Indian Financial System - Credit Analysis and Research Limited (CARE) - Notes - Finance, Study notes of Business Administration

Download Indian Financial System - Credit Analysis and Research Limited (CARE) - Notes - Finance and more Study notes Business Administration in PDF only on Docsity! Credit Analysis and Research Limited (CARE) Credit Analysis and Research Limited is the third rating agency promoted by IDBI jointly with investment institution, banks and finance companies in 1993. They include Canara Bank, Unit Trust of India, Credit Capital Venture Fund (India) Limited, (since taken over by Infrastructure Leasing and Financial Services Ltd.). Sundaram Finance Limited, The Federal Bank Limited the Vysya Bank Limited, First Leasing Company of India Limited, ITC Classic Finace, Kolak Mahindra Finance among others. CARE commenced its rating operations in October, 1993. Credit rating by CARE covers all types of debt instruments such as debentures, fixed deposits, commercial paper and structured obligations. It also undertakes credit analysis of companies for the use of bankers, other lenders and business enterprises. CARE’s Rating Symbols For long-term and medium-term instruments. CARE AAA Best quality investments. CARE AAA Debt service payments protected by stable of (FD)/(CD)/(SO) Cash flows with good margin CARE AA High quality but rated lower because CARE AA Somewhat lower margin of protection (FD)/(CD)/(SO) CARE A Upper medium gr ade. Safety adequate CARE AA (FD)/(CD)/(SO) CARE BBB Sufficient safety. But adverse changes in CARE BBB assumptions likely to weaken the debt (FD)/(CD)/(SO) Servicing capabilities CARE BB Speculative instruments. Inadequate CARE BB protection for interest and principal FD)/(CD)/(SO) payments. CARE C Highest investment risk. CARE C FD)/(CD)/(SO) CARE D Lowest category. Likely to be in default soon. CARE D FD)/(CD)/(SO) In order of increasing risk, the ratings for short-term instruments are PR-1,PR-2, PR-3 and PR-5 and CARE -1, CARE -2, CARE -3, CARE – 4, and CARE – 5 for credit analysis of companies. Duff and Phelps Credit Rating Agency of India Ltd., (DCR) DCR (India) set up in 1996 is one of the credit rating agencies for rating the non-banking financial companies (for fixed deposits). The minimum investment grade credit rating to be assigned by this company which will be acceptable to the RBI has been fixed at Ind- BBB. Subscribed Capital: Issued capital is the nominal value of shares offered for public subscription. In case all shares offered for public subscription are not taken up, the portion subscribed, is subscribed capital which is less than issued capital. Par value is the face value of share. It does not tell anything about the value of shares. Conversion of Shares into stock Stock is the aggregate of fully paid shares, legally consolidated. Portions of stock may be transferred or split up into fractions of any amount without regard to the original nominal amount of the shares. It cannot be issued directly but comes into being only after the shares are issue and paid up in full. Denomination A public limited company is free to make right or public issue of equity shares in any denomination determined by it. It has however to comply with SEBI regulations that F 0 B 7 Shares should not be of decimal of rupee, F 0 B 7 at any point of time there shall be only one denomination, F 0 B 7 Memorandum and Articles of Association should be conformed F 0 B 7 Comply with disclosure and accounting norms specified by SEBI Cash Dividends A stable cash dividend payment was believed to be the basis for the increase in company‟s share prices. Growth oriented firm retains as much capital as possible for internal financing. Capital appreciation rather than dividends is what an investor has to look for in their case. Old established firms tend to pay out large proportion of their earnings as dividend. Bonus Shares (or stock dividends) : Bonus shares are dividends paid in shares instead of cash. Bonus shares are issued by capitalizing reserves. While net worth remains the same in the balance sheet it s distribution between shares and surplus is altered. The New York shares. No such carry forward provision exists for non-cumulative preference shares. Participating If the articles association provide that a preference share holder will also have the right to participate in surplus profits or surplus assets on the liquidation of a company or in both, such preference share holders would be called participating preference shareholders. Redeemable Preference Shares Redeemable preference shares are paid back to the shareholder out of the profits or out of the proceeds of new issue of shares. The maximum period of a redemption is 20 years with effect from 1.3.1997 under the Companies Amendment Act, 1996. The shares have to state clearly that they are redeemable. It should be noted that redeemable preference shares are not shares in the strict sense of the term. Since they are repayable, they are similar to debentures. Only fully paid shares are redeemed. Where redemption is made out of profits, a Capital Redemption Reserve Account is opened to which a sum equal to the nominal amount of the shares redeemed is transferred. It is treated as paid-up share capital of the company. Two innovative types of preference shares were introduced into the market in 1992-93. There are fully convertible cumulative preference shares (Equipref) and preference shares with warrants attached. Fully Convertible Cumulative Preference Share (Equipref) Equipref has two parts: A and B, is convertible into equity shares automatically and compulsorily on the date of allotment without any further act or application by the allottee and part B will be redeemed at par \ converted into equity shares after a lock in period at the option of the investors. Conversion into equity shares after the lock in period will take place at a price which would be 30 percent lower than the average market price. The average market price shall be the average of the monthly high and low price of the shares in a stock exchange for a period of six months to the date of conversion including the month in which the conversion would take place. The dividend on fully convertible cumulative preference shares shall be fixed and shall be given only for the portion that represents part B shares. Upon conversion of each part of the equipref shares, the face value of it will stand reduced proportionately and the equipref shares shall be deemed to have been redeemed to extent of each part on their respective dates of conversion. Preference Shares with Warrants Attached Under this instrument, each preference share would carry certain number of warrants entitling the holder to apply for equity shares for cash at „premium‟ at any time in one or more stages between the third and fifth year from the date of allotment. If the warrant holder fails to exercise his option, the unsubscribed portion will lapse. The holders of warrants would be entitled to all rights of bonus shares that may be issued by the company. From the date of allotment, the preference shares with warrants attached would not be sold for a period of three years. 5.8 Public Issues of Securities Objective and Scope of SEBI Guidelines The capital issues (Control) Act, 1947 which controlled the issue of capital was repealed on May 29, 1992. As a consequence, the issue of capital and pricing of issues by companies has become free of prior approval. However, with a view to ensure proper disclosure and investor protection, the Securities and Exchange Board of India (SEBI) has issued certain guidelines for the observance by the companies making issue of capital. The guidelines broadly cover the requirements as to first issue by new companies and existing private/closely held companies and also further issues of capital by other companies by way of shares, debentures and bonds. The guidelines will apply to all issues of capital. GENERAL Period of Subscription Public Issues (a) Subscription list for public issues shall be kept open for at least 3 working days and not more than 10 working days. (b) The public issue made by an infrastructure company, satisfying the requirements in Clause 2.4.1 (iii) of Chapter II may be kept open for a maximum period of 21working days. (c) The period of operation of sub subscription list of public issue shall be disclosed in the prospectus. Rights Issues Right Issues shall be kept open for at lease 30 days and not more 60 days. Terms of the issue Minimum number of share applications and applications money public issue: (i) In case of public issue at par, the minimum number of shares for which an application is to be made, shall be fixed at 200 shares of face value of Rs. 10/- each (ii) Where the public issue is at a premium or comprises security, whether convertible or non-convertible, or the public issue is of more than one security, the minimum applications moneys payable in respect of each security by each applicant, shall not be less than Rs.2000/- irrespective of the size of premium subject to applications being for a multiple of trade able lots; (iii) the successful applicants shall be issued by the issuer company share certificates\ instruments for eligible number of shares in trade able lost. Provided that the maximum trade able lot in any case shall not exceed 100 shares. Offer price per share Minimum Trade able lot Upto Rs. 100 100 Shares filing of offer with regional stock exchange. Listing Application for listing is obligatory before making public issue. Dematerialization Before public or rights issue or an offer of sale of securities, the company should arrange for dematerialization of securities already issued or proposed to be issued. Investors should be given the option to receive the share certificates or hold them in dematerialized form. Public Issue of Securities by Unlisted Company 1. It has to have a pre issue work net worth of Rs. 1 crore in three out of preceding five years, with a minimum net worth to be met in preceding two years ; and 2. it has a track record of distributable profits for the least three out of immediately preceding five years. Issue size should not exceed 5 times, its pre issue net worth and 60 % of issue is allotted to qualified institutional buyers (QIBs). An unlisted company which does not meet minimum net wroth and track record should use book building method for public issue of securities. Offer for Sale Public Issue by Listed Companies Issue size should not exceed 5 times its pre issue net worth. Book building process has to be adopted if issue size exceed 5 times its net worth. In the book building process 60 % of issue should be allotted to QIBs. The provision does not apply to banks, infrastructure companies and rights issue by listed companies. Credit Rating for Debt Instrument 1. Public issue to debt instruments irrespective of maturity period cannot be made unless credit rating is obtained and stated in offer document. 2. Where credit rating is obtained from more than one agency all the credit ratings, including unaccepted ones have to be disclosed. 3. For public and rights issues of debt instruments of more than Rs.100 crores two ratings from two agencies have to be obtained. 4. Earlier ratings obtained in preceding 3 years for any listed security shall be disclosed in the offer document. Outstanding Warrants In the case of an unlisted company, if there are outstanding warrants or financial instruments it cannot make a public issue of equity shares or convertible debt. Partly Paid-up Shares Partly paid up shares should be fully paid before public or rights issues. II. Pricing by Companies Issuing Securities Companies eligible to make public issue can freely price their equity shares or security convertible at a later date into an equity share. Listed Companies A listed company can freely price its equity shares and convertible debenture offered through public issue. Unlisted Companies An unlisted company desirous of listing may freely price its equity shares and convertible debentures. Infrastructure Company Eligible infrastructure company can freely price its equity shares subject to compliance with disclosure norms. IPO by Bank Banks may freely price their equity shares and convertible debentures subject to approval by RBI. Differential Pricing An unlisted company or listed company may issue securities at a higher price in the firm allotment category. Price Band certificate from Chartered Accountant that the promoters contribution has been brought in has to be filed with SEBI. Exemption from Requirement of Promoter’s Contribution (i) In case of a listed company (3 years) with a track record of dividend payment in 3 immediate preceding years. (ii) in case of companies where no identifiable promoter or promoter group exits ; and (iii) in case of rights issue. Lock-in Requirements Minimum in Public Issues The minimum promoter‟s contribution is locked in for 3 years. Lock-in of Excess In case of public issue by unlisted company as well as listed company, the excess would be locked in for one year. Pre issues share capital of an unlisted company shall be locked in for a year. This does not apply to pre issue share capital held by venture capital funds and foreign capital investors registered with SEBI and held for a period of at least one year at the time of filing offer document with SEBI and being offered to public for sale. Firm Allotment Basis Securities issued on firm allotment basis are locked in for one year form the date of commencement of commercial production or date of allotment. Locked in securities should carry an inscription that they are nontransferable along with duration. IV. Pre- issue Obligations Obligations of Lead Merchant Banker (i) Due diligence The lead merchant banker should satisfy himself about all the aspects of offering, veracity, adequacy of disclosure in the offer documents. His liability would continue even after the issue process. Along with the draft offer document he should pay the requisite fee to SEBI. List of Promoter Group The issue has to submit to SEBI the list of promoter group and their holdings. Appointment of Merchant Bankers A merchant banker who is associated with issuer company as promoter or director should not lead manage the issue, except in the case of securities of the issuer company are proposes to be listed on OTCEI and market makers are to be appointed. Co-managers The number of co-managers to an issue should not exceed the lead managers to the issue and there is only one advisor to the issue. Bankers to Issue Lead manager has to ensure that Banker to issue are appointed of all mandatory collection centers. Registrars to Issue They should be registered with SEBI. The lead merchant banker should not act as Registrar to an issue in which he is also handling post issue responsibilities. Registrars to issue should be appointed in all public issues and rights issue. If the issuer company is registered Registrar to an issue, the issuer should appoint an independent Registrar to process the issue. Underwriting Lead merchant banker should satisfy himself about the ability of the underwriters to discharge their underwriting obligations. Lead merchant banker should state in the offer document that the underwriters assets are adequate to meet under writing obligation; and obtain under writers written consent. Lead merchant banker has to undertake a minimum under writing obligation of 5 % of total under writing commitment or Rs. 25 lacks whichever is less. The outstanding under writers commitments of a merchant banker at any time shall not exceed 20 times its net worth. The offer document of an under written issue should contain relevant details of underwriters. Offer Document to be Made Public Offer documents should be made public within 21 days from date of filing it with SEBI. Lead merchant banker has to ensure that offer documents are filed with stock. Exchange where the securities are proposed to be listed. The offer document has also to be filed with SEBI. Co-lead manager has to obtain and furnish to SEBI and in principled approval of stock exchange for listing the securities within 15 days. Despatch of Issue Material The lead merchant banker has to ensure for public issues offer documents and other issue materials are dispatched to various stock exchange, brokers, underwriters, bankers to the issue, investors associating in advance as agreed upon. In case of rights issues, the lead merchant banker has to ensure that the letters of offer are dispatched one week before opening of the issue. No-Complaints Certificate After 21 days from the date of draft document was made public the lead merchant banker has to file with SEBI a list of complaints received by it, amend the draft offer document and highlight those amendments. Mandatory Collection Centers The minimum number of collection centers for issue of capital are the four metropolitan centers at Mumbai, Delhi, Calcutta and Chennai and all such centres where the stock exchange are located. Authorized Collection Agents Issuer company can appoint collection agents in consultation with lead merchant bankers whose names and addresses should be disclosed in offer document. Lead merchant banker has to ensure that collection agents are properly equipped for the purpose in terms of infrastructure and money order. They collect applications accompanied by payment by cheque, draft and stock invoice collection against which will be forwarded to Registrars to the Issue. Advertisement for Rights Post Issue The lead merchant banker shall ensure that in the case of a rights issue an advertisement giving the date of completion of dispatch of letters of offer is published at least 7 days before the date of opening of the issue. Appointment of a Compliance Officer The issuer company should appoint a Compliance Officer who directly liaises with SEBI with regard to compliance with various laws, rules, regulations and other directives issued by SEBI. SEBI should be informed of the name of the compliance Officer.