Primary & Secondary Markets

Financial Management
Prof. Deepa Iyer

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 Primary & Secondary Markets
• An initial public offer popularly called IPO is an
excellent way of making money in the primary
market.
• In the primary market, investors buy shares
directly from Companies issuing them. In the
secondary market, investors trade shares already
issued by Companies over stock exchanges
like National Stock Exchange(NSE) and Bombay
Stock Exchange (BSE).

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 Primary & Secondary Markets
• Secondary markets are defined as the markets where
the securities ,both equity and debt, which are initially
issued by the companies are traded. The trading
involves buying and selling of the securities.
• Secondary markets help trade safely in shares as they
are regulated by the capital markets regulator, The
Securities and Exchange Board of India (SEBI).
• Secondary market is the market for outstanding
securities and enables price discovery. The market
value of shares gives value to the Company.

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 Primary & Secondary Markets
• The securities or the financial instruments are
issued in the primary market and the investors
purchase these instruments directly from the
IPO or through the Private Placement and sell
these to other investors in the secondary
market.

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 Primary & Secondary Markets
• Various securities & financial instruments that are
traded in the stock market are;
• Equity Shares
• Preference Shares
• Bonus Shares
• Bonds
• Debentures
• Commercial Papers
• Treasury Bills
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 Share Capital
• According to the Companies Act, 2013, primarily
there are four modes of increasing the share capital.
The four modes are
• Public issue,
• Right issue,
• Bonus issue and
• Private Placement.

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 Equity Share Capital
• Initial public offering (IPO)
Initial public offering is the process by which a
private company can go public by sale of its stocks to
general public. It could be a new, young company or
an old company which decides to be listed on an
exchange and hence goes public.

Companies can raise equity capital with the help of

an IPO by issuing new shares to the public or the
existing shareholders can sell their shares to the
public without raising any fresh capital.
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 Equity Share Capital
• Follow-on Public Offer (FPO)
A follow-on public offer (FPO) is the issuance of
shares to investors by a public company that is
currently listed on a stock market exchange.
An FPO is a stock issue of additional shares made by
a company that is already publicly listed and has
gone through the IPO process.

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 Equity Share Capital
• Rights Issue
A rights issue is a way by which a listed company can
raise additional capital. However, instead of going to
the public, the company gives its existing
shareholders the right to subscribe to newly issued
shares in proportion to their existing holdings.

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 Equity Share Capital
• Rights Issue
For example, 1:4 rights issue means an existing
investor can buy one extra share for every four
shares already held by him/her. Usually the price at
which the new shares are issued by way of rights
issue is less than the prevailing market.

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 Equity Share Capital
• Bonus Share
Bonus shares are additional shares given to the
current shareholders without any additional cost,
based upon the number of shares that a shareholder
owns. These are company's accumulated earnings
which are not given out in the form of dividends, but
are converted into free shares.

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 Equity Share Capital
• Stock Split
When a company declares a stock split, the number
of shares of that company increases, but the market
cap remains the same. Existing shares split, but the
underlying value remains the same. As the number
of shares increases, price per share goes down.

Stock split is done to infuse liquidity and to make

shares affordable for various investors who could not
buy the shares of that company before due to high
prices. 12
 Equity Share Capital
• Stock Split
Suppose a company has 100 crore
outstanding shares of Rs 10 face value and it
announced a split to Rs 2 face value per share.
Therefore, one share of face value Rs 10 will become
5 shares of Rs 2 face value. A person holding
200 shares of the company will have
1,000 shares after the stock split.

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 Equity Share Capital
• Stock Split
Stock split refers to split the face value of the shares
of companies. Accordingly, in 1:10 split, shares of Rs.
10 face value may be reduced to face value of Re. 1.
In such case, you will have 10 times the initial
number of share held. However, the price of shares
would also fall proportionately split but the total
value of your holding remains the same. This mean
more number of shares are available for investors.

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 Private Placement
• Private Placement
Private placement is one of the mode for increasing
the share capital through issue of a private
placement offer letter .
It shall be made only to the selected group of
persons who are identified by board first and such
number of persons must not 200 in a financial year
(excluding qualified institutional buyers and
employees of the company being offered securities
under ESOP)..
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IPO PROCESS IN INDIA

Once a private company is convinced about the need to become a public

company, it kick-starts the process of IPO. the entire IPO process is
regulated by the ‘Securities and Exchange Board of India (SEBI)’. This is
to check the likelihood of a scam and protect investor interest.

Step 1: Hire an investment bank

Step 2: Register with SEBI
Step 3: Draft the Red Herring document
Step 4: Go on road show
Step 5: IPO is priced
Step 6: Available to public
Step 7: Going through with the IPO

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STEP 1: HIRE AN INVESTMENT BANK

A company seeks guidance from a team of under-writers or investment

banks to start the process of IPO.

The team will study the company’s current financial situation, work with
their assets and liabilities and then they plan to cater to the financial needs.

An underwriting agreement will be signed which will have all the details of
the deal and the amount that will be raised, the securities that will be issued.

Though the under-writers assure on the capital they will raise, they won’t
make promises.

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STEP 2: REGISTER WITH SEBI

The Company and the under-writers together file the registration statement
which comprises of every fiscal data and business plans of the company.

It will also have to declare how the Company is going to utilize the funds it
will raise from the IPO and about the securities of public investment.

If the registration statement has compliance to the stringent guidelines set

by the SEBI, which ensures that the company has disclosed every detail a
potential investor should know, then it gets a green signal.

Else it is sent back with comments. The company should then work on the
comments and file for registration again.

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STEP 3: DRAFT THE RED HERRING DOCUMENT

An initial prospectus which contains the probable price estimate per share
and other details regarding the IPO is shared with the people who are
involved with the IPO.

It is called a red herring document because the first page of the prospectus
contains a warning which states that this is not a final prospectus.

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STEP 4: GO ON ROAD SHOW

Before the IPO goes public, the executives of the Company travel around
the country marketing the upcoming IPO to the potential investors, mostly
Qualified Institutional Buyer (QIBs).

The agenda of the marketing includes presentation of facts and figures,

which will drum up the most positive interest.

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STEP 5: IPO IS PRICED

Based on whether company wants to float a fixed price IPO or Book

Building Issue, the price or price band is fixed.

A fixed price IPO will have a fixed price in the order document, and the
book building issue will have a price band within which an investor can bid.

Number of shares that will be sold is decided.

The Company should also decide the stock exchange where it be going to
list their shares.

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STEP 6: AVAILABLE TO PUBLIC

On a planned date, the prospectus and application forms are made available
to public online and offline.

People can get a form from any designated banks or broker firms.

Once they fill in the details, they can submit them with a cheque. Or they
can submit it online as well.

SEBI has fixed the period of availability of an IPO to public.

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STEP 7: GOING THROUGH WITH THE IPO

After the IPO price is finalized, the stakeholders and under-writers work
together to decide how many shares will every investor receive.

Investors will usually get full securities unless it is oversubscribed.

The shares are credited to their demat account.

The refund is given if the shares are oversubscribed.

Once the securities are allotted, the stock market will start trading the
Company’s IPO.

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SHARE CAPITAL OF A COMPANY IS DIVIDED INTO

• Nominal or Authorized Share Capital

• Issued Share Capital

• Subscribed Share Capital

• Called-up Share Capital

• Paid-up Share Capital

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BOOK BUILDING PROCESS

Book building is a process of price discovery. It is a mechanism where,

during the period for which the IPO is open, bids are collected from
investors at various prices, which are above or equal to the floor price. The
offer price is determined after the bid closing date.

BOOK BUILDING VS. FIXED PRICE

In case of book building process the issue price is not disclosed in the
beginning and that the bids are made in a range. Depending upon demand
and supply, the issue price is decided.

In case of fixed price, the price is decided in the beginning and investors
buy the shares at that price.

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BOOK BUILDING PROCESS

Fixed price Book Building Issue

Issue Size Rs. 2,500 cr Rs. 2,250 cr- Rs.2,500 cr

No of shares to be issued 10 cr shares 10 cr shares

Issue Price Rs. 250/share NA

Floor Price NA Rs. 225

Cap Price NA Rs. 250

Lot size 50 shares 50 shares

Min. Investment Rs. 12,500 Rs. 11,250 - Rs. 12,500

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SHARE CAPITAL OF A COMPANY IS DIVIDED INTO

(i) Nominal or Authorized Share Capital:

Authorized capital is the maximum amount of capital which a company is

allowed to raise. Authorized capital is the sum mentioned in the capital
clause of Memorandum of Association registered with the Registrar of
Companies. It is the maximum amount, which the company raises by
issuing the shares. This limit cannot be exceeded unless the Memorandum
of Association is changed.

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SHARE CAPITAL OF A COMPANY IS DIVIDED INTO

(ii) Issued Share Capital:

A company need not issue total authorised capital. Whatever portion of the
share capital is issued by the company , it is called ‘Issued Capital’. Issued
Capital means and includes the nominal value of shares issued by the
Company for:
1. Cash and
2. Consideration other than cash to:
(a) Promoters of a company and
(b) Others.
It is also shown in the balance sheet at nominal value.

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SHARE CAPITAL OF A COMPANY IS DIVIDED INTO

(iii) Subscribed Share Capital:

It is that part of the issued share capital , which is subscribed/applied by the

public and allotted by the company. It also includes the face value of shares
issued by the company for consideration other than cash.

(iv) Called-up Share Capital:

Called up capital is a part of subscribed capital which has been called up by

the company for payment. For example, if 1,000 shares of Rs. 10 each have
been subscribed by the public and of which Rs. 5 per share has been called
up. Then the subscribed capital of the Company works out to Rs. 10,000 of
which the called up capital of the Company is Rs. 5,000.

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SHARE CAPITAL OF A COMPANY IS DIVIDED INTO

(v) Paid-up Share Capital:

Paid-up capital refers to that part of the called up capital which has been
actually paid by the shareholders. Some of the shareholders might have
defaulted in paying the called up money. Such defaulted amount is called
arrears. From the called up capital, calls-in-arrears is deducted to obtain the
paid-up capital.

In balance sheet, called-up and paid-up capital are shown together.

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SHARE CAPITAL OF A COMPANY IS DIVIDED INTO

(v) Paid-up Share Capital:

Paid-up capital refers to that part of the called up capital which has been
actually paid by the shareholders. Some of the shareholders might have
defaulted in paying the called up money. Such defaulted amount is called
arrears. From the called up capital, calls-in-arrears is deducted to obtain the
paid-up capital.

In balance sheet, called-up and paid-up capital are shown together.

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SHARE CAPITAL OF A COMPANY IS DIVIDED INTO

Example:

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SHARE CAPITAL OF A COMPANY IS DIVIDED INTO

Solution:

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SHARE CAPITAL OF A COMPANY IS DIVIDED INTO

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TYPES OF SHARES

Shares issued by a company can be divided into following categories:

(i) Preference Shares: According to section 43 of the Companies Act,

2013, persons holding preference shares, called preference shareholders, are
assured of a preference dividend at a fixed rate during the life of the
company. They also carry a preferential right over other shareholders to be
paid first in case of winding up of the company . Thus, they enjoy
preferential rights in the matter of:
(a) Payment of dividend and
(b) Repayment of capital

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TYPES OF SHARES

(ii) Equity Shares: Equity shares are those, which do not enjoy any
preferential rights in the matter of payment of dividend or repayment of
capital. The rate of dividend on equity shares is recommended by the Board
of Directors and may vary from year to year . Rate of dividend depends
upon the dividend policy and the availability of profits after satisfying the
rights of preference shareholders.

The shares can be issued for cash or for consideration other than cash.

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ISSUE OF SHARES FOR CASH

A public company issues a prospectus inviting general public to subscribe

for its shares. On the basis of prospectus, applications are deposited in a
scheduled bank by the interested parties along with the amount payable at
the time of application, in cash. First installment paid along with the
application is called ‘Application Money’.

As per section 39 of the Companies Act 2013, ‘Application Money’ must be

at least 5% of the nominal value of shares. However, as per SEBI
regulations, the minimum application money to be paid by an applicant
along with the application shall not be less than 25% of the issue price.

A company cannot proceed to allot shares unless minimum subscription is

received by the company. The Company reserves the right to reject or
accept an application fully or partially.

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ISSUANCE OF SHARES

A company can issue its shares either

1. at par (face value),

2. at a premium or
3. even at a discount.

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ISSUANCE OF SHARES

The shares will be at par (face value) is when the shares are
sold at their nominal value.

Shares sold at a premium cost more than their nominal

value, and the amount in excess of the face value is the
premium.

Shares sold at discount cost less than the face/nominal

value.

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ISSUE OF SHARES FOR CASH

The issue price of shares is generally received by the company in

installments and these installments are known as under:

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SHARES ISSUED AT DISCOUNT

According to Section 53 of the Companies Act,2013, a company cannot

issue shares (either equity or preference share) at a discount.Thus, any issue
of shares at discount shall be void.

When issue of shares at discount is not prohibited?

1. Sweat equity shares
2. Issue of shares to creditors
3. Rights issue at discount
4. Initial Public Offering (IPO)
5. Offer for Sale (OFS)

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SHARES ISSUED AT PREMIUM

The issue of shares at premium refers to the issue of shares at a price higher
than the face value of the share.

Usually, the companies that are financially strong, well- managed and have
a good reputation in the market issue their shares at a premium. For
example, if a company issues a share of nominal or face value of ₹10 at
₹11, it issues it at 10% premium.

A company may call the amount of premium from the applicants or

shareholders at any stage, i.e. at the time of application, allotment or calls.
However, a company generally calls the amount of Premium at the time of
allotment.

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SHARES ISSUED AT PREMIUM

The company needs to credit the amount of Premium in a

separate account i.e. Securities Premium A/c, as it is not a part of the Share
Capital.

It is actually a gain for the company.

As per the Companies Act, 2013 the company shows the credit balance of
the Securities Premium A/c under the heading ‘Reserves and Surplus’ on
the liabilities side of the Balance Sheet.

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PREMIUMS RECEIVED ON ISSUE OF SHARES

As per section 52(2) of the Companied Act,2013, the Securities Premium

account may be applied by the company—

(a) towards the issue of unissued shares of the company to the members of
the company as fully paid bonus shares;

(b) in writing off the preliminary expenses of the company;

(c) in writing off the expenses of, or the commission paid or discount
allowed on, any issue of shares or debentures of the company;

(d) in providing for the premium payable on the redemption of any

redeemable preference shares or of any debentures of the company; or

(e) for the purchase of its own shares or other securities under section 68

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SUBSCRIPTION OF SHARES

Full Subscription
Issue is fully subscribed if the number of shares offered for subscription and the
number of shares actually subscribed by the public are the same.

Under Subscription
It means the number of shares offered for subscription is more than the number
of shares subscribed by the public. In this case, calculation of application,
allotment and the call money is based on number of shares actually applied and
allotted. Shares are allotted only when the minimum subscription is received.

Over Subscription
If an issue is oversubscribed, some applications may be rejected and application
money refunded and in respect of others only a part of the shares applied for
may be allotted and the excess amount received can be utilized towards
allotment or call money which has fallen due or will soon fall due.

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SUBSCRIPTION OF SHARES

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ISSUE OF SHARES FOR CONSIDERATION OTHER THAN
CASH
A Company may choose to buy the assets in exchange of fully paid equity
shares instead of cash.

A company may issue these shares at par or at a premium.

The company calculates the number of shares on the basis of the amount
payable to the vendor.

Number of shares= Amount payable to the Vendor​

Issue price of the shares

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ISSUE OF SHARES FOR CONSIDERATION OTHER THAN
CASH
It can also issue shares to the promoters or the lawyers for rendering
services in the formation of the company.

The company shall produce a written contract regarding the issue

of shares for consideration other than cash before the Registrar of the
Companies, within the specified time of allotment.

It needs to show the ‘shares issued for consideration other than cash’
separately under the heading ‘Share Capital’ .

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