New Issue Market PDF

UNIT –I NEW ISSUE MARKET MEANING The primary market, often referred to as the "new issue market," is where companies issue new securities to the public for the first time. In the case of equity, this proce...

UNIT –I NEW ISSUE MARKET MEANING The primary market, often referred to as the "new issue market," is where companies issue new securities to the public for the first time. In the case of equity, this process is known as an Initial Public Offering (IPO), while for debt instruments, it involves issuing bonds or debentures. The new issue market deals with the new securities which were not previously available to the investing public, i.e., the securities that are offered to the investing public for the first time. The market, therefore, makes available a new block of securities for public subscription. All financial institutions which contribute, underwrite and directly subscribe to the securities are part of new issue market. There are various intermediaries like registrars, custodians and merchant bankers that are involved in this activity of issuing new securities. FUNCTIONS OF NEW ISSUE MARKET The main function of a new issue market is to facilitate transfer of resources from savers to the users. The savers are individuals, commercial banks, insurance companies etc. The users are public limited companies and the government. It is not only a platform for raising finance to establish new enterprises but also for expansion/ diversification/ modernization of existing units. In this basis the new issue market can be classified as:- 1. Market where firms go to the public for the first time through initial public offering (IPO). 2. Market where firms which are already trading raise additional capital through seasoned equity offering (SEO). The main functions of a new issue market can be divided into a triple service functions: 1. Origination: It refers to the work of investigation, analysis and processing of new project proposals. It starts before an issue is actually floated in the market. This function is done by merchant bankers who may be commercial banks, all India financial institutions or private firms. At present, financial institutions and private firms also perform this service. Though this service is highly important, the success of the issue depends, to a large extent, on the efficiency of the market. 2. Underwriting: It is an agreement whereby the underwriter promises to subscribe to a specified number of shares or debentures or a specified amount of stock in the event of public not subscribing to the issue. If the issue is fully subscribed, then there is no liability for the underwriter. If a part of share issues remains unsold, the underwriter will buy the shares. Thus, underwriting is a guarantee for marketability of shares. There are two types of underwriters in India - Institutional (LIC, UTI, IDBI, ICICI) and Non-institutional are brokers. 3. Distribution: It is the function of sale of securities to ultimate investors. This service is performed by brokers and agents who maintain a regular and direct contact with the ultimate investors. METHODS OF FLOATING NEW ISSUE The various methods which are used in the flotation of securities in the new issue market are : 1. Public issues 2. Offer for sale 3. Placement 4. Rights issues 1. Public Issues Under this method, this issuing company directly offers to the general public/ institutions 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. The prospectus must state the following: * Name of the company * Address of the registered office * Existing and proposed activities * Location of the industry * Names of Directors * Minimum subscription * Names of brokers/ underwriters/ bankers/ managers and registrars to the issue. 2. Offer for Sale This method of offer of sale consists in outright sale of securities through the intermediary of Issue Houses or share-brokers. In other words, the shares are not offered to the public directly. This method consists of two stages: The first stage is a direct sale by the issuing company to the issue house and brokers at an agreed price. 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 in the purchase and sale price is called spread. It is otherwise called Bought out deals (BOD). This method is used generally in two instances: 1. Offer by a foreign company of a part of it to Indian investors. 2. Promoters diluting their stake to comply with requirements of Stock exchange at the time of listing of shares. 3. Placement Under this method, the issue houses or brokers buy the securities outright with the intention 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 as well as underwriting agreement. 4. Rights Issue It is a method of raising funds in the market by an existing company. A right means an option to buy certain securities at a certain privileged price within a certain specified period. Shares, so offered to the existing shareholders are called rights shares. Rights shares are offered to the existing shareholders in a particular proportion to their existing share ownership. The ratio in which the new shares or debentures are offered to the existing share capital would depend upon the requirement of capital. The rights themselves are transferable and sale-able in the market. Section 81 of the Companies Act deals with rights issue. The cost of issue is minimum. There is no underwriting, brokerage, advertising and printing of prospectus expenses. It prevents the directors from issuing new shares in their own name or to their relatives at a lower price and get controlling right. PLAYERS IN THE PRIMARY MARKET There are many players in the new issue or primary market. The important of them are: 1. Merchant Bankers - They are the issue managers, co-managers, and are responsible to the company and SEBI. They are registered by SEBI under category I, II, III and IV based on the capital adequacy and track record. 2. Registrars to the issue - They are an important category of intermediaries who undertake all activities connected with new issue management. They are appointed in consultation with the merchant bankers. A networth of Rs. 6 Lakhs is essential for Registrars. 3. Collecting and Co-ordinating Bankers - They collect information on subscriptions and co- ordinate the collection work. 4. Underwriters and Brokers - Brokers along with the network of sub-brokers market the new issues. They send their own circulars and applications to the clients and do follow up work to market securities. Advantages & Disadvantages of Primary Market Advantages :- 1. Mobilisation of savings 2. Channelising savings for productive use 3. Source of large supply of funds 4. Rapid Industrial growth due to increase in production and productivity in the economy. Disadvantages :- 1. Possibility of deceiving investors 2. No fixed norms for project appraisal 3. Lack of post issue seriousness eg. Facebook IPO 4. Ineffective role of merchant bankers 5. Delay in allotment process ROLE OF SEBI RELATING TO NEW ISSUE MARKET PROTECTION Securities and Exchange Board Of India [SEBI] is a regulator of securities market in India. Initially, it was formed for the purpose of observing the activities afterward in May 1992, Government of India granted legal status to SEBI. Functions of Primary Market Under SEBI Primary Market facilitates capital growth by encouraging individuals to convert savings into investments. Primary Market being the part of Capital market also issues new securities. Government or Public sector institutions and companies can obtain funds in exchange of a new stock or bond issues via an investment Bank or financial Syndicate of securities dealers. It encourages Initial Public Offerings [IPO] Role of SEBI Protecting the interest of investors  SEBI ensures that the investors do not get befooled by misleading and false advertisements. In return, SEBI issued guidelines so as to protect investors and also ensured that the advertisement is fair and concise.  Regulation of price rigging: Price rigging refers to manipulation of prices by way of fluctuating the prices with the object of inflating and depressing the market price of securities.  SEBI make efforts to educate investors so that they are able to make choices between the offerings of different companies and choose the most profitable securities.  SEBI has issued guidelines to investigate cases of fraud and insider trading. Adding to this the provisions for fine and Imprisonment. To ensure Development activities in Stock Exchange  E-Trading: Concept of E-trading have been introduced few years back by SEBI to eliminate the discomfort. It simplifies the process of buying and selling of securities.  The initial public offering of Primary Market (which is a part of Capital market) permits through stock exchange.   SEBI promotes training of intermediaries of securities market with the object of smooth functioning. Regulate the business of stock exchange and activities of stock exchange  SEBI introduced proper Code Of Conduct applicable to everyone who is a part of the process of buying and selling of securities, stock exchange, etc. Following are the areas of concern:  Rules and Regulations to regulate intermediaries such as Broker, underwriters, etc.  Registers and Regulates the working of merchant Bankers, sub-brokers, stock-brokers, share transfer agent, trustees, etc.  Registers the working of mutual Funds.  SEBI regulates turnover of the companies.  It also conducts inquiry and audits. To Regulate Insider Trading  Insider Trading have been a problem since the introduction of the Market dealing with buying and selling of securities, stock exchange, etc. An Insider is a person or a group of people having first- hand knowledge about the internal issues and Ups and downs of a company. The moment insider gets to know about the loss which is going to occur, the shares under insider’s name are sold immediately. Hence, company suffers a huge amount of loss. Process of Issuance of Securities Preparation of Prospectus The prospectus must contain following information: 1. Name 2. Address 3. Registered Office 4. Names and Addresses of Company Promoters 5. Managers 6. Managing Directors 7. Director 8. Company Secretary 9. Legal Advisor  10. Auditors 11. Bankers It also includes information related to project, plant location, Technology, collaboration, products, export obligations, etc. An intermediary includes underwriters and Brokers are separately appointed by the company to sell the minimum number of shares. Prospects issued by the company must be approved by SEBI. A company offers minimum of 49 percent of the amount of shares to the public. FOLLOWING MENTIONED ARE THE WAYS OF ISSUING STOCKS IN MARKET, 1. Initial Public Offering [IPO] When a company make public issue of shares for the very first time it is referred to as Initial Public Offering. Process of Initial public offering as per the guidelines of SEBI includes: Firstly, issuance of prospectus is the first and foremost task, the prospectus must include every detail about the company and about the issue; Secondly, issuance of share Application Forms by the intermediaries (underwriters and brokers); Thirdly, brokers make a list of orders collected from clients and then place orders with the company; Fourthly, company then begins with the allotment of Shares with the help of stock exchange. After the Allotment procedure share certificates are delivered to the investors or credited to their respective Demat Accounts. Investors Must be vigilant about additional offers and tempting IPO which company offers. FACTORS MUST BE KEPT IN MIND WHILE STUDYING AN IPO OFFER DOCUMENT Promoter Performance Prospects Price 2. Private Placement The securities are offered for sale privately to some specific individuals and other institutions. No prospectus is issued to cut the cost and time involved in the process of allotment and issuance. This method is very popular among investors these days. This way, shares are concentrated in few hands only. Thus this increases the price temporarily and is sold to the small and common investors. 3. Offer For Sale Process of offer for sale is somewhat similar to private placements. Stock Brokers negotiate with companies regarding the price and terms and conditions bsed of which the shares are being issued. After negotiation, intermediaries buy shares from the company. Securities are then sold to the investors at a higher price to earn some extra profit. This method is adopted to save time and cost of the process. 4. Bought out deals Bought out deals are those deals wherein a company in order to introduce its shares to the market sells all its equity shares to a single broker. The sale under Bought out deals is similar to that of Offer for sale. 5. Right Issue Right issue is made by a company to its existing shareholders in proportion to the number of shares that they posses. GUIDELINES BY SEBI, Only Listed company can make right issue. Right can be made only in respect of fully paid up shares. Company will have to make announcement before such issue and this cannot be withdrawn. The right issue should be open for minimum period of 30 days, and maximum up to 60 days. Company will have to make an agreement with the depository to issue the shares in Demat form. 6. Bonus Issue Extra Bonus received is treated as a part of Profit under Share Capital and thus it is divided between the shareholders of a company. 7. Book- Building Under normal circumstances, brokers are the intermediaries through which shares are allotted whereas under book building process feedbacks of the investors are taken for the fixation of price of the shares SEBI GUIDELINES FOR DISCLOSURE & INVESTOR The Securities and Exchange Board of India (SEBI) has issued a comprehensive set of guidelines aimed at ensuring transparency and protecting investor interests in the securities market. Below is an overview of SEBI's key guidelines on disclosure and investor protection: 1. Listing Obligations and Disclosure Requirements (LODR) Regulations These regulations mandate listed companies to disclose material information to the public in a timely and accurate manner.  Periodic Financial Disclosures: Companies must disclose quarterly and annual financial results, including profit and loss statements, balance sheets, and cash flow statements.  Material Events: Immediate disclosure of any events or information that could affect the company’s stock price, such as mergers, acquisitions, or changes in management.  Corporate Governance Reports: Regular disclosure of corporate governance practices, including board composition and functioning, and details of committees. 2. Prohibition of Insider Trading (PIT) Regulations These regulations aim to prevent insider trading and ensure fair market practices.  Disclosure of Trades by Insiders: Insiders must disclose their trades in the company’s securities to the company and the stock exchanges.  Trading Plans: Insiders can adopt trading plans for systematic trading, which need to be disclosed to the stock exchanges.  Confidentiality of Unpublished Price Sensitive Information (UPSI): Companies must ensure that UPSI is kept confidential and is disclosed only on a need-to-know basis. 3. Issue of Capital and Disclosure Requirements (ICDR) Regulations These regulations govern the process of public issues, rights issues, and preferential allotment of shares.  Prospectus and Offer Documents: Detailed disclosures in the prospectus, including financial statements, risk factors, and management discussions.  Pricing and Allocation: Guidelines for the fair pricing of issues and transparent allocation procedures. 4. Substantial Acquisition of Shares and Takeovers (SAST) Regulations These regulations ensure transparency in the acquisition of shares and takeovers.  Disclosure of Share Acquisition: Any substantial acquisition of shares or voting rights must be disclosed to the company and the stock exchanges.  Open Offer Obligations: Requirement to make an open offer to the public shareholders in case of substantial acquisition or change in control. 5. Mutual Funds Regulations These regulations ensure that mutual funds operate in a transparent and fair manner.  Scheme Information Document (SID): Detailed disclosure about the mutual fund scheme, including investment objectives, risk factors, and fee structure.  Key Information Memorandum (KIM): A summarized version of the SID, providing essential information about the scheme. 6. Credit Rating Agencies (CRA) Regulations These regulations ensure that credit rating agencies provide transparent and unbiased ratings.  Rating Rationale: Detailed disclosure of the rationale behind the assigned ratings, including the factors influencing the rating decision.  Monitoring and Review: Periodic review and public disclosure of changes in ratings. 7. Alternative Investment Funds (AIFs) Regulations These regulations ensure transparency and fair practices in the operation of AIFs.  Fund Information Disclosure: Detailed information about the AIF’s investment strategy, risk factors, and performance.  Periodic Reporting: Regular reports to investors on the performance and composition of the fund’s portfolio. 8. Investor Grievance Redressal Mechanism SEBI has established mechanisms to address investor grievances effectively.  SCORES Platform: An online platform for investors to lodge complaints against listed companies and market intermediaries.  Arbitration and Mediation: Provision for alternative dispute resolution mechanisms to resolve investor grievances. 9. Corporate Governance Guidelines These guidelines promote ethical corporate behavior and transparency in the management of companies.  Board Composition and Functioning: Requirements for a balanced composition of independent and executive directors.   Audit Committees: Mandate for the constitution of audit committees to oversee financial reporting and disclosure. 10. Risk Management and Internal Controls These guidelines require companies to disclose their risk management policies and internal control systems.  Risk Factors: Identification and disclosure of key risks that could impact the company’s operations.  Internal Control Framework: Disclosure of internal control mechanisms and their effectiveness. These guidelines are part of SEBI’s broader mandate to protect investors, promote transparency, and maintain the integrity of the securities markets in India.