3. PRIMARY MARKET
What is the role of the ‘Primary Market’?
The primary market provides the channel for sale of new securities. Primary
market provides opportunity to issuers of securities; Government as well as
corporates, to raise resources to meet their requirements of investment
and/or discharge some obligation.
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. They
may issue the securities in domestic market and/or international market.
What is meant by Face Value of a share/debenture?
The nominal or stated amount (in Rs.) assigned to a security by the issuer.
For shares, it is the original cost of the stock shown on the certificate; for
bonds, it is the amount paid to the holder at maturity. Also known as par
value or simply par. For an equity share, the face value is usually a very
small amount (Rs. 5, Rs. 10) and does not have much bearing on the price
of the share, which may quote higher in the market, at Rs. 100 or Rs. 1000
or any other price. For a debt security, face value is the amount repaid to
the investor when the bond matures (usually, Government securities and
corporate bonds have a face value of Rs. 100). The price at which the
security trades depends on the fluctuations in the interest rates in the
What do you mean by the term Premium and Discount in a
Securities are generally issued in denominations of 5, 10 or 100. This is
known as the Face Value or Par Value of the security as discussed earlier.
When a security is sold above its face value, it is said to be issued at a
Premium and if it is sold at less than its face value, then it is said to be
issued at a Discount.
3.1 Issue of Shares
Why do companies need to issue shares to the public?
Most companies are usually started privately by their promoter(s). However,
the promoters’ capital and the borrowings from banks and financial
institutions may not be sufficient for setting up or running the business over
a long term. So companies invite the public to contribute towards the equity
and issue shares to individual investors. The way to invite share capital from
the public is through a ‘Public Issue’. Simply stated, a public issue is an offer
to the public to subscribe to the share capital of a company. Once this is
done, the company allots shares to the applicants as per the prescribed
rules and regulations laid down by SEBI.
What are the different kinds of issues?
Primarily, issues can be classified as a Public, Rights or Preferential issues
(also known as private placements). While public and rights issues involve a
detailed procedure, private placements or preferential issues are relatively
simpler. The classification of issues is illustrated below:
Initial Public Offering (IPO) is when an unlisted company makes either a
fresh issue of securities or an offer for sale of its existing securities or both
for the first time to the public. This paves way for listing and trading of the
A follow on public offering (Further Issue) is when an already listed
company makes either a fresh issue of securities to the public or an offer for
sale to the public, through an offer document.
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 shareholders.
A Preferential issue is an issue of shares or of convertible securities by
listed companies to a select group of persons under Section 81 of the
Companies Act, 1956 which is neither a rights issue nor a public issue. This
is a faster way for a company to raise equity capital. The issuer company
has to comply with the Companies Act and the requirements contained in
the Chapter pertaining to preferential allotment in SEBI guidelines which
inter-alia include pricing, disclosures in notice etc.
What is meant by Issue price?
The price at which a company's shares are offered initially in the primary
market is called as the Issue price. When they begin to be traded, the
market price may be above or below the issue price.
What is meant by 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.
Classification of Issues
Initial Public Offering
Further Public Offering
Fresh Issue Offer for Sale Fresh Issue Offer for Sale
What is the difference between public issue and private
When an issue is not made to only a select set of people but is open to the
general public and any other investor at large, it is a public issue. But if the
issue is made to a select set of people, it is called private placement. As per
Companies Act, 1956, an issue becomes public if it results in allotment to 50
persons or more. This means an issue can be privately placed where an
allotment is made to less than 50 persons.
What is an Initial Public Offer (IPO)?
An Initial Public Offer (IPO) is the selling of securities to the public in the
primary market. It is when an unlisted company makes either a fresh issue
of securities or an offer for sale of its existing securities or both for the first
time to the public. This paves way for listing and trading of the issuer’s
securities. The sale of securities can be either through book building or
through normal public issue.
Who decides the price of an issue?
Indian primary market ushered in an era of free pricing in 1992. Following
this, the guidelines have provided that the issuer in consultation with
Merchant Banker shall decide the price. There is no price formula stipulated
by SEBI. SEBI does not play any role in price fixation. The company and
merchant banker are however required to give full disclosures of the
parameters which they had considered while deciding the issue price. There
are two types of issues, one where company and Lead Merchant Banker fix a
price (called fixed price) and other, where the company and the Lead
Manager (LM) stipulate a floor price or a price band and leave it to market
forces to determine the final price (price discovery through book building
What does ‘price discovery through Book Building Process’
Book Building is basically a process used in IPOs for efficient 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.
What is the main difference between offer of shares through
book building and offer of shares through normal public issue?
Price at which securities will be allotted is not known in case of offer of
shares through Book Building while in case of offer of shares through normal
public issue, price is known in advance to investor. Under Book Building,
investors bid for shares at the floor price or above and after the closure of
the book building process the price is determined for allotment of shares.
In case of Book Building, the demand can be known everyday as the book
is being built. But in case of the public issue the demand is known at the
close of the issue.
What is Cut-Off Price?
In a Book building issue, the issuer is required to indicate either the price
band or a floor price in the prospectus. The actual discovered issue price can
be any price in the price band or any price above the floor price. This issue
price is called “Cut-Off Price”. The issuer and lead manager decides this after
considering the book and the investors’ appetite for the stock.
What is the floor price in case of book building?
Floor price is the minimum price at which bids can be made.
What is a Price Band in a book built IPO?
The prospectus may contain either the floor price for the securities or a price
band within which the investors can bid. The spread between the floor and
the cap of the price band shall not be more than 20%. In other words, it
means that the cap should not be more than 120% of the floor price. The
price band can have a revision and such a revision in the price band shall be
widely disseminated by informing the stock exchanges, by issuing a press
release and also indicating the change on the relevant website and the
terminals of the trading members participating in the book building process.
In case the price band is revised, the bidding period shall be extended for a
further period of three days, subject to the total bidding period not
exceeding ten days.
Who decides the Price Band?
It may be understood that the regulatory mechanism does not play a role in
setting the price for issues. It is up to the company to decide on the price or
the price band, in consultation with Merchant Bankers.
What is minimum number of days for which a bid should
remain open during book building?
The Book should remain open for a minimum of 3 days.
Can open outcry system be used for book building?
No. As per SEBI, only electronically linked transparent facility is allowed to
be used in case of book building.
Can the individual investor use the book building facility to
make an application?
How does one know if shares are allotted in an IPO/offer for
sale? What is the timeframe for getting refund if shares not
As per SEBI guidelines, the Basis of Allotment should be completed with 15
days from the issue close date. As soon as the basis of allotment is
completed, within 2 working days the details of credit to demat account /
allotment advice and despatch of refund order needs to be completed. So an
investor should know in about 15 days time from the closure of issue,
whether shares are allotted to him or not.
How long does it take to get the shares listed after issue?
It would take around 3 weeks after the closure of the book built issue.
What is the role of a ‘Registrar’ to an issue?
The Registrar finalizes the list of eligible allottees after deleting the invalid
applications and ensures that the corporate action for crediting of shares to
the demat accounts of the applicants is done and the dispatch of refund
orders to those applicable are sent. The Lead Manager coordinates with the
Registrar to ensure follow up so that that the flow of applications from
collecting bank branches, processing of the applications and other matters
till the basis of allotment is finalized, dispatch security certificates and
refund orders completed and securities listed.
Does NSE provide any facility for IPO?
Yes. NSE’s electronic trading network spans across the country providing
access to investors in remote areas. NSE decided to offer this infrastructure
for conducting online IPOs through the Book Building process. NSE operates
a fully automated screen based bidding system called NEAT IPO that enables
trading members to enter bids directly from their offices through a
sophisticated telecommunication network.
Book Building through the NSE system offers several advantages:
§ The NSE system offers a nation wide bidding facility in securities
§ It provide a fair, efficient & transparent method for collecting bids
using the latest electronic trading systems
§ Costs involved in the issue are far less than those in a normal IPO
§ The system reduces the time taken for completion of the issue
The IPO market timings are from 10.00 a.m. to 3.00 p.m. On the last day of
the IPO, the session timings can be further extended on specific request by
the Book Running Lead Manager.
What is a Prospectus?
A large number of new companies float public issues. While a large number
of these companies are genuine, quite a few may want to exploit the
investors. Therefore, it is very important that an investor before applying for
any issue identifies future potential of a company. A part of the guidelines
issued by SEBI (Securities and Exchange Board of India) is the disclosure of
information to the public. This disclosure includes information like the reason
for raising the money, the way money is proposed to be spent, the return
expected on the money etc. This information is in the form of ‘Prospectus’
which also includes information regarding the size of the issue, the current
status of the company, its equity capital, its current and past performance,
the promoters, the project, cost of the project, means of financing, product
and capacity etc. It also contains lot of mandatory information regarding
underwriting and statutory compliances. This helps investors to evaluate
short term and long term prospects of the company.
What does ‘Draft Offer document’ mean?
‘Offer document’ means Prospectus in case of a public issue or offer for sale
and Letter of Offer in case of a rights issue which is filed with the Registrar
of Companies (ROC) and Stock Exchanges (SEs). An offer document covers
all the relevant information to help an investor to make his/her investment
‘Draft Offer document’ means the offer document in draft stage. The draft
offer documents are filed with SEBI, atleast 21 days prior to the filing of the
Offer Document with ROC/SEs. SEBI may specify changes, if any, in the
draft Offer Document and the issuer or the lead merchant banker shall carry
out such changes in the draft offer document before filing the Offer
Document with ROC/SEs. The Draft Offer Document is available on the SEBI
website for public comments for a period of 21 days from the filing of the
Draft Offer Document with SEBI.
What is an ‘Abridged Prospectus’?
‘Abridged Prospectus’ is a shorter version of the Prospectus and contains all
the salient features of a Prospectus. It accompanies the application form of
Who prepares the ‘Prospectus’/‘Offer Documents’?
Generally, the public issues of companies are handled by ‘Merchant Bankers’
who are responsible for getting the project appraised, finalizing the cost of
the project, profitability estimates and for preparing of ‘Prospectus’. The
‘Prospectus’ is submitted to SEBI for its approval.
What does one mean by ‘Lock-in’?
‘Lock-in’ indicates a freeze on the sale of shares for a certain period of time.
SEBI guidelines have stipulated lock-in requirements on shares of promoters
mainly to ensure that the promoters or main persons, who are controlling
the company, shall continue to hold some minimum percentage in the
company after the public issue.
What is meant by ‘Listing of Securities’?
Listing means admission of securities of an issuer to trading privileges
(dealings) on a stock exchange through a formal agreement. The prime
objective of admission to dealings on the exchange is to provide liquidity
and marketability to securities, as also to provide a mechanism for effective
control and supervision of trading.
What is a ‘Listing Agreement’?
At the time of listing securities of a company on a stock exchange, the
company is required to enter into a listing agreement with the exchange.
The listing agreement specifies the terms and conditions of listing and the
disclosures that shall be made by a company on a continuous basis to the
What does ‘Delisting of securities’ mean?
The term ‘Delisting of securities’ means permanent removal of securities of a
listed company from a stock exchange. As a consequence of delisting, the
securities of that company would no longer be traded at that stock
What is SEBI’s Role in an Issue?
Any company making a public issue or a listed company making a rights
issue of value of more than Rs 50 lakh is required to file a draft offer
document with SEBI for its observations. The company can proceed further
on the issue only after getting observations from SEBI. The validity period of
SEBI’s observation letter is three months only i.e. the company has to open
its issue within three months period.
Does it mean that SEBI recommends an issue?
SEBI does not recommend any issue nor does take any responsibility either
for the financial soundness of any scheme or the project for which the issue
is proposed to be made or for the correctness of the statements made or
opinions expressed in the offer document. SEBI mainly scrutinizes the issue
for seeing that adequate disclosures are made by the issuing company in the
prospectus or offer document.
Does SEBI tag make one’s money safe?
The investors should make an informed decision purely by themselves based
on the contents disclosed in the offer documents. SEBI does not associate
itself with any issue/issuer and should in no way be construed as a
guarantee for the funds that the investor proposes to invest through the
issue. However, the investors are generally advised to study all the material
facts pertaining to the issue including the risk factors before considering any
investment. They are strongly warned against relying on any ‘tips’ or news
through unofficial means.
3.2 Foreign Capital Issuance
Can companies in India raise foreign currency resources?
Yes. Indian companies are permitted to raise foreign currency resources
through two main sources: a) issue of foreign currency convertible bonds
more commonly known as ‘Euro’ issues and b) issue of ordinary shares
through depository receipts namely ‘Global Depository Receipts
(GDRs)/American Depository Receipts (ADRs)’ to foreign investors i.e. to the
institutional investors or individual investors.
What is an American Depository Receipt?
An American Depositary Receipt ("ADR") is a physical certificate evidencing
ownership of American Depositary Shares ("ADSs"). The term is often used
to refer to the ADSs themselves.
What is an ADS?
An American Depositary Share ("ADS") is a U.S. dollar denominated form of
equity ownership in a non-U.S. company. It represents the foreign shares of
the company held on deposit by a custodian bank in the company's home
country and carries the corporate and economic rights of the foreign shares,
subject to the terms specified on the ADR certificate.
One or several ADSs can be represented by a physical ADR certificate. The
terms ADR and ADS are often used interchangeably.
ADSs provide U.S. investors with a convenient way to invest in overseas
securities and to trade non-U.S. securities in the U.S. ADSs are issued by a
depository bank, such as JPMorgan Chase Bank. They are traded in the
same manner as shares in U.S. companies, on the New York Stock Exchange
(NYSE) and the American Stock Exchange (AMEX) or quoted on NASDAQ
and the over-the-counter (OTC) market.
Although ADSs are U.S. dollar denominated securities and pay dividends in
U.S. dollars, they do not eliminate the currency risk associated with an
investment in a non-U.S. company.
What is meant by Global Depository Receipts?
Global Depository Receipts (GDRs) may be defined as a global finance
vehicle that allows an issuer to raise capital simultaneously in two or
markets through a global offering. GDRs may be used in public or private
markets inside or outside US. GDR, a negotiable certificate usually
represents company’s traded equity/debt. The underlying shares correspond
to the GDRs in a fixed ratio say 1 GDR=10 shares.