SEMESTER: VIII & IX CORPORATE FINANCE

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1 SEMESTER: VIII & IX CORPORATE FINANCE INTRODUCTION TO THE COURSE: Corporate Finance is concerned with the financing and investment decisions made by the management of companies in pursuit of corporate goals. This subject is concerned to the study of how the companies actually make financing and investment decisions, and it s is often the case that theory and practice disagree. In Corporate Finance, the fundamental goal is usually taken to be to increase the wealth of shareholders. Corporate finance gives an understanding of the reasons why shareholder wealth maximization is the primary financial objective of a company, rather than other objectives a company may consider. The object of the Corporate Finance is the acquisition and allocation of corporate funds or resources with the maximizing shareholders wealth. In the financial management of a corporation funds are generated from various sources and allocated or invested for desired assets. The primary function of corporate finance is resource acquisition, refers to the generation of funds from both internal and external sources at the lowest possible cost to the corporation. There are two main categories of resources are equity (shares) and liability (borrowings). The equities are proceeds from the sale of stock, returns from investments and retained earnings. Liabilities include bank loans or other debts, accounts payable, product warranties and other types of commitments from which an entity derives value. The second function of corporate finance is resources allocation and investment of funds with the intent of increasing share holders wealth over a period of time. There are two basic categories investments are current assets and fixed assets. Current assets include cash, inventory and accounts receivable. The fixed assets are buildings, real estate and machinery. In addition, the resource allocation function is concerned with intangible assets such as goodwill, patents and brand names. It is the duty of financial manager of a corporation to conduct the above functions in a manner that maximizes shareholders wealth or stock price and he must balance the interests of owners or shareholders and creditors including banks and bondholders and other parties, such as employees, suppliers and customers. For example a corporation may choose to invest its resources in risky ventures in an effort to offer its share holders the potential for large profit. However, risky investments may reduce the perceived security of the companies bond, thus decreasing their value in the firm must pay to borrow money in the future. Conversely, if the corporation invests too conservatively, it could fail to maximize the value of its equity. If the firm performs better than other companies its stock price will rise, in theory, enabling it to raise additional funds at a labour cost, among other benefits. Practical

2 issues and factors influenced by corporate finance include employee s salaries, marketing strategies customer credit and the purchase of new equipment. The Financial decision affects both the profitability and risk of a firm s operation. An increase in cash holdings, for instance risk, but, because of cash is not an earning asset, converting other types of assets to cash reduces the other firm s profitability. Similarly, the issue of additional debt can raise the profitability of a firm, but more debt means more risk. Striking a balance between risk and profitability that will maintain the long term value of a firm s securities in the large of finance. This course is divided into Eight modules. The First unit briefly tries to recapitulate the basics of Corporate Law and also sets the stage for introducing the meaning, nature and scope of Corporate Finance. The Second module discusses thoroughly through the concepts, objectives of Corporate Finance like risk and return, time value of money, profit and wealth maximization, agency problem etc. The Third module explores the area of capital budgeting, the meaning, importance, principles involved in it, the process and the steps involved etc. It also talks through the role and function of a financial manager. The Fourth module discusses the concepts like Issue management, Price Fixing, Book Building and allotment and post allotment formalities. The Fifth module exclusively deals with equity finance, IPOs, FPOs common conditions and eligibility requirements along with the detail discussion with regards to the ICDR Module Six covers debt finance in detail. Unit 7, one of the important unit covers the area of intermediaries, their roles, responsibilities and their contribution in the entire issues management (pre issue and post issue). It tries to exclusively talk through the role, functions, and powers of the different intermediaries with the help of different regulations issued by SEBI. The last unit is the Eighth unit deals with corporate fund raising. It talks through the Depositaries, its working machinery, IDRs, its issuing process, the recent developments along with other sources like ADRs, dematerialization of securities etc. MODULE 1. INTRODUCTION 1. Financial System Overview 2. Overview of Indian Capital Market 3. Corporate Finance and Financial Management a) Scope, Relevance, Function. b) Investment, Financing and Dividend Decision: Interrelationship and Factors affecting 4. Objectives of Corporate Finance a) Profit Maximisation b) Wealth Maximisation MODULE 2. CORPORATE FINANCE AN INSIGHT

3 5. Concept of Corporate Finance: a) Capital Investment: Needs and Factors effecting Capital Investment b) Risk and Return- Correlation, Kinds & different approaches c) Time Value of Money d) Agency problem - Features and solution MODULE 3. CAPITAL BUDGETING 1. Principles of Capital Budgeting 2. Capital Budgeting : Meaning, Importance and Types 3. Capital Budgeting Process / Steps involved 4. Role of a Financial Manager MODULE 4. ISSUE AND PRICE FIXING 1. Credit Rating and IPO grading concept, purpose and procedure 2. Public Issue a) Common Conditions and eligibility requirements Initial Public Offer (IPO) Further Public Offer (FPO) 3. Provisions as to Public Issue a) Eligibility requirements b) Pricing in Public Issue 4. Rights Issue 5. Bonus Issue 6. Book Building Concept and Meaning 7. Bidding Procedure 8. Allotment and Post Allotment Formalities MODULE 5. EQUITY FINANCE 9. Share Capital 10. Prospectus a) Meaning, importance and kinds b) Information and disclosure requirements Regulations to be referred: a. SEBI (Issue of Capital and Disclosure Requirements) Regulations, MODULE 6. DEBT FINANCE 1. Debentures - Nature, Issue and Class 2. Deposit and acceptance 3. Creation of charge, fixed and floating charges MODULE 7. INTERMEDIARIES

4 1. Intermediaries Meaning and Importance 2. Types of Intermediaries and their role in Capital Market a) Merchant Bankers b) Registrars and Share Transfer Agents c) Underwriters d) Debenture Trustees e) Bankers to an Issue f) Credit Rating Agencies g) Stock Brokers, Sub-brokers h) Portfolio Managers Guidelines for Primary Issue ICDR 2009 Regulations to be referred: 1. SEBI (Merchant Bankers) Regulations, SEBI (Credit Rating Agencies) Regulations, SEBI (Portfolio Managers) Regulations, SEBI (Stock Brokers and Sub-brokers) Regulations SEBI (Underwriters) Regulations SEBI (Bankers to an Issue) Regulations, SEBI (Registrars to an Issue and Share Transfer Agents) Regulations, SEBI (Intermediaries) Regulations, SEBI (Debenture Trustees) Regulations, SEBI (Issue and Listing of Debt Securities) Regulations, SEBI (Issue of Capital and Disclosure Requirements) Regulations, MODULE 8. CORPORATE FUND RAISING 1. Dematerialisation of Securities Concept, benefits and working machinery of a Depositary 2. Various instruments of raising finance a. Indian Depository receipts (IDR) b. American Depository Receipts (ADR) c. Global Depository receipts (GDR) BIBLIOGRAPHY 1) Eil s Feran, Company Law and Corporate finance, (1999) Oxford. 2) Frank.B. Cross & Robert A. Prentice- Law and Corporate Finance, Edward Elgar Publishing Limited-U.K (2007). 3) Altman and Subramanian, Recent Advances in Corporate Finance (1985) LBC. 4) Denzil Watson and Andhonyhead, Corporate Finance Principles and Practice, P.S. Arson Education Ltd.(2007).

5 5) Ross P. Buckley, International Financial System: Policy and Regulation, Wolters Kluwer Law and Business 6) Diana R. Harrington-Corporate Financial Analysis 7) Financial Treasury and Forex Management, Institute of Company Secretaries of India 8) Donald H. Chew, Studies in International Corporate Financial System, Oxford (1997). 9) Francis Snyder, Regional and global regulations Trade, Oxford (2002). 10) Gilbert Harold, Corporation Finance (1956) 11) H.L.J. Ford and A.P.Austen, Fords Principles of Corporations Law, (1999) Butterworths 12) Henry E. Hoagland, Corporate Finance (1947). 13) Jonathan Charkham, Fair Share: The Future of Shareholders Power and Responsibility, Oxford. 14) J.H. Farrar and B.M. Hanniyan, Farrar s company Law, (1998) LBC, Maryin M.Kristein, Corporate finance (1975). 15) Philip R. Wood, Law and Practice of International Finance-Regulation of International Finance, Sweet-Maxwell (2007). 16) Ramaiya, A Guide to The Companies Act, (1998) Vol.I.II.III. 17) R. C. Osborn, Corporation Finance, (1959). 18) S. C. Kuchhal, Corporation Finance; Principles and Problems, (6 th ed.1966). 19) T.R. Venkatesh-New Financial Markets the regulators fame work, ICFAI (2005). 20) Babby Dutta, Indian Financial Markets the regulations framework, ICFAI ) Board of Editors, Financial Strategy Conceptual Issue, ICFAI, ) Vasantdsai: Fundamentals of Indian Financial Systems, Himalaya Publishing house (2007). 23) V.Subbu Lakshmi, Corporate Finance Research Insights, the ICFAI University press. (2004). 24) Y.D.Kulshreshta, Government Regulation of Financial Management of Private Corporate Sector in India, (1986)

CLS-CORPORATE FINANCE BA.LL.B. (HON S.)

INTRODUCTION TO THE COURSE: CLS-CORPORATE FINANCE BA.LL.B. (HON S.) Corporate Finance is concerned with the financing and investment decisions made by the management of companies in pursuit of corporate