PRIMARY MARKET

Prepared By: Rajesh Kiri

 The primary market is that part of the capital
market that deals with the issue of new
securities. Companies, governments or public
sector institutions can obtain funding through
the sale of a new stock or bond issue.
 This is the market for new long term equity
capital. The primary market is the market where
the securities are sold for the first time.
Therefore it is also called the new issue market
(NIM).
 In a primary issue, the securities are issued by
the company directly to investors. The company
receives the money and issues new security
 Primary issues are used by companies for the
purpose of setting up new business or for
expanding or modernizing the existing business.
 The primary market performs the crucial function
of facilitating capital formation in the economy.
 Issues offered through prospectus and the public
subscribes directly section 67 of the companies
(amendment) act 2000 provides that where the
offer or invitation to subscribe for shares or
debenture is made to 50 or more person then
such offer is deemed to be public offer.
INTERMEDIARIES TO AN ISSUE
Registrar to the issue
Banker to the issue
Merchant Banker
MERCHANT BANKER
 It must be registered with SEBI as per SEBI
regulation 1992 to act as book running lead
manager to an issue. It performs pre- issue and
post issue activity
 Pre-issue activities includes due diligence of
companies operation, drafting and designing
offer document, finalizing the prospectus,
crafting marketing strategy
 Post –issue activities includes management
escrow accounts , coordinating non institutional
allocation, intimation of allocation, listing and
trading of securities and coordinating the
FREE PRICING REGIME
Before 1992 the Controller of Capital
Issue(CCI) used to regulate the new issue
market under the capital issue control act
1947
BOOK BUILDING
 It is basically an auction of shares .During the process
on both the NSE and BSE investor can watch the
book being built a chart shown indicates the bid
price and the number of shares being bid for.
 Book building is a process by which demand for the
proposed issue is elicited and built-up and the price
at which the securities will be issued is determined
on the basis of bids received.
 This process will help to discover the demand and the
price of the shares. also, the costs of public issue are
much reduced and the time taken for completion of
the entire process is much less than the in the normal
public issue
 Book Building option
75 percent book building- Rs.100 cr and
more
100 percent book building- Rs 25cr and more
 Reverse Book Building:

It is process wherein the shareholders are

asked to bid for the price at which they are
willing to offer their shares . It is reverse to
auction.
GREEN SHOE OPTION
 SEBI permitted green shoe option in book
building issues in August 2003.
 It is referred to as an over allotment option.
It is mechanism to provide post listing price
stability to an initial public offering.
 Company should appoint one of the merchant
banker to appoint as Stabilizing agent who
will be responsible for price stabilization.
 This mechanism is can be used for a period
not exceeding 30 days as per provision of
Chapter VIIIA of the DIP guidelines.
 The SA should enter into an agreement
with the promoter who will lend their
shares. It can not be more than 15% of
total issue size.
 The promoters and pre issue share holder
of both unlisted and listed company
holding more than 5% shares should lend
the shares.
RED HERRING PROSPECTUS
 Red herring prospectus is a prospectus which
does not have details of either price or
number of shares being offered or the
amount of issue.
ON- LINE IPO
 It is carried out via electronic network of
stock exchanges. As per SEBI ( DIP) guideline
2000 public issue can be made either
through the existing banking channels.
 Company has to comply with section 55-68A
of companies Act 1956 and DIP guideline
 Advantages – Saves time (15 days) , faster
access to funds, reduce stationary, printing
and other expenses.
FEATURE OF GUIDELINE
 Agreement with stock exchange for the online IPO
 Appoint registrar to issue having electronic connectivity
with stock exchange.
 Stock exchange will appoint SEBI Registered broker for
accepting application
 Broker will collect money
 Applicant may approach broker of exchange
 If issue size is more than Rs.10 Cr or more registrar
shall open collection centres in Delhi,Chennai,Kolkata
and Mumbai.
 Broker shall open a separate a/c(escrow a/c) with
clearing house.
INITIAL PUBLIC OFFERING(IPO)
 it is an offering of either a fresh issue or an offer
for sale of existing securities or both by an
unlisted company for the first time to the public .
 Follow -on Public offering (FPO)
it is offer of sale of securities by listed company.
 The SEBI eligibility norms for IPO and an FPO
Norm I :
 Net tangible assets of atleast Rs. 3 cr for three
full years of which not more than 50 percent is
held in monetary assets.
 Distributable Profits in atleast 3 out of 5 yeas.
 Net woth of atleast Rs 1 Cr in 3 years
 If change in compan’s name ,atleast 50 % revenue
for preceding year should be from the new activity.
 Issue size : Not more than 5 times of net worth.
 Entry Norm II:
 Issue shall be though Book building route with atleast 50%
alloted to QIB
 Minimum post issue face value capita shall be Rs 10 cr.

or
Entry Norm III:
 The project is appraised and participate to the extent of
15% by FI/SCB of which at least 10% comes from appraiser.
 Minimum post issue face value capita shall be Rs 10 cr.
RIGHT ISSUE
 Right issue is an offer of new securities by
a listed company to its existing
shareholders on a pro rata basis.
 It is kept open for atleast 30 days and not
more than 60 days.
 Private Placement: It refers to the
direct sale of newly issued securities by
the issuer to a small number of investors
through merchant bankers.
PREFERENTIAL ISSUE
 Preferential allotment’ includes issue of shares on
preferential basis and or through private placement
made by company under section 81 of the companies
act 1956 and issue of shares to promoters and their
relatives either in public issue or otherwise.
 A company need to take approval from share holder
for this.
 Such allotment can be made to promoters, foreign
partner, technical collaborators .
 Preferential issue can be equity shares, warrants,
Partly convertible debenture, Fully conv. Deb.(FCD)
or any instrument which can be converted in to
equity shares.
 It is issued to promoters with lock in period of 3
years.
 Details of amount utilised out of it should be
disclosed.
 The allotment rate should not be less than
higher of two(1) Avg. of weekly high and low of
closing price of script during 6 month preceding
the date of GM.(2) Avg. of weekly high and low
of closing price of script during 2 week
preceding the date of GM.
 In case of partly paid up shares lock in will be 1
year from the date of shares fully paid up.
QUALIFIED INSTITUTIONAL
PLACEMENT
 Qualified Institutional Placement is a private
placement of equity shares or convertible securities by
a listed company to qualified institutional buyer.
 Fund can be raised from foreign as well as
domestically. No lock in clause.
 QIP can be issued to Indian MF, banks and insurance
company. It reduce cost.
 A minimum of 10 % of securities in each placement
shall be allotted to Mutual fund.
 Issue size up to Rs.250 cr : Atleast 2 allottees.
 Issue size more than Rs.250 cr: Atleast 5 allottees.
 Atleast 6 month gap between each placement in case
multiple placement.
RESOURCE MOBILIZATION FROM
INTERNATIONAL MARKET
 Global Depository Receipts (GDRs)
 American Depository Receipts (ADRs)
 External Commercial Borrowings (ECBs)
 Foreign Currency Convertible Bonds (FCCBs)
GLOBAL DEPOSITORY RECEIPTS (GDRS)

 It is equity instrument issued abroad by authorized

overseas corporate body against shares/bond of
Indian companies held with nominated domestic
custodian banks. It creates equity shares of issuing
company which kept in designated bank. Dividend is
paid in Indian rupees. It is listed and traded on
foreign stock exchange. Holder of GDR can convert
it in to shares that it represent but till the conversion
it does not carry voting right as well as can be listed
and traded on the domestic exchange. Rule 144A of
securities and Exchange commission of US permits
to issue GDR to qualified institutional buyer.
AMERICAN DEPOSITORY RECEIPTS (ADRS)

 ADR are negotiable Instrument ,denominated

in dollars, and issued by the US Depository
Bank. A company have to deposit its shares
with a bank and receives a receipt which enable
to issue ADR. They are listed on NYSE and
NASDAQ. ADR issue offer access to the US
institutional and retail market. ADR listing
requires comprehensive disclosure and greater
transparency as compared to GDR. ADR is
more liquid and cover wider market.
EXTERNAL COMMERCIAL BORROWINGS (ECBS)

 Indian corporate are allowed to raise foreign loans

for financing infrastructure projects.
 ECBs are linked to Federal Reserve Board Rate
which is 3 % since 2005. ECB need sound risk
management – both interest rate and forex risk.
 Indian companies has preferred this route to raise
fund as the cost of borrowing is low in
international market.
 Reliance petroleum raised $125 million in the
form of ECB in August 1996. It was the only
company raised resources from the international
market without any guarantee with only 7.84%
 FOREIGN CURRENCY CONVERTIBLE BONDS
(FCCBS)
 It is issued by Indian companies and subscribed by a
non resident in foreign currency. They carry fixed
interest rate and can be converted in to ordinary
shares. this bond traded and listed on abroad. Till
conversion company pay in dollars if conversion
option is not exercised redemption is also made in
dollars.. Thus foreign investors prefers FCCBs.
 The interest rate is low but exchange risk is more in
FCCBs .Hence only company with low debt equity
ratio and large forex earning potential opt for FCCBs.
 The coupon rate is 1.5% which is lower than
domestic rate if interest.
 Govt. has allowed Indian company for raising
fund through FCCBs in 1993. Bond up to $50
Mn are cleared automatically , up to $100 mn
By the RBI and those above that by the
finance ministry. Minimum maturity period is 5
years but no restriction on conversion
GUIDELINES RELATING TO
INTERNATIONAL ISSUE
 ADR/GDR are considered to be of FDI. Therefore
such issues would need to conform to the existing
FDI policy and only in areas where FDI is
permissible. Indian companies raising money from
ADR/GDR through registered exchange can
access the ADR/GDR market automatically
without approval of Ministry of Finance,
Department of Economic affairs. Prior permission
is required in case of FCCBs
 A company must have good track record of at least
for 3 years.
 The foreign equity participation directly or
GUIDELINES RELATING TO
INTERNATIONAL ISSUE
 End use restriction on ADR/GDR issue have
been removed.

 Fund raised through FCCBs can be used for

restructuring of external debt and not more than
25% may be used for general corporate
restructuring including working capital
requirements.
 company are free to utilise 100% of the proceeds
for overseas investment.
 Govt. allowed two way fungibility for Indian
ADR/GDR
 In September 2002 Govt. Liberalized the guideline
for external commercial borrowing(ECBs)
allowing companyies to raise foreign loan from
foreign sources like banks, export credit agencies,
suppliers of equipment , foreign colloborator ,
international capital market
 For ECBs up to $20 mn minimum maturity period
is 3 years, for amount exceeding $20mn Avg.
Maturity period is 5 years
INDIAN DEPOSITORY
RECEIPT(IDR)
 Foreign company can raise fund from India
 Companies Act was amended in 2002 to permit
foreign companies to offer shares in form of
depository receipt in India. However the
department of company affaires has given
guideline for it.
 Only those company registered overseas and
having a preissue paid up capital and free reserve
of at least $100 mn. And Avg turnover $500mn
during 3 fin. Year preceding the issue.
 Made profit for at least 5 years prior to the issue
and dividend record not less than 10% in those
years. Debt Equity ratio not more than 2:1
 IDR shall not be redeemable into equity shares for
1 year from the date of issue.
 In a financial year not more than 15% of paid up
capital and free reserve.
 Draft prospectus should be filed before 21 days to
SEBI.
 Dividend will be distributed proportionately
among the IDR holders.
 It can be listed on stock exchange having nation
wide Trading terminal in India..