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Primary market

INTRODUCTION
The primary market is a market for new issues. It is also called the new issues
market. It is a market for fresh capital. Funds are mobilised in the primary
market through public issue, rights issues, and private placement.
Prospectus shall be issued when securities are offered to the public and
prospectus shall comply with all the provisions of the act as well as the SEBI
guidelines applicable to such public offerings. The direct sale of securities by
a company to some selected people to institution is termed as private
placement and there is no need to issue prospectus

Intermediaries to an Issue
There are different intermediaries to an issue such as merchant bankers or
book running lead tanagers BRLM), syndicate members, registrars to the
issue, bankers to the issue, auditors of the company and solicitors. The
issuer discloses the addresses, telephone, fax numbers and email
addresses of these intermediaries.
Merchant Banker: A merchant banker should be registered with the SEBI as
per the SEBI (Merchant Bankers) Regulations, 1992 to act as a book
running lead manager (BRLM) to an issue. The lead merchant banker
performs most of the pre-issue and post-issue activities. The pre-issue
activities of the lead manager include due diligence of company's operations/
management/business plans/legal etc., drafting and designing offer
document, finalizing the prospectus, drawing up marketing strategies for the
issue, and ensuring compliance with stipulated requirements and
completion of prescribed formalities with the stock exchanges and the
Registrar of Companies (ROC).
The post-issue activities include management of escrow accounts,
coordinating, non-institutional allocation, intimation of allocation,
coordination with the registrar for dispatching of refunds, demateralising
of securities, listing and trading of securities and coordinating the work of
other intermediaries involved in the issue process.
Registrar to the Issue : The role of the registrar is to
finalise the list of eligible allottees, ensure crediting of
shares to the demat accounts of the eligible allottees, and
dispatch refund orders.
Bankers to the issue : They are appointed in all the mandatory collection
centres, and by the lead merchant banker to carry out activities relating to

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collection of application amounts, transfer of this amount to escrow accounts,
and dispatching refund amounts.
It is now mandatory to issue all new initial public offerings
(IPOs) in dematerialised form as they are compulsorily
traded in dematerialised form.

Primary market :

1) Public issue (a) Initial public offering (1PO) a first time offer of sale of
securities by an unlisted company.(b) Follow on public offer (FPO)- An
offer of sale of securities by a listed company.
2) Right issue- An offer of sale of securities existing to shareholders
3) Private Placement (a) private placement (unlisted companies ). Direct
sale of securities to some selected group of persons under sec 81 of the
companies act (b) Preferential issue allotment of shares to some
selected group of persons under sec 81 of the companies act.(c) Qualified
institutions placement for listed company

INTRODUCTION

Equity/ordinary share capital, as a long-term source of finance, represents
ownership capital/ securities and its owners—equity-holders/ordinary
shareholders—share the reward and risk associated with the ownership of
corporate enterprises. It is also called ordinary share capital in contrast with
preference share capital which carries certain preferences/prior rights in regard
to income and redemption. When a company is formed, it first issues equity
shares to the promoters. As the need for financing increases, the company may
issue ordinary shares to specific and small number privately to promoters’
relatives, friends, business associates, employees, financial institutions, mutual
funds, venture capital funds and so on. As the company grows further, it raises
capital from the public. The first issue of equity shares to the public by an unlisted
company is called the initial public offering (IPO). Subsequent offerings are
called further issues/offerings.

Types of Equity share capital

Authorized equity/share capital represents the maximum amount which a
company can raise from the ordinary share holders

Issued capital: The portion of the authorised capital offered by the company to
the investors is the Issued capital.

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Subscribed share capital is that part of the issued capital which has been
accepted/subscribed by the investors. The actual amount paid by the
shareholders is the Paid-up capital. The issued, subscribed and paid-up capitals
are generally the same.

Ordinary shares have typically a par/face value in terms of the price for each
share, the most popular denomination being Rs 10. The price at which the equity
shares are issued is the Issue price. The issue price for new companies is
generally equal to the face value. It may be higher for existing companies, the
difference/ excess being share premium. The price at which equity shares are
traded in the stock market is their market value.

Features of equity shares:

The ordinary shares have some special features in terms of the rights and claims
of their holders.

Residual Claim to Income The equity shareholders have a residual claim to the
income of the company. They are entitled to the remaining income/profits of the
company after all outside claims are met. However, the residual claim is only a
theoretical entitlement as the amount actually received by the shareholders in the
form of dividend will depend on the decision of the board of directors. The
directors have the right to decide what portion of the Earnings will be distributed
to the shareholders as cash dividend and what portion will be ploughed back as
retained earnings which the shareholders will receive later in the form of capital
appreciation/bonus shares.

Residual Claim on Assets The ordinary shareholders’ claim in the assets of the
company is also residual in that their claim would rank after the claims of the
creditors and preference shareholders in the event of liquidation. If the liquidation
value of assets is insufficient, their claims may remain unpaid.

Right to Control As owners of the company, the equity-holders have the right to
control the operations of/ participate in the management of, the company. Their
control is, however, indirect. The major policies/decisions are approved by the
Board of Directors and the Board-appointed management carries out the day-to-
day operations. The shareholders have the legal right/power to elect the board of
directors as well as vote on every resolution placed in various meetings of the
company. Though, in theory, they have indirect right to control/participate in
management, in actual practice, it is weak and ineffective partly because of the
apathy and indifference of the majority of the shareholders who rarely bother to
cast their votes and partly because scattered and by and large unorganized
equity-holders are unable to exercise their collective power effectively.

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Voting System: The ordinary shareholders exercise their right to control through
voting in the meetings of the company. According to the most commonly used
system of voting in India, namely, majority rule voting, each share carries one
vote

Pre-emptive Right ( Right shares) : The ordinary shareholders of a company
enjoy pre-emptive rights in the sense that they have a legal right to be offered by
the company the first opportunity to purchase additional issue of equity capital in
proportion to/pro rata basis their existing/current holdings/ownership

Merits The advantages of equity capital to a company are: first, it is a permanent
source of funds without any repayment liability; second, it does not involve
obligatory dividend payment and, thirdly, it forms the basis of further long-term
financing in the form of borrowing related to the creditworthiness of the firm. The
shareholders with limited liability exercise control and share other ownership
rights in the income/assets of the firm.

Demerits The disadvantages of equity capital from the viewpoint of a company
are: (i) High cost of funds reflecting the high required rate of return of investors
as a compensation for higher risk as also the fact that equity dividends are not
tax-deductible payments. They are paid out of post-tax profits; (ii) High flotation
cost in terms of underwriting, brokerage and other issue expenses compared to
other securities; (iv) Dilution of control of existing shareholders on sale of new
shares to outsiders/public. The disadvantages associated with equity capital for
the shareholders are: (i) The equity capital is in reality risk capital as it ranks the
last as a claimant to income as well as the assets of the company. (ii) The
scattered and unorganized shareholders are unable to exercise effective and real
control over the company. (iii) The shareholders cannot claim dividend as a
matter of right. (iv) There is a wide fluctuation in share prices with attendant risk
for the investors.
In brief, equity capital is a high risk-high reward permanent source of long-
term finance for corporate enterprises. The shareholders who desire to share the
risk, return and control associated with ownership of companies would invest in
corporate equity. As a source of long-term fund, it has high cost, low/nil risk, does
not dilute control and puts no restraint on managerial freedom.

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