Issue and Issue

Pricing
Financial Managemnt Assignment

Submitted by
Abhinav
Prakash(141205)
Akash Singh (141206)
Chinmay

Public issue
It is the issue or offer of securities made to new investors for becoming

part of shareholders family.

Initial public offer (IPO):
Unlisted company making either a fresh issue of securities or offers its

existing securities for sale or both for the first time to the public.
This paves way for listing and trading of the issuerssecurities in the
Stock Exchanges.
Further public offer (FPO) or Follow on offer:
Already listed company making either a fresh issue of securities to the

public or an offer for sale to the public

Steps For Issuing Security

Approval from the board of directors.
)
Preparing and filing of a registration statement with the SEBI or the SEC.

This contains financial history, details of existing business future plans

etc.
)
The SEBI or the SEC studies the registration statement. This period is

the Waiting Period. During this time the firm may distribute copies of a
preliminary prospectus. The preliminary prospect is called a reed herring
)
The registration statement does not initially contain the price of new

issue. On the effective date of the registration statement, a price is

determined and a full fledged selling effort gets under way.
)
Tombstone advertisement are used during and after waiting period.

Pricing of an Issue
Indian primary market ushered in an era of free

pricing in 1992. SEBI does not play any role in price

fixation. The issuer in consultation with the merchant
banker on the basis of market demand decides the
price. The offer document contains full disclosures of
the parameters which are taken in to account by
merchant Banker and the issuer for deciding the price.
The Parameters include EPS, PE multiple, return on
net worth and comparison of these parameters with
peer group companies.

Types of Pricing
Fixed Price Issue:

Issuer decides the issue price and mentions it in the

Offer Document at the outset.
Book building Issue:

Price of an issue is discovered on the basis of demand

received from the prospective investors at various
price levels.

Problems in Pricing
Short-run underpricing
Cycles in volume and extent of underpricing
Long-run underperformance

Cost of Public Issues

Gross spread, or under writing discount:

The spread is the difference between the price the issuer receives and the
price offered to the public.
Other direct expenses:

These are costs incurred by the issuer that are not part of the compensation
to underwriters. They include filing files, legal fees, and taxes- all reported
in the prospectus.
Indirect expenses:

These costs are not reported in the prospectus and include the time
management spends on the new issue.

Cost of Public Issues

Abnormal returns:

In a seasoned issue of stock, the price typically drops by 3 to 4

percent upon the announcement of the issue. The drop protects new
share holders from buying overpriced stocks.
Under pricing:

For initial public offerings, the stock typically rises substantially

after the issue date.
Green shoe option:

The Green Shoe option gives the underwriters the right to buy
additional shares at the offer price to cover over allotments.

Thank You