23-05-2014, 12:30 PM
Shares
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Definition
Ordinary share represent the ownership position in the company. The holders of ordinary shares are called the shareholders and they are the legal owners of the company.
By a share it also means right to participate in the profits made by a company, while it is a going concern and declares dividend, and in the assets of the company when it is wound up.
A stock is defined as consolidated value of fully paid up shares of a member.
Types of shares capital
Equity shares capital
Preference shares capital: Preference share is the one which satisfies the following criteria
With respect to dividend it carries a preferential right to be paid which may be a fixed amount or a fixed rate
On winding up or on repayment of capital a preferential right to be repaid the amount .
Features of Preference Share
Claims on income and assets
Fixed Dividend
Cumulative dividend
Redemption
Sinking fund
Call feature
Participation feature
Types of Preference Shares
Participating preference shares.:- they carry a right to participate in the surplus profit along with equity shareholders after dividend at certain rate has been paid to equity shareholders.
Cumulative and non-cumulative shares
Redeemable preference shares
Fully or partly convertible preference shares.
Voting rights for preference shareholders
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 remain unpaid in case of cumulative as well as non cumulative for two years.
Types of Equity Shares
Authorized share capital
Issued share capital
Subscribed share capital
Paid up share capital
Evaluation
Merits
it is a permanent source of fund without any repayment liability
It does not involve any obligatory dividend payment
Demerits
high cost of fund reflecting the high required rate of return of investors as a compensation for higher risk
High floatation cost in terms of underwriting, brokerage and other issue expenditure
Dilution of control
Eligibility for an IPO
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
Green Shoe option
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.
Greenshoe 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 greenshoe 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.
Other new sources of finance
Leasing and hire purchase
leasing: It is a process by which a firm can obtain the use of certain fixed assets for which it must make a series of contractual, periodic, tax-deductible payments.
Hire purchase:- It is a type of financial transaction in which goods are let on hire with an option to the hirer to purchase them.
Venture capital financing: It is a type of finance available for investors looking for high potential returns and entrepreneurs who need capital as they are yet to go to the public