THE PRIMARY MARKET

Prepared by : Kruti Desai

Chapter Objectives

Fund-raising through prospectus, right

issues, private placement and
preferential issues.
Book building : A New Issue Mechanism
Green-Shoe Option
On-line IPOs
Trends in resources mobilised from
international capital markets

Introduction

The 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 stock

To bring down stock prices
To restructure their capital

Introduction
Private Placements

Public offering through prospectus

According 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 Placements

The 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, debentures
No prospectus is issued
More quick and less expensive than
public offering

Right Issue

Right issue is an offer of new securities

by a listed company to its existing
shareholders on a pro-rata basis.

Participants in the
Primary Market

Issuers of the Securities

Investors in the securities
Intermediaries

Merchant Bankers
Pre-issue

activities
Post-issue activities

Syndicate Members
Registrar to an issue
Bankers to the issue

Free Pricing Regime

Before 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 INDIA

Meaning and Concept

Book 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

Types of Book Building

The 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 building

The 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 Process

The 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 Process

Bids 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

Process

3000 shares at the Price band of Rs. 2024

Off Price Rs. 22

Bid Quantity

Bid price

Cumulative
Quantity

Subscription

500

24

500

16.67%

1000

23

1500

50.00%

1500

22

3000

100.00%

2000

21

5000

166.67%

2500

20

7500

250.00%

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 Selfcertified 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

Issue

Anchor Investor

An 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 Building

It 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 OPTION

A 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 greenshoe option

1.

2.

3.

If a company is issuing 1000 shares, the company

will enter into an agreement regarding overallotment 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).

Continue
4.

5.

In 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 overallotment 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 IPO

The 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 Issue
Private
Placement
Initial
Follow
Private
Preferential
Qualified
Public
on
Placement
Institutional
Public
Issue
offering
Offering
(Unlisted
Placement
(FPO)
Company)

Indian 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:

Company

Close
(USD)

Gail (India) Limited

24.25

Axis Bank Limited

12.00

Reliance Industries Limited

23.51

Larsen & Turbo Limited

10.25

Reliance Infrastructure
Limited

16.50

American 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:

Company

Close
(USD)

ICICI Bank Limited

26.26

HDFC Bank Limited

27.85

Infosys Limited

22.96

Wipro Limited

9.14

Tata Motors Limited

22.30

Sterlite
Industries 5.56
(India) Limited
Dr.
Reddys 32.27
Laboratories Limited
This 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 equityrelated 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