Types of capital market

Capital Market

Primary Market Secondary Market

For new issues

For Trading

Primary Market

Primary Market
How?
1. Public issues
2. Rights issues
3. Private placements
There is no trading in primary market.
Primary market links investors to the
entrepreneurs.

1. Public issues
1. Initial public offer to investors by new
companies
2. Public issues by established companies
3. Subsequent / further public offers/
follow on offer by existing companies
4. Established co. with a track record of
dividend paying capacity for last 3 yrs.
can issue shares with premium
5. New companies must issue shares at
par

Public issues
6. A public financial inst. must appraise
the project and finance at least 10%
of the of the project cost
7. If the issue fails, the underwriter has
to purchase the unsubscribed shares
8. Public issue involves the tasks like
SEBI approval, pricing of the shares,
preparing prospectus, Companies
Act compliances, appointment of
brokers, bankers etc. which may be
done through merchant bankers

Methods of Pricing of Public

Issues
Indian primary market adopted free
pricing in 1992. SEBI does not play any
role in price fixation.
1. Fixed Price issue: Price of shares is already
fixed and printed in prospectus.
2. Book Building: A price band is printed in
the prospectus with the lowest and the
highest bid price.
The investor has to bid the price of the
security as per his inclination.
In USA this type offer is called as Redherring prospectus

Allotment of shares
Preferential allotment: Allotting the shares to
specific categories. Eg. Promoters (min. 20%),
co.s employees, bankers etc. A proportion of
capital can be reserved for such categories.
Pro-rata allotment: When issue is oversubscribed, the company allots proportionate
shares to each applicant according to the
number of shares applied by him.
E.g. I,00,000 shares are offered for sale to the
public; public has applied for 2,00,000 shares,
pro-rata allotment is made in proportion of 1:2
Green Shoe option: Over-allotment option for an
over-subscribed public issue.

Investor categories
(i) Retail Individual Investor (RIIs): Investor
who applies or bids for securities for a
value of Rs. 1,00,000 or less.
(ii) Qualified Institutional Buyers (QIBs) :
Financial institutions, Mutual Funds,
Pension Funds, IRDA registered insurance
companies, Foreign institutional investors,
Banks, Provident Funds etc.
(iiI) NonInstitutional Investors (NIIs):
Investors who do not fall within the
definition of the above two categories are
categorized as NonInstitutional
Investors.

2. Rights Issue
Raising further capital from the
existing shareholders by offering
additional shares to them on preemptive rights.
Pro-rata allotment is made (sec.
81 of companies act)
Shareholders may partially or fully
forgo this right and permit the
company to approach public afresh
Cheaper source of funds as compared
to public issue

3. Private Placements
Selling securities privately to a group of
investors
No need of formal prospectus, underwriting
agreement, lead managers to the issue etc.
Suitable for :
- closely held companies,
- private limited companies,
- companies which may not get response from
public at large
- small companies which may not get good
secondary market
- companies who want to raise funds through
institutional investors, mutual funds or FIIs

Intermediaries in Primary
Market
1.
2.
3.
4.
5.
6.
7.

Lead manager to the issue

Registrar & Transfer agent
Underwriter
Legal advisor
Banker to the issue
Depository
Depository participant

Discuss a Prospectus
Or an offer document
Of a public offer
In the class

Primary Market - Problems

1.
2.
3.
4.
5.

Over pricing of the issue

Price rigging before the issue
Vague disclosures in offer document
Misleading projections about profitability
Delay in penal action against erring
market intermediaries
6. Existence of unofficial intermediaries
(e.g., dabba traders)
7. Uneducated / misguided investors
8. Weak control of SEBI over primary
market

Primary Market Points to be

understood by investors
Promoters track record
Professionalism of management
Purpose of the issue
Project details
Statutory clearances to implement
the project
6. Relevant business environment
7. Financial data published in
prospectus
8. Pending litigations
1.
2.
3.
4.
5.

Primary Market Points to be

understood by investors
9. Justification of the pricing of the
securities being issued
10.Risk factors
11. Auditors report
12. Statement of statutory dues /
Institutional or bank dues
13. Record of servicing of enquiries from
investors
14. Track record of the managers to the
issue

Bonus shares
When an issuer makes an issue of securities
to its existing shareholders as on a record
date, without any consideration from them, it
is called a bonus issue.
The shares are issued out of the Companys
free reserve or share premium account in a
particular ratio to the number of securities
held on a record date.
Used as a strategy to handle situations like
super-normal profits, capitalization of
reserves to bring down the excessively high
EPS or for profit sharing with share-holders.

Home Assignment
Write down the procedure of a public offer
and the SEBI guidelines for the same.
Write a note on fixed price public issue
and book building.
Write the problems in Indian primary
market.
Submit the same to the coordinator within
next 3 days.
Print out will not be accepted