Generally a corporation can raise its capital by following either debt financing or equity financing.
The topic “Raising Capital for Corporation” will discuss the influences of equity financing.
The Basic Procedure of Public Issue
1. Management gets the approval of the Board of Directors.
2. The firm prepares and files a registration statement with the SEC.
3. The SEC studies the registration statement during the waiting period.
4. The firm prepares and files an amended registration statement with the SEC.
5. If everything is copasetic with the SEC, a price is set and a full-fledged selling effort gets underway.
Reasons for Issuing Shares
- To Raise Capital
- To Keep Profits and earnings to the owners of the company
- To extend the market share
- To create the good will
- To avoid the borrowings
- To avoid the repayments
- To make familiar about the company and the products/services
- To get the tax benefits
What is right share?
Right Share is a security giving stockholders entitlement to purchase new shares issued by the corporation at a predetermined price (normally less than the current market price) in proportion to the number of shares already owned.
Rights are issued only for a short period of time, after which they expire
Advantages of Right Share
- More capital can be collected
- Low cost
- Controlling of the company is retained in the hands of the existing shareholders.
- The existing shareholders do not suffer on account of dilution in the value of their holdings if fresh shares are offered to them because value of the shares is likely to fail with fresh issue.
- The expenses to be incurred, if shares are offered to the general public, are avoided.
- Images of the company is bettered when rights issues are made from time to time and existing shareholders remain satisfied.
- There is more certainty of getting capital when fresh issue of shares is made to the existing shareholders instead of to the general public.
- Directors cannot misuse the opportunity of issuing new shares to their friends and relatives at lower prices and at the same time retaining more control in their hands when right shares are issued because in rights issue shares are offered proportionately to the existing shareholders according to their existing holdings.
Flotation Costs and Dilution
Flotation costs: The costs incurred by a publicly traded company when it issues new securities. Flotation costs are paid by the company that issues the new securities.
- underwriting fees
- legal fees and
- registration fees.
A subject that comes up quite a bit in discussions involving the selling of securities is dilution. Dilution refers to a loss in existing shareholders’ value. There are several kinds:
- Dilution of percentage ownership.
- Dilution of market value.
- Dilution of book value and earnings per share.
Contributor: Dr. Zulfiqar Hasan, (Ph.D. in Bank Conversion, AIS, IU), working as an Associate Professor (Finance), Department of Business Administration, Bangladesh Islami University, Dhaka. He has done his MBA from London School of Commerce (LSC), London, UK. He has also been the Program Coordinator, MBA program, Northern University Bangladesh (NUB), Dhaka and in the same capacity in Bangladesh Islami University, Dhaka.
He can be reached: facebook.com/zulfiqar.hasan.56