A

Project Report
On

Different issue Mechanisms adopted by

Different Organization
Submitted To:

Ms. Dipali Patel

Faculty Member,
S. K. School of Business Management
(HNGU), Patan

Submitted By:
Jadav Nikulkumar J.
Roll no. 11
MBA- III
Batch Number 2013-15

Explain different issue mechanisms adopted by different organization

by giving relevant :

1. Public Issue through Prospectus

When a company raises funds by selling (issuing) its shares (or debenture / bonds) to the
public through issue of offer document (prospectus), it is called a public issue.
1) Initial Public Offer (IPO): When a (unlisted) company makes a public issue for the
first time and gets its shares listed on stock exchange, the public issue is called as
initial public offer (IPO).
2) Further public offer (FPO): When a listed company makes another public issue to
raise capital, it is called further public / follow-on offer (FPO).

For Example:

2. Tender / Book Building Method

On the basis of pricing, issues can be classified into Book Built issues and Fixed Price issues.
We shall focus on the book built issues as most of the issues nowadays are through this
method.
In a Book Building issue the issuer company mentions the minimum and maximum price
(price band) at which it will sell (issue) its shares. Thus the offer document (in this case,
called the Red Herring Prospectus) contains only the price band instead of the price at
which its shares are offered to the public.
Within this price band the investor can choose the price at which the investor are willing to
buy the shares and also the quantity. As this process is similar to bidding in an auction, the
application form for book built issue is also known as the bid form.
At times the issuer may revise the price band (revision of price band) which has to be
accompanied with news paper advertisement.
Bids by various investors are entered into the stock exchange system through the brokers
(also called syndicate member) terminal. The list of the bid received from investors at
various price bands is known as the book and can be seen in the website(s) of the stock
exchange for each investor category.
Based on the total demand in the book, the cut off price is then decided by the issuer and
merchant banker. The cut off price is the price at which the cumulative demand for shares,
equals or exceeds the offer size. Illustratively, the cut off price of a public issue of 1,000
shares with a price band of Rs. 100 to 120 would be arrived as follows:

Number of shares Cumulative number

bid
of shares bid

Bid price
(Rs.)

Shares
allotted

0
300
450
550
200
0
Cut off Price

0
300
750
1,300
1,500
1,500

120
119
117
114
112
110

0
300
450
250
0
0
Rs. 114

Total 1,000

All investors who are applied (bid) for shares at or above the cut off price will be allotted
shares at the cut off price (issue price), proportionately.
If the investment is less than Rs. 200,000 (retail investor), the investor have the option of
bidding at the cut off price by ticking the cut-off option in the application form.
After the allotment, a public advertisement is issued, giving details of the issue price as well
as a table showing the number of securities and the amount payable by successful bidders.

For Example:

3. Offer for Sale

Institutional investors like venture funds, private equity funds etc., invest in unlisted company
when it is very small or at an early stage. Subsequently, when the company becomes large,
these investors sell their shares to the public, through issue of offer document and the
companys shares are listed in stock exchange. This is called as offer for sale. The proceeds
of this issue go the existing investors and not to the company.
For Example:
Offer for Sale of SAIL (Steel Authority of India Ltd.)
A method of bringing a company to the stockmarket by selling shares in a new issue. The
company sponsor offers shares to the public by inviting subscriptions from investors.
(a).Offer for sale by fixed price - the sponsor fixes the price prior to the offer.
(b).Offer for sale by tender - investors state the price they are willing to pay. A strike price is
established by the sponsors after recieving all the bids. All investors pay the strike price.
A prospectus containing details of the sale must be printed in a national newspaper.
Steel Authority of India Ltd (SAIL)s offer for sale (OFS), where the government will divest a 5% stake,

may collect about Rs.2,000 crore, higher than Rs.1,514 crore raised in March 2013 for the sale of a 5.82%
stake, top executives in the company said.
The companys shares have risen 45.92% since then.

The state-run steelmakers OFS could hit the market in August-September and is likely to
follow divestment of part of the governments stake in Oil and Natural Gas CoRs.. Ltd, the
executives said, asking not to be identified. The Economic Times reported last week that the
government could consider selling a 5-10% stake in ONGC for as much as Rs.35,000 crore.
Reuters cited an unnamed oil ministry official in a report on Tuesday and said the
government could sell 5% in the oil explorer. That will be worth almost Rs.18,000 crore at
the current share price of ONGC.
The thinking in the government is that since ONGC will fetch a large sum, it should go first,
followed by SAIL, one senior executive at SAIL said. The SAIL share sale could happen
sometime in September.

The government expects to raise Rs.58,425 crore from divesting part of its stake in stateowned firms, according to the budget presented by finance minister Arun Jaitley in

Parliament last week. The number is critical to the governments efforts of keeping the fiscal
deficit for the year down to 4.1% of GDP, a target it may still miss according to analysts.
The first executive added that the decision on the floor price will be taken by the government.
Retail investors may get a 5% discount.
A second executive said roadshows are to be held in Hong Kong, Singapore, London, Boston
and New York, probably at least one location in West Asia and Mumbai and Chennai.
The company did not respond to a questionnaire sent on Monday seeking details.
The market sentiment is right so it would be good to quickly launch it before things
change, said a fund manager in an Indian mutual fund, who spoke on condition of
anonymity.
Metals are still weak, but the investors appetite in the domestic and overseas markets is
good, he said.
Last March, the government planned to sell 10.82% stake in SAIL, but the size of the share
sale was reduced due to weak market conditions and the government ended up selling 5.82%
for Rs.1,514 crore.
Since the OFS planned for this year is being seen as a continuation of last years plan, the
bankers to the issue are likely to be the same as in 2013, said the first executive. SBI Capital
Markets, Axis Bank, J.P. Morgan, Deutsche Bank and HSBC Securities Services were the
bankers to last years issue.
An equity analyst said the focus of the new government on infrastructure spending will help
the OFS.
SAIL is going to be the immediate beneficiary as infrastructure and manufacturing sectors
pick up. We are already seeing infrastructure firms rushing to raise money, an indication that
the sector outlook is improving. SAILs issue should get a robust response from investors as it
is also upgrading itself and entering into new sectors, said Samir Bahl, head of investment
banking at Anand Rathi Financial Services Ltd.

In the next couple of months, a lot of liquidity will be sucked up by infrastructure and
financial services firms and therefore it would make sense for SAIL to launch its issue right
away, he added.
After the OFS, the governments stake in SAIL will fall to 75%, in line with stock market
regulator Securities and Exchange Board of Indias requirement.
SAIL is Indias oldest steel company with five integrated steel plants that collectively have a
capacity of 16.62mt of steel. It is Indias second largest steel producer after Tata Steel Ltd.
SAIL closed on BSE at Rs.84.85, up 1.68% from the previous day, while the Sensex ended at
25,228.65 points, up 0.69% from the previous day.

4. Private Placement Method

It refers to the direct sale of newly issued securities to a small number of investors through
merchant bankers.
These investors are selected clients like as under:
Financial Institution
Other corporate bodies
Banks
High Net worth Individuals

Benefits

1.

Less time and cost of issue

2.

Greater flexibility

3.

Simplified procedure

For Example:
HQC sets firms for private placement

Hoang Quan Consulting Trading Service Real Estate CoRs.oration

(HQC) announced it has selected three strategic investors, all domestic
construction companies, for a sale of 50 million shares.
HA NOI (VNS) Hoang Quan Consulting Trading Service Real Estate CoRs.oration (HQC)
announced it has selected three strategic investors, all domestic construction companies, for a
sale of 50 million shares.
The property developer plans to issue 110 million shares to raise its charter capital to VND2
trillion (US$95 million) this year, of which 50 million will be offered to strategic investors in
a private placement at the face value of VND10,000 ($0.48) a share.
Bao Linh Housing Development & Construction Investment Joint Stock Company will be
offered 10 million shares, while both Indochina Real Estate Development Investment
Company Limited and Binh Thuan Construction and House Trading Joint Stock Company
will buy 20 million shares each.
The placement will be carried out in the next three months and HQC expects to raise
VND500 billion ($24 million) from this issue. As shares are issued at par value, transfer will
be restricted to one year.
In addition, the company will issue 30 million shares to its existing shareholders at the price
of VND10, 000 per share. Proceeds of these two issues will be put into four apartment
construction projects in HCM City.

HQC shares are being traded below par value. The shares hit the ceiling price yesterday at
VND7, 900 ($0.38) per share.
HQC posted a net profit of just VND6.5 billion ($308,000) in the first half of this year, only
half of the same period last year. This number is far below the yearly after-tax profit target of
VND150 billion ($7.1 million). VNS
HLIB Research said assuming conversion price of 75 sen and full conversion of the bonds,
the share base will be enlarged by 8% from 2.34 billion shares to 2.53 billion shares.
Gross gearing will fall from 0.7 times to 0.6 times. However, we believe the dilution will be
minimal or even offset as they are only convertible after second anniversary of the issue date
and potentially more integrated project contracts, it said.

5. Others
1) Rights issue (RI): When a company raises funds from its existing shareholders by selling
(issuing) those new shares / debentures, it is called as rights issue. The offer document for a
rights issue is called as the Letter of Offer and the issue is kept open for 30-60 days.
Existing shareholders are entitled to apply for new shares in proportion to the number of
shares already held. Illustratively, in a rights issue of 1:5 ratio, the investors have the right to
subscribe to one (new) share of the company for every 5 shares held by the investor.
For Example:
Right issue of PT Bumi Resources (BUMI)
Shareholders of Indonesias largest coal producer PT Bumi Resources (BUMI) have approved
the companys plan to raise up to Rs. 8 trillion (US$672.5 million) by offering its rights
shares to pay off its numerous debts.
The decision was achieved after the vote received a 56.30 percent quorum. Initially, the
threshold was set by the Financial Services Authority (OJK) at 75 percent, but due to there

not being a change in the statute, the attendance threshold was lowered to 66% of Share
holders.
The vote approving the rights shares issuance in an extraordinary shareholders meeting was
delayed by about five hours to 8 p.m. after the companys annual shareholders meeting,
which was scheduled at 2 p.m., resulting in a lower than expected attendance.
A 56.30 percent quorum was obtained during the meeting in favor of the rights issuance.
Around 32.2 million shares, or 55.7 percent of the companys enlarged stake, will be offered
at Rs. 250 per share.
Bumi expects to offer the new shares in September, corporate secretary Dileep Srivastava told
reporters after the meeting. All of the proceeds will be used to pay the companys debts,
according to him.
The price of coal is also improving, and will also give a positive outlook for the future, he
said after the shareholders meetings at the Gran Melia Hotel in Jakarta.
Among the debts that the company needs to pay are the $150 million owed to the China
Investment CoRs.oration (CIC) through Country Forest Limited (CFL), the $150 million
owed to Castleford Investment Holdings Ltd., and another $150 million that is part of the
$375 million guaranteed convertible bonds.
Previously, the Bakrie family-owned company tried to secure approval from bondholders to
change the maturity of the $375 million convertible bonds, which are due on Aug. 5 this year,
or a month before the approved rights issue will be completed.
Bumi proposed to extend the maturity of the bonds to July 2021, lower the coupon rate to 7
percent from 9.25 percent and cut the conversion price to Rs. 750, according to Bloomberg,
citing a memo to a creditor dated June 5. However, it failed to secure a quorum at the
bondholder meeting, which was held on June 20.
Bumi

independent

commissioner Anton

Setianto

Soedarsono

evaluates

that

the

approved rights issuance will likely improve the companys work performance by covering
up the debts that it owes.

M. Saladdin, one of Bumis shareholders who approved of the rights issue, said the
atmosphere inside the meeting was tense as several shareholders questioned the companys
decision to issue rights shares to solely cover its debts.
But I understand they have no other choice. The increased price of coal is also of concern,
Saladdin told The Jakarta Post on Monday evening.
Bumis majority shareholder Long Haul Holdings Limited will take new shares that are
unsubscribed to, equal to $150 million, and Castleford will absorb 6.9 billion new shares.
The $150 million from Long Haul will be used to pay part of the debts to CFL. The share
allocation to Castleford is for the conversion of the companys debt into shares, Bumi said in
its previous statement.
PT Danatama Makmur is serving as a standby buyer, which will absorb up to Rs. 2.04 billion
new shares.

2) Bonus Issue: In a Bonus Issue, the company issues new shares to its existing
shareholders. As the new shares are issued out of the companys reserves (accumulated
profits), shareholders need not pay any money to the company for receiving the new shares.
The net worth (owners money) of a company consist of its equity capital and its reserves.
After a bonus issue, there is an increase in the equity capital of the company with a
corresponding decrease in the reserves, while the net worth remains constant. In a bonus issue
of 5:1 ratio, the investor will receive five new shares of the company for each share the
investor held as illustrated below.
ABC company
Number of shares issued
Equity capital (Face value of Rs.10)
Reserves (accumulated profits)
Net worth

Before bonus issue

After (1:5) bonus issue
100
600 (100+500)
Rs.1,000
Rs. 6000 (1,000+5,000)
Rs. 10,000 Rs. 5,000 (10,000-5,000)
Rs. 11,000
Rs. 11,000

For Example:
Bonus share of Samruddhi realty

Bonus Issue of JMT Auto Ltd