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Primary Market

The primary market is that part of the capital
markets that deals with the issuance of new
securities. Companies, governments or public
sector institutions can obtain funds through
the sale of a new stock or bond issue.
Securities are offered to the public for the first

Functions of New Issue Market
Origination Function
Study of technical, economical and financial
viability of the project
Advisory services
Type of issue
Magnitude of issue
Timing of issue
Pricing of issue
Method of issue
Technique of selling
Merchant bank commercial bank, financial
institution or private firm

Underwriting Function
An agreement whereby the underwriter promises to subscribe to
specified number of shares or debentures or a specified amount of
stock in the event of public not subscribing to the issue.
Standing behind the issue
Outright Purchase
Consortium Method
Assured raisising capital
Minimum subscription
Specialised function of distribution
Other advisory services
Enhanced public confidence
Institutional and Non-institutional underwriter
Distribution Function
Sale of securities to ultimate investors

Methods of Floating New Issue
Public issue
Offer for sale
Rights issue

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.
Follow-on Public Offering (FPO): It is also known as
subsequent or seasoned public offering. It is offer of
sale of security by a listed company.
Prospectus legal document related to issue an
abridged prospectus
Merits: large mass of investors, direct method, non-
Demerits: Expensive method, suitable only for large
Right Issue
Rights Issue is when a listed company which proposes to
issue fresh securities to its existing shareholders as on a
record date.
The rights are normally offered in a particular ratio to the
number of securities held prior to the issue.
This route is best suited for companies who would like to
raise capital without diluting stake of its existing
In short, It is offering of new securities by a listed company
to its existing shareholders on a pro-rata basis.
Rights are transferable and saleable
Issue of capital under Sub-section (1) of Section 81 of the
Companies Act, 1956
Merits: minimum cost, no dilution of control, secures
interest of existing share holder.
Private Placement
Private placement refers to direct sale of newly
issued securities to a small number of investors
through merchant bankers. The number of
investors can go only up to 49.
This is a faster way for a company to raise equity
To go for the private placement, the company has
to be listed on a stock exchange and has to
comply with the Companies Act and the
requirements as per SEBI guidelines.
Preferential Issue
Preferential Allotment includes issue of shares or
convertible securities on preferential basis and/or through
private placement made by a company in pursuance of a
resolution passed under Sub-section (IA) of Section 81 of
the Companies Act,1956
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.
An issuer need not file an offer document in case of
preferential allotment.
The promoters continue to hold some minimum percentage
of shares in the company
Qualified Institutional Placement (QIP)
QIP is an issue of equity shares or securities convertible
into equity shares by a listed company to qualified
institutional buyers only.
Funds can be raised from foreign as well as domestic
institutional investors (FII & DII) without getting listed on a
foreign exchange.
A QIP issue can be offered to a wider set of investors
including Indian mutual funds, banks and insurance
companies, as well as, foreign institutional investors.
Issuer shall prepare a placement document containing all
the relevant and material disclosures.
There will be no pre-issue filing of the placement
document with SEBI
Indian Depository Receipts (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 Companies Act was amended in 2002 to permit
foreign companies to offer shares in the form of
depository receipts in India. However, the Department
of Company Affairs (DCA) laid down the guidelines in
February 2004.
Why IDR?
Enable foreign companies to raise capital in India
Enable Indian investors to diversify risk
Enable globalisation of Indian stock exchanges
Market Capitalisation
The market value of a quoted company, which is
calculated by multiplying its current share price
(market price) by the number of shares in issue is
called as market capitalization. E.g. Company A
has 120 million shares in issue. The current
market price is Rs. 100. The market capitalisation
of company A is Rs. 12000 million.
Capitalisation-wise segments of different stocks:
large-cap, mid-cap and small-cap segment based
on 80%-15%-5% market capitalization
Process of IPO
1. Draft Prospectus SEBIs observation letter
2. Fulfillment of Entry Norms*
3. Appointment of Underwriter maximum
commission 2.5%
4. Appointment of Banker collecting agent &
procurement of funds during issue
5. Brokers to the Issue recognise member of the stock
exchanges, maximum brokerage of 1.5%
6. Filling of Documents with Registrar of Companies
7. Printing of Prospectus and Application Form
and dispatch to merchant bankers, underwriters and
8. Listing the issue
9. Publication in Newspapers abridged prospectus
and the issues commencing and closing dates
10.Initiating Allotment Procedure after minimum
11.Underwriters Liability if the issue is not fully
subscribed, underwriter subscribe to the shortfall
12.Optimal listing - compulsory in the Regional stock
Exchange and optionally at other stock exchanges
*SEBI Entry Norms for IPO & FPO
Entry Norm I: Profitability Route.

Net tangible assets of at least Rs. 3 crores for three full years, of
which not more than 50 per cent is held in monetary assets.
Distributable profits in at least three out of the preceding five
Net worth of at least Rs. 1 crore in three years.
If there is a change in the companys name, at least 50 per cent
revenue for preceding one year should be earned from the new
The issue size should not exceed 5 times the pre-issue net
worth as per the audited balance sheet of the last financial year.
Entry Norm II: QIB Route.
Issue shall be through a book building route, with at least 50 per
cent of the issue to be mandatorily allotted to the qualified
institutional buyers (QIBs), failing which the money shall be
The minimum post-issue face value capital shall be Rs. 10 crore or
there shall be compulsory market making for at least 2 years.
Norm III: Appraisal Route.
The project is appraised and participated to the extent of 15 per
cent by FIs/scheduled commercial banks of which at least 10 per
cent comes from the appraiser(s). In addition, at least 10 per cent of
the issue size shall be allotted to QIBs, failing which the full
subscription monies shall be refunded.
The minimum post-issue face value capital shall be Rs. 10 crore or
there shall be a compulsory market making for at least 2 years.
Grading of IPO is Mandatory
In order to enable investors assess new equity
issues offered through an IPO, the issuer has to
get IPO grading done by at least one credit
rating agency, before filing the offer
documents with SEBI or thereafter.
However, the prospectus / Red Herring
Prospectus must contain the grade/s given to
the IPO by all the rating agencies.
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 basis of the bids revived
It is the mechanism though which an offer price for IPOs based on
the investors demand is determined investors demand is
important input to arrive at an offer price an auction of shares
Book building built the US market almost entirely in the 1940s and
1950s - first introduced in India 1999
Book Running Lead Manager(BRLM) is a lead merchant banker
appointed by the issuer company and whose name is mentioned in
the offer document of the company
Red Herring Prospectus is a prospectus which does not have details
of either price or number of shares being offered or the amount of
Methods for Determining the Offer Price
Fixed Price
Book Building
Book Building Process
appoints one or more merchant banker as book runner
disclosed in red herring prospectus
lead book runner and co-book runner as underwriter may
be with syndicate members (registered with SEBI)
an agreement with one or more of stock exchange(s)
appoint stock broker who are members of the recognized
stock exchange and registered with the SEBI for the purpose
of accepting bids application
Application Supported by Blocked Amount
Self-certified Syndicate Bank
file a draft red herring prospectus with the SEBI, containing
all disclosure including total issue size, if applicable, except
the price and the number of specified securities to be offered.

The issuer may mention the floor price or price band in the red
herring prospectus.

If the issuer opts not to make such disclosure the following
shall be disclosed

a statement that the floor price or price band be disclosed at
least two working days (IPO) and at least one working (FPO)
before the opening of the bid;
a statement that the investors may be guided in the meantime
by the secondary market prices (in case of a FPO); and
the names and editions of the newspapers; names of websites
(with address), journals, or other media in which the said
announcement will be made.
Where the issuer decides to opts for price band instead of floor price
the issuer shall also ensure compliance with the following

The spread (range) between the floor and the cap of the price band should
not be more than 20 per cent, i.e. the cap should not be more than 120
per cent of the floor price.
The price band can be revised during the bidding period - maximum
revision either side not exceed 20 per cent and the cap of the revised
price band will be fixed i.e. 20%
Any revision in the price band shall be widely circulated
In case the price band is revised, the bidding period shall be extended to a
maximum of ten working days.
The manner in which the shortfall, if any, in the project financing, arising
on account of lowering of price band to the extent of 20 per cent will be
met shall be disclosed in the red herring prospectus. It shall also be
disclosed that the allotment shall not be made unless the financing is
tied up.
The basis for issue price, floor price, or price band, as the
case may be, shall be disclosed and justified by the issuer in
consultation with the lead merchant banker on the basis of
the following information, which shall be also disclosed
i. Earnings per share and diluted earnings per share, pre-issue,
for the last three years (as adjusted for changes in capital).
ii. Price earning ratio pre-issue.
iii. Average return on net worth in the last three years.
iv. Minimum return on increased net worth required to maintain
pre-issue earnings per share.
v. Net asset value per share based on last balance sheet.
vi. Net asset value per share after issue and comparison thereof
with the issue price.

Foreign Capital Issuance: ADR, GDR
Indian companies are permitted to raise foreign currency
resources through two main sources:
a. Foreign Currency Convertible Bonds (FCCBs) more
commonly known as Euro Issues and
b. ordinary equity shares through depository receipts,
namely, Global Depository Receipts (GDRs)/American
Depository Receipts (ADRs) to foreign investors
(including NRIs).
A depository receipt (DR) is any negotiable instrument in
the form of a certificate denominated in US dollars.
The shares are deposited by the issuing company with the
depository bank. The depository bank in turn tenders DRs
to the investors.

Global Depository Receipts (GDRs) may be defined as a
global finance vehicle that allows an issuer to raise capital
simultaneously in two or more markets through a global
GDRs may be used in public or private markets inside or
outside US. GDR, a negotiable certificate usually represents
companys traded equity/debt.
The underlying shares correspond to the GDRs in a fixed ratio
say 1 GDR=10 shares.

An American Depository Receipt (ADR) is a negotiable U.S.
certificate representing ownership of shares in a non-U.S.
ADRs are quoted and traded in U.S. dollars in the U.S.
securities market.
Also, the dividends are paid to investor in U.S. dollars.
ADRs were specifically designed to facilitate the purchase,
holding and sale of non-U.S. securities by U.S. investor, and
to provide a corporate finance vehicle for non-U.S.
Any non-U.S. company seeking to raise capital in the U.S. or
increase their base of U.S. investor can issue ADRs.