The Primary Market in India

Prepared By –
PINAL SHAH
Faculty at L.J.Institute of
Management Studies
Ahmebabad, Gujarat
 Introduction
 Free pricing regime
 Book building
 On-line Epos
 Resource mobilization from domestic market
 New issue
 Private placement
 Non-govt public ltd co.
 Absorption of private capital issues
 Banks and FI in public sector
 MF
 Resource mobilization from international market
 GDRs
 ADRs
 FCCBs
 ECBs
 Euro Issues
prepared by PINAL SHAH 2
Introduction
 Primary market is market for fresh capital.
 Funds raised through
 IPO
 Right Issue
 Private Placement
 Three category
 Issuer
 Investor
 Intermediary

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Free price regime
 Before 1992 companies have to take
permission from CCI to decide timing,
quantum and price of New issue.
 For pricing two criteria was decided
 The net assets value and
 Price earning value

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Resource mobilisation through
New Issue Market
 New Issue
 Private Placement market
 Non- govt Public limited companies
 Mega issues by Non-govt Public limited
companies
 Absorption of private capital issues
 Banks and FI in the public sector
 MF

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New Issue Market – Prospects and Right Issues
 The growth rate was highest immediately

after reforms announced, I.e. 1992-93.

 It is also due to abolition of capital issue s act

and free pricing of issues.

 Since 1995-96 primary mkt was depressed,

because
 scams took place in secondary market.
 Premium on some scrip were very high and
declined after listing. (I.e. saurashtra cement –
285 and at listing – 50)
 Strict disclosure standards by SEBI
 Overall slowdown in economy
 This decline in PSU through prospects and right
issue was much sharper that they cannot tap mkt
for 3 consecutive prepared
years.by(I.e. 1996-1999)
PINAL SHAH 6
Resource mobilisation
 Most IPO having premium of their offer
price on listing day. I.e.Biocon, price
bands – 270-314, listed on 7 April 2004
at 400 and touched to 740 on 13 April
only. This attracts several new players
and many companies for IPO.

prepared by PINAL SHAH 7

Ye ar No
of
CR .
Remarks
IPO
2003-2004 29 17.8 All govt IPO like IPCL, IBP, BOM, GAIL
(govt Epos raised 14.3 crores thorough sale of govt
only) stake.
- Other private IPO like Biocon, Patni
computers, TV today IOB, UCO bank
were also over subscribed
Oct 03 –04 30 30,302 cr =3 (preceding five yr)
(whole) 19,690 cr through disinvestments (65%)
10,612 cr through private sectors.
01-02 7 1202
02-03 6 1039
04-05 60 22 – Epos – By Non Financial companies
6-Epos by six companies – ICICI, TCS,
Sterlite, NTPC, Jet Airways, PNB – 72.9 % of
total resource

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 TCS IPO
 Up beat response from mkt in July 2004.
 Listed as 1076 and allotted at 850 Rs. Was
also milestone in secondary mkt.
 Offer for 55.4 million shares and
oversubscribed by 7.7 times and raised
54,200 crores.
 NTPC – may 04 raised 5369 cr.

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 Private Placement
It is direct sale of newlyMarket
issued securities to group of
investor (I.e. FI, banks, corporate, HNI) by issuer
through merchant bankers.
 Advantage
 Time and cost is less compared to IPO and right issue.
 It can be customised for both issuer and investor.
 It does not require detail compliance of formalities, ratings,
and disclosure norms
 During 1995-2002 this route has grown to 88%.
 Major issuers - All FI, PSUs, central and state level
undertakings (I.e. AEC bonds), banks
 Major subscribers - banks, Provident funds, MF, HNI
 Instruments used

Debt – debentures, bonds
 Equity – preference shares

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Factors affecting Private Placement
market
 Prolonged conditions in primary market
 PP is not bound to any regulatory system till
sept 2003.
 No lock-in period for promoters
 No compliance system for merchant bankers
 Banks can raise their tier II capital.
 Operational flexibility and attractive pricing
 Private sector can tap this route to retire their
old expensive bonds/ debt instruments
 Short- term debentures are more popular
with issuers and investors.

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Facts of Private Placements
 In India Privately placed securities are
admitted for trading, but not listed.
 Banks do not trade this securities and hold till
maturity.
 No secondary market for such securities
 Banks and Fis have over Rs. 1 Lakh crores
exposure in PP.
 Earlier RBI issued guide lines PP having more
than 50 members.
 Later on sept 2003, SEBI issued stringent
disclosure norms which
prepared was still unregulated.
by PINAL SHAH 12
Current scenario
 PP now regulated.
 Companies want to list their privately placed
securities.
 For securities up to 10 lakhs such disclosure made
through company on the site of exchanges.
 Credit rating also becomes compulsory.(lest
investment grade is necessary)
 All debt issuer must have redemption reserve and
must appoint trustee.
 Securities issued and traded in demat form
 All securities must be executed on exchanges only.
 RBI also barred Fis from investing in uncrated
securities and securities below minimum credit
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Non-govt public limited
companies
 Until 1990 their shares as right issuer and
prospects were only 45 %
 After reforms announced (I.e.1991)their
participation raised to 91% in 92-93.
 After 1994-95 this has been decreased due to
scam in secondary market till 2001-02.
 Again decline in 03-04 duet to strengthen
norms of SEBI.
 Debenture issue in private sector – prominent
in 1990-91 and declined due to free pricing
era and again prepared
gained popularity in 97-98 14
by PINAL SHAH
Mega issues
 An issue size of more than 100 Cr termed as
mega issues.
 In 94-95, 41 mega issue worth of 12,090 cr
were issued.
 In 05-06, highest amount of (49) mega issues
worth of 23,815 cr were issued which is 87%
to new capital issue.
 Largest FPO was – Icici bank (5101 cr)
 IPO – Suzlon – 1496 cr
 Largest – RPL – 2700 cr.
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Absorption of private capital
issues
 This is the concept of underwriting.
 It was compulsory till 1994 than was
optional.
 When it was compulsion the amount
underwritten was 97% of total issue
amount raised through public.

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Banks and FI’s participation in
public issues
 After 1991 banks and FI’s can also participate
in Epos.
 Initially the participation was slow (1.7% of
total amount raised in 91-92) but than raised
to 46.5% in 98-99.
 Later on banks emerged as biggest class of
issuer in 02-04.
 In 1993 SBI entered into market at low price
which soon rise and it also attracts other
banks to trade in secondary and primary
market.
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Resource Mobilisation through
international market

 GDRs
 ADRs

 FCCBs

 ECBs

 Euro Issues

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
GDRs
It is equity instruments issued in abroad
market by overseas corporate bodies against
the shares/bonds of Indian companies held
with domestic custodian bank.
 I.e. Indian companies engaged in IT,
software are eligible to offer their non-
resident/resident permanent employees
GDRs/ADRs against the issue of ordinary
shares.
 An issuing company can raise funds through
ordinary equity shares but this shares would
be transferred in GDRs in some ratios. I.e 1
GDR – 10 shares.prepared by PINAL SHAH 19
GDR
 An issuing company have to obtain prior
permission of the dept of economics affairs,
ministry of finance and govt of India.
 An intermediary is approved would be
investment banker registered with securities
and exchange commission in USA, or in UK or
appropriate authority in Germany, France,
Singapore or Japan.

prepared by PINAL SHAH 20

GDR
 GDRs are freely transferable outside Indian and
divided in respect of shares y GDR is paid in Indian
rupees only.
 They are listed and traded on foreign stock exchange
and OTC market.
 The holder of GDR can convert it into no of shares at
any time.
 Till conversion GDR does not have any voting rights
but once converted it is listed on Indian stock
exchange.
 Most of Indian companies have their GDRs issues
listed on Luxembourg stock exchange and the
London stock exchange.
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ADRs
 ADRs are negotiable instruments in dollars
 Issued by US Depository banks
 A non – US company has to deposits its
shares with US depository banks
 It receives receipts from which the same
company can issue ADRs.
 ADRs serve as stock certificates.
 ADRs listed on NYSE and NASDAQ.
 ADRs taps to US institutional and retail
markets while GDRs tap to only US
institutional market.
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ADRs
 GDRs can be converted into ADRs by
surrendering the existing GDRs and
depositing the underlying equity shares with
ADR depository in exchange for ADRs.
 The company has to comply with SEC
requirements but company does not get any
funds in conversion.
 The trend towards conversion of GDR into
ADR as ADR is more liquid and cover wider
market.
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ECBs
 Indian corporate are allowed to raise foreign
loans for financing infrastructure projects.
 RPL raised $125 million in august 1996. The
issue was without guarantee of bank and with
very low coupon rate of 7.84%.
 In oct 1996, global telesystems raised 60
million swis francs in FCB form. The company
offered LIBOR + 175 points interest rate.
 SIDBI raised $ 20 million for 38 years bonds
(largest in India)
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ECBs
 Indian companies are free to raise ECBs
from any internationally recognised
source such as bank, export credit
agencies, suppliers of equipment,
foreign collaborators, foreign equity
holders and international capital
markets.

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FCCB (Foreign currency
convertible bonds)
 It is issued by Indian companies and
subscribed by non-resident in foreign
currency.
 It carries fixed interest or coupon rate and
are convertible into a certain number of
ordinary shares at preferable price.
 It can be converted into ordinary shares of
issuing company either in whole or in pat on
the basis of any equity related warrants
attached to the debt instruments.
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FCCB
 Till conversion, the company has t pay interest in
dollars and if conversion option is not exercised, the
redemption is also made in dollars.
 Interest rate is low but exchange risk is more.
 So only companies with low debt equity ratios and
large forex earnings potential opt for FCCB.
 For the bonds upto $ 50 million no permission
required, upto $100 million RBI permission and
above that permission from ministry of finance is
necessary.
 The maturity period is 5 yrs (minimum) and no
restriction on time period for converting into shares.
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FCCB
 Interest rate is lower in FCCB than bonds or
loan
 Conversion into equity is attractive features
for investor.
 Higher premium for conversion of equity
higher will be the yield on FCCB.
 Initially only cash outflow of interest only as
interest rates are very low between 0 to
1.5%.
 Only 2 FCCB in 2001-02.
 BSES and GujaratpreparedAmbuja
by PINAL SHAHcement. 28
Euro Issues
 Euro issue market comprises FCCB,
GDRs/ADRs.
 In 1993-94 and 94-95 , Indian companies
raised rs 14,500 cror through euro issues.
 Infosys was the first company to tap
international market in march 1999 (listed on
NASDAQ), than ICICI (NYSE) and satyam
(NASDAQ). Satyam was not listed any of
Indian stock exchange.
 In 1999-200 Indian firms raised $ 1billion and
in 2000-01 $4 billion was raised.
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Euro Issues
 Rediff.com was the first dot company to list
nearly at 100% premium on NASDAQ even
bypassing BSE.
 Rediff.com could not able to bring IPO in
Indian stock market due to accumulated
losses of $8.6 million.
 Indian companies can go directly for ADRS
without domestic offering as the scrip
appreciates more in US market as concept of
futuristic stocks is stronger in US.
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Organizing Euro Issues
 A company which wants to tap international
market for raising resources has to prepare is
books of accounts of last three to five years
in GAAP format, prevalent in US or US for its
GDR/ADR issue.
 The merchant banker occupies a pivotal place
as he formulates the mktg strategy desings
the issue structure and arranges syndicate
members, underwriters and other
intermediaries.

prepared by PINAL SHAH 31

Organizing Euro Issues
 After finalizing offer documents he conducts road
shows where interviews with fund managers and
potential investors re held and distribution of
pamphlets brochures and reports of issuing company.
 These help in knowing investor response to issue.
 Issue price is also based on this response and price
of securities on the domestic stock exchange (if
listed).
 Issue price is decided few hours before opening of
issue.
 In the initial years Indian GDRs were priced at
discount by in nov 1993, Mahindra and mahindra
placed its GDR atprepared
par.by PINAL SHAH 32
Private Equity
 It is long-term equity investment by a fund in private
and public (listed) firms with successful business
models and potential for a higher growth.
 PE plays an important role in growth of enterprises.
 It helps the investee companies in promoting their
growth by providing capital knowledge and skills.
 It also helps in formulating and shaping the
corporate strategy of ivnestee firms and improving
their corporate governance.
 Some PE firms such as Warbury Pincus Investments,
GW capital investment and GA parterners
investments have invested highly successful
companies like Bharti, Spectramind, ICICI ventures,
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The End

The Primary Market