Modules for Investors
IPOs, Bankruptcy, Mergers and Splits
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Glossary (Key terms and their definitions)
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20 key terms and their definitions
1. Angel investors
Angel investors are individuals with a high net worth or annual income looking for startups and new and exciting investment opportunities to invest in. In exchange for their investment, they receive a portion of the company’s equity shares.
2. Venture capitalists
Venture capitalists are firms and corporations that pool money from various partners and invest the same in companies. They are capable of investing huge sums of money in businesses and easily outrank angel investors.
3. Private equity firms
Similar to venture capitalists, private equity firms pool the funds from multiple investors and create a private equity fund. This is usually much larger than a typical venture capitalist. These private equity firms then invest these funds in businesses, in exchange for a stake in the equity.
4. Initial Public Offering (IPO)
An Initial Public Offering is a process by which a privately held company offers its shares out to the public for the first time. The public are invited to apply for and subscribe to the shares of the company.
5. Lead managers
Lead managers are financial institutions who help a company with the entire IPO process. They are responsible for charting the IPO process framework, assessing the company’s fund requirements, suggesting the quantum of issue, drafting the regulatory paperwork, getting them approved from SEBI and stock exchanges, and coordinating the various other parties.
6. Red herring prospectus
The red herring prospectus is an informational booklet that is circulated to the public. It contains all the details of the proposed IPO and the issuing company.
7. Book building process
After fixing the price band in the IPO process, the company opens up a particular window of time to allow the public to apply for its shares. When applying for the shares of the company, the applicants are allowed to select any price within the specified price band, according to their choice. This method of price discovery is known as the book building process.
8. Equity shares with differential voting rights (DVR)
These are quite similar to ordinary equity shares but with lowered voting rights. For instance, normal equity shares have a 1:1 voting ratio. But equity shares with differential voting rights possess a lowered voting ratio, like 10:1.
9. Preference shares
Preference shares are shares that hold a higher preference with respect to the dividend payouts and residual claim when compared with ordinary equity. However, unlike equity shares, holders of preference shares are not entitled to any voting rights.
10. Application Supported by Blocked Amount (ASBA)
The Application Supported by Blocked Amount is a process developed by SEBI to enable regular investors to purchase shares via an IPO using a bank’s internet banking facility. Unlike applying through a trading account, in the ASBA process, the total amount of shares that you’re applying for doesn’t get debited from your account till the bank receives confirmation of share allotment.
11. Follow-on public offer (FPO)
Any further issues of shares to the public after the IPO are all termed as follow-on public offers. An FPO is effectively a fresh issue of shares by a company that’s already listed on the stock exchanges. It is done to acquire fresh additional capital.
12. Offer for sale (OFS)
An offer for sale (OFS) is a method by which the promoters of the company can sell their shares to the public. Here, the promoters or initial investors of the company are the ones selling their shares and not the company itself. Therefore, the proceeds from the sale of such shares do not go to the company, but rather to the entities putting them up for sale.
13. Rights issue
A rights issue is another way in which a company can raise funds. Here, the company approaches its existing shareholders instead of the public to raise capital. A rights issue gives the existing shareholders the right to purchase additional shares of the company at a discounted price that’s lower than the current market price.
14. Going concern
The going concern theory is an accounting principle that assumes that the entity will continue to be in business for the foreseeable future. The theory also assumes that the company’s business is stable and generates enough revenue to meet its debt and other financial obligations.
Insolvency is the term that’s used to refer to a situation where an entity is unable to satisfactorily meet its financial obligations when they are due.
Bankruptcy is a legal process that cements an entity’s insolvency and is aimed at helping the insolvent entity pay off its debts, thereby giving its creditors some much-needed relief. While insolvency is more of a temporary phase that entities go through, bankruptcy is permanent. There are two primary forms of bankruptcy - reorganisation bankruptcy and liquidation bankruptcy.
Delisting is a process wherein the shares of a listed company are removed (delisted) from the stock exchanges. A company can either be voluntarily delisted or compulsorily delisted from the exchanges.
Relisting is the process through which a delisted company again lists its shares on the stock exchange for trading.
Also known as a demerger, the process or the event through which a single company splits into two or more independent companies is commonly known as a company split.
A merger is a process through which two or more independent and separate entities are united (merged) into one single entity. A merger can happen in one of two ways:
- Where two or more companies come together to form a new entity and the older entities cease to exist after the merger.
- Or, where one company merges with the others by absorbing them.
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