Interpreting Corporate Events of Raising Capital – Background Summary

The way Indian economy has bounced back from 2008 downturn, it has continuously fueled the sense of optimism. In the eyes of developed countries in west, India may be corruption ridden, India may not replicate China’s infrastructure, India may have slow decision making, India is in politically sensitive region, and many more negative connotations. China had been benchmark for western world. But bottom line is, the bounce back from 2008 has proved to the debt ridden western world, structurally, India has sound economic and governance system. The democracy makes it slow, but it provides freedom and openness.  It may not be the best as per the western standards, but it is free and open society (ignoring occasional nuisances from regional groups). What does this have to do with individual investing?


This optimism fuels growth of economy, growth of businesses, and capital investments. Folks who are optimistic, and believe there is ROI for their capital, they are willing to invest money in businesses. And where there is investment, there will be investors like you and me.

Now, there are multiple ways to put capital into businesses. Myriad different ways of raising capital are:

  • Equities, IPOs,
  • ADRs / GDRs
  • Corporate bonds
  • Rights issues
  • Non-convertible debentures (NCDs)
  • Warrants
  • Preferential issues
  • Qualified institutional placements (QIPs), and
  • Others


So next time when you hear about all these different means of raising funds, remember, it means business are trying to collect more capital for their businesses. That’s the fundamental objective in each of these methods.


Simply put, when environment is optimistic, it is relatively easy to raise large capital. You would pay more for the same item during optimism (than in pessimistic environment).


Each of these methods of raising capital is legally allowed. However, which method to use, when to use, how much to raise, is very subjective. It depends upon company and its investment banker. Every method has its pros and cons.


I do not intend to cover these topics in generic form. Meaning, you will find tons of resources on internet that cover definition, pros and cons, mechanism, etc, etc. What I will try to discuss is as an individual investor…

  • Should this bother you?
  • Should this affect your thoughts about a company?
  • What to expect if you are an existing shareholder?
  • Should this affect the price you pay to buy its shares?
  • Does it even matter what you think? Ans: No, it doesn’t matter what you think. You are small fish in a large pond.


One of my blog readers, Raja, has cited four specific cases from recent corporate announcements. As a start point, in next few posts, I will take those as starting point and discuss them in the context of individual investors. As a principle, there is nothing wrong for businesses to raise capital from financial markets. But what is important is to understand why the capital is being raised, how does management plan to use it, how it will affect profits, etc. So stay tuned!










Facebook User Comments:


9 Responses to “Interpreting Corporate Events of Raising Capital – Background Summary”

  1. Raja says:

    Wow!! that’s really quick. Eagerly looking forward to the posts 🙂

    Regards
    Raja

  2. Chirag Ali says:

    Dear Tip Guy

    You have choosen good topic to discuss. Awaiting Posts

  3. Sachin8778 says:

    Hey TIP Guy, interesting topic.. looking forward to these posts.

    Sachin

  4. saky1472 says:

    Hii TIP Guy…nice post eagerly want to know about these things..waiting for your next post..
    With regards
    Saket

  5. Chandru says:

    mmm, a good topic which we always wanted to learn. Awaiting your insights.

  6. Raja says:

    Hi TIP Guy,

    If I may take the liberty to add yet another controversial and confusing topic to the list of topics already mentioned. It’s about the non-compete fee being paid only to promoter in case of buy outs. There is lot of news/controversy regarding the exclusive payment of non-compete fee of Rs. 50/- per share being paid to promoters in case of Cairn India.

    But a similar fee was also paid in case of Piramal, but since there was no buyback/de-listing following that, there was hardly any controversy on that. How do you distinguish these 2 cases from an investors point of view ?

    Regards
    Raja

    • TIP Guy says:

      Hello Raja,

      To an extent, such news/controversies are sometimes on purpose to get attention of opposing parties or sometimes media driven which have no basis. Are you asking in the context of retail investors (a) wanting to make new investing in such companies?; or (b) existing investors wanting to decide what to do? or (c) wanting to know what this event or situation means?

      Let me know.

  7. Arun says:

    Hi TIPGuy,

    Like other readers here, I too am keen to read your posts on these interesting topics and get to know the impact on retail investors like me.

    As an aside, have you been tracking the Coal India IPO – have you done your analysis on this. There is a lot of hype about it, based on my quick analysis on the numbers, the company seems to be very strong in fundamentals (consisent ROC and Zero Debt). However, the price range fixed by Gov seems to (225-245) be above my fair price estimate which is around 150 +/- 20.

    Please me know your views, if you have done any analysis.

    Thanks
    Arun.

    • TIP Guy says:

      Hello Arun,

      No, I haven’t done much reading about Coal India, only cursory look based on news bits. I would agree with you that buying at 150 gives lots of room. From the govt’s point of view, I think they priced it very attractively. It is fairly priced to attract investors in current feel good environment. It is not high (like Reliance Power) and not low (like SJVN).

      Best Wishes,

Leave a Reply




~