Primary market is a place where a corporate may raise capital by
way of a :
1. Public Issue : Sale
of securities to member of the Public.
2. Rights issue : Method
of raising further capital from the existing shareholders/debenture holders by
offering additional shares to them on a pre-emptive basis.
3. Private placement: As its
name suggests it; involves selling securities privately to a group of
All issues by a new company has to be made at par and for existing
companies the issue price should be justified as per Malegam Committee
The earnings per share (EPS) for the last three years and comparison of
pre-issue price to earnings (P/E) ratio to the P/E ratio of the Industry.
Latest Net Asset Value.
Minimum return on increased networth to maintain pre-issues EPS. Accompany may
also raise finance from the international markets by issuing GDR’s and ADR’s.
Principal steps of a Public Issue
A draft prospectus is prepared giving out details
of the Company, promoters background, Management, terms of the issue, project
details, modes of financing, past financial performance, projected
profitability and others. Additionally a Venture Capital Firm has to file the
details of the terms subject to which funds are to be raised in the proposed
issue in a document called the ‘placement memorandum. ‘
(a) Appointment of underwriters: The underwriters
are appointed who commit to shoulder the liability and subscribe to the
shortfall in case the issue is under-subscribed. For this commitment they are
entitled to a maximum commission of 2.5 % on the amount underwritten.
(b) Appointment of Bankers: Bankers along with
their branch network act as the collecting agencies and process the funds
procured during ;the public issue . The Banks provide temporary loans for the
period between the issue date and the date the issue proceeds becomes available
after allotment , which is referred to as a ‘bridge loan’.
(c) Appointment of Registrars : Registrars process
the application forms, tabulate the amounts collected during the issue and
initiate the allotment procedures.
(d) Appointment of the 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%.
(e) Filing of prospectus with the Registrar of
Companies: The draft prospectus along with the copies of the agreements entered
into with the Lead Manager, Underwriters, Bankers, registrars and Brokers to
the issue is filed with the Registrar of Companies of the state where the
registered office of the company is located.
(f) Printing and dispatch of Application forms: The
prospectus and application forms are printed and dispatched to all the merchant
bankers, underwriters, brokers to the issue.
(g) Filing of the initial listing application: A
letter is sent to the Stock exchanges where the issue is proposed to be listed
giving the details and stating the intent ;of getting the shares listed on the
Exchange. The initial listing application has to be sent with a fee of Rs.
(h) Statutory announcement: An abridged version of
the prospectus and ;the Issue start and close dates are published in major
English ;dailies and vernacular newspapers.
(i) Processing of applications: After the close of
the Public Issue all the application forms are scrutinized, tabulated and then
shares are allotted against these application.
(j) Establishing the liability of the underwriter:
In case the Issue is not fully subscribed to, then the liability for the
subscription falls on the underwriters who have to subscribe to the shortfall,
incase they have not procured the amount committed by them as per the
(k) Allotment of shares: after the issue is
subscribed to the minimum level, the allotment procedure as prescribed by SEBI
(l) Listing of the Issue : The shares after
having been allotted have to be listed compulsorily in the regional stock
exchange and optionally at the other stock exchanges.
The cost of a public issue works out between 8% to 12% depending of
the issue size but the maximum has been specified by SEBI as under.
For Equity & Convertible
Non Convertible debentures
When the issue size is upto n5 crores =Mandatory costs + 5%
When the issue size is greater than 5 crores : Mandatory costs + 2%
When the issue size is upto 5 crores = Mandatory costs + 2%
When the Issue size is greater than 5 crores : Mandatory costs + 1%
**Mandatory costs includes underwriting commission,
brokerage, fees of the lead managers of the issue , expenses on statutory
announcements, listing fees and stamp duty.
An Indian Company is allowed to make an IPO if:
The company has a track record of dividend paying capability for 3 out of the
immediately preceding 5 years;
A public financial institution or scheduled commercial banks has appraised the
project to be financed through the proposed offer and the appraising agency
participates in the financing of the project to the extent of at least 10% of
the Project cost. Typically a new company has to compulsorily issue shares at
par, while for companies with a track record the shares can be issued at a
premium. Before the advent of SEBI the prices of shares were valued as per the
Controller of Capital Issues (CCI).
The rights issue involves selling of securities to
the existing shareholders in proportion to their current holding. When a
company issues additional equity capital it has to be offered in the first
instance to the existing shareholders on a pro-rata basis as per Section 81 of
the Companies Act, 1956. The shareholders may by a special resolution forfeit
this right, partially or fully by a special resolution to enable the company to
issue additional capital to the public or alternatively by passing a simple
resolution and taking the permission of the Central Government.
A private placement results from the sale of securities by the
company to one or few investors. The distinctive features of private placement
There is no need for a formal prospectus as well as underwriting arrangement
The terms of the issue are negotiated between the company and the investors
The issuers are normally the listed public limited
companies or closely held public or private limited companies which cannot
access the primary market. The securities are placed normally with the
Institutional investors, Mutual funds or other Financial Institutional.
Allotment has to be made within 30 days of the closure of the Public Issue and
42 days in case of a Rights issue.
Net Offer to the General Public has to be at least 25% of the Total Issue Size
for listing on a Stock exchange. For listing an IPO on the NSE firstly,
firstly, Paid up capital should be Rs. 20 Crores, secondly the issuer or the
promoting company should have a track record of profitability and thirdly the
project should be appraised by a financial Institution, banks or Category I
merchant bank. For knowledge based companies like IT the paid up capital should
be Rs. 5 Crores, but the market capitalization should be at least Rs. 50
Crores. It is mandatory for a company to get its shares listed at the regional
stock exchange where the registered office of the issuer is located.
A Venture Capital Fund shall not be entitled to get its securities listed on
any stock exchange till the expiry of 3 years from the date of issuance of
In an issue of more than Rs. 100 crores the issuer is allowed to place the
whole issue by book building.
Minimum of 50% of the Net offer to the Public has to be reserved for Investors
applying for less than 1000 shares.
All the listing formalities for a public Issue has to be completed within 70
days from the date of closure of the subscription list.
There should be at-least 5 investors for every 1 lakh of equity offered.
Quoting of permanent Account number or GIR No. in application for allotment of
securities is compulsory where monetary value of Investment is Rs.50,000/- or
Firm Allotment to permanent and regular employees of the issuer is subject to a
ceiling of 10% of the issue amount.
Indian development financial institutions ad Mutual Fund can be allotted
securities upto 75% of the Issue Amount.
Allotment to categories of FIP's and NRI's/OCB's is upto ? Maximum of 24% which
can be further extended to 30% by an application to the RBI - supported by a
resolution passed in the General Meeting.
10% individual ceiling for each category a) Permanent employees' b)
Shareholding of the promoting companies.
Securities issued to the promoter, his group companies by way of firm allotment
and reservation have a lock-in period of 3 years. However shares allotted to
FII's and certain Indian and multilateral development financial institutions
and Indian Mutual Funds are not subject to Lock-in periods.
The minimum period for which a public issue has to be kept open is 10 working
days. The minimum period for a rights issue is 15 working days and the maximum
60 working days.
A public issue is effected if the issue is able to procure 90% of the Total
issue size within 60 days from the date of earliest closure of the Public
Issue. In case of over - subscription the company may have the right to retain
the excess application money and allot shares more than the proposed issue
which is referred to as the 'green-shoe' option.
A rights issue has to procure 90% subscription in 60
days of the opening of the issue:
20% of the total issued capital, if the company is an unlisted one with a three
year track record of consistent profitability Else in all cases the following
slab rate apply: Size of Capital issued (Including Premium) Contribution %
Less than Rs 100 Crores 50%
> 100 crores upto 300 crores 40%
>300 crores upto 600 crores 30%
> 600 crores 15%
Promoter's contribution is subject to a lock -in period of 3 years.
Refund orders have to be dispatched within 30
days of the closure of the Public Issue.
Refunds of excess application money i.e. for
un-allotted shares have to be made within 30 days of the closure of the Public