Chapter 6

PRIMARY MARKET
 Chapter Objectives
To understand

Fund Raising
Book-building
Green-shoe Option
Online IPOs
Trends In Resources Mobilised From
The Primary Market
Trends In Resources Mobilised From
International Capital Markets
 Intermediaries to an
Issue

Merchant Banker

Registrars To The Issue

Bankers To The Issue

Primary Issues
 1. Public Issue (IPO)
IPO or Initial Public Offer is a way for a company to
raise money from investors for its future projects
and get listed to Stock Exchange. Or An Initial
Public Offer (IPO) is the selling of securities to the
public in the primary stock market.

Company raising money through IPO is also called

as company going public'.

From an investor point of view, IPO gives a chance

to buy shares of a company
 2. 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 stocks true worth
To hike promoters stake
 2. Rights Issue (cont.)

Four option given to the shareholder.

i. Buy the share at the offered price

ii. Renounce his right and sell them in
the open market
iii.Renounce part of his right and
exercise the remainder
iv. Choose to do nothing
 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
Preferential Allotment (cont.)

Why preferential allotment?

To enhance promoters 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
 3. 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
463 issues of Rs 97517 cr. privately placed in
2005-06
 Mechanism in India
Before 1992 CCI regime
Timing, quantum and pricing was controlled
Fixed price mechanism

Free Pricing Regime

Promoter and merchant banker decided
Rosy and unreal projections
 Free Pricing Regime

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

Methods of IPO (type of IPO)

Initial Public Offering can be made through

the
1.Fixed Price Method,
2.Book Building Method or
3.a combination of both.
 1. Fixed Price Method
In this method of pricing the investment
bank in consultation with the firm fixes the
price at which an investor can subscribe to.

This price could be at par value or at a

premium above the par value.
 1. Fixed Price Offerings
(cont.)

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

 2. Book-building Process

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
2. Book Building Process
(cont.)

1. Appointment of merchant banker

2. Submits draft documents and obtains
acknowledgement card
3. Decides specified price range
4. Offers at different prices are invited
5. Arrives at final cut-off rate
6. Final prospectus is filed with the ROC
7. Placement option opens
8. Public option opens
 Book building option
In 75% book building the issue can be categories
in to
1. The placement portion
2. The public portion The net offer to the public
Remaining 25% has to be compulsory of loaded in the
general market at fix price discover during the book
building process

In 100% book building issue implies that the

entire issue completed in a single stage without having
to make mandatory fix price of a ring
 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

 Reverse Book-building

Used by companies to delist their

shares

Helps in discovering exit price

Similar to reverse auctions

Reverse Book Building (cont.)

Reverse book building is a process wherein

the shareholders are asked to bid for the
price at which they are willing to offer their
shares back to the company.

This process helps in discovering the exit

price and used by companies who want to
delist their share or buy back their share
from the public.
 Green-shoe Option
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

 GREEN SHOE OPTION (cont.)
A Green Shoe option means an option of allocating shares
in excess of the shares included in the public issue and
operating a post-listing price stabilizing mechanism for a
period not exceeding 30 days in accordance with the
provisions of Chapter VIIIA of DIP Guidelines, which is
granted to a company to be exercised through a Stabilizing
Agent.

This is an arrangement wherein the issue would be over

allotted to the extent of a maximum of 15% of the issue size.
From an investors perspective, an issue with green shoe
option provides more probability of getting shares and also
that post listing price may show relatively more stability as
compared to market.
 Online IPOs
Issue via electronic network of stock
exchange
Agreement with stock exchange and
appointment of brokers
Reduces time taken for issue process
Faster allotment of securities
Reduces expenses
Elimination of refunds
 Initial Public Offering
(IPO)
Initial public offering is an offering of either
a fresh issue of securities or an offer of sale
of existing securities or both by an unlisted
company for the first time to the public.

IPO enables listing and trading of issuers

securities.
 ELIGIBILITY NORMS
Entry Norm I (EN I)
(a) Net Tangible Assets of at least Rs. 3 crores for 3 full
years.
(b) Distributable profits in at least three years out of
past five years.
(c) Net worth of at least Rs. 1 crore in three years
(d) If change in name, at least 50% revenue for
preceding 1 year should be from the new activity.
(e) The issue size does not exceed 5 times the pre- issue
net worth
To provide sufficient flexibility and also to ensure
that genuine case do not suffer on account of rigidity
of the parameters, SEBI has provided two other
alternative routes to company not satisfying any of
the above conditions, for accessing the primary Mkt.
 ELIGIBILITY NORMS (cont.)

Entry Norm II (EN II)

(a) Issue shall be through book building route,

with at least 50% to be mandatory allotted to
the Qualified Institutional Buyers (QIBs).
(b) The minimum post-issue face value capital
shall be Rs. 10 crore or there shall be a
compulsory market-making for at least 2
years.
 ELIGIBILITY NORMS (cont.)

Entry Norm III (EN III)

(a)The project is appraised and participated to the extent

of 15% by FIs/Scheduled Commercial Banks

(b) The minimum post-issue face value capital shall be Rs.

10 crore or there shall be a compulsory market-making
for at least 2 years.

In addition to satisfying the aforesaid eligibility norms, the

company shall also satisfy the criteria of having at least
1,000 prospective allotees in its issue.
 Retail Individual Investor (RII)

In retail individual investor category, investors

can not apply for more then Rs one lakh (Rs
1,00,000) in an IPO.

Retail Individual investors have an allocation of

35% of shares of the total issue size in Book
Build IPO's.

NRI's who apply with less then Rs 1,00,000 /-

are also considered as RII category.
 Non-institutional bidders

Individual investors, NRI's, companies, trusts etc.

who bid for more then Rs 1 lakhs are known as
Non-institutional bidders.

They need not to register with SEBI like RII's.

Non-institutional bidders have an allocation of

15% of shares of the total issue size in Book
Build IPO's.
Qualified Institutional Bidders (QIB's)

Financial Institutions, Banks, FII's and Mutual Funds

who are registered with SEBI are called QIB's. They
usually apply in very high quantities.

QIBs are mostly representatives of small investors

who invest through mutual funds, ULIP schemes of
insurance companies and pension schemes.

QIB's have an allocation of 50% of shares of the

total issue size in Book Build IPO's.
 EXEMPTED ENTITIES
(a) Private Sector Banks

(b) Public sector banks

(c) An infrastructure company whose project has

been appraised by a PFI or IDFC or IL&FS or a
bank which was earlier a PFI and not less than 5%
of the project cost is financed by any of these
institutions.

(d) Rights issue by a listed company

 RESOURCE MOBILIZATION
FROM PRIMARY MARKET
Mega issue by private sector
Absorption of private capital issues
Bank & financial institutions in the public sector
Mutual fund

Rights Issue
Preferential Allotment
Private Placement
 Resource Mobilization from
Primary Market
2005-06 2004-05
Particulars No. Amount No. Amount
(Rs.cr.) (Rs. cr.)

Public issues 102 23168.74 34 24640.14

IPOs 79 10918.82 23 12382.04

Listed 23 12249.92 11 12258.10
Rights 36 4125.85 26 3615.69
issues
Total 138 27249 59 60 28255 83
Trends in Resource Mobilization
from Primary Market

Three trends

An increasing trend from 1991-92 to

1994-95

A decreasing trend from 1995-96 to

2002

An increasing trend since 2002-03

RESOURCE MOBILIZATION
FROM INTERNATIONAL
CAPITAL MARKET
ADRs (American Depository Receipts)

GDRs (Global Depository Receipts)

ECB (External commercial Borrowings)

FCCB (Foreign Currency Convertible

Bonds)
 1. GDRs and ADRs
(Global Depository Receipts &
American Depository
Receipts)
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
 ADRs
American Depositary Receipts
If any Indian company issue the equity share
and list the equity share in American stock
exchange it is called ADR

Denominated in dollar

Dividend is declared in rupees

ADR may represent more than one share

 GDRs
Global Depositary Receipts
If any Indian company issue the equity share
and list the equity share in foreign stock
exchanges Other than American stock
exchange it is called GDR UK, Hong Kong,
Singapore, France etc.

Dividend is declared in rupees.

GDR may represent more than one share

2. Foreign Currency Convertible
Bonds (FCCBs)

Bonds issued by Indian companies in

foreign currency

Fixed interest/coupon rate

Convertible into ordinary shares

Bonds listed and traded abroad

 FCCB
FCCB are bond which can be issued outside India
in foreign currency

They carry a fixed interest or coupon rate.

Interest is payable in foreign currency.

After some time (maturity period) this bond can

be converted to ordinary equity shares of the
issuer company.
 3. External Commercial
Borrowings (ECBs)

Supplement domestic resources

Low cost of borrowing

Two routes of access

Automatic
Approval
 ECB
External Commercial Borrowing

Any Indian company raise loan from foreign

country in foreign currency is called ECB.

India has allowed infrastructure company to go

for ECB.

Reliance petroleum is the first company to go

for ECB -$125 million.
 IDRs
Indian Depository Receipt

Any foreign company issues equity share

in India and get them listed on Indian
stock exchange is called IDR issue.

It enable Indian investor to diversify risk

 Recent Developments in the Indian
Equity Market
The Indian equity market has witnessed a series of
reforms since the early 1990s.

The reform measures were aimed at

i. creating growth enabling institutions;
ii. boosting competitive conditions in the equity market
through improved price discovery mechanism;
iii. putting in place an appropriate regulatory
framework;
iv. reducing the transaction costs; and
v. reducing information asymmetry, thereby boosting.
 Other reform measures are as follows:
The most significant reform in respect of the primary capital
market was the introduction of free pricing.
The issuers of securities were allowed to raise capital from
the market without requiring any consent from any
authority for either making the issue or pricing it. All
companies are now able to price issues based on market
conditions.
Restrictions on rights and bonus issues were also removed.
The improvement in disclosure standards has enhanced
transparency, thereby improving the level of investor
protection.
Issuers also have the option of raising resources through
fixed price mechanism or the book building process.
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