New Issue Market

1. INTRODUCTION :- 

                It refers to the set-up which helps the industry to raise the funds by issuing different types of securities. These securities are issued directly to the investors (both individuals as well as institutional) through the mechanism called primary market or new issue market. The securities take birth in this market.

2. FUNCTIONS :-

                The main function of new issue market is to facilitate transfer resources from savers to the users. It plays an important role in mobilizing the funds from the savers and transferring them to the borrowers. The main function of new issue market can be divided into three service functions:

i) Origination : It refers to the work of investigation, analysis and processing of new project proposals. Origination starts before an issue is actually floated in the market. It includes a careful study of the technical, economic and financial viability to ensure the soundness of the project and provides advisory services.

ii) Underwriting : It is an agreement whereby the underwriter promises to subscribe to a specified number of shares or debentures in the event of public not subscribing to the issue. Thus it is a guarantee for the marketability of shares. Underwriters may be institutional and non-institutional.

iii) Distribution : It is the function of sale of securities to ultimate investors. Brokers and agents who maintain regular and direct contract with the ultimate investors, perform this service.

3. METHODS OF FLOATING NEW ISSUES :-

                The various methods which are used in the floating of securities in the new issue market are: Public issues Offer for sale Placement Right issues

a) Public issues or Initial public offering (IPO) The issuing company directly offers to the general public/institutions a fixed number of securities at a stated price or price band through a document called prospectus. This is the most common method followed by companies to raise capital through issue of the securities.

b) Offer of sale It consists in outright sale of securities through the intermediary of issue houses or share brokers. It 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 purchase the securities at a negotiated price and resell at a higher price. The difference in the purchase and sale price is called turn or spread.

c) Right Issue When a listed company proposes to issue securities to its existing shareholders, whose names appear in the register of members on record date, in the proportion to their existing holding, through an offer document, such issues are called ‘Right Issue’. This mode of raising capital is the best suited when the dilution of controlling interest is not intended.

d) Private placement It involves sale of securities to a limited number of sophisticated investors such as financial institutions, mutual funds, venture capital funds, banks, and so on. It refers to sale of equity or equity related instruments of an unlisted company or sale of debentures of a listed or unlisted company.

e) Preferential Issue An issue of equity by a listed company to selected investors at a price which may or may not be related to the prevailing market price is referred to as preferential allotment in the Indian capital market. In India preferential allotment is given mainly to promoters or friendly investors to ward off the threat of takeover.

f) E-IPO The companies are now allowed to issue capital to the public through the on-line system of the stock exchanges. For making such on-line issues, the companies should comply with the provisions contained in Chapter 11A of SEBI( Disclosure and Investor Protection) Guidelines, 2000.

g) Green Shoe Option It denotes ‘an option of allocating shares in excess of the shares included in the public issue’. SEBI guidelines allow the issuing company to accept over subscriptions, subject to a ceiling, say 15% of the offer made to public. It is extensively used in international IPOs to stabilized the post-listing price of new issued shares.

h) Pricing of Issues The companies eligible to make public issue can freely price their equity shares or any security convertible at a later date into equity shares as per SEBI guidelines 2000. The issuer can fix-up issue price in consultation of with merchant banker, subject to giving disclosures of the parameters which have considered while deciding the issue price.

i) Fixed Price Process The price which has been fixed by the company for its securities before issue is brought to the market. The price at which the securities are offered/allotted is known in advance to the investor. Demand for the securities offered is known only after the closure of the issue. Payment is made at the time of subscription whereas refund is given after allotment.

j) Book-Building/Price Band It is a process used for marketing a public offer of equity shares of a company. Book building is a process wherein the issue price of a security is determined by the demand and supply forces in the capital market The Price at which securities will be allotted is not known in advance to the investor. Only an indicative price range is known. (Also called price band and it should not be more than 20% of the floor price).

k) Lock-in Period Lock-in indicates the freeze on transfer of shares. SEBI (Disclosure and Investor Protection) Guidelines, 2000 have stipulated lock-in requirements as to specified percentage of shares subscribed by promoters with a view to avoid unscrupulous floating of securities and to ensure the promoters involved in the issue continue have controlling a interest in the company, which can be subjected to legal compliances.

l) Offer Documents An offer document means ‘prospectus’ in case of public issue or an offer for sale and ‘letter of offer’ in case of right issue, which is required to be filed with the Registrar of Companies (ROC) and Stock Exchanges. An offer document covers all the relevant information to help an investor in making wise investment decisions.

m) Kinds of Offer Documents Draft Prospectus Draft Letter of Offer Prospectus Abridged Prospectus Shelf Prospectus Information Memorandum Red-Herring Prospectus

n) Listing of Securities Listing means admission of the securities to dealings on a recognized stock exchange. The securities may be of any public limited company, central or state government, quasi governmental and other financial institutions/corporations, municipalities etc.