Primary Market

The primary market provides the channel for creation of new securities. Primary market provides opportunity to issuers of securities; Government as well as corporates, to raise resources to meet their requirements of investment.They may issue the securities at face value, or at a discount/premium and these securities may take a variety of forms such as equity, debt etc.

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Here I will talk about why do companies raise funds or need to issue shares,what is face value of share and premium and discount. Explain the concept of equity and debt

PRIMARY MARKET

FUNCTIONS OF NEW ISSUES/PRIMARY MARKET

Channeling of investible funds into industrial enterprises through the triple-service function

OriginationUnderwritingDistribution

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PRIMARY MARKET

FUNCTIONS OF NEW ISSUES/PRIMARY MARKET

Origination

Refers to the work of investigation and analysis and processing of new proposals. Preliminary investigation refers to a careful study of technical, economical, financial and legal aspects of the issuing companies.It warrants the backing of the issue houses in the sense of lending their name to the company and thus gives the issue the stamp of respectability.

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PRIMARY MARKET

FUNCTIONS OF NEW ISSUES/PRIMARY MARKET

Underwriting

Refers to contractually guaranteeing subscription to shares or other securities. An underwriting agreement serves as back-up in the event of inadequate subscription to a public subscription.The adequate institutional arrangement for underwriting is of crucial importance both to the issuing companies as well as investing public. In India, merchant bankers, stockbrokers, banks and financial institutions offer underwriting commitments and receive commission on the amount underwritten. In some western countries, underwriting means purchase of securities from a company by investment bankers, who subsequently sell it to investors,

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PRIMARY MARKET

FUNCTIONS OF NEW ISSUES/PRIMARY MARKET

Distribution

Success of an issue depends on the issues being acquired by the investing public.The sale of securities to ultimate investors is called as distribution,It is a specialist job which can be performed by brokers and dealers in securities, who maintain regular and direct contact with the ultimate investor.

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Issues Types

Issues of equity shares can be classified as Public, Rights or Preferential or Private placements. Public issues can be Initial Public Offering (IPO) or Follow On Public Offers (FPO).When an unlisted company go for offering its equity shares for the first time to the public it is called IPO.If a listed company makes second issues to public it is called FPO.When a listed company issues its fresh equities to its existing shareholders it is called right issues. Issues of shares or convertible debenture/securities by a listed company to a select group of persons as per the SEBI guidelines is called preferential issues.

Minimum Listing Requirements for New Companies

The following eligibility criteria have been prescribed effective August 1, 2006 for listing of companies on BSE, through Initial Public Offerings (IPOs) & Follow-on Public Offerings (FPOs):Companies have been classified as large cap companies and small cap companies. A large cap company is a company with a minimum issue size of Rs. 10 crore and market capitalization of not less than Rs. 25 crore. A small cap company is a company other than a large cap company

In respect of Large Cap Companies

The minimum post-issue paid-up capital of the applicant company (hereinafter referred to as "the Company") shall be Rs. 3 crore; 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)

Small Cap Companies

The minimum post-issue paid-up capital of the Company shall be Rs. 3 crore;

and

- The minimum issue size shall be Rs. 3 crore; and

The minimum market capitalization of the Company shall be Rs. 5 crore and

The minimum income/turnover of the Company shall be Rs. 3 crore in each of the preceding three 12-months period; and

The minimum number of public shareholders after the issue shall be 1000.

Draft Offer Document

Company making IPO/FPO or right issues have to prepare the Draft Offer Document as per SEBI Guidelines.

Offer Document generally contains about the company, risk factors, management, business environment, need of capital, capital structure etc.

Role of Underwriters/ Lead Managers

Two merchant bankers / lead managers certify the Draft Offer Document. Draft offer Documents should be filed with SEBI 21 days before and it is generally in the SEBI website for public comments for 3 weeks. After 21 days, necessary corrections need to be made as per the SEBI order to finalise the Prospectus of Issue. Lead managers assist the company in the preparation of offer document, pricing of process, issue management, allocation of shares, etc.Underwriters provide assurance for the raising the amount of capital issued by the company.

Pricing of Issues

Pricing of IPO is generally decided by the company in consultation with the lead manager. Following parameters play leading role in the pricing decision.

Book Value/ Networth of the company

Average EPS of the company during the preceding three years.

Valuation of intangible assets including goodwill

Equity Price of similar company

PRIMARY MARKET

PUBLIC ISSUE THROUGH PROSPECTUS

Corporate enterprise raise capital through issue of securities by means of prospectusIssuing companies themselves offer directly to the general public a fixed number of shares at a stated price.

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PRIMARY MARKET

PUBLIC ISSUE THROUGH PROSPECTUS

Another feature of this method is that generally the issues are underwritten to ensure success arising out of public response.

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PRIMARY MARKET

ABRIDGED PROSPECTUS

Instead of appending full prospectus, only an abridged prospectus need only be appended to the application form. However, for full version of prospectus can be seen from the lead managers offices.

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Method of Pricing:
Fixed Price vis--vis Book Building

In case of fixed price IPO, the price and the amount of money the company is going to raise is known to investors before the subscription. However, fixed price IPO generally is under-priced primarily due to the fear of under-subscription.The issue of actual price discovery was addressed by adopting the book-building process of IPO allocation. One of the most prominent of these guidelines was the abolition of control on pricing of capital. Book building was then introduced into the Indian market in 1999.

Book Building

In the book-building approach the issuer sets a base price and a price band, and the final offer price is required to be within the initial pricing band. The upper price of the band can be a maximum of 1.2 times the base or floor price.

A Red herring prospectus is issued which means a prospectus that does not have complete particulars on the price and the quantum of securities offered.

An issue through the book-building route remains open for a period of 3 to 7 days and can be extended by another three days if the issuer decides to revise the floor price and the bandEach category investors bid the price and the number of share they wanted to purchase. After the bidding process the lead managers segregate the shares as per the investor categories and allocation is done.

Cut Off Price (Dutch auction)

1 million shares to be issued.

Actual allocation at Price Rs.53 which is the cut off price.

No. of SharesBid PriceCumulative Shares2000005520000040000054600000600000531000000

Book Building

The Basis of Allotment should be completed with 15 days from the issue close date. As soon as the basis of allotment is completed, within 2 working days the details of credit to demat account /allotment advice and despatch of refund order needs to be completed. So an investor should know in about 15 days time from the closure of issue, whether shares are allotted to him or not.The shares would get listed around 3 weeks after the closure of the book built issue.

PRIVATE PLACEMENT AND PREFERENTIAL ALLOTMENT

Private placement and preferential allotment involve

sale of securities to a limited number of sophisticated

investors such as financial institutions, mutual funds,

venture capital funds, banks, and so on.

In a preferential allotment, the identity of investors is

known when the issuing company seeks the approval of

the shareholders, whereas in a private placement, the

identity of investors is not known when the offer

document (popularly known as the information

memorandum) is prepared.

PRIVATE PLACEMENT AND PREFERENTIAL ALLOTMENT

In the Indian context we find broadly (i) private placement refers to sale of equity or equity related instruments of an unlisted company or sale of debentures of a listed or unlisted company and (ii) preferential allotment refers to sale of equity or equity related instruments of a listed company.

PRIMARY MARKET

It is the issue of new shares in which the existing shareholders are given preemptive rights to subscribe to the new issue on a pro-rata basisThe right is given in the form of an offer to existing shareholders to subscribe to a proportionate number of fresh, extra shares at a price. A shareholder has four optionsExercise his rights and buy new shares at the offered price.Renounce the right and sell them in open marketRenounce part of his rights and exercise the remainderChoose to do nothing.

RIGHTS ISSUE

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Emerging Trends

Shares Split - Increases the number of outstanding shares through a proportional reduction in the par value of the share. It helps to make the shares more attractive.Reverse Split Issue of Bonus Share - increases the paid up capital and reduces the reserves.

A bonus issue represents capitalization of free reserves.

Emerging Trends

Share buyback - Repurchase of its own shares by a company.

Return of surplus cash to shareholders

Increase EPS thereby increasing share value

IPO Rating Green Shoe option - issuer can issue more shares in case of oversubscription on a prorata basis. The green shoe option can be a maximum of 15% of the public offer.