Ch.

3 – Primary Market ( Notes )

Primary Market: In a primary market, securities are created for the first time for investors to purchase. New
securities are issued in this market through a stock exchange, enabling the government as well as companies
to raise capital.

Face Value : When you start investing in stocks, the first thing to comprehend is the share’s face value in the
stock market. It is also referred to as the par value, and it’s determined at the time the stock is issued. In the
stock market Face Value is a financial term used to describe the nominal value of a security.

Premium : Shares are generally issued at par or their nominal value, but sometimes the shares are issued at an
amount that is higher than the par value or the nominal value, such instance of issuing shares is known as
shares issued at premium.
For example, if a company issues share of Rs.100 at Rs.110 then Rs.10 (i.e. Rs 100—110) is the amount of
premium.

Discount : The issue of shares at a discount means the issue of the shares at a price less than the face value of
the share. For example, if a company issues share of Rs.100 at Rs.90, then Rs.10 (i.e. Rs 100—90) is the amount
of discount.

What is Issue of Shares?

The issue of shares is the procedure in which enterprises allocate new shares to the shareholders.
Shareholders can be either corporates or individuals. The enterprise follows the rules stipulated by Companies
Act 2013 while circulating the shares.

Initial Public offering

Initial public offering is the process by which a private company can go public by sale of its stocks to general
public. It could be a new, young company or an old company which decides to be listed on an exchange and
hence goes .

Right Issue:
A rights issue is a way of raising additional capital from the shareholders of a company. In a rights issue, the
company first extends an invitation to its existing shareholders to purchase the shares before it is opened up
for take in the secondary .

Book Building:
Book building is a process that helps companies discover the price of their security when their shares are being
offered for sale in an IPO with the help of investment bankers. Major stock exchanges and regulators
recommend it because it is the most efficient mechanism to price securities in the market.

Price – Band:
A price band is a value-setting method in which a seller indicates an upper and lower cost limit, between
which buyers are able to place bids. The price band's floor and cap provide guidance to the buyers. This type
of auction pricing technique is often used with initial public offerings (IPOs).
Cut – Off Price: An IPO book building issue opens with a price range and there are both, minimum price and
a maximum price for the issue. An investor can place bids for the desired quantity in multiples of the lot size
with a price within the applicable range.

What is the role of registrar of an IPO?

Registrar of a public issue is a prime body in processing IPO's. They are independent financial institution
registered with SEBI and stock exchanges. They are appointed by the company going public. Responsibility of a
registrar for an IPO is mainly involves processing of IPO applications, allocate shares to applicants based on
SEBI guidelines, process refunds through ECS or cheque and transfer allocated shares to investors Demat
accounts.

What is Follow on public offering or FPO?

Follow on public offering (FPO) is public issue of shares for already listed company.

Prospectus:
The prospectus is a legal document, which outlines the company’s financial securities for sale to the investors.
The company provides prospectus with capital raising intention. Prospectus helps the investors to make a
well-informed decision because of the prospectus all the required information of the securities which are
offered to the public for sale.

Draft Offer Document: Offer document’ 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 with the Registrar of Companies (ROC) and Stock Exchanges
(SEs). An offer document covers all the relevant information to help an investor to make his/her investment
decision.
‘Draft Offer document’ means the offer document in draft stage.
The draft offer documents are filed with SEBI, atleast 30 days prior to the registration of red herring
prospectus or prospectus with ROC.
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.

Abridged prospectus – An abridged prospectus contains all the essential information regarding the company,
its financial history, its promoters, and its offer for sale.

American Depositary Share (ADS): An American depositary share (ADS) is an equity share of a non-U.S.
company that is held by a U.S. depositary bank and is available for purchase by U.S. investors.
The entire issuance of shares by a foreign company is called an American Depositary Receipt (ADR), while the
individual shares are referred to as ADSs. But the terms American Depositary Shares and American Depositary
Receipts are often used interchangeably.

PRIMARY & SECONDARY MARKET

Basis Primary market Secondary market
 Definition A primary market is a marketplace A secondary market is a prototype of the capital
where corporations imbibe a fresh issue market where debentures, current shares,
of shares for being contributed by the options, bonds, treasury bills, commercial
public for soliciting capital to meet their papers, etc., of the enterprises are patronised
necessary long-term funds like amongst the investors
extending the current trade or buying a
unique entity.
Purchasing Direct purchase Indirect purchase
type
Parties of Buying and selling takes place between Buying and selling takes place between the
buying and the company and the investors. investors.
selling
To whom it It provides financing to the existing It does not provide any kind of financing.
provides companies for facilitating growth and
financing expansion.
Intermediaries Underwriters Brokers
involved
Price levels Remain fixed Price level varies with variations in demand and
supply

ADR & GDR

Basis ADR GDR

American Depository Receipts (ADR) is a Global Depository Receipts (GDR) are a type of
Definition type of negotiable security instrument negotiable instruments that are issued by a
that is issued by a US bank on behalf of foreign depository bank for trading of shares of
a non-US company, which is trading on a company in an international market
the US stock exchange.
US Dollars US Dollars, Euro
Currency
traded in

To acquire resources in the US Market To acquire resources in the International Market

Purpose

Listed in NASDAQ Listed in Non-US stock exchanges such as LSE

(London Stock Exchange) and Euronext (France)

US Capital Market European Capital Market

Issued By