Unit 2: Capital Market Operations I.

Function of New Issue Market

II. Methods of Floating New Issue

The various methods used in floatation of securities in New Issue Market are: 1. 2. 3. 4. Public Issues Offer for Sale Placement Right Issues

1. Public Issue
Meaning: Under this method the
Issuing Company directly offers to the General Public/Institution a Fixed Number of Shares at a Stated Price through a Document called Prospectus

This is the Most Common Method

Followed by Joint stock Companies

To raise capital

Through the Issue of Securities

Contents of Prospectus:
The prospectus must state the following:

1. Name of the company 2. Address of the Registered office of the company 3. Existing and proposed activities 4. Location of the industry 5. Names of Directors

6. Authorized and Proposed issue capital to the public 7. Dates of opening and closing the subscription list 8. Minimum Subscription

9. Names of the brokers/underwriters/bankers /managers and

registrars to the issue 10. A statement by the company that it will apply to stock exchange for quotations of its shares

Merits: of Public Issue

1.Sale through Prospectus has a advantage of inviting a large section of the Investing Public through Advertisement 2.It is a Direct Method
No intermediaries are involved in it.

3.Shares, under this method are allotted to a large section of investors on a non- discriminatory basis 4. This method helps in wide dispersion of shares

5. Avoids concentration of wealth in few hands

Demerits: 1. It is an expensive method: Company has to incur expenses on :

Printing of Prospectus Advertisement Banks Commission Legal Charges, Stamp duty listing fee

2. This method is suitable only for large issues

2. Offer of Sale
Meaning: In this method the shares are not offered directly to the public This method consist of 2 Stages:

1st Stage The first stage is the Direct Sale by the Issuing company to the Issue House and brokers at an agreed price.

2nd Stage In the second stage the intermediaries resell the above securities to the ultimate investors

The issue houses or stock brokers purchase the securities at a negotiated price and resell at a higher price The difference between the purchase and the sell price is called Turn or Spread

Advantages: 1. It enables the issuer (with a good project) to obtain funds with a minimum cost without the fear of under subscription. 2. In this case the intermediaries get higher return than the conventional merchant banking services

3. The company is relieved from the problem of printing and advertisement of prospectus and making allotment of shares Offer of sale is not common in India.

3.Placement (or Private Placement)

Under this method, the issue houses or brokers buy the securities outright with the intension of placing them with their clients

afterwards
Here the brokers act as almost wholesalers selling them in retail to the public.

The brokers would make profit in the process of reselling to the

Public The issue houses or brokers maintain their own list of clients and through customer contact sell the securities. There is no need for a formal prospectus

Advantages: 1. Timing of issue is important for successful flotation of shares: In a depressed market conditions when the issue are not likely to get Public Response through Prospectus, Placement Method is a useful method of flotation of shares.
2. Suitable for small companies to issue their shares 3. It avoids delays and the expenses involved in Public Issue

4. There are no entry barriers for a company to access the Private Placement Market (Useful for unlisted companies)

5. A private placement deal can be successfully executed much faster than a public offering . The procedural formalities for a private placement are minimal.

6. This method is also suitable to the first generation entrepreneurs who are less known to the Public which makes the public issue less successful.

7.

Issue expenses in case of private placement is low. Because of the

absence of several statutory and non statutory expenses associated with underwriting, brokerage, printing, promotions, etc.

The main disadvantage of this method is that the securities are not widely distributed to the large section of investors.

A selected group of small investors are able to buy a large

number of shares and get the majority holding in a company.

This method of private placement is used to a limited extent in India

The promoters sell the shares to their friends, relatives and well
wishers to get minimum subscription

4. Rights Issue
Meaning: Rights shares are offered to the existing shareholders in a

particular proportion to their existing share ownership.

Why?

As per Section 81 of Companies Act which Deals with Rights Issue:

According to this section, where a company increases its subscribed capital by issue of new shares either after two years of its formation or after 1 year of its 1st issue of share whichever is earlier, these have to be 1st offered to the existing shareholders.

Process:
A company issuing rights are required to send a circular to all existing
shareholders. The circular should provide information on how additional funds would

be used and their effect on the earning capacity of the company.

Company should normally give a time limit of at least 1 month to 2 months to the shareholders to exercise their right.

If the rights are not fully taken up , the balance is to be equitably distributed
among the applicants for additional shares. Any balance still left over may be disposed off in the market in a way which is most beneficial to the company

Advantages: 1. The cost of issue is minimum : There is no underwriting , brokerage advertising and printing of prospectus expenses.

2. It ensures equitable distribution of shares to all existing

shareholders and so control of company remains undistributed as proportionate ownership in the company remains same.

Home Work
1. Contents of Offer Document of any Latest IPO 1. Methods of Underwriting and its Advantages --Underwriters in India 1. a) b) c) d) Examples of Public Issue Offer For Sale Private Placement Rights Issue