Method of listing shares
For a company that seeks its shares to be listed on the stock exchange for the first time (a new issue), the following methods are available:
- Offers for sale
- Offers for subscription
- Intermediate offers
In a public offer, a company's shares will be offered up to the general public, including institutional and private investors. This is the most expensive method to list but carries the greatest potential to attract capital. This type of offer is frequently used to 'float' new applicant companies who are looking for substantial amounts of capital to expand or consolidate their businesses. This type of public offer is known as an initial public offer or IPO.
Offers for sale
An offer for sale means an invitation to the public to buy existing shares in the company. This happens when the existing shareholders take advantage of the floatation to dispose of some or all of their holdings in the company. Offers for sale are frequently combined with IPOs to enable existing shareholders to take advantage of the floatation.
Offers for subscription
An offer for subscription is another kind of public offer and involves an offer to the public to subscribe for new shares in the company. The public can apply for shares directly at a fixed price. The offer for subscription is the other component of an IPO with an offer for sale and is the mechanism which allows companies to access fresh capital.
A placing involves an offer of the shares not to the public at large, but instead, on a selective basis to specified persons or clients of the sponsor or any securities house assisting in the placing. A placing is appropriate when the company wants to target specific investors who are likely to be interested in the investment. A placing is cheaper than offer for subscription and is particularly useful when the total value of the offer is low.
This method does not involve an issue of new shares; instead, the shares are already widely held by the public and they are then formally listed. Introduction is only available when the shares are already of such amount and are so widely held that their marketability when listed can be assumed, e.g. when the company has an overseas listing so that its shares are already being traded internationally.
Companies that have already been brought to the stock exchange may wish to seek a listing to get further share capital by way of issuing ordinary shares. Listed below are the methods available to a company to bring further shares to the market:
- Rights issues
- Open offers
- Capitalisation issues
- Acquisition or merger issues
- Vendor placings
- Offers for sale
- Offers for subscription
- Intermediaries offers
The last four methods of issue are considered under the previous section 'Method of issue - first time listing' of this guide. We will briefly consider the first five methods in turn.
A rights issue involves the holders of shares being given the right by the company to apply for new shares in proportion to their current holdings. The consideration for the issue is paid for in cash, but the subscription price is usually less than the market price of the existing shares to induce the shareholders to subscribe for the shares. The discount varies between transactions.
The company will issue each participating shareholder a 'provisional allotment letter' containing details of the shares provisionally allotted to the shareholder The provisional allotment letter (PAL) can be traded in the market and enables shareholders to either subscribe for the shares in the offer or to give up their rights in favour of a third party. These tradings are called 'nil paid dealings' as no subscription money is paid to the company until the issue is closed.
An open offer is where new shares are 'placed' with large institutional investors with a corresponding 'open offer' to existing shareholders to take up rights in the issue of new share. Any shares not taken up by the shareholders will automatically be taken up by the institutional investors. The main difference between an open offer and a rights issue is the fact that if the shareholders don't take up their rights, they can't trade them on the basis of a PAL. So, if shareholders don't want to participate in the open offer, they don't get anything out of it and ultimately their shareholdings are diluted.
A bonus or 'capitalised' issue is an issue to existing shareholders, in proportion to their existing shareholdings, of further shares credited as fully paid out of the company's reserves. This is similar to a rights issue, except that the shareholders do not have to pay for the new shares (which is why the shares are referred to as bonus shares). After the bonus issue, the shareholder still holds the same percentage of shares; however, their stake is now represented by a different number of shares.
A vendor placing takes place when a company (A plc.) wishes to acquire something from another company (B plc.), typically a part of its business or a subsidiary company. It is a way of avoiding existing shareholders' pre-emption rights because the share exchange is not for cash but for other shares, which excludes it from the operation of the pre-emption rights requirement, A plc allots shares to B plc in return for the shares in the subsidiary A plc wants to buy. A plc's investment bank then places B plc's shares in the market for cash or pays cash for the shares itself. A plc then controls the subsidiary it had targeted and B plc has the cash from A plc's shares.
Cash box placings
This type of offer has become popular and is a variation of the vendor placing. A company is used for the purposes of the issue (it effectively becomes the cash box). The cash box company sells its shares to an investment bank participating in the cash box scheme. The bank arranges with the company wanting to issue shares to swap its shares in the cash box company for shares in the issuing company. The cash box company becomes a wholly owned subsidiary of the issuing company and is loaded with the cash it got for its shares from the investment bank. The investment bank can then place the shares it owns in the issuing company and recoup the cash it paid to the cashbox. The incentive for the bank is that it usually makes a premium on the shares placed or the issuing company will pay it a fee. There have been concerns raised recently that this method of listing is circumventing shareholders pre-emption rights but no definitive prohibition exists as yet.
Block trades are, unsurprisingly, the trade of blocks of large numbers of individual shares bundled together. These transactions take advantage of a number of exemptions and don't require prospectuses. There are typically no other announcements or promotions and they're marketed through telephone calls to institutional investors. They're usually launched and completed within a very short space of time which can be as short as 24 hours.