Raising capital in the securities market | Local company

T&T Securities and Exchange Commission

THE SALE and purchase of financial assets, such as stocks and bonds, takes place in the securities market. The securities market includes both the primary market and the secondary market. Most investors are familiar with secondary market operations where existing securities are traded. The exchange takes place between a buyer and a seller, with the exchange facilitating the transaction.

Transactions can also take place “over the counter”, i.e. direct exchanges between brokers. In the secondary market, the company that issues the security is not involved in its sale, because the amount invested by the buyer goes to the seller. However, companies use the primary market to issue new securities, to raise capital for growth and investment. In this article, we will discuss the various methods of raising capital in the primary securities market.

The primary market, where new securities are sold directly to investors, provides a channel for the government, corporations, or other institutions to raise funds through the issuance of new securities related to debt (bonds) and equities. (shares).

A bond qualifies as a fixed income instrument since bonds traditionally pay a fixed rate of interest (coupon) to investors throughout their life. At maturity, the bondholder will be repaid the principal (also known as face value) along with the final coupon payment. This is the amount of money borrowed by the bond issuer. A company or government may issue bonds to raise funds for the development of large-scale, long-term, capital-intensive projects, as this provides some protection against fluctuating interest rates or economic changes.

On the other hand, companies may prefer to generate equity through the sale of company stock. One of the main advantages of raising equity is that, unlike debt capital, the company is not required to repay the shareholders’ investment. Instead, shareholders receive returns based on market performance in the form of dividends or an increase in stock valuation.

Bonds and shares are then traded on the secondary market once the issue period is closed.

Raising capital in primary markets

Stocks and bonds can be issued on the primary market through a public offering or a private placement. In a private placement, the securities are not sold directly to the public, but the entire issue is sold to an accredited investor or group of investors, usually large institutions. However, if the company wishes to raise capital from public investors, the securities must be offered to the public in a new issue of shares through an initial public offering, also known as an IPO.

In addition to an IPO, other methods used to raise capital in the securities market include:

• Additional or complementary public offer

This occurs when a listed company makes a new public issue to raise capital, after having its securities traded on the securities market. Current investors are offered pro rata rights based on the shares they currently own and new investors can participate in newly issued shares.

• Question of rights

Unlike a new public offering, a company can raise funds from its existing shareholders by issuing new shares to them at a discounted price within a specified time frame. Existing shareholders have the right to request new shares in proportion to the number of shares already held. For example, in a 1:5 rights issue, investors are entitled to subscribe for one (new) share of the company for every five shares held by the investor.

• Subscribed offers

This occurs when an underwriter (a party that assesses and assumes the payment risk of another party) buys the entire issue and takes on the risk of reselling it by one of the following means;

• Best effort offers: where the underwriter acts only as a broker and makes a best effort or promises in good faith to the issuer to sell as many of its securities as possible. Although both parties agree to the sale of certain securities, the subscriber does not guarantee to sell them all or;

• Firm commitment: when the subscriber buys all the shares or the debt and agrees to resell them.

• On-shelf check-ins

The issuer files a single document with the regulator that allows for additional future issuances. A shelf offering allows a company to register a new issue with its regulator, as long as it sells within the specified time frame. The issuer can sell portions of the issue during the period without re-registering the security or incurring penalties. The company keeps all unissued shares as treasury stock, where they remain “on the shelf” until they are offered for public sale. A shelf offering allows an issuer to access the markets quickly, with little additional paperwork, when market conditions are optimal for the issuer.

• Auctions

Bidding price discovery is frequently used in the issuance of government bonds. Government bonds are issued through an electronic auction system at the Central Bank of Trinidad and Tobago. The auction is generally open for two weeks and purchase can be made by the public on a competitive or non-competitive basis.

There are a variety of options available to investors to raise capital in the securities market, regardless of the method used, the TTSEC is committed to fostering an environment that allows for the fair and transparent sale of securities on primary and secondary markets.

For more information on the securities market and the role and functions of the TTSEC, please visit our website at www.ttsec.org.tt. To become a smart investor, download our Investor Protection App (IPA) through Google Play and Apple Stores. You can also take the online investor education course on our investor education website, www.InvestUcateTT.comand test your knowledge in our InvestorQuestTT interactive investment game on www.InvestorQuest-tt.com, and don’t forget to connect with us via Facebook; Twitter, Instagram, LinkedIn or YouTube.