Understanding the Process of Issuing Securities: IPOs, FPOs, ESOPs, and Trading, Lecture notes of Financial Economics

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How Securities are Traded?

How Firms Issue Securities?

• (^) Primary Market: Market for new

issues of securities

• (^) Secondary Market: Market for already

existing securities

• (^) There are two types of primary

market issues;

1. IPO

2. Seasoned /Follow on Public Offer

What is a 'Follow On Public Offer - FPO‘?

• (^) A follow-on public offer (FPO) is an issuing of shares to investors by a public company that is already listed on an exchange.
• (^) An FPO is essentially a stock issue of supplementary shares made by a company that is already publicly listed and has gone through the IPO process.
• (^) FPOs are popular methods for companies to raise additional equity capital in the capital markets through a stock issue.

Shares Issues And Its Types

Issue types

Private Placement: Here the company issues the securities to the selected group of investors not exceeding more than 49. It can be done in two ways as follows:

1. Preferential Issue: The listed company issues the equity shares which have some more benefits over the normal equity shares like in terms of dividends etc. These benefits are mentioned at the time of issue. 2. Qualified Institutional Placement (QIP): Here, the listed company issues equity shares or shares convertible into equity shares to Qualified Institutional Buyers

Employee Stock Option Plan (ESOPs):

• (^) These are a special kind of stock options which are issued only to the employees of the company. The shares are issued at a discounted price and many have cash benefits also.
• (^) This is done to develop the interest of the employees as the stakeholders of the company for its well being.
• (^) This plan have the tax benefits for the employees.

How Firms Issue Securities?

• (^) Primary Market
  • (^) Firms issue new securities through

underwriter to public

• (^) Investors get new securities; firm gets

funding

• (^) Secondary Market
  • (^) Investors trade previously issued securities

among themselves

• (^) Ownership is transferred, no new securities

How Firms Issue Securities?

• (^) Stocks
  • (^) IPO
  • (^) Seasoned offering
• (^) Bonds
  • (^) Public offering
  • (^) Private placement

Preliminary Prospectus – Red Herring

• (^) A first draft registration statement filed by a firm prior to proceeding with an initial public offering of securities.
• (^) The document, filed with the Securities & Exchange Commission (SEBI in India), is intended to provide pertinent information to prospective shareholders about the company's business description, management, strategic initiatives, financial statements and ownership structure.

Underwriters?

• (^) IPOs generally involve one or

more investment banks known as

"underwriters".

• (^) The company offering its shares,

called the "issuer", enters into a

contract with a lead underwriter to

sell its shares to the public.

• (^) The underwriter then approaches

investors with offers to sell those

shares.

Investment Banking

• (^) Firm commitment
  • (^) investment bank purchases securities from the issuing company and then resells them to the public
  • (^) investment bank carries price risk

Investment Banking

(Ctd.)

• (^) Private placements
  • (^) Firm uses underwriter to sell

securities to a small group of

institutional or wealthy investors.

• (^) Cheaper than public offerings
• (^) Suitability concerns
• (^) Not traded in secondary markets

IPO Pricing

• (^) Corporates may raise capital in the primary market by way of an initial public offer, rights issue or private placement.
• (^) An Initial Public Offer (IPO) is the selling of securities to the public in the primary market.
• (^) This Initial Public Offering can be made through the fixed price method, book building method or a combination of both.

There are two types of Public Issues (Pricing)