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Primary Market

Financial markets can be categorized as those

dealing with newly issued financial claims, called the
primary market; and those for exchanging financial
claims previously issued, called the secondary
market, or the market for seasoned securities.
Primary market is market for fresh capital.
In India, new capital issues are floated through
prospectus, rights and private placement.

Primary Market
The primary market is the market for new issues/shares.
Primary market provides opportunity to issuers of securities;
Government as well as corporates, to raise resources to meet
their requirements of investment.
They may issue the securities at face value, or at a
discount/premium and these securities may take a variety of
forms such as equity, debt etc.
Company may issue the securities in domestic market and/or
international market.

Classification of Issues

Private Placement

Private Placement

Preferential Issue

Public Issue
Public issue means an invitation by a company
to the public to subscribe the

Initial Public Offer

Initial Public Offering (IPO) is when an unlisted company
makes a fresh issue of securities for the first time to the
public. This paves way for listing and trading of the issuers

A Follow-On Public Offering (Further Issue) is when an

already listed company makes a fresh issue of securities
(additional new shares) to the public.

Eligibility Norms for raising funds through IPOs

and FPOs (follow on public offers).
Entry Norm I :
Commonly known as profitability route.
Net tangible assets : 3 crores for three full years
(out of which monetary assets should not be more
than 50 %)
Distributable Profit : 3 out of 5 years.
Net worth : At least Rs. 1 crore in three years
Issue Size : Should not exceed 5 times of net worth.

Entry Norm II :
Commonly known as QIB route.
Issue shall be through book building root.
At least 50% of the issue is mandatorily allotted
to QIB (qualified institutional investors).
Minimum post issue face value capital shall be
Rs. 10 crores.

Entry Norm III
Commonly known as Appraisal route.
The project is being appraised and participated to the
extent of 15% by FIs/Scheduled Commercial Banks of
which atleast 10% comes from appraiser.

Minimum post issue face value capital shall be Rs. 10


Procedure Offer Documents

Offer documents means prospectus in case of a public issue.
Pre-Issue EPS, P/E Ratio, Avg. Net worth.
Other information like credit rating, risk involved internal
& external, schedule of implementation of projects.
The company needs to submit offer documents to SEBI.

After 21 days, offer documents will be filed to ROC, SEs.

The issuer (company) is allowed to freely price the issue.

Pricing of issues
Companies eligible to make public issue
can freely price their equity shares or any
Fixed Price
Book Building

Fixed Price
In the fixed-price issue method, the issuer fixes
the issue price well before the actual issue.
For this very reason, it is cautious and
conservative in pricing the issue so that the
issue is fully subscribed.
Underwriters also do not like the issue to
devolve on them and hence favour conservative
pricing of the issue. For these practical reasons,
the issue price in the case of traditional fixed
price method generally errs on the lower side
and, therefore, in the investors favour.

Book building
Book building 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 bids
The company first appoints one or more
merchant banker as book runner and their
names are disclosed in draft prospectus.
The lead book runner shall compulsorily
underwrite the issue .

Book building
Book-building is a process of price
discovery used in public offers. The issuer
sets a floor price and a band within which
the investor is allowed to bid for shares.
The upper price of the band can be a
maximum of 1.2 times the floor price.
The investor had to bid for a quantity of
shares he wished to subscribe to within
this band.

Book building
A public issue shall be kept open for at
least three working days but not more
than ten working days.
Only electronic bidding is permitted
Bidding demand is displayed at the end of
every day.
The lead manager analyses the demand
generated and determines the issue price
or cut-off price in consultation with the

Cut-off price
The cut-off price is the price discovered by the
market. It is the price at which the shares are
issued to the investors.
Investors bidding at a price below the cut-off
price are ignored.

Lets say a company wants to issue 10,00,000

shares. The floor price for one share of face
value, Rs10, is Rs48 and the band is between
Rs48 and Rs55.
At Rs55, on the basis of bids received, the
investors are ready to buy 2,00,000 shares. So
the cut-off price can not be set at Rs55 as only
2 lacs shares will be sold.

So as a next step, the price is lowered to Rs54.

At Rs54, investors are ready to buy 4 lacs
shares. So if the cut-off price is set at Rs54, 6
lacs shares will be sold. This still leaves 4 lacs
shares to be sold.

The price is now lowered to Rs53. At Rs53,

investors are ready to buy 4 lacs shares. Now if
the cut-off price is set at Rs53, all ten lacs
shares will be sold.
Investors who had applied for shares at Rs55
and Rs54 will also be issued shares at Rs53.

Fixed Price vs. Book Building

Fixed Price

Book Building


The price is known in advance 1.

to investor and the demand is
known at close of the issue.
Conservative pricing (Low 2.
Generally oversubscribed


It favours the investors



Demand can be known at the

end of every day but price is
known at the close of issue.
Aggressive pricing (High
No pressure of unsatisfied
demand in the market.
It favours the issuers.

Benefits of book building

Book building enables issuers to reap benefits
arising from price and demand discovery.
The aim of process is to have issue pre-sold and
preclude chances of under-subscription.
The cost and time for making public issues is
Investor can trust the price at which the syndicate
members have purchased the shares. Due to this,
the possibility of price falling below par after listing
is remote.

Limitations of Book Building

Objective is efficient price discovery.
Asymmetric information between
promoter and investors.
Investors always remain in dark.
Issuers have to sell cheap due to the
collective bargaining power of

Rights Issue
Rights Issue is when a listed company which
proposes to issue fresh securities to its
existing shareholders (on pro-rata basis.)

It is generally issued at a price lower than the

currently traded market price of the share.
In addition to this, right issue has to be kept
open for 30 days.

Private placement
It involves issues of securities to a limited number of
subscribers, such as banks, FIs, MFs and high net worth
It is arranged through a merchant banker, an agent of
issuers, who brings together the issuers and investor(s).
Securities offered are exempt from public disclosers
regulations and registration requirements of the regulatory
This market is preferred by small and medium size firms,
particularly new entrants who do not have track record of

Private Placement
A Private Placement is the direct sale of newly issued
securities, to a limited number of subscribers such as
banks,financial institutions,mutual funds and high net worth

Private placement can be done through the subscription of 50


* Time and Cost * Tailor

* Disclosure and compliance norms

Disadvantage : * Hostile takeover


Private Placement vs Public Issues

Private Placement


Public Issues

Issues are offered to mature 1.

and sophisticated institutional
No discloser requirements.
Issues are not screened and
this increases the risk.

Issues are primarily offered to

retail investors.
All issues are screened.


Preferential Issue
A Preferential issue is an issue of shares by listed companies
to a select group of persons which is neither a rights issue nor
a public issue.
The allotment is made to various STRATEGIC GROUPS
(promoters, foreign partners, technical collaborators)
This is a faster way for a company to raise equity capital.

SEBI Norms :
Lock in period for 3 years for promoters.
The amount utilised should be disclosed.
PRICE @ which share allotment should be done ?

Advantages :
Company prefer to allot shares to its promoters (to
pledge shares with banks and get cash)
Raising the commitment towards the company.