Page 12 - DCOM504_SECURITY_ANALYSIS_AND_PORTFOLIO_MANAGEMENT

Unit 1: Introduction to Capital Market

Demerits Notes
(a) It is an expensive method. The company has to incur expenses on printing of prospects,
advertisement, banks commission, underwriting commission, legal charges, stamp
duty listing fee and registration charges.
(b) This method is suitable only for large issues.
2. Offer for sale: The method of offer for sale consists in outright sale of securities through
the intermediary of issue houses or share brokers. In other words, the shares are not
offered to the public directly. This method consists of two stages: the first stage is a direct
sale by the issuing company to the issue house and brokers at an agreed price. In the
second stage, the intermediaries resell the above securities to the ultimate investors. The
issue houses or stockbrokers purchase the securities at a negotiated price and resell at a
higher price. The difference in the purchase and sale price is called turn or spread.
One chief advantage of this method is that the company is relieved from the problem of
printing and advertisement of prospectus and making allotment of shares. Offer for sale is
not common in India. This method is used generally in two instances:
(a) Offer by a foreign company of a part of it to Indian investors
(b) Promoters diluting their stake to comply with requirements of stock exchange at
the time of listing of shares.

Follow on Public Offering (FPO)
When an existing listed company either makes a fresh issue of securities to the public or
makes an offer for sale of securities to the public for the first time, through an offer
document, such issues are called as 'Follow on Public Offering'. Such public issue of
securities or offer for sale to public is required to satisfy the stock exchange listing
obligations along with SEBI guidelines.
Rights Issue (RI): When a listed company proposes to issue securities to its existing
shareholders, whose names appear in the register of members on record date, in the
proportion to their existing holding, through an offer document, such issues are called
'Rights Issue'. This mode of raising capital is the best suited when the dilution of controlling
interest is not intended.
Preferential Issue: A preferential issue is an issue of equity shares or of convertible securities
by listed companies to a select group of persons, which is neither a rights issue nor a
public issue. The issuer company has to comply with the provisions of the Companies Act,
as well as SEBI's DIP guidelines with reference to preferential issues as contained in
Chapter XIII.
A company that makes any public or rights issue or an offer for sale can issue shares only
in a dematerialised form. A company shall not make a public or rights issue of shares
unless all the existing partly paid shares have been fully paid-up or forfeited. A company,
which is making public issue of securities, shall make an application to the stock exchange
for listing of those shares.
Eligibility Norms for Public Issue: SEBI has laid down the eligibility norms for entities accessing
the primary market through public issues. The entry norms for companies making initial
public offer or follow-on public offer, are summarised as follows:
Entry Norm I
The company shall meet the following requirements:
(a) Net tangible assets of at least 3 crores for three full years.

LOVELY PROFESSIONAL UNIVERSITY 7