1.0 INTRODUCTION
In this note, we are
going to discuss various forms of shares as a form of long-term finance and as
a means of raising new capital. These forms of financing take a long period
before maturity from the
beginning of a business. They could have maturity
period of over 10 years, though some have a period of less than 10 years but
above five years. We shall discuss how companies raise funds through equity,
preference and debenture shares.
2.0 OBJECTIVES
By the end of this
lecture, you should be able to:
·
explain the various types of finance
·
distinguished between equity and preference shares capital
·
identify debenture stock and its features
·
identify the activities of regulatory bodies.
3.0 MAIN CONTENT
3.1 Equity/Ordinary Shares
Ordinary shares are issued to the owners of a company. They have a
nominal or ‘face’ value, typically N1 or 50k. Ordinary capital is the foundation
of any company’s financial structure. It is the traditional form of capital.
The holders of this type of shares are the owners of the business. The market
value of a quoted company’s share bears no relationship to their nominal value,
except that when ordinary shares are offered for cash, the issue price must be
equal to or be more than the nominal value of the shares.
Shareholders of equity/ordinary shares bear a huge portion of the
entire risks associated with the company; hence, they expect a higher rate of return
than most other providers of funds do.
The ordinary share could be divided into the following:
i. Preferred Ordinary Share: This is a type of share which its holders
have a prior right to a fixed non-cumulative dividend.
ii. Deferred Ordinary Shares: This is one in which the holders share
in the profit only after preferred shareholders have been settled. Generally,
the features or ordinary capital include: a. They must have nominal value. b.
Share may be offered at a price equal to their nominal value or at a price
exceeding their nominal value. c. Its income is the residual of the profit of
the company.
3.2 Preference Share A preference share is one, which confers preferential rights on
holder over other holders, such that its holders have a fixed percentage dividend
before any dividend is paid to the ordinary shareholders. The holders are also
considered first in the case of liquidation of the Organization.
The preference share could
be:
a. Cumulative
b. Participating
c. Redeemable
Cumulative Preference Share: The holders of this share are entitled
to a fixed rate of dividend; such dividend is payable out of future profits in the
event that the current year profit is insufficient. They could also have their
dividend income accumulated and paid at future dates if the organization has
liquidity problems. All arrears of dividend of these shares must be paid before
other shareholders can partake in the profit when the Organization’s profit is
sufficient.
Participating Preference
Share: Its holders are entitle to a fixed dividend income per year, plus a
further share in any other profits. In some cases, this further share of profit
could be after the ordinary shareholders might have taken their own.
Redeemable Preference Share: This is share issued on the authority of
the company’s article. It may be cumulative, non-cumulative or participating.
However, such shares are subjected to certain conditions; the shares are to be
redeemed only out of profits available for dividend or out of proceeds of a
fresh issue of shares made for redemption purpose. Because of their prior claim
on assets and income, preference shareholders are not given a ‘voice’ in the
management of the company.
3.3 Debenture Loan These are loans of a long-term nature. They are a form of loan
legally defined as the written acknowledgement of a debt incurred by a company.
Every registered company is usually presumed to have the power to borrow money
or take a loan to finance its operations. Debentures are documents issued by a
company, usually under its seal, as evidence of a loan and of any charge securing
it. It bears a fixed rate of interest, which must be paid before any dividends
are distributed.
Debentures may take the
form of fixed charge and floating charge.
Fixed charge: Security on fixed charge would be related to a specific asset or a
group of assets, typically land and building. The company will be unable to
dispose of the asset without providing a substantive asset as security, or
without the lender’s consent. When the company attempts to dispose of a asset
charged, then a receiver may be appointed to take possession of the asset and
sell it for the benefits of the debenture holder.
Floating charge: This covers all the assets of the company, as they exist from time
to time excluding assets subjected to fixed charge. A floating charge does not
prevent the company from buying and selling assets in the normal course of its
business until a default took place. In the event of default, the lender would
probably appoint a receiver to run the company rather than lay claim to a
particular asset. Debenture could
also be redeemable or irredeemable. A redeemable debenture is one, which the
loan is repayable at a fixed rate. The date for redemption is usually written
in form of a range (for instance, 2005 – 2015). The date will be agreed upon at
the time of negotiating the loan. An irredeemable debenture is one, which is
repayable only in a contingency situation, such as when the organization is
winding-up or going bankrupt. We should note that the debenture might be issued
as debenture stock, in which case the loan is packaged as a whole and issued to
interested holders who, after paying for the issued, are issued with debenture
stock certificate.
Generally, the main features of debentures are:
i. They usually secured against specified assets of the business.
ii. They are not entitled to voting rights.
iii. They are fixed securities entitled to annual interest
payments.
iv. The interest elements
are tax deductible
vi. They could be redeemable or irredeemable
vii. They could take the form of floating charge or fixed charge.
3.4 Government Development
Stocks and Bonds
Development stock is a device by the Federal Government to raise money
from the public to finance its programmes. The Federal Government issues these
instruments usually annually; they are longterm loans with varying maturity
periods between six years and 25 years. Development stock normally possesses
the following features:
1. It is an interest income instrument.
2. It is redeemable.
3. It is considered gilt-edged that is, the chance of recovering
the principal is sure, to a large extent, and it is risk-free.
4. It could be a measure
for implementing fiscal policy.
Bonds are like the Federal Government Development stock but, in
this case, it is a device of a State and Local Government for borrowing money
from the public to finance their public work projects. They possess the
following features:
1. It is usually tied to a
project such as road construction, hospital, water, schools, etc.
2. Repayment is through a sinking fund account, which is built up for
standing payment order (S.P.O) tied to a statutory allocation.
3. State’s revenue base and corporate governance usually determine
the success level.
3.5 Securities and the Financial Organization
The regulatory and supervisory bodies of Nigeria capital market
consist of the Security and Exchange Commission (SEC), Nigeria Stock Exchange
(NSC), Central Bank of Nigeria (CBN) and Federal Ministry of Finance. The
surveillance role of the regulatory supervisory authorities is critical to
measuring the effectiveness and efficiency of financial institutions in order
to build-up confidence and stability o the system.
SEC is the apex regulatory body in the capital market. It is
empowered by the Securities and Exchange Commission Decree 1999 with the following
functions:
i. To register and approve all securities, subscription, or sale
to the public while ensuring that full disclosure is given in the prospectuses
and other issued documentation in the case of a public offer.
ii. To ensure fair orderly and equitable dealing in securities.
iii. To register commodity and stock exchange investment.
iv. To advise all market operators with a view to maintaining an enviable
standard of conduct and professionalism in the stock market.
v. To review approval and regulate merger and acquisitions
vi. To perform market oversight function, surveillance monitoring and
site inspection with a view to assuring fair play and equitable dealing on the
exchange. vii. To promote investor education and all categories of intermediaries
in the security market. Nigerian Stock
Exchange (NSE) complements the effort of Securities and Exchange Commission and
stand to regulate the activities of the capital market.
A Stock Exchange Market is a place where securities (bonds, stock
and shares) of varying types are traded openly and where one can purchase or
sell any of such securities easily. It is also a place where securities and
capital required to operate huge industries and commercial activities can be
raised on a large scale. Competitive by Nigerian Stock Exchange include the
following:
i. Provision of
machinery for mobilisation of private and public funds and channelling such
funds to productive investment through stocks and shares.
ii. Provision of avenues for members to buy and sell as well as
raise new funds.
iii. Facilitating the
purchase and sale of securities.
iv. Dealing in government securities thereby generating funds for government
development purposes. v. Provision of rules and regulations, which prevent
public from legal deals in quoted securities, thus, ensuring fair dealings
vi. Facilitating the transfer of enterprises from the public to
the private sector.
Generally, the financial Organizations relating to securities are
meant to regulate its activities and ensure fair dealing on the capital market.
4.0 CONCLUSION
Several forms of finance are available in the capital market.
However, these types of finance are of long-term. It is very essential that the
trading of securities should be regulated thereby involving some financial
bodies to ensure fair dealing in the trading of securities. The financial Organizations
are responsible for coordinating and regulating of the entire activities of the
capital market.
5.0 SUMMARY
This note has examined the various types of finance available at
the capital market. It has also revealed that the trading of securities need to
be done in an organized manner. It considered the functions of regulatory
bodies of the market.
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