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PRIVATE PLACEMENT 1.1 Concept and background of private placement:
According According to the Dictionary of Banking and Finance, 'Private placement is the ac
placing a new issue of shares with a group of selected financial institutio
Bloomberg defines a private placement as ‘the transferring of securities to a s
group of investors. The sale of a bond or other security directly to a lim
number of investors… an institutional investor likes an insurance compan antithesis of public offering’.
Private placement is the method of fund raising from the capital market, when pu
issue is not feasible option. It can be made both by companies that have already g
public in the past (listed companies) and by those that have not (unlisted companies
In the Indian capital market, private placements do not require issue of a prospe and regulatory clearances for the issue of securities. However, if such securities
subsequently proposed to be listed in a stock exchange (NSE or BSE), they would n
to be compliant with the Listing regulations of the respective stock exchange. Master your semester with Scribd Read Free Foron 30this Days Sign up to vote title & The New York Times Useful Not useful Though the intention behind a private placement is fund raising, sometimes they Special offer for students: Only $4.99/month.
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also made not with a. fund raising raising intentio intention n but to accommo accommodate date certain certain stra
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1.2. Types of private placement:
Private placement
B.
Private Placements Made
with a Fund Raising Objective
A.
Private Issues Made wit
Strategic Objective
Early Stage Venture Capital
Promoters and Promoter Group
Later Stage Private Equity
Employees
Other Institutional Investors
Non-institutional investors
Introduction of Strategic Investor International Capital Markets You're Reading a Preview
and
S
Management
Bonus Issues
Unlock full access with a free trial.
With Free Trial 1.3. Assessment of PrivateDownload Placement:
From an issuer's perspective, private placement provides faster access to funds, Master your semester with Scribd Read Foron 30this Days Sign to vote title market uncertainties and a more cost effective way ofupFree raising funds as compare & The New York Times Useful Not useful public offers. The effectiveness of private placement would however, depend on Special offer for students: Only $4.99/month.
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maturity of this market in respective countries. Floatation costs would also depend
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with institutional investors. Therefore, it can be stated that private placement of deb as efficient as a public issue of similar instruments from an issuer's perspective.
From an investor's perspective, private placement provides lesser transparency an
therefore suitable more for informed institutional and HNI investors than retail invest A balancing factor though is the opportunity for investors to interact with the
company's management on a one-to-one basis and assess investment prospects in
proposal. If private placed securities are also listed on the stock exchange, they wo combine the advantages of publicly offered securities as well by providing liquidity price validation on a continuous basis to investors.
1.4. Market Segments for Privately Placed Debt:
You're Reading Preview Private placement ofa debt securities Unlock full access with a free trial.
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PSU bonds
Bonds from banks and institutions
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Corporate deb securities
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Special offer for students: Only $4.99/month. A) The PSU bond market consists of debt securities issued by public
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The essential difference between PSU bonds and other corporate debt is
constitution of the PSUs. In many of them, the government being the m
shareholder provides credit enhancements including a financial guarantee. example, the bond issue made by Krishna Bhagya Jala Nigam Ltd
guaranteed by the State Government of Karnataka. This kind of a structure only helps the PSU to raise funds but raise them at competitive rates as well. B)
The institutional bond segment consists of all India and state level fina
institutions and commercial banks that raise funds through issue of SLR
non-SLR bonds. SLR bonds are called so since they fulfill the requirement the statutory liquidity ratio.
SLR bonds constitute an inter-bank offering whereby the bonds issued b
financial institution or a bank are subscribed to by other banks. Finan
institutions do not subscribe to Reading SLR bonds since they do not have to main You're a Preview any statutory liquidity ratio. The non-SLR bonds are issued to other inves Unlock full access with a free trial.
mainly to augment the fund base of the financial institutions and banks. T Withfrom Freedeposits. Trial serve as an alternative to Download raising funds
C) The corporate debt securities market consists of private sector compa Master your semester with Scribd Read Free Foron 30this Days Sign up to vote title that issue privately placed debentures to financial institutions, banks and o & The New York Times Useful Not useful investors to raise funds through the debt route as a substitute for long-t Special offer for students: Only $4.99/month.
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borrowings through term loans. These debentures offer better advantage
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1.5. Market Segments for Privately Placed Equity:
Private placement of equity
Venture capital
Institutional private equity
Placement to others QIBs and non institutional investors
The main investors in the private market are qualified institutional buyers such
banks, insurance companies, mutual funds, registered venture capital funds, fore
institutional investors and others. Unregistered foreign private equity investors also f
a significant part of the investing community in privately placed equity. In the priva You're Reading a Preview placed debt market, the dominant investors are mutual funds, banks and insura Unlock fullinstitutional access with a freeinvestors, trial. companies. To lesser extent foreign HUFs, private trus
comprise the bottom layer of the investment community. Download With Free Trial
Master your semester with Scribd A) VENTURE CAPITAL: & The New York Times Special offer for students: Only $4.99/month. and Concept
introduction:
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capital, or shareholdings, for the formation and setting up of small scale enterprise the early stages of their life cycle.”
Bloomberg defines it as 'An investment in a start-up business that is perceived to h excellent growth prospects but does not have access to capital markets. Ty financing sought by early-stage companies seeking to grow rapidly'. Some famous companies of today such as Netscape Communications, Apple Com
Cisco Systems, Compaq (since merged with HP), Network General, Yahoo, e-Bay
were all start-up companies financed through venture capital. The Indian example successful venture backed companies include Biocon, i-Flex Solutions,S Geometric Software, Mastek Global etc.
Venture financing involves significant risk-taking on the part of the venture capita
since young businesses are subject to high rates of mortality and the venture inve could stand to lose the investment made in the company. You're Reading a Preview The venture capital recognizes different stages of financing, namely: Unlock full access with a free trial.
1. Early stage financing - This is the first stage financing when the firm is undertak Download With Free Trial production and need additional funds for selling its products. It involves seed/ in
finance for supporting a concept or idea of an entrepreneur. The capital is provi for product development, R&D and initial marketing. Master your semester with Scribd Read Free Foron 30this Days Sign up to vote title 2. Expansion financing - This is the second stage financing for working capital & The New York Times Useful Not useful Cancel anytime.
expansion of a business. It involves development financing so as to facilitate Special offer for students: Only $4.99/month. public issue.
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Venture capital is not meant for any type of start up business. A venture capital bac
business requires certain characteristics in the business model and financing struc of the company. Some of the usual features are furnished in below: Structure of a venture capital backed start up business
Business structure: 1.
Generally associated with a technology venture or a knowledge intensiv innovation driven business model.
2. Venture to be backed by technology that has been created or is to be created 3. Requires product development / technology and / or market validation.
4.Product has to be successful at lab scale / prototype level (beta version) before i commercially launched.
You're Reading a Preview 5. Test marketing or phased marketing is required since concept sellin Unlock full access with a free trial.
involved. Download With Free Trial 6. Cash flow model requires to be established.
7. Business to be ramped up in phase.
Master your semester with Scribd Read Free Foron 30this Days Sign up to vote title 8.Business are taken in phases. Investmentmonitoring by useful the VC is more & The New York risks Times Useful Not Cancel anytime.
Special offer for students: Only $4.99/month. mentoring, with the VC appointing its nominees on the board of the company
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2.Financial risk is taken in phases. The highest risk reward relationship is at the se
stage and the risks and rewards go down progressively as the business gets d risked in each subsequent round of financing.
3.Promoters may or may not have sufficient financial resources. Their technology
valued and allowed to be capitalized as stock. Alternatively, investors are prepa
to pay a high premium on their stock. Promoters’ equity is more in intellectual cap and stock options than in hard cash.
4.More suitable for financing through equity since the business model may not be a
to support debt financing. Some part of the financing could be a convertible or a s loan to prevent excessive dilution of promoters’ equity.
5.Tangible asset creation would be less there is a high component of intellect
property valuation. VCs are open to financing soft costs in the business plan t
does not result in creating tangible assets. In other words they are not secur You're Reading a Preview oriented in the financing structuring. No collateral security needs to be created Unlock full access with a free trial.
VC financing unlike in bank borrowing. Download With Free Trial 6.Involves significant amount of cash burn in terms of product developmen
validation expenditure and seed marketing expenses. No restriction is placed
allocation of funds forwith working capital. Master your semester Scribd Read Free Foron 30this Days Sign up to vote title & The New York Times Useful Not useful 7.The business model should have the potential for very high returns to invest Special offer for students: Only $4.99/month.
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since the risk level is also very high. The risks are clearly understood through a d
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A concept that significantly improves existing processes or applications and there find a vast replacement market.
A business or idea that has potential for spin off businesses or revenue stream significant possibilities for future scale up.
A start-up business that has the potential to become an attractive proposition strategic acquisition in future by a market leader.
A firm that has the caliber to become an industry leader in due course with the r inputs.
A business that is in a cutting edge technology that could become an indu benchmark.
A company that has sufficient technology and management bandwidth to reach sustain the leadership position that it promises to attain. You're Reading a Preview
A business or technology thatUnlock has full a first advantage which can be harnes accessmover with a free trial. adequately before competition catches up. Download With Free Trial
A business that has significant entry barriers for the competition either in techno or in business variables that can largely be sustained.
Master your semester with Scribd Read Free Foron 30this Days Sign up to vote title eno A firm that has an unfair advantage to begin with which could remain long & The New York Times Useful Not useful beforeOnly it is$4.99/month. diluted by competition or regulation. Special offer for students:
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Regulatory framework of Venture Capital in India:
Venture Capital in India governs by the SEBI Act, 1992 and SEBI (Venture Cap
Fund) Regulations, 1996. According to which, any company or trust proposing to c
on activity of a Venture Capital Fund shall get a grant of certificate from SEBI. Howe
registration of Foreign Venture Capital Investors (FVCI) is not obligatory under the F regulations. Venture Capital funds and Foreign Venture Capital Investors are
covered by Securities Contract (Regulation) Act, 1956, SEBI (Substantial Acquisitio Shares & Takeover) Regulations, 1997, SEBI (Disclosure of Investor Prote Guidelines, 2000.
Guidelines for the Venture Capital Funds:
You're Reading a Preview For the Venture Capital Funds, it is required that Memorandum of Association or T Unlock full access with a free trial.
Deed must have main objective to carry on action of Venture Capital Fund includ prohibition by Memorandum ofDownload Association Article With&Free Trial of Association for maki invitation to the public to subscribe to its securities.
Further,semester it is required that Director or Principal Officer or Employee or Trustee is Master your with Scribd Read Free Foron 30this Days Sign up to vote title caught up in any litigation connected with the securities market and has not atany & The New York Times Useful Not useful Cancel anytime.
convicted of any offence involving moral turpitude or any economic offence. A Special offer forbeen students: Only $4.99/month.
in case of, body corporate, it must have been set up under Central or State legislat
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start of functions by the VCF. Disclosure of investment strategy to SEBI registration, no investment in associated companies and duration of the life cycle
fund is compulsorily being done. It shall not invest more than twenty five percent of
funds in one Venture Capital Undertaking. Also, minimum 66.67% of the invest
funds shall be utilized in unlisted equity shares or equity linked instruments of Ven Capital
Undertaking.
It is also mandatory that not more than 33.33% of the investible funds may be inves by way of following as stated below:
1.Subscription
to
IPO
of
a
Venture
Capital
Undertaking
(
2. Debt or debt instrument of a VCU in which VCF has already made an investmen way
of
3. Preferential allotment of equity shares of a listed company subject to lock in perio You're Reading a Preview
one
Unlock full access with a free 4. The equity shares or equity linked instruments oftrial. a monetarily weak company
sick
industrial
company whose shares are Download With Free Trial 5. SPV (special purpose vehicles) which are created by VCF for the purpose of ma possible
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Criteria:
inves Read Free Foron 30this Days Sign up to vote title
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cycle to SEBI, and it must achieve the investment conditions by the end of its life cy
b) At least 66.67 per cent of the investible funds must be invested in unlisted eq shares
or
equity
linked
instru
c) Not more than 33.33 per cent of the investible funds may be invested by way of: Subscription
to initial public offer of a venture capital undertaking, whose shares
proposed to be listed. Debt
or debt instrument of a venture capital undertaking in which the foreign ven
capital investor has already made an investment, by way of equity. Preferential
allotment of equity shares of a listed company, subject to a lock-in pe
of one year. The
equity shares or equity linked instruments of a financially weak or a sick indus
You'reFVCI Reading a Preview whose shares are listed. company (as explained in the SEBI Regulations) Unlock full access with a free trial.
A foreign venture capital investor may invest its total corpus into one venture fund.
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Tax Matters related to Venture Capital Funds:
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forego the tax exemptions available under Section 10(23F) of the Income Tax Ac would be within its rights to invest in any sector
B) INSTITUTIONAL PRIVATE EQUITY
The private placement market for equity is quite large and consists of several type
institutional and non-institutional investors. The term 'private equity' is comm
associated with the institutional investors that cater to the requirement of equity cap by companies otherwise than through public offers. You're Reading Venture capital is all about identifying earlya Preview stage investment opportunities,
private equity is large and as companies grow and they require more of eq Unlock full access with a freemature, trial.
capital through private sources. Thus, private equity is associated with those compa Download With Free Trial that have crossed the venture stage in their life cycle.
Thus, Private equity can be termed as 'later stage financing' as compared to ven
Master your semester with Scribd a dist capital, which is all about early stage financing. Private financing is thus Read Free For 30this Days Signequity up to vote on title & The New Times Useful Not useful modelYork of making direct equity investments whereininvestors identify good investm Special offer for students: Only $4.99/month.
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opportunities in well performing companies, some of them even listed, either
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said that private equity market is all about investors who invest later, invest more, pre reasonable stakes and moderate risk entailed returns.
Private equity investors showed interest even in project financing, an area domina
by large banks and specialized financial institutions. Private equity investments ext
over later stage unlisted companies and many a time, in listed companies as we phenomenon known as PIPE in the US markets.
•
Private investment in Public Equity (PIPE):
According to Bloomberg, 'Private Investment in Public Equity (PIPE) occurs
private investors take a sizable investment in publicly traded corporations. This usu
occurs when equity valuations have fallen and the company is looking for new sou
of capital'. From the above definition, it is clear that when private equity is infused in You're Reading a Preview listed company it would be classified as a PIPE investment. Unlock full access with a free trial.
Character of PIPE:
Download With Free Trial A) Private- A PIPE is a private placement transaction between a limited grou
investors and a listed company. The private placement of securities is made poss
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Special offer for students: Only $4.99/month. B) Investment - A PIPE is a direct investment in a company. Unlike securities
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interpreted, make PIPEs a discrete financing alternative, distinct from other form private and public investments. D)
Equity- A PIPE is an equity or equity-linked investment, i.e. securities
involve an equity component, and securities that are convertible or exchangea into equity.
C)
PRIVATE PLACEMENTS WITH OTHER DOMESTIC INVESTORS
Apart from institutional equity in the nature of venture capital or private equity
raised from dedicated equity funds, there are other sources to raise equity in the priv
placement route. The QIB sources for private placements are mutual funds, fore You're Reading a Preview institutional investors, insurance and pension funds, banks and financial institutions. Unlock full access with a free trial.
The non-institutional sources for private placements include family sourc Download With Free Trial associates of promoters, private high net worth investors (called HNIs), early st investors (also called ‘angel' investors), financial and investment companies,
corporate investors, stock broking companies, portfolio funds and non-residents. Master your semester with Scribd Read Free Foron 30this Days Sign up to vote title If equity is raised from any of the above sourceswithout offer, it is sim & The New York Times Useful apublic Not useful Cancel anytime.
Special offer forreferred students: Only $4.99/month. to as a private placement as distinguished from venture capital or priv
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Regulatory aspect of private placement:
Point Special Resolution
2003 Rules 2011 Rules The issue of shares can be only The Additional You're Reading a Preview made, if includes:
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Minimum
60
d
between two issues.
Any financial instrume is
convertible
in
shares at a later
resulting into a cu amount of Rs. 5 more will require approval
of
the
government.
After the issue, the
has to file a return of a Dematerialization of No such requirement
with the ROC within 30 All securities issue
Securities
preferential allotment
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placement has to be
demate form. A Similar audit With certificate was The compliance certificat Download Free Trial
Compliance
only required to be placed before be filed with the ROC.
Certificate
the shareholders. applicable. in the Not
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1.7. Guidelines of the private placement:
1. All placements of securities must be done through an independent placement ag (a merchant bank or a stock broking company), except where,
The securities are to be issued to the directors or substantial shareholders of issuing company;
2. Time Frame for Placements
Securities must be placed out to places within a period of 5 market days from the pr fixing date of the placement.
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