A

Project Report

On

Different issue Mechanisms adopted by Different Organization

Submitted To:

Ms. Dipali Patel

Faculty Member,

S. K. School of Business Management

(HNGU), Patan

Submitted By:

Jadav Nikulkumar J.

Roll no. 11

MBA- III

Batch Number 2013-15

Explain different issue mechanisms adopted by different organization by giving relevant :

1. Public Issue through Prospectus

When a company raises funds by selling (issuing) its shares (or debenture / bonds) to the

public through issue of offer document (prospectus), it is called a public issue.

1) Initial Public Offer (IPO): When a (unlisted) company makes a public issue for the

first time and gets its shares listed on stock exchange, the public issue is called as

initial public offer (IPO).

2) Further public offer (FPO): When a listed company makes another public issue to

raise capital, it is called further public / follow-on offer (FPO).

For Example:

2. Tender / Book Building Method

On the basis of pricing, issues can be classified into Book Built issues and Fixed Price issues.

We shall focus on the book built issues as most of the issues nowadays are through this

method.

In a Book Building issue the issuer company mentions the minimum and maximum price

(price band) at which it will sell (issue) its shares. Thus the offer document (in this case,

called the Red Herring Prospectus) contains only the price band instead of the price at

which its shares are offered to the public.

Within this price band the investor can choose the price at which the investor are willing to

buy the shares and also the quantity. As this process is similar to bidding in an auction, the

application form for book built issue is also known as the bid form.

At times the issuer may revise the price band (revision of price band) which has to be

accompanied with news paper advertisement.

Bids by various investors are entered into the stock exchange system through the broker’s

(also called syndicate member) terminal. The list of the bid received from investors at

various price bands is known as the ‘book’ and can be seen in the website(s) of the stock

exchange for each investor category.

Based on the total demand in the ‘book’, the cut off price is then decided by the issuer and

merchant banker. The cut off price is the price at which the cumulative demand for shares,

equals or exceeds the offer size. Illustratively, the cut off price of a public issue of 1,000

shares with a price band of Rs. 100 to 120 would be arrived as follows:

Number of sharesbid

Cumulative number of shares bid

Bid price(Rs.)

Sharesallotted

0 0 120 0

300 300 119 300

450 750 117 450

550 1,300 114 250

200 1,500 112 0

0 1,500 110 0

Cut off Price Rs. 114 Total 1,000

All investors who are applied (bid) for shares at or above the cut off price will be allotted

shares at the cut off price (issue price), proportionately.

If the investment is less than Rs. 200,000 (retail investor), the investor have the option of

bidding at the cut off price by ticking the cut-off option in the application form.

After the allotment, a public advertisement is issued, giving details of the issue price as well

as a table showing the number of securities and the amount payable by successful bidders.

For Example:

3. Offer for Sale

Institutional investors like venture funds, private equity funds etc., invest in unlisted company

when it is very small or at an early stage. Subsequently, when the company becomes large,

these investors sell their shares to the public, through issue of offer document and the

company’s shares are listed in stock exchange. This is called as offer for sale. The proceeds

of this issue go the existing investors and not to the company.

For Example:

Offer for Sale of SAIL (Steel Authority of India Ltd.)

A method of bringing a company to the stockmarket by selling shares in a new issue. The

company sponsor offers shares to the public by inviting subscriptions from investors.

(a).Offer for sale by fixed price - the sponsor fixes the price prior to the offer.

(b).Offer for sale by tender - investors state the price they are willing to pay. A strike price is

established by the sponsors after recieving all the bids. All investors pay the strike price.

A prospectus containing details of the sale must be printed in a national newspaper.

Steel Authority of India Ltd (SAIL)’s offer for sale (OFS), where the government will divest a 5% stake, may collect about Rs.2,000 crore, higher than Rs.1,514 crore raised in March 2013 for the sale of a 5.82% stake, top executives in the company said.

The company’s shares have risen 45.92% since then.

The state-run steelmaker’s OFS could hit the market in August-September and is likely to

follow divestment of part of the government’s stake in Oil and Natural Gas CoRs.. Ltd, the

executives said, asking not to be identified. The Economic Times reported last week that the

government could consider selling a 5-10% stake in ONGC for as much as Rs.35,000 crore.

Reuters cited an unnamed oil ministry official in a report on Tuesday and said the

government could sell 5% in the oil explorer. That will be worth almost Rs.18,000 crore at

the current share price of ONGC.

“The thinking in the government is that since ONGC will fetch a large sum, it should go first,

followed by SAIL,” one senior executive at SAIL said. “The SAIL share sale could happen

sometime in September.”

The government expects to raise Rs.58,425 crore from divesting part of its stake in state-

owned firms, according to the budget presented by finance minister Arun Jaitley in

Parliament last week. The number is critical to the government’s efforts of keeping the fiscal

deficit for the year down to 4.1% of GDP, a target it may still miss according to analysts.

The first executive added that the decision on the floor price will be taken by the government.

“Retail investors may get a 5% discount.”

A second executive said roadshows are to be held in Hong Kong, Singapore, London, Boston

and New York, probably at least one location in West Asia and Mumbai and Chennai.

The company did not respond to a questionnaire sent on Monday seeking details.

“The market sentiment is right so it would be good to quickly launch it before things

change,” said a fund manager in an Indian mutual fund, who spoke on condition of

anonymity.

“Metals are still weak, but the investors’ appetite in the domestic and overseas markets is

good,” he said.

Last March, the government planned to sell 10.82% stake in SAIL, but the size of the share

sale was reduced due to weak market conditions and the government ended up selling 5.82%

for Rs.1,514 crore.

Since the OFS planned for this year is being seen as a continuation of last year’s plan, the

bankers to the issue are likely to be the same as in 2013, said the first executive. SBI Capital

Markets, Axis Bank, J.P. Morgan, Deutsche Bank and HSBC Securities Services were the

bankers to last year’s issue.

An equity analyst said the focus of the new government on infrastructure spending will help

the OFS.

“SAIL is going to be the immediate beneficiary as infrastructure and manufacturing sectors

pick up. We are already seeing infrastructure firms rushing to raise money, an indication that

the sector outlook is improving. SAIL’s issue should get a robust response from investors as

it is also upgrading itself and entering into new sectors,” said Samir Bahl, head of investment

banking at Anand Rathi Financial Services Ltd.

In the next couple of months, a lot of liquidity will be sucked up by infrastructure and

financial services firms and therefore it would make sense for SAIL to launch its issue right

away, he added.

After the OFS, the government’s stake in SAIL will fall to 75%, in line with stock market

regulator Securities and Exchange Board of India’s requirement.

SAIL is India’s oldest steel company with five integrated steel plants that collectively have a

capacity of 16.62mt of steel. It is India’s second largest steel producer after Tata Steel Ltd.

SAIL closed on BSE at Rs.84.85, up 1.68% from the previous day, while the Sensex ended at

25,228.65 points, up 0.69% from the previous day.

4. Private Placement Method

“It refers to the direct sale of newly issued securities to a small number of investors through

merchant bankers.”

These investors are selected clients like as under:

Financial Institution

Other corporate bodies

Banks

High Net worth Individuals

• Benefits1. Less time and cost of issue

2. Greater flexibility

3. Simplified procedure

For Example:

HQC sets firms for private placement

Hoang Quan Consulting Trading Service Real Estate CoRs.oration

(HQC) announced it has selected three strategic investors, all domestic

construction companies, for a sale of 50 million shares.

HA NOI (VNS) — Hoang Quan Consulting Trading Service Real Estate CoRs.oration

(HQC) announced it has selected three strategic investors, all domestic construction

companies, for a sale of 50 million shares.

The property developer plans to issue 110 million shares to raise its charter capital to VND2

trillion (US$95 million) this year, of which 50 million will be offered to strategic investors in

a private placement at the face value of VND10,000 ($0.48) a share.

Bao Linh Housing Development & Construction Investment Joint Stock Company will be

offered 10 million shares, while both Indochina Real Estate Development Investment

Company Limited and Binh Thuan Construction and House Trading Joint Stock Company

will buy 20 million shares each.

The placement will be carried out in the next three months and HQC expects to raise

VND500 billion ($24 million) from this issue. As shares are issued at par value, transfer will

be restricted to one year.

In addition, the company will issue 30 million shares to its existing shareholders at the price

of VND10, 000 per share. Proceeds of these two issues will be put into four apartment

construction projects in HCM City.

HQC shares are being traded below par value. The shares hit the ceiling price yesterday at

VND7, 900 ($0.38) per share.

HQC posted a net profit of just VND6.5 billion ($308,000) in the first half of this year, only

half of the same period last year. This number is far below the yearly after-tax profit target of

VND150 billion ($7.1 million). — VNS

HLIB Research said assuming conversion price of 75 sen and full conversion of the bonds,

the share base will be enlarged by 8% from 2.34 billion shares to 2.53 billion shares.

“Gross gearing will fall from 0.7 times to 0.6 times. However, we believe the dilution will be

minimal or even offset as they are only convertible after second anniversary of the issue date

and potentially more integrated project contracts,”  it said.

5. Others

1) Rights issue (RI): When a company raises funds from its existing shareholders by selling

(issuing) those new shares / debentures, it is called as rights issue. The offer document for a

rights issue is called as the Letter of Offer and the issue is kept open for 30-60 days.

Existing shareholders are entitled to apply for new shares in proportion to the number of

shares already held. Illustratively, in a rights issue of 1:5 ratio, the investors have the right to

subscribe to one (new) share of the company for every 5 shares held by the investor.

For Example:

Right issue of PT Bumi Resources (BUMI)

Shareholders of Indonesia’s largest coal producer PT Bumi Resources (BUMI) have

approved the company’s plan to raise up to Rs. 8 trillion (US$672.5 million) by offering its

rights shares to pay off its numerous debts.

The decision was achieved after the vote received a 56.30 percent quorum. Initially, the

threshold was set by the Financial Services Authority (OJK) at 75 percent, but due to there

not being a change in the statute, the attendance threshold was lowered to 66% of Share

holders.

The vote approving the rights shares issuance in an extraordinary shareholders meeting was

delayed by about five hours to 8 p.m. after the company’s annual shareholders’ meeting,

which was scheduled at 2 p.m., resulting in a lower than expected attendance.

A 56.30 percent quorum was obtained during the meeting in favor of the rights issuance.

Around 32.2 million shares, or 55.7 percent of the company’s enlarged stake, will be offered

at Rs. 250 per share.

Bumi expects to offer the new shares in September, corporate secretary Dileep Srivastava

told reporters after the meeting. All of the proceeds will be used to pay the company’s debts,

according to him.

“The price of coal is also improving, and will also give a positive outlook for the future,” he

said after the shareholders meetings at the Gran Melia Hotel in Jakarta.

Among the debts that the company needs to pay are the $150 million owed to the China

Investment CoRs.oration (CIC) through Country Forest Limited (CFL), the $150 million

owed to Castleford Investment Holdings Ltd., and another $150 million that is part of the

$375 million guaranteed convertible bonds.

Previously, the Bakrie family-owned company tried to secure approval from bondholders to

change the maturity of the $375 million convertible bonds, which are due on Aug. 5 this year,

or a month before the approved rights issue will be completed.

Bumi proposed to extend the maturity of the bonds to July 2021, lower the coupon rate to 7

percent from 9.25 percent and cut the conversion price to Rs. 750, according to Bloomberg,

citing a memo to a creditor dated June 5. However, it failed to secure a quorum at the

bondholder meeting, which was held on June 20.

Bumi independent commissioner Anton Setianto Soedarsono evaluates that the

approved rights issuance will likely improve the company’s work performance by covering

up the debts that it owes.

M. Saladdin, one of Bumi’s shareholders who approved of the rights issue, said the

atmosphere inside the meeting was tense as several shareholders questioned the company’s

decision to issue rights shares to solely cover its debts.

“But I understand they have no other choice. The increased price of coal is also of concern,”

Saladdin told The Jakarta Post on Monday evening.

Bumi’s majority shareholder Long Haul Holdings Limited will take new shares that are

unsubscribed to, equal to $150 million, and Castleford will absorb 6.9 billion new shares.

“The $150 million from Long Haul will be used to pay part of the debts to CFL. The share

allocation to Castleford is for the conversion of the company’s debt into shares,” Bumi said in

its previous statement.

PT Danatama Makmur is serving as a standby buyer, which will absorb up to Rs. 2.04 billion

new shares.

2) Bonus Issue: In a Bonus Issue, the company issues new shares to its existing

shareholders. As the new shares are issued out of the company’s reserves (accumulated

profits), shareholders need not pay any money to the company for receiving the new shares.

The net worth (owner’s money) of a company consist of its equity capital and its reserves.

After a bonus issue, there is an increase in the equity capital of the company with a

corresponding decrease in the reserves, while the net worth remains constant. In a bonus issue

of 5:1 ratio, the investor will receive five new shares of the company for each share the

investor held as illustrated below.

ABC company Before bonus issue After (1:5) bonus issueNumber of shares issued 100 600 (100+500)

Equity capital (Face value of Rs.10) Rs.1,000 Rs. 6000 (1,000+5,000)

Reserves (accumulated profits) Rs. 10,000 Rs. 5,000 (10,000-5,000)

Net worth Rs. 11,000 Rs. 11,000

For Example:

Bonus share of Samruddhi realty

Bonus Issue of JMT Auto Ltd