Financing and Listing Securities


This chapter has been categorized into two parts financing of securities and listing of securities. Financing refers to various sources of obtaining money, whereas listing involves listing of bonds and IPO listing

This chapter has been categorized into two parts: (a) financing of securities and (b) listing of securities.

1. Financing of Securities

Financing refers to various sources of obtaining money in order to:
  • Start up the business
  • Run the business, and
  • Expand the business

There are two approaches to raise funds from the market.

  • Firstly, private financing where ownership and share of interests are held by promoters or their families or group of investors by infusing funds into the business through venture capital, venture debt and private equity.
  • Secondly, public financing in which funds are raised by offering its securities to general public either through stock exchange or over-the-counter (OTC) exchange. There are two major forms of public financing - public equity and public debt.

Let us understand various forms of PRIVATE FINANCING:

1.Venture Capital (VC)

venture capital

Venture Capital Financing is nothing but financing a risky and Start-up Company perceived to have long term growth potential and which is promoted by entrepreneurs/founders who lack funding. It can also in the form of technical or management expertise. It is also known as ‘risk capital’.

VC funding comes from institutional investors (organizations such as commercial banks, mutual funds, insurance companies etc.) and high net worth individuals. Examples: Inventus Capital Partners, Accel Partners, SAIF Partners, Zodius Capital and so on.

2.Private Equity (PE)

Usually institutional and accredited investors come together and invest substantial amount of money for longer time period for the following purposes:

  • pulling out companies from distressed situation
  • expansion and diversification
  • enabling IPO
  • funding in new technology
  • improving working capital requirements

Note The major difference between private equity and venture capital is that former one tends to fund large and established businesses seeking for injecting of equity and latter one focuses on funding start-ups and emerging companies.

private equity

3.Venture Debt

Venture Debt, known as Venture lending, is a debt financing for emerging entities or start-up companies by specialized banks and non-banks lenders in order to provide funds for capex (such as purchase of equipments, machinery etc.) or meeting working capital requirements.

venture debt

Types of Venture Debt

Venture Debt has been classified into three categories:
  • Growth Financing

    Debt amount is used for M&A activities, diversification or working capital

  • Accounts Receivables Financing:

    Borrowings against debtors/accounts receivables

  • Equipment Financing

    Used for capital expenditure

Now, let us focus on two types of PUBLIC FINANCING

I. Public Equity

Under Public Equity ownership of the business exchanges hands by offering common stocks and preferred stocks which allow the investors to share in company’s profits. It is also known as EQUITY FINANCING.

Objectives of issuing equity to the public:
  • to raise funds for capital expenditure such as expansion, diversification
  • to meet the working capital requirements of the company
  • for repayment of debt amount
  • to gain the benefits of getting listed in either of the stock exchange
  • to provide liquidity to existing shareholders by selling their stake to the public
  • to build public image and prestige

II. Public Debt

There are three types of public debt:
  • Corporate Bonds
  • Government Bonds (G-Sec)
  • Money Market Instruments
types of public debt

2. Listing of Securities

This part has two segments: (a) Listing of shares i.e. Initial Public Offer (IPO) in which we will study how a private company first time offers its shares to public and raises funds from the market (b) Listing of Bonds which includes how government and corporate bonds are first listed and traded in the market.

listing of securities

A company is offering its share to the public is called public offer and for the first time then it is known as INITIAL PUBLIC OFFERING. It is a process where a company issues shares to the public for the first time. Thus, it is also known as ‘going public’. Through issuance of shares, company is selling ownership/sharing the ownership with the public at large and investors buy shares and in this way company gets to raise capital.

Prior to IPO, it used to be private limited company where promoters/founders (who had business idea) invest their own money and a small number of shareholders are also there with their investment as well, known as angel investors/venture capitalists, carry on business operations

IPO Process IPO process 1. Selecting An Investment Bank

The initial step in an IPO is to nominate an investment banker or consortium of merchant bankers. They are also called as Book Running Lead Managers (BRLM)/ Lead Managers (LM). The roles and responsibilities are:

  • Conduct due diligence
  • Preparing Draft Red Herring Prospectus (DRHP)
  • Underwriting the shares (agree to buy wholly or partly company’s share)
  • Assist in campaigning and promotional activities
  • Appointment of other participants such as registrars, advertising agencies etc.
Illustration:

Indostar Capital Finance Limited IPO : Book Running Lead Manager

selecting an investment bank example 2) Getting Approval From SEBI Through Registration Statement

Company has to file a registration statement to SEBI comprising particulars such as operations of business, financial performance of the company, management details and their holdings and purpose of the IPO. Once SEBI approves, underwriters start preparing the prospectus.

3)Preparation Of Draft Red Herring Prospectus (DRHP)

Underwriters prepare the prospectus containing details such as:

  • About the company
  • Terms of offer
  • Disclosure of legal and other information
  • Peers comparison
  • Industry Analysis
  • Financial performance of the company
Illustration INDOSTAR CAPITAL FINANCE LIMITED: DRAFT RED HERRING PROSPECTUS (DRHP) To see Draft prospectus follow the link: Click
4) IPO Grading

The company has to appoint a credit rating agency duly registered with SEBI in respect to obtaining grading for the offer. It is a kind of score indicating how good company’s financial indicators are, how good company’s business is. Who are these grading agencies? Example: CRISIL, ICRA, CARE and so on.

5) Marketing the IPO and Fixing Price Band

In order to bring awareness to potential investors regarding IPO, the company gets involved in promotion and advertising activities (this process is also called as ROAD SHOW) and decides the price band of the issue.

Illustration: INDOSTAR CAPITAL FINANCE LIMITED has fixed the price band of Rs.570 – Rs.572

6) Rolling Out of IPO Application Forms

Once SEBI reads prospectus and approves the IPO, BRLM begins with distributing IPO application forms for investors to participate through syndicate managers. So, any potential investors who wish to participate in IPO fills up this application form.

Illustration: Indostar Capital Finance Limited: IPO Application Form To see full form follow the link: www.nseindia.com/content/ipo/FORMS_INDOSTAR.zip

7) Initial Public Issue Is Open (BOOK BUILDING PROCESS)

An IPO can be Fixed Price IPO or Book Building IPO. In Fixed Price IPO, price of an IPO is predetermined and in Book Building IPO investors bid for the number of shares they wish to buy and the price at which they want the share within the price band fixed by the Book building Lead Manager.

8) Day of Listing

Company finally gets listed on stock exchange at a price to be determined by market forces of demand and supply at that day.


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