Public

Public Issue
Issue of
of Equity
Equity &
&
Debt:
Debt: Merits
Merits && Demerits
Demerits
-Nabaraj Adhikari, PhD
After studying public issue process, you should
be able to:

 Describe the two primary methods used by

companies to raise external long-term funds --
public issue and private placement.
 Understand the Securities Board of Nepal
(SEBON) registration process, including the role
played by the registration statement, preliminary
prospectus, and announcement letter.
 Discuss the potential signaling effects that often
accompany the issuance of new long-term
securities and merits & demerits of public issue.
Public Issue
Public Issue -- Sale of bonds or stock to the
general public.
 Securities are sold to hundreds, and often
thousands, of investors under a formal
contract overseen by regulatory authorities.
 The main purpose of the public issue,
amongst others, is to raise money through
public and get its shares listed at any of the
recognized stock exchanges.
 When a company issues securities to the
general public, it is usually uses the services
of an investment/merchant banker.
banker
Prospectus
 “prospectus” is the most important document for the
Company to come out with a public issue.
 A prospectus is a formal summary that provides
information on an issue of securities.
 Prospectus is a document by way of which the investor
gets all the information pertaining to the Company in
which they are going to invest.
 It gives the detailed information about the Company,
Promoters, capital structure, terms of the present issue,
details of proposed project, particulars of the issue, etc.
 One of the key functions of a prospectus is to warn
investors about the risks involved in investment in the
firm.
 The prospectus must be available to prospective investors
and others who request it.
Regulation of securities offerings
Securities Related Act, 2007 -- Generally
requires that public offerings be registered with
the SEBON before they may be sold.
Securities Related Act, 2007 - Regulates the
secondary market for long-term securities - the
stock exchange and the over-the-counter market.

Securities Board of Nepal (SEBON) enforces the act.

Regulator aims to protect investors against fraud,
promote efficient flow of information about
securities, and the smooth functioning of
securities markets
Role of SEBON in Public Issue
 SEBON reviews the registration statement and the
prospectus submitted by issuer company and
merchant banker/issue manager for the purpose of
public issue to see that all the required information
are presented and it is not misleading.
 SEBON, in course of examining the information
and documents submitted with the application for
registration, may require the issuing company to
submit additional information or documents, seek
clarification, may require making amendment or
submitting information related to the issue
process, method to be used for allotment as
according to the type and nature of securities to
be issued.
Role of SEBON in Public Issue, contd.
 If the SEBON is satisfied with the information, it approves
the prospectus and registers the securities, and the
company then is able to issue a final prospectus and sell
the securities.
 If not, the SEBON issues a stop order, which prevents the
sale of the securities. Most deficiencies can be corrected by
the company, and approval will usually be given eventually,
except in cases of fraud or misrepresentation.
 The emphasis of SEBON in reviewing the prospectus is to
make the prospectus self explanatory and more
comprehensive so that investors can make informed
decisions.
 SEBON is not concerned with the investment value of the
securities being issued, only with the presentation of
complete and accurate information on all material facts
regarding the security.
Regulation of Securities Offerings, contd.
Registration Statement -- The disclosure
document filed with the SEBON in order
to register a new securities issue.

Part 1: Prospectus -- Discloses information

about the issuing company and its
new offering and is distributed to
investors.
Part 2:
2 Additional information required by
the SEBON that is not part of the
printed prospectus.
Preliminary Prospectus
The preliminary prospectus. The prospectus
before taking to the public/ publishing.

 SEBON reviews the preliminary prospectus and

registration statement to see that all the required
information is presented and that it is not
misleading.
 Deficiencies are communicated in a comment
letter.
letter
 Once the SEBON is satisfied, it approves the
prospectus. If not, it asks more clarification and
documents or issues a stop order.
order
Regulation of Securities Offerings, contd.
Registration Statement Effective Date
 Registration statements become
effective only after registering in
CRO by all corporate and NRB by
financial institutions or IB by
insurance companies and then
publishing the prospectus.
Regulation of Securities Offerings, contd.
Announcement Letter -- An announcement
placed in newspapers and magazines
giving just the most basic details of a
securities offering.
 Includes the company’s name, a brief
description of the security, the offering
price, and the names of the issue managers
and underwriter/s.
 Each of such issue related notices shall
have to be presented to the SEBON before
one working day of the publication.
Major public issue related provisions under SECURITIES
REGISTRATION AND ISSUE REGULATIONS, 2008
 “Underwriting” means the act of undertaking
responsibility, under agreement, to buy all or any
unsubscribed portion of securities issued by an issuing
company.
 An issuing company incorporated as a public limited
company or if incorporated in other form enabled to raise
funds through the issuance of securities to the general
public, shall be required to get its securities registered
with the SEBON before issuance of the securities.
 The issuing company shall inform the SEBON the
Allotment date, type of securities issued and number
thereof, Method of issue, Name and address of the buyer
or holders of the allotted shares, Paid up value of each
security within seven days of distribution and allotment.
Major public issue related provisions under SECURITI ES
REGISTRATION AND ISSUE REGULATIONS, 2008, contd.
 If an issuing company intends to sale and
distribute its securities to more than fifty persons at
a time, it shall be required to make public issuance
of securities.
 If the issuing company is making public issuance,
the concerned issuing company shall, unless
otherwise prescribed by the regulating body related
with the concerned business, set aside at least thirty
percent of its issued capital for public subscription.
 Unless otherwise it is prescribed by the concerned
regulating body, the public issuance shall be made
making at least fifty one percent promoters' share
holding.
Major public issue related provisions under SECURITI ES
REGISTRATION AND ISSUE REGULATIONS, 2008, contd.
 If securities to be issued by an issuing company
other than financial institutions, the shares set aside
for the public issuance should have been
underwritten as prescribed in the Securities
Issuance Directives.
 If the price of the securities to be issued is fixed
higher than the face value, the methodology of
fixation of price and basis to justify the premium
requires to be mentioned.
 Provisions Related to Further Public Issue: A body
corporate having issued the securities publicly and
having been listed may go for new issue (further
public issue) in order to raise its capital.
Major public issue related provisions under SECURITI ES
REGISTRATION AND ISSUE REGULATIONS, 2008, contd.
 While making new issue (further public issue), the
following conditions shall have to be fulfilled:-(a)
Require to have a track record of net profit in the
latest two years out of last five years and have net
worth per share higher than paid up value per share.
 The prospectus approved shall remain valid for the
public issuance of the securities so long as the
content and in formation in the prospectus remain
complete and accurate.
 The face value of securities shall, generally, be Rs
100 per unit, if share, Rs 1000 per unit, if debenture,
and Rs 10 per unit, if collective investment scheme.
Major public issue related provisions under SECURITI ES
REGISTRATION AND ISSUE REGULATIONS, 2008, contd.
 Announcement to be Published: In order to issue
and sale securities through the publication of
prospectus or offer document, an issuing company
shall have to publish announcement with information
as prescribed through the Issue Manager for public
information at least in one national daily newspaper
minimum one week earlier from the date of opening of
the issue by informing the SEBON on such matters.
 While publishing announcement or publishing issue
related advertisement, the issuer, through the Issue
Manager, shall be required to publish and
communicate truthful and factual matters related to
the issue including management, technical and
economic matters.
Major public issue related provisions under SECURITI ES
REGISTRATION AND ISSUE REGULATIONS, 2008, contd.
 The issuing company getting their securities
registered with the SEBON according to the Act
and these regulations shall require submitting
annual report to SEBON as prescribed, within
five months from the end of the financial year.
 In addition to the annual report to be
submitted, quarterly report as prescribed shall
be required to be prepared and submitted to
the SEBON, within a month of the end of each
quarterly period and such report shall also be
required to be published in the national dailies.
Major public issue related provisions under SECURITI ES
REGISTRATION AND ISSUE REGULATIONS, 2008, contd.
 In order to issue the securities at premium, the following
condition shall be required to have fulfilled
- Shall have to fulfill the conditions prescribed by the
prevailing company related law,
-Securities may be issued at premium while remaining
within the limit of Net Worth per Share derived from latest
audit,
-Outside expert or expert institution shall be required to
have carried out due diligence audit about the
methodology, rationale and justification of fixation of
premium.
 Share allotment duration is based on the number of
application: 40 working days if the number of application is
100,000; 50 days for100,001 to 200,000; 60 days for 200,001
to 300,000; and 70 days for 300,001 to above.
Private Placement
Private (or Direct) Placement -- The sale of an
entire issue of unregistered securities (usually
bonds) directly to one purchaser or a group of
purchasers (usually financial intermediaries).
 Eliminates the issue management function of the
merchant banker.
 The dominant private placement lender are
banks/financial institutions, and pension funds.
Private Placement and Other
Developments
 Event Risk -- The risk that existing debt will
suffer a decline in creditworthiness because of
the issuance of additional debt securities, usually
in connection with corporate restructuring.

 Qualified Institutional Buyers (QIBs) --

Eligible purchasers
Private Placement Features
 Allows the firm to raise funds more quickly.
 Eliminates risks with respect to timing.
 Eliminates SEBON regulation of the security.
 Terms can be tailored to meet the needs of the
borrower.
 Flexibility in borrowing smaller amounts more
frequently rather than a single large amount.
Initial Financing -- Initial Public Offerings
Initial Public Offering (IPO) -- A company’s first
offering of common stock to the general public.

 Often prompted by venture capitalists who wish

to realize a cash return on their investment.
 Founders of the firm may wish to go through an
IPO to establish a value for their company.
 There exists greater price uncertainty with an
IPO than with other new public stock issues.
Signaling Effects

 Negative stock
price reaction to 3 Relative Abnormal
common stock or Stock Returns for a

Abnormal Return (%)

2
convertible Cumulative Average New Equity Issue
issues. 1

0
 Straight debt and
-1
preferred stock
do not tend to -2
show statistically -3
significant -4
effects.
-10 -8 -6 -4 -2 0 2 4 6 8
Time Around Announcement (in days)
Possible Explanations for Price Reactions
Expectations of Future Cash Flows
 The unexpected sale of securities may be associated
with lower than expected operating cash flows and
interpreted as bad news. Hence, the stock price might
suffer accordingly.
Asymmetric (Unequal) Information
 Potential investors have less information than
management (particularly for common stock).
 Exchanges of different types of securities show that
increases (decreases) in financial leverage are
associated with positive (negative) abnormal returns.
Some Important Issues on PS
 Companies can price up to the level of net worth to its
securities.
 Company can not come out with public issue unless all its
existing partly paid up shares, if any, are made fully paid up.
 Public issue should be opened for at least 5 working days
and at least 4 working days if managed at least one
collection centre in every region and 10 collection centres in
total. And issue may remain open for maximum of 15 days.
 Must mention bank account to subscribe securities
amounting to more than Rs.50,000.
 Must mention PAN number if the applicant is subscribing
the securities amounting to more than Rs.1,000,000.
 Company can come out with an issue within 2 months from
the issue approval from SEBON.
Some Important Issues ..., contd.
 Must manage a collection centre in every region if
securities amounting to Rs.50,000,000 or more is to
be issued.
 If the issuing company is employing local resources
most issue securities to the locals affected by the
industry by opening issue at maximum for 35 days.
 Issue manager may charge maximum 2% of issued
amount, underwriter maximum 4% of underwriting
amount, share registrar Rs.10 per person name
transfer, and portfolio management charges as per
negotiation.
 Trading of securities of all new public issues will be
made through listing at stock exchange.
Merits of Public Issue of Equity & Debt
 Money non-refundable except in the case of winding
up or buy back of shares.
 No financial burden i.e. no fixed rate of return on
equity payable. However, in order to service the equity,
dividend may be paid.
 Enhance shareholders’ value if the company performs
well.
 Greater Transferability.
 Trading & Listing of securities at stock exchanges.
 Better liquidity of securities.
 Helps building reputation of promoters, Company &
its products/services, provided the Company performs
well.
Demerits of Public Issue of Equity & Debt
 Time consuming process.
 Expensive.
 Several legal formalities.
 Involvement of many intermediaries.
 Transparency requirements and public disclosure of
information may lead to lack of privacy.
 Continuous compliance of provisions of listing
agreement and other legal requirements.
 Constant scrutiny of performance by investors.
 May lead to takeover of the company
 Securities of the company may be made subjective to
speculative attacks.
Demerits of Public Issue of Equity & Debt
 Many if not most successful companies aspire to public
ownership. But going public and raising public equity
capital may not be the optimal solution for all of them.
 For mature companies with reasonably stable free cash
flows, private equity may be ideal.
 Companies with credibility concerns or companies
undergoing rapid change may also benefit from private
equity investment rather than going public.
 This may even be true of public companies undergoing
difficult periods of transition and financial challenge,
circumstances that may prove difficult for public investors
to evaluate and monitor, and
 Even some of the most successful public companies may
at some point find that going private, or doing a significant
recapitalization, could be the best way to add value.
Assignments
1. What do you mean by public issue of debt and equity?
State the usual process of making public issue.
2. What do you mean by merchant bankers? Explain in
detail the role of merchant bankers in public issue of
securities.
3. What is the role of Securities Board of Nepal (SEBON) in
public issue of securities? Explain in brief major
concerns of SEBON in public issue.
4. What are the major legal provisions to be followed while
issuing securities in Nepal? Explain in detail.
5. What are the merits of issuing securities? Explain in
brief.
6. Conduct a mini research to find out whether Nepalese
companies are making public issue voluntarily or
mandatorily. Thanking you