3. PRIMARY MARKETS OR NEW ISSUE
MARKETS
•Primary market is the part of capital
market where issue of new securities
takes place.
•The issuer may be a new company
or may be an existing company.
•The issues may be of new types or
the securities used in the past.
4. Role of Primary Market
•Capital formation - It provides attractive issue to the potential
investors and with this company can raise capital at lower costs.
•Liquidity - As the securities issued in primary market can be
immediately sold in secondary market the rate of liquidity is
higher.
•Diversification - Many financial intermediaries invest in
primary market; therefore there is less risk if there is failure in
investment as the company does not depend on a single investor.
The diversification of investment reduces the overall risk.
•Reduction in cost - Prospectus containing all details about the
securities are given to the investors hence reducing the cost is
searching and assessing the individual securities.
5. Functions of Primary Market
1. Origination – It refers to the work of
investigation, analysis, and processing of new
project proposal. Therefore origination is the
origin of new issues.
2. Underwriting – It is an agreement between
the underwriter and the issuer whereby the
underwriter promises to subscribe to a
specified no. of securities in the event of
public not subscribing to it.
7. Players in the New Issue Markets
Lead managers – They are appointed by the issuing
company to manage the public issue.
Duties –
i) Drafting Prospectus
ii) Preparing the budget related to issues.
iii) Suggesting the appropriate timings of the public issues.
iii) Assisting in the marketing of public issues.
iv) Advising the company in the appointment of the Registrar
of the issue, underwriter, brokers, bankers to the
issue, advertising agents, etc.
v) Directing the various agencies involved in the public issues.
8. Players in the New Issue Markets
Registrar to issue – Registrars are the
important category of intermediaries who
undertake all activities connected with New Issue
Management.
Duties – i) They receive the share application
from various collection centres.
ii) They recommend the basis of allotment in
consultation with the regional stock exchanges.
iii) They arrange for the despatching of shares
9. Players in the New Issue Markets
iii) They handover the details of the share
allocation and other related registers to the
company.
iv) Usually registrar to the issue retain records at
least for a period of six months from the last
date of despatch of letters of allotment to enable
the investors to approach the registrars for
redressal of their complaints.
10. Players in the New Issue Markets
Underwriters – Underwriting is a contract by means of
which a person gives an assurance to the issuer to the effect
that the former would subscribe to the securities offered in
the event of non subscription by the person to whom they
are offered. The person who assures is called an
underwriter.
Duties –
•They Stand as back up supporters.
•They provide an insurance against the possibility of
inadequate subscription.
• They either may be Banks or FIs or may be brokers and
approved investment companies.
•They charge a commission for underwriting from the
issuing company.
11. Players in the New Issue Markets
Bankers to the Issue – They are responsible for
collecting the application money along with the
along with the application form.
The banker to the issue generally charges
commission besides the brokerage, if any.
As specified by the central government there are
numbers of collections centre and the banker to
the issue should have branches in the in these
collection centers.
12. Players in the New Issue Markets
Advertising Agents – Advertising plays a key role in
promoting public issues. This agency is given the
responsibility to the issue on the suitable media.
These Media Includes
Newspaper/magazines/hoardings/press releases.
The Financial institutions - Financial Institutions
generally underwrite the issue and lend term
loans to the companies. Hence they normally go
through the draft prospectus, study the proposed
programme for public issue and approve them.
13. PLACEMENT OF THE ISSUE/ METHODS
OF FLOATING NEW ISSUES/ IPO
i) Offer through Prospectus/ Public Issues
Under this methods, the issuing company directly offers to
the general public/institutions a fixed no. of shares at a
stated price through a document called prospectus.
The Prospectus should contain:
a) Name of the company.
b) Address of the registered office of the company.
c) Existing and proposed activities.
d) Location of the company.
14. PLACEMENT OF THE ISSUE/ METHODS
OF FLOATING NEW ISSUES.
e) Name of the directors
f) Authorized and issued capital to the public.
g)Dates of opening and closing the subscription.
h) Minimum subscription.
i) Names of the brokers/lead mangers/ merchant
bankers/ registrar to the issue.
j) Floor price and cap price of the share.
k) A statement by the company that it will apply to
the stock exchanges for quotations of its shares.
15. OFFER FOR SALE
• Promoter places his shares with an investment banker
(bought out dealer or sponsor) who offer it to the public
at a later date
Promoter Investment Banker Public
• Hold on period is 70 days to more than a year
• Bought out dealer decides the price after analyzing the
viability, the gestation period, promoters’ background
and future projections
• Boughs out dealer sheds the shares at a premium to the
public
Asst.Prof .Sudatta Mohapatra
16. PRIVATE PLACEMENT
• Small number of financial intermediaries (like Unit
Trust of India, mutual funds, insurance
companies, merchant banking subsidiaries of
commercial banks) purchase the shares and sell them
to investors at a later date at a suitable price
• Advantages:
Cost Effective - statutory and non-statutory
expenses are avoided.
Time Effective
Structure Effectiveness - flexible to suit the
financial intermediaries
Access Effective - issue of all sizes can be
accommodated
17. RIGHT ISSUE
According to the section 81 of the companies Act
1956, if a public company wants to increase its
subscribed capital by allotment of further share
after two years from the date of its formation or
one year from the date of its allotment, which
ever is earlier, should offer share first to its
existing shareholders in proportion to the share
held by them at the time of offer.
18. RIGHT ISSUE
Certain conditions:
A notice should be issued to specify the
number of shares issued
The time given to accept should not be
less than 15 days
Right of the share holders to renounce
the offer in favor of others
19. Book Building
Book building is actually a price discovery method. In this
method, the company doesn't fix up a particular price for the
shares, but instead gives a price range, e.g. Rs 80-100.
When bidding for the shares, investors have to decide at which
price they would like to bid for the shares, for e.g. Rs 80, Rs 90 or
Rs 100. They can bid for the shares at any price within this range.
Based on the demand and supply of the shares, the final price is
fixed. The lowest price (Rs 80) is known as the floor price and the
highest price (Rs 100) is known as cap price.
The price at which the shares are allotted is known as cut off
price. The entire process begins with the selection of the lead
manager, an investment banker whose job is to bring the issue to
the public.
Asst. Prof. Sudatta Mohapatra 19
20. The Process:
The Issuer who is planning an offer nominates lead
merchant banker(s) as 'book runners'.
• The Issuer specifies the number of securities to be
issued and the price band for the bids.
• The Issuer also appoints syndicate members with
whom orders are to be placed by the investors.
• The syndicate members input the orders into an
'electronic book'. This process is called 'bidding' and is
similar to open auction.
• The book normally remains open for a period of 5
days.
• Bids have to be entered within the specified price
band.
20
21. The Process:
• Bids can be revised by the bidders before the
book closes.
• On the close of the book building period, the
book runners evaluate the bids on the basis of
the demand at various price levels.
• The book runners and the Issuer decide the final
price at which the securities shall be issued.
• Generally, the number of shares are fixed, the
issue size gets frozen based on the final price per
share.
• Allocation of securities is made to the successful
bidders. The rest get refund orders.
22. Types of investors
• There are three kinds of investors in a book-building issue.
• The retail individual investor (RII), the non-institutional investor
(NII) and the Qualified Institutional Buyers (QIBs).
• RII is an investor who applies for stocks for a value of not more
than Rs 100,000. Any bid exceeding this amount is considered in
the NII category.
• NIIs are commonly referred to as high net-worth individuals.
• Each of these categories is allocated a certain percentage of the
total issue. The total allotment to the RII category has to be at
least 35% of the total issue. RIIs also have an option of applying
at the cut-off price. This option is not available to other classes
of investors. NIIs are to be given at least 15% of the total issue.
• And the QIBs are to be issued not more than 50% of the total
issue. Allotment to RIIs and NIIs is made through a proportionate
allotment system. The allotment to the QIBs is at the discretion
of the BRLM.
23. Qualified Institutional Buyers (QIBs)
• Qualified Institutional Buyers (QIBs) those institutional investors who are
generally perceived to possess expertise and the financial muscle to
evaluate and invest in the capital markets.
• a ‘Qualified Institutional Buyer’ shall mean:
• a) Public financial institution as defined in section 4A of the Companies
Act, 1956;
• b) Scheduled commercial banks;
• c) Mutual Funds;
• d) Foreign institutional investor registered with SEBI;
• e) Multilateral and bilateral development financial institutions;
• f) Venture Capital funds registered with SEBI.
• g) Foreign Venture Capital investors registered with SEBI.
• h) State Industrial Development Corporations.
• i) Insurance Companies registered with the Insurance Regulatory and
Development Authority (IRDA).
• j) Provident Funds with minimum corpus of Rs.25 crores
• k) Pension Funds with minimum corpus of Rs. 25 crores "These entities are
not required to be registered with SEBI as QIBs. Any entities falling under
the categories specified above are considered as QIBs for the purpose of
participating in primary issuance process."
24. Book building vs fixed price
• The main difference between the book building method and
the fixed price method is that in the former, the issue price is
not decided initially.
• The investors have to bid for the shares within the price
range given and based on the demand and supply of the
shares, the issue price is fixed. On the other hand, in the
fixed price method, the price is decided right at the start.
Investors cannot choose the price, but must buy the shares
at the price decided by the company. In the book building
method, the demand is known every day during the offer
period, but in fixed method, the demand is known only once
the issue closes.
25. Pricing of new issue.
According to the guidelines issued by the SEBI
and controller of capital issues Act 1947 the
pricing of the issue is carried on.
GUIDELINES FOR ISSUE AT PREMIUM:
1. First issue of new companies set up by
existing companies having a track record.
2. First issue of existing privately/closely held
or other existing unlisted companies with
three year track record of consistence
profitability.
26. 3. First Public issue by existing privately/ closely
held or other existing unlisted companies without
three year track record but promoted by existing
companies with a five year track record.
4. Existing privately/closely held or other existing
unlisted company with three year track record of
consistent profitability, seeking disinvestment by
offers to public without issuing fresh capital.
5. Public issue by existing listed companies with the
last three years of dividend paying track record.
27. Guidelines for not permitting to
fix their issue prices at premium.
1. First public issue by existing private, closely
held or other existing unlisted companies
without three year track record of consistent
profitability.
2. Existing private/closing held and other
unlisted companies without three year track
record of consistent profitability seeking
disinvestment offer to public without issuing
fresh capital.
