PRIMARY MARKETS

Definition: The primary market is where equity or debt capital is raised by issuers from public investors through an offer of securities, also known as the “new issue market.”
Functions: The primary market serves several functions, including:
- Tapping larger markets for capital
- Fostering a competitive process
- Diversifying ownership
- Ensuring better disclosures
- Facilitating evaluation by investors
- Providing an exit for early investors
- Offering liquidity for securities
- Regulatory supervision
Regulatory Framework: The primary market for equity shares is regulated by SEBI, while the primary market for government securities is regulated by the RBI, and the primary market for corporate bonds is regulated by SEBI.
Intermediaries: Various intermediaries function in the primary market, including:
- Merchant bankers: Provide services connected with the management of a primary issue of securities.
- Underwriters: Subscribe to securities being offered if the issue fails to garner the required response.
- Brokers: Distribute securities to prospective investors through a network.
Types of Issues: The primary market involves different types of issues, including:
- Public Issue: A public offer of securities to investors.
- Rights Issue: An issue of securities to existing shareholders.
- Private Placement: An issue of securities to a select group of investors, such as institutional investors.
Relationship with Secondary Markets: The primary market is closely linked with the secondary market, where securities are traded among investors, providing liquidity for securities bought by investors.

PRIMARY MARKETS (Part 2)

Introduction to Primary Markets: Primary markets involve the issuance of new securities to raise capital. Merchant bankers play a crucial role in managing the issue process, including pricing, document preparation, listing, and underwriting.
Intermediaries in Primary Markets: Key intermediaries include:
- Merchant Bankers: Manage the issue process and provide underwriting services.
- Book Running Lead Managers (BRLM): Responsible for due diligence, prospectus drafting, and marketing the issue.
- Registrar and Transfer Agents (RTA): Maintain records of applications and money received, and assist in allotment and refund processes.
- Bankers to the Issue: Manage sale proceeds and refund application money.
- Brokers to the Issue: Procure subscription to the issue.
- Depositories and Depository Participants: Hold securities in electronic form and facilitate transactions.
- Debenture Trustees: Safeguard interests of debenture holders.
- Portfolio Managers: Advise clients on investments or manage portfolios on their behalf.
- Primary Dealers: Act as underwriters for government securities issued by the RBI.
Types of Issues: Primary market issues can be classified into:
- Public Issue: Securities are issued to the public.
- Private Placement: Securities are issued to a select set of institutional investors.
- Preferential Issue: Securities are issued to identified investors on preferential terms.
- Rights and Bonus Issues: Securities are issued to existing investors.
Types of Issuers: Issuers in the primary market include:
- Central, State, and Local Governments: Issue bonds, treasury bills, and sovereign gold bonds.
- Public Sector Units: Issue equity shares, bonds, and other securities.
- Private Sector Companies: Issue equity shares, preference shares, bonds, and other securities.
- Banks, Non-Banking Finance Companies, and Financial Institutions: Issue equity shares, preference shares, bonds, and other securities.
- Mutual Funds: Issue units for specifically defined schemes.
- Investment Trusts: Issue units for specifically defined schemes.
Types of Investors: Investors in the primary market include:
- Retail Investors: Individual investors who invest up to Rs. 2 lakhs in a single issue.
- Institutional Investors: Banks, companies, financial institutions, mutual funds, insurance companies, and foreign portfolio investors.
- Non-Institutional Buyers (NIBs): Investors who invest more than Rs. 2 lakhs in a single issue.

PRIMARY MARKETS

Institutional Investors: Also known as Qualified Institutional Buyers (QIBs), they require internal approval for making investments and have specifically identified personnel to transact in primary markets.
Foreign Investors: They can use foreign currency to buy securities, but their purchase and sale are subject to foreign exchange rules and regulations.
Securities Availability: Some securities may only be available to specific categories of investors, with information provided in the offer document.

Regulatory Framework for Primary Markets

Regulating Acts: The primary markets are regulated by the Companies Act, 2013, Securities Contracts (Regulation) Act, 1956, SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018, Government Securities Act, 2006, and Government Securities Regulations, 2007.
Regulatory Provisions: These acts and regulations govern aspects such as eligibility to make public issues, information to be provided to the public and regulators, reservation for different categories of investors, methods of making the offer to investors, timelines for the public issue process, usage of funds raised, and continued involvement and accountability of promoters and inside investors.

Regulatory Framework for Types of Issuers

Business Structure: A business enterprise seeking capital must have a legal structure approved by law, such as a limited company, and register with the Ministry of Corporate Affairs.
Banks and Financial Institutions: They must be approved by the RBI and permitted to borrow in the securities markets.
Mutual Funds: They must be registered with SEBI to raise unit capital from the public.

Types of Instruments

Securities Definition: All securities issued to the public must be structured as securities, as defined under the Securities Contracts (Regulation) Act, 1956, or deposits as defined by the Banking Regulation Act, 1949 or the Companies (Acceptance of Deposits) Rules, 1975.

Regulations Pertaining to Public Issue of Shares

Eligibility: An issuer may make an initial public offer if it has net tangible assets of at least Rs. 3 crores, an average operating profit of at least Rs. 15 crores, and a net worth of at least Rs. 1 crore in each of the preceding 3 full years.
Promoters’ Contribution: The promoters’ contribution shall be not less than 20 percent of the post-issue capital, and this contribution will be locked-in for a period of 18 months from the date of allotment in the IPO.
Minimum Offer to Public: A company must make a net offer to the public of at least 25 percent of each class or kind of equity shares or debentures convertible into equity shares issued by the company.
Period of Subscription: A public issue will be open for a minimum of 3 working days and a maximum of 10 working days.
Underwriting: SEBI’s regulations require that an issue should receive subscription of a minimum of 90 percent of the net offer to the public, failing which the company has to refund the entire subscription amount received to the applicants.

PRIMARY MARKETS (Part 4)

Underwriting: An agreement with institutions prior to filling of the prospectus for public offer of shares to subscribe to the shares of the company if they remain unsubscribed by the investors. For undertaking this commitment, the underwriters are paid a commission.
Dematerialization of Shares: SEBI’s regulations require a company making a public issue of shares to enter into an agreement with all the depositories to dematerialize its shares.
Grading of IPO: Companies making a public offer of shares may get the IPO graded by one or more credit rating agency registered with SEBI. The grading is done based on the prospects of the industry, the competitive strength of the company and risks in the business.

Key Concepts

Types of Public Issue of Equity Shares:
- Initial Public Offer (IPO): The first public offer of shares made by a company.
  - Fresh Issue: New shares are issued by the company to public investors, resulting in an increase in issued share capital.
  - Offer for Sale (OFS): Existing shareholders offer a part of their holdings to the public investors, with no change in the company's share capital.
- Further Public Offer (FPO): A further issue of securities to the public by an issuer that has already made an IPO in the past.

Pricing a Public Issue of Shares

Fixed Price Issue: The company decides on the price at which the shares will be issued in consultation with the lead manager.
Book Built Issue: The price is determined by a process of bidding by investors, with the company specifying a floor price or price band.

Book Built Issue

Allocation Pattern: The allocation pattern in a book-built offer varies based on the issuer's eligibility criteria, with different percentages allocated to retail individual investors, non-institutional investors, and Qualified Institutional Buyers (QIBs).
Discount to Retail Investors: Book built issues may have a clause allowing allotment to retail investors at a price that is at a discount to the cut-off price, not exceeding 10 percent of the price at which shares are allotted to other category of investors.

Public Issue Process of Equities

Allocation in Non-Institutional Investors' Category: One-third of the portion available to non-institutional investors is reserved for applicants applying for amounts more than Rs. 2 lakhs and up to Rs. 10 lakhs, and two-thirds for applicants with application size of more than Rs. 10 lakhs.
Allocation Pattern for Issues Made Other Than Through Book-Built Offer: Minimum 50 percent to retail individual investors and remaining to individual applicants other than retail individual investors and other investors.

PRIMARY MARKETS (Part 5)

Definition: The process by which a company issues new shares to the public for the first time, involving various internal and external steps.
Details: The company must obtain approval from its board of directors and existing shareholders, appoint a lead manager, and comply with regulatory requirements.

Key Steps in a Public Issue

The company passes a board resolution and shareholders resolution for the issue of shares.
The issuer appoints a lead manager to manage the regulatory and operational aspects of the public offer.
The lead manager appoints R&T agents, bankers, brokers, and underwriters to the issue.
The company obtains in-principle approval from the stock exchange where the shares are proposed to be listed.
The draft prospectus is filed with SEBI, and changes are made as suggested by SEBI.
The lead manager signs the due diligence that all regulatory requirements are complied with.
Marketing activities are conducted to promote the issue.

Constituents in a Public Issue

Lead Manager: responsible for managing the issue process.
Registrar and Transfer Agents (RTA): appointed by the lead manager to handle pre-issue and post-issue work.
Bankers to the Issue: responsible for collecting funds and providing updates on collection figures.
Brokers to the Issue/Syndicate Members: facilitate the collection of application forms and bids.
Underwriters: institutions that subscribe to shares if they remain unsubscribed by investors.

Prospectus

Definition: A document containing all relevant information for an investor to make an investment in a fixed price public issue of shares.
Content: includes details of the issuer, objective of the public issue, terms of the public issue, financial statements, and risk factors.
Red Herring Prospectus: a document used for a public issue of shares made through a book-building exercise, which discloses the upper and lower band of the price and the number of shares.

Applying to a Public Issue

Process: investors can apply for a public issue through the Application Supported by Blocked Amount (ASBA) facility.
Online Bidding System: the NSE and BSE provide an online bidding system for the book-building process for IPOs.
e-IPO Facility: investors can bid for IPOs using the electronic trading facility of any broker of the exchange.

PRIMARY MARKETS (Part 6)

Definition: Primary markets are where companies raise capital by issuing new securities to investors.
Details: Investors can bid at the cut-off price, ensuring their application is always accepted, or specify a bidding price.

Key Concepts in Primary Markets

Bidding at Cut-off: Bidding at the cut-off price implies that the investor accepts the price determined by the bidding process, ensuring their application is always accepted.
Revision of Bids: Investors can revise or modify their bids at any time before the issue closing date using the revision form or online modification facility.
Payment Mechanism: Payment for applications in a public issue must be made using the ASBA (Application Supported by Blocked Amount) facility.
ASBA Facility: ASBA is an application for subscription to an issue containing an authorization to block the application money in the bank account and release funds only on allotment.

Regulatory Requirements

SEBI Regulations: SEBI has introduced the use of Unified Payment Interface (UPI) as a payment mechanism with ASBA for applications in public issues.
UPI Limits: SEBI has notified a circular stating that all individual investors applying in public issues with an application amount up to Rs. 5 lakhs should use UPI.
Additional Payment Mechanisms: SEBI has introduced additional channels for making subscriptions and/or paying call money, including Online ASBA, Physical ASBA, and Additional Online mode.

Basis of Allotment

Definition: Basis of allotment is the process of deciding the number of shares each investor is entitled to be allotted.
Details: If the issue is over-subscribed, the number of shares allotted to each investor will be in proportion to the oversubscription.

Green Shoe Option

Definition: The Green Shoe Option (GSO) is used by companies to provide stability to the share price in the secondary market immediately after listing.
Details: A company can allot additional shares not exceeding 15% of the issue size to the general public who have subscribed to the issue.

Listing of Shares

Definition: Listing of shares refers to the process of getting shares listed on a stock exchange after allotment.
Details: The company must enter into a listing agreement with the stock exchange, pay listing fees, and agree to abide by the rules regarding notification and disclosure of price-sensitive information.

Rights Issue of Shares

Definition: A rights issue is an offer of shares to existing shareholders in a proportion approved by the board of the company.
Details: The rights shares are offered to existing shareholders to prevent dilution of their holdings, and the issue must follow all SEBI regulations on the issue of shares.

Regulatory Requirements for Public Issue of Debt Securities

Definition: A company can make a public issue of debt securities, such as debentures, by making an offer through a prospectus.
Details: The issue of debt securities is regulated by the provisions of the Companies Act and SEBI (Issue and Listing of Non-Convertible Securities) Regulations, 2021.

PRIMARY MARKETS (Part 7)

Definition: A public issue of debt securities is possible by a company registered as a public limited company under the Companies Act, 2013.
Details: An unlisted company can make a public issue of debentures and list them on a stock exchange.

Key Concepts

Issuer: As per the SEBI (NCS) Regulations, means any company, public sector undertaking or statutory corporation or Trusts registered with SEBI as Real Estate Investment Trusts (REIT) or Infrastructure Investment Trusts (InvIT) which are authorized to issue and seek to list non-convertible securities and/or commercial papers on any recognized stock exchange(s).
Offer Document: A company making a public issue of debt securities must file a draft offer document with the stock exchanges where the issue is proposed to be listed through its lead managers.
Shelf Prospectus: Eligible entities are permitted to file a shelf prospectus with the Registrar of Companies for public issuance of their debt securities and make multiple issues under this document through tranche prospectus.
Listing of Securities: The debentures issued under a public offer must mandatorily be listed on a stock exchange.
Credit Rating: Credit rating has to be obtained from at least one credit rating agency registered with SEBI and the rating has to be disclosed in the offer document.
Minimum Subscription: The minimum subscription in a public issue of debt securities should not be less than 75 percent of the base issue size or as specified by SEBI.
Dematerialization: The issuer has to enter into an agreement with a depository for dematerialization of the securities proposed to be issued.
Debenture Trustees: Debenture trustees have to be appointed to oversee the interests of the investors.
Debenture Redemption Reserve: For the redemption of the debt securities issued by a company, the issuer must create a debenture redemption reserve and transfer a portion of profits into it each year till the redemption of the debentures.

Public Issue Process for Debt Securities

Board Resolution: Board resolution for issue of debt securities authorized by shareholders’ resolution.
Draft Prospectus: Submission of draft prospectus to stock exchanges and SEBI.
Final Offer Document: Submission of final offer document to Registrar of Companies after addressing any comments from stock exchanges or SEBI or the public.
Listing Application: Application to the exchanges for listing of the debt securities.
Dematerialization Application: Application to the depositories for dematerialization of the debt securities.
Credit Rating: Obtaining a credit rating for the issue.
Compliance: Compliance with SEBI regulations relating to issue and listing of securities, disclosure requirements and provisions of the Companies Act, 2013 and other applicable regulations.

Private Placements in Equity and Debt

Definition: A private placement of securities is an offer made by a company to a select group of investors.
Advantages: Investors are better informed and there are less regulatory compliances in issuances to them.
Requirements: The offer for a private placement of securities shall be made by name to identified persons and the details of the offer made shall be filed with the Registrar of Companies.
Payment: Payment by investors for subscription to a private placement shall only be through banking channels and not by cash.
Preferential Allotment: A private placement of shares or debt securities that can be converted into shares at a future date, made by a listed company is called a preferential allotment of securities.
Qualified Institutions Placement (QIP): An issue of eligible securities by a listed issuer to Qualified Institutional Buyers (QIBs) on a private placement basis.

PRIMARY MARKETS (Part 8)

Qualified Institutional Placement (QIP): A process where a company can issue securities to Qualified Institutional Buyers (QIBs), such as financial institutions, mutual funds, and banks, on a private placement basis.
Eligibility Criteria: To be eligible for QIP, a company must:
- Pass a special resolution approving the QIP by its shareholders.
- List its shares on the stock exchange for at least 1 year before notice of the issue is given.
Offer for Sale: Promoters or promoter groups can make an offer for sale through QIP to achieve minimum public shareholding, as prescribed by SEBI.
Listing Requirement: Companies listed on stock exchanges must adhere to a minimum public shareholding of 25 percent, as per the Securities Contracts (Regulation) Rules, 1957.
Bidding Process: Investors must bid using the ASBA (Application Supported by Blocked Amount) facility, and bids cannot be revised downward or withdrawn after the issue closure.
Allotment: A minimum of 10 percent of eligible securities will be allotted to mutual funds, with any unsubscribed portion allotted to other QIBs.

Electronic System for Book-Building in Debt Securities

Private Placement: Companies in India prefer private placement for issuing debt securities due to its cost-effectiveness and efficiency.
SEBI Framework: SEBI has set up a framework for electronic bidding of debt securities on a private placement basis to increase transparency and reduce costs.
Eligible Securities: Include equity shares, non-convertible debt instruments, warrants, and convertible securities other than warrants.
Electronic Book Provider (EBP) Platform: Provided by stock exchanges, the EBP platform facilitates electronic bidding for private placement of debt securities.
Registration: Issuers, arrangers, QIBs, and custodians must register with the exchange to access the EBP facility.
Issue Documents: The issuing company must upload issue documents, such as the private placement memorandum and term sheet, on the EBP platform at least 2 working days prior to the issue opening date.
Bidding Process: Participants must enroll with the EBP prior to entering the bidding process, and the EBP ensures that eligible participants have access to issue-related information and the bidding portal.
Bidding Announcement: The issuer must make the bidding announcement on the EBP at least 1 working day before initiating the bidding process.
Bid Limits: Eligible participants cannot bid for an amount more than Rs. 100 crore or 5 percent of the base issue size, whichever is lower, through arrangers on the EBP platform.
Cut-off Price/Yield: The cut-off price/yield must be calculated by the system after completion of the bidding process.
Successful Bids: The EBP system determines successful bids based on price-time priority or yield-time priority and informs bidders about the status of their bids.
Market Dissemination: The EBP must disseminate information regarding bidding and allotment to the market as per SEBI guidelines.

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