Capital Market - Primary

Capital Market
 The capital market is an important
constituent of the financial system.
 It is a market for long-term funds both Debt
and Equity. It covers both domestic and
overseas market.
 Deficit units seeking funds can directly
raise funds in the capital market without
any intermediation .However the same has
to be done within the defined rules and
regulations of the market.
CONTINUED
 Capital market has two segments. The
Primary market is for new issue of
securities and the Secondary market
is the market for second hand
securities.
 It is a highly regulated market to
ensure investor protection. SEBI is
the regulating authority.
Continued….

 The Companies Act 2013 , SEBI Act

1992 ,Securities Regulation Act 1956 ,
Depository Act 1996 and RBI Rules
and Regulations represent the
regulatory framework of Capital
Market.
 CAPITAL MARKET

PRIMARY SECONDARY
MARKET MARKET
Functions of Capital market:
 It provides a mechanism to mobilize
long term funds (both ownership and
debt capital) for long term use.
 It helps to raise risk capital through
issue of Equity and quasi equity
instruments.
 Improve the efficiency of capital
allocation in the economy through a
competitive pricing mechanism.
Continued…
 It provides a platform for buying and
selling of second hand corporate
securities and thereby providing
much needed liquidity for the
securities.

 Lower the cost of transaction and

information.
Date Event
July ,1875 Native Share and Stock Brokers’ Association with
318 members were formed in Bombay 9 latter on
became Bombay Stock Exchange (BSE)
1925 The Bombay Securities Contract Control Act
comes into force.
January ,1986 The BSE Sensex was launched as the first stock
market index with 1978-79 as the base year.
April ,1988 The Securities and Exchange Board of India
(SEBI) was set up.
January , 1992 SEBI was given statutory Powers.
May,1992 The Capital Issues Control Act 1947 is repealed
Date Event
Nov. 1994 National Stock Exchange -NSE , the capital market
segment starts operation. For the first time screen
based trading starts.
April ,1996 NIFTY is borne and National Securities Clearing
Corporation Ltd (NSCCL) ,India’s first clearing
corporation was set up.
Nov.1996 The national Securities Depository Limited is
created
May,1997 The BSE introduces screen based trading.
Feb.2000 Internet trading starts in NSE.
June 2000 The BSE and NSE introduce derivatings trading in
India.
July 2001 SEBI bans carry forward and introduces rolling
Need for Investor Protection
 Investors in corporate securities can
include institutional and non-
institutional (households) investors.
 The individual investors who form the
largest segment of investors often do
not have knowledge to judge a
company’s offer and can be easily
misled. So they require protection by
law.
 SEBI
 The SEBI is the regulatory authority in
India established under Section 3 of
SEBI Act to protect the interests of
the investors in securities and to
promote the development of, and to
regulate, the securities market and for
matters connected therewith and
incidental thereto
Role of SEBI
1. Protecting the interests of investors
in securities and promoting and
regulating the development of the
securities market
2. Regulating the business in stock
exchanges.
3. Registering and regulating the
working of stock brokers, sub–
brokers, share transfer agent etc.
continued
4. Registering and regulating the
working of venture capital funds,
collective investment schemes (like
mutual funds) etc
5. Promoting investor’s education and
training intermediaries.
6. Promoting and regulating self-
regulatory organizations
Continued…
7. Prohibiting fraudulent and unfair trade
practices
8. Calling for information from,
undertaking inspection, conducting
inquiries and audits of the stock
exchanges, intermediaries, self –
regulatory organizations, mutual funds
and other persons associated with the
securities market.
PRIMARY CAPITAL MARKET
A Company’s Growth timeline

Stage 4 • 4.Follow-on Public Offering

Stage 3 • 3.Listing in Stock Exchange

•2.Public Offering
Stage 2
Public shareholding starts.
Stage1 1.Formation
With promoters’ contribution, Angel
Investor or VCF Funding and Bank
Loans
PRIMARY CAPITAL MARKET
 It is also called new issue market.
 Whenever a new issue of any financial
security is made to raise capital it is
done in primary market.
 The issue of security may be by
companies or government and may be
sold to public at large or a group of
institutional buyers or to existing
members.
 It is a virtual market where transactions
are done online.
Functions of Primary Market
 It provides a market or a mechanism
to raise fresh funds by issuing new
securities by companies.
 It helps channelization of savings
directly to capital formation without
any intermediation.
 It lowers cost of transactions and
information.
 It provides a mechanism for price
discovery .
 Public Offering of Securities
 Section 67 of the Companies Act 2013
provides that where the offer or
invitation to subscribe for shares or
debentures is made to 50 or more
persons , then such an offer or
invitation shall be deemed to be a
public offering and shall have to
comply with all provisions of the Act
as well as SEBI guidelines.
 Public Issue of Securities

By an old and
By a New and listed company-
Unlisted Company- Further Public
Initial Public Offer Offer
(IPO) (FPO)
 Primary Issues

Public Rights Selective

Issues Issues Placement
Public Issue
A. Initial Public Offering (IPO) –
A. A first time offer of sale of securities
by an unlisted company.

B. Follow-on Public Offering (FPO) –

A. An offer of sale of securities by an
existing listed company
 A. Initial Public Offering (IPO)
 Public Issue means an invitation by a
company to the public to subscribe to
the securities offered through a
prospectus.

 Offer for Sale means offer of

securities by existing shareholders of
an unlisted company to the public for
subscription , through an offer
document.
Rights Issue
 An offer of sale of securities to
existing shareholders in terms of
provision of Sec.81 of Company Act.

 This right of shareholders is called

pre-emptive right.
3. Selective Placement
 Private Placement :- Placement with
selected people or to financial
institutions.
 Preferential Issue: Allotment of shares
to some select group of persons in terms
of SEBI guidelines.
 Qualified Institutional Placement
(QIP): Placement of securities by listed
company with qualified institutional
investors registered with SEBI.
INITIAL PUBLIC OFFER (IPO)
Initial Public Offer (IPO)
 -“initial public offer” means an offer of
specified securities by an unlisted
issuer to the public for subscription
and includes an offer for sale of
specified securities to the public by
any existing holders of such specified
securities in an unlisted issuer”- SEBI
 So an IPO can be
1. Fresh Issue of Securities
2. An offer for Sale
Continued…
 IPO enables listing and trading of the
issuer’s securities.
 The SEBI has laid down eligibility
norms of entities raising funds
through an IPO and an FPO.
Entities not eligible to make
an initial public offer

1. if the issuer, any of its promoters,

promoter group or directors or
selling shareholders are debarred
from accessing the capital market by
the SEB
2. if the issuer or any of its promoters
or directors is a willful defaulter.
Continued….
3. if any of its promoters or directors is
a fugitive economic offender.

4. if there are any outstanding

convertible securities or any other
right which would entitle any person
with any option to receive equity
shares of the issuer
 ENTRY NORMS:
1. Profitability Route: An issuer shall be
eligible to make an initial public offer
only if
I. Net tangible assets of at least Rs.3 Crores
in each of the preceding three full years ,
of which not more than 50% is held in
monetary assets
II. it has an average operating profit of at
least fifteen crore rupees during the
preceding three years.
continued…
IV. it has a net worth of at least one
crore rupees in each of the
preceding three full years
V. if it has changed its name within the
last one year, at least fifty per cent.
of the revenue ,
VI. for the preceding one full year has
been earned by it from the activity
indicated by its new name.
continued…
2. QIB Route: An issuer not satisfying the
condition stipulated in sub-regulation
(1) shall be eligible to make an initial
public offer only if the issue is made
through the book-building process and
the issuer undertakes to allot at least
seventy five per cent. of the net offer to
qualified institutional buyers and to
refund the full subscription money if it
fails to do so.
 General conditions:
 It has made an application to one or
more stock exchanges to seek an in-
principle approval for listing of its
specified securities on such stock
exchanges and has chosen one of them
as the designated stock exchange

 It t has entered into an agreement with a

depository for dematerialisation of the
specified securities already issued and
proposed to be issued
 All its specified securities held by the
promoters are in dematerialised form prior to
filing of the offer document;
 All its existing partly paid-up equity shares
have either been fully paid-up or have been
forfeited;
 It has made firm arrangements of finance
through verifiable means towards seventy five
per cent. of the stated means of finance for a
specific project proposed to be funded from
 The issue proceeds, excluding the amount to
be raised through the proposed public issue or
through existing identifiable internal accruals.
 Merchant Bankers :
 Merchant Banker is a specialized
financial institutions recognized in
India by SEBI as the only authorized
institution to undertake management
of a public issue of securities by an
issuing company.
Registration of Merchant
banker and their Roles

 (a) Category I, that is—

 (i) to carry on any activity of the issue
management, which will, inter alia,
consist of preparation of prospectus and
other information relating to the issue,
determining financial structure, tie up of
financiers and final allotment and refund
of the subscriptions; and
Continued….
 (b) Category II, that is to act as
adviser, consultant, co-manager,
underwriter, portfolio manager;
 (c) Category III, that is to act as
underwriter, adviser, consultant to an
issue;
 (d) Category IV, that is to act only as
adviser or consultant to an issue.
Methods of Marketing New Issue of
Corporate Securities:
 1. Pure Prospectus Method:

 By means of an issue of a prospectus

(offer document).

 Prospectus contains all information about

the company ,its promoters ,project ,
financial structure and issue details.

 It is the most popular method of making

public issue of securities by corporate
enterprises.
 2. Offer for Sale Method:

 Under this method, the sale of securities

takes place in two stages.

 In the first stage, the issuer company makes

an en-block sale of securities to
intermediaries such as Venture Capitalist
,Financial Institutions at an agreed price.

 Under the second stage, the securities are re-

sold to ultimate investors at a market-related
price
 3. Private Placement Method: A method of
marketing of securities whereby the issuer
makes the offer of sale of individuals and
institutions privately without the issue of a
prospectus is known as Private Placement
Method.

 4. Rights Issue Method : Where the shares of

an existing company are offered to its
existing shareholders. It takes the form of
rights issue. Under this method, the existing
company issues shares to its existing
shareholders in proportion in the number of
shares already held by them.
 Raising Funds Overseas by
Indian Companies
 American Depository Receipt (ADR) is
a certified negotiable instrument issued
by an American bank suggesting the
number of shares of a foreign company
that can be traded in U.S. financial
markets.
 American Depository Receipts provide
US investors with an opportunity to trade
in shares of a foreign company
 he domestic company, already listed in
its local stock exchange, sells its shares
in bulk to a U.S. bank to get itself listed
on U.S. exchange.
 The U.S. bank accepts the shares of the
issuing company. The bank keeps the
shares in its security and issues
certificates (ADRs) to the interested
investors through the exchange.
ADR PROCESS

 Investors set the price of the ADRs through

bidding process in U.S. dollars. The buying
and selling in ADR shares by the investors
is possible only after the major U.S. stock
exchange lists the bank certificates for
trading.
 The U.S. stock exchange is regulated by
Securities Exchange Commission, which
keeps a check on necessary compliances
that need to be complied by the foreign
company.
continued
 Investors set the price of the ADRs through
bidding process in U.S. dollars. The buying
and selling in ADR shares by the investors
is possible only after the major U.S. stock
exchange lists the bank certificates for
trading.
 The U.S. stock exchange is regulated by
Securities Exchange Commission, which
keeps a check on necessary compliances
that need to be complied by the foreign
company.
Global Depository Receipt (GDR)
 GDRs are the global equivalent of the
original American depositary
receipts (ADR).
 It is a negotiable instrument which is
denominated in some freely
convertible currency. GDRs for
Citizens of any country.
 GDRs enable a company, the issuer,
to access investors in capital
markets outside of its home country.
continued
 Several international banks issue GDRs,
such as
 JPMorgan Chase,
 Citigroup,
 Deutsche Bank,
 The Bank of New York Mellon.
 GDRs are often listed in the
 Frankfurt Stock Exchange,
 Luxembourg Stock Exchange, and
 the London Stock Exchange,