Following factors shall be considered by the lead manager before making the choice of an appropriate public issue proposal:
The basic factor that must be considered by the lead manager is the promoters and the management viz., their education, business / technical expertise, financial strength and reputation etc. The success of a company is greatly dependent on this factor. The issue will be well received in the market if it is from a company with a successful track record. Equally important are the success profiles of the group/associate concerns or the holding company. If the group/associate concerns are financially strong enough, they can also lend support to the public offering. The merchant banker must investigate whether there is any pending litigation, defaults and disputes of the promoters for the company with any person, bank or institution before picking a public issue proposal.
The track record of the company and the quality of its management, the industry in which it operates the product mix of the company and business prospects of the proposed to be manufactured must be considered by the merchant banker. The financial health of the company can be gauged by probing the existing capital structure, debt equity ratio, level of gearing, nature and extent of various resources/provisions etc.
Aspects such as whether an outside financial institution appraises the project, whether there is participation of institutions in the financing of the project and the level of financial participation are looked into by the lead manager. The fact the projects is appraised and funded by an institution certifies the viability of he project top a greater extent.
Capital Market Profile:
The lead manager should consider the conditions that are prevailing in the capital market. The share price movement of the group / associate concerns whose shares are already listed on stock exchanges should be analyzed. It would be beneficial to make a comparison of such price movements with that of other similar companies.
1) Investor outlook towards other companies in similar industries, which are already listed
2) Investor’s response to previous public issues of similar companies.
3) Divided payment schedule of the company and its associate concerns
4) Cost benefit analysis of the issue
Pricing of Issues:
While fixing an appropriate price, the relevant price, the relevant guidelines for capital issues given by SEBI from time to time must be considered. Companies, themselves in consultation with the merchant bankers, do the pricing of issues. While fixing a price for the security issue, the following factors should be considered:
1) Qualitative factors, which include the prospects of the industry, track record of the promoters, the competitive advantage the company has in making the best use of the business opportunities and growth of the company as compared to the industry etc.
2) Quantitative factors, which include the earnings per share, book value, the average market price for 2 or 3 years, divided payment record, the profit margin, the composite industry price earnings ratio and the future prospects of the company etc.
With the abolition of the office of the Controller of capital Issues, companies can adopt free pricing.
The CCI model:
Although the CCI was abolished long ago, it would be interesting to discuss the mode of fixing the price for the issues. The fair value of the share is calculated on the basis of the NAV of the share, Profit Earning Capacity Value and “Average market Price”.
A. A Net Asset value
NAV = Total Net Worth + Total number of shares outstanding
Total Net Worth = [Equity capital + Free Reserves – Contingent Liability] + Fresh capital
B. Profit Earning Capacity Value (PEVC)
Share price = EPS X 100 / capitalization rate
EPS = [Average Profit before tax – Provision for taxation + Contribution to profits by fresh issue] + Total number of shares outstanding
C. Average Market Price
In this method, the fair price of the share is determined as an average of the NAV and PECV. The average market is kept in the background, as a relevant factor while settling the fair value.
Safety Net scheme:
This is the most popular method of pricing public issue used by a number of companies in India. The method aims at affording a measure of protection while fixing the price. Some companies, while making issues at a premium, use this scheme. Under this scheme, the merchant bankers provide a buy back facility to the individual investor, in case the price of the share goes below the issue price after listing. This arrangement is of great help to the investors as it reduces losses. In this connection, SEBI has laid down guidelines for the safety net scheme.