Unit 3 - Primary Market

Financial Markets & Services
Unit – III
Primary Market & Secondary Market
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Deemed to be University
Financial Markets and Services

Contents:
Primary Market: Primary Market: Meaning, Constituents,

Instruments, Financial intermediaries, Issue process, fixed
pricing, Book building and its process, sourcing from
international capital markets, Corporate requirements of
listing and other issue procedures and regulations as
prescribed under Companies Act and SEBI Regulations,
Different types of Prospectuses used in corporate IPO,
Marketing initiatives for IPO. Preparation of prospectus.
Excellence and Service

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Contents:
Secondary Market: Secondary Market: Meaning,

Development of secondary markets in India, Constituents
stock exchanges and its functions, Listing compliances as
per SEBI guidelines, Brokers, Functions of trading and
settlement procedure-Stock Exchanges in India-BSE, NSE,
OTCEI, Internet trading, Commodity, currency and other
emerging exchanges.

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Primary Market:
Meaning:
A primary market is also known as the New Issue
Market (NIM) because securities are sold for the first time here.
When a company decides to go public for the first time, it
does so through an Initial Public Offering (IPO) in the primary
market.

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The primary market is a subset of the capital market in
which entities such as corporations, governments, and other
institutions raise funds by selling debt and equity-based securities.
Banks, financial institutions, insurance companies,
mutual funds, and individuals are among those who have invested
in this market.
Funds raised could be used to start new projects, expand,
diversify, modernize existing ones, merge and takeovers, and so on.

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Functions of NIM:
 New Issue offer
This is one of the primary market's most important
functions.
This market organizes the offering of a new issue that has
never been traded on another exchange. Because of this, the
primary market is also known as the new issue market.

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 Underwriting Services
Underwriting is one of the most vital aspects of offering a
new issue offer.
An underwriter's role in the primary market is to purchase
unsold shares.
Financial institutions frequently act as underwriters,
earning a commission in the process.
It is also possible that the underwriter will purchase the
entire IPO issue and then sell it to investors.

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 Distribution of New Issue
This is yet another important function of the primary market.
A new prospectus issue kicks off the distribution process.
The general public is invited to purchase the new issue, and
detailed information about the company, the issue, and the
underwriters is provided.

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Intermediaries to an Issue:
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 activity includes:
-due diligence of company’s operations/management

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-drafting and designing offer document
-finalizing the prospectus,
- drawing up marketing strategies for the issue
-completion of prescribed formalities with the stock
exchanges.
The post-issue activities include:
-co-ordinating
-an intimation of allocation
-coordination with the registrar for dispatching of
refunds Excellence and Service
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-dematerializing of securities,
-listing and trading of securities
Registrar to the Issue:
The role of the registrar is to finalize the list of eligible
allottees, ensure crediting of shares to the demat accounts of the
eligible allottees, and dispatch refund orders.

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Bankers to the Issue:
They are appointed in all the mandatory collection centers
and by the lead merchant banker to collect application amounts and
dispatch refund amounts.

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Principal Steps of a Public Issue:
Draft Prospectus:
A draft prospectus is prepared, giving all detail as mentioned
earlier. Any company making a public issue must file a draft offer
document with SEBI for observation.

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Fulfillment of Entry Norms:
The SEBI has laid down certain parameters for accessing
primary market. They are:
 The company should have net tangible assets of at least three
crore for three years.
 It should have profits for at least three years.
 It should possess net worth of at least 1 crore in three years.

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Appointment of Underwriters:
Underwriters are appointed to shoulder the liability and
subscribe to the shortfall in case the issue is undersubscribed. For
this commitment, they are entitled to get a maximum commission
of 2.5 percent on the amount undertaken.
Appointment of Bankers:
The company nominates its own bankers to act as collecting
agents. The bankers will act as collecting agencies and process the
funds procured during the public issue.

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Initiating allotment procedure:
The next step is that the registrars process the application
forms, tabulate the amounts collected during the issue and initiate
the allotment procedures. The allotment procedure can initiated
only when the issue is subscribed to the minimum level.
Brokers to the issue:
Recognized members of the stock exchanges are appointed
as brokers to the issue for marketing the issue. They are eligible for
a maximum brokerage of 1.5 percent.

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Filing of Documents:
The draft prospectus, along with the copies of the agreement
entered with the underwriters, bankers, registrars and brokers to the
issue, have to be filed with the Registrar of Companies of the State
where the company's registered office is located.
Printing of Prospectus and Application Forms:
After filing the above documents, the prospectus and
application forms are printed and dispatched to all merchant
bankers, underwriters and brokers to the issue.

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Listing of the Issue:
It is essential to send a letter to the stock exchange
concerned where the issue is proposed to be listed giving all
necessary details and stating the intention of getting the shares
listed on the stock exchange. The initial listing application has to
be sent with a fee of Rs. 7500.

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Publication in Newspapers:
The next step is to publish an abridged version of the
prospectus and the issues commencing and closing dates in major
English and Vernacular newspapers.
Allotment of Shares:
After the close of the public issue all application forms are
scrutinized, tabulated and then shares are allotted against those
applications received.

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Underwriter’s Liability:
In case, the issue is not fully subscribed, then the liability for
the subscription to the extent of undersubscription falls on the
shoulders of underwriters who have to subscribe to the shortfall.

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Methods of Pricing:
Fixed Pricing Method:
In a fixed price issue, the offer price is fixed (e.g., Rs 75
per share), which is decided before the IPO opens for the
subscription. The SME companies prefer a fixed price issue over
the book-building method due to the smaller issue size.

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Features of Fixed Pricing Method:
 The Fixed price IPO prospectus contains all the details about the
IPO price and the basis of its determination.
 The issuer has to register the fixed price IPO prospectus with
the Registrar of Companies before the issue opens for the
subscription.
 A minimum of 50% of the net offer of securities should be
made available to retail investors.
 A fixed price issue should be kept open for 3-10 working days.

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Fixed price IPO process
 The lead manager appointed by the issuer company jointly
evaluates factors like the company's financials, growth
prospects, assets, and liabilities and decides the issue size and
the IPO price.
 The bidding process takes place once the IPO opens for the
subscription.
 The investors place the bids at the set price.

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 The lead manager assesses the demand of the issue at the close
of the bidding period and accordingly works with the Registrar
of the company (RoC) for the allotment process.
 The Registrar completes the allotment, credits the shares to the
Demat account, and initiates the refund (as applicable).

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Book Building Method:
 It is a process used in IPOs for efficient price discovery.
 The price at which securities would be offered is not known
initially.
 It is known only after the closure of the book building process.
 It is a common marketing method of new issues in several
developed countries.
 In book building method, the market discovers the price instead
of the company determining the price.

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Features of Book Building Method:

 The IPO is launched without fixing the final price of the issue.
 The issuer announces a price band for the issue. As per
regulations, the price band should be announced at least two
working days before the issue opens for the subscription.
 The issuer can revise the IPO price band while the issue is
open.

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 A book-built issue is to be kept open for 3-7 working days,
extendable by three days in case of revision in the price band.
 BSE and NSE offer a fully automated online bidding system for
Book Building IPOs.

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Methods of Book Building:
Open Book System:
In issues made through book building, Issuers and merchant
bankers must ensure online display of the demand and bids during
the bidding period. This is the Open book system of book building.

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Closed Book System:
Under closed book building, the book is not made public,
and the bidders will have to take a call on the price at which they
intend to make a bid without having any information on the bids
submitted by other bidders.

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IPO Price Band Rules
 A price band has a lower price and an upper price (e.g. Rs 75 to
Rs 80).
 The lower price of the band is known as the Floor Price or
the Base Price, and the upper price of the price band is known
as the Cap Price or the Ceiling Price.
 The difference between the lower and upper prices should
not be more than 20%.

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 A retail investor can apply at any price within the specified
range or at the Cut-off price.
 The Cutoff price is the final price within the price band, at
which the shares would get allotted to the investors.
 The Cutoff price is known at the end of the bidding process.
 The basis for price determination is mentioned in the Prospectus
document.

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Participants in IPO:
a) Retail Individual Investor (RII):
 Resident Indian Individuals, NRIs, and HUFs who apply for less
than Rs. 2 lakhs in an IPO under the RII category.
 Less than 35% of the Offer is reserved for the RII category.
 NRI or HUF applying for an IPO with less than Rs. 2,00,000
can apply in the RII category.
 RII category allows bids at cut-off price.

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b) Non-institutional bidders (NII)
 Resident Indian individuals, NRIs, HUFs, Companies,
Corporate Bodies, Scientific Institutions, Societies, and Trusts
who apply for more than Rs. 2 lakhs of IPO shares fall under the
NII category.
 Not less than 15% of the Offer is reserved for the NII category.
 A high Net-worth Individual (HNI) who applies for over Rs. 2
Lakhs in an IPO falls under this category.

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 Non-institutional bidders are not permitted to withdraw their
bids once placed. They could modify the bid price.
 NIIs are not eligible to bid at the cut-off price.
 NII need not register with SEBI.

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NII category has two subcategories:
 sNII or sHNI:
The Small NII category is for NII investors who bid for
shares between Rs 2 lakhs to Rs 10 lakhs.
 bNII or bHNI:
The Big NII category is for NII investors who bid for shares
worth more than Rs 10 Lakhs.

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Qualified Institutional Bidders (QIB's)
 Public financial institutions, commercial banks, mutual

funds and Foreign Portfolio Investors can apply in QIB
category. SEBI registration is required for institutions to
apply under this category.
 50% of the Offer Size is reserved for QIB's
 Allotment Basis - Proportionate.

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 QIBs are mostly representatives of small investors who
invest through mutual funds, ULIP schemes of insurance
companies and pension schemes.
 QIB's are prohibited by SEBI guidelines to withdraw their

bids after the close of the IPOs.
 QIB's are not eligible to bid at cut-off price.

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d) Anchor Investor:
 An anchor investor in a public issue refers to a qualified
institutional buyer (QIB) applying for a value of Rs 10 crores or
more through the book-building process. An anchor investor can
attract investors to public offers before they hit the market to
boost their confidence.
 Up to 60% of the QIB Category can be allocated to Anchor
Investors;

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 The minimum application size for each anchor investor should
be Rs 10 crores.
 Anchor investors are not eligible to bid at the cut-off price.
 Anchor investors has different Anchor Investor Bid/Offer
Period.

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Price Discovery Mechanism:
 The IPO price is the price at which the shares of a company
are offered to the general public for the first time through an
initial public offering (IPO). The IPO price can either be a fixed
price or a price range.
 IPO pricing is one of the crucial steps of the IPO process that
needs to happen before the IPO launch date. If an IPO is
overpriced, the investors may be reluctant to invest in it as it
may convert to losses.

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 If an IPO is underpriced, it may create doubt in the investors’
minds on its performance, as good things do not come at low
prices. Hence, pricing an IPO rightly is very important for
fair listing.
 This process examines various intangible and tangible factors,
such as the geopolitical and economic scenario, investor risk
attitudes, demand, supply, etc.

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Process/Steps involved in Price Discovery of IPO:
 Demand
Demand refers to how big investors consider an IPO to be.
In early November 2021, Paytm launched the biggest IPO of all
time. With an issue size of INR 18,300 crore, the IPO was priced at
INR 2,150. The issue was subscribed to 1.89 times. However, the
company was listed at INR 1,950, at a 9.3% discount to its IPO
price.

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 Industry Comparable
If the company launching an IPO has many competitors
already listed, investors will compare the company’s valuations
with those listed. If they consider the IPO overvalued and too
different from their competitors, they might not invest in it.

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 Growth Potential
A company’s growth potential is crucial in determining the
IPO price. Companies generally raise money from the market to
fund their business ambitions and fuel their growth. However, if a
company’s primary purpose for going public is to consolidate its
debt, the valuations might be quite low. Investors prefer investing
in a company with a solid growth story.

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 The Industry Narrative
Sometimes, the industry narrative may influence the IPO
price more than quantitative figures. For instance, the COVID-19
pandemic brought the pharmaceutical industry back into focus.
This can automatically increase the valuation of a pharma company
launching its IPO.

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 The overall market conditions:
If the stock market is doing well, demand for new IPOs will
increase and vice versa.
 The sector:
Certain sectors, such as technology, are typically more
volatile than others and may see more fluctuations in IPO prices.

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Types of Offer Document/Prospectus:
a) Prospectus:
A prospectus is a legal document that provides detailed
information about the company, its financials, management, and
business model. It is intended to help potential investors decide
whether to invest in the company's IPO.

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b) Letter of Offer:
A letter of offer is a document sent to investors who have
applied for shares in an IPO. It contains details about the number of
shares allotted to the investor, the amount to be paid, and the date
by which payment must be made.
c) Abridged prospectus:
It is an abridged version of the offer document in public
issue and is issued along with the public issue application form. It
contains all the salient features from the prospectus.

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d) Red Herring Prospectus:
A red herring prospectus is a preliminary prospectus that
contains most of the information found in a final prospectus. Still,
it lacks certain key details, such as the price and the number of
shares offered. The term "red herring" refers to the document's
warning that the information is incomplete and may be subject to
change.

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e) Shelf Prospectus:
A shelf prospectus is a type of prospectus that allows a
company to issue securities over a period of time without filing a
new prospectus for each offering. The shelf prospectus contains all
the necessary information about the company and the securities
being offered, but it does not specify the amount or timing of the
offering.

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f) Deemed Prospectus:
As the name suggests, a deemed prospectus is a document
deemed a company’s prospectus. In general, any offer for the sale
of its stock by a company, when presented in the form of a detailed
document addressed to the public, is deemed to be a prospectus.

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Preparation of Prospectus:
The regular prospectus is presented in three parts:
PART I
a. General Information about the company e.g., Name and
address of the registered office consent of the Central Government
for the issue and names of regional stock exchanges, etc.,
b. Capital Structure such as authorized, issued, subscribed, and
paid up capital, etc.,

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c. Terms of the issue like mode of payment, rights of instrument
holders, etc.,
d. Particulars of the issue like project cost, means of financing,
etc.,
e. Company, Management, and project like promoters for the
project, location of the project, etc.
f. Disclosures of public issues made by the Company, giving
information about the type of issue, amount of issue, date of closure
of the issue, etc.,

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g. Disclosure of Outstanding Litigation, Criminal Prosecution,
and Defaults
h. Perception of Risk factors like difficulty in marketing the
products, availability of raw materials etc.
PART II
a. General Information
b. Financial Information like Auditor’s Report, Chartered
Accountant's Report, etc.,
c. Statutory and Other Information

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PART III
a. Declaration, i.e., by the directors, that all the relevant provisions
of the Companies Act 2013 and guidelines issued by the
Government have been complied with.
b. Application with the prospectus.

Unit 3 - Primary Market

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Financial Markets & Services

MISSION VISION CORE VALUES

Financial Markets and Services

Primary Market: Primary Market: Meaning, Constituents,

Excellence and Service

Financial Markets and Services

Secondary Market: Secondary Market: Meaning,

Excellence and Service

Financial Markets and Services

Excellence and Service

Financial Markets and Services

Excellence and Service

Financial Markets and Services

Excellence and Service

Financial Markets and Services

Excellence and Service

Financial Markets and Services

Excellence and Service

Financial Markets and Services

Excellence and Service

Financial Markets and Services

Financial Markets and Services

Excellence and Service

Financial Markets and Services

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Financial Markets and Services

Excellence and Service

Financial Markets and Services

Excellence and Service

Financial Markets and Services

Excellence and Service

Financial Markets and Services

Excellence and Service

Financial Markets and Services

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Financial Markets and Services

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Financial Markets and Services

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Financial Markets and Services

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Financial Markets and Services

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Financial Markets and Services

Excellence and Service

Financial Markets and Services

Excellence and Service

Financial Markets and Services

Excellence and Service

Financial Markets and Services

Excellence and Service

Financial Markets and Services

Features of Book Building Method:

Excellence and Service

Financial Markets and Services

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Financial Markets and Services

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Financial Markets and Services

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Financial Markets and Services

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Financial Markets and Services