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FUNCTIONS OF NEW ISSUE MARKET
Transcript of FUNCTIONS OF NEW ISSUE MARKET
FUNCTIONS OF NEW ISSUE MARKET
The process of changing a private company into a public company by issuing shares and soliciting the public to purchase them.
Flotation allows companies to obtain financing from outside the company instead of using retained earnings to fund a new project or expansion.
METHODS OF FLOATATION
Public Issue (Prospectus)
Offer for Sale
The issuing company directly offers to the general public a fixed number of shares at a stated price through a document called prospectus.
Name of the Company
Existing and proposed activities
Location of the industry
Name of the directors
Date of opening and closing subscription list
Name of the brokers, underwriters, bankers managers or the registrars
OFFER FOR SALE
A situation in which a company advertises new shares for sale to the public as a way of launching itself on the Stock Exchange.
It’s the same traditional mechanism of follow-on-public-offer.A method of bringing a company to the stock market by selling shares in a new issue.
The company sponsor offers shares to the public by inviting subscriptions from investors.
(a). Offer for sale by fixed price - the sponsor fixes the price prior to the offer.
(b). Offer for sale by tender - investors state the price they are willing to pay.
A strike price is established by the sponsors after receiving all the bids. All investors pay the strike price.
Compulsorily have a demat/trading account(s) and permanent account number (PAN) to participate in an Offer for Sale.
You can participate in the process yourself using your online trading accounts like ICICI Direct, Kotak Securities etc. by placing your bids on the respective broking websites.
Investors, who do not have online trading accounts, can place their bids by directing the dealer of their broking company to do it on their behalf.
Once the bidding gets over, allotment price is fixed and allocation is done.
Increased capital for the issuer.
Creates a type of currency in the form of its stock.
Company's debt-to-equity ratio improves, company may be able to obtain more favourable loan terms from lenders.
Retain a certain degree of control.
Allow the company to attract better personnel.
It is an expensive process.
Public companies operate under close scrutiny.
New pressure on public companies to increase earnings.
At risk of takeover attempts.
A rights issue is an issue of rights to buy additional securities in a company made to the company's existing security holders.
In a rights offering, the subscription price at which each share may be purchased in generally at a discount to the current market price.
Rights are often transferable, allowing the holder to sell them on the open market.
BOOK BUILDING PROCESS
The industrial securities market in India consists of new issue market and stock exchange.
The new issue market deals with the new securities which were not previously available to the investing public, i.e., the securities that are offered to the investing public for the first time.
The market, therefore, makes available a new block of securities for public subscription. In other words, new issue market deals with raising of fresh capital by companies either for cash or for consideration other than cash.
The new issue market encompasses all institutions dealing in fresh claim. These claims may be in the form of equity shares, preference shares, debentures, right issues, deposits etc.
All financial institutions which contribute, underwrite and directly subscribe to the securities are part of new issue market.
NEW ISSUE MARKET
It refers to the work of investigation, analysis and processing of new project proposal.
Origination starts before an issue is actually floated in the market.
It includes a careful study of the technical, economical and financial viability of the flotation.
The sale of securities to the ultimate investors is referred to as distribution.
It is another specialized job, which can be performed by brokers and dealers in securities who maintain regular and direct contact with the ultimate investors.
The ability of the New Issue Market to cope with the growing requirements of the expanding corporate sector would depend on this triple-service function.
Large section of investing Public through advertisement
Increase Market share
Avoids wealth concentration within few hands
Suitable only for large issues
Underwriting refers to the process by which investment banks raise investment capital from investors on behalf of corporations and governments that are issuing securities (both equity and debt capital). The services of an underwriter are typically used during a public offering.
This is a way of distributing a newly issued security, such as stocks or bonds, to investors.
They take up the risk of distributing the securities.
The Underwriting spread.
TYPES OF UNDERWRITING
Development banks like IFCI, ICICI and IDBI
Institutional investors like LIC and AXIS
Insurance Companies and stock brokers
The sale of securities to a relatively small number of select investors as a way of raising capital.
Investors involved in private placements are usually large banks, mutual funds, insurance companies and pension funds.
Private placement is the opposite of a public issue, in which securities are made available for sale on the open market.
Staying private allows your company to choose its own investors.
Saves the time and money required to make a public offering and maintain the financial records.
Flexibility and get you capital much faster than searching for venture capitalists.
It’s a large amount of investment.
Significantly narrows the range of investors you can reach.
A wide market will not exist for your bonds, so investors may also demand more equity in your company to protect their investments.
The process by which an underwriter attempts to determine at what price to offer an IPO based on demand from institutional investors.
Book building refers to the process of generating, capturing, and recording investor demand for shares during an Initial Public Offering (IPO), or other securities during their issuance process, in order to support efficient price discovery.