What are the ways to Issue Securities?

In the Indian stock market, a security refers to a financial instrument that can be traded, such as stocks (equity securities), bonds (debt securities), mutual fund units, derivatives, and other investment products. These securities represent ownership or debt in companies, government entities, or investment funds and can be bought and sold on stock exchanges or other authorized trading platforms.

What Is Meant by Issuance of Security in Indian Stock Market?

The issuance of securities in the Indian stock market refers to the process by which companies or entities raise capital by creating and selling new financial instruments to investors. This is typically done to finance their operations, expansion, or other financial needs. Here's how the issuance of securities works in the Indian stock market:

Company Decision: A company or entity decides to raise capital by issuing securities. This decision can involve issuing new shares (equity securities) or issuing bonds (debt securities).

Regulatory Compliance: Before issuing securities, the company must comply with the regulations set forth by the Securities and Exchange Board of India (SEBI), which is the regulatory authority overseeing the Indian stocks market. SEBI's guidelines govern the issuance process to ensure transparency and protect investors' interests.

Offer Document: The company prepares an offer document (Prospectus in the case of an Initial Public Offering or IPO) that provides detailed information about the company, its financials, the securities being offered, and the purpose of the offering. This document is submitted to SEBI for approval.

Valuation: In the case of an IPO, an independent valuation is often conducted to determine the issue price of the shares. This price is typically based on factors such as the company's financial performance, market conditions, and investor demand.

Allotment: After regulatory approval, the securities are offered to the public or specific investors through a process known as allotment. In an IPO, shares are allocated to investors who have applied for them. In the case of bonds or other debt securities, they are offered to potential buyers.

Listing: If it's an equity offering, once the allotment process is complete, the shares are listed on a stock exchange like the National Stock Exchange (NSE) or the Bombay Stock Exchange (BSE). Debt securities may also be listed on exchanges, or they can be privately placed with institutional investors.

Trading: Once listed, the securities can be freely traded on the stock exchange, allowing investors to buy and sell them in the secondary market.

Capital Raised: The funds raised from the issuance of securities are used by the company for its intended purposes, such as business expansion, debt repayment, or working capital needs.

The issuance of securities is a crucial mechanism for companies and entities to access capital markets and raise funds, and it provides opportunities for investors to participate in the growth and financial success of these entities. Additionally, it plays a significant role in the development and functioning of the Indian stock market.

What are the methods of issuing securities in primary market?

Types of issues in primary market:

Public Offering: Selling securities to the general public.p

Private Placement: Selling to specific investors or institutions.

Rights Offering: Offering to existing shareholders first.

Preferential Allotment: Offering to select investors.

Book Building: Determining price based on investor bids.

ESOPs: Offering shares to employees.

Venture Capital/Private Equity: Raising capital from investors.

Crowdfunding: Using online platforms to raise funds.

Underwritten Offerings: Investment banks purchase and sell securities.

Direct Public Offerings (DPOs): Selling directly to the public.

Ways To Issue Securities in Indian Stock Market?

There are different methods of issuing securities in the primary & secondary markets.

Primary Market

The primary market is utilized by companies (issuers) for lifting fresh capital from the investors. Primary market offerings may be a public offering or an offer to a choice group of investors in a confidential assignment program.The shares offered may be new shares issued by the company, or it may be an offer for sale, where an existing large investor/investors or promoters offer a part of their holding to the public.

In the Indian stock market, there are several types of primary market in which securities can be issued to raise capital. These methods of issue of shares  are regulated by the Securities and Exchange Board of India (SEBI). The different primary market types of issues can be broadly categorized into the following:

Initial Public Offering (IPO)

What is the new issue market ? An IPO is the process by which a company offers its first sale of corporate shares to the public through a new issue market on a large scale.This fresh issue of shares in the new issue market is also known as Primary Market. The shares issued are primarily for retail investors.

The chief features of new issue market is to raise equity capital for the extra development of the business.Eligibility criteria for raising capital from public investors are defined by SEBI in its regulations and comprise minimum wants for net tangible assets, profitability, and net worth. SEBI’s regulations also force timelines within which the securities should be issued and other essentials such as a mandatory listing of the shares on a national stock exchange and offering the shares in dematerialized form etc.

The methods of the new issue market for a company are preparation of detailed prospectus, which provides information about the company, its financials, and the offering.Primary market examples are Indian Stock Exchanges like NSE , BSE etc.

Follow-on Public Offering (FPO)

When a previously listed company makes either a fresh issue of securities to the public or an offer for sale to the public, it is called FPO. 

When a company wants extra capital for expansion or wishes to rebuild its capital structure by retiring debt, it raises equity capital through a fresh issue of capital in an FPO.

An FPO offer may also be in the course of an offer for sale, which generally occurs when it is essential to increase the public shareholding in the company to meet the regulatory requirements. 

Private Placement–It can be said as a private placement when an issuer makes an issue of securities to a choice group of persons and which is neither a rights issue nor a public issue.

This is chiefly a wholesale issue of securities to institutional investors. It could be in the structure of a Qualified Institutional Placement (QIP) or a preferential allotment. 

According to the Companies Act 2013, an offer to subscribe to securities made to less than 50 persons is known as private placement of securities. 

The requirements of SEBI’s regulations with value to a public issue will not be relevant to a private placement. 

A privately placed security can look for a listing on a stock exchange provided it meets up the listing requirements of SEBI and the stock exchange. 

Private placement of securities can be done by a company no matter whether it has made a public offer of shares or not.

Rights Issue & Bonus Issue

Securities are issued to existing shareholders of the company on a particular cut-off date, allowing them to buy more securities at a particular price in case of rights or with no concern in case of bonus.

Both bonus shares and rights were offered in a certain ratio to the number of securities held by investors as on the record date.

It is also significant to comprehend that rights are like options, and investors may or may not choose to exercise their rights. They can choose to either accept or not in case additional shares are offered to them.

On the other hand, in the case of a bonus, additional shares are conferred to the existing shareholders (without any consideration) by the capitalization of reserves in the balance sheet of the company.

Onshore and Offshore Offerings While raising capital, issuers can raise either issue the securities in the domestic market and raise capital or approach investors outside the country.

It is known as an onshore offering; if capital is raised from the domestic market and if capital is raised from investors outside the country, it is known as an offshore offering.

Preferential Allotment

Preferential allotment means an issue of specified securities by a listed issuer to any choice person or group of persons on a private placement basis and does not comprise an offer of specific securities made through a public issue, rights issue, bonus issue, employee stock option scheme, employee stock purchase scheme or qualified institutions placement or the issue of depository or sweat equity shares issued in a country outside India or foreign securities.

The issuer is required to comply with various provisions defined by SEBI, which inter-alia include pricing, disclosures in the notice, lock-in, and total to the requirements specified in the Companies Act.

Qualified Institutional Placement (QIP)

A QIP is a method for listed companies to raise capital by issuing shares or other securities to qualified institutional buyers (QIBs) such as mutual funds, foreign institutional investors (FIIs), and banks.

It is a faster way to raise capital than traditional public offerings.

Qualified Institutional Placement (QIP) is a private placement of shares made by a listed company to a certain identified group of investors called Qualified Institutional Buyers (QIBs).

QIBs contain mutual funds, financial institutions, and banks, among others. SEBI has defined the eligibility standard for corporates to be able to raise capital through QIP and other conditions of issuance under QIP such as quantum and pricing etc.

Private Placement

Companies can issue securities through a private placement to a select group of investors, including institutions and high-net-worth individuals.

Private placements are not open to the general public and are typically used for debt securities or preferential allotments of equity shares.

Debenture Issue

Companies can issue debentures or bonds to raise funds. These are debt securities with a fixed interest rate and maturity date.

Debentures can be issued through private placements or public issue of securities , and they may or may not be listed on stock exchanges.

Employee Stock Options (ESOPs)

Companies may issue securities, usually in the form of stock options, to their employees as part of their compensation packages.

ESOPs provide employees with the opportunity to become shareholders in the company.

The choice of method depends on the company's specific needs, regulatory requirements, and market conditions. Each method has its own advantages and considerations, and companies must comply with SEBI regulations and stock exchange rules when issuing securities in the Indian stock market.

These are the methods of issuing and selling securities in the primary market.

Offer For Sale (OFS)

An Offer for Sale (OFS) is a type of share sale where the shares offered in an IPO or FPO are not fresh shares issued by the company but an offer by existing shareholders to sell shares that have previously been allotted to them.

An OFS does not result in an increase in the share capital of the company as there is no fresh issuance of shares.

The advances from the offer go to the offers, who may be promoter(s) or another large investor (s).

An example of OFS is the disinvestment program of the Government of India, where the government offers shares held by it in Public Sector Undertakings (PSUs),

It may be stated that OFS is a secondary market transaction done through the primary market direction.

Secondary Market

Whilst the primary market is used by issuers for raising fresh capital from the investors through the issue of securities, the secondary market gives liquidity to these instruments.

An active secondary market supports the expansion of the primary market and capital formation, as the investors in the primary market are assured of a continuous market where they have an option to liquidate/exit their investments.

Consequently, in the primary market, the issuers have direct contact with the investors; at the same time, in the secondary market, the dealings between investors and the issuers do not come into the picture. The secondary market can be largely divided into two subdivisions:

Over-The-Counter Market (OTC Market markets) are the markets where trades are directly arranged between two or more counterparties. In such type of market, the securities were settled and traded over the counter among the counterparties directly.

Exchange-Traded Markets

The other choice of trading in securities is through the stock exchange direction, where trading and settlement are done through the stock exchanges. The trades executed on the exchange are settled through the clearing corporation, which performs as a counterparty and guarantees the settlement of the trades to both buyers and sellers.

Trading

Trading is a formal contract to buy/sell securities. As defined above, trading can be done either in the Exchange Traded Market or the Over-The-Counter (OTC) market. Stock exchanges in India feature an electronic order-matching system that helps efficient and speedy execution of trades.

Clearing and Settlement

Clearing and settlement are post-trading activities that comprise the core part of the equity and trading series.

Clearing action is all about establishing the net obligations of buyers and sellers for a definite time period.

Settlement is the subsequent step of settling obligations by buyers and settlers - Paying money - if the transaction is a buy transaction or delivering securities - if it is a sell transaction.

Whilst OTC transactions are settled directly between the counterparties, a clearing house or corporation is the entity through which settlement of securities takes place for all the trades done on stock exchanges.

The particulars of all transactions carried out by the brokers are made available to the   Stock exchange.

The Clearing House gives an obligation report to Brokers and Custodians who are required to settle their money or securities obligations within the specific deadlines, failing which they are required to pay penalties.

The clearing corporation offers full notation of contracts between buyers and sellers, which means it acts as buyer to every seller and seller to every buyer. The operational risk of the transaction has been substantially reduced as a result.

Risk Managment

In OTC transactions, counterparties are expected to take care of the credit risk on their own.

The clearing corporation offers a settlement guarantee of trades to the counterparties (all buyers and sellers).

This depicts the clearing corporation at the risk of default by the buyers and sellers. To handle this risk, the clearing corporation charges various types of margins; the most important among these margins are Initial or upfront margin and mark-to-market (MTM) margins.

Initial margin is a percentage of transaction value arrived at based on the idea of the “Value at Risk” viewpoint, and MTM margin is the estimated loss that an outstanding trade has experienced during a specified period on account of price movements.

Frequently Asked Questions

What are the methods of selling securities in primary market ?

The top methods of issuing securities in primary market are IPOs, rights issue and private placements

What is new issue market?

New Issue Market is also known as the primary market, it is where freshly issued securities are initially sold. Companies raise capital by selling stocks or bonds directly to investors in the new issue market.It  includes IPOs, rights issues, and private placements, enabling companies to access funding for various purposes

What are the methods of new issue market?

IPOs: Initial Public Offerings involve a private company's first sale of stock to the public, often managed by investment banks.

Rights Issues: Existing shareholders are given the option to buy additional shares at a discounted price before they are offered to the public.

Private Placements: Direct sale of securities to a select group of investors, excluding the general public, often used by companies for targeted fundraising.

What are the methods of marketing securities ? 

Roadshows: Companies conduct presentations to potential investors, often organized by investment banks, showcasing the investment opportunity.

Online Marketing: Utilizing digital platforms and social media to disseminate information, target specific investor demographics, and generate interest in securities.

Print and Media Campaigns: Traditional advertising methods, such as newspaper ads and television interviews, are employed to reach a broader audience and create awareness about the securities being offered.

What is the role of investment banks in issuing securities?

Investment banks play a crucial role in underwriting securities, helping with the issuance process, and facilitating the sale of securities to investors.

Can small businesses issue securities?

Yes, small businesses can issue securities through methods such as private placements or crowdfunding, although there are specific regulations that apply.