Why should a company try to price it’s public issue of shares as high as possible?

In fact, any company trying to price its public issue higher than its market price is being silly.  For that matter any company trying to price any of its products higher than the market price is being silly.  It should be obvious, that in such a case the investor (or the customer) will eject the offered share (or the product) outright, unless the higher price is qualitatively justified or he is ill informed.  True, there have been many instances following the free pricing policy where companies have priced their issues higher than the market price.  But these are errors of judgment, which a company soon comes to learn and learns to correct.  However, one important reason for the propensity of companies to price their shares unduly high may be attributed to their mistaken notion that the higher the price at which a company issues its shares, the lower its cost of capital.

Men who should know better, for example, our chief executives of companies and development banks, have frequently gone on record saying that under free pricing it is cheaper to raise equity than debt.  Such statements are made on the argument that while a debenture issue involves a cost of around 18% to 19%, the cost of raising equity can be as low as 3% (for example, when a company paying 30% dividend on a share with a par value of Rs.10 is issued at Rs.100, that is at or near the market price of the share).  According to this notion, the abolition Controller of Capital Issues (CCI – an official of the Ministry of Finance, a position now abolished) has reduced the cost of raising capital significantly. … Read the rest

Is free pricing of pubic issues are good or bad for investors

The answer depends upon whom we mean by “investors”?  Is investor the one who is already holding a share, that is, an existing shareholder, or one who is going to become a shareholder?  Unfortunately there has been some confusion in this regard.  To any reasonable person, it should be clear that is the existing shareholder who is the true investor since he has already invested.

Whenever a company makes a public issue of shares at a price, which is lower than the market value of the share, some part of the wealth gets transferred from the existing shareholder to the new shareholder.  It happens like this.  Consider a company with 1lakh shares outstanding, quoted in the market at Rs.50 each.  The total wealth of the existing shareholders can be said to be Rs.50 lakh.  If this company raises another Rs.10 lakh by issuing 50,000 shares at Rs.20 each, as used to be the case before free pricing, the share price of the company roughly falls down to Rs.40 (being (50 lakh + 10 lakh) / 105 lakh shares).  This means a loss of Rs.10 per share to the existing shareholders, amounting in all to Rs.10 lakh.

At the same time, this represents a gain to the new shareholders,.  Since their holding of 50,000 shares at the rate of Rs.40 each is now worth Rs.20 lakh and their investment was only Rs.10 lakh, the loss of 10 lakh to the existing shareholders becomes the gain to the new shareholders.

However, under free pricing regime, when a public issue of shares is made at the market price, say, Rs.40 in the above case, the existing shareholders suffer no net loss. … Read the rest

Introduction to stocks and shares

Stocks or securities are generic terms that stand for instruments of ownership like shares, as well as instruments of lending like debentures, which are issued publicly.  Just as a share represents the smallest unit of ownership, a debenture or a bond represents the smallest unit of lending.  Shares and debentures may be of various kinds.

An ordinary share represents the form of fractional ownership in which a shareholder (one who holds ordinary shares), as a fractional owner, undertakes maximum entrepreneurial risk associated with a business venture.  This risk has several dimensions.  During the life of a business, in general, an ordinary shareholder receives dividends out of operating surplus.  This surplus is the residual from the revenue, after subtracting all the operating expenses, the interest charges on all kinds of borrowing, various taxes, and dividends due to the non-ordinary shareholders.  Now, various economic factors, government policies, market conditions, the labour situation, management’s efficiency, etc. may affect revenues, expenses, interest, taxes, etc. in such a way that in any given period, there may or may not be adequate surplus left for ordinary shareholders.  Again, even when a business it at the verge of closing, all other stakeholders, such as employees, creditors, lenders, government, preference shareholders, etc. must be paid their claims first and only the residual can be shared by the ordinary shareholders.  Then, for various reasons, there may or may not be enough residual left for the ordinary shareholders are the last to receive their claims.  In this sense, ordinary shareholders are exposed to the highest risk amongst all the stakeholders in a business. … Read the rest

Issue of a share at par and at a premium

In general, an ordinary share in India is said to have a par value (face value) of Rs.10, though some shares issued earlier still carry a par value of Rs.100.  Par value implies the value at which a share is originally recorded in the balance sheet as equity capital. Equity capital is the same as ordinary share capital. The SEBI guidelines for public issues by new companies established by individual promoters and entrepreneurs, require all new companies to offer their shares to the public at par, i.e. at Rs.10.  However, a new company set up by existing companies (and of course existing companies themselves) with a track record of at least five years of consistent profitability are allowed by the SEBI guidelines to issue shares at a premium.

It should be noted that when a company issues shares at a premium, it is able to raise the required amount of capital from the public by issuing a fewer number of shares.  For example, while a new company promoted by first time entrepreneurs intending to raise say, Rs. One crore, has to offer 10 lakh ordinary shares at Rs.10 each (at par), an existing company may arise the same amount by offering only 2.5 lakh shares at Rs.40 each (close to the market value of its shares).  The latter is said to have issued its share at a subscription price of Rs.40 (Rs.10 in of the former case), at a premium of Rs.30 (being the excess of subscription price over par value). … Read the rest

Different approaches to training needs assessment

What is need assessment?

“A training need exists when an employee lacks the knowledge or skill to perform an assigned task satisfactorily. It arises when there is a variation between what the employee is expected to do on the job and what the actual job performance is.”

To pinpoint the range of training needs and define their content, the HR department uses different approaches to needs assessment.

1. Survey:

  • Survey the potential trainees to identify specific topics about which they want to learn more.
  • It suggests that trainees are more likely to be receptive to the resulting programs when they are viewed as relevant.
  • The group’s expertise may be tapped through a group discussion, a questionnaire, the Delphi procedure, or a nominal group meeting.

2. Group recommendation:

The group’s expertise may be tapped through a group discussion, a questionnaire, the Delphi procedure, or a nominal group meeting.

i. Group discussion:

  • Resembles face-to-face interview technique, e.g., structured or unstructured, formal or informal, or somewhere in between.
  • Can be focused on job (role) analysis, group problem analysis, group goal setting, or any number of group tasks or themes (e.g., “leadership training needs of the board”).
  • Uses one or several of the familiar group facilitating techniques: brainstorming, nominal group process, force fields, consensus ranking, organizational mirroring, simulation, and sculpting.
  • Advantages:
  1. Permits on-the-spot synthesis of different viewpoints.
  2. Builds support for the particular service response that is ultimately decided on.
  3. Decreases client’s “dependence response” toward the service provider since data analysis is (or can be) a shared function.
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Different employee training & development methods

Every organization needs well-adjusted, trained and experienced people to perform its activities. As jobs in today’s dynamic organizations have become more complex, the importance of employee education has increased. Employee training is a learning experience, it seeks a relatively permanent change in employees that their improves job performance. Training involves changing skills, knowledge, attitudes, or behavior. This may means changing what employee know, how they work, or their attitudes toward their jobs, coworkers, managers, and the organization.

Managers, with HRM assistance, decide when employees need training and what form that training should take.

A.    On-the-Job Training Methods 1. Job instructions:
  • It is received directly on the job, and so it is often called “on-the-job” training (OJT).
  • It is used primarily to teach an employee how to do their current jobs.
  • A trainer, supervisor, or coworker serves as the instructor.

OJT includes several steps:

  1. The trainee receives an overview of the job, its purpose, and its desired outcomes, with an emphasis on the relevance of the training.
  2. Trainer demonstrates the job to give the employee a model to copy.
  3. Employee is allowed to mimic the trainer’s example.
  4. Demonstrations by trainer and practice by the trainee are repeated until the job is mastered.
  5. Employee performs the job without supervision.

2. Job rotation:

  • Job rotation involves moving employees to various positions in the organization to expand their skills, knowledge and abilities.
  • It can be either horizontal or vertical.
  1. Vertical job rotation is promoting a worker into a new position.
  2. Horizontal job rotation is short-term lateral transfer.
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