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Distribution functions of new issue market.
The distribution functions of new issue market are detailed under the following headings.
- Offer for sale.
- Private placement.
- Bonus Share.
- Book Building.
This is a method by which a company directly sells its share to the public. Through the media, the company advertises and interested persons are given the prospectus which carry full details about the company. Based on this, the public apply to the company and shares of the new company are allotted at the face value.
The old companies may issue shares at the market value with the due permission of authorities concerned, (SEBI). The issue of shares is guaranteed by an underwriter who ensures certain minimum quantity of sale of shares.
A copy of the prospectus should be submitted to SEBI for approval before coming out to the public. This prospectus is known as Red herring prospectus (RHP).
2. Offer for sale
Here the company resorts to the sale of shares through intermediaries who are stock brokers or issue houses. By this method, the company is able to promote the sale of shares and the sale is also guaranteed with the help of underwriters.
Intermediaries will take more interest in the sale of shares as they are offered to them at a lesser price and they in turn will sell them at a higher price to the public. The difference in the price will be the profit earned by the intermediaries.
The drawback of this system is that the company will not be benefited when the shares are sold at a higher price by the intermediaries.
3. Private Placement
The shares of the companies are given to the investing public with the help of issue houses. This method is adopted by certain companies as it prevents the presence of underwriters. The issue houses are responsible for the sale of the shares and no prospectus is required under this system. It also involves minimum expenditure.
4. Rights issue
When a company wishes to expand its capital base, it prefers to issue shares to the existing shareholders which are called rights shares. But before the issuing of the rights shares, the company should get permission of the Government (SEBI) and a resolution has to be passed by the board of directors.
The rights issue will be based on a proportion of existing shares held by the shareholders. A company can issue rights shares only after 2 years of its formation or after 1 year of its first issue of shares, whichever is earlier. There is no need for issue of prospectus or advertisements and this can be adopted only by an existing company and not a new company. The price of rights shares may be fixed at a premium also, subject to the permission of the Government (SEBI).
When a company decides to capitalize its profit, it will issue bonus shares which will be available only to the existing shareholders. Bonus shares can be issued only by companies which earned profit, which is a commercial profit arising out of their business operations. If a company earns profit by the sale of assets, it will not be construed as profit.
For the issue of bonus shares, the company must fulfill statutory obligations of providing various reserves and declaring dividend to the existing shareholders. After meeting the statutory regulations, if the remaining profit is more than 40%, then the company with the prior permission of Government (SEBI), can go in for the issue of bonus shares. It will be issued on a proportion to existing shares held by the shareholders.
6. Book Building
When a company, instead of offering shares directly to the public, invites bids from the merchant bankers for the sale of shares, it is called book building. The merchant bankers will take the full responsibility for the issue of the shares. The entire procedure of allotment of listing of shares will be undertaken by the merchant bankers.
The share price depends on the demand for the shares in the market. The book runner or the merchant banker will select any stock exchange and register the shares for the issue. If the stock exchange is having an on-line computer facility, then the merchant banker will make available the shares through the on-line system. The closing date for the sale of shares will be fixed by the merchant banker after consulting with the stock exchange concerned.
Depending upon the offers received after the date of closure, the price will be fixed. On finalization of the share price, the shares will be allotted. While allotting shares, preference may be given to promoters, employees, and finally to QIB (qualified institutional bidders) who are otherwise known as qualified intermediaries.