Friday, January 15, 2021

SERVICES: Debenture Issue

Swadesh Investment Management Limited

Debenture Issue

If a company doesn’t want to issue the share, it can issue the Debenture instead. Debenture is different to equities because rather than investors having to rely on the company’s returns to make money, the company pays a fixed sum back to investors every year. It also promises to repay the full amount it borrowed after a set number of years.

That’s way the raising money is called issuing debt as the company is effectively borrowing money from you.


Right Offer

Companies decide to raise more money for a variety of reasons but usually it is for fund expansion, perhaps to take over a rival or to diversify into a new business area. Rights issues are almost always offered to existing investors and amount they are offered depends on how many shares they already own. They could, for example decide to issue two new shares for every one held.

Shares offered under a rights issue are usually offered at a discount, of the current share price. Existing shareholders receive a Provisional Allotment Letter which tells them how many shares they are entitled to be and how much it would be.

If you receive this letter you can either take up the offer or decide to sell the letter into another person who can subscribe for the shares instead. This is known as ‘rights nil paid’. Another option is to do nothing. If you do this the company will sell the shares in the market, retain the subscription price and remit any excess proceeds from the sale to you.

You should remember that once a company has issued extra shares, you own a smaller proportion of it and so your shares should be worth a little less. How much less will depend on how much other investors are prepared to pay for them.

Companies can also issue the new shares through a placing. This is when new shares are created and sold through the company’s financial adviser, usually at a price just below the price of the existing shares. SIML provide all the formalities.

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