Chapter 6

The Primary Market

 Chapter Objectives
To understand:
1. Fund raising
2. Book- building
3. Green- shoe option
4. On line IPOs
5. Trends in resources mobilised from the primary
market
6. Trends in resources mobilised from international
capital markets
Primary Market
 New Issues Market- Market for fresh
capital
 Funds mobilized through prospectus,
rights issue and private placement
 Bonus Issue also is means to raise
capital- To boost liquidity, to bring down
stock price, to restructure capital
Primary Issues
 Intermediaries to an Issue

Merchant banker- The merchant banker should be

registered with SEBI . It performs most pre-issue and
post-issue activities

Registrars to the Issue- Finalises list of eligible

allottees, ensure credit rating of shares ,to demat
accounts and process refund orders

Bankers to the Issue- They are appointed by

merchant banker to carry out transactions related to
collection of money its transfer and refunds.
 Free Pricing Regime

Before 1992, CCI regulated price-

Timing , quantum and pricing decided by CCI
New companies – Shares only at par
Existing companies- If substantial reserves
could issue at premium.
Premium – Net Assets Value & P/E value
Issue price set far below market price

Earlier it was misused

- After 1992, the promoter and the
merchant banker decide the pricing
- Now the issue price is to be justified
 Fixed Price offerings & Book
Building
- Made to uninformed investors
- Investors demand not taken into
account
-Under pricing of many issues as it
resulted in high cost of capital
-Long time gap between pricing date,issue
opening date and trading commenced
date

- An alternative method, Book Building

uses investors demand for shares at
various prices- Auction of shares or book
being bulit
- Investors watch the book being built –
Chart indicates bid price and no shares
being bid for. Investors can judge mkt
Fixed Pricing vs Book Building

Fixed Pricing Book Building

 Price known in Advance  Only Indicative Price

 Demand for securities Range Known

offered is known only  Demand for securities
after closure offered is known everyday
 Payment is made at the as book is built in.
time of subscription  Payment Only after
whereas refund after Allocation
allocation
 Book- building Process
- The company appoints a book
runner
- Book runner submits draft
documents to SEBI- Red Herring
prospectus
- Offer of shares at a specified
price range
- Based on the bids, cut- off rate is
decided- ASBA
- Public subscription, allotment
 Allotment of a Book- built issue
Category % of issue to be
allotted on a
proportionate basis
QIB 50%( 5% of the QIB to
be
reserved
for MFs)
HNI 15%
Retail Investor 35%
Retail individual investor – who bids in a book built
issue for a value not more than Rs. 1,00,000
.
Anchor Investor
 Introduced in June 2009 to enhance issuer’s ability to
sell the issue , generate confidence in minds of retail
investors and better discovery of price
 Has to be QIB that buy large chunk of shares a day
before IPO opens.
 Issuer can allot upto 30% of its institutional quota to
such investors
 Pays upfront 25% and remaining 75% within two days
of close of issue
 Hold shares for at least one month
Benefits – Book Building

 Reap benefits arising from price and demand

discovery.
 Cost and time for making public issues lowered.
Process simplified
 Price falling below par after listing remote as investors
trust the price at which syndicate members purchased
the price
Limitations – Book Building
 In India it still depends on good faith
 Lack of transparency at critical steps
 Issuers may have to sell cheap due to collective bargain
power of financial institutions
 Role of retail investors in determining prices is minimum
and thus judging the issue can be difficult
 Share of public offer in total capital reduced from 75%
to 25% in some cases 10%. Effectively for retail
investors(35% of 25%) 8.75%
 https://youtu.be/R-dorvdzH1o
 Reverse Book- building

- Used by companies to delist or buy back

their shares
- Helps in discovering exit price
- Similar to reverse auctions
 Green- shoe option

- An option of allocating shares in excess

of the shares included in the public issue.

- Extent of 15% of issue size

- Post listing price stabilising mechanism

- Mitigates volatility

- Enhances investor confidence

Public Issues
 IPO :It is an offering of either 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.
 FPO :It is an offer of sale of securities by
a listed company. FPO is also known as
subsequent or seasoned public offering.
Rights issue
- issue of new shares to existing shareholders on
a pro-rata basis
- to be kept open for at least 30 days and not
more than 60 days.
Why rights ?
- to reward shareholders
- to reflect the stock’s true worth
- to hike promoter’s stake
Preferential Allotment
- An issue of shares to a select group of persons under section 81
of the Companies Act.
- Select group consists of
promoters
foreign partners
technical collaborators
private equity funds
- Why preferential allotment ?
- to enhance promoter’s holding
- to cash in on the bull run
- to issue shares by way of ESOPs.
- for takeover of company
- quick fund raising at low cost
Private Placement Market
- Direct sale of securities to a few investors through
merchant bankers.
- Preferred route between 1997-98 to 2002-03
- Dormant conditions in the capital market
- Time as well as cost of issue is low
- Tailor- made issues
- Less formalities
- Private placement now regulated
-
Resource Mobilisation from
International Capital Markets
Sources: GDRs / ADRs
FCCBs
ECBs
GDRs and ADRs – equity instruments issued abroad
– represent one or more shares of
the issuing company
_ two- way conversion
_ GDRs sold to institutional investor
- ADRs sold both to institutional and retail
investors
- Listed and traded on a foreign stock exchange
- GDRs can be converted into ADRs.
ECBs
- Supplement domestic resources
- Low cost of borrowing
- Two routes of access
a. Automatic
b. Approval

LIBOR+100 basis points

FCCBs

- bonds issued by Indian companies in foreign

currency
- fixed interest / coupon rate
- convertible into ordinary shares
- bonds listed and traded abroad