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)
- Preferential issues
- Qualified institutional placements (QIPs), and
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!
bonds, IPO, NCD, preferred shares, rights issues, warrants