Primary Markets - Unit II

Introduction to Primary Market

• Entrepreneurs often start or expand businesses by pooling personal savings and contributions from friends and family, but this may be insufficient for capital-intensive projects.
• To raise substantial funds, promoters can issue shares to the public, inviting investment through an offer document that details the company's track record, project nature, and business model.
• The primary market allows corporate entities to issue new securities for long-term capital requirements, with intermediaries like Merchant Bankers, Bankers to the Issue, Underwriters, and Registrars involved.
• Issuers in the primary market can offer securities at various values, including face value, discount, or premium and can operate in domestic or international markets.

Regulatory Measures for Primary Market

• SEBI mandates disclosure of all material facts regarding projects, including risk factors and basis for premium calculations.
• Initial Public Offers (IPOs) have gained encouragement with companies allowed to set share par values and use "Book Building" methods for share reservations.
• The private placement market has popularity due to fewer entry barriers and lower costs, leading to rapid growth.
• Underwriting of issues is optional, although non-compliance with the 90% funds collection rule results in refunds to investors.
• Lead managers must issue a due diligence certificate, which is part of the offer document.
• SEBI regulates the minimum application size and allocation proportions for institutional investors.
• Merchant banking is now regulated by SEBI, ensuring accountability in offer documents.
• Companies making public issues must deposit 1% of the issue amount to ensure compliance with regulations.
• Fresh regulations now allow private mutual funds to operate under SEBI's jurisdiction, improving their investment capabilities.

Types of Investors

• The primary market attracts varied investors, including retail, non-institutional investors, and qualified institutional buyers (QIBs).
• QIBs include mutual funds, banks, and other large financial institutions. They must now pay margins during bidding to prevent manipulative practices.
• Non-institutional investors encompass a range of entities such as individuals and trusts with applications exceeding ₹2 lakh, with at least 15% of the total issue reserved for them.
• Retail investors apply for issues valued up to ₹2 lakh, with 35% of the issue reserved for them, requiring PAN disclosure.

Types of Public Issues

• Initial Public Offering (IPO): This marks the first public share offering by an unlisted company, allowing it to be listed on the Bombay Stock Exchange (BSE) or National Stock Exchange (NSE).
• IPOs enable companies to raise capital without repayment obligations, while government entities can utilize them for disinvestment.
• Private Placement: An alternative to public issuance, where debt or equity securities are sold to a select few investors instead of the general public.

Difference Between IPO and FPO

• IPO (Initial Public Offering):

  • The first public offering by a company.
  • Issued by unlisted companies.
  • Higher risk and profit potential.
  • Less predictable revenue generation.

• FPO (Follow-on Public Offering):

  • A subsequent public offering by a listed company.
  • Lower risk and profit expectations compared to IPOs.
  • More predictable due to established performance history.

Book Building

• Book Building is a process used during IPOs where the issuer collects bids from institutional investors to establish the appropriate price and size of the issuance.

Explore the fundamentals of primary markets in this quiz. Understand how entrepreneurs pool personal savings and contributions to fund new business ventures. Learn about the significance of equity in capital-intensive projects.