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Primary Market
The primary market
issues/shares.
is
the
market
for
new
Classification of Issues
Private Placement
Private
Placement
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Preferential
Issue
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Public Issue
Public issue means an invitation by a
company to the public to subscribe
the securities/shares
MBA/MS219/U1/L4-L5
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Entry Norm I :
Commonly known as profitability route.
Net tangible assets : 3 crores for three full
years (out of which monetary assets should
not be more than 50 %)
Distributable Profit : 3 out of 5 years.
Net worth : At least Rs. 1 crore in three years
Issue Size : Should not exceed 5 times of net
worth.
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Cont
Entry Norm II :
Commonly known as QIB route.
Issue shall be through book building
route.
At least 50% of the issue is mandatorily
allotted to QIB (qualified institutional
buyers).
Minimum post issue face value capital
shall be Rs. 10 crores.
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Cont
Entry Norm III
Commonly known as Appraisal
route.
The project is being appraised and participated to
the extent of 15% by FIs/Scheduled Commercial
Banks of which atleast 10% comes from appraiser.
Minimum post issue face value capital shall be Rs.
10 crores.
MBA/MS219/U1/L4-L5
Procedure Offer
Documents
Offer documents means prospectus in case of a public
issue.
Pre-Issue EPS, P/E Ratio, Avg. Net worth.
Other information like credit rating, risk involved
internal & external, schedule of implementation of
projects.
The company needs to submit offer documents to SEBI.
After 21 days, offer documents will be filed to ROC, SEs.
The issuer (company) is allowed to freely price the issue.
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Pricing of issues
Companies
eligible to make
public issue can freely price their
equity shares or any security.
Fixed Price
Book Building
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Fixed Price
In the fixed-price issue method, the issuer
fixes the issue price well before the actual
issue.
For this very reason, it is cautious and
conservative in pricing the issue so that
the issue is fully subscribed.
Underwriters also do not like the issue to
devolve on them and hence favour
conservative pricing of the issue. For
these practical reasons, the issue price in
the case of traditional fixed price method
generally errs on the lower side and,
therefore, in the investors favour.
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Book building
Book building is a process by which
demand for the proposed issue is
elicited and built up and the price at
which the securities will be issued is
determined on the bids received.
The company first appoints one or
more merchant banker as book
runner and their names are
disclosed in draft prospectus.
The lead book runner shall
compulsorily underwrite the issue .
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Book building
Book-building is a process of price
discovery used in public offers. The
issuer sets a floor price and a band
within which the investor is allowed
to bid for shares.
The upper price of the band can be
a maximum of 1.2 times the floor
price.
The investor had to bid for a
quantity of shares he wished to
subscribe to within this band.
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Book building
A public issue shall be kept open for
at least three working days but not
more than ten working days.
Only electronic bidding is permitted
Bidding demand is displayed at the
end of every day.
The lead manager analyses the
demand generated and determines
the issue price or cut-off price in
consultation with the issuer.
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Cut-off price
The cut-off price is the price
discovered by the market. It is the
price at which the shares are issued to
the investors.
Investors bidding at a price below the
cut-off price are ignored.
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2.
3.
4.
Book Building
4.
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Rights Issue
Rights Issue is when a listed company
which proposes to issue fresh securities to
its existing shareholders (on pro-rata basis.)
It is generally issued at a price lower than
the currently traded market price of the
share.
In addition to this, right issue has to be kept
open for 30 days.
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Private placement
It involves issues of securities to a limited
number of subscribers, such as banks, FIs, MFs
and high net worth individual.
It is arranged through a merchant banker, an
agent of issuers, who brings together the
issuers and investor(s).
Securities offered are exempt from public
disclosers
regulations
and
registration
requirements of the regulatory body.
This market is preferred by small and medium
size firms, particularly new entrants who do not
have track record of performance.
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Private Placement
A Private Placement is the direct sale of newly issued
securities, to a limited number of subscribers such as
banks,financial institutions,mutual funds and high net
worth individuals.
Private placement can be done through the subscription of
50 investors.
Advantages : * Time and Cost * Tailor made
* Disclosure and compliance
norms
Disadvantage : * Hostile takeover
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2.
3.
Public Issues
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Preferential Issue
A Preferential issue is an issue of shares by
listed companies to a select group of persons
which is neither a rights issue nor a public issue.
The allotment is made to various STRATEGIC
GROUPS (promoters, foreign partners, technical
collaborators)
This is a faster way for a company to raise equity
capital.
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SEBI Norms :
Lock in period for 3 years for promoters.
The amount utilised should be disclosed.
PRICE @ which share allotment should be
done ?
Advantages :
Company prefer to allot shares to its
promoters (to pledge shares with banks and
get cash)
Raising the commitment towards the
company.
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