Primary Market

Primary MarketMeaningThe primary market is that part of the capital markets that deals with the issuance of new securities. Companies, governments or public sector institutions can obtain funds through the sale of a new stock or bond issue. Securities are offered to the public for the first time.

Functions of New Issue MarketOriginationUnderwritingDistributionOrigination FunctionStudy of technical, economical and financial viability of the projectAdvisory servicesType of issueMagnitude of issueTiming of issuePricing of issueMethod of issueTechnique of sellingMerchant bank commercial bank, financial institution or private firm

Underwriting FunctionAn agreement whereby the underwriter promises to subscribe to specified number of shares or debentures or a specified amount of stock in the event of public not subscribing to the issue.MethodsStanding behind the issueOutright PurchaseConsortium MethodAdvantagesAssured raisising capitalMinimum subscriptionSpecialised function of distributionOther advisory servicesEnhanced public confidence Institutional and Non-institutional underwriterDistribution FunctionSale of securities to ultimate investors

Methods of Floating New IssuePublic issueOffer for salePlacementRights issue

Public IssueInitial Public Offering (IPO): It is an offering of either a fresh issue of securities or an offer for sale of existing securities or both by an unlisted company for the first time to the public.Follow-on Public Offering (FPO): It is also known as subsequent or seasoned public offering. It is offer of sale of security by a listed company.Prospectus legal document related to issue an abridged prospectusMerits: large mass of investors, direct method, non-discreminatoryDemerits: Expensive method, suitable only for large issueRight IssueRights Issue is when a listed company which proposes to issue fresh securities to its existing shareholders as on a record date. The rights are normally offered in a particular ratio to the number of securities held prior to the issue. This route is best suited for companies who would like to raise capital without diluting stake of its existing shareholders.In short, It is offering of new securities by a listed company to its existing shareholders on a pro-rata basis.Rights are transferable and saleableIssue of capital under Sub-section (1) of Section 81 of the Companies Act, 1956 Merits: minimum cost, no dilution of control, secures interest of existing share holder.Private PlacementPrivate placement refers to direct sale of newly issued securities to a small number of investors through merchant bankers. The number of investors can go only up to 49.This is a faster way for a company to raise equity capital. To go for the private placement, the company has to be listed on a stock exchange and has to comply with the Companies Act and the requirements as per SEBI guidelines.Preferential IssuePreferential Allotment includes issue of shares or convertible securities on preferential basis and/or through private placement made by a company in pursuance of a resolution passed under Sub-section (IA) of Section 81 of the Companies Act,1956Allotments are made to various strategic groups including promoters, foreign partners, technical collaborators, and private equity funds.Companies need to seek approval from shareholders for preferential allotment of shares. An issuer need not file an offer document in case of preferential allotment.The promoters continue to hold some minimum percentage of shares in the company Qualified Institutional Placement (QIP)QIP is an issue of equity shares or securities convertible into equity shares by a listed company to qualified institutional buyers only.Funds can be raised from foreign as well as domestic institutional investors (FII & DII) without getting listed on a foreign exchange.A QIP issue can be offered to a wider set of investors including Indian mutual funds, banks and insurance companies, as well as, foreign institutional investors.Issuer shall prepare a placement document containing all the relevant and material disclosures. There will be no pre-issue filing of the placement document with SEBIIndian Depository Receipts (IDRs)An IDR is an instrument denominated in Indian rupees in the form of a depository receipt against the underlying equity of issuing company to enable foreign companies to raise funds from the Indian Capital market.The Companies Act was amended in 2002 to permit foreign companies to offer shares in the form of depository receipts in India. However, the Department of Company Affairs (DCA) laid down the guidelines in February 2004.Why IDR?Enable foreign companies to raise capital in India Enable Indian investors to diversify riskEnable globalisation of Indian stock exchangesMarket CapitalisationThe market value of a quoted company, which is calculated by multiplying its current share price (market price) by the number of shares in issue is called as market capitalization. E.g. Company A has 120 million shares in issue. The current market price is Rs. 100. The market capitalisation of company A is Rs. 12000 million.Capitalisation-wise segments of different stocks: large-cap, mid-cap and small-cap segment based on 80%-15%-5% market capitalizationProcess of IPODraft Prospectus SEBIs observation letterFulfillment of Entry Norms*Appointment of Underwriter maximum commission 2.5%Appointment of Banker collecting agent & procurement of funds during issueBrokers to the Issue recognise member of the stock exchanges, maximum brokerage of 1.5%Filling of Documents with Registrar of CompaniesCont.Printing of Prospectus and Application Form and dispatch to merchant bankers, underwriters and brokersListing the issuePublication in Newspapers abridged prospectus and the issues commencing and closing datesInitiating Allotment Procedure after minimum subscriptionUnderwriters Liability if the issue is not fully subscribed, underwriter subscribe to the shortfallOptimal listing - compulsory in the Regional stock Exchange and optionally at other stock exchanges *SEBI Entry Norms for IPO & FPOEntry Norm I: Profitability Route.

Net tangible assets of at least Rs. 3 crores for three full years, of which not more than 50 per cent is held in monetary assets.Distributable profits in at least three out of the preceding five years.Net worth of at least Rs. 1 crore in three years.If there is a change in the companys name, at least 50 per cent revenue for preceding one year should be earned from the new activity.The issue size should not exceed 5 times the pre-issue net worth as per the audited balance sheet of the last financial year.Entry Norm II: QIB Route.Issue shall be through a book building route, with at least 50 per cent of the issue to be mandatorily allotted to the qualified institutional buyers (QIBs), failing which the money shall be refunded.The minimum post-issue face value capital shall be Rs. 10 crore or there shall be compulsory market making for at least 2 years.ORNorm III: Appraisal Route.The project is appraised and participated to the extent of 15 per cent by FIs/scheduled commercial banks of which at least 10 per cent comes from the appraiser(s). In addition, at least 10 per cent of the issue size shall be allotted to QIBs, failing which the full subscription monies shall be refunded.The minimum post-issue face value capital shall be Rs. 10 crore or there shall be a compulsory market making for at least 2 years.Grading of IPO is MandatoryIn order to enable investors assess new equity issues offered through an IPO, the issuer has to get IPO grading done by at least one credit rating agency, before filing the offer documents with SEBI or thereafter. However, the prospectus / Red Herring Prospectus must contain the grade/s given to the IPO by all the rating agencies.Book BuildingBook building is a process by which demand for the proposed issue is elicited and built-up and the price at which the securities will be issued is determined on the basis of the bids revivedIt is the mechanism though which an offer price for IPOs based on the investors demand is determined investors demand is important input to arrive at an offer price an auction of sharesBook building built the US market almost entirely in the 1940s and 1950s - first introduced in India 1999Book Running Lead Manager(BRLM) is a lead merchant banker appointed by the issuer company and whose name is mentioned in the offer document of the companyRed Herring Prospectus is a prospectus which does not have details of either price or number of shares being offered or the amount of issue.Methods for Determining the Offer Price Fixed Price Book BuildingBook Building Processappoints one or more merchant banker as book runner disclosed in red herring prospectus lead book runner and co-book runner as underwriter may be with syndicate members (registered with SEBI)an agreement with one or more of stock exchange(s)appoint stock broker who are members of the recognized stock exchange and registered with the SEBI for the purpose of accepting bids applicationApplication Supported by Blocked AmountSelf-certified Syndicate Bankfile a draft red herring prospectus with the SEBI, containing all disclosure including total issue size, if applicable, except the price and the number of specified securities to be offered.

21Cont.The issuer may mention the floor price or price band in the red herring prospectus.

If the issuer opts not to make such disclosure the following shall be disclosed

a statement that the floor price or price band be disclosed at least two working days (IPO) and at least one working (FPO) before the opening of the bid;a statement that the investors may be guided in the meantime by the secondary market prices (in case of a FPO); andthe names and editions of the newspapers; names of websites (with address), journals, or other media in which the said announcement will be made.cont...Where the issuer decides to opts for price band instead of floor price the issuer shall also ensure compliance with the following

The spread (range) between the floor and the cap of the price band should not be more than 20 per cent, i.e. the cap should not be more than 120 per cent of the floor price. The price band can be revised during the bidding period - maximum revision either side not exceed 20 per cent and the cap of the revised price band will be fixed i.e. 20%Any revision in the price band shall be widely circulatedIn case the price band is revised, the bidding period shall be extended to a maximum of ten working days.The manner in which the shortfall, if any, in the project financing, arising on account of lowering of price band to the extent of 20 per cent will be met shall be disclosed in the red herring prospectus. It shall also be disclosed that the allotment shall not be made unless the financing is tied up.The basis for issue price, floor price, or price band, as the case may be, shall be disclosed and justified by the issuer in consultation with the lead merchant banker on the basis of the following information, which shall be also disclosed separately:Earnings per share and diluted earnings per share, pre-issue, for the last three years (as adjusted for changes in capital).Price earning ratio pre-issue.Average return on net worth in the last three years.Minimum return on increased net worth required to maintain pre-issue earnings per share.Net asset value per share based on last balance sheet.Net asset value per share after issue and comparison thereof with the issue price.

Cont.Foreign Capital Issuance: ADR, GDRIndian companies are permitted to raise foreign currency resources through two main sources:Foreign Currency Convertible Bonds (FCCBs) more commonly known as Euro Issues and ordinary equity shares through depository receipts, namely, Global Depository Receipts (GDRs)/American Depository Receipts (ADRs) to foreign investors (including NRIs).A depository receipt (DR) is any negotiable instrument in the form of a certificate denominated in US dollars.The shares are deposited by the issuing company with the depository bank. The depository bank in turn tenders DRs to the investors.

GDRGlobal Depository Receipts (GDRs) may be defined as a global finance vehicle that allows an issuer to raise capital simultaneously in two or more markets through a global offering.GDRs may be used in public or private markets inside or outside US. GDR, a negotiable certificate usually represents companys traded equity/debt. The underlying shares correspond to the GDRs in a fixed ratio say 1 GDR=10 shares.

ADRAn American Depository Receipt (ADR) is a negotiable U.S. certificate representing ownership of shares in a non-U.S. corporation. ADRs are quoted and traded in U.S. dollars in the U.S. securities market. Also, the dividends are paid to investor in U.S. dollars.ADRs were specifically designed to facilitate the purchase, holding and sale of non-U.S. securities by U.S. investor, and to provide a corporate finance vehicle for non-U.S. companies.Any non-U.S. company seeking to raise capital in the U.S. or increase their base of U.S. investor can issue ADRs.