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
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.
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-today 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.
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 longterm 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.