Page 9 - DCOM504_SECURITY_ANALYSIS_AND_PORTFOLIO_MANAGEMENT

Security Analysis and Portfolio Management

Notes establish new enterprises, but also for expansion/diversification/modernizations of existing
units. On this basis, the new market can be classified as:
1. A market where firms go to the public for the first time through Initial Public Offering
(IPO).
2. A market where firms which are already trade raise additional capital through Seasoned
Equity Offering (SEO).
The main function of new issue market can be divided into three service functions:
1. Origination
2. Underwriting

3. Distribution
1. Origination: Origination refers to the work of investigation, analysis and processing of
new project proposals. Origination starts before an issue is actually floated in the market.
There are two aspects in these functions:
(a) A careful study of the technical, economic and financial viability to ensure soundness
of the project. This is a preliminary investigation undertaken by the sponsors of the
issue.
(b) Advisory services which improve the quality of capital issues and ensure its success.
The advisory services include:
(i) Type of issue this refers to the kind of securities to be issued whether equity
share, preference share, debenture or convertible debenture.
(ii) Magnitude of issue
(iii) Time of floating an issue
(iv) Pricing of an issue - whether shares are to be issued at per or at premium

(v) Methods of issue
(vi) Technique of selling the securities
The function of origination is carried out by merchant bankers, who may be commercial
banks, all Indian financial institutions, or private firms. Initially, specialized division of
commercial banks provided this service. At present, financial institutions and private
firms also perform this service. Though this service is highly important, the success of the
issue depends, to a large extent, on the efficiency of the market.
The origination itself does not guarantee the success of the issue. Underwriting, a
specialized service is required in this regard.
2. Underwriting: Underwriting is an agreement whereby the underwriter promises to
subscribe to a specified number of shares or debentures or a specified amount of stock in
the event of public not subscribing to the issue. If the issue is fully subscribed then there is
no liability for the underwriter. If a part of share issues remain unsold, the underwriter
will buy these shares. Thus underwriting is a guarantee for the marketability of shares.
Method of Underwriting

An underwriting agreement may take any of the following three forms:
(a) Standing behind the issue: Under this method, the underwriter guarantees the sale of
a specified number of shares within a specified period. If the public do not subscribe
to the specified amount of issue, the underwriter buys the balance in the issue.

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