NEW ISSUE MANAGEMENT

NEW ISSUE MANAGEMENT

CONTENTSClassification of IssuesPrimary Market / New issue marketPlacement of issueOffer through prospectusOffer for salePrivate placementRights issueBook buildingRed herring prospectusIntermediaries to issueLead ManagerRegistrarBankers to issueUnderwritersPricing of issueKey TermsCLASSIFICATION OF ISSUESIssuesPublicRightsPreferentialInitial Public Offering (IPO)Follow on Public Offering (FPO)Fresh IssueOffer for SaleFresh IssueOffer for SalePRIMARY MARKETS OR NEW ISSUE MARKETPrimary 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 timePLACEMENT OF THE ISSUEInitial issues are floated 1. Through prospectus 2. Bought out deals/offer for sale 3. Private placement 4. Right issue 5. Book buildingOFFER THROUGH PROSPECTUSInvites offers for subscription or purchase of any shares or debentures from the public

The salient features of the prospectus are1. General Information about company2. Capital structure of the company3. Terms of the present issue4. Particulars of the Issue - issue-opening, closing and earliest closing date of the issue5. Company Management and Project6. Details of the outstanding litigations 7. Management perception of risk factors 8. Justification of the issue premium9. Financial Information - cost of the project, projected earningsOFFER FOR SALEPromoter places his shares with an investment banker (bought out dealer or sponsor) who offer it to the public at a later date

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

Boughs out dealer sheds the shares at a premium to the public

PromoterInvestment BankerPublicContd.Advantages for the issuing companyhelps the promoters to realize the funds without any loss of timethe cost of raising funds is reduced - For issuing share cost as high as 10 percent of the cost of the projecthelps 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 problemspossess low risk to investors since the sponsors have already held the shares for a certain period

Disadvantagesell at a hefty premium, manipulation of the results, insider trading and price riggingPRIVATE PLACEMENTSmall 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 EffectiveStructure Effectiveness - flexible to suit the financial intermediariesAccess Effective - issue of all sizes can be accommodatedRIGHTS ISSUEOffers shares at first to the existing share holders In proportion to the shares held by them at the time of offerOffered at a advantageous rate compared with the market rate

Certain conditions:A notice should be issued to specify the number of shares issuedThe time given to accept should not be less than 15 daysRight of the share holders to renounce the offer in favor of othersBOOK BUILDINGProcess of price discoveryNot a fixed price for its sharesIndicatesa price band that mentions the lowest (referred to as the floor) and the highest (the cap) pricesThe 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 companyMalegam Committee - introduction of the book building process Oct 1995Originally, companies issuing more than Rs 100 cr allowed; Later SEBI allowed for issue of any sizeContd.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 shareMarket response to offer not too good; final issue price U.S. $85Enabled Google to find price that market was willing to pay for its issueRED HERRING PROSPECTUSProspectus 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 companyIt 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

PRICING OF ISSUEPrior to 1992, governed by Controller of Capital Issues Act 1947Fixation 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 pricePRICE 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 premiumINTERMEDIATRIES TO ISSUEIntermediaries to an issue are:Merchant Bankers to the issue or Book Running Lead Managers (BRLM)Registrars to the issue Bankers to the issueAuditors of the company Underwriters to the issueSolicitorsAdvertising agenciesFinancial institutionsGovernment/ statutory agenciesLEAD MANAGERAppointed 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.

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.

Role of Lead Manager in the Pre & Post IssuePre issue:Post issue:Due diligenceDesign of offer doc, prospectus, memoEnsure the formalities with SE, ROC & SEBIAppointment wd intermediariesMarketing strategy Mgt of escrow a/ct Co-ordinate non institutional allocation Intimation of allocation Dispatch of refunds to bidders Follow up steps- finalization of trading, Dealing of instruments, dispatch of certificates & demat of delivery of shares Look at the functioning of agenciesREGISTRARFinalizes the list of eligible allotees after deleting the invalid applicationsCorporate action for crediting of shares to the demat accounts of the applicantsDispatch of refund orders to those applicableReceive the share application from various collection centresRecommend the basis of allotment in consultation with the Regional Stock Exchange for approvalArrange for the dispatching of the share certificatesBANKERS TO THE ISSUEEnsure that the funds are collected and transferred to the Escrow accounts. Estimates of collection and advising the issuer about closure of the issue

UNDERWRITERSUnderwriting 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 bankeror 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

KEY TERMSGreen-shoe OptionAn option of allocating shares in excess of the shares included in the public issuePost-listing price stabilizing mechanism for a period not exceeding 30 days through a Stabilizing AgentIssue would be over allotted to the extent of a maximum of 15% of the issue sizeProvides an investor more probability of getting sharesPost 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