New Issue Market

New Issue Market

New Issue Market, broadly, the market in new long-term capital. The capital is raised by the financial intermediaries merchant banks, issuing houses, finance companies and stockbrokers for industry, commerce, public authorities and other institutions at home and abroad, by new issues of bonds, stocks, shares, etc., or other securities that are usually quoted and then dealt in on the Stock Exchanges. The borrowers' needs may be for new capital to finance business expansion or to convert private into public share capital. Issuing institutions use specialized knowledge to advise on, sponsor and underwrite the issues, thus minimizing the borrowers' risk of unsuccessful issues and smoothing the market.

New issues are made to the public either directly by the borrowing company ('public issue by prospectus') or by an 'offer for sale' by an issuing house of shares already bought from a borrowing company. (Most of the former are handled by issuing houses.) Both require public advertisement of prospectuses and other information. In both an important function of the issuing house is to arrange to 'under-write', i.e. to guarantee in return for commission the purchase of shares remaining unsold. They may retain some underwriting them-selves but usually 'contract out' to sub-underwriters (mainly investment trusts and insurance companies). The cost to borrowers of these issues is apt to be high unless the issue is large and the borrower well known.

The cost of smaller issues and first issues by borrowers may be reduced by 'private placings' with buyers of shares with or without the benefit of a Stock Exchange quotation. These arrangements minimize advertising and underwriting costs. The 'marketability' of these shares (especially 'unquoted' ones) is apt to be limited, so that they are likely to be attractive only to investors who intend to hold them for long periods, such as pension funds and insurance companies, and even then only if placed at a sufficiently low price. Established companies often cut the cost of raising new capital by offering 'rights issues' of new shares for cash to existing shareholders in proportion to the shares they hold. The terms of rights issues are made sufficiently attractive to guarantee their success.

Until 2009 the extent and timing of new issues in the U.K. were controlled by the Treasury through the CapitalIssues Committee. Treasury consent may still be required for market issues by local authorities and overseas companies. The timing of issues of million and upwards is controlled by the Bank of England acting for the Treasury.

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