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Chapter 12: Investment through Primary Market

The Primary Market offers multiple structured avenues for corporate entities, statutory bodies, and governments to raise capital from domestic and international investors. These avenues are broadly divided into Public Offerings, Rights Offerings, and Private Placements:

1. Initial Public Offering (IPO)

An Initial Public Offering is the premier issuance channel whereby an unlisted company offers equity shares or convertible debentures to the public for the first time.

  • Fresh Issue: The company creates and issues entirely new shares, receiving the proceeds to finance business expansion, capital expenditure, debt reduction, or working capital.
  • Offer for Sale (OFS): Existing early-stage investors (venture capital, private equity) or company promoters divest part of their existing shareholding to public investors. Proceeds from an OFS flow to the selling shareholders, not to the company's balance sheet.

2. Follow-on Public Offering (FPO)

A public offering made by an already listed public company to raise additional capital from the market or dilute promoter holding to comply with Minimum Public Shareholding (MPS) norms (which mandates at least 25% public float for listed companies in India).

3. Rights Issue and Preferential Allotment

  • Rights Issue: Offered to existing shareholders in proportion to their shareholding as of a specified record date under Section 62 of the Companies Act, 2013. Rights are renounceable—an existing shareholder can either subscribe to their entitlement or trade/renounce their Rights Entitlement (RE) on the stock exchange.
  • Preferential Allotment: Direct issuance of shares or convertible instruments to a select group of promoters or strategic investors under Section 42/62 of the Companies Act, subject to pricing formulas and statutory lock-in periods.

Under the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 (SEBI ICDR Regulations), public offerings in India are segmented into distinct investor categories with legally mandated minimum allotment quotas:

1. Retail Individual Investors (RIIs)

  • Definition: Individual investors, Hindu Undivided Families (HUFs), and Non-Resident Indians (NRIs) whose total application value across all bid options does not exceed Rs. 2,00,000 (Rs. 2 Lakhs).
  • Quota: In standard profitability-based IPOs, a minimum of 35% of the net offer to the public is reserved for RIIs.
  • Allotment Methodology: Allotment in the retail category is conducted on a proportionate or lottery basis to ensure that as many unique retail applicants as possible receive at least the minimum bid lot.

2. Non-Institutional Investors (NIIs) / High Net-Worth Individuals (HNIs)

  • Definition: Resident individuals, HUFs, companies, corporate bodies, and trusts applying for securities worth more than Rs. 2,00,000.
  • Sub-Categories (SEBI Rule):
    • Small NII (sNII): Bids between Rs. 2,00,001 and Rs. 10,00,000 (one-third of the NII quota).
    • Big NII (bNII): Bids above Rs. 10,00,000 (two-thirds of the NII quota).
  • Quota: Typically 15% of the net offer. Bids cannot be made at the cut-off price; specific prices must be entered.

3. Qualified Institutional Buyers (QIBs)

  • Definition: Institutional entities possessing professional financial expertise, including SEBI-registered Mutual Funds, Foreign Portfolio Investors (FPIs), Scheduled Commercial Banks, Insurance Companies, and Pension Funds.
  • Quota: Typically 50% of the net offer (or 75% in issues qualifying under the alternative book-building route).
  • Anchor Investors: A sub-set of QIBs who can be allocated up to 60% of the QIB quota one day prior to the public issue opening, subject to statutory 30-day and 90-day lock-in periods.

In addition to equity offerings, the primary market is a vital venue for the issuance of Non-Convertible Debentures (NCDs) and public corporate bonds.

  • Credit Rating: Mandatory credit rating from at least one SEBI-registered credit rating agency must be disclosed in the offer document.
  • Debenture Trustee: Issuers must appoint an independent SEBI-registered Debenture Trustee to monitor collateral, oversee asset cover maintenance, and protect the interests of debenture holders.
  • Tenor and Coupon Structure: NCDs offer diverse tenors (e.g., 3, 5, or 10 years) with monthly, annual, or cumulative compounding coupon options.
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