Primary Markets

FS
 Capital Markets
Market for financial assets which have a
long or indefinite maturity.
Further divided into:

Primary Market
Secondary Market
 Primary Markets
Primary Market

New Issue Market

Operations in Primary Markets
The firms go to the public for the first time
through initial public offer. (IPO)

Firms which are already trading raise

additional capital through seasoned equity
offering ( FPO)
Methods of Floating New Issues
Public Issues
Rights issue
Private placement
Bonus Issues
 Instruments
Equity
Preference
Debentures / bonds
 Offer documents
Offer document’ is a document which contains
all the relevant information about the company,
promoters, projects, financial details, objects of
raising the money, terms of the issue etc and is
used for inviting subscription to the issue being
made by the issuer.
‘Offer Document’ is called “Prospectus” in case
of a public issue or offer for sale and “Letter of
Offer” in case of a rights issue
Red herring prospectus is an offer document
used in case of a book built public issue. It
contains all the relevant details except that of
price or number of shares being offered. It is
filed with RoC before the issue opens.
Prospectus is an offer document in case of a
public issue, which has all relevant details
including price and number of shares being
offered
Abridged prospectus is an abridged
version of offer document in public issue
and is issued along with the application
form of a public issue. It contains all the
salient features of a prospectus.
 Guidelines for Public Issue
Filing of draft prospectus at least 21 days
before its filing with the ROC.
Issue of securities in Demat form
It should highlight the risk factors
And the details of co’s mgmt and history
 Pricing
Free Pricing
New co’s: issues at par
New co’s set up by existing co: issues can
be at premium
Differential Pricing is allowed
Subscription list should be kept open min
3days and max 10 days.
Oversubscription should not be retained.
Promoters contribution should not be less
than 20 %. Lock in period 3 years.
If minimum subscription of 90% is not recd
then amount is to be refunded within 120
days.
Underwriting is compulsory.
 Bonus issues
Guidelines
Provision in AOA
Out of free reserves or share premiums
Reserves from revaluation of assets are
not permitted to be capitalized
Not permitted unless partly paid up share
are fully paid
No bonus issue if default in payment of
gratuity
No bonus issue within 12 months of public
or rights issue.
board must implement the decision within
6 months
Increase the authorized capital if required
No dilution in the rights of debenture
holders
 Rights issue
Guidelines
Composite issue is allowed except existing
unlisted cos making an issue for the first
time
Appointment of merchant bankers
Minimum subscription of 90%
Underwriting not mandatory
No dilution of rights of FCD and PCD
Promoters contribution should be 20%
Vetting of offer letter
Advertisement in the paper
 Book Building
When the price of an issue is discovered
on the basis of demand received from the
prospective investors at various price
levels, it is called “Book Built issue
It refers to the collection of bids from
investors which based on the indicative
price range.
The process allows for price and demand
discovery
 Issue Type Offer Price Demand Payment Reservations

50 % of the shares
Price at which the
Demand for the securities 100 % advance payment offered are reserved for
securities are offered and
offered is known only is required to be made by applications below Rs. 1
Fixed Price Issues would be allotted is made
after the closure of the the investors at the time lakh and the balance for
known in advance to the
issue of application. higher amount
investors
applications.

10 % advance payment
A 20 % price band is
Demand for the securities is required to be made by
offered by the issuer 50 % of shares offered
offered , and at various the QIBs along with the
within which investors are are reserved for QIBS,
prices, is available on a application, while other
BookBuildingIssues allowed to bid and the 35 % for small investors
real time basis on the categories of investors
final price is determined and the balance for all
BSE website during the have to pay 100 %
by the issuer only after other investors.
bidding period.. advance along with the
closure of the bidding.
application.
The Issuer who is planning an offer nominates lead merchant banker(s) as 'book
runners'.
The Issuer specifies the number of securities to be issued and the price band for the
bids.
The Issuer also appoints syndicate members with whom orders are to be placed by
the investors.
The syndicate members input the orders into an 'electronic book'. This process is
called 'bidding' and is similar to open auction.
Bids have to be entered within the specified price band.
Bids can be revised by the bidders before the book closes.
On the close of the book building period, the book runners evaluate the bids on the
basis of the demand at various price levels.
The book runners and the Issuer decide the final price at which the securities shall
be issued.
Generally, the number of shares are fixed, the issue size gets frozen based on the
final price per share.
Allocation of securities is made to the successful bidders. The rest get refund orders.
Types of investors
There are three kinds of investors in a book-building
issue. The retail individual investor (RII), the non-
institutional investor (NII) and the Qualified Institutional
Buyers (QIBs).
RII is an investor who applies for stocks for a value of
not more than Rs 200,000. Any bid exceeding this
amount is considered in the NII category. NIIs are
commonly referred to as high net-worth individuals. On
the other hand QIBs are institutional investors who
posses the expertise and the financial muscle to invest in
the securities market.
Applications Supported by
Blocked Amount (ASBA)
 Applications Supported by
Blocked Amount (ASBA)
Payment through ASBA i.e. Application Supported by Blocked Amount has been
made mandatory by SEBI for applying to any public issue of equity shares from
January 1st 2016
ASBA is basically an application by investors for subscribing to an issue containing
an authorization to block the application money in a bank account
An alternative payment mode for applying in primary issues, ASBA has helped
investors do away with getting Demand Drafts or Cheques made for payment of
application money. Therefore, one’s money stays in one’s bank account until
allotment of the issue takes place. There is no hassle of refunds in case of less or
no allotment of shares. The advantage is that one get to earn interest even on the
blocked amount until it is debited for allotment.
Green Shoe
Option
 Anchor Investors
Anchor investors are Qualified Institutional
Buyers (QIB) who purchases shares one
day before the IPO opens.
They help in arriving at a fair price and
instill confidence in the minds of the
investors
An anchor investor shall make an
application of a value of at least Rs. 10
crore in the public issue.
 IPO Grading
IPO grade 1 Poor fundamentals
IPO grade 2 Below Average fundamentals
IPO grade 3 Average fundamentals
IPO grade 4 Above average fundamentals
IPO grade 5 Strong fundamentals
 Dutch Auction
The cut-off price is arrived at by the method of Dutch auction. In a Dutch auction the
price of an item is lowered, until it gets its first bid and then the item is sold at that
price.
Let's say a company wants to issue one million shares. The floor price for one share
of face value, Rs 10, is Rs 48 and the band is between Rs 48 and Rs 55.
At Rs 55, on the basis of the bids received, the investors are ready to buy 200,000
shares. So the cut-off price cannot be set at Rs 55 as only 200,000 shares will be
sold. So as a next step, the price is lowered to Rs 54. At Rs 54, investors are ready to
buy 400,000 shares. So if the cut-off price is set at Rs 54, 600,000 shares will be
sold. This still leaves 400,000 shares to be sold.
The price is now lowered to Rs 53. At Rs 53, investors are ready to buy 400,000
shares. Now if the cut-off price is set at Rs 53, all one million shares will be sold.
Investors who had applied for shares at Rs 55 and Rs 54 will also be issued shares at
Rs 53. The extra money paid by these investors while applying will be returned to
them.
After the closure of the issue, the bids received are aggregated
under different categories i.e., firm allotment, Qualified Institutional
Buyers (QIBs), Non-Institutional Buyers (NIBs), Retail, etc. The
oversubscription ratios are then calculated for each of the
categories as against the shares reserved for each of the categories
in the offer document. Within each of these categories, the bids are
then segregated into different buckets based on the number of
shares applied for. The oversubscription ratio is then applied to the
number of shares applied for and the number of shares to be
allotted for applicants in each of the buckets is determined. Then,
the number of successful allottees is determined. This process is
followed in case of proportionate allotment
 SEBI Guidelines
100% BB is allowed only to those issuers
whose issuing capital is more than Rs100
crores.
It shall be for the portion other than
promoters contribution, allocation to
employees.
MB will submit he draft prospectus.
Advertisement indicating the open, close
date, names of the syndicate members.
The price will be decided on the basis of
the bids.
Allotment not later than 15 days from the
closure of the issue. ( int 15 %)
Offer to remain open for min 5 days.
IPO Grading: Disclosure of “IPO Grades”,
is mandatory for companies coming out
with an IPO.
Pricing of an Issue: SEBI does not decide
the prices.
 Players or Intermediaries in
Primary market
Merchant bankers
Merchant banker does the due diligence to
prepare the offer document which contains all
the details about the company. They are also
responsible for ensuring compliance with the
legal formalities in the entire issue process and
for marketing of the issue
Registrars
They are involved in finalizing the basis of
allotment in an issue and for sending refunds,
allotment etc.
Bankers to the Issue: The Bankers to the Issue enable
the movement of funds in the issue process and
therefore enable the registrars to finalize the basis of
allotment by making clear funds status available to the
Registrars.
Underwriters: Underwriters are intermediaries who
undertake to subscribe to the securities offered by the
company in case these are not fully subscribed by the
public, in case of an underwritten issue
Printers advertising agencies and mailing agencies: they
help in procedure for displaying the prospectus. There
are mailing agency which help in the mailing.
Merchant Banker
 Definition
Any person who is engaged in the
business of issue management either by
making arrangements regarding selling,
buying or subscribing to the securities as
manager, consultant, adviser or rendering
corporate advisory service in relation to
such issue management.
 Services
Corporate counseling
Project counseling
Loan syndication
Issue management
pre issue management
post issue management
 Pre issue management
Vetting of prospectus
Appointment of bankers to issue, brokers
Marketing of the issue
Pricing of issue
 Post issue management
Underwriting
Other services
Mangers , consultants and advisors to the
issue
Portfolio management
Advisory services relating to M&A
Off shore finance
 Guidelines
Authorization by SEBI
Not more than two MB’s associated with
one issue as lead manager. But for issue
more than Rs 100 crores there can be 4.
C I MB shall accept a minimum
underwriting obligation of 5% of the total
issue or Rs. 25 lakhs whichever is less
Half yearly un audited financial results to
SEBI
Code of conduct
SEBI can cancel the certification
SEBI can conduct inspection
 Categories
Earlier
CI: carry on any activity to the issue (mnw : 1cr)
CII : advisor ,consultant , underwriter, PM (50 L)
CIII: Advisor , consultant , underwriter (20 L)
CIV: advisor , consultant
Now
CI
Others can either upgrade to CI or apply for
separate registration
Source : ICAI.org