Chapter: Business Science - Merchant Banking and Financial Services - Issue Management Introduction

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Bought out deals

A method of marketing of securities of a body corporate whereby the promoters of an unlisted company make an outright sale of a chunk of equity shares to a single sponsor or the lead sponsor is known as bought-out deals’.


BOUGHT OUT DEALS

 

A method of marketing of securities of a body corporate whereby the promoters of an unlisted company make an outright sale of a chunk of equity shares to a single sponsor or the lead sponsor is known as bought-out deals’.

 

The following are the characteristics of Bought out deals

 

1. Parties: There are three parties involved in the bought-out deals. They are promoters of the company, sponsors and co-sponsors who are generally merchant bankers and investors. 

 

2. Outright sale: Under this arrangement, there is an outright sale of a chunk of equity shares to a single sponsor or the lead sponsor. 

 

3.  Syndicate: Sponsor forms syndicate with other merchant bankers for meeting the resource requirements and for distributing the risk. 

 

4.Sale price: The s ale price is finalized through negotiations between the issuing company and the purchaser, the sale being influenced by such factors as project evaluation, promoters image and reputation, current market sentiments, prospects of off-loading these shares at a future date, etc.

5. Fund-based: Bought-out deals are in the nature of fund-based activity where the funds of the merchant bankers get locked in for at least the prescribed minimum period. 

 

6. Listing: The investor-sponsors make a profit, when at a future date, the shares get listed and higher prices prevail. Listing generally takes place at a time when the company is performing well in terms of higher profits and larger cash generations from projects. 

 

7.   OTCEI: Sale of these shares at Over-the-Counter Exchange of India (OTCEI) or at a recognized stock exchanges, the time of listing these securities and off loading them simultaneously are being generally decided in advance. 

 

BOUGHT OUT DEALS vs. PRIVATE PLACEMENTS BENEFITS

 

Bought-out deals provide the following benefits:

 

1.  Speedy sale: Bought-out deals offer a mechanism for a speedier sale of securities at lower costs relating to the issue. 

 

2. Freedom: Bought-out deals offer freedom for promoters to set a realistic price and convince the sponsor about the same. 

 

3.  Investor protection: Bought-out deals facilities better investor protection as sponsors are rigorously evaluated and appraised by the promoters before offloading the issue. 

 

4.  Quality offer: Bought-out deals help enhance the quality of capital floatation and primary market offerings. 

 

Limitations Bought-out deals pose the following difficulties for the promoters, sponsors and

 

investors:

 

1. Loss of control: The apprehensions in the minds of promoters, particularly of the private or the closely held companies that the sponsors may control the company as they own large chunk of the shares of the company. 

 

2.  Loss of sales: Bought-out deals pose considerable difficulties in off-loading the shares in times of unfavorable market conditions. This results in locking up of investments and entailing losses to sponsors. 

 

3. Wrong appraisal: Bought-out deals cause loss to sponsors on account of wrong appraisal of the project and overestimation of the potential price of the share. 

 

4. Manipulation: Bought-out deals give great scope for manipulation at the hands of the sponsor through insider trading and rigging. 

 

5. No accountability: Bought-out deals pose difficulty of penalizing the sponsor as there are no SEBI guidelines to regulate offerings by sponsors.

 

6. Windfall profits: Bought-out deals offer the advantage of windfall profits by sponsors at the cost of small investors. 

 

7. Loss to investors: Where the shares taken up by issue brokers and a group of select clients are being bought back by the promoters at a pre-fixed higher price after allotment causing loss to investors of the company.


ADVERTISING STRATEGIES

 

SEBI Guidelines For Issue Advertisement (11.10.1993) SEBI issued Guidelines in 1993 to ensure that the advertisement are truthful fair and clear and do not contain statements to mislead the investors to imitate their judgment. All lead managers are expected to ensure that issuer companies strictly observe the code of advertisement set-out in the guidelines. For the purpose of these guidelines the expression advertisement, means notices, brochures, pamphlets, circulars show cards, catalogues, boarding‘s, placa pictures, films, radio/television program or through any electronic media and would also include the cover pages of the offer documents.

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