Security issue process

Before issuing security the board of director of the firm decides how much fund to be raised. It also decides whether to raise funds from private placement or public sale. In private placement, fund can be raised promptly with lower cost. If the issue is big, the public sale can also be made at lower cost.

If the issue has to be sold publicly the firm should select investment bank. An individual investment bank alone may take the responsible of issue and sale and distribute of the security. If the issue is big, many investment banks make syndicate and take the responsibility of issue jointly.

The investment bank receives the new security at low price as far as possible and earns profit by selling to other investors. The investment bank may directly purchase security with the issuing firm, or may only guarantee the fixed price of the security. But in both situations, the investment bank bears the risks of profit or loss that occur in security market.

After selecting the investment bank, the bank and the firm jointly make final decision regarding the basis, maturity, type, interest rate of the security and the commission of the investment bank etc. the commission charged by the investment bank may be a great financial cost particularly in small issue. Most of the firms have the rights to negotiate the commission charged by the investment bank. It is know as negotiated issue. But the public utilities select the investment bank by competitive bids. The investment bank which provides cheapest service is selected in it. The bid reduces the profit of an investment bank.

The delay in selling the security is regarded as the great enemy of the investment bank. It is because, he has to get addition fund to keep the security not sold and has also additional risk of fall in price. In case of adverse change in the price there is decline in the prestige of the investment banking business is risky and highly competitive due to various uncertainties.

The security can be sold through underwriting or on best efforts basis. In underwriting the investment bank sells the security to the ultimate investor by buying with the firm. Since the issuer already receives money in it, he needs not worry at all. The bank bears all risk as an underwriter or a guaranteer.

In best effort basis, the investment bank does not make guarantee of sale. He just makes maximum effort to sale the security. In case of no sale, he returns to the firm itself. The bank receives commission on the basis of amount sale.

After registration on the concerned agency by the investment bank it makes the prospectus available to the potential investors. The prospectus contains firm’s history, management, financial position, feature of security, promoters, share to be allotted the promoters and outsiders.

In final, the security is sold to the general public. The formal public sale is called ‘opening the book’. The sales start after opening the books. In case of high demand, the book is immediately closed and an application given more than requirement is announced. It is called the issue ‘flayed out of the windows.’ If the issue is not sold, time is increased and the book is kept open.