2 Primary Markets

7/30/2019 2 Primary Markets

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2. Primary Markets


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Issue of Shares

Promoters capital and borrowings may not be

sufficient ; companies invite public to contribute

towards the equity and issue shares

Issues classified as a Public, Rights or

Preferential (also known as private

placements).

Public and rights issues involve a detailed

procedure; private placements or preferential issues

are relatively simpler


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Public Issue- IPO and FPO

Initial Public Offering (IPO) - an unlistedcompany makes either a fresh issue of securitiesor an offer for sale of its existing securities or

both for the first time to the public. paves way for listing and trading of the issuers

securities.

Follow on public offering (Further Issue) -analready listed company makes either a freshissue of securities to the public or an offer forsale to the public, through an offer document.


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Rights and Preferential issue

Rights Issue - an issue of capital to be offered

to the existing shareholders of the company

through a Letter of Offer.

best suited for companies who would like to raise

capital without diluting stake of existing

shareholders.

Preferential issue- an issue which is neither arights issue nor a public issue.

faster way for a company to raise capital..


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Private placement

When an issuer makes an issue of securities to

a select group of persons not exceeding 49,

and which is neither a rights issue nor a

public issue, it is called a private placement.

Private placement can be of two types:

Preferential allotment

Qualified institutions placement (QIP)


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Preferential allotment

When a listed issuer issues shares or

convertible securities, to a select group of

persons in terms of provisions of SEBI (DIP)

guidelines

The issuer is required to comply with various

provisions which include pricing, disclosures in the

notice, lockin etc.,


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Qualified institutions placement (QIP)

When a listed issuer issues equity shares or

convertible securities to Qualified Institutions

Buyers in terms of provisions of SEBI (DIP)

guidelines


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Qualified Institutional Buyer

Qualified Institutional Buyer means :

a) a public financial institution as defined in the Companies Act (ICICI, IFCI, IDBI,

LIC, UTI, Infrastructure Development Finance Company )

b) a scheduled commercial bank;

c) a mutual fund registered with the SEBI;

d) foreign institutional investor registered with the SEBI

e) a multilateral and bilateral development financial institution;f) a venture capital fund registered with SEBI;

g) a foreign venture capital investor registered with SEBI;

h) a state industrial development corporation;

i) an insurance company registered with the Insurance Regulatory and

Development Authority (IRDA);

j) a provident fund with minimum corpus of Rs. 25 crores;

k) a pension fund with minimum corpus of Rs. 25 crores;

l) National Investment Fund


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Guidelines for Preferential issue-

Pricing

Where the equity shares of a company have been

listed on a stock exchange for a period of six

months or more higher of the following

The average of the weekly high and low of theclosing prices during the preceding six months

OR

The average of the weekly high and low of theclosing prices during the preceding two weeks


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GUIDELINES FOR QUALIFIED

INSTITUTIONS PLACEMENT

Companys shares were listed on a stockexchange having nation wide trading terminalsfor a period of at least one year

Only QIBs shall be eligible for allotment. Minimum of 10 per cent of securities shall be

allotted to mutual funds.

If no mutual fund is agreeable such minimumportion or part thereof may be allotted toother QIBs.


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Pricing of Preferential issue Where the equity shares of a company have been listed on a

stock exchange for a period of less than six months higher of thefollowing

The price at which shares were issued by the company in its IPO

OR

The average of the weekly high and low of the closing prices during

the period shares have been listed

OR

The average of the weekly high and low of the closing prices duringthe preceding two weeks

Provided that on completing a period of six months of beinglisted on a stock exchange, the company shall recompute theprice of the shares and if the price at which shares were allottedon a preferential basis was lower than the price so recomputed,the difference shall be paid by the allottees to the company.


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QUALIFIED INSTITUTIONS

PLACEMENT- Pricing

Allotment at a price not less than the average

of the weekly high and low of the closing

prices of the related shares quoted on the

stock exchange during the two weekspreceding the relevant date.


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Public Issue

No issuer company shall make any public issue ofsecurities, unless a draft Prospectus has beenfiled with SEBI through a Merchant Banker, at

least 30 days prior to the filing of the Prospectuswith the Registrar of Companies (ROC)

If SEBI specifies changes or issues observations on thedraft Prospectus the issuer company or the LeadManager to the Issue shall carry out such changes inthe draft Prospectus or comply with the observationsissued by the Board before filing the Prospectus withROC.


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Prospectus Prospectus facilitates the disclosure of information

to the public. It helps investors to evaluate short

term and long term prospects of the company.

reason for raising the money, the way money is proposed

to be spent, the return expected on the money etc. the size of the issue, the current status of the company,

its equity capital, its current and past performance,

the promoters, the project, cost of the project, means of

financing, product and capacity

mandatory information regarding underwriting and

statutory compliances.


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What does Draft Offer document

mean?

Offer document means Prospectus in case of

a public issue or offer for sale and Letter of

Offer in case of a rights issue which is filed

with the Registrar of Companies (ROC) andStock Exchanges (SEs).

Draft Offer document means the offer

document in draft stage. The draft offerdocuments are filed with SEBI, prior to the

filing of the Offer Document with ROC/SEs.


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What is an Abridged Prospectus?

Abridged Prospectus is a shorter version of

the Prospectus and contains all the salient

features of a Prospectus. It accompanies the

application form of public issues.


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Who prepares the Prospectus/Offer

Documents?

Generally, the public issues of companies are

handled by Merchant Bankers who are

responsible for getting the project appraised,

finalizing the cost of the project, profitability

estimates and for preparing of Prospectus.


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What is Listing of Securities ?

Listing means admission of securities of an

issuer to trading privileges (dealings) on a

stock exchange through a formal agreement.

The prime objective of admission to dealingson the exchange is to provide liquidity and

marketability to securities, as also to provide a

mechanism for effective control andsupervision of trading.


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What is a Listing Agreement?

At the time of listing securities of a company

on a stock exchange, the company is required

to enter into a listing agreement with the

exchange. The listing agreement specifies theterms and conditions of listing and the

disclosures that shall be made by a company

on a continuous basis to the exchange.


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Public Issue-Application for listing

No company shall make any public issue of

securities unless it has made an application

for listing of those securities in one or more

stock exchange.

Any allotment of shares is void if the

permission has not been granted by the stock

exchange


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Prohibition of allotment unless

minimum subscription received

No allotment shall be made of any share

capital of a company offered to the public for

subscription, unless the amount stated in the

prospectus as the minimum amount hasbeen raised by the issue of share capital


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Issue of securities in dematerialised

form

No company shall make public or rights issue or anoffer for sale of securities, unless:

(a) the company enters into an agreement with a

depository for dematerialisation of securitiesalready issued or proposed to be issued to thepublic or existing shareholders; and

(b) the company gives an option to subscribers/

shareholders/ investors to receive the securitycertificates or hold securities in dematerialisedform with a depository.


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IPO Grading

No unlisted company shall make an IPO of

equity shares or convertible securities unless

the unlisted company has obtained grading for

the IPO from at least one credit rating agency


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Promoters Contribution

In a public issue by an unlisted company, the

promoters shall contribute not less than 20% of

the post issue capital.

In case ofpublic issues by listed companies, the

promoters shall participate either to the extent

of 20% of the proposed issue or ensure post-

issue share holding to the extent of 20% of thepost-issue capital.


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Promoters Contribution

In case ofcomposite issues of a listed company,the promoters contribution shall at the optionof the promoter(s) be either 20% of the

proposed public issue or 20% of the post-issuecapital.

Composite issue- issue of securities by a listedcompany on a public cum rights basis offered

through a single offer document The promoters shareholding after offer for sale

shall not be less than 20% of the post issuecapital.


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What does one mean by Lock-in?

Lock-in indicates a freeze on the sale of shares

for a certain period of time.

SEBI guidelines have stipulated lock-in

requirements on shares of promoters mainly

to ensure that the promoters who are

controlling the company, shall continue to

hold some minimum percentage in thecompany after the public issue.


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LOCK-IN REQUIREMENTS

In case of any issue of capital to the public theminimum promoters contribution shall belocked in for a period of 3 years.

Lock-in of pre-issue share capital of anunlisted company - The entire pre-issuecapital, other than that locked-in as minimumpromoters contribution, shall be locked-in fora period of one year from the date ofallotment


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PRICING BY COMPANIES ISSUING

SECURITIES

Indian primary market have free pricing since1992. The issuer in consultation withMerchant Banker decides the price.

There is no price formula stipulated by SEBI.SEBI does not play any role in price fixation.

The company and merchant banker are

required to give full disclosures of theparameters which they had considered whiledeciding the issue price.


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Differential Pricing

A company making a public issue of equity

shares or convertible securities may issue such

securities to applicants in the firm allotment

category at a price different from the price atwhich the net offer to the public is made,

provided that the price at which the security is

being offered to the applicants in firmallotment category is higher than the price at

which securities are offered to public.


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Firm Allotment

Firm Allotment means allotment on a firm

basis in public issues by an issuing company

made to Indian and Multilateral Development

Financial Institutions, Indian Mutual Funds,Foreign Institutional Investors including non-

resident Indians and overseas corporate

bodies and permanent/ regular employees ofthe issuer company


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Fixed price and Book Building

There are two types of issues: Fixed Price Issue: the company and Lead Merchant

Banker fix a price (called fixed price) and mention it

in the Offer Document

Book built Issue: the price of an issue is discovered

on the basis of demand received from the

prospective investors at various price levels.

The company and the Lead Manager (LM) stipulate afloor price or a price band and leave it to market forces to

determine the final price (price discovery through book

building process).

B k B ildi


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Book Building

Book building is a process of price discovery.

The issuer discloses a price band (cap in the price

band should not be more than 20% of the floor

price) or floor price before opening of the issue of

the securities offered. The investors bid for the shares quoting the price and

the quantity that they would like to bid at.

After the bidding process is complete, the cutoff

price at which the security offered by the issuer, can

be issued is arrived at based on the demand of

securities.

How Book Building works Cut off


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How Book Building works- Cut off

Option

Cutoff option : Cutoff option is available for only retailindividual investors i.e. investors who are applying for securitiesworth up to Rs 1,00,000/ only.

Such investors are required to tick the cutoff option which

indicates their willingness to subscribe to shares at any pricediscovered within the price band.

Unlike price bids (where a specific price is indicated) which can be

invalid, if price indicated by applicant is lower than the pricediscovered, the cutoffbids always remain valid for the purpose ofallotment.

How Book Building works?


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Can an investor change/revise his bid?

Yes, an investor can change or revise the quantity

or price in the bid.

However, the entire process of changing or revising

the bids should be completed within the date of

closure of the issue.



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Can an investor cancel his Bid?

Yes, an investor can cancel his bid anytime before

the finalization of the basis of allotment by

approaching / writing/ making an application to

the registrar to the issue.



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Can open outcry system be used for book building?

No. As per SEBI, only electronically linked transparent facility

is allowed to be used in case of book building.

NSE offers an electronic Book Building facility for issuers and

investors.

For more information on the book building mechanism and

current / past issues in the market please log on to

www.nseindia.com and click on the link IPO.
http://www.nseindia.com/http://www.nseindia.com/http://www.nseindia.com/http://www.nseindia.com/http://www.nseindia.com/http://www.nseindia.com/


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Green Shoe Option


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Green Shoe Option

On expiry of the stabilization period, in case the SA doesnot buy shares to the extent of shares over-allotted by thecompany from the market, the issuer company shall allotshares to the extent of the shortfall . These shares shall bereturned to the promoters by the SA in lieu of the sharesborrowed from them

An issue with green shoe option provides more probabilityof getting shares and also that post listing price may showrelatively more stability as compared to market volatility.


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Registrars

The actual work of drawing up the list ofallottees, crediting the shares to their demataccounts and ensuring refunds is done by the

Registrars to the Issue. These are financial institutions appointed to

keep a record of the issue and ownership ofcompany shares.

Sh lf t


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Shelf prospectus

Is a prospectus which enables an issuer to

make a series of issues within a period of 1

year without the need of filing a freshprospectus every time.

This facility is available to public sector banks/Public Financial Institutions.

Date post:	14-Apr-2018
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