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

Brokers To The Issue

Brokers are the persons mainly concerned with the procurement of subscription to the issue from the prospective investors. The appointment of brokers is not compulsory and the companies are free to appoint any number of brokers. The managers to the issue and the official brokers organize the preliminary distribution of securities and procure direct subscriptions from as large or as wide a circle of investors as possible.



Brokers are the persons mainly concerned with the procurement of subscription to the issue from the prospective investors. The appointment of brokers is not compulsory and the companies are free to appoint any number of brokers. The managers to the issue and the official brokers organize the preliminary distribution of securities and procure direct subscriptions from as large or as wide a circle of investors as possible. The stock exchange bye-laws prohibits the members from the acting as managers or brokers to the issue and making preliminary arrangement in connection with any flotation or new issue, unless the stock exchange of which they are members gives its approval and the company conforms to the prescribed listing requirements and undertakes to have its securities listed on a recognized stock exchange. The permission granted by the stock exchange is also subject o other stipulations which are set out in the letter of consent. Their active assistance is indispensable for broad basing the issue and attracting investors. By and large, the leading merchant bankers in India who act as managers to the issue have particulars of the performance of brokers in the country. The company in consultation with the stock exchange writes to all active brokers of all exchanges and obtains their consent to act as brokers to the issue. Thereby, the entry of experienced and unknown agencies in to the field of new issue activity as issue managers, underwriters, brokers, and so on, is discouraged. A copy of the consent letter should be filed along with the prospectus to the ROC. The names and addresses of the brokers to the issue are required to be disclosed in the prospectus. Brokerage may be paid within the limits and according to other conditions prescribed. The brokerage rate applicable to all types of public issue of industrial securities is fixed at 1.5 percent, whether the issue is underwritten or not. The mailing cost and other out-of pocket expenses for canvassing of public issues have to be borne by the stock brokers and no payment on that account is made by the companies. A clause to this effect must be included in the agreement to be entered into between the broker and the company. The listed companies are allowed to pay a brokerage on private placement of capital at a maximum rate of 0.5 percent.


Brokerage is not allowed in respect of promo directors, their friends and employees, and in respect of the rights issues taken by or renounced


by the existing shareholders. Brokerage is not payable when the applications are made by the institutions/bankers against their underwriting commitments or on the amounts devolving on them as underwriters consequent to the under subscription of the issues. The issuing company is expected to pay brokerage within two months from the date of allotment and furnish to the broker, on request, the particulars of allotments made against applications bearing their stamp, without any charge. The Cheques relating to brokerage on new issues and underwriting commission, if any, should be made payable at par at all centre where the recognized stock exchanges are situated. The rate of brokerage payable must be is enclosed in the prospectus.


(i) Banking All types of foreign exchange transactions including advice on exchange, imports, exports finance, financing the movement of goods through acceptance credits, the handling of commercial letters of credit, the negotiation and collection of foreign bills, accepting call or term deposits, short or medium term finance, bridging finance, leading; corporate banking, treasury/trading services, discount/guarantee facilities. Issuing and underwriting. Public issues; underwriting of issues, preparation of prospectuses; new equity; obtaining stock exchange listings/broking services.

(ii) Corporate Finance New issues; development capital; negotiation of mergers and takeovers; capital reconstruction; bridging finance, medium term loans; public sector finance.


(iii) Management Services Economic planning; trusts administration; share secretarial services; primary capital market participation.


(iv) Product Knowledge Foreign exchange, import finance; export finance; commercial LCs; FBCSs; Call/ Term deposits; medium term loans (MTL); Bridging finance; leasing, treasury services, discount/guarantees, Acceptance credits, public issues, underwriting, equity, broking, estate planning, trusts, share transfers. Marketing the public issue arises because of the highly competitive nature of the capital market. Moreover, there is a plethora of companies, which knock at the doors of investors seeking to sell their securities. Above all the media bombards the


modern investors with eye catching advertisement to sell their concepts to prospective investors.



Merchant Banking And Marketing of New Issues Following are the steps involved in the marketing of the issue of securities to be undertaken by the lead manager:


1.    Target market: The first step towards the successful marketing of securities is the identification of a target market segment where the securities can be offered for sale. This ensures smooth marketing of the issue. Further, it is possible to identify whether the market comprises of retail investors, wholesale investors or institutional investors.


2. Target concentration: After having chosen the target market for selling the securities, steps are to be taken to assess the maximum number of subscriptions that can be expected from the market. It would work to the advantage of the company if it concentrates on the regions where it is popular among prospective investors.


3. Pricing: After assessing market expectations, the kind and level of price to be charged for the security must be decided. Pricing of the issue also influences the design of capital structure. The offer has to be made more attractive by including some unique features such as safety net, multiple options for conversion, attaching warrants, etc.


4.  Mobilizing intermediaries: For successful marketing of public issues, it is important that efforts are made to enter into contracts with financial intermediaries such as an underwriter, broker/sub-broker, fund arranger, etc.

5.  Information contents: Every effort should be mad3e to ensure that the offer document for issue is educative and contains maximum relevant information. Institutional investors and high net worth investors should also be provided with detailed research on the project, specifying its uniqueness and its advantage over other existing or upcoming projects in a similar field.

6. Launching advertisement campaign: In order to push the public issue, the lead manager should undertake a high voltage advertisement campaign. The advertising agency must be carefully selected for this purpose. The task of advertising the issue shall be entrusted to those agencies that specialize in launching capital offerings. The theme of the advertisement should be finalized keeping in view SEBI guidelines. An ideal mix of different advertisement vehicles such as the press, the radio and the television, the hoarding, etc. should be used. Press meets, brokers and investor’s conference, etc. shall be arranged by the lead manager at targeted in carrying out opinion polls. These services would useful in collecting data on investors’ opinion and reactions relating to the public issue of the company, such a task would help develop an appropriate marketing strategy. This is because; there are vast numbers of potential investors in semi-urban and rural areas. This calls for sustained efforts on the part of the company to educate them about the various avenues available for investment.


7. Brokers and investors conferences: As part of the issue campaign, the lead manager should arrange for brokers‘ and investors‘ conferen centre which have sufficient investor population. In order to make such endeavors more successful, advance planning is required. It is important that conference materials such as banners, brochures, application forms, posters, etc. reach the conference venue in time. In  addition, invitation to all the important people, underwriters, bankers at the respective places, investors‘ associations should also be sent.

8. A critical factor that could make or break the proposed pu8blic issue is its timing. The market conditions should be favorable. Otherwise, even issues from a company with an excellent track record, and whose shares are highly priced, might flop. Similarly, the number and frequency of issues should also be kept to a minimum to ensure success of the public issue.


Methods Following are the various methods being adopted by corporate entities for marketing the securities in the new Issues Market: 1. Pure Prospectus Method 2. Offer for Sale Method 3. Private Placement Method 4. Initial Public Offers Method 5. Rights Issue Method 6. Bonus Issue Method 7. Book-building Method 8. Stock Option Method and 9. Bought-out Deals Method



• PPM Pure Prospectus Method • OSM Offer for Sale Method • PPM Private  Placement Method • IPOM Initial Public Offers Method • RIM Right Issue Method • BIM Bonus  Issue Method • BBM Book Building Method • SOM Stock Option Method • BODM BroughtOut Deals Method

1. Pure Prospectus Method The method whereby a corporate enterprise mops up capital funds


from the general public by means of an issue of a prospectus, is called ‘Pure Method’. It is the most popular method of m enterprises. The features of this method are



a.  Exclusive subscription: Under this method, the new issues of a company are offered for exclusive subscription of the general public. According to the SEBI norms, a minimum of 49 percent of the total issue at a time is to be offered to public.


b. Issue price: Direct offer is made by the issuing company to the general public to subscribe to the securities at a staged price. The securities may be issued either at par, of at a discount or at a premium.


c. Underwriting: Public issue through the pure prospectus method‘s usually underwritten. This is to safeguard the interest of the issuer in the event of an unsatisfactory response from the public.

d. Prospectus: A document that information relating to the various aspects of the Issuing company, besides other details of the issue is called a Prospectus’. The document is circulated to the public. The general details include the company’s name and address of the registered office, the names and addresses of the company’s promoters, manager, managing director, directors, company secretary, legal adviser, auditors, bankers, brokers, etc. the date of opening and closing of subscription list, contents of Articles, the names and addresses of underwriters, the amount underwritten and the underwriting commission, material details regarding the project, i.e. Location, plant and machinery, technology, collaboration, performance guarantee, infrastructure facilities etc. nature of products, marketing set-up, export potentials and obligations, past performance and future prospects, management’s perception regarding risk factor, credit rating obtained from any other recognized rating agency, a statement regarding the fact that the company will make an application to specified stock exchange(s) for listing its securities and so on.




a. Benefits to Investors: The pure prospectus method of marketing the securities serves as an excellent mode of disclosure of all the information pertaining to the issue. Besides, it also facilitates satisfactory compliance with the legal requirements of transparency etc.. It also allows for good publicity for the issue. The method promotes confidence of investors through transparency and non-discriminatory basis of allotment. It prevents artificial packing up of prices as the issue is made public.


b. Benefits to Issuers: The pure prospectus method is the most popular method among the large issuers. In addition, it provides for wide diffusion of ownership of securities contributing to reduction in the concentration of economic and social power.


Draw Backs


a. High Issue Costs: A major drawback of this method is that it is an expensive mode of raising funds from the capital market. Costs of various hues are incurred in mobilizing capital. Such costs as underwriting expenses, brokerage, administrative costs, publicity costs, legal costs and other costs are incurred for raising funds. Due to the high cost structure, this type of marketing of securities is followed only for large issues.


b. Time consuming: The issue of securities through prospectus takes more time, as it requires the due compliance with various formalities before an issue could take place. For instance, a lot of work such as underwriting, etc. should be formalized before the printing and the issue of a prospectus.


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Business Science : Merchant Banking and Financial Services : Issue Management Introduction : Brokers To The Issue |

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