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Every company needs capital to operate. Funding requirements might be short-term or long-term. To address short-term needs, the corporation may contact banks and lenders, as well as collect fixed deposits from the public/shareholders.
To satisfy its long-term needs, cash can be generated through loans from lenders, banks, and institutions, among others. These loans come with a financial burden in the form of interest that must be paid on a regular basis. Public offerings are another way to raise long-term money. Raising donations from the general public is referred to as a public problem.
There are two types of public issues that are being stated. They are as follows:
When a firm makes its first public offering, it is referred to as an initial public offering (IPO)
When a corporation raises funds through another public offering, it is referred to as a subsequent public/follow-on offer (FPO).
There are certain advantages and disadvantages of a public issue that are required to be understood for better knowledge.
There are several intermediates involved in the public problem. To function as an intermediary, the following intermediaries must be registered with SEBI and possess a valid certificate from SEBI:
When firm management decides to go public, they must first hire a Merchant Banker to oversee the whole public offering process. A merchant banker is a financial institution/intermediary that specialises in managing public offerings, complying with SEBI regulations, and acting as a Registrar of Companies on public offerings. The Merchant Banker provides the following services in relation to Public Issues:
The Merchant Banker provides advice to the issuing firm on the amount, manner, and timing of the public offering. Based on this advice, the issuing firm can make a final choice.
It contains the following items:
The merchant banker initially develops the draught prospects (red herring prospectus) and then prepares the final Prospectus at a later stage of the issuance. A prospectus is a document that provides all of the information about the issuing firm in which the investor intends to invest.
It contains thorough information on the company, the promoters/directors, the group businesses, the capital structure, the terms of the current issue, the specifics of the proposed project, the particulars of the issue, and so on. The Merchant Banker files them with SEBI and the Registrar of Companies on behalf of the firm.
It is a binding agreement between the issuing corporation and the Merchant Banker. It establishes the merchant banker's rights, responsibilities, and obligations in relation to public issues.
This is a declaration issued by the Merchant Banker that all of the information provided by the firm is credible and that all SEBI standards for public offering have been met. If SEBI is pleased with the information, it will recommend that the Merchant Banker draught the final report.
If more than one Merchant Banker is needed for a public problem, the appointment is made by the principal Merchant Banker, who is also known as the Lead Manager. Furthermore, all public issue obligations are shared by Merchant Bankers.
Following the public offering, the shares will be listed/included on recognised stock exchanges for trading. For this, an application for listing authorization must be made with recognised stock exchanges. The stock exchange allows listing when the issuing business meets all of the stock exchange's listing rules.
Today, shares are distributed to investors electronically. This necessitates the establishment of a Demat Account with a depositary, and all authorised shares are credited to the Demat Account.
A depository is an institution that holds an investor's securities in electronic form. The issuing business enters into an agreement with the Depositories to allocate shares. In India, the Demat Account is maintained by two depositories:
A financial advisor who assures the subscription/purchase of shares if the general public does not subscribe to the requisite number of shares is known as an underwriter. The Lead Manager verifies the underwriter's net worth & outstanding commitments and reports this information to SEBI.
By cooperating with the Lead Manager, the Registrar to Issues a bank or even a similar firm normally undertakes the following record-keeping activities:
The application money is not collected directly from the investors by the issuing firm. The issuing business appoints Bankers to the Issue with the assistance of the Lead Manager & Registrar of the Issue. Bankers to the Issue open a separate bank account to receive application funds from investors through its branches.
When the share issue process begins, the company's management, in collaboration with merchant bankers, appoints brokers to the issue. A broker is a stock exchange member who has a wide network of investors. Merchant bankers employ a reputable broker to secure the selling of shares to the general public.
A public problem is marketed with the help of an advertising agency. Advertisements are placed in both electronic and print media to raise awareness of the public problem. The Road Shows are also arranged to pique the curiosity of potential investors. The advertisement emphasises the date of opening & closing of the subscription list, the number of shares offered, the price band, and the basis of allotment.
Following the designation of different competent authorities and the completion of the prospectus, listing agreement, applications, and so on, the following procedures are taken in the public offering of shares:
The Lead Manager is responsible for arranging for the final prospectus to be filed with SEBI, the Registrar of Companies, and the Stock Exchange.
A press conference/investor meeting is held to announce the public offering of shares.
The Registrar of the Issue shall arrange for the distribution of application forms to bankers, brokers, and others.
The subscription list is maintained available for a minimum of three days and a maximum of seven days, during which time the public can apply for the public issuance of shares. The bankers receive the application together with the money and notify the Registrar on a daily basis of the progress of the response.
The corporation uses the media to notify the end of the public issue. Following the closing, the bankers submit the applications to the Registrar of the Issue.
The Registrar allots shares in cooperation with the issuing company, SEBI, and stock exchanges. The allocation is made to the investors' Demat Accounts, and the excess application money is refunded.
Shares are finally listed on stock exchanges where a listing agreement has been reached, and the business tells the SEBI about the listing. Following that, normal stock trading begins.
If the shares in an initial public offering (IPO) are issued at a predetermined price, the issue is known as a fixed price issue. This is the 2nd most popular method of launching an initial public offering. The issuer must provide reasons and appropriate justification for the price established in the offer document.
In general, corporations use fixed pricing issues only when the management believes that a reasonable price can be determined among them without testing in the market, as in the case of book building.
It is a procedure used in initial public offerings (IPOs) for efficient price discovery and determining the number of shares to be offered. The initial price at which shares would be offered is unknown. It will be revealed only when the book creation process is completed.
It is a frequent strategy for selling new products in a number of industrialised countries. In the book-building process, the market determines the pricing rather than the firm.
In the end, we can understand that the public issue has several norms, advantages and disadvantages as its part but the most important fact to know about it is, the public issue advantages and disadvantages.
Without knowing the advantages and disadvantages, opting for the public issue will not be the right choice to choose. The above-mentioned details not only contain the concept of public issue advantages and disadvantages but also the other norms.
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