PRIMARY MARKET NOTES: New issues market, Public issue pricing and marketing, Problems associated with primary market etc.
QUESTION: Explain the steps involved and the procedure adopted in the flotation of new issues in the market?
ANSWER: NEW ISSUES: New issues are the securities hat are offered to investing public for the first time. This is also known as initial public offerings.
New issues market is the market for new long term capital.
Here the securities are issued by the company for the first time directly to the investors. On recovering the money from the new issues, the company will issue the security certificates to the investors.
- HIRE AN INVESTMENT BANK: A company seeks guidance from a team of under-writers or investment banks to start the process of new issues offerings or IPO’s. They take services from more than one bank. The team will study the company’s current financial situation, works with their assets and liabilities and then they plan to later to the financial needs. An underwriting agreement will be signed, which will have all the details of the deal, the amount that will be raised and the securities that will be issued.
Though the underwriters assure on the capital they will raise, they won’t make promises. Even the investment banks will not shoulder all the risks involved in the money movement.
- REGISTER WITH THE SEC (SECURITIES AND EXCHANGE COMMISSION): The company and the underwriters together file the registration statement, which comprises of all the fiscal data and business plans of the company. It will also have to declare how the company is going to utilize the funds it will raise from the IPO and about the securities of public investment.
If the registration statement is complaint with the stringent guidelines set by the SEC which ensures that the company has disclosed every detail a potential investor should know, then gets a green signal, or else set back with comments. The company should then work on the comments and file for registration again.
2. DRAFT THE RED HERRING DOCUMENT: An initial prospectus, which contains the probable price estimate per share and other details regarding IPO, is shared with then people who are involved with the IPO. It is called a red herring document because the first page of prospectus contains a warning which states that this is not a final prospectus. This phase tests the waters for the IPO among the potential investors.
3. MARKETING: GO ON A ROAD SHOW: Before the IPO goes public, this phase happens over an action packed two weeks. The executives of the company travel around the country marketing the upcoming IPO to the potential investors. The agenda of the marketing includes presentation of facts and figures which will drum up the most positive interest.
4. IPO PERIOD: Based on whether company wants to float a fixed price IPO or book building issue, the price or price bank is fixed. A fixed price in order document, and the book building issue will have a price band within which the investor can bid. The number of shares that will be sold is decided. The company should also decide the stock exchange where it be going to list their shares. The company asks the securities and exchange commission to announce the registration statement as effectual so that purchases can be made.
5. AVAILABLE TO THE PUBLIC: Un a planned date, the prospectus and the application forms are made available to the public, online and offline. People can get a form, from any designated banks or broker firms. Once they fill in the details, they can submit them with a cheque, or online, as well. SEBI has the fixed period of availability of an IPO to the public, which is usually 5 working days.
6. GOING THROUGH WITH THE IPO: After the IPO price is finalized, the stakeholders and under-writers work together to decide how may shares will every investor will receive. Investors usually get full securities unless it is oversubscribed. Once the securities are allotted, the stock market will start trading the company’s IPO.
IPO’s are dealt in or traded through demat account. Any amount received due to over-subscription is refunded.