PRIMARY MARKET

DEFINED:
It is a market in which equity securities are issued by the company/firm to the investors.

FORMS OF EQUITY ISSUES:

IPO or FPO Rights issue Private Placement

Book building vs. Fixed Price

Discovery of real price. Proper allocation Faster completion of process, collection etc. Less risk of low subscription.

PARTIES INVOLVED IN THE NEW ISSUE

Lead manager to the issue

Functions: drafting prospectus, preparing budget, timing of issue, appointment of registrar and other parties, assistance in marketing of issue etc. DSP Merrill Lynch Ltd, ICICI Securities Ltd, Almondz Global Securities Ltd, IL & FS Investmart Securities Ltd, SBI Capital Markets Ltd, ABN AMRO Securities (India) Pvt Ltd, Deutsche Equities India Pvt Ltd, Enam Securities Pvt ltd, J P Morgan India Pvt Ltd, JM Financial Consultants Pvt Ltd, Kotak Mahindra Capital Company Ltd, Macquarie India Advisory Services Pvt Ltd, SBI Capital Markets Ltd, UBS Securities India Pvt Ltd etc.

PARTIES INVOLVED IN THE NEW ISSUE

Registrar to the issue : Karvy, Reliance capital, Intime Spectrum, India Infoline etc. Underwriters: Soft underwriting and hard underwriting Bankers to the issue

Advertising Agencies

Steps involved in New Issue:

Approval of Board of Directors Approval of Shareholders Appointment of lead managers Appointment of other intermediaries Preparation of Draft offer document. Filing of draft prospectus with SEBI. Filing of red herring prospectus with ROC after any modifications suggested by SEBI (takes 21 days for SEBI to suggest and this approval remains valid for 365 days)

Steps involved in New Issue:

Promotion of Issue Printing, distribution of applications and statutory announcements Collection and processing of applications Finalizing allotment and liability of underwriters.(15 days after receipt of application) Registration of final prospectus with ROC Giving Demat credit Listing of issue (3 weeks after closure)

Issue requirements
UNLISTED COMPANIES: (IPO) Entry norm I (Profitability route) Pre-issue net worth: not less than Rs.1 crore in three (3) out of preceding five (5) years,

Track record of distributable profits: at least three (3) out of immediately preceding five (5) years.
Its issue size (i.e. offer through offer document + firm allotment + promoters contribution through the offer document) should not exceed five (5) times its pre-issue net worth The company has net tangible assets of at least Rs. 3 crores in each of the preceding 3 full years

Issue requirements
Entry Norm II (QIB Route)

Issue via book-building with at least 50% for QIBs Minimum post issue capital should be 10 crores with compulsory market making for 2 years.
Entry Norm III (Appraisal route) Appraisal of project by FIs with 15% participation by them. Minimum post issue capital should be 10 crores with compulsory market making for 2 years

Issue requirements
LISTED COMPANY (FPO) Entry Norm I Its issue size (i.e. offer through offer document + firm allotment + promoters contribution through the offer document) should not exceed five (5) times its pre-issue net worth If co. has changed name 50% of last year revenue should be from activity suggested by new name.

Entry Norm II And III same as in unlisted companies.

Entities exempted from issue requirements.

Private sector banks Public sector banks Infrastructure companies Rights issue. Insurance Companies

Other compliances
Minimum promoters contribution and lockin: minimum 20% of issue size and 5 year lock-in IPO grading:1-5

Basis of price fixation

Issuer vis--vis merchant banker Parameters like EPS, PE multiple, Return on net worth, comparison with peer group, book value in relation to offer price, growth rate in PAT. Qualitative factors like experience of promoters, industry scenario, international recognitions etc.

BOOK-BUILDING
What is book-building? What is price band? How does book building work? Cut-off option (subscribe at any price discovered within band) Changing/revising/canceling bids. Time for book-building (exception for infrastructure companies)

Basis of Allotment
Basis of allotment For 100% book buit issues: Max 50%-QIBs,Min.35% Retail investors, Min.15% HNIs. Overseas, all allotments are discretionary and there are no reservations. For Compulsory book built issues: Atleast 50% -QIBs(failing which money shall be refunded),Min.35% Retail investors, Min.15% HNIs

Basis of Allotment
If issue size is <25% of post issue capital i.e <25% stake is made public (Rule 19(2)(b):
Max 60%-QIBs,Min.30% Retail investors, Min.10% HNIs. Overseas, all allotments are discretionary and there are no reservations. (NA to govt./PSUs/Infrastructure cos.)

Cut off Price and its Determination

Let's say a company wants to issue one million (10 lakh) shares. The face value of the share is Rs 10, and the band is between Rs 20 and Rs 24.
Bid Quantity Bid Price Cumulative Quantity 200000 600000 1100000 1150000 1175000 Subscription

200000 400000 500000 50000 25000

24 23 22 21 20

20% 60% 110.0% 115% 117.5%

BOOK-BUILDING
ALLOTMENT OF SHARES
Suppose there is an IPO of 1000 shares. (Retail category has 1000 shares).
Lot sizes in retail category are 10, 20 and 30. Total applications for 10 shares = 300 = 3000 shares. Total applications for 20 shares = 100 = 2000 shares. Total applications for 30 shares = 500 = 15000 shares. Total subscription = 20000 shares = 20 times available shares.

ALLOTMENT OF SHARES
Now the company will allot shares in each "lot size" in equal proportion. 10 share applications add up to 3000 shares, so they will get 150 shares. 20 share applications add up to 2000 shares, so they will get 100 shares. 30 share applications add up to 15000 shares, so they will get 750 shares.

ALLOTMENT OF SHARES
Usually allotment is done in lots of minimum application size. In this case it will be 10 shares. Now, for those who applied for 10 shares, only 15 people will get 10 shares each. (15 X 10 = 150) Now, for those who applied for 20 shares, only 10 people will get 10 shares each. (10 X 00 = 100)

Now, for those who applied for 30 shares, only 75 people will get 10 shares each. (75 X 10 = 750)

BOOK BUILDING: ADDITIONAL ASPECTS ASBA Firm Allotment Reservation On Competitive Basis Safety Net Open Vs. Closed Book Hard vs. soft underwriting Differential pricing (eg. discount to retail) Fast track issues Green shoe option.