Submitted on: JUNE 23rd ,2014

     

FLOATATION OF CORPORATE BONDS

        Table of Contents CORPORATE BONDS. 5 Diversification. 6 Steady Income. 6 Attractive yields. 6 Liquidity. 6 ELIGIBILITY TO FLOAT CORPORATE BONDS. 6 PROCEDURE. 6 STEP#1. 6 Categorization of bonds: 7 STEP #2 APOINTMENT OF UNDERWRITER & TRUSTEE. 8 UNDERWRITER: 8 REQUIREMENTS FOR UNDERWRITERS. 8 TRUSTEE: 9 ELIGIBILITY FOR TRUSTEE. 9 STEP # 3. 9 STEP #4. 10 Matters to be specified in the prospectus. 10 Reports to be set out in prospectus. 10 RISK ANALYSYS. 11 SHELF REGISTRATION.. 11 General requirements. 12 Language: 12 Signatures: 12 Features of Bonds. 12 Underwriting. 12 Expense of the issue. 12 Pictorial representations. 12 Glossary of Defined terms. 12 STEP # 5 Approval & Registration of Prospectus: 12 STEP # 6. 13 Civil Liability for Misstatement in the Prospectus: 14 Criminal Liability: 14 Penalty for fraudulently inducing person to invest money. 14 LIST OF DOUCUMENTS REQUIRED FOR APPROVAL OF PROSPECTUS OF CORPORATE BONDS. 14 PROCESS MAP. 17 REFERENCE: 17     A bond can be defined as an instrument of indebtedness of the bond issuer to the holders. A written and signed promise to pay a certain sum of money on a certain date, or on fulfillment of a specified condition. It’s an debt security under which the issuer owes the holders a certain amount of money (debt) and, depending on the terms laid in it ,and  is obliged to pay interest /repay the principle amount on later date on its maturity date. Interest is usually paid at fixed intervals i.e. semiannual, annual, or monthly. In some cases bond is negotiable, i.e. the ownership of the instrument can be transferred in the secondary market. The holder of the bond is called creditor. While the issuer is called debtor According to limitation Act No IX of 1908 “Bond includes any instrument whereby a person obliged himself to pay money to another on condition that the obligation shall be void if a specified act is performed, or is not performed, as the case may be”

CORPORATE BONDS 

  A corporate bond is a bond issued by a corporation and is basically a debt obligation. Investors who buy these bonds are lending money to the corporation issuing them. In return corporation makes a legal commitment to pay a certain amount of interest periodically on the principle amount and principle amount when bond comes to maturity. Unlike shares corporate bonds does not gives a right of ownership to the bearer. Often corporate bonds are listed on major exchanges and the interest payment is taxable. Majority of trading volume of corporate bonds in most developed market takes place in decentralized, dealer-based, over-the-counter markets. However principle amount of corporate bonds is usually to be paid when the bond matures, but some corporate bonds have a “call” option which allows the issuer to compensate the debt before its maturity date. Corporate bonds share some Characteristics including:    

 

Diversification

Corporate bonds offer investors an opportunity to invest in variety of business sectors. This way a diversification can be added in equity portfolio and risk of loss can be minimized by investing in different sector rather than investing all money in one sector

Steady Income

Corporations pay a steady income on bonds on the fixed periods i.e. annually, semi- annually or quarterly as the case may be.

Attractive yields

Corporate bonds usually tends to provide higher yields as compared to government bonds (such as t-bills, FIBs, PIBs etc)

Liquidity

Usually corporate bonds are more liquid as compared to other securities and can be sold any time prior to maturity.

ELIGIBILITY TO FLOAT CORPORATE BONDS 

  According to the company’s ordinance 1984, any public limited company is eligible to float corporate bonds in market through issue, publication and circulation of a prospectus under sec 57 read with sec 120 of the ordinance. Provided that the issuer as well as the instrument should have a minimum credit rating grade of triple B Minus (BBB-) . This grade shall be assigned to them by a credit rating agency registered with SECP under the Credit Rating Companies Rules 1995.

PROCEDURE

STEP#1 

  First the company needs to decide is really a good idea to raise finance from corporate bonds or it has some more alternatives that are more attractive. When a company elects to issue corporate bonds, it can either sell the bonds to the general population by way of public offering, or it can sell them to a limited number of banks, insurance companies, pension planners, and other institutional investors via private placement.

   
It must also decide the amount to be float in market the minimum amount is 50 million.

Categorization of bonds:

According to SECP The application for subscription of Bonds should be categorized as for Rs. 5,000/-, Rs.25,000/-, Rs. 50,000/-, Rs. 100,000/- and in multiples of the highest category. The bonds offered to the general public should be allocated among different categories of applications in the following manner   In case of issuing corporate bonds of 50 millions:

Category of application	Reserve Allocation of Corporate Bonds
For and in Multiples of  Rs. 5000	100% of public offer

    In case of issuing corporate bonds of 50 million to 100 million

Category of application	Reserve Allocation of Corporate bonds
for Rs 5000/-	50% i.e 50 million minimum
For Rs. 25000/-	25%
For and in Multiples of Rs 50000/-	25%

    In case of issuing corporate bonds of more than 100 million

Category of application	Reserve Allocation of Corporate bonds
for Rs 5000/-	25% or minimum 50million
For Rs. 25000/-	Balance should be equally allocated to each category
For Rs. 50000/-
For and in multiples of Rs 100000/-

   

 

STEP #2 APOINTMENT OF UNDERWRITER & TRUSTEE 

  UNDERWRITER:  Second the company must invite the prospect underwriters which are generally investment banks. In an underwriting, the underwriting institution promises to take part or the entire shortfall bond that are not demanded by investors. There can be more than one underwriter in this way risk of underwriting can be divided among them so that each will have to bear small risk especially its more important when an issue is too large for one underwriter. Both the issuer and the under...