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Chapter: Business Science : Security Analysis and Portfolio Management : Securities Markets

Methods of Marketing Securities

1. Pure Prospectus Method 2. Offer for Sale Method 3. Private Placement Method 4. Initial public Offers (IPOs) Method 5. Rights Issue Method 6. Bonus Issue Method 7. Book-building Method 8. Stock Option Method and 9. Bought-out Deals Method



Methods of Marketing Securities


Following are the various methods being adopted by corporate entities for marketing the securities in the New Issue Market:


1. Pure Prospectus Method


2.     Offer for Sale Method


3.     Private Placement Method


4.     Initial public Offers (IPOs) Method


5.     Rights Issue Method


6.     Bonus Issue Method


7.     Book-building Method


8.     Stock Option Method and


9.     Bought-out Deals Method


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 Prospectus Method . It is the most popular method of making public issue of securities by corporate enterprises.




Exclusive subscription: Under this method, the new issues of a company are offered for exclusive subscription of the general public.


Issue Price: Direct officer is made by the issuing company to the general public to subscribe to the securities as a stated price.


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



Prospectus: A document that contains 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 its registered office, the names and addresses of the company s promoters, manager, managing director, directors, company secretary, legal adviser, auditors, bankers, brokers, etc.




The pure prospectus method offers the following advantages to the issuer and the investors alike:


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.


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




The raising of capital through the pure prospectus method is fraught with a number of drawbacks as specified below:


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.


Time Consuming: The issue of securities through prospectus takes more time, as its requires the due compliance with various formalities before an issue could take place.




Offer for Sale Method




Where the marketing of securities takes place through intermediaries, such as issue houses, stockholders and others, it is a case of Offer for sale Method .




Under this method, the sale of securities takes place in two stages. Accordingly, in the first stage, the issuer company makes an en-block sale of securities to intermediaries such as the issue houses and share brokers of an agreed price. Under the second stage, the securities are re-sold to ultimate investors at a market-related price.


The issue is also underwritten to ensure total subscription of the issue. The biggest advantage of this method is that it saves the issuing company the hassles involved in selling the shares to the public directly through prospectus.





Private Placement Method




A method of marketing of securities whereby the issuer makes the offer of sale of individuals and institutions privately without the issue of a prospectus is known as Private Placement Method.





Under this method, securities are offered directly to large buyers with the help of share brokers. This method works in a manner similar to the Offer for Sale Method whereby securities are first sold to intermediaries such as issues houses, etc.




Private placement of securities offers the following advantages:


1.     Less expensive as various types of costs associated with the issue are borne by the issue houses and other intermediaries.


2.     Placement of securities suits the requirements of small companies.


3.     The method is also resorted to when the stock market is dull and the public response to the issue is doubtful.




The major weaknesses of the private placement of securities are as follows:


1.     Concentration of securities in a few hands.


2.     Creating artificial scarcity for the securities thus jacking up the prices temporarily and misleading general public.



3.     Depriving the common investors of an opportunity to subscribe to the issue, thus affecting their confidence levels.



Initial Public Offer (IPO) Method


The public issue made by a corporate entity for the first time in its life is called Initial public Offer (IPO), Under this method of marketing, securities are issue to successful applicants on the basis of the orders placed by them, through their brokers.


When a company whose stock is not publicly traded wants to offer that stock to the general public, it takes the form of Initial public offer . The job of selling the stock is entrusted to a popular intermediary, the underwriter. The underwriters charge a fee for their services.


Stocks are issued to the underwriter after the issue of prospectus which provides details of financial and business information as regards the issuer.


The issuer and the underwriting syndicate jointly determine the price of a new issue. IPO stock at the release price is usually not available to most of the public. Good relationship between, the broker and the investor is a pre-requisite for the stock being acquired.


Full disclosure of all material information in connection with the offering of new securities must be made as part of the new offerings. A statement and preliminary prospectus (also known as a red herring) containing the following information is to be filled with the Registrar of Companies:


1.     A description of the issuer  s business.


2.     The names and addresses of the Key company officers, with salary and a 5 year business history on each.


3.     The amount of ownership of the key officers


4.     Any legal proceedings that the company is involved in


The essential steps involved in this method of marketing of securities are as follows:


1.     Order: Broker receives order from the client and places orders on behalf of the client with the issuer.


2.     Share Allocation: The issuer finalizes share allocation and informs the broker regarding the same.



3.     The Client: The broker advises the successful clients of the share allocation. Clients then submit the application forms for shares and make payment to the issuer through the broker.


4.     Primary issue account: The issuer opens a separate escrow account (primary issue account) for the primary market issue. The clearing house of the exchange debits the primary issue account of the broker and credits the issuer s account.


5.     Certificates: Certificates are then delivered to investors. Otherwise depository account may be credited.




Rights issue Method


Where the shares of an existing company are offered to its existing shareholders. It takes the form of rights issue. Under this method, the existing company issues shares to its existing shareholder sin proportion in the number of shares already held by them.


The relevant guidelines issued by the SEBI in this regard are as follows:


1.     Shall be issued only by listed companies.


2.     Announcement regarding rights issue once made, shall not be withdrawn and where withdrawn, no security shall be eligible for listing upto 12 months.


3.     Underwriting as to rights issue is optional and appointment of Registrar is compulsory.


4.     Appointment of category I Merchant Bankers holding a certificate of registration issued by SEBI shall be compulsory.


5.     Rights share shall be issued only in respect of fully paid share.


6.     Letter of Offer shall contain disclosures as per SEBI requirements.


7.     Issue shall be kept open for a minimum period of 30 days and for a maximum period of 60 days.


8.     A No complaints Certificate is to be filed by the Legal Merchant Banker with the SEBI after 21 days from the date of issue of the document.


9.     Obligatory for a company where increase in subscribed capital is necessary after two years of its formation of after one year of its first issue of shares, whichever is earlier (this requirement may be dispensed with by a special resolution).




Rights issue offers the following advantages


1.     Economy: Rights issue constitutes the most economical method of raising fresh capital, as it involves no underwriting and brokerage costs.


2.     Easy: The issue management procedures connected with the rights issue are easier as only a limited number of applications are to be handled.


3.     Advantage to shareholders: Issue of rights shares does not involve any dilution of ownership of existing shareholders.




The method suffers from the following limitations:


1.     Restrictive: The facility of rights issue is available only to existing companies and not to new companies.


2.     Against society: the issue of rights shares runs counter to the overall societal consideration of diffusion of share ownership for promoting dispersal of wealth and economic power.





Bonus Issues Method


Where the accumulated reserves and surplus of profits of a company are converted into paid up capital, it takes the form of issue of bonus shares. It merely implied capitalization of existing reserves and surplus of a company.


Issue under Section 205 (3) of the companies Act, such shares is governed by the guidelines issued by the SEBI (applicable of listed companies only) as follows:


SEBI Guidelines


Following are the guidelines pertaining to the issue of bonus shares by a listed corporate enterprise:


Reservation: In respect of FCDs and PCDs, bonus shares must be reserved in proportion to such convertible part of FCDs and PCDs. The shares so reserved may be issued at the  

time of conversion(s) of such debentures on the same terms on which the bonus issues were made.


2.     Reserves: the bonus issue shall be made out of free reserves built out of the genuine profits or share premium collected in cash only.


3.     Dividend mode: the declaration of bonus issue, in lieu of dividend, is not made.


4.     Fully paid: The bonus issue is not made unless the partly paid shares, if any are made fully paid-up.


5.     No default: The Company has not defaulted in payment of interest or principal in respect of fixed deposits and interest on existing debentures or principal on redemption thereof and has sufficient reason to believe that it has not defaulted in respect of the payment of statutory dues of the employees such as contribution to provident fund, gratuity, bonus, etc.


6.     Implementation: A company that announces its bonus issue after the approval of the Board of Directors must implement the proposal within a period of 6 months from the date of such approval and shall not have the option of changing the decision.


7.     The articles: The articles of Association of the company shall contain a provision for capitalization of reserves, etc. if there is no such provision in the articles, the company shall pass a resolution at is general body meeting making provision in the Articles of Association for capitalization.


8.     Resolution: consequent to the issue of bonus shares if the subscribed and paid-up capital exceeds the authorized share capital, the company at its general body meeting for increasing the authorized capital shall pass a resolution.




Book-building Method


A method of marketing the shares of a company whereby the quantum and the price of the securities to be issued will be decided on the basis of the bids received from the prospective shareholders by the lead merchant bankers is known as book-building method .


The option of book-building is available to all body corporate, which are otherwise eligible to make an issue of capital of the public. The initial minimum size of issue through book-building route was fixed at Rs.100 crores.

The book-building process involves the following steps:


1.     Appointment of book-runners: the first step in the book-building is the appointment by the issuer company, of the book-runner, chosen from one of the lead merchant bankers. The book-runner in the forms a syndicate for the book building. A syndicate member should be a member of National Stock Exchange (NSE) or Over-the-Counter Exchange of India (OTCEI). Offers of bids are to be made by investors to the syndicate members, who register the demands of investors.


2.     Drafting prospectus: The draft prospectus containing all the information except the information regarding the price at which the securities are offered is to be filed with SEBI as per the prevailing SEBI guidelines. The offer of securities through this process must separately be disclosed in the prospectus, under the caption placement portion category .


3.     Circulating draft prospectus: A copy of the draft prospectus filed with SEBI is to be circulated by the book-runner to the prospective institutional buyers who are eligible for firm allotment and also to the intermediaries who are eligible to act as underwriters.


4.     Maintain offer records: The book-runner maintain a record to the offers received. Details such as the name and the number of securities ordered together with the price at which each institutional buyer or underwriter is willing to subscribed to securities under the placement portion must find place in the record. SEBI has the right to inspect such records.


5.     Intimation about aggregate orders: The underwriters and the institutional investors shall give intimation on the aggregate of the offers received to the book-runner.


6.     Bid analysis: The bid analysis is carried out by the book-runner immediately after the closure of the bid offer date. An appropriate final price is arrived at after a careful evaluation of demands at various prices and the quantity.


7.     Mandatory underwriting: Where it has been decided to make offers of shares to public under the category of Net offer of the Public , it is incumbent that the entire portion offered to the public is fully underwritten.


8.     Filling with ROC: A copy of the prospectus as certified by the SEBI shall be filed with the Registrar of Companies within two days of the receipt of the acknowledgement card from the SEBI.



9.     Bank accounts: The issuer company has to open two separate accounts for collection of application money, one for the private placement portion and the other for the public subscription.


10.Collection of completed applications: The book-runner collects from the institutional buyers and the underwriters the application forms along with the application money to the extent of the securities proposed to be allotted to them or subscribed by them.


11.Allotment of securities: Allotment for the private placement portion may be made on the second day from the closure of the issue. The issuer company, however, has the option to choose one date for both the placement portion and the public portion.


12.Payment schedule and listing: The book-runner may require the underwriters to the net offer to the public to pay in advance all moneys required to be paid in respect of their underwriting commitment by the eleventh day of the closure of the issue.


13.Under-subscription: In the case of under-subscription in the net offer to the public category, any spillover to the extent of under subscription is to be permitted from the placement portion category subject to the condition that preference is given to the individual investors.


Advantages of book-building


Book building process is of immense use in the following ways:


1.     Reduction in the duration between allotment and listing


2.     Reliable allotment procedure


3.     Quick listing in stock exchanges possible


4.     No price manipulation as the price is determined on the basis of the bids received.




Stock Option or employees Stock Option Scheme (ESOP)


A method of marketing the securities of a company whereby its employees are encouraged to take up shares and subscribe to it is known as stock option . It is a voluntary scheme on the part of the company to encourage employees participation in the company. The scheme also offers an incentive to the employees to stay in the company.


SEBI Guidelines

Company whose securities are listed on any stock exchange can introduce the scheme of employees stock option. The offer can be made subject to the conditions specified below:


1.     Issue at discount: Issue of stock options at a discount to the market price would be regarded as another form of employee compensation and would be treated as such in the financial statements of the company regardless the quantum of discount on the exercise price of the option.


2.     Approval: The issue of ESOP s is subject to the approval by the shareholders through a special resolution.


3.     Maximum limit: There would be no restriction on the maximum number of shares to be issued to a single employee.


4.     Minimum period: A minimum period of one year between grant of options and its vesting has been prescribed. After one year, the company would determine the period during which the option can be exercised.


5.     Superintendence: The operation of the ESOP Scheme would have to be under the superintendence and direction of a Compensation Committee of the Board of Directors in which there would be a majority of independent directors.


6.     Eligibility: ESOP scheme is open to all permanent employees and to the directors of the company but not to promoters and large shareholders.


7.     Director  s report:The Director  s report shall make a disclosure of the following:



a.     Total number of shares as approved the shareholders


b.     The pricing formula adopted


c.      Details as to options grated, options vested, options exercised and options forfeited, extinguishments or modification of options, money realized by exercise of options, total number of options in force, employee-wise details of options granted to senior managerial personnel and to any other employee who received a grant in anyone year of options amounting to 5 percent or more of options granted during that year.


d.     Fully diluted EPS computed in accordance with the IAS


8.     IPO: SEBI s stipulations prohibiting initial public offerings by companies having outstanding options should not apply to ESOP.


Stock Option Norms for Software Companies


The relevant guidelines issued by the SEBI as regards employees stock option for software companies are as follows:


1.     Minimum issue: A minimum issue of 10 percent of its paid-up capital can be made by a software company which has already floated American Depository Receipts (ADRs) and Global Depository Receipts (GDRs) or a company which is proposing to float these is entitled to issue ADR/GDR linked stock options to its employees.


2.     Mode of Issue: Listed stock options can be issued in foreign currency convertible bonds and ordinary shares (through depository receipt mechanism) to the employees of subsidiaries of Info Tech Companies.


3.     Permanent employees: Indian IT companies can issue ADR/GDR linked stock options to permanent employees, including Indian and overseas directors, of their subsidiary companies incorporated in India or outside.


4.     Pricing: The pricing provisions of SEBI s preferential allotment guidelines would not cover the scheme. The purpose is to be enable the companies to issue stock options to its employees at a discount to the market price which serves as another form of compensation.


5.     Approval: Shareholders approval through a special resolution is necessary for issuing the ESOPs. A minimum period of one year between grant of option and its vesting has been prescribed. After one year, the company would determine the period in which option can be exercised.




Bought-out Deals




A method for 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 .




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 a syndicate with other merchant bankers for meeting the resource requirements and for distributing the risk.


4.     Sale price: The sale 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.     Listing: The investor-sponsor 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.


6.     OTCEI: Sale of these share 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.


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