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Basics of Stock Market - 4

Let us see how the shares are issued and at what price.

At what price a Share is issued?

Every share will have a Face Value (FV). Normally it will be Rs.10. Now every company decides their own (Rs.5, Rs.2, Re.1, Rs.100). For example, if the Share Capital of a company is Rs.100,00,000, it will be either

  • 10,00,000 shares of Rs.10 each
  • 100,00,000 shares of Re.1 each
  • 20,00,000 shares of Rs.5 each

So the face value will decide how many number of shares to be issued for a given share capital.

  • If a Share is issued at that Face Value, then it is said to be issued at PAR.
  • If a Share with a Face Value of Rs.10 is issued at Rs.15, then it is issued at a Premium of Rs.5 per share (Rs.10 + Rs.5)
  • If a share with a Face Value of Rs.10 is issued at Rs.8, then it is issued at Discount of Rs.2 per share (Rs.10 - Rs.2).

To summarise, if a share is issued above its Face Value, it is an issue at PREMIUM and if issued at the face value then it is an issue at PAR and if issued below the Face Value, then it is issued at a DISCOUNT. The Adani Power corporation issue, which was priced at Rs.100 is a issue at a premium of Rs.90 (Rs.10+Rs.90). The issue price is depends on various parameters and also the demand & supply.

Okay..let us now see what are the types of Issue.

  1. Public Offer / Issue
  2. Rights Issue
  3. Bonus Issue

Again, there are 2 types of public issues:

(a) Initial Public Offer and (b) Follow-on-Public Offer

Initial Public Offer (IPO)

As the name says, it is the first ever issue of shares to the public. For example, Adani Power issue of share is an IPO. It can be either an issue of fresh shares or offer of existing shares of Promoters to the publice (atleast 25%) for the purpose of getting the shares listed in a stock exchange. As discussed earlier, listing of shares in a stock exchange gives liquidity to the holder of the shares.

Follow-on-Public Offer (FPO)

Any public offer after the IPO is an FPO. Refer Rights Issue below.

Rights Issue

This further issue of shares (after IPO or FPO) should be first made to the existing shareholders and only if the shareholders agree in a General Meeting (Annual General Meeting or Extraordinary General Meeting), then the shares can be issued to the Public. Since this is a right of the existing shareholder, it is called Rights Issue. If the shareholders decide to forego their rights and issue the shares to the Public, it will be an FPO.

Bonus Issue

This is an issue is only to the existing shareholders. As the name says, it is a Bonus (reward) to the shareholders. There is no need to pay for this share. The Reserves of the company (current year or previous years Profits, any share premium collected during the issue of shares) are capitalised and given to the existing shareholders. How it is done? Normally they look at the amount of Reserve that are available for capitalisation and the number of shares outstanding (that is the number of shares issued so far). For example, if the company is having Rs.1,00,00,000 in reserves , has 10,000 shares outstanding and want to capitalise the entire reserves, it will divide the Reserve amount by the Face Value (will explain why face value later). Let us take the face value as Rs.10 per share. Then, it is Rs.1,00,00,000 / Rs.10 = 10,00,000 shares. It is already having 10,000 shares outstanding. So each share will be eligible for 100 shares (10,00,000 / 10,000). That is every existing share will be getting 100 share as Bonus. In sharemarket parlance, they say the Bonus issue is 100:1 (that is 100 bonus shares for every 1 share held). Now let us see why the Bonus share is issued at Par? From where are we issuing the Bonus Shares? from the reserves (Profits & Share Premium). If we issue the Bonus Shares at Premium, it is nothing but transfering the Share Premium to Share Premium itself. That is why the Bonus Shares are issued at PAR (face value) and has no cost to the existing shareholder.

Apart from the above issues, there are other ways of issuing Shares for raising capital. It is called Private Placement (now you can see lot of Qualifies Institutional Placement - QIP in the news). For more details on QIP - CLICK HERE

Who is SEBI?

The Securities and Exchange Board of India (SEBI) is the regulatory authority in India. SEBI was created for

  • protecting the interests of investors
  • promoting the development of the securities market; and
  • regulating the securities market.
SEBI's role is the regulate/control the share market and all the listed companies are governed by SEBI.

Let us get to the fundamentals of the share market in the next blog. Happy weekend.

Cheers,

Gopal

1 comments:

sumi on Sep 19, 2009, 9:39:00 AM said...

Quite a nice style of teaching basics.

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