Capital Market – Industrial Securities Market Market where industrial concerns raise their capital or debt by issuing appropriate instruments – Equity, Preference shares & debentures/bonds
Primary/New issue Market
Secondary Market
First time issue to public by borrowers to exchange new financial securities in long term funds.
Securities which have already passed through the primary market. Buying and selling of quoted securities.
i.e. capital formation by new issue
Stock Exchange – Regulated under the Security Contracts (Regulation) Act,1956
Dr. Ratnesh Chaturvedi, FMS, Session – 2-3
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Distinction between New Issue Market & Stock Exchange
Functional
Organisational
New Issue Market
Deals with new securities
No Physical Existence
Stock Exchange
Deals with old securities
Physical Existence
Dr. Ratnesh Chaturvedi, FMS, Session – 2-3
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Relationship between New Issue Market & Stock Exchange
New Issue Market
Secondary Market
New Securities
Old Securities
Stock Exchange
Provides mechanism for regular and continuous purchase and sale of securities Dr. Ratnesh Chaturvedi, FMS, Session – 2-3
The above two markets are complementary in nature
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Functions of New Issue Market Transfer of resources from Savers to Users Savers
Users
Individuals Commercial Banks Insurance Companies, etc.
Public Ltd. Companies Government
New Issue Market involves two aspects
Dr. Ratnesh Chaturvedi, FMS, Session – 2-3
Market where borrower goes to the public first time i.e. fresh issue
Market where borrower goes to the public first time i.e. fresh issue
To raise capital for starting Business
To raise additional capital for expansion/diversification
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Functions of New Issue Market Origination
Work of investigation, analysis and processing of new project proposals before floating of issue in the market
Underwriting Distribution
Dr. Ratnesh Chaturvedi, FMS, Session – 2-3
So there are two aspect : 3.
Technical, economic and financial viability of the new project and its soundness
4.
Advisory services which improve the quality of capital issues and ensure its success
Advisory services include : Type of issue Magnitude of issue Time of floating an issue Pricing of an issue Methods of issue Technique of selling the securities
The functions of origination is done by merchant bankers i..e. commercial banks, financial institution or private firms 5
Functions of New Issue Market Origination Underwriting Distribution
User / Borrower
Issues
Underwriters
Dr. Ratnesh Chaturvedi, FMS, Session – 2-3
Underwriting is an agreement in which underwriter promises to subscribe a specified no. of shares or debentures or stock in the event of public not subscribing to the issue
Savers
Underwriting is a guarantee for the marketability of shares If issues are fully subscribed – No liability for underwriter If issues are partly subscribed – Liability to buy remaining issues 6
Methods of Underwriting Standing behind the issue Outright Purchase Underwriter guarantees the sale of a specific no. of shares within a specified period
Underwriter makes outright purchase of shares and resell them
Consortium Method Underwriting is jointly done by a group of underwriters (formation of syndicate) For large issue
Dr. Ratnesh Chaturvedi, FMS, Session – 2-3
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Advantages of Underwriting
Assurance of getting adequate capital
Expert advise
Assurance of minimum subscription
Acceptability of securities
Highly specialised function of distributing securities
Dr. Ratnesh Chaturvedi, FMS, Session – 2-3
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Underwriters in India Institutional
Non-institutional
LIC, UTI, IDBI, ICICI, Commercial banks and General insurance companies
Brokers
Functions of New Issue Market Origination Underwriting Distribution Dr. Ratnesh Chaturvedi, FMS, Session – 2-3
Distribution is the function of sale of securities to ultimate investors performed by brokers and agents. 9
Methods of Floating New Issues Public Issue Offer for Sale Placement Right Issues
Public Issue The issuing company directly offers to the general public/institutions a fixed number of shares at a stated price through a prospectus. A company issuing shares to public must issue a prospectus. It is an invitation to offer to the public to take shares or debentures or to deposit money in the company. Sec 2(36) of ICA, 1956 defines prospectus means any document described or issued as a prospectus and includes any notice, circular, advertisement or other document inviting deposits from the public or inviting offers from the public for the subscription or purchase of any shares in, or debentures of, a body corporate.
Dr. Ratnesh Chaturvedi, FMS, Session – 2-3
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Prospectus
Merits of issue through Prospectus
According to the ICA,1956, every application form must be accompanied by prospectus. But as per companies amendment act, 1988, an abridged prospectus is being annexed to every application form
Inviting a large section of the investors No involvement of intermediaries Proper allocation of shares
Demerits of issue through Prospectus Expensive Suitable for large issues
Dr. Ratnesh Chaturvedi, FMS, Session – 2-3
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Methods of Floating New Issues Public Issue Offer for Sale Placement Right Issues
Offer for Sale Sale of securities in two stages First Stage -Sale of securities to Intermediaries
Second Stage -Sale of securities to Public by Intermediaries
Adv. of issue through Offer for sale Not common in India. This method is used generally in following situation : -Offer by a foreign company of a part of it to Indian investors -Promoters diluting their stake to comply with requirements of stock exchange at the time of listing of shares Dr. Ratnesh Chaturvedi, FMS, Session – 2-3
Relieved from preparation of prospectus & allotment Offer for sale from Intermediaries not Prospectus 12
Placement
Methods of Floating New Issues Public Issue Offer for Sale Placement
Issue Houses or brokers buy the securities outright with the intention of placing them with their clients afterwards Issue Houses or brokers – Act as wholesalers and selling securities at retail to public
Right Issues
Adv. of issue through Placement Demerits of issue through Placement Not widely distributed to the large sector of public
In case of depressed market condition In case of issue of small companies share
Limited use of this method in India Dr. Ratnesh Chaturvedi, FMS, Session – 2-3
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Methods of Floating New Issues Public Issue Offer for Sale Placement Right Issues Reasons for a Right Issue
Right Issue -By an existing company i.e. already listed in Stock Exchange - To existing shareholders in proportion to their existing share ownership -Generally at a certain privileged price - For specified period -Right of entitlement can be sold to someone else
Advantage of Right Issue
-Inflation – High replacement cost of Assets -For Funding expansion projects - High share prices
Dr. Ratnesh Chaturvedi, FMS, Session – 2-3
To Shareholders : Same proportion of share ownership To Company : Lower issue costunderwriting cost, etc.
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Calculation of Rights Offer Ratio
Number of outstanding shares
N =
Number of new shares to be offered
Ajanta Ltd. Has 100000 equity shares outstanding and it plans to issue 20000 new shares, then the number of rights needed to buy each new share is 5 ( 100000/20000). An investor who owns 4000 shares (4 percent) of the company’s shares would have enough rights to buy 800 (4000/5) of the new shares. Upon subscribing to the new issue, the investor would own 4800 shares, or 4 percent of the total 120000 shares now outstanding. The investor’s proportionate ownership is maintained.
Dr. Ratnesh Chaturvedi, FMS, Session – 2-3
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-Issue of Bonus Shares
Other Methods
-Offer to employees -Offer to the Creditors -Offer to the customers
Dr. Ratnesh Chaturvedi, FMS, Session – 2-3
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Instruments of Issue
Equity Shares
Preference Shares
Debentures
- Cumulative & non cumulative
-Redeemable & Irredeemable
- Cumulative convertible
- Unsecured & secured
New Instruments :
-Participating & Non Participating -Redeemable & Irredeemable
Dr. Ratnesh Chaturvedi, FMS, Session – 2-3
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Instruments of Issue Preference Share Capital - As per sec 85 of ICA’1956, in the case of a company limited by shares, that part of the capital which carries a preferential rights as to – - payment of dividend during the life time of the company - return on capital on winding up Equity all share capital which is not preference share capital
Offer for Sale – In this case offer for sale to public is made by intermediaries (deemed Prospectus). Prospectus is not required. Offer to Employees – to promote better industrial relation and higher productivity Offer to creditors – in full settlement of their loans or advances Offer to the customers – share holding of customers helps in the affairs and functioning of the concern.
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Players in the New Issue Market
Merchant Bankers Registrars Collecting and coordinating Bankers Underwriters and brokers Printers, Advertising agencies and mailing agencies
Dr. Ratnesh Chaturvedi, FMS, Session – 2-3
Merchant Bankers As per SEBI (Merchant Bankers) Rules, 1992 : Merchant Bankers means any person who is engaged in the business of issue management either by making arrangements regarding selling, buying or subscribing to securities or acting as manager, consultant, adviser or rendering corporate advisory service in relation to such issue management.
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Players in the New Issue Market
Merchant Bankers Registrars Collecting and coordinating Bankers Underwriters and brokers Printers, Advertising agencies and mailing agencies
Dr. Ratnesh Chaturvedi, FMS, Session – 2-3
Registrars Important category of intermediaries who undertake all activities connected with new issue management Role of Registrars Role in Pre-issue : -Suggest draft application form to the merchant bankers -Help identifying the collection centres -Assist in opening collection accounts with banks and forming procedure of operation -Sending instructions to collecting branches
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Role of Registrars Role during the currency of issue : -Receive the collection figures every day -Tabulate and classify the collection data -Keep the merchant bankers and the company informed of the progress of subscription -Inform the stock exchange about the closure of issue
Role during Pre-allotment work : -Getting all application forms and sorting -Group wise categorisation of valid application -Reclassification of valid application eligible for allotment -Approach to stock exchange for finalising the basis of allotment (in case of over subscription) -Finalisation on the basis approved by SE and tally of final allotment list Dr. Ratnesh Chaturvedi, FMS, Session – 2-3
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Role of Registrars Role during allotment work : -Allotment of shares ( proportionate allotment, etc.)
Role during Post-allotment work : -To get the letters of allotment letter and refund orders printed ready for despatch. -Submit all statements to the company for their final approval. -Arrange to pay the brokerage and underwriters commission and submit their relevant statements -Assist the company in getting the allotted shares listed on the stock exchange
Qualifications for Registrars to the Issue Registration from SEBI based on having competency and expertise, quality of manpower, their past records, adequacy of infrastructure and capital adequacy. Code of conduct by SEBI. They have to maintain proper books of accounts and registers for a period of three years. Dr. Ratnesh Chaturvedi, FMS, Session – 2-3
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Players in the New Issue Market
Merchant Bankers Registrars Collecting and coordinating Bankers
Collecting and coordinating Bankers Collecting Bankers – collect the subscription in cash, cheques, etc. Coordinating Bankers – collect information on subscription and coordinate the collection work Both may be same or different banks
Underwriters and brokers Printers, Advertising agencies and mailing agencies
Dr. Ratnesh Chaturvedi, FMS, Session – 2-3
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