New Issue MarketN e w I s s u e s M a r k e t c o m p r i s e s a l l p e o p l e , institutions,m e t h o d s , s e r v i c e s a n d p r a c t i c e s involved in raising fresh capital for both newande x i s t i n g c o m p a n i e s . T h i s M a r k e t i s a l s o c a l l e d Primary Market. PM deals in only newsecuritieswhich acquir e f or m f or the fir st ti me, i.e. which were not available previously.O nthe other hand, secondary market or stock m a r k e t o r s t o c k e x c h a n g ed e a l i n e x i s t i n g securities, i.e. securities which have already beenissued by companies andare listed with the stockexchanges.Functions of Merchant Bankers:The basic function of merchant banker or investment banker is marketing of corporate and othersecurities. In the process, he performs a number of services concerning various aspects ofmarketing, viz., origination, underwriting, and distribution, of securities. During the regime oferstwhile Controller of Capital Issues in India, when new issues were priced at a significantdiscount to their market prices, the merchant banker’s job was limited to ensuring press coverageand dispatching subscripttion forms to every corner of the country. Now, merchant bankers aredesigning innovative instruments and perform a number of other services both for the issuingcompanies as well as the investors. The activities or services performed by merchant bankers, inIndia, today include:1. Project promotion services.2. Project finance.3. Management and marketing of new issues.4. Underwriting of new issues.5. Syndication of credit.6. Leasing services.7. Corporate advisory services.8. Providing venture capital.9. Operating mutual funds and off shore funds.10. Investment management or portfolio management services.11. Bought out deals.
12. Providing assistance for technical and financial collaborations and joint ventures.13. Management of and dealing in commercial paper.14. Investment services for non-resident Indians.R e g i s t r a r s :undertake all activities connected withnew issue management – Pre-allotment work,allotment work, postallotment workA merchant banker plays multiple roles which include those of an entrepreneur, a managementadvisor, an investment banker, and a transaction broker.This shows that the breadth and depth of a merchant bankers activity has changed over the years.Services offered: The wide gamut of services offered by a merchant banker include: Issuemanagement- this forms the ‘Bread and Butter’ operations for most merchant bankers. The mainarea of service involves: Instrument designing Pricing of the issue Registration process for the issue of shares Underwriting of the issue Marketing efforts Final allotment to investors Listing details on stock exchangesCorporate advisory servicesMerchant bankers offer customised solutions to solve the financial problems of their clients.Advice is sought in areas of financial structuring (as shown in the Modern Manufacturing caseabove). Merchant bankers study the working capital practices that exist within the company andsuggest alternative policies. They also advise the company on rehabilitation and turnaroundstrategies, which would help companies to recover from their current position. They also provideadvice on appropriate risk management strategies like hedging strategies.Project advisory servicesMerchant bankers help clients to conceptualise the project idea, to carry out feasibility studies tofind out the viability of the project, and also to appraise their project.Loan syndication
These financial intermediaries arrange loans, for their clients, by analysing their cash flowpattern, so that the terms of borrowing meet the clients cash requirements. They also offerassistance in loan documentation procedures.Restructuring strategiesMerchant bankers assist the management of the client company to successfully restructurevarious activities, which include mergers and accquisitions, divestitures, management buyouts,joint venture among others.To help companies achieve the objectives of these restructuring strategies, the merchant bankerparticipates in different activities at various stages which include understanding the objectivesbehind the strategy (objectives could be either to obtain financial, marketing, or productionbenefits), and help in searching for the right partner in the strategic decision and financialvaluation of the proposal.ConclusionThe merchant banker plays a vital role in channelizing the financial surplus of the society intoproductive investment avenues. Hence before selecting a merchant banker, one must decide whatare the services for which he is being approached. Selecting the right intermediary who has thenecessary skills to meet the requirements of the client will ensure success.s a student of investment management, one should know the number of agencies involved andtheir respective role in the public issue. The promoters also should have a clear idea about theagencies to coordinate their activities effectively in the public issue. The main agencies involvedin the public issue are managers to the issue, registrars to the issue, underwriters, bankers,advertising agencies, Financial institutions and government/statutory agencies.Managers to the issue: Lead managers are appointed by the company to manage the publicissue programmes. Their main duties are (a) drafting of prospectus (b) preparing the budget ofexpenses related to the issue (c) suggesting the appropriate timings of the public issue (d)assisting in marketing the public issue successfully (e) advising the company in the appointmentof registrars to the issue, underwriters, brokers, bankers to the issue, advertising agents etc. and(f) directing the various agencies involved in the public issue. There are many agencies whichare performing the role of lead managers to the issue. The merchant banking division of thefinancial institutions, subsidiary of commercial banks, foreign banks, private sector banks andprivate agencies are available to act as lead managers.Registrar to the issue: In consultation with the lead manager, the Registrar to the issue isappointed. Quotations containing the details of the various functions they would be performingand charges for them are called for selection. Among them the most suitable one is selected. It isalways ensured that the registrar to the issue has the necessary infrastructure like computer,internet and telephone.
The Registrars to the issue normally receive the share application from various collectioncentres. They recommend the basis of allotment in consultation with the Regional StockExchange for approval. They arrange for the dispatching of the share certificates. They handoverthe details of the share allocation and other related registers to the company. Usually registrars tothe issue retain the issuer records at least for a period of six months from the last date of dispatchof letters of allotment to enable the investors to approach the registrars for redressal of theircomplaints.Underwriters: Underwriter is a person/organization who gives an assurance to the issuer to theeffect that the former would subscribe to the securities offered in the event of non-subscriptionby the person to whom they were offered. They stand as back-up supporters and underwriting isdone for a commission. Underwriting provides an insurance against the possibility of inadequatesubscription. Some of the underwriters are financial institutions, commercial banks, merchantbankers, members of the stock exchange, Export and Import Bank of India etc. The underwritersare exposed to the risk of non subscription and for such risk exposure they are paid anunderwriting commission.When appointing an underwriter, the financial strength of the prospective underwriter isconsidered because he has to undertake the agreed non-subscribed portion of the public issue.The other aspects considered are a. experience in the primary market b. past underwriting performance and default c. outstanding underwriting commitment d. the network of investor clientele of the underwriter and e. his overall reputation.Bankers to the issue: The responsibility of collecting the application money along with theapplication form is on bankers to the issue. The bankers charge commission besides thebrokerage, if any. Depending upon the size of the public issue more than one banker to the issueis appointed. When the size of the issue is large, three or four banks are appointed as bankers tothe issue. The number of collection centres is specified by the central government. The bankersto the issue should have branches in the specified collection centres. In big or metropolitan citiesmore than one branch of the various bankers to the issue are designated as collecting branch foracceptance of money. To create investment awareness in the minds of the people collectingbranches are designated in the different towns of the state where the project is being set up. If thecollection centres for application money are located nearby people are likely to invest the moneyin the company shares.Advertising agents: Advertising a public issue is very essential for its promotion. Hence, thepast track record of the advertising agency is studied carefully. Tentative programmes of eachadvertising agency along with the estimated cost are called for. After comparing theeffectiveness and cost of each programme with the other, a suitable advertising agency isselected in consultation with the lead managers to the issue. The advertising agencies take theresponsibility of giving publicity to the issue on the suitable media. The media may benewspapers /magazines/ hoardings/press release or a combination of all.
The financial institutions: The function of underwriting is generally performed by financialinstitutions. Therefore, normally they go through the draft of prospectus, study the proposedprogramme for public issue and approve them. IDBI, IFCI, ICICI, LIC, GIC and UTI are thesome of the financial institutions that underwrite and give financial assistance. The lead managersends copy of the draft prospectus to the financial institutions and include their comments, if anyin the revised draft.