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 investors.

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 recommendations by

  • 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. 7,500/-.

(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 Underwriting agreement.

(k) Allotment of shares: after the issue is subscribed to the minimum level, the allotment procedure as prescribed by SEBI is initiated.

(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.

  • 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:

  1. The company has a track record of dividend paying capability for 3 out of the immediately preceding 5 years;
  2. 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 is that:

  • 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.

  1. Allotment has to be made within 30 days of the closure of the Public Issue and 42 days in case of a Rights issue.
  2. 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.
  3. 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 securities.
  4. In an issue of more than Rs. 100 crores the issuer is allowed to place the whole issue by book building.
  5. Minimum of 50% of the Net offer to the Public has to be reserved for Investors applying for less than 1000 shares.
  6. All the listing formalities for a public Issue has to be completed within 70 days from the date of closure of the subscription list.
  7. There should be at-least 5 investors for every 1 lakh of equity offered.
  8. 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 above.
  9. Firm Allotment to permanent and regular employees of the issuer is subject to a ceiling of 10% of the issue amount.
  10. Indian development financial institutions ad Mutual Fund can be allotted securities upto 75% of the Issue Amount.
  11. 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.
  12. 10% individual ceiling for each category a) Permanent employees' b) Shareholding of the promoting companies.
  13. 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.
  14. 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.
  15. 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.
  16. A rights issue has to procure 90% subscription in 60 days of the opening of the issue:
  17. 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 %
  18. 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.
  19. Refund orders have to be dispatched within 30 days of the closure of the Public Issue.
  20. Refunds of excess application money i.e. for un-allotted shares have to be made within 30 days of the closure of the Public Issue.