primary market in india

8/13/2019 Primary Market in India

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Primary Market

Dr M Manjunath Shettigar


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Primary MarketIt is that market in which shares, debentures and other

securities are sold for the first time for collecting long-

term capital.

This market is concerned with new issues. Therefore,

the primary market is also called NEW ISSUE

MARKET.


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In this market, the flow of funds is from savers to borrowers(businesses). Hence, it helps in capital formation in theeconomy.

The money collected from this market is generally used bycompanies/businesses to set up new projects, expansion,

diversification, modernization of existing projects, mergersand takeovers, etc.


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Features of Primary Market

It Is Related With New Issues It Has No Particular Place

It Has Various Methods Of Float Capital: Following are the methodsof 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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Distinctions between new issuemarket and stock market (G&N 27)

Functional differenceOrganizational differenceNature of contribution to industrial finance


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Distinctions between new issuemarket and stock market (G&N 27)

However the two are interlinkedInvestors in primary market are encouraged

to do so, as secondary market assures themof liquidity of their investmentsCompanies which issue new shares, apply forlisting of these share in stock exchangesBoth are affected by common economic andnon-economic factors, both national andinternational


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Functions of new issue market

Main functions of new issue marketinclude:

OriginationUnderwriting

Distribution


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Functions of new issues market1. Origination

Origination refers to the work ofinvestigation, analysis and processing of newproject proposals

Company that wishes to issue additional stock orissue stock for the first time contacts IBF

Gets advice on the amount of issue & other details

Helps determine stock price for first-time issuesIBF assists with SEBI filings

Registration statementProspectus —summary of registration statement givento prospective investors


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Functions of new issues market

2. Underwriting stockIssuer and investment bank negotiate theunderwriting spread

The difference between the net price given to thecompany and the selling price to investors

The lead investment bank usually forms anunderwriting syndicate

Other IBFs underwrite a part of the securityofferingHelps spread the underwriting risk among IBFs


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Primary market instruments

Equity sharesPreference shares

Debentures


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A share is one unit into which the total share capital isdivided. Share capital of the company can be explained as

a fund or sum with which a company is formed to carryon the business and which is raised by the issue of shares.

Shares are the marketable instruments issued by thecompanies in order to raise the required capital.

These are very popular investments which are tradedevery day in the stock market and the value of the share atthe end of the day decides the value of the firm.

MEANING OF SHARES

& SHARE CAPITAL


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The shares which are issued by companies are of twotypes:

• Equity Shares • Preference Shares

TYPES OF SHARES


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Equity Shares are securities that represent ownership interest in

a company.

Equity share holders only get dividend after preferenceshareholders & debenture holders.

The returns on the equity shares are not at all fixed. It dependson the amount of profits made by the company.

The board of directors decides on how much of the dividendswill be given to equity share holders. Share holders can acceptor reject the offer during the annual general meeting.

Equity shareholders have the right to vote on any resolution

placed before the company.

EQUITY SHARES


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ADVANTAGES

• High Return • Easily Transferable. • These can be easily liquidated. • Right to vote • Right to choose the board of directors. • Equity share holders have the right to oppose any of the decisions taken

by the board of directors.

DISADVANTAGES

• High Risk • In worst cases less privilege given to equity share holders.


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These are other type of shares. The preference shares aremarket instrument issued by the companies to raise thecapital. Preference shares have the characteristics of bothequity shares and debentures. Fixed rate of dividends are

paid to the preference share holders, irrespective of the profits earned by the company.

PREFRENCE SHARE


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Preference shares are divided into:

• Cumulative & Non cumulative shares

• Redeemable & Non -redeemable

• Convertible & Non -convertible shares

• Participating and non -participating

TYPES OF PREFERENCE SHARES


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ADVANTAGES

• These yield fixed rate of returns • It’s a hybrid instrument having some of the characteristics ofdebentures and equity shares.

DISADVANTAGES

• They do not provide the investor with any of the votingrights.• If the company gets huge profits then they won’t get anyextra bonus.


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Instrument of debt executed by the company A certificate of loanCompany pays pre specified percentage of interest

Part of the company's capital structureDebentures are generally secured against thecompany’s assets Convertible debentures can be either fully orpartly converted into SharesConvertible debentures may carry a lower rate ofinterest

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DEBENTURES


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Types of Debentures

1. Non-convertible debentures (NCDs):NCDs are pure debentures without a feature ofconversion. They are repayable on maturity. Theinvestor is entitled for interest and repayment of

principal.2 . Fully-convertible debentures (FCDs):

FCDs are converted into shares as per the terms of theissue, with regard to the price and time of conversion.

3. Partly-convertible debenture (PCDs):The investor has advantages of both convertible andnon-convertible debenture blended into single

debenture.


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ADVANTAGES

1. Less costly (as interest paid on them is tax exempted)2. No ownership dilution3. Fixed payment of interest4. Reduced real obligation5. Debenture can be redeemed when company has surplus

funds.

DISADVANTAGES

1. Common people cannot buy debenture as they are of highdenominations.2. Obligatory payments3. Financial risk4. Cash outflows


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CONCLUSION

No doubt equity shares have both

advantages and disadvantages butthe fact is that equity shares arethe most sought financial

instruments for both investment orfor speculation.


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Participants in the new issuemarket

1. Merchant bankers2. registrars of the issue3. Bankers to the issue4. underwriters5. brokers6. advertising agencies, Printers, andmailing agencies


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Merchant BankersMerchant bankers, also known as Lead

Managers, are institutions appointed by issuingcompany to manage the IPO campaignTheir duties are:

1. drafting prospectus2. preparing the budget of expenses related to the issue3. suggesting appropriate timing of the public issue4. assisting in marketing the public issue successfully

5. advising the company in the appointment of registrars tothe issue, underwriters, brokers to the issue, advertisingagents, etc.6. directing various agencies involved in the public issue


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Merchant bankers

Commercial banks, subsidiaries ofcommercial banks, non-bankingcompanies act as Merchant bankers

SBI Capital Market LtdICICI Securities and Finance Company Ltd

DSP Financial Consultant Ltd

They are also called ‘Investment Bankers’


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Registrars to the issue

Registrars are the institutions appointed tohandle operational functions associatedwith an issue.

Printing applicationDespatch of applicationsCollection of applications

Collection of data and tabulationDespatch of certificatesRefund to the non-allottees


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Bankers to the issue

It is some commercial bankWhich accepts the responsibility ofcollecting the application money alongwith the application formThey charge a commission for the serviceMore than one banker can be there


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Underwriters

Underwriting is a contract by means ofwhich a person gives an assurance to theeffect that the former would subscribe tothe securities offered in the event of non-subscription by the person to whom theywere offered.

The person who assures is called anunderwriterThey get a commission


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Brokers

Brokers are members of the recognisedstock exchanges in different parts of thecountry.They can use the large body of theirclients to market the shares that are beingissued


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Other participants

advertising agencies, Printers, and mailingagencies


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ISSUE OF SHARES

Prospectus

Application

Repayment/

dividend

Allotment


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ISSUE OF SHARES

Detail of a Company & Shares in Prospectus.

90 % application is necessary

If excess applications are received then company issues shares by prorata basis

full amount can be called up by company at the time of application or itcan be paid up in installments also (calls)

share of the company may be issued in any of the following three ways:1. At par;2. At premium; and3. At discount.


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Issue of shares for consideration other than cash(For example: issue of shares to vendors, to promoters etc.)

Forfeiture of shares

Buy – Back of Shares

Right Shares

Redemption of preference shares/ Debenture

CONT….


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Methods of floating new issues

i) Public Issue (IPOs – Initial Public Offers)ii) Follow on Public offer (FPO)

iii) Offer For Sale (bought out deals)

iv) Private Placement

v) Right Issue vi) Qualified institutional placement (QIP)


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i) Public Issue (IPOs – Initial Public Offers)

New unlisted companies raising capital

No track record, no published financial data

Attract stringent SEBI regulations

Reputed merchant bankers help


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ii) Follow-on Public offer (FPO)

for further expansion, M & A activity

easy to collect money, for a company with healthyimage

through premium itself

but the risk of share price decrease is there


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iii) Offer For Sale (bought out deals)

Bulk selling to parties, such as merchant bankersThere can be multiple parties also (syndicate)

Investors buy in bulk after due diligence

1. Easy procuremetn of funds

2. Low cost

3. Useful for unfamiliar/ small firms

4. SEBI regulations can be bypassed

5. Low risk for investors too


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iv) Private Placement

This is for unlisted companies

Advantages

1. Cost effective

2. Time effective

3. Structure effectiveness

4. Access effective


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v) Right Issue

these are shares issued to the existing share holdersWho possess ‘pre -emptive right’ Shares are issued in some proportion

Advantages includelow cost of raising fundsno brokers and intermediaries


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vi) Qualified institutional placement (QIP)

These are for listed companies

Designated institutions like FIs like IDBI, IFCI, Banks,Mutual Funds, Venture Capital Funds, FIIs, etc

Good source in times of bad market conditions

primary market in india

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