PRIMARY MARKET (STOCK MARKET)

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 CHAPTER -2 – PRIMARY MARKET

❖ Types of Issues
❖ Public issue - IPO
❖ Rights Issue
❖ Bonus Issue
❖ Foreign Currency Convertible Bond (FCCB)
❖ Public Issue process
❖ Time-line for Public Issue
❖ Buy Back of Securities

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 INTRODUCTION :

• The primary market is where securities are created. It's in this

market that firms sell (float) new stocks and bonds to the public
for the first time.

• An initial public offering, or IPO, is an example of a primary market.

• These trades provide an opportunity for investors to buy securities

from the bank that did the initial underwriting for a particular stock.

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 INTRODUCTION : contd..

• The primary market acts as a potential avenue for diversification

to cut down on risk. It enables an investor to allocate his/her
investment across different categories involving multiple financial
instruments and industries.

• It is not subject to any market fluctuations. The prices of stocks

are determined before an initial public offering, and investors
know the actual amount they will have to invest.

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 FEATURES OF PRIMARY MARKET:

➢ It Is Related with New Issues

➢ Primary issues are used by companies for the purpose of

setting up new business or for expanding or modernizing
the existing business.

➢ The company receives the money and issues new security

certificates to the investors.

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 FEATURES OF PRIMARY MARKET:

• Distribution of securities to prospective investors to mop up their

surpluses is a highly specialized activity that requires a lot of
expertise and experience.

• As such, companies seeking to garner funds from a large number of

investors - both individuals and institutions - have to hire the services
of the specialized agencies such as underwriters, brokers, merchant
bankers, etc.

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 FEATURES OF PRIMARY MARKET:

• Besides, there are other ways which can be employed for selling
securities to the investing public. In India, following methods are
usually employed to garner funds from the public through
floatation of securities.

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 FEATURES OF PRIMARY MARKET:
➢ It has various methods of Float Capital:
Following are the methods of raising capital in the primary market:

➢– i) Public Issue
➢– ii) Offer For Sale
➢– iii) Private Placement
➢– iv)Right Issue
➢– v) Electronic-Initial Public Offer
= It comes before Secondary Market =

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Players in the Primary market (The three I’s )

• Issuers

• Intermediaries

• Investors

❑ Individual Investors
❑ Corporate Investors and FIIs

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 ROLE OF PRIMARY MARKET:
• Companies can raise capital at relatively low cost, and the
securities so issued in the primary market provide high liquidity as
the same can be sold in the secondary market almost immediately.

• Chances of price manipulation in the primary market are

considerably less when compared to the secondary market.

• Such manipulation usually occurs by deflating or inflating a

security price, thereby deliberately interfering with fair and free
operations of the market

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 ROLE OF PRIMARY MARKET: CONTD..

• It studies needs, wants and expectations of the customers.

• It finds out reactions of customers to products of the company.

• It evaluates company’s sales promotion measures for suitable

adjustment and improvements.

• It studies current marketing problems and opportunities for

suitable follow up.

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 1) PUBLIC ISSUE THROUGH PROSPECTS:

❑ Basically, when shares, bonds etc., are made available

for anyone to buy.

❑ The main purpose of the public issue is to raise money

through public and get its shares listed at any of
the recognized stock exchanges in India.

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 1) PUBLIC ISSUE THROUGH PROSPECTS:

❑ In this method, a public limited company invites the public

at large through prospectus to subscribe to the issue of
securities. According to the SEBI norms, a minimum of 49%
of the total issue at a time is to be offered to public.

❑ A prospectus is a document that provides information about

the company and its proposed issue. The company and the
directors signing this document are personally liable for any
false statement or misrepresentation of material facts in the
prospectus.

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 1) PUBLIC ISSUE THROUGH PROSPECTS:

❑ Investors have the advantage of getting detailed information

about the company and its issue through prospectus
as per the SEBI requirements.

❑ This method can be gainfully employed by large companies

offering big issues because of high costs involved in raising
capital.

❑ Further, it is a time-consuming method as a lot of legal

formalities need to be complied with before floating an issue.

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 2) OFFER FOR SALE:

❑ This method involves outright sale of shares by the company

to issue houses or a group of brokers at an agreed price who in
turn resell them to the public at large.

❑ In such cases, the issuing houses may act as agents of the

company.

❑ The difference between the resale price and purchase price

is termed as spread and represents the profit of the issue houses.

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 2) OFFER FOR SALE:

• In India, this method has been employed on an

experimental basis under the name ‘bought out deals’ wherein
the shares are first sold to the sponsor under an agreement
that the sponsor shall sell them to public within a specified
period of time.

• This method of distribution of securities has the advantage of

ensuring success of the issue and economizing on cost of new
issues and thus the issuing company is relieved of the
botherations involved in selling securities to the public.

• The issue houses also stand to gain by charging higher prices.

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 3) PRIVATE PLACEMENT:

• In this method, the issuing company offers issue privately to

a select group of investors without the prospectus.

• In this process, the issuer may call upon the services of

brokers or issue houses.

• This method works in a manner similar to the ‘offer for sale

method’ whereby securities are first sold to issue houses, etc.,
who then sell them at higher prices to individuals and
institutions.

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 3) PRIVATE PLACEMENT:

❑ This method of selling securities is very economical and less

troublesome. As such, it suits the requirements of small
companies.

❑ To others, this method is useful especially when the stock

market is in bearish state and the public response is poor.

❑ However, the disadvantage of this method is that the

investor cannot resell the security for a specific period of time.

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 4) RIGHT ISSUE:

• Rights issue method is an important method of

distributing securities in which the existing company offers
shares to its existing shareholders in proportion to their
existing ownership (Pro-rata Basis).

• For that purpose, a company intending to increase its

subscribed capital by the issue of new shares either after
two years of its formation or after one year of the first issue
of shares whichever is earlier will have Notes to offer the
shares to the existing shareholders.

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 4) RIGHT ISSUE:

❑ Rights issue is the cheapest and convenient method of

raising funds and protects the interest of the existing
shareholders against the dilution of their ownership

❑ As per Section 81 of the Companies Act, 1956, existing

shareholders get a right of ‘pre-emption’ and they have the
option to exercise the right to renounce it or throw away

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 SEBI GUIDELINES FOR ISSUE IN PRIMARY MARKET:

• I. Initial Public Offering & Primary Market- SEBI

(Disclosure& Investors Protection) Rules and Regulation, 24th
Feb. 2009.

• 1. Minimum offering of 25% of post issue capital to the public.

This requirement was relaxed to 10% first for IT sector, later it
was relaxed to all the sectors.

• 2. IPO of issue size up to 5 times of pre-issue , shall be allowed

only to those companies having consistent track record of making
profit at least for 5 year .

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 SEBI GUIDELINES FOR ISSUE IN PRIMARY MARKET:
• 3. For issue above Rs. 100 crores book building route has been
made compulsory for comp. making IPO.

• 4. Time for finalizing the allotment of shares and refund has been
reduced from 30 to 15 days.

• 5. Issue shall open within 12 months from the date of issue of

observation letter by SEBI.

• 6. Should disclose price band at least 2 working days before opening

of bid by announcement in all newspapers
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GDR/ADR ISSUES:

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AMERICAN DEPOSITORY RECEIPTS (ADR)

• ADR is a dollar-denominated negotiable certificate. It

represents a non-US company’s publicly traded equity. It was
devised in the late 1920s to help Americans invest in
overseas securities and to assist non-US companies wishing
to have their stock traded in the American Markets.

• ADR were introduced as a result of of the complexities

involved in buying shares in foreign countries and the
difficulties associated with trading at different prices and
currency values.

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PROCESS TO ISSE ADR/GDR:

Issuing Share Domestic

Company certificate Custodian bank
(RIL) (SBI)
confirmation
Foreign GDR/ADR
Issue of DR
Depository Holders
(Morgan (Bank Of
Stanley) America)
Payment
Foreign Stock
Clearing Agency
(Euro Clear) Dividend Exchange
(NYSE)

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 ADVANTAGES OF ADR/GDR:

• Can be listed on any of the overseas stock exchanges/OTC/Book

entry transfer system.

• Freely transferable by non-resident.

• They can be redeemed by ODB.

• The ODB should request DCB to get the corresponding underlying

shares released in favor of non resident of investors. (Shareholders
of issuing companies).
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 TYPES OF ADR:

SPONSORED ADR UNSPONSORED ADR

Issued with cooperation of the Issued by – broker/dealer or
company whose stock will depository bank without the
underlie the ADR involvement of company whose
stock underlies the ADR

Comply with regulatory reporting. No regulatory reporting

Listing on international Trade on OTC market

Stock Exchanges allowed.

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 ADVANTAGES OF ADR/GDR:

• Can be listed on any of the overseas stock exchanges/OTC/Book

entry transfer system.

• Freely transferable by non-resident.

• They can be redeemed by ODB.

• The ODB should request DCB to get the corresponding underlying

shares released in favor of non resident of investors. (Shareholders
of issuing companies).
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GLOBAL DEPOSITORY RECEIPTS:

• A bank certificate issued in more than one country for shares in

a foreign company. The shares are held by a foreign branch of
an international bank. The shares trade as domestic shares, but
are offered for sale globally through the various bank branches.

• A financial instrument used by private markets to raise capital

denominated in either U.S. dollars or Euros.

• The voting rights of the shares are exercised by the Depository

as per the understanding between the issuing company and the
GDR holders.
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 TYPES OF ADR:

SPONSORED ADR UNSPONSORED ADR

Issued with cooperation of the Issued by – broker/dealer or
company whose stock will depository bank without the
underlie the ADR involvement of company whose
stock underlies the ADR

Comply with regulatory reporting. No regulatory reporting

Listing on international Trade on OTC market

Stock Exchanges allowed.

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 DIFFERNCE BETWEEN ADR & GDR
ADR GDR
American depository receipt (ADR) is Global depository receipt (GDR) is
compulsory for non –us companies to compulsory for foreign company to
trade in stock market of USA. access in any other country’s share
market for dealing in stock.
ADRs can get from level 1 to level III. GDRs are already equal to high
preference receipt of level II and level
III.
ADRs up to level –I need to accept only GDRs can only be issued under rule 144
general condition of SEC of USA. A after accepting strict rules of SEC of
USA .
ADR is only negotiable in USA . GDR is negotiable instrument all over the
world

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WHICH INDIAN COMPANIES HAVE ADR & GDR

COMPANY ADR GDR

Bajaj Auto No YES
Dr Reddy’s YES YES
HDFC Bank YES YES
ICICI bank YES YES
ITC NO YES
L&T NO YES
MTNL YES YES
HINDALCO NO YES

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WHICH INDIAN COMPANIES HAVE ADR & GDR
COMPANY ADR GDR
INFOSYS YES YES
TECHNOLOGIES
TATA MOTORS YES NO
PATNI YES NO
COMPUTERS
SBI
TATA MOTORS NO
YES YES
NO
WIPRO YES YES
VSNL YES YES

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WHAT IS ASBA IS IPO?

❖ASBA abbreviated as Application Supported by Blocked

Amount is an IPO application process developed by SEBI.

❖It is an application containing an authorization to block the

application money in the bank account, for subscribing to an
IPO issue.

❖You cannot use the blocked amount for any purpose.

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 WHAT IS ASBA IS IPO?

• The amount remains blocked in your bank account for the IPO
application.
• Earn interest on the earmarked funds.
• The amount is debited only when the shares are allotted to you.
• No need to wait for your refund cheques/ ECS credits.
• This facility is absolutely FREE.

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 WHAT IS FCCB?

• Foreign Currency Convertible Bond is a type of convertible

bond issued in a currency different than the issuer's domestic
currency.

• It is a quasi-debt instrument which are attractive to both investors

and issuers. The investors receive the safety of guaranteed
payments on the bond and are also able to take advantage of any
large price appreciation in the company's stock.

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WHAT IS FCCB?
• Where the amount of fund to be raised is to be USD 20 million or
less the minimum maturity period should be not less than three
years.

• If the amount to be raised is more than USD 20 million and upto

500 million the minimum maturity period should not be less than
5 years.

• FCCBs upto USD 20 million can also carry a call and put option
provided the option shall not be exercised until minimum
maturity period of 3 years has expired

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WHAT IS FCCB?

➢An Indian company or a body corporate, created by an

Act of Parliament may issue FCCBs not exceeding US
$ 500 million in any one financial year to a person
resident outside India under the automatic route,
without the approval from Government or the Reserve
Bank.

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INDIAN DEPOSITORY RECEIPTS (IDR)

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 • As per the definition given in the Companies (Issue of Indian Depository Receipts)
Rules, 2004, IDR is an instrument in the form of a Depository Receipt created by the
Indian depository in India against the underlying equity shares of the issuing
. company.

. • In an IDR, foreign companies would issue shares, to an Indian Depository (say

National Security Depository Limited – NSDL), which would in turn issue depository
. receipts to investors in India.

• The actual shares underlying the IDRs would be held by an Overseas Custodian, which
shall authorize the Indian Depository to issue the IDRs.
.

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 Features of IDRs
• Foreign bank with branches in India
Overseas Custodian • Requires approval from Finance Ministry and has to be registered with SEBI

• IDR issue will require approval from SEBI and application can be made
Approvals for the issue for this purpose 90 days before the issue opening date

• These IDRs would be listed on stock exchanges in India and would

Listing be freely transferable

• The issue during a particular year should not exceed 15% of the paid
Extent of Issue up capital plus free reserves

• IDRs would not be redeemable into underlying equity shares before

Redemption one year from date of issue

• IDRs would be denominated in Indian rupees, irrespective of the

Denomination denomination of underlying shares

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 Why do you need an IDR?
• An IDR is meant to diversify your holdings across regions to free
you from a “region bias” or the risk of a portfolio getting too
concentrated in the home market.

• You need to study the firm’s financials before you buy its IDR.

• However, since these IDRs are listed, bought and sold on the Indian
markets, the impact of global markets and exchange-rate risks are
reduced, though not totally eliminated.

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Eligibility Criteria
TURNOVER
CAPITAL Average turnover of
Paid up capital and $500 million during
free reserve of at the last 3 years
least $100 million

PROFITABILITY
Profitable in the last
DEBT-EQUITY RATIO
5 years and paid
dividends of at least The pre-issue debt
10% each year during equity ratio should not
this period be more than 2:1

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Parties Involved & their Roles
• Intends to raise capital in India
Issuer • Must be listed in its home country
Company
• Indian entity appointed by the issuer
Domestic company and registered as a custodian of
securities with SEBI
Depository • Issues IDRs and serves as the trustee on
Parties behalf of the shareholders

Involved • Holder of equity shares on behalf of the

Overseas Domestic depository
Custodian • Appointed by Domestic Depository

• Provides services to the issuer company, the

Registrar & Domestic Depository and the IDR holders
Transfer • Services - Keeping records of the IDR holders,
(R&T) Agent coordinating corporate actions, and handling
investor grievances

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What is the security of the underlying shares?
Where will the receipts be deposited?
• The underlying shares for IDRs will be deposited with
an overseas custodian who will hold the shares on
. behalf of a domestic depository.

• The domestic depository will accordingly issue receipts

to investors in India. Investors will get an entry in their
. Demat accounts reflecting their IDR holding.

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 Will Indian Investors get Equal
Rights as Shareholders?

Whatever benefits accrue to the

shares, by way of dividend,
rights, splits or bonuses will be
They can vote on EGM passed on to the IDR holders
resolutions through the also, to the extent permissible
overseas custodian. They can’t under Indian law
attend AGMs.
Indian investors have equivalent
rights as shareholders

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 PROS CONS

It provides enhanced Ambiguous

local branding and rationale behind
target business having an IDR
opportunities in India

It gives access to the

large Indian capital Too rigid
pool and creates regulatory
opportunities for frameworks
future fund raising

Provides a currency
for any acquisition in Possibility of
India which otherwise negative capital
would be possible only
through cash
flow

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BUY BACK OF SECURITIES:

The Corporate action where a company repurchases its

own shares from its existing shareholders

➢Buyback : Opposite of public issue of shares

✓ In a public issue, company sells its shares in the stock market

✓ In a Buyback, company offers to buy shares from the investors.

After buyback, those shares are extinguished.

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 Conditions for Buy-back
50 Maximum
Buy-back • <= 25% of (Paid-up capital + Free Reserves)
Limit

Debt to Equity
Ratio* • < 2:1

• Board Resolution would suffice if Buy-back <= 10% of (Paid

Approved by Special/ up capital + Free Reserves)
Board Resolution • Special Resolution required, if more than 10%

Cooling period# • 1 year from the date of expiry of buyback period

* Paid up capital & free reserve

# No offer of buy-back should be made by a company within a period of one year from the date of the
closure of the preceding offer of buy-back
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 Methods of Buyback

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Buyback

Open Market
Odd lot
Tender offer (Stock
exchange Buyback
Mechanism)
❖ Tender offer : Shareholders can tender their shares on a proportionate
basis
❖ Odd Lot Buyback : Provisions of buy-back through tender offer shall be
applicable
❖ Open Market: Shareholder can sell shares in the secondary markets

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 Common reasons for Buy-back
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❖To return surplus cash to shareholders

Issue of shares
❖Improve return on equity shares through
distribution of cash

❖Improve earnings per share (EPS) by reduction of

Company Shareholders shares (buy-back reduce the total number of
shares of the company)

❖Shareholders get option either to sell shares and

receive cash or not to sell shares and get an
Buyback of increase in percentage shareholding post
buyback without additional investment
shares

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Thank You

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