NEW ISSUE MANAGEMENT

NIKHIL GARG
ASIAN BUSINESS SCHOOL
Widescreen Graphics
 CAPITAL MARKETS
There are two types of
capital market:
 Primary market,

 Secondary market

PRIMARY MARKET
 It is that market in which shares,
debentures and other securities
are sold for the first time for
collecting long-term capital.
 This market is concerned with new
issues. Therefore, the primary market
is also called NEW ISSUE MARKET.
Features of Primary
Market
 It Is Related With New Issues
Factors to be considered by
 It Has No Particular Place
Investors
 Following are the methods of  Promoters Credibility
raising capital in the primary
market:  Project Details
i) Public Issue  Product
ii) Offer For Sale
iii) Private Placement  Financial data

iv) Right Issue  Risk factors

v) Electronic-Initial Public Offer
 Auditors report
 It comes before Secondary
Market
 SECONDARY MARKETS
 The secondary market is that market in Features of Secondary Market
which the buying and selling of the
previously issued securities is done.  It Creates Liquidity
The transactions of the secondary market
 It Comes After Primary

are generally done through the medium
of stock exchange. Market
 The chief purpose of the secondary  It Has A Particular Place
market is to create liquidity in securities.
 If an individual has bought some security  It Encourage New Investments
and he now wants to sell it, he can do so
through the medium of stock exchange to  Aids in financing the industry
sell or purchase through the medium of  Ensures safe & fair Dealing
stock exchange requires the services of
the broker presently. (MEDIA BROADCASTING)
PRE-ISSUE
 Appointed by company to manage
the public issue programmes.
BRLM - A Merchant banker
possessing a valid SEBI
registration
Main duties – Pre Issue
(a) drafting of prospectus
(b) preparing the budget of expenses
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
appointment of registrars to the
issue, underwriters, brokers, bankers
to the issue, advertising agents etc.
(f) directing the various agencies
involved in the public issue
MERCHANT
BANKER
Post Issue
 management of escrow accounts,
 Coordinate non-institutional
allocation, intimation of allocation
and dispatch of refunds to bidders
etc are performed by the LM.
 finalization of trading and dealing
of instruments and
 dispatch of certificates and demat
of delivery of shares with the various
agencies connected with the work
such as the Registrar(s) to the Offer
 REGISTRAR
 Finalizes the list of eligible allotees after
deleting the invalid applications
 Corporate action for crediting of shares to
the demat accounts of the applicants
 Dispatch of refund orders to those
applicable
 Receive the share application from various
collection centres
 Recommend the basis of allotment in
consultation with the Regional Stock
Exchange for approval
 Arrange for the dispatching of the share
certificates
UNDERWRITERS
 Underwriting means they will subscribe to the
balance shares if all the shares offered at the IPO
are not picked up
 Could be a banker, broker, merchant banker or
financial institution
 Insurance against the possibility of inadequate
subscription
 Done for a commission
The aspects considered before appointing 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
RED
HERRING
• First thing to attract people without
disclosing much information about the
deal.
• The “red herring” is a reference to a
legal disclosure, printed in red.
• Informing to readers that the SEC has not
yet reviewed and approved the
document.
• Securities may not be sold or may offers
to buy be accepted prior to the time the
Registration Statement becomes effective.
 “Offer document” means Prospectus in
case of a public issue or offer for sale
 and Letter of Offer in case of a rights
issue which is filed Registrar of
Companies (ROC) and Stock
Exchanges.
 An offer document covers all the
relevant information to help an investor
to make his/her investment decision
 “Draft Offer document” means the
offer document in draft stage
 The draft offer documents are filed
with SEBI, at least 21 days prior to
the filing of the Offer Document with
ROC/ SEs.
 Open for public comments on SEBI
website
 Public Issue through Prospectus
Company directly issue a prospectus to the investors.
Features-
1. Names and addresses of the company promoters, managers, board members,
legal advisor, bankers etc.
2. The date of opening and closing of subscriptions.
3. Details regarding the project, plant location, technology, collaboration,
infrastructure facilities.
4. Past performance of the company.
5. Management perception regarding the risk factors involved in the project.
6. Credit rating obtained from recognized rating agency like, CRISIL, ICRA, and
CARE.
e-IPO
 A company proposing to issue
capital to public through the on-line
system of the stock exchange for
offer of securities can do so if it
complies with the requirements under
Chapter 11A of DIP Guidelines.
 The appointment of various
intermediaries by the issuer includes
a prerequisite that such
members/registrars have the required
facilities to accommodate such an
online issue process.
'IPO Grading‘
 IPO grading is the grade assigned by a Credit
Rating Agency registered with SEBI, to the
initial public offering (IPO) of equity shares
IPO grade 1: Poor fundamentals
IPO grade 2: Below-average fundamentals
IPO grade 3: Average fundamentals
IPO grade 4: Above-average fundamentals
IPO grade 5: Strong fundamentals
SEBI does not play any role in the assessment
made by the grading agency. The grading is
intended to be an independent and unbiased
opinion of that agency.
WHAT IS BOOK BUILDING?
 Process of price discovery Types of investors for book
 Not a fixed price for its building
shares
 Indicates a price band that  There are three kinds of investors
mentions the lowest (referred in a book-building issue.
to as the floor) and the highest
(the cap) prices 1.The retail individual investor (RII),
 The spread between the floor
and the cap of the price band 2.The non-institutional investor (NII)
shall not be more than 20%.
The cap should not be more 3.The Qualified Institutional Buyers
than 120% of the floor price. (QIBs)
 Price is finalized by the book
runner and the issuer company
There are two type of book building process according to SEBI‟s guidelines.
1. 75% book building
2. 100% book building
How does Book Building work
 the Red Herring prospectus does not contain a price contains either the floor
price of the securities offered through it or
a price band along with the range within which the bids can move.
 The applicants bid for the shares quoting the price and the quantity that
they would like to bid at.
 ‘cut-off’ price is arrived at on the lines of Dutch auction.
 The basis of Allotment is then finalized and letters allotment/refund is
undertaken final prospectus with all the details including the final issue price
and the issue size is filed with ROC
 In French auction, bidders are allotted shares at the price they have bid, unlike the Dutch
auction system under which the cut-off price at which the shares are allotted to everybody
participating in the bidding process is the one at which the issue gets fully subscribed.
  Qualified Institutional Buyers are those institutional
investors who are generally perceived to possess
expertise and the financial muscle to evaluate and
invest in the capital markets
 a. Public financial institution as defined in section 4A of
the Companies Act, 1956;
b. Scheduled commercial banks;
c. Mutual funds;
 In the retail individual investor category,
d. Foreign institutional investor registered with SEBI;
investors cannot apply more than Rs2lakh (Rs2,
00,000) in an IPO. e. Multilateral and bilateral development financial
institutions;
 •Retail Individual investors have an allocation f. Venture capital funds registered with SEBI.
of 35% of shares of the total issue size in Book g. Foreign Venture capital investors regd.with SEBI.
build IPOs. h. State Industrial Development Corporations.
 •NRI‟s who apply with less than Rs200000/ are i. Insurance Companies registered with the Insurance
also considered as RII category. Regulatory and Development Authority (IRDA).
j. Provident Funds with minimum corpus of Rs.25 crores
 •Retail Individual investor can bid for more than
Rs200000 in an IPO by applying in NON k. Pension Funds with minimum corpus of Rs. 25 crores)
institutional Investors Category. There is no
upper limit for bidding amount in „NON These entities are not required to be registered with
institutional Investors Category. SEBI as QIBs.
 QIB have an allocation of 50% of shares of the total
issue size in book build IPOs.

GUIDELINES BY SEBI
 On the recommendations of Malegam
committee, The concept of Book Building
assumed significance in India as SEBI
approved, with effect from November 1,
1995, the use of the process in pricing
new issues.
 •SEBI issued the guidelines under which
the option of 100%book-building was
available to only those issuer companies
which are to make an issue of capital of
and above Rs.100crore.
 •These guidelines were modified in
1998-99.The ceiling of issue size was
reduced to Rs. 25crore.
MODIFIED GUIDELINES
1. Compulsory display of demand at the terminals was
made optional.
2. The reservation of 15% of the issue size for
individual investors.
3. The issuer was allowed to disclose either the issue
size or the number of securities being offered.
4. The allotment of the book built portion was
required to be made in Demat mode only.
5. In an issue made through the book building process,
the allocation in the net offer to public category is
made as follows
I. Not less than 35 % to retail individual investors.
II. Not less than 15 % to non institutional investors i.e.
investors other than retail individual investors and
qualified institutional buyers.
III. Not more than 50% to Qualified Institutional
Buyers; 5 % of which would be allocated to mutual
funds
 Minimum 50% to retail individual investors (if not book
building)
 How many days is the issue open?
 at least 3 working days and not more
than 10 working days
 In Book built issues, the minimum and
maximum period for which bidding will
be open is 3 – 7 working days
extendable by 3 days in case of a
revision in the price band
 public issue made by an infrastructure
Company may be kept open for a
maximum period of 21 working days.
 Rights issues shall be kept open for at
least 30 days and not more than 60
days
 In case the price band is revised, the
bidding period shall be extended for
a further period of three days,
subject to the total bidding period
not exceeding thirteen days.
 The basis of issue price is disclosed in
the offer document.
 The issuer is required to disclose in
detail about the qualitative and
quantitative factors justifying the issue
price
Finalization of Allotment
 the investor is intimated about the CAN/Refund order within 30 days
of the closure of the issue
 book built issues, the basis of allotment is finalized by the Book Running
lead Managers within 2 weeks from the date of closure of the issue
 registrar then ensures that the demat credit or refund as applicable is
completed within 15 days of the closure of the issue.
 The listing on the stock exchanges is done within 7 days from the
finalization of the issue
 In case of fixed price issue, it would be around 37 days after closure
of the issue
TYPES OF ORDERS
Market Orders Price Contingent Orders
 Executed immediately  Placing orders at
 Ex. Bid = Rs. 90, Ask = 91 specified prices
 Posted price quote  Like Limit Buy orders
represent commitments to  Limit sell orders
trade up specified no. of
shares  Collection of limit orders
 Volatility in execution of
waiting to be executed is
orders known as limit order book
TYPES OF ORDERS
Stop Orders
 Stop Loss order: stock is
sold if its price falls
below a stipulated level
 Stop Buy orders: Stock
shall be bought when its
price rises above a limit
 Short Sales
Circuit Breakers
 In some cases, stock prices may move up or down
drastically, accelerated mostly due to fear or greed by
speculators and manipulators.
 Such movements are harmful for the stock markets.
 to control such heavy price fluctuations, stock exchanges
have a system called „circuit breakers‟
 Circuit breakers were first introduced in the trading system
of Indian stock exchanges back in 1992 at the BSE
 These are also called circuit limits or price bands.
 There are 3 circuit limits for indices – 10%, 15% and 20%.Circuit filter is
applied to Sensex or Nifty whichever is breached first.
2. 15% movement in either direction
1. 10% movement in either direction
 After the above mentioned halts,
 If the movement is before 1 pm – 1 trading starts again. If the market
hour halt hits 10% again, there will not be any
halts, but if it breaches 15%, circuit
 If the movement is after 1 but before limits comes to play again.
2:30 pm – half an hour halt  If the movement is before 1 pm – 2
hours halt
 If the movement is after 2.30 pm – no  If the movement is after 1 pm but
halt before 2 pm- 1 hour halt
 I the movement is after 2 pm – no
further halt.
3. 20% movement in either direction
if the market hits 20%, trading will be halted for the day.
Above percentage is calculated on the closing value of the Sensex or the Nifty on the last
day of the immediate preceding quarter. So, for deciding the circuit limit for the Jan-march
2011 period, the closing value of the bellwether indices on December 31, 2010 would be used.
WHAT HAPPENS TO ORDERS
DURING CIRCUIT LIMITS?
 If the market hits the upper or
lower circuits, trading is halted
and you cannot place orders
until the market re-opens
 If you have pending orders
with the broker at the time of
circuit break, such orders can
be modified or cancelled only
once the trading re-opens.
CIRCUIT LIMITS FOR
INDIVIDUAL STOCKS
 the percentage for
circuit filter limit is 2%,
5%, 10%, 20%
 For newly listed
companies, there is a
circuit limit of 20% from
the issue price.
INDIAN MARKETS
 Trading on the Indian equities segment
takes place on all weekdays.
 There is No trading on Saturday, Sunday
and Published Indian Stock Market
Holidays declared by the Indian Stock
Exchange in advance.
 The Market Opens at: 09:15 hours and
Closes at: 15:30 hours
 Pre open trade session will be from
09:00 ~ 09:15 hours
 Pre-open trade session is a 15 minute
trade session from 9:00AM to 9:15AM on
the 50 stocks of NIFTY index .
 Only 50 stocks of the NIFTY index can be
traded during this time on both NSE and
BSE. Normal trading for all other stocks
will start at 9:15AM till 3:30PM.
PRE MARKET SESSION
 In case a major event or announcement
comes overnight before market opens,
such events are likely to bring heavy
volatility on the next day when the
market opens.
 Special events include merger and
acquisition announcements, open offers,
delistings, debt-restructurings, credit-
rating downgrades etc which may have a
deep impact on investors wealth.
 In order to stabilize this, pre open call
auction is conducted to discover the right
price and to reduce volatility.
BREAK-UP OF 15 MINUTES
 The 15 minutes of pre open session is broken into 8 + 4 + 3.
 The first 8 minutes: During this session investors can place/ modify /cancel orders
on the basis of which the exchanges would determine the rates at which trading
would happen. Orders are not accepted after this initial 8 minutes.
 Limit orders will get priority over market orders at the time of execution of trades
.All orders shall be disclosed in full quantity, i.e. orders where revealed quantity
function is enabled, will not be allowed during the pre-open session
 In the next four minutes, orders are matched, executable price is discovered and
trades are confirmed. The next 3 minutes is just a buffer period for transmission
from pre-market session to normal market session.
PRICE DISCOVERY
 The equilibrium price shall be the price at which the maximum volume is executable
 In case of more than one price meets the said criteria, the equilibrium price shall be the price at
which there is minimum order imbalance quantity (unmatched qty).
 in case more than one price has same minimum order imbalance quantity, the equilibrium price shall
be the price closest to previous day‟s closing price.
 In case the previous day‟s closing price is the mid-value of a pair of prices which are closest to it,
then the previous day‟s closing price itself shall be taken as the equilibrium price.
 If the price is not discovered in pre-open session then the orders entered in the pre-open session will
be shifted to the order book of the normal market.
 The price of the first trade in the normal market shall be the opening price.

REGIONAL STOCK MARKETS

 Apart from the BSE and NSE, there are 21 regional exchanges which open at normal hours 9:15 to
15:30 hrs.
ORDER BOOK
 an electronic list of buy and sell orders for a specific security or financial instrument, organized by price level
 lists the number of shares being bid or offered at each price point
 It also identifies the market participants behind the buy and sell orders, although some choose to remain anonymous
 dynamic and constantly updated in real time throughout the day
 Also known as “continuous book.”
 Orders that specify execution only at market open or market are maintained separately.
 These are known as the “opening (order) book” and “closing (order) book,” respectively
 at market close, when the closing book and continuous book are consolidated to generate a single closing price.
 the order book information helps traders make better-informed trading decisions
 they can see which brokerages are buying or selling the stock and whether market action is being driven by retail
investors or institutions
 The order book also shows order imbalances, which may provide clues to the stock‟s direction in the very short term
 Order Imbalance: A situation resulting from an excess of buy or sell orders for a specific security on a trading
exchange, making it impossible to match the buyers' and sellers' orders.
Who are custodians?
 In general, a custodian is a bank or a
financial institution that holds financial
securities such as stocks, bonds, gold, etc.
So basically, custodians are involved in
having the custody of securities/ shares.
They might be some banks who are
holding the securities. Such as ICICI bank
in India holding shares on behalf of a
customer.
So customer (say Mukesh) has 1000
shares of a company (say Reliance
Industries), and those shares are held with
ICICI bank. Here ICICI bank acts as a
custodian of these shares/ securities
SEBI (Custodian of Securities) Reg. 1996
Who are Depositories?
 Depositories are the ones who have
the custody of the securities as well
as also the legal ownership of those
securities.
 Custodians do not have legal
ownership of securities.
 Who are the two Depositories in
India?
1. National Securities Depository
limited (NSDL)
2. The Central Depository
Services (India) Limited (CDS)
 Depositories Act – 1956, a part from
SEBI (depositories and participant )
Reg . 1996
Difference b/w Depository & Custodian
 if a custodian A transfers securities to custodian B and for those securities the Depository is X,
then at depository level, the total amount of securities remains same (depository will just
change legal ownership) but at Custodian level, custodian A will see a reduction in number of
securities while custodian B will see an increase in number of securities.

 So continuing from our above ICICI bank example, if the customer is now holding the same
securities with another bank say HDFC bank, then still the depository is same even though the
custodian has changed.
 In a nutshell, custody is a function of depository and so each depository is a custodian, but
custodian is not a depository.
* Custodian = custody only
* Depositary = custody (frequent delegation) + control and legal ownership of securities
 So, basically the main difference is that the legal ownership of assets lie with Depository and
not with custodian.
Some of the largest Some of the custodians
custodians in the world of securities in India are:
are: – ICICI bank
– SBI (State bank of India)
– The Bank of New York Mellon – HDFC Bank
– State Street Bank and Trust – Standard Chartered Bank
Company – Stock Holding Corporation of India
– JPMorgan Chase Limited
– Citigroup – IL&FS Securities Services Ltd.
– Axis Bank Limited
What happens in case of any loss?
In case of any investment loss, depository is held liable. Because a custodian is
responsible only for any general loss or negligence, and is not responsible for any
investment loss.
BUYING ON MARGIN
 Margin is portion of purchase price contributed by buyer,
BROKER’S remainder borrowed by broker
CALL LOAN
 Brokers borrow money from banks at the call money rate
Source of to finance purchases
debt financing  The same rate is then charged from clients plus service
for investor
charge
 Securities purchased are collateral for the loan
 Maintenance margin, in case owner‟s equity becomes
negative.
 If %margin falls below maintenance level; broker issues a
margin call
FREE CASH FLOW TO EQUITY
DISCOUNT MODELS
Given what  Cash flows to equity as the cash flows left over after meeting
firms are all financial obligations, including debt payments, and after
returning to their
stockholders in
covering capital expenditure and working capital needs.
the form of  Free Cash Flow to Equity (FCFE) = Net Income
dividends or
stock buybacks, - (Capital Expenditures - Depreciation)
how do we
decide whether - (Change in Non-cash Working Capital)
they are
returning too + (New Debt Issued - Debt Repayments)
much or too
little?  This is the cash flow available to be paid out as dividends or
stock buybacks.
 This calculation can be simplified if we assume that the net capital
expenditures and working capital changes are financed using a fixed
mix1 of debt and equity.
 If δ is the proportion of the net capital expenditures and working
capital changes that is raised from debt financing, the effect on cash
flows to equity of these items can be represented as follows:
 Equity Cash Flows associated with Capital Expenditure Needs = –
(Capital Expenditures - Depreciation)(1 - δ)
 Equity Cash Flows associated with Working Capital Needs = - (Δ
Working Capital)(1-δ)
What about preferred dividends?
Underlying Principles
When we replace the dividends with FCFE to value equity,
we are doing more than substituting one cash flow for
another. We are implicitly assuming that the FCFE will be
paid out to stockholders. There are two consequences
 There will be no future cash build-up in the firm, since the
cash that is available after debt payments and reinvestment
needs is paid out to stockholders each period.
 The expected growth in FCFE will include growth in income
from operating assets and not growth in income from
increases in marketable securities.
 Estimating Growth in FCFE

Expected Growth rate = Retention Ratio * Return on Equity

 The use of the retention ratio in this equation implies that whatever is not paid out
as dividends is reinvested back into the firm.
 There is a strong argument to be made, though, that this is not consistent with the
assumption that free cash flows to equity are paid out to stockholders which
underlies FCFE models.
 It is far more consistent to replace the retention ratio with the equity reinvestment
rate, which measures the percent of net income that is invested back into the firm.
 The return on equity may also have to be modified to reflect the
fact that the conventional measure of the return includes interest
income from cash and marketable securities in the numerator and
the book value of equity also includes the value of the cash and
marketable securities.
 In the FCFE model, there is no excess cash left in the firm and the
return on equity should measure the return on non-cash investments.
 You could construct a modified version of the return on equity that
measures the non-cash aspects.
 The free cash
flow to the firm
is the sum of the
cashflows to all
claim holders in
the firm,
including
stockholders,
bondholders
and preferred
stockholders.
There are two
ways of
measuring the
free cashflow to
the firm (FCFF).