Primary market

Introduction
▪ The primary market is where securities are created.
▪ In the primary market, companies sell new stocks and bonds to the public for the first time,
such as with an initial public offering (IPO).
▪ Newly Created securities
▪ Fresh Capital can be raised
▪ Issued in the form of – Share
A Company raises its long term fund in 3 ways:
 Public Issue
Common
Sale of Securities to public
 Right issue
Additional Security
To existing share holders
 Private Placement
For raising small amount of capital
Functions
▪ Assist to transfer fund
▪ Investors- Public, Company and Govt
▪ Client – Public, Company and Govt
▪ 1. Origination
▪ 2. Propagation
▪ 3. Underwriting
▪ 4. Distribution

1. Origination
▪ A preliminary investigation by sponsor
▪ Respect to Technical, Economic and Financial viability of the project
▪ Based on this advise the type of issue, magnitude , time of floating and pricing- Merchant
banker
2. Propagation
▪ Prospects of new issue should be highlighted. – inform – benefits- intimated
3. Underwriting
▪ Contract of guarantee
▪ Minimum subscription is assured by u/w
▪ Form of insurance
▪ Charge commission- U/w Commission
▪ Forms of underwriting
▪ Guaranteeing the issue
 Promise
 If not subscribed by public- u/w will pay
▪ Outright Purchase
 u/w will purchase fully and then they will sell in market
▪ Syndicate underwriting
 Several u/w form a syndicate & they assure
▪ Types
▪ There are 2 types of u/w
▪ 1. Institutional
 LIC. UTI, Commercial Banks, etc
▪ 2. Non Institutional
 Brokers
4. Distribution
▪ Final sale of securities
▪ Agent perform this function
Regulation
▪ SEBI
 norms and procedures
▪ Company law Board
 Investor grievances
▪ Respective Stock exchanges
 Listing regulations
 Code of conduct
Methods of Floating
1. Public issue
2. Offer for sale
3. Private placement
4. Bought out Deals
5. Right Issue
6. Bonus Share
7. Book Building
8. ESOP
9. Other Methods- Offer to -

1. Public Issue (IPO)

▪ Done by an unlisted company makes a fresh issue or an offer for sale for its existing securities
▪ That means issuing for first time
▪ IPO or Further PO
Through Prospectus
▪ Common form
▪ Fixed no of shares at a stated price- offered through prospectus
▪ Prospectus- Invitation to public
 To intimate
 To induce
▪ Drafted by lead manager – inform SEBI
IPO & NFO
▪ IPO- Initial Public Offer
Shares
▪ NFO- New Fund Offer
Mutual Fund
Fast Track issuance of securities
▪ Faster and cost effective method
▪ Available subject to the conditions
 Listed for at least 3 years
 Excellent track record- redressed
  Avg. Free float capitalization- 10,000 Cr.
 Compliance with listing agreement
 Promoter group shares are held in DEMAT form
 No change of profit In audit
 No prosecution
2. Offer for sale
▪ Shares Issued to issue house or intermediaries
▪ Issued through letter of offer- negotiated price
▪ They will sell to public- higher price
▪ They gives Advertisement
▪ They will get spread (Diff. B/w Purchase price & Sales price)
3. Private placement
▪ Private placement is a funding round of securities which are sold not through a public
offering, but rather through a private offering.
▪ No need of prospectus
▪ Only agreement
▪ Only small fund can be raised
▪ Limited to specific area
4. Bought out Deals
▪ Similar to private placement
▪ A bought out deal is a method of offering securities to the public through a sponsor or
underwriter.
▪ Sponsor will directly invest in the security- in turn sell to public- at high price
▪ Merchant banker perform this function
5. Right issue
▪ A rights issue or rights offer is a dividend of subscription rights to buy additional securities in
a company made to the company's existing security holders.
▪ Sec 81 (1)
▪ It is a right – no need to accept the claim
▪ To existing SH
▪ If issue price is less than Market price = Value of right
6. Bonus Share
▪ Bonus Shares are shares distributed by a company to its current shareholders as fully paid
shares free of charge.
▪ To capitalize a part of the company's retained earnings.
▪ It is a gift to the existing SH

7 Book Building
▪ Book building is a systematic process of generating, capturing, and recording investor
demand for shares.
▪ It is process of price discovery.
▪ The investors have to bid for the shares within the price range given.
▪ The issue price is fixed on the basis of demand and supply of the shares.
▪ There is price band (80- 100) 80- Floor, 100- Cap Price

8.Employees’ Stock Option Plan

▪ Employee Stock Option Plan (ESOP) is an employee benefit scheme under which the
company encourages its employees to acquire ownership in the form of shares.
▪ Non transferable Convertible debentures (5th year- to equity)
▪ Issued at a lower rate

9. Other Methods
▪ Offer to employees
▪ Offer to customers
▪ Offer to Creditors

Primary Market instruments

▪ 1 Equity Share
-ordinary share
- do not carry preferential right
- risk bearer
- it can be
a) Blue chip shares
well reputed, matured& established co having good track record of earning & divided pay out.
 Blue Chip Companies
b) Growth share
- issued by growing co
- high performance
c) Income share
- co. who always distribute dividend
- which will not reinvest it in business
d) Cyclical shares
- if value of share are fluctuating due to market forces
e) Defensive share
- share of co engaged in food processing, drug, etc
- moderate income through out
f) Speculative shares
- risky class of shares
- speculation deal with these share
g) Stalwarts
- share issued by giant co having ability to surpass GDP of Country
h) Fast grown
- share of small co which are having a steady growth
i) Slow growers
- share of large & aging co
j) Turn around
- share of co which have accumulated loss &show sign of recovery

2) Equity share with differential right

-Share with differential right as to dividend, voting or otherwise
- Sec 43 of companies Act.

3) Preference share
▪ preference right
4) Debenture ( Bond)
- debt instrument 2(12) of companies Act any thing that
has a charge on asset
- both same
- in India --- Govt – bond
Pvt - debenture

Intermediaries in new issue market

▪ 1. Merchant Bankers (Managers to the Issue)
▪ 2. Registrars to the Issue
▪ 3. Underwriters
▪ 4. Brokers to the Issue
▪ 5. Banker to the Issue
Merchant Bankers
▪ As per SEBI rules, a merchant banker refers to, “any person who is engaged in the business of
issue management either by making arrangement regarding buying, selling or subscribing to
securities or acting as manager, consultant or rendering corporate advisory services in relation
to such issue management”.
▪ Functions of Merchant Banking Organization
▪ Portfolio Management: Merchant banks provides advisory services to the institutional
investors, on account of investment decisions. They trade in securities, on behalf of the
clients, with the aim of providing them with portfolio management services.
▪ Raising funds for clients: Merchant banking organisation assist the clients in raising funds
from the domestic and international market, by issuing securities like shares, debentures, etc.,
▪ Promotional Activities: One of the most important activities of merchant banking is the
promotion of business enterprise, during its initial stage, right from conceiving the idea to
obtaining government approval.
▪ Loan Syndication: Loan Syndication means service provided by the merchant bankers, in
raising credit from banks and financial institutions, to finance the project cost or working
capital of the client’s project, also termed as project finance service.
▪ Leasing Services: Merchant Banking organizations renders leasing services to their
customers. There are some banks which maintain venture capital funds to help entrepreneurs.
Registration
▪ Registration with SEBI is compulsory
Role of merchant banker
Pre issue management is time bound programme and concerned with following:
▪ 1) Issue of shares- obtain approval from SEBI
▪ 2) Marketing, Coordination and underwriting of the issue.
▪ 3) Pricing of issues
▪ 4) draft prospectus
▪ 5) selection of intermediaries
▪ 6) Other works
Post issue management is concerned with following:
▪ 1) Collection of application forms and amount received
▪ 2) Scrutinizing application
▪ 3) Obtaining approval from SEBI
▪ 4) Deciding allotment procedure
▪ 5) Publish in newspapers
▪ 6) Mailing of share certificates/refund or allotment orders

Registrars to the Issue

▪ The person appointed by a body corporate or any person or group of persons to carry on the
following activities on its or his or their behalf:
 Collecting applications from investors in respect of an issue;
 Keeping a proper record of applications and monies received from investors or paid
to the seller of the securities; and
 Assisting body corporate or person or group of persons in:
(a) Determining the basis of allotment of securities in consultation with stock exchange;
(b) Finalizing list of persons entitled to allotment;
(c) Processing and dispatching allotment letters, refund orders or certificates and other related
documents in respect of an issue.
▪ Services
Pre issue functions
▪ Suggest a draft application form
▪ Help to identify collection centre
▪ Open collection account with bank- procedure for operation
▪ Send instruction- collection centers
 ▪ Workout the modalities to obtain collection figures- daily
Issue functions
▪ Obtain collection figures daily
▪ Tabulate and classify data
▪ Intimate the progress- subscription
▪ Inform stock exchange
Pre allotment functions
▪ Collect application form- sort it
▪ Classify valid application-
▪ Re classify valid application eligible
▪ Assist companies to determine basis of allotment
▪ Finalize the allotment- approved by stock exchange
▪ Tally the final list- rejection- mismatch - correct
Function related with allotment
▪ Most important function
▪ According to SEBI- 50% - should be allotted to small investors
 All applicants up to 1000 shares
▪ Balance to others
Post allotment functions
▪ Make arrangements- letter of allotment- printed
▪ Dispatch- letter
▪ Submit all statements
▪ Pay brokerage- commission
▪ Inform all stake holders
▪ Dispatch final certificate

Underwriters to the issue

▪ Contract of guarantee
▪ Minimum subscription is assured by u/w
▪ Form of insurance
▪ Charge commission- U/w Commisssion
Functions
▪ Serve as the intermediary between the company seeking to issue shares in an initial public
offering (IPO) and investors.
▪ The underwriter helps the company prepare for the IPO
Banker to the issue
▪ “banker to an issue” means a scheduled bank carrying on all or any of the
following issue related activities namely:-
▪ ( i) acceptance of application and application monies;
▪ (ii) acceptance of allotment or call monies;
▪ (iii) refund of application monies;
▪ (iv) payment of dividend or interest warrants.
Two types of bankers re appointed:
▪ (a) Collecting banker
▪ (b) Coordinating banker
▪ Banker will provide information to SEBI as when it is expected to.

Brokers to the issue

▪ Intermediaries that are responsible for procuring the subscription to the issue from the
prospective investor are called ‘Broker to the issue’.
▪ Vital connection link between the prospective investors and the issuer.
▪ Assist in the speedy subscription of issue by the public.
▪ Appointment of broker is however not compulsory, unless permitted by stock exchanges.
▪ Help the investors to make a right choice of the company for making investment.

Reasons for the poor performance

▪ Manifestation of real economy
▪ Failure to mobilize household savings
▪ Passive situation
▪ Gap in primary market
▪ New reforms
▪ Not supplementing sufficient data
▪ Development in international markets