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Chapter 6

The Primary Market

Indian Financial System, 5e

By: Bharati V. Pathak
 Chapter Objectives

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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

Indian Financial System, 5e

By: Bharati V. Pathak
 Intermediaries to an Issue

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 Merchant banker
 Registrars to the Issue
 Bankers to the Issue

Indian Financial System, 5e

By: Bharati V. Pathak
 Free Pricing Regime

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 Before 1992, CCI regulated price
 After 1992, the promoter and the
merchant banker decide the pricing
 Earlier it was misused
 Now the issue price is to be justified

Indian Financial System, 5e

By: Bharati V. Pathak
 Fixed Price Offerings

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 Made to uninformed investors
 Investors demand not taken into account
 An alternative method, Book Building uses
investors demand for shares at various prices
 Investors watch the book being built

Indian Financial System, 5e

By: Bharati V. Pathak
 Book-building Process

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 The company appoints a book runner
 Book runner submits draft documents to SEBI
 Offer of shares at a specified price range
 Based on the bids, cut- off rate is decided
 Public subscription, allotment and listing

Indian Financial System, 5e

By: Bharati V. Pathak
 Allotment of a Book-built Issue

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Category % of issue to be allotted on a
proportionate basis

QIB 50% (5% of the QIB to be reserved for

MFs)
HNI 15%
Retail 35%
Investor

Retail individual investor – who bids in a book built

issue for a value not more than Rs. 1,00,000.
Indian Financial System, 5e
By: Bharati V. Pathak
 Anchor Investor

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• Anchor investors are qualified institutional
buyers that buy a large chunk of shares a
day before an IPO opens.
• They help arriving at an approximate
benchmark price for share sales and
generate confidence in retail investors.

Indian Financial System, 5e

By: Bharati V. Pathak
 Reverse Book-building

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 Used by companies to delist their shares
 Helps in discovering exit price
 Similar to reverse auctions

Indian Financial System, 5e

By: Bharati V. Pathak
 Green-shoe Option

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 An option of allocating shares in excess of
the shares included in the public issue.
 Post listing price stabilising mechanism
 Mitigates volatility
 Enhances investor confidence

Indian Financial System, 5e

By: Bharati V. Pathak
 "Copyright © 2018 Pearson India Education Services Pvt. Ltd".
By: Bharati V. Pathak
Indian Financial System, 5e
 Public Issues

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 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.

Indian Financial System, 5e

By: Bharati V. Pathak
 Rights Issue

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 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

Indian Financial System, 5e

By: Bharati V. Pathak
Preferential Allotment

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 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

Indian Financial System, 5e

By: Bharati V. Pathak
Indian Depository Receipts
(IDRs)

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• To enable Indian investors to diversify risk
and as a step towards integration of the
Indian capital market with the international
capital markets, foreign companies are
allowed to access the Indian capital market
by issuing Indian depository receipts (IDRs).

• Enable globalization of Indian stock

exchanges.
Indian Financial System, 5e
By: Bharati V. Pathak
 Facilitating Capital Raising by
Start-ups

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• The platform shall now be called as Institutional
Trading Platform (ITP) and shall facilitate capital
raising as well.

• Companies which are intensive in their use of

technology, information technology, intellectual
property, data analytics, biotechnology and
nanotechnology to provide products, services or
business platforms with substantial value addition.
Indian Financial System, 5e
By: Bharati V. Pathak
Private Placement Market

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 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

Indian Financial System, 5e

By: Bharati V. Pathak
Trends in Resource Mobilization
from Primary Market

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 Three trends
1. An increasing trend from 1991-92
to 1994-95
2. A decreasing trend from 1995-96
to 2002
3. An increasing trend since 2002-03

Indian Financial System, 5e

By: Bharati V. Pathak
Resource Mobilization from
International Capital Markets

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Sources: GDRs / ADRs, FCCBs, FCEBs, ECBs,
Masala Bonds
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.

Indian Financial System, 5e

By: Bharati V. Pathak
 FCCBs

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 bonds issued by Indian companies in
foreign currency
 fixed interest / coupon rate
 convertible into ordinary shares
 bonds listed and traded abroad

Indian Financial System, 5e

By: Bharati V. Pathak
FCEBs

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 FCEB is a foreign currency bond issued by
an Indian company which is a part of the
promoter group of offered company and
exchangeable into equity shares of the
offered company.

Indian Financial System, 5e

By: Bharati V. Pathak
ECBs

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 Supplement domestic resources
 Low cost of borrowing
 Two routes of access
1. Automatic
2. Approval

Indian Financial System, 5e

By: Bharati V. Pathak
 Masala Bonds

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• Indian corporate were allowed to raise
foreign currency denominated currency
through debt including external
commercial borrowings, trade credits
and bonds which accounted for about
one fifth of the total corporate funding.
• IFC named its rupee denominated bonds
as “Masala Bonds” and had been
successful in issuing these bonds on
multiple occasions with maturity as long
as fifteen years.
Indian Financial System, 5e
By: Bharati V. Pathak