NEW ISSUE AND SECONDARY MARKET By: Asst. Prof. Sudatta Mohapatra Module – 1, SAPM, MBA 3rd SEM.
INDIAN SECURITIES (CAPITAL) MARKET SECONDARY PRIMARY MARKET ORMARKET OR NEW STOCK ISSUE MARKET EXCHANGES
PRIMARY MARKETS OR NEW ISSUE MARKETS•Primary market is the part of capitalmarket where issue of new securitiestakes place.•The issuer may be a new companyor may be an existing company.•The issues may be of new types orthe securities used in the past.
Role of Primary Market•Capital formation - It provides attractive issue to the potentialinvestors and with this company can raise capital at lower costs.•Liquidity - As the securities issued in primary market can beimmediately sold in secondary market the rate of liquidity ishigher.•Diversification - Many financial intermediaries invest inprimary market; therefore there is less risk if there is failure ininvestment as the company does not depend on a single investor.The diversification of investment reduces the overall risk.•Reduction in cost - Prospectus containing all details about thesecurities are given to the investors hence reducing the cost issearching and assessing the individual securities.
Functions of Primary Market1. Origination – It refers to the work of investigation, analysis, and processing of new project proposal. Therefore origination is the origin of new issues.2. Underwriting – It is an agreement between the underwriter and the issuer whereby the underwriter promises to subscribe to a specified no. of securities in the event of public not subscribing to it.
Distribution – Distribution is thesale of securities to the ultimate investors.
Players in the New Issue Markets Lead managers – They are appointed by the issuingcompany to manage the public issue.Duties –i) Drafting Prospectusii) Preparing the budget related to issues.iii) Suggesting the appropriate timings of the public issues.iii) Assisting in the marketing of public issues.iv) Advising the company in the appointment of the Registrarof the issue, underwriter, brokers, bankers to theissue, advertising agents, etc.v) Directing the various agencies involved in the public issues.
Players in the New Issue Markets Registrar to issue – Registrars are theimportant category of intermediaries whoundertake all activities connected with New IssueManagement.Duties – i) They receive the share applicationfrom various collection centres.ii) They recommend the basis of allotment inconsultation with the regional stock exchanges.iii) They arrange for the despatching of shares
Players in the New Issue Marketsiii) They handover the details of the shareallocation and other related registers to thecompany.iv) Usually registrar to the issue retain records atleast for a period of six months from the lastdate of despatch of letters of allotment to enablethe investors to approach the registrars forredressal of their complaints.
Players in the New Issue MarketsUnderwriters – Underwriting is a contract by means ofwhich a person gives an assurance to the issuer to the effectthat the former would subscribe to the securities offered inthe event of non subscription by the person to whom theyare offered. The person who assures is called anunderwriter.Duties –•They Stand as back up supporters.•They provide an insurance against the possibility ofinadequate subscription.• They either may be Banks or FIs or may be brokers andapproved investment companies.•They charge a commission for underwriting from theissuing company.
Players in the New Issue MarketsBankers to the Issue – They are responsible forcollecting the application money along with thealong with the application form.The banker to the issue generally chargescommission besides the brokerage, if any.As specified by the central government there arenumbers of collections centre and the banker tothe issue should have branches in the in thesecollection centers.
Players in the New Issue MarketsAdvertising Agents – Advertising plays a key role inpromoting public issues. This agency is given theresponsibility to the issue on the suitable media.These Media IncludesNewspaper/magazines/hoardings/press releases.The Financial institutions - Financial Institutionsgenerally underwrite the issue and lend termloans to the companies. Hence they normally gothrough the draft prospectus, study the proposedprogramme for public issue and approve them.
PLACEMENT OF THE ISSUE/ METHODS OF FLOATING NEW ISSUES/ IPOi) Offer through Prospectus/ Public IssuesUnder this methods, the issuing company directly offers to the general public/institutions a fixed no. of shares at a stated price through a document called prospectus.The Prospectus should contain:a) Name of the company.b) Address of the registered office of the company.c) Existing and proposed activities.d) Location of the company.
PLACEMENT OF THE ISSUE/ METHODS OF FLOATING NEW ISSUES.e) Name of the directorsf) Authorized and issued capital to the public.g)Dates of opening and closing the subscription.h) Minimum subscription.i) Names of the brokers/lead mangers/ merchantbankers/ registrar to the issue.j) Floor price and cap price of the share.k) A statement by the company that it will apply tothe stock exchanges for quotations of its shares.
OFFER FOR SALE• Promoter places his shares with an investment banker (bought out dealer or sponsor) who offer it to the public at a later date Promoter Investment Banker Public• Hold on period is 70 days to more than a year• Bought out dealer decides the price after analyzing the viability, the gestation period, promoters’ background and future projections• Boughs out dealer sheds the shares at a premium to the public Asst.Prof .Sudatta Mohapatra
PRIVATE PLACEMENT• Small number of financial intermediaries (like Unit Trust of India, mutual funds, insurance companies, merchant banking subsidiaries of commercial banks) purchase the shares and sell them to investors at a later date at a suitable price• Advantages: Cost Effective - statutory and non-statutory expenses are avoided. Time Effective Structure Effectiveness - flexible to suit the financial intermediaries Access Effective - issue of all sizes can be accommodated
RIGHT ISSUEAccording to the section 81 of the companies Act1956, if a public company wants to increase itssubscribed capital by allotment of further shareafter two years from the date of its formation orone year from the date of its allotment, whichever is earlier, should offer share first to itsexisting shareholders in proportion to the shareheld by them at the time of offer.
RIGHT ISSUECertain conditions:A notice should be issued to specify the number of shares issuedThe time given to accept should not be less than 15 daysRight of the share holders to renounce the offer in favor of others
Book Building Book building is actually a price discovery method. In this method, the company doesnt fix up a particular price for the shares, but instead gives a price range, e.g. Rs 80-100. When bidding for the shares, investors have to decide at whichprice they would like to bid for the shares, for e.g. Rs 80, Rs 90 orRs 100. They can bid for the shares at any price within this range. Based on the demand and supply of the shares, the final price isfixed. The lowest price (Rs 80) is known as the floor price and the highest price (Rs 100) is known as cap price. The price at which the shares are allotted is known as cut off price. The entire process begins with the selection of the leadmanager, an investment banker whose job is to bring the issue to the public. Asst. Prof. Sudatta Mohapatra 19
The Process: The Issuer who is planning an offer nominates lead merchant banker(s) as book runners.• The Issuer specifies the number of securities to be issued and the price band for the bids.• The Issuer also appoints syndicate members with whom orders are to be placed by the investors.• The syndicate members input the orders into an electronic book. This process is called bidding and is similar to open auction.• The book normally remains open for a period of 5 days.• Bids have to be entered within the specified price band. 20
The Process:• Bids can be revised by the bidders before the book closes.• On the close of the book building period, the book runners evaluate the bids on the basis of the demand at various price levels.• The book runners and the Issuer decide the final price at which the securities shall be issued.• Generally, the number of shares are fixed, the issue size gets frozen based on the final price per share.• Allocation of securities is made to the successful bidders. The rest get refund orders.
Types of investors• There are three kinds of investors in a book-building issue.• The retail individual investor (RII), the non-institutional investor (NII) and the Qualified Institutional Buyers (QIBs).• RII is an investor who applies for stocks for a value of not more than Rs 100,000. Any bid exceeding this amount is considered in the NII category.• NIIs are commonly referred to as high net-worth individuals.• Each of these categories is allocated a certain percentage of the total issue. The total allotment to the RII category has to be at least 35% of the total issue. RIIs also have an option of applying at the cut-off price. This option is not available to other classes of investors. NIIs are to be given at least 15% of the total issue.• And the QIBs are to be issued not more than 50% of the total issue. Allotment to RIIs and NIIs is made through a proportionate allotment system. The allotment to the QIBs is at the discretion of the BRLM.
Qualified Institutional Buyers (QIBs)• Qualified Institutional Buyers (QIBs) those institutional investors who are generally perceived to possess expertise and the financial muscle to evaluate and invest in the capital markets.• a ‘Qualified Institutional Buyer’ shall mean:• a) Public financial institution as defined in section 4A of the Companies Act, 1956;• b) Scheduled commercial banks;• c) Mutual Funds;• d) Foreign institutional investor registered with SEBI;• e) Multilateral and bilateral development financial institutions;• f) Venture Capital funds registered with SEBI.• g) Foreign Venture Capital investors registered with SEBI.• h) State Industrial Development Corporations.• i) Insurance Companies registered with the Insurance Regulatory and Development Authority (IRDA).• j) Provident Funds with minimum corpus of Rs.25 crores• k) Pension Funds with minimum corpus of Rs. 25 crores "These entities are not required to be registered with SEBI as QIBs. Any entities falling under the categories specified above are considered as QIBs for the purpose of participating in primary issuance process."
Book building vs fixed price• The main difference between the book building method and the fixed price method is that in the former, the issue price is not decided initially.• The investors have to bid for the shares within the price range given and based on the demand and supply of the shares, the issue price is fixed. On the other hand, in the fixed price method, the price is decided right at the start. Investors cannot choose the price, but must buy the shares at the price decided by the company. In the book building method, the demand is known every day during the offer period, but in fixed method, the demand is known only once the issue closes.
Pricing of new issue.According to the guidelines issued by the SEBIand controller of capital issues Act 1947 thepricing of the issue is carried on.GUIDELINES FOR ISSUE AT PREMIUM:1. First issue of new companies set up by existing companies having a track record.2. First issue of existing privately/closely held or other existing unlisted companies with three year track record of consistence profitability.
3. First Public issue by existing privately/ closelyheld or other existing unlisted companies withoutthree year track record but promoted by existingcompanies with a five year track record.4. Existing privately/closely held or other existingunlisted company with three year track record ofconsistent profitability, seeking disinvestment byoffers to public without issuing fresh capital.5. Public issue by existing listed companies with thelast three years of dividend paying track record.
Guidelines for not permitting to fix their issue prices at premium.1. First public issue by existing private, closely held or other existing unlisted companies without three year track record of consistent profitability. 2. Existing private/closing held and other unlisted companies without three year track record of consistent profitability seeking disinvestment offer to public without issuing fresh capital.