ACQUIRING NET-DEBT-FREE AND DEBT-FREE STATUS BY PUBLIC ISSUE IN CASE OF A COMPANY: UNDERSTANDING SOME OF THE CORE PRINCIPLES OF THIS SITUATION

 

ACQUIRING NET-DEBT-FREE AND DEBT-FREE STATUS BY PUBLIC ISSUE IN CASE OF A COMPANY: UNDERSTANDING SOME OF THE CORE PRINCIPLES OF THIS SITUATION

 

Dear Readers,

You must be hearing the Terminologies like “Net-Debt-Free” or “Debt-Free” Status to be acquired by some Companies by Public Issues of their Shares in the Market and getting listed in the Registered and Regulated Stock Exchanges.

Recently one of the Very Large and Reputed Private Companies of India in the Digital and Tele Communication Space has announced that by doing a Mega Public Issue (of about Rs 30 000 Crores) it will become Net-Debt-Free. That is a very Interesting Situation being aimed for by the Said Large Company. Their Peer Companies in the Group are known to have done that in the past.

Everybody understands what does “Debt” means. In the most simple language, “Debt” means the “Loans” anyone takes to finance any operation, in case of a Company it is the Loans a company takes for financing the company Operations in anyway.

Also everyone understands that the Other Name of Share Holding in a company is called as “Equity”. By Public Issue, in very simple language, it means a Purely Private Company (who did not have public shareholding earlier) is issuing (selling) its company shares to members of public (they may be institutions or individuals) or a Company who has issued its company shares to public earlier and is already listed in a Registered and Regulated Stock Exchange, is again issuing(selling) its company shares to the Members of Public under the conditions approved by the National Regulators of Securities Markets (such as SEBI, i.e. the Securities and Exchange Board of India, RBI , i.e. Reserve Bank of India and Other Relevant Authorities). When a Purely Private company is doing public issue of its share for the first time to be listed in the Registered and Regulated Stock Exchanges is called as IPO (Initial Public Offer) or in Other Case where a company had done public issue earlier and doing it again can be “nth”-PO (like 2nd… 3rd … Public Offer etc.).

Let us Understand First what do the above two situations, such as “Net-Debt-Free” and “Debt-Free” mean in case of a company:

NET-DEBT-FREE :

If a company says it is Net-Debt-Free, it means, the company still has loans or debt in its books, but it holds enough cash and cash equivalents to pay off all of that debt immediately if or as and when required and in such an eventuality.

DEBT-FREE :

When a company says it is Debt-Free, it means the company has Zero total borrowings or loans on its balance sheet.

Therefore, when a Large Private Company has announced that by doing a public issue of Rs. 30,000 Crores in India and thereby being listed in the  Registered and Regulated Stock Exchange in India it is going to be Net-Debt-Free, it means, after the Rs. 30,000 Crores are drawn as Equity Holding of the Public by the said public issue, the Company might be aiming to close some amount of Debt by paying it off to the lenders  it has right now by this Equity Financing route to become Net-Debt-Free. That also means, the Company intends to reduce the Interest Cost   or Debt Servicing Cost Burden of that part of Debt, it is going to close by paying off out of the said equity financing. Being Net-Debt-Free by the said Equity Financing, the company will still have some loans, however, it will also have enough cash and cash equivalents in hands to repay the Remaining Debt any time it may be needed, therefore the company will not be and no more be prone to the “Eye Showing” and “Control Pressures” of its lenders who have financed the Debt to the company.

Implications and Consequences of being NET-DEBT-FREE or being DEBT-FREE by Public Issue :

1.  By Public Issue, when the Company issues (sells) its shares to Public, the Company gets money from the Public Hands against the value of the Shares issued. That money amount comes to the hands of the Company for its use in Company Operations. If the Company decides to close some of its debts by the Public Issue Money to become Net-Debt-Free, it means the company decides to pay back a Part (normally a major part) of its Debt to the lenders by the Public Issue Money. If the company decides to become Debt-Free by using the Public Issue Money, in that case the Company decides to pay back its entire debt to its lenders by using the Public Issue Money.

2.  When the Company pays back its Debt in Part (Major Part) or Full to its lenders, what it saves is the Interest Cost Burden or the Cost Burden of servicing the debt that is being paid back to the lenders. The Interest Cost Burden or Cost Burden of Servicing the Debt when saved what exactly the company saving?

2.1. The Interest and its Associated Costs of Servicing the Debt is saved by the Company.

2.2. The Interest or Debt Servicing Cost is a Pre-Tax Cost. It means if a company is paying Rs 100/- as Interest or Debt Servicing Cost, in reality it is Paying Rs. 70/- as Real or Effective Interest or Debt Servicing Cost and Rs. 30/- as saving of Tax (Income Tax) that the company would have had to otherwise pay as Income Tax (considering an Income Tax Component of about 30% in India) if the Debt Servicing Cost was not a Pre-Tax Cost. Thus the Debt Servicing Cost saved by paying back the Debt, the company in Reality and Effectively saves 70% of it as real cost to the company (while rest 30% in any case is the income tax component that will go off later).

2.3.  In case of Equity Financing by Public Issue, the Company does not have to pay interest on the Share Holding Issued to Public as it is Equity or Share Holding in the Company by the Shareholders. The Shareholders thus will be entitled to Dividend ( that is in simple language is the portion of Profit, if the company makes profit, the company would like to share with its shareholders by pro-rata basis and on the basis of shareholding quantum and Dividend Payout Formula announced by the Company applicable to all share holders) on yearly basis. The Dividend is a Post-Tax Profit Sharing by the Company with its Shareholders. It means if a company has made a Pre-Tax Profit of Rs 100/-, first it has to pay Rs 30/- as Income Tax (Considering Corporate Income Tax 30% on an average) and then out of the Rest Rs 70/- Post Tax Profit left in the hands of the Company as Post-Tax Profit, the company can give some part of it to its shareholders as Dividend depending on other avenues allowed under the law for the company to use the Post-Tax Profit for the company’s growth and development for future. 

2.4. What the Public Equity Investors thus get by purchasing the Company Shares through the Public issues ?

2.4.(a) :  Dividend on Equity (Share) Investment : Normally in India, the Public Equity Investors (especially the Retail Equity or Individual or Non-Institutional Equity Investors) look for minimum of about 10% Dividend per year on their shareholding money. This is considered comparatively based on the Fixed Deposit Interest Rates generally given by the Banks in India. This 10% or more Dividend can come precisely from the Interest/Debt Servicing Cost Saving of the Company by paying back the Debt from Equity Money of Public Issue (that is from the 70% of Real Interest or Debt Servicing Cost Burden Saving explained above) combined with a share from the Post Tax Profit of the Company that is decided by the company on a formula applicable to all share holders. For a Company making Good Profit from its Operations and Post-Tax Profit, this is not a problem.

2.4.(b) :    Capital Market Appreciation of Share Price when traded in the Registered and Regulated Stock Exchanges could be a Gain for the Equity Investors if the Company does Good Performance in its Operations year after year consistently and the Stock Market (the Securities Market Operated through the Registered and Regulated Stock Exchange) thus gives avenues for Share Price Appreciation of the Company’s Share.

2.5.  Being  either Net-Debt-Free or Debt-Free by Equity Financing through Public Issue, the Company Gets lot of Autonomy and Independence to drive its Operations in the Desired and Expected Directions of its choice, without being shown the Eyes by its Lenders and the Pressure of the Lenders to Control its Operations and Direction of Operations, by the Rules of Lending by the Lenders ( whether Banks or Other Institutional Lenders or any Other Lenders).

2.6.  Being  either Net-Debt-Free or Debt-Free by Equity Financing through Public Issue, the Company can do better Brand Building over time, with public participation in its shareholding and autonomy that comes into its own hands, instead of being lender dependent for financing its operations in the short term as well as in the long term. 

World wide it is seen that the Companies who operate in the situation of Net-Debt-Free or Debt-Free, they are generally found to sustain on long term, grow and prosper and have larger longevity of existence with good performance in its Life Cycle of Existence, if the Management is Committed and Competent.

With best regards,

Dr. Nimain Charan Biswal,

Mumbai, India


About the Author : Dr. Nimain Charan Biswal is a B.Sc.(Agri. Science and Technology), M.B.A. and Ph.D.(Management Area ) by qualifications; and he has 40+ years of work experience in Social, both industrial and Development sectors in diversified fields of Social Importance. He has been educated at Orissa University of Agriculture and Technology (OUAT)-Bhubaneswar, Institute of Rural Management Anand (IRMA) and Gujarat University (with Resource Support of IIM-Ahmedabad). He is further educated at IIM-Calcutta, XLRI-Jamshedpur, Apple Computer Industries and Spar Inc., USA. He has worked for reputed National and International Organizations in Senior/Top Management Capacities at Board level as well as Managing Director and CEO. He is a management expert covering extensive areas from management in Social Sectors, industrial sectors, management in Agriculture, Dairy and Foods, Agri-Food, Pharma, FMCG and Consumer Healthcare Sectors and Management of Cooperatives, Development Management to management of Public Systems. He is a prominent professional of India and known Internationally as well. He is also a Business and Political Strategist. He lives at Mumbai in India.

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