CU -BBA Sem VI- investment management

Critics said that it forces traders to do transactions on the trading venue with the lowest price, despite the fact that they would rather conduct their transactions on the site with the fastest execution or the highest level of reliability. With all expenses taken into account, it was thought that institutional orders would do worse as a result. National Market System Plan: A set of guidelines known as the national market system plan is largely utilised to choose distinctive stock symbols for securities traded on American exchanges. Other facets of equities stocks trading activity, transparency, and execution are also covered by the strategy. The national market system plan was designed by the Securities and Exchange Commission (SEC). The United States Congress gave its formation permission in 1975. Periodically, the plan is updated and altered. The SEC invites public feedback by publishing draught and final modifications on its website. Section 11A of the 1934 Securities Exchange Act governs the national market system and national market system plans in the United States. The Securities Acts Amendments of 1975, which were passed in 1975, are included in Section 11A. The Securities Exchange Commission (SEC) was mandated by those amendments to formally construct a national market system framework for the American markets. Regulation NMS was later passed as a result of this. Four complete components of the SEC's Regulation NMS substantially rely on the NMS framework for full compliance. Several market system plan components make up the U.S. national market system. The Intermarket symbol reservation authority To enhance the overall effectiveness and efficiency of the American national market system, the ISRA plan was designed. Additionally, it aims to promote impartial competition among all market players. The main objective of ISRA is to maintain a uniform system for choosing, allocating, and managing equity security symbols for specific securities. Securities are given between one of five characters symbols by the ISRA, which serve as a company's identity for listing and trading activity. Equity market exchanges must follow ISRA criteria when deciding how to disclose information about newly listed stocks. 151 CU IDOL SELF LEARNING MATERIAL (SLM)

Both the Consolidated Tape System and the Consolidated Quotation System are managed by the Consolidated Tape Association. These two systems handle transaction and quotation data from equity exchanges, respectively. The CTS and CQS are required to be used by all of the main, regulated U.S. equity exchanges. The CTS and CQS procedures are required for options market exchanges, just like almost all other parts of the U.S. national market system. An alternate element is the OTC/UTP Plan, which concentrates on quotation and trade processing for over-the-counter stocks, also known as unlisted trading privileges securities. OTC/UTP exchanges are subject to the national market system framework in the United States but have less strict restrictions for the equities they list. The Securities Information Processor (SIP), a designated UTP processor inside the OTC/UTP Plan component, gathers and processes quotation and transaction data on OTC securities. Processing transactions and disseminating quotes fall under the purview of the SIP. Tape C or UTP Level 1 data are other names for UTP Plan data. 11.5 SUMMARY  Indian capital market as opposed to the money market, which deals in short-term cash, the Indian capital market is the market for long-term loanable funds. The facilities and institutional arrangements for borrowing and lending \"term funds,\" medium-term funds, and long-term funds are discussed.  Entrepreneurs and investors interact financially through merchant bankers. The establishment of merchant banks by enterprises and individuals involved in the financial advice sector, private financial service companies, or subsidiaries of commercial banks are all possible options.  Leasing has proven to be a popular financing option for purchasing equipment, particularly for small and medium-sized businesses. The benefits of speed, informality, and flexibility to meet specific demands have contributed to the expansion of leasing companies.  The National Market System (NMS), which governs how all significant exchanges declare and carry out trades, encourages free market transparency. It is the trading, clearing, depository, and quotation distribution components of the US equity trading and order fulfilment system.  The NMS mandates that exchanges make bids and offers accessible to and visible to both ordinary and institutional investors in order to enable the fair dissemination of information. 152 CU IDOL SELF LEARNING MATERIAL (SLM)

 Companies listed on this tier had to adhere to corporate governance rules and meet strict financial requirements. 11.6 KEYWORDS  Capital Market- In the capital market, bonds, stocks, and other financial instruments are bought and sold by buyers and sellers. The trading is undertaken by participants such as individuals and institutions. Most securities traded on the capital market are long-term ones.  Indian Market – As opposed to the money market, which deals in short-term cash, the Indian capital market is the market for long-term loanable funds.  National market– In the capital market, bonds, stocks, and other financial instruments are bought and sold by buyers and sellers. The trading is performed by participants such as individuals and institutions. Most securities traded on the capital market are long-term ones.  Trends– A price series is said to be trending if it consistently closes higher or lower (on average over a certain number of sessions). A market with an upward trend may experience ups and downs, but on average, it frequently closes higher. 11.7LEARNING ACTIVITY 1. Define Indian market 2. Explain Capital market ___________________________________________________________________________ ___________________________________________________________________________ 11.8 UNIT END QUESTIONS A. Descriptive Questions Short Questions 1. What are the functions of capital market? 2. What is the main function of Primary market? 153 CU IDOL SELF LEARNING MATERIAL (SLM)

3. Features is Indian capital market 4. Who controls Indian capital market? 5. What is meant by external commercial borrowing? Long Questions 1. What are the functions of capital market? 2. What is the main function of Primary market? 3. Features in indian capital market 4. Who controls Indian capital market? 5. What is meant by external commercial borrowing? B. Multiple Choice Questions 1. Which of the following is not a requisite for charging income-tax on capital gains – A. The transfer must have been affected in the relevant assessment year B. There must be a gain arising on transfer of capital asset C. Capital gains should not be exempt u/s 54 D. Capital gains should not be exempt u/s 54EC 2. The following shall not be regarded as capital asset: 154 A. Urban Land B. Securities held by a Foreign Institutional Investor as per SEBI Act, 1992 C. Archaeological Collections D. Motor Car 3. The following shall be regarded as capital asset: A. Gold Jewelry held by jeweler as SIT trade. CU IDOL SELF LEARNING MATERIAL (SLM)

B. Securities held by FII as per SEBI Act, 1992, held as stock in trade. C. Motor car held by motor car manufacturer as SIT D. None of above 4. A contract between a buyer and a seller, entered on a particular date, regarding a transaction that they will fulfil at a later date, is known as ______. a. Forward Contract b. Future Contract c. Fixed Contract d. Derivative Contract Answer: b 5.The first computerised stock exchange in India was ________. Bombay Stock Exchange (BSE) Multi Commodity Exchange (MCX) National Stock Exchange (NSE) Over-the-Counter Exchange of India (OCTEI) Answers 1-a, 2-c, 3-d, 4-b, 5-c 11.9 REFERENCES Reference books  SEBI. On October 3, 2010, the original version was archived. 26 September 2012 was obtained.  The 25-year adventure of Sebi. Livemint (2013-05-21). taken from 2013-07-29.  Companies are required by SEBI to declare their promoters' shares \". 6 October 2011. The Economic Times. obtained on October 26, 2012.  Sebi tightens IPO rules and doubles the retail cap \"and Rediff.com. obtained on October 27, 2010. 155 CU IDOL SELF LEARNING MATERIAL (SLM)

 Notice to the Center regarding the quo warranto against the SEBI chief. 26 September 2012. The Hindu 26 September 2012 was obtained. Textbooks  Development of the Capital Market and Privatization: Methods to Encourage Economic Growth, John McLindon (1996)  The capital markets union is what? Commission Europe - Commission Europe. The 2018-03-07 retrived.  Lauren Tett (September 28, 2014). \"Bill Gross missed the key shift after a lifetime of trend-spotting.\" Financial Times (2014) 14 October retrieved.  Products, Strategies, and Participants in the International Capital Markets Theodore Chisholm (2009) Website  https://www.grantthornton.co.uk/insights/capital-markets-top-10-themes-and-trends- for-2022/  https://www.investopedia.com/terms/n/nms.asp  https://www.investopedia.com/terms/n/nasdaq-nm.asp 156 CU IDOL SELF LEARNING MATERIAL (SLM)

UNIT - 12 NEW ISSUES MARKET & PROBLEMS STRUCTURE 12.0 Learning Objectives 12.1 Introduction 12.2 Definition, Functions 12.3 Method of flotation 12.4 Offer through prospectus 12.5 Summary 12.6 Keywords 12.7 Learning Activity 12.8 Unit End Questions 12.9 References 12.0 LEARNING OBJECTIVES After studying this unit, you will be able to:  The new issues market  Underwritings and distributions  Public issue and right issue  Know what is prospectus  Services of product offered by a company 12.1 INTRODUCTION The capital market is divided into two segments: primary and secondary markets. The primary market is often referred to as the new issue market. What Is New Issue Market? A new issue is a stock or bond which is being offered for the first occasion to investors. This new issue may be a corporation’s Initial Public Offering (IPO) or a new issue floated by an entity that has previously floated several similar issues. 157 CU IDOL SELF LEARNING MATERIAL (SLM)

Where this issue will come is known as the new issue market. The new issue market is compared to the secondary market, which interacts with existing shares and bonds. Important Points  New issues, whether stocks or bonds, are a way for a business to raise money.  An initial public offering (IPO) is a form of stock offering that allows investors to purchase a formerly private organization’s stock for the first time.  Bonds, preferreds, and convertible securities may all be issued as new issues to help a company collect debt money.  Bonds are classified debt financing when they are issued as new issues, while stocks and IPOs are regarded as equity financing when they are issued as new issues.  Investors should be mindful of the “hype” that surrounds a new problem such as an IPO, as it can swing either way.  A secondary offering allows businesses that are already publicly traded to create a new issue. 12.2 DEFINATION AND FUNCTIONS Definition A stock or bond that is being offered to investors for the first time is referred to as a \"new issue.\" This new issue may be an Initial Public Offering (IPO) by a corporation or one that is being offered by a company that has already offered a number of issues that are comparable. The new issue market is where this issue will be sold. An initial stock or bond offering is referred to as a \"new issue.\" The majority of fresh issues come from privately owned businesses that go public, giving investors fresh chances. A company's stock is first made available to the public through exchanges like the New York Shares Exchange (NYSE) or Nasdaq in an initial public offering (IPO), which is the normal process for a new issue via stock. Bond reissues function in the same way. Both types of fresh issuance are designed to help the issuing company raise money. To raise money for a corporation, a new issue is carried out. Companies primarily have two options: issue debt (i.e., borrow money) or issue equity in the form of stock (i.e., selling a portion of the company). Whichever path they choose, when those securities are put up for sale, they will be creating a new issue. Treasury securities are another sort of new sovereign debt that governments would issue in order to raise money for their operations. 158 CU IDOL SELF LEARNING MATERIAL (SLM)

The new issue will be examined based on the issuer's ability to repay its debts and overall financial soundness if it chooses the debt option (i.e., issuing bonds). Issuing bonds may not be a viable choice if the company is a startup with no income. If they can persuade investors that the company has long-term promise, the stock path might still be open to them. In order to assist the business grow and prosper in exchange for ownership in the new company, venture capital (VC) and private equity firms may get involved in this situation. If successful, the business might subsequently try to issue a new stock through an IPO and become publicly traded. Companies that have already gone public may later launch a secondary offering to launch another new issue. Example of a new issue Let's say a new IT business has created a programme to make cash exchanges simple to access globally. It has been effective at making money and attracting interest from the venture capital industry. However, it estimates that in order to expand, it will require additional funding— roughly $30 million—which it currently lacks. As a result, it must obtain this funding from outside sources. When the company consults with investment banks to determine what its shares would be worth on the open market, the banks' underwriters advise that a reasonable IPO price of $19 per share, or little under $100 million, would be appropriate. The board of directors of the firm decides to list its shares, and they apply for an IPO to issue a certain number of shares valued at half the overall valuation, or $50 million. The new issuance allows the company to raise money and list on a stock exchange where its shares can be traded freely. The company raised $50 million with the new offer, just over the $30 million they had projected they would require for expansion. The corporation nevertheless had a sizable part of ownership because not all of its shares were listed. Function: The new issues market The New Issue Market's primary purpose is to make the \"transfer of resources\" from savers to users easier. However, conceptually speaking, the New Issue Market shouldn't be seen as a venue for solely obtaining funds for new capital expenditures. 159 CU IDOL SELF LEARNING MATERIAL (SLM)

In fact, the market's resources are also used to convert existing proprietary firms or private companies into public companies, which are then sold to the public as going concerns. These are based on whether the company already has a stock market listing rather than how old the company is. Thus, this classification exclusively addresses the movement of \"new money.\" Another classification (see Merrett, Howe, and Newbold, \"Equity Issues and the London Capital Market,\" 1967) distinguishes between the flow of \"new money\" and the flow of funds into the market; as a result, we have \"new money issues\" or capital issues involving newly created shares and \"no new money issues,\" or sales of securities that are already in existence and sold by their holders. Origination A preliminary investigation carried out by the issue's sponsors (specialised agencies). To determine whether the support of the issue house is justified, a detailed examination of the technical, economic, financial, and legal factors of the issuing firms is required. advising services that aim to raise the standard of capital issues. These services/advice include: choosing the type of security to be/issued and the price of the issue in light of market conditions; the timing and size of issues; the method of flotation; and technique of selling, among other aspects of capital issues. It is difficult to overstate the significance of the specialised services offered by the New Issue Market organisation in this regard. The allocative efficiency of the market is largely dependent on how in-depth the inquiry is and how sound the sponsoring institution's judgement is. Even if the genesis is done well, it cannot by itself ensure a problem's success. Underwriting, a second specialised service, is frequently needed. Underwritings Due to the aforementioned capital market concerns, which make the issue's success unclear, the concept of underwriting was first proposed. If the offer is still undersubscribed, the directors cannot proceed with the share allocation and are required to reimburse the applicants for their money if the subscription falls below a threshold set by the Companies Act. As a result, both the problem and the project will be unsuccessful. When a person or organisation enters into an arrangement known as underwriting, they agree to accept a predetermined number of shares, debentures, or stocks that have been made 160 CU IDOL SELF LEARNING MATERIAL (SLM)

available to the public in the event that they are not purchased by the public in exchange for an underwriting commission. In our nation, institutional underwriting has been focused on development. It acts as a crucial support for initiatives that frequently fall flat with the investing public. These initiatives typically receive more priority from such underwriters since they rank highly from the standpoint of national relevance, such as steel and fertiliser. Thus, it is generally accepted that institutional underwriting plays a crucial role in channelling a nation's economic resources toward desired activities when it comes to development credit. This does not imply that they are prohibited from publishing so-called glamorous issues, to which the public is likely to quickly subscribe. In these situations, they might be underwriting, but what is required of them is their support for initiatives in the priority industry. They are undeniably superior in terms of resources, which is one of their main advantages. Even under the worst imaginable circumstances, they are able to uphold their underwriting obligations. Distribution Distribution is the sale of securities to the ultimate investors; it is another specialised task that can be carried out by securities brokers and dealers that keep constant and direct touch with the ultimate investors. This triple-service role would determine if the New Issue Market could meet the escalating demands of the increasing corporate sector. 12.3 METHOD OF FLOTATION A corporation can raise money in the main market in one of three methods. 1. Public Issues 2. Rights Issues 3. Private Placement Public Issues 161 CU IDOL SELF LEARNING MATERIAL (SLM)

The public distribution of prospectuses is the most significant method of issuing securities. Initial Public Offer (IPO) is the term used when a corporate organisation makes an issue for the first time. The following approach is used in public problem cases: A paper called a \"prospectus\" serves as an invitation to subscribe for the share. The company is inviting applications on the specified form, along with application fee. The subscription list is accessible for three to seven days. No allocation may be made until the minimum subscription amount specified in the prospectus has been met and the business has received the application fee. The quantity of shares that must be subscribed for is referred to as the minimum subscription. The minimum subscription has been set at 90% of the total public issue in accordance with SEBI standards. Application money and allocation money are typically the two instalments used to mobilise the funds. The balance is called up in one or two calls later and is known as call money if the full amount is not requested at the time of allocation itself. The company's letter of allotment can be exchanged into share certificates. The allottee's shares may be forfeited if he doesn't pay the calls. Then, the allottee is not qualified for a return. An underwriter may also support the public issue. Underwriting is now required. The underwriter guarantees that the issuing business will accept the unsold shares. Shares are being devalued on the underwriters in this way, and they are compensated with a commission for this service. The three types of underwriting agencies in India are sole underwriting, syndicate underwriting, and sub-underwriting under sole underwriting. With the issuing company, an underwriter alone enters into an agreement for underwriting. When a group of investment bankers get together to buy a company's securities because the amount of money required for such a venture would be greater than any one banker would care to invest, the practise is known as syndicate underwriting. The third underwriting technique, known as sub-underwriting, entails the hiring of a sub underwriter to hasten the selling of securities and spread the associated risk. There are two different sorts of agreements in underwriting. For example: 1. Agreement between issuing company and the underwriters. 162 2. Agreement between the underwriters and sub underwriters CU IDOL SELF LEARNING MATERIAL (SLM)

Rights Issue: A rights issue is selling securities on the open market while issuing current owners with rights. With this strategy, the corporation allows its current shareholders to subscribe for new shares on a prorated basis. A rights issue maker includes a letter of offer and a composite application form, which is divided into parts A, B, C, and D. The purpose of Part A is to accept the offer. If the shareholder wishes to assign his rights to another party, he must use Part B. The individual in whose favour the renunciation has been made fills out Part C. The share split request is made in Part D. Within a predetermined window of time, often 30 days, the composite application form must be mailed to the employer. The public will be given the opportunity to subscribe for any shares that are still available. Sometimes an established business will simultaneously release a \"Right cum Public Issue. The important characteristics of right issues are: i) The issuing business decides how many shares will be offered to each current shareholder on a rights basis. Based on current holdings, the incumbent shareholder's claim is determined. For every two or three shares the shareholder has, for instance, one Rights share may be provided. ii) The issue price per rights share is left to the discretion of the company. iii) Rights can be discussed. The owner of the rights may assign his ownership of the shares to anyone else, renouncing his right to subscribe for the shares in favour of anyone else who may submit an application to the company for the allotment of the shares in his name. iv) Rights may be exercised for a predetermined amount of time, typically 30 days. It automatically expires if it isn't used during this time frame. Private Placement: A public Issue is an expensive favour that involves brokers, fees, press conferences, press advertisements, etc. As a result, some businesses find it simple and less expensive to raise money through the private issue of bonds and shares. This strategy involves issuing securities to a chosen group of investors, such as banks or financial organizations. When the issue size is not particularly large and the issuer does not want to spend a lot of money floating the issue, a private placement agreement is entered into. Private placement industry has experienced incredible growth. Private placements have grown 163 CU IDOL SELF LEARNING MATERIAL (SLM)

at a faster rate over the past several years in India than both public and legal difficulties due to this. i) Accessibility - It is simple to reach the private placement market whether the company is a public limited company, private limited company, listed company, or an unlisted one. While public issue does not allow issues less than a predetermined minimum size, it can accommodate issues of smaller sizes. ii) Flexibility - The terms of issue can be negotiated with more latitude. A corporation sells securities to one or a small number of investors as a consequence of a private placement. A formal prospectus and underwriting agreements are not necessary for private placements. In most cases, the corporation (issuing the securities) and the investors agree the terms of the issue. In order to entice institutional investors to a private placement of a nun-convertible debenture, a discount may be offered. iii) Speed - Due to the numerous formalities that must be completed, a public issue typically takes six months or longer to complete. A private placement, on the other hand, takes less time. iv) Lower issues cost - A public offering involves a number of statutory and non- statutory costs for underwriting, brokerages, etc. These charges added up to even 10% of the problem in the past. It is far less for a company seeking a private placement. 12.4 OFFER THROUGH PROSPECTUS A prospectus is a formal document that must be submitted to the Securities and Exchange Commission (SEC) that contains information regarding a public offering of securities. For offerings of stocks, bonds, and mutual funds, a prospectus is submitted. Because it offers a wealth of pertinent information about the investment or security, the prospectus can assist investors in making more educated investing decisions. A prospectus is a printed document that advertises or discusses an offering, such as a school, business, upcoming book, etc., outside the realm of investing. To entice or inform customers, members, buyers, or investors, all types of prospectuses are available. Companies that want to sell bonds or shares to the general public must register with the Securities and Exchange Commission and submit a prospectus as part of that procedure. 164 CU IDOL SELF LEARNING MATERIAL (SLM)

Companies are required to submit a preliminary and final prospectus, and the SEC has unique requirements for the information that must be included for different securities. The majority of the information about the business and transaction is contained in the preliminary prospectus, which is the security issuer's first offering document. However, neither the number of shares to be issued nor the pricing information are disclosed in the preliminary prospectus. The preliminary prospectus is typically used to determine market interest in the proposed security. The whole information about the public investment offering is contained in the final prospectus. Any finalised background details, the total number of shares or certificates that will be offered, and the offering price are all included in the final prospectus. A prospectus includes some of the following information: 1. A succinct synopsis of the company's history and financial data 2. The company's name issuing the stock. 3. The quantity of shares 4. The nature of the securities offered 5. whether a public or private offering 6. Principals of the business's names 7. Names of the financial institutions or banks that are handling the underwriting An abbreviated prospectus, which is a document that includes part of the same information as the final prospectus, may be filed by some corporations. The disclosure of the risks associated with investing in the security or fund is another reason a prospectus is released. Investors should review a company's financials even if it may be raising funds through the issuing of stock or bonds to make sure it is able to pay its obligations. Normally, risks are mentioned briefly early on in the prospectus and then in greater detail later on. A description of the company's age, management experience, business activity, and capitalization of the stock issuer is also provided. The information in the prospectus also protects the issuing corporation against accusations that important information was not adequately disclosed. 165 CU IDOL SELF LEARNING MATERIAL (SLM)

Prospectus Example: A prospectus for a mutual fund provides information about the fund's goals, investment tactics, risks, performance, distribution guidelines, costs, and management. The mutual fund fees are included in a table near the beginning of the prospectus because they reduce investors' returns. The process of evaluating the prices of different mutual funds is made easier by the inclusion of fees for purchases, sells, and switching between funds. PNC Financial (PNC) submitted a prospectus to the Securities and Exchange Commission in 2019 asking for a new debt issuance as an illustration of a prospectus for an offering. The senior note that is being made available to the public is a bond or promissory note that will mature with a specific yield. To recap, senior notes are debt securities, or bonds, that are prioritised in the case of bankruptcy over other unsecured notes. If assets are accessible in the case of a corporate liquidation, senior notes must be paid first. A senior note has a better level of security and a lesser chance of default than junior unsecured bonds, hence it pays a lower coupon rate of interest. The prospectus's table of contents, which gives a summary of the offering's details, is excerpted below. The following details can be seen listed: Securities provided are senior notes with a 3.5% interest rate. The notes' maturity date is January 23, 2024. The release date, which has not yet been decided How interest will be paid, as well as the amounts that will be issued Use of proceeds or intended use of funds, which may include funding operations, paying off debt, or repurchasing stock Why Is a Prospectus Useful for Investors? Investors can find critical information about an investment offering in a prospectus that is mandated by the SEC. It summarises important data about the investment and the company being invested in while educating the public about investment risk. Investors should take into account the type and degree of risk involved, thus such facts are often provided early in the prospectus and subsequently in detail. Investors want to know that the company will be able to fulfil its obligations, hence they are concerned with the company's financial standing. 166 CU IDOL SELF LEARNING MATERIAL (SLM)

A prospectus contains important details like a synopsis of the company's history and financial data. the company's name, the names of its founders, how old the business is, how experienced the management is, and how involved the management is in the operations. In addition, the names of the banks or financial institutions handling the underwriting are stated, as well as the quantity of shares being issued, the kind of securities being sold, whether an offering is private or public, and the number of shares being issued. The majority of the information about the business and transaction is contained in the preliminary prospectus, which is the security issuer's first offering document. However, neither the number of shares to be issued nor the pricing information are disclosed in the preliminary prospectus. The preliminary prospectus is typically used to determine market interest in the proposed security. The whole information about the public investment offering is contained in the final prospectus. Any finalised background details, the total number of shares or certificates that will be offered, and the offering price are all included in the final prospectus. Prospectus for a stock bond issue A prospectus is made available to investors when a company issues stocks or bonds in order to provide them all the information they require to make an informed choice. A draught prospectus and a final prospectus are both provided by the issuer. The initial offering document, or preliminary prospectus, contains information on the proposed transaction. When the offering has been completed and is being made available to the public for subscription, the final prospectus is made available. The number of shares issued, the offering price, financial information about the company, risk factors, how the money will be used, the dividend policy, and other pertinent information are all included in the final prospectus. An investor can use this information to make an informed choice about whether to invest in the firm. Prospectus for mutual funds The SEC mandates mutual funds file and make available to interested investors a mutual fund prospectus, which is a legal disclosure document. The document contains information on the fund's goals, risks, performance, distribution rules, management group, investment tactics, etc. A short prospectus, which is a few pages long and covers crucial information that investors need, may be made available by a mutual fund. In order to give investors all the information they could need to make a purchase decision, it may also produce a statutory prospectus, which 167 CU IDOL SELF LEARNING MATERIAL (SLM)

is extensive and very detailed. Following the purchase of shares, mutual funds are required to provide the document to investors. The information is also available to investors on the fund's website. Overview and history of the company The prospectus provides a history of the business going back to its founding. It offers a timeline of significant occasions across time, such as those that contributed to the company's expansion. It also contains details on the company's incorporation, first service offerings, and information on the founders. An description of the company's strategy and what the management sees as its \"unique selling proposition\" or competitive edge may also be included in this section (USP). Services or product offered by a company The company's primary economic activities are included in the services/products section. The business informs clients about the goods and services it offers as well as any recent changes to its business model. Management profile The executive management of the company is also covered in a prospectus. It describes the management team's background, training, and credentials that make them a suitable fit for the business. Investors require confirmation that the company's executives are qualified to protect their capital. Desired deal structure An summary of the issuer's present capital structure and how the new issue will influence it may be provided if the issuer is an established business that has previously issued securities. For instance, investors may be curious about the company's debt level and ability to make payments while buying bonds. In order to understand how their investment would affect the structure and the expected rate of return, equity investors will want to see the present equity ownership structure. Use proceeds When a corporation is unable to raise enough money internally to finance a significant investment, it frequently issues securities. For instance, the business might desire to broaden its reach into new regions, acquire proprietary technology, invest in expensive equipment, finance the creation of a new line of goods, carry out mergers and acquisitions (M&A), etc. 168 CU IDOL SELF LEARNING MATERIAL (SLM)

Security offering deals The prospectus also lists the total quantity of securities being sold to the public as well as their respective prices. Additionally, the anticipated rate of return on the investor's money should be stated. The subscription period, during which interested investors can purchase the securities, is also covered in this section. Financial information Investors should be informed about the company's historical financial performance through the prospectus. EBIT, net income, stock performance, and other data points may be included. The performance of the security can be measured against a well-known benchmark like the Dow Jones Industrial Average or the S&P 500. Risk involved The risks that investors take on when purchasing mutual funds should be disclosed in the prospectus. For instance, a statement on the currency risks investors take on while participating in a global mutual fund might be present. A business may also disclose risks such as potential capital constraints, governmental prohibitions, huge numbers of stocks held by one investor, etc. The disclosures shield the business against claims that it concealed important information and subjected investors to losses. Prospectus in US A corporation must submit the prospectus to the SEC when it plans to issue securities to the general public. Before they can complete the sale, the security issue must wait for the SEC to declare the registration statement valid. If the federal government is confident that the security issuer has complied with all disclosure regulations, the registration statement will only be accepted. There are, however, several exceptions when submitting a prospectus to the SEC. When a corporation issues a security and reports a market capitalization that is higher than the statutory minimum, the company may release a simplified version that incorporates the information into their 10-K Form filings. 169 CU IDOL SELF LEARNING MATERIAL (SLM)

Prospectus in UK For a security to be offered to the public or to be registered on a regulated exchange like the London Stock Exchange, the United Kingdom requires a prospectus (LSE). The Prospectus Rules, an expansion of the Prospectus Directive in European Law, cover security issues and must be authorized by the Financial Conduct Authority (FCA). 12.5 SUMMARY  A new securities issuance, such as a stock in a single firm or a bond, is distributed under the control of an underwriting group. The organisation first purchases the issuance from the company at a set price before selling it to the general public.  A stock or bond that is being offered to investors for the first time is referred to as a \"new issue.\" This new issue may be an Initial Public Offering (IPO) by a corporation or one that is being offered by a company that has already offered a number of issues that are identical to it.  What exactly are goods and services? A service is an intangible good that results from the labour of one or more people, whereas a product is a tangible good that is placed on the market for purchase, consideration, or consumption.  The streamlined prospectus is a legal document that must be submitted to the relevant securities regulator and provides crucial information to investors about the mutual fund. 12.6 KEYWORD  Prospectus ― A prospectus is a legal disclosure document that must be submitted with the Securities and Exchange Commission (SEC) or a local regulator in order to notify the public about an investment offering. The prospectus includes details about the business, its management group, recent financial results, and other relevant information that potential investors would be interested in.  New market issues - A stock or bond that is being offered to investors for the first time is referred to as a \"new issue.\" This new issue may be an Initial Public Offering (IPO) by a corporation or one that is being offered by a company that has already offered a number of issues that are comparable. The new issue market is where this issue will be sold. The secondary market, which deals with existing shares and bonds, is contrasted with the fresh issue market. 170 CU IDOL SELF LEARNING MATERIAL (SLM)

12.7LEARNING ACTIVITY 3. Define new market issues 4. What are the chief functions of the new market issues? ___________________________________________________________________________ ___________________________________________________________________________ 12.8 UNIT END QUESTIONS 171 A. Descriptive Questions Short Questions 1. What are the three types of Underwriting? 2. What do you mean by public issue? 3. Difference between public issue and IPO? 4. What information do we get normally in Prospectus? Long Questions 1. Explain the offers through prospectus 2. Explain the rights issue and public issues? 3. What is the method of flotation? 4. Name and explain the functions in new issues market? B. Multiple Choice Questions CU IDOL SELF LEARNING MATERIAL (SLM)

1. Preference shares can be redeemed ------- (A) Only if they are fully paid (B) Even if they are partly paid up (C) After getting the Court permission (D) All of the above 2. The application forms bearing the stamp of underwriter are termed as ----- (A) Unmarked application (B) Sole underwriting (C) Firm underwriting (D) Marked application 13 Restriction on use of money through prospectus shall not be used For buying, trading or otherwise dealing in equity shares of any other listed company. True or False. a. True b. False c. Partly True d. Partly False 14 Any changes between Red Herring Prospectus and a Prospectus shall be highlighted as ‘variations’ in actual Prospectus. True or False. a. Yes 172 CU IDOL SELF LEARNING MATERIAL (SLM)

b. No c. Partly Yes d. Partly No Answers 1-d, 2-c, 3-a. 4-b 12.9 REFERENCES References book  Black, Lucy (2018-04-24). EU's Dombrovskis starts a new argument about the City's access to markets after Brexit. Inactive since the beginning  Lauren Tett (September 28, 2014). \"Bill Gross missed the key shift after a lifetime of trend-spotting.\" Financial Times (2014) 14 October retrieved.  Kenneth Rogoff and Carmen Reinhart (2010). The Eight Centuries of Financial Folly: This Time Is Different. Press of Princeton University.  Cookson, Clive (2016-09-19). \"Man vs. machine: The secret to successful financial trading is gut feelings\"  Spaulding, William C. (2011). New Securities Issuance and Sale in Investment Banking Textbook references  A century of advancements in the chemistry of flotation technology, Fuerstenau, D.W.  The Martin Lynch (2002). Mining through time. Reaktion Press, London.  \"Method of preserving floating minerals in ore separation,\" Hezekiah Bradford  Michael Nelson (2012). \"Observations on 100 Years of Flotation Technology: From 10 Cubic Feet to 500 Cubic Meters\" Website 173  https://www.investopedia.com/terms/p/prospectus.asp CU IDOL SELF LEARNING MATERIAL (SLM)

 https://www.yourarticlelibrary.com/investment/what-are-the-chief-functions-of-the- new-issue-market/1271  https://corporatefinanceinstitute.com/resources/data/public-filings/prospectus/ 174 CU IDOL SELF LEARNING MATERIAL (SLM)

UNIT - 13 DEBT VERSUS EQUITY STRUCTURE 13.0 Learning Objectives 13.1 Introduction 13.2 Equity and Debt 13.3 Meaning of Debt Versus Equity 13.4 Rights of conversion of debt into equity 13.5 Problems of the new issue market 13.6 Summary 13.7 Keywords 13.8 Learning Activity 13.9 Unit End Questions 13.10 References 13.0 LEARNING OBJECTIVES After studying this unit, you will be able to:  Meaning of Debt and Equity  Identify the difference between debt & equity  State the functions of financing  Other factors to consider 13.1 INTRODUCTION Companies typically have two types of finance as options for raising funds for commercial needs: equity financing and debt financing. Although most businesses combine debt and equity funding, both have some clear benefits. The most important of these is that equity financing has no payback requirements and offers additional working capital that can be used to expand a business. On the other side, debt financing doesn't call for relinquishing any ownership. Typically, businesses can choose between equity and debt financing. The decision frequently comes down to the company's ability to acquire the capital, its cash flow, and how vital it is to the company's major owners to preserve control of the business. The debt-to-equity ratio demonstrates how equally debt and equity contribute to a company's funding. Equity Finance 175 CU IDOL SELF LEARNING MATERIAL (SLM)

Equity in the context of finance refers to ownership of assets with potential obligations such as debts. For accounting reasons, equity is calculated by deducting liabilities from the value of the assets. The difference of $14,000, for instance, is equity if a person owns a car worth $24,000 and owes $10,000 on the loan used to purchase the vehicle. A single asset, like a car or house, or an entire company may be covered by equity. A company that needs to launch or grow its operations can sell equity to raise money that doesn't need to be repaid on a predetermined timeline. Assets are referred described as being \"underwater\" or \"upside-down\" when the liabilities associated to them surpass the value of the asset. Equity is referred to as \"net position\" or \"net assets\" in the context of government finance or other non-profit organizations. Because this kind of ownership was governed by the equity legal system that was established in England during the Late Middle Ages to suit the expanding demands of commercial activity, this sort of ownership is referred to as \"equity\" in English. Equity courts handled contractual interests in property, whilst the older common law courts dealt with issues of property title. The same asset could have two owners: one at law who kept the title indefinitely or until the contract was performed, and one at equity who held the contractual stake. In order to determine whether the provisions and administration of the contract were fair—that is, equitable— contract conflicts were analysed. Any asset acquired with a secured loan is referred regarded as having equity. The asset is partially owned by the buyer while the debt is still outstanding. If the buyer defaults, the lender has the right to take it back, but only to recoup the outstanding loan sum. The equity balance, which is the asset's market value less the loan balance, represents the buyer's ownership stake in the asset. The total amount that the buyer has paid on the loan, which includes interest costs but does not take into account any changes in the asset's value, may be different from this. The loan's terms govern whether the lender can seek repayment from the borrower when an asset has a deficit rather than equity. Other assets are typically funded with full-recourse loans, which make the borrower liable for any deficit, while houses are typically financed with non- recourse loans, in which the lender accepts a risk that the owner may default with a deficit. Additional liabilities may be secured by an asset's equity. Home equity loans and home equity lines of credit are typical examples. This lower the owner’s equity and raise the asset's overall obligations. 176 CU IDOL SELF LEARNING MATERIAL (SLM)

13.2 MEANING OF DEBT VS EQUITY The debt-to-equity ratio (D/E) is a financial metric that shows how much debt and equity were utilised to finance the assets of a company. [1] The ratio, often known as risk, gearing, or leverage, is closely related to leveraging. If the company's debt and equity are publicly traded, the ratio can also be calculated using market values for both, or by using a combination of book value for debt and market value for equity. The two components are frequently taken from the firm's balance sheet or statement of financial position (so-called book value). Preferred stock can be categorised as either equity or debt. Preferential shares' classification as belonging to one or the other will be based in part on subjective judgement and in part on their unique characteristics. In order to determine a company's financial leverage, the debt is often only comprised of long- term debt (LTD). Even the present component of the LTD can be left out of quoted ratios. The Modigliani-Miller theorem also discusses the relationship between equity and debt and how it affects a company's value. Since all liabilities are typically referred to as debt in academic writing and financial economics, the assertion that equity + liabilities equals assets is an accounting identity (it is, by definition, true). It is important to carefully examine different definitions of debt to equity because they might not adhere to this accounting identity. In general, a high ratio could mean that the company has more resources from (outside) borrowing than it does through shareholder funding. Debt Financing Whether we've taken out loans for a house or education expenses, many of us are familiar with the concept of loans. It's similar to financing a firm with debt. The borrower takes funds from a third party and makes a repayment commitment that includes both the principal and interest, which is known as the \"cost\" of the initial loan. After that, borrowers would make regular payments for both interest and principal, as well as provide some assets as security for the lender. Collateral, which will be utilised as repayment in the event that the borrower defaults on the loan, can include stock, real estate, accounts receivable, insurance policies, or equipment. Types of debt financing: 177 CU IDOL SELF LEARNING MATERIAL (SLM)

1. Standard bank loans - These loans are typically more affordable than loans from alternative lenders, despite the fact that they are frequently challenging to secure. 2. SBA financing - Popular with business owners is the government Small Business Administration. Although there are higher conditions for approval, the SBA makes loans through banking partners with lower interest rates and longer maturities. 3. Cash advances from merchants - This type of debt financing is taking out a loan from a different lender and paying it back with a percentage of your credit and debit card sales. Keep in mind that annual percentage rates on merchant cash advances are notoriously high (APRs). 4. Credit lines. You receive a lump sum of cash from business lines of credit, but you only use it when you actually need some of it. You just pay interest on the amount you actually use, and you won't likely need to provide security, unlike with other forms of loan financing. 5. Commercial credit cards. The operation of business credit cards is the same as that of personal credit cards, although they may contain features that are more advantageous to businesses, such as spending rewards that are absent from company credit lines. Equity financing: Equity financing is giving investors a stake in your business in exchange for a portion of any future profits. A transaction with a venture capitalist or equity crowdsourcing are two examples of how to get equity financing. If they choose this option, business owners won't have to pay high interest rates or make monthly repayments. Instead, depending on the conditions of the sale, investors will be partial owners with the right to a share of company profits and possibly even a vote in management decisions. Few seemlier types of equity financing 1. Angel investors A wealthy person who generously injects a lot of money into a company is an angel investor. A share of the company, or convertible debt, is what the angel investor receives in exchange for their investment. 2. Venture capitals A group or an individual who invests money in businesses, typically high-risk startups, is known as a venture capitalist. Most of the time, the startup's growth potential outweighs the 178 CU IDOL SELF LEARNING MATERIAL (SLM)

risk to the investor. The venture capitalist might eventually attempt to purchase the business or, if it's publicly traded, a sizable percentage of its shares. 3. Equity crowdfunding Equity crowdfunding is the practise of using crowdsourcing platforms to distribute modest shares of your business to various investors. For these initiatives to succeed and receive money, significant marketing efforts and preparation are typically necessary. The specifics of equity crowdfunding are laid out in Title III of the JOBS Act. Venture capitalists and angel investors are frequently extremely skilled, selective investors who won't back any old project. Entrepreneurs require a pro forma with strong financials, some semblance of a functioning product or service, and a qualified management team to persuade an angel or VC to invest. If they are not already in your network, angels and venture capitalists can be challenging to approach, but incubator and accelerator programmes frequently offer advice to firms on how to optimise their operations and attract investors, and they may also have access to their own networks. As opposed to debt, equity frequently does not require interest payments, according to Andy Panko, owner and financial counsellor at Tenon Financial. But equity often has a higher 'cost' than debt does. Share holders will still seek compensation, [which] typically entails paying dividends and/or making sure that equity prices rise favourably, both of which might be challenging to accomplish. Is debt cheap than equity Debt may be less expensive than equity depending on your company and how well it performs, but the contrary is also true. Your equity finance essentially comes at no cost to you if your business fails and closes. You must still repay the loan plus interest even if you use debt finance to obtain a small business loan but make no money. In this case, debt financing is more expensive. However, the amount you pay shareholders may be far higher than it would be if you had retained ownership and only made a loan if your company sold for millions of dollars. Every situation is unique. Risks It varies. If you are not making money, debt financing may be riskier because your lenders will put more pressure on you to make payments. Equity financing might be problematic, though, if your investors anticipate that you will make a healthy profit, which they frequently do. If they are not satisfied, they may try to bargain for lower equity prices or completely divest. 179 CU IDOL SELF LEARNING MATERIAL (SLM)

Debt fund investing involves a variety of risks. Credit risk, interest rate risk, inflation risk, reinvestment risk, etc. are some of these hazards. However, credit risk and interest rate risk are the main hazards that should be taken into account before investing in debt funds. Potential investors may view a company that relies too heavily on debt as \"high risk,\" which could eventually restrict the company's access to equity financing. Collateral. You might put certain business assets at danger if you agree to give the lender collateral. Total Debt/Equity is a ratio that measures all of a company's future financial commitments in relation to equity. However, compared to other kinds of commitments that could be present on the balance sheet under the liabilities column, the ratio can be more discriminating about what is genuinely a borrowing. For instance, rather than using the broader category of \"total liabilities,\" only the liabilities accounts that are specifically labelled as \"debt\" on the balance sheet are used in the numerator. In other words, actual borrowings are used rather than the more general definition of total liabilities, which can include include accrual accounts like unearned revenue in addition to debt-labelled accounts like bank loans and interest-bearing debt securities. The long-term-debt-to-equity ratio is another widely used variation of the ratio that uses solely long-term debt as the numerator rather than total debt or total liabilities. The total amount of debt includes both long-term and short-term obligations, the latter of which consists of actual short-term obligations with actual short-term maturities as well as the percentage of long-term obligations that is currently short-term because it is approaching maturity. This second category of short-term debt is separated from long-term debt and is now referred to as the current portion of long-term debt (or a similar name). The long-term debt to equity ratio uses the residual long- term debt as its numerator. 13.3 RIGHTS OF CONVERSION OF DEBT INTO EQUITY A corporation may think about issuing a debt/equity or equity/debt exchange when it wishes to change the ratio of debt to equity to better position itself for long-term success. All specified shareholders are offered the option to exchange their stock for a predetermined amount of debt in the same company in the case of an equity-for-debt swap. The sort of debt that is typically offered is bonds. 180 CU IDOL SELF LEARNING MATERIAL (SLM)

In contrast, a debt/equity swap involves exchanging debt for a predetermined amount of stock. All participants in the swap will now be a part of the new or expanding asset class that is being phased in after some or all of the original asset class has been phased out. Management may restructure a company's finances for a variety of reasons. One explanation is that the business might have to fulfil certain contractual requirements, including maintaining a target debt-to-equity ratio. The contractual responsibilities can stem from funding conditions imposed by a lending institution or might be ones that the firm itself imposed as described in the prospectus. So that they can obtain favourable terms on credit or debt, if necessary, or so that they will be able to raise money through a share offering, the company may aim to maintain the debt/equity ratio within a specified range. The ability to raise money in the future may be constrained if the ratio is too skewed. To avoid future coupon and face value payments on the debt, a business may exchange shares for debt. The company provides debt holders equity as a substitute for substantial cash payments for debt settlement. Businesses may employ a debt/equity swap to give creditors better terms in bankruptcy cases. Usually, the transfer is made to keep a faltering business operating. The reasoning behind this is that a corporation that is insolvent cannot pay its debts or raise its equity position. But occasionally, a business might only want to profit from opportune market circumstances. A swap may not take place without agreement if certain covenants in the bond indenture are present. Valuing Swaps While management may provide greater exchange values to persuade share and debt holders to engage in the swap, equity/debt and debt/equity swaps are both normally valued at current market rates. Consider an investor who has 1,500 dollars' worth of ZXC Corp stock, for instance. All shareholders have the option to exchange their shares for debt at a rate of 1:1, or dollar for dollar, thanks to ZXC. In this case, if the investor chose to accept the exchange, they would receive debt valued at $1,500. Offering a swap ratio of 1:1.5 may entice investors to trade shares for bonds if the corporation really wanted to. Investors effectively gained $750 by simply changing asset classes because they would receive $2,250 (1.5 * $1,500) in debt. However, it is important to note that if the investor traded their equity for debt, they would forfeit all of their respective shareholder rights, including voting rights. 181 CU IDOL SELF LEARNING MATERIAL (SLM)

Implications Current shareholders' interests are diluted when additional stock is issued. Because the company's earnings are now shared among more owners, this often has a cooling effect on share price. Despite the fact that in theory a firm may issue shares to avoid debt payments, the action would probably impact the share price even more if the company was already having financial problems. The transaction not only dilutes shareholders but also highlights how cash-strapped the business is. On the other hand, the business might be in a stronger position now that it has more cash on hand and fewer debt. More debt is issued, which results in higher interest costs. This might be a reasonable alternative to diluting shareholders because financing can often be obtained at reasonable rates. A certain amount of debt is beneficial since it gives shareholders internal leverage. However, having too much debt is an issue since rising interest costs could harm the business if sales begin to decline. Swaps are often required to maintain the company's balance so that they can ideally achieve long-term success because there are advantages and disadvantages to issuing both debt and stock in certain conditions. Conversion - One of the most often employed tools in the bankruptcy world is the debt to equity conversion. Companies can use these transactions to convert their long-term debt into equity shares in the business. Companies are able to better control their cash flow during the bankruptcy process because to these transactions. The remainder of this essay has spoken in length about debt to equity conversions. Both debt and equity are ways to acquire a financial stake in an organisation. As opposed to equity, which has a variable rate of return, debt has a fixed rate of return. Furthermore, it must be realised that loan holders have no influence over how the business is operated because they are not taking any risks. However, equity owners do have the ability to vote in the company. A debt to equity transfer doesn't involve any actual monetary exchange. For instance, firm A might decide to issue equity securities valued at $10 million or even more if it owes a lender a debt of $10 million. In exchange, the debt holder will have to give up their claim to future principle and interest payments. 182 CU IDOL SELF LEARNING MATERIAL (SLM)

An equity to debt transfer is regarded as a dangerous move because it's possible that the newly formed company's equity could likewise lose all of its value. Add Value For instance, debtors choose variable payments over fixed ones since they are aware that the variable payments have a higher expected value. For instance, if a business is having trouble with cash flow, it cannot afford to pay interest. Despite having a strong core business, the company's financial situation is being destroyed by these interest payments. The business could therefore prosper without these interest payments, and within a few years, the profits will be sizable enough to offer a better rate of return than the agreed-upon interest rate. On the other hand, the company's primary operation could fail if the creditors persisted in exerting pressure and getting their just desserts in the form of high interest and penalties. As a result, in such circumstances, both the return on investment and the return on investment would be at risk. Many times, it is in the debt holders' best interests to put pressure on the corporation and avoid thinking in the short term. The fact that the creditor corporation gains total control over the debtor organisation must be considered. As a result, they can carry out and execute ideas that they believe would be advantageous. The debt to equity transfer is advantageous for the debtor company as well. This is because the debtor corporation is no longer obligated to pay interest payments right away. This releases more cash flow without generating any related liabilities! The debtor corporation may use this surplus cash to expand the company's operations. Limitations of Debt to Equity swaps 1. Limitations by existing shareholders - It is important to understand that in order to issue new equity, the existing equity that the company's shareholders currently own must be extinguished. The newly issued equity might not be as valuable as the existing equity. This is so that the market does not receive a favourable signal when a business converts debt into equity. The prices consequently fall even lower. Because of this, many minority shareholders frequently believe that during the entire process, their rights are being disregarded. They think that money is being taken from them without their will in order to give it to the debt holders. As a result, they might bring legal claims, which would make the procedure time-consuming and expensive. 2. Deep Pockets - Debt for equity swaps might not appeal to all investors. The majority of creditors prefer cash payments since they want to utilise it for their own businesses. Only financial institutions without a particular line of operation are content to accept shares in place of debt. This is due to the fact that even if they had received money, 183 CU IDOL SELF LEARNING MATERIAL (SLM)

they would have most likely put it in securities. As a result, they are glad to take securities that the company offers at a higher valuation. 3. Liquidity - The recently released stock shares are less tradable. This is due to the court's refusal to immediately permit the sale of these shares on the open market. The time period during which these shares may be traded is constrained. As a result, investors who do not want their money to be tied down find little purpose for the shares. 4. Tax implications - Finally, since interest is a tax-deductible expense, interest payment gives the business a tax shelter. As a result, even when the corporation pays less, debt holders still benefit more. The tax authorities provide the remaining amount! There will be no tax benefit following the conversion of debt to equity, and the cost of satisfying the debtors will be much higher for the company. The importance of bankruptcy on share holder: Like other businesses, companies that declare bankruptcy also have a capital structure. This indicates that both debt and equity are included in their capital structure. We have been discussing the interests of the debt holders—specifically, how they will be compensated in the case of liquidation or reorganization—constantly in the last several columns. However, we have fully disregarded the issue of shareholders up until this point. Because stockholders are not seen as benefactors of a bankrupt corporation, this is the case. Throughout the process, their wants and preferences are ignored. In this post, we'll detail just how the bankruptcy process impacts shareholders' interests. Dividends are stopped completely The bankruptcy procedure has a negative effect on the interests of shareholders. This is so because businesses that declare bankruptcy typically have more obligations than assets. Additionally, their cash flow at that moment is insufficient. As a result, any cash flow a business generates is used to pay down its debts in full first. According to corporate law, the corporation is not required to pay its shareholders anything. Only when the business is profitable and has extra cash can it pay its shareholders. As a result, dividend payments cease in the case of bankruptcy. This break in dividend payments is expected to last for a considerable amount of time, or until the company emerges from restructuring. The shareholders who depend on the dividends for their monthly income are severely harmed by this. Equity gets wiped out 184 CU IDOL SELF LEARNING MATERIAL (SLM)

It's crucial to understand that a corporation only declares bankruptcy if it has no or very little equity left. The value of the shareholder's investments is typically completely destroyed. There are many investors who purposely buy stocks in companies facing bankruptcy. This is carried out since these equities only fetch a few cents on the dollar. Therefore, there could be a huge upside if the company survives. However, this type of investment requires a great deal of patience and competence. 90% of the time, stockholders stand to lose all or most of their investment in a failing company. The skill is in figuring out the remaining 10%. Equity may get diluted Even if the equity's worth is not entirely lost, the process could result in a significant diluting of it. This is due to the fact that a company's reorganisation frequently results in the conversion of a sizable portion of its debt to equity. Voting rights may or may not be attached to this newly constituted equity. It does, however, reduce the equity's current value. Promoters frequently lose their controlling ownership in a company after the reorganisation process. Issuance of new shares In many instances, the former shares of the corporation that is declaring bankruptcy just vanish. Thus, they lose all of their value. A new class of equity shares is introduced in their place. These shares are typically given to creditors who have agreed to accept equity in place of debt. In other cases, current shareholders also receive this new equity. There may be a decrease in the quantity or price of shares issued. This is a serious loss from the perspective of the shareholders. Ideally, they are giving the debt holder the value of the shares they own. However, this can be viewed as fair because the shareholders were in charge of the business when it was incurring losses, therefore can be responsible for the downturn. Loss of management rights The most crucial element is that the company's stockholders also forfeit their managerial rights. The management chosen by the shareholders is in total control of the company up until it declares bankruptcy. However, upon the filing of the bankruptcy petition, a trust is given management duties. The interests and welfare of the creditors are the responsibility of this trust. The interests of equity stockholders don't worry them. Additionally, this group does not have total authority over the business. Any significant action that needs to be made must first receive bankruptcy court approval. As a result, if shareholders believe they can implement a reorganisation plan that will benefit them, they must wait until all other shareholders have approved it before doing so. 185 CU IDOL SELF LEARNING MATERIAL (SLM)

Therefore, it is true that declaring bankruptcy might be seen as a death warrant for a company's shareholders. That is not always the case, only extremely seldom. However, equity shareholders risk losing every penny 90% of the time. Because of this, equity values fall sharply after a bankruptcy is declared. If the shareholders are unaware that the bankruptcy filing is merely tactical and that the value of their investment would be safeguarded, this occurs. 13.4 PROBLEMS OF THE NEW ISSUE MARKET An initial stock or bond offering is referred to as a \"new issue.\" The majority of fresh issues come from privately owned businesses that go public, giving investors fresh chances. A company's stock is first made available to the public through exchanges like the New York Shares Exchange (NYSE) or Nasdaq in an initial public offering (IPO), which is the normal process for a new issue via stock. Bond reissues function in the same way. Both types of fresh issuance are designed to help the issuing company raise money. To raise money for a corporation, a new issue is carried out. Companies primarily have two options: issue debt (i.e., borrow money) or issue equity in the form of stock (i.e., selling a portion of the company). Whichever path they choose, when those securities are put up for sale, they will be creating a new issue. Treasury securities are another sort of new sovereign debt that governments would issue in order to raise money for their operations. The new issue will be examined based on the issuer's ability to repay its debts and overall financial soundness if it chooses the debt option (i.e., issuing bonds). Issuing bonds could be a possibility if the company is a startup with no income. Let's say a new IT business has created a programme to make cash exchanges simple to access globally. It has been effective at making money and attracting interest from the venture capital industry. However, it estimates that in order to expand, it will require additional funding— roughly $30 million—which it currently lacks. As a result, it must obtain this funding from outside sources. When the company consults with investment banks to determine what its shares would be worth on the open market, the banks' underwriters advise that a reasonable IPO price of $19 per share, or little under $100 million, would be appropriate. The board of directors of the firm decides to list its shares, and they apply for an IPO to issue a certain number of shares valued at half the overall valuation, or $50 million. The new issuance 186 CU IDOL SELF LEARNING MATERIAL (SLM)

allows the company to raise money and list on a stock exchange where its shares can be traded freely. The company raised $50 million with the new offer, just over the $30 million they had projected they would require for expansion. The corporation nevertheless had a sizable part of ownership because not all of its shares were listed. If they can persuade investors that the company has long-term promise, the stock path might still be open to them. In order to assist the business grow and prosper in exchange for ownership in the new company, venture capital (VC) and private equity firms may get involved in this situation. If successful, the business might subsequently try to issue a new stock through an IPO and become publicly traded. Companies that have already gone public may later launch a secondary offering to launch another new issue. When selecting whether to sell stock or issue bonds, companies must take their business objectives into account. When a company issues stocks or bonds to raise money for projects, it may change the capital structure of the company (which is comprised of a mix of debt and equity). The ratio of debt to equity in a company's structure impacts the cost of capital for that company. The interest rate that the issuing corporation must remit to its lenders and investors on a regular basis is the cost of issuing debt. Dividend payments are part of the price of issuing shares. A company may be able to avoid paying a high cost of capital by finding a good balance between the two forms of securities. Equity investments don't require repayment, and dividends linked with shares don't require payment like interest does with bonds. There is a cap on the amount of stock that a company can issue before dilution becomes an issue since each issue of shares modifies an investor's ownership in the company. However, businesses may issue bonds if investors are prepared to take on the role of lenders. Issuing bonds is less expensive than borrowing from a bank because corporations may pay bondholders a cheaper interest rate and maintain greater control over funding. Bonds do not affect a company's ownership or management, whereas selling shares does. Because all bonds with the same issuance receive the same interest rate and have the same maturity date, record- keeping for bondholders is easier. Additionally, bond issuance is more adaptable than stock issue. 187 CU IDOL SELF LEARNING MATERIAL (SLM)

13.5 SUMMARY  Assets are referred described as being \"underwater\" or \"upside-down\" when the liabilities associated to them surpass the value of the asset. Equity is referred to as \"net position\" or \"net assets\" in the context of government finance or other non-profit organisations.  Businesses can obtain the capital they require through stock and debt finance. Depending on your business objectives, risk tolerance, and control requirements, you'll need one over the other.  Many businesses in the start-up stage will explore equity funding, whilst established businesses and those with good credit who don't mind taking on debt may choose for typical debt financing options like small business loans.  Debt is the direct borrowing of money, whereas equity is the sale of stock in your company in an effort to raise money.  A prospectus is a company's invitation to the public to subscribe for shares. It may appear as a notice, circular, or advertisement asking for offers for a specific quantity of shares or debentures at a specific price that could then be allocated to them. 13.6 KEYWORDS  Debt and equity ratio- The debt-to-equity ratio (D/E) is a financial metric that shows how much debt and equity were utilized to finance the assets of a company. The ratio, often known as risk, gearing, or leverage, is closely related to leveraging.  Equity finance - Equity in the context of finance refers to ownership of assets with potential obligations such as debts. For accounting reasons, equity is calculated by deducting liabilities from the value of the assets.  Valuing swaps - While management may provide greater exchange values to persuade share and debt holders to engage in the swap, equity/debt and debt/equity swaps are both normally valued at current market rates.  Special consideration - Several variables, including your existing and projected profitability, dependency on ownership and control, and your eligibility for either one, will determine which one is best for you. 188 CU IDOL SELF LEARNING MATERIAL (SLM)

 Calculate ratio - Business owners monitor debt ratios and other financial parameters using a range of tools. A balance sheet template that is offered by Microsoft Excel performs financial ratio calculations such as the debt ratio and debt ratio automatically. 13.7 LEARNING ACTIVITY 1. Define Debt 2. Explain debt and equity ratio ___________________________________________________________________________ ___________________________________________________________________________ 13.8 UNIT END QUESTIONS A. Descriptive Questions Short Questions 1. Define Equity and Debt? 2. Explain the pros and cons of debt financing? 3. What is private placement? 4. What is Bought out deals? 6. Explain Public issues? Long Questions 1. Explain origination and how is it used? 2. What are the functions of new issue market? 3. Describe Debt Equity swap implications? 4. Explain the fundamentals of corporate finance and accounting. B. Multiple Choice Questions 1. Which one of the following statements is untrue? a. The cost of equity capital is lower than the cost of debt before taxes 189 CU IDOL SELF LEARNING MATERIAL (SLM)

b. The cost of equity capital is very difficult to estimate c. The cost of equity capital is the minimum rate that a business should earn on the part of financed by equity d. None of the above 2. A company's stock shares must yield a greater return than its debt because: a. Bonds require a market premium b. Demand for equity shares is greater than bonds c. Demand for equity shares is lesser than bonds d. Equity shares involve more systematic risk 3. Regardless of whether the business generates money or not, two financial instruments that have a fixed rate of interest are __________ and _______________ a. Equity Shares, Preference Shares b. Equity Shares, Debentures c. Bonds, Debentures d. Equity Shares, Bonds 4. The market price of an equity share is determined by? a. Buyers and sellers of those shares b. The president of a company c. The board of directors d. The stock exchange where those shares are getting traded 5. Which of the above factors helps to determine the capital structure of a firm? a. Government policies 190 CU IDOL SELF LEARNING MATERIAL (SLM)

b. Degree of Control c. Cost of capital d. All of the above Answers 1-a, 2-d, 3-c, 4-a, 5-d 13.9 REFERENCES Reference books  Patricia Peterson (1999). Financial statement analysis. Wiley, New York  Rohit Manglik (2020-06-09). Practice pack with Mock Exams & Chapter-wise Test for JAIIB 2020  Ivo Welch (20 October 2010). The financial debt-to-asset ratio is a poor indicator of leverage  Chron. September 8, 2020. \"Difference Between Insolvency And Negative Equity.\" 29th April 2021, retrieved. Textbooks  Robert C. Merton (1974) \"The Risk Structure of Interest Rates and Corporate Debt Pricing  How to figure up your overall equity \". AccountingTools. retrieved on 20201102.  F. W. Maitland (1909). The Common Law Forms of Action and Equity Website  https://www.investopedia.com/ask/answers/06/debtequityswap.asp  https://en.wikipedia.org/wiki/Equity (finance)  https://www.investopedia.com/ask/answers/042215/what-are-benefits-company- using-equity-financing-vs-debt-financing.asp 191 CU IDOL SELF LEARNING MATERIAL (SLM)