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

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Offers For Sale Method

Where the marketing of securities takes place through intermediaries, such as issue houses, stockbrokers and others, it is a case sale of securities takes place in two stages. Accordingly, in the first stage, the issuer company makes an end-block sale of securities to intermediaries such as the issue houses and share brokers at an agreed price.


OFFERS FOR SALE METHOD

 

Where the marketing of securities takes place through intermediaries, such as issue houses, stockbrokers and others, it is a case sale of securities takes place in two stages. Accordingly, in the first stage, the issuer company makes an end-block sale of securities to intermediaries such as the issue houses and share brokers at an agreed price. Under the second stage, the securities are re-sold to ultimate investors at a market-related price. The difference between the purchase price and the issue price constitutes profit for the intermediaries. The intermediaries are responsible for meeting various expenses such as underwriting commission, prospectus cost, advertisement expenses, etc. 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. This method is, however, expensive for the investor as it involves the offer of securities by issue houses at very high prices.



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. 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. 


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