The Primary Market

The Primary MarketPrepared by : Kruti DesaiChapter ObjectivesFund-raising through prospectus, right issues, private placement and preferential issues.Book building : A New Issue MechanismGreen-Shoe OptionOn-line IPOsTrends in resources mobilised from international capital markets

IntroductionThe primary market is market for new issues.Also called new issues market.Bonus Issue :Companies distribute profit to existing shareholders by the way of fully paid bonus shares instead of paying them dividends.They are issued in the ration of existing shares held.Reasons for Bonus issue :To boost liquidity of their stockTo bring down stock pricesTo restructure their capitalIntroductionPublic offering through prospectusAccording to Section 67 of the Companies Act, 2000, where the offer or invitation to subscribe for shares or debenture is made to 50 or more persons, then such an offer or invitation shall be deemed to be a public offering and shall have to comply with all the provisions of the act as well as the SEBI guidelines applicable to such public offerings.Wide publicity made

Private PlacementsThe direct sale of securities by a company to some select people or to institutional investors is called private placement.It covers equity shares, preference share, debenturesNo prospectus is issuedMore quick and less expensive than public offeringRight IssueRight issue is an offer of new securities by a listed company to its existing shareholders on a pro-rata basis.

Participants in the Primary MarketIssuers of the SecuritiesInvestors in the securitiesIntermediariesMerchant BankersPre-issue activitiesPost-issue activitiesSyndicate MembersRegistrar to an issueBankers to the issue

Free Pricing RegimeBefore 1992, the Controller of Capital Issues (CCI) used to regulate the new issues market under the Capital Issues Act, 1947.In 1992, the Capital Issue Control Act, 1947 was removed and all controls relating to raising resources from the markets were removed.BOOK BUILDING A NEW MECHANISM IN INDIAMeaning and ConceptBook Building is a mechanism by which the issue price is discovered on the basis of the bids received from the syndicate members/brokers and not by the issuers/merchant bankers. The process refers to the collection of bids from investors. The issue price is fixed after the bid closing date based on the price at which bids were made.The book building is basically an auction of shares.Types of Book BuildingThe issue of securities through book building prior to August 2009 could be done either in the following two ways:75% book building known as partial book building &100% known as one-stage book buildingThe option of 100% book building was available only to those issuer companies which are to make an issue of capital of and above Rs.100 crore.In 1998-99, the ceiling of issue size for book building was reduced from Rs.100 crore to Rs.25 crore.

Book Building ProcessThe 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. The book normally remains open for a period of 5 days. Bids have to be entered within the specified price band.

Book Building ProcessBids 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 numbers 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.Price discovery in Book Building Process3000 shares at the Price band of Rs. 20-24Off Price Rs. 22

Bid QuantityBid priceCumulative QuantitySubscription5002450016.67%100023150050.00%1500223000100.00%2000215000166.67%2500207500250.00%Application Supported By Blocked Amount(ASBA)ASBA is an application by retail investors for subscribing to an issue, containing an authorization to block the application money in a bank account.This system co-exist with the current process, wherein cheque is used as a mode of payment by retail investors.This system does away with the refund process and thereby reduces the time between an issue and its listing.All investors including retail, high net worth individuals, corporate investors and qualified institutional buyers are eligible to apply through ASBA in public issues.

ASBA PROCESS:1. An ASBA investor shall submit an ASBA physically or electronically through the internet banking facility to the Self-certified Syndicate Bank (SCSB) with whom the bank account to be blocked is maintained.SCSB is a bank which offers the facility of applying through the ASBA Process. ASBA PROCESS:2. The SCSB shall then block the application money in the bank account specified in the ASBA, on the basis of authorization to this effect given by the account holder in the ASBA.The application money shall remain blocked in the bank account till finalization of the basis of allotment in the issue or till withdrawal / failure of the issue or till withdrawal / rejection of the application, as the case may be.3. The SCSB shall upload the details in the electronic bidding system of the BSE or NSE.

ASBA PROCESS:4. Once the basis of allotment is finalized, the Registrar to the issue shall send an appropriate request to the SCSB for unblocking the relevant bank accounts and for transferring the requisite amount to the issuers account.In case of withdrawal/failure of the issue, the amount shall be unblocked by the SCSB on receipt of information from the pre-issue merchant bankers.Allotment/Allocation in Book Built IssueAnchor InvestorAn Anchor investors are qualified institutional buyers that buy a large chunk of shares by a day before an IPO opens.They pay an upfront margin of 25% and follows it up with the remaining 75% within two days of the closure of the public issue.They hold the shares for at least one month which instills confidence in retail investors and boosts primary market.

Reverse Book BuildingIt is a price-discovery mechanism for companies who want to delist their shares or buy-back shares from the shareholders.It is a process wherein the shareholders are asked to bid for the price at which they are willing to offer the shares.There shall be a lock-in of 30 days on the shares allotted to the anchor investor from the date of allotment in the public issue.

GREEN SHOE OPTIONA Green-shoe option means an option of allocating shares included in the public issue and operating a post-listing price mechanism for a period not exceeding 30 days.The Green-shoe company was the first to issue this type of option, hence the name green-shoe option.Mechanism for green-shoe optionIf a company is issuing 1000 shares, the company will enter into an agreement regarding over-allotment option (lending excess shares) with one of the merchant bankers or book runners or lead managers known as Stabilizing Agent (SA) to the extent of 150 shares.In pursuance with the agreement, the promoters would lead 150 shares to the SA for a limited period of 30 days from the date of issuing.Allotment would be made to the extent of 1,150 shares (1000 shares issued by the company and 150 borrowed from the promoters).

ContinueIn case, on listing, the market price falls below the issue price, the SA may buy shares from the market to the extent of 150 shares. This may counter the selling pressure and raise the market price. The shares bought by the SA are then then returned to the promoters. Thus, only 1000 shares remain listed on the exchange after 30 days.In case, on listing, the share rises rapidly, and the SA does not buy the shares from the market, then at the end of the 30 days period (or before) the over-allotment option gets invoked. The company allots 150 more shares which are then returned to the promoters. Thus, 1150 shares remain listed on the exchange.ONLINE IPOThe online issue of the shares is carried out via the electronic network of stock exchanges.This system reduces the time taken and securities get listed within 15 days from the closure of the issue, there by enabling faster access to funds.Corporates planning an online IPO can reduce their stationery, printing and other expenses.The new norms prescribes that the allotment of securities should be made not later than 15 days from the closure of the issue, failing to which interest at the rate of 15% should be paid to the investors.Features of the guidelines issued by SEBI for the online IPOs:The company will have to first enter into an agreement with stock exchange for online offer of securities.The company will have to appoint a registrar to the issue having electronic connectivity with the stock exchange.The stock exchange in turn will appoint the SEBI-registered brokers for accepting the applications and placing the orders for shares.The stock broker will collect money from clients. In case the clients fail to pay for the shares collected, the broker will have to pay an amount.Recently IPO of Rural Electrification Corporation Limited is going on. Issue start date : 23rd August, 2013 & Issue End date : 23rd September, 2013. It is an Debt instrument for which an IPO is made.Primary IssueIndian Depository Receipt (IDRs)An IDR is an instrument denominated in Indian rupees in the form of a depository receipt against the underlying equity of issuing company to enable foreign companies to raise funds from the Indian Capital Market.The foreign company IDR will deposit shares to an Indian depository. The depository would issue receipts to investors in India against these shares. The benefits of underlying shares (like bonus, dividends etc.) would accrue to the DR holder in India.Standard Chartered PLC is the first foreign company to issue IDRs on May 25,2010.Global Depository Receipts (GDRs)GDRs are equity instruments issued abroad by authorized overseas corporate bodies against the shares/bonds of Indian Companies held with nominated domestic custodian banks.An Indian company intending to issue GDRs will issue the corresponding number of shares to an overseas depository bank.Most of the Indian companies have their GDR issues listed on the Luxembourg Stock Exchange and the London Stock Exchange.IDRs are primarily sold to institutional investors and the major demand is in the UK, US, Hong Kong, Singapore, France and Switzerland.Companies who have issued GDRs:CompanyClose (USD)Gail (India) Limited24.25Axis Bank Limited12.00Reliance Industries Limited23.51Larsen & Turbo Limited10.25Reliance Infrastructure Limited16.50American Depository Receipt (ADRs)There is no technical difference between ADRs and GDRs as both are listed on the NYSE (New York Stock Exchange) and NASDAQ (National Association of Securities Dealers Automated Association).ADR issues offer access to the US institutional and retail markets while GDR issues offer access only to the US institutional market.Companies who have issued ADRs:CompanyClose (USD)ICICI Bank Limited26.26HDFC Bank Limited27.85Infosys Limited22.96Wipro Limited9.14Tata Motors Limited22.30Sterlite Industries (India) Limited5.56Dr. Reddys Laboratories Limited32.27This data is according to 28th August, 2013.External Commercial Borrowings (ECBs)External Commercial Borrowings are borrowings raised from the international markets by corporates.ECBs supplement domestically available resources for expansion of existing capacity as well as for fresh investment.Indian companies have preferred this route to raise the funds as the cost of borrowing is low in the international markets.ECB needs sound risk management both interest rate and forex risk.Foreign Currency Convertible Bonds (FCCBs)FCCBs are bonds issued by Indian Companies and subscribed by non-resident in foreign currency.They carry a fixed interest or coupon rate and are convertible into a certain number of ordinary shares at a preferred price.They are convertible into ordinary shares of the issuing company either in whole or in part, on the basis of any equity-related warrants attached to the debt instrument.Till the conversion, the company has to pay the interest in dollars and if the conversion option is not exercised, the redemption is also made in dollars.The interest rate is low but the exchange rate risk is more. Hence, only the companies with low debt equity ratios and large forex earnings potential opt for FCCBs.Corporates can raise FCCBs at a coupon rate of 1.5%.Foreign Currency Exchangeable Bonds (FCEBs)Foreign Currency Exchangeable Bond means a bond expressed in foreign currency, the principal, and interest in respect of which is payable in foreign currency, issued by an Issuing company and subscribed to by a person who is resident outside India, in foreign currency and exchangeable into equity shares of equity shares of another company, offered company, in any manner, wholly or partly.THANK YOU