Financial Intermediation.

 It

is a process by which funds are mobilized from a large number of savers and make them available to those who are in need of it. Particularly to Corporate Customers.

 Economic

Growth Promotion of Savings Capital Formation Provision of Liquidity Financial Intermediation Contribution to GNP Creation of Employment Opportunities

1.

CAPITAL MARKET: Term Lending Institutions Investing Institutions Long Term Funds

2. MONEY MARKET: Consists of Commercial banks, Co-operative banks and other agencies. Short term funds.

A. TRADITIONAL ACTIVITIES 1. FUND BASED ACTIVITIES: includes Underwriting Dealing in secondary market activities Participating in money market instruments Leasing, hire-purchase, venture capital, etc.

2. FEE BASED ACTIVITIES: includes Managing the capital issues Arrangements for placement of capital and debt instruments Arrangement of funds from financial institutions Assisting in Government and other clearance

B. MODERN ACTIVITIES Few of them are: 1. Rendering project advisory services 2. Planning for Mergers and Acquisitions 3. Acting as trustees to the Debenture-holders 4. Hedging of risks 5. Managing the portfolio of large public sector companies. 6. Undertaking risk management services.

 Industrial

promotion through Merchant Banking

Services Working Capital Finance Through Factoring Services Equipment Finance through Leasing Financial resources through Mutual Funds Long-term Risk Capital through Venture Capital

 Risk

Management through Derivatives Debenture issue through Credit rating Development Finance through Development Banking Sector Industrial Development through Specialized Services

Merchant Banking Loan Syndication Leasing Mutual Funds Factoring Venture Capital Custodial Services

Corporate Advisory Services Securitization Reverse Mortgage Derivatives: - Forward Contract - Options - Futures - Swaps

 Commercial

Papers Treasury Bills Certificates of Deposit Inter-bank Participation(IBPs) Option Bonds Medium Term Maturity Equity with 100% Safety Net

 Convertible

Bonds Flip-Flop Notes Loyalty Notes Convertible Bonds with a Premium Put Debentures with Call and Put features Easy Exit Bonds

A written agreement under which a property owner

allows a tenant to use the property for a specified

period of time and rent.

The lessee (person taking out a lease) agrees to pay a number of fixed or flexible installments over an agreed period to the lessor, who remains the owner of the asset (item) throughout the period of the lease.

Leasing a product is similar to renting it

A contract lasts over a number of years,

usually between 2 and 10, depending on the cost and usable life of the product.

Have the full use of a piece of equipment without having to pay the full cost of the item in one go.

TYPES OF LEASING
Lease

Finance lease

Operating lease

Sale and Lease Back

Leveraged leasing

Direct leasing

Long-term, non-cancellable lease contracts are known as financial leases. The essential point - it contains a condition whereby the lessor agrees to transfer the title for the asset at the end of the lease period at a nominal cost. At lease it must give an option to the lessee to purchase the asset he has used at the expiry of the lease. High cost high tech equip.

 The

lease agreement is irrevocable.

All

the risks incidental to the asset ownership are transferred to the lessee who bears the cost of maintenance, insurance and repairs.
Only

title deeds remain with the lessor.

 Contrast A lease

to the financial lease

agreement gives to the lessee only a

limited right to use the asset.

The

lessor is responsible for the upkeep and lessee is not given any uplift to purchase

maintenance of the asset.

The

the asset at the end of the lease period.

 Sub-part The

of finance lease

owner of an asset sells the asset to a

party (the buyer), who in turn leases back the same asset to the owner in

consideration of lease rentals.

Under

this arrangement, the assets are

not physically exchanged but it all happens in records only.

 Sale

and lease back transaction is

suitable for those assets, which are not subjected depreciation but

appreciation, like land.

The

seller assumes the role of a lessee and the buyer assumes the role of a lessor. seller gets the agreed selling price and the buyer gets the lease rentals.

The

third party is involved beside lessor and

lessee.
The

lessor borrows a part of the purchase cost (say

8 0 %) of the asset from the third party i.e., lender

The

asset so purchased is held as security against

the loan.
The

lender is paid off from the lease rentals

directly by the lessee and the surplus after meeting the claims of the lender goes to the lessor.

 Under

direct leasing, a firm acquires the right to use an asset from the manufacturer directly. ownership of the asset leased out remains with the manufacturer itself.

The

 No

large outlay:

The cost is spread over a number of years; there is no need to pay the entire amount upfront.

Security:

The product is still owned by the leasing company, meaning that they have better security on finance.

 Flexibility The

and convenience

lease agreement can be tailor-

made in respect of lease period and lease rentals according to the convenience and requirements of all lessees

1. 2.

No Ownership Costly option - high interest rates, costlier than straight buying

3. 4. 5.

Long Term Expense Maintenance No working capital

A document under which a landlord and tenant set

forth the rights and obligations of each party with

respect to an apartment, rental unit, or other real property owned by the landlord and used by the tenant.

An instrument conveying the possession of real property for a fixed period in consideration of the payment of rent.

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 Hire

purchase is used to buy expensive items which a person cannot afford to pay outright: e.g. a car A down payment is usually paid and the balance is paid over several months (monthly installments).

 Goods

are let out on finance by a finance company to the hire purchaser customer Buyer is required to pay an equal amount of periodic installments during a given period Ownership transfers at the payment of the last installment

 An agreement under which goods are let on hire and under which the hirer has an option to purchase them in accordance with the terms of the agreement.

 In

hire purchase the purchase has to follow the agreement and he cannot terminate the contract. The seller can however, terminate the agreement in case of default of purchaser hire purchase price is higher than cash price, because interest element is added in this price

 The

Dealer, contracts with finance co. for financing his hire purchase deals. The customer selects the goods for HP, and dealer arranges for the complete set of documents Down payment by customer on completion of proposal form Dealer sends documents to finance co. with request to purchase the goods, and accept the HP transaction.

The finance co. signs the agreement and sends copy a long with EMI details to dealer. delivers the goods to the customer, property passes on to the finance co.

Dealer

Hirer

pays EMIs, and on last payment , the ownership passes on to him, with loan completion certificate by the finance co.

 Many

kinds of business asset are suitable for financing using hire purchase or leasing , including:-

Plant and machinery Business cars Commercial vehicles Agricultural equipment. Hotel equipment Medical and dental equipment Computers, including software packages Office equipment

 Bi-partite

arrangement: - two parties viz. borrower/consumer and dealer/financier. Tripartite Transaction: - three parties viz. dealer, financier, and customer. The dealer arranges the credit from the financier

Venture capital means funds made available for startup firms and small businesses with exceptional growth potential. Venture capital is money provided by professionals who alongside management invest in young, rapidly growing companies that have the potential to develop into significant economic contributors.

Venture Capitalists generally:

Finance new and rapidly growing companies Purchase equity securities Assist in the development of new products or services Add value to the company through active participation.

The SEBI has defined Venture Capital Fund in its Regulation 1996 as a fund established in the form of a company or trust which raises money through loans, donations, issue of securities or units as the case may be and makes or proposes to make investments in accordance with the regulations.

 Long
Lack

time horizon
of liquidity

High

risk
participation in management

Equity

Participation

It injects long term equity finance which provides a solid capital base for future growth. The venture capitalist is a business partner, sharing both the risks and rewards. Venture capitalists are rewarded by business success and the capital gain. The venture capitalist is able to provide practical advice and assistance to the company based on past experience with other companies which were in similar situations.

The venture capitalist also has a network of contacts in many areas that can add value to the company. The venture capitalist may be capable of providing additional rounds of funding should it be required to finance growth.
Venture capitalists are experienced in the process of preparing a company for an initial public offering (IPO) of its shares onto the stock exchanges or overseas stock exchange such as NASDAQ. They can also facilitate a trade sale.

The financing pattern of the deal is the most important element. Following are the various methods of venture financing: Equity Conditional loan Income note Participating debentures Quasi equity

The concept of venture capital was formally introduced in India in 1987 by IDBI.
The government levied a 5 per cent cess on all know-how import payments to create the venture fund. ICICI started VC activity in the same year Later on ICICI floated a separate VC company - TDICI

VCFs in India can be categorized into following five groups:

1)

Those promoted by the Central Government controlled development finance institutions. For example: - ICICI Venture Funds Ltd. - IFCI Venture Capital Funds Ltd (IVCF) - SIDBI Venture Capital Ltd (SVCL)

2) Those promoted by State Government controlled development finance institutions. For example: - Punjab Infotech Venture Fund - Gujarat Venture Finance Ltd (GVFL) - Kerala Venture Capital Fund Pvt Ltd.

3) Those promoted by public banks. For example: - Canbank Venture Capital Fund - SBI Capital Market Ltd

4)Those promoted by private sector companies. For example: - IL&FS Trust Company Ltd - Infinity Venture India Fund 5)Those established as an overseas venture capital fund. For example: - Walden International Investment Group - HSBC Private Equity management Mauritius Ltd

AS PER SEBI AS PER INCOME TAX ACT,1961

VCF are regulated by the SEBI (Venture Capital Fund) Regulations, 1996. The following are the various provisions: A venture capital fund may be set up by a company or a trust, after a certificate of registration is granted by SEBI on an application made to it. On receipt of the certificate of registration, it shall be binding on the venture capital fund to abide by the provisions of the SEBI Act, 1992.

A VCF may raise money from any investor, Indian, Non-resident Indian or foreign, provided the money accepted from any investor is not less than Rs 5 lakhs. The VCF shall not issue any document or advertisement inviting offers from the public for subscription of its security or units

 SEBI

regulations permit investment by venture capital funds in equity or equity related instruments of unlisted companies and also in financially weak and sick industries whose shares are listed or unlisted

At least 80% of the funds should be invested in venture capital companies and no other limits are prescribed. SEBI Regulations do not provide for any sectoral restrictions for investment except investment in companies engaged in financial services.

A VCF is not permitted to invest in the equity shares of any company or institutions providing financial services. The securities or units issued by a venture capital fund shall not be listed on any recognized stock exchange till the expiry of 4 years from the date of issuance .

A Scheme of VCF set up as a trust shall be wound up (a) when the period of the scheme if any, is over (b) If the trustee are of the opinion that the winding up shall be in the interest of the investors (c) 75% of the investors in the scheme pass a resolution for winding up or, (d) If SEBI so directs in the interest of the investors.

The Income Tax Act provides tax exemptions to the VCFs under Section 10(23FA) subject to compliance with Income Tax Rules. Restrict the investment by VCFs only in the equity of unlisted companies.
VCFs are required to hold investment for a minimum period of 3 years.

The Income Tax Rule until now provided that VCF shall invest only upto 40% of the paid-up capital of VCU and also not beyond 20% of the corpus of the VCF. After amendment VCF shall invest only upto 25% of the corpus of the venture capital fund in a single company. There are sectoral restrictions under the Income Tax Guidelines which provide that a VCF can make investment only in specified companies.

It was established in 1993 and is based in Delhi, the capital of India It is a member based national organization that - represents venture capital and private equity firms - promotes the industry within India and throughout the world - encourages investment in high growth companies and - supports entrepreneurial activity and innovation.

 IVCA

members comprise venture capital firms, institutional investors, banks, incubators, angel groups, corporate advisors, accountants, lawyers, government bodies, academic institutions and other service providers to the venture capital and private equity industry. represent most of the active venture capital and private equity firms in India. These firms provide capital for seed ventures, early stage companies and later stage expansion.

Members

Percentage
9.03 3.36 12.92 6.94 7.73 IT & ITES Energy Manufacturing
11.5

Media & Ent. BFSI Shipping & logistics Eng. & Const. Telecom Health care

4.32 11.43 4.82 27.95

Others

Percentage calculated on the total VC investment- 14,234 USB (fig. of 2007)

CITIES MUMBAI

SECTORS Software services, BPO, Media, Computer graphics, Animations, Finance & Banking All IP led companies, IT & ITES, Biotechnology Software services, ITES , Telecom IT , Telecom

BANGALORE

DELHI CHENNAI

HYDERABAD
PUNE

IT & ITES, Pharmaceuticals

Bio-technology, IT , BPO

16000
14234

450

14000

400
387

12000
299

350

300

10000

280

250
8000
7500 6390

200

6000
146

170

150

4000

110

100
78
71 56 1650 2200

2000

1160

937

50

591

470

0 2000 2001 2002 2003 2004 2005

No of deals

0
2006 2007 1st half of 2008
Value of deals

The down market virtually closed the IPO market for emerging companies.

With less opportunities for getting ROI investors tend to scale back, adjust their investment focus and/or get more picky in funding companies. The investors that put money into their funds became less aggressive during recession so it was harder for the VCs to raise money.

 The

increase in weighted deduction of in house R&D will boost up investment in health care.
of the total investment is going to infrastructure development which is a positive sign for investors.

46%

 VC

can help in the rehabilitation of sick units. VC can assist small ancillary units to upgrade their technologies VCFs can play a significant role in developing countries in the service sector including tourism, publishing, health care etc. They can provide financial assistance to people coming out of universities, technical institutes, etc thus promoting entrepreneurial spirits

THANK YOU

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