Showing posts with label Inv-Banking-Chapters. Show all posts
Showing posts with label Inv-Banking-Chapters. Show all posts
Monday, December 17, 2007
IB-PS Introduction
I use the text book by Pratap Subrahmaniam for the course on Investment Banking. This online basic support material for students and aspiring professionals is structured on the basis of chapter scheme of this book. Basic steps and rules are provided in various chapters. For details, the text book and the relevant regulations issued by SEBI are to be studied.
Ib-Ps Ch. 5 IPOs
Important Regulatory Provisions for an IPO
The minimum post nominal value of equity capital of the company shall be Rs. 10 crore.
OR
Compulsory market making for at least 2 years from date of listing of of share subject to following condition
Market Makers should offer to buy or sell quotes for a minimum of 300 shares.
Market maker to ensure bid-ask spread for their quotes shall not exceed 10% any time.
Inventory of market makers on each of stock exchange as on the date of allotment of securities, shall be atleast 5% of the proposed issue of the company.
Additional Conditions
IPOs shall not be deemed successful and company shall not make allotment pursuant to IPO unless prospective allottees under the IPO are not less than 1000 in number.
No unlisted company shall make a public issue or equity shares or convertibles if there are any outstanding financial instruments or rights that would entitle existing shareholders to additional equity shares after IPO. Similarly no partly paid shares shall be subsisting as on the date of IPO.
IPOs shall not be deemed successful and company shall not make allotment pursuant to IPO unless prospective allottees under the IPO are not less than 1000 in number.
No unlisted company shall make a public issue or equity shares or convertibles if there are any outstanding financial instruments or rights that would entitle existing shareholders to additional equity shares after IPO. Similarly no partly paid shares shall be subsisting as on the date of IPO.
An infrastructure company may go public even if it does not satisfy the above criteria if it has been appraised and / or funded by one or more of a public financial institution or IDFC or IL&FS or a bank which was formerly a public financial institution to the extent of at least 5% of the project cost either as a loan or equity or both.
NO company shall make an IPO unless firm arrangements of finance through verifiable means towards 75% of stated means of finance excluding the amount to be raised through proposed issue, have been made.
There is a cap on companies making retail issue with high premia. Under free pricing regime, there is a tendency on the part of the issuers to make high priced issue. If such issue are allowed to go through 100% retail route, there wouldn’t be any price validation. Share price of such issue will come down after listing due to lack of buyer support.
Additional Conditions for Issue of Convertibles
An unlisted company may make an IPO through a convertible instrument even without having to make a pure equity offer and getting shares listed initially. Other than satisfying above criteria, it has to comply with additional conditions.
Promoters Contribution
SEBI has also introduced the concept of minimum promoters’ contribution to be present in the companies going public so that they become interested parties in preserving the interest of the shareholders. In terms of DIP Guidelines, the following are the main provisions that apply to promoters’ contribution in case of IPOs.
Firm Allotments and Reservations
Allotment and Reservation are tools for pre-marketing a sizable part of issue thereby bringing down the risk of the issue.
Allotment – Investor or category of investor are approached by lead manager or the issuer company to subscribe the issue on a firm basis. ‘FIRM’ - ability to get same quantity as subscribed for in full. Investors have to make commitment to bring in their firm subscription even before issue is floated. This indicates the offer document showing certain amount of share being set aside for such investors, balance available for public subscription.
Reservation - It’s a modification of allotment, where allotment is done on competitive basis among certain category of investors. Reservation is without any prior commitments. If there is an over-subscription, then allotment happens on pro-rata basis.
Permanent Employees (not exceeding 10% of issue size), shareholders of group companies (not exceeding 10%, no firm allotments), mutual funds, Foreign Institutional Investors, Banks and Financial Institution and Multilateral Institution are category of person which are eligible for allotment or reservation.
Provisions of allotment and reservation for public issue Refer Page 233
Lock-in of Shares
Concept of Lock-in of promoters’ share and other share capital is for purpose of preventing such shareholders in making an unfair gains or exits from company and also for providing stabilization period for company’s post-script issue.
Provisions of lock-in of promoters’ share and other share capital are provided in
Differential Pricing and Price Band
Any unlisted company making an IPO of equity shares or convertibles may issue such securities to applicants in the firm allotment category at a price different from price at which net offer to the public is made provided that the price at which the security is being offered to the applicants in firm allotment category is higher than the price at which net offer is being made to Indian Public.
A justification has to be furnished in offer document on the price differential for the firm allotment category
The issuer company can mention a price band of 20% (the cap should not be more than the floor by 20%) in the offer documents filed by SEBI and the actual price can be determined at a later date before filing of offer document with ROC (Registrar of Companies)
Other Important Issue Requirements
All new issues shall be in dematerialized form and can also be made through online interface following the necessary guidelines.
The minimum application size shall be worth Rs. 2000 and maximum can be equal to the net public offer. Minimum tradable lot of shares priced up to Rs. 100 for Rs. 100 shares and minimum application money shall be 2.5% of the total amount.
In offer for sale, entire subscription amount shall be bought in at the time of application.
If there are calls on shares , they should be complicated within 12 months of the issue.
Over-subscription of a max number of 10% of the net offer to the public can be retained
Underwriting is optional. Lead Manager makes of 5% or Rs. 25 lakhs, whichever less. Underwriting commission and brokerage on shares should not be exceeded 2.5% and 1.5% respectively as per the guidelines issued by Ministry of Finance.
Safety Net or buy back arrangements can be made with a minimum period of 6 months and for maximum of 1000 shares per allottee.
Issue should be opened within 365 days from the date of SEBI approval or after 21 days of filing with SEBI if no observations are made
Additional Requirements under the Companies Act
Under the provision of Companies Act, no public issue shall be made without the issue of a prospectus or offer document. Section 56 specifies the prospectus contain matter specified in Parts I and II of Schedule II of the Act.
Other section which are applicable are Section 60, 73, 69, 72 to name a few. Every application form inviting subscription from prospective investors shall be accompanied by a Memorandum in Form 2A of the Companies (Central Government’s) General Rules and Forms, 1956. This has been discussed in detail in Page 235, 236
5.5.8 Statutory Requirements under Other Laws
Besides DIP guidelines and Companies Act 1956, the other important statutes that govern public issues are:
SCRA (Securities Contract and Regulation Act)
FEMA (Foreign Exchange Management Act)
Stock Exchange Listing Agreement (BSE, NSE and other Regional Stock Exchanges)
Role of Merchant Banker in issue management
Accepting appointment, MoU and Inter- se allocation of Responsibilities
Issue structuring and pricing
Due Diligence
Preparation of Offer Document
Pre-Issue Compliance
Liaison with SEBI and Stock Exchange
Co-ordination with other functionaries
Issue Marketing
Functions during the Issue
Post Issue Compliance
The minimum post nominal value of equity capital of the company shall be Rs. 10 crore.
OR
Compulsory market making for at least 2 years from date of listing of of share subject to following condition
Market Makers should offer to buy or sell quotes for a minimum of 300 shares.
Market maker to ensure bid-ask spread for their quotes shall not exceed 10% any time.
Inventory of market makers on each of stock exchange as on the date of allotment of securities, shall be atleast 5% of the proposed issue of the company.
Additional Conditions
IPOs shall not be deemed successful and company shall not make allotment pursuant to IPO unless prospective allottees under the IPO are not less than 1000 in number.
No unlisted company shall make a public issue or equity shares or convertibles if there are any outstanding financial instruments or rights that would entitle existing shareholders to additional equity shares after IPO. Similarly no partly paid shares shall be subsisting as on the date of IPO.
IPOs shall not be deemed successful and company shall not make allotment pursuant to IPO unless prospective allottees under the IPO are not less than 1000 in number.
No unlisted company shall make a public issue or equity shares or convertibles if there are any outstanding financial instruments or rights that would entitle existing shareholders to additional equity shares after IPO. Similarly no partly paid shares shall be subsisting as on the date of IPO.
An infrastructure company may go public even if it does not satisfy the above criteria if it has been appraised and / or funded by one or more of a public financial institution or IDFC or IL&FS or a bank which was formerly a public financial institution to the extent of at least 5% of the project cost either as a loan or equity or both.
NO company shall make an IPO unless firm arrangements of finance through verifiable means towards 75% of stated means of finance excluding the amount to be raised through proposed issue, have been made.
There is a cap on companies making retail issue with high premia. Under free pricing regime, there is a tendency on the part of the issuers to make high priced issue. If such issue are allowed to go through 100% retail route, there wouldn’t be any price validation. Share price of such issue will come down after listing due to lack of buyer support.
Additional Conditions for Issue of Convertibles
An unlisted company may make an IPO through a convertible instrument even without having to make a pure equity offer and getting shares listed initially. Other than satisfying above criteria, it has to comply with additional conditions.
Promoters Contribution
SEBI has also introduced the concept of minimum promoters’ contribution to be present in the companies going public so that they become interested parties in preserving the interest of the shareholders. In terms of DIP Guidelines, the following are the main provisions that apply to promoters’ contribution in case of IPOs.
Firm Allotments and Reservations
Allotment and Reservation are tools for pre-marketing a sizable part of issue thereby bringing down the risk of the issue.
Allotment – Investor or category of investor are approached by lead manager or the issuer company to subscribe the issue on a firm basis. ‘FIRM’ - ability to get same quantity as subscribed for in full. Investors have to make commitment to bring in their firm subscription even before issue is floated. This indicates the offer document showing certain amount of share being set aside for such investors, balance available for public subscription.
Reservation - It’s a modification of allotment, where allotment is done on competitive basis among certain category of investors. Reservation is without any prior commitments. If there is an over-subscription, then allotment happens on pro-rata basis.
Permanent Employees (not exceeding 10% of issue size), shareholders of group companies (not exceeding 10%, no firm allotments), mutual funds, Foreign Institutional Investors, Banks and Financial Institution and Multilateral Institution are category of person which are eligible for allotment or reservation.
Provisions of allotment and reservation for public issue Refer Page 233
Lock-in of Shares
Concept of Lock-in of promoters’ share and other share capital is for purpose of preventing such shareholders in making an unfair gains or exits from company and also for providing stabilization period for company’s post-script issue.
Provisions of lock-in of promoters’ share and other share capital are provided in
Differential Pricing and Price Band
Any unlisted company making an IPO of equity shares or convertibles may issue such securities to applicants in the firm allotment category at a price different from price at which net offer to the public is made provided that the price at which the security is being offered to the applicants in firm allotment category is higher than the price at which net offer is being made to Indian Public.
A justification has to be furnished in offer document on the price differential for the firm allotment category
The issuer company can mention a price band of 20% (the cap should not be more than the floor by 20%) in the offer documents filed by SEBI and the actual price can be determined at a later date before filing of offer document with ROC (Registrar of Companies)
Other Important Issue Requirements
All new issues shall be in dematerialized form and can also be made through online interface following the necessary guidelines.
The minimum application size shall be worth Rs. 2000 and maximum can be equal to the net public offer. Minimum tradable lot of shares priced up to Rs. 100 for Rs. 100 shares and minimum application money shall be 2.5% of the total amount.
In offer for sale, entire subscription amount shall be bought in at the time of application.
If there are calls on shares , they should be complicated within 12 months of the issue.
Over-subscription of a max number of 10% of the net offer to the public can be retained
Underwriting is optional. Lead Manager makes of 5% or Rs. 25 lakhs, whichever less. Underwriting commission and brokerage on shares should not be exceeded 2.5% and 1.5% respectively as per the guidelines issued by Ministry of Finance.
Safety Net or buy back arrangements can be made with a minimum period of 6 months and for maximum of 1000 shares per allottee.
Issue should be opened within 365 days from the date of SEBI approval or after 21 days of filing with SEBI if no observations are made
Additional Requirements under the Companies Act
Under the provision of Companies Act, no public issue shall be made without the issue of a prospectus or offer document. Section 56 specifies the prospectus contain matter specified in Parts I and II of Schedule II of the Act.
Other section which are applicable are Section 60, 73, 69, 72 to name a few. Every application form inviting subscription from prospective investors shall be accompanied by a Memorandum in Form 2A of the Companies (Central Government’s) General Rules and Forms, 1956. This has been discussed in detail in Page 235, 236
5.5.8 Statutory Requirements under Other Laws
Besides DIP guidelines and Companies Act 1956, the other important statutes that govern public issues are:
SCRA (Securities Contract and Regulation Act)
FEMA (Foreign Exchange Management Act)
Stock Exchange Listing Agreement (BSE, NSE and other Regional Stock Exchanges)
Role of Merchant Banker in issue management
Accepting appointment, MoU and Inter- se allocation of Responsibilities
Issue structuring and pricing
Due Diligence
Preparation of Offer Document
Pre-Issue Compliance
Liaison with SEBI and Stock Exchange
Co-ordination with other functionaries
Issue Marketing
Functions during the Issue
Post Issue Compliance
Ib-Ps Ch. 6 Rights Issues and Secondary Public Offers - PTR
Made to existing share holders only.
Entitlement to apply for and receive additional shares.
It’s a RIGHT, not an OBLIGATION.
For ascertaining the right, record date is fixed.
Entitlement ratio is fixed e.g. 1:2
- Thus if a shareholder has 200 shares he is entitled for 100 shares.
Shareholder can exercise or renounce his right to a third party.
Renouncee is entitled to subscribe & receive rights shares.
If the right is neither exercised nor renounced, it lapses and the issue is undersubscribed to that extent.
Promoters can seek to apply for those shares. The impact is change in shareholding pattern.
Oversubscription can occur if shareholders apply for additional shares. The letter of offer should specify the right to apply for more shares.
Considerations for Issuer
Objective of the Issue: Fund raising, consolidation or shareholder reward.
Is this an adequate source of financing?
If seeking shareholder loyalty, compare vis-à-vis bonus issue & higher dividend payout.
Overall condition of the primary markets.
Likelihood of poor response and its effect on market price of share.
Analysis of alternate sources of funding such as private placement.
Regulatory provisions
Companies Act.
Shares will be offered in proportion to their existing holding.
Minimum notice of 15 days.
If offer not exercised within time frame, it shall be presumed to be declined.
Right of renunciation given unless the articles of company provides otherwise.
If shareholder declines to accept offer, it can be disposed off by the board of directors.
The shareholder may be allowed to exercise the power of renunciation only once and not again under the pretext that the first renouncee has declined to accept the offer.
SEBI Guidelines
If aggregate value of issue is greater than Rs 50 Lakh, a letter of offer has to be filed with SEBI through an eligible merchant banker at least 21 days before filing the letter with the stock exchange.
If aggregate value of issue is less than Rs 50 Lakh, company prepares and files the letter of offer with SEBI. The issue shall be open within a year from the 22nd day of filing the letter provided no observations are made by SEBI.
All rights issues shall be made by offering the shares in dematerialized form.
Any listed company may freely price further offerings through a rights issue or any security convertible into equity.
The letter of offer to SEBI may have a price band of 20% and the actual price can be determined at a later date. The final letter of offer sent to shareholders shall contain a single fixed price.
The minimum contribution provision of promoters is not applicable to rights issues so long as they disclose their shareholding and extent of participation in the offer letter.
No company shall make a rights issue unless firm verifiable arrangements towards 75% of the stated means of finance, excluding the amount raised by rights issue is made.
No company shall make a further issue of capital by any means from the time the letter of offer is submitted to SEBI until either the money is refunded or the securities are listed.
A company cannot withdraw the rights issue after announcing the record date.
In exceptional circumstances if it needs to be done, then the company cannot make any listing application to any stock exchange for a period of 12 months from the announced record date.
A rights issue is kept open for a minimum period of 30 days and a maximum period of 60 days.
The quantum of issue cannot exceed the amount specified in the letter of offer.
Rights issue need not be underwritten. However if they are, underwriting requirements are the same as for a public issue.
No firm allotments and reservations can be made in a rights issue.
Minimum subscription of 90% is required for the company to be permitted to utilize the funds.
Entitlement to apply for and receive additional shares.
It’s a RIGHT, not an OBLIGATION.
For ascertaining the right, record date is fixed.
Entitlement ratio is fixed e.g. 1:2
- Thus if a shareholder has 200 shares he is entitled for 100 shares.
Shareholder can exercise or renounce his right to a third party.
Renouncee is entitled to subscribe & receive rights shares.
If the right is neither exercised nor renounced, it lapses and the issue is undersubscribed to that extent.
Promoters can seek to apply for those shares. The impact is change in shareholding pattern.
Oversubscription can occur if shareholders apply for additional shares. The letter of offer should specify the right to apply for more shares.
Considerations for Issuer
Objective of the Issue: Fund raising, consolidation or shareholder reward.
Is this an adequate source of financing?
If seeking shareholder loyalty, compare vis-à-vis bonus issue & higher dividend payout.
Overall condition of the primary markets.
Likelihood of poor response and its effect on market price of share.
Analysis of alternate sources of funding such as private placement.
Regulatory provisions
Companies Act.
Shares will be offered in proportion to their existing holding.
Minimum notice of 15 days.
If offer not exercised within time frame, it shall be presumed to be declined.
Right of renunciation given unless the articles of company provides otherwise.
If shareholder declines to accept offer, it can be disposed off by the board of directors.
The shareholder may be allowed to exercise the power of renunciation only once and not again under the pretext that the first renouncee has declined to accept the offer.
SEBI Guidelines
If aggregate value of issue is greater than Rs 50 Lakh, a letter of offer has to be filed with SEBI through an eligible merchant banker at least 21 days before filing the letter with the stock exchange.
If aggregate value of issue is less than Rs 50 Lakh, company prepares and files the letter of offer with SEBI. The issue shall be open within a year from the 22nd day of filing the letter provided no observations are made by SEBI.
All rights issues shall be made by offering the shares in dematerialized form.
Any listed company may freely price further offerings through a rights issue or any security convertible into equity.
The letter of offer to SEBI may have a price band of 20% and the actual price can be determined at a later date. The final letter of offer sent to shareholders shall contain a single fixed price.
The minimum contribution provision of promoters is not applicable to rights issues so long as they disclose their shareholding and extent of participation in the offer letter.
No company shall make a rights issue unless firm verifiable arrangements towards 75% of the stated means of finance, excluding the amount raised by rights issue is made.
No company shall make a further issue of capital by any means from the time the letter of offer is submitted to SEBI until either the money is refunded or the securities are listed.
A company cannot withdraw the rights issue after announcing the record date.
In exceptional circumstances if it needs to be done, then the company cannot make any listing application to any stock exchange for a period of 12 months from the announced record date.
A rights issue is kept open for a minimum period of 30 days and a maximum period of 60 days.
The quantum of issue cannot exceed the amount specified in the letter of offer.
Rights issue need not be underwritten. However if they are, underwriting requirements are the same as for a public issue.
No firm allotments and reservations can be made in a rights issue.
Minimum subscription of 90% is required for the company to be permitted to utilize the funds.
Sunday, December 16, 2007
IB - PS Ch. 7 Public Offer - Debt Securities - PTR
Pre-requisites for Issue of Debt Instruments
Creation of Debenture Trust
Under section 117B of the Companies Act, any company whether listed or unlisted cannot make an issue of debenture to the public without constituting a trustee mechanism. The Debenture trustee is constituted by the registration of a private trust under the Indian Trusts act 1881 and a trust deed is prepared. The trust deed points out the following:
Time limit for creation of security for issue of debentures.
Any change in the trust property would require approval of the trustee.
Rights of the debenture holders in the event of default by the issuer company.
Terms of redemption of the securities.
Debt-Equity ratios and Debt service coverage ratio.
Obligation to inform the company about the change in the nature and conduct of the business of the company.
Quarterly updates to the trustee about the servicing of the debenture holders and asset-liability profile of the company.
Functions of the Debenture Trustee
To ensure that the assets of the company and each of the guarantors are sufficient to discharge the principal amount of the debentures at all times.
To verify that the prospectus or the offer letter is consistent with the terms of the debentures or the trust deed.
To ensure that the company does not commit any breach of the terms of the issue of debentures and take remedy steps in case of any breach.
To take all steps to call for a meeting of debenture holder as and when required.
To petition the NCLT at any time when the trustee concludes that the assets of the company are insufficient to discharge the principal amount of the debentures as and when it falls due.
Credit Rating
Under DIP guidelines, no public or rights issue of debt instruments, including convertibles irrespective of their maturity or conversion period shall be made unless credit rating from a credit rating agency ha already been obtained and disclosed in the offer document.
If the issue size exceeds Rs 100 Cr two credit ratings need to be obtained.
Where there are multiple ratings all the ratings need to be disclosed.
All the ratings obtained for public or rights issues of debt instruments and convertibles during the three years preceding the current issue should also be disclosed.
It would enhance the investor confidence
It would help in fine pricing as well.
Creation of Debenture Redemption Reserve (DRR)
Under section 117c of the Companies Act, every company that issues debentures has to create a DRR to which adequate amounts will be credited out of the company’s profits every year until such debentures are redeemed and it cannot be used for any other purpose.
This reserve shall form a part of the general reserve and it enables a company to conserve that much of cash resources after distribution of dividends.
The amount of reserve is normally the face value of the debentures to be redeemed which is built progressively y-0-y.
DRR requirement does not apply to infrastructure companies.
The trustee shall supervise the implementations of conditions regarding creation of DRR.
Creation of Security
Debentures to be issued by companies have to be secured against the assets of the company.
Hence according to DIP guidelines security shall be created within six months of the close of issue of debentures. However if the company does not create any security within 12 months it will have to pay a penalty of 2% interest on the debentures.
If the security is not created within 18 months then a meeting for within 21 days to explain the reasons regarding the non creation of the security and the completion date for the same.
The debenture trustee shall supervise the implementation of the conditions regarding the creation of the security for the debenture holders.
It is necessary for the company to secure the debt securities by way of mortgage of fixed assets or by any other means which needs the approval of the shareholders.
Disclosures in the offer Document
Apart from the normal disclosures to be made in the offer document which has been discussed in the previous lectures additional requirements have to be met with:
The terms of conversion of a convertible into an equity such as the conversion price and time of conversion shall be disclosed.
In case of non-convertible debt the redemption amount, period of maturity and yield to maturity shall be disclosed.
The existing and future equity and long term debt ratio.
The offer document should specifically state the assets on which security shall be created and the security cover to be maintained.
Additional Statutory requirement for Debt Offers
Requirements under the Companies Act
The power to issue debentures can be exercised only at a board meeting.
Issue of debt instruments by a company adds to the borrowings of the company, hence these must be made within the limits approved by the company shareholders. Requirements under the DIP Guidelines
Debenture issues by companies belonging to the same group shall not be permitted if the proceeds thereof are used for replenishment of funds (i.e. to provide loans) or for acquiring shareholding of other companies belonging to same group.
No debt instrument including convertibles can be issued either through public or rights issue unless it is rated by a rating agency.
No convertibles with a conversion period of more than 36 months can be issued unless the conversion is made optional with “put” and “call” options
Conversion price and period of conversion shall be determined at the time of issue and shall be disclosed in the offer document.
The interest rate for the debt instruments can be freely determined by the issuer company.
Creation of Debenture Trust
Under section 117B of the Companies Act, any company whether listed or unlisted cannot make an issue of debenture to the public without constituting a trustee mechanism. The Debenture trustee is constituted by the registration of a private trust under the Indian Trusts act 1881 and a trust deed is prepared. The trust deed points out the following:
Time limit for creation of security for issue of debentures.
Any change in the trust property would require approval of the trustee.
Rights of the debenture holders in the event of default by the issuer company.
Terms of redemption of the securities.
Debt-Equity ratios and Debt service coverage ratio.
Obligation to inform the company about the change in the nature and conduct of the business of the company.
Quarterly updates to the trustee about the servicing of the debenture holders and asset-liability profile of the company.
Functions of the Debenture Trustee
To ensure that the assets of the company and each of the guarantors are sufficient to discharge the principal amount of the debentures at all times.
To verify that the prospectus or the offer letter is consistent with the terms of the debentures or the trust deed.
To ensure that the company does not commit any breach of the terms of the issue of debentures and take remedy steps in case of any breach.
To take all steps to call for a meeting of debenture holder as and when required.
To petition the NCLT at any time when the trustee concludes that the assets of the company are insufficient to discharge the principal amount of the debentures as and when it falls due.
Credit Rating
Under DIP guidelines, no public or rights issue of debt instruments, including convertibles irrespective of their maturity or conversion period shall be made unless credit rating from a credit rating agency ha already been obtained and disclosed in the offer document.
If the issue size exceeds Rs 100 Cr two credit ratings need to be obtained.
Where there are multiple ratings all the ratings need to be disclosed.
All the ratings obtained for public or rights issues of debt instruments and convertibles during the three years preceding the current issue should also be disclosed.
It would enhance the investor confidence
It would help in fine pricing as well.
Creation of Debenture Redemption Reserve (DRR)
Under section 117c of the Companies Act, every company that issues debentures has to create a DRR to which adequate amounts will be credited out of the company’s profits every year until such debentures are redeemed and it cannot be used for any other purpose.
This reserve shall form a part of the general reserve and it enables a company to conserve that much of cash resources after distribution of dividends.
The amount of reserve is normally the face value of the debentures to be redeemed which is built progressively y-0-y.
DRR requirement does not apply to infrastructure companies.
The trustee shall supervise the implementations of conditions regarding creation of DRR.
Creation of Security
Debentures to be issued by companies have to be secured against the assets of the company.
Hence according to DIP guidelines security shall be created within six months of the close of issue of debentures. However if the company does not create any security within 12 months it will have to pay a penalty of 2% interest on the debentures.
If the security is not created within 18 months then a meeting for within 21 days to explain the reasons regarding the non creation of the security and the completion date for the same.
The debenture trustee shall supervise the implementation of the conditions regarding the creation of the security for the debenture holders.
It is necessary for the company to secure the debt securities by way of mortgage of fixed assets or by any other means which needs the approval of the shareholders.
Disclosures in the offer Document
Apart from the normal disclosures to be made in the offer document which has been discussed in the previous lectures additional requirements have to be met with:
The terms of conversion of a convertible into an equity such as the conversion price and time of conversion shall be disclosed.
In case of non-convertible debt the redemption amount, period of maturity and yield to maturity shall be disclosed.
The existing and future equity and long term debt ratio.
The offer document should specifically state the assets on which security shall be created and the security cover to be maintained.
Additional Statutory requirement for Debt Offers
Requirements under the Companies Act
The power to issue debentures can be exercised only at a board meeting.
Issue of debt instruments by a company adds to the borrowings of the company, hence these must be made within the limits approved by the company shareholders. Requirements under the DIP Guidelines
Debenture issues by companies belonging to the same group shall not be permitted if the proceeds thereof are used for replenishment of funds (i.e. to provide loans) or for acquiring shareholding of other companies belonging to same group.
No debt instrument including convertibles can be issued either through public or rights issue unless it is rated by a rating agency.
No convertibles with a conversion period of more than 36 months can be issued unless the conversion is made optional with “put” and “call” options
Conversion price and period of conversion shall be determined at the time of issue and shall be disclosed in the offer document.
The interest rate for the debt instruments can be freely determined by the issuer company.
IB - Ps Ch.9 Exit Offers
Reulatory Requirements for delisting
Has to be listed for 3 years
Approval from shareholders
Merchant banker
Public announcement – floor price, trading centers, trading members, time table of bidding process, Stock exchanges, material facts etc.
Floor price – average of 26 weeks traded price
No maximum price for the offer
Infrequently traded shares – As per Takeover Code
Escrow account - deposit 100% of amount required (at the floor price)
Bidding atleast 3 days
Option to revise bids before bidding closes
Final price – Reverse book building – price at which maximum shares have been offered for sale
Option to accept or reject
Second public announcement to me made within two days
De-listing application and seek approval from stock exchange(s)
If quantity of outstanding shares after the buy back does not fall below minimum requirements, then company remains listed
The promoter shall not acquire any shares and the offer should be cancelled
The public shareholding has to be brought up to required minimum within 6 months
Offer for sale
New issue
Sale in the secondary market
Outstanding convertibles – conversion process has to be completed or exercise period of conversion option should have lapsed
De-listing offer need not be given in cases where securities continue to be traded in stock exchange having nationwide trading terminals
Buyback Rules in India
This was not permitted under Indian law until 1999
In October 1998, the law was amended that introduced 4 types of buy backs
We discuss in brief the below methods:
Buy back by unlisted public and private companies
Buy back by listed companies
Open market purchase through stock exchange mechanism
Provisions shall apply to all types including ESOP shares and other securities as may be specified from time to time
Buy back may be approved by a special regulation in a general meeting
Buy back has to be financed out of free reserves or securities account or form proceeds of earlier issue of dissimilar share
Under SEBI buy back regulations, it is mandatory to engage a merchant banker to prepare a L of O (Letter of Offer) and manage buy back offer
Pricing mechanism fixed by the board of companies
Requirement of an escrow account to be opened under the Tender Offer and the book building methods to the extent specified under regulations
The offer shall not open before 7 days and not after 30 days from the specified date and shall be kept open for a minimum of 15 days and a maximum of 30 days
Has to be listed for 3 years
Approval from shareholders
Merchant banker
Public announcement – floor price, trading centers, trading members, time table of bidding process, Stock exchanges, material facts etc.
Floor price – average of 26 weeks traded price
No maximum price for the offer
Infrequently traded shares – As per Takeover Code
Escrow account - deposit 100% of amount required (at the floor price)
Bidding atleast 3 days
Option to revise bids before bidding closes
Final price – Reverse book building – price at which maximum shares have been offered for sale
Option to accept or reject
Second public announcement to me made within two days
De-listing application and seek approval from stock exchange(s)
If quantity of outstanding shares after the buy back does not fall below minimum requirements, then company remains listed
The promoter shall not acquire any shares and the offer should be cancelled
The public shareholding has to be brought up to required minimum within 6 months
Offer for sale
New issue
Sale in the secondary market
Outstanding convertibles – conversion process has to be completed or exercise period of conversion option should have lapsed
De-listing offer need not be given in cases where securities continue to be traded in stock exchange having nationwide trading terminals
Buyback Rules in India
This was not permitted under Indian law until 1999
In October 1998, the law was amended that introduced 4 types of buy backs
We discuss in brief the below methods:
Buy back by unlisted public and private companies
Buy back by listed companies
Open market purchase through stock exchange mechanism
Provisions shall apply to all types including ESOP shares and other securities as may be specified from time to time
Buy back may be approved by a special regulation in a general meeting
Buy back has to be financed out of free reserves or securities account or form proceeds of earlier issue of dissimilar share
Under SEBI buy back regulations, it is mandatory to engage a merchant banker to prepare a L of O (Letter of Offer) and manage buy back offer
Pricing mechanism fixed by the board of companies
Requirement of an escrow account to be opened under the Tender Offer and the book building methods to the extent specified under regulations
The offer shall not open before 7 days and not after 30 days from the specified date and shall be kept open for a minimum of 15 days and a maximum of 30 days
IB-Ps Ch. 10 Private Placement of Equity - PTR
The SEBI Regulations, 1996 stipulate that venture investments shall be only in unlisted companies either privately or through the prospectus when they go for IPO.
Venture capital is meant for young companies that evolve from a start-up stage. The term start-up typically refers to the early stage in the life cycle of a company that has been formed to set up a technology backed business venture with an intent to commercialize the same.
Conceptualizing the business idea.
Validation of business idea.
Forming the core team.
Appointment of outside agencies.
Floating the business entity.
Formulation of the business plan.
Seed Financing/Angel Round Financing
Proof of concept/Product Validation
Making key statutory filings.
Early stage/First round Financing.
Commercial launch and market validation.
First equity fund raised through Institutional investors (VCs) who generally accept high risk
Attributes that a VC look forward before investing:
An Industry that is currently a sunrise sector
An exciting concept that has the potential for uninhibited growth
An idea with significant possibilities in future
A business that could become an attractive proposition for strategic acquisition by a market leader
A business with cutting edge technology
A business with first mover advantage
A business with significant entry & easy exit options
Key Elements in Business structuring of a start-up
Formulation of a business strategy & corporate structure
Key commercial contracts
Composition of board
Management structure
Key employment contracts
IPR protection & Management
Corporate governance
Composition of board
Customary for a start up to have a non executive external chairman such as industry/corporate personality.
Political personalities should not be appointed
Chairman should be a person of good business acumen & sound character
Other members may be drawn from promoters, nominees of VCs or lenders
A board with 6 members is ideal for an start up- 2 promoter Directors, 1 non executive chairman & 3 professional independent Directors
Management structure
Can be either pyramidical or flat
Should be chosen on the basis of the type of prevalent industry work culture & business dynamics
Key executive positions should be identified– CEO, COO, CFO etc
Key employment contracts
Defines the commitment of the core team members
These contracts should take care of employees as well
Contracts should cement a long lasting relationship between the company & the core team
Can be done in 2 ways, issuing either:
Sweat Equity
ESOPs
IPR protection & Management
IPRs – Technological, process know hows, copyrights, licences, brand names, trade marks etc
A start up needs to legally safegaurd these rights through appropriate registrations under the relevant IPR laws
These IPRs should not get diluted in key commercial contracts that the company may enter
IP management should be done for the most knowledge intensive businesses
IPs should remain with the company if it seeks to create value in the long run
Key Elements in the Financial structuring of Start ups
Estimation of fund requirements
First & foremost exercise is the Forecast of the financial requirements, in terms of:
Capital Cost of fixed assets & intangible assets
Deferred revenue expenses to be incurred upfront such as product development costs etc
Pre operative expenses to meet the cash burn till the project starts generating revenues
Working capital requirements etc
Capital structuring for equity financing
For capital intensive companies, equity financing is a must
Such start ups are funded through equity & convertibles or hybrids raised through private resources
Once the company is financed through the equity route later on debt can be taken
Promoters subscribe to the equity at par, while VCs at a premium
Knowledge intensive companies (Like IT, media) are not capital intensive, so they may be financed by debt also at inception
Capital structuring for debt financing
In case of manufacturing companies, About half the total project cost & margin money for working capital is taken through Debt component
The balance project cost is contributed through equity
Companies are also required to raise financing for meeting Working Capital requirements.
Banks usually finance these.
Venture capital is meant for young companies that evolve from a start-up stage. The term start-up typically refers to the early stage in the life cycle of a company that has been formed to set up a technology backed business venture with an intent to commercialize the same.
Conceptualizing the business idea.
Validation of business idea.
Forming the core team.
Appointment of outside agencies.
Floating the business entity.
Formulation of the business plan.
Seed Financing/Angel Round Financing
Proof of concept/Product Validation
Making key statutory filings.
Early stage/First round Financing.
Commercial launch and market validation.
First equity fund raised through Institutional investors (VCs) who generally accept high risk
Attributes that a VC look forward before investing:
An Industry that is currently a sunrise sector
An exciting concept that has the potential for uninhibited growth
An idea with significant possibilities in future
A business that could become an attractive proposition for strategic acquisition by a market leader
A business with cutting edge technology
A business with first mover advantage
A business with significant entry & easy exit options
Key Elements in Business structuring of a start-up
Formulation of a business strategy & corporate structure
Key commercial contracts
Composition of board
Management structure
Key employment contracts
IPR protection & Management
Corporate governance
Composition of board
Customary for a start up to have a non executive external chairman such as industry/corporate personality.
Political personalities should not be appointed
Chairman should be a person of good business acumen & sound character
Other members may be drawn from promoters, nominees of VCs or lenders
A board with 6 members is ideal for an start up- 2 promoter Directors, 1 non executive chairman & 3 professional independent Directors
Management structure
Can be either pyramidical or flat
Should be chosen on the basis of the type of prevalent industry work culture & business dynamics
Key executive positions should be identified– CEO, COO, CFO etc
Key employment contracts
Defines the commitment of the core team members
These contracts should take care of employees as well
Contracts should cement a long lasting relationship between the company & the core team
Can be done in 2 ways, issuing either:
Sweat Equity
ESOPs
IPR protection & Management
IPRs – Technological, process know hows, copyrights, licences, brand names, trade marks etc
A start up needs to legally safegaurd these rights through appropriate registrations under the relevant IPR laws
These IPRs should not get diluted in key commercial contracts that the company may enter
IP management should be done for the most knowledge intensive businesses
IPs should remain with the company if it seeks to create value in the long run
Key Elements in the Financial structuring of Start ups
Estimation of fund requirements
First & foremost exercise is the Forecast of the financial requirements, in terms of:
Capital Cost of fixed assets & intangible assets
Deferred revenue expenses to be incurred upfront such as product development costs etc
Pre operative expenses to meet the cash burn till the project starts generating revenues
Working capital requirements etc
Capital structuring for equity financing
For capital intensive companies, equity financing is a must
Such start ups are funded through equity & convertibles or hybrids raised through private resources
Once the company is financed through the equity route later on debt can be taken
Promoters subscribe to the equity at par, while VCs at a premium
Knowledge intensive companies (Like IT, media) are not capital intensive, so they may be financed by debt also at inception
Capital structuring for debt financing
In case of manufacturing companies, About half the total project cost & margin money for working capital is taken through Debt component
The balance project cost is contributed through equity
Companies are also required to raise financing for meeting Working Capital requirements.
Banks usually finance these.
IB-PS Ch. 11 Private Placement - Debt Securities - PTR
Deal Process and Role of Investment Banker
The Process start with typically with issuer rolling out a plan to raise funds through private placement route.
Issuer appoints investment banker (with a universal banking background or pure IBs with strong institutional broking background) as an arranger to whole placement.
Investment Bankers are short-listed and finalized through talks and invitation of quotes.
The Investment Bankers ascertain that the company has taken the necessary approval from it board, shareholders and existing lender for the proposed debt and has the necessary power under it memorandum and the article of association, Section 293(1)(a) and 293(1)(d) of the Companies Act.
Investment Banker then become familiar with company’ business, industry pace and financial, the information is put together in form of a private placement memorandum.
Next the Investment Bankers arrive at the instrument in offer and the deal structure, uses his conventional wisdom, ingenuity and market intelligence to arrive at the coupon rate and suitable enhancement, if any.
As soon as the structure has evolved, the rating process starts.
Rating is important because it enhance the possibility of closing the deal early.
A listing application is made to be filed as soon as the issue is placed and allotment gets completed. If the issue does not satisfy the requirement of Rule 19(2)(b) of the SCR Rule, suitable exemption needs to be obtained for listing the privately placed debt.
In the placement part of the deal, the private placement memorandum is circulated among the closed set of appropriate potential investors.
The institutional investors process the proposal internally and take approval from their credit rating or investment committee or their BoDs, before issuing the commitment letters.
After receiving the commitment letters from all investors, the issue is treated a closed and issuer puts up the letter of intent for consideration by its BoD.
These letter stipulate the general terms and conditions applicable to the particular sanction.
After the board of the company accepts the letter of intent, the company proceeds with the documentation.
The documentation consists of entering into a subscription agreement, which would be common if there is more than one lender. This is because, the security ha to be created in common and therefore, a common subscription agreement is created with all the lenders and all the issuer.
Next is to make allotments and receive the funds from the investors by complying with the procedure prescribed under the Companies Act.
The listing application if required, is also simultaneously filed with the stock exchanges.
The role of investment banker usually ends with the receipt of commitment letters from the investors and the acceptance thereof by the issuer.
The post-sanction formalities are normally handled by the in-house professionals of the company, their auditor or it practicing company secretaries.
The Process start with typically with issuer rolling out a plan to raise funds through private placement route.
Issuer appoints investment banker (with a universal banking background or pure IBs with strong institutional broking background) as an arranger to whole placement.
Investment Bankers are short-listed and finalized through talks and invitation of quotes.
The Investment Bankers ascertain that the company has taken the necessary approval from it board, shareholders and existing lender for the proposed debt and has the necessary power under it memorandum and the article of association, Section 293(1)(a) and 293(1)(d) of the Companies Act.
Investment Banker then become familiar with company’ business, industry pace and financial, the information is put together in form of a private placement memorandum.
Next the Investment Bankers arrive at the instrument in offer and the deal structure, uses his conventional wisdom, ingenuity and market intelligence to arrive at the coupon rate and suitable enhancement, if any.
As soon as the structure has evolved, the rating process starts.
Rating is important because it enhance the possibility of closing the deal early.
A listing application is made to be filed as soon as the issue is placed and allotment gets completed. If the issue does not satisfy the requirement of Rule 19(2)(b) of the SCR Rule, suitable exemption needs to be obtained for listing the privately placed debt.
In the placement part of the deal, the private placement memorandum is circulated among the closed set of appropriate potential investors.
The institutional investors process the proposal internally and take approval from their credit rating or investment committee or their BoDs, before issuing the commitment letters.
After receiving the commitment letters from all investors, the issue is treated a closed and issuer puts up the letter of intent for consideration by its BoD.
These letter stipulate the general terms and conditions applicable to the particular sanction.
After the board of the company accepts the letter of intent, the company proceeds with the documentation.
The documentation consists of entering into a subscription agreement, which would be common if there is more than one lender. This is because, the security ha to be created in common and therefore, a common subscription agreement is created with all the lenders and all the issuer.
Next is to make allotments and receive the funds from the investors by complying with the procedure prescribed under the Companies Act.
The listing application if required, is also simultaneously filed with the stock exchanges.
The role of investment banker usually ends with the receipt of commitment letters from the investors and the acceptance thereof by the issuer.
The post-sanction formalities are normally handled by the in-house professionals of the company, their auditor or it practicing company secretaries.
IB-PS Ch.12 Business Advisory Services - PTR
The term 'Corporate advisory services' is an umbrella term taht includes specialised advice rendered to corporations by advisers such as investment banks, chartered and cost accountants, lawyers and other such service provider.
Within corporate advisory services, business advisory services (that are connected to investment banking) relate to advising a company on its present and future businesses from a strategic perspective for survival an growth and on orgaisations structures for implementing strategies.
Business Advisory services
Entry strategy plans
Project feasibility studies
Corporate plan preparation
Merger strategy formulation
Foreign collaborations - Finding and evaluating collaborators and finalising agreements
Business alliance opportunities - search and evaluation
Cross border investment opportunities
Corporate structuring and restructuring
Within corporate advisory services, business advisory services (that are connected to investment banking) relate to advising a company on its present and future businesses from a strategic perspective for survival an growth and on orgaisations structures for implementing strategies.
Business Advisory services
Entry strategy plans
Project feasibility studies
Corporate plan preparation
Merger strategy formulation
Foreign collaborations - Finding and evaluating collaborators and finalising agreements
Business alliance opportunities - search and evaluation
Cross border investment opportunities
Corporate structuring and restructuring
IB-PS Ch.13 Project Advisory Services - PTR
Full recourse and limited recourse project financing structures
Full recourse
The existing assets as well as assets to be created in future are providedd as a security for the lenders. In addition personal guarantees by the promoters and/or other corporate concerns is also obtained by the lenders.
Limited recourse
In limited recourse, the project is implemented as an SPV and a recourse to promoter is insisted for the proper completion of the project and some additional guarantees may be given by some other parties to the project. For example, Government may guarantee minimum revenues for a fixed number of years
Project Financing Process
Project Conceptualization
Sound Concept backed by business opportunity and revenue model
Project should be bankable
Not necessary to be backed by empirical experience
Should satisfy policy requirements of the government and lending institutions
Should not be under negative list of industries
Project Structuring
Concerns regarding location, procurement, production, technology, marketing and promoter usefulness are considered
Mitigation of risk is key responsibility and Important
Normally awarded to consortia
Normally implemented under and SPV to avoid bankruptcy
RBI Guidelines:
Sponsor commits to provide support for cost overruns
SPV has security structure more stringent than normal projects
Cash flow of the SPV are captured by way of TRA arrangement
Types of project Financing
Project Financing through Equity
Project Financing through long term debt
Domestic Rupee Term Loans
ECB
Automatic Route
Approval Route
Debentures
Other Debt Securities
Project Advisory and Related Transaction Services provided by Investment Banks
Bid Advisory Services (in case of projects that require bids - development of oil fields etc.)
Preparation of “Expression of Interest”
Preparation of a detailed “Information memorandum”
Bid Document
Draft License Agreement
The making ready the “Data Room” – Contains all material information for inspection by eligible bidders
Project Advisory Services
Putting the Project Consortium in place
Completion of documentation for some key project contracts
Listing out of all key statutory clearances required for project to proceed
Preparation of financing plan
Should be in line with institutional norms
Permissible debt-equity ratio
Provisions regarding various sources of finance considered
Various debt and equity instruments considered
Financial Advisory and Transaction Services
Financial closure it the term used to denote completion of tying of the funds required for the project.
Issues need to get sorted at policy level to complete financial closure
Final aspects of contractual agreements between various parties need to be sorted out
Financing mix should be a trade-off between optimization of cost of funds and cost of closure
Feasibility of financing mix needs to be considered
Credit enhancements that would de-risk the financing institution and increases bankability helps the financial closure
Full recourse
The existing assets as well as assets to be created in future are providedd as a security for the lenders. In addition personal guarantees by the promoters and/or other corporate concerns is also obtained by the lenders.
Limited recourse
In limited recourse, the project is implemented as an SPV and a recourse to promoter is insisted for the proper completion of the project and some additional guarantees may be given by some other parties to the project. For example, Government may guarantee minimum revenues for a fixed number of years
Project Financing Process
Project Conceptualization
Sound Concept backed by business opportunity and revenue model
Project should be bankable
Not necessary to be backed by empirical experience
Should satisfy policy requirements of the government and lending institutions
Should not be under negative list of industries
Project Structuring
Concerns regarding location, procurement, production, technology, marketing and promoter usefulness are considered
Mitigation of risk is key responsibility and Important
Normally awarded to consortia
Normally implemented under and SPV to avoid bankruptcy
RBI Guidelines:
Sponsor commits to provide support for cost overruns
SPV has security structure more stringent than normal projects
Cash flow of the SPV are captured by way of TRA arrangement
Types of project Financing
Project Financing through Equity
Project Financing through long term debt
Domestic Rupee Term Loans
ECB
Automatic Route
Approval Route
Debentures
Other Debt Securities
Project Advisory and Related Transaction Services provided by Investment Banks
Bid Advisory Services (in case of projects that require bids - development of oil fields etc.)
Preparation of “Expression of Interest”
Preparation of a detailed “Information memorandum”
Bid Document
Draft License Agreement
The making ready the “Data Room” – Contains all material information for inspection by eligible bidders
Project Advisory Services
Putting the Project Consortium in place
Completion of documentation for some key project contracts
Listing out of all key statutory clearances required for project to proceed
Preparation of financing plan
Should be in line with institutional norms
Permissible debt-equity ratio
Provisions regarding various sources of finance considered
Various debt and equity instruments considered
Financial Advisory and Transaction Services
Financial closure it the term used to denote completion of tying of the funds required for the project.
Issues need to get sorted at policy level to complete financial closure
Final aspects of contractual agreements between various parties need to be sorted out
Financing mix should be a trade-off between optimization of cost of funds and cost of closure
Feasibility of financing mix needs to be considered
Credit enhancements that would de-risk the financing institution and increases bankability helps the financial closure
IB-PS-Ch.14. Financial Restructuring Advisory - PTR
Debt Restructuring is part of the restructuring of a balance sheet as it is related to the borrowing obligation of a company
Debt Restructuring is a much more routine process (than Equity restructuring) and can be Triggered off even as a financial management tools to increase the efficiency of borrowing and reduction of financing costs.
Need:
A healthy company wants to restructure its debt portfolio by substituting existing high cost debt with fresh low cost borrowing
A Company without servicing capacity and liquidity problem would want to restructure its debt portfolio to reduce the cost of borrowing and improve working capital position
A company that is insolvent would need a wholesale restructuring of its debt portfolio to Rehabilitate it and make it solvent.
Isssues in Restructuring Various Types of Debt
Broad categories of debt
Secured long term borrowings
Unsecured long term borrowings
Secured working capital borrowings
Other short term borrowings
Restructuring of Secured long term borrowings
Long term secured borrowing can be either in the form of mortgage backed loans provided by commercial bank and financial bank.
Long term borrowing can be both rupee denominated or In foreign currency from Indian lending agencies.
The need for restructuring long term secured borrowing
To Reduce the cost of capital.
TO improve Liquidity and cash flow for a potentially sick company
To Enable rehabilitation of a sick.
Reducing cost of Capital for healthy companies
Restructuring Debt obligations for companies facing bankruptcy or for potential sick units
Recovery laws and restructuring of secured long term borrowings
Restructuring of Unsecured long term borrowings
It can be in the nature of public deposits, private Unsecured loans and privately placed, unsecured debenture bonds or debenture.
For unlisted non-financial companies, the appropriate is the Department of company Affair set up under the ministry of Finance
For listed companies, non-financial companies, the appropriate is the SEBI.
Restructuring of Secured working capital borrowings
Working capital borrowing encompasses credit Limits from Commercial banks in the nature of credit, demand loan, bill discounting, overdraft facilities and commercial paper
These are first charge on inventory and book debts and second charge on other assets.
For other short term borrowing which include inter corporate deposits, clean bills, other acceptance and clean overdraft are generally not restructured. It is rolled over with fresh terms.
Restructuring of other short term borrowings
IB Role
The first step would be to formulate a viability plan for the company
The next step would be to float the “Debt restructuring scheme”.
The next step is to present the DBS to lenders and represent the client in discussion and negotiations with the consortium of lenders..
After the proposal DRS is approved in principle, it is to be ratified by the approving authorities in each lender’s organization.
Debt restructuring services involves a lot of compliance and legal work.
Debt Restructuring is a much more routine process (than Equity restructuring) and can be Triggered off even as a financial management tools to increase the efficiency of borrowing and reduction of financing costs.
Need:
A healthy company wants to restructure its debt portfolio by substituting existing high cost debt with fresh low cost borrowing
A Company without servicing capacity and liquidity problem would want to restructure its debt portfolio to reduce the cost of borrowing and improve working capital position
A company that is insolvent would need a wholesale restructuring of its debt portfolio to Rehabilitate it and make it solvent.
Isssues in Restructuring Various Types of Debt
Broad categories of debt
Secured long term borrowings
Unsecured long term borrowings
Secured working capital borrowings
Other short term borrowings
Restructuring of Secured long term borrowings
Long term secured borrowing can be either in the form of mortgage backed loans provided by commercial bank and financial bank.
Long term borrowing can be both rupee denominated or In foreign currency from Indian lending agencies.
The need for restructuring long term secured borrowing
To Reduce the cost of capital.
TO improve Liquidity and cash flow for a potentially sick company
To Enable rehabilitation of a sick.
Reducing cost of Capital for healthy companies
Restructuring Debt obligations for companies facing bankruptcy or for potential sick units
Recovery laws and restructuring of secured long term borrowings
Restructuring of Unsecured long term borrowings
It can be in the nature of public deposits, private Unsecured loans and privately placed, unsecured debenture bonds or debenture.
For unlisted non-financial companies, the appropriate is the Department of company Affair set up under the ministry of Finance
For listed companies, non-financial companies, the appropriate is the SEBI.
Restructuring of Secured working capital borrowings
Working capital borrowing encompasses credit Limits from Commercial banks in the nature of credit, demand loan, bill discounting, overdraft facilities and commercial paper
These are first charge on inventory and book debts and second charge on other assets.
For other short term borrowing which include inter corporate deposits, clean bills, other acceptance and clean overdraft are generally not restructured. It is rolled over with fresh terms.
Restructuring of other short term borrowings
IB Role
The first step would be to formulate a viability plan for the company
The next step would be to float the “Debt restructuring scheme”.
The next step is to present the DBS to lenders and represent the client in discussion and negotiations with the consortium of lenders..
After the proposal DRS is approved in principle, it is to be ratified by the approving authorities in each lender’s organization.
Debt restructuring services involves a lot of compliance and legal work.
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