NEW ISSUE

MANAGEMENT




CONTENTS
Classification of Issues
Primary Market / New issue market
Placement of issue
Offer through prospectus
Offer for sale
Private placement
Rights issue
Book building
Red herring prospectus
Intermediaries to issue
Lead Manager
Registrar
Bankers to issue
Underwriters
Pricing of issue
Key Terms
CLASSIFICATION OF ISSUES
Issues
Public Rights Preferential
Initial Public
Offering (IPO)
Follow on Public
Offering (FPO)
Fresh
Issue
Offer for
Sale
Fresh
Issue
Offer for
Sale
PRIMARY MARKETS OR NEW
ISSUE MARKET
Primary markets - include all types of securities
- being sold for the first time
After being offered in the primary market, it
becomes part of the secondary market
Primary market offered consist of
(1) FPOs, new offerings of listed companies that have
sold securities to the public before, and
(2) IPOs, where an unlisted company is selling
securities to the public for the first time
PLACEMENT OF THE ISSUE
Initial issues are floated
1. Through prospectus
2. Bought out deals/offer for sale
3. Private placement
4. Right issue
5. Book building
OFFER THROUGH PROSPECTUS
Invites offers for subscription or purchase of any shares or
debentures from the public

The salient features of the prospectus are
1. General Information about company
2. Capital structure of the company
3. Terms of the present issue
4. Particulars of the Issue - issue-opening, closing and earliest
closing date of the issue
5. Company Management and Project
6. Details of the outstanding litigations
7. Management perception of risk factors
8. Justification of the issue premium
9. Financial Information - cost of the project, projected earnings
OFFER FOR SALE
Promoter places his shares with an investment banker
(bought out dealer or sponsor) who offer it to the
public at a later date



Hold on period is 70 days to more than a year

Bought out dealer decides the price after analyzing
the viability, the gestation period, promoters
background and future projections

Boughs out dealer sheds the shares at a premium to
the public

Promoter Investment Banker Public
Contd.
Advantages for the issuing company
helps the promoters to realize the funds without any loss of
time
the cost of raising funds is reduced - For issuing share cost as
high as 10 percent of the cost of the project
helps the new entrepreneurs, not familiar with the capital
market, to raise adequate capital from the market.
a company with no track record of projects, public issues at a
premium may pose problems
possess low risk to investors since the sponsors have already
held the shares for a certain period

Disadvantage
sell at a hefty premium, manipulation of the results, insider
trading and price rigging
PRIVATE PLACEMENT
Small number of financial intermediaries (like Unit
Trust of India, mutual funds, insurance companies,
merchant banking subsidiaries of commercial banks)
purchase the shares and sell them to investors at a
later date at a suitable price

Advantages:
Cost Effective - statutory and non-statutory
expenses are avoided.
Time Effective
Structure Effectiveness - flexible to suit the
financial intermediaries
Access Effective - issue of all sizes can be
accommodated
RIGHTS ISSUE
Offers shares at first to the existing share holders
In proportion to the shares held by them at the time
of offer
Offered at a advantageous rate compared with the
market rate

Certain conditions:
A notice should be issued to specify the number of
shares issued
The time given to accept should not be less than 15
days
Right of the share holders to renounce the offer in
favor of others
BOOK BUILDING
Process of price discovery
Not a fixed price for its shares
Indicates a price band that mentions the lowest
(referred to as the floor) and the highest (the cap)
prices
The spread between the floor and the cap of the
price band shall not be more than 20%. The cap
should not be more than 120% of the floor price.
Price is finalized by the book runner and the issuer
company
Malegam Committee - introduction of the book
building process Oct 1995
Originally, companies issuing more than Rs 100 cr
allowed; Later SEBI allowed for issue of any size
Contd.
Nirma offering a maximum of 100 lakh equity shares
through this process; first company to adopt the
mechanism

An example of pricing securities - Googles IPO
offer:
Googles IPO offer on the Dutch-auction basis, similar
to the book-building process.
Target range between U.S. $105 and U.S. $135 per
share
Market response to offer not too good; final issue
price U.S. $85
Enabled Google to find price that market was willing
to pay for its issue
RED HERRING PROSPECTUS
Prospectus without details of either price or number
of shares being offered or the amount of issue

A preliminary registration statement that must be
filed with the SEBI describing a new issue of stock
(IPO) and the prospects of the issuing company

It is known as a red herring because it contains a
passage in red that states the company is not
attempting to sell their shares before the
registration is approved by the SEBI

PRICING OF ISSUE
Prior to 1992, governed by Controller of Capital Issues Act 1947
Fixation of a fair price on the basis of the net asset value per
share

Era of free pricing in 1992; SEBI does not play any role in price
fixation

Issuer in consultation with Merchant Banker shall decide the
price

FIXED PRICE - company and LM fix a price
PRICE DISCOVERY THROUGH BOOK BUILDING - company
and LM stipulate a floor price or a price band and leave it to
market forces to determine the final price

At premium Companies are permitted to price their issues at
premium
At par value In certain cases companies are not permitted to
fix their issue prices at premium
INTERMEDIATRIES TO ISSUE
Intermediaries to an issue are:
Merchant Bankers to the issue or Book Running Lead Managers
(BRLM)
Registrars to the issue
Bankers to the issue
Auditors of the company
Underwriters to the issue
Solicitors
Advertising agencies
Financial institutions
Government/ statutory agencies
LEAD MANAGER
Appointed by company to manage the public issue programmes.

BRLM - A Merchant banker possessing a valid SEBI registration

Main duties
(a) drafting of prospectus
(b) preparing the budget of expenses related to the issue
(c) suggesting the appropriate timings of the public issue
(d) assisting in marketing the public issue successfully
(e) advising the company in the appointment of registrars to the
issue, underwriters, brokers, bankers to the issue, advertising
agents etc.
(f) directing the various agencies involved in the public issue.

The merchant banking division of the financial
institutions, subsidiary of commercial banks, foreign
banks, private sector banks and private agencies are
available to act as lead managers

Some of them are SBI Capital Markets Ltd., Bank of
Baroda, Canara Bank, DSP Financial Consultant Ltd.
ICICI Securities & Finance Company Ltd., etc.


Role of Lead Manager in the Pre & Post
Issue
Pre issue:
Post issue:
Due diligence
Design of offer doc,
prospectus, memo
Ensure the formalities
with SE, ROC & SEBI
Appointment wd
intermediaries
Marketing strategy
Mgt of escrow a/ct
Co-ordinate non institutional
allocation
Intimation of allocation
Dispatch of refunds to
bidders
Follow up steps-
finalization of trading,
Dealing of instruments,
dispatch of certificates &
demat of delivery of shares
Look at the functioning of
agencies
REGISTRAR
Finalizes the list of eligible allotees after deleting the invalid
applications
Corporate action for crediting of shares to the demat accounts
of the applicants
Dispatch of refund orders to those applicable
Receive the share application from various collection centres
Recommend the basis of allotment in consultation with the
Regional Stock Exchange for approval
Arrange for the dispatching of the share certificates
BANKERS TO THE ISSUE
Ensure that the funds are collected and transferred to the
Escrow accounts.
Estimates of collection and advising the issuer about closure of
the issue

UNDERWRITERS
Underwriting means they will subscribe to the balance shares if
all the shares offered at the IPO are not picked up

Could be a banker, broker, merchant banker or financial
institution

Insurance against the possibility of inadequate subscription

Done for a commission

The aspects considered before appointing are
(a) experience in the primary market
(b) past underwriting performance and default
(c) outstanding underwriting commitment
(d) the network of investor clientele of the underwriter and
(e) his overall reputation

KEY TERMS
Green-shoe Option
An option of allocating shares in excess of the shares included in
the public issue
Post-listing price stabilizing mechanism for a period not
exceeding 30 days through a Stabilizing Agent
Issue would be over allotted to the extent of a maximum of 15%
of the issue size
Provides an investor more probability of getting shares
Post listing price may show relatively more stability as compared
to market.

Qualified Institutional Buyer (QIBs)
Institutional investors who are perceived to possess expertise
and the financial muscle to evaluate and invest in the capital
markets