Capital Market – Industrial Securities Market

Market where industrial

concerns raise their capital or
debt by issuing appropriate
instruments – Equity,
Preference shares &
debentures/bonds

Primary/New issue Market Secondary Market

First time issue to public by
borrowers to exchange new
financial securities in long
term funds.
i.e. capital formation by new
issue
Securities which have
already passed through the
primary market. Buying and
selling of quoted securities.
Stock Exchange – Regulated
under the Security Contracts
(Regulation) Act,1956

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Dr. Ratnesh Chaturvedi, FMS, Session – 2-3
 Distinction between New Issue Market & Stock Exchange

Functional Organisational

New Issue Deals with No Physical

Market new securities Existence

Stock Deals with old Physical

Exchange securities Existence

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Dr. Ratnesh Chaturvedi, FMS, Session – 2-3
 Relationship between New Issue Market & Stock Exchange

New Issue Market Secondary Market

New Securities Old Securities

Stock Exchange The above two markets

are complementary in
nature
Provides mechanism for
regular and continuous
purchase and sale of
securities
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Dr. Ratnesh Chaturvedi, FMS, Session – 2-3
 Functions of New Issue Market

Transfer of resources from Savers to Users

Savers Users
Individuals Public Ltd. Companies
Commercial Banks Government
Insurance Companies, etc.

New Issue Market involves two aspects

Market where borrower Market where borrower

goes to the public first
time i.e. fresh issue
To raise capital for
starting Business
Dr. Ratnesh Chaturvedi, FMS, Session – 2-3
goes to the public first
time i.e. fresh issue
To raise additional
capital for
expansion/diversification 4
 Functions of New Issue Market
Work of investigation, analysis and processing of
Origination new project proposals before floating of issue in
the market
Underwriting So there are two aspect :

Distribution 3. Technical, economic and financial viability of

the new project and its soundness
4. Advisory services which improve the quality of
capital issues and ensure its success
Advisory services include : The functions of
- Type of issue origination is
done by
- Magnitude of issue merchant
- Time of floating an bankers i..e.
issue commercial
- Pricing of an issue banks, financial
institution or
- Methods of issue
private firms
- Technique of selling the 5
Dr. Ratnesh Chaturvedi, FMS, Session – 2-3 securities
 Functions of New Issue Market

Origination
Underwriting is an agreement in which underwriter
Underwriting promises to subscribe a specified no. of shares
or debentures or stock in the event of public not
subscribing to the issue
Distribution

Underwriting is a guarantee for

User / Borrower Issues Savers the marketability of shares
If issues are fully subscribed –
No liability for
underwriter
Underwriters If issues are partly subscribed –
Liability to buy
remaining issues

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Dr. Ratnesh Chaturvedi, FMS, Session – 2-3
 Methods of Underwriting

Standing behind the issue

Outright Purchase

Underwriter Underwriter Consortium Method

guarantees makes
the sale of a outright
specific no. purchase of Underwriting
of shares shares and is jointly
within a resell them done by a
specified group of
period underwriters
(formation of
syndicate)
For large
issue 7
Dr. Ratnesh Chaturvedi, FMS, Session – 2-3
 Advantages of Underwriting

Assurance of getting adequate capital Expert advise

Assurance of minimum subscription Acceptability of securities

Highly specialised function of

distributing securities

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Dr. Ratnesh Chaturvedi, FMS, Session – 2-3
 Underwriters in India

Institutional Non-institutional

LIC, UTI, IDBI, ICICI, Brokers

Commercial banks and
General insurance companies

Functions of New Issue Market

Origination

Underwriting Distribution is the function of sale of securities to

ultimate investors performed by brokers and
Distribution agents.
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Dr. Ratnesh Chaturvedi, FMS, Session – 2-3
 Public Issue
Methods of Floating New Issues
The issuing company directly offers to the
general public/institutions a fixed number
Public Issue of shares at a stated price through a
prospectus.
Offer for Sale
A company issuing shares to public must
issue a prospectus.
Placement
It is an invitation to offer to the public to
take shares or debentures or to deposit
Right Issues
money in the company.

Sec 2(36) of ICA, 1956 defines prospectus

means any document described or issued
as a prospectus and includes any notice,
circular, advertisement or other document
inviting deposits from the public or
inviting offers from the public for the
subscription or purchase of any shares in,
or debentures of, a body corporate.
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Dr. Ratnesh Chaturvedi, FMS, Session – 2-3
 Prospectus
Merits of issue through Prospectus
According to the ICA,1956, every
application form must be accompanied by Inviting a large section of the investors
prospectus. But as per companies
amendment act, 1988, an abridged No involvement of intermediaries
prospectus is being annexed to every
application form Proper allocation of shares

Demerits of issue through Prospectus

Expensive

Suitable for large issues

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Dr. Ratnesh Chaturvedi, FMS, Session – 2-3
 Methods of Floating New Issues Offer for Sale

Public Issue Sale of securities in two stages

Offer for Sale First Stage -Sale Second Stage

of securities to -Sale of
Intermediaries securities to
Placement
Public by
Intermediaries
Right Issues

Adv. of issue through Offer for sale

Not common in India. This method is used
generally in following situation :
Relieved from preparation of prospectus
-Offer by a foreign company of a part of it & allotment
to Indian investors
-Promoters diluting their stake to comply Offer for sale from Intermediaries not
with requirements of stock exchange at the Prospectus
time of listing of shares
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Dr. Ratnesh Chaturvedi, FMS, Session – 2-3
 Methods of Floating New Issues Placement

Public Issue Issue Houses or brokers buy the

securities outright with the
intention of placing them with
Offer for Sale their clients afterwards

Placement Issue Houses or brokers – Act

as wholesalers and selling
Right Issues securities at retail to public

Adv. of issue through Placement

Demerits of issue through Placement
In case of depressed market condition

Not widely distributed to the large sector of

In case of issue of small companies
public
share

Limited use of this method in India

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Dr. Ratnesh Chaturvedi, FMS, Session – 2-3
 Methods of Floating New Issues Right Issue

-By an existing company i.e. already listed in

Public Issue Stock Exchange
- To existing shareholders in proportion to
Offer for Sale their existing share ownership
-Generally at a certain privileged price
Placement - For specified period
-Right of entitlement can be sold to someone
Right Issues else

Reasons for a Right Issue Advantage of Right Issue

-Inflation – High replacement cost of Assets

-For Funding expansion projects To Shareholders :
- High share prices Same proportion of
share ownership
To Company :
Lower issue cost-
underwriting cost, etc. 14
Dr. Ratnesh Chaturvedi, FMS, Session – 2-3
 Calculation of Rights Offer Ratio
Number of outstanding shares
N =
Number of new shares to be offered

Ajanta Ltd. Has 100000 equity shares outstanding and it plans to issue 20000 new
shares, then the number of rights needed to buy each new share is 5
( 100000/20000).

An investor who owns 4000 shares (4 percent) of the company’s shares would have
enough rights to buy 800 (4000/5) of the new shares. Upon subscribing to the new
issue, the investor would own 4800 shares, or 4 percent of the total 120000 shares
now outstanding. The investor’s proportionate ownership is maintained.

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Dr. Ratnesh Chaturvedi, FMS, Session – 2-3
 -Issue of Bonus Shares

-Offer to employees
Other Methods
-Offer to the Creditors

-Offer to the customers

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Dr. Ratnesh Chaturvedi, FMS, Session – 2-3
 Instruments of Issue

Equity Preference Shares Debentures New Instruments :

Shares - Cumulative & non -Redeemable &
cumulative Irredeemable
- Cumulative - Unsecured &
convertible secured
-Participating & Non
Participating
-Redeemable &
Irredeemable

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Dr. Ratnesh Chaturvedi, FMS, Session – 2-3
 Instruments of Issue
Preference Share Capital - As per sec 85 of ICA’1956, in the case of a company limited
by shares, that part of the capital which carries a preferential rights as to –
- payment of dividend during the life time of the company
- return on capital on winding up
Equity all share capital which is not preference share capital

Offer for Sale – In this case offer for sale to public is made by intermediaries (deemed
Prospectus). Prospectus is not required.
Offer to Employees – to promote better industrial relation and higher productivity
Offer to creditors – in full settlement of their loans or advances
Offer to the customers – share holding of customers helps in the affairs and functioning of
the concern.

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 Players in the New Issue Market
Merchant Bankers
Registrars
Collecting and coordinating
Bankers
Underwriters and brokers
Printers, Advertising
agencies and mailing
agencies
Dr. Ratnesh Chaturvedi, FMS, Session – 2-3
Merchant Bankers
As per SEBI (Merchant Bankers)
Rules, 1992 :
Merchant Bankers means any person
who is engaged in the business of
issue management either by making
arrangements regarding selling,
buying or subscribing to securities or
acting as manager, consultant,
adviser or rendering corporate
advisory service in relation to such
issue management.
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 Players in the New Issue Market
Merchant Bankers
Registrars
Collecting and coordinating
Bankers
Underwriters and brokers
Printers, Advertising
agencies and mailing
agencies
Dr. Ratnesh Chaturvedi, FMS, Session – 2-3
Registrars
Important category of intermediaries
who undertake all activities
connected with new issue
management
Role of Registrars
Role in Pre-issue :
-Suggest draft application form to the
merchant bankers
-Help identifying the collection centres
-Assist in opening collection accounts
with banks and forming procedure of
operation
-Sending instructions to collecting
branches 20
 Role of Registrars
Role during the currency of issue :
-Receive the collection figures every day
-Tabulate and classify the collection data
-Keep the merchant bankers and the company informed of the progress of subscription
-Inform the stock exchange about the closure of issue

Role during Pre-allotment work :

-Getting all application forms and sorting
-Group wise categorisation of valid application
-Reclassification of valid application eligible for allotment
-Approach to stock exchange for finalising the basis of allotment (in case of over
subscription)
-Finalisation on the basis approved by SE and tally of final allotment list

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Dr. Ratnesh Chaturvedi, FMS, Session – 2-3
 Role of Registrars

Role during allotment work :

-Allotment of shares ( proportionate allotment, etc.)

Role during Post-allotment work :

-To get the letters of allotment letter and refund orders printed ready for despatch.
-Submit all statements to the company for their final approval.
-Arrange to pay the brokerage and underwriters commission and submit their relevant
statements
-Assist the company in getting the allotted shares listed on the stock exchange

Qualifications for Registrars to the Issue

Registration from SEBI based on having competency and expertise, quality of manpower,
their past records, adequacy of infrastructure and capital adequacy. Code of conduct by
SEBI. They have to maintain proper books of accounts and registers for a period of three
years.
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Dr. Ratnesh Chaturvedi, FMS, Session – 2-3
 Players in the New Issue Market Collecting and coordinating Bankers

Collecting Bankers – collect the

subscription in cash, cheques, etc.
Merchant Bankers
Coordinating Bankers – collect
information on subscription and
Registrars
coordinate the collection work

Collecting and coordinating Both may be same or different banks

Bankers

Underwriters and brokers

Printers, Advertising
agencies and mailing
agencies

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Dr. Ratnesh Chaturvedi, FMS, Session – 2-3