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Chapter – 3
Primary and Secondary Stock Market

 Primary market

Primary Market issues new securities on an exchange for companies, governments, and other
groups to obtain financing through debt-based or equity-based securities. Primary markets are
facilitated by underwriting groups consisting of investment banks that set a beginning price
range for a given security and oversee its sale to investors.

Once the initial sale is complete, further trading is conducted on the secondary market, where
the bulk of exchange trading occurs each day.

The primary market is where securities are created. It's in this market that firms sell (float)
new stocks and bonds to the public for the first time. An initial public offering, or IPO, is an
example of a primary market. These trades provide an opportunity for investors to buy
securities from the bank that did the initial underwriting for a particular stock. An IPO occurs
when a private company issues stock to the public for the first time. Companies and
government entities sell new issues of common and preferred stock, corporate bonds and
government bonds, notes, and bills on the primary market to fund business improvements or
expand operations. Although an investment bank may set the securities' initial price and
receive a fee for facilitating sales, most of the funding goes to the issuer. Investors typically
pay less for securities on the primary market than on the secondary market.
 Issue of shares in market
All issues on the primary market are subject to strict regulation. Companies must file
statements with the Securities and Exchange Commission (SEC) and other securities agencies
and must wait until their filings are approved before they can go public.

A rights offering (issue) permits companies to raise additional equity through the primary
market after already having securities enter the secondary market. Current investors are
offered prorated rights based on the shares they currently own, and others can invest anew in
newly minted shares.

Other types of primary market offerings for stocks include private placement and preferential
allotment. Private placement allows companies to sell directly to more significant investors
such as hedge funds and banks without making shares publicly available. While preferential
allotment offers shares to select investors (usually hedge funds, banks, and mutual funds) at a
special price not available to the general public.

Similarly, businesses and governments that want to generate debt capital can choose to issue
new short- and long-term bonds on the primary market. New bonds are issued with coupon
rates that correspond to the current interest rates at the time of issuance, which may be higher
or lower than pre-existing bonds.

 IPO

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Definition: Initial public offering is the process by which a private company can go public by
sale of its stocks to general public. It could be a new, young company or an old company
which decides to be listed on an exchange and hence goes public.

Companies can raise equity capital with the help of an IPO by issuing new shares to the
public or the existing shareholders can sell their shares to the public without raising any fresh
capital.

Description: A company offering its shares to the public is not obliged to repay the capital to
public investors.

The company which offers its shares, known as an 'issuer', does so with the help of
investment banks. After IPO, the company's shares are traded in an open market. Those
shares can be further sold by investors through secondary market trading.
 Follow on Public Offer / Further Public Offer (FPO)
Follow on public offer or FPO is a way by which companies already listed on the stock
exchange issue shares to the public. It is different from an IPO which is when a company
offers its shares to the public for the first time. There are two ways in which a company
can conduct its follow-on public offer. A company generally needs a follow-on offering to
raise ‘additional capital’ for various reasons and this goal is achieved by conducting a
dilutive FPO where new shares are offered and new money is generated.

Dilutive

Dilutive FPO is when the new offer of shares actually increases the number of outstanding

shares of the company.

Non-dilutive

Nondilutive, as the name suggests, does not dilute the existing shareholding. The shares

issued in a non-dilutive IPO are those that are already in existence. This means that it is

the directors or the bigger shareholders who sell their shares and offer them to the public.

 Offer For Sale (ofs)'

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Definition: Offer for sale (OFS) is a simpler method of share sale through the exchange
platform for listed companies. The mechanism was first introduced by India’s securities
market regulator Sebi, in 2012, to make it easier for promoters of publicly-traded companies
to cut their holdings and comply with the minimum public shareholding norms by June 2013.
The method was largely adopted by listed companies, both state-run and private, to adhere to
the Sebi order. Later, the government started using this route to divest its shareholding in
public sector enterprises.

Description: Unlike a follow-on public offering (FPO), where companies can raise funds by
issuing fresh shares or promoters can sell their existing stakes, or both, the OFS mechanism is
used only when existing shares are put on the block. Only promoters or shareholders holding
more than 10 per cent of the share capital in a company can come up with such an issue.

The mechanism is available to 200 top companies in terms of market capitalisation. In an

OFS, a minimum of 25 per cent of the shares offered, are reserved for mutual funds (MFs)
and insurance companies. At any point, no single bidder other than these two institutional
categories is allocated more than 25 per cent of the size of the offering.

A minimum of 10 per cent of the offer size is reserved for retail investors. A seller can offer a
discount to retail investors either on the bid price or on the final allotment price. The OFS
window is open only for a single day. It is mandatory for the company to inform the stock
exchanges two banking days prior to the OFS about its intention.

This has a key advantage over follow-on public offer (FPO), which stays open for three to 10
days, and takes considerable time, as it requires filing of draft papers and obtaining necessary
approvals from Sebi. In OFS, the entire retail bid amount is backed by 100 per cent margins
in the form of cash and cash-equivalent. The process is quick and any excess fund, due to
non-allotment or partial allotment, is refunded to the trading member on the same day, after 6
pm.

Bids backed by 100 per cent margins are allowed to be modified anytime during the OFS
hours. Nonetheless, those with zero per cent margin can only be modified upwards, for
revision in price and quantity. No cancellation is permitted in such bids.

Bids below the floor price are rejected. The allocation remains subject to final price
discovery. An FPO, on the other hand, defines a price band within which bids are placed.

 Private Placement
A private placement is a sale of stock shares or bonds to pre-selected investors and
institutions rather than on the open market. It is an alternative to an initial public offering
(IPO) for a company seeking to raise capital for expansion.

Investors invited to participate in private placement programs include wealthy individual

investors, banks and other financial institutions, mutual funds, insurance companies,
and pension funds.

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One advantage of a private placement is its relatively few regulatory requirements.

 Preferential allotment

Preferential allotment involves bulk allotment of fresh issue of shares by a company to

individuals, venture capitalists and companies at a pre-determined price. Usually, a company

chooses to make a preferential allotment to people who want to acquire a strategic stake in

the company. This includes the existing shareholders like promoters, venture capitalists,

financial institutions, suppliers or buyers who want to increase their stake in the company.

Therefore, preferential allotment allows the company to get equity participation of those

whom it considers to be a value addition as shareholders.

Every company, whether it is a private or public, listed or unlisted, and even section 8

company can opt for preferential allotment. 

 Institutional Placement Programme (IPP): 

This is one of such methods available to Indian listed companies for the purpose of
complying with minimum public shareholding requirements by raising additional share
capital. In the light of a guideline that mandates the listed companies to raise their public
shareholding to 25% by limiting the promoter’s shareholding to a maximum level of 75%,
methods such as this have become inevitable to comply with the minimum public
shareholding requirement.
Technically, Institutional Placement Programme means a further public offer of eligible
securities by an eligible seller, in which the offer, allocation and allotment of such securities
is made only to qualified institutional buyers in terms of (ISSUE OF CAPITAL AND
DISCLOSURE REQUIREMENTS) Chapter VIII A, where

1. Eligible securities shall mean equity shares of same class listed and traded in the stock
exchange
2. Eligible seller include listed issuer, promoter/promoter group of listed issuer

 Qualified Institutional Placement (QIP)

A qualified institutional placement (QIP) is, at its core, a way for listed companies to raise
capital without having to submit legal paperwork to market regulators. It is common in India
and other Southeast Asian countries. The Securities and Exchange Board of India (SEBI)
created the rule to avoid the dependence of companies on foreign capital resources.

 Rights Issue

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A rights issue is a primary market offer to the existing shareholders to buy additional
shares of the company on a pro-rata basis within a specified date at a discounted price than
the current market price.
It is important to note that the rights issue offer is an invitation that provides an opportunity
for existing shareholders to increase their shareholding. It is a right that a shareholder may or
may not choose to exercise and not an obligation to buy the shares. A company issues rights
shares to raise additional capital. The most common reasons for a company to prefer rights
issue over other public offerings is as follows.

1. To reduce the debt-equity ratio of the company.

2. Cash strapped companies in need of capital and not wanting to increase the debt
burden by taking any loans.
3. For company expansion, acquisition, takeovers or other general corporate purposes.

 Bonus Issue
A bonus issue, also known as a scrip issue or a capitalization issue, is an offer of free
additional shares to existing shareholders. A company may decide to distribute further shares
as an alternative to increasing the dividend payout. For example, a company may give
one bonus share for every five shares held.

 Secondary Market
A secondary market is the market in which securities issued in the primary market are traded
by market participants. It provides an exit route to the investors—they can sell securities in
the secondary market that they had purchased earlier. A stock exchange is an example of a
secondary market. Additionally, many securities are traded on “over the counter” platforms
as well. In this kind of trade

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