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ZULFIQAR HASAN 2
Contents
Financing for a corporation: Issuing Debt instrument and issuing Equity instrument; Basic procedure of Public Issue, General process of listing with DSE through IPO; Particulars for Consent to Issue of IPO Bangladesh; Documents Along with the Application; Corporate Securities as Contingent Claims on Total Firm Value; Corporate Securities as Contingent Claims on Total Firm Value; Risk Involvement in a Stock; How Stocks are Traded; Analysis of IPO Application form; Trading Markets in DSE, Categories of Shares in DSE, Numerical Examples
ZULFIQAR HASAN 3
The Basic Procedure of Public Issue1. Management gets the approval of the Board of
Directors.2. The firm prepares and files a registration
statement with the SEC.3. The SEC studies the registration statement
during the waiting period.4. The firm prepares and files an amended
registration statement with the SEC.5. If everything is copasetic with the SEC, a price
is set and a full-fledged selling effort gets underway.
ZULFIQAR HASAN 4
General process of listing with DSE through IPO
1. Appoint Issue Manager: Every company intending to enlist its securities to DSE by issuing its securities through IPO is required to appoint Issue Manager to proceed with the listing process of the company in the Exchange;
2. Submitting Draft Proposal to SEC: The Issue Manager prepares the draft prospectus of the company as per Public Issue Rules of SEC and submit the same to the SEC and the Exchange(s) for necessary approval;
3. Agreement With The Underwriter(s) and Bankers: The Issuer is also required to make agreement with the Underwriter(s) and Bankers to the Issue for IPO purpose;
4. Examining and Evaluating The Prospectus: After receiving the draft prospectus, the Exchange examine and evaluate overall performance as well as financial features of the company which may have short term and long term impact on the market;
5. Sending Opinion To SEC: The Exchange send its opinion to SEC within 15 days of receipt of draft prospectus for SEC's consideration;
The unlisted companies are required to complete certain procedures to get listing at DSE (Dhaka Stock Exchange). The present process/way of listing, in short, may describe as follows:
ZULFIQAR HASAN 5
General process of listing with DSE through IPO
6. SEC’s Consent: After proper scrutiny, SEC gives it consent for floating IPO as per Public Issue Rule;
7. File Application To The Exchange: Having consent from SEC, the Issuer is required to file application to the Exchange for listing its securities within 5 days of issuance of its prospectus;
8. Subscription & Distribution Of Allotment/Refund: On successful subscription, the company is required to complete distribution of allotment/refund warrants within 42 days of closing of subscription;
9. Decision of the Board of DSE: After 100% distribution of shares/refund warrants and compliance of other requirements, the application for listing of the Issuer is placed to the Exchange's meeting for necessary decision of the Board of DSE;
10. Duration: The Board of DSE takes the decision regarding listing/non-listing of the company which must be completed within 75 days from the closure of the subscription.
ZULFIQAR HASAN 6
Particulars for Consent to Issue of IPO Bangladesh
1. A Company intending to issue capital in Bangladesh shall make an application to the Securities and Exchange Commission for consent.
2. The application shall contain the following particulars, namely:-
a) Name of the Company;b) Address of the registered office;c) Telephone number;d) Fax number and email number, if any;e) Date of incorporation;f) Date of Commencement of business;g) Authorized capital;h) Paid up capital;i) Amount of capital to be issuedj) Face value of shares; andk) Period within which capital to be issued.
ZULFIQAR HASAN 7
Documents Along with the Application
a. A certificate copy of memorandumb. A certificate copy of articles of associationc. Certified copy of certificate of incorporation and d. Certificate of commencement of businesse. List of directorsf. Audited/provisional financial statementg. Statement relating to purpose of raising capitalh. [Copy of resolution of the board of directors deciding
to raise capital, attested by the managing director, in case of an existing company ]
i. Certificate of Bankerj. Vendor’s agreementk. Short description of the business
ZULFIQAR HASAN 8
Corporate Securities as Contingent Claims on Total Firm Value
• The basic feature of a debt is that it is a promise by the borrowing firm to repay a fixed dollar amount of by a certain date.
• The shareholder’s claim on firm value is the residual amount that remains after the debtholders are paid.
• If the value of the firm is less than the amount promised to the debtholders, the shareholders get nothing.
ZULFIQAR HASAN 9
Reasons for Issuing Stocks
1. To Raise Capital2. To Keep Profits and earnings to the
owners of the company3. To extend the market share4. To create the good will5. To avoid the borrowings6. To avoid the repayments7. To make familiar about the company and
the products/services8. To get the tax benefits
ZULFIQAR HASAN 10
Risk Involvement in a Stock:
Shareholder view points• No guaranty of return
percentage• Speculations may not
always work• Market Price volatility• Chance of Loosing
money• Chance of getting no
dividend• Chance of trading in Bad
market (OTC of DSE)• Chance of degrading the
category ( from A to Z etc)
Corporations view points• Transparency bindings• More regulations• More regulatory authorities• Disclosure of sensitive
information• Show Cause and Penalty• Lost of Goodwill• Chance of facing sue• Chance of trading in Bad
market (OTC of DSE)• Chance of degrading the
category ( from A to Z etc)• Suspension of trading
securities
ZULFIQAR HASAN 11
What is right share?
• A security giving stockholders entitlement to purchase new shares issued by the corporation at a predetermined price (normally less than the current market price) in proportion to the number of shares already owned. Rights are issued only for a short period of time, after which they expire
• Right Share is a security giving stockholders entitlement to purchase new shares issued by the corporation at a predetermined price (normally less than the current market price) in proportion to the number of shares already owned. Rights are issued only for a short period of time, after which they expire
ZULFIQAR HASAN 12
Advantages of Right Share• More capital can be collected• Low cost• Controlling of the company is retained in the hands of the existing
shareholders. • The existing shareholders do not suffer on account of dilution in the
value of their holdings if fresh shares are offered to them because value of the shares is likely to fail with fresh issue.
• The expenses to be incurred, if shares are offered to the general public, are avoided.
• Images of the company is bettered when rights issues are made from time to time and existing shareholders remain satisfied.
• There is more certainty of getting capital when fresh issue of shares is made to the existing shareholders instead of to the general public.
• Directors cannot misuse the opportunity of issuing new shares to their friends and relatives at lower prices and at the same time retaining more control in their hands when right shares are issued because in rights issue shares are offered proportionately to the existing shareholders according to their existing holdings.
ZULFIQAR HASAN 13
Open Discussion: How Stocks Trade?
1. DSE Trading Market
1. Public Market
2. Spot Market
3. Block/Odd lot market
4. OTC Market
2. Offering and Issuing IPOs in Bangladesh
1. Private Placement
2. Pre IPO offering
3. Book Building Methods
4. Direct Listing
Describeindetails
ZULFIQAR HASAN 14
How Stocks Trade:• Most stocks are traded on exchange, which are places where
buyers and sellers meet and decide on a price. Some exchange are physical locations where transactions are carried out on a trading floor. Two trading floor are located in Bangladesh, DSE which is located in Dhaka, CSE is located in Chittagong. Chittagong stock exchange is expanded to compose of a network of computers where trades can be made electronically. We should distinguish between the "primary" and "secondary" market. The primary market is the first phase of stock where securities created before trading at the floor which is called IPO. In the secondary market, investors trade previously issued securities without the involvement of the issuing companies. The secondary market is what people are referring to when they talk about "the stock market."
ZULFIQAR HASAN 15
What causes stock prices to change• Stock prices change everyday by market forces. By this
we mean that share prices change because of supply and demand. Any single time, if more people want to buy a stock (demand) than sell it (supply), then the price moves up. Conversely, if more people want to sell a stock than buy it, which is a greater supply than demand, then the price falls.
• Understanding supply and demand is pretty much easy. What is difficult to comprehend is what makes people like a particular stock and dislike another stock. This comes down to figuring out what news is positive for a company and what news is negative. There are many answers to this problem and just about any investor you ask has their own ideas and strategies.
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IPO Application Form
ZULFIQAR HASAN 17
Filling IPO Application form
Dear Sir,I/we apply for and request you to allot me/us the…50… number of shares and I/we agree to accept the same or any smaller number that may be allotted to me/us upon terms of the Company’s approved Prospectus and subject to the Memorandum and Articles of Association of the Company. Further, I/we authorize you to place my/our name(s) on the Register of Member(s) of the Company and deposit the said shares to my/our Beneficiary Owner (BO) account and/or a crossed (A/C Payee Only) cheque in respect of any application money refundable by post/courier at my/our risk to the first applicant’s address stated below:1. No. of ordinary shares…....500.......of Tk. 100 each at par2. Amount Tk. (in figure) .... 5000/=.... Taka (in words) ......FIVE THOUSAND....... only deposited vide Cash/Cheque/Draft/Pay Order No................. Date....... ……….on …………Bank.............. ……….Branch……………………………………
ZULFIQAR HASAN 18
3. (BO) account number 1 2 0 4 1 4 0 0 1 8 1 4 3 5 4 0
a) Sole/First Applicant: Mr./Mrs./Ms. KAZI ZULFIQAR HASAN
Father’s/Husband’s Name : LATE MOSLEM UDDIN
Mother’s Name: LUTFA BEGUM
Postal Address : 5/C MAYAKANON, SABUJBAG, BASHABO, DHAKA-1214
Telephone No. (if any): 01712546825
Occupation : UNIVERSITY TEACHING Nationality: BANGLADESHI
For refund warrant: (Application will not be treated as valid if anyone uses a non-scheduled bank. To avoid this complication, investors are requested not to use the name of any non-scheduled bank) Please write the correct and full name of bank and branch.
Applicant’s Bank A/C No. : 10112100074818
Name of the Bank : THE PREMIER BANK LTD Branch: DILKUSHA
b) Second Applicant: Mr./Mrs./Ms.
Father’s/Husband’s Name: Mother’s Name: Postal Address:
Occupation: Contact no: Nationality:
6. I/we hereby declare that I/we have read the Prospectus of R.N. Spxnning Mills Limited , and have willingly subscribed for…50…. no. of Shares of Tk. 100.00 each7. Specimen Signature(s):
4. I/we agree to fully abide by the instructions given herein.5. Particulars of Applicant(s):
ZULFIQAR HASAN 19
Instructions1. As per provision of Depository Act, 1999 and regulations made there under shares will only be
issued in dematerialized condition. Please mention your BO (Beneficiary Owner) account number in the application form. If you do not mention your valid BO (Beneficiary Owner) account, your application will be treated as invalid.
2. All information must be typed or written in full (in Block letters) in English or in Bengali and must not be abbreviated.
3. Application must be made on the Company’s printed form/photocopy or typed copy/hand written form thereof.
4. Application must not be for less than 500 ordinary shares and must be for a multiple of 500 ordinary shares. Any application not meeting this criterion will not be considered for allotment purpose.
5. Remittance for the full amount of the Shares must accompany each application and must be forwarded to any of the Bankers to the Issue. Remittance should be in the form of Cash/Cheque/Bank Draft/Pay Order payable to one of the Bankers to the Issue favouring A/C “R.N. Spxnning Mills Limited” and crossed “A/C Payee only” and must be drawn on a Bank in the same town as the Bank to which the application form has been sent.
6. In the case of joint application form, the allotment letter will be dispatched to the person whose name appears first on this application Form and where any amount is refundable in whole or in part the same will be refunded by Account Payee Cheque by post/courier service to the person named first on this application form in the manner prescribed in the Prospectus.
7. Joint application form for more than two persons will not be accepted. In case of joint application, each party must sign the application form.
8. Application must be in full name of individuals or companies or societies or trusts and not in the name of firms, minors or persons of unsound mind. Application from financial and market intermediary companies and Private Company must be accompanied by Memorandum and Articles of Association and Certificate of Incorporation.
ZULFIQAR HASAN 20
Instructions9. An applicant can not submit more than two applications, one in his/her own name and another
jointly with another person. In case an applicant makes more than two applications, all applications will be treated as invalid and will not be considered for allotment purpose. In addition, whole or part of application money may be forfeited by the commission.
10. No receipt will be issued for the payment made with Application, but the bankers will issue a provisional acknowledgment to the Issue for Application lodged with them.
11. In the case of non-allotment of shares, the application money of unsuccessful applicant shall be refunded to the respective banks for onward deposit of the refund money into the applicant’s bank account as provided in the respective application form for subscription.
12. After completion of remittance of the fund to the respective applicant’s bank account, the issuer shall disclose the information in the news papers where the abridge version of prospectus has been published.
13. Allotment shall be made solely in accordance with the instructions of the Securities and Exchange Commission (SEC).
14. Making of any false statement in the application or supplying of incorrect information therein or suppressing any relevant information shall make the application liable to rejection and subject to forfeiture of application money. The said forfeited application money will be deposited in account specified by the Securities and Exchange Commission (SEC). This may be in addition to any other penalties as may be provided for by law.
15. Applications, which do not meet the above requirements, or Applications, which are incomplete, shall not be considered for allotment purpose.
16. The Banker’s to the Issue shall be obliged to receive the A/C Payee Cheque(s) on the closing day of the subscription.
17. No sale of securities shall be made, nor shall any money be taken from any person, in connection with such sale until 25 (twenty five) days after the prospectus has been published.
ZULFIQAR HASAN 21
Formula in This Topic
Priceon Subscripti
Fund Desired Shares New of No.
Shares New
Shares Existing Rights of No.
shares New shares Existing
Price
onSubscripti
Shares
New
PriceMarket
Current
Share
Existing
Shares of PricePriceRitht EXor
issueright after
Price
onSubscripti
Shares
New
PriceMarket
Current
Share
Existing ValueMarket New
(New) Share of
shares New shares Existing
Shares of ValueMarket New Shares of Price
PriceRitht EXor issueright after
ZULFIQAR HASAN 22
Example 01: Calculating New Number of Share
National Power wants to raise $5 million in new equity. Suppose the subscription price is set at $10 per share. How many numbers of Shares will be issued by the company?
Priceon Subscripti
Fund Desired Shares New of No.
000,500$10
50,00,000 $ Shares New of No.
Solution
ZULFIQAR HASAN 23
Example 02: Calculating the Number of Rights
Suppose the number of Old Shares of National Power Company are 10 million. It desires to issue 5 million news shares. Calculate the number of rights for getting one new shares.
Shares New
Shares Existing Rights of No.
2Rights5000000
10000000 Rights of No.
Solution
ZULFIQAR HASAN 24
Example 03: Existing Market Value and New Market ValueFollowing information are given for National Power company:
Market Price of a Share= $20, Existing number of Share = 10000000, New Shares = 5000000, Subscription Price = $10. Calculate (a) Existing Market Value and (b) New Market Value
PriceMarket
Current
Share
Existing ValueMarket Existing
Company of
Solution-a
Price
onSubscripti
Shares
New
PriceMarket
Current
Share
Existing ValueMarket New
Company of
Solution- b
$200000000 $20 10000000 ValueMarket ExistingCompany of
00$2500,00,0 500,00,000 00$2000,00,0
$10 50,00,000 $20 100,00,000 ValueMarket NewCompany of
ZULFIQAR HASAN 25
Example 04: Value of a RightFollowing information are given for National Power company:
Market Price of a Share= $20, Existing number of Share = 10000000, New Shares = 5000000, Subscription Price = $10. Calculate the value of the Right
shares New shares Existing
Price
onSubscripti
Shares
New
PriceMarket
Current
Share
Existing
Shares of PricePriceRitht EXor
issueright after
Solution
$16.67 15000000
$250000000 15000000
$50000000 $200000000
5000000 10000000
$10 5000000 $20 10000000 Shares of Price
PriceRitht EXor issueright after
Value of one right= Old price - New price =$20 - 16.67 = $3.33
ZULFIQAR HASAN 26
Example 05: Rights Offerings
Lizard King, Inc., is proposing a rights offering. Presently there are 400,000 shares outstanding at $75 each. There will be 70,000 new shares offered at $70 each.
a. What is the new market value of the company?
b. How many rights are associated with one of the new shares?
c. What is the ex-rights price?
d. What is the value of a right?
e. Why might a company have a rights offering rather than a general cash offer?
ZULFIQAR HASAN 27
Solution: Example 01- Rights Offer
d. Value of a right = $75.00 – 74.26 = $0.74e. A rights offering usually costs less, it protects the proportionate
interests of existing shareholders and also protects against under pricing.
Price
onSubscripti
Shares
New
PriceMarket
Current
Share
Existing ValueMarket
(New) Share of
34900000$
$70 70000 $75 400000 ValueMarket (New) Share of
Shares New
Shares Existing Rights of No. 5.71
70000
400000
shares New shares Existing
ValueMarket New Total Shares of Price
PriceRight EXissueright after
26.74$00007 400000
34900000$
a
b
c
ZULFIQAR HASAN 28
Practice 01: Rights Offerings
Lizard King, Inc., is proposing a rights offering. Presently there are 240,000 shares outstanding at $80 each. There will be 60,000 new shares offered at $60 each.
a. What is the new market value of the company?
b. How many rights are associated with one of the new shares?
c. What is the ex-rights price?
d. What is the value of a right?
e. Why might a company have a rights offering rather than a general cash offer?
ZULFIQAR HASAN 29
Example 06: Rights OfferingThe Clifford Corporation has announced a rights offer to raise $50 million for a new journal, the Journal of Financial Excess. This journal will review potential articles after the author pays a nonrefundable reviewing fee of $5,000 per page. The stock currently sells for $40 per share, and there are 5.2 million shares outstanding.a. What is the maximum possible subscription price? What is the
minimum?b. If the subscription price is set at $35 per share, how many
shares must be sold? How many rights will it take to buy one share?
c. What is the ex-rights price? What is the value of a right?d. Show how a shareholder with 1000 shares before the offering
and no desire (or money) to buy additional shares is not harmed by the rights offer.
ZULFIQAR HASAN 30
Solutions: Example 06…a. The maximum subscription price is the current stock price,
or $40. The minimum price is anything greater than $0.
Rights 3.641428571
52,00,000
b. 1428571
$35
0$50,000,00 Shares New of No.
Shares New
Shares Existing Rights of No.
shares New shares Existing
Price
onSubscripti
Shares
New
PriceMarket
Current
Share
Existing
Shares of PricePriceRitht EXor
issueright after
c.
92.38$
1428571 5200000
$35 1428571 $40 5200000 Shares of Price
PriceRitht EXor issueright after
Value of a right = $40 – 38.92 = $1.08
ZULFIQAR HASAN 31
Solutions: Example 06…
d. Before the offer, a shareholder will have the shares owned at the current market price, or:
Portfolio value = (1,000 shares)($40) = $40,000
After the rights offer, the share price will fall, but the shareholder will also hold the rights, so:
Portfolio value = (1,000 shares)($38.92) + (1,000 rights)($1.08) = $40,000
ZULFIQAR HASAN 32
Example 07: Flotation Costs
The St. Anger corporation needs to raise $25 million to finance its expansion into new markets. The company will sell new shares of equity via a general cash offering to raise the needed funds. If the offer price is $35 per share and the company’s underwriters charge an 8 percent spread, how many shares need to be sold?
If the SEC filing fee and associated administrative expenses of the offering are $900000, how many shares to be sold?
ZULFIQAR HASAN 33
Solution: Example 07a. Required total proceeds from sale.
X(1-FCR) = NF
=> X(1 – .08) = $25M X = $27,173,913 Number of shares offered = $27,173,913/$35 = 776,398
Here, X = required sale proceedsFCR = Floatation Cost RateNF = Needed Funds
b. This is basically the same as the previous problem, except we need to include the $900,000 of expenses in the amount the company needs to raise, so:
X(1 – .08) = $25.9M
X = $28,152,174 required total proceeds from sale.
Number of shares offered = $28,152,174/$35 = 804,348
