CHAPTER 3: PRIMARY MARKET

NOTES
Primary market: Primary market is where new securities are issued.
What is the role of the ‘Primary Market’?
 Government as well as corporates can raise equity or debt securities.
 securities may be issued at face value, or at a discount/premium

Face Value of a share (also called issue at par value or simply par)/debenture
Shares- original cost of the stock shown on the certificate.
Bonds- the amount paid to the holder at maturity.

When a security is sold above its face value, it is said to be issued at a Premium and if it is sold at less than its face
value, then it is said to be issued at a Discount.

Issue of Shares/ Why do companies need to issue shares to the public?

• Most companies start privately by their promoter(s). However, the promoters’ capital and the borrowings
from banks and financial institutions may not be sufficient for setting up or running the business over a long
term.
• So, companies invite the public to contribute towards the equity and issue shares to individual investors.
• The way to invite share capital from the public is through a ‘Public Issue’.

What is Public Issue? / Public issue: a public issue is an offer to the public to subscribe to the share capital of a
company.

 Initial Public Offering (IPO) is when an unlisted company makes either a fresh issue of securities or an offer for
sale of its existing securities or both for the first time to the public. This paves way for listing and trading of the
issuer’s securities.
 A follow-on public offering (Further Issue) is when an already listed company makes either a fresh issue of
securities to the public or an offer for sale to the public, through an offer document.

Rights Issue-
1. It is when a listed company which proposes to issue fresh securities to its existing shareholders as on a
record date.
2. The rights are normally offered in a particular ratio to the number of securities held prior to the issue.
3. This route is best suited for companies who would like to raise capital without diluting stake of its existing
shareholders.
Preferential issue:
  It is an issue of shares or of convertible securities (eg: convertible preference shares) by listed companies to
a select group of persons under Section 81 of the Companies Act, 1956 which is neither a rights issue nor a
public issue.
 This is a faster way for a company to raise equity capital.
Issue price: The price at which a company’s shares are offered initially in the primary market is called the Issue price.

Market Capitalisation: It is calculated by multiplying its current share price (market price) by the number of shares in
issue is called as market capitalization.
market price of a share Company x the number of shares issued.

What is the difference between public issue and private placement?

PUBLIC ISSUE PRIVATE PLACEMENT
When the issue is open to the general public and any The issue is made to a select set of people, it is called
other investor at large. private placement.

This means an issue can be privately placed where an

allotment is made to less than 50 persons.

 The sale of securities can be either through book building or through normal public issue.
 The company and merchant banker are however required to give full disclosures of the parameters which
they had considered while deciding the issue price.
 Two types of issue:
1. fixed price: When company and Lead Merchant Banker fix a price.
2. Price discovery process: The company and the Lead Manager (LM) stipulate a floor price or a price band and
leave it to market forces to determine the final price.

What does ‘price discovery through Book Building Process’ mean?

Book Building is basically a process used in IPOs for efficient price discovery. It is a mechanism where,
1. during the period for which the IPO is open,
2. bids are collected from investors at various prices, which are above or equal to the floor price.
3. The offer price is determined after the bid closing date.
What is the main difference between offer of shares through book building and offer of shares through normal
public issue?

Cut-Off Price vs floor price

• In a Book building issue, the issuer is required to indicate either the price band or a floor price in the
prospectus.
• The actual discovered issue price can be any price in the price band or any price above the floor price. This
issue price is called “Cut-Off Price”.
• The issuer and lead manager decides this after considering the book and the investors’ appetite for the
stock.
 • Floor price is the minimum price at which bids can be made.
What is a Price Band in a book-built IPO?
• The prospectus may contain either the 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 shall not be more than 20%.
Can the price band be revised?
• The price band can have a revision and such a revision in the price band shall be widely disseminated by
informing the stock exchanges, by issuing a press release and indicating the change on the relevant website
and the terminals of the trading members participating in the book building process.
• The bidding period shall be extended for a further period of three days, but the total bidding period shall
not exceed ten days.

 It is up to the company to decide on the price or the price band, in consultation with Merchant Bankers.
 During book building a bid should remain open for 3days.
 Allotment should be completed with 8 days from the issue close date.
 Within next 2 working days details should show in demat account or in case of refund, dispatch order must
be released. So, an investor should know in about 11 days’ time from the closure of issue, whether shares
are allotted to him or not.
It takes 12 working days to list a company on a stock exchange after the closure of the book-built issue.
 NSE bidding system called NEAT IPO enables trading members (stockbrokers) to enter bids directly from
their offices through a sophisticated telecommunication network.
Offer Draft offer Prospectus Red herring Abridged prospectus
document document Prospectus
It has all the The draft offer ‘Prospectus’ is a It is filed with the It is a shorter version
relevant documents are filed document with registrar before the of the Prospectus and
information to with SEBI, atleast 30 information issue and hence does contains all the salient
help an days prior to the regarding the size of not have any features of a
investor to registration of the issue, the current information such as Prospectus.
make his/her prospectus with status of the number of shares
investment ROC (registrar of company, its equity issued or issue price
decision. companies) for SEBI capital, its current etc.
to specify changes and past
performance, the
promoters, the
project, cost of the
project, means of
financing, product
and capacity etc. It
also contains lot of
mandatory
information
regarding
underwriting and
statutory
compliances.
It means Its purpose is to It accompanies the
Prospectus in fetch reviews of application form of
case of a SEBI and make public issues.
public issue or changes thereafter.
offer for sale
and Letter of
Offer in case
of a rights
issue
 These documents are prepared by the merchant bankers.
 ‘Lock-in’ indicates a freeze on the sale of shares for a certain period of time.
Listing of securities:
• Listing means admission of securities of a company for trading on a stock exchange through a formal
agreement (between company and the stock exchange).
• It provides liquidity and marketability to securities,
• Also, helps company to have effective control and supervision on trading of its shares/ securities.

Role of SEBI (in the issue process at primary market)

1. Any company planning to come up with public issue or any company planning to come with rights issue of
more than 50 lakhs must get Sebi approval.
2. For this the company must prepare Draft offer document and submit it to Sebi for their review. Sebi after
reviewing would give its observations.
3. Company must come up with its issue within 3 months of this approval by Sebi.
4. Sebi ensures that the required disclosures are made by the company in the draft offer document. Sebi DOES
NOT recommend any issue or validate what is mentioned in the disclosures.
Foreign Capital Issue
Indian companies can raise money from foreign countries in 2 ways
1. foreign currency convertible bonds more commonly known as ‘Euro’
2. issue of ordinary shares through depository receipts- GDR/ ADR.

ADR/ ADS: An American Depositary Share (“ADS”) is a U.S. dollar denominated form of equity ownership in a
non-U.S. company. ADR represent a bunch of shares issued by an Indian company which wants to raise capital
from U.S. The holders of ADR are entitled to dividends as when declared by the Indian company. But they are
not entitled to vote. Also, the custodian bank would hold the securities with it and issue depository receipts to
these investors. These ADRs can be traded on the US stock exchange like any other US company share.

A. MUTIPLE CHOICE QUESTIONS:

1 What is not true for primary market?

a) companies issue shares
b) Government issue Government Securities
c) Companies and government securities can be traded
d) All of the above

2. _________________ is when a listed company which proposes to issue fresh securities to its existing shareholders
as on a record date.
a) Rights Issue
b) Preferential issue
c) Private placement
d) listed issue

3. The market value of a quoted company, which is calculated by multiplying its current share price (market price) by
the number of shares in issue is called as _____________.
a) Offer on sale
b) market capitalisation
c) issue capital
d) None of the above

4. Who decides the issue price of a share?

a) Sebi
b) Company through fix price method
c) Lead manager in the investment company through book building process
d) Company and lead manager through book building process.

5.The issue price is also called______

a) market price
b) listed price
c) issue price
d) traded price

B Very Short Answer Questions VSA (1 Mark) Level

1 What is Primary market? U

2 What is offer of sale of securities? MD

3 What is ADR/ADS? U

4 Name the two ways of deciding the issue price of any share. H

5 When is draft offer document submitted to SEBI for their review? C

C Short Answer Questions SA (2/3 Marks) Level

1 Explain the advantages of Book Building through the NSE system. U

2 What are the SEBI guidelines on allotment of shares? MD

3 What is market capitalization? What is its significance? H

4 Differentiate between preferential issue and rights issue. U

5 Differentiate between IPO and FPO. MD

D Long Answer Questions LSA (5 Marks) Level

1 Explain the Book Building process of price fixation of a share. MD

2 What is the role of SEBI in an new issue / fresh issue of shares? C

3 Explain ADR as a Foreign Capital Issuance security. U

4 What is listing of securities? What is its significance? What is delisting of MD

securities?