UNIT 2

 1Q)ACQUISITION OF BUSINESS

2Q) UNDERWRITING OF SHARES

3Q) UNDERWRITING OF DEBENTURES 

4Q) STATE THE MAXIMUM UNDERWRITING COMMISSION THAT CAN BE PAID IN RESPECT OF UNDERWRITING OF SHARES AND DEBENTURES

1Q)ACQUISITION OF BUSINESS

Acquisition of a business refers to the process by which one company purchases another company, either in full or in part, to gain control or ownership. This can happen in various forms, such as buying the majority or all of the company's shares or assets. 

Key aspects of a business acquisition include:

1. Strategic Reasons: Companies often acquire other businesses to expand into new markets, gain competitive advantages, acquire new technologies or intellectual property, diversify their product offerings, or increase market share.

2. Due Diligence: Before acquiring a company, the buyer conducts extensive research to assess the financial health, legal standing, assets, liabilities, customer base, and any potential risks of the target company.

3. Valuation: Determining the value of the target company is a critical step. Valuation methods can include looking at the company’s earnings, assets, market position, and potential for growth.

4. Types of Acquisition:

   - Asset Purchase: The acquiring company buys specific assets of the target company.

   - Stock Purchase: The buyer purchases the shares of the target company to gain control.

   - Merger: A form of acquisition where two companies combine to form a new entity.

5. Negotiation and Agreement: Once due diligence is complete, the two parties negotiate terms, including price, payment method (cash, stock, or a combination), and the structure of the deal.

6. Integration: After the acquisition, integrating the operations, cultures, and systems of both companies is often a complex process. Effective integration is key to realizing the full value of the acquisition.

Acquisitions can be friendly (mutually agreed upon) or hostile (when the target company resists the acquisition). The overall goal of most acquisitions is to strengthen the acquiring company’s position in the market.

2Q) UNDERWRITING OF SHARES

Underwriting of shares refers to the process where an underwriter, typically a financial institution, investment bank, or a group of underwriters, agrees to buy and distribute shares being issued by a company. The underwriter guarantees that the company will raise a certain amount of capital, even if the public does not fully subscribe to the shares offered.

 Key Concepts in Share Underwriting:

1. Underwriter's Role:

   - The underwriter assesses the company’s value and helps determine the offer price of the shares.

   - They commit to purchasing unsold shares, ensuring the issuer receives the intended capital.

   - Underwriters also advise on the structure, timing, and marketing of the share issuance.

2. Types of Share Underwriting:

   - Firm Commitment: The underwriter buys all the shares being issued by the company, assuming the risk of reselling them to the public. The company is guaranteed to raise the full capital.

   - Best Efforts: The underwriter commits to selling as many shares as possible but does not guarantee the sale of the entire issue. Unsold shares remain with the company.

   - Standby Underwriting: Used primarily in rights issues, the underwriter agrees to purchase any shares that are not bought by existing shareholders. This acts as a safety net for the company.

   - Bought Deal: The underwriter buys the entire issue from the company upfront and then resells it to the public, taking on full market risk.

3. Pricing:

   - Underwriters help set the offer price for shares based on market conditions and the company's financials. This price is critical for balancing investor demand and ensuring that the company raises adequate funds.

4. Risk:

   - The underwriter assumes the risk of selling the shares in the market. In case the shares are not fully sold to investors, especially in a firm commitment, the underwriter holds those shares.

5. Importance:

   - Capital Guarantee: Underwriting ensures that a company can raise the capital it needs, even if market demand for its shares is low.

   - Market Confidence: The presence of an underwriter provides reassurance to potential investors about the value and potential of the company’s shares.

 Process of Underwriting:

1. Agreement: The company and underwriter agree on terms, including fees, share price, and the underwriting commitment type.

2. Due Diligence: The underwriter conducts a detailed assessment of the company, including financial performance, market conditions, and business prospects.

3. Marketing: The underwriter markets the share issue to potential investors through roadshows, advertisements, and meetings.

4. Distribution: Shares are offered to the public, with the underwriter purchasing any unsold shares if needed.

Role in IPOs:

In an Initial Public Offering (IPO), underwriters are essential for raising capital. They help determine the IPO price, manage the risks involved, and ensure the successful sale of shares to the public.

3Q) UNDERWRITING OF DEBENTURES

The underwriting of debentures refers to the process where an underwriter (usually an investment bank, financial institution, or a group of such entities) agrees to purchase the debentures issued by a company if they are not fully subscribed by the public. This guarantees that the issuing company will raise the desired funds, even if the market demand for the debentures falls short.

 What are Debentures?

Debentures are long-term debt instruments used by companies to borrow money. They are typically unsecured, meaning they are not backed by physical assets but rather by the general creditworthiness of the company. Investors who purchase debentures receive a fixed interest rate (coupon) for a specified period, and the principal is repaid at maturity.

Key Features of Debenture Underwriting:

1. Guarantee of Funds:

   - The underwriter guarantees the sale of the debentures, ensuring that the issuing company will receive the funds it seeks, even if not all debentures are sold to the public.

   - In case of under-subscription, the underwriter purchases the remaining unsold debentures.

2. Underwriter's Role:

   - The underwriter assesses the company's financial stability and creditworthiness to help determine the terms of the debenture (such as the interest rate, maturity period, etc.).

   - They assist in marketing the debentures to potential investors.

   - In case of under-subscription, they step in and buy the remaining unsold portion.

3. Types of Debenture Underwriting:

   - Firm Commitment: The underwriter commits to purchasing the entire issue of debentures, bearing the risk of resale to the public. The issuer is assured of receiving the full amount of capital.

   - Best Efforts: The underwriter agrees to sell as many debentures as possible but does not guarantee the sale of the entire issue. The risk of unsold debentures remains with the company.

   - Standby Underwriting: The underwriter acts as a standby purchaser, agreeing to buy any debentures that are not subscribed by the public after the issue has been offered.

4. Underwriting Commission:

   - The underwriter charges a commission or fee for their services, typically calculated as a percentage of the total debenture issue. This fee compensates the underwriter for taking on the risk of unsold debentures.

5. Risk Management:

   - The underwriter bears the risk of not being able to sell the debentures if market demand is low. However, they are compensated for this risk through underwriting fees.

   - This arrangement transfers much of the risk from the issuing company to the underwriter.

6. Due Diligence:

   - Underwriters perform due diligence to assess the issuing company's financial health, creditworthiness, and ability to repay the debt. This helps in pricing the debentures properly and setting the terms, such as the interest rate, repayment schedule, and other conditions.

 Importance of Debenture Underwriting:

- Guaranteed Capital: The issuer is assured of raising the desired funds, even if investor demand is low.

- Enhanced Credibility: The presence of a reputable underwriter can boost investor confidence in the debenture issue, as it signals that the company has passed the underwriter's due diligence checks.

- Market Expertise: Underwriters provide valuable advice on pricing, timing, and marketing the debentures to ensure the issuance is successful.

Steps in Debenture Underwriting:

1. Underwriting Agreement: The issuing company and the underwriter enter into an agreement outlining the terms of underwriting, including the type of underwriting, the commission payable, and the conditions under which the underwriter will step in to purchase unsold debentures.

   

2. Pricing and Structuring: The underwriter helps determine the coupon rate (interest rate), maturity date, and other terms based on the company's creditworthiness and market conditions.

3. Marketing and Distribution: The underwriter markets the debenture issue to potential investors, which could include institutional investors, mutual funds, and retail investors.

4. Subscription Process: The debentures are offered to the public. If the debentures are not fully subscribed, the underwriter purchases the remaining portion, as per the agreement.

 Advantages to the Issuer:

- Capital Assurance: The issuer is guaranteed to raise the necessary capital, reducing the risk of an unsuccessful issue.

- Risk Reduction: The underwriter assumes the risk of unsold debentures, protecting the company from market volatility.

- Market Expertise: Underwriters bring their expertise in pricing, structuring, and selling debentures, ensuring a smoother issuance process.

In conclusion, underwriting of debentures is a crucial mechanism for companies to raise debt capital. It provides security to the issuing company by ensuring that the required funds will be raised, even if there is a lack of public demand for the debentures. It also provides investors with confidence in the offering, as the underwriter has performed due diligence on the company’s financials and prospects.

4Q)STATE THE MAXIMUM UNDERWRITING COMMISSION THAT CAN BE PAID IN RESPECT OF UNDERWRITING OF SHARES AND DEBENTURES

The maximum underwriting commission that can be paid in respect of the underwriting of shares and debentures is governed by company law in most countries. In India, for example, the provisions regarding underwriting commissions are outlined in Section 40 of the Companies Act, 2013, and the rules are as follows:

1. For Shares:

   - The maximum underwriting commission for equity shares is 5% of the issue price of the shares.

2. For Debentures:

   - The maximum underwriting commission for debentures is 2.5% of the issue price of the debentures.

Conditions for Payment of Underwriting Commission:

- The payment of an underwriting commission must be disclosed in the company’s prospectus or offer document.

- The underwriting commission cannot exceed the rate prescribed by law or the rates authorized by the company’s articles of association.

- The commission can only be paid if the company has issued and sold the shares or debentures to the public.

These percentages may vary depending on the country’s specific company laws and regulations, but the above figures represent the limits under Indian law, which are often similar to those in many other jurisdictions.