Summer Training 2013

By Shruti Girotra

Table of Contents
Capital market
Primary market Eligibility Pricing Promoters contribution

Lock in requirements
Preference allotment of shares

Capital Market
It is the market for securities, where companies and government can raise long-term funds
It includes:
Stock market
Bond market

SEBI is the financial regulator

Capital market is divided into two markets:

Primary market Secondary market

Primary Market
Generally, the personal savings of the entrepreneur along with contributions from friends and relatives are pooled in to start a new business or expand an old one It is not feasible in case of large or intensive projects

So the entrepreneur(promoter) instead of depending upon small savings , he has the option of raising money from the public across the country/world by issuing shares of the company
This part of the capital market that deals with the issuance of the new securities is called primary market

Primary Market
Companies, governments and public sector can obtain funding through the sale of the new stock If the investor is comfortable with this proposed venture, he may invest and thus become a shareholder of the company Underwriting( process) - process of selling new issues to the investors IPO (instrument) a new stock issued is called an Initial Public Offer The issue of capital to the public by Indian companies is governed

by the DIP (Disclosure and Investor Protection) guidelines of SEBI

Features of Primary Market

The securities are issued by the company directly to the investors. The company receives the money and issues new securities to the investors. The primary markets are used by companies for the purpose of setting up new ventures/ business or for expanding or modernizing the existing business Primary market performs the crucial function of facilitating capital formation in the economy

Eligibility
The unlisted company can make a public issue of equity shares or any other security convertible in equity shares The requirements are: It has net tangible assets of at least Rs. 3 crore in each of the preceding 3 years It has a pre-issue net worth of not less than Rs. 1 crore in each of the preceding 5 years If there is change in name, at least 50% of the revenue for preceding one year should be from the new activity The issue size should not exceed the five times its pre issue

net worth

Eligibility
These provisions do not apply to a banking company, an infrastructure company and rights issued by a listed company
Infrastructure companies are exempt from eligibility norms if:
If the project cost is financed by a public financial institution Not less than 5% of the project cost is financed by any of the institutions, jointly or severally, by way of loan and/or subscription to equity

Eligibility and pricing requirements do not apply to:

Company making IPO of equity shares and proposing to list them on OTCEI

Eligibility
Securities Contracts (Regulations) Act 1956 requires:
The company has to offer at least 10% of securities to public which is subject to min. 20 Lakh securities

60% allocation to qualified institutional buyers

Issue of securities should be through book building method otherwise at least 25% securities has to be offered to the public

How to invest in a Public issue

The pre-requisites The investor need to have Permanent Account Number (PAN) issued by the Income Tax Department and quote the same in the application for, Bank account Shares or debentures allotted in a public issue will be credited to the investors account in electronic form. For this the investor need to have a demat account

Pricing
An eligible company is free to make public/rights issue of securities of any denomination and at any price

Choice between two types of issue pricing:

Fixed price where the company determines the price Book-building the company allows the investors to determine the price

Fixed price price is known in advance, but the

demand is only known at the close of the issue

Book Building Issue

In a Book Building issue the issuer company mentions the minimum and maximum price (price band) at which it will sell (issue) its shares. Thus the offer document contains only the price band instead of the price at which its shares are offered to the public. The list of the bid received from investors at various price bands is known as the book Based on the total demand in the book, the cut off price is then decided by the issuer and merchant banker Book-building issue demand can be known at any time, while the price is only known at closing of the issue

Pricing
Book Building Issue
Two options to issue capital through book building: 75% book building route
Not more than 50% of net offer to public can be allocated to QIBs 25% to retail individual investors who have either not participated in book building or have not received any allocation

100% book building route

Not more than 50% of net offer to public can be allocated to QIBs Not less than 25% allocation to retail individual investors Not less than 25% allocation to non institutional investors

Promoters Contribution
In case of IPO and OFS the promoters contribution should be at least a 50%
When the IPO is launched by a unlisted company, the promoters contribution should not be less than 20% of the post issue capital The promoter shall bring in the full amount of the promoters share including premium at least one day prior to the issue opening date These conditions do not apply to companies listed in stock exchanges for 3 years or has a track record for paying dividend for three years

Lock-In Requirements
The minimum promoters contribution is locked in for a minimum for a 3 year period
The shares held by promoter which are locked under the provisions of DIP guidelines may be transferred to and amongst promoter/promoters or to new promoter This can be done for the remaining period and compliance with Securities and Exchange Board of India (Substantial Acquisitions of Shares and Takeovers)

Preference of allotment of shares

A listed company whose equity share capital is listed on any Stock Exchange can issue equity shares/fully convertible/partly convertible debentures or any other financial instruments to any select group of persons u/s 81(A) of the Companies Act, 1956 on private placement basis
In case the shares of company are traded on any Stock Exchange:
Issue price of new shares has to be higher than the average of weekly high and low of the closing prices

Who can get preferential allotment?

Preferential allotment can be made to any person who has:
Previous shareholding in demat form His entire pre-preferential holding has been under lockin for 6 months

Allotment cannot be made to:

Persons who have sold there shareholding in previous six months

THANK YOU