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Primary Markets( Critical)

Swati Gupta

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Meaning

Different Kinds of issues

◦ Public Issue (IPO, FPO)

◦ Rights Issue

◦ Bonus Issue

Offer Document

Draft Prospectus, Red Herring

Letter of Offer

Placement Document

Regulation for Different Kinds of Issue

IPO Grading

Book Building

Listing

DR, ADR, GDR, IDR, FCCB, ECB

By the end of the module you will be familiar with the following

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The capital market has 3 components - the equity market, the debt market, and the derivative

market.

It consists of all those connected with issuing and trading in equity shares and also medium

and long term debt instruments, namely, bonds and debentures.

It is well accepted that tenures less than one year are considered as short term; while tenures

more than one year and up to three years may be taken as medium term while more than

three years can be considered as long term.

Both equity and debt market have 2 segments - the primary market dealing with new issues

of equity and debt instruments and the secondary market which facilitates trading in equity

and debt instruments thereby imparting liquidity to the instruments and making it possible

for people with different liquidity preferences to participate in the market.

The capital market operations are regulated by the Securities and Exchange Board of India

[SEBI]

To begin with...

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The primary market provides a channel for sale of new securities.

The primary market enables the government as well as corporates in raising the

capital that is required to meet their requirements of capital expenditure and/or

discharge of other obligations such as exit opportunities for venture capitalist/

PE firms. The most common primary mechanism for raising capital is an Initial

Public Offer (IPO)

Thus this market provides opportunity to issuers of securities, the government

as well as corporate, to raise resources to meet their requirements of

investments and/or discharge their obligations.

They may issue securities at face value, discount, or premium

Primary Market

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Function of the Primary Market

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Discussion 3-Can IPOs make you Rich?

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What is your Take on this?

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The quality of management

The stage of the projects in which the company has invested

The exchanges where the instrument will be listed, will there be enough trading.

Apart from the fundamental strength of the company, you should look at the

auditor, the merchant banker, the registrar, the track record of the promoters in their

existing listed companies

Management philosophy in terms of sharing the rewards with the shareholder

......and also find out what the press has on the said issue.

Before investing in an IPO, what you need to know:

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The primary market is governed by the provisions of the Companies Act, 1956,

which deals with issues, listing, and allotment of securities.

Additionally, SEBI prescribes the eligibility and disclosure norms through the

ICDR( Issue of Capital and Disclosure Requirements Regulations)2014 that the

issuer and the promoter need to comply with for accessing the market..

Refer Handout on norms to be fulfilled before Issue( pg 23-26)

Primary Market

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Initial Public Offering [IPO] - An initial public offering is when an unlisted

company makes either a fresh issue of securities of an offer for sale of its existing

securities or both for the first time to the public.

Further Issue - A follow on public offering is known as further issue. This is

offered through an offer document when an already listed organization makes

either a fresh issue of securities to the public or an offer for sale to the public.

Different Kinds of Issues

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Rights Issue - Here, a listed organization proposes to issue fresh securities to its

existing shareholders as on a record date. The rights are offered in a particular ratio

to the number of securities held prior to the issue. This route is best suited for

organizations who would like to raise capital without diluting the stake of its

existing shareholders.

Preferential Issue - This is an issue of either shares or convertible securities by

listed organizations to a select group of people under Section 81 of the Companies

Act,1956. This issue is neither a Rights issue nor Public issue and is a faster way

for any organization to raise capital.

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IPO grading is the grade assigned by a Credit Rating Agency, registered with SEBI, to the

initial public offering (IPO) of equity shares or any other security which may be converted

into or exchanged with equity shares at a later date. The grade represents a relative assessment

of the fundamentals of that issue in relation to the other listed equity securities in India. Such

grading is generally assigned on a five-point scale with a higher score indicating stronger

fundamentals and vice versa as below.

IPO grade 1: Poor fundamentals

IPO grade 2: Below-average fundamentals

IPO grade 3: Average fundamentals

IPO grade 4: Above-average fundamentals

IPO grade 5: Strong fundamentals

IPO grading has been introduced as an endeavour to make additional information available for

the investors in order to facilitate their assessment of equity issues offered through an IPO.

IPO Grading

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Discussion 4-Financial Inclusion to Boost Markets

Discussion 5- Promoters guide Primary Market Sentiment says SEBI chief

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Duties of the IPO management team involve a vast amount of preparatory work, which

includes research and due diligence.

IPO filings require a prospectus detailing plans for the future, including proposed

responsibilities of the offering company and potential shareholders.

The group managing an IPO develops the plan for staffing and production during an

initial public offering.

Intermediaries involved in the Issue Process: Merchant Bankers to the issue or Book

Running Lead Managers (BRLM), syndicate members, Registrars to the issue, Bankers

to the issue, Auditors of the company, Underwriters to the issue, Solicitors, etc.

Merchant Bankers Role

Underwriters Duty

IPO Management

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Few Terminologies

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1. When a listed company declares dividends or bonus issues, there has to be a cut-off date for such benefits to be transferred to the shareholders.

2. When the markets go down3. are additional shares given to the current

shareholders without any additional cost, based upon the number of shares that a shareholder owns.

4. The first draft prospectus5. ____________means Prospectus in case of

a public issue or offer for sale and Letter of Offer in case of a rights issue, which is filed Registrar of Companies (ROC) and Stock Exchanges.

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Draft Offer document means the offer document in draft stage. The draft offer

documents are filed with SEBI, at least 21 days prior to the filing of the offer

document with ROC/ SEs. SEBI may specifies changes, if any, in the draft offer

document and the issuer or the Lead Merchant banker shall carry out such changes

in the draft offer document before filing the offer document with ROC/SEs. The

draft offer document is available on the SEBI website for public comments for a

period of 21 days from the filing of the draft offer document with SEBI.

Offer Document

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(a) Cover Page

Under this head full contact details of the Issuer Company, lead managers and registrars, the

nature, number, price and amount of instruments offered and issue size, and the particulars

regarding listing. Other details such as Credit Rating, IPO Grading, risks in relation to the first

issue, etc are also disclosed if applicable.

 

(b) Risk Factors

Under this head the management of the issuer company gives its view on the Internal and external

risks envisaged by the company and the proposals, if any, to address such risks. The company also

makes a note on the forward looking statements. This information is disclosed in the initial pages

of the document and also in the abridged prospectus. It is generally advised that the investors

should go through all the risk factors of the company before making an investment decision.

 

Contents of an Offer Document

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(c) Introduction

Under this head a summary of the industry in which the issuer company operates, the business of the Issuer

Company, offering details in brief, summary of consolidated financial statements and other data relating to general

information about the company, the merchant bankers and their responsibilities, the details of brokers/syndicate

members to the Issue, credit rating (in case of debt issue), debenture trustees (in case of debt issue), monitoring

agency, book building process in brief, IPO Grading in case of First Issue of Equity capital and details of

underwriting Agreements are given. Important details of capital structure, objects of the offering, funds

requirement, funding plan, schedule of implementation, funds deployed, sources of financing of funds already

deployed, sources of financing for the balance fund requirement, interim use of funds, basic terms of issue, basis for

issue price, tax benefits are also covered.

 

(d) About us

Under this head a review of the details of business of the company, business strategy, competitive strengths, insurance,

industry‐regulation (if applicable), history and corporate structure, main objects, subsidiary details, management

and board of directors, compensation, corporate governance, related party transactions, exchange rates, currency of

presentation and dividend policy are given.

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(e) Financial Statements

Under this head financial statement and restatement as per the requirement of the Guidelines and

differences between any other accounting policies and the Indian Accounting Policies (if the Company has

presented its Financial Statements also as per either US GAAP/IFRS) are presented.

 

(f) Legal and other information

Under this head outstanding litigations and material developments, litigations involving the company, the

promoters of the company, its subsidiaries, and group companies are disclosed. Also material

developments since the last balance sheet date, government approvals/licensing arrangements, investment

approvals (FIPB/RBI etc.), technical approvals, and indebtedness, etc. are disclosed.

(g) Other regulatory and statutory disclosures

Under this head, authority for the Issue, prohibition by SEBI, eligibility of the company to enter the capital

market, disclaimer statement by the issuer and the lead manager, disclaimer in respect of jurisdiction,

distribution of information to investors, disclaimer clause of the stock exchanges, listing, impersonation,

minimum subscription, letters of allotment or refund orders, consents, and the like

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(h) Offering information

Under this head Terms of the Issue, ranking of equity shares, mode of payment of dividend, face

value and issue price, rights of the equity shareholder, market lot, nomination facility to investor,

issue procedure, book building procedure in details along with the process of making an application,

signing of underwriting agreement and filing of prospectus with SEBI/ROC, announcement of

statutory advertisement, issuance of confirmation of allocation note("can") and allotment in the issue,

designated date, general instructions, instructions for completing the bid form, payment instructions,

submission of bid form, other instructions, disposal of application and application moneys, , interest

on refund of excess bid amount, basis of allotment or allocation, method of proportionate allotment,

dispatch of refund orders, communications, undertaking by the company, utilization of issue

proceeds, restrictions on foreign ownership of Indian securities, are disclosed.

 

(i) Other Information

This covers description of equity shares and terms of the Articles of Association, material contracts

and documents for inspection, declaration, definitions and abbreviations, etc

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(a) Where can I get application forms for applying/ bidding for the shares?

  Application forms for applying/bidding for shares are available with all syndicate members, collection centers, the brokers to

the issue and the bankers to the issue. In case you intend to apply through new process introduced by SEBI i.e.

APPLICATIONS SUPPORTED BY BLOCKED AMOOUNT (ASBA), you may get the ASBA application forms form the

Self Certified Syndicate Banks.

 

(b) Whom should I approach if the information disclosed in the offer document appears to be factually incorrect?

  The document is prepared by Merchant Banker(s), registered with SEBI. They are required to do the due diligence while

preparing an offer document. The draft offer document submitted to SEBI is put on website for public comments. In case,

you find any instance of misinformation/ lack of information, you may send your complaint to Lead Manager to the issue

and/ or to SEBI, at this address:

 

(c) Is it compulsory for me to have a Demat Account?

  As per the requirement, all the public issues of size in excess of Rs.10 crore, are to made compulsorily in demat mode. Thus,

if you intend to apply for an issue that is being made in a compulsory demat mode, you are required to have a demat account

and also have the responsibility to put the correct DP ID and Client ID details in the bid/application forms

FAQs about Investing in Public/Rights Issues

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(d) How can I know about the demand for an issue at any point of time?

  The status of bidding in a book built issue is available on the website of BSE/NSE on a consolidated basis. The data regarding

bids is also available investor category wise. After the price has been determined on the basis of bidding, the public advertisement

containing, inter alia, the price as well as a table showing the number of securities and the amount payable by an investor, based

on the price determined, is issued. However, in case of a fixed price issue, information is available only after the closure of the

issue through a public advertisement, issued within 10 days of dispatch of the certificates of allotment/ refund orders.

 

(e) How will I get my refund in an issue?

  You can get refunds in an issue through various modes viz. registered/ordinary post, Direct Credit, RTGS (Real Time Gross

Settlement), ECS (Electronic Clearing Service) and NEFT (National Electronic Funds Transfer). As stated above, if you are

residing in one of the 68 centers as specified by Reserve Bank of India, then you will get refunds through ECS only except where

you are otherwise disclosed eligible under Direct Credit and RTGS. If you are residing at any other center, then you will continue

to get refunds through registered/ordinary post. You are therefore advised to read the instructions given in the prospectus/

abridged prospectus/ application form about centers. For more details, you may read subsection on “Electronic Clearing Scheme

for Refunds”.

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Can a retail investor also bid in a book-built issue?

How is a retain investor defined?

Can I apply for the IPO online?

Can I change/revise my bid?

Can I know the number of shares that would be allotted to me?

Does it mean that SEBI recommends an issue?

Does SEBI approve the contents of the issue?

Does SEBI tag make my money safe?

Having applied for an IPO how can I know my allotment status?

Test your Knowledge...

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Book building is essentially a process used in IPOs for efficient price discovery,

wherein during the period when the offer is open, bids are collected from investors at

various prices, which are above or equal to the floor price.

The offer price is determined after the bid closing date. In its endeavour to

continuously improve the Indian securities market, the NSE has offered an

infrastructure for conducting online IPOs through book building.

It helps to discover prices as well as the demand for the security to be issued through

a process of bidding.

The advantages are that (a) the investor parts with his/her money only after the

allotment, (b) it eliminates refunds except in the case of direct applications, and (c) it

reduces the time taken to process the issue.

Book Building

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Book building is a process of price discovery. The issuer discloses a price band or

floor price before opening of the issue of the securities offered. On the basis of the

demands received at various price levels within the price band specified by the

issuer, Book Running Lead Manager (BRLM) in close consultation with the issuer

arrives at a price at which the security offered by the issuer, can be issued.

The price band is a band of price within which investors can bid. The spread

between the floor and the cap of the price band shall not be more than 20%. The

price band can be revised. If revised, the bidding period shall be extended for a

further period of three days, subject to the total bidding period not exceeding

thirteen days.

FAQs about Book Building

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Book building is a process of price discovery. A floor price or price band within which

the bids can move is disclosed at least two working days before opening of the issue in

case of an IPO and atleast one day before opening of the issue in case of an FPO. The

applicants bid for the shares quoting the price and the quantity that they would like to

bid at. After the bidding process is complete, the ‘cut‐off’ price is arrived at based on the

demand of securities. The basis of Allotment is then finalized and allotment/refund is

undertaken. The final prospectus with all the details including the final issue price and

the issue size is filed with ROC, thus completing the issue process. Only the retail

investors have the option of bidding at ‘cut‐off’.

“Cut‐off” option is available for only retail individual investors i.e investors who are

applying for securities worth up to Rs 1,00,000/‐ only. Such investors are required to tick

the cut‐off option which indicates their willingness to subscribe to shares at any price

discovered within the price band. Unlike price bids (where a specific price is indicated)

which can be invalid, if price indicated by applicant is lower than the price discovered,

the cut‐off bids always remain valid for the purpose of allotment 

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You can change or revise the quantity or price in the bid using the form for changing/revising

the bid that is available along with the application form. However, the entire process of

changing or revising the bids shall be completed within the date of closure of the issue.

 

You can cancel your bid anytime before the finalization of the basis of allotment by

approaching/ writing/ making an application to the registrar to the issue.

What Proof can I request from a trading member or a syndicate member for entering bids?

  The syndicate member returns the counterfoil with the signature, date and stamp of the

syndicate member. You can retain this as a sufficient proof that the bids have been accepted by

the trading / syndicate member for uploading on the terminal.

 

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Discussion 6-Analysts expect Lavasa to trigger IPO market revival

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 ‘Lock-in’ indicates a freeze on the sale of shares for a certain period of time. SEBI

guidelines have stipulated lock-in requirements on shares of promoters mainly to

ensure that the promoters or main persons, who are controlling the company, shall

continue to hold some minimum percentage in the company after the public issue

Lock- in

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Listing means admission of securities to dealings on a recognised stock exchange. The

securities may be of any public limited company, Central or State Government, quasi

governmental and other financial institutions/corporations, municipalities, etc.

The objectives of listing are mainly to :

provide liquidity to securities;

mobilize savings for economic development;

protect interest of investors by ensuring full disclosures.

The BSE Limited has a dedicated Listing Department to grant approval for listing of securities

of companies in accordance with the provisions of the Securities Contracts (Regulation) Act,

1956, Securities Contracts (Regulation) Rules, 1957, Companies Act, 1956, Guidelines issued

by SEBI and Rules, Bye-laws and Regulations of BSE.

Listing

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Eligibility Criteria:

The following eligibility criteria have been prescribed for listing of companies on BSE,

through Initial Public Offerings (IPOs) & Follow-on Public Offerings (FPOs):

Minimum Listing Requirements for New Companies

The minimum post-issue paid-up capital of the applicant company (hereinafter referred

to as "the 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 (market

capitalization shall be calculated by multiplying the post-issue paid-up number of equity

shares with the issue price).

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Further :

In respect of the requirement of paid-up capital and market capitalization, the issuers shall be required to

include in the disclaimer clause forming a part of the offer document that in the event of the market

capitalization (product of issue price and the post issue number of shares) requirement of BSE not being

met, the securities of the issuer would not be listed on BSE.

The applicant, promoters and/or group companies, shall not be in default in compliance of the listing

agreement.

The above eligibility criteria would be in addition to the conditions prescribed under SEBI (Issue of

Capital & Disclosure Requirements) Regulations, 2009.

The Issuer shall comply to the guidance/ regulations applicable to listing as bidding inter alia from

◦ Securities Contracts (Regulations) Act 1956

◦ Securities Contracts (Regulation) Rules 1957

◦ Companies Act 1956

◦ Securities and Exchange Board of India Act 1992

◦ And any other circular, clarifications, guidelines issued by the appropriate authority.

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A DR is a type of negotiable (transferable) financial security traded on a local stock exchange but

represents a security, usually in the form of equity, issued by a foreign, publicly-listed company.

The DR, which is a physical certificate, allows investors to hold shares in equity of other countries.

One of the most common types of DRs is the American depository receipt (ADR), which has been

offering companies, investors and traders global investment opportunities since the 1920s.

Since then, DRs have spread to other parts of the globe in the form of global depository receipts

(GDRs).

The other most common type of DRs are European DRs and International DRs.

ADRs are typically traded on a US national stock exchange, such as the New York Stock Exchange

(NYSE) or the American Stock Exchange, while GDRs are commonly listed on European stock

exchanges such as the London Stock Exchange.

Both ADRs and GDRs are usually denominated in US dollars, but can also be denominated in

Euros.

Few Concepts: Foreign Capital Issuance1. Depository Receipts, ADR and GDR

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Indian companies can raise foreign currency resources abroad through the issue of

ADRs/ GDRs, in accordance with the Scheme for issue of Foreign Currency

Convertible Bonds and Ordinary Shares (Through Depository Receipt Mechanism)

Scheme, 1993 and guidelines issued by the Government of India thereunder from time

to time.

A company can issue ADRs / GDRs, if it is eligible to issue shares to persons resident

outside India under the FDI Scheme. However, an Indian listed company, which is not

eligible to raise funds from the Indian Capital Market including a company which has

been restrained from accessing the securities market by the Securities and Exchange

Board of India (SEBI) will not be eligible to issue ADRs/GDRs.

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2. IDR

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A type of convertible bond issued in a currency different than the issuer's domestic

currency.

In other words, the money being raised by the issuing company is in the form of a foreign

currency.

A convertible bond is a mix between a debt and equity instrument. It acts like a bond by

making regular coupon and principal payments, but these bonds also give the bondholder

the option to convert the bond into stock.

Due to the equity side of the bond, which adds value, the coupon payments on the bond are

lower for the company, thereby reducing its debt-financing costs.

The investors receive the safety of guaranteed payments on the bond and are also able to

take advantage of any large price appreciation in the company's stock. (Bondholders take

advantage of this appreciation by means warrants attached to the bonds, which are

activated when the price of the stock reaches a certain point.)

3. FCCB

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It refers to commercial loans in the form of bank loans, buyers’ credit, suppliers’

credit, securitized instruments (e.g. Floating rate notes and fixed rate bonds, non-

convertible, optionally convertible or partially convertible preference shares)

availed of from non-resident lenders with a minimum average maturity of 3 years.

4. External Commercial borrowings

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ECB can be accessed under two routes, viz.:-

A) Automatic Route:-

Access of funds under Automatic Route does not require RBI/GOI approval. Corporate

including hotel, hospital, software sectors (registered under the Companies Act 1956)

and Infrastructure Finance Companies (IFCs) except financial intermediaries such as

banks, FIs, HFCs, and NBFCs are eligible to raise ECB. Units in SEZs are allowed to

raise ECB . NGOs engaged in micro finance activities are eligible to avail of ECB

(subject to certain conditions). Trusts and Non-Profit making organizations are not

eligible to raise ECB.

ECB can be raised by borrowers from internationally recognized sources such as (i)

international banks, (ii) international capital markets, (iii) multilateral financial

institutions /Regional Financial Institutions and Government owned Development

Financial Institutions, (iv) Export Credit Agencies, (v) Suppliers of Equipments, (vi)

Foreign Collaborators and (vii) Foreign Equity Holders

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(B) APPROVAL ROUTE

Proposals falling under the category include:-

a) On lending by the EXIM Bank for specific purposes (case to case basis).

b) Banks and financial institutions which had participated in the textile or steel sector restructuring

package as approved by the Government.

c) ECB with minimum average maturity of 5 years by NBFC to finance import of infrastructure equipment

for leasing to infrastructure projects.

d) Infrastructure Finance Companies (IFCs) i.e. NBFCs, categorized as IFCs, by RBI (beyond 50% of their

owned funds) for on-lending to the infrastructure sector as defined under the ECB policy and subject to

compliance of certain stipulations.

e) Foreign Currency Convertible Bonds (FCCBs) by Housing Finance Companies.

f) Special Purpose Vehicles (SPV) or any other entity notified by the RBI, set up to finance infrastructure

companies / projects exclusively

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