New Issue Market

NEW ISSUE MARKET RITESH AGARWAL M.Com, AICWA ( Gold Medalist ) [email_address]

MEANING OF NEW ISSUE MARKET It refers to the set-up which helps the industry to raise the funds by issuing different types of securities. These securities are issued directly to the investors (both individuals as well as institutional) through the mechanism called primary market or new issue market. The securities take birth in this market.

FUNCTIONS OF NEW ISSUE MARKET The main function of new issue market is to facilitate transfer resources from savers to the users. It plays an important role in mobilizing the funds from the savers and transferring them to the borrowers. The main function of new issue market can be divided into three service functions:

Contd….. 1. Origination: It refers to the work of investigation, analysis and processing of new project proposals. Origination starts before an issue is actually floated in the market. It includes a careful study of the technical, economic and financial viability to ensure the soundness of the project and provides advisory services.

Contd…… 2. Underwriting: It is an agreement whereby the underwriter promises to subscribe to a specified number of shares or debentures in the event of public not subscribing to the issue. Thus it is a guarantee for the marketability of shares. Underwriters may be institutional and non-institutional.

Contd…… 3. Distribution: It is the function of sale of securities to ultimate investors. Brokers and agents who maintain regular and direct contract with the ultimate investors, perform this service.

METHODS OF FLOATING NEW ISSUES The various methods which are used in the floating of securities in the new issue market are: Public issues Offer for sale Placement Right issues

Public issues or Initial public offering (IPO) The issuing company directly offers to the general public/institutions a fixed number of securities at a stated price or price band through a document called prospectus. This is the most common method followed by companies to raise capital through issue of the securities.

Offer of sale It consists in outright sale of securities through the intermediary of issue houses or share brokers. It consists of two stages: the first stage is a direct sale by the issuing company to the issue house and brokers at an agreed price. In the second stage, the intermediaries resell the above securities to the ultimate investors. The issue houses purchase the securities at a negotiated price and resell at a higher price. The difference in the purchase and sale price is called turn or spread.

Right Issue When a listed company proposes to issue securities to its existing shareholders, whose names appear in the register of members on record date, in the proportion to their existing holding, through an offer document, such issues are called ‘Right Issue’. This mode of raising capital is the best suited when the dilution of controlling interest is not intended.

Private placement It involves sale of securities to a limited number of sophisticated investors such as financial institutions, mutual funds, venture capital funds, banks, and so on. It refers to sale of equity or equity related instruments of an unlisted company or sale of debentures of a listed or unlisted company.

Preferential Issue An issue of equity by a listed company to selected investors at a price which may or may not be related to the prevailing market price is referred to as preferential allotment in the Indian capital market. In India preferential allotment is given mainly to promoters or friendly investors to ward off the threat of takeover.

E-IPO The companies are now allowed to issue capital to the public through the on-line system of the stock exchanges. For making such on-line issues, the companies should comply with the provisions contained in Chapter 11A of SEBI( Disclosure and Investor Protection) Guidelines, 2000.

Green Shoe Option It denotes ‘an option of allocating shares in excess of the shares included in the public issue’. SEBI guidelines allow the issuing company to accept over subscriptions, subject to a ceiling, say 15% of the offer made to public. It is extensively used in international IPOs to stabilized the post-listing price of new issued shares.

Pricing of Issues The companies eligible to make public issue can freely price their equity shares or any security convertible at a later date into equity shares as per SEBI guidelines 2000. The issuer can fix-up issue price in consultation of with merchant banker, subject to giving disclosures of the parameters which have considered while deciding the issue price.

Fixed Price Process The price which has been fixed by the company for its securities before issue is brought to the market. The price at which the securities are offered/allotted is known in advance to the investor. Demand for the securities offered is known only after the closure of the issue. Payment is made at the time of subscription whereas refund is given after allotment.

Book-Building/Price Band It is a process used for marketing a public offer of equity shares of a company. Book building is a process wherein the issue price of a security is determined by the demand and supply forces in the capital market The Price at which securities will be allotted is not known in advance to the investor. Only an indicative price range is known. (Also called price band and it should not be more than 20% of the floor price).

Lock-in Period Lock-in indicates the freeze on transfer of shares. SEBI (Disclosure and Investor Protection) Guidelines, 2000 have stipulated lock-in requirements as to specified percentage of shares subscribed by promoters with a view to avoid unscrupulous floating of securities and to ensure the promoters involved in the issue continue have controlling a interest in the company, which can be subjected to legal compliances.

Offer Documents An offer document means ‘prospectus’ in case of public issue or an offer for sale and ‘letter of offer’ in case of right issue, which is required to be filed with the Registrar of Companies (ROC) and Stock Exchanges. An offer document covers all the relevant information to help an investor in making wise investment decisions.

Kinds of Offer Documents Draft Prospectus Draft Letter of Offer Prospectus Abridged Prospectus Shelf Prospectus Information Memorandum Red-Herring Prospectus

Listing of Securities Listing means admission of the securities to dealings on a recognized stock exchange. The securities may be of any public limited company, central or state government, quasi governmental and other financial institutions/corporations, municipalities etc.

Objectives of Listing Providing liquidity to securities; Mobilize savings for economic development; Protect interest of investors by ensuring full disclosures. The exchange has a separate Listing Dept. to grant approval for listing of securities of companies in accordance with the various provisions of the concerned laws, guidelines issued by SEBI and rules, bye-laws and regulation of the exchange.

Participants In The Securities Market Regulators: The key agencies that have a significant regulatory influence , direct or indirect, over the securities market such as SEBI, RBI, CLB, DEA and MCA etc. Stock Exchanges: A stock exchange is an institution where securities that have already been issued are bought and sold. Presently there are 23 stock exchanges in India, the most important ones being BSE and NSE.

Listed Securities: Securities that are listed on various stock exchanges and hence eligible for being traded there are called listed securities. Depositories: A depository is an institution which dematerialize physical certificates and effects transfer of ownership by electronic book entries. Presently there are two depositories in India, viz. NSDL and CSDL.

Brokers: Brokers are registered members of the stock exchanges though whom investors transact. Foreign Institutional Investors: Institutional investors from abroad who are registered with SEBI to operate in the Indian Capital market are called foreign institutional investors (FIIs).

Merchant Bankers: Firms that specialize in managing the issue of securities are called merchant bankers. They have to be registered with SEBI. Primary Dealers: Appointed by the RBI, primary dealers serve as underwriters in the primary market and as market makers in the secondary market for governmental securities.

Mutual Funds: A mutual fund is a vehicle for collective investment. It pools and manages the funds of investors. Custodians: A custodian looks after the investment back office of a mutual fund. It receives and delivers securities, collects income, distributes dividends, and segregates the assets between schemes.

Registrars: Also known as a transfer agent, a registrar is employed by a company or a mutual fund to handle all investor-related services. Underwriters: An underwriter agrees to subscribe to a given number of shares (or any other security) in the event the public subscription is inadequate. The underwriter, in essence, stands guarantee for public subscription.

Bankers to an issue: The bankers to an issue collect money on behalf of the company from the applicants. Debenture Trustees: When debentures are issued by a company, a debenture trustee has to be appointed to ensure that the borrowing firm fulfills its contractual obligations.

Venture Capital Funds: A venture capital fund is a pool of capital which is essentially invested in equity shares or equity-linked instruments of unlisted companies. Credit Rating Agencies: A credit rating agency assigns ratings primarily to debt securities. In India there are two main credit rating agencies; Credit Rating Investment Services of India Limited (CRISIL) and Investment Information and Credit Rating Agency (ICRA).

New Issue Market

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New Issue Market