PTR Restaurant

RAISING LONG TERM FINANCE

Group 7 Saurabh raj 12202156 Saurav Shaisesh 12202157 Sheelpam dhar 12202158 Shiv kumar singh 12202159 Shreyansh agrawal 12202160 Shreyanshi Das - 12202161

An Introduction
A venerable restaurant in Bangalore set-up decades ago.

Successful business
Owner unwilling to open new branches due to risk of

dilution in quality New business opportunities and competitive compulsions led to the opening of branches in Bangalore & Chennai. Newest endeavor financed by internal accruals Successful attempt led to plans for opening nation-wide chain of PTR restaurants , hence to raise capital through IPO.

KEY ISSUES
in the minicase

What are the pros of going public ?

Access to capital-A company that doesnt tap the public financial market

may find it difficult to grow beyond a certain point for want of capital. Respectability-Many entrepreneurs believe that they have arrived in some sense if their company goes public because a public company may command greater respectability Investor recognition- In Robert Mertons pricing model it is shown that other things being equal ,stock prices are higher , the larger the number of investor who are aware of the securities of the firm. Window of opportunity-When a non-public company recognises that other companies in its industry are over-priced , it has an incentive to go public and exploit that opportunity. Benefits of diversification-When a firm goes public those who have invested in it-original owners ,investors , managers and others-can cash out of the firm. Signals from the market-Stock prices represent useful information for managers.

What are the cons of going public ?

Dilution-When a company issues shares to public , existing

shareholders suffer dilution of their proportionate ownership in the firm. Loss of flexibility-the affairs of a public company are subject to fairly comprehensive regulations. Disclosures-A company cannot maintain a strict veil of secrecy over its expansion plans and product market strategies as its non public counterpart can do. Accountability-the degree of accountability of a public company is higher. Public pressure-Because of its greater visibility , a public company may be pressurized to do things that it may not otherwise do.

company satisfy to make an IPO ?

A company has to satisfy at least one of the following conditions to make an IPO:1) Track record The company should have net tangible assets of at least Rs 3 crore, net worth of at least Rs 1 crore, & distributable profits for at least three out of the preceeding five years. The issue size should not exceed 5 times the pre-issue net worth. 2) QIB Participation The issue is made through the book building process, with at least

Continued .
3. ) Appraisal & Participation by Financial Institutions or Commercial Banks Companys project should have been appraised by financial institutions or scheduled commercial banks & the appraisers should provide at least 10% of the financing. The post-issue capital has to be at least Rs 10 crore , failing which has to be compulsory market making for 2 yrs.

What is book building ?

- Book building is actually a price discovery method. In this method, the company doesn't fix up a particular price for the shares, but instead gives a price range, e.g. Rs 80-100. In book building, The company announces a price band within which potential investors are required to bid for the shares. The lowest price of the range is called the floor price and the highest price is called as cap price. During the bidding process, investors can change their bids. After the bidding is over, the cut-off price is determined based on the demand for the share. Cut off price is the

What are the principal steps in an IPO ?

1. Appointment of lead managers. 2. Appointment of other intermediaries like co

managers, underwriters, bank, brokers, and registrars. 3. Preparing the prospectus and filing the same with the Registrar of Companies and SEBI 4. Printing the prospectus and dispatching the same to brokers. 5. Making the statutory announcements. 6. Collecting and processing the applicants 7. Establishing the liability of underwriters. 8. Allotment of shares 9. Getting the issues listed.

What is the role played by the lead manager ?

Structure the issue, taking into account the funds

requirements of the company, the expectations of the investors, and other relevant factors. Submit the draft prospectus to SEBI Arrange underwriting by the financial institutions, commercial banks and brokers. Finalize the prospectus in consultation with solicitors, stock exchange authorities and others. Coordinate the efforts of brokers, bankers, registrars, advertising agencies, printers and others.

Continued
Develop the strategy for marketing the issue by issuing

a judicious mix of conferences ( press, broker, and investor), advertisements, mailings, etc. Monitor the issue during the subscription period. Help in finalizing the basis allotment Assist in securing stock exchange listing.

What are the costs of a public issue?

The important expenses incurred for a public issue are as under : Underwriting expenses : it is fixed at 2.5 % of the nominal value ( including the premium ) of the equity capital being issued to public. Brokerage : applicable to all types of public issues of industrial securities is fixed at 1.5 % , whether the issue is underwritten or not . Fees to the managers to the issue : this fees is fixed on the basis of negotiation. Fees for registrars to the issue : this fees depends upon number of applications received, number of

Continued .
Printing expenses : relates to the printing of

prospectus, application forms, brochures, share certificates, allotment/ refund letters, envelopes, etc. Postage expenses : these pertain to the mailing of application letters by ordinary posts and allotment / refund letters by registered post. Advertising and publicity expenses : these are incurred primarily toward statutory announcements, PCs and investor conferences. Listing fees : the fees payable to concerned stock exchanges where the securities are listed. Stamp duty : this is the duty payable on share certificates issued by the company.

Can a company making a public issue freely price its shares ?

As per the present SEBI disclosure and investor protection guidelines 2000 ( DIP guidelines ) , every company whether listed or unlisted, which is eligible to make a public issue can freely price its shares. However the issuing company has to make the following disclosures. Adjusted EPS ( past 3 years ) P / E ratio in relation to issue Return on net worth Minimum return on the total net worth after the issue needed to maintain EPS Net asset value

Why is under-pricing of IPOs a universal phenomenon ?

Under pricing of IPO is termed as a universal phenomenon due to the following explanations Winners curse : investors are of 2 types : informed & uninformed . In general the FI are informed and the individual investors are uninformed. So the individual investors tend to become victims of winners curse . When they receive allotment of shares for which they have applied in for in an IPO , it may be because the shares are overpriced and informed investors have stayed away from the issue. Hence the uninformed investors will need an incentive in the form of a substantial underpricing of the IPO to remain in the market .
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Continued .
Bait for future offerings : a company making an IPO

would like the investors to have a rewarding experience, to create loyalty, which helps in raising capital in future at a higher price. Informational asymmetry : the merchant bankers know the market better than the issuing company . They may exploit this superior knowledge to underpricing issues. Regulatory constraints : during the days of controller of capital issues , the issue price in India was governed by a very conservative formula. Political goals : companies may deliberately underprice their issues and allot them to people in power. ( Eg: recruitment company in Japan )
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What is a right issue ?

A right issue is an issue of capital to the existing share holders of the company through a letter of order made in the 1st instance to the existing shareholders on a prorata basis. Characteristics of rights : The issuing firm decides on the number of rights shares to be issued. Based on the proposition , rights entitlement of the existing shareholders are determined . The price / share for additional equity called the subscription price is left to discretion of the company. Rights are negotiable. Holder can sell them Rights can be exercised only during a fixed period , usually about 30 days .

Continued .
Conditions : the conditions that have to be satisfied for obtaining the approval for rights issues are as under : Existing shareholders , exercising their full rights are given opportunities to apply for additional shares. Existing shareholders , who renounce their rights wholly or partially are not entitled to do the above . Shares which become available , due to non exercise of rights by some shareholders, are allotted to shareholders who have applied for additional shares in proportion to their shareholding. Any balance shares , left after meeting requests for additional shares by the existing shareholders, are disposed of at the ruling market price or the issue price , whichever is higher .

What are the different kinds of dilution ?

There are 3 kinds of dilution : Control dilution Earnings dilution Value dilution Control Dilution :- Control dilution describes the reduction in ownership percentage or loss of a controlling share of an investment's stock. Many venture capital contracts contain an anti-dilution provision in favor of the original investors, to protect their equity investments. One way to raise new equity without diluting voting control is to give warrants to all the existing shareholders equally. They can choose to put more money in the company, or else lose ownership percentage. When employee options threaten to dilute the ownership of a control group, the company can use cash to buy back the shares issued.

Continued .
The measurement of this percent dilution is made at a point in time. It will change as market values change, and cannot be interpreted as a measure of the impact of dilutions. Presume that all convertible securities are convertible at the date. 2. Add up the number of new shares that will be issued as a result. 3. Add up the proceeds that would be received on these conversions and issues (The reduction of debt is a 'proceed'). 4. Divide the total proceeds by the current market price of the stock to determine the number of shares the proceeds can buyback. 5. Subtract the number bought-back from the new shares originally issued 6. Divide the net increase in shares by the starting shares outstanding.
1.

Continued .
Earnings dilution :- Earnings dilution describes the reduction in amount earned per share in an investment due to an increase in the total number of shares. The calculation of earnings dilutions derives from this same process as control dilution. The net increase in shares (steps 1-5) is determined at the beginning of the reporting period, and added to the beginning number of shares outstanding. The Net Income for the period is divided by this increased number of shares. Notice that the conversion rates are determined by market values at the beginning, not the period end. The returns to be realized on the reinvestment of the proceeds are not part of this calculation
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Continued .
Value dilution :- Value dilution describes the reduction in the current price of a stock due to the increase in the number of shares. This generally occurs when shares are issued in exchange for the purchase of a business, and incremental income from the new business must be at least the Return on equity (ROE) of the old business. When the purchase price includes goodwill, this becomes a higher hurdle to clear. The theoretical diluted price, i.e. the price after an increase in the number of shares, can be calculated as : Theoretical Diluted Price = ((O x OP) +(N x IP)) / (O + N) where O = original number of shares , OP = Current share price,N = number of new shares to be issued , IP = issue price of new shares For example if there is a 3-for-10 issue, the current price is $0.50, the issue price $0.32, we have O = 10, OP = $0.50, N = 3, IP = $0.32 and TDP = ((10x0.50)+(3x0.32))/(10+3) = $0.4585
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