The primary market is where securities created (by means of an IPO) in others words provide the channel for sale of new securities. Primary market provides opportunity to issuers of securities government as well as corporates, to rise resource to meet their requirements of investment and discharge some obligation.
Corporates may issue the securities at face value, or at a discount/premium and these securities may take a variety of forms such as equity debt etc. they may issue the securities in domestic market and international market.
The nominal or stated amount assigned to a security by the issuer. For shares it is the original cost of the stock shown on the certificate for bond, it is the amount paid to the holder at maturity also known as par value or simply par. For an equity share the face value is usually a very small amount (5rs,10rs) and does not have much bearing on the price of the share, which make quote higher in the market, at 100 rs. or 1000 rs. or any other price. For a debt security, face value is the amount repaid to the investor when the bond matures (usually government securities and corporate bonds have a face value of 100 rs.). the price at which the security trades depend on the fluctuations in the interest rates in the economy.
When security is sold above its face value it is said to be issued at a Premium and if it is sold at less than its face value, then it is said to be issued at a discount.
Most companies are usually started privately by their promoters. However the promoters capital and the borrowings from banks and financial institutions may not be sufficient for setting up or running the business over a long term. So companies invite the public to contribute towards the equity and issue shares to individual investors. The way to invite share capital from the public is through a Public Issue. Simply stated a public issue is an offer to the public to subscribe to the share capital of a company. Once this is done the company allots shares to the applicants as per the prescribed rules and regulations laid down by SEBI.
Initial Public Offering is when an unlisted company makes either a fresh issue of securities or an offer for sale of its existing securities or both for the forst time to the public.
It is when an already listed company makes either a fresh issue of securities to the public or an offer for sale to the public, through an offer document.
The procedure for a public issue by a listed company is similar to that of an IPO. Company sends application from similar to IPO to existing share holder to accept the right issue is the destination of share holder.
Rights issue involves selling of securities in the primary market by issuing right to the existing shareholder. When company issue additional equity capital is has to be offered in the first instance to the existing shareholders on a pro rata basis and this enable the company to issue additional capital to public and raise funds. The number of rights that a shareholder gets is equal to the number of share held by the existing share holder.
This is required under section 81 of the companies Act 1956. The shareholder, however, may be a special resolution forfeit this right, partially or fully, to enable the company to issue additional capital to public.
In case of Initial Public Offer(IPO) the sale of securities can be either through Normal Public Issue or through Book Building Process.
In case of Normal Public Issue the company making Issue fixes a price called fixed price whereas in case of book building process the company stipulate a floor price or a price band and leaves it to market forces to determine the final issue price.
Price at which securities will be allotted is not known in case of offer of shares through book building while in case of offer of shares through normal public issue, price is known in advance to investor. Under book building investors bid for shares at the floor price or above and after the closure of the book building process the price is determined for allotment of shares.
In case of book building the demand can be known everyday as the book is being built. But in case of the public issue the demand is known at the close of the issue.
The price at which a company shares are offered initially in the primary market is called as the issue price. When they begin to be traded the market price may be above or below the issue price.
In book building issue the issuer is required to indicate either the price band or floor price in the prospectus. The actual discovered issue can be any price in the price band or any price above the floor price. This issue price is called “Cut-Off Price”. The issuer and lead manager decides this after considering the book and the investor’s appetite for the stock.
Incase of book building process floor price is the minimum price at which bids be made.
The prospectus may contain either the floor price for the security or a price band within which the investors can bid. The spread between the floor and the cap of the price band shall not be more than 20%.
Any company floating public issues, need to provide adequate disclosure of information to public as per guidelines issued by SEBI. This disclosure includes information like the reason for rising the money, the way money is proposed to be spent the return expected on the money etc. this information is in the form of “Prospectus” which also includes information regarding the size of the issue, the current status of the company, its equity capital its current and past performance, the promoters, the project, cost of the project means of financing product and capacity etc. it also contains lot of mandatory information regarding underwriting and statutory compliances. This helps investors to evaluate short term and long term prospects of the company.
As per the SEBI guidelines the basis of Allotment should be completed with 15 days from the issue close date. As soon as the basis of allotment is completed within 2 working days the details of credit to demat account allotment advice and dispatch of refund order need to be completed. So an investor should know in about 15 days time from the closure of issue, whether shares are allotment to him or not.
Listing means admission of securities of an issuer to trading privileges (dealing) on a stock exchange through a formal agreement. The prime objective of admission to dealing on the exchange is to provide liquidity and market ability to securities as also to provide a mechanism for effective control and supervision of trading.
It would take around 3 weeks after the closure of the book built issue.
The market value of a quoted company, which is calculated by multiplying its current share price (market price) by the number of shares in issue is called as market capitalization. E.g. company has 120 million shares in issue the current market price is Rs.100. the market capitalization of company is a 12000 million.
Indian companies are permitted to raise foreign currency resources through two main resources:
An American Depositary Receipt (ADR) is a physical certificate evidencing ownership of American Depositary Shares (ADS). An American depositary share (ADS) is a U.S. dollar denominated form of equity ownership in a non-U.S company. It represent the foreign shares of the company held on deposit by a custodian bank in the company’s home country and carries the corporate and economic rights of the foreign shares subject to the terms specified on the ADR certificate.
ADS provide U.S investors with a convenient way to invest in overseas securities and to trade non-U.S securities in the U.S. ADS are issued by a depository bank such as JP Morgan Chase bank. They are traded in the same manner as share in U.S. companies on the New York Stock Exchange (NYSE) and the American stock exchange (AMEX) or quoted on NASDAQ and the over-the-counter (OTC) market.
Global Depository Receipts (GDR) is similar to ADR which can be used to raise capital simultaneously in two or more markets through a global offering. GDR may be used in public or private markets inside or outside us.
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