Primary Market and Security Issuances

1. Primary Market and Security
Issuances
Dr. Anu Thakur

2. Primary Market (NIM)
Primary market provides opportunity to issuers of securities, Government as well as
corporate, to raise resources to meet their requirements of investment and/or
discharge some obligation.
The issuers create and issue fresh securities in exchange of funds through public
issues and/or as private placement.

3. Features of New Issue Market
1. This is the market for raising long term capital.
2. 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).
3. In a primary issue, the securities are issued by the company directly to investors or by
involving intermediaries.
4. The company receives the money and issues new security certificates to the investors.
5. The primary market performs the crucial function of facilitating capital formation in the
economy.
6. Primary issues are used by companies for the purpose of setting up new business or for
expanding, diversifying or modernizing the existing business.

4. Services of the Primary Market
1. Introduction (Investigating and Advisory Services)
2. Underwriting
3. Distribution

5. Services of the Primary Market
1. Introduction: Starts before an issue is floated in the market.
I. Technical, economic and financial viability to ensure soundness of
the project.
II. Advisory services. (improve the quality)
a) Type of issue
b) Magnitude of issue
c) Time of floating
d) Pricing of an issue
e) Methods of issue, etc.

6. Services of the Primary Market
2. Underwriting:
Underwriting is an agreement, whereby the underwriter promises to
subscribe to a specified number of shares or specified amount of share in
the event of public.
If the issue is fully subscribed, then there is no liability for the underwriter.
If a part of share issues remains unsold, the underwriter will buy the shares.
Thus, underwriting is a guarantee for the marketability of shares.

7. Services of the Primary Market
2. Underwriting:
Advantages of underwriting:
i. The issuing company is relieved from the risk of finding buyer.
ii. The company is assured of getting the minimum subscription within
the stipulated time.
iii. Underwriters undertake the burden of highly specialized function of
distributing securities.
iv. Underwriters provide expert advice about timing of issue, pricing,
size and type of securities to be issued.
v. Public confidence is enhanced when Underwriting is done through
reputed Underwriters.

8. Services of the Primary Market
3. Distribution:
Sale of securities to ultimate investors. This service is performed by
brokers, agents, who maintain a regular and direct contact with
the ultimate investors.

9. Primary Market Constituents

10. Primary Market/New Issue Market
• Issuer
An issuer in the primary market is the entity seeking capital through the
issue of securities. Issuer in primary markets include, Governments,
Public companies, Private Companies, Banks, Non-Banking Finance
companies, Financial Institutions and Mutual Funds.

11. Primary Market/New Issue Market
• Types of Investors
Qualified institutional investors (QIB)
Retail investors:
Non-institutional investors
Employees of the issuing company

13. Primary Market/New Issue Market
• Types of Investors
Qualified institutional investors (QIB): They usually apply in very high quantities. As per the
changes SEBI guidelines, QIBs now have to pay a margin, not the full amount, at the time of
bidding in the book building of an issue (preferential treatment for investment SEBI).
Mutual funds, Scheduled commercial banks, FIs, Insurance co. registered under IRDA. 50%
Retail investors: A retail investor is an individual investor in the Indian Securities market
whose subscription to securities is of a value less than Rs. 2 lakh. 35% of the issue has to
be reserved for them.
Non-institutional investors: Indian resident, HUF, companies, NRIs, Societies and Trusts, etc
who bid for more than Rs 2 lakhs. They need not to register with SEBI. Non-institutional
bidders have an allocation of 15% of shares of the total issue size.
Employees of the issuing company

14. Intermediaries involved in Primary Market
I. Merchant Bankers
II. Lead Managers
III. Registrar of an Issue
IV. Share transfer agent
V. Bankers to the issue
VI. Underwriters
VII. Advertisers
VIII. Printers
IX. Stock-brokers and sub-brokers
X. Depositories
XI. Legal Counsel

15. Role of Intermediaries involved in Primary
Market
I. Merchant Bankers: Assist the company right from preparing prospectus (about the
correctness of all information). A company can appoint more than one MB
provided allocation of responsibilities between MB is properly structured.
II. Lead Managers: Merchant Banker must be appointed as lead manager for
coordinating all issue related activities. The name of LM should appear on the
prospectus.
III. Registrar to an Issue process all applications received from the public and prepare
the basis of allotment. He finalizes the total list of applicants after rejecting invalid
ones. The dispatch of certificates/refund orders are also handled by him. Then
ensures shares are credited to the allottees A/c and refunds are sent to
unsuccessful ones.

16. Role of Intermediaries involved in Primary
Market
iv. Share Transfer Agent: who maintains the records of holders of
securities on behalf of the company.
v. Banker to an Issue are banks those accept applications from the public
on behalf of the company and forwarded to registrar and share transfer
agents.
vi. Underwriters
vii. Stock-brokers and sub-brokers who through their contacts/sources
invite the public for subscribing shares and get brokerage.

17. Role of Intermediaries involved in Primary
Market
viii. Advertisers: The company coming out with public issue must release
advertisements before the issue opens and after it closes as per SEBI
guidelines.
ix. Printers: Printers must comply with the guidelines regarding size of
pages, font size, contents, no. of copies and so on.
x. Depository: With whom they will be placing the shares allotted to the
applicants (NSDL and CDSL) are the intermediaries who hold securities in
DEMAT form on behalf of the shareholders.
xi. Legal Counsel: Related to every legal formalities and execution of
documents.

18. Role of SEBI in Primary Market
1. Prescribing thorough code of conduct for every player of Primary market
for protecting interests of the investors.
2. Prescribing guidelines with respect to various methods that can be
adopted by the company to sell its securities.
3. Laying down rules with respect to duties and responsibilities of various
players of the Primary market.
4. Conducting the inspection of the working of every intermediaries involved.
5. Suspending the certificate of registration granted to the intermediary in
case of any violation of the SEBI’s provisions.
6. Cancelling the certificate of registration in case of repeated defaults.

19. Primary Market
Instruments

20. Primary Market Securities

21. Concepts of Equity/owned capital
• Authorized capital
• Issued capital
• Subscribed capital
• Called-up capital
• Paid-up capital
• Calls-in-arrears/unpaid capital

22. Concepts of Equity/owned capital
• Authorized capital: As per companies act, a company can issue only as much
shares as it has been authorized to by its MOA (Memorandum of
Association).
• Issued capital: The actual number of shares at their face value that have
been issued to investors out of the authorized capital.
• Subscribed capital: The actual amount subscribed by the investors out of
the issued capital by making commitments to pay for the shares.
• Paid-up capital: Any amount of money that has already been paid by
investors in exchange for shares of stock is paid-up capital.
• Called-up capital: The capital which has been called up for payment on
shares issued to them.
• Calls-in-arrears: The amount that remains unpaid.

23. Solution:
1. Authorized capital = Rs. 10,00,000 (1,00,000 shares of Rs. 10 each)
2. Issued capital = Rs. 7,50,000 (75,000 shares of Rs. 10 each)
3. Subscribed capital = Rs. 7,00,000 (70,000 shares of Rs. 10 each)
4. Called-up capital = Rs. 3,50,000 (70,000 shares of Rs. 3 each – final call)
5. Called-up = Rs. 7,00,000 (70,000 * 10)
6. Paid-up capital = Rs. 6,75,000 (70,000 shares* Rs. 5) + (65,000 shares * Rs. 5)
7. Calls-in-arrears = Rs. 25,000 (5,000 shares* Rs. 5)

24. Solution:
1. Authorized capital = Rs. 10,00,000 (100,000 shares of Rs 10/- each)
2. Issued capital = Rs. 7,50,000 (75,000 shares x Rs. 10/- each)
3. Subscribed capital = Rs. 7,00,000 (70,000 shares x Rs. 10)
4. Called-up capital = Rs. 3,50,000 (70,000 shares x Rs. 5)
5. Paid-up capital = Rs. 6,75,000 (70,000 x Rs. 5 + 65,000 x 5)
6. Calls-in-arrears = Rs. 25,000 (5,000 x 5)

25. Sum 2:
The Capital XYZ Ltd.’s MOA discloses of 80,000 shares of Rs. 10 each. Out of
above, the company decides to issue 60,000 shares to investors. The
company requires the shareholders to pay Rs. 5 on application and allotment
and Rs. 5 on 1st call. Applicants have applied for 55,000 shares. All applicants
have paid the call amount, except 4,000 shares.
1. Authorized capital = Rs. 8,00,000
2. Issued capital = Rs. 6,00,000
3. Subscribed capital = Rs. 5,50,000
4. Called-up capital = Rs. 2,75,000
5. Paid-up capital = Rs. 5,30,000
6. Calls-in-arrears = Rs. 20,000

26. Sum 3:
The Capital XYZ Ltd.’s MOA discloses of 80,000 shares of Rs. 10 each. Out of
above, the company decides to issue 60,000 shares to investors. The
company requires the shareholders to pay Rs. 8 on application and allotment
and the balance as a call after 4 months. Applicants have applied for 55,000
shares. All applicants have paid the call amount, except 5,000 shares.
1. Authorized capital = Rs. 8,00,000
2. Issued capital = Rs. 6,00,000
3. Subscribed capital = Rs. 5,50,000
4. Called-up capital = Rs. 1,10,000
5. Paid-up capital = Rs. 5,40,000
6. Calls-in-arrears = Rs. 10,000

27. 27
SHARE CAPITAL: TERMINOLOGIES
Shares
 Number of units of capital of a company
 Share certificate evidences ownership of shares. Indicates (a) kind of shares (b)
number of shares and (c) distinctive serial number
 Demat or dematerialized shares are shares in electronic forms

28. 28
TYPES OF SHARE CAPITAL
(a) Equity Capital/ Common Stock/ Share Capital
 Owners of the firm
 Residual interest in the profits after payments to creditors and preferred shareholders
are met
(c) Preferred Capital/ Preferred Stock/ Preference Share Capital
Preference over equity shareholders over two aspects
 Payment of periodic dividend
 Distribution of assets on liquidation of the company
 Carries fixed rate of dividend which is payable when the company has earned adequate
profits. They get dividend before equity shareholders

29. 29
TYPES OF SHARE CAPITAL
(c) Preferred Capital/ Preferred Stock/ Preference Share Capital
Cumulative and Non Cumulative Preference Shares
 Cumulative: Receive dividends for one or more years in which no dividend was paid.
 Preference dividend not paid is ‘dividends in arrears’
 Non cumulative: ‘Dividends in arrears’ not payable
Redeemable and Non-Redeemable Preference Shares
 Redeemable: Repayable after the period of holding stated in the share certificate
 Non- Redeemable: Can not be repaid except at the time of liquidation
Convertible and Non-Convertible Preference Shares
 Convertible: Can be converted into equity shares at a predetermined ratio
 Non- Convertible: Will always remain preference shares

30. Debentures or Bonds
30
 Consists of a written promise to pay principal amount at a specified time and interest at
a specified rate
 A debenture certificate is issued to each lender as evidence of the issuing company’s
obligations to the debenture-holder.
 The debenture trust deed (also known as bond indenture) is a legal document that
states the rights and obligations of the debenture-holders and the issuer.

31. 31
Characteristics of Debentures or Bonds
Secured and Unsecured Debentures
 Debentures which are backed by specific assets to ensure their repayment are called
Secured Debentures.
 A mortgage is a legal arrangement for securing a borrowing with immovable assets
such as land, building or embedded plant and machinery.
 In a pledge, the borrower gives physical possession of the asset to the lender, e.g.
pawning jewellery with a bank as security for a loan.
 Unsecured debentures are backed only by the general creditworthiness of the
issuer, not by a legal interest in any specific asset.

32. 32
LIABILITIES: Non- Current Liabilities
Characteristics of Debentures or Bonds
Term and serial debentures
• When all the debentures of a single issue, mature or come due on a single date are called
term debentures.
• In contrast, Serial bonds are bonds which do not mature or come due on a single date.
Instead, serial debentures mature in instalments on a series of specified dates.
Convertible debentures
• The debenture-holder has the option of exchanging these debentures for shares of
the issuing company.
• A convertible debenture has a stipulated conversion rate of some number of shares
for each debenture.
Callable bonds
• These bonds contain a provision that gives the issuer the right to call the debenture
before its maturity date.
• The price the issuer must pay, known as the call price, is specified in the debenture trust
deed.

33. 33
LIABILITIES: Non- Current Liabilities
Characteristics of Debentures or Bonds
Zero-coupon bonds
• these debentures do not carry any periodic interest payment, or coupon.
• Zero-coupon bonds have two special features:
a) They have low issue price and a high maturity value, and
b) They are issued for long periods.
Deep Discount Bonds
• An extension of ZCB, the DDB is a very long tenor unsecured bond, issued at discount
and redeemed at its face value.

34. Other Aspects of Fixed Income Securities
• Investors’ Perspective of Debt Securities: Stable and assured return.
Suited for investors with less appetite for risk.
Pure debt vs Convertible debt. (evaluations can be based on NPV
approach).
a. NPVC > NPVP = Convertible Debt good option.
b. NPVP > NPVC = Pure Debt good option.
• Issuers’ Perspective of Debt Securities: less cost of capital (debt is
cheaper than equity due to limited risk profile).
Tax break enjoyed on the interest paid on debt securities.

35. Securities Issuances in Primary Market

36. Securities Issuances in Primary Market
• Fixed Price Method
• Book Building Method

40. Book Building
• Book-building is a process of price discovery used in public offers. The issuer
sets a base price band within which the investor is allowed to bid for shares.
• It is a mechanism where, during the period for which the book for the offer
is open, the bids are collected from the investors at various prices, within
the price band specified by the issuer.
• In this process, the price determination is based on orders placed and
investors can place orders at different prices.

41. Book Building
Floor Price: Floor price is the minimum price at which bids can be made.
Price Band: The offer document may have a floor price for the securities or a
price band within which the investors can bid. The spread between the
floor and the cap of the price band cannot be more than 20%.
Cut-off price: Once the issue period is over and the book has been built, the IB
along with the issuer arrived at a cut-off price. It is the final price at which
the shares are issued to the investors.
Investors bidding at a price below the cut-off price are ignored. So those
investors who apply at a higher than the cut-off price have a higher chance
of getting the stock.

42. Book-Building Process
Company plans an IPO via the book-building route
Appoints Investment Banker
Issues a draft prospectus
Book-runner appoints syndicates members and registered
intermediaries
At close of bidding, book runner and company decide upon
the allocation and allotments
Draft prospectus filled
simultaneously with
concerned authority
Price discovery begins
through the bidding process

43. Book Building Process
1. Appoint one or more MB(s) as book runner(s) and their name shall be
disclosed in the draft red herring prospectus. The LMB shall act as the lead
book runner and shall be primarily responsible for the BB. If more than one
book runner, they shall either be co-book runner or syndicate members.
2. The book runner(s)/syndicate members shall appoint stock-brokers who are
members of the recognized stock exchange and registered with the SEBI, for
the purpose of accepting bids, applications and placing orders with the issuer
and ensure that the stock-brokers are financially capable.
3. The lead MB shall file with the SEBI a draft red herring prospectus containing
all the disclosures including total issue size (if applicable), except the price and
the number of specified securities to be offered.

44. Book Building Process
4. Price band (Floor price and cap price)
a. If the issuer opts not to make disclosure of the price band in RHP, then following
shall be disclosed:
• A statement that FP or PB, shall be disclosed at least 2 days before the opening of
bid;
• A statement that the investors may be guided in the meantime by the secondary
market;
• The names and editions of the newspapers where the announcement of the FP or
PB would be made.

45. Book Building Process
5. A public issue shall be kept open for at least 3 working days but not more than 7 days
(3-7 days). In case of revision in PB, may be extended to a maximum of 10 working
days.
6. The issuer shall, after registering the red herring prospectus with the registrar of
companies, make a pre-issue advertisement in one English national daily newspaper,
Hindi national daily newspaper and one regional language newspaper.
7. Bid Analysis: carried out by the book-runner immediately after the closure of the bid
offer date.
8. The book runner and the issuer decide the final price at which the securities shall be
issued.
9. Allotment of securities

46. Bidding Process
1. Shall be through an electronically linked transparent bidding facility provided by recognized
stock exchanges.
2. The lead book runner shall ensure the availability of adequate infrastructure with syndicate
members for data entry of the bids in a timely manner.
3. The syndicate members shall be present at the bidding centers.
4. Every stock-broker shall accept orders from all clients who place orders through certified
syndicate bank.
5. Applicants who are QIBs shall place their bids only through the stock-brokers.
6. The bidding terminals shall contain an online graphical display of demand and bid prices
updated at periodic intervals, not exceeding 30 minutes.
7. The investors may revise their bids.
8. The QIBs shall not withdraw their bids after closure of bidding.
9. The stock exchanges shall continue to display on their website, the data pertaining to book-
built in a uniform format.

47. Difference between Fixed Price and Book Building
Features Fixed Price Book-building
1. Pricing Price at which the securities are
offered/allotted is Known in advance to the
investor.
Price is Not known in advance to the
investor. Only Price Range is known.
2. Demand Demand for the securities offered is known
only after the closure of the issue.
Can be known everyday as the book
built.
3. Payment Payment is made at the time of
subscription wherein refund is given after
allocation.
Payment only after allocation.

48. Types of Primary Market Issuances
I. Public Issue/ Offer through prospectus
II. Offer for Sale
III. Preferential Issues/Private Placement
IV. Right Issues
V. Bonus Issue

49. 1. Public Issue/Offer through Prospectus
Application forms for shares of a company should be accompanied by
a prospectus.
“Prospectus” means any document issued by the company and
includes any notice, circular, advertisement or other document
inviting deposits from the public.
Prospectus is a document by way of which the investor gets all the
information pertaining to the company in which they are going to
invest.
It gives detail information about the company, promoter, directors,
group companies and capital structure, etc.

50. Writing the prospectus
• The most important document the company and the investment bankers must
produce to make an IPO happen is the prospectus. The prospectus is the
massive document that lists all the opportunities, risks, and financial details about
the company that’s selling stock to the public. It’s available to investors,
regulators, and other interested parties.
• At the top of a prospectus, the investment bankers lay out the main details an
investor should be concerned with. Here, in the summary section, investors learn
about the company’s intentions from the deal.
• Investment bankers also try to demonstrate why the company is looking to sell
stock. It’s typical for the investor to get a taste of the size of the company’s target
market. The summary is also a common place for the company’s management
team to lay out their broad objectives for the company.

52. Public Issue
Public Issues can be further classified as:
• Initial Public Offering (IPO): IPO is an offering of a fresh issue of
securities to the public.
• Follow on Public Offering (FPO): Shares issued by a company already
listed on stock exchange.

53. Regulations regarding Issue of Prospectus
1. A company cannot come out with public issue unless draft prospectus is
filed with SEBI.
2. A company cannot file prospectus directly with SEBI. It must be file
through an Investment Banker.
3. SEBI after examining the same, may suggest changes within 21 days (if
any).
4. If the issue size is up to Rs. 20 crore then IB required to file prospectus
with the regional office of SEBI falling under the jurisdiction in which
registered office of the company is situated.
5. If the issue size is <20 crore, IB required to file prospectus at SEBI, Mumbai
office.
6. Prospectus is also required to filed with the concerned stock exchange
along with the application for listing its securities.

54. The role of IB in IPOs
1. The company produces information about its stock sale – (Prospectus).
2. The company takes its story to the streets – (Roadshows).
3. The IBs gather up the investors in the book-building process.
4. Underwriters’ price the deal.
5. Underwriters’ support the IPO.

55. The goals of the sell-side analyst
• Protecting new stocks from being lost and forgotten
• Performing surveillance for investors
• Highlighting anomalies

56. What investors look to sell-side analyst for
• Research reports
• Instant updates
• Industry analysis

57. Thank you