PRIMARY MARKET

Primary market is a market for new issues, also called new issues
market, a market for fresh capital.
Funds mobilized in the primary market through Initial Public
Offer(IPO), Right issue and private placement. Bonus shares are
issued in lieu of dividend payment.
If the offer or invitation to subscribe for shares or debentures is more
than 200 persons, then such an offer or invitation shall be deemed to
be public offering.
The direct sale of securities by a company to some select people or to
institutional investors is called private placement. No prospectus is
issued in private placement. Private placement covers equity shares,
preference shares and debentures. It offers access to capital more
quickly than the public issue and is quite inexpensive on account of
the absence of various issue related expenses.
Participants in Primary Market
Broadly, there are three categories of participants.
1. Issuers of securities
2. Investors in securities
3. Intermediaries to an issue
Intermediaries to an issue
- Merchant bankers or Book running lead managers(BRLM)
- Syndicate members
- Registrars to the issue
- Bankers to the issue
Merchant bankers
 - should be registered with SEBI
- performs most of the pre-issue and post-issue activities
Registrars to the issue
- finalizing the list of eligible allottees
- ensuring crediting of shares to the demat accounts of eligible
allottees
- arranging refund orders
Bankers to the Issue
- activities relating to collection of application amounts
- transfer the amount to escrow accounts
- crediting the refund amount
All IPO allotments are in dematerialized form as they are
compulsorily traded in dematerialized form.
Determining the Offer Price
1. Fixed Price
2. Book Building
In the fixed price method, the investors demand is not taken into
account.
Book Building, is a mechanism through which an offer price for IPOs
based on the investors’ demand is determined. This method explicitly
uses investors’ demand for shares at various prices as an important
input to arrive at an offer prices. In this, the 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 received.
In case of fixed price issue, offer is done through Prospectus and for
Book building, the offer is done through Red Herring Prospectus. It
is a prospectus which does not have details of either price or number
of shares being offered or the amount of issue.
A public issue shall be kept open for at least three working days but
not more than seven working days which can be extended for a
maximum period of ten days.
Application supported by Blocked Amount (ASBA) Process
ASBA is an application for submitting to an issue, containing an
authorization to block the application money in a bank account, which
will avoid the refund process.
The application money will remain blocked in the bank account till
finalization of the allotment. On finalistion of the allotment, the
Registrar to the issue will send an appropriate request to the Bank for
unblocking the relevant bank account and for transferring the requisite
amount to the issuer company’s account. Else it will be simply
unlocked so that the applicant depositor will be able to use the
blocked amount in the account.
Anchor Investor
To generate more confidence in the minds of retail investor, better
price in the issue, the Anchor Investor concept was introduced by
SEBI.
- Anchor investor subscribe to the issue prior to the opening.
- Anchor investor will be Qualified Institutional Buyer .
- They cannot be related to the promoter or promoter group or
lead managers.
- Minimum Rs.10 cr, they have to pay at least 25 percent upfront
and the remaining 75 percent within two days of the closure of
the public issue.
- Holds the share for at least one month which instills confidence
in the retail investors and boosts primary market.
Green Shoe Option
A greenshoe option is an over-allotment option. In the context of an
initial public offering (IPO), it is a provision in an underwriting
agreement that grants the underwriter the right to sell investors more
shares than initially planned by the issuer if the demand for a security
issue proves higher than expected.
It is an option of over allotting shares by an issuer. This option is to
the extent of 15 per cent of the issue size.
In 1919, Green Shoe Manufacturing Company (now part of
Wolverine World Wide, Inc,US) was the first to issue this type of
option. That is why this name, ‘Green Shoe’ got for this type of issue.
PUBLIC ISSUE
- Has to comply with public issue requirements prescribed in
Companies Act 2013 and the rules made thereunder.
- SEBI requirements also
- Has to submit a listing application to recognized stock
exchange
- Issue, transfer of securities by listed companies administered by
SEBI.
- In case of debt securities, procedures are simpler which requires
compliance with basic requirements like having a debenture
trustee, credit rating, disclosure requirements etc. But once
securities are listed in a recognized stock exchange, the issuer
has to comply with continuous listing requirements.
Initial Public Offer (IPO)
IPO is an offering
- 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.
 - In case of an IPO, the availability of information regarding the
past performance of the company and its track record is
generally inadequate and may lack credibility.
- Follow-on public offering (FPO) is an offering of either a fresh
issue of securities or an offer for sales of existing securities by
an already listed company through an offer document.
Primary Issues
1. Public Issue
a) Initial Public Offer(IPO)
b) Follow on Public Offering(FPO)
2. Rights Issue
3. Private Placement
a) Private Placement - Direct sale of securities to some selected
people or to financial institutions
b) Preferential issue – allotment of shares to some select group of
persons
c) Qualified Institutions Placement
A company cannot make a public or rights issue of debt instruments
unless it fulfills the following two conditions:
a) Credit rating of not less than investment grade(Aaa to Baaa3 from
Moody’s or AAA to BBB- from Standard and Poor’s)
is obtained from not less than two SEBI registered credit agencies.
b) It should not be in the list of willful defaulters of RBI and should
not have defaulted payment of interest or principal for a period of
morethan 6 months.
In case of a public issue by an unlisted company, the promoters shall
contribute not less than 20 per cent of the post issue capital which
should be locked in for a period of three years.
Follow on Public Offering (FPO)
- It is an offer of sale of securities by a listed company
- Also known as subsequent or seasoned public offering
- Listed companies issue FPOs to finance their growth plans
Rights Issue
It is an offer of new securities by a listed company to its existing
shareholders on a pro-rata basis
- Offered to the existing shareholders of the company through a
letter of offer.
- Who are holders of equity shares of the company at the date of
offer in proportion to the paid up capital on each share.
- Existing shareholders have a pre-emptive rights to subscribe
- Offered at attractive price often at discount to market price so as
to reward the existing shareholders
- Funds can be raised without diluting the stakes of both its
existing shareholders and promoters. Their ratio of holdings
will be continued in the same proportion even after the rights
issue.
Indian Depository Receipts (IDR)
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.
- Foreign companies are allowed to access the Indian capital
market by issuing IDR.
- Can be purchased by any person who is resident in India as
defined under FEMA. NRIs and FIIs cannot purchase or
possess IDRs without permission of the RBI
 - Only those companies registered overseas and having a pre-
issue paid up capital and free reserves of at least USD 50 million
- Issuing company should have made profits for at least five years
prior to the issue and a dividend record of not less than 10 per
cent in those years.
- The IDR shall not be redeemable into underlying equity shares
for a period of one year from the date of issue
- To be denominated in Indian rupees and will have to be listed on
one or more stock exchanges
- Automatic fungibility of IDRs not permitted. But it should have
partial fungibility, ie., the IDRs can be converted into
underlying equity shares and the underlying equity shares can be
converted into IDRs within the available headroom.
Private Placement
- Direct sale of newly issued securities by the issuer to a small
number of investors through merchant bankers.
- These investors are selected clients such as financial institutions,
corporates, banks and high net worth individuals.
- Private placement offer or invitations cannot be made to more
than 50 persons and 200 persons in the aggregate in a financial
year.
Preferential Issue
- Allottments are made to various strategic groups including
promoters, foreign partners, technical collaborators and private
equity funds.
- No offer document required.
- It is an issue of shares or of convertible securities by listed
companies to a select group of persons.
Qualified Institutional Placement (QIP)
- Issue of equity shares or securities convertible into equity shares
by a listed company to qualified institutional buyers.
- Funds can be raised from domestic and foreign institutional
investors.
- No lock in period
- Issue process is simple and can be completed speedily
- Company issues equity shares and does not create a derivative
investment as is the case with GDR/ADR
- Securities which can be issued are equity shares or any
securities other than warrants, which are convertible into or
exchangeable with equity shares.
- Can be issued to Qualified Institutional Buyers(QIB). Such
QIBs should not be promoters or related to promoters of the
issuer, either directly or indirectly.
- Aggregate funds that can be raised through QIPs in one financial
year shall not exceed five times of the networth of ltghe issuer at
the end of its previous year.
Resource Mobilisation from International Markets
Funds in the primary market can be raised from the domestic market
as well as from international markets. Indian Firms can raise long-
term funds from the international markets in the following ways:
1) Global Depository Receipts(GDR)
2) American Depository Receipts(ADR)
3) Foreign Currency Convertible Bonds(FCCB)
4) External Commercial Borrowings (ECBs)
GDRs/ADRs are esentially equity instruments; FCCB is a debt
instrument convertible into equity on a future date; ECBs are long
term loans raised from the international markets.
1) Global Depository Receipts (GDR)
These are essentially equity instruments issued abroad by authorized
overseas corporate bodies against the share/bonds of Indian
companies held with nominated domestic custodian banks.
 The Indian company intending to issue GDRs will issue the
corresponding number of shares to an overseas depository bank.
 Accordingly the depository bank will issue GDR on the
underlying shares.
 GDRs are freely transferable outside India.
 Dividend in respect of the underlying shares will be paid in
Indian rupees only.
 Denominated in dollars or euros, listed and traded in a foreign
stock exchange
 GDR may represent one or more shares of the issuing company.
 GDRs are fungible – means the holder of GDRs can instruct the
depository to convert them into underlying shares and sell them
in the domestic market.
 GDRs at any time can be converted into underlying shares that it
represents. Till conversion the GDRs do not carry voting rights
and once conversion takes place, the underlying shares are listed
and traded on the domestic exchange
 Mostly, GDRs of Indian companies are listed in Luxembourg
Stock Exchange and London Stock Exchange. Sold primarily to
institutional investors
2) American Depository Receipts (ADR)
These are similar to GDRs. A non-US company that seeks to list in
the US, deposits it’s shares with a US Depository bank and in turn
receives a receipt (ie ADR) which enables the company(Indian or any
other non-US) to raise the funds from US.
  Enables a non-US company(eg: companies registered outside
US) to raise funds from US with the depository receipts issued
by the US depository banks.
 These US depository banks issue ADRs on the strength of
underlying shares of Indian Companies.
 These are negotiable instruments and traded in New York Stock
Exchange(NYSE) and National Association of Securities
Dealers Automated Association (NASDAQ)
 Denominated in USDs
Differences between in GDR and ADR
- ADR issued by US Depository Banks while GDR can be by
depository banks in any other countries
- ADR denominated in USD only, whereas GDR in Euros and
USDs
- ADR had access to the US institutional and retail markets,
whereas GDR apart from the exchanges in other countries, in
US, it had access to US institutional markets only(no access to
retail markets).
GDRs can be converted into ADRs by surrendering the existing
GDRs and depositing the underlying equity shares with the ADR
repository in exchange for ADRs.
The trend is towards the conversion of GDRs into ADRs as ADRs are
more liquid and cover a wider market.
ADRs are accessible to only good companies with high transparency
and good governance practices which also benefits the local investor,
this gets reflected in a higher P/E ratio. Companies are attracted
towards raising ADRs as they are free to decide the deployment of
funds either in the US or in India.
US govt has made listing norms more stringent in the wake of spate of
accounting scandals. With the introduction of stringent Sarbanes
Oxley Act in the US, many Indian Companies have found it difficult
to raise funds through ADRs.
3)Foreign Currency Convertible Bonds(FCCB)
FCCBs are bonds issued by Indian companies and subscribed by a
non-resident in foreign currency. They carry a fixed interest or
coupon rate and are convertible into a certain number of ordinary
shares at a preferred price. They are convertible into ordinary shares
of the issuing company either in whole, or in part. These bonds are
listed and traded abroad.
Investor is given a choice to convert his bond into fixed number of
shares at a pre-determined price or to receive a fixed yield on maturity
 Minimum maturity of 5 years, but no restriction on the time
period for converting the FCCBs into shares.
 Exchange risk is more in FCCBs as interest is payable in foreign
currency.
 Call and put option, if any, shall not be exercisable prior to 5
years
 Issuance without any warrants attached
 Issue related expenses not exceeding 4 per cent of issue size
 FCCBs are subject to all the regulations which are applicable to
ECBs
4) Foreign Currency Exchangeable Bonds (FCEBs)
Issued by an Indian company which is part of the promoter group of
offered company and exchangeable into equity shares of the offered
company. Exchangeable into equity shares of another company,
which is called the offered company, either wholly or partly or on the
basis of any equity related warrants attached to debt instruments
Eg:- Tata Sons, a promoter of all key Tata group companies, issues
exchangeable bonds to raise funds for Tata Motors
  Bonds are exchangeable into equity shares of another company,
to be called offered company, either wholly or partly or on the
basis of any equity related warrants attached to debt instruments.
 The issuing company shall be part of the promoter group of the
offered company and shall hold the equity share/s being offered
at the time of issuance of FCEB.
 The proceeds of FCEBs may be invested by the issuing
company in the promoter group companies.
5) External Commercial Borrowings (ECBs)
ECBs are borrowings raised from the international markets by
corporates. These are India’s overall external debt which includes
external assistance, buyer’s credit, supplier’s credit, short and long
term term credit
 Governed by ECB policy administered by Finance Ministry
alongwith RBI
 Supplement domestically available resources for expansion of
existing capacity as well as for fresh investment.
 Preferred route as the cost of borrowing is low in the
international markets
 Requires sound risk management in view of forex exchange risk
 Default by one Indian corporate will impact subsequent issues.
 Minimum maturity is 3 years
ECBs are commercial loans raised by eligible resident entities from
recognized non-resident entities and should conform to parameters
such as minimum maturity, permitted and not permitted end users etc.
Raising funds through the following three tracks:
Track I – Medium term foreign currency denominated ECB-min 3/5 years
Track II –Long term foreign currency denominated ECB-min 10 years
Track I – Indian rupee(INR) denominated ECB-min 3/5 years
ECBs by
a) Loans including Bank loans
b) Securitized instruments(eg.floating rate notes and fixed rate
bonds, non converitible, optionally converitible or partially
converitible preference shares/debentures)
c) Buyer’s Credit
d) Supplier’s Credit
e) Foreign Currency Converitible Bonds(FCCBs)
f) Foreign Currency Exchangeable Bonds(FCEBs)
g) Financial Lease
Buyer’s credit –Finance for payment of imports in India is arranged
by the importer (buyer) from a bank or financial institution outside
India
Supplier’s credit – Credit extended for imports directly by the
overseas supplier (exporter) instead of a bank or financial institution.
This will be an agreement in the commercial contract.
ECBs can be raised either under the automatic route or under the
approval route
Security for raising ECBs
Banks are permitted to allow creation of charge on immovable assets,
movable assets, financial securities and issue of corporate and/or
personal guarantees in favour of overseas lender/security trustee to
secure the ECB
Guideline relating to International issues
- ADRs/GDRs are considered to be a part of FDI
- ADRs/GDRs have to conform to the existing FDI policy and
only in areas where FDI is permissible.
- Prior permission from Govt is essential for the issue of FCCB
- The company seeking to raise funds abroad through these
instruments should have a consistently good track record of at
least 3 years.
- Proceeds from such issues would not be invested in stock
market and real estate.
- ADRs/GDRs proceeds can be utilized for first stage acquisition
of shares in the disinvestment process of PSUs and also in the
mandatory second stage offer to the public in view of their
strategic importance
- The Govt allowed two-way fungibility for Indian GDRs/ADRs
by which converted local shares could be reconverted into
ADRs/GDRs subject to sectoral caps. Under this scheme, a
stock broker in India, registered with SEBI, can purchase shares
of an Indian company from the market for conversion into
ADRs/GDRs based on instructions received from overseas
investors. R-issuance of ADRs/GDRs would be permitted to the
extent of ADRs/GDRs which have been redeemed into
underlying shares and sold in the Indian market.
- Funds raised through FCCBs can be used for restructuring of
external debt and not more than 25 per c ent of the FCCB issue
proceeds may be used for general corporate restructuring,
including working capital requirements.
- Listed companies not eligible to raise funds from the domestic
capital market, including those restrained by the SEBI, will not
be eligible to issue FCCBs/GDR/ADR.
 - The Indian company issuing ADRs/GDRs has to furnish to the
RBI, full details of such issue within 30 days from the date of
closing of the issue
MASALA BONDS
- These are Rupee denominated bonds issued overseas
- RBI permitted in June 2015
- Can be issued on multiple occasions
- Minimum maturity period is 3 years. Maximum can be as long
as fifteen years
- Corporates , Indian Banks are all eligible to issue Masala Bonds.
- Call and put options if any, shall not be exercisable prior to
completion of minimum maturity.
- The RBI has raised the minimum maturity period for masala
bonds issued over and above US$50 million equivalent in
rupees to five years, while the same has been kept to three years
for issuance up to US$50 million equivalent rupees. Earlier, a
common three years minimum maturity period was allowed,
irrespective of the size of masala bonds issuance.
End-use of Masala Bonds
Proceeds of the borrowing can be used for all purposes except for the
following:
a) Real estate activities, other than development of integrated
township/affordable housing projects.
b) Investing in capital market and using the proceeds for equity
investment domestically.
c) Activities prohibited as per the foreign direct investment
guidelines
d) On-lending to other entities for any of the above purposes; and
e) Purchase of land.
The blue-chip companies tapped the international markets via the
GDR/ADR route to raise financial resources. Corporates, FIs and
banks preferred the private placement routes. The private placement
route became more popular than the public issue route.
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