Submitted by:

Submitted to: Adhiraj

Dr. Suveera Gill Aditya
Ashish
Deepak Chandhok
Deepak Rana
Maninder
Vipin

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 Introduction
PRIMARY CAPITAL MARKET
Features of Primary Market
How Primary Market Works
WAYS OF ISSUING IN PRIMARY CAPITAL MARKET
INITIAL PUBLIC OFFERING
PREFERENTIAL ISSUE
RIGHTS ISSUE
FUNCTIONS OF PRIMARY CAPITAL MARKET
NEED OF PRIMARY CAPITAL MARKET
BASIC CAPITAL MARKET INSTRUMENTS

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 BASIC CAPITAL MARKET INSTRUMENTS
EQUITY SHARES
PREFERENCE SHARES
DEBENTURES
BONDS
ADVANTAGES OF PRIMARY CAPITAL MARKET
DISADVANTAGES OF PRIMARY CAPITAL
MARKET
Primary market Intermediaries
Merchant bankers
Underwriters
Bankers to an Issue
Portfolio Managers
Debenture trustees

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 Capital market is a market where buyers and
sellers engage in trade of financial securities like
bonds, stocks, etc. The buying/selling is
undertaken by participants such as individuals
and institutions.
Capital markets help channelize surplus funds
from savers to institutions which then invest
them into productive use. Generally, this market
trades mostly in long-term securities.

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 Financial Market
Short Long
term term
Money Market Capital Market

Primary

Secondary
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 A Primary market issues new securities on an
exchange for companies, governments and
other groups to obtain financing through debt-
based or equity-based securities.
Primary markets are facilitated by underwriting
groups consisting of investment banks that set
a beginning price range for a given security
and oversee its sale to investors.

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1. Public issue: Securities are issued to the all the
members of the public who are eligible to participate
in the issue.
2. Private placement: The sale of securities to a
relatively small number of select investors as a way of
raising capital. This is a wholesale issue of securities
to institutional investors by an unlisted company.
3. Preferential issue: A private placement of securities
by a listed company. Securities are issued to an
identified set of investors which may include
promoters, strategic investors, employees and such
groups.

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4. Qualified Institutional Placement (QIP): A
private placement of securities by a listed
company to a set of institutional investors
termed as qualified institutional buyers is a QIP.

5. Rights and bonus issues: Securities are issued

to existing investors by offering them to buy
more securities at a pre-determined price (rights)
or get an allotment of additional free shares
(bonus).

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 This is the market for new long term equity capital.
The primary market is the market where the securities
are sold for the first time.
In a primary issue, the securities are issued by the
company directly to investors.
The company receives the money and issues new
security certificates to the investors.
Primary issues are used by companies for the purpose
of setting up new business or for expanding or
modernizing the existing business.

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 Success of Capital Market Depends on Primary Market.
Accelerates the process of Capital formation in a
countrys economy.
The new issue market does not include certain other
sources of new long term external finance
Borrowers in the new issue market may be raising
capital for converting private capital into public capital;
this is known as "going public."

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Preparation and filing of Offer Document

Opening Of Issue

Allotment and Listing.

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 I. Preparation and filing of Offer Document

A company waiting to raise capital is required to prepare an

offer document. (Letter of Offer, Prospectus)
Issuer has to engage a SEBI registered merchant banker.
The draft document thus prepared is filed with SEBI.

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 II. Opening of Issue

After completing legal formalities, the issuer issues the

advertisement.
Investor can apply for the issue before it closes.
Backend services are handled by Registrar to the issue on
behalf of the issuer company.

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 III. Allotment and Listing

The issue then closes.

Shares are allotted proportionately or on lottery basis.

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 Ways of
offering new
issues

Initial Public Preferential

Right Issue
Offering Issue

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 The very first sale of stock issued
by a company to the public.
Prior to an IPO the company is
considered private.
Also referred to as "going public.
IPOs are often issued by smaller,
younger companies seeking capital
to expand.
In an IPO, the issuer obtains the
assistance of an underwriting firm.

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 New capital
Almost all companies go public primarily because they
need money to expand the business
Future capital
Once public, firms have greater and easier access to
capital in the future
Raises the largest amount of money
It helps the company to raise the largest
amount compared to other options

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Guidelines issued by SEBI under
Section 11 of the SEBI Act, 1992.
Entry Norm I (Profitability Route)
a) Net tangible assets of at least Rs. 3 crore in
each of the preceding three years of which not
more than 50% are held in monetary assets.
b) Net worth of at least Rs. 1 crore in each of
the preceding three years.
c) Minimum of Rs. 15 crore as average pre-
tax operating profit.

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d) If there has been a change in the companys name, at least
50% of the revenue for preceding one year should be from the
new activity denoted by the new name.
e) The issue size should not exceed 5 times the pre-issue net
worth.

Entry Norm II (QIB Route)

Issue shall be through book building route, with at least 75%
of net offer to the public to be mandatory allotted to the
Qualified Institutional Buyers (QIBs). The company shall
refund the subscription money if the minimum subscription of
QIBs is not attained.

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 There are two ways in which the
price is determined in the IPO.
Fixed Price Issues

Offer Price :-Made known in

advance to the investors.
Demand :-Known only after the
closure of the issue
Payment:- 100 % advance payment.
Reservations:- Divided into 2 parts.

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Book Building Issues

Offer Price:- A 20% price band

Demand:- Available on a real time basis on the BSE
website
Payment:-10% in case of QIBs, 100% advance for
the rest.
Reservations:- 50% of the shares offered are reserved
for QIBs, 35% of small investors and the balance of all
other investors.

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Issuer Issue Open Issue Close Offer Price Issue Issue Size
Company (Rs.) Type (Rs Crore)
Security and Jul 31, 2017 Aug 2, 2017 805/- to IPO-BB 362.25
Intelligence 815/-
Services
(India) Ltd
IPO
Cochin Aug 1, 2017 Aug 3, 2017 424/- to IPO-BB 1,454
Shipyard 428/-
Ltd IPO
Salasar Jul 12, 2017 Jul 17, 2017 108/- IPO-FP 35.87
Techno
Engineering
Ltd IPO

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 Preferential issue is an issue of shares or of
convertible securities by listed companies to a select
group of persons under Section 81(1A) of the
Companies Act, 2013
For raising funds, it is not always feasible for a
company to issue securities to the public at large as it
is time consuming as well as an expensive option.

contd..

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 In such situations, the securities can be offered to a
comparatively smaller group of individuals, such as
the directors or the existing shareholders. This
entire process is known as preferential allotment.
During 2015-16, through 333 preferential issues the
amount raised was 49,916 crore, which is 76.6 per
cent higher than the 28,260 crore garnered in 2014-
15.

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 Background- As per Section 62(1) of the Companies act,
2013 if the Company decides to issue fresh shares, these
should be offered to existing shareholders .
Right Issue means offering shares to existing members in
proportion to their existing share holding.
In a rights offering, the price at which each share may be
purchased is generally at a discount to the current market
price.
Rights are often transferable, allowing the holder to sell them
on the market.

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 CAPITAL
FORMATION

DISTRIBUTION FUNCTIONS ORIGINATION

UNDERWRITING

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1) Capital formation
channelizing of funds from individual savers into proper
productive investments.
2) Origination
a) In primary market, origination means to investigate, and
evaluate new project proposals.
b) The preliminary investigation involves a detailed study of
economic, financial, legal, technical aspects to ensure the
soundness of the project.
c) It is done with the help of merchant bankers
contd

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 3) Underwriting:
It 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.
If a part of share issues remains unsold,
the underwriter will buy the shares or else he is not
liable.
Thus, minimum subscription is guaranteed by
underwriters.
There are two types of underwriters in India -
Institutional ( LIC, UTI, IDBI, ICICI) and Non-
institutional are brokers.
contd
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 4) Distribution
a) In primary capital market the success of any grand
new issue is hinges on whether the issue is being
subscribed by the people.
b) The sale of the securities to the investors is termed
as distribution.
c) Distribution Job is given to brokers and dealers.

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 To raise funds.
To create market for new issues of securities.
To mobilize Resource of the economy.
For overall development of companies.

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 According to the Companies Act 1956, equity shares are
that part of the share capital of the company, which are not
preference shares.
They are called as ordinary shares or common stock or
voting share.
These shareholder are the real owner of the company.
The return on equity shares depends on the performance
profitability of the company.
Equity shareholders are also known as the member of the
company.

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 A permanent source of finance to the company
No fixed rate of dividend
Easy liquidity and marketability

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 No guarantee on returns to shareholders

Loss of managerial control

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 Preference shares are known as preferred stock.

Preference share capital has two priorities i.e.,

in the repayment of capital before the Equity Share Capital
on winding up of the company and payment of dividend.

Preferred stocks usually carry no voting rights.

Preference Share are of Following Types:

- Cumulative and Non Cumulative
- Redeemable and Irredeemable
- Participating and Non Participating
- Convertible and Non-Convertible
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 From Companys point of view

Hybrid security
Absence of voting rights
No dilution of control
Fixed return
Trading on Equity
Variety (Convertible, participative, etc.)

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 From Investor s point of view

Not secured

Not an attractive investment

No right to participate in the management

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 Debentures are the long-term borrowed funds of the company.
Debentures have a fixed maturity period and have a fixed rate
of interest.
Debentures are usually in the form of a certificate issued under
the common seal of the company. The certificate is an
acknowledgement by the company of its indebtedness to the
holder of the debentures.

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 Various kinds of debentures which are issued by a
company:-
Secured and unsecured debentures
Redeemable and irredeemable debentures
Fully convertible, partly convertible and non-convertible
debentures

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 No loss of managerial control

A Flexible source of finance

Reduces burden of tax of the company

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 Fixed rate on interest

Companies may have to mortgage their assets

Not an attractive investment from companys point of view.

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 Bonds are long-term borrowed funds of the government and also
companies. Bonds have a fixed maturity period and have a fixed
rate of interest which is called as coupon rate.
A bond is a negotiable certificate which entitles the holder of
repayment of the principal sum plus interest.
The most common process of issuing bonds is through
underwriting.

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 various kinds of bonds which are issued are:-
Fixed rate bonds
Floating rate bonds
High yield bonds
Zero coupon bond

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Debentures
Debentures are issued mostly by
the companies.
The rate of interest on
debentures is generally higher
than bonds.
Debentures carry a higher risk
than bonds.
The return on debentures is
called as interest and the rate of
return is called as interest rate.
Bonds
Bonds are issued mostly by the
government.
The rate of interest on bonds is
generally lower than debentures.
Bonds carry a lower risk than
debentures.
The return on bonds is called as
coupon and the rate of return is
called as coupon rate.
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 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.
Existing companies will be in a position to expand their
activities
Promotion of partnership firm into Public Limited
companies or merger of companies or facilitates buy-
back of shares

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 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 more days
in primary market compared to secondary market
where it takes only 3 days to allot the shares.

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 Merchant bankers play an important role in
issue management process.
The Securities Board of India, under the SEBI
Regulations, exercising its powers under
Section 30, SEBI Act, 1992, has made
regulations for various components of the
capital market. The merchant bankers are
regulated by SEBI (Merchant Bankers)
Regulations, 1992.
Fundamentally, merchant banks are financial
institutions. They engage in business loans as
well as underwriting.
They mostly cater to large enterprises
and individuals of high net worth.
They perform a combination of consultancy
and banking services.
They provide consultancy on matters
pertaining the finances, marketing,
management, and law.
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 Such consultancy services assist starting of businesses,
raise finance, modernize, expand or restructure a business,
revival of sick units as well as provide assistance to
companies in registering, buying and selling shares.
The Securities Exchange Board of India segregated
merchant bankers into the following four categories:
Category-I: advisor, Lead manager, consultant,
portfolio manager and underwriter.
Category-II: Consultant, advisor, portfolio manager,
and underwriter.
Category-III: Advisor, underwriter, and consultant only.
Category-IV: Advisor or consultant to issue of capital.

Lead managers have to ensure correctness of the

information furnished in the offer document.
They ensure compliance with SEBI rules and regulations as
also Guidelines for Disclosures and Investor Protection.
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 To this effect, they are required to submit to SEBI a
due diligence certificate confirming that the
disclosures made in the draft prospectus or letter of
offer are true, fair and adequate to enable the
prospective investors to make a well informed
investment decision.
SEBI's various operational guidelines issued during the
year to merchant bankers primarily addressed the need
to enhance the standard of disclosures
ROLE OF MERCHANT BANKERS
1. Raising finance
2. Brokers in stock exchange
3. Project management
4. Advise of modernization and expansion 50
 In the securities industry an underwriter is a
company, usually an investment bank, that
helps companies introduce their new
securities to the market.
An underwriter is any entity that is
responsible for evaluating and assuming
another entity's risk, for a fee such as a
commission, premium, spread or interest.
The company has to appoint underwriters in
order to guarantee the minimum subscription.
An underwriter is generally an investment
banking company.
The underwriter agrees to pay the certain
price and buy a minimum number of shares, if
they are not subscribed by the public.
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 The 3 main types of underwriting agreements are:
i) Complete underwriting. : If the whole issue of shares or
debentures of a company is underwritten, it is called complete
underwriting. In such a case the whole issue is underwritten either
by an individual/institution agreeing to take the entire risk or by a
number of firms or institutions each agreeing to take the risk to a
limited extent.
ii) Partial underwriting.: If part of the issue of shares or debentures
of a company is underwritten, it is said to be partial underwriting.
In such a case the part of the issue is underwritten either by an
individual/institution or by a number of firms or institutions each
agreeing to take the risk to a limited extent.
iii) Firm underwriting. Firm underwriting means when an
underwriter agrees to buy a definite number of shares or
debentures in addition to the shares or debentures he has to take
under the underwriting agreement. In case of firm underwriting the
underwriters get issue is over subscribed, the underwriters are
liable to take up the agreed number of shares or debentures

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 Banker to an Issue means a scheduled
bank carrying on all or any of the following
issue related activities namely:-
-> Acceptance of application and
application monies;
-> Acceptance of allotment or call
monies;
-> Refund of application monies;
-> Payment of dividend or interest
warrants.

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 A portfolio manager is either a person
who makes investment decisions using
money other people have placed under
his or her control or a person who
manages a financial institution's asset
and liability (loan and deposit)
portfolios.

On the investments side, they work with

a team of analysts and researchers, and
are ultimately responsible for
establishing an investment strategy,
selecting appropriate investments and
allocating each investment properly for 54
 A debenture trustee is a person or entity
that serves as the holder of debenture
stock for the benefit of another party.
When a company is looking to raise
capital, one method of accomplishing this
is by issuing stock as a form of debt with
the obligation to repay the debt at a
specific interest rate.
The trustee serves as a liaison (the person
who keeps in contact with different
groups) between the company that issued
the debentures and the debenture holders
that are collecting interest payments.

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 Liabilities
No one can be appointed as a debenture trustee if he has a share
ownership in the company.
He cannot be appointed if he is a promoter of the company, employee or
the manager.
The vacancy of the debenture can be filled by the company by the
consent of the other trustees.
Duties
The trustee ensures that there is no breach in the terms of issue of
debentures.
The trustee can take steps to remedy the breach (above mentioned).
The trustee is the person who informs the debenture holders about such
breach.
The trustee ensures that all the condition regarding creation of security
for debentures is met
The trustee is the person who ensures that the debentures are redeemed
as per the conditions agreed upon.

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 http://taxguru.in/company-law/issue-
shares-companies-act2013.html
http://articles-
junction.blogspot.in/2013/09/what-is-
primary-market-functions-of.html
http://economictimes.indiatimes.com/articl
eshow/3803131.cms?utm_source=contento
finterest&utm_medium=text&utm_campaig
n=cppst
www.economictimes.indiatimes.com
www.rbi.org.in

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