CAPITAL MARKET:

PRIMARY MARKET
 INTRODUCTION

◉ The capital market is a market for long-term funds—

both equity and debt—and funds raised within and
outside the country.
◉ The capital market aids economic growth by
mobilizing the savings of the economic sectors and
directing the same towards channels of productive
use.

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 FUNCTIONS
◉ Mobilize long-term savings to finance long-term investments.
◉ Provide risk capital in the form of equity or quasi-equity to
entrepreneurs.
◉ Provide liquidity with a mechanism enabling the investor to
sell financial assets.
◉ Lower the costs of transactions and information.

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 FUNCTIONS (contd.)

◉ Enable quick valuation of financial instruments—both

equity and debt.
◉ Enable wider participation by enhancing the width of the
market by encouraging participation through networking
institutions and associating individuals.
◉ Direct the flow of funds into efficient channels through
investment, disinvestment, and reinvestment.

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 PRIMARY MARKET

◉ This refers to the long-term flow of funds from the surplus sector
to the government and corporate sector and to banks and non-
bank financial intermediaries.
◉ Primary issues of the corporate sector lead to capital formation
(creation of net fixed assets and incremental change in
inventories).
◉ The capital formation function enables companies to invest the
proceeds of a primary issue in creating productive capacities,
increasing efficiency, and creating jobs which, in turn, generate
wealth.

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FUND RAISING IN THE PRIMARY MARKET ***

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IPO
 INITIAL PUBLIC OFFERING

◉ 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.
◉ In the case of an IPO, the availability of information regarding
the past performance of the company and its track record is
generally inadequate and may lack credibility.
◉ https://www.chittorgarh.com/ipo/sbi-cards-ipo/1025/

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 Fixed Price Issues & Book Building Issues

◉ Fixed Price Issues: Price at which the securities are offered

and would be allotted is made known in advance to the
investors
◉ Book Building Issues: A price band is offered by the issuer
within which investors are allowed to bid and the final price
is determined by the issuer only after closure of the bidding.

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 More About Book Building
◉ Book Building is essentially a process used by companies raising capital
through Public Offerings-both 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.

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FPO
 FOLLOW-ON OFFERING: ALLOTMENT OF SHARES

◉ 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.
◉ SEBI (DIP) Guidelines define a listed company as a company
which has any of its securities offered through an offer
document listed on a recognized stock exchange and also
includes public sector undertakings whose securities are listed
on a recognized stock exchange.

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Rights Issue
 RIGHTS ISSUE

◉ Rights issue is the issue of new shares in which existing

shareholders are given pre-emptive rights to subscribe to the
new issue on a pro-rata basis.
◉ The right is given in the form of an offer to existing
shareholders to subscribe to a proportionate number of fresh,
extra shares at a pre-determined price.
◉ Companies offer shares on a rights basis either to expand,
diversify, restructure their balance sheet or raise the promoter
stake.

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 RIGHTS ISSUE vs PUBLIC ISSUE

Rights Issue is different from public issue:

◉ In a rights issue, new shares are offered to existing shareholders while in a public
issue shares are offered to public at large.
◉ In case of rights, shareholders can renounce their ‘rights entitlement’ (REs) while
there is no rights entitlement in case of public issue.
◉ Rights shares are allotted based on shareholding as on record date as against
‘proportionate allotment’ based on application size in public issues.

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Private Placement
 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 major issuers of privately placed securities are financial
institutions, banks, and central- and state-level undertakings.
◉ The subscribers are banks, provident funds, mutual funds, and
high net worth individuals.

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 PRIVATE PLACEMENT: ADVANTAGES

◉ The time taken by, as well as the cost of issue for the private
placement route is much less for the issuer as compared to the public
and rights issues.
◉ Privately placed issues can be tailor-made to suit the requirements of
both the issuer and the investor, to give them greater flexibility than
public or rights issues.
◉ Moreover, private placement does not require detailed compliance of
formalities, rating, and disclosure norms as required in public or
rights issues.

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Preferential Issue
 PREFERENTIAL ISSUE
◉ A public/rights issue is cumbersome and requires compliance with statutory provisions.
Hence, 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. An issuer need not file an offer document in case of preferential allotment.
◉ The SEBI (Issue of Capital and Disclosure Requirements) Regulations define
‘preferential issue’ as an issue of specified securities by a listed issuer to any select
person or group of persons on a private placement basis and does not include an
offer of specified securities made through a public issue, rights issue, bonus issue,
employee stock option scheme or or an issue of sweat equity.’

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 PREFERENTIAL ISSUE: ADVANTAGES
Preferential allotment is carried out for various reasons:
◉ to enhance the promoters’ holding by issuing share warrants to themselves;
◉ 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 and
◉ for take-over of company by management group.
Preferential issues enable quick fund raising at low cost and allow a company to take on
board its business partners like technology collaborators, to raise their commitment to
the company.

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 What is a Share Warrant?

◉ A Share Warrant is a document issued by the company under its

common seal, stating that its bearer is entitled to the shares or
stock specified therein.
◉ Share warrants are negotiable instruments. They are
transferable by mere delivery without registration of transfer.

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Qualified Institutions
Placement
 QUALIFIED INSTITUTIONS PLACEMENT

◉ QIP is an issue of equity shares or securities convertible into equity shares by a

listed company to qualified institutional buyers only, in terms of provisions of
Chapter XIIIA of SEBI(DIP) guidelines.
◉ 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.

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 IPO GRADING
◉ Initial Public Offering (IPO) Grading has been introduced as an attempt to make additional
information available for investors to facilitate their assessment of equity issues offered
through an IPO.
◉ With the increase in the domestic retail and institutional participation in the equity markets,
the markets regulator, Securities and Exchange Board of India, has made the grading of these
IPOs mandatory.
◉ Investment decisions for IPOs presently require analysing complex disclosure documents,
which is a challenge for investors, especially retail investors.
◉ IPO Grading aims to provide an independent, unbiased view of the company's fundamentals,
enabling the investor to benchmark new issuers with their peers in the equity universe.
◉ It is a one-time assessment undertaken prior to the proposed initial public issue; therefore,
there would be no ongoing coverage of the issuer after the initial grading.

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 IPO GRADING: METHODOLOGY
The IPO Grading methodology adopted by Ind-Ra (
https://www.indiaratings.co.in/about-us/overview ) is a combination of both the quantitative and
qualitative factors taken to assess the financial and business risks of the issuer.
Qualitative Analysis
◉ Industry analysis and market position.
◉ Analysis of the operating environment.
◉ Management quality
◉ Corporate governance, quality of disclosures in the prospectus, accounting standards, and
compliance.
Quantitative Analysis
◉ Past financial performance including growth, earnings, profitability, cash flow analysis,
capital structure, liquidity, and working capital.
◉ Future financial prospects including investment, capital expansion, acquisition plans and
utilisation of IPO proceeds, and projections.

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 IPO GRADING: SCALE
◉ The IPO grade scale as arrived at by SEBI is a 5-point scale with Grade 1 denoting poor
fundamentals and Grade 5 indicating strong fundamentals.
◉ The grade assigned to any individual issue represents a relative assessment of the
'fundamentals' of that issue in relation to the universe of other listed equity securities in
India.

Grading Category Definitions

IPO Grade 5 Strong fundamentals
IPO Grade 4 Above average fundamentals
IPO Grade 3 Average fundamentals
IPO Grade 2 Below average fundamentals
IPO Grade 1 Poor fundamentals

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Book Building
Mechanism
 MEANING

◉ Book building is a mechanism through which an offer price for IPOs based on the investors’
demand is determined.
◉ The SEBI guidelines define book building as a process undertaken by which a demand for the
securities proposed to be issued by a corporate body is elicited and built-up and the price for
such securities is assessed for the determination of the quantum of such securities to be
issued by means of a notice, circular, advertisement, document or information, memoranda
or offer document.
◉ The book building is basically an auction of shares. Book building essentially means that the
‘book is being built.’
◉ During the process on both the NSE and the BSE, investors can watch the book being built– a
chart shown indicates the bid price and the number of shares being bid for. This helps the
investor to know the market price.
◉ It offers investors the opportunity to bid collectively. It then uses the bids to arrive at a
consensus price.

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FIXED PRICE vs BOOK BUILDING

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 GREEN SHOE OPTION
https://www.investopedia.com/terms/g/greenshoe.asp
◉ The SEBI permitted the green-shoe option in book building issues when it amended the guidelines
in August 2003.
◉ A green-shoe option means an option of allocating shares in excess of the shares included in the
public issue and operating a post-listing price stabilising mechanism for a period not exceeding 30
days in accordance with the provisions of Chapter VIIIA of the DIP (Disclosure and Investor
Protection) guidelines.
◉ Green-shoe option is an option of over-allotting shares by an issuer to the underwriter in a
public offering to provide post-listing price stability to an initial public offering.
◉ This option is to the extent of 15 per cent of the issue size.
◉ It is also referred to as an over-allotment option.
◉ Over allotment is an allotment or allocation of shares in excess of the size of a public issue, made
by the SA (stabilizing Agent) out of shares borrowed from the promoters or the pre-issue
shareholders or both.

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