PRIMARY MARKET INTRODUCTION FEATURES OF PRIMARY MARKET DIFFERENT TYPES OF ISSUES

PRIMARY MARKET INTRODUCTION:

The primary market is a market for new issues. It is also called the new issues market or market for fresh capital. Four ways to raise capital through primary market: - Prospectus Rights issues Private placement Bonus issue. The primary market is that part of the capital markets that deals with the issuance of new securities. Companies, governments or public sector institutions can obtain funding through the sale of a new stock or bond issue. This is typically done through a syndicate of securities dealers. The process of selling new issues to investors is called underwriting. In the case of a new stock issue, this sale is an initial public offering (IPO). Dealers earn a commission that is built into the price of the security offering, though it can be found in the prospectus. Primary markets create long term instruments through which corporate entities borrow from capital market. Generally, the personal savings of the entrepreneur along with contributions from friends and relatives are pooled in to start new business ventures or to expand existing ones. However, this may not be feasible in the case of capital intensive or large projects as the entrepreneur (promoter) may not be able to bring in his share of contribution (equity), which may be sizable, even after availing term loan from Financial Institutions/Banks. Thus availability of capital is a major constraint for the setting up or expanding ventures on a large scale. Instead of depending upon a limited pool of savings of a small circle of friends and relatives, the promoter has the option of raising money from the public across the country/world by issuing) shares of the company. For this purpose, the promoter can invite investment to his or her venture by issuing offer document which gives full details about track record, the company, the nature of the project, the business model, etc. If the investor is comfortable with this proposed venture, he may invest and thus become a shareholder of the company. Through aggregation, even small amounts available with a very large number of individuals translate into usable capital for corporates. Primary market is a market wherein corporates issue new securities for raising funds generally for long term capital requirement. The companies that issue their shares are called issuers and the process of issuing shares to public is known as public issue. This entire process involves various intermediaries like Merchant Banker, Bankers to the Issue, Underwriters, and Registrars to the Issue etc. All these intermediaries are registered with SEBI and are required to abide by the prescribed norms to protect the investor.

The Primary Market is, hence, the market that provides a channel for the issuance of new securities by issuers (Government companies or corporates) to raise capital. The securities (financial instruments) may be issued at face value, or at a discount / premium in various forms such as equity, debt etc. They may be issued in the domestic and / or international market.

Features of primary markets are:

This is the market for new long term equity capital. The primary market is the market where the securities are sold for the first time. Therefore it is also called the new issue market (NIM).

In a primary issue, the securities are issued by the company directly to investors. The company receives the money and issues new security certificates to the investors. Primary issues are used by companies for the purpose of setting up new business or for expanding or modernizing the existing business. The primary market performs the crucial function of facilitating capital formation in the economy. The new issue market does not include certain other sources of new long term external finance, such as loans from financial institutions. Borrowers in the new issue market may be raising capital for converting private capital into public capital; this is known as "going public."

The financial assets sold can only be redeemed by the original holder.

Different types of issues i. Public issue: When a company raises funds by selling (issuing) its shares (or debenture / bonds) to the public through issue of offer document (prospectus), it is called a public issue. According to section 67 of the companies (Amendment) Act, 2000 Prospectus means where the offer or invitation to subscribe for shares or debenture 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 the provisions of the act as well as the SEBI guidelines applicable to such public offerings. In finance, a prospectus is a document that describes a financial security for potential buyers. A prospectus commonly provides investors with material information

about mutual funds, stocks, bonds and other investments, such as a description of the company's business, financial statements, biographies of officers and directors, detailed information about their compensation, any litigation that is taking place, a list of material properties and any other material information. In the context of an individual securities offering, such as an initial public offering, a prospectus is distributed by underwriters or brokerages to potential investors. A formal legal document, which is required by and filed with the Securities and Exchange Commission, which provides details about an investment offering for sale to the public. A prospectus should contain the facts that an investor needs to make an informed investment decision. It is also known as offer document There are two types of prospectuses for stocks and bonds: preliminary and final. The preliminary prospectus is the first offering document provided by a securities issuer and includes most of the details of the business and transaction in question. Some lettering on the front cover is printed in red, which results in the use of the nickname "red herring" for this document. The final prospectus is printed after the deal has been made effective and can be offered for sale, and supersedes the preliminary prospectus. It contains finalized background information including such details as the exact number of shares/certificates issued and the precise offering price.

In the case of mutual funds, which, apart from their initial share offering, continuously offer shares for sale to the public, the prospectus used is a final prospectus. A fund prospectus contains details on its objectives, investment strategies, risks, performance, distribution policy, fees and expenses, and fund management. 1) Initial Public Offer: When a (unlisted) company makes a public issue for the first time and gets its shares listed on stock exchange, the public issue is called as initial public offer (IPO). 2) Further public offer: When a listed company makes another public issue to raise capital, it is called further public / follow-on offer (FPO). ii. Offer for sale: Institutional investors like venture funds, private equity funds etc., invest in unlisted company when it is very small or at an early stage. Subsequently, when the company

becomes large, these investors sell their shares to the public, through issue of offer document and the companys shares are listed in stock exchange. This is called as offer for sale. The proceeds of this issue go the existing investors and not to the company. iii. Issue of Indian Depository Receipts (IDR): A foreign company which is listed in stock exchange abroad can raise money from Indian investors by selling (issuing) shares. These shares are held in trust by a foreign custodian bank against which a domestic custodian bank issues an instrument called Indian depository receipts (IDR), denominated in. IDR can be traded in stock exchange like any other shares and the holder is entitled to rights of ownership including receiving dividend. iv. Others: 1) Rights issue (RI): When a company raises funds from its existing shareholders by selling (issuing) those new shares / debentures, it is called as rights issue. The offer document for a rights issue is called as the Letter of Offer and the issue is kept open for 30-60 days. Existing shareholders are entitled to apply for new shares in proportion to the number of shares already held. Illustratively, in a rights issue of 1:5 ratio, the investors have the right to subscribe to one (new) share of the company for every 5 shares held by the investor. A rights issue is an issue of rights to buy additional securities in a company made to the company's existing security holders. When the rights are for equity securities, such as shares, in a public company, it is a way to raise capital under a seasoned equity offering. Rights issues are sometimes carried out as a shelf offering or shelf registration. With the issued rights, existing shareholders have the privilege to buy a specified number of new shares from the firm at a specified price within a specified time. In a public company, a rights issue is a form of public offering (different from most other types of public offering, where shares are issued to the general public). Rights issues may be particularly useful for closed-end companies, which cannot retain earnings, because they distribute essentially all of their realized income and capital gains each year; therefore, they raise additional capital through rights offerings. As equity issues are generally preferable to debt issues from the company's viewpoint, companies usually opt for a rights issue when they have problems raising equity capital from the general public and choose to ask their existing shareholders to buy more shares

2) In a Bonus Issue, the company issues new shares to its existing shareholders. As the new shares are issued out of the companys reserves (accumulated profits), shareholders need not pay any money to the company for receiving the new shares. The net worth (owners money) of a company consist of its equity capital and its reserves. After a bonus issue, there is an increase in the equity capital of the company with a corresponding decrease in the reserves, while the net worth remains constant. In a bonus issue of 5:1 ratio, the investor will receive five new shares of the company for each share the investor held as illustrated below. Bonus is the capitalization of free reserves. Higher the free reserves, higher are the chances of a bonus issue. Companies convert their retained earnings into capital. To boost liquidity of companies stock to bring down the stock price to restructure companies capital. It is an offer of free additional shares to existing shareholders. A company may decide to distribute further shares as an alternative to increasing the dividend payout. It is also known as a "scrip issue" or "capitalization issue". New shares are issued to shareholders in proportion to their holdings. For example, the company may give one bonus share for every five shares held.

PARTICIPANTS IN PRIMARY MARKET METHODS OF DETERMINING OFFER PRICE DIFFERENCE BETWEEN FIXED PRICE AND BOOK BULIDING PROCESS

 REVERSE BOOK BUILDING

Participants in the Primary Market: The participants in the Primary Market are as follows: Merchant Bankers Registrar to the issue Bankers to the issue Agents/Brokers Auditors of the company Syndicate members

Methods for Determining the Offer Price: Methods for Determining the Offer Price are:

Fixed Price: The term "fixed price" (as in: fixed-price contract) is a phrase used in the English language to mean that no bargaining is allowed over the price of a good or, less commonly, a service.

Book Building: Book building refers to the process of generating, capturing, and recording investor demand for shares during an IPO (or other securities during their issuance process) in order to support efficient price discovery. Usually, the issuer appoints a major investment bank to act as a major securities underwriter or book runner. The book is the off-market collation of investor demand by the book runner and is confidential to the book runner, issuer, and underwriter. Where shares are acquired, or transferred via a book build, the transfer occurs off-market, and the transfer is not guaranteed by an exchanges clearing house. Where an underwriter has been appointed, the underwriter bears the risk of nonpayment by an acquirer or non-delivery by the seller. Book building is a common practice in developed countries and has recently been making inroads into emerging markets as well. Bids may be submitted on-line, but the book is maintained off-market by the book runner and bids are confidential to the book runner. The price at which new shares are issued is determined after the book is closed at the discretion of the book runner in consultation with the issuer. Generally, bidding is by invitation only to clients of the book runner and, if any, lead manager, or co-manager. Generally, securities laws require additional disclosure requirements to be met if the issue is to be offered to all investors. Consequently, participation in a book build may be limited to certain classes of investors. If retail clients are invited to bid, retail bidders are generally required to bid at the final price, which is unknown at the time of the bid, due to the impracticability of collecting multiple price point bids from each retail client. Although bidding is by invitation, the issuer and book runner retain discretion to give some bidders a greater allocation of their bids than other investors. Typically, large institutional bidders receive preference over smaller retail bidders, by receiving a greater allocation as a proportion of their initial bid. All book building is conducted

off-market and most stock exchanges have rules that require that on-market trading be halted during the book building process. The key differences between acquiring shares via a book build (conducted off-market) and trading (conducted on-market) are: 1) bids into the book are confidential v/s transparent bid and ask prices on a stock exchange; 2) bidding is by invitation only (only clients of the book runner and any co-managers may bid); 3) the book runner and the issuer determine the price of the shares to be issued and the allocations of shares between bidders in their absolute discretion; 4) all shares are issued or transferred at the same price whereas on-market acquisitions provide for a multiple trading prices. It is one of the merger process the book runner collects bids from investors at various prices, between the floor price and the cap price. Bids can be revised by the bidder before the book closes. The process aims at tapping both wholesale and retail investors. The final issue price is not determined until the end of the process when the book has closed. After the close of the book building period, the book runner evaluates the collected bids on the basis of certain evaluation criteria and sets the final issue price. If demand is high enough, the book can be oversubscribed. In these cases the green shoe option is triggered. Book building is essentially a process used by companies raising capital through public offeringsboth initial public offers (IPOs) and follow-on public offers (FPOs) to aid price and demand discovery. It is a mechanism where, during the period for which the book for the offer is open, the bids are collected from investors at various prices, which are within the price band specified by the issuer. The process is directed towards both the institutional as well as the retail investors. The issue price is determined after the bid closure based on the demand generated in the process.

Under pricing: The pricing of an initial public offering (IPO) below its market value. When the offer price is lower than the price of the first trade, the stock is considered to be underpriced. A stock is usually only underpriced temporarily because the laws of supply and demand will eventually drive it toward its intrinsic value. It is believed that IPOs are often underpriced because of concerns relating to liquidity and uncertainty about the level at which the stock will trade. The less liquid and less predictable the shares are, the more underpriced they will have to be in order to compensate investors for the risk they are taking. Because an IPO's issuer tends to know more about the value of the shares than the investor, a company must under price its stock to encourage

investors

to

participate

in

the

IPO.

Difference between Fixed Price and Book- Building Process:

An issuer company is allowed to freely price the issue. The basis of issue Price is to be disclosed in the offer document where the issuer discloses in detail about the qualitative and quantitative factors justifying the issue price. There is only one price and issue will be offered at that price. Such type of issue is known as Fixed Price Issue. "Book Building" means a process undertaken by which a demand for the securities proposed to be issued by a body corporate is elicited and built up and the price for the securities is assessed on the basis of the bids obtained for the quantum of securities offered for subscription by the issuer. This method provides an opportunity to the market to discover price for securities. Individuals who apply for the IPO put their bid.

These are issues where a company enters the capital market and invites subscription from the public to its issue of equity capital at a fixed price at par or at a premium. Fixed price issues was the norm until some years ago, especially before the book building concept was introduced in India but now we find more and more companies adopting the book building route to raise capital. Here the companies announce a price band for the issue and the investors can exercise their options in the application and bid for the same at whatever price they are prepared to pay for the issue but within the price band. The price band essentially consist of two prices the floor price and the cap price. The difference between the two cannot be more than 20%. In case of an FPO the listed company can announce the price band just a day before the issue opens for subscription while in the case of IPOs the price bands are mentioned in the application form itself. Benefits of Book Building Method: It enables issuers to reap benefits arising from price and demand discovery. The cost and time for making public issues is lowered. The procedures are also simplified.

The possibility of price falling below par after listing is remote.

Limitations of Book Building Method: Limitations of Book Building Method the book building process adopted in India is quite different from the USA. In India, unlike the developed markets, the process is still dependent on good faith. There is a lack of transparency at critical steps and the absence of strong regulation. Since the price fixed for the public portion as well as for the placement portion is the same, issues may not succeed in inviting the desired public response. Advertisements about book built issues to retail investors are not necessary. This increases the chances of negotiated deals. It has not proved to be a good price discovery mechanism because many issues have been listed below their issue price. Issuers may have to sell cheap due to the collective bargaining power of institutions. The role of retail investors in determining the pricing decreases. Moreover, retail investors may not have the information to judge the issue. REVERSE BOOK BUILDING: Reverse book building is a process wherein the shareholders are asked to bid for the price at which they are willing to offer their shares. This process helps in discovering the exit price and is used by companies who want to delist their shares or buy-back shares from the shareholders. Delisting of securities means permanent removal of securities of a listed company from a stock exchange. The reverse book building route is a difficult and costly process. Price discovery is problems in case of small companies as their shares are thinly traded, making it difficult to delist through the reverse book building route. Unless the shares are delisted, the small companies have to pay all listing charges. Like a book building process is used to determine an effective price for raising funds, a reverse book building process is used to determine an exit price for de-listing.

Generally, when a person (seller) wants to exit, he doesn't know the intention of buyer. Reverse book building gives the seller a right to decide the price at which he wishes to exit, and the buyer, the option to decide whether he wants to accept or reject the same. The acquirer would determine the average price of 26 weeks before the date of announcement of public announcement, and the shareholders are allowed to tender at/ or above this floor price. The process of price discovery is undertaken as in normal book building process, and the cut off price /final price is the one at which maximum shares are tendered. If the acquirer accepts the price, the shares are tendered to all those who have bid lower than that, and if the acquirer rejects the price, then the shares are returned to the shareholders. This is likely to be implemented in some time. Some views are that it would result in improved transparency, and better price discovery. While others feel that there could be increased manipulation because of the lesser participation as opposed to book building process which attract increased participation.

GREEN SHOE OPTION ONLINE IPOS PUBLIC ISSUE FPOS PREFRENTIAL ISSUE

GREEN-SHOE OPTION: Green-shoe option is also referred to as an overallotment option. It is a mechanism to provide post-listing price stability to an initial public offering. The green shoe company was the first to issue this type of option, hence the name green-shoe option. The first ever exercise of a greenshoe option in the course of a public issue was carried out by the ICICI bank. The LIC became the first institution to lend shares in the primary market. A provision contained in an underwriting agreement that gives the underwriter the right to sell investors more shares than originally planned by the issuer. This would normally be done if the demand for a security issue proves higher than expected. Legally referred to as an overallotment option.

A green shoe option can provide additional price stability to a security issue because the underwriter has the ability to increase supply and smooth out price fluctuations if demand surges. Green shoe options typically allow underwriters to sell up to 15% more shares than the original number set by the issuer, if demand conditions warrant such action. However, some issuers prefer not to include green shoe options in their underwriting agreements under certain

circumstances, such as if the issuer wants to fund a specific project with a fixed amount of cost and does not want more capital than it originally sought.

The term is derived from the fact that the Green Shoe Company was the first to issue this type of option.

A green shoe option (sometimes green shoe, but must legally be called an "over-allotment option" in a prospectus) allows underwriters to short sell shares in a registered securities offering at the offering price. The green shoe can vary in size and is customarily not more than 15% of the original number of shares offered. The green shoe option is popular because it is one of a few SEC-permitted, risk-free means for an underwriter to stabilize the price of a new issue post-pricing. Issuers will sometimes not include a green shoe option in a transaction when they have a specific objective for the offering and do not want the possibility of raising more money than planned. The term comes from the first company, Green Shoe Manufacturing (now called Stride Rite Corporation) to permit underwriters to use this practice in an offering.

BENEFITS OF GREEN-SHOE OPTION: Investor protection measure- especially for protection of small investors during the post-listing period. Benefits the underwriters in both bullish and bearish conditions. In a bull market, underwriters will opt for additional allotment of 15 per cent due to index riding high. In a bearish market, the underwriting option may not be exercised or the underwriters may buy up to 15 per cent at prices lower than the issue price from the market.

ON-LINE IPOs: The on-line issue of shares is carried out via the electronic network of the stock exchanges. The company proposing to make a public issue through the on-line system of stock exchange has to comply with sections 55-68A of the companies act, 1956 and Disclosure and Investor Protection (DIP) guidelines. The issuer company is required to enter into an agreement with

stock exchanges which have the requisite system for an o-line offer and has to appoint brokers and registrars to the issue having electronic connectivity with stock exchanges. BENEFITS OF ON-LINE IPOs: It reduces the time taken for the issue process. Securities get listed within 15 days from the closure of the issue, thereby enabling faster access to funds. If allotment made after 15 days then interest at the rate of 15 per cent should be paid to investors. Corporate can reduce their stationery, printing and other expenses. The investor also benefits as the system eliminates refunds except in case of direct application. PUBLIC ISSUE: Initial Public Offering (IPO): It is an offering of either a fresh issue of securities or an offer for sale of existing securities, or both by an unlisted company for the first time to the public. IPO enables listing and trading of the issuers securities. The availability of information regarding the past performance of the company and its track record is generally inadequate and may lack credibility. The SEBI has laid down entry norms to protect the interest of investors and to enable investors to take informed decisions. An initial public offering (IPO) or stock market launch is a type of public offering where shares of stock in a company are sold to the general public, on a securities exchange, for the first time. Through this process, a private company transforms into a public company. Initial public offerings are used by companies to raise expansion capital, to possibly monetize the investments of early private investors, and to become publicly traded enterprises. A company selling shares is never required to repay the capital to its public investors. After the IPO, when shares trade freely in the open market, money passes between public investors. Although an IPO offers many advantages, there are also significant disadvantages. Chief among these are the costs associated with the process, and the requirement to disclose certain information that could prove helpful to competitors, or create difficulties with vendors.

REASONS FOR LISTING

When a company lists its securities on a public exchange, the money paid by the investing public for the newly issued shares goes directly to the company (primary offering) as well as to any early private investors who opt to sell all or a portion of their holdings (secondary offering) as part of the larger IPO. An IPO, therefore, allows a company to tap into a wide pool of potential investors to provide itself with capital for future growth, repayment of debt, or working capital. A company selling common shares is never required to repay the capital to its public investors. Those investors must endure the unpredictable nature of the open market to price and trade their shares. After the IPO, when shares trade freely in the open market, money passes between public investors. For early private investors who choose to sell shares as part of the IPO process, the IPO represents an opportunity to monetize their investment. After the IPO, once shares trade in the open market, investors holding large blocks of shares can either sell those shares piecemeal in the open market, or sell a large block of shares directly to the public, at a fixed price, through a secondary market offering. This type of offering is not dilutive, since no new shares are being created. Once a company is listed, it is able to issue additional common shares in a number of different ways, one of which is the follow-on offering. This method provides capital for various corporate purposes through the issuance of equiy without incurring any debt. This ability to quickly raise potentially large amounts of capital from the marketplace is a key reason many companies seek to go public. An IPO accords several benefits to the previously private company:

Enlarging and diversifying equity base Enabling cheaper access to capital Increasing exposure, prestige, and public image Attracting and retaining better management and employees through liquid equity Facilitating acquisitions (potentially in return for shares of stock) Creating multiple financing opportunities: equity, convertible debt, cheaper bank loans,

participation

etc.

DISADVANTAGES OF IPO

There are several disadvantages to completing an initial public offering:

Significant legal, accounting and marketing costs, many of which are ongoing Requirement to disclose financial and business information Meaningful time, effort and attention required of senior management Risk that required funding will not be raised Public dissemination of information which may be useful to competitors, suppliers and

customers.

STAG PROFIT Stag profit is a stock market term used to describe a situation before and immediately after a company's Initial public offering (or any new issue of shares). A stag is a party or individual who subscribes to the new issue expecting the price of the stock to rise immediately upon the start of trading. Thus, stag profit is the financial gain accumulated by the party or individual resulting from the value of the shares rising.

LARGEST IPOs

1. 2. 3. 4. 5. 6.

Agricultural Bank of China US$22.1 billion (2010) Industrial and Commercial Bank of China US$21.9 billion (2006) American International Assurance US$20.5 billion (2010) Visa Inc. US$19.7 billion (2008) General Motors US$18.15 billion (2010) Facebook, Inc. US$16 billion (2012)

Eligibility Norms for Entities Raising Funds through an IPO and an FPO: Entry Norm 1:

Net tangible assets of atleast Rs 3 crores for 3 full years, of which not more than 50 per cent is held in monetary assets. Distributable profits in atleast 3 out of the preceding 5 years. Net worth of atleast Rs 1 crore in 3 years. If there is a change in companys name, atleast 50 per cent revenue for preceding 1 year should be earned from the new activity. The issue size should not exceed 5 times the pre-issue net worth.

Entry norm 2: Issue shall be through a book building route, with atleast 50 per cent of the issue to be mandatorily allotted to the QIBs, failing which the money shall be refunded. The minimum post-issue face value capital shall be Rs 10 crore or there shall be compulsory market making for atleast 2 years. Entry norm 3: The project is appraised and participated to the extent of 15 per cent by FIs/Scheduled commercial banks of which atleast 10 per cent comes from the appraiser(s). The minimum post-issue face value capital shall be Rs 10 crore or there shall be a compulsory market making for atleast 2 years. The SEBI has exempted the following entities from entry norms: Private sector banks and Public sector banks. Rights issue by a listed company. Follow-on Public Offering (FPO): It is an offer of sale of securities by a listed company. FPO is also known as subsequent or seasoned public offering. Listed companies issue FPOs to finance their growth plans. Listed companies with a good track record find it easier to raise funds through FPOs. Due to cumbersome procedural requirements and high cost and time, the FPOs are no longer an attractive route to raise funds. Listed companies prefer the QIP route. Rights issue is an offer of new securities by a listed company to its existing shareholders on a pro-rata basis. Companies issue rights by sending a letter of offer to the shareholders whose names are recorded in the books on a particular date. A shareholder has four options in case of rights: To exercise the rights. Renounce rights and sell them in the open market. Renounce part

of the rights and exercise the reminder to do nothing.Promoters offer rights issues at attractive price due to following reasons: They want to get their issues fully subscribed to. To reward their shareholders. It is possible that the market price does not reflect a stocks true worth or that it is overpriced, prompting promoters to keep the offer price low. To hike their stake in their companies, thus, avoiding the preferential allotment route which is subject to lot of restrictions. PRIVATE PLACEMENT: Private placement refers to the direct sale of newly issued securities by the issuer to a small number of investors through merchant bankers. The investors are selected clients such as financial institutions, corporate, banks. There are some advantages to the issuer like the time taken by, as well as the cost of issue is much less as compared to the public and rights issue. These issues can be tailor-made to suite the requirements of both the parties. Moreover private placement does not require detailed compliance of formalities, rating and disclosure norms as required in public or rights issues.

Private placement (or non-public offering) is a funding round of securities which are sold not through a public offering, but rather through a private offering, mostly to a small number of chosen investors."Private placement" usually refers to non-public offering of shares in a public company (since, of course, any offering of shares in a private company is and can only be a private offering). PIPE (private investment in public equity) deals are one type of private placement. In the United States, although these placements are subject to the Securities Act of 1933, the securities offered do not have to be registered with the Securities and Exchange Commission if the issuance of the securities conforms to an exemption from registrations as set forth in the Securities Act of 1933 and SEC rules promulgated there under. Most private placements are offered under the Rules known as Regulation D.[2] Private placements may typically consist of offers of common stock or preferred stock or other forms of membership interests, warrants or promissory notes (including convertible promissory notes), bonds, and purchasers are often institutional investors such as banks, insurance companies or pension funds.

PREFERENTIAL ISSUE: A preferential issue is an issue of shares or of convertible securities by listed companies to a select group of persons under Section 81 of the Companies Act, 1956 which is neither a rights issue nor a public issue. This is a faster way for a company to raise equity capital. The issuer company has to comply with the Companies Act and the requirements contained in Chapter pertaining to preferential allotment in SEBI (DIP) guidelines which inter-alia include pricing, disclosures in notice etc. Due to cumbersome statutory provisions of a public/rights issue, many companies opt for preferential allotment of shares for raising funds. Such allotments are made to various strategic groups including promoters, foreign partners, technical collaborators and private equity funds. Companies need to seek approval from shareholders for preferential allotment of shares. It is done by listed companies, whose entire shareholding is held in dematerialised form, to a select group of persons under section 81 of the companies act, 1956 which is neither a rights issue or a public issue. Reasons for raising capital through preferential allotment: To enhance the promoters holding. As part of debt restructuring/conversion of loans. For the purpose of strategic investments by institutional/foreign investors. To issue shares by way of Employees Stock Option Plans (ESOPs). For fresh issue to shareholders other than promoters. For take over of company by management group.

 QUALIFIED INSTITUTION PLACEMENT QUALIFIED INSTITUTION BUYERS RESOURCE MOBILISATION FROM INTERNATIONAL CAPITAL MARKETS INDIAN DEPOSITORY RECIPETS STEPS TO IMPROVE PRIMARY MARKET

QUALIFIED INSTITUTION PLACEMENT Qualified Institutions Placement (QIP): QIP is a private placement of equity shares or convertible securities by a listed company to QIBs. It has emerged as a new fund raising investment for listed companies in India. Through a QIP issue, funds can be raised from foreign as well as domestic institutional investors without getting listed on a foreign exchange, which is a lengthy and cumbersome affair. A designation of a securities issue given by the Securities and Exchange Board of India (SEBI) that allows an Indian-listed company to raise capital from its domestic markets without the need to submit any pre-issue filings to market regulators. The SEBI instituted the guidelines for this relatively new Indian financing avenue on May 8, 2006. Prior to the innovation of the qualified institutional placement, there was concern from Indian market regulators and authorities that Indian companies were accessing international funding via issuing securities, such as American depository receipts (ADRs), in outside markets. This was seen as an undesirable export of the domestic equity market, so the QIP guidelines were introduced to encourage Indian companies to raise funds domestically instead of tapping overseas markets.

The issue process is not only simple but can be completed speedily since the company issues equity shares and does not create a derivative investment as is the case with GDR/ADR. Unlike GDRs, a QIP issue can be offered to a wide set of investors including Indian mutual funds,

banks and insurance companies, as well as, FIIs. As there is no new stock exchange listing, the issue is free from the hassles of continuing disclosures and administrative costs.

Eg: LIC Housing Finance Ltd (LIC HFL) is planning to launch its Qualified Institutional Placement (QIP) by issuing 4.6 crore fresh equity shares (which according to today's share price amounts to around Rs 1,200 crore) in next two to three months. Besides, despite the adverse market conditions, the company expects to grow at 20% this year. Gujrat pipavav port has launched Qualified Institutional Placement (QIP) issue. The company is looking to raise USD 36.39 million. The indicative offer price is at Rs 58.45 per share. Kotak Mahindra Capital and IDFC Securities are the bankers for the issue, reports CNBC-TV18.

QUALIFIED INSTITUTIONAL BUYERS A qualified institutional buyer (or QIB), in law and finance, is a purchaser of securities that is deemed financially sophisticated and is legally recognized by security market regulators to need less protection from issuers than most public investors. Typically, the qualifications for this designation are based on an investor's total assets under management as well as specific legal conditions in the country where the fund is located. Currently, Rule 144A requires an institution to manage at least $100 million in securities from issuers not affiliated with the institution to be considered a QIB. Additionally, if the institution is a bank or savings and loans thrift they must have a net worth of at least $25 million. Certain private placements of stock and bonds are made available only to qualified institutional buyers to limit regulatory restrictions and public filing requirements.

"Qualified Institutional Buyers are those institutional investors who are generally perceived to possess expertise and the financial muscle to evaluate and invest in the capital markets.

Resource Mobilisation from International Capital Market: Resource Mobilisation from International Capital Market Global Depository Receipts (GDRs): GDRs are listed o the European stock exchanges or on the Asian stock exchanges such as the Dubai and Singapore stock exchanges. American Depository Receipts (ADRs) -An American depositary receipt (ADR) is a negotiable security that represents securities of a non-US company that trade in the US financial markets. Securities of a foreign company that are represented by an ADR are called American depositary shares (ADSs). Shares of many non-US companies trade on US stock exchanges through ADRs. ADRs are denominated and pay dividends in US dollars and may be traded like regular shares of stock. Over-the-counter ADRs may only trade in extended hours. The first ADR was introduced by J.P. Morgan in 1927 for the British retailer Selfridges

External Commercial Borrowings (ECBs) -An external commercial borrowing (ECB) is an instrument used in India to facilitate the access to foreign money by Indian corporations and PSUs (public sector undertakings). ECBs include commercial bank loans, buyers' credit, suppliers' credit, securitised instruments such as floating rate notes and fixed rate bonds etc., credit from official export credit agencies and commercial borrowings from the private sector window of multilateral financial Institutions such as International Finance Corporation (Washington), ADB, AFIC, CDC, etc. ECBs cannot be used for investment in stock market or speculation in real estate. The DEA (Department of Economic Affairs), Ministry of Finance, Government of India along with Reserve Bank of India, monitors and regulates ECB guidelines and policies. For infrastructure and greenfield projects, funding up to 50% (through ECB) is allowed. In telecom sector too, up to 50% funding through ECBs is allowed. Recently Government of India has increased limits on RBI to up to $4[1]0 billions and allowed borrowings in Chinese currency Renminbi.

Foreign Currency Convertible Bonds (FCCBs)- Foreign Currency Convertible Bonds commonly referred to as FCCB's are a special category of bonds. FCCB's are issued in currencies different from the issuing company's domestic currency. Corporates issue FCCB's to raise money in foreign currencies. These bonds retain all features of a convertible bond making them very attractive to both the investors and the issuers.

INDIAN DEPOSITORY RECEIPTS (IDRs):

An Indian Depository Receipt is an instrument denominated in Indian Rupees in the form of a depository receipt created by a Domestic Depository (custodian of securities registered with the Securities and Exchange Board of India) against the underlying equity of issuing company to enable foreign companies to raise funds from the Indian securities Markets. The foreign company IDRs will deposit shares to an Indian depository. The depository would issue receipts to investors in India against these shares. The benefit of the underlying shares (like bonus, dividends etc.) would accrue to the depository receipt holders in India. The Ministry of Corporate Affairs of the Government of India, in exercise of powers available with it under section 642 read with section 605A had prescribed the Companies (Issue of Indian Depository Receipts) Rules, 2004 (IDR Rules) vide notification number GSR 131(E) dated February 23, 2004. Standard Chartered PLC became the first global company to file for an issue of Indian depository receipts in India. The rules provide inter alia for (a) Eligibility for issue of IDRs (b) Procedure for making an issue of IDRs (c) Other conditions for the issue of IDRs (d) Registration of documents (e) Conditions for the issue of prospectus and application (f) Listing of Indian Depository Receipts (g) Procedure for transfer and redemption (h) Continuous Disclosure Requirements (i) Distribution of corporate benefits. These rules (principal rules) were operationalised by the Securities and Exchange Board of India (SEBI)the Indian markets regulator in 2006. Operation instructions under the Foreign

Exchange Management Act were issued by the Reserve Bank of India on July 22, 2009. The SEBI has been notifying amendments to these guidelines from time to time.

It enables foreign companies to raise capital in India. Enable Indian investors to diversify risk. It also enables globalisation of Indian stock exchanges.

Steps to Improve Primary Market Infrastructure: The IPO process should be automated wherein the investor will have to provide his name and depository umber or the unique identification number while subscribing to an IPO. The book running lead manager should be made more accountable and should be empowered to pick up his team. To increase retail participation in public issues and to maintain the retail character of the primary market, there must be direct retailing of primary issues and allotment incentives for early bid investors. T

here must be 10 per cent margin imposed on all QIB bids. Issue expenses should be reduced by way of issuing electronic prospectus rather than application forms. Internet and digital signatures should also be considered to prevent the use of paper and save precious natural resources. Certified brokers should be used for even non-online applications.