What is new issue? Who are the key players involved?

What is new issue? Who are the key players involved?

New Issue Market (NIM) comprises all people, institutions, methods/ mechanism, services and practices involved in raising fresh capital for both new and existing companies. This market is also called Primary Market. NIM helps raising resources from the investors by issuing them only new or fresh securities. Thus, NIM facilitates direct conversion of savings into corporate investment or diversion of resources from the rest of the system to the corporate sector. Primary market deals in only new securities i.e., which were not available previously. They are offered to the investors for the first time. The issuing houses, investment bankers, and brokers act as the channel of distribution for the new issues. On the other hand, secondary market or stock market or stock exchanges deal in existing securities, i.e., securities which have already been issued by companies and are listed with the stock exchanges.

Relationship between the primary and secondary market

1. The primary/new issue market cannot function without the secondary market. The secondary market or the stock market provides liquidity for the issued securities. The issued securities are traded in the secondary market offering liquidity to the stocks at a fair price.

 2. The new issue market provides a direct link between the prospective investors and the company. By providing liquidity and safety, the stock markets encourage the public to subscribe to the new issues. The marketability and the capital appreciation provided in the stock market are the major factors that attract the investing public towards the stock market. Thus, it provides an indirect link between the savers and the company.

3. The stock exchanges through their listing requirements, exercise control over the primary market. The company seeking for listing on the respective stock exchange has to comply with all the rules and regulations given by the stock exchange

4. Though the primary and secondary markets are complementary to each other, their functions and the organisational set up are different from each other. The health of the primary market depends on the secondary market and vice versa..

Parties involved in the new issue - The number of agencies involved and their respective role in the public issue. The promoters also should have a clear idea about the agencies to coordinate their activities effectively in the public issue. The main agencies involved in the public issue are managers to the issue, registrars to the issue, underwriters, bankers, advertising agencies, financial institutions and government/statutory agencies.

Managers to the issue: Lead managers are appointed by the company to manage the public issue programmes. Their main duties are (a) drafting of prospectus (b) preparing the budget of expenses related to the issue (c) suggesting the appropriate timings of the public issue (d) assisting in marketing the public issue successfully (e) advising the company in the appointment of registrars to the issue, underwriters, brokers, bankers to the issue, advertising agents etc. and (f) directing the various agencies involved in the public issue. There are many agencies which are performing the role of lead managers to the issue. The merchant banking division of the financial institutions, subsidiary of commercial banks, foreign banks, private sector banks and private agencies are available to act as lead managers. Some of them are SBI Capital Markets Ltd., Bank of Baroda, Canara Bank, DSP Financial Consultants Ltd., ICICI Securities and Finance Company Ltd., etc. The company negotiates with the prospective managers to its issue and settles its selection and terms of appointment. Usually companies appoint lead managers with a successful background. There may be more than one manager to the issue. Some times the banks or financial institutions impose a condition while sanctioning term loan or underwriting assistance to be appointed as one of the lead managers to the issue. The fee payable to the lead managers is negotiable between the company and the lead manager. The fee agreed upon is revealed in the Memorandum of the Understanding filed along with the offer document.

Registrar to the issue: In consultation with the lead manager, the Registrar to the issue is appointed. Quotations containing the details of the various functions they would be performing and charges for them are called for selection. Among them the most suitable one is selected. It is always ensured that the registrar to the issue has the necessary infrastructure like computer, internet and telephone. The Registrars to the issue normally receive the share application from various collection centres. They recommend the basis of allotment in consultation with the Regional Stock Exchange for approval. They arrange for the despatching of the share certificates. They handover the details of the share allocation and other related registers to the company. Usually registrars to the issue retain the issuer records atleast for a period of six months from the last date of despatch of letters of allotment to enable the investors to approach the registrars for redressal of their complaints.

Underwriters: Underwriter is a person/organisation who gives an assurance to the issuer to the effect that the former would subscribe to the securities offered in the event of non-subscription by the person to whom they were offered. They stand as back-up supporters and underwriting is done for a commission. Underwriting provides an insurance against the possibility of inadequate subscription. Some of the underwriters are financial institutions, commercial banks, merchant bankers, members of the stock exchange, Export and Import Bank of India etc. The underwriters are exposed to the risk of nonsubscription and for such risk exposure they are paid an underwriting commission. When appointing an underwriter, the financial strength of the prospective underwriter is considered because he has to undertake the agreed non-subscribed portion of the public issue. The other aspects considered are (a) experience in the primary market (b) past underwriting performance and default (c) outstanding underwriting commitment (d) the network of investor clientele of the underwriter and (e) his overall reputation. After the closure of subscription list, the company communicates in writing to the underwriter the total number of shares/debentures remaining unsubscribed, the number of shares/debentures required to be taken up by the underwriter. The underwriter would take the agreed portion. If the underwriter fails to pay, the company is free to allot the shares to others or take up proceeding against the underwriter to claim damages for any loss suffered by the company for his denial.

Bankers to the issue: The responsibility of collecting the application money along with the application form is on bankers to the issue. The bankers charge commission besides the brokerage, if any. Depending upon the size of the public issue more than one banker to the issue is appointed. When the size of the issue is large, three or four banks are appointed as bankers to the issue. The number of collection centres is specified by the central government. The bankers to the issue should have branches in the specified collection centres. In big or metropolitan cities more than one branch of the various bankers to the issue are designated as collecting branch for acceptance of money. To create investment awareness in the minds of the people collecting branches are designated in the different towns of the state where the project is being set up. If the collection centres for application money are located nearby people are likely to invest the money in the company shares.

Advertising agents: Advertising a public issue is very essential for its promotion. Hence, the past track record of the advertising agency is studied carefully. Tentative programmes of each advertising agency along with the estimated cost are called for. After comparing the effectiveness and cost of each programme with the other, a suitable advertising agency is selected in consultation with the lead managers to the issue. The advertising agencies take the responsibility of giving publicity to the issue on the suitable media. The media may be newspapers/magazines/ hoardings/press release or a combination of all.

The financial institutions: The function of underwriting is generally performed by financial institutions. Therefore, normally they go through the draft of prospectus, study the proposed programme for public issue and approve them. IDBI, IFCI, ICICI, LIC, GIC and UTI are the some of the financial institutions that underwrite and give financial assistance. The lead manager sends copy of the draft prospectus to the financial institutions and include their comments, if any in the revised draft.

Regulatory bodies: The various regulatory bodies related with the public issue are: 1. Securities Exchange Board of India 2. Registrar of companies 3. Reserve Bank of India (if the project involves foreign investment) 4. Stock Exchanges where the issue is going to be listed 5. Industrial licensing authorities 6. Pollution control authorities (clearance for the project has to be stated in the prospectus)

Collection centres: There should be at least 20 mandatory collection centres inclusive of the places where stock exchanges are located. If the issue is not exceeding Rs. 10 cr (excluding premium if any) the mandatory collection centres are the four metropolitan centres viz. Mumbai, Delhi, Calcutta and Chennai and at all such centres where stock exchanges are located in the region in which the registered office of the company is situated. In addition to the collection branch, authorised collection agents may also be appointed. The names and addresses of such agent should be given in the offer documents. The collection agents are permitted to collect such application money in the form of cheques, draft, stock invests and not in the form of cash. The application money so collected should be deposited in the special share application account with the designated scheduled bank either on the same day or latest by the next working day. The bankers to the issue at different centres would forwarded the applications collected to the Registrar after realisation of the cheques, within a period of two weeks from the date of closure of the public issue. The applications accompanied by stock invests are sent directly to the Registrars to the issue along with the schedules within one week from the date of closure of the issue. The investors who reside in places other than mandatory and authorised centres, can send their application with stock invests to the Registrar to the issue directly by registered post with acknowledgement card.