Chapter 5 - Issue of shares Flashcards
Distinguish between:
Being listed on Stock Exchange
Being quoted on the Stock Exchange
- Listing is used to refer to being a member of the Stock Exchange main market
- Quotation can be applied to companies that are either a member of the main market or the alternative investment market (AIM). AIM has less stringent requirements for admission.
Give reasons why a company might seek a Stock Exchange Quotation
• To raise capital for the company
• To make it easier for the company to raise capital in the future
• To provide an exit route to shareholders
• To make shares more marketable and easier to value. In particular:
o Helps with tax calcualtions
o Shares are more useful as backing for shareholder borrowing
o Shares are a more effective offering as part of a takeover bid
o Employee share schemes are more attractive
List 5 methods of obtaining a quotation
- Offer for sale fixed price (most common)
- Offer for subscription
- Offer for sale by tender
- Placing
- Introduction
Describe an offer for sale at fixed price
• A predetermined number of shares (or other securities) offered to general public at a specified price through an issuing house.
• The issuing house underwrites the issue.
• The shares offered could be:
o New shares (if company is seeking a quotation to raise money)
o Existing shares (if purpose of quotation is to be an exit route for the existing owners)
• The issuing house also acts as a professional adviser to the company, overseeing the whole process and co-ordinating the activities of the other professional advisers.
Set out the steps in an offer for sale process
• Try to ensure that pre-launch press comments are favourable
• Change the company documentation to make the company a PLC
• Consider the price which should be set
• Prepare the prospectus
• At impact day:
o Set the price
o Launch prospectus (in at least one national newspaper)
• Application received
• If oversubscribed, determine the basis of allocation
• If undersubscribed, underwriters take up the remaining shares
• Post letters of acceptance and refund cheques
• Trading on Stock Exchange starts the next day
• Issue share certificates (in many countries electronic ‘paperless’ share registration has replaced the traditional physical share certificate.)
Describe an offer for sale by tender
An offer for sale by tender is similar to offer for sale at fixed price but issuing house invites applicants to submit a tender stating the number of shares they are prepared to buy and at what price they are prepared to pay.
After closing, a single strike price is determined. This may be:
• The highest price at which all stock can be allocated
• A lower strike price if this is necessary to ensure a sufficient spread of shareholders
All applicants who bid at least as much as the strike price will have their applications accepted. Applicants who bid less than the strike price will have their applications rejected. All successful applicants will pay the strike price, regardless of how much they have bid.
Describe an offer for subscription
Similar to offer for sale by tender and fixed price except whole issue is not underwritten.
The issuing company sells shares directly to the public and bears the risk of undersubscription.
Sometimes offer for subscription are used for unusual issues and launches of investment trusts where it is uncertain whether investors will want to buy shares, and how many can be sold.
An issuing house will still be employed as an adviser to the issue.
Describe placings (or selective marketing)
• Firstly buys the securities from the company
• Then offers them to a small number of its institutional clients
No public applications are invited.
Placings are a simple and cheap method of making small issues.
Describe introductions
Introductions do not involve the sale of any shares. They simply mean that the existing shares will in future be quoted on the Stock Exchange.
For a full listing, 25% of shares may be in public hands. The Stock Exchange only allows introductions in cases where this requirement is already met.
List the steps in the underwriting process
- Company arranges to sell all the shares at an agreed price to the issuing house (and pays a fee to the issuing house).
- The issuing house will probably not want to accept all the risk and so will arrange a sub-underwriting (and pay them).
- The main risk faced by the underwriters is that an unexpected event (adverse to the share price) occurs between accepting the underwriting and the closing date for applications.
- Either:
a. Fully subscribed issue: The issuing house and sub underwriters will have made an underwriting profit equal to their underwriting commission less any expenses.
b. Partly subscribed issue: The underwriters and sub-underwriters get their fee/commission, but they also need to take up all the shares that have not been purchased.
Explain what a rights issue is and describe the main effects of a successful rights issue.
A rights issue is an offer by a company to sell further shares, at a given price, to existing shareholders in proportion to their existing holdings.
The purpose is to raise money for the company.
The main effects of a successful rights issue are:
• New shares created
• New money raised for the company
• Total value of the company should be increased by the extra money raised
• The price per share will fall
Give a formula for the share price after a rights issue.
P' = [M x (original share price) + N x (rights issue share price)] / New total number of shares P' = [Original market capitalisation + extra value] / new total number of shares
Companies avoid the need to have a rights issue underwritten by setting an offer price that is very low compared to the market price, ie issuing at a deep discount.
List 3 possible problems with this approach.
- Can increase CGT liabilities for those investors who choose to sell their rights.
- Companies are not allowed to issue shares below their par value which places an upper bound on the size of the discount.
- Can be interpreted by investors as a sign of weakness (inability to obtain underwriting).
Explain what a scrip issue is and describe the main effects of a successful scrip issue.
A scrip issue is an issue of free shares by a company to all ordinary shareholders in proportion to their existing holding. No payment is required from the shareholders.
The main effects of a successful scrip issue are:
• New shares created
• No money raised
• Value of whole company is unchanged (but price per share should fall in proportion to increase in number of shares)
• Total value of each investor’s holding should be unchanged
• Shareholder’s reserves in the statement of financial position are converted into share capital
List 6 possible reasons for a scrip issue
List 6 possible reasons for a scrip issue
