The primary issue market is that component of the capital markets that deals with the issuance of new securities. Companies, governments or public sector institutions can obtain funding through the sale of a new stock. In the case of a new stock issue, this sale is an initial public offering (IPO). Primary markets create long term instruments through which corporate entities borrow from capital market. Primary market provides opportunity to issuers of securities, government as well as corporate, to raise resources to meet their requirements of investments and/or discharge some obligation. Primary market also known as New Issue Market as it deals with new securities which are not previously available and are offered for the investment to the public for the first time. The primary market enjoys neither any tangible form nor any administrative organizational set-up and is not subject to any centralized control and administration for the execution of its business. It is recognized by the services that it renders to the lenders and borrowers of capital. As the new issue market directs the flow of savings into long term investments, it is of paramount importance for the economic growth and industrial development of a country. The availability of financial resources for corporate enterprises, to a great extent, depends upon the status of new issue market in the country.
The growing number of companies in the primary equity market represents the growth of the economy of the country itself. The growth of the primary equity market is remarkable in the developed countries. In the primary market, securities are issued on an exchange basis. The underwriters, that is, the investment banks, play an important role in this market: they set the initial price range for a particular share and then supervise the selling of that share. Investors can obtain news of upcoming shares only on the primary market. The issuing firm collects money, which is then used to finance its operations or expand business, by selling its shares. Before selling a security on the primary market, the firm must fulfill all the requirements regarding the exchange. After trading in the primary market the security will then enter the secondary market, where numerous trades happen every day. The primary market accelerates the process of capital formation in a country’s economy.
Under the Securities and Exchange Board of India (SEBI) Guidelines, the securities can be offered for sale in the primary market in different ways. Each method of issue has got its procedure and mechanism. The methods of issues of securities are :
1. Public Issue through Prospectus
This method is the most common and popular method of issue of securities. The securities are offered to the investors through a detailed statement of terms and conditions known as prospectus. The prospectus is also known as the offer document. The contents of a prospectus are as per the requirements given in the Chapter VI of the SEBI Guidelines, 2000. These requirements are in respect of Name of the Company; Board of Directors; Existing and Proposed activities of the issuer; Authorized, Issued and Paid-up Capital; Names of the Merchant Bankers, Lead Manager, Advisers, Registrar, Bankers, Underwriters; Minimum Subscription; Different Disclaimer Clauses; Terms of the Present Issue: Utilization of Issue Proceeds; Analysis of Financial Conditions and Result of Operations; Financial Information of Group Companies; Issues Price and basis for that; Risk Factors; Other general and financial information. The issue by prospectus method is adopted when the company wants to issue fixed number of securities at a fixed price (which may be equal to, less than or more than the face value). The application forms together with the copy of prospectus are distributed among the public investors who offer to the company to buy a specific number of securities. In case of over-subscription, the securities are allotted to the investors, in consultation with the stock exchange where the securities are proposed to be listed.
One of the shortcomings of this method is that it is an expensive method. High cost of advertisement, flotation, brokerage and underwriting are involved. In order to save the high cost of issue by prospectus, the companies are allowed to issue the securities through an abridged prospectus also. The contents of the abridged prospectus are less than the regular prospectus.
2. Offer for Sale
In certain cases, the companies do not offer the securities directly to the investors. Instead, the securities are issued to an issue house or a merchant banker who will subsequently offer the securities for sale to the investors. Sometimes, the existing shareholder(s) (a holding company or a foreign parent company) may offer to offload their holding to the investors. The difference between the issue price by the company and the offer price by the issue house is the gain to the latter. Disinvestment of shares in PSU by the Government is offer for sale. Contents of the Letter of Offer for Sale are given in Chapter VI(Section III) of the SEBI Guidelines, 2000.
3. Issue through Private Placement of Securities
In this case, the issuing company does not offer the securities to investors in general. Instead, the securities are offered to selected big institutional clients only. The institutional investors may be selected in conformity with the merchant banker. The terms and conditions are agreed between the company and the institutional buyer. SEBI Guidelines, 2000 are not applicable in case of private placement, because there is no public offer involved. Unlisted companies may also adopt this method. Even listed companies may adopt private placement method for raising of funds through debt instruments.
4. Offer through Book-building Process
Public issue of securities through the book-building process is a relatively new concept for Indian capital market. In case of book-building, the company decides the funds to be raised. The number of securities and issue price are decided by the demand and supply forces. In this case, offers are invited from the public, stating the price as well as the number of shares, the investors are ready to buy. On the basis of bids received from the investors, the issue price is decided by the company. At the price, all the eligible investors are issued securities. It may be noted that in case of normal public issue, the issue price of securities is known to the investors in advance. But in case of book-building, the issue price is decided after the closure of the book. The order book remains open for a minimum period of 5 days and the securities are issued at the same price under the placement portion and net offer to public. Companies issuing securities through book building process declare a price band (price limit of highest and minimum price) within which the final price is decided. There are specific guidelines issued by SEBI in respect of book-building issues. Company issuing securities through book-building process is required to issue a red harring prospectus. The concept and other related matters of book-building process have been discussed in Chapter 16.
5. Public Offer through Stock Exchange On-line System
Securities and Exchange Board of India (SEBI) has also allowed to offer shares through the on-line systems of stock exchanges. In this case, the issuing company has to fulfil the general requirements of public offer as well as some other conditions. The company has to enter into an agreement with a stock exchange which has an on-line system. It has to appoint the requisite merchant bankers. The company shall announce the process of application and allotment, opening and closing dates of the subscription, etc. The applications are to be submitted through stock brokers. The brokers enter the application in the on-line system as a buy order. On the closure of the issue, the stock exchange and the merchant banker ensure that there is a fair and proper allotment of shares. The successful applicants may get the shares in physical form or dematerialised form.