Primary Capital Markets

Presented by:
Ankit Kumar
Farid Farotan
Parth
Shubham Dhiman
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 • Financial System
• Primary Capital Market Introduction
• Functions of Primary Capital Market
• Market Participants
Table of Contents • Modes of floating new issues
• Types of Prospectus
• Book building
• OTCEI
• Conclusion
• References

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 Primary Capital Market

● It is the market where firms float new stocks and bonds to the
public for the first time. Therefore it is also called a new issues
market (NIM). Primary issues are made for the purpose of setting
up new businesses or for expanding or modernizing the existing
business. Primary market performs the crucial function of
facilitating capital formation in the economy.

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 LINKING SAVERS AND FIRST TIME
ISSUERS

FUNCTIONS OF FACILITATING STARTUPS THROUGH

PRIMARY VENTURE CAPITAL

CAPITAL ENABLES BUSINESS EXPANSION

MARKET AND GROWTH

RAISING FUNDS GLOBALLY

PROVIDES LIQUIDITY

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FUNCTIONS OF
PRIMARY
CAPITAL
MARKET

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 Market Participants

The important intermediaries/players in the new issue market are:

1. Corporations: In the capital markets, corporations behave as operating

businesses that require capital to grow and run their operations.
2. Institutions(“Buy Side” Fund Managers):Institutions consist of fund managers,
institutional investors, and retail investors. These investment managers
provide capital to corporations that need the money to grow and operate their
businesses. In return for their capital, corporations issue debt or equity to the
institutions in the forms of bond and shares, respectively.

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 Market Participants

3. Investment Banks: Acting as an intermediary, investment banks are hired

to facilitate deals between corporations and institutions. The job of
investment banks is to connect institutional investors with corporations.
4. Public Accounting Firms: Their roles include financial reporting, auditing
financial statements, taxes, consulting on accounting systems, M&A
advisory, and capital raising. Therefore, public accounting firms are
usually hired by corporations for their accounting and advisory services.

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 Market Participants

Examples of publicly traded corporations: Examples of top investment banks:

● Alphabet ● Goldman Sachs
● Amazon ● JP Morgan
● Apple ● Credit Suisse
● Exxon ● HSBC
● Toyota ● Morgan Stanley
Examples of top “Buy Side” Firms: Examples of top public accounting firms:
● Bridgewater Associates ● Deloitte
● Blackstone ● PwC
● KKR ● Ernst & Young
● The Carlyle Group ● KPMG
● Apollo Global Management ● Grant Thornton
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 Primary Capital Market Examples

● On 6th May, 2014, Chinese E-commerce heavyweight Alibaba

filed registration document to go to public in the US in what maybe
the mother of all Initial Public Offerings in the US history. Alibaba is a fairly
unknown entity in the US and other regions, though its massive size is
comparable or even bigger than Amazon or eBay.

● On 24th March,2014, Online storage company Box filed for an IPO and
unveiled its plans to raise US$250 million. The company is in race to be
build the largest cloud storage platform and it competes with larger
companies like Google Inc and its rival, Dropbox.
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Methods of Floating New Issues

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 Methods of Floating New Issues

Basically, issues made by an Indian company can be

classified as follows:

1. Public Issue

2. Private Placement

3. Rights Issue

4. Bonus Issue

5. Employees Stock Option Plan (ESOP)

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 1.Public Issue

● When an issue or offer of securities is made to new investors for

becoming part of shareholders’ family of the issuer it is called a Public
Issue.
● Public issue can be further classified into:
(a) Initial Public Offer (IPO) and
(b) Follow on Public Offer (FPO)
● Both IPO and FPO can be either a Fresh Issue or an Offer For Sale.

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 (a) Initial Public Offer (IPO):

● IPO means an offer of specified securities (i.e. equity shares and

convertible securities) by an unlisted issuer to the public for
subscription (including an offer for sale of its existing securities) for
the first time.
● It is the first sale of stock by a company to the public.
● The Initial Public Offering can be made through the fixed price
method, book building method or a combination of both.

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Number of companies and amounts raised through Main Board and SME
IPOs in the last 5 years are given in the tables below:

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 (b) Follow on Public Offer (FPO):

● It is the subsequent public offer of securities of a listed company.

● FPO is also known as Seasoned or Subsequent Public offer or
Further Public Offer.

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● The methods of offering a
public issue (IPO/FPO) can be
of two:
(i) Offer through Prospectus
(ii) Offer of Sale.

Source: Prime database, December 2017

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 2. Private Placement

● The sale of securities to a relatively small number of select investors

as a way of raising capital. This is a wholesale issue of securities to
institutional investors by an unlisted company.
● Private placement of securities by listed issuer can be of two types:
(a) Preferential Issue/Allotment
(b) Qualified Institutions Placement

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 (a) Preferential Issue/Allotment

● Preferential Issue means an issue of specified securities by a

listed issuer to any select person or group of persons on a private
placement basis.
● An issuer can make preferential issue of specified securities only
if, a special resolution by the shareholders has been passed.
● A private placement of securities by a listed company. Securities
are issued to an identified set of investors which may include
promoters, strategic investors, employees and such groups.

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 (b) Qualified Institutions Placement (QIP)

● When a listed issuer issues/allots equity shares or securities convertible

into equity shares to Qualified Institutions Buyers on private placement
basis, it is called a QIP.
● An issuer can make a QIP only if a special resolution approving the
qualified institutions placement has been passed by its shareholders.
● A private placement of securities by a listed company to a set of
institutional investors termed as qualified institutional buyers is a QIP.

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 3. Rights Issue

● Shares offered to the existing shareholders of a

company are called rights issues.
● The shares are offered in a particular proportion
to the existing share ownership. The proportion
may be decided on the basis of capital
requirement of the company.
● The cost of issue is minimum.
● The control of the company is undisturbed as the
shareholders get shares according to the
proportion of existing number of shares held.
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 4. Bonus Issue

● Bonus issue is the issue of shares to the existing shareholders out

of the free reserves of the company.
● The existing shareholders get this as a bonus without payment of
any money.
● Companies usually adopt this method to bring up the value of
shares with market value. As the free reserves are capitalized there
is an increase of equity capital.
● SEBI Regulations on Bonus Issue: Chapter IX of SEBI ICDR
Regulations 2009 discusses the conditions with respect to bonus
issue.

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 5. Employees Stock Option Plan (ESOP)

● Employee Stock Option is an option given to the whole time directors,

officer or employees of a company to purchase the securities offered
by the company at a predetermined price, at a future date.
● The option granted to an employee shall not be transferable to any
person- the option can only be exercised by the employee to whom
the option is granted.
● Shares can be issued under employee stock option only with the
approval of shareholders by way of Special Resolution.

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PUBLIC ISSUE
THROUGH
PROSPECTUS

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 Definition

● Section 2(70) of the Companies Act, 2013 defines a prospectus as

““A prospectus means Any documents described or issued as a
prospectus and includes any notices, circular, advertisement, or
other documents inviting deposit from the public or documents
inviting offer from the public for the subscription of shares or
debentures in a company.
● A prospectus is a legal document by which a public company
raises money from investors.

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 Types of Prospectus

Shelf Deemed
Red Herring Abridged
Prospectus Prospectus
Prospectus Prospectus

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● Red Herring Prospectus: When a company decides to attract investors to invest in
their company, they use a prospectus named Red Herring Prospectus.
● Abridged Prospectus: Abridged Prospectus is the actual summary of a prospectus. It
contains all the salient features of a prospectus
● Shelf Prospectus: Only selected companies bring their shelf prospectus. All
companies are not eligible for designing a shelf prospectus. normally finance based
companies are eligible for bringing out their shelf prospectus.
● Deemed Prospectus:Deemed means to presume something. When a company agrees
to allot shares to an issuing house( which is a different company) which they will later
sell to the public, then the document by which offer is made is deemed to be a
prospectus.

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Source: Author’s Elaboration
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 Interpretation

• Market 2017-18 witnessed a raising of Rs.1,77,116 crore through the

public equity markets, 3.46 times the Rs.51,120 crore that was raised in
the preceding year.
• This is the highest amount ever raised in a financial year, with the
previous highest being Rs. 86,710 crore in 2009-10.
• The largest IPO was from General Insurance Corp. for Rs. 11,257 crore.

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 Contents of Prospectus

Matters in Reports in
Prospectus Declaration
Prospectus

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 Contents of Prospectus

A. Matters in Prospectus
• Names and addresses of the registered office of the company,
company secretary, CFO, auditors, legal advisers, bankers
trustees, if any, underwriters and such other persons.
• Dates of the opening and closing of the issue.
• A statement by the board of directors including all the details of
the money received from the issue.

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CONTINUED…

• Particulars relating to-

• Management perception of risk factors specific to the
project;
• Gestation period of the project;
• Extent of progress made in the project;
• Legal action pending or taken by government department or
a statutory body during the last 5 years immediately
preceding the year of the issue of prospectus against the
promoter;
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CONTINUED…
• Details about underwriting of the issue.
• Consent of the directors, auditors, bankers to the issue etc.
• The authority for the issue.
• Procedure and time schedule for allotment and issue of
securities.
• Capital Structure of the company in the prescribed manner.
• Main objects of public offer, terms of the present issue and
such other particulars as may be prescribed.
• Main objects and present business of the company and its
location, schedule of implementation of the project. 35
B) Reports in Prospectus
i) reports by the auditors of the company with respect to its profits and
losses and assets and liabilities and such other matters as may be
prescribed.
ii) Reports relating to profit and losses for each of the five financial
years immediately preceding the financial year of the issue of
prospectus.
iii) Reports about the business or transaction to which the proceeds of
the securities are to be applied directly or indirectly.

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Bookbuilding

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 Book Building

● It is a mechanism through which an offer price for IPOs based on

the investors' demand is determined
● Book building method explicitly uses investors' demand for shares at
various prices as an important input to arrive at an offer price.
● It is a recognized mechanism for capital raising.

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 CONTINUED…

● Book building is an alternative method of making a public issue.

● Applications are accepted from large buyers such as financial
institutions, corporations or high net-worth individuals, almost on firm
allotment basis, instead of asking them to apply in public offer.
● Book building is a relatively new option for issues of securities.
● The first guidelines of which were issued on October 12, 1995 and have
been revised from time to time .
● Book building is a method of issuing shares based on a floor price which
is indicated before the opening of the bidding process.

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 In a nutshell

Price
Final price
discovery
decided
mechanism

Bookbuilding

Bidding by Within a
investors price range
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 Book Building Process

1. Firstly, appoint a book runner (merchant banker) who prepares and

submit the draft documents to SEBI and obtains an acknowledgement
card. He offers shares at a price within a specified price band(range).
2. Offers are invited from syndicate members(brokers, bankers,
underwriters. mutual funds etc.). It should contain opening and closing
dates for the bids(minimum 5 working days)
3. Based on the bids received, the issuer arrives at the final cut-off rate and
the final allocation in consultation with the book runner.

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CONTINUED…
4. The issuer and the book runner may impose restrictions on the number
of the shares that can be allotted to avoid any future takeover threats.
5. The final prospectus is filed with the ROC along with the procurement
agreement. Placement portion open for subscription and closes a day
before the opening of the public issue portion.
6. Placement portion closes a day before the opening of Public issue
portion
7. The public portion opens and the allotment and the listing is done. The
price determined is applicable to the public portion as well.
8. Incase the public portion is undersubscribed, the shortfall is distributed
amongst those who have opted for placement.
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BOOK BUILDING
OPTIONS

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A. 75 percent book building
● Available to all corporates eligible to make issue to public.
● Issue should not be less than 100 crores.
● Underwriting shall be mandatory.
● Prospectus should indicate the price band.
● Example- IPOs of Hughes software and HCL.
B. 100 percent book building
● Entire issue is completely in single stage
● The size of issue should be atleast 25 crores.
● Example- Bharti Tele ventures.

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 Reverse book building

● The process wherein shareholders are asked to bid for the price at
which they are willing to offer their shares.
● It helps the companies for determining the exit price when they
want to delist or buy back their shares.
● But it is a difficult in case of small companies as their shares are
thinly traded unless the shares are delisted small companies have
to pay all listing charges.

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OTCEI(Over the Counter Exchange
of India)

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 OTCEI(Over The Counter Exchange of India)

● Over the Counter Exchange of India was started in 1992 with the objective
of providing a market for the smaller companies that could not afford the
listing fees of the large exchanges and did not fulfill minimum requirement
of listing.
● It aimed at creating a fully decentralised and transparent market.

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 Nationwide
reach

Features of
FEATURES Elimination
OTCEI Executive
of trading
trading
OF OTCEI ring

Computerised
trading

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 OTCEI Issues

●Eligibility Norms:
o It a sponsored by members of OTCEI
o Has appointed at least two market makers
o Any offer of sale of equity share or any other convertible security
resulting from a bought out deal registered with the OTCE
●Pricing Norms:
o The promoters, after such issue, would retain at least 20%of the
total issued capital with a lock-in of three years from the date of
allotment of securities in the proposed issue.
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 SUMMARY
● Capital Market is divided into primary and secondary markets.

● Primary capital market is the market where firms float new stocks and bonds to the public for the first
time.

● There are 4 major market participants of Primary capital market.

● Methods of floating new issues: Public issue, private placement, rights issue, bonus issue, ESOP.

● Types of prospectus: Red Herring, Shelf, Abridged, Deemed.

● Book building is a mechanism through which an offer price for IPOs based on the investors' demand is
determined

● OTCEI is India's first exchange for small companies, as well as the first screen-based nationwide stock
exchange in India. 51
 References

1. www.primedatabase.com
2. https://www.thehindubusinessline.com/markets/2017-robust-year-for-ipos-
for-indian-primary-markets/article10007310.ece
3. https://www.nse-india.com/content/us/ismr2004ch2.pdf
4. https://www.sebi.gov.in/sebi_data/commondocs/regulation_p.pdf
5. https://www.wallstreetmojo.com/primary-market/
6. http://www.businessmanagementideas.com/markets/securities-
market/players-in-the-new-issues-market-india-financial-management/17109

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Thank You

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