Question

Kaysons Ltd. was a reputed company manufacturing automotive parts for electric vehicles. With growing demand for electric vehicles, Kaysons Ltd. required more capital to meet the increased demand for automotive parts. Atul, the Finance Manager, suggested raising funds through a public issue of shares as the stock market was bullish. Although this process would reduce the management’s holding and involve significant expenditure, the Chief Executive Officer agreed. The public issue of shares was made in compliance with Securities and Exchange Board of India (SEBI) guidelines. Identify and state four factors affecting the choice of capital structure being discussed above.

Hint:

Factors like stock market conditions, control, cost, and regulatory compliance are critical when deciding on a capital structure.

Answer 1

1. Market Sentiment: A bullish stock market facilitates equity capital acquisition due to easier and potentially higher-priced share sales.

2. Ownership Dilution: Issuing new equity diminishes existing management's ownership percentage, potentially reducing their control over corporate decisions.

3. Issuance Expenses: Equity fundraising incurs substantial costs, including underwriting, promotion, and regulatory adherence.

4. Legal Compliance: The company was required to adhere to SEBI regulations during the share issuance process.