Security Analysis and Portfolio Management - Unit II

1. NEW ISSUE MARKET

2. MEANING OF NEW
ISSUE MARKET
• 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.

3. FUNCTIONS OF NEW
ISSUE MARKET
• 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:

4. Contd…..
• 1. 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.

5. Contd……
• 2. 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.

6. Contd……
• 3. 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.

7. 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

8. 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.

9. 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.

10. 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.

11. 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.

12. 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.

13. 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.

14. 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.

15. 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.

16. 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.

17. 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).

18. 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.

19. 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.

20. 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.

21. Objectives of Listing
• Providing liquidity to securities;
• Mobilize savings for economic
development;
• Protect interest of investors by ensuring
full disclosures.
The exchange has a separate Listing Dept. to
grant approval for listing of securities of
companies in accordance with the various
provisions of the concerned laws,
guidelines issued by SEBI and rules, bye-
laws and regulation of the exchange.

22. Participants In The
Securities Market
• Regulators: The key agencies that havea
significant regulatory influence , direct or
indirect, over the securities market such
as SEBI, RBI, CLB, DEA and MCA etc.
• Stock Exchanges: A stock exchange isan
institution where securities that have
already been issued are bought and sold.
Presently there are 23 stock exchanges in
India, the most important ones being BSE
and NSE.

23. • Listed Securities: Securities that are
listed on various stock exchanges and
hence eligible for being traded there are
called listed securities.
• Depositories: A depository is an institution
which dematerialize physical certificates
and effects transfer of ownership by
electronic book entries. Presently there
are two depositories in India, viz. NSDL
and CSDL.

24. • Brokers: Brokers are registered
members of the stock exchanges
though whom investors transact.
• Foreign Institutional Investors:
Institutional investors from abroad
who are registered with SEBI to
operate in the Indian Capital market
are called foreign institutional
investors (FIIs).

25. • Merchant Bankers: Firms that specialize
in managing the issue of securities are
called merchant bankers. They have to be
registered with SEBI.
• Primary Dealers: Appointed by the RBI,
primary dealers serve as underwriters in
the primary market and as market makers
in the secondary market for governmental
securities.

26. • Mutual Funds: A mutual fund is a
vehicle for collective investment. It
pools and manages the funds of
investors.
• Custodians: A custodian looks after
the investment back office of a
mutual fund. It receives and delivers
securities, collects income,
distributes dividends, and segregates
the assets between schemes.

27. • Registrars: Also known as a transfer
agent, a registrar is employed by a
company or a mutual fund to handle all
investor-related services.
• Underwriters: An underwriter agrees to
subscribe to a given number of shares (or
any other security) in the event the public
subscription is inadequate. The
underwriter, in essence, stands guarantee
for public subscription.

28. • Bankers to an issue: The bankers to
an issue collect money on behalf of
the company from the applicants.
• Debenture Trustees: When
debentures are issued by a company,
a debenture trustee has to be
appointed to ensure that the
borrowing firm fulfills its contractual
obligations.

29. • Venture Capital Funds: A venture capital
fund is a pool of capital which is essentially
invested in equity shares or equity-linked
instruments of unlisted companies.
• Credit Rating Agencies: A credit rating
agency assigns ratings primarily to debt
securities. In India there are two main
credit rating agencies; Credit Rating
Investment Services of India Limited
(CRISIL) and Investment Information and
Credit Rating Agency (ICRA).