Issue mechanism

Introduction

Section 86 of the companies act deals with the kinds of shares that a company can issue. The
share capital of a company limited by shares formed after the commencement of the act issued
after such commencement shall be of two kinds namely:

(a) Equity shares

(b) Preference shares

Classification Of Issue Of Equity Shares

1.Initial public offer of the equity shares(IOP)

If the firm is issuing the shares for the first time, it is referred to as initial to as initial
public offer. Initial public offer will be followed by listing of the equity shares in the stock
exchange.

Parties involved in IOP

(a)Managers to the issue /Lead Manager : Lead managers are appointed by the company to
manage the initial public offering campaign.

(b)Registrar to the issue : After the appointment of the lead managers to the issue, in the
consultation with them, the registrar to the issue is appointed. The registrars normally receive the
share application from various collection centers. They recommend the basis of the allotment in
consultation with the Regional Stock Exchange for approval.

(c)underwriters : underwriting is a contract by means of which a person gives an assurance to the

issuer. The person who assures is called as underwriter. The underwriters do not buy or sell the
securities. They stand as the back up supporters &underwriting is done for a commission .

(d)bankers to the issue : bankers to the issue have the responsibility of collecting the application
money along with the application form. The bankers to the generally charge commission besides
the brokerage, if any. Depending upon the size of the public issue. Underwriters are divided into
two categories :

• Financial institution and banks

• Brokers and approved investment companies.
(e)Advertising agents : Advertising plays a key role in promoting the public issue. The
advertising agencies take the responsibility of giving publicity to the issue on the suitable media.

(f)The financial institution : financial institution generally underwrite the issue and lend term
loans to the companies. Hence, normally they go through the draft of prospectus, study the
proposed program for public issue and approve them. IDBI, IFCI, ICICI, LIC etc…are the
examples .

(g)Government & statutory agencies

The various regulatory bodies related with the public issue are:

• Securities Board Of India

• Registrar of companies
• Reserve bank of India
• Stock Exchange where the issue is going to be listed
• Industrial Licensing Authorities

2. Public Issue

Meaning

Public issue or public offer is a company that issues additional securities to the public, adding to
those currently being traded.

Public issue with prospectus is the most popular method of raising funds by the public limited
companies. Public issue of securities means the selling or marketing of securities for subscription
by the issue of prospectus. The price at which securities are offered for sale is at the face value of
the share in case of new companies and may be premium or discount in the case of old
companies. Legally, no public limited company can issue shares to the public without issuing
prospectus.

(i)issue of prospectus

Prospectus means any document described or issued as prospectus and includes any notice,
circular, advertisement. So, a prospectus is an invitation to the public to subscribe the shares or
debentures of a company.
Contents Of Prospectus

A. General Information

(a) Name and address of the registered office of the company

(b) Activities of the company
(c) Location of the industry
(d) Minimum subscription
(e) Date of opening of issue
(f) Names and addresses of auditors and lead managers
(g) Names and addresses of the underwriters

B. Capital structure of the company

C. Terms of the present issue

D. Particulars of the issue

E. Company management and project.

3.Right issue

Right issue involves selling equity/securities in the primary market to existing shareholders.
The shareholders have no legal binding to accept the offer and they have the right to renounce
the offer in favor or any person. Shares of this type are called right shares

Characteristics of right issue :

1. Price per share is determined by the company

2. Existing shareholders can exercise right and can apply for the share
3. Shareholders who renounce their rights are not entitled for additional shares
4. Rights can be sold
5. Rights can be exercised only during a fixed period
6. Number of rights that a shareholders gets is equal to the number of shares held by him.

Merits of right issue

1. Less expensive as compared to direct public issue

2. Management of applications and allotment is less cumbersome
Limitations /demerits of right issue

1. Can be used by only existing company

2. Cannot be used for large issues
3. Wider ownership bare cannot be achieved

4.private placement

It involves allotment of shares by a company to few selected sophisticated investors likr

mutual funds, insurance companies, banks etc. in this method the issue is placed with a small
number of financial institution. The financial intermediaries purchase the shares and sell
them to investors at a late date at a suitable price.

Advantages of private performance

1. Cost effective
2. Time effective
3. Structure effectiveness
4. Access effective

5.Preferential allotment

It is an issue of equity by a listed company to selected investors at a price which may or may not
be related to prevailing market price. It is not a public issue of shares. This kind of preferential
allotment is made mainly to promoters or friends and relatives.

Pricing :- price of preferential allotment must not be lower than 6 months average closing price.

Lock in period :- the shares allotted under preferential allotment process will attract a lock in
period. If it is allotted a promoter, the lock in period will be 3 years and to others, it is 1 year.