» Primary market is the market where equity and debt securities are issued directly by the issuer to raise capital from public or institutional investors.
» Primary markets allow issuers to raise capital from a wider market thereby diversifying ownership, provides an efficient mechanism for raising funds, ensures disclosure of information and provides liquidity to investors.
» The eligibility and process of raising capital, timelines for the issue, use of capital raised, and the role and responsibility of the participants are defined by regulations.
» The responsibilities associated with the securities being issued rests with the issuer of the securities who raises the capital.
» Issuance of capital in the primary market can be classified under four broad heads:
Public Issue
Private placement
Preferential issue
Rights and bonus issues
» Issuers include the government, companies, banks and financial institutions.
» The securities issued have to comply with the requirements of the Securities Contract Regulation Act (SCRA), 1956 or deposits as defined by the Banking Regulation Act, 1949 or the Acceptance of Deposits (Rules) 1975 and include shares, bonds, debentures, units of mutual funds, government securities, among others.
» In a public issue securities are offered to the public, in a private placement it is issued to a select set of institutional investors, in preferential issue securities are issued on preferential terms to identified set of investors and a rights or a bonus issues involves issuing securities to existing investors.
» A company making an initial public issue of shares has to comply with the minimum eligibility norms specified by the SEBI (Issue of Capital and Disclosure Requirements) guidelines on net worth, profitability or assets held.
» Promoters must contribute at least 20% of the post-issue paid up capital of a company making a public issue and this is locked on for a period of 3 years.
» A company has to offer at least 25% of its post-issue paid-up capital to the public. In case of government companies, this limit is 10%.
» A public issue will be open for a minimum of three and a maximum of 10 working days.
» If the issue does not receive subscription for at least 90% of the offer to the public, the company has to refund the subscription. Companies enter into underwriting agreements with institutions to ensure minimum subscription.
» All issues to the public have to be mandatorily credit-rated.
» Investors in a public issue must be given the option to hold shares in the dematerialized form.
» Individual investors are categorized as retail investors who invest less than Rs.2 lakhs in a public issue and Non-Institutional buyers who invest more than Rs.2 lakhs. Institutional investors are also called Qualified institutional buyers.
» A public issue of shares may be an initial public offer (IPO) or a follow-on public offer (FPO).
» An IPO can be made by issuing fresh shares to the public or it can be an offer for sale where an existing large investor divests a portion of their holding to the public.
» In a follow-on public offer a company that has already made a public issue raises further capital from the public.
» In a fixed price issue, the price at which shares will be issued is determined by the issuer with the lead manager.
» In a book built issue, a price band is defined and the price is determined based on the offers received at various prices.
» A prospectus or a red herring prospectus is the document which gives the investor information about the issue.
» The lead manager, R&T agent, brokers and underwriters are the primary participants in the issue process.
» The number of shares allotted to an investor will depend upon the extent of oversubscription in their category.
» Shares issued in a public issue have to be listed on a stock exchange.
» Debt securities can be issued to the public even if the company has not made a public of shares.
» The securities have to be credit rated and dematerialized and listed on a stock exchange.
» The advantage of private placement as a way to issue securities and raise funds comes from the following
Investors are better informed and there are less regulatory compliances in issuances to them
Issuing securities are less time consuming and cost-efficient since there are fewer procedures.
