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1. Variousmethods of raising equity capital
Equity Capital is basically invested money that, in contrast to debt capital, is not repaid to the investorsin the normal course of business. It represents the risk capital staked by the owners through purchase of
a company's common stock (ordinary shares).The value of equity capital is computed by estimating the
current market value of everything owned by the company from which the total of all liabilities is
subtracted.
The Various Methods to raise equity capital are:-
1) F rom lenders who secure assets for a loan.Pos sible lenders include banks, specialty finance
companies, title and vehicle loan companies, pawn shops, government agencies or non-profitor. Lenders often insist on securing assets, called collateral, before granting loans to reduce
their risk. To secure assets, the borrower must sign over ownership of valuable collateral to the
lender until the debt is paid in full.
2 ) F rom Individual investors willing to be business partner. Business associates or even
employees who want to take an ownership role in a company contribute equity capital to
become a partner. New partners can contribute their own personal funds or borrow money to
gain the ownership level specified in the partnership agreement.
3) By partnering with investors organized as venture capitalists and angel investors. Venturecapitalists and Angel investors are interested in Businesses with high-profit potential that is
willing to give investors a certain amount of control.
4) By sending business plan to the venture capitalist and angel investor.Venture capitalists and
angel investors study business plansand if the business plans are found to have a high-profit
potential, they invest their money in the plan.
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2 . Describe the following:A) IPO (Meaning)-
An initial public offering (IPO), referred to simply as an "offering" or "flotation", iswhen a company (called the issuer) issues common stock or shares to the public for the first time.
They are often issued by smaller, younger companies seeking capital to expand, but can also be
done by large privately owned companies looking to become publicly traded.
P rocess:
IPOs generally involve one or more in vestment banks known as "underwriters". The
company offering its shares, called the "issuer", enters a contract with a lead underwriter to sell its
shares to the public. The underwriter then approaches investors with offers to sell these shares. The
sale (allocation and pricing) of shares in an IPO may take several forms. Common methodsinclude:
1) Best efforts contract2 ) F irm commitment contract
3) All-or-none contract
4) Bought deal
5) Dutch auctionA dvantages:
1) F inancial benefits from raising capital 2 ) Capital can be used to fund research and development
3) Increased public awareness of the company
4) Increased market share for the company
Disadvantages:
1) Companies must meet rules and regulations that are monitored by the Securities and Exchange
Commission (SEC).
2 ) Cost of complying with regulatory requirements is very high.
3) Companies are also faced with the added pressure of the market which may cause them to focus more onshort-term results rather than long-term growth
4) The actions of the company's management become increasingly scrutinized
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B) Q IP (meaning):
Qualified institutional placement (QIP) is a capital raising tool, primarily used in
India, whereby a listed company can issue equity shares, fully and partly convertible debentures, or any securities other than warrants which are convertible to equity shares to a Qualified Institutional
Buyer (QIB). Apart from preferential allotment, this is the only other speedy method of private
placement whereby a listed company can issue shares or convertible securities to a select group of
persons. QIP scores over other methods because the issuing firm does not have to undergo
elaborate procedural requirements to raise this capital.
P rocess:
SEBI allows Companies listed on recognised stock exchanges in India (BSE, NSE, etc.)
to raise capital by issuing equity shares, or any securities other than warrants, which are convertibleinto or exchangeable with equity shares. The Qualified institutional Buyers (QIB) are not
promoters or related to promoters of the issuer i.e. a company which intends to go for Institutional
placement rather than the subsequent public offering or right issue. QIBs are generally large
institutional investors who have the expertise to evaluate market offering and invest large amount.
The issue is managed by a SEBI-registered merchant banker. There is no pre-issue filing of the
placement document with SEBI. The placement document is placed on the websites of the stock
exchanges and the issuer, only for QIBs on the private placement basis and is not an offer to the
public.A dvantage:
1) QIBs can be raised within short span of time rather than in F PO, Right Issue takes long process.2 ) In a QIP there are fewer formalities with regard to rules and regulation, as compared to F ollow-
on Public Issue ( F PO) and Rights Issue.
3) It is cost efficient
4) It provides an opportunity to buy non-locking shares
Disadvantages:
1) Only QIB's are allowed to participate in a QIP.2 ) Promoters and related parties cannot purchase shares in a QIP.
3) The aggregate funds that can be raised through QIP's in one financial year shall not exceedfive
times of the net worth of the issuer at the end of its previous financial year.
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3 . Recent trends in equity fund raising in I ndian markets
G lobal private equity investors showed continued interest in India in 20 10 . Driven by strongG DP growth when the developed world was still struggling with recovery, an increase was
seen in all aspects of deals from average deal size to total deal value, to the overall number
of deals. By the end of 20 10 there were 27 5 private equity deals in India, valued at about
US$ 7 .2 b. This growth in private equity activity is e xpected to continue stimulated by global
private equity firms intentions to increase allocations toward India and by the expansion of the
domestic private equity market, a sustained exit market and an increase in private investment in
public equity (PIPE) deals.
Although, the global private equity funds still account for a majority of announced deal value
currently, the market share of domestic private equity firms is growing. In 20 10 , several
domestic private equity firms announced mega fund-raising plans, with notable new fund
closures and announcements by industry veterans striking out on their own.Armed with local
knowledge, expertise and access to domestic network, large corporate houses are also getting
involved in the industry as investors. Another encouraging trend in India last year was record-
breaking exit activity. Private equity firms exited 1 08 private equity deals including IPOs,
M&A and secondary deals valued at US$6. 2 b. Private equity funds seeking returns fromtheir pre- 2007 vintage deals, along with strong stock market valuations, were the prime factors
for increased exit activity in 20 10 .
Challenges abound for private equity in India however specifically around a constantly
evolving tax and regulatory framework. G reater time and effort are being spent to keep pace as
the G overnment and authorities look to implement tax legislation and other regulations that
will impact the present structures used by private equity funds operating inIndia. F und-raising
also remained sluggish in20
10
, with only US$2
.4b raised by funds focused on India. Whilethis was a decline of nearly 3 8% from 2009 , it does not appear to be an immediate worry.
Recent fund announcements by global and local firms alike also demonstrate that private
equity remains confident in the opportunities in India. After the lull of 2009 , momentum was
built during 20 10 , which bodes well for the activity through 20 11. Private equity funds remain
optimistic with current levels of deal activity and healthy pipelines, and expect more deals to
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close in 20 11. The G overnment and economic commentators also show continued confidence
in Indias growth story forecasting 8% to 9% G DP growth in 20 11. Deal activity will
remain driven by the significant infrastructure build expected in the next few years in India and by growing domestic consumption.
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