Bachelor of Business Administration
BB0022 Capital and Money Market
Name: Hemant Kumar
Roll No: 511116559
Q 1: Explain the securities market and discuss the methods of underwriting the securities.
Answer: Securities market is an economic institute, which within takes place the sale and purchase transactions of securities between subjects of the economy, on the base of demand and supply. Also we can say that securities market is a system of interconnection between all participants (professional and nonprofessional) that provides effective conditions to buy and sell securities, and also to attract new capital by means of issuance new security to transfer real asset into financial asset, to invest money for short or long term periods with the aim of deriving profit, commercial function to derive profit from operation on this market, price determination (demand and supply balancing, the continuous process of prices movements guarantees to state correct price for each security so the market corrects mispriced securities), informative function (market provides all participants with market information about participants and traded instruments), regulation function (securities market creates the rules of trade, contention regulation, priorities determination)
METHODS OF UNDERWRITING THE SECURITIES:
1. LETTER OF INTENT
A letter of intent (LOI) is an agreement to proceed with the registration of securities with the Securities and Exchange Commission (SEC). The contents of the LOI state, as clearly as possible, the duties and obligations of the parties are as follows:
a. A nonbinding letter of intent requires a good-faith deposit from the company to demonstrate its financial capacity to complete the costly and cumbersome process of going public. In a binding LOI the entrepreneur is responsible for payment of certain costs whether or not the securities are actually issued.
b. LOIs contains an adverse-change clause, allowing the underwriter to pull out if there are material adverse changes in the financial position of the company or in business conditions.
2. UNDERWRITING AGREEMENT
The underwriting agreement finalizes the terms of the underwriting contract, except for the final price of the security to be offered and the amount of the security to be offered. The parties usually sign this agreement a day or two before the actual public offering.
For a firm commitment, the underwriting may include a "green shoe" provision, which is an allotment option of up to 15 percent of additional stock for the account of the underwriter. When a public offering goes particularly well, the underwriter executes the green shoe to increase the amount of securities for sale. Underwriting on a best-efforts basis uses a number of variable options to conclude the offering. An all-or-none offering will be canceled if all the securities are not sold. A mini-max offering establishes acceptable upper and lower ranges.
3. UNDERWRITING COSTS
Underwriters are paid commissions, securities, or through a combination of fees and securities. In a firm commitment the price underwriters pay the company for the securities is expected to be less than the price offered to the public. This "underwriter's spread" compensates the underwriter for conducting the offering. The spread averages 10 percent or less and is dependent on the anticipated complexity and size of the offering. The maximum spread allowed by the National Association of Securities Dealers (NASD) is 10 percent. There are certain "non accountable expenses" that cannot be construed as an integral part of the offering, but which were necessitated by the preliminary steps to bring the company to the registration process. The NASD is the only exchange that requires an accounting of these expenses.