Primary Market Issue Management
Primary Market Issue Management
Primary Market Issue Management
Faculty in Management
[email protected]
Primary Market
Primary market is a market for new issues or new
financial claims. Hence, it is also called New Issue
Market.
the SEBI has put in place guidelines as ground rules relating to new issue
procedures/activities. These are in addition to the company law
requirements in relation to issues of capital/securities.
They are applicable to :
In case of rights issues of less than Rs. 50 lac, the company
should prepare the letter of offer in accordance with the
disclosure requirements and file the same with the SEBI for its
information and for being put on the SEBI website.
OFFER DOCUMENTS
Offer document mean prospectus in case of a public
issue or offer for sale and letter of offer in case of a
right issue which filed with the Registrar of
companies (ROC) and Stock Exchange.
Section 2(36) of the Companies Act, 1956 defines prospectus means "any
document described or issued as a prospectus and includes any notice,
circular advertisement or other document inviting deposits from the public
or inviting offers from the public for the subscription or purchase of any
shares in, or debentures of a body corporate. “
In the case of book built issues, it is a process of price discovery and the
price cannot be determined until bidding process is completed. Hence, such
details are not shown in Red-herring prospectus filed with RoC in terms of
the provisions of the Companies Act.
Only on completion of the bidding process, the details of the final prices are
included in the offer document. The offer document filed thereafter with
RoC is called a 'prospectus'.
PUBLIC ISSUES
The eligibility norms for issue of equity shares and
convertible securities relate to
(1) unlisted companies
(2) listed companies
Initial Public Offerings (IPO’s) by Unlisted
Companies
An unlisted company can make an IPO only if it meets all
the following conditions:
4. In case of change of its name within the last one year, at least 50 per
cent of the revenue for the preceding one full year is earned by the
company from the activity suggested by the new name
5. The aggregate of the proposed issue and all previous issues made in the
same financial year in terms of size (i.e. offer through offer document
plus firm allotment and promoters contribution through the offer
document) does not exceed 5 times its pre-issue net worth as per the
audited balance sheet of the last financial year.
(IPO’s) by Unlisted Companies………cont…
If an unlisted company does not comply with any of the five conditions
specified above, it may make an IPO only if it satisfies both the following
conditions :
(1) The issue is made through the book-building process with at least 60 per
cent of the issue size being allotted to the Qualified Institutional Buyers
(QIBs) failing which the full subscription would be refunded; or the
project has at least 15 per cent participation by banks/financial institutions.
In addition, at least 10 per cent of the issue size should be allotted to the
QIBs failing which the full subscription should be refunded
(2) The minimum post-issue issue face value of capital of the company would
be Rs. 10 crore or there would be a compulsory market-making for at least
2 years from the date of listing of the shares subject to the following
In case of a change in the name of the issuer company within the last
one year (reckoned from the date of filing of the offer document), the
revenue accounted for by the activity suggested by the new name
should not be less than 50 per cent of its total revenue in the
preceding one full year.
A listed company which does not fulfill the above conditions, would
be eligible to make a public issue through book-building process
with the same conditions as are applicable to unlisted companies
Exemptions
The eligibility norms specified above for IPO’s are not
applicable in the following cases
Private/public sector banks
Infrastructure companies, wholly engaged in the
business of developing, maintaining and operating
infrastructure
Rights issue by a listed company.
Right Issue
If an existing company intends to raise additional funds, it can do so
by borrowing or by issuing new shares. One of the most common
methods for a public company to use is to offer existing shareholders
the opportunity to subscribe further shares. This mode of rising
finance is called rights issues'.
After the issue has actually been made, the market price per share will
normally fall, because there are more shares in issue and the new
shares were issued at a discount price.
PRIVATE PLACEMENT
In the primary capital market corporate can raise resources through public
issues and rights issues and 'private placement'. While public issues involve
allotting securities to the general public, rights issues entail allotment of
securities to the shareholders.
The time taken as well as the cost of issue for the private placement route is
much less for the issuer as compared with a public issue. Thus the private
placement is a cost and time effective way of raising funds for the
corporates. The privately placed issues offer greater flexibility to the issuers
as the instruments can be structured according to the needs of the
entrepreneurs. Moreover, private placement does not require detailed
compliance of formalities as required in public or rights issues.
Private placement market in India
The private placement market is subject to some regulations rather
than the other developed markets. In sharp contrast to this, the
private placements in India are not bound by any regulatory system.
The cap of the price band should not exceed 20 per cent of
the floor.
The time taken to raise money in the capital market by a company takes
as much as six months and this time is very high for a company in an
infancy stage. The waste of time in the initial stage can be avoided by
going for BOD.
The investors also gain from the BOD in a way that they get good issues
where some merchant banker has already invested in it. The common
investors do not have enough scope and information for proper
evaluation of a company. The merchant bankers are professionals and
can make proper appraisal of a company.
Drawbacks of BOD
There is a fear of loss of management control because the sponsor is a
holder of a large chunk of equities at one time. The sponsor may also
influence the policy decision which may affect the functioning of the
company.
The investment banker who has to off-load the equities in the primary
market at a later date is entitled to ask for a higher price for the risk taken
by him. But this price may scare away the common investors.
If a merchant banker does not make proper analysis of the company it may
face a lot of problems with the BOD. Unless it evaluates all the risks
associated with the project, there is every chance that the sponsor may burn
its fingers.
ISSUE OF DEBT INSTRUMENTS
A company offering converting and non-convertible debt instruments through an
offer document should complies with the following provisions:
Redemption
In the case of partly convertible debentures, the DRR should be created with
respect to the non-convertible portion on the same lines as applicable for fully
non-convertible debenture issue.
The drawal from DRR is permissible only after 10 per cent of the debenture
liability has actually been reduced by the company. The requirement of
creation of DRR is not, however, applicable in the case of issue of debt
instruments by infrastructure companies.
Creation of Debenture Redemption
Reserves (DRR)
In case of convertible issues by new companies, the creation of DRR
should commence from the year the company earns profits for the
remaining life of debentures.
The company should create the DRR equivalent to 50 per cent of the
amount of debenture issue before the commencement of debenture
redemption.
Disclosure and Creation of Charge
The offer document should specifically state the assets on
which the security would be created as also the ranking of
the charge(s). In case of second/residual charge or
subordinated obligation, the associated risks should also
be clearly stated. The relevant consent for creation of
security such as pari passu letter, consent of the lesser of
the land in case of leasehold land, and so on, should be
obtained and submitted to the debenture trustee before
opening of the debenture issue.
Other Requirements
No company should Issue fully convertible debentures (FCDs) have a
conversion period of more than 36 months unless conversion is made
optional with "put" and "call" option.