Issue Mechanism of Shares

Issue Mechanism of Shares:

The success of an issue depends, partly, on the issue mechanism.

The methods by which new issues are made are:

(i) Public issue through prospectus,

(ii)Tender/Book building,

(iii) Offer for sale

(iv) Placements

(v) Rights issue.

(i) Public Issue through Prospectus:

Under this method, the issuing companies themselves offer directly to general public a fixed number of shares at a stated price, which in the case of new companies is invariably the face value of the securities, and in the case of existing companies, it may sometimes include a premium amount, if any. Another feature of public issue is that generally the issues are underwritten to ensure success arising out of unsatisfactory public response. Transparency and wide distribution of shares are its important advantages.

(ii) Tender / Book building:

When a company plans for raising of funds from the market, the book building method is one such way to raise more funds. After accepting the free pricing mechanism by the SEBI, the Book building process has acquired too much significance and has opened a new lead in development of capital market.

Issue Mechanism of Shares

A company can use the process of book building to fine tune its price of issue. When a company employs book building mechanism, it does not pre-determine the issue price (in case of equity shares) or interest rate (in case of debentures) and invite subscription to the issue.

Instead it starts with an indicative price band (or interest band) which is determined through consultative process with its merchant banker and asks its merchant banker to invite bids from prospective investors at different prices (or different rates). Those who bid are required to pay the full amount. Based on the response received from investors the final price is selected.

(iii) Offer for Sale:

Another method by which securities can be issued is by means of an offer for sale. Under this method, instead of the issuing company itself offering its shares, directly to the public, it offers through the intermediary of issuing houses/merchant banks/investment banks or firms of stockbrokers. The modus operandi of the offer of sale is akin to the public issue method. Moreover, the issues are underwritten to avoid the possibility of the issue being left largely in the hands of the issuing houses. But the mechanism adopted is different. The sale of securities with an offer for sale method is done in two stages.

Issue Mechanism of Shares

(iv) Placement Method:

Yet another method to float new issues of capital is the placing method defined by London Stock Exchange as “sale by an issue house or broker to their own clients of securities which have been previously purchased or subscribed”. Under this method, securities are acquired by the issuing houses, as in offer for sale method, but instead of being subsequently offered to the public, they are placed with the clients of the issuing houses, both individual and institutional investors. Each issuing house has a list of large private and institutional investors who are always prepared to subscribe to any securities which are issued in this manner. Its procedure is the same with the only difference of ultimate investors.

(v) Rights Issue:

This method can be used only by the existing companies. In the case of companies whose shares are already listed and widely-held, shares can be offered to the existing shareholders. This is called rights issue. Under this method, the existing shareholders are offered the right to subscribe to new shares in proportion to the number of shares they already hold. This offer is made by circular to ‘existing shareholders’ only. The chief merit of right issue is that it is an inexpensive method.

Issue Mechanism of Shares

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