ABC of Primary Market

7/29/2019 ABC of Primary Market

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Intricacies of Primary Market

BY: Dr. Neelam Tandon


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The different kinds of

issues which can bemade by an Indian

company in India


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(a) Public issue: When an issue / offer of

securities is made to new investors for

becoming part of shareholders family of the

issuer it is called a public issue. Public issue can be further classified into Initial

public offer (IPO) and Further public offer

(FPO).


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(i) Initial public offer (IPO): When an unlisted

company makes either a fresh issue of

securities or offers its existing securities for

sale or both for the first time to the public, it iscalled an IPO. This paves way for listing and

trading of the issuers securities in the Stock

Exchanges.


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(ii) Further public offer (FPO) or Follow on

offer: When an already listed company makes

either a fresh issue of securities to the public

or an offer for sale to the public, it is called aFPO.


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(b) Rights issue (RI): When an issue of

securities is made by an issuer to its existing

shareholders as on a particular date fixed by

the issuer (i.e. record date), it is called anrights issue. The rights are offered in a

particular ratio to the number of securities held

as on the record date.


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(c) Bonus issue: When an issuer makes an

issue of securities to its existing shareholders

as on a record date, without any consideration

from them, it is called a bonus issue. Theshares are issued out of the Companys free

reserve or share premium account in a

particular ratio to the number of securities held

on a record date.


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(d) Private placement: When an issuer

makes an issue of securities to a select group

of persons not exceeding 49, and which is

neither a rights issue nor a public issue, it iscalled a private placement.


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Types of Offer Documents

(ODs

(a)Offer document is a document which

contains all the relevant information about the

company, promoters, projects, financial details,

objects of raising the money, terms of theissue etc and is used for inviting subscription

to the issue being made by the issuer.


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OFFER DOCUMENT

Offer Document is called Prospectus in case of apublic issue or offer for sale and Letter of Offer incase of a rights issue.

Terms used for offer documents vary depending upon

the stage or type of the issue where the document isused. The terms used for offer documents are definedbelow:

(i) Draft offer document: is an offer document filed

with SEBI for specifying changes, if any, in it, before itis filed with the Registrar of companies (ROCs). Draftoffer document is made available in public domainincluding SEBI website, for enabling public to givecomments, if any, on the draft offer document.


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(ii) Red herring prospectus is an offer documentused in case of a book built public issue. Itcontains all the relevant details except that ofprice or number of shares being offered. It is filed

with RoC before the issue opens. (iii) Prospectus is an offer document in case of a

public issue, which has all relevant detailsincluding price and number of shares being

offered. This document is registered with RoCbefore the issue opens in case of a fixed priceissue and after the closure of the issue in case ofa book built issue.


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(iv) Letter of offeris an offer document in

case of a Rights issue and is filed with Stock

exchanges before the issue opens.

(v) Abridged prospectus is an abridgedversion of offer document in public issue and is

issued along with the application form of a

public issue. It contains all the salient features

of a prospectus.


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(vi) Abridged letter of offeris an abridgedversion of the letter of offer. It is sent to all theshareholders along with the application form.

(vii) Shelf prospectus is a prospectus which

enables an issuer to make a series of issueswithin a period of 1 year without the need of filinga fresh prospectus every time.

This facility is available to public sector banks/Public Financial Institutions.

(viii) Placement document is an offer documentfor the purpose of Qualified InstitutionalPlacement and contains all the relevant andmaterial disclosures.


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Pricing of an Issue

Indian primary market ushered in an era of freepricing in 1992. SEBI does not play any role inprice fixation. The issuer in consultation with themerchant banker on the basis of market demand

decides the price. The offer document contains fulldisclosures of the parameters which are taken into account by merchant Banker and the issuer fordeciding the price. The Parameters include EPS (

net profit/number of shares), PE (market price pershare * profit) multiple, return on net worth andcomparison of these parameters with peer groupcompanies.


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FIXED and BOOK BUILT

ISSUE

On the basis of Pricing, an issue can be furtherclassified into Fixed Price issue or Book Builtissue.

Fixed Price Issue: When the issuer at theoutset decides the issue price and mentions itin the Offer Document, it is commonly knownas Fixed price issue.

Book built Issue: When the price of an issueis discovered on the basis of demand receivedfrom the prospective investors at various pricelevels, it is called Book Built issue.


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BOOK BUILDING PROCESS

Book building is a process of price discovery.

The issuer discloses a price band or floor price

before opening of the issue of the securities

offered. On the basis of the demands receivedat various price levels within the price band

specified by the issuer, Book Running Lead

Manager (BRLM) in close consultation with the

issuer arrives at a price at which the securityoffered by the issuer, can be issued.


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PRICE BAND

The price band is a band of price within which

investors can bid. The spread between the

floor and the cap of the price band shall not be

more than 20%. The price band can berevised. If revised, the bidding period shall be

extended for a further period of three days,

subject to the total bidding period not

exceeding thirteen days.


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Working of Book Building

Process

Book building is a process of price discovery. A

floor price or price band within which the bids

can move is disclosed at least two working

days before opening of the issue in case of anIPO and atleast one day before opening of the

issue in case of an FPO. The applicants bid for

the shares quoting the price and the quantity

that they would like to bid at.


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After the bidding process is complete, the

cutoff price is arrived at based on the

demand of securities. The basis of Allotment is

then finalized and allotment/refund isundertaken.

The final prospectus with all the details

including the final issue price and the issue

size is filed with ROC, thus completing the

issue process. Only the retail investors have

the option of bidding at cutoff.


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CUT OFF OPTION

Cutoff option is available for only retailindividual investors i.e investors who areapplying for securities worth up to Rs1,00,000/ only. Such investors are required totick the cut

off option which indicates their

willingness to subscribe to shares at any pricediscovered within the price band. Unlike pricebids (where a specific price is indicated) whichcan be invalid, if price indicated by applicant islower than the price discovered, the cutoffbids always remain valid for the purpose ofallotment


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Categories of Investors

Investors are broadly classified under following

categories:

(i) Retail individual Investor (RIIs)

(ii) NonInstitutional Investors (NIIs)

(iii) Qualified Institutional Buyers (QIBs)


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Retail individual investor means an investor whoapplies or bids for securities for a value of not morethan Rs. 1,00,000.

Qualified Institutional Buyer shall mean:

a) a public financial institution as defined in section 4Aof the Companies Act, 1956;

b) a scheduled commercial bank;

c) a mutual fund registered with the Board;

d) a foreign institutional investor and subaccount

registered with SEBI,

other than a sub account which is a foreign corporateor foreign individual;


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e) a multilateral and bilateral development

financial institution;

f) a venture capital fund registered with SEBI;

g) a foreign venture capital investor registeredwith SEBI;

h) a state industrial development corporation;

i) an insurance company registered with theInsurance Regulatory and Development

Authority (IRDA);


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j) a provident fund with minimum corpus of Rs. 25

crores;

k) a pension fund with minimum corpus of Rs. 25

crores); l) National Investment Fund set up by resolution

no. F. No. 2/3/2005DDII dated November 23,

2005 of Government of India published in the

Gazette of India.

Investors who do not fall within the definition of

the above two categories are categorized as

NonInstitutional Investors


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Appointment Procedure

1. Meeting of Board of Directors

2. Appointing of Merchant Bankers-

Specialized financial Consultancy who looks

after Initial Public Offering3. Apponting of Registrar and transfer agent

done by Merchant Bankers

4. Banks- Appointed by Merchant Bankers

5. Appointing of Lawyer


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Real Procedure

6. Book issued by Merchant bankers and

submit it to SEBI which includes Reason of

Issuing, no of Shares, Financial Condition ofthe company, current Business, Management,

Growth in Sectors and Risk factor

7. Prospectus- Issued to stock Market and

registrars8. Printing Of Forms


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9. appointment of Brokers

10. Marketing & Advertising

11. Brokers Meeting in a Company

12. Road Shows or meetings13. IPO starts 3-7 days opened

14. IPO closed


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Post IPO

15. collection of Forms

16. Oversubscripttion or Undersubscripttion

17. Allotement Of shares

a. Pro data allotementb. lottery system

18. Issue of share certificate

a. Letter of allotement

b. regret Letter19. Refund cheque

20. Listing Of shares in NSE or BSE


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About Book Building

Book Building is basically a capital issuance

process used in Initial Public Offer (IPO) which

aids price and demand discovery. It is a

process used for marketing a public offer ofequity shares of a company.


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Cont--

It is a mechanism where, during the period for

which the book for the IPO is open, bids are

collected from investors at various prices,

which are above or equal to the floor price.The process aims at tapping both wholesale

and retail investors. The offer/issue price is

then determined after the bid closing date

based on certain evaluation criteria.


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The Process:

The Issuer who is planning an IPO nominates

a lead merchant banker as a 'book runner'.

The Issuer specifies the number of securities

to be issued and the price band for orders.The Issuer also appoints syndicate members

with whom orders can be placed by the

investors.

Investors place their order with a syndicatemember who inputs the orders into the

'electronic book'. This process is called

'bidding' and is similar to open auction.


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A Book should remain open for a minimum of 5

days.

Bids cannot be entered less than the floor

price.Bids can be revised by the bidder before the

issue closes.

On the close of the book building period the

'book runner evaluates the bids on the basis ofthe evaluation criteria which may include -

-Price Aggression

-Investor quality-


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The book runner and the company conclude

the final price at which it is willing to issue the

stock and allocation of securities.

Generally, the number of shares are fixed, theissue size gets frozen based on the price per

share discovered through the book building

process.


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Allocation of securities is made to the

successful bidders.

Book Building is a good concept and

represents a capital market which is in theprocess of maturing.


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Features of Fixed Price process (FPP) and Book Building

process (BBP)

Pricing

(FPP): Price at which the securities are

offered/allotted is known in advance to the

investor.(BBP) : Price at which securities will be

offered/allotted is not known in advance to the

investor. Only an indicative price range is

known.


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Cont--

Demand

(FPP): Demand for the securities offered is

known only after the closure of the issue

(BBP): Demand for the securities offered canbe known everyday as the book is built.

Payment

(FPP):Payment if made at the time of

subscripttion wherein refund is given afterallocation.

(BBP): Payment only after allocation.


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Reforms in Capital Market

Investing in mutual funds might become more

expensive, but retail investors will be assured

of a minimum number of shares in initial public

offers as market regulator SEBI hasannounced extensive changes in its rules for

MFs and IPOs.

It has also recommended to the government

tax benefits to equity MF investors under the

proposed Rajiv Gandhi Equity Savings

Scheme (RGESS), SEBI.


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In a major decision that could make it

expensive for investors to put money in mutual

funds, SEBI decided that any service tax

would be charged to ultimate investor, not tothe asset management company (AMC) as is

the practice at present.

Besides, the AMCs would be allowed to

charge additional expense ratio (the charge

levied by fund houses towards fund

management fees and other expenses) for

catering beyond a threshold limit in the smaller


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The various decisions also include allowing

mutual funds flexibility in using fund expense

charges and said a committee is being set up

to frame a national mutual fund policy. SEBI decided that a minimum lot of shares

would be assured to retail investors in IPOs. It

also approved e-IPO procedure for electronic

bidding in public offers to help investors across

the country bid for shares in a cost-effective

manner.


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The regulator would also frame new rules for

investment advisers.

Among other decisions, non-retail investors

cannot withdraw or reduce their price or offersize in IPOs, but can enhance the same, as is

the rule for retail investors.


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For companies coming out with IPOs, they

would now have to disclose the price band at

least five working days before the opening of

the bidding, as against the current norm fortwo days


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The decision of the market regulator SEBI to

allow e-IPO or electronic issuance of IPO is

likely to increase retail participation and may

provide momentum to the primary market.SEBI has increased the price band to Rs

10,000/ 15,000 will result in better participation

from investors.


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The government's disinvestment programme

to raise Rs 30,000 crore would provide much

needed impetus to the primary market with e-

IPO process in place.

Retail participation is likely to increase through

the measures announced by Sebi while steps

taken with regard to mutual fund industrywould see higher penetration.


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ABC of Primary Market

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