Escolar Documentos
Profissional Documentos
Cultura Documentos
C3
New Issue Market
Chapter 3
New Issue Market
3 1
Excel Books
An Initial Public Offer (IPO) is the selling of securities to the public in the primary market. This Initial Public Offering can be made through the fixed price method, book-building method or a combination of both. The new issue market deals with the new securities, which were not previously available to the investing public. The new issue market encompasses all institution dealing in fresh claim.
3 2
Excel Books
exchange
The distinction between new issue market and stock exchange can be made on three grounds.
1.
2. 3.
Functional difference
Organisational difference Nature of contribution to industrial finance
3 3
Excel Books
Excel Books
3 5
Excel Books
3 6
Excel Books
3 7
Excel Books
Disadvantages of Floatation
The disadvantages of floatation include the following:
There are considerable costs in floatation and listing. It takes lot of management's time, before and after floatation and listing.
The company must comply with the stringent stock exchange regulations.
It will be necessary to meet the regulatory requirements for disclosure of information, including details of managerial remuneration. A dilution of management control will result from the widely held shares of the company.
Cont.
Copyright 2008, Sudhindra Bhat
3 8
Excel Books
The affairs of the company are subject to public scrutiny and fluctuations in share price may some time cause adverse image in the public. Since the costs of floatation are higher, other ways of rising finance would reduce the cost of funds. Listed company status will put additional burden on the managerial staff. The buying and selling of shares by the directors and other related persons might attract the provisions of 'insider trading'. There will always be pressure from shareholders to dividends, which may not be in the interests of the company. declare
Cont.
Copyright 2008, Sudhindra Bhat
3 9
Excel Books
The adverse campaigns against the company may drive share price; it is technically called 'bear raids'.
down the
The investors always expect a raise in the share price. The company's growth and profitability may not afford the increase in share price always.
3 10
Excel Books
Promoters
A 'promoter' has been defined as a person or group of persons who are instrumental in formation of the company, who enable the company to start its commercial operations by bringing in the necessary funds required for the concern. The promoters are in the overall control of the company, whose names are mentioned in the offer document.
'Promoter group' includes promoter, an immediate relative of the promoter (i.e. any spouse of that person, or any parent, brother, sister or child of the person or of the spouse).
Cont.
Copyright 2008, Sudhindra Bhat
3 11
Excel Books
Any company in which the promoter holds 10% or more of the equity capital or which holds 10% or more of the equity capital of the promoter. Any company in which a group of individuals or combinations thereof who holds 20% or more capital in that company also holds 20% or more capital in that company also holds 20% or more capital of the issuer company. companies or of the equity of the equity of the equity
In case, the promoter is an individual, any company in which 10% or more of the share capital is held by the promoter or an immediate relative of the promoter or a firm or HUF in which the promoter or any one or more of his immediate relative is a member.
Cont.
Copyright 2008, Sudhindra Bhat
3 12
Excel Books
Promoters Contribution
Promoters' contribution in any public issue shall be in accordance with the following provisions under SEBI's DIP Guidelines:
Unlisted companies Offers for sale Listed companies Composite issues of listed companies
3 13
Excel Books
Cont.
Copyright 2008, Sudhindra Bhat
3 14
Excel Books
There would be more flow of funds into the capital market, thereby development of the economy and faster growth in industrialisation.
Disadvantages of Free Pricing The free pricing system of public issues is subject to the following drawbacks: Even though it appears that the price is fixed freely, it may happen to be an unrealistic price fixed by the company in consultation with the lead manager to the issue. For a developing country like India, absolute freedom from regulations will lead to unethical practices in the capital market. In an unregulated market, the risk exposure to the investor is more, and hence the regulatory mechanism should continue.
Copyright 2008, Sudhindra Bhat
3 15
Excel Books
Lock-in Period
'Lock- in' indicates the freeze on transfer of shares. Lock-in of Minimum Specified Promoters Contribution in Public Issues In case of any issue of capital to the public the minimum promoter contribution shall be locked in for a period of three years. The lock-in shall start from the date of allotment in the proposed public issue and the last date of the lock-in shall be reckoned as three years from the date of commencement of commercial production or the date of allotment in the public issue, whichever is later. "The date of commencement of commercial production" means the last date of the month in which commercial production in a manufacturing company is expected to commence as stated in the offer document.
Copyright 2008, Sudhindra Bhat
3 16
Excel Books
Cont.
Copyright 2008, Sudhindra Bhat
3 17
Excel Books
3 18
Excel Books
3 19
Excel Books
3 20
Excel Books
Demand
Demand for the securities offered is known only after the closure of the issue.
Payment if made at the time of subscription whereas refund is given after allocation.
Demand for the securities offered can be known everyday as the book is built.
Payment only after allocation.
Payment
3 21
Excel Books
Safety Net
Safety net is a scheme under which a person or a company (generally a finance company) undertakes to buy shares issued and allotted in a new issue from the allottees at a stipulated price This is an agreement in relation to an issue of equity shares. The main feature of the safety net is to provide the equity investors safety of their investments from fall of the share price below the issue price.
3 22
Excel Books
Stockinvest
The stockinvest is a non-negotiable bank instrument issued by the bank in different denominations. The investor who has a savings or current account with the bank will obtain the stockinvest in required denominations and will have to enclose it with the share/debenture application.
3 23
Excel Books
Rights Issues
If an existing company intends to raise additional funds, it can do so by borrowing or by issuing new shares. One of the most common methods for a public company to use is to offer existing shareholders the opportunity to subscribe further shares. This mode of raising finance is called 'Rights Issues'.
Reasons for a Rights Issue In times of inflation, the replacement costs of assets will be high; unless the company can retain cash from substantial profits, the only alternative is to raise cash from a fresh issue of shares. For funding expansion projects, a company may make a rights issue. If a company has a proportion of interest-bearing loan capital, it can suffer from a squeeze on profits. The company can improve its capital structure position by obtaining extra share capital. At a time when the share prices were relatively high, companies found it easy to persuade their shareholders to subscribe cash for new issues with a view to expansion by takeover. Copyright 2008, Sudhindra Bhat
3 24
Excel Books
Long-dated Rights
Cont.
Copyright 2008, Sudhindra Bhat
3 25
Excel Books
Non-voting Shares Non-voting shares (NVS) are an innovative instrument for raising funds, although prevalent in many developed countries for years. The non-voting shares are closely akin to preference shares that do not carry any voting rights nor is the dividend payable pre-determined. However, unlike preference capital, non-voting shares do not carry a pre-determined dividend. The payoff to the investor for the assumption of higher risk levels and the compensation for loss of control is the high rate of dividends payable to them. Companies that are shy of exposure over leveraged companies, new companies and closely held companies can find NVS useful. It may find favour with small investors, non-resident Indians, overseas corporate bodies, mutual funds etc. The investor gains in terms of higher dividends, purchase at advantageous low price, liquidity and capital appreciation.
3 26
Excel Books
investment is being made with an understanding between the company and the sponsor to go for public offering in a mutually agreed time. Bought out deal, as the very name suggests, is a type of wholesale of equities by a company. A company allots shares in full or in lots to sponsors at a price negotiated between the company and the sponsor(s). After a particular period of agreed upon between the sponsor and the company the shares are issued to the public by the sponsor with a premium. The holding cost of such shares by the sponsor may either be reimbursed by the company, or the sponsor may absorb the profit in part or full as per the agreement, arising out of the public offering at a premium. After the public offering, the shares are listed in one or more stock exchanges.
Copyright 2008, Sudhindra Bhat
3 27
Excel Books