Download - ABC of Primary Market
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Intricacies of Primary Market
BY: Dr. Neelam Tandon
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The different kinds of
issues which can bemade by an Indian
company in India
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(a) Public issue: When an issue / 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 Initial
public offer (IPO) and Further public offer
(FPO).
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(i) Initial public offer (IPO): When an unlisted
company makes either a fresh issue of
securities or offers its existing securities for
sale or both for the first time to the public, it iscalled an IPO. This paves way for listing and
trading of the issuers securities in the Stock
Exchanges.
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(ii) Further public offer (FPO) or Follow on
offer: When an already listed company makes
either a fresh issue of securities to the public
or an offer for sale to the public, it is called aFPO.
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(b) Rights issue (RI): When an issue of
securities is made by an issuer to its existing
shareholders as on a particular date fixed by
the issuer (i.e. record date), it is called anrights issue. The rights are offered in a
particular ratio to the number of securities held
as on the record date.
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(c) Bonus issue: When an issuer makes an
issue of securities to its existing shareholders
as on a record date, without any consideration
from them, it is called a bonus issue. Theshares are issued out of the Companys free
reserve or share premium account in a
particular ratio to the number of securities held
on a record date.
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(d) Private placement: When an issuer
makes an issue of securities to a select group
of persons not exceeding 49, and which is
neither a rights issue nor a public issue, it iscalled a private placement.
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Types of Offer Documents
(ODs
(a)Offer document is a document which
contains all the relevant information about the
company, promoters, projects, financial details,
objects of raising the money, terms of theissue etc and is used for inviting subscription
to the issue being made by the issuer.
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OFFER DOCUMENT
Offer Document is called Prospectus in case of apublic issue or offer for sale and Letter of Offer incase of a rights issue.
Terms used for offer documents vary depending upon
the stage or type of the issue where the document isused. The terms used for offer documents are definedbelow:
(i) Draft offer document: is an offer document filed
with SEBI for specifying changes, if any, in it, before itis filed with the Registrar of companies (ROCs). Draftoffer document is made available in public domainincluding SEBI website, for enabling public to givecomments, if any, on the draft offer document.
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(ii) Red herring prospectus is an offer documentused in case of a book built public issue. Itcontains all the relevant details except that ofprice or number of shares being offered. It is filed
with RoC before the issue opens. (iii) Prospectus is an offer document in case of a
public issue, which has all relevant detailsincluding price and number of shares being
offered. This document is registered with RoCbefore the issue opens in case of a fixed priceissue and after the closure of the issue in case ofa book built issue.
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(iv) Letter of offeris an offer document in
case of a Rights issue and is filed with Stock
exchanges before the issue opens.
(v) Abridged prospectus is an abridgedversion of offer document in public issue and is
issued along with the application form of a
public issue. It contains all the salient features
of a prospectus.
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(vi) Abridged letter of offeris an abridgedversion of the letter of offer. It is sent to all theshareholders along with the application form.
(vii) Shelf prospectus is a prospectus which
enables an issuer to make a series of issueswithin a period of 1 year without the need of filinga fresh prospectus every time.
This facility is available to public sector banks/Public Financial Institutions.
(viii) Placement document is an offer documentfor the purpose of Qualified InstitutionalPlacement and contains all the relevant andmaterial disclosures.
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Pricing of an Issue
Indian primary market ushered in an era of freepricing in 1992. SEBI does not play any role inprice fixation. The issuer in consultation with themerchant banker on the basis of market demand
decides the price. The offer document contains fulldisclosures of the parameters which are taken into account by merchant Banker and the issuer fordeciding the price. The Parameters include EPS (
net profit/number of shares), PE (market price pershare * profit) multiple, return on net worth andcomparison of these parameters with peer groupcompanies.
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FIXED and BOOK BUILT
ISSUE
On the basis of Pricing, an issue can be furtherclassified into Fixed Price issue or Book Builtissue.
Fixed Price Issue: When the issuer at theoutset decides the issue price and mentions itin the Offer Document, it is commonly knownas Fixed price issue.
Book built Issue: When the price of an issueis discovered on the basis of demand receivedfrom the prospective investors at various pricelevels, it is called Book Built issue.
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BOOK BUILDING PROCESS
Book building is a process of price discovery.
The issuer discloses a price band or floor price
before opening of the issue of the securities
offered. On the basis of the demands receivedat various price levels within the price band
specified by the issuer, Book Running Lead
Manager (BRLM) in close consultation with the
issuer arrives at a price at which the securityoffered by the issuer, can be issued.
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PRICE BAND
The price band is a band of price within which
investors can bid. The spread between the
floor and the cap of the price band shall not be
more than 20%. The price band can berevised. If revised, the bidding period shall be
extended for a further period of three days,
subject to the total bidding period not
exceeding thirteen days.
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Working of Book Building
Process
Book building is a process of price discovery. A
floor price or price band within which the bids
can move is disclosed at least two working
days before opening of the issue in case of anIPO and atleast one day before opening of the
issue in case of an FPO. The applicants bid for
the shares quoting the price and the quantity
that they would like to bid at.
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After the bidding process is complete, the
cutoff price is arrived at based on the
demand of securities. The basis of Allotment is
then finalized and allotment/refund isundertaken.
The final prospectus with all the details
including the final issue price and the issue
size is filed with ROC, thus completing the
issue process. Only the retail investors have
the option of bidding at cutoff.
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CUT OFF OPTION
Cutoff option is available for only retailindividual investors i.e investors who areapplying for securities worth up to Rs1,00,000/ only. Such investors are required totick the cut
off option which indicates their
willingness to subscribe to shares at any pricediscovered within the price band. Unlike pricebids (where a specific price is indicated) whichcan be invalid, if price indicated by applicant islower than the price discovered, the cutoffbids always remain valid for the purpose ofallotment
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Categories of Investors
Investors are broadly classified under following
categories:
(i) Retail individual Investor (RIIs)
(ii) NonInstitutional Investors (NIIs)
(iii) Qualified Institutional Buyers (QIBs)
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Retail individual investor means an investor whoapplies or bids for securities for a value of not morethan Rs. 1,00,000.
Qualified Institutional Buyer shall mean:
a) a public financial institution as defined in section 4Aof the Companies Act, 1956;
b) a scheduled commercial bank;
c) a mutual fund registered with the Board;
d) a foreign institutional investor and subaccount
registered with SEBI,
other than a sub account which is a foreign corporateor foreign individual;
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e) a multilateral and bilateral development
financial institution;
f) a venture capital fund registered with SEBI;
g) a foreign venture capital investor registeredwith SEBI;
h) a state industrial development corporation;
i) an insurance company registered with theInsurance Regulatory and Development
Authority (IRDA);
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j) a provident fund with minimum corpus of Rs. 25
crores;
k) a pension fund with minimum corpus of Rs. 25
crores); l) National Investment Fund set up by resolution
no. F. No. 2/3/2005DDII dated November 23,
2005 of Government of India published in the
Gazette of India.
Investors who do not fall within the definition of
the above two categories are categorized as
NonInstitutional Investors
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Appointment Procedure
1. Meeting of Board of Directors
2. Appointing of Merchant Bankers-
Specialized financial Consultancy who looks
after Initial Public Offering3. Apponting of Registrar and transfer agent
done by Merchant Bankers
4. Banks- Appointed by Merchant Bankers
5. Appointing of Lawyer
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Real Procedure
6. Book issued by Merchant bankers and
submit it to SEBI which includes Reason of
Issuing, no of Shares, Financial Condition ofthe company, current Business, Management,
Growth in Sectors and Risk factor
7. Prospectus- Issued to stock Market and
registrars8. Printing Of Forms
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9. appointment of Brokers
10. Marketing & Advertising
11. Brokers Meeting in a Company
12. Road Shows or meetings13. IPO starts 3-7 days opened
14. IPO closed
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Post IPO
15. collection of Forms
16. Oversubscripttion or Undersubscripttion
17. Allotement Of shares
a. Pro data allotementb. lottery system
18. Issue of share certificate
a. Letter of allotement
b. regret Letter19. Refund cheque
20. Listing Of shares in NSE or BSE
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About Book Building
Book Building is basically a capital issuance
process used in Initial Public Offer (IPO) which
aids price and demand discovery. It is a
process used for marketing a public offer ofequity shares of a company.
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Cont--
It is a mechanism where, during the period for
which the book for the IPO is open, bids are
collected from investors at various prices,
which are above or equal to the floor price.The process aims at tapping both wholesale
and retail investors. The offer/issue price is
then determined after the bid closing date
based on certain evaluation criteria.
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The Process:
The Issuer who is planning an IPO nominates
a lead merchant banker as a 'book runner'.
The Issuer specifies the number of securities
to be issued and the price band for orders.The Issuer also appoints syndicate members
with whom orders can be placed by the
investors.
Investors place their order with a syndicatemember who inputs the orders into the
'electronic book'. This process is called
'bidding' and is similar to open auction.
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A Book should remain open for a minimum of 5
days.
Bids cannot be entered less than the floor
price.Bids can be revised by the bidder before the
issue closes.
On the close of the book building period the
'book runner evaluates the bids on the basis ofthe evaluation criteria which may include -
-Price Aggression
-Investor quality-
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The book runner and the company conclude
the final price at which it is willing to issue the
stock and allocation of securities.
Generally, the number of shares are fixed, theissue size gets frozen based on the price per
share discovered through the book building
process.
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Allocation of securities is made to the
successful bidders.
Book Building is a good concept and
represents a capital market which is in theprocess of maturing.
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Features of Fixed Price process (FPP) and Book Building
process (BBP)
Pricing
(FPP): Price at which the securities are
offered/allotted is known in advance to the
investor.(BBP) : Price at which securities will be
offered/allotted is not known in advance to the
investor. Only an indicative price range is
known.
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Cont--
Demand
(FPP): Demand for the securities offered is
known only after the closure of the issue
(BBP): Demand for the securities offered canbe known everyday as the book is built.
Payment
(FPP):Payment if made at the time of
subscripttion wherein refund is given afterallocation.
(BBP): Payment only after allocation.
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Reforms in Capital Market
Investing in mutual funds might become more
expensive, but retail investors will be assured
of a minimum number of shares in initial public
offers as market regulator SEBI hasannounced extensive changes in its rules for
MFs and IPOs.
It has also recommended to the government
tax benefits to equity MF investors under the
proposed Rajiv Gandhi Equity Savings
Scheme (RGESS), SEBI.
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In a major decision that could make it
expensive for investors to put money in mutual
funds, SEBI decided that any service tax
would be charged to ultimate investor, not tothe asset management company (AMC) as is
the practice at present.
Besides, the AMCs would be allowed to
charge additional expense ratio (the charge
levied by fund houses towards fund
management fees and other expenses) for
catering beyond a threshold limit in the smaller
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The various decisions also include allowing
mutual funds flexibility in using fund expense
charges and said a committee is being set up
to frame a national mutual fund policy. SEBI decided that a minimum lot of shares
would be assured to retail investors in IPOs. It
also approved e-IPO procedure for electronic
bidding in public offers to help investors across
the country bid for shares in a cost-effective
manner.
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The regulator would also frame new rules for
investment advisers.
Among other decisions, non-retail investors
cannot withdraw or reduce their price or offersize in IPOs, but can enhance the same, as is
the rule for retail investors.
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For companies coming out with IPOs, they
would now have to disclose the price band at
least five working days before the opening of
the bidding, as against the current norm fortwo days
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The decision of the market regulator SEBI to
allow e-IPO or electronic issuance of IPO is
likely to increase retail participation and may
provide momentum to the primary market.SEBI has increased the price band to Rs
10,000/ 15,000 will result in better participation
from investors.
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The government's disinvestment programme
to raise Rs 30,000 crore would provide much
needed impetus to the primary market with e-
IPO process in place.
Retail participation is likely to increase through
the measures announced by Sebi while steps
taken with regard to mutual fund industrywould see higher penetration.
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THANX