Raising Equity Capital PDF

Raising Equity Capital Outline Equity Financing for Private Companies Taking Your Firm Public: The Initial Public Offering Raising Additional Capital: The Seasoned Equity Offering Equity Financing for Private Companies Sources of Funding: – A private company can seek funding from...

Raising Equity Capital Outline Equity Financing for Private Companies Taking Your Firm Public: The Initial Public Offering Raising Additional Capital: The Seasoned Equity Offering Equity Financing for Private Companies Sources of Funding: – A private company can seek funding from several potential sources: Angel Investors Venture Capital Firms Institutional Investors Corporate Investors Equity Financing for Private Companies Angel Investors: – Individual investors who buy equity in small private firms – The first round of outside private equity financing is often obtained from angels Angel Investors in India https://www.ian-fund.com/ Indian Angel Network Major Angel Investor in India https://digest.myhq.in/active-angel-investor s-india/ Equity Financing for Private Companies Venture Capital Firms: – Specialize in raising money to invest in the private equity of young firms – In return, venture capitalists often demand a great deal of control of the company Most Active Venture Capital Firms in India Annual VC investments in India ($B) Equity Financing for Private Companies Institutional Investors: – Pension funds, insurance companies, endowments, and foundations May invest directly May invest indirectly by becoming limited partners in venture capital firms AI, VC and PE Comparison Taking Your Firm Public: The Initial Public Offering The process of selling stock to the public for the first time is called an initial public offering (IPO) Top 10 IPOs in India 2024 with Biggest Issue Size 10 Largest SME IPOs in India in 2024 by Issue Size Taking Your Firm Public: The Initial Public Offering Advantages and Disadvantages of Going Public – Advantages: Greater liquidity Better access to capital – Disadvantages: Equity holders more dispersed Must satisfy requirements of public companies (SEBI, MCA, Stock Exchange) Taking Your Firm Public: The Initial Public Offering IPOs include both Primary and Secondary offerings Underwriters and the Syndicate – Underwriter: an investment banking firm that manages the offering and designs its structure Lead Underwriter – Syndicate: other underwriters that help market and sell the issue  Book Building Process https://www.youtube.com/watch?v=0Lq818 4z9qw Taking Your Firm Public: The Initial Public Offering SEBI Filings – Registration Statement preliminary prospectus or red herring prospectus – Final Prospectus Taking Your Firm Public: The Initial Public Offering Valuation – Underwriters work with the company to come up with a price Estimate the future cash flows and compute the present value Use market multiples approach – Road Show – Book Building Taking Your Firm Public: The Initial Public Offering Pricing the Deal and Managing Risk – Firm Commitment IPO: the underwriter guarantees that it will sell all of the stock at the offer price – Over-allotment allocation, or greenshoe provision: allows the underwriter to issue more stock, amounting to 15% of the original offer size, at the IPO offer price Taking Your Firm Public: The Initial Public Offering Other IPO Types – Best-Efforts Basis: the underwriter does not guarantee that the stock will be sold, but instead tries to sell the stock for the best possible price – Auction IPO: The company or its investment bankers auction off the shares, allowing the market to determine the price of the stock Summary of IPO Methods Raising Additional Capital: The Seasoned Equity Offering (FPO) A firm’s need for outside capital rarely ends at the IPO – Seasoned Equity Offering (SEO): firms return to the equity markets and offer new shares for sale Raising Additional Capital: The Seasoned Equity Offering SEO Process – When a firm issues stock using an SEO, it follows many of the same steps as for an IPO – Main difference is that the price-setting process is not necessary Raising Additional Capital: The Seasoned Equity Offering Two kinds of seasoned equity offerings: – Cash offer – Rights offer Hyundai Motors IPO Details  Kotak Mahindra Capital Company Limited, Citigroup Global Markets India Private Limited, HSBC Securities & Capital Markets Pvt Ltd, J.P. Morgan India Private Limited and Morgan Stanley India Company Pvt Ltd are the book running lead managers of the Hyundai Motor IPO, while Kfin Technologies Limited is the registrar for the issue. ASBA Process https://www.youtube.com/watch?v=rhYR_ZC O5-o  Class Activity Think and Reflect : Time 10 minutes in a group of 2-3 Does life cycle stage of the company affect the choice of funding? Can you match the sources of finance with the life cycle stage of the company? Is there any order of financing you can recommend for financing? CP data in India https://nsdl.co.in/commercial-papers-main. php  Financial System The financial system is a complex network of institutions, markets, instruments, and regulations that facilitates the flow of funds between savers and borrowers. It plays a crucial role in the allocation of capital, supporting economic growth and stability. Intermediation in Capital Flow  Financial Institutions Commercial Banks: Provide loans, accept deposits, and offer investment products to both individuals and businesses. – Example: ICICI Bank, State Bank of India (SBI). Investment Banks: Facilitate capital raising activities such as issuing shares and bonds, provide advisory services, and manage mergers and acquisitions. – Example: JM Financial, Goldman Sachs.  Non-Banking Financial Companies (NBFCs): Provide a variety of services such as loans, asset financing, and leasing, but they do not have a full banking license. – Example: Bajaj Finance, Muthoot Finance. Insurance Companies: Provide risk management solutions by pooling funds from policyholders and offering products like life insurance, health insurance, and general insurance. – Example: LIC (Life Insurance Corporation of India), ICICI Lombard.  Mutual Funds: Pool money from various investors to invest in a diversified portfolio of stocks, bonds, or other securities. – Example: HDFC Mutual Fund, SBI Mutual Fund.  Financial Markets Financial markets provide the platform for buying and selling financial instruments. These markets ensure the efficient allocation of capital and the liquidity of financial assets. Types of Financial Markets: Capital Market Money Market Foreign Exchange Market Derivatives Market Commodity Market Financial Markets  Capital Markets: Where long-term funding is raised through the issuance of shares (equity) and bonds (debt). This market includes both primary markets (new issues of securities) and secondary markets (trading of existing securities). – Example: The Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE) in India.  Money Markets: Where short-term borrowing and lending take place, typically for less than one year. Instruments traded here include Treasury Bills, Certificates of Deposit (CDs), and Commercial Papers (CPs). – Example: Treasury Bills issued by the Reserve Bank of India (RBI).  Foreign Exchange (Forex) Market: A global marketplace for buying and selling currencies. It helps in determining exchange rates and facilitating international trade and investments. – Example: The INR (Indian Rupee) traded against USD (US Dollar) in global forex markets. Derivatives Markets: A market where financial instruments (such as futures, options, and swaps) derive their value from underlying assets like stocks, commodities, or interest rates. – Example: National Stock Exchange's (NSE) Futures and Options segment. 3. Financial Instruments Financial instruments are contracts that represent a claim on an underlying asset or a right to future cash flows. They are broadly categorized into: Equity Instruments: Represent ownership in a company, giving shareholders voting rights and the potential for dividends. – Example: Shares, Stock (listed on exchanges like NSE, BSE).  Debt Instruments: Borrowing instruments where the issuer is obligated to pay a fixed amount of interest and principal. – Example: Bonds, Treasury Bills, Commercial Papers, Debentures. Derivatives: Financial contracts whose value is derived from the performance of an underlying asset, index, or rate. – Example: Futures, Options, Swaps. Hybrid Instruments: Combine features of both equity and debt instruments. Convertible bonds, for example, can be converted into equity at a later date. – Example: Convertible bonds. Financial Regulators in India  Financial Services These are specialized services that support the activities of financial markets and institutions. Brokerage Services: Facilitate the buying and selling of securities on behalf of clients. – Example: Zerodha, Angel One. Investment Advisory: Provide advice on investment strategies, portfolio management, and financial planning. – Example: Motilal Oswal, Edelweiss. Credit Rating Agencies: Assess the creditworthiness of borrowers and rate debt instruments based on the issuer's ability to repay. – Example: CRISIL, ICRA, and CARE Ratings.  Payment and Settlement Systems These systems ensure that transactions between buyers and sellers are completed smoothly and efficiently, ensuring trust in the financial system. RTGS (Real-Time Gross Settlement): A system for transferring large-value transactions in real-time. – Example: RTGS for interbank fund transfers in India. NEFT (National Electronic Funds Transfer): A popular electronic payment system for smaller-value transfers. – Example: NEFT for personal bank transfers. UPI (Unified Payments Interface): A mobile-based platform that allows instant transfer of money between different banks. – Example: Google Pay, PhonePe using UPI.  Activity Group 1: Start-Up Group 2: Growth Stage Group 3: Mature Stage Each group represents a different phase of a company’s lifecycle, and their task is to decide the best financing method for their specific stage.  Group 1: Start-Up Scenario: You are the founders of a tech start-up in the early stages of development. Your company needs $2 million in funding for product development, marketing, and team expansion. You are considering raising funds either through venture capital (VC) or angel investors. The company has no established track record and high growth potential but is also a high-risk investment. Questions to Consider: – What are the key advantages of venture capital vs. angel investment? – How much control are you willing to give up? – What are the risks involved in equity financing at this early stage? Decision-making: Discuss the pros and cons of each option, considering factors like speed of funding, control, and future funding needs. Group -2 :Growth Stage Scenario: Your company has successfully completed its initial development phase, and your product is now gaining traction in the market. You are planning an Initial Public Offering (IPO) to fund expansion into new markets or considering raising funds through private equity (PE) or debt (e.g., bank loans or bonds). Questions to Consider: – Should you go public (IPO), or is private equity or debt financing a better fit for your expansion? – What are the costs associated with going public vs. using private equity or debt? – What impact will each option have on control, ownership, and long-term growth? Decision-making: Assess the risks and rewards of going public (IPO), taking on debt, or seeking private equity based on the company’s growth needs and current market conditions  Group – 3 Mature Stage Scenario: Your company is a well-established player in the market with strong revenue and profit streams. It is now considering a major acquisition to expand its market share and capabilities. The company has sufficient retained earnings, but you are also considering issuing bonds to raise the necessary funds for the acquisition. Questions to Consider: – Should you leverage retained earnings, or should you issue bonds to raise the capital? – What are the pros and cons of debt financing (bonds) versus using internal funds (retained earnings)? – How will this decision affect the company’s balance sheet, cash flow, and cost of capital? Decision-making: Analyze the benefits of using retained earnings (lower financial risk) versus the flexibility of raising funds via bonds (increased debt, higher leverage).