NEW ISSUE

MANAGEMENT
 CONTENTS
 Classification of Issues
 Primary Market / New issue market
 Placement of issue
 Offer through prospectus
 Offer for sale
 Private placement
 Rights issue
 Book building
 Red herring prospectus
 Intermediaries to issue
 Lead Manager
 Registrar
 Bankers to issue
 Underwriters
 Pricing of issue
 Key Terms

Prof. Deepak Tandon

 CLASSIFICATION OF ISSUES

Issues

Public Rights Preferential

Initial Public Follow on Public

Offering (IPO) Offering (FPO)

Fresh Offer for Fresh Offer for

Issue Sale Issue Sale
Prof. Deepak Tandon
 PRIMARY MARKETS OR NEW
ISSUE MARKET
 Primary markets - include all types of securities
- being sold for the first time
 After being offered in the primary market, it
becomes part of the secondary market

Primary market offered consist of

(1) FPOs, new offerings of listed companies that have
sold securities to the public before, and
(2) IPOs, where an unlisted company is selling
securities to the public for the first time

Prof. Deepak Tandon

 PLACEMENT OF THE ISSUE
Initial issues are floated
1. Through prospectus
2. Bought out deals/offer for sale
3. Private placement
4. Right issue
5. Book building

Prof. Deepak Tandon

 OFFER THROUGH PROSPECTUS
 Invites offers for subscription or purchase of any shares or
debentures from the public

 The salient features of the prospectus are

1. General Information about company
2. Capital structure of the company
3. Terms of the present issue
4. Particulars of the Issue - issue-opening, closing and earliest
closing date of the issue
5. Company Management and Project
6. Details of the outstanding litigations
7. Management perception of risk factors
8. Justification of the issue premium
9. Financial Information - cost of the project, projected earnings

Prof. Deepak Tandon

 OFFER FOR SALE
 Promoter places his shares with an investment banker
(bought out dealer or sponsor) who offer it to the
public at a later date
Promoter Investment Banker Public
 Hold on period is 70 days to more than a year

 Bought out dealer decides the price after analyzing

the viability, the gestation period, promoters’
background and future projections

 Boughs out dealer sheds the shares at a premium to

the public

Prof. Deepak Tandon

 Contd.
Advantages for the issuing company
 helps the promoters to realize the funds without any loss of
time
 the cost of raising funds is reduced - For issuing share cost as
high as 10 percent of the cost of the project
 helps the new entrepreneurs, not familiar with the capital
market, to raise adequate capital from the market.
 a company with no track record of projects, public issues at a
premium may pose problems
 possess low risk to investors since the sponsors have already
held the shares for a certain period

Disadvantage
 sell at a hefty premium, manipulation of the results, insider
trading and price rigging

Prof. Deepak Tandon

 PRIVATE PLACEMENT
 Small number of financial intermediaries (like Unit
Trust of India, mutual funds, insurance companies,
merchant banking subsidiaries of commercial banks)
purchase the shares and sell them to investors at a
later date at a suitable price

 Advantages:
Cost Effective - statutory and non-statutory
expenses are avoided.
Time Effective
Structure Effectiveness - flexible to suit the
financial intermediaries
Access Effective - issue of all sizes can be
accommodated
Prof. Deepak Tandon
 RIGHTS ISSUE
 Offers shares at first to the existing share holders
 In proportion to the shares held by them at the time
of offer
 Offered at a advantageous rate compared with the
market rate

Certain conditions:
 A notice should be issued to specify the number of
shares issued
 The time given to accept should not be less than 15
days
 Right of the share holders to renounce the offer in
favor of others
Prof. Deepak Tandon
 BOOK BUILDING
 Process of price discovery
 Not a fixed price for its shares
 Indicates a price band that mentions the lowest
(referred to as the floor) and the highest (the cap)
prices
 The spread between the floor and the cap of the
price band shall not be more than 20%. The cap
should not be more than 120% of the floor price.
 Price is finalized by the book runner and the issuer
company
 Malegam Committee - introduction of the book
building process Oct 1995
 Originally, companies issuing more than Rs 100 cr
allowed; Later SEBI allowed for issue of any size
Prof. Deepak Tandon
 Contd.
 Nirma offering a maximum of 100 lakh equity shares
through this process; first company to adopt the
mechanism

 An example of pricing securities - Google’s IPO

offer:
Google’s IPO offer on the Dutch-auction basis, similar
to the book-building process.
Target range between U.S. $105 and U.S. $135 per
share
Market response to offer not too good; final issue
price U.S. $85
Enabled Google to find price that market was willing
to pay for its issue
Prof. Deepak Tandon
 RED HERRING PROSPECTUS
 Prospectus without details of either price or number
of shares being offered or the amount of issue

 A preliminary registration statement that must be

filed with the SEBI describing a new issue of stock
(IPO) and the prospects of the issuing company

 It is known as a red herring because it contains a

passage in red that states the company is not
attempting to sell their shares before the
registration is approved by the SEBI

Prof. Deepak Tandon

 PRICING OF ISSUE
 Prior to 1992, governed by Controller of Capital Issues Act 1947
Fixation of a fair price on the basis of the net asset value per
share

 Era of free pricing in 1992; SEBI does not play any role in price
fixation

 Issuer in consultation with Merchant Banker shall decide the

price

 FIXED PRICE - company and LM fix a price

PRICE DISCOVERY THROUGH BOOK BUILDING - company
and LM stipulate a floor price or a price band and leave it to
market forces to determine the final price

 At premium Companies are permitted to price their issues at

premium
At par value In certain cases companies are not permitted to
fix their issue prices at premium
Prof. Deepak Tandon
 INTERMEDIATRIES TO ISSUE
Intermediaries to an issue are:
 Merchant Bankers to the issue or Book Running Lead Managers
(BRLM)
 Registrars to the issue
 Bankers to the issue
 Auditors of the company
 Underwriters to the issue
 Solicitors
 Advertising agencies
 Financial institutions
 Government/ statutory agencies

Prof. Deepak Tandon

 LEAD MANAGER
 Appointed by company to manage the public issue programmes.

 BRLM - A Merchant banker possessing a valid SEBI registration

 Main duties
(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.
(f) directing the various agencies involved in the public issue.

Prof. Deepak Tandon

 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 Consultant Ltd.
ICICI Securities & Finance Company Ltd., etc.

Prof. Deepak Tandon

 Role of Lead Manager in the Pre & Post
Issue Post issue:
Pre issue:
 Mgt of escrow a/ct
Due diligence  Co-ordinate non institutional
Design of offer doc,
allocation
prospectus, memo…  Intimation of allocation
Ensure the formalities  Dispatch of refunds to
with SE, ROC & SEBI bidders
Appointment wd  Follow up steps-
intermediaries finalization of trading,
Marketing strategy
Dealing of instruments,
dispatch of certificates &
demat of delivery of shares
 Look at the functioning of
agencies
Prof. Deepak Tandon
 REGISTRAR
 Finalizes the list of eligible allotees after deleting the invalid
applications
 Corporate action for crediting of shares to the demat accounts
of the applicants
 Dispatch of refund orders to those applicable
 Receive the share application from various collection centres
 Recommend the basis of allotment in consultation with the
Regional Stock Exchange for approval
 Arrange for the dispatching of the share certificates

BANKERS TO THE ISSUE

 Ensure that the funds are collected and transferred to the
Escrow accounts.
 Estimates of collection and advising the issuer about closure of
the issue

Prof. Deepak Tandon

 UNDERWRITERS
 Underwriting means they will subscribe to the balance shares if
all the shares offered at the IPO are not picked up

 Could be a banker, broker, merchant banker or financial

institution

 Insurance against the possibility of inadequate subscription

 Done for a commission

 The aspects considered before appointing 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
Prof. Deepak Tandon
 KEY TERMS
Green-shoe Option
 An option of allocating shares in excess of the shares included in
the public issue
 Post-listing price stabilizing mechanism for a period not
exceeding 30 days through a Stabilizing Agent
 Issue would be over allotted to the extent of a maximum of 15%
of the issue size
 Provides an investor more probability of getting shares
 Post listing price may show relatively more stability as compared
to market.

Qualified Institutional Buyer (QIBs)

 Institutional investors who are perceived to possess expertise
and the financial muscle to evaluate and invest in the capital
markets

Prof. Deepak Tandon

Capital Raising mistake # 1 Targeting the Wrong types of Capital

 VC Firms is not the only solution of Raising Capital

 VC firms have a very strict criteria regarding scale, speed, and exit
potential
 VCs tend to fund technology companies that typically have scale,
speed and exit potential.
 Traditional businesses like retail, food & beverage, manufacturing,
restaurants and real estate are not appropriate for VC financing.
 Another mistake within the category is the fact that most firms seek just
one type of capital.
Capital Raising Mistake #2 Raising the Wrong Amount of Capital

 Source of funds: If you are seeking capital from a venture capital

firm, the amount of capital sought generally needs to be above $1
million.
 Control: In general, the more equity capital you raise, the more
control of your company that you are going to give up.
 Your ability to comfortably pay back the funds: If you are
seeking debt capital , you need to make sure that the amount of
capital borrowed, at the interest rate in which you are borrowing it,
does not put too much of a financial burden on your firm.

Capital Raising Mistake #3 Having a Weak Business Plan

 Keep the business plan simple enough for the investors to understand.
 Don’t exclude successful companies or competitors.
 
Capital Raising Mistake #4 Failing to Develop and Present a Complete Financial Forecast

 Detailed revenue stream should include : Sales, Referral Revenues,

Advertising Sales, Royalty, Data Sales.
 The Pro-Forma Financial Statements The Financial Plan must
numerically detail the revenue model through past (if applicable)
and pro-forma (projected) Income Statements, Balance Sheets and
Cash Flow Statements.
Capital Raising Mistake #5 Not Using Online & Offline
Networking to Your Advantage

 Go to industry events and conferences and meet people. Befriend them and
follow-up with them.
 Then get them to open up their networks to you.
 Ad/or meet them on professional networking sites like LinkedIn,
Spoke or Facebook.
Capital Raising Mistake #6 Not Being Creative

Two creative financing accomplishments:

 When he first launched his company, shoe designer Kenneth Cole
had no money. So, he found a small Italian shoe production facility
that had been hit hard by the economy of the 1980s and desperately
needed more clients. Cole approached the company and got it to
offer him a line of credit (they manufactured the shoes and he didn’t
have to pay for them until he sold the shoes), and they immediately
started manufacturing shoes.
 Australia's Blowfly Beer was equally creative in funding its early
operations. How? The company sold equity to its customers. Not
only did this provide the capital that that company needed, but it
provided the company with market research, a customer base, and
great word of mouth advertising
Capital Raising Mistake #7 Failing to Get Meetings with Investors

 Most venture capital firms have forms in which you can submit your
business plan or a generic email address to send your plan.
 They will use the generic business plan submissions to search for
stealth-mode competition.
 They will also look at the market research within some of the
generically submitted plans to learn more about markets and
competition…not to fund the plans themselves!
 Rather, smart entrepreneurs research who the right individuals are
at professional investment firms (e.g., private equity firms, venture
capital firms, banks, etc.) and use teaser emails to gain their
interest.

Capital Raising Mistake #8 Poor Presentation Skills and
Collateral

 Far too often, investment discussions go astray because of poor oral

presentation skills on the part of Company management and weak
collateral (i.e., investor slide presentation).
 It is not unusual for a principal at a high profile venture capital firm to
review dozens of prospective investments every month. As such, it
is imperative that your investment presentation be extraordinarily
brisk, to the point, and delivered with flair and great enthusiasm.
Capital Raising Mistake #9 Not Being Fully Prepared

 It becomes very important to be prepared with answers after the first

meeting.
 Investors would like to see various detailed documents.
 Failing on either on them could cost you your funding.
 Public Issue of Secured Non Convertible Debentures 
Offering Summary

Size Aggregating upto Rs. 500 crs with an option to

retain oversubscription upto Rs 500 crs

Investment options Five Options

Credit Rating "CARE AA+" by CARE and "AA (ind)" by Fitch

Yield on redemption 10.75% to  11.50% Per annum.

Subscription period Issue Opening date : 27th July 2009 - Issue Closing

date : 14thAugust 2009

Security First charge on an identified immovable property

and specified future receivables
of the Company to ensure minimum one time
security cover
Listing The NCDs to be listed on National Stock Exchange
("NSE")