Primary Markets and

Secondary Markets
FINANCIAL MANAGEMENT
SESSION 3-4

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Objective
At the end of this session you should be able to understand
◦ Procedural aspects of Primary Issues, Pre Issues Decision Making
◦ SEBI Guidelines for Public Issues, IPO – Pricing and Timing of Public
Issues, Pre-Issue Management
◦ Regulatory Aspects – Advertising and Marketing.
◦ Post-Issue Management – Rights Issues, Scope, Management of Debt
and Equity, Corporate Advisory Services, Project Advisory Services,
Loan Syndication, Venture Financing, Private Equity, M&A, Financial
Engineering, Structural Analysis of Investment Banking Industry

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Primary Issue
The primary equity market deals with new equity issues by
issuers and investors in such securities and is a part of the
Equity Capital Market
New issues can be made through public offers and through
private placements to few investors
While public offers are a heavily regulated process world over,
the extent of regulation on private placement is selective
depending upon the type of investors being targeted.

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 Primary
Market

Public Rights Private

Issue Issues Placement

Issuers/ Instrument
Investors Intermediaries
Companies s

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Eligibility for Issue Management
Given the fact that merchant bankers are entrusted with the
responsibility of issue management by law, the regulatory
framework is designed to ensure that they have sufficient
competence and exercise diligence in their work such that the
issuers comply with all statutory requirements concerning the
issue.
All merchant bankers need to have a valid registration
certificate under the SEBI (Merchant Bankers) Rules, 1992 to
perform the role of merchant bankers to issues

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Public Offers
Public Issue: “An initial public offer (IPO) or further public offer
(FPO)”.
Offer for Sale: “An offer of securities by existing shareholder(s)
to the public for subscription, through an Offer Document.”
Composite Issue: “An issue of specified securities by a listed
issuer on public-cum-rights basis, wherein the allotment in both
public issue and rights issue is proposed to be made
simultaneously.”

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Initial Public Offer
It means an offer of specified securities by an unlisted issuer to
the public for subscription and included an offer for sale of
specified securities to the public by any existing holders of such
securities in an unlisted issuer.
There has to be an invitation to the public to subscribe to
securities
The invitation has to be made through a prospectus
The invitation should specifically talk about subscription to
shares, debentures or deposits in a company

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Going Public
It can be a source of finance if it is meant to finance a specified
end use
It creates a new ownership opportunity called the retail window
and a class of investors called the ‘retail investors’.
It can be a liquidity event since it creates an exit route for the
existing and future investors of the company
It creates market capitalization for the company, which is the
aggregate value of its issued shares as multiplied by the current
market price

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The Listing Decision
The Pre-IPO discussion relates to the timing of the IPO decision,
while the post-IPO discussion is about continuance or
discontinuance of the listed status
Timing an IPO is a strategic, financial and investment banking
decision
Strategic – whether listing fits into the company’s overall corporate
philosophy
Financial – whether the company needs the capital to be raised
Investment Banking – determine the appropriate structure, pricing,
timing and marketing strategy
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Regulatory Framework for Public
Offers
Public Offers are regulated under the SEBI ICDR Regulations
insofar as they relate to disclosures, investor protection,
procedures and documentation
Other aspects of public offers such as allotment of shares,
share capital, irregular allotments, misstatements in offer
documents, etc. are governed by the Companies Act 1956
Public offers are governed by the provisions of SCRA and the
listing agreement with the stock exchange for the purpose of
listing and secondary market trading thereafter

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Important Terms
Issue Size includes offer through offer documents (Public
Offer) and Promoters’ Contribution
Net Offer to Public (NPO) means an offer of specified
securities to the public but does not include reservations
Offer through Offer Document means net offer to public and
reservations
QIBs Qualified Institutional Buyers shall mean public financial
institutions as defined under Section 4A of the Companies Act

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Important Terms
Non-institutional investor means an investor other than a retail individual investor
and QIB
Offer Document means a red herring prospectus, prospectus or shelf prospectus
and information memorandum in terms of Sec 60A of the Companies Act, 1956
in case of a public issue and a letter of offer in case of a rights issue.
Prospectus
Draft Red Herring Prospectus
Red Herring Prospectus
Abridged Prospectus
Shelf Prospectus

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Eligibility Criteria for IPO
A company can make an IPO of pure equity or convertibles
only if it meets all of the following conditions. These conditions
apply mutatis mutandis to an offer for sale as they apply to a
public issue
◦ The company has net tangible assets of at least Rs. 3 crore in each of
the preceding 3 full years (of 12 months each), of which not more than
50% is held in monetary assets
◦ The company has a minimum average pre-tax profit of Rs. 15 crore on
a consolidated basis during the three most profitable years out of the
immediately preceding 5 years

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Eligibility Criteria for IPO
◦ The company has a net worth of at least Rs. One crore in each of the
preceding 3 full financial years (of 12 months each)
◦ In case the company has changed its name within the last 1 year, at
least 50% of the revenue for the preceding 12 months is earned by the
company from the activity suggested by the new name
◦ The aggregate size of the proposed issue and all previous issues made
in the same financial year by the company does not exceed five times
its pre-issue net worth as per the audited balance sheet of the last
financial year

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Differential Pricing and Price Band
The issuer may mention a price or price band in the draft
prospectus (in case of a fixed price issue) and floor price or
price band in the red herring prospectus (in case of a book built
issue) and determine the price at a later date before registering
the prospectus with the ROC
An issuer may offer specified securities at different prices,
subject to certain conditions

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Regulatory Aspects – Advertising and
Marketing
Issue Marketing, includes road shows, pre-issue meets with
journalists and media men, brokers, investor associations, etc.

The Merchant Banker has to ensure that no publicity material

or report is issued with information other than what is
contained in the offer document, no incentives other than
underwriting commission and brokerage are offered through
advertisement or by any other means, the advertisement code
is followed.

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Regulatory Aspects – Advertising and
Marketing
Codified under Issue of Capital and Disclosure Requirements
Regulations, 2009 (ICDR Regulations)
Prospectus – Any document described or issued as a
prospectus and includes any notice, circular, advertisement or
other document inviting deposits from the public or inviting
offers from the public for the subscription or purchase of any
shares in, or debentures of a body corporate.
Draft Red Herring Prospectus – preliminary RHP filed with
SEBI

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Regulatory Aspects – Advertising and
Marketing
Red Herring Prospectus (RHP) – A prospectus which does not
have complete particulars on the price of the securities offered
and the quantum of securities offered
Abridged Prospectus – A memorandum containing such salient
features of a prospectus as may be prescribed.
Shelf Prospectus – A prospectus issued by an FI or bank for
one or more issues of the securities or class of securities
specified in the prospectus

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Rights Issue
A rights issue is made only to the existing shareholders of a
company.
The ‘right’ herein refers to the entitlement of a shareholder to apply
for and receive additional shares in the company
This is a ‘pre-emptive right’ given to shareholders under law so as
to enable a shareholder to protect his dilution in the event of the
company making a new issuance of capital, whereby the company
is obliged to offer such shares to existing shareholders who shall
have the right to subscribe in the proportion of their existing
holdings.

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Rights Issue
The application for additional shares is only a right and not an
obligation on the shareholder
For the purpose of ascertaining the right, a record date is fixed
The entitlement is fixed on a proportionate basis according to
the entitlement ratio fixed under the rights issue
The shareholder would be given the right to subscribe for and
receive the rights shares or to renounce the rights in favour of
any third person of the choice of the shareholders

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Pricing of Rights Issue
Unlike in an IPO, where the company has no prior record of a
quoted market price, in the rights issue of a listed company, the
market price plays a major factor in pricing.
If the objective is to seek fund support from the shareholders,
there is a need to carry them along and therefore, an investor-
friendly pricing may augur well for the company

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Public Issue of Debt Securities
Public offer for debt instruments would mean making a public
issue of pure debt instruments such as bonds and non-
convertible debentures (NCD) and debt convertibles such as
partly-convertible debentures (PCDs), fully convertible
debentures (FCDs), convertible bonds and fully convertible
zero coupon debt instruments.

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SEBI Listing of Debt Regulations
The provisions of the SEBI (Issue and Listing of Debt
Securities) Regulations, 2008 (Listing of Debt Securities
Regulations) are applicable only for the public offers of pure
debt securities, i.e., those that have no convertibility option and
are to be redeemed as debt

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Corporate Advisory Services
Corporate Advisory Services is an umbrella term that
encompasses specialized advice’s rendered to corporate houses
by professional advisers such as accountants, investment
banks, law practitioners and host of similar service providers.
Business advisory services relate to considerations involved in
corporate restructuring, joint ventures and collaborations and
cross-border investments. This entails rendering of corporate
advisory services pertaining to a company’s present and future
businesses from a strategic and financial perspective.

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 Corporate Advisory Services
The corporate advisory services are spread over a vast spectrum
of corporate activity. Some of them are very well suited for
investment banks, with the rest finding place with specialist advisory
firms.
The essence of corporate advisory services for investment banking
relates to Business advisory, Restructuring advisory, Project
advisory and Merger & Acquisition advisory.
Corporate Advisory Services is an umbrella term that encompasses
specialized advice’s rendered to corporate houses by professional
advisers such as accountants, investment banks, law practitioners
and host of similar service providers.
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Project Advisory Services
With our reviving economy and pressure on performance,
companies are restating business plans to ride the growth wave.
Limited project management talent available externally, coupled
with varying regional influences, regulatory requirements, and
differing stakeholder needs, further exacerbate the difficulty for
successful project implementation.
Surveys have indicated analogous results – a majority of projects
have suffered (a) time overruns, (b) cost overruns and (c) failure
to achieve the desired benefits.

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KPMG’s Major Project Advisory
MPA provides leading practice assistance that facilitates
ongoing improvement to develop owner organization program
and project management governance and processes.
MPA focuses on two key areas:
“Doing the right project”
“Doing the project right”
KPMG

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Loan Syndication
Loan syndication is the process of involving several different lenders
in providing various portions of a loan.
Loan syndication most often occurs in situations where a borrower
requires a large sum of capital that may be too much for a single
lender to provide or outside the scope of a lender's risk exposure
levels.
Thus, multiple lenders work together to provide the borrower with the
capital needed.
Loan syndication is used in corporate borrowing. Companies seek
corporate loans for a wide variety of reasons.

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 Loan Syndication
A syndicated loan is offered by a group of lenders who work together to
provide credit to a large borrower.
The borrower can be a corporation, an individual project, or a government.
Each lender in the syndicate contributes part of the loan amount, and they
all share in the lending risk. One of the lenders act as the manager
(arranging bank), which administers the loan on behalf of the other lenders
in the syndicate.
The syndicate may be a combination of various types of loans, each with
different repayment terms that are agreed upon during negotiations
between the lenders and the borrower.

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Venture Financing
Venture capital funds are prepared to finance an untried
concept that appears to have promising prospects
Venture capital funds seek to support growing firms during their
initial stages, before they are ready to make a public offering of
securities.
VC is provided mainly in the form of equity capital
VC represents financial investment in a highly risky proposition
made in the hope of earning a higher rate of return

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Venture Financing
At its core, venture capital financing (also known as venture
capital funding or VC funding) is risk-equity investing through
funds that are professionally managed and provide seed, early-
stage and later-stage funding to accelerated growth
companies.

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Private Equity
•Private Equity investors invest mostly in later stage operations
with a substantial operating history
•PE investment may be used for financial or operational
restructuring of the investee company
•PE investment package may include debt, which is a rare in a
VC investment package
•The PE investor puts more emphasis on corporate governance,
whereas the VC investor focuses more on management
capability

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Mergers & Acquisitions
A merger (also, amalgamation) refers to a combination of two or more
companies into one company.
In an absorption, one company acquires another company
In a consolidation, two or more companies combine to form a new
company
Purchase of Division or Plant – a company may acquire a division or
plant of another company
Takeover – involves the acquisition of a certain stake in the equity capital
of a company which enables the acquirer to exercise control over the
affairs of the company

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Mergers & Acquisitions
Leverage Buyout is a variant of takeover or purchase of a
division, effected substantially with the help of debt finance
Partial Selloff involves the sale of a business division or plant one
company to another
Sale of Equity Stake involves one investor selling an equity stake,
usually representing a controlling block, to another investor.
Demerger involves the transfer by a company of one or more of its
business divisions to another company which is newly set up

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Financial Engineering
Financial engineering is the application of mathematical methods
to the solution of problems in finance.
It is also known as financial mathematics, mathematical finance,
and computational finance.
Financial engineering draws on tools from applied mathematics,
computer science, statistics, and economic theory.
Investment banks, commercial banks, hedge funds, insurance
companies, corporate treasuries, and regulatory agencies
employ financial engineers.

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Financial Engineering
These businesses apply the methods of financial engineering
to such problems as new product development, derivative
securities valuation, portfolio structuring, risk management,
and scenario simulation.
Quantitative analysis has brought innovation, efficiency and
rigor to financial markets and to the investment process.
As the pace of financial innovation accelerates, the need for
highly qualified people with specific training in financial
engineering continues to grow in all market environments.

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Structural Analysis of Investment
Banking Industry
Investment banking, also referred to as merchant banking,
primarily refers to the business of raising capital for companies
and advising them on mergers, acquisitions, and restructuring.
Investment banks also have business like asset management,
stock broking and investment advisory, risk advisory and
management, and custodial services.
Investment bank is an intermediary that matches sellers or
securities and businesses with the buyers of securities and
businesses

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Structural Analysis of Investment
Banking Industry
The core services offered by Indian investment banks are:
(a) merchant banking, underwriting and book running,
(b) mergers and acquisitions advisory, and
(c) corporate advisory relating to project financing, corporate
restructuring, capital restructuring through repurchases, private
equity and so on. The allied services provided by Indian
investment banks are (a) securities business, (b) asset
management business, and (c) investment advisory and wealth
management

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Structural Analysis of Investment
Banking Industry
The Indian regulatory framework does not allow all investment
banking functions to be performed within one legal entity.
So, Indian investment banks follow a conglomerate structure in
which different business segments are handled by different
corporate entities to meet regulatory norms.
For e.g. merchant banking business has to be in a separate
company with a merchant banking license from SEBI
Asset management business has to be done by a Mutual Fund
that requires a 3-tier structure.

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E.g. ICICI Group
ICICI Bank
ICICI Prudential Life Insurance Company
ICICI Securities
ICICI Securities Primary Dealership Limited
ICICI Lombard General Insurance Company
ICICI Prudential Asset Management Company
ICICI Venture
ICICI Home Finance Company
ICICI Direct
ICICI Foundation
Disha Financial Counselling
ICICI Bank Subsidiaries in UK and Canada

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Conclusion
In this session we learnt about
◦ Procedural aspects of Primary Issues, Pre Issues Decision Making
◦ SEBI Guidelines for Public Issues, IPO – Pricing and Timing of Public
Issues, Pre-Issue Management
◦ Regulatory Aspects – Advertising and Marketing
◦ Post-Issue Management – Rights Issues, Scope, Management of Debt
and Equity, Corporate Advisory Services, Project Advisory Services,
Loan Syndication, Venture Financing, Private Equity, M&A, Financial
Engineering, Structural Analysis of Investment Banking Industry

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