Important terms (shares and trading): Part 1

In the last few posts I had attempted to introduce to my readers the basic concepts of shares and the stock exchange. In this post, some more commonly used terms– Book Building, Dual Listing and Preferential issue have been taken up for discussion.

Book Building

According to SEBI Guidelines 2000, Book Building means a process undertaken by which demand for the securities proposed to be issued by a body corporate is elicited and built up, and the price for such securities assessed, for the determination of the quantum of such securities to be issued by means of a notice, circular, advertisement, document or information memorandum or offer document.

In case of book building, the investors place their bids at different prices and finally the price at which there is maximum demand is selected. The prospectus generally contains a base price and a maximum price between which the bids are made for the securities. The spread between the base price and the maximum price cannot be more than 20%. For example, of a company issues n number of securities with a base price of Rs 100, the maximum price cannot exceed Rs 120 (Rs 100 + 20% of Rs 100)

Difference between book building and fixed issue:

In case of a fixed issue, the price of the issue is fixed first and then the securities are offered to the investors. However, in case of book building, the price is determined on the basis of the demand.

The demand for securities in case of a fixed is known only at the close of the issue, whereas the demand is know on a regular basis in case of book building.

Dual listing

Dual listing is a process that allows a company to be listed on the stock exchanges of two different countries and hence the shares of the company are traded in both the stock exchanges. Dual listing generally takes place when companies belonging to two different companies enter into an equity alliance. Royal Dutch Shell (UK/ Netherlands) and Unilever (UK / Netherlands) are examples of companies which have their shares .

Dual listing is not allowed in India and it will need major amendments to key corporate laws of the country to allow dual listing. The Foreign Exchange Management Act (FEMA) too would need to be amended because case of a dual listed company, an investor can buy shares in one country and sell it in an overseas market and this would require the Indian rupee to be fully convertible. Also, it should be noted that domestic trading in shares denominated in foreign currency cannot take place without the permission of the Reserve Bank of India. It should be noted that the dual listing was one of the prime reasons for failure of the Bharti-MTN deal in the year 2009.

Preferential issue

A preferential issue is an issue of shares or of convertible securities by listed companies to a select group of persons under. The issuer company has to comply with Section 81 of the Companies Act, 1956 and to the guidelines laid down by SEBI. A preferential issue is neither a rights issue nor a public issue, and is a faster way to issue shares.

I hope that the readers will come up with questions and feedback. In the next post, some other important terms like futures, options and leverage would be taken up.

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