Book Building and Rights Issues Quiz

Primary Market & Secondary Market

• The primary market is where companies issue shares for the first time, allowing the public to subscribe.
• It's not a physical location but encompasses all places where initial subscriptions occur.
• This market facilitates the transfer of resources from investors (savers) to companies (users) through three main functions: origination, underwriting, and distribution.

Functions of New Issue Market

• Origination: This involves investigating and processing proposed projects, advising the company on issuing securities, determining issuing methods, and pricing shares. Merchant bankers typically handle this role.
• Underwriting: Underwriters agree to buy unsold shares, ensuring the financing of the project even if public subscription is not complete. They guarantee the marketing of the shares.
• Distribution: Marketing and selling the shares to investors via public issues, placements, rights offerings, or bonus issues. This is handled by merchant banks, brokers, agents, and intermediaries.

Methods of Floating New Issues

• Public Issue: Includes Initial Public Offering (IPO) and Further Public Offering (FPO), where securities are offered for sale to the public.
  • IPO: First-time public offering of securities.
  • FPO: Subsequent public offer of securities.
• Private Placement: Issue of securities to a select group of investors (no exceeding 50).
  • Preferential Issue: Offering securities to a select group.
  • Qualified Institutional Placement (QIP): Issuing securities to qualified institutional buyers (QIBs).
  • Institutional Placement Programme (IPP): Offering through an institutional program.
• Rights Issue: Offering securities to existing shareholders at a discounted price.
• Bonus Issue: Issuing additional shares to existing shareholders out of the company's reserves, without additional capital investment.
• Employee Stock Option Plan (ESOP): Offering employees options to purchase company shares.

Public Issue

• Initial Public Offer (IPO): This involves the initial sale of shares to the public by an unlisted company.
• Further Public Offer (FPO): This involves the additional sale of shares to the public. Both offerings can be a "fresh issue" or an "offer for sale."

Forms of Offer Documents

• Prospectus: A document containing company details, used for inviting public subscription in a public offering.
• Abridged Prospectus: Contains key prospectus details, often accompanying application forms.
• Red Herring Prospectus (RHP): A prospectus without complete details (price, amount), but containing issue size and the price range. Useful for book building issues.
• Statement in Lieu of Prospectus: When a company with share capital doesn't issue a prospectus, they submit a statement-in-lieu.
• Letter of Offer: An offer document used for a rights issue, including details.
• Prospectus: A detailed document explaining company details and offering terms, often used in public offerings (IPO or FPO).
• Shelf Prospectus: Used for a series of issues within a year, which avoids filing a new prospectus every time.

Secondary Market

• A marketplace for trading existing securities (stocks, bonds, etc.).
• Main functions include liquidity provision, price discovery, and monitoring of company management.
• Includes stock exchanges, depositories, and market participants such as brokers.

Forms of Securities

• Non-voting shares: Have no voting rights but are often issued with higher dividend payouts.
• Shares with differential voting rights (DVRs): Shareholders have different voting rights for different types of shares in a company.
• Floating Rate Bonds: Bonds with interest rates tied to market rates, often for infrastructure or corporate use.

Other Important Players/Participants

• Merchant Bankers: Act as managers in executing the issue process. This commonly applies in large public offerings.
• Underwriters: Guarantee the sale of shares, protecting the issuer from risk if the public does not subscribe enough.
• Brokers: Help in marketing and making contact with prospective investors.
• Registrars: Responsible for managing subscription, allotment, and certificate issuance.
• Bankers to the Issue: Handle receipt of application forms and payment for investments.
• Depositories: Store securities in electronic (dematerialized) form, simplifying transfer of ownership.
• Syndicate Members: Help in the underwritings process.

Other Types

• Employee Stock Option Plans (ESOPs): Options enabling employees to purchase company shares.
• Secured Premium Notes (SPNs): A secured debenture with a detachable warrant.
• Depository Receipts (ADRs/GDRs): Certificates representing shares of foreign companies; often traded on local exchanges.
• Yankee Bonds: Dollar-denominated bonds issued by non-US corporations in the U.S. market.
• Hybrid Instruments: Financial instruments with both equity and debt features.
• Infrastructure Bonds: Debt instruments issued to fund infrastructure projects.
• Derivative Instruments: Financial instruments whose value depends on another underlying asset (ex. commodities, currency, bonds, etc.).

Trading Mechanisms

• Book Building: A sophisticated method used to assess market demand for securities; used for IPOs to determine the optimal initial price.
• Screen-based Trading: Traders can execute orders online from their desktops or mobile devices. This significantly broadens the participation in the market.

Stock Exchanges

• Act as a platform for trading listed securities.
• Ensure efficient management of capital flow.
• Establish a standardized process for pricing, trade, and settlement.

Listing Procedures

• Companies undertaking IPO often have to fulfil strict conditions imposed by the relevant stock exchange.

Categories of Investors

• Retail Individual Investors (RIIs): Individuals investing up to a certain amount, determined by stock exchange rules.
• Qualified Institutional Buyers (QIBs): Institutions like financial firms and mutual funds that are allowed to invest above-mentioned amounts.
• Non-Institutional Investors (NIIs): An investor other than a retail or qualified institutional buyer.