Primary Market

Unit 4

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Contents

● Meaning,
● Constituents,
● Instruments,
● Financial intermediaries,
● Issue process,
● Fixed pricing,
● Book building and its process
● Sourcing from international capital markets,
● Corporate requirements of listing and other issue procedures and regulations as
prescribed under Companies Act and SEBI Regulations,
● Different types of Prospectuses used in corporate IPO
● Marketing initiatives for IPO,
● Preparation of prospectus

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Meaning

● The primary market is a market for new issues. It is also

called the new issues market. It is a market for fresh
capital.

● Funds are mobilized in the primary market through

prospectus, rights issues, and private placement.

● There are three categories of participants in the

primary market. They are the issuers of securities,
investors in securities, and intermediaries.

● The last named render services to both the issuers and

investors to enable the sale and purchase of securities.

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Ways to raise Equity capital in Primary Market

1. Public Issue
• Initial Public Offer
• Further Public offer
 Fixed Method
 Book-Building Method (Price Band)
2. Rights Issue
3. Preferential Allotment
4. Private Placement
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Constituents
• Initial public offering (IPO): when a company issues
shares of stock to the public for the first time.

• Rights issue/offering: an offer to the company's

current stockholders to buy additional new shares at a
discount.

• Private placement: an issue of company stock shares

to an individual person, corporate entity, or a small
group of investors—usually institutional or accredited
ones—as opposed to being issued in the public
marketplace.

• Preferential allotment: shares offered to a particular

group at a special or discounted price, different from
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Instruments

● Shares (Equity and Preference) issued by corporate

bodies (govt. firms and Pvt. firms).

● All types of Debt instruments (debentures and bonds)

issued by government and the corporate bodies.

● Overseas equity instruments issued such as Global

Depositary Receipts and American Depositary Receipts.

● Overseas debt instruments issued such as External

commercial borrowings.

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 Instrum
ents
Debentures/
Shares Bonds

I. Equity Shares
II. Preference Shares 1. Secured/Mortgage Debentures
1.Cumulative & Non- Cumulative 2. Unsecured/ Naked Debentures
2. Redeemable & Irredeemable 3. Non Convertible Debentures
3. Convertible & Non- Convertible 4. Fully Convertible Debentures
4. Participating & Non- Participating 5. Partly Convertible Debentures
III. Preference Shares with Warrant 6. SPN (Secured Premium Notes)
IV.Equity Shares with detachable 7. Zero Interest Debentures
Warrant
8. Floating Rate Debentures
V. IDR (Indian Depository Receipt)
VI. ADR/ GDR
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Functions of the new issue markets/
primary market
● To facilitate the mobilisation and transfer of funds from
the savers to the users.

● Origination, underwriting and distribution of securities.

● Origination: A careful study/analysis/investigation of the

technical, economic and financial viability of new project
proposals.

● Advisory services: Type of securities to be issued,

magnitude of issue, time of floating an issue, pricing of an
issue (par, premium) and methods of issue (fixed or book-
building).

● Underwriting: An agreement, whereby the underwriter

promises to subscribe to a specialised no. of shares or
debentures in the event of and
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Financial intermediaries
● There are different intermediaries to an issue such as

● merchant bankers or book running lead

managers (BRLM),
● registrars to the issue,
● bankers to the issue,
● Underwriter,
● auditors of the company and
● Solicitors/Lawyers.

● The issuer discloses the addresses, telephone, fax

numbers and email addresses of these intermediaries.

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Merchant Banker
● A merchant banker should be registered with the SEBI as per
the SEBI (Merchant Bankers) Regulations, 1992 to act as a book
running lead manager (BRLM) to an issue.

● The lead merchant banker performs most of the pre-issue and

post-issue activities.

● The pre-issue activities of the lead manager include due

diligence (comprehensive analysis) of company’s
operations/management/business plans/legal, etc., drafting and
designing offer document, finalizing the prospectus, drawing up
marketing strategies for the issue, and ensuring compliance
with stipulated requirements and completion of prescribed
formalities with the stock exchanges and the Registrar of
Companies (ROC).

● The post-issue activities include management of escrow

accounts, coordinating non-institutional allocation, intimation of
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allocation, coordination with the registrar for dispatching of
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● Registrar to the Issue: The role of the registrar is to

finalize the list of eligible allottees, ensure crediting of
shares to the demat accounts of the eligible allottees,
and dispatch refund orders.

● Bankers to the Issue: They are appointed in all the

mandatory collection centres, and by the lead merchant
banker to carry out activities relating to collection of
application amounts, transfer of this amount to escrow
accounts, and dispatching refund amounts.

● Underwriters: Underwriters are intermediaries who

undertake to subscribe to the securities offered by the
company in case these are not fully subscribed by the
public, in case of an underwritten issue.

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TYPES OF UNDERWRITING SECURITIES
● Complete underwriting: when the whole issue of
shares or debentures of a company is underwritten, it is
called complete underwriting. In such a case the whole
issue is underwritten either by an individual/institution
agreeing to take the entire risk or by a number of firms
or institutions, each agreeing to take the risk to a
limited extent.

● Partial underwriting. When only a part of the

issue of shares or debentures of a company is
underwritten, it is known as partial underwriting. In
such a case the part of the issue is underwritten either
by an individual/institution or by a number of firms or
institutions each agreeing to take the risk to a limited
extent.

● Syndicate Underwriting: When

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Issue process

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1. Draft prospectus: A first legal document that a company files to

SEBI prior to proceeding with an initial public offering (IPO).

2. Fulfilment of entry norms by the companies going public

(EN).

3. Appointment of underwriters: (under subscription, max. 2.5% UW

commission).

4. Appointment of bankers: (Act as collecting agents to process the

funds during the public issue).

5. Initiating allotment procedure: (Registrars of the co., initiates th

allotment process, min. subscription level required).

6. Brokers to the issue: Recognised members of the stock exchange

are appointed to marketing the issue; 1.5% max. brokerage eligible.

7. Filing the documents: The draft prospectus, agreements with lea

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manager, underwriters, bankers, registrars and brokers to be filed with
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8. Printing of prospectus and application forms: Printed forms are
to be dispatched.

9. Listing of issue: letter to be sent to the concerned stock exchange,

details stating the intention of the listing. Listing application along with
listing fee Rs. 7500.

10. Publication in newspapers: Abridged version of prospectus, issue

window period in major English and vernacular newspapers.

11. Allotment of shares: After the issue window closes, all

applications are scrutinised, tabulated and then allotted against
applications received.

12. Underwriters’ liability: In the case of under subscription, the

liability of the underwriter to the extent of under subscription to be
mentioned clearly.

13. Optional listing: Compulsory listing in the proposed stock

exchanges and regional stock exchanges but optional in other stock
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Methods of Pricing securities in the

primary markets
● Fixed price method.
● Book-building method.

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Fixed Price Issue

● In a Fixed Price Issue, the price of the offerings are
evaluated by the company along with their merchant
banks.

● They evaluate the company's assets, liabilities, and every

financial aspect.

● They then work on these figures and fix a price for their
offerings. Investors must pay a fixed price to apply for
shares.

● Determining the appropriate price for an IPO can be

complex, and merchant bankers use various methods for
IPO valuation, depending on the company’s type and
available information.

● These methods include: Relative

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● The relative valuation method, also known as the

comparative valuation method, involves determining the
value of an IPO based on the valuations of other companies.
This method requires specialists to compare the IPO to the
closest industry benchmarks already listed on stock markets.
The Parameters include EPS, PE multiple, return on net worth and
comparison of these parameters with peer group companies.

● An absolute valuation method for an IPO involves

analyzing the financial position and strength of the company.
Merchant bankers use the discounted cash flow (DCF)
method to determine the company’s wealth.

● The discounted cash flow (DCF) method values an IPO

that assesses projected cash flows, future performance,
corporate investments, and potential revenue sources. An
inaccurate estimate can affect the company’s valuation, so
this method is considered more challenging than relative or
comparative valuation methods.
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Book building method

● Book Building is essentially a process used by companies raising
capital through Public Offerings-both Initial Public Offers (IPOs)
and Follow-on Public Offers (FPOs) to aid price and demand
discovery.

● It is a mechanism where, during the period for which the book for
the offer is open, the bids are collected from investors at various
prices, which are within the price band specified by the issuer.

● Price band consists of the floor price and the cap/ceiling price.

● Floor Price is the minimum price (lower level) at which bids can be
made for an IPO. The ceiling price is the highest limit price where
a stock can be bided in an IPO.

● The process is directed towards both institutional as well as retail

investors. The issue price is determined after the bid closure
based on the demand generated in the process.

● Regulations governingExcellence and Service

Book building are covered in the Securities
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• The Issuer who is planning an offer nominates lead merchant

banker(s) as 'book runners'.
• The Issuer specifies the number of securities to be issued and the
price band for the bids.
• The Issuer also appoints syndicate members with whom orders
are to be placed by the investors.
• The syndicate members input the orders into an 'electronic book'.
This process is called 'bidding' and is similar to open auction.
• The book normally remains open for a period of 3 days.
• Bids have to be entered within the specified price band.
• Bids can be revised by the bidders before the book closes.
• On the close of the book building period, the book runners evaluate
the bids on the basis of the demand at various price levels.
• The final price chosen in simply the weighted average of all the bids.
• The book runners and the Issuer decide the final price at which the
securities shall be issued, this is called the cutoff price.
• Generally, the number of shares are fixed, the issue size gets frozen
based on the final price per share.
• Allocation of securities isExcellence
made toandthe successful bidders above or
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Advantages and Disadvantages of Book

Building Process

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• The final price chosen in simply the weighted average of

all the bids.
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Internet Book Building System

• BSE offers a book building platform through the Book

Building software branded as iBBS - Internet Book
Building System

• The software is operated by book-runners of the issue

and by the syndicate members, for electronically
placing the bids on line real-time basis for the entire
bidding period.

• In order to provide transparency, the system provides

visual graphs displaying price v/s quantity on the BSE
website as well as all BSE terminals.

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ASBA
● ASBA is an application by retail investors for subscribing
to an issue, containing an authorization to block the
application money in a bank account.

● This system does away with the refund process and

thereby reduces the time between an issue and its
listing.

● Once the basis of allotment is finalized, the Registrar to

the Issue shall send an appropriate request to the SCSB
(Self-Certified Syndicate Banks under the Syndicate ASBA
facility) for unblocking the relevant bank accounts and
for transferring the requisite amount to the issuer’s
account.

● In case of withdrawal/failure of the issue, the amount

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Sourcing from international capital markets

● American Depositary Receipts (ADR).

● Global Depositary Receipts (GDR).

● Indian Depositary Receipts (IDR).

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American Depositary Receipts (ADR)

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● ADRs is a way for the Indian companies who are willing to raise funds
from the U.S. by issuing shares on American Stock exchange.

● The issuance of ADR is governed by the rules and regulations as laid

down by the regulator SEC (Securities and Exchange Commission).

● The Indian Companies will have to maintain accounts as per the

American Accounting Standards.

● The Indian companies cannot directly list their equity shares on the
international stock exchange.

● So in order to overcome this problem; the companies give shares to an

American bank. In return for those shares provide receipts to the Indian
companies.

● The companies raise funds by providing those ADR receipts in American

share market.

● One ADR comprises of a certain number of shares in an Indian company

and these ADRs are quoted in US dollars.
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Global Depositary Receipts (GDR)

• GDRs are similar to ADRs except for the fact that it is

listed on an exchange outside the U.S. and helps the
issuer to raise funds simultaneously in different markets
worldwide.
• It allows the foreign firms to trade on the exchange
outside its home country.
• These shares are held by a foreign bank that provides
depository receipts to these companies in return for the
shares.
• Generally, GDR stands for ten equity shares of the
underlying firm.
• They are usually listed on London or Luxembourg stock
exchange and even on the newer exchanges including
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Indian Depositary Receipts (IDR)

• An Indian Depository Receipt (IDR) is a financial instrument

denominated in Indian Rupees in the form of a depository receipt.
• It is created by a Domestic Depository and the custodian of
securities registered with the Securities and Exchange Board of
India against the underlying equity of issuing company.
• It enables the foreign companies to raise funds from the Indian
securities Markets.
• Standard Chartered became the first global company to file for an
issue of Indian depository receipts in India.

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SEBI guidelines towards the Issue of

• Equity Shares
Entry Norms
• Minimum Promoters Contribution and Lock in
period
• IPO Grading
• Filing of offer documents/Prospectus

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Entry norms
● Entry norms are different routes available to an issuer for
accessing the capital market by way of a public issue. They
are meant for protecting the investors by restricting fund
raising by companies if they do not satisfy the entry
Anrequirements.
unlisted issuer making
Entry Norms A listed issuer making a
a Public Issue (i.e. IPO) public issue (i.e. FPO)

Entry Norm I
Entry Norm II a. Change in name of the company: at least
“Profitability
“QIB Route” 50% revenue for the preceding 1 year should
Route”
be from the new name.

b. The aggregate of the proposed issue and

all previous issues made in the same
financial year in terms of issue size does not
exceed five times its pre-issue net worth.

If not satisfying the above two rules, take the

compulsory QIB route i.e. at least 75%
mandatory allotment to QIBs.

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Entry requirements for an issuer to make an
issue / offer to public
Entry Norm I (commonly known as “Profitability
Route”)
An unlisted issuer making a Public Issue (i.e. IPO) is
required to satisfy the following provisions. The Issuer Company
shall meet the following requirements:

(a) Net Tangible Assets of at least Rs. 3 crores in each of the

preceding three full years of which not more than 50% are
held in monetary assets.

(b) Minimum of Rs. 15 crores as average pre-tax operating

profit in at least three of the immediately preceding five
years.

(c) Net worth of at least Rs. 1 crore in each of the preceding

three full years.

(d) If the company has changed its name within the last one
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year, at least 50% revenue for the preceding 1 year should
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To provide sufficient flexibility and also to ensure that

genuine companies are not limited from fund raising on
account of strict parameters, SEBI has provided the
alternative route to the companies not satisfying any of
the above conditions, for accessing the primary Market, as
under:

Entry Norm II (Commonly known as “QIB Route”)

An unlisted issuer making a Public Issue (i.e.

IPO) is required to satisfy the following provisions.
The Issuer Company shall meet the following
requirements:

● Issue shall be through book building route, with at least

75% of net offer to the public to be mandatory allotted
to the Qualified Institutional
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A listed issuer making a public issue (i.e.

FPO)
● is required to satisfy the following requirements:

● (a) If the company has changed its name within the last
one year, at least 50% revenue for the preceding 1 year
should be from the activity suggested by the new name.

● (b) The aggregate of the proposed issue and all previous

issues made in the same financial year in terms of issue
size does not exceed five times its pre-issue net worth as
per the audited balance sheet of the preceding financial
year.

● Any listed company not fulfilling these conditions shall be

eligible to make a public issue (i.e. FPO) by complying
with QIB Route as specified for IPOs i.e. issue shall be
through book building route,
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Who can be called as QIBs?

● Qualified Institutional Buyers are those institutional investors who are
generally perceived to possess expertise and the financial muscle to
evaluate and invest in the capital markets.
In terms of clause 2.2.2B (v) of DIP (Disclosure and Investor Protection
Guidelines) 2000 Guidelines, a ‘Qualified Institutional Buyer’ shall mean:
a. Public financial institution as defined in section 4A of the Companies
Act, 1956;
b. Scheduled commercial banks;
c. Mutual funds;
d. Foreign institutional investor registered with SEBI;
e. Multilateral and bilateral development financial institutions;
f. Venture capital funds registered with SEBI.
g. Foreign Venture capital investors registered with SEBI.
h. State Industrial Development Corporations.
i. Insurance Companies registered with the Insurance Regulatory and
Development Authority (IRDA).
j. Provident Funds with minimum corpus of Rs.25 crores
k. Pension Funds with minimum corpus of Rs. 25 crores)
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Any entities falling under the categories specified above are considered as
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Besides entry norms, mandatory

provisions which an issuer is expected to
comply before
● Minimum making
Promoter’s an issue
contribution and lock‐in:

● In a public issue by an unlisted issuer, the promoters shall

contribute not less than 20% of the post issue capital
which should be locked in for a period of 3 years. “Lock‐in”
indicates a freeze on the shares.

● The remaining pre-issue capital of the promoters should

also be locked in for a period of 1 year from the date of
listing.

● In case of public issue by a listed issuer [i.e. FPO], the

promoters shall contribute not less than 20% of the post
issue capital or 20% of the issue size.
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IPO Grading

● IPO grading is the grade assigned by a Credit Rating

Agency registered with SEBI, to the initial public offering
(IPO) of equity shares or other convertible securities.

● The grade represents a relative assessment of the

fundamentals of the IPO in relation to the other listed
equity securities.

● Disclosure of “IPO Grades”, so obtained is mandatory for

companies coming out with an IPO.

● Disclose the grading obtained in the prospectus,

issue advertisements and all other advertising
places of the issue.
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Offer document
It is a document which contains all the relevant information about
the company, promoters, projects, financial details, objects of
raising the money, forms of the issue etc. and is using for inviting
subscription to the issue being made by the issuer.

Offer document is called

“Prospectus” in case of a Public Issue and

The prospectus is an offer document in case of a
public issue, which has all relevant details including
price and number of shares or convertible securities
being offered. This document is registered with RoC
before the issue opens in case of a fixed price issue
and after the closure of the issue in case of a book
built issue.
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“Letter of Offer” in case of Rights Issue.
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Types of Offer Documents / Prospectus

Terms used for offer documents vary depending upon the
stage or type of the issue where the document is used.
The terms used for offer documents are defined below:

Whenever the company issues the prospectus, the

company must file it with the regulator. The prospectus
includes the details of the company’s business, financial
statements.

1. To notify the public of the issue.

2. To put the company on record with regards to the terms
of the issue and allotment process
3. To establish accountability on the part of the directors
and promoters of the company

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Types of prospectus
● According to Companies Act 2013, there are four types of
prospectus.

● Deemed Prospectus – Deemed prospectus has

mentioned under Companies Act, 2013 Section 25 (1).
When a company allows or agrees to allot any
securities of the company, the document is considered
as a deemed prospectus via which the offer is made to
investors. Any document which offers the sale of
securities to the public is deemed to be a prospectus by
implication of law.

● Red Herring Prospectus – Red herring prospectus

does not contain all information about the prices of
securities offered and the number of securities to
be issued. According to the act, the firm should issue
this prospectus to the registrar
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● Shelf prospectus – Shelf prospectus is stated under

section 31 of the Companies Act, 2013. Shelf
prospectus is issued when a company or any public
financial institution offers one or more securities to
the public. A company shall provide a validity
period of the prospectus, which should not be
more than one year. The validity period starts
with the commencement of the first offer. There is
no need for a prospectus on further offers. The
organization must provide an information memorandum
when filing the shelf prospectus.

● Abridged Prospectus – Abridged prospectus is a

memorandum, containing all salient features of the
prospectus as specified by SEBI. This type of
prospectus includes all the information in brief,
which gives a summary to the investor to make
further decisions. A company
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The prospectus contents are specified in

the Companies Act. The prospectus must
touch over the following content points:
1. Details of the company, such as name, registered office address,
and objects
2. Details of signatories to the Memorandum and their shareholding
particulars
3. Details of the directors
4. Details of shares offered and the class of the issue as well as
voting rights
5. Minimum subscription amount
6. The amount payable on application, on allotment, and on further
calls
7. Underwriters of the issue
8. Auditors of the company
9. Audited reports regarded profit and losses of the company

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Marketing initiatives for IPO

● When a company goes public through an IPO, it is
essential to have a well-developed marketing
strategy in place.

● The goal of the marketing campaign is to generate

interest and excitement in the stock, which will help
drive up the price on the first day of trading.

● There are a number of different marketing strategies

that can be used to promote an IPO.

● One common approach is to target institutional

investors, such as hedge funds and mutual funds, who
are more likely to be active in the market for new
stocks.
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● Another strategy is to focus on individual investors who

may be interested in buying shares of the new stock.
This can be done through online advertising, direct
mail, or even television commercials.

● Finally, it is important to generate buzz among the

general public about the upcoming IPO. This can be
done through social media, traditional media, or even
word-of-mouth.

● The most important thing is to make sure that the

marketing campaign is well-planned and targeted to
the right audience. By doing so, companies can
increase the chances of a successful IPO.

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