Capital Raising is a practice through which the company raises additional funds required for its business. Among various capital raising techniques, the company may choose any specific method that best suits its business methodology and fundamentals.
If we think of a private company, the first capital raising idea that would have popped up in our minds would have been the Initial Public Offering (IPO). The IPO empowers the private entity to raise equity capital from investors in exchange for its shares listed on stock exchange, in case of Australia on the Australian Securities Exchange. But making a debut on stock exchange requires satisfaction of regulatory requirements and an attractive business model that can entice investors to put their money in the company.
Further, the capital raising program can be broadly divided into two segments that are Debt Capital and Equity Capital.
The debt capital includes borrowing from the third party that is secured at a pre-determined cost for a fixed time period. Its most common examples include Bank Loan, Issue of Bonds or other lines of credit. Under this method, there is one biggest drawback that is the payment of interest to lenders and so the company’s pocket may get burnt if the benefits derived from the loan amount is less than the interest they are paying to lenders.
Coming to the equity capital, it can be understood that the company raises additional capital by the sale of its shares. That means the investors acquire an interest in the company at a price and to the limit specified by the company.
With this method, the company gets rescue from payment of fixed cost like in the case of debt, however, the ownership get diluted. The cost of equity capital is the return on investment in the form of dividend and a healthy valuation of the stock. It is essential for the company to maintain a strong track record of return on investment or exhibit the massive growth from funds re-investment over distribution decision.
Some of the common methods of Equity Capital Raising are Private Placement, Share Purchase Plan, Entitlement offer to the institution as well as retail investors.
Talking more precisely about entitlement offer, it can be said that entitlement offer refers to the realm of equity raising under which the company issues new shares of its stock at a specified price and under a set timeframe. In other words, it provides the existing shareholders with the opportunity to purchase a security or other assets at a set price, usually lower than the market price.
Unlike the rights offer, the existing shareholders are prohibited to transfer the entitlement offer to anyone else. Moreover, it may include institutional as well as retail component offered to institutional investors and retail investors, respectively, sometimes at different price and length. The company issuing the offer may have to match the new shares issued under the offer with the type of the shares that are already held by the existing shareholders.
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