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M.Com, AICWA (Gold Medalist)
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:
Origination starts before an issue is actually floated in the market. economic and financial viability to ensure the soundness of the project and provides advisory services. Origination: It refers to the work of investigation. ..Contd«. analysis and processing of new project proposals. It includes a careful study of the technical. 1.
. Thus it is a guarantee for the marketability of shares. 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.Contd«« 2. Underwriters may be institutional and noninstitutional.
Contd«« 3. perform this service. Brokers and agents who maintain regular and direct contract with the ultimate investors. Distribution: It is the function of sale of securities to ultimate investors. .
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 .
. This is the most common method followed by companies to raise capital through issue of the securities.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.
The issue houses purchase the securities at a negotiated price and resell at a higher price. In the second stage. .Offer of sale It consists in outright sale of securities through the intermediary of issue houses or share brokers. the intermediaries resell the above securities to the ultimate investors. 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. The difference in the purchase and sale price is called turn or spread.
in the proportion to their existing holding. This mode of raising capital is the best suited when the dilution of controlling interest is not intended. such issues are called ¶Right Issue·. through an offer document. whose names appear in the register of members on record date. .Right Issue When a listed company proposes to issue securities to its existing shareholders.
banks.Private placement It involves sale of securities to a limited number of sophisticated investors such as financial institutions. It refers to sale of equity or equity related instruments of an unlisted company or sale of debentures of a listed or unlisted company. mutual funds. . and so on. venture capital funds.
In India preferential allotment is given mainly to promoters or friendly investors to ward off the threat of takeover. .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.
E-IPO The companies are now allowed to issue capital to the public through the online 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. .
. It is extensively used in international IPOs to stabilized the post-listing price of new issued shares. say 15% of the offer made to public. subject to a ceiling.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.
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. .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.
Fixed Price Process The price which has been fixed by the company for its securities before issue is brought to the market. . Payment is made at the time of subscription whereas refund is given after allotment. 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.
. (Also called price band and it should not be more than 20% of the floor price). 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.Book-Building/Price Band It is a process used for marketing a public offer of equity shares of a company. Only an indicative price range is known.
Lock-in Period Lock-in indicates the freeze on transfer of shares. which can be subjected to legal compliances. 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. . SEBI (Disclosure and Investor Protection) Guidelines.
An offer document covers all the relevant information to help an investor in making wise investment decisions.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. .
5. 6. 7. 4. Draft Prospectus Draft Letter of Offer Prospectus Abridged Prospectus Shelf Prospectus Information Memorandum Red-Herring Prospectus . 3.Kinds of Offer Documents 1. 2.
municipalities etc.Listing of Securities Listing means admission of the securities to dealings on a recognized stock exchange. central or state government. . quasi governmental and other financial institutions/corporations. The securities may be of any public limited company.
guidelines issued by SEBI and rules. .Objectives of Listing Providing liquidity to securities. Mobilize savings for economic development. to grant approval for listing of securities of companies in accordance with the various provisions of the concerned laws. byelaws and regulation of the exchange. Protect interest of investors by ensuring full disclosures. The exchange has a separate Listing Dept.
Stock Exchanges: A stock exchange is an institution where securities that have already been issued are bought and sold. the most important ones being BSE and NSE. over the securities market such as SEBI. RBI.Participants In The Securities Market Regulators: The key agencies that have a significant regulatory influence . DEA and MCA etc. CLB. . Presently there are 23 stock exchanges in India. direct or indirect.
Listed Securities: Securities that are listed on various stock exchanges and hence eligible for being traded there are called listed securities. viz. Depositories: A depository is an institution which dematerialize physical certificates and effects transfer of ownership by electronic book entries. NSDL and CSDL. Presently there are two depositories in India. .
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). . Brokers: Brokers are registered members of the stock exchanges though whom investors transact.
Merchant Bankers: Firms that specialize in managing the issue of securities are called merchant bankers. . They have to be registered with SEBI. primary dealers serve as underwriters in the primary market and as market makers in the secondary market for governmental securities. Primary Dealers: Appointed by the RBI.
Mutual Funds: A mutual fund is a vehicle for collective investment. and segregates the assets between schemes. Custodians: A custodian looks after the investment back office of a mutual fund. It receives and delivers securities. . It pools and manages the funds of investors. collects income. distributes dividends.
Registrars: Also known as a transfer agent. stands guarantee for public subscription. Underwriters: An underwriter agrees to subscribe to a given number of shares (or any other security) in the event the public subscription is inadequate. in essence. The underwriter. . a registrar is employed by a company or a mutual fund to handle all investor-related services.
. Bankers to an issue: The bankers to an issue collect money on behalf of the company from the applicants. a debenture trustee has to be appointed to ensure that the borrowing firm fulfills its contractual obligations. Debenture Trustees: When debentures are issued by a company.
Credit Rating Agencies: A credit rating agency assigns ratings primarily to debt securities. . Credit Rating Investment Services of India Limited (CRISIL) and Investment Information and Credit Rating Agency (ICRA). 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. In India there are two main credit rating agencies.