Share issue Mechanism

New issue can be made in any of the following ways:

1) Public Issue through Prospectus

2) Through offer for sale

3) Private placement

4) Right Issue

5) Issue of bonus shares

6) IPOs through secondary market

7) Book-building

8) Stock option

1. Public Issue through Prospectus: company issue a prospectus which is an invitation for subscription by the investing public. It is a direct offer by the company to the public. Normally the shares of new company are issued at par and shares of existing company can be issued at premium. Prospectus contains all the details of the company and its promoters, prospects and risk associated.

Key Features simple way of issuing shares.

• Wide distribution of share is possible.
• floatation costs, administrative costs, publicity costs and
• Legal costs are high.

2. Offer for Sale: The Company does not offer shares directly to the public, but through intermediaries, such as, issuing houses or stock broker firms. Sale of securities done in two stages. In the first stage, the issuing company makes an en bloc sale of securities to the issue house at an agreed fixed price. The second stage involves re-issue of securities by issue houses to the ultimate investor at higher price. The difference between the sale and purchase price of issue house is called as turn. All the costs related with the issue like underwriting, advertisement etc. have to meet by issuing houses, out of the turn.

Major benefit of the method is issuing company is free of hassles involved in issuing shares. 

3. Private Placement: Under this method, the securities are acquired by the issuing company at an agreed price and then these are placed only with their investor-clients, both individual and institutional investors, at a higher price and hence earning turn. In this case no underwriting is required. The advantage of this method is no advertisement costs or no underwriting fee is to be paid.

Advantages SEs requirement regarding prospectus is also less stringent.

On the other hand, the major limitation of this method is – fear of issue getting concentrated in few hands. This method is more common for Government Owned Institutions.

4. Right Issue: A fresh issue of shares by an existing company to its existing shareholders in proportion to the number of shares already held by them is called as right issue. Only a company whose shares are already listed can make right issue. It is offered on pro-rata basis.

Major advantage of this method is economical and do not disturb the existing shareholding pattern. Limitations are only existing company can issue it, shares may get concentrated in few hands and there may be conflict between the rights of existing shareholders and overall societal considerations of diffusion of share ownership for promoting dispersal of wealth and economic power. 

5. Bonus Shares: It does not result in raising fresh capital. It is merely a conversion of existing reserves and surpluses into share capital. It represents just a book entry subject to certain rules and regulation. Total resource base of the company does not change nor it results into entry of new shareholders
6. IPOs through Secondary Market: In October 1999, SEBI accepted the proposal for marketing IPOs through the secondary market, i.e. using existing infrastructure. Here the brokers place orders on behalf of clients through a special window on trading terminal. After finalisation of allocation, brokers are advised to inform the allottees. Successful allottees submit the application form and the amount payable through the broker to the clearing house. Subsequently the share certificates would be delivered to the investors by crediting the depositories account in the name of investor.

The major advantage of the method is investors need not to park their funds until allotment. 

7. Book Building: Most commonly used method now-a-days. In this case the issuer company does not directly issue shares to the public but invites bids from public. Therefore this method is also called as “Price Discovery Through book Building Process”. In this method the bids are collected from investors at various prices which are above or equal to the floor price. The offer price is determined after the bid closing date. In this case the issuer company advertise about the issue in the national newspaper. The advertisement will have the information about floor price, price band and cap price. Floor price is the minimum price of the issue and cap price is the maximum price, and the spread between these two prices are called as price band. Here the cap price must not be more than 120 percent of the floor price. The book shall remain open minimum for three days. The price band can be revised also and in that case the bidding process can be extended to three more days subject to total bidding period not exceeding ten days. The actual discovered issue price can be any price between the price band.

The issue price is called as “Cut-Off Price”, which is decided by issuer and lead managers looking at the demand of issue in the market. As per SEBI guidelines, the basis of allotment should be completed within 15 days from the issue close date. As soon as the basis of allotment is completed, within 2 working days the details of credit to demat account /allotment advice and dispatch of refund order needs to be completed.

So an investor should know in about 15 days time from the closure of issue, whether shares are allotted to him or not. It should take around three weeks, after the closure of book, to get listed the shares on SEs. The role of Registrar to an Issue is to finalize the list of eligible allottees after deleting the invalid applications and ensures that the corporate action for crediting of shares to the demat accounts of the applicants is done and the dispatch of refund orders to those applicable are sent.

The Lead Manager coordinates with the Registrar to ensure follow up so that that the flow of applications from collecting bank branches, processing of the applications and other matters till the basis of allotment is finalized, dispatch security certificates and refund orders completed and securities listed. Specially for book building process the lead managers are also called as “Book Running Lead Managers (BRLMs)”.

According to the disclosure guidelines of SEBI, the issuer company have to give all details about the issue like – the reason for raising the money, the way money is proposed to be spent, the return expected on the money etc. This information is in the form of ‘Prospectus’ which also includes information regarding the size of the issue, the current status of the company, its equity capital, its current and past performance, the promoters, the project, cost of the project, means of financing, product and capacity etc. The prospectus is called as “Red Herring Prospectus (RHP)”, which also contains lot of mandatory information regarding underwriting and statutory compliances. This helps investors to evaluate short term and long term prospects of the company. the RHP also contains about the information regarding listing of shares on the SEs. The regulatory mechanism does not play a role in setting the price for issues. It is up to the company to decide on the price or the price band, in consultation with Merchant Bankers.

If shares are issued first time in the market then it is called as “Initial Public Offer (IPO)”, otherwise for an existing company whose shares are already listed with SE, the further issue is called as “Follow-on Public Offer (FPO)”. 

Eligibility Norms: Any company issuing security through the offer document has to satisfy the following conditions:

A company making a public issue of securities has to file a draft prospectus with SEBI, through eligible merchant banker, at least 21 days prior to the filing of prospectus with Registrar of the Companies (RoCs). Filing of application is mandatory for listed company even in case of right issue, if the issue amount is more than Rs 50 lakhs (including premium).

Moreover listing of securities to the SEs is mandatory.

Prior agreement with depositories regarding dematerialisation of share certificates is also important.

A company can not make public issue if it has been prohibited by SEBI.

An unlisted company can also make a public issue at a fixed price or by book building method provided:

(i) it has pre-issue net worth of not less than Rs1 crore in 3 out of the preceding 5 years and has minimum net worth in immediately preceding two years.

(ii) it has a track record of distributable profits for at least 3 out of immediately preceding 5 years

(iii) the issue size should not exceed five times its pre-issue net worth. If the company, listed or unlisted, does not meet the above criteria then the issue have to be compulsorily made through book building route and in such case, 60% of the issue size will have to be allotted to Qualified Institutional Buyers (QIBs)

Failing which the full subscription monies shall be refunded. Infrastructure companies are exempt from the eligibility norms if their project has been appraised by PFIs or Infrastructure Development Finance Corporation. Banks and right issues of listed companies are also exempt from the eligibility norms. The companies eligible to make public issues can freely price their securities subject to disclosure norms of SEBI. Contribution of Promoters and Lock-In: The promoters’ contribution in case of public issue of unlisted companies should not be less than 20% of the post-issue capital. In case of public issues of listed companies, promoter should contribute to the extent of 20% of the proposed issue or should ensure post-issue holding to the extent of 20 % of the post-issue capital.

The requirement of promoters’ contribution is not required in case of:

(i) public issue of securities which has been listed in the SE for at least 3 years and has track record of dividend payment for at least 3 immediate preceding years.

(ii) companies where no identifiable promoter or promoter group exists.

(iii) right issues. 

Listing of Securities: Listing means admission of securities of an issuer to trading privileges (dealings) on a stock exchange through a formal agreement. The prime objective of admission to dealings on the exchange is to provide liquidity and marketability to securities, as also to provide a mechanism for effective control and supervision of trading.

Listing Agreement: The listing agreement specifies the terms and conditions of listing and the disclosures that shall be made by a company on a continuous basis to the exchange.

Delisting of Securities: The term ‘Delisting of securities’ means permanent removal of securities of a listed company from a stock exchange. As a consequence of delisting, the securities of that company would no longer be traded at that stock exchange.