fica | cemcrmiassasaccnT ennai LEARNING OBJECTIVES: | After studying the chapter you should be able to understand: > What are the primary markets? > Fixed price and book building methods of IPO’S? >» What are ADRS AND GDRS > What is eligibility criterion for listing of shares on stock markets? > Procedure for floating an IPO? > What IPO grading? Introduction |_ Capital market has twoimportant and interdependent components, primary markets and secondary markets. Primary market is one which deals with the issuance of new securities for the first time. Companies, public sector institutions or even governments can obtain funds through the sale of new share or bond issues. Selling new issues to investors for the first time is called an initial Public Offering (IPO) or floatation of a public issue. Features of Primary Market are-— 1. This is the market for funds mobilization by selling shares or bonds for the first time. Therefore, it is also designated as New Issue Market (NIM). 2. The company or government receives the money and issue new security (shares or bonds) in demat form to the investors. . Expansions or modernization of the existing business or even for repayment of existing loans can be easily undertaken by raising the funds in the primary market (IPO market). . Capital formation in the economy improves if the primary markets are doing well and helping companies or institutions to raise funds 71PRIMARY MARKETS 2 s y olers te PO's can be used by existing promot 2 Cony, Public issues or IPO's can Biel aKe. 5 Fete ada REIT mechanism known aol 4 : Or sale faraatiotthe public. Hudco and coal India floated issue wh are olfer for sale by the existing promoters een in th are offer for sz Z eae eee ‘ is an example of promos, ase), Similarly S Chand’s public issue elcid : capital going to public through this IPO. In cet ae han are issued rather the existing shares of promoters are offered tg 4 public through IPOs, 1, Methods of raising funds in the primary market (NIM) 1. Initial Public Offer (PO); 2. Rights Issue (For existing Companies); 3. Follow on public offer (FPO); and 4, Private placements. Initial public offering (IPO): An Initial Public Offer (IPO), The main purpose of an IPO is to raise capita for the company. The funds mobilized can be used for any of the purposes like expansion, diversification or even takeover of a company. The term IPO refers to the first public issuance of acompany’s shares. The company may be a new company coming for the public issue for the first time. I) may be an existing private limited company or even closely held public limited company coming for the public issue for the first time. It may bea Public sector unit where the shares are sold for the purpose of privatization, Initial Public Offering (IPO) refers toa company’s first issuance of stock to the public. In most cases, the IPO makes the company’s stock accessible to a large group of public investors for the first time through the direct purchase from the company. The process of going public ofte 4 young company needs additional capital to grow its busin resources the firm needs to off ils equity to outside investors, is referred to as “going public” or flotation of an IPO, Corporate can make an offer to the existing shareholders also which is knownas Rights Offering. However, if an existing corporate which had accessed the Capital market earlier also, wants to offer more equity to public it is known as Follow on Public Offer (FPO), n begins when . To garner his process The new issues of a company’s shares owned either by the promoters or by iss When promoters’ shares are olfered to t sale. However, if the new issues are floated to the public it is known as public In case of offer for sale the company’s paid up capital does but in case of public issue the paid up capital of the company shall go up. Public issue of CRSL and BSE LTD are examples of offer for are given to the public that are ung new shares of the company. he public, it is known as offer for ee a erne noPRIMARY MARKETS, sale. BSE limited ha: S Come ¢ Ut With the 2 itself ie gh he offer for sal also pla Sale of . : 554 of ts og SPMINE topo tor sits SMES forth institution in the NSE Lp,» “WY capital held be domestic me oHer for i i estic and foreig EE Ors ai, ie gn 1. The fixed price method hrough dil fferent methods, 2. Book building method 3. Combination of both, known until the clos 7 may get oversubscribed or undersub: Osure of the is ener Sue. The issue Fixed price was the method used in Indian primary markets fora long ti However, in this method of issuance, there wasa problem of, oversubseri sion or under subscription. This was a great problem for both company as well as investors. It arises mainly in the case of companies issuing the shares at a premium and is unable to judge the genuine demand for t! that premium. If the premiw the shares at m charged was too low, it resulted into heavy oversubscription. If the premium charged was too highitresultedinto under subscription. So as to avoid this problem, the new method oi f floating the public issue was initiated in the Indian primary markets known as book building method of floatation. 2. Book Building method Book Building method helps in price and demand discovery. To avoid the problem of oversubscription or under subscription, the method used now- a-days for the IPO issuance is book building mechanism. In this method investors make bids at various prices at which they are willing to buy the shares. These bids may be at prices above or equal to the floor price. The offer/issue price more commonly knownas cut offpriceisthen etree : after the receipt of the bids, based on certain evaluation ta sas are being made by the investing public online to Pe a merchant banker. The investors who apply for this boo a ‘oe swaliied institutional buyers) like mutual funds, foreign ins laa aeaiiial book or insurance companies. As per regulations for shares fo a for building, at least 25 per cent of the shares on olter m retail investors. ~~~PRIMARY MARKET js lors (Op itional inve meant for qualified insult 1 perenne nal buyers (QIB's), fitied wnstitul offered to them, then thay quali ive the other two categories j, ora ‘ sstors ¢ . etail Inve » allocated among . some vat paras a it the discretion of the management, 1 QB's a " » book buile securities through the | ling 0 options; yn't pick up the shares. natlocated au » issuer chooses to issue has tw ee + SEBL guidelines, an issuer Comparty as per SEBI ag 100% of the ae route may be 10 i ) The public through the book building route (@ The t ae s public through | dther option is that 75% of the net offer to the ne ai wah th - book pidine prace s and the rest of the 25% of the puri x a fixed price. In this case, cut off price is firs discover anaes ed price , d “to the public at th, brill method of 75%, Then rest of 25% is made 7 4 a i hat At off price discovered in the book building met hod: This ha cut of price disc mel is therefore, known as combination of fixed price and boo! Duilding method. Process of Book building @ The Issuer Company which is planning an IPO nominates a lead merchant banker as a ‘book runner’. # The Issuer specifies the number of shares to be issued and the price band for orders. Price band refers to upper ceiling price and the floor price. @ Syndicate members are appointed by theissuing company. Orders for the IPO can be placed by the investors with this syndicate member, Orders into the ‘electronic book’ of the lead merchant banker will be routed through the various syndicate members who will be ap- proached by investors, This Process is called ‘bidding’ and is similar to an open auction, @ A Book should rem: of 3 days. Thi corfpany, ain open for subseri iption for a minimum period ‘an be extended if the Price is revised by the issuing Bids cannot be entered, ceiling pric @ Bid: pri at less than the floor Af itis Placed, the bids an be revised by the is decided, The final price at which the i a illing fe stock andallocsien anh Latter the company This price is known S Cut off mice neh Sa cee TAY : XMANN® —— eee ee Price or more than the shall automatically be rejected. bidder before the ‘sue closes and final company will be 8 shall be decidedcs 75 PRIMARY MARKETS |, the investors who have applied ance the cut off prices determines « tapt “hove the cut olf price are ‘allotted at the cut olf price only ava price 2 The xdditional price over and above the cut off price is refunded to the investor ves is fixed; the issue size gets frozen o Generally, the number of shai based on the price Pet share d proc .e between shares blic issue: Fixed Price process pifferenc normal pu! Features i ric hich the securities Pricing Price at w s are offered/allotted is known in advance to the investor. Demand Demand for the securities offered is known only after the closure of the issue Over/under It may create over Or under subscription subscription Underwriting When a company floats a p' enthusiastic response. from underwriters U Underwriting is like an ins of the public issue. It can to sell a security at t ‘The underwriters provid According to SEBI (Underwriters) Rules, in the business of underwriting 0 iscalled as“Underwriter”; and the consi as “Underwriting Commission”. public subscription and in turn t hat they will urance against Listing of securities fihen the securities are allowed for trading isting of the shares institutions /corporations, etc. liscovered throt offered through book ublic issue through _In such a situation, it nee buy the shi the adverse situation in the timing be defined as bearing the he fixed price or through le this service for a commission. 1993 means“A person who engages f an issue of s ‘deration for the assurance is known The Underwriters give guarantee hey receive the commission. The shares, bonds or deb of a . -. — any public limited company, quasi-government, igh this book building building and through Book Building process Price at which securities will be offered/allotted isnotknown in advance to the investor. Demand for the s curities offered can be known everyday as the book is built with the book runner. No problem of over-or- subscription under and IPO it may not get an ds some kind of insurance ares offered in the IPO. isk of not being able book building mechanism. ecurities of a body corporate for the onastock exchange it is called sntures to be listed may be fal and other financial16 PRIMARY MARKETS Reasons for listing: Accompany would be interested Lo get its shares listed to provide its g hoklersan exit route through the slck exchange and provide liquidity, ql ted shares yous direc Hy inte f money paid by investors for the newly colters of the company but when the shares are traded ona stock exe} cha id the money passes between investors, the company is not alfected is, rom new investors (buyers) to the old investors (sellers). The comma never required to repay the equity capital except in few cases ol buy an! share by the company [rom its investors, The new shareholders shall hae"! right to future profits distributed by the company in the form of divides! en A listed company on the stock exchange can casily issue further sh through rights issue to existing shareholders, The company can avo” a follow on offer or another public issue easily if it stock is already nu and traded on a stock exchange, This ability to raise large amount! capital from the market is a key incentive for many companies, pine . their shares to list. I's not only the convenience of raising more Lundy ht is now a major regulating requirement to get the stock listed for tradi as per SEBI regulations. The company must apply for listing of the share on any national level stock exchange before it goes for the IPO. Therelore y planning to go for IPO to get its shares it is mandatory for any comp: listed for trading on the stock exchange. Minimum Listing Requirements for new companies The following are the eligibility criteria for listing of companies on a Stock Exchange, through Initial Public Offerings (IPOs) & Follow-on Public Offerings (FPOs) Eligibility Criteria for Listing of IPOs/FPOs 1. Any large company intending to gets its stock listed on the stock exchange must meet the following conditions a. It must have a paid-up capital of & 10 crores after its public issue 10 crores; and b. Minimum public issue size must be & ¢ Minimum capitalization of the Company must be & 25 crore 2. A small company with an issue size of less than 25 crore and market capitalization of less than 25 crore must fulfill these conditions for getting its stocks listed. (a) Post-issue paid-up capital of the Company shall be a minimum of &3 crores; and TAXMANN® —PHUIMARY MARKETS 1 (5) Issue size shall be €3 crores; and () Minimum eat (@ Por each of the preceding three L-months period, the mininum jneome/turnover of the Company shoukl be € 4 crore ( Number of sitalization of the Company shall be © § crore public sharcholders after the issue shall be 1000 at least Process of Listing 1. Application for listing any coming out with for listing of its shares be ¢ Companies (ROC). 4 public issue must have applied to a stock The compa exchange ore filing the prospectus with the Registrar o! IL. Allotment of Securities be sought from the respective shares at a fixed price. s must be made within an interest at the val of the basis of allotment must ‘cof the company issuing the allotment of shares e. In case it is delayed The appro stock exchange in case In case of Book Building issu 5 days from the closure of the isst rate of 15% shall be paid to the investors. IIL. Trading Permission f Basis of Allotment of shares. The is lities for trading at Stock Exchange thin 7 working days of uer company es where the After the finalization o} should complete the forma securities are to be listed wi IV, Requirement of Security /rights issues are required to deposit 1% of 1 Stock Exchange belore the issue opens. Ln ing the complaints ol investorsregarding delay in sending refund order share certilicates this security deposit shall be forfeited (after dematerialization this problem does not crop up), nen- payment of commission to underwriters, brokers, ete. V. Payment of Listing Fees Annual Listing Fees are compulsory for all companie: stock exchange, A company which stops paying listing Fees get the delisted for trading VL Compliance with Listing Agreement isted fortradingon thestock exchange must provide facilities ration, to give proper notice of closu eof transler ibridged Annual Reports bution Schedule with ‘The companies making public. issue amount with the Regiona the event of the company not resolvi .s listed for trading on ir share: Any company for prompt transfer, regi books and record dates, to forward copies of una nd Balance Sheets to the shareholders, to fie Distr 0ly; to furnish financial results On 4 Quartey, vi e the important happenings, ang e, etc. In case of any iy dy) pri 78 the Exchange annual Cae intimate pr comptly 0 the Exc hana vel ie with (he conditions oer : e Ge inst te detaulting ca > takes penal @ 2 | the stock exchange ta es pel mt vt f shi sec Delisting of S! ares see r syerse Book Building. Th slisting of share aferredtoas Reverse Boo g.TheRe 3° pefetingofsharesisasoreferredlO25 T7757 capturing the sell on to ‘a mechanism provi ack tive Book Running Lead Mang! 2” list their she th nu Book Building is hans ; Ider through respec Seb veintending 10 d from the share hol (BRLMSs) whieh can be used by compan through buy back process. a Building scenario, the Acquirer/Company offer, g¢ ‘The Reverse Book Building 0! i ke In the Reverse Book buy back shares from the share holde! basically a process used for efficient P} for which the Reverse Book Building is open discovery: During the per, offers are collected from, share holders at various prices, which are above or equal to the floor prig The buyback price is determined after the offer closing date. hange Board of India had issued the SEBI (Delist of Securities) Guidelines, 2003 for delisting of shares from stock exchangs, The guidelines provide the overall framework for voluntary delisting b promoter. The process is used by the companies to reduce their float, capital so as to enable them to get delisted from the stock exchani 2 Listing on stock exchanges entails a number of compliances. In re avoid such compliances, many companies opt to get delisted. Moreover, the also be used in case of acquisition process of another compan) The Securities and E proces: by the acquirer. ADRs: To accommodate US investors dema ; American Depositary Receipt eee ree a instrument called a in any non-American company. An ADR is US See ota issued in the US by a depositary bank, representing con cnmated cout ae These are the receipts issued against ee non-US s therefore help US investors to acquire and nderlying shares. Thes at US stock market like NYSE or NAS DAO. Tt trade non-US securities compani like Indian companies, HDFC, Relig ney also provide non-US US capital markets. Many of the Indian com ‘ance or Infosys to access the Lee ae erie copia toed Baer GDR's: Are . ares COR Ae ee aL and trading in lobe) ese its Jong Kong, Australia or Tee bone (eee ee Tec geraphics ADR's but they are issued to larger world Sree They eee ather than only ae similar t0 US markets.a PRIMARY MARKETS 19 private placement whena company issues financial securities such as shares and convertible scurilies toa particular group of investors (not more than 49 in numbers) secon as private placement If the quality of the issue is very good nd some select BFOUPS ol individuals or institutional investors are willing atu the shares well.in advance then it makes sense to avoid the costly 1 mje consuming process of IPO issuance. These shares/ bonds eat be ar ace se se : an rately paced with these select investors, When the offer is made to these select people it is known as Private placement. It’s a short cut method any to float an issue to mobilize funds without appr vaching the fora comp’ : eneral public and thereby saving lots of expenses involved in the process of public issue. The private placement is preferred because of some of the factors like - @ Fi 1, the lengthy i: the information disc for companies to opt for the pri @ Secondly, the costs of a public issue those for a private placement. unts that can be raised through private placements ¢ Thirdly, the amo juiimes are far bigger than those that can be gamered through a public issue. Aprivateplacement isadire toa limited number of sel uance procedure for public issues, in particular, sure requirements, provide a strong incentive vate placement route. are considerably higher than ret private offering of securities (shares or bonds) ected investors. Investors in privately placed securities include insurance companies, pension funds, mutual funds and high net worth investors. Securities issued as private placements include debt, equity, and hybrid securities. Major bonds issuances are generally on theprivate placement basis in India. Some of the private placement of shares is also made to promoters themselves, known as preferential placement. Rights Issues Whenacompany requires funds for further expansionsit may not necessarily £0 to the public again. The company can decide to issue shares to the costing shareholders through rights shares issuance. gas ise is the issue of additional shares to the existing shareholders Subsea which is in proportion of their existing shareholding. etion tthe new shares through the rights issue is not open to lowever if is restricted only to existing shareholders of the company. an existing shareholder does not want to subscribe to additional pit exis {_“Ptal the offer can be renounced in favour of somebody who is not the80 PRIMARY MARKETS, existing holder of share. In case of rights offer in profit making comp, this renunciation can earn the existing shareholder some Premium, a Me depends on the difference between the offer price and the market yh of the company and he decides to sell this Tenunciation at a premiy, a the renouncee. For example, recently South Indian Bank came oy , a rights offer at the price of & 16 when the prevailing price on the th market was 20, The renunciati ion by the existing share holder coulg ft casily fetched a premium of & 4 & 202 16), a Follow on Public Offer (FPO) When an already listed Company comes across the need for further fu the company can visit the primary market for further issuance of gh’ When the public issue is made again by an existing listed company '° 'ssuc is called Follow-on-Public offer (FPO). The process and Procedy for the FPO are similar to that of the Initial public offer ( 7 c IPO). Some of 4 times companies come out with Rights issue to the exist as wellas folk ‘ing sharehold. v low on public issue to the new set of investors, simultaneous, This is known as rights cum public issue. : ¥PO Grading: Thvestment decisions for IPOs demand knowledge and understand complex documents like prosp. ectus, projected financial statements, I a challenging task for retail inve: stors, So as to facili equity issues offered through an Initial Public Offe: introduced by SEBI. With an increase in the dome: Participation in the equity markets, the markets regulator, Securities arg Exchange Board of India (SEBI) has made the grading of IPOs mandate. IPO grading is the grade assigned bi y a Credit Rating Agency, to the IPO« equity shares or any convertible b t tis, litate their assessment gf (PO), Gradinghas bes, 'stic retail and institution, ond, 1PO Grading purports to provide an independent, unbiased view of tk Company's fundamentals, enabling the investor to decide abo investment worthiness ut the f the issue. It is a one-time assessment undertake: prior to the proposed initial public issue. I’s an assessment and gradings the IPO issue and not of the company. IPO grading has been introduced an endeavour to make additional information available for the investors: order to help their decision regarding an IPO. A company which has fil the draft offer document for its IPO with SEBI, on or after I* May, 20 is required to obtain a grade for the IPO from at least one of the ered! rating agencies. IFO Grading is intended to provide the investor with an informed a objective opinion expressed by a professional rating agency after analyZiPRIMARY MARKETS cee 8 factors like business and financial prospects, + ; corporate governance practices etc. As on date the follow oi aaa i ncies. Credit Analysis & Research Ltd (CARE), IC RA Limited, CRISIE and FITCH Ratings are registered with SEBI for grading the ea chy PO Benefits of IPO Grading ae | @ IPO grading brings valuable ir e aluable informatio! . pester rmation about the issuer to the @ The fundamental strength/weakness of c e akne an issue can be eva ‘ from the grading. in be evaluated —— 4 Companies of different sizes operating in different industries can be compared on the basis of IPO grading. @ Ithelpsin increasing both domestic and foreign investor participation. ‘An IPO grade is NOT a suggestion or recommendation as to whether one should subscribe to the IPO or not. There is no guarantee that public issue with better rating ‘of 5 shall certainly give benefits to the investors. IPO grade needs to be read together with the disclosures made in the prospectus including the risk factors as well as the price at which the shares are offered in the issue. Summary Capital market performs number of important functions. The most important function is to help transferring the investible funds from investors to corporate. Tomeet the varving needs of Savers. and investors, Varieties of financial instruments of capital market are created. Capital market is a market for long-term debt and equity shares which is further dividedinto Primary and secondary markets. Domestic issues like Shares, Preference Shares and Bonds are important financial instruments of primary markets. International issues of shares are in the form of GDR’s and ADR's There are certain statutory requirements which every company needs to follow before “Going public’. Companies have to make regular disclosure about their working in addition to a prospectus issued at the time of going public. Prospectus is issued when companies float capital in the market, which contains information about owners, project, market of the product, and capital structure etc. The primary market is the market where the securities known as shares or bonds are sold for the first time. It is new issue market. Methods of issuing securities in the Primary Market are In | Public Offer (PO), Follow on public offer (FPO), Private Placements, Rights Issue (For existing Companies) and offer for sale.a PRIMARY MARKETS IPO issues can be made through fixed price method or through book buildin, method, When an IPO is made by issuing the new shares. resulling INLO ICre Ay in paid up capital of the » company company and additional cash flows to the ¢ mr ANY, AL j known as Public Issue of shares. When the shares are issued to the public out the promoters’ holding with no increase in paid up Capital of the company it; Known as Offer-for- Sale (OFS). In this case there is no cash inflow to The company rather the funds go to promoters who are selling their shares to public throug) Offer-for-Sale. International instruments like GDR, ADRs are quasi equity issues offered 1p international investors. An Assessment of the Quality of a proposed IPO can be done through the [PO grading which is now mandatory for all Companies making an IPO: SOM A SA RC RIA kh Review Questions Q. 1 Differentiate between an IPO and a GDR issue. Q. 2 What is IPO grading? Is it compulsory for a public issue. Q.3 What are the steps involved in listing of a share on the stock markets? Q.4 What is the process of book building of an IPO. Explain. Q.5 How does book building method differ from the fixed price public issue?