Page 306 - DMGT207_MANAGEMENT_OF_FINANCES

Unit 14: Capital Market and Financial Institutions

only for the purpose of raising finance for new capital expenditure. In fact, the facilities of the Notes
market are also utilized for selling exiting concerns to the public as going concerns through
conversions of exiting proprietary enterprises or private companies into public companies. The
main function of the New Issue Market, i.e. channelling of investible funds, can be divided, from
the operational stand- point, into a triple service function:
1. Origination
2. Underwriting
3. Distribution

The institutional setup dealing with these can be said to constitute the New Issue Market
organization. Let us elucidate a little on all of these.
1. Origination: Origination refers to the work of investigation and analysis and processing
of new proposals. This in turn may be:
(i) A preliminary investigation undertaken by the sponsors (specialized agencies) of
the issue. This involves a careful study of the technical, economic, financial and legal
aspects of the issuing companies to ensure that it warrants the backing of the issue
house.
(ii) Services of an advisory nature which go to improve the quality of capital issues.
These services include advice on such aspects of capital issues as:

(a) Determination of the class of security to be issued and price of the issue in
terms of market conditions;
(b) The timing and magnitude of issues;

(c) Method of flotation; and
(d) Technique of selling and so on.
2. Underwriting: The idea of underwriting originated on account of uncertainties prevailing
in the capital market as a result of which the success of the issue becomes unpredictable. If
the issue remains undersubscribed, the directors cannot proceed to allot the shares, and
have to return money to the applicants if the subscription is bellow a minimum amount
fixed under the Companies Act. Consequently, the issue and hence the project will fail.
Underwriting entails an agreement whereby a person/organization agrees to take a
specified number of shares number of shares or debentures or a specified amount of stock
offered to the public in the event of the public not subscribing by the public, there is no
liability attaching to the underwriters; else they have to come forth to meet the shortfall
to the extent of the under subscription.

The underwriters in India may broadly be classified into the following two types:
(i) Institutional Underwriters;
(ii) Non-institutional Underwriting
3. Distribution: The sale of securities to the ultimate investors is referred to as distribution;
it is another specified job, which can be performed by brokers and dealers in securities
who maintain regular and direct contact with the ultimate investors.

Notes The ability of the New Issue Market to cope with the growing requirements of the
expanding corporate sector would depend on this triple service function.

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