Unit - 3.

Public Issue Management

● Meaning
● Types of issues
● Appointment and role of merchant bankers in
issue management
● Pre - issue and post - issue management
activities performed by merchant bankers

Underwriting
● Concept
● Develvement
● Business Model
● Underwriting in fixed price offers
● Book built offers

Meaning of Public issue management

Public issue management refers to the process of
facilitating the issuance of securities by a company to the
general public. This typically involves the sale of new
shares or bonds to investors through a public offering.
Public issue management encompasses various activities
and responsibilities aimed at ensuring the successful
execution of the offering and compliance with regulatory
requirements. Key aspects of public issue management
include:

1. **Preparation and Planning**: This involves

determining the type and size of the offering, conducting
feasibility studies, and preparing the necessary
documentation, such as prospectuses and offering
circulars. Companies also need to plan the timing of the
offering to coincide with favorable market conditions.

2. **Regulatory Compliance**: Public offerings are

subject to regulatory oversight by securities regulators,
such as the Securities and Exchange Commission (SEC)
in the United States or the Securities and Exchange Board
of India (SEBI) in India. Public issue managers must
ensure that the offering complies with relevant laws,
regulations, and disclosure requirements.

3. **Underwriting**: Underwriting involves arranging for

the sale of the securities to investors. Investment banks or
underwriters may purchase the securities from the issuing
company and then resell them to investors, thereby
assuming the risk of unsold securities. Underwriters play a
crucial role in pricing the offering and marketing it to
potential investors.
4. **Marketing and Promotion**: Public issue managers
work with underwriters to market the offering to
institutional and retail investors. This may involve
roadshows, presentations, and other promotional activities
to generate interest and demand for the securities.

5. **Allocation and Allotment**: Once the offering is

oversubscribed, public issue managers allocate and allot
the securities to investors based on predetermined criteria.
This may involve allocating shares to institutional
investors, retail investors, and other stakeholders
according to their respective allocations.

6. **Listing and Trading**: After the securities are issued,

public issue managers assist the company in listing the
securities on a stock exchange, facilitating trading and
liquidity for investors. This involves meeting listing
requirements and complying with exchange rules and
regulations.

7. **Post-Issue Reporting and Compliance**: Public

issue managers assist the company in fulfilling its ongoing
reporting and compliance obligations following the offering.
This may include filing periodic financial reports,
disclosures, and other regulatory filings with securities
regulators and stock exchanges.
Overall, public issue management encompasses a range
of activities aimed at facilitating the issuance of securities
to the public, ensuring compliance with regulatory
requirements, and maximizing the success of the offering
for both the issuing company and investors.

Types of public issue management

Public issue management involves various types of
offerings that companies can use to raise capital from the
public. The primary types of public issue management
include:

1. **Initial Public Offering (IPO)**:

- An IPO is the first time a company offers its shares to
the public for investment.
- It allows the company to raise capital by selling a
portion of its ownership (equity) to investors in exchange
for cash.
- IPOs can be used by both private companies seeking
to go public and by established companies looking to raise
additional capital.

2. **Follow-on Public Offering (FPO)**:

- An FPO occurs when a company that is already
publicly traded issues additional shares to the public.
 - FPOs are typically used by companies to raise
additional capital for various purposes, such as financing
growth initiatives, reducing debt, or funding acquisitions.

3. **Rights Issue**:
- A rights issue is an offering of new shares to existing
shareholders in proportion to their current ownership
stakes.
- Shareholders are given the right (but not the obligation)
to purchase additional shares at a predetermined price,
usually at a discount to the market price.
- Rights issues allow companies to raise capital while
giving existing shareholders the opportunity to maintain
their proportional ownership in the company.

4. **Preferential Allotment**:
- Preferential allotment involves the issuance of shares
to select investors (such as institutional investors, strategic
investors, or promoters) on a preferential basis.
- Unlike rights issues, preferential allotments are not
offered to all existing shareholders but are instead
targeted at specific investors identified by the company.
- Preferential allotments can be used by companies to
raise capital quickly and selectively, often at a premium to
the market price.

5. **Qualified Institutional Placement (QIP)**:

 - A QIP is a private placement of shares to qualified
institutional buyers (QIBs), such as institutional investors,
mutual funds, and banks.
- QIPs are typically used by listed companies to raise
capital quickly without the need for a public offering.
- QIPs offer flexibility in terms of pricing and timing and
are often used by companies to fund growth initiatives or
strengthen their balance sheets.

6. **Debt Offerings**:
- While not equity offerings, debt offerings are another
form of public issue management where companies issue
bonds or debentures to raise capital from investors.
- Debt offerings may include bonds, notes, or other debt
instruments with fixed or variable interest rates and
maturity dates.
- Companies use debt offerings to raise funds for various
purposes, including financing capital expenditures,
refinancing existing debt, or funding working capital
requirements.

Each type of public issue management has its own

characteristics, advantages, and considerations, and
companies may choose the most appropriate type based
on their specific financial needs, market conditions, and
strategic objectives.
Appointment and role of merchant
bankers in issue management
Merchant bankers play a crucial role in the process of
issue management, particularly in facilitating public
offerings of securities by companies. Here's an
explanation of their appointment and role:

**Appointment of Merchant Bankers**:

1. **Selection Process**: Companies typically appoint

merchant bankers through a selection process, often
based on their expertise, track record, reputation, and
capabilities in handling public offerings.

2. **Regulatory Compliance**: Merchant bankers must

be registered with regulatory authorities such as the
Securities and Exchange Board of India (SEBI) in India or
the Securities and Exchange Commission (SEC) in the
United States. Companies must ensure that the appointed
merchant bankers comply with all regulatory requirements.

3. **Engagement Agreement**: Once selected, the

company and the merchant banker enter into an
engagement agreement outlining the terms, conditions,
and scope of the services to be provided. This agreement
typically includes details such as fees, responsibilities,
timelines, and regulatory compliance.

**Role of Merchant Bankers**:

1. **Due Diligence**: Merchant bankers conduct thorough

due diligence on the issuing company to assess its
financial health, business prospects, management team,
and regulatory compliance. This involves reviewing
financial statements, legal documents, and other relevant
information to ensure accuracy and completeness.

2. **Structuring the Offering**: Merchant bankers assist

the company in structuring the offering, including
determining the type of offering (e.g., IPO, FPO, rights
issue), pricing the securities, and defining the offering size
and terms. They provide valuable advice on market
conditions, investor demand, and pricing strategies to
optimize the offering.

3. **Documentation and Compliance**: Merchant

bankers help prepare the necessary documentation for
regulatory filings, such as prospectuses, offer documents,
and other disclosures required by regulatory authorities.
They ensure that all legal and regulatory requirements are
met throughout the offering process.
4. **Marketing and Investor Relations**: Merchant
bankers play a key role in marketing the offering to
potential investors. This involves conducting roadshows,
investor presentations, and marketing campaigns to
generate interest and demand for the securities. They also
handle investor inquiries and coordinate investor meetings
and conferences.

5. **Underwriting and Syndication**: Merchant bankers

may underwrite the offering themselves or act as lead
managers in syndicating the offering to other investment
banks or financial institutions. They coordinate with
underwriters, syndicate members, and other parties
involved in the underwriting process to ensure a
successful offering.

6. **Price Stabilization and Market Support**: After the

offering, merchant bankers may engage in price
stabilization activities to support the trading price of the
securities in the secondary market. This may involve
buying or selling securities to maintain price stability and
support investor confidence.

7. **Post-Offering Support**: Merchant bankers provide

ongoing support to the company after the offering,
including assistance with post-offering filings, investor
communications, and compliance with listing
requirements. They help the company navigate the
transition to being a publicly traded entity and ensure
ongoing compliance with regulatory obligations.

Overall, merchant bankers play a critical role in the entire

process of issue management, from due diligence and
structuring the offering to marketing, underwriting, and
post-offering support. Their expertise, guidance, and
support are essential for companies seeking to raise
capital from the public markets efficiently and effectively.

Pre - issue and post - issue management

activities performed by merchant bankers
Merchant bankers are involved in various pre-issue and
post-issue management activities during the process of
issuing securities. Here's an explanation of these
activities:

**Pre-Issue Management Activities**:

1. **Due Diligence**: Merchant bankers conduct due

diligence on the issuing company to assess its financial
health, business prospects, management team, and
regulatory compliance. This involves reviewing financial
statements, legal documents, and other relevant
information to ensure accuracy and completeness.
2. **Structuring the Offering**: Merchant bankers assist
the company in structuring the offering, including
determining the type of offering (e.g., IPO, FPO, rights
issue), pricing the securities, and defining the offering size
and terms. They provide valuable advice on market
conditions, investor demand, and pricing strategies to
optimize the offering.

3. **Documentation Preparation**: Merchant bankers

help prepare the necessary documentation for regulatory
filings, such as prospectuses, offer documents, and other
disclosures required by regulatory authorities. They
ensure that all legal and regulatory requirements are met
throughout the offering process.

4. **Marketing Strategy**: Merchant bankers develop a

marketing strategy for the offering, including identifying
target investors, conducting roadshows, investor
presentations, and marketing campaigns to generate
interest and demand for the securities. They also handle
investor inquiries and coordinate investor meetings and
conferences.

5. **Underwriting and Syndication**: Merchant bankers

may underwrite the offering themselves or act as lead
managers in syndicating the offering to other investment
banks or financial institutions. They coordinate with
underwriters, syndicate members, and other parties
involved in the underwriting process to ensure a
successful offering.

**Post-Issue Management Activities**:

1. **Listing and Trading Support**: After the offering,

merchant bankers assist the company in listing the
securities on a stock exchange, facilitating trading and
liquidity for investors. This involves meeting listing
requirements and complying with exchange rules and
regulations.

2. **Price Stabilization and Market Support**: Merchant

bankers may engage in price stabilization activities to
support the trading price of the securities in the secondary
market. This may involve buying or selling securities to
maintain price stability and support investor confidence.

3. **Investor Relations**: Merchant bankers provide

ongoing support to the company in managing investor
relations. They assist in communicating with investors,
handling investor inquiries, and organizing investor
meetings and conferences to maintain investor confidence
and support.
4. **Post-Offering Compliance**: Merchant bankers
ensure that the company complies with post-offering
regulatory requirements, including filing periodic financial
reports, disclosures, and other regulatory filings with
securities regulators and stock exchanges.

5. **Corporate Actions**: Merchant bankers may assist

the company in executing corporate actions related to the
offering, such as stock splits, mergers, acquisitions, or
other strategic transactions.

Overall, merchant bankers play a critical role in both

pre-issue and post-issue management activities, providing
expertise, guidance, and support to companies throughout
the process of issuing securities and transitioning to being
a publicly traded entity.

Underwriting

Concept

Underwriting is a financial service provided by investment

banks or underwriters to companies issuing securities,
such as stocks or bonds, to the public. The underwriter
assumes the risk of purchasing the securities from the
issuing company at a predetermined price and then
reselling them to investors at a higher price, thereby
facilitating the issuance process. Here's how underwriting
works:

1. **Risk Assumption**: When a company decides to

issue securities to raise capital, it may engage an
underwriter to purchase the securities from the company
at an agreed-upon price, known as the underwriting price.
By doing so, the underwriter assumes the risk of owning
the securities and guarantees the company a certain
amount of proceeds from the issuance.

2. **Pricing**: The underwriter works with the company to

determine the offering price of the securities based on
factors such as market conditions, demand from investors,
and the company's financial performance. The offering
price is typically set at a level that ensures the securities
will be attractive to investors while also generating
sufficient proceeds for the company.

3. **Distribution**: Once the offering price is determined,

the underwriter markets the securities to potential
investors through a process known as distribution. This
may involve conducting roadshows, investor
presentations, and marketing campaigns to generate
interest and demand for the securities. The underwriter
may also work with other financial institutions to syndicate
the offering and distribute the securities to a broader base
of investors.

4. **Underwriting Agreement**: Before the offering, the

underwriter and the issuing company enter into an
underwriting agreement that outlines the terms and
conditions of the underwriting arrangement. This
agreement typically specifies the underwriter's obligations,
including the amount of securities to be purchased, the
underwriting fee, and any conditions or contingencies that
must be met before the offering can proceed.

5. **Stabilization**: After the securities are offered to the

public, the underwriter may engage in price stabilization
activities to support the trading price of the securities in
the secondary market. This may involve buying or selling
securities to maintain price stability and support investor
confidence.

6. **Compensation**: In exchange for assuming the risk

of purchasing the securities and facilitating the issuance
process, the underwriter receives compensation in the
form of underwriting fees or commissions. These fees are
typically calculated as a percentage of the total proceeds
raised from the offering and are paid by the issuing
company.
Overall, underwriting plays a critical role in the process of
issuing securities to the public, providing companies with
access to capital markets and investors with opportunities
to invest in new securities. By assuming the risk of
purchasing the securities and facilitating the issuance
process, underwriters help ensure the success of public
offerings and support the efficient functioning of financial
markets.

Development

The development of underwriting traces back to the origins

of modern financial markets and the need for companies
to raise capital from investors. Here's an overview of the
key stages in the development of underwriting:

1. **Early History**: Underwriting has roots dating back to

ancient times when merchants and traders would pool
resources to finance risky ventures, such as maritime
expeditions or trade ventures. These early forms of
underwriting involved individuals or groups assuming
financial risk in exchange for a share of the potential
profits.

2. **Emergence of Modern Financial Markets**: The

concept of underwriting evolved with the emergence of
modern financial markets in the 17th and 18th centuries.
As economies expanded and trade flourished, the need for
capital to finance large-scale projects grew, leading to the
development of organized stock exchanges and securities
markets.

3. **Industrial Revolution**: The Industrial Revolution in

the 18th and 19th centuries marked a period of rapid
industrialization and economic growth, creating a surge in
demand for capital to fund new industries, infrastructure
projects, and technological innovations. Underwriting
became a critical mechanism for companies to raise
capital by issuing stocks and bonds to investors.

4. **Rise of Investment Banking**: The late 19th and

early 20th centuries saw the rise of investment banking
firms specializing in underwriting securities offerings.
These firms played a central role in facilitating the
issuance of stocks and bonds by providing underwriting
services to companies seeking to raise capital.

5. **Regulatory Framework**: With the growth of

financial markets and the increasing complexity of
securities offerings, governments began to introduce
regulations to protect investors and ensure the integrity of
capital markets. Regulatory frameworks governing
underwriting activities were established to set standards
for disclosure, pricing, and investor protection.
6. **Expansion of Underwriting Services**: Over time,
underwriting evolved to encompass a broader range of
financial services, including mergers and acquisitions
advisory, corporate finance, debt syndication, and risk
management. Investment banks and underwriters
expanded their scope of services to meet the growing
needs of companies and investors in increasingly
globalized financial markets.

7. **Technological Advancements**: The advent of

technology, particularly the internet and electronic trading
platforms, revolutionized the underwriting process by
enabling faster, more efficient communication, and
execution of securities offerings. Online platforms and
digital tools streamlined the underwriting process, making
it more accessible and cost-effective for companies and
investors.

8. **Globalization**: In the late 20th and early 21st

centuries, globalization further transformed the
underwriting landscape by opening up opportunities for
cross-border capital flows, international securities
offerings, and global investment banking operations.
Investment banks and underwriters expanded their reach
to serve clients and investors in diverse markets around
the world.
Overall, the development of underwriting reflects the
evolution of financial markets and the dynamic interplay
between economic, technological, regulatory, and societal
factors shaping the capital-raising process for companies
and the investment opportunities available to investors.

Business Model

The business model of underwriting involves providing

financial services to companies seeking to raise capital by
issuing securities to investors. Underwriters assume the
risk of purchasing the securities from the issuing company
at a predetermined price and then reselling them to
investors at a higher price, thereby facilitating the issuance
process. Here's an overview of the business model of
underwriting:

1. **Risk Management**: Underwriting involves managing

various types of financial risks, including market risk, credit
risk, and liquidity risk. Underwriters assess the
creditworthiness of the issuing company, analyze market
conditions, and determine the appropriate pricing and
terms for the securities being offered.

2. **Capital Raising**: The primary function of

underwriting is to assist companies in raising capital from
investors by issuing stocks, bonds, or other securities.
Underwriters help companies structure the offering,
determine the offering price, and market the securities to
potential investors.

3. **Pricing and Valuation**: Underwriters play a key role

in pricing the securities being offered to ensure they are
attractive to investors while also generating sufficient
proceeds for the issuing company. This involves analyzing
market conditions, investor demand, and the financial
performance of the issuing company to determine the
optimal pricing strategy.

4. **Market Making and Distribution**: Underwriters act

as intermediaries between the issuing company and
investors, facilitating the distribution of securities to the
public. They market the offering to potential investors
through roadshows, investor presentations, and marketing
campaigns, and coordinate the sale of securities through
syndication or direct placement.

5. **Underwriting Fees**: In exchange for assuming the

risk of purchasing the securities and facilitating the
issuance process, underwriters receive compensation in
the form of underwriting fees or commissions. These fees
are typically calculated as a percentage of the total
proceeds raised from the offering and are paid by the
issuing company.

6. **Stabilization and Support**: After the securities are

offered to the public, underwriters may engage in price
stabilization activities to support the trading price of the
securities in the secondary market. This may involve
buying or selling securities to maintain price stability and
support investor confidence.

7. **Advisory Services**: In addition to underwriting

securities offerings, underwriters may provide advisory
services to companies on various aspects of corporate
finance, including mergers and acquisitions, debt
restructuring, and strategic planning. These advisory
services help companies optimize their capital structure
and financial performance.

Overall, the business model of underwriting revolves

around providing financial services to companies seeking
to raise capital through securities offerings, managing
financial risks, and facilitating the efficient allocation of
capital between issuers and investors in the capital
markets.

Underwriting in fixed price offers

In fixed price offers, underwriting refers to the process of
guaranteeing the purchase of securities by an underwriter
at a predetermined price, known as the fixed price, and
then reselling them to investors at the same price. Here's
how underwriting works in fixed price offers:

1. **Offering Price Determination**: In a fixed price offer,

the issuing company and the underwriter agree on a
specific price at which the securities will be offered to
investors. This price is typically determined based on
factors such as market conditions, demand from investors,
and the financial performance of the issuing company.

2. **Underwriting Agreement**: Before the offering, the

issuing company and the underwriter enter into an
underwriting agreement that outlines the terms and
conditions of the underwriting arrangement. This
agreement specifies the underwriter's obligations,
including the amount of securities to be purchased, the
fixed price, and any conditions or contingencies that must
be met before the offering can proceed.

3. **Purchase of Securities**: Under the terms of the

underwriting agreement, the underwriter agrees to
purchase a certain number of securities from the issuing
company at the fixed price. This means that the
underwriter assumes the risk of owning the securities and
guarantees the issuing company a certain amount of
proceeds from the offering.

4. **Distribution to Investors**: Once the securities are

purchased by the underwriter, they are offered for sale to
investors at the fixed price. Investors have the opportunity
to purchase the securities at the specified price until the
offering period expires or until the securities are fully
subscribed.

5. **Allocation and Allotment**: If the offering is

oversubscribed, meaning that there is more demand for
the securities than there are securities available, the
underwriter may allocate and allot the securities to
investors based on predetermined criteria. This ensures
that all investors have a fair opportunity to participate in
the offering.

6. **Underwriting Fees**: In exchange for assuming the

risk of purchasing the securities and facilitating the
issuance process, the underwriter receives compensation
in the form of underwriting fees or commissions. These
fees are typically calculated as a percentage of the total
proceeds raised from the offering and are paid by the
issuing company.
7. **Post-Offering Support**: After the offering, the
underwriter may provide additional support to the issuing
company, such as assisting with post-offering filings,
investor communications, and compliance with regulatory
requirements.

Overall, underwriting in fixed price offers involves the

underwriter guaranteeing the purchase of securities at a
predetermined price and facilitating the offering process by
purchasing the securities from the issuing company and
reselling them to investors at the same price.

Book built offers

In a book-building process, underwriting refers to the

process of facilitating the offering of securities by
determining the demand for the securities and setting the
final price based on investor interest. Here's how
underwriting works in book-built offers:

1. **Offering Process**: In a book-built offer, the issuing

company or underwriter (often an investment bank)
initiates the offering by announcing the intention to issue
securities to the public. The offering is typically conducted
for a specified period during which investors can submit
their bids for the securities.
2. **Price Discovery**: Unlike fixed price offers, where
the price is predetermined, in a book-built offer, the price is
determined through a price discovery process based on
investor demand. Investors submit bids specifying the
quantity of securities they wish to purchase and the price
they are willing to pay.

3. **Book Building**: The underwriter collects and

aggregates the bids from investors to create a "book" of
demand for the securities. This book provides valuable
information about investor interest and pricing
expectations, which is used to determine the final offering
price.

4. **Price Setting**: Based on the bids received during

the book-building process, the underwriter sets the final
offering price for the securities. The goal is to set a price
that maximizes investor participation while also generating
sufficient proceeds for the issuing company.

5. **Allocation and Allotment**: Once the final price is

determined, the underwriter allocates and allots the
securities to investors based on predetermined criteria.
This may include factors such as the size of the investor's
bid, the level of demand for the securities, and any
regulatory requirements.
6. **Underwriting Commitment**: In a book-built offer,
the underwriter typically provides a commitment to
underwrite the offering, meaning that they agree to
purchase any unsold securities at the final offering price.
This provides assurance to the issuing company that the
offering will be successfully completed, even if investor
demand is lower than expected.

7. **Regulatory Compliance**: Throughout the

book-building process, the underwriter ensures
compliance with regulatory requirements, including
disclosure obligations, investor protection measures, and
pricing transparency. This helps maintain the integrity and
fairness of the offering process.

8. **Underwriting Fees**: In exchange for underwriting

the offering and facilitating the book-building process, the
underwriter receives compensation in the form of
underwriting fees or commissions. These fees are typically
calculated as a percentage of the total proceeds raised
from the offering and are paid by the issuing company.

Overall, underwriting in book-built offers involves the

underwriter facilitating the offering process by determining
investor demand, setting the final offering price, allocating
securities to investors, and ensuring compliance with
regulatory requirements. This approach allows for greater
flexibility in pricing and allocation, enabling companies to
maximize investor participation and optimize the terms of
the offering.