The Primary Market in India

The Primary Market in India

Prepared By – PINAL SHAH

Faculty at L.J.Institute of Management StudiesAhmebabad, Gujarat

prepared by PINAL SHAH 2

Introduction Free pricing regime Book building On-line Epos Resource mobilization from domestic market

New issue Private placement Non-govt public ltd co. Absorption of private capital issues Banks and FI in public sector MF

Resource mobilization from international market

GDRs ADRs FCCBs ECBs Euro Issues


Introduction Primary market is market for fresh

capital. Funds raised through

IPO Right Issue Private Placement

Three category Issuer Investor Intermediary


Free price regime Before 1992 companies have to

take permission from CCI to decide timing, quantum and price of New issue.

For pricing two criteria was decided The net assets value and Price earning value


Resource mobilisation through New Issue Market New Issue Private Placement market Non- govt Public limited companies Mega issues by Non-govt Public limited

companies Absorption of private capital issues Banks and FI in the public sector MF


New Issue Market – Prospects and Right Issues The growth rate was highest immediately after

reforms announced, I.e. 1992-93. It is also due to abolition of capital issue s act and

free pricing of issues. Since 1995-96 primary mkt was depressed, because

scams took place in secondary market. Premium on some scrip were very high and declined after

listing. (I.e. saurashtra cement – 285 and at listing – 50) Strict disclosure standards by SEBI Overall slowdown in economy This decline in PSU through prospects and right issue was

much sharper that they cannot tap mkt for 3 consecutive years. (I.e. 1996-1999)


Resource mobilisation Most IPO having premium of their

offer price on listing day. I.e.Biocon, price bands – 270-314, listed on 7 April 2004 at 400 and touched to 740 on 13 April only. This attracts several new players and many companies for IPO.


Year No of IPO

CR. Remarks

2003-2004(govt Epos only)

29 17.8 All govt IPO like IPCL, IBP, BOM, GAIL raised 14.3 crores thorough sale of govt stake.- Other private IPO like Biocon, Patni computers, TV today IOB, UCO bank were also over subscribed

Oct 03 –04 (whole)

30 30,302 cr =3 (preceding five yr)19,690 cr through disinvestments (65%)10,612 cr through private sectors.

01-02 7 1202

02-03 6 1039

04-05 60 22 – Epos – By Non Financial companies6-Epos by six companies – ICICI, TCS, Sterlite, NTPC, Jet Airways, PNB – 72.9 % of total resource


TCS IPO Up beat response from mkt in July 2004. Listed as 1076 and allotted at 850 Rs.

Was also milestone in secondary mkt. Offer for 55.4 million shares and

oversubscribed by 7.7 times and raised 54,200 crores.

NTPC – may 04 raised 5369 cr.


Private Placement Market It is direct sale of newly issued securities to group of investor (I.e. FI, banks, corporate, HNI) by issuer through merchant bankers.

Advantage Time and cost is less compared to IPO and right issue. It can be customised for both issuer and investor. It does not require detail compliance of formalities,

ratings, and disclosure norms During 1995-2002 this route has grown to 88%. Major issuers - All FI, PSUs, central and state

level undertakings (I.e. AEC bonds), banks Major subscribers - banks, Provident funds, MF,

HNI Instruments used

Debt – debentures, bonds Equity – preference shares


Factors affecting Private Placement market Prolonged conditions in primary market PP is not bound to any regulatory system till

sept 2003. No lock-in period for promoters No compliance system for merchant

bankers Banks can raise their tier II capital. Operational flexibility and attractive pricing Private sector can tap this route to retire

their old expensive bonds/ debt instruments Short- term debentures are more popular

with issuers and investors.


Facts of Private Placements In India Privately placed securities are

admitted for trading, but not listed. Banks do not trade this securities and hold

till maturity. No secondary market for such securities Banks and Fis have over Rs. 1 Lakh crores

exposure in PP. Earlier RBI issued guide lines PP having more

than 50 members. Later on sept 2003, SEBI issued stringent

disclosure norms which was still unregulated.


Current scenario PP now regulated. Companies want to list their privately placed securities. For securities up to 10 lakhs such disclosure made

through company on the site of exchanges. Credit rating also becomes compulsory.(lest

investment grade is necessary) All debt issuer must have redemption reserve and must

appoint trustee. Securities issued and traded in demat form All securities must be executed on exchanges only. RBI also barred Fis from investing in uncrated

securities and securities below minimum credit ratings.


Non-govt public limited companies Until 1990 their shares as right issuer and

prospects were only 45 % After reforms announced (I.e.1991)their

participation raised to 91% in 92-93. After 1994-95 this has been decreased due to

scam in secondary market till 2001-02. Again decline in 03-04 duet to strengthen norms

of SEBI. Debenture issue in private sector – prominent in

1990-91 and declined due to free pricing era and again gained popularity in 97-98 among private players.


Mega issues An issue size of more than 100 Cr termed

as mega issues. In 94-95, 41 mega issue worth of 12,090

cr were issued. In 05-06, highest amount of (49) mega

issues worth of 23,815 cr were issued which is 87% to new capital issue.

Largest FPO was – Icici bank (5101 cr) IPO – Suzlon – 1496 cr Largest – RPL – 2700 cr.


Absorption of private capital issues This is the concept of underwriting. It was compulsory till 1994 than

was optional. When it was compulsion the

amount underwritten was 97% of total issue amount raised through public.


Banks and FI’s participation in public issues After 1991 banks and FI’s can also

participate in Epos. Initially the participation was slow (1.7% of

total amount raised in 91-92) but than raised to 46.5% in 98-99.

Later on banks emerged as biggest class of issuer in 02-04.

In 1993 SBI entered into market at low price which soon rise and it also attracts other banks to trade in secondary and primary market.


Resource Mobilisation through

international market

GDRs ADRs FCCBs ECBs Euro Issues


GDRs It is equity instruments issued in abroad market

by overseas corporate bodies against the shares/bonds of Indian companies held with domestic custodian bank.

I.e. Indian companies engaged in IT, software are eligible to offer their non-resident/resident permanent employees GDRs/ADRs against the issue of ordinary shares.

An issuing company can raise funds through ordinary equity shares but this shares would be transferred in GDRs in some ratios. I.e 1 GDR – 10 shares.


GDR An issuing company have to obtain prior

permission of the dept of economics affairs, ministry of finance and govt of India.

An intermediary is approved would be investment banker registered with securities and exchange commission in USA, or in UK or appropriate authority in Germany, France, Singapore or Japan.


GDR GDRs are freely transferable outside Indian and

divided in respect of shares y GDR is paid in Indian rupees only.

They are listed and traded on foreign stock exchange and OTC market.

The holder of GDR can convert it into no of shares at any time.

Till conversion GDR does not have any voting rights but once converted it is listed on Indian stock exchange.

Most of Indian companies have their GDRs issues listed on Luxembourg stock exchange and the London stock exchange.


ADRs ADRs are negotiable instruments in dollars Issued by US Depository banks A non – US company has to deposits its shares

with US depository banks It receives receipts from which the same

company can issue ADRs. ADRs serve as stock certificates. ADRs listed on NYSE and NASDAQ. ADRs taps to US institutional and retail

markets while GDRs tap to only US institutional market.


ADRs GDRs can be converted into ADRs by

surrendering the existing GDRs and depositing the underlying equity shares with ADR depository in exchange for ADRs.

The company has to comply with SEC requirements but company does not get any funds in conversion.

The trend towards conversion of GDR into ADR as ADR is more liquid and cover wider market.


ECBs Indian corporate are allowed to raise foreign

loans for financing infrastructure projects. RPL raised $125 million in august 1996. The

issue was without guarantee of bank and with very low coupon rate of 7.84%.

In oct 1996, global telesystems raised 60 million swis francs in FCB form. The company offered LIBOR + 175 points interest rate.

SIDBI raised $ 20 million for 38 years bonds (largest in India)


ECBs Indian companies are free to raise

ECBs from any internationally recognised source such as bank, export credit agencies, suppliers of equipment, foreign collaborators, foreign equity holders and international capital markets.


FCCB (Foreign currency convertible bonds) It is issued by Indian companies and

subscribed by non-resident in foreign currency.

It carries fixed interest or coupon rate and are convertible into a certain number of ordinary shares at preferable price.

It can be converted into ordinary shares of issuing company either in whole or in pat on the basis of any equity related warrants attached to the debt instruments.


FCCB Till conversion, the company has t pay interest in

dollars and if conversion option is not exercised, the redemption is also made in dollars.

Interest rate is low but exchange risk is more. So only companies with low debt equity ratios and

large forex earnings potential opt for FCCB. For the bonds upto $ 50 million no permission

required, upto $100 million RBI permission and above that permission from ministry of finance is necessary.

The maturity period is 5 yrs (minimum) and no restriction on time period for converting into shares.


FCCB Interest rate is lower in FCCB than bonds or

loan Conversion into equity is attractive features

for investor. Higher premium for conversion of equity

higher will be the yield on FCCB. Initially only cash outflow of interest only as

interest rates are very low between 0 to 1.5%.

Only 2 FCCB in 2001-02. BSES and Gujarat Ambuja cement.


Euro Issues Euro issue market comprises FCCB, GDRs/ADRs. In 1993-94 and 94-95 , Indian companies raised

rs 14,500 cror through euro issues. Infosys was the first company to tap

international market in march 1999 (listed on NASDAQ), than ICICI (NYSE) and satyam (NASDAQ). Satyam was not listed any of Indian stock exchange.

In 1999-200 Indian firms raised $ 1billion and in 2000-01 $4 billion was raised.

Investors (From abroad) respond highly to Indian ADRs


Euro Issues Rediff.com was the first dot company to

list nearly at 100% premium on NASDAQ even bypassing BSE.

Rediff.com could not able to bring IPO in Indian stock market due to accumulated losses of $8.6 million.

Indian companies can go directly for ADRS without domestic offering as the scrip appreciates more in US market as concept of futuristic stocks is stronger in US.


Organizing Euro Issues A company which wants to tap

international market for raising resources has to prepare is books of accounts of last three to five years in GAAP format, prevalent in US or US for its GDR/ADR issue.

The merchant banker occupies a pivotal place as he formulates the mktg strategy desings the issue structure and arranges syndicate members, underwriters and other intermediaries.


Organizing Euro Issues After finalizing offer documents he conducts road

shows where interviews with fund managers and potential investors re held and distribution of pamphlets brochures and reports of issuing company.

These help in knowing investor response to issue. Issue price is also based on this response and price of

securities on the domestic stock exchange (if listed). Issue price is decided few hours before opening of

issue. In the initial years Indian GDRs were priced at

discount by in nov 1993, Mahindra and mahindra placed its GDR at par.


Private Equity It is long-term equity investment by a fund in private and

public (listed) firms with successful business models and potential for a higher growth.

PE plays an important role in growth of enterprises. It helps the investee companies in promoting their growth

by providing capital knowledge and skills. It also helps in formulating and shaping the corporate

strategy of ivnestee firms and improving their corporate governance.

Some PE firms such as Warbury Pincus Investments, GW capital investment and GA parterners investments have invested highly successful companies like Bharti, Spectramind, ICICI ventures, Biocon, Patni Computers and many others.

The End

The Primary Market

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The Primary Market in India

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