Methods for Marketing of Securities

Posted by Robert on September 26, 2011 Marketing of securities is a process of approaching a large number of investors, both individual and institutional, to invest their savings and surpluses in the shares or debentures of a company. It is a highly specialised activity that involves a lot of skill and experience. In case a company wants to approach only a limited number of institutional or other investors, there is hardly any need to take help of the specialised agencies or intermediaries operating in the field of marketing of securities. But, if a company is seeking to approach widely scattered large number of small investors, it has to arrange for advertisements, press conferences, etc. to persuade investors and further there is not certainty of sale of the total number of securities. Thus, in such a case, there is a need to take help of the specialised agencies or intermediaries such as underwriters, brokers, investment bankers, etc. There are a number of methods/techniques for marketing of securities. A company may adopt any one or more than one of these methods. The various methods for marketing of securities are as below : 1. Public Issue by prospectus, which includes :

Direct selling Sale through Investment Intermediaries. Underwritten placement

2. Offer for sale 3. Placement method 4. Tender Method 5. Over-the Counter Placement 6. Rights Issue 7. Bonus Issue Public Issue by Prospectus This is the most popular method of raising capital or marketing of securities (shares and debentures) for the public limited companies. (Under this method, a public limited company issues a document, called prospectus, containing information about the company and inviting public to apply for shares or debentures of the company. If the promoters are confident of raising the required funds through private contacts, it may issue a statement in lieu of prospectus. A prospectus gives details about the company and proposed issue to the prospective investors. The company ties to convince the public that it offers best opportunity for their investment. The company as well as the directors signing this document are personally liable for any false statement or misrepresentation of material facts in the prospectus. A company may issue a prospectus inviting applications direct from the public or through some intermediaries such as brokers, investment bankers and underwriters, etc. Thus, this methods includes (a) Direct selling of securities by the company, (b) Sale through investment intermediaries, and (c) Underwritten placement.

Direct selling of securities can be successfully employed if the company wants to approach only a small number of institutional or other large investors. A company may convince such investors through conferences, personal meetings, advertisements, etc. This method is economical as it saves expenses and commission or profit of the intermediaries. But if a company wants to approach a large number of small investors, direct selling of securities may not be a sufficient-method. Further, there is no certainty about the success in raising funds through sale of securities in direct selling. To remove the difficulties of direct selling, a company may take help of intermediaries and specialised agencies in marketing of its securities. There are brokers, merchant bankers and others who provide specialised services and help company in selling its securities on commission basis. These agencies may not guarantee the issue of securities or invest their own funds in purchase of securities but attract investors for the company. These intermediaries charge commission for the securities issued through them. The prestige of these intermediaries also attracts investors to purchase securities of a company. As direct selling as well as marketing of securities through brokers, etc. does not provide any guarantee to the issuing company regarding the sale of securities, a company is not certain about the procurement of funds. To remove this drawback, a company may approach a firm of underwriters who guarantee the issue of securities for a fixed commission payable to them. In case a company is not able to sell its securities in full, the underwriters purchase the unsubscribed securities out of their own funds. There are a number of financial institutions, commercial banks, life insurance companies, etc., as well as a number of private firms which provide underwriting facilities. An underwritten placement is a safer way of marketing securities and investors in advanced countries are influenced more by the prestige of the underwriting agencies than by the prestige of issuing company. 2. Offer for Sale This method of marketing securities is generally adopted in case of large issues by companies. Under this method, the issuing companies sell or agrees to sell the securities for sale to certain issue houses or the specialised financial institutions at a fixed price., The issue house or the financial institutions then issue advertisements making offer for sa\e of such securities at a price higher than the price at which they obtain the securities from the issuing company. The objective of this method is to ensure success in sale of securities. The issue houses may retain the securities for sometime and may not offer the entire stock in one lot. This avoids glut of such securities in the market. The main advantages of this method include surety of success of issues and saving in costs of new issues. But at the same time, the issue houses make considerable profits by charging higher prices. 3. Placement Method Under this method the securities are sold by the issuing companies to certain intermediaries such as brokers, issue houses or financial institutions, etc. so as to be privately placed to their clients and associates. The issuing company may also use their service for private placement to certain individuals or institutions without having sold such securities to the intermediaries. Usually, the companies reserve certain number of securities for private placement. The Securities and Exchange Board of India has laid down certain restrictions on the reservation of securities in any public issues. The maximum permissible allotment through reservation is restricted to 10% for permanent employees, 10% for shareholders of promoting companies,

20% for Indian mutual funds, 24% for foreign institutional investors and 20% for Indian and multilateral development-financial institutions. The main advantage of this method is that it is very cheap way of marketing securities as it saves in issuing costs but the securities are sold to only a selected group of investors. 4. Tender Method Under the tender method of marketing the securities, the issue price is not pre determined like the other usual methods of public issues. The company announces the public issue without indicating the issue price inviting bids from various interested parties. The parties participating in the tender submit their maximum offers indicating the maximum price they are willing to pay as well as the number of shares they are interested to buy. The company, after receiving various offers, may decide about the price in such a manner that the entire issue is fairly subscribed or sold to the parties participating in the tender. 5. Over the Counter Placement It is a recent development in the Indian securities market. The Over the Counter Exchange began its operations as a second tier bourse only in 1992. It permits smaller companies to raise funds. A company may place its issue through OTC Exchange. The procedure involved under this method is that the company wishing to raise capital through OTC Exchange appoints a member of the OTCEI as sponsor. The sponsor appraises the project and values the shares of the company. The shares proposed to be offered for public trading by the company are placed by the sponsor with itself and other members and dealers of the OTCEI. The sponsor ensures the success of the issue even if it has to subscribe to all the shares by itself. The OTCEI members and dealers operate counters to facilitate trading with investing public. The SEBI has issued certain guidelines for issue of shares through OTC exchange of India. This method of marketing securities is very suitable for smaller companies. 6. Rights Issue Rights issue is an invitation to the existing shareholders to subscribe for further shares to be issued by a company. A right simply means an option to buy certain securities at a certain privileged price within a certain specified period. Section 81 of the Companies Act, 1956 has provided a pre-pemptive to the existing shareholders of a company to purchase shares in further issues of the company. In recent years, many companies are coming up with further issues of capital and the practice of issuing securities to the existing investors of the company has increased over a period of time. In terms of value, rights issues account for 10 to 25 per cent of the new issues. 7. Bonus Issue A company having free reserves built out of genuine profits or share premium collected in cash may issue bonus shares to its existing shareholders Usually, the companies which have huge accumulated profits and reserves b