CHAPTER .6. PRIMARY MARKET : CHAPTER .6.

PRIMARY MARKET INTRODUCTION : INTRODUCTION The primary market is a market for new issues. It is also called the new issues market or market for fresh capital. Four ways to raise capital through primary market:- Prospectus Rights issues Private placement Bonus issue PROSPECTUS : According to section 67 of the companies (Amendment) Act, 2000 Prospectus means 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. PROSPECTUS Why Bonus Issue? : Why Bonus Issue? Bonus is the capitalization of free reserves. Higher the free reserves, higher are the chances of a bonus issue. Companies convert their retained earnings into capital. To boost liquidity of companies stock To bring down the stock price To restructure companies capital Participants in the Primary Market : Participants in the Primary Market Merchant Bankers or BRLM Registrar to the issue Bankers to the issue Agents/Brokers Auditors of the company Syndicate members Methods for Determining the Offer Price : Methods for Determining the Offer Price Fixed Price Book Building Book building is a mechanism through which an offer price for IPOs based on the investors demand is determined. In other words, it is a process by which demand for the proposed issue is elicited and built-up and the price at which the securities will be issued is determined on the basis of the bids received. Difference between Fixed Price and Book- Building Process : Difference between Fixed Price and Book- Building Process BOOK BUILDING PROCESS : BOOK BUILDING PROCESS Flow chart showing book building process BOOK BUILDING OPTIONS : BOOK BUILDING OPTIONS Benefits of Book Building Method : Benefits of Book Building Method Enables issuers to reap benefits arising from price and demand discovery. The cost and time for making public issues is lowered. The procedures are also simplified. The possibility of price falling below par after listing is remote. Limitations of Book Building Method : Limitations of Book Building Method The book building process adopted in India is quite different from the USA. In India, unlike the developed markets, the process is still dependent on good faith. There is a lack of transparency at critical steps and the absence of strong regulation. Since the price fixed for the public portion as well as for the placement portion is the same, issues may not succeed in inviting the desired public response. Limitations of Book Building Method : Limitations of Book Building Method Advertisement about book built issues to retail investors are not necessary. This increases the chances of negotiated deals. It has not proved to be a good price discovery mechanism because many issues have been listed below their issue price. Issuers may have to sell cheap due to the collective bargaining power of institutions. The role of retail investors in determining the pricing decreases. Moreover, retail investors may not have the information to judge the issue. REVERSE BOOK BUILDING :

REVERSE BOOK BUILDING Reverse book building is a process wherein the shareholders are asked to bid for the price at which they are willing to offer their shares. This process helps in discovering the exit price and is used by companies who want to delist their shares or buy-back shares from the shareholders. Delisting of securities means permanent removal of securities of a listed company from a stock exchange. REVERSE BOOK BUILDING : REVERSE BOOK BUILDING The reverse book building route is a difficult and costly process. Price discovery is a problem in case of small companies as their shares are thinly traded, making it difficult to delist through the reverse book building route. Unless the shares are delisted, the small companies have to pay all listing charges. GREEN-SHOE OPTION : GREEN-SHOE OPTION Green-shoe option is also referred to as an over allotment option. It is a mechanism to provide post-listing price stability to an initial public offering. The green shoe company was the first to issue this type of option, hence the name green-shoe option. The first ever exercise of a green-shoe option in the course of a public issue was carried out by the ICICI bank. The LIC became the first institution to lend shares in the primary market. BENEFITS OF GREEN-SHOE OPTION : BENEFITS OF GREEN-SHOE OPTION Investor protection measure- especially for protection of small investors during the post-listing period. Benefits the underwriters in both bullish and bearish conditions. In a bull market, underwriters will opt for additional allotment of 15 per cent due to index riding high. In a bearish market, the underwriting option may not be exercised or the underwriters may buy up to 15 per cent at prices lower than the issue price from the market. ON-LINE IPOs : ON-LINE IPOs The on-line issue of shares is carried out via the electronic network of the stock exchanges. The company proposing to make a public issue through the on-line system of stock exchange has to comply with sections 55-68A of the companies act, 1956 and Disclosure and Investor Protection (DIP) guidelines. The issuer company is required to enter into an agreement with stock exchanges which have the requisite system for an o-line offer and has to appoint brokers and registrars to the issue having electronic connectivity with stock exchanges. BENEFITS OF ON-LINE IPOs : BENEFITS OF ON-LINE IPOs Reduces the time taken for the issue process. Securities get listed within 15 days from the closure of the issue, thereby enabling faster access to funds. If allotment made after 15 days then interest at the rate of 15 per cent should be paid to investors. Corporates can reduce their stationery, printing and other expenses. The investor also benefits as the system eliminates refunds except in case of direct application. PRIMARY ISSUES-PUBLIC ISSUE : PRIMARY ISSUES-PUBLIC ISSUE Initial Public Offering (IPO): It is an offering of either a fresh issue of securities or an offer for sale of existing securities, or both by an unlisted company for the first time to the public. IPO enables listing and trading of the issuers securities. The availability of information regarding the past performance of the company and its track record is generally inadequate and may lack credibility. The SEBI has laid down entry norms to protect the interest of investors and to enable investors to take informed decisions. PRIMARY ISSUES-PUBLIC ISSUE : PRIMARY ISSUES-PUBLIC ISSUE Eligibility Norms for Entities Raising Funds through an IPO and an FPO: Entry Norm I: Net tangible assets of atleast Rs 3 crores for 3 full years, of which not more than 50 per cent is held in monetary assets. Distributable profits in atleast 3 out of the preceding 5 years. Net worth of atleast Rs 1 crore in 3 years. If there is a change in companys name, atleast 50 per cent revenue for preceding 1 year should be earned from the new activity. The issue size should not exceed 5 times the pre-issue net worth. PRIMARY ISSUES-PUBLIC ISSUE : PRIMARY ISSUES-PUBLIC ISSUE Entry Norm II: Issue shall be through a book building route, with atleast 50 per cent of the issue to be mandatorily allotted to the QIBs, failing which the money shall be refunded. The minimum post-issue face value capital shall be Rs 10 crore or there shall be compulsory market making for atleast 2 years. OR PRIMARY ISSUES-PUBLIC ISSUE : PRIMARY ISSUES-PUBLIC ISSUE Entry Norm III: The project is appraised and participated to the extent of 15 per cent by FIs/Scheduled commercial banks of which atleast 10 per cent comes from the appraiser(s). The minimum post-issue face value capital shall be Rs 10 crore or there shall be a compulsory market making for atleast 2 years.

PRIMARY ISSUES-PUBLIC ISSUE : PRIMARY ISSUES-PUBLIC ISSUE The SEBI has exempted the following entities from entry norms: Private sector banks. Public sector banks. Rights issue by a listed company. PRIMARY ISSUES-PUBLIC ISSUE : PRIMARY ISSUES-PUBLIC ISSUE 2. Follow-on Public Offering (FPO): It is an offer of sale of securities by a listed company. FPO is also known as subsequent or seasoned public offering. Listed companies issue FPOs to finance their growth plans. Listed companies with a good track record find it easier to raise funds through FPOs. Due to cumbersome procedural requirements and high cost and time, the FPOs are no longer an attractive route to raise funds. Listed companies are preferring the QIP route . PRIMARY ISSUES-RIGHTS ISSUE : PRIMARY ISSUES-RIGHTS ISSUE 3. Rights Issue: Rights issue is an offer of new securities by a listed company to its existing shareholders on a pro-rata basis. Companies issue rights by sending a letter of offer to the shareholders whose names are recorded in the books on a particular date. A shareholder has four options in case of rights: To exercise the rights. Renounce rights and sell them in the open market. Renounce part of the rights and exercise the reminder. To do nothing. PRIMARY ISSUES-RIGHTS ISSUE : PRIMARY ISSUES-RIGHTS ISSUE Promoters offer rights issues at attractive price due to following reasons: They want to get their issues fully subscribed to. To reward their shareholders. It is possible that the market price does not reflect a stocks true worth or that it is overpriced, prompting promoters to keep the offer price low. To hike their stake in their companies, thus, avoiding the preferential allotment route which is subject to lot of restrictions. PRIMARY ISSUES-PRIVATE PLACEMENT : PRIMARY ISSUES-PRIVATE PLACEMENT 4. Private Placement: Private placement refers to the direct sale of newly issued securities by the issuer to a small number of investors through merchant bankers. The investors are selected clients such as financial institutions, corporates, banks. There are some advantages to the issuer like the time taken by, as well as the cost of issue is much less as compared to the public and rights issue. These issues can be tailormade to suite the requirements of both the parties. Moreover private placement does not require detailed compliance of formalities, rating and disclosure norms as required in public or rights issues. PRIMARY ISSUES-PREFERENTIAL ISSUE : PRIMARY ISSUES-PREFERENTIAL ISSUE Due to cumbersome statutory provisions of a public/rights issue, many companies opt for preferential allotment of shares for raising funds. Such allotments are made to various strategic groups including promoters, foreign partners, technical collaborators and private equity funds. Companies need to seek approval from shareholders for preferential allotment of shares. It is done by listed companies, whose entire shareholding is held in dematerialised form, to a select group of persons under section 81 of the companies act, 1956 which is neither a rights issue or a public issue. PRIMARY ISSUES-PREFERENTIAL ISSUE : PRIMARY ISSUES-PREFERENTIAL ISSUE Reasons for raising capital through preferential allotment: To enhance the promoters holding. As part of debt restructuring/conversion of loans. For the purpose of strategic investments by institutional/foreign investors. To issue shares by way of Employees Stock Option Plans (ESOPs). For fresh issue to shareholders other than promoters. For take over of company by management group. PRIMARY ISSUES-QIP : PRIMARY ISSUES-QIP 6. Qualified Institutions Placement (QIP): QIP is a private placement of equity shares or convertible securities by a listed company to QIBs. It has emerged as a new fund raising investment for listed companies in India. Through a QIP issue, funds can be raised from foreign as well as domestic institutional investors without getting listed on a foreign exchange, which is a lengthy and cumbersome affair. PRIMARY ISSUES-QIP : PRIMARY ISSUES-QIP The issue process is not only simple but can be completed speedily since the company issues equity shares and does not create a derivative investment as is the case with GDR/ADR. Unlike GDRs, a QIP issue can be offered to a wide set of investors including Indian mutual funds, banks and insurance companies, as well as, FIIs. As there is no new stock exchange listing, the issue is free from the hassles of continuing disclosures and administrative costs.

Resource Mobilisation from International Capital Market : Resource Mobilisation from International Capital Market Global Depository Receipts (GDRs): GDRs are listed o the European stock exchanges or on the Asian stock exchanges such as the Dubai and Singapore stock exchanges. American Depository Receipts (ADRs) External Commercial Borrowings (ECBs) Foreign Currency Convertible Bonds (FCCBs) INDIAN DEPOSITORY RECEIPTS (IDRs) : INDIAN DEPOSITORY RECEIPTS (IDRs) Enable foreign companies to raise capital in India. Enable Indian investors to diversify risk. Enable globalisation of Indian stock exchanges. Steps to Improve Primary Market Infrastructure : Steps to Improve Primary Market Infrastructure The IPO process should be automated wherein the investor will have to provide his name and depository umber or the unique identification number while subscribing to an IPO. The book running lead manager should be made more accountable and should be empowered to pick up his team. To increase retail participation in public issues and to maintain the retail character of the primary market, there must be direct retailing of primary issues and allotment incentives for early bid investors. There must be 10 per cent margin imposed on all QIB bids. Steps to Improve Primary Market Infrastructure : Steps to Improve Primary Market Infrastructure Issue expenses should be reduced by way of issuing electronic prospectus rather than application forms. Internet and digital signatures should also be considered to prevent the use of paper and save precious natural resources. Certified brokers should be used for even non-online applications.