A debenture is a type of loan stock issued by a company where a company will indicate the amount borrowed and the amount of interest that will be paid on the debentures. There are different types of debentures
Secured Debentures
This is where the company which is issuing the debentures will provide assets as security. Secured debentures can be broadly derived in to two as
Floating Charge
This is where the company will keep all the assets as security when issuing the debentures
Fixed Charge
This is where a specific asset will be kept as security when issuing the debentures
Unsecured Debentures
This is where a company will issue debentures without providing assets as security. The investors will be taking a higher risk in buying unsecured debentures. Based on the method of paying interest, debentures can be divided into two
Floating Rate of Debentures
Floating rate debentures will be issued where the rate of interest to be paid will be linked to generally LIBOR (London Inter Bank Offered Rate) which is the rate of interest at which the commercial banks will borrow from one another
Fixed Rate of Debentures
If debentures are issued at fixed rate debentures, then the company will specified the rate of interest that will be paid at the time of issuing the debentures
Sunday, July 25, 2010
Alternative Investment Market (AIM)
This was started in 1995 to replace unlisted securities market. The AIM was introduced so that even the companies which do not meet the conditions laid down by the main market can have their shares traded in the AIM. The following conditions relate to the AIM.
• There are no eligibility criteria. (Past track records is not needed)
• Any type of security can be traded as long as there are no restrictions on the ability to transfer the ownership
• There are no stock exchange requirements for purchasing of shares by the general public or the number of shareholders.
• There are few obligations to issue shareholders circulars, therefore public announcements will be sufficient
• Every company which has its shares traded on the AIM must have a nominated adviser selected from the official list. This adviser will instruct the company on how it’s shares are to be traded in the AIM. In addition a stock broker should also be selected where this stock broker must be a member firm of the stock exchange
• Documents provided for admission to the AIM will be the responsibility of the directors. Therefore it will not be reviewed by the exchange
• The shares traded in the AIM will be treated as unquoted shares for tax purposes
• There are no eligibility criteria. (Past track records is not needed)
• Any type of security can be traded as long as there are no restrictions on the ability to transfer the ownership
• There are no stock exchange requirements for purchasing of shares by the general public or the number of shareholders.
• There are few obligations to issue shareholders circulars, therefore public announcements will be sufficient
• Every company which has its shares traded on the AIM must have a nominated adviser selected from the official list. This adviser will instruct the company on how it’s shares are to be traded in the AIM. In addition a stock broker should also be selected where this stock broker must be a member firm of the stock exchange
• Documents provided for admission to the AIM will be the responsibility of the directors. Therefore it will not be reviewed by the exchange
• The shares traded in the AIM will be treated as unquoted shares for tax purposes
London International Stock Exchange
London International Stock exchange is considered as one of the main stock exchanges in the world. The others being the Tokyo Stock Exchange and the New York Stock Exchange. If a company is to obtain a listing in the London International Stock Exchange which is called the main market the following conditions should be met.
• There should be at least three years past track records if a listing to be provided. This will ensure that start up companies (new companies) cannot have its shares traded in the main market.
• The shares offered to the general public should amount to at least 25% of the issued share capital
• There must be sufficient trading in the shares
• The market capitalization (value per share into number of shares in issue) should exceed £ 6 million
• There must be an agreement with a market makers (an organization which act as a stock broker but it can buy and sell shares under its own name) to market the shares
• The board of directors should pass a resolution indicating that they will abide by the rules and regulations of the stock exchange
• There should be at least three years past track records if a listing to be provided. This will ensure that start up companies (new companies) cannot have its shares traded in the main market.
• The shares offered to the general public should amount to at least 25% of the issued share capital
• There must be sufficient trading in the shares
• The market capitalization (value per share into number of shares in issue) should exceed £ 6 million
• There must be an agreement with a market makers (an organization which act as a stock broker but it can buy and sell shares under its own name) to market the shares
• The board of directors should pass a resolution indicating that they will abide by the rules and regulations of the stock exchange
Advantages of a Stock Exchange Listing
This is where the company will have it’s shares traded in the stock exchange which will provide the following benefits to the company
The company will have access to avoid a pool of financing because the company can issue new shares; have a rights issue, issue debentures and commercial payment to attract financing in to the company.
The company will have improved marketability for this shares
The company has the ability to transfer the capital to other users
Enhancement of the company’s image
Ability to grow by acquisition
The company will have access to avoid a pool of financing because the company can issue new shares; have a rights issue, issue debentures and commercial payment to attract financing in to the company.
The company will have improved marketability for this shares
The company has the ability to transfer the capital to other users
Enhancement of the company’s image
Ability to grow by acquisition
Methods of Issuing Shares
Offer For sale
This is where the company which is issuing the shares will offer the shares to an issuing house. Generally a merchant bank will cat as an issuing house. The shares bought over by the issuing house will be re issued to the general public. Under this method the company which is issuing the shares can make use of the financial strength and the image of the issuing house to make.
Prospectus Issue
This is where the company will directly issue the shares to the general public by preparing a document called a prospectus which will be used to invite general public to participate in the share issue. Therefore the prospectus will carry information about the company, its past, its present and the future expectations. This will be an expensive method of issuing shares. This is because the company which is issuing the shares should bear the cost of preparing the prospectus, advertise, the share issue, pay underwriting cost. If the share issue is to be underwritten and incur any legal fees necessary to make the share issue possible such as changing the articles and memorandum of association. In a prospectus issue the company can make use of an issuing house for the administration of the share issue.
Placing
This is where the company which is carrying out the share issue will select large institutional investors and offer the shares by conducting “road shows”. A road show is where the company will conduct a presentation to educate the selected investors about the share issue. This will be a low cost method of issuing the shares. Some of the institutional investors who will be interested in the share issue will include pension funds, unit trusts, venture capital organizations, building societies.
Offer for Sale by Tender
This is where the company which is issuing the shares will call upon the investors to bid the price at which they are willing to buy the shares. Therefore each individual investor will indicate the quantity of shares they expect to buy and price they are willing to pay. The company should decide upon a price at which all the shares can be issued and collect the highest possible revenue. This price will be called the strike price.
Stock Exchange Introduction
This is where a company which already has shares in issue, wants to obtain a listing (quotation) in a recognized stock exchange. In a stock exchange introduction the company will not issue new shares but will obtain a facility to have the existing shares traded in the stock exchange. This can be used by the existing shareholders as an ‘exit rate’ where the shareholders can convert their paper wealth (share certificate) in to cash.
This is where the company which is issuing the shares will offer the shares to an issuing house. Generally a merchant bank will cat as an issuing house. The shares bought over by the issuing house will be re issued to the general public. Under this method the company which is issuing the shares can make use of the financial strength and the image of the issuing house to make.
Prospectus Issue
This is where the company will directly issue the shares to the general public by preparing a document called a prospectus which will be used to invite general public to participate in the share issue. Therefore the prospectus will carry information about the company, its past, its present and the future expectations. This will be an expensive method of issuing shares. This is because the company which is issuing the shares should bear the cost of preparing the prospectus, advertise, the share issue, pay underwriting cost. If the share issue is to be underwritten and incur any legal fees necessary to make the share issue possible such as changing the articles and memorandum of association. In a prospectus issue the company can make use of an issuing house for the administration of the share issue.
Placing
This is where the company which is carrying out the share issue will select large institutional investors and offer the shares by conducting “road shows”. A road show is where the company will conduct a presentation to educate the selected investors about the share issue. This will be a low cost method of issuing the shares. Some of the institutional investors who will be interested in the share issue will include pension funds, unit trusts, venture capital organizations, building societies.
Offer for Sale by Tender
This is where the company which is issuing the shares will call upon the investors to bid the price at which they are willing to buy the shares. Therefore each individual investor will indicate the quantity of shares they expect to buy and price they are willing to pay. The company should decide upon a price at which all the shares can be issued and collect the highest possible revenue. This price will be called the strike price.
Stock Exchange Introduction
This is where a company which already has shares in issue, wants to obtain a listing (quotation) in a recognized stock exchange. In a stock exchange introduction the company will not issue new shares but will obtain a facility to have the existing shares traded in the stock exchange. This can be used by the existing shareholders as an ‘exit rate’ where the shareholders can convert their paper wealth (share certificate) in to cash.
Some Definitions
Nominal Value (Par Value / Face Value)
This is the value at which the shares will be recorded in the share capital account. The company will pay dividends based on the nominal value of the shares
Market Value
This is the value at which the shares will be treated in a recognize stock exchange
Bonus Issue (Free Issue / Scrip Issue / Capitalization Issue)
This is where the company will issue shares free of charge to existing shareholders based on their current shareholding. Companies will carry out a bonus issue when they have large amounts of undistributed profits or if the company does not want cash out flow by having a cash dividend payment instead of a cash dividend the company can carry out a bonus issue.
Rights Issue
This is where the company will issue shares to the existing shareholders for a fee. The rights issue will also be carried out based on the current shareholding. The rights received from the company will be negotiable instrument because the rights can be separated from the shares and traded. If the rights are to be converted in to shares then the specified amounts should be paid to the company.
Stock Split
This is where the company will cancel the existing shares and convert the shares in to shares with a lower nominal value. A stock split will be carried out if the company has identified that it’s shares are too expensive or the company wants to make the shares available at which time a stock split would be carried out.
Share Consolidation
This will be the opposite of stock split therefore in a share consolidation. The company will add up shares will a lower nominal value and issue shares with a higher nominal value.
This is the value at which the shares will be recorded in the share capital account. The company will pay dividends based on the nominal value of the shares
Market Value
This is the value at which the shares will be treated in a recognize stock exchange
Bonus Issue (Free Issue / Scrip Issue / Capitalization Issue)
This is where the company will issue shares free of charge to existing shareholders based on their current shareholding. Companies will carry out a bonus issue when they have large amounts of undistributed profits or if the company does not want cash out flow by having a cash dividend payment instead of a cash dividend the company can carry out a bonus issue.
Rights Issue
This is where the company will issue shares to the existing shareholders for a fee. The rights issue will also be carried out based on the current shareholding. The rights received from the company will be negotiable instrument because the rights can be separated from the shares and traded. If the rights are to be converted in to shares then the specified amounts should be paid to the company.
Stock Split
This is where the company will cancel the existing shares and convert the shares in to shares with a lower nominal value. A stock split will be carried out if the company has identified that it’s shares are too expensive or the company wants to make the shares available at which time a stock split would be carried out.
Share Consolidation
This will be the opposite of stock split therefore in a share consolidation. The company will add up shares will a lower nominal value and issue shares with a higher nominal value.
Disadvantages of Issuing Preference Shares
The company will have to pay dividend if the company has made a profit
If the shares were issued as redeemable preference shares then the share capital should be repaid after a specific time period at which time there will be cash out flow.
The preference shareholders should be paid a return more than other forms of debit capitals so that they are compensated for taking a higher risk
If the shares were issued as redeemable preference shares then the share capital should be repaid after a specific time period at which time there will be cash out flow.
The preference shareholders should be paid a return more than other forms of debit capitals so that they are compensated for taking a higher risk
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