2. Primary Market
It is a place where new offerings
by Companies are made either as an
Initial Public Offering (IPO)
&Following Public Offering(FPO).
3. Role of Primary Market
Role of primary market in the economy
– Source of finance
– Economically deficit units and economically
surplus units come together
– Issuers raise resources to meet their requirements
5. Issues and Investors
Type of Issues Investors
Public Issue
(IPOs / FPOs)
Public at large
Rights Issue Existing shareholders
Private Issues
Private placements,
Preferential Issue, Sweat
Equity and QIPs
Individuals, Corporates,
QIBs, Promoters, Directors,
Employees
6. Private Issue Rights Issue Public Issue
Offer
Document
Placement
Document/
Information
Memorandum
Letter of Offer Prospectus
Draft
Prospectus /
RHP
Offer type Private placement,
QIP, Preferential
issue, Sweat
equity
No variety IPO,FPO
Investors Banks, FIs, FIIs,
MFs, Promoters,
Directors,
Employees etc.
Existing
shareholders
Public at large
Process Securities are
offered,
subscribed, may
/may not be listed
Securities
offered,
subscribed and
listed
Grading of issue,
Fixed price/book
built issue, Offer,
acceptance,
allotment & listing
8. Premium and Discount
• Securities normally issued at face value of Rs
10
• Issue at face value other than Rs.10 permitted
if the issue price is above Rs.500/-
• Issued at Premium – when sold above face
value
• Issued at Discount – When sold below face
value
9. General Conditions for a company to
come out with public issue
• A company will not be allowed to come out with
issue of capital if
– Promoters / directors are debarred by regulator
– In the list of willful defaulters of RBI list
– Issuer has not applied for listing
– If issuer has not tied up with depository
– If all partly-paid shares are not fully paid or forfeited
– 75 % of funds ( (Other than public issue) are not tied
up
10. Eligibility Criteria for Issuer
• Profitability related
– Assets – Rs.3 crores, Net worth Rs.1 crore
– Distributable profits, Issue size < 5 * Net worth
– New name condition
• QIB related
– 50 % allotment to QIBs
• Appraisal related
• Project to be appraised by Banks/ PFI with 15 % of
project cost contribution,
• Post issue capital = 10 crore ,
• Market making for 2 years
11. Pricing of an Issue
Who decides the issue price?
– Free pricing
– Differential pricing
– RBI permission
– Denominations
13. Lock –In period
• For promoters – 3 years, 1 year
• For other persons (Pre issue capital) – 1 year
14. Minimum offer and Reservation
• 25 % of post issue capital – Public
shareholding
• Reservation for employees – maximum 5 %
• Reservation for shareholders of promoting
and group companies – maximum 10 %
• Reservation for deposit holders / bond
holders- maximum 5 %
15. Qualified Institutional Placement
• Means allotment of securities to QIBs on
private placement basis
• Issuer has to have securities listed for at least
one year
• Issuer should have minimum required public
shareholding
• Allotment on the basis of placement
document
16. Qualified Institutional placement
• Pricing : Average closing price for last two
weeks
• Minimum 10 % allotment to MFs
• Minimum 2 allottees for Rs.250 cr and 5
allottees for more than Rs.250 cr issue
respectively
17. Contents of Offer Document
• Cover page
– Issue details
– Name of promoters
– Risk in relation to first issue
– General risk
– Issuer’s absolute responsibility
– Names , logos, addresses of Merchant Bankers
– Mandatory clauses on cover page
– Date of opening, closing
– Exchanges where listing will take place
18. Contents of Offer Document
• Risk factors and managements’ perception of
risk factors
• Summary of industry ,business etc.
• Major events in recent history-2 years
• Consolidated financial and operating data
• General information about company
• Addresses, telephone nos. members of BoD
• Ratings, Grading
• Capital structure etc.
19. Contents of Offer Document
• Objects of the issue
• Cost of Project
• Means of Finance
• Appraisal
• Implementation schedule
• Basis of issue price
• Comparison with other industry players
20. Contents of Offer Document
• Tax benefits
• Business strategy
• Property purchases
• Various agreements, Govt. approvals
• Management, key personnel
• Outstanding ,Material developments
• Information about listed companies in the group
21. Issue Process- Public Issues
• Importance of Prospectus
– Basis of subscription
– Stringent norms for disclosures
– Issuer and Merchant Banker responsible for
adequacy and veracity of disclosures
– Liable to be punished for lapses
22. Issue Process- Public Issues
• Fixed price and Book built issue
• Differentiation
– In terms of price
– In terms of demand
23. Book Building Process
• The process and purpose
– Efficient process of price discovery
– Price bands
– Market forces decide price
24. Book Building Process
• From Opening of an Issue to Listing
– Bids open for three to seven / three to ten days
– Only electronic bidding
– Demand to be displayed end of the day
– Cut off price
– Allotment in 12 / 15 days
– Listing
– Trading commences on 13 / 16 th day
25. IPO Grading
• IPO grading is the grade assigned by a Credit
Rating Agency registered with SEBI, to the
initial public offering (IPO) of equity shares or
any other security which may be converted
into or exchanged with equity shares at a later
date.
• The grade represents a relative assessment of
the fundamentals of that issue in relation to
the other listed equity securities in India.
26. IPO GRADING
• Grading process should look into
– Prospects of the industry in which the company
operates,
– Competitive strengths of the company that would
allow it to address the risks inherent in the
business(es) and
– Capitalise on the opportunities available, as well
as the company’s financial position.
27. IPO GRADING
• Business Prospects and Competitive Position
• i. Industry Prospects
• ii. Company Prospects
• Financial Position
• Management Quality
• Corporate Governance Practices
• Compliance and Litigation History
• New Projects—Risks and Prospects
29. SEBI and Public Issues
• SEBI’s role
– Approval for issue means no recommendation
– Rs. 50 lacs limit (For Rights issues)
– Three months validity of SEBI’s observations
– SEBI’s disclaimer clause
30. Primary Market- Facts
Year Number of
issues
Amount raised
(Rs. Crore)
2008-09 47 16,620
2009-10 76 57,555
2010-11 91 67,609
2011-12 71 48,468
Apr 12-Dec 12 40 20,869
31. Primary market and the investor
• Mechanics of applying for an IPO
– You need to have a demat account
– Maximum three individuals can apply jointly in a
public issue
– Demat account need to be in the name of all
applicants
– Retail investor can invest up to Rs.2,00,000/-
– Only cheques / DDs/ASBA are accaptable for
investment
– PAN of all investors is must for investment
32. Primary market and the investor
• Mechanics of applying for an IPO
– Forms for IPOs are available with most sub-brokers /
distributors / investment advisors
– You should get allotment letter or refund from the
registrar for the issue by 11th day from the date of closing
of the issue
– In case of difficulty in allotment / refund order ,
immediately contact compliance officers of the issuer
company and the merchant banker with a copy to the
exchange where the securities are to be listed and SEBI
Investor Grievance Cell
33. Primary market and the investor
• “Do’s and Don’t’s” for investing in primary market
• Do’s
– Read the prospectus / detailed application form
carefully
– Ask for complete application form if prospectus is not available
– Understand purpose of IPO eg. Retirement of high cost debt / exit of
strategic investors / expansion of business etc. and its effect on the
company
– Read risk factors and management’s view on the same
– Try to form judgment about promoters and management with the help
of available information
contd…
34. Primary market and the investor
• Do’s
– See if the reputed anchor investor / institutional investors
are investing in the issue. It may be treated as positive
indication about quality of issue
– Look for
• Unique business opportunities
• Association of reputed bankers / merchant bankers / investors
with the issue
• The use of proceeds of the issue and cash flows
– If you find all the above difficult to do, then at least see
what is IPO grading before making investment decision
35. Primary market and the investor
• Don’t
– invest before knowing these basics
• Business of the issuer
• Quality of promoters and management
• Purpose of issue and use of issue proceeds of issue
• Significant risk factors
– invest because someone promises you incentive for
investment
– invest because someone else invests as your investment
goals / risk appetite could be different
– get carried away by hype
