CHAPTER ONE
INTRODUCTION
- BACKGROUND TO THE STUDY
In the capital markets hundred investors make several deals a day. The screen-based trading makes these deals known to all in the capital markets. Thus, a large number of buyers and sellers interact in the capital markets. The demand and supply forces help in determining the prices. Since all information is publicly available, and since no single investor is large to influence the security prices, the capital markets provide a measure of fair price of security especially if the markets have efficient pricing mechanism.
Pricing of new issues is different from the method earlier mentioned. Companies in the Nigerian capital markets are allowed to freely price share issues, subject to Securities and Exchange Commission guidelines and approval. In the case of the listed companies the current market price provides a basis for pricing the new issue of securities. Companies generally fix the issue price 10 to 15 per cent below the current market price to account for the effect of the supply pressure; It is relatively difficult to price an IPO. Companies use the services of merchant or investment bankers, who act as issue managers, to determine the issue price and manage the issue of securities.
A company is required to issue a prospect when it issues a share to the public. The prospectus should disclose full information, including the risk factors in the issue, to the investors to be able to appraise the pricing and form a judgement. New companies should give the justification for the pricing to the prospective investors. Generally, the price of the issue is fixed well before the actual issue. The price is not changed at any stage of the offer. The price is generally kept on the lower side so that the issue is fully subscribed and there is no devolvement of underwriters. However, book building is an alternative to the fixed-pricing method. In the case of normal public issue, the price is fixed and known in advance. At the close of subscription, the company knows the number of shares applied for. In book building the issue price is not fixed. Book building is a process of offering securities at various bid prices from investors. The demand for the security is assessed and the price discovered based on bids made by investors. Price discovery, therefore, depends on the demand for shares at different prices.
An Initial Public Offering (IPO) is a company’s offering of equity to the public and it is a major source of raising capital for firms. There are at least three distinct mechanisms available for firm for issuing new securities which include initiation public offer, right issue, and private placement
In this study, we shall be examining the pricing of public offering in the Nigerian capital market with particular reference to the Nigerian banking sector.