PRIMARY MARKETS

What is PRIMARY MARKET

Capital Markets that deals with the issuance of New Securities. It refers to the set-up which helps the industry to raise the funds by issuing different types of securities. These securities are issued directly to the investors (both individuals as well as institutional) through the mechanism called primary market or new issue market.

Classification of Issues

Main Functions of Primary Markets

The main function of Primary Market is to facilitate transfer resources from savers to the users. The main Function can be further divided into three service functions: Origination Underwriting Distribution

Origination:

The work of investigation, analysis and processing of new project proposals. It includes a careful study of the technical, economic and financial viability to ensure the soundness of the project and provides advisory services.

Underwriting:
An agreement whereby the underwriter promises to subscribe to a specified number of shares or debentures.
Thus it is a guarantee for the marketability of shares.

Underwriters can be Institutional or Non-institutional.

Distribution:

The function of sale of securities to ultimate investors. Brokers and agents who maintain regular and direct contract with the ultimate investors, perform this service.

Minimum Requirements
BSE: The minimum post-issue paid-up capital of the applicant company shall be Rs. 10 crore for IPOs & Rs.3 crore for FPOs; and The minimum issue size shall be Rs. 10 crore; and The minimum market capitalization of the Company shall be Rs. 25 crore NSE: Post Paid-up capital should not be less than Rs. 10 crores. Capitalization should not be less than 25 crores. Atleast 3 years of track record.

Categories of Investors
Qualified Institutional Buyers(QIBs) Public Financial Institutions, SCBs, Mutual Funds, Registered FIIs etc

High Net Worth Individuals(HNIs) Investors with big capitals for investment
Retail Individual Investors Investors with investment capital less than Rs. 2,00,000.

Intermediaries in Book Building

Bidding Center To accept bids and applications and to register the same. Escrow Bankers To disburse the final issue certificates and to transfer the funds to Public Issue account Also, to transfer the refunds Registrar Verification & Rejection authority Seek Clarifications for mismatches Verify the amount collected

Prospectus
Draft Prospectus
The Prospectus submitted to SEBI before issue of IPO.

Offer Prospectus
Prospectus which is filed with Registrar of Companies (ROC) and Stock Exchanges after approval from SEBI.

Abridged Prospectus
It accompanies the application form of public issues.

Methods of Floating New Issues

Various methods which are used in the floating of securities are: Initial Public Offering

Follow On Public Issue

Offer for Sale Private or Stock Market Placement Right Issues Preferential Issues

Initial Public Offering

The issuing company directly offers to the general public/institutions a fixed number of securities at a stated price or price band through a document called prospectus. This is the most common method followed by companies to raise capital through issue of the securities.

Follow On Public Offer

FPO is for the companies which are already listed on exchange. FPO is done to raise funds by issuing some more equity shares FPO is open to all investors Price band depends on the market value of the existing company shares

Offer for Sale

It consists in outright sale of securities through the intermediary of issue houses or share brokers. It consists of two stages: First stage: Direct sale by the issuing company to the issue house and brokers at an agreed price. Second stage: Intermediaries resell the above securities to the ultimate investors. The issue houses purchase the securities at a negotiated price and resell at a higher price. The difference in the purchase and sale price is called turn or spread.

Private or Stock Market Placement

It involves sale of securities to a limited number of sophisticated investors such as financial institutions, mutual funds, venture capital funds, banks, and so on.
It refers to sale of equity or equity related instruments of an unlisted company or sale of debentures of a listed or unlisted company.

Right Issues
When a listed company proposes to issue securities to its existing shareholders, whose names appear in the register of members on record date, in the proportion to their existing holding, through an offer document, such issues are called Right Issue. This mode of raising capital is the best suited when the dilution of controlling interest is not intended.

Preferential Issues
An issue of equity by a listed company to selected investors at a price which may or may not be related to the prevailing market price is referred to as preferential allotment in the Indian capital market.

In India preferential allotment is given mainly to promoters or friendly investors to ward off the threat of takeover.

Book Building Process

A process used by companies raising capital through Public Offerings. Initial Public Offers (IPOs) or Follow-on Public Offers ( FPOs) A 20 % price band is offered Demand shown on a real- time basis Two Types of Book Building
75% Book Building 100% Book Building

Book Building Process Contd

Margin Amount
10% for QIBs 100% for other investors.

Reservations
50% for QIBs(Maximum) 35% for Small Investors(< Rs 1,00,000) 15% for other Investors(HNIs)

Book Building Process Contd

Red Herring Prospectus Book Runner Syndicate Price Discovery

Options for Investors: Cut-Off Option Revision/Cancellation Option

Advantages of Book Building Process

Discovery of Realistic Prices Proper Allocation Ascertainment of Level of Subscription Overall improvement of Fixed Price IPO

Green Shoe Option

Greenshoe options typically allow underwriters to sell up to 15% more shares than the original number set by the issuer.

Advantages: Price Stabilization Reduce the Risk Increases Investor Confidence.

GSO in India
Introduced by SEBI on 14 August 2003 Initiative to reassure investors, especially RII Green Shoe Window of 30 days Invocation of the doctrine of unjust enrichment Only 18 companies availed GSO from August 2003 to December 31, 2011(365 Companies issued IPO in this period)

Reasons for indifference towards GSOs

Uncertainty about impact of GSOs Interference with free play of market forces Unwillingness of merchant banks to accept additional responsibility Lack of incentives

Online IPO Auction

Attractive to companies because of the lower fees Allows many more people to participate, instead of limiting the opportunity to buy shares to a few large investors.
Roadblocks to online IPO: Free Riders and Winners curse hampers price discovery Investment return is likely to be substantially less than it would be for a traditional IPO.

ASBA
ASBA: Application Supported by Blocked Amount Benefits:
Bid amount is blocked and not debited until successful allotment Free from hassles of refund process Earn interest while amount is blocked

Challenges:
Lack of knowledge Brokers/Banks dont get any commission/charges

Resource Mobilization from International Capital Markets

ADRs Represents securities of a non-US company that trade in the US financial markets GDRs A bank certificate issued in more than one country for shares in a foreign company FCCB Are issued in currencies different from the issuing company's domestic currency. Corporate issue FCCB's to raise money in foreign currencies.

DIP Guidelines
It must have a pre-issue net worth of not less than Rs. 10,000,000 (Rupees ten million) in three (3) out of the preceding five (5) years, with a minimum net worth to be met during the two (2) immediately preceding years. It must have a track record of distributing dividends for at least three (3) out of the immediately preceding five (5) years

DIP Guidelines
The issue size, i.e., the offer through the offer document, the firm allotment and the promoters contribution through the offer document, should not exceed five times the pre-issue net worth as per the last available audited account. Net worth means the average of the value of the paid up equity capital and free reserves, minus the average value of the accumulated losses and deferred expenditure not written off.

DIP Guidelines
Promoters Contribution In an IPO, the promoters must contribute at least twenty percent (20%) of the postissuecapital.

Lock-in Requirements The minimum promoters contribution, i.e., twenty percent (20%) of the post-issue capital, is required to be locked-in for a period of three (3) years, starting from the date of allotment in the proposed issue and ending three (3) years from the date of commencement of commercial production or the date of allotment in the public issue, whichever is later.

DIP Guidelines
Prospectus Requirements
The offer document must contain true and sufficient information to enable the investor to make an informed decision while investing in the offered securities.

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