Semester test 2• Wednesday 21 May 2014• Scope:

• Learning area 3 (Chapter 3 – UK material, lectures 1 & 2) also the South African presentations for lectures 3a, 3b & 4

• Learning areas 7 (Chapter 10), 8 (Chapter 11), 9 (Chapters 12 & 13)

• Time: 17:30 • Venue: IT 4-1 (Surnames A- Ma)

IT 4-5 (Surnames Mb – Z)• Total: 40 marks• Duration: 60 minutes

LEARNING AREA 2Chapter 6: Issue of shares

What should you be able to do?

• Describe the reasons for listing• Describe and apply the different methods for obtaining a

quotation (to list). • Describe the different issues to existing shareholders

(right issue and scrip issue)• Describe the role of underwriting the issue of securities

Introduction p2

2 Types of Transactions:• New issues / primary market where borrower

(company/government) raises money by selling securities to lenders (pension funds / life offices)

• Secondary market transactions where 1 investor sells security on to another investor (has a useful economic purpose – shareholders could dispose of shares in market)

Structure of chapter:• Section 1: Obtaining a stock market quotation • Section 2: Issues made by companies already quoted

Obtaining a stock exchange quotation p3

• What is a quotation?• Company’s share price is included on the exchange’s official list• Called: Listed shares

• South Africa: Johannesburg Stock Exchange (JSE)• UK Stock Exchange runs two different markets:

• Alternative Investment Market (AIM)• Main market

• Companies requiring a quotation on the main market must fulfill certain minimum requirements.

• The minimum requirements for full listing =• 25% of share in public hands• 3 year trading record

Reasons for seeking a quotation p3• Raise capital

• Sell new shares to a wide market, larger sums of money available

• Easier to raise future capital• New shares or debt (lenders lend money easier to a listed

company)

• Give existing shareholders an exiting route• Easier to sell shares especially family owned business

• Shares more marketable and easier to value• Assist with tax calculations• Listed shares more useful for shareholders’ backing own borrowing• Quotes shares more effective for example in a takeover• Option of offering employees share schemes (incentive to motivate

staff)

Methods of obtaining a quotation p5

• Offer for sale at a fixed price• Offer for sale by tender• Offer for sale by subscription• Placing• Introduction

Offer for sale at a fixed price p5

• Usual method (most common) for obtaining a listing and simultaneously raising new money (First issue)

• Predetermined number of shares offered to the general public at a specific price via an issuing house

• New shares - if purpose is to raise money• Old shares – existing shareholders sell their shares

Offer for sale (cont..): Issuing house and underwriting p6

• What is an issuing house?

Company sells to issuing house who then sells to public

Issuing house thus “underwrites” the issue:• Role of issuing house:

• Professional adviser• Reputation of issuing house – for investors indication that offer is a

good one

• Self study: Page 6 ‘Timetable for an offer for sale’ until page 8 before ‘1.5 Offer for sale by tender’. DO NOT LEAVE IT OUT IT IS IMPORTANT!!!

Offer for sale by tender p8

Similar to offer for sale at fixed price, but instead the issuing house invites members of the public to submit a tender stating number of shares to buy and the price willing to pay (price therefore not fixed).

Public is invited to submit a tender with the number of shares and the price

• Offer closes – single strike price determined• Low enough that all shares issued and• Sufficient spread amongst shareholders

• Advantage: raise more money• Disadvantages:

• Concentration of ownership, decrease marketability• Allocation more complex

Offer for subscription p9

• Same as offer for sale, normally fixed price, but can also be by tender. Company sell its shares directly to the public.

• No underwriting. Company bears risk that not all shares are issued.

• Unusual issues e.g. hi-tech bio research company and or also launches of investment trusts

• Only new shares

Placings / Selective marketings p10

• A simpler cheaper method of making small issues (small number of clients / investors)

• Issuing house buys securities from company• Issuing house then individually approach institutional investors (pension funds / life offices)

• Specific groups of investors are invited to buy shares, not the general public

• Therefore:

Company issuing house selective market

Introductions p10• Do not involve the sale of any shares, simply mean that

the existing shares are “introduced” and will in future be quoted on the London Stock Exchange

• For full listing requirements: 25% of shares belongs to the public

Can be use when:• Second listing in another country (USA based list in UK)• Already listed company wants to “de-merge”• Unquoted company has already shares in wide ownership

and sufficient capital but wants to become quoted

1.7 The role of underwriting p11Underwriting is a form of insurance against the risk of an

unsuccessful issue.

Used to ensure issuing company raises the required money!

Process:

1. Company agree to sell shares at an agreed price to issuing house. Pay fee / share price less

2. Issuing house accept risk not all shares bought by public, but sub-underwrites to transfer some of the risk… But pay commission.

3. Price shares at price expected to be successful

4. Shares either fully subscribed or partly subscribed and underwriter and sub-underwriter pay for shares not purchased.

HOMEWORK

•For better understanding do:

Questions 6.1 – 6.4