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Module II
Meaning of Primary
Market
Functions of Primary
Market
Origination : Origination refers to the work of investigation, analysis and
processing of new project proposals. Origination begins before an issue is
actually floated in the market. The function of origination is done by merchant
bankers who may be commercial banks, all India financial institutions or private
firms.
Underwriting: When a company issues shares to the public it is not sure that the
whole shares will be subscribed by the public. Therefore, in order to ensure the full
subscription of shares (or at least 90%) the company may underwrite its shares or
debentures.
The act of ensuring the sale of shares or debentures of a company even before
offering to the public is called underwriting. It is a contract between a company
and an underwriter (individual or firm of individuals) by which he agrees to
undertake that part of shares or debentures which has not been subscribed by the
public. The firms or persons who are engaged in underwriting are called
underwriters.
Distribution
This is the function of sale of securities to ultimate investors. This service is
performed by brokers and agents. They maintain a direct and regular contact with
the ultimate investors.
Methods of Determination of
Prices of New Shares
Equity offerings by companies are
offered to the investors in two forms
Book-building Method
Under this method, the company does not price the
securities in advance. Instead, it offers the investors an
opportunity to bid collectively. It then uses the bids to arrive
at a consensus price.
All the applications received are arranged and a final offer
price (known as cut off price) is arrived at. Usually the cut off
price is the weighted average price at which the majority of
investors are willing to buy the securities.
In short, book building means selling securities to investors
at an acceptable price with the help of intermediaries called
Book-runners. It involves sale of securities to the public and
institutional bidders on the basis of predetermined price
range or price band. The price band cannot exceed 20% of
the floor price.
The floor price is the minimum price at which bids can be
made by the investors. It is fixed by the merchant banker in
consultation with the issuing company. Thus, book building
refers to the process under which pricing of the issue is left
C. Private Placement of
Private placement isSecurities
the issue of securities of a company
D. Rights Issue
Right issue is a method of raising funds in the market by an
existing company. Under this method, the existing company
issues shares to its existing shareholders in proportion to the
number of shares already held by them. Thus a right issue is the
issue of new shares in which existing shareholders are given preemptive rights to subscribe to the new issue on a pro-rata basis.
According to Section 81 (1) of the Companies Act, when the
company wants to increase the subscribed capital by issue of
further shares, such shares must be issued first of all to existing
shareholders in proportion of their existing shareholding. The
existing shareholders may accept or reject the right. Shareholders
who do not wish to take up the right shares can sell their rights to
another person. If the shareholders neither subscribe the shares
nor transfer their rights, then the company can offer the shares to
public.
Rights Issue
A company making right issue is required to send a
circular to all existing shareholders. The circular should
provide information on how additional funds would be
used and their effect on the earning capacity of the
company. The company should normally give a time limit
of at least one month to two months to shareholders to
exercise their rights before it is offered to the public. No
new company can make right issue.
Promoters offer right issue at attractive price often at a
discount to the market price due to a variety of reasons.
The reasons are:
(a) they want to get their issues fully subscribed to,
(b) to reward their shareholders,
(c) it is possible that the market price does not reflect a
shares true worth or that it is overpriced,
(d) to increase their stake in the companies so as to avoid
preferential allotment.
Other Methods
3. Offer to the employees: Now a days companies
issue shares on a preferential basis to their
employees (including whole time directors). This
attracts, retains and motivates the employees by
creating a sense of belonging and loyalty. Generally
shares are issued at a discount. A company can
issue shares to their employees under the following
two schemes:
(a) Employee stock option scheme and
(b) Employee stock purchase scheme.
4. Offer to the creditors: At the time of
reorganization of capital, creditors may be issued
shares in full settlement of their loans.
5. Offer to the customers: Public utility
Merchant Bankers
Depository
Brokers
Bankers
Underwriter
Primary Market
Players..
Merchant Bankers
When a company approaches the public for funds,
merchant bankers manage the process of public
issue. They perform in the capacity of issue
managers, lead managers and co-managers.
Underwriters
Underwriters subscribe to a certain amount of
capital in the issue. They have to fill the gap, if
any, due to the failure of subscription as
planned.
Primary Market
Players..
Brokers
They act as intermediaries in purchase and sale of
securities in the primary and secondary markets.
They have a network of sub brokers spread
throughout the length and breadth of the country.
Bankers:
Some commercial banks act as collecting agents
and some act as co-ordinating bankers. Some
bankers act as merchant bankers and some are
brokers. They play an important role in transfer,
transmission and safe custody of funds.
Primary Market
Players..
Depositories
A bank or company which holds securities deposited by others,
and where exchanges of these securities take place is defined as a
depository. It can also be defined as an organization where the
securities of an investor are held in electronic form, at the request
of the investor through the medium of a Depository Participant.
A depository can be compared to a bank for shares. Just as a bank
holds cash in your account and provides all services related to the
transaction of cash, a depository holds securities in electronic
form and provides all services related to transaction of shares /
debt instruments.
A depository interacts with clients through a Depository
Participant (DP) with whom he client has to maintain a Demat
Account.
SEBI GUIDELINES
IPO & Primary Market
Company
Merchant bankers
Underwriters
Stock Broker & Sub-broker to the issue
Banker to the issue
Registrar to the issue & Share transfer agent
Investors protection & Education
Venture Capital
Foreign Institutional Investors (FII)
Initial Public Offering & Primary Market- SEBI (Disclosure & Investors
Protection) Rules and Regulation, 24th Feb., 2009.
1.
2.
3.
4.
5.
6.
1.
: RS. 1 CRORES
12.
Up to 50 crores
50 to 100 crores
Three
four
five
Above 400
GRANT
OF
CERTIFICATE
OF
A bank can operate as banker to the issue only after obtaining a certificate of
registration from SEBI. It considers past experience, nature, size of bank.
Certificate of registration is granted if it satisfies :- The applicant has necessary infrastructure, office space, equipment, data
processing and manpower.
Applicant is scheduled bank.
Application fees is paid i.e. Rs 2.5 lakh for 1-2 years from date of initial
registration and Rs. 1 lakh for 3rd year.
Banker to the issue should record in the statement the agreement with issuing
company, submission of daily statements, furnishing the information to sebi i.E.
Details of issue, no. Of applicants and details of application money, refund to the
investors. Inspection by RBI.
IPO
APPROVAL OF BOD
APPOINTMENT OF LEAD MANAGERS
APPOINTMENT OF OTHER INTERMEDIARIES :
- CO-MANAGERS AND ADVISORS
- UNDERWRITERS
- BANKERS
- BROKERS AND PRINCIPAL BROKERS
- REGISTRARS
COLLECTIONS OF APPLICATIONS :
The statutory announcement specifies when the
subscription would open, when it would close, and the
banks where the applications can be made. During the
period the subscription is kept open, the bankers will
collect the applications on behalf of the company.
PROCESSING OF APPLICATIONS : Scrutinizing of the
applications is done.
BOOK BUILDING
Book building means a process undertaken to elicit demand
and to assess the price for determination of the quantum or
value of specified securities or Indian depository receipts,
as the case may be.
The book building process in India is very transparent. All
investors including small investors can see on an hourly
basis where the book is being built before applying.
According to this method, share prices are determines on
the basis of real demand for the shares at various price
levels in the market.
Pricing
Demand
Payment
3. The issuer company is required to enter into an agreement with one or more of
the stock exchange(s) which have the requisite system of on-line offer of
securities. The agreement would cover inter-alia, the rights, duties,
responsibilities and obligations of the company and stock exchange (s) inter se.
The agreement may also provide for a dispute resolution mechanism between
the company and the stock exchange.
The company may also apply for listing of its securities on an exchange other than
the exchange through which it offers its securities to public through the on-line
system.
4. The lead merchant banker shall act as the lead book runner. In case the issuer
company appoints more than one merchant banker,the names of all such
merchant bankers who have submitted the due diligence certificate to SEBI,
may be mentioned on the front cover page of the prospectus. A disclosure to the
effect that the investors may contact any of such merchant bankers, for any
complaint pertaining to the issue is required to be made in the prospectus, after
the risk factors.
5. The lead book runner/issuer may designate, in any manner, the other merchant bankers if
the inter-se allocation of responsibilities amongst the merchant bankers is disclosed in the
prospectus on the page giving the details of the issue management team and a coordinator has been appointed amongst the lead book runners, for the purpose of coordination with SEBI. However the names of only those merchant bankers who have
signed the inter-se allocation of responsibilities would be mentioned in the offer
document on the page where the details of the issue management team is given.
6. The primary responsibility of building the book is of the lead book
runner. The book runner(s) may appoint those intermediaries who are
registered with SEBI and who are permitted to carry on activity as an
underwriter as syndicate members. The book runner(s)/syndicate
members shall appoint brokers of the exchange, who are registered
with SEBI, for the purpose of accepting bids, applications and placing
orders with the company and ensure that the brokers so appointed are
financially capable of honouring their commitments arising out of
defaults of their clients/investors, if any. However, in case of application
supported by blocked amount, self certified banks shall accept and
upload the details of such application in electronic bidding system of
the stock exchange.
7. The brokers, and self certified syndicate banks accepting applications and
application monies, are considered as bidding/collection centres. The broker/s
so appointed, shall collect the money from his/their client for every order
placed by him/them and in case the client/investors fails to pay for shares
allocated as per the guidelines, the broker shall pay such amount.
8. In case of applications supported by blocked amount, the self certified
syndicate banks shall follow the procedure specified by SEBI in this regard.
The company shall pay to the broker/s/self certified syndicate banks a
commission/fee for the services rendered by him/them. The exchange shall
ensure that the broker does not levy a service fee on his clients/investors in lieu
of his services.
The draft prospectus containing all the disclosures except that of price and the
number of securities to be offered to the public shall be filed by the lead
merchant banker with sebi. The total size of the issue shall be mentioned in the
draft prospectus.
9. The red herring prospectus shall disclose, either the floor price of the securities offered
through it or a price band along with the range within which the price can move, if any.
However, the issuer may not disclose the floor price or price band in the red herring
prospectus if the same is disclosed in case of an initial public offer, at least two working
days before the opening of the bid and in case of a further public offer, at least one
working day before the opening of the bid, by way of an announcement in all the
newspapers in which the pre-issue advertisement was released by the issuer or the
merchant banker; further, the announcement shall contain the relevant financial ratios,
computed for both upper and lower end of the price band and also a statement drawing
attention of the investors to the section titled basis of issue price in the offer
document.
Where the issuer opts not to make the disclosure of the price band or floor price in the redherring prospectus in terms of the foregoing proviso, the following shall be additionally
disclosed in the red-herring prospectus:
a) A statement that the floor price or price band, as the case may be, shall be disclosed
atleast two working days (in case of an initial public offer) and atleast one working day
(in case of a further public offer) before the opening of the bid;
b) A statement that the investors may be guided in the meantime by the secondary
market prices in case of public offer;
c) Names and editions of the newspapers where the announcement of the floor price or
price band would be made;
d) Names of websites (with address), journals or other media in which the said
announcement will be made. Where the issuer decides to opts for price band instead of
floor price, the lead book runner shall ensure compliance with the following conditions:
(A) the cap of the price band should not be more than 20% of the floor
of the band; i.E., Cap of the price band shall be less than or equal to
120% of the floor of the price band.
(B) the price band can be revised during the bidding period in which
case the maximum revision on either side shall not exceed 20% i.E
floor of price band can move up or down to the extent of 20% of
floor of the price band disclosed in the red herring prospectus and
the cap of the revised price band will be fixed in accordance with
clause (a) above;
(C) any revision in the price band shall be widely disseminated by
informing the stock exchanges, by issuing press release and also
indicating the change on the relevant website and the terminals of
the syndicate members.
(D) 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 working days.
(E) the manner in which the shortfall, if any, in the project financing,
arising on account of lowering of price band to the extent of 20%
will be met shall be disclosed in the red herring prospectus. It shall
also be disclosed that the allotment shall not be made unless the
financing is tied up.
10. In case of appointment of more than one lead merchant banker or book
runner for book building, the rights, obligations and responsibilities of each
should be delineated. In case of an under subscription in an issue, the
shortfall shall have to be made good by the book runner(s) to the issue
and the same shall be incorporated in the inter se allocation of
responsibility as provided in the regulations.
11. The issuer company shall circulate the application forms to the brokers.
12. The pre-issue obligations and disclosure requirements shall be applicable
to issue of securities through book building unless stated otherwise in
these regulations.
13. The book runner(s) and the issuer company shall determine the issue
price based on the bids received through the syndicate members and
self certified syndicate banks.
14. Retail individual investors may bid at cut off price instead of their
writing the specific bid prices in the bid forms.
15. On determination of the price, the number of securities to be offered
shall be determined i.E. Issue size divided by the price which has been
determined.
16. Once the final price (cut-off price) is determined all those bidders whose
bids have been found to be successful shall become entitle for allotment of
securities.
17. No incentive, whether in cash or kind, shall be paid to the investors who
have become entitled for allotment of securities.
18. The broker may collect an amount to the extent of 100% of the application
money as margin money from the clients/investors before he places an order on
their behalf. The margin collected shall be uniform across all categories of
investors.
19. Bids for securities beyond the investment limit prescribed under relevant laws
shall not be accepted by the syndicate members/brokers from any category of
clients/investors.
20. The lead book runner may reject a bid placed by a qualified institutional buyer
for reasons to be recorded in writing provided that such rejection shall be made
at the time of acceptance of the bid and the reasons therefor shall be disclosed to
the bidders. Necessary disclosures in this regard shall also be made in the offer
document.
21. On determination of the entitlement, the information regarding the same i.E.
The number of securities which the investor becomes entitled shall be intimated
immediately to the investors.
22. The final prospectus containing all disclosures as per these guidelines
including the price and the number of securities proposed to be issued shall
be filed with the registrar of companies.
23. Arrangement shall be made by the issuer for collection of the applications
by appointing mandatory collection centres as per these regulations.
24. The bidding terminals shall contain a online graphical display of demand
and bid prices updated at periodic intervals not exceeding 30 minutes. The
book running lead manager shall ensure the availability of adequate
infrastructure with syndicate members for data entry of the bids in a timely
manner.
25. The investors who had not participated in the bidding process or have not
received intimation of entitlement of securities may also make an application.
(G) the bidding terminals shall contain an online graphical display of demand and bid prices
updated at periodic intervals, not exceeding thirty minutes.
(H) at the end of each day of the bidding period, the demand including allocation made to
anchor investors, shall be shown graphically on the bidding terminals of syndicate
members and websites of recognised stock exchanges offering electronically linked
transparent bidding facility, for information of public.
(I) the retail individual investors may either withdraw or revise their bids until finalization
of allotment.
(J) the issuer may decide to close the bidding by qualified institutional buyers one day prior
to the closure of the issue subject to the following conditions:
(I) bidding shall be kept open for a minimum of three days for all categories of applicants;
(Ii) disclosures are made in the red herring prospectus regarding the issuers decision to
close the bidding by qualified institutional buyers one day prior to closure of issue.
(K) the qualified institutional buyers and the non-institutional investors shall neither
withdraw nor lower the size of their bids at any stage .
(l) the identity of qualified institutional buyers making the bidding shall not be made public.
(M) the stock exchanges shall continue to display on their website, the data pertaining to
book built issues in an uniform format, inter alia giving category-wise details of bids
received, for a period of at least three days after closure of bids.
ALLOCATION/ALLOTMENT
100% OF THE NET OFFER TOPROCEDURE
THE PUBLIC THROUGH 100% BOOK BUILDING PROCESS
ANCHOR INVESTORS
Anchor investor means a qualified institutional buyer who
makes an application for a value of ten crores rupees or more
in a public issue made through the book building process in
accordance with these regulations:
APPLICATION SUPPORTED BY BLOCK AMOUNT
(ASBA)
ASBA is a process developed by the india's stock market
regulator SEBI for applying to IPO. In ASBA, an IPO
applicant's account doesn't get debited until shares are allotted
to them.
FPO
FOLLOW ON PUBLIC OFFER OR FURTHER PUBLIC
OFFER
A follow-on public offer (FPO) is an issuing of shares to
investors by a public company that is already listed on an
exchange. An FPO is essentially a stock issue of
supplementary shares made by a company that is already
publicly listed and has gone through the IPO process. FPOs are
popular methods for companies to raise additional equity
capital in the capital markets through a stock issue.
PRIVATE PLACEMENT
A private placement is the sale of securities to a relatively small number of select
investors as a way of raising capital.
Investors involved in private placements are usually large banks, mutual funds,
insurance companies and pension funds.
A private placement is different from a public issue, in which securities are made
available for sale on the open market to any type of investor.
Private placement of shares or convertible securities by listed issuer can be of two
types:
(I) Preferential allotment: When a listed issuer issues shares or convertible
securities, to a select Group of persons in terms of provisions of chapter VII of
SEBI (ICDR) regulations, it is called a Preferential allotment. The issuer is
required to comply with various provisions which inter alia Include pricing,
disclosures in the notice, lock in etc., In addition to the requirements specified in
the Companies act.
(II) Qualified Institutions Placement (QIP): when a listed issuer issues equity shares
or securities Convertible in to equity shares to qualified institutions buyers only in
terms of provisions of chapter VIII of SEBI (ICDR) regulations, it is called a QIP.
RIGHTS ISSUE
A rights issue is an issue of rights to a company's existing
shareholders that entitles them to buy additional shares
directly from the company in proportion to their existing
holdings, within a fixed time period.