NEW ISSUE MANAGEMENT

Classification of Issues Primary Market / New issue market Placement of issue Offer through prospectus Offer for sale Private placement Rights issue Book building Red herring prospectus Intermediaries to issue Lead Manager Registrar Bankers to issue Underwriters Pricing of issue

CONTENTS

CLASSIFICATION OF ISSUES
Issues Public Rights Preferential

Initial Public Offering (IPO) Fresh Issue Offer for Sale

Follow on Public Offering (FPO)

Fresh Issue

Offer for Sale

Prof. Deepak Tandon

PRIMARY MARKETS OR NEW ISSUE MARKET

Primary markets - include all types of securities - being sold for the first time After being offered in the primary market, it becomes part of the secondary market

Primary market offered consist of (1) FPOs, new offerings of listed companies that have sold securities to the public before, and (2) IPOs, where an unlisted company is selling securities to the public for the first time

PLACEMENT OF THE ISSUE

Initial issues are floated 1. Through prospectus 2. Bought out deals/offer for sale 3. Private placement 4. Right issue 5. Book building
Prof. Deepak Tandon

OFFER THROUGH PROSPECTUS

Invites offers for subscription or purchase of any shares or debentures from the public The salient features of the prospectus are 1. General Information about company 2. Capital structure of the company 3. Terms of the present issue 4. Particulars of the Issue - issue-opening, closing and earliest closing date of the issue 5. Company Management and Project 6. Details of the outstanding litigations 7. Management perception of risk factors 8. Justification of the issue premium 9. Financial Information - cost of the project, projected earnings

OFFER FOR SALE

Promoter places his shares with an investment banker (bought out dealer or sponsor) who offer it to the public at a later date
Promoter Investment Banker Public

Hold on period is 70 days to more than a year Bought out dealer decides the price after analyzing the viability, the gestation period, promoters background and future projections Bought out dealer sheds the shares at a premium to the public

Advantages for the issuing company helps the promoters to realize the funds without any loss of time the cost of raising funds is reduced - For issuing share cost as high as 10 percent of the cost of the project helps the new entrepreneurs, not familiar with the capital market, to raise adequate capital from the market. a company with no track record of projects, public issues at a premium may pose problems possess low risk to investors since the sponsors have already held the shares for a certain period
Disadvantage sell at a hefty premium, manipulation of the results, insider trading and price rigging
Prof. Deepak Tandon

Contd.

PRIVATE PLACEMENT
Small number of financial intermediaries (like Unit Trust of India, mutual funds, insurance companies, merchant banking subsidiaries of commercial banks) purchase the shares and sell them to investors at a later date at a suitable price

Advantages: Cost Effective - statutory and non-statutory expenses are avoided. Time Effective Structure Effectiveness - flexible to suit the financial intermediaries Access Effective - issue of all sizes can be accommodated
Prof. Deepak Tandon

RIGHTS ISSUE
Offers shares at first to the existing share holders In proportion to the shares held by them at the time of offer Offered at a advantageous rate compared with the market rate

Certain conditions: A notice should be issued to specify the number of shares issued The time given to accept should not be less than 15 days Right of the share holders to renounce the offer in favor of others

BOOK BUILDING
Process of price discovery Not a fixed price for its shares Indicates a price band that mentions the lowest (referred to as the floor) and the highest (the cap) prices The spread between the floor and the cap of the price band shall not be more than 20%. The cap should not be more than 120% of the floor price. Price is finalized by the book runner and the issuer company Malegam Committee - introduction of the book building process Oct 1995 Originally, companies issuing more than Rs 100 cr allowed; Later SEBI allowed for issue of any size

 Nirma offering a maximum of 100 lakh equity shares through this process; first company to adopt the mechanism An example of pricing securities - Googles IPO offer: Googles IPO offer on the Dutch-auction basis, similar to the book-building process. Target range between U.S. $105 and U.S. $135 per share Market response to offer not too good; final issue price U.S. $85 Enabled Google to find price that market was willing to pay for its issue

Contd.

RED HERRING PROSPECTUS

Prospectus without details of either price or number of shares being offered or the amount of issue A preliminary registration statement that must be filed with the SEBI describing a new issue of stock (IPO) and the prospects of the issuing company It is known as a red herring because it contains a passage in red that states the company is not attempting to sell their shares before the registration is approved by the SEBI

 Prior to 1992, governed by Controller of Capital Issues Act 1947 Fixation of a fair price on the basis of the net asset value per share Era of free pricing in 1992; SEBI does not play any role in price fixation Issuer in consultation with Merchant Banker shall decide the price FIXED PRICE - company and LM fix a price PRICE DISCOVERY THROUGH BOOK BUILDING company and LM stipulate a floor price or a price band and leave it to market forces to determine the final price At premium Companies are permitted to price their issues at premium At par value In certain cases companies are not permitted to fix their issue prices at premium

PRICING OF ISSUE

INTERMEDIATRIES TO ISSUE
Intermediaries to an issue are: Merchant Bankers to the issue or Book Running Lead Managers (BRLM) Registrars to the issue Bankers to the issue Auditors of the company Underwriters to the issue Solicitors Advertising agencies Financial institutions Government/ statutory agencies

 Appointed by company to manage the public issue programmes. BRLM - A Merchant banker possessing a valid SEBI registration
Main duties (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.

LEAD MANAGER

 The merchant banking division of the financial institutions, subsidiary of commercial banks, foreign banks, private sector banks and private agencies are available to act as lead managers Some of them are SBI Capital Markets Ltd., Bank of Baroda, Canara Bank, DSP Financial Consultant Ltd. ICICI Securities & Finance Company Ltd., etc.

Prof. Deepak Tandon

Role of Lead Manager in the Pre & Post Issue

Pre issue:
Due diligence Design of offer doc, prospectus, memo Ensure the formalities with SE, ROC & SEBI Appointment wd intermediaries Marketing strategy

Post issue:
Mgt of escrow a/ct
Co-ordinate non institutional allocation Intimation of allocation Dispatch of refunds to bidders Follow up stepsfinalization of trading, Dealing of instruments, dispatch of certificates & demat of delivery of shares Look at the functioning of Prof. Deepak Tandon agencies

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 BANKERS TO THE ISSUE Ensure that the funds are collected and transferred to the Escrow accounts. Estimates of collection and advising the issuer about closure of the issue

 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

UNDERWRITERS

KEY TERMS
Green-shoe Option An option of allocating shares in excess of the shares included in the public issue Post-listing price stabilizing mechanism for a period not exceeding 30 days through a Stabilizing Agent Issue would be over allotted to the extent of a maximum of 15% of the issue size Provides an investor more probability of getting shares Post listing price may show relatively more stability as compared to market. Qualified Institutional Buyer (QIBs) Institutional investors who are perceived to possess expertise and the financial muscle to evaluate and invest in the capital markets