UNIT 5

Bharat Singh Thapa

Lecturer
ISSUING SECURITIES Central Department of Management
Tribhuvan University
UNIT OUTLINE
 Public offering of securities: IPO and FPO
 Selling common stock through a rights
issue, value of each right, effect of rights
offering on shareholders’ wealth
 Financing a fledgling-founders and angels,
venture capital
 Information effects
 PUBLIC OFFERING OF
SECURITIES: IPO AND FPO
 Public offerings is distributing securities to general public rather than institutional
investors.
Methods of Public Offerings
Initial public offering (IPO) – the first public issuance of shares
Further public offering (FPO) – the additional public issue of shares, also known as
seasoned offering
Right offering – the additional issue of shares to the existing stockholders of the
company
INITIAL PUBLIC OFFERINGS
(IPO)
Steps in IPO
1. Preliminary decisions (Board decides plus rating)
2. Selection of issue manager (Underwriter)
3. Preparation of prospectus
Prospectus - a legal document that contains information about the issuer and the
securities
4. Filing the registration statement (SEBON)
5. Review of prospectus (SEBON-Company)
6. Approval of issue (SEBON)
7. Issue open (min. 4 days- max. 30 days)
8. Allotment and refunding (Security issue and allotment directive 2074)
 Allotment Time: 30-40 and 50 days after closing IPO announcement Refunding time: 4 days after allotment

Securities Registration and Issue Regulation, 2073

FURTHER PUBLIC OFFERINGS
Securities Registration and Issue Regulation, 2073

 Further Public Offering (FPO) is an issuance of shares to general investors by a

company that has already issued shares in the past (Listed in NEPSE).
FPOs are popular methods for companies to raise additional share capital in the
capital market.
Effects of FPO:
 Increase number of shares
 Decline in EPS
 Net worth per share increases in issued at premium

Price of FPO must be determined based on capitalized earnings, net worth per
share, average closing price of 180 days and discounted cash flow.
 RIGHTS OFFERINGS
Method of selling new common stocks to existing shareholders at
subscribed price, which is below existing share price.
Also known as privileged subscription (preemptive)
Very popular in Nepal
Purpose of preemptive rights
Protect the power of control of present stockholders
Protects stockholders against dilution of wealth
Rights offering is less costly than a public offering
IMPORTANT DATES OF RIGHTS OFFERING

May 10 June 12 June 13 June 15 July 31

Declaration Date Expiration Date

Ex-right Date of
Date Record

Right on period Ex-right period

Stock sells on right on price (P0) Stock sells on ex-right price (Pe)
ANALYSIS OF RIGHTS OFFERING

Subscription price
Number of shares to be issued
Number of rights required to purchase a share
Value of a right
Ex-right value
ANALYSIS OF RIGHTS …

Subscription price
The price at which existing shareholders are allowed to
purchase one new share
Equal or above the par value but less than prevailing market
price
Funds to be raised
Number of new shares = Subscription price (5.2)
 ANALYSIS OF RIGHTS …

Number of rights required to purchase a share

Number of old shares outstanding

= Number of new shares to be issued (5.3)
ANALYSIS OF RIGHTS …
Value of a right
𝑃0− 𝑆
𝑅0 =
𝑁 +1
Where
P0 = right on price of the stock
S = subscription price
N = number of rights required to purchase a new share of stock
= value of one right
ANALYSIS OF RIGHTS …

Ex-right value
Ex-right price (Px) = Right on price  Value of each right
Ex-rights price can also be computed
𝑃0∗ 𝑁 + 𝑆
𝑃 𝑋=
𝑁 +1
The value of a right when the stock is trading at ex-rights price (Px):
𝑃X−𝑆
𝑅𝑋=
𝑁
 PRACTICE I

Additional fund to be raised = Rs 10 million

Number of shares outstanding = 200,000
Subscription price (S) = Rs 100
Current market price per share (P0) = Rs 250
a. How many new shares will have to be sold to raise required
funds?
b. How many rights will be required to purchase a new share?
c. What will be theoretical value of rights?
d. Calculate ex-rights price.
PRACTICE II
The ABC Company has grown rapidly during the past five years. Recently, company has
discovered some good investment opportunity. It plans to raise an additional Rs 10,00,000
through rights offerings. Current market price of the stock is Rs 150. But subscription price
is set at Rs 100 which is equal to its par value. Company has 40,000 shares outstanding
Required:
a. Number of new shares to be issued.
b. Number of rights required to purchase one new share.
c. Theoretical value of each right.
d. Theoretical value of a share when stock goes ex-right.

a. 10,000 shares b. 4 rights c. Rs 10 d. Rs 140

 EFFECT OF RIGHTS OFFERINGS ON
SHAREHOLDERS’ WEALTH

Shareholders’ wealth remains unchanged after rights issue if

Rights are exercised/ used
Rights are sold at theoretical value
Rights are partially sold and exercised
Shareholders’ wealth decreases after rights issue if
Rights are discarded (neither sold nor exercised)
EFFECT OF RIGHTS (PRACTICE III)
Current price of stock (Po) = Rs 250
Number of rights required to purchase one new share (N) = 2
Subscription Price (S) = Rs 100
a. Calculate value of each right and ex-right price.
b. Your total assets consist of 100 shares of the company and cash balance of
Rs 15,000. Prepare statements of your total assets before rights offerings.
c. Prepare statement showing your total assets after rights offerings for each of
these courses of action if,
i. you sells all your rights
ii. you exercises all your rights.
iii. you sells 60 rights and exercises 40 rights.
iv. you neither sells your rights nor exercises
a. 50 & 200
b. 40,000
c.
i) 20000+15000+(100*50)=40000
ii) 30000+(15000-(50*100)) = 40000
iii) 24000 +(15000-2000)+(60*50)= 40,000
iv) 20000+15000= 35,000
FINANCING A FLEDGLING

Financing a fledging means financing start-up companies

Major sources of financing start-ups are Founders, Angels, and Venture Capitalist.
Founders – establish and finance the startups with a vision
Angel investor – wealthy individual who provides funding for startup to make the
founders idea successful
Venture capital – refers to a firm which provide fund to firms at early stage or at
later stages of the enterprise
ANGEL INVESTORS AND VENTURE CAPITAL

Angel investors and venture capitalists both provide fund for mostly
startups; but they differ in some important aspects
Angel investors are mostly accredited investors (meet the requirements of SEC in U. S.
for accredited investors) and invest their own fund in the startups
Venture capitalists create a firm, pool funds from others (individuals, corporations,
foundations, etc.), and invest in startups
Angel investors’ primary motive is to ease the resource constraints of the startup
Venture capital firms primary motive is to earn profit
Venture capital firms provide professional services and offer their network to startups,
which is not available from angel investors
VENTURE CAPITAL: FEATURES

Generally, investments are made in equity

Wait for 5-7 years to reap the benefit of capital gains
Investments are made in innovative projects with new
products/services
Do not interfere in the day-to-day business affairs but closely
monitor the performance
Exit through stock exchanges
INFORMATION EFFECTS
Public offering of securities by corporations have several information effects
Primary reasons
Expectation of future cash flows
Expansion
Repay debt
Increase dividend
Make-up cash flow
Asymmetric information
There is negative stock price reaction to the issuance of shares to public.
Managers are more likely to issue debt when they believe the common stock is
underprices and to issue common stock when it is believed to be overpriced.