Lectures on New Issue Market

Defines Primary Market

It is a market where the securities are sold in order

to raise the funds or the capital required by the
company. The securities can be in many forms
such as equity shares, preference shares, debt
instruments, bonds etc.
 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.
Primary Market - An Overview....!!!

To promote a new company

To Expand an Existing company

To diversify the Production

To Capitalise the reserves

 WHY Companies Need ?????

• Companies Raise funds to finance their projects

through various methods.
• The promoters can bring their own money or borrow
from the financial institutions or mobilise capital by
issuing securities .
• The funds may be raised through fresh issues of
shares .
 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
• Underwriting
• Distribution
Origination
It refers to the work of investigation, analysis and
processing of new project proposals. Origination
starts before an issue is actually floated in the
market. It includes a careful study of the technical,
economic and financial viability to ensure the
soundness of the project and provides advisory
services
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. Thus it is a guarantee for the marketability of
shares.
Underwriters may be institutional and non-
institutional .
Distribution

It is the function of sale of securities to ultimate

investors. Brokers and agents who maintain regular
and direct contract with the ultimate investors,
perform this service.
 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 (Bought Out Sale)
– Private Placement
– Right Issues
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. This is the most common
method followed by companies to raise capital
through issue of the securities .
The Major agencies which involve in the public
issue to coordinate the activities effectively in the
public issue are :

The Managers to the Issue

Registrar to the Issue
Underwriters
Bankers to the Issue
Advertising Agents
 Managers to the Issue
• Lead Managers are appointed by the company to
manage the public issue programmes .
• Drafting of prospectus
• Preparation the budget of Expenses related to the
issue .
• Suggested appropriate timing of the public issue.
• Advising the company in the appointment of
registrars to the issue , underwriters , brokers,
bankers to the issue , advertising agency.
 Registrar to the Issue

• Normally receives the share application from

various collection centres .
• They recommend the basis of allotment in consult
with the regional stock exchange .
• They arrange for the despatching for the share
certificates .
• They handed over the details of the share allocation.
Other Vital Parties in the IPO

Underwriters

Bankers to the Issue

Advertising Agency
 Important Terminology
• Book Running Lead Managers (BRLM)
• Red Herring Prospectus (RHP)
• Delivery Instruction Slip (DIS)
• Lot Size
• Qualified Institutional Bidder
• Retail Bidder
• ESCROW
 Placement of the Issue

Initial Issues are floated through

• Prospectus
• Private placement
• Bought out Deals / Offer for sale
• Right Issues
 Private Placement

In this type the share brokers or issue houses

purchase all the shares out-rightly from the
company and issue them to their own clients at
the same price or at the premium price
 In the news recently

Financial Express Sun, 5 Sep 2010

• Cairn India raises $625 m via private placement

• Mumbai, Mar 17: Cairn India has arranged a private
placement of approximately Rs 2,534.6 crore ($ 625 million)
after entering into an agreement with Petronas and Orient
Global Tamarind Fund Pte Ltd. These new investors have
agreed to purchase a total of 113 million shares of Cairn India
at Rs 224.30 per share.
The net proceeds of the private placement will be used to
fund capital expenditure and for general corporate purposes.
 
 Bought out deals (Offer for Sale)
In this type the company sells off all its securities to
one issue houses or the share brokers. The share
brokers sell these securities at higher price than the
price at which they have purchased them from the
company. The difference in the purchasing and
selling price is called as “turn or spread or Bought
Out Deals (BOD)”. The advantage of this kind of
sale is that the company need not print and
advertise the prospectus
 Rights Issue

This is an FPO. In this type the company

distributes the new shares or securities
amongst the existing share holders. The
distribution depends on the capital that has to
be raised by the company and the number of
the shares that the existing investors possess.