MSG Team's other articles

12369 Artificial Intelligence and Machine Learning in the Retail Sector

Artificial intelligence (AI) and machine learning (ML) are disrupting the entire business landscape across the globe. The retail industry is no exception. Leading retailers from across the world have started experimenting with Artificial intelligence (AI) and machine learning (ML). There has been an influx of various technologies into the sector in order to shape the […]

12851 Compounding Intervals and Interest Rate

Theoretically there are two types of interest rates, simple and compounding. However, in finance the word interest usually refers to compound interest. Simple interest almost never factors in financial calculations. In all calculations related to present values and future values, compound interest is used. However, as a student of corporate finance, it is essential to […]

10647 The Pitfalls of Quarterly Capitalism

Creating the maximum possible shareholder value had always been the cornerstone of capitalism. All economic theories had always been aimed at maximizing long term shareholder value. However, in the late 90’s and early 2000’s, this situation changed rapidly. Instead of reporting annually, companies had to report their profits or losses on a quarterly basis. It […]

8766 The Importance of Personal Finance

There is no shortage of education in the field of finance. There are various academicians who work tirelessly in the field of finance. Many theories have been developed, and many conjectures have been disproved. Every year thousands of people graduate with finance as their major. However, most of these people are trained in the field […]

11310 Smart Contracts in Cryptocurrency

Smart contracts is another term that is commonly used within the cryptocurrency community. For the layman, this term can be intimidating if they do not know the meaning of the term. However, once the meaning is explained, the term and its implications become quite easy to understand. Also, the various applications of the smart contract […]

Search with tags

  • No tags available.

Companies want to go public because it helps them raise cash, which can be used for further expansion. However, the promoters of these companies often do not want to go public since this would mean that their stakes would be diluted and that they would lose control over the company. A low promoter’s stake in a company is often considered to be a sign of weakness. This is one of the parameters which the opposition evaluates when they want to make a hostile takeover bid. This is the reason that promoters have often asked investment bankers to devise ways using which they can actually raise capital without actually diluting their stake in the company. Some of these ways have been listed in the article below.

  1. Market Purchases: The most obvious way for any promoter to raise their stakes in their own company is to buy their own shares from the market. However, there are two problems with this. Firstly, it assumes that promoters have the money which is required to make this purchase, which may not be true in several cases. Also secondly, in many markets all over the world, there is a limit to the number of shares that a promoter can buy in their own company in a given year. Hence, using this method, promoters cannot increase their stake drastically overnight. If the promoters have the required time and can wait for a few years before their stake is increased, this may be the preferred route.

  2. Rights Issue: Investment bankers have often used rights issues to help promoters increase their holdings in the company. Under normal circumstances, the rights issue provides an equal opportunity for all shareholders to subscribe to the issue.

    Anyone who is already a shareholder can be allowed to buy shares in the same proportion. However, here investment bankers use timing to their advantage. They deliberately schedule the issue at the worst possible time. This is because they want the market conditions to be bad.

    During a recession or a slowdown, most investors would not want to invest more in the company. Hence, a lot of the shares being issued will be left unsubscribed. This is where the promoters can come into action. They can buy leftover shares at a reasonable price. Hence, during this issue, they end up buying more shares than the other shareholders. Therefore, the proportion of their holding in the company changes during the course of the issue.

  3. Buy Backs: Investment bankers also suggest the promoters indulge in buybacks from the open market. This is because, during a buyback, the company purchases shares from the open market and extinguishes them. This means that the number of shares available to the general public is reduced. Now, it must be understood that the shares being extinguished come out of the public quota, whereas the promoters’ shares stay untouched. Hence, in the overall situation, the percentage of promoter shares increases.

    Let’s understand this with the help of an example. For instance, the company has a total of 100 shares, out of which 20 are owned by the promoters and the rest by the public. This means that promoters have 20% shares of the company. Now, if the company buys and extinguished 20 shares, the total shares outstanding will be 80. Out of 80, the promoters will still have 20 shares. Hence the shareholding of the promoter will increase to 25% (20 out of 80 shares).

    This mechanism is preferred by a lot of promoters since it allows them to use the company’s funds to increase their own shareholding in the company.

  4. Allotment to Promoters: In some cases, the investment bankers might try to simply get more shares allotted to the promoters. This allotment depends upon the law prevailing in the country.

    In some countries, companies are allowed to issue additional shares to promoters as long as they pay the price, which is higher than the prevailing market price.

    In some other countries, the concept of sweat equity also exists. This means that the company can allot more shares to promoters in lieu of their salary or any other intellectual asset that they may provide.

  5. Private Placement: Investment bankers also help promoters use private placements in order to increase their shareholding in a company. In many countries of the world, direct placement to promoters may not be allowed. This is where investment bankers come in. They use complex financial structures to allow promoters or their allies to get control of the company by getting more shares issued.

  6. Tiered Shares: Last but not least, investment bankers can use tiered shares as a workaround. In this arrangement, the shares issued get dividends like normal shares. However, they may not have equal voting rights. In some cases, the shares issued may not have any voting rights at all. This arrangement helps achieve both purposes. On the one hand, promoters are able to raise the cash that they require, whereas, on the other hand, there is no dilution of stake!

It is common for investment bankers to prepare a detailed strategy for the promoters. This means that only one technique is not used. Instead, a combination of several means is used, and that too is staggered over a larger period of time.

Article Written by

MSG Team

An insightful writer passionate about sharing expertise, trends, and tips, dedicated to inspiring and informing readers through engaging and thoughtful content.

Leave a reply

Your email address will not be published. Required fields are marked *

Related Articles

Conflict of Interest in Investment Banking

MSG Team

The Components of an Investment Bank

MSG Team

Chinese Walls in Investment Banking

MSG Team