What is Primary Market? Primary market is the part of capital market where issue of new securities takes place.

Public sector institutions, companies and governments obtain funds for further growth of the company after the sale of their securities or bonds in primary market. Role of Primary Market Capital formation - It provides attractive issue to the potential investors and with this company can raise capital at lower costs. Liquidity - As the securities issued in primary market can be immediately sold in secondary market the rate of liquidity is higher. Diversification - Many financial intermediaries invest in primary market; therefore there is less risk if there is failure in investment as the company does not depend on a single investor. The diversification of investment reduces the overall risk. Reduction in cost - Prospectus containing all details about the securities are given to the investors hence reducing the cost is searching and assessing the individual securities.

Features of Primary Market It is the new issue market for the new long term capital. Here the securities are issued by company directly to the investors and not through any intermediaries. On receiving the money from the new issues, the company will issue the security certificates to the investors. The amount obtained by the company after the new issues are utilized for expansion of the present business or for setting up new ventures. The primary market performs the crucial function of facilitating capital formation in the economy The new issue market does not include certain other sources of new long term external finance, such as loans from financial institutions. Borrowers in the new issue market may be raising capital for converting private capital into public capital; this is known as going public. Prerequisites for Investor to Participate in Primary market Activities:

PAN Number Bank Account Demat Account

Types of issues Public issues can be classified into 3 types: Initial Public Offering (IPO) Fresh issue of shares or selling existing securities by an unlisted company for the first time is known as IPO. Listing and trading of securities of a company takes place in IPO. Rights Issue Rights issue is when the listed company issues new securities and provides special rights to its existing shareholders for buying the securities before issuing it to public. The rights are issued on particular ratio based on the number of securities currently held by the share holder. Preferential Issue It is the fresh issue of securities and shares by listed company. It is

called as preferential as the shareholders with preferential shares get the preference when it comes to dividend disbursement. Benefits

Price manipulation is very less in primary market compared to secondary market. There is no payment of brokerage, transaction fees, and stamp duty or service tax. Investors get the shares at same prices so market fluctuations do not affect it.

Disadvantages

The shares are allotted proportionately if there is over subscription which means, the small investors may not get any allotment. Money is locked in for longer time, as it is a long term investment. The shares allotment for the investor takes few days in primary market compared to secondary market where it takes only 3 days to allot the shares.

FUNCTIONS: The main function of the New Issue Market, i.e. channelling of investible funds, can be divided, from the operational stand-point, into a triple-service function: (a) Origination (b) Underwriting (c) Distribution The institutional setup dealing with these can be said to constitute the New Issue Market organisation. (a) Origination: Origination refers to the work of investigation and analysis and processing of new proposals. This in turn may be: (i) A preliminary investigation undertaken by the sponsors (specialised agencies) of the issue. This involves a/careful study of the technical, economic, financial and/legal aspects of the issuing companies to ensure that/it warrants the backing of the issue house. (ii) Services of an advisory nature which go to improve the quality of capital issues. These services include/advice on such aspects of capital issues as: Determination of the class of security to be/issued and price of the issue in terms of market conditions; The timing and magnitude of issues; Method of flotation; and Technique of selling and so on.

The function of origination is done by merchant bankers who may be commercial banks, all India financial institutions or private firms. The success of the issue depends, to a large extent, on the efficiency of the market. The origination itself does not guarantee the success of the issue. Underwriting, the special service is required in this regard. (b) Underwriting: The idea of underwriting originated on account of uncertainties prevailing in the capital market as a result of which the success of the issue becomes unpredictable. If the issue remains undersubscribed, the directors cannot proceed to allot the shares, and have to return money to the applicants if the subscription is below a minimum amount fixed under the Companies Act. Consequently, the issue and hence the project will fail. Underwriting entails an agreement whereby a person/organisation agrees to take a specified number of shares or debentures or a specified amount of stock offered to the public in the

event of the public not subscribing to it, in consideration of a commission the underwriting commission. If the issue is fully subscribed by the public, there is no liability attaching to the underwriters; else they have to come forth to meet the shortfall to the extent of the under- subscription. The underwriters in India may broadly be classified into the following two types: (i) Institutional Underwriters; (ii) Non-Institutional Underwriting. Institutional Underwriting in our country has been development oriented. It stands as a major support to those projects which often fail to catch the eye of investing public. These projects rank high from the points of view of national importance e.g. steel, fertilizer, and generally receive higher priority by such underwriters. Thus institutional underwriting may be broadly recognised, in the context of development credit, as playing a decisive role in directing the economic resources of the country towards desired activities. This does not mean that they are barred entrance in the issue market from so called glamorous issues to which public can be expected to readily subscribe. They may be underwriting in such cases, but what is expected of them is their support to projects in the priority sector. One of the principal advantages they offer is that resource-wise they are undoubted. They are in a position to fulfill their underwriting commitments even in the worst foreseeable situations. The public financial institutions namely IDBI, IFCI, ICICI, LIC and UTI, underwrite a portion of the issued capital. Usually, the underwriting is done in addition to granting term finance by way of loans on debentures. These institutions are usually approached when one or more of the following situations prevail: o o o o o o The issue is so large that broker-underwriting may not be able to cover the entire issue. The gestation period is long enough to act as distinctive The project is weak, in as much as it is being located in a backward area. The project is in the priority sector which may not be able to provide an attractive return on investment. The project is promoted by technicians. The project is new to the market.

The quantum of underwriting assistance varies from institution to institution according to the commitments of each of them for a particular industry. However, institutional underwriting suffers from the following two drawbacks: o o The institutional handling involves procedural delays which sometimes dampen the initiative of the corporate managers or promoters. The other disadvantage is that the institutions prefer to wait and watch the results to fulfill their obligations only where they are called upon to meet the deficit caused by under subscription.

(c) Distribution: The sale of securities to the ultimate investors is referred to as distribution; it is another specialised job, which can be performed by brokers and dealers in securities who maintain regular and direct contact with the ultimate investors. The ability of the New Issue Market to cope with the growing requirements of the expanding corporate sector would depend on this triple-service function

PLAYERS/INTERMEDIARIES IN THE NEW ISSUE MARKET There are many players in the new issue market. The important of them are the following: 1. Merchant bankers: They are the issue managers, lead managers, co-managers and are responsible to the company and SEBI. Their functions and working are described in a separate chapter. 2. Registrars to the issue: Registrars are an important category of intermediaries who undertake all activities connected new issue management. They are appointed by the company in consultation with the merchant bankers to the issue. Registrars have a major role, next to merchant bankers, in respect of servicing of investors. The roles of registrar in the pre-issue, during the currency of issue, pre-allotment and postallotment are described below: Role of registrar in pre-issue 1. Suggest draft application form to the merchant bankers. 2. Help in identifying the collection centres. The choice of collection centre and of collecting banker is critical to the issue. 3. Assist in opening collection accounts with banks and lay down procedure for operation of these accounts. 4. Send instructions to collecting branches, for collection of application along with cheques, drafts, stock invest separately and remittance of funds. 5. Workout modalities to receive the collection figures on a regular basis until the subscription list are closed. During the currency of issue 1. Receive the collection figures every day. 2. Tabulate and classify the collection data on the basis of the standard proforma of slabs of shares applied for. 3. Keep the merchant bankers and the company informed of the progress of total subscriptions. 4. Inform the stock exchange about the closure of issue. Pre- allotment work 1. Get all application forms from the collecting bankers and sort out valid and invalid application forms. 2. The valid applications are to be categorized and grouped as cash, draft and stock invest applications. 3. Reclassify the valid applications eligible for allotment.

4. Prepare the list with inverted numbers and then approach the regional stock exchange for finalizing the basis of allotment, in the event of over subscription. 5. Finalize the allotments as per the basis approved by the stock exchange. 6. Tally the final list approved for allotment and rejections with the inhouse control numbers and correct mistakes, if any. Allotment work The most important work of a registrar is allotment of shares. The system of proportional allotment was adopted for new issues in 1993. A new quota system was approved by SEBI in April, 1995. According to the new system 50% of quota is for small investors and another 50% for other categories. The small investors include all applicants upto 1,000 shares. It has also been revised recently. Post allotment work 1. Get the letters of allotment and refund orders printed ready for dispatch. They have to be mailed on or before 70 days from the closing date of subscription. For any delay, get the permission of the Registrar of Companies and the relevant stock exchange. 2. Submit all statements to the company for their final approval. 3. Arrange to pay the brokerage and underwriting commission and submit their relevant statements. 4. Assist the company in getting the allotted shares listed on the stock exchange. Qualifications for Registrars to the issue To be appointed as Registrar to the issue, registration with SEBI is essential. The criteria adopted by SEBI for registration are the competency and expertise, quality of manpower, their track record, adequacy of infrastructure such as computers, storage space etc. and capital adequacy. A net worth of Rs.6 lakhs is essential for Registrars. SEBI has laid down a code of conduct for their observance. They have to maintain proper books of accounts and registers for a period of three years. 3. Collecting and co-ordinating bankers: Collecting bankers collect the subscriptions in cash, cheques, stock invest etc. Co-ordinating bankers collect information on subscriptions and co-ordinate the collection work. They monitor the work and inform it to the registrars and merchant bankers. Collecting banker and co-ordinating banker may be the same bank or different banks. 4. Underwriters and brokers:

Underwriting is an agreement whereby the underwriter promises to subscribe to a specified number of shares or debentures or a specified amount of stock in the event of public not subscribing to the issue. Brokers along with the network of sub brokers market the new issues. They send their own circulars and applications to the clients and do follow up work to market the securities.

Underwriting is an agreement whereby the underwriter promises to subscribe to a specified number of securities in the event of public not subscribing to the issue. Relieved from the risk of finding buyer Company is assured of Getting minimum subscription Provide expert advise Public confidence on issue enhances Institutional underwriters: LIC, GIC, UTI, IDBI, ICICI, commercial banks etc. Non Institutional underwriters: Brokers

1. Process of applying for an IPO

Investor need to have a demat account. Maximum three individuals can apply jointly in a public issue. Demat account need to be in the name of all applicants. Retail investor can invest up to Rs.1,00,000/-. Only cheques / DDs are acceptable for investment. Other mode now available for retail investors is ASBA mode, wherein you can block the amount in your bank account till allotment is made to you. PAN of all investors is must for investment. For all investments above Rs.50,000/- copy of KYC document is to be attached to the application form. KYC document can be obtained from most of the mutual fund offices by submitting a simple form along with PAN card and address proof. Forms for IPOs are available with most sub-brokers / distributors / investment advisors. You should get allotment letter or refund from the registrar for the issue by 30th day in case of a fixed price issue or by 15th day in case of a book built issue, from the date of closing of the issue. In case of difficulty in allotment / refund order , immediately contact compliance officers of the issuer company and the merchant banker with a copy to the exchange where the securities are to be listed and SEBI Investor Grievance Cell.

What is Warrant? A Warrant allows the holder to buy a number of share at a pre-specified price in future.

Methods of Floating New Issues in the Primary Market

Public issue: When a company raises funds by selling (issuing) its shares (or debenture / bonds) to the public through issue of offer document (prospectus), it is called a public issue. Initial Public Offer (IPO): When a (unlisted) company makes a public issue for the

first time and gets its shares listed on stock exchange, the public issue is called as initial public offer (IPO).Follow-on public offer (FPO): When a listed company makes another public issue to raise capital, it is called follow-on offer (FPO).

Offer for sale: Institutional investors like venture funds, private equity funds etc., invest in unlisted company when it is very small or at an early stage. Subsequently, when the company becomes large, these investors sell their shares to the public, through issue of offer document and the companys shares are listed in stock exchange. This is called as offer for sale. The proceeds of this issue go the existing investors and not to the company. Private Placement: The sale of securities to a relatively small number of select investors for raising capital. Investors involved in private placements are usually large banks, mutual funds, insurance companies and pension funds. Private placement is the opposite of a public issue, in which securities are made available for sale on the open market. Issue of Indian Depository Receipts (IDR): A foreign company which is listed in stock exchange abroad can raise money from Indian investors by selling (issuing) shares. These shares are held in trust by a foreign custodian bank against which a domestic custodian bank issues an instrument called Indian depository receipts (IDR).IDR can be traded in stock exchange like any other shares and the holder is entitled to rights of ownership including receiving dividend. Rights issue (RI): When a company raises funds from its existing shareholders by selling (issuing) them new shares / debentures, it is called as rights issue. The offer document for a rights issue is called as the Letter of Offer and the issue is kept open for 30-60 days. Existing shareholders are entitled to apply for new shares in proportion to the number of shares already held. Bonus Issue, the company issues new shares to its existing shareholders. As the new shares are issued out of the companys reserves (accumulated profits), shareholders need not pay any money to the company for receiving the new shares.

Book Building: In 1998 Securities and Exchange Board of India (SEBI) allowed every issuer of equity shares of Rs 250 million and above to have an option to make an issue through the Book Building Process. 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 of equity shares of a company. 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. Once the price and the quantum of issue has been determined by the issuer, the issue may either be offered under the private placement of the public offer category, or both, as per the requirement of the SEBI regulations. The principal intermediaries involved in a book building process are the company, Book Running Lead Manager (BRLM) and syndicate members who are intermediaries registered with SEBI and eligible to act as underwriters. Syndicate members are appointed by the BRLM. Characteristics: (i) Tendering Process: Book building involves inviting subscriptions to a public offer of securities, essentially through a tendering process. Eligible investors are required to place their bids for the number of shares to be issued and the price at which they are willing to invest, with the lead manager running the book. At the end of the cut off period, the lead manager determines the response to the issue in terms of the quantum of shares and the highest price at which demand is sufficient to match the size of the issue. (ii) Floor Price: Floor price is the minimum price set by the lead manager in consultation with the issuer. This is the price at which the issue is open for subscription. Investors are free to place a bid at any price higher than the floor price. (iii) Price Band: The range of price (the highest and the lowest price) at which offer for the subscription of securities is made is known as price band. Investors are free to bid any price within in the price band. The difference between floor price and cap price in the book building cannot be more than 20% of the floor price. The difference between lower and upper price is price band. (iv) Bid: The investor can place a bid with the authorized lead manager merchant banker. In the case of equity shares, usually several brokers in the stock exchange are also authorized by the lead manager. The investor fills up a bid-cum-application form, which gives a choice to bid for up to three optional prices. The price and demand options submitted by the bidder are treated as optional demands and are not cumulated. (v) Allotment: The lead manager, in consultation with the issuer, decides the price at which the issue will be subscribed and proceeds to allot shares to investors who have bid at or above the fixed price. All investors are allotted shares at the same fixed price. For any allottee, therefore the price would be equal to or less than the price bid. (vi) Participants: Generally, all investors, including individuals, eligible to invest in a particular issue of securities can participate in the book building process. However, if the issue is restricted to qualified institutional, as in the case of government securities, then, only those eligible can participate. (vii) The Process: The procedures relating to the book building process depend on the level at which it is to be taken up by a corporate entity. According to the SEBI, there are two options available to a company either 75 per cent or 100 per cent book building process. 75 per cent Book Building: The 75 per cent book building option of securities is offered on a firm basis where a minimum of 25 per cent of the securities is offered to the public.

The following steps are involved in this process: (i) Eligibility: All corporates eligible for public shares are also eligible for raising capital through the book building process. (ii) Earmarking securities: Where a decision is taken by a corporate to issue shares through the book building process, the securities to be used should be separately earmarked as the placement portion category in the prospectus. The balance securities must be stated as net offer to the public category. (iii) The process begins with consultations between issuer company, the fund managers and the institutional investors. The above process is used to derive a price-band with a median point at which the demand for the companys stock is maximum. The issuer company, in tandem with the lead manager and the book runner, then fixes a price band for the issue. (iv) Draft prospectus: A draft prospectus containing all the information except price of the issue must be filed wit the SEBI. Although no precise mention is made, a price band indicating the price range within which securities are being offered for subscription should be indicated. The prospectus is to be filed with the ROC within two days of the issue price being finalized. (v) Appointment of book runner: The issuing company appoints a merchant banker as the book runner, which mentioned in the prospectus. The book runner circulates a copy of the draft prospectus among the institutional buyers who are eligible for firm allotment and to the intermediaries who are eligible to act as underwriters, inviting them to subscribe to the issue of securities. The book runner maintains a record of the names and number of securities ordered by intermediary buyers and the price at which they are willing to subscribe the issue under the placement portion. The book runner collects information about the subscriptions received from underwriters and other intermediaries. After a stipulated time period, the book runner aggregates the subscription so received. The underwriters are required to make a payment of the total amount for the subscription of issues. 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. The issue document contains the name of syndicate members who are entitled to receive the bids. Investors place their order with a syndicate member who inputs the orders into the 'electronic book'. This process is called 'bidding' and is similar to open auction. A Book should remain open for a minimum of 5 days. Bids cannot be entered less than the floor price. The price band can have a revision. SEBI requires that any revision in the price band has to be widely disseminated by informing the stock exchanges, by issuing press release and also indicating the change on the relevant website and the terminals of the syndicate members. When the price band is revised, the bidding period has to be extended for a further period of three days, subject to the total bidding period not exceeding thirteen days. The bids can be revised innumerable number of times by the bidder before the issue closes. On the close of the book building period the 'book runner evaluates the bids on the basis of the evaluation criteria which may include -Price Aggression, Investor quality, Earliness of bids, etc. 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 numbers of shares are fixed, the issue size gets frozen based on the price per share discovered through the book building process. Allocation of securities is made to the successful bidders. Book Building is a good concept and represents a capital market which is in the process of maturing. Guidelines for Book Building: Rules governing book building is covered in Chapter XI of the Securities and Exchange Board of India (Disclosure and Investor Protection) Guidelines 2000. In an issue made through the book building process, the allocation in the net offer to public category is made as follows: i) Not less than 35 % to retail individual investors. ii) Not less than 15 % to non institutional investors i.e. investors other than retail individual investors and qualified institutional buyers. iii) Not more than 50% to Qualified Institutional Buyers; 5 % of which would be allocated to mutual funds In an issue made through the book building process, the issuer may allocate up to 30% of the portion available for allocation to qualified institutional buyers to an anchor investor in accordance with the conditions laid down in ICDR Regulations 2009. In an issue made other than through the book building process, allocation in the net offer to public category will be made as follows: (a) Minimum 50% to retail individual investors; and (b) Remaining to individual applicants other than retail individual investors and other investors including corporate bodies or institutions, irrespective of the number of equity shares and convertible securities applied for; (c) The unsubscribed portion in either of the categories specified above (point a and b) may be allocated to applicants in the other category. If the retail individual investor category is entitled to more than 50% on proportionate basis, the retail individual investors will be allocated that higher percentage.

While bidding for the equity shares of the company in a book built portion, each bidder shall, with the submission of the bid-cum-application form, draw a cheque/demand draft/stock invest for the maximum amount of this bid in favour of the escrow account of the escrow collection bank. Bid form accompanied by cash is not accepted.

Functions of Stock Exchanges Liquidity and marketability of securities Fair price determination Source of long-tern funds Helps in capital formation Reflects general state of economy