Capital shortage by Czech firms has caused a major decline in the number of shares listed in the key index on the Prague Stock market. Due to this, firms which were previously located in the Czech Republic are moving out of the country to its neighbor in search for more attractive investments. This is caused by the fact that macroeconomic conditions in Czech are not as favorable as they are in the neighboring Hungary and Poland. The negative effect of lack of capital has caused Czech's stock market to perform poorly hence leading to losses of share values. The lack of capital has also led to privatization.
The privatization of state owned enterprises has led to the placements of shareholdings in the hands of institutions and organizations which are more focused on exerting control of on the companies rather than raising capital. The lack of capital has also led to the search of capital through initial public offers (IPO). in case the lack of capital continues, the Czech companies will not be able to invest in the necessary plants and equipment. The banks are issuing loans at high interest rates hence borrowing from them is proving to be a hard thing leading to further lack of capital.
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Selling equity to foreign investors will enable the Czech enterprises raise capital for instance Ceske Radiokomunikace which is a radio station company owned by the government was able to raise $134 in equity when it listed its Global Depository Receipts on the London exchange. Issuing equities to foreign investors also reduce the state ownership apart from raising equities for the enterprise.
A major drawback of selling equities to foreigners is that the enterprises have to lose some control of the companies to the foreign share holders. There might be conflict of interests and opinions and this can bring affect the company negatively. Therefore, there is need for a lot of paper work to deal with the legal aspect of selling the equities.
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