ASST. PROF JONLEN DESA

METHODS OF MARKETING OF

SECURITIES

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When a company wants to raise capital, it markets its securities in the New Issue Market.

Marketing of securities means selling securities to different types of buyers or investors.

It should be quick, adequate and economical.

Buyers & Sellers.

MARKETING OF SECURITIES

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DIRECT PLACEMENT

PRIVATE PLACEMENT

RIGHTS ISSUE

SALE TO EMPLOYEES

SALE TO CUSTOMERS

SALE THROUGH INTERMEDIARIES

SALE TO CREDITORS

SALE THROUGH UNDERWRITERS

METHODS OF MARKETING OF SECURITIES

1. DIRECT PLACEMENT OF SECURITIES

It is the sale of securities directly through a prospectus.

It is a very popular and extensively used method and is also known as “Public Issue”

Details in a prospectus Legal formalities & SEBI guidelines. Drafted by financial experts Advertisement in newspaper & magazines. Important informative document available to

public.

1. DIRECT PLACEMENT OF SECURITIES

ADVANTAGES

Simple Method It has a wide coverage. Economical Direct sale Decentralization of ownership Convenient for stable companies.

1. DIRECT PLACEMENT OF SECURITIES

DISADVANTAGES

No guarantee of sales.

Time consuming

May not get positive response from investors, specially for new companies.

2. PRIVATE PLACEMENT OF SECURITIES

All securities are sold to one or few financial institutions at an agreed price.

These institutions/agencies in turn sell the securities to the public.

In this method, the company has no direct contact with the public, but in case of direct placement, direct contact was possible.

The finance companies purchase securities for resale.

2. PRIVATE PLACEMENT OF SECURITIES

The buyers are insurance companies, mutual funds, brokers and banks.

This method is used by private as well as public companies.

In India, IDBI, LIC, ICICI participate in private placement of securities.

2. PRIVATE PLACEMENT OF SECURITIES

ADVANTAGES Simplicity Reduces cost of selling to the public. Economical Quick sales of securities. Limited risk.

2. PRIVATE PLACEMENT OF SECURITIES

DISADVANTAGES

The agencies sell the securities to the public at a higher price. Therefore this profit is not transferred to the company.

Identity lost It may lead to takeovers.

3. SALE OF SECURITIES TO EMPLOYEES

New securities are offered to the employees as a type of incentive.

This gives them a participation in the management as well as in the profits of the company.

Securities are offered at a concessional rate. Co-partnership is introduced. Popular method followed by many countries. Sometimes, a part of the total issue is reserved for

employees. They are issued to the investors only if there is no positive response from the employees.

Reliance, Infosys, L&T, BOI offer shares to their employees on preferential basis.

3. SALE OF SECURITIES TO EMPLOYEES

Employee Stock Option Plan (ESOP) Many Indian companies follow the ESOP scheme. It is a voluntary scheme and it gives employees the

option to buy the shares. Employees become shareholders, get a share in the

company’s profits through dividend. Employees have an option of purchasing a

predetermined number of shares at a predetermined price.

Infosys is a leading company that offers ESOP to its employees.

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Securities offered under ESOP should not exceed 5% of the company’s paid up capital.Shares under ESOP scheme are not transferable for a few years.SEBI has issued certain guidelines for the issue of ESOP.ESOP needs approval of the shareholders through a special resolution.ESOP scheme should be available to permanent employees, directors and not promoters.Certain minimum disclosure about ESOP would be required in the annual report of the company.

3. SALE OF SECURITIES TO EMPLOYEES

ADVANTAGES

Ensures good cordial industrial relations. Participation in company’s prosperity. Allows labour participation and motivates

employees. Strengthens employee loyalty. Introduction of co-partnership.

3. SALE OF SECURITIES TO EMPLOYEES

DISADVANTAGES

Poor response from the employees Low dividend can affect employee morale. Additional formalities for the company. Opposition from trade unions Not popular in India

4. RIGHTS ISSUE

Shares under this method, new shares are offered to existing shareholders on a preferential basis.

It is also called a privileged subscription. Different from bonus shares. Used when the company raises capital for

further expansion. Provision of right issue is compulsory in India.

4. RIGHTS ISSUE The number and price of shares are decided by

the BOD. Acceptance of the offer within 15 days. The existing shareholders have the right whether

to buy or reject the offer. It is known as a pre-emptive right.

The shares are offered to them on a pro-rata basis.

E.g.: 1 new share for every 5 existing shares.

4. RIGHTS ISSUE

ADVANTAGES

Economical Prospectus and underwriting not required. Equity in surplus Control remains in the hand of the same shareholders. Low price Wide coverage Simplicity Reward to existing shareholders

4. RIGHTS ISSUE

DISADVANTAGES

Sale to new investors is not possible.

No guarantee of positive response

Shares have to be issued at a lower than the market price.

Useful to popular companies only

5. SALE OF SECURITIES TO CUSTOMERS

A method mostly followed by Public Utility concerns.

Share are sold to customers of the business. Customers are converted into owners. Rare method Shares can also be sold to dealers and suppliers of

the company. Ensures loyalty and establishes a closer relation

with the company.

5. SALE OF SECURITIES TO CUSTOMERS

ADVANTAGES

Quick sale of securities.

Low cost method.

Wide coverage.

Avoids speculation

5. SALE OF SECURITIES TO CUSTOMERS

DISADVANTAGES

If dividend rate is low, customers are dissatisfied.

Suitable to public utilities only.

6. SALE OF SECURITIES TO CREDITORS

Existing creditors may be requested to purchase the company’s shares in full settlement of their loans or advances.

This method is possible at the time of reorganization of the capital structure.

6. SALE OF SECURITIES TO CREDITORS

ADVANTAGES

Simple method with limited formalities.

Low cost method.

Provides ready market

6. SALE OF SECURITIES TO CREDITORS

DISADVANTAGES

Sale to creditors is doubtful.

Creditors may not want to convert their debt into shares.

Prefer to remain creditors rather than owners.

7. SALE OF SECURITIES THROUGH INTERMEDIARIES

Intermediaries such as stock brokers and commission agents are used to sell the shares.

They personally sell the securities for a commission.

7. SALE OF SECURITIES THROUGH INTERMEDIARIES

The intermediaries affix their seal on every application form before distributing to the public.

This application form is given by the company.

Depending on the application received, the company pays the commission.

7. SALE OF SECURITIES THROUGH INTERMEDIARIES

ADVANTAGES

Relief to issuing company.

Suitable to new companies.

Positive response

7. SALE OF SECURITIES THROUGH INTERMEDIARIES

DISADVANTAGES

Intermediaries do not give guarantee of sale.

There may be delay and the capital may not be available in time.

Costly method.

8. SALE OF SECURITIES THROUGH UNDERWRITERS

Popular & widely used method. Underwriting is the act of guaranteeing

subscription to issued capital. The act of guaranteeing subscription to the

issued capital is underwriting. It is a type of an insurance against under-

subscription of an issue.

UNDERWRITING OF SHARES

An underwriter promises to subscribe to a specified number of share if the public does not subscribe to it.

He is paid underwriting commission.

It has no liability if the issue is fully subscribed.

Underwriters may be individuals, firms or financial institutions.

UNDERWRITING OF SHARESUNDERWRITING COMMISSION

As per the Companies Act, 1956, they get a commission of:

Up to 2.5% on the issue price of debentures.

5% on the issue price of shares

The commission is paid even when the issue is fully subscribed or over subscribed.

UNDERWRITING OF SHARES

ADVANTAGES

Enhances the credit worthiness of the company. Assured sale of securities. Wide coverage. Underwriters provide expert advice to the

company. Quick sale

UNDERWRITING OF SHARES

DISADVANTAGES Costly method.

Confidential information about the company is given to the underwriter.

May not be a good option for new companies.

Underwriter may get control on the company

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1. STANDING BEHIND THE

ISSUE

2. OUTRIGHT PURCHASE METHOD

3. SYNDICATE METHOD

TYPES/METHODS OF UNDERWRITING

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• 1. Term Lending Institutions- IDBI, ICICI, IFCI, SFCs

• 2. Commercial Banks- SBI, BOI

• 3. Investment Institutions – LIC, GIC, UTI

• 4. Stock brokers

• 5. Merchant Banking Institutions

UNDERWRITING AGENCIES IN INDIA

MUTUAL FUNDS

MEANING OF MUTUAL FUND A mutual fund is a financial institution which collects the savings from small investors,

invests them in Government as well as corporate securities and

earns income through interest and dividends.

Mutual fund investments are subjected to market risks. (Advertisement)

Mutual funds started in 1964 in India

MUTUAL FUNDSMutual funds are popular among all categories of investing

classes.People prefer mutual funds to other securities because of

attractive return, reasonable safety and high degree of liquidity.Availability of tax benefits.A mutual fund collects small savings of investors and creates a

huge profitable and diversified investment.Hence, mutual fund is a form of collective investment.Thus, a mutual fund is formed by the coming together of a

number of investors who hand over their surplus funds to a professional organization to manage their funds.

ADVANTAGES Benefits of diversified & profitable investment Presents a variety of investment options Benefits of professional management Liquidity to the investment Tax benefits Assured allotment Effective regulation Spread of risk Mutual funds keeps the money market active Provides financial resources to industries Vital role in developing capital market

TYPES OF MUTUAL FUND SCHEMES

Closed Ended Schemes

Open Ended Schemes

Income Schemes

Income And Growth Schemes

Growth Schemes

Tax Saving Schemes

TYPES OF MUTUAL FUND SCHEMES

1. CLOSE ENDED FUNDS

1. The corpus/size of the fund and the number of units are determined in advance & are prefixed.

2. The duration of the offer is also prefixed and the entry of new investors is closed once the subscription is closed.

3. After the expiry of the fixed period, the entire fund proceeds are distributed to the unit holders in proportion to their holdings.

4. Main objective is capital appreciation.

TYPES OF MUTUAL FUND SCHEMES

1. CLOSE ENDED FUNDS

ICICI Prudential Mutual Fund -Series 3, UTI Long Term Advantage Fund-Series I

TYPES OF MUTUAL FUND SCHEMES

2. OPEN ENDED FUNDS1. Opposite of close ended funds2. The size of the fund or the period is not

predetermined.3. Investors are free to buy and sell the units at any

time.4. The corpus/size of the fund changes with the entry

and exit of investors.5. The fund has got perpetual existence.6. Anybody can buy or sell the units at any time.7. These are flexible & highly liquid.

TYPES OF MUTUAL FUND SCHEMES

2. OPEN ENDED FUNDS

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HDFC Top 100 Fund, Tata Infrastructure Fund, Birla Cash Plus, Axis Equity Fund.

TYPES OF MUTUAL FUND SCHEMES

3. INCOME FUNDS1. The main aim of the fund is to generate and distribute

regular income to the members periodically.2. More focus is on the regular distribution of income.3. Therefore these funds invest in only high and fixed income

yielding securities.4. Average return should be higher than that of the income

from bank deposits.5. Income fund is concerned with short term gains.6. Income schemes are either closed ended or open ended.7. Investor gets returns at periodic intervals.8. Suitable for senior people.

TYPES OF MUTUAL FUND SCHEMES

4. GROWTH FUNDS

1. Their main aim is long term gain (capital appreciation).

2. They do not offer regular income but a high profit at the time of sale.

3. Described as “Nest Eggs” Investment.4. Suitable for salaried and business people.5. E.g. Birla Advantage Fund, Birla Midcap Fund,

Birla Dividend Yield Plus, Birla Sun Life.

TYPES OF MUTUAL FUND SCHEMES

5. INCOME AND GROWTH FUNDS

1. Combination of both income and growth funds.2. They aim at providing both regular income as well as

capital appreciation.3. Balance is achieved by investing in high growth

equity funds and fixed income securities.4. E.g. Tata Balance Fund, Magnum Balance Fund, Birla

Balance.

TYPES OF MUTUAL FUND SCHEMES

6. TAX SAVING FUNDS

1. Tax saving schemes offer tax benefits to investors.2. They allow investors to reduce their tax liability.3. Individuals can get a tax deduction for investing in

such funds.4. Suitable for salaried people as they get tax benefit

under Sec 80 C.5. Returns are not taxable.6. E.g. HDFC Long Term Advantage Fund, Reliance Tax

Saver, Kotak Tax Saver, Tata Tax Saving Fund.

MERCHANT BANKING

MERCHANT BANKING

MERCHANT BANKING Merchant Banking is a combination

of banking and consultancy services.

MBs are financial intermediaries which offer a variety of services.

It provides consultancy to its clients for financial, marketing, managerial and legal matters along with financial assistance.

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MBs keep a close and continuous contact with their clients.

They offer financial assistance and also consultancy services on various aspects.

Originated in Britain and are now popular all over the world.

They are more of consultants rather than bankers.

The staff of the MBs are highly qualified and professional and offer high quality services to their customers.

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Project Planning, Project Reports and Feasibility StudiesGovernment Consent for Industrial ProjectsNegotiation for loans from Financial InstitutionsProvision of Management Consultancy ServicesIssue ManagementAssistance in Expansion ProgrammesSpecial Assistance to Small Companies and EntrepreneursProvision of FinanceRevival of Sick UnitsPortfolio Management

MERCHANT BANKING - FUNCTIONS

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Investment Advisory Services

Indianization of foreign companies

Assistance in foreign collaboration and lease finance

Preparation of financial plan and financial structure

Underwriting of new issues of companies

Advisory services relating to mergers and takeovers

Investment advisory services to NRIs

MISCELLANEOUS FUNCTIONS

ISSUE HOUSES

ISSUE HOUSES• Issue houses are financial intermediaries between the borrowing

company and investing class.

• They are useful for the sale of securities to investors

• It charges a commission for the services provided to the issuing company.

• It is a financial agency useful for marketing of securities.

• Merchant Banks also act as issue house.

• They keep close contact with the developments in the stock exchange and capital market.

• Provides necessary guidance to the issuing companies.

• Originated in England

ISSUE HOUSES - NEED• They offer useful services to the issuing company.

• They make the new issue market active and user friendly.

• They establish a link between borrowing companies and investors.

• They help in mobilization of funds.

• Needed for healthy growth of the capital market.

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• 1. Drafting of prospectus for new issue as per legal provisions.

• 2. publicity to the prospectus for positive response from investors.

• 3. Appointment of brokers for quick sale of securities.

• 4. Underwriting of securities.

• 5. Providing assistance to sponsoring agency.

• 6. Undertaking all other steps needed for successful marketing of securities.

ISSUE HOUSES - FUNCTIONS