Page 24 - DCOM504_SECURITY_ANALYSIS_AND_PORTFOLIO_MANAGEMENT

Unit 1: Introduction to Capital Market

funds from domestic sources and larger requirement of finance, NRIs can be motivated to Notes
invest in Indian companies through the mechanism of this instrument.
4. The mobilisation of funds through this instrument would also help companies to reduce
their debt-equity ratio and thereby enhance their financial health and profitability. It will
give them more leverage.

5. Increased borrowing power may be granted to companies.
6. It will give a new financial tool to the managements who do not want to shed their control
or voting rights, as it enables the promoters to retain control over management while
expanding equity base.
7. Lower cost of capital for companies.

Disadvantages

1. Foreign institutional investors and overseas corporate bodies may not be much interested
in NVS because in case of liquidation, non-voting shareholders will not enjoy the same
rights as equity shareholders do.

2. NVS on one side provide attraction to the issues, but this is an expensive option. The
shares remain a permanent liability and may become voting shares by default. Investors
have no power to challenge management. They will face reduced earning per share;
further, there is no guarantee of dividend payment.
3. Investors may fall prey to the not so consistent profit-making companies and there may
not be an adequate exit route available to investors in case of poor performing companies.
4. The creation of new class of equity i.e. NVS will certainly have an adverse impact on the
earnings of the other members who own equity shares with voting right. Since, the non-
voting shareholders will be offered higher rate of return, to that extent the distributable
surplus available for the remaining shareholders will be reduced and thus it is not in the
interest of the other shareholders, particularly those belonging to non-management group.

5. Since the quantum to be distributed as dividend will be higher in the case of NVS, the
profits will also get reduced to that extent and correspondingly, transfer to reserves may
go down. It will lessen the possibilities of augmented reserves and consequently the
changes of issue of bonus shares may also get reduced.

Example: Wipro Ltd. has 1,00,000 equity shares outstanding and it plans to issue 20,000
new shares, then the number of rights needed to buy each new share is 5 (i.e., 1,00,000/20,000).
An investor who owns 4,000 shares (4 per cent) of the company's shares would have enough
rights to buy 800 (i.e. 4,000/5) of the new shares. Upon subscribing to the new issue, the investor
would own 4,800 shares, or 4% of the total 1,20,000 shares now outstanding. The investor's
proportionate ownership is maintained.
1.2.4 Bought Out Deal

Bought Out Deal (BOD) is a process of investment by a sponsor or a syndicate of investors/
sponsors directly in a company. Such direct investment is being made with an understanding
between the company and the sponsor to go for public offering in a mutually agreed time.
Bought out deal, as the very name suggests, is a type of wholesale of equities by a company.
A company allots shares in full or in lots to sponsors at a price negotiated between the company

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