NEW ISSUE MARKET OR PRIMARY MARKET

Introduction

• The NIM deals with the securities that have been offered to the public for the first time

• The major 3 functions of NIM are: - Origination - Underwriting - Distribution• The interplay of these functions helps to transfer sources of

surplus funds to users of these funds.• The first public offering of equity shares of a company which

is followed by listing in the stock market(exchange/s) is called Initial public offer(IPO). It is the first issue of equity shares to the public by an unlisted company.

IPO- Origination- Decision to go public

• This calls for a careful study of the investment climate in the country.

• Timing of the issue is very crucial. During the period of economic buoyancy, the issues would generally be oversubscribed many times & during the period of depression, the issues may be undersubscribed.

• Price of shares: As per SEBI guidelines, a company eligible to go for public can freely price its shares. However, the issuing company has to disclose the basis of the issue price based on:

- Adjusted EPS for the past 3 years - P/ E ratio in relation to the issue price - Return on Networth - Proposed NW to maintain EPS - Net Assert Value

Benefits to go public

• Access to larger capital: A company unable to go public will find it difficult to grow beyond a certain point for want of capital

• Respectability: A company publicly listed commands higher respect in the market

• Growth prospects: Publicly listed companies offer greater growth potential for its employees & hence can attract better talent

• Liquidity: The investments become liquid, boosting further growth prospects

• Diversification: Investors gets diversified

Disadvantages for going public

• Dilution: Existing share holders suffer from dilution of their ownership

• Loss of flexibility: The affairs of the public company is highly regulated & hence may suffer from loss of flexibility

• Disclosures: A public company is required to make lot of disclosures to the investors & hence find it difficult to maintain secrecy relating to its expansion plans, market strategy, etc.

• Accountability: Degree of accountability is very high.• Public pressure: Public will have lot of say in the functioning of the

company & hence under pressure always.• Costs: Public company has to incur recurring expenses relating to

printing/providing annual reports, holding AGMs, etc.

Method of Floating New Issues

• Different kinds of issues: Primarily, issues made by an Indian company can be

classified as Public, Rights, Bonus and Private Placement.

• Public issue: When an issue / offer of securities is made to new investors

for becoming part of shareholders’ family of the issuer, it is called a public issue.

Public issue can be further classified into Initial public offer (IPO) and Further public offer (FPO).

IPOs/FPOs

• Initial public offer (IPO): When an unlisted company makes either a fresh issue of

securities or offers its existing securities for sale or both for the first time to the public, it is called an IPO. This paves way for listing and trading of the issuer’s securities in the Stock Exchanges. It is the first issue of equity shares to the public by an unlisted company.

Further public offer (FPO) or Follow on offer: When an already listed company makes either a fresh issue of

securities to the public or an offer for sale to the public, it is called a FPO.

IPOs

• Here the issues are offered to the public for subscription.• Section 67 of companies(amendment act) 2000 provides that

where the offer or invitation to subscribe for shares/debentures for 50 or more persons is made, then such an offer is deemed to be public offer attracting compliance to SEBI regulations.

• Public issues are always through issuance of prospectus.• The issuing company makes an offer to the public directly of a

fixed number of shares at a specified rate.

RIGHTS ISSUE

• When an issue of securities is made by an issuer to its shareholders existing as on a particular date fixed by the issuer (i.e. record date), it is called an rights issue. The rights are offered in a particular ratio to the number of securities held as on the record date.

• It is issue of new shares in which existing share holders are given preemptive rights to subscribe to new issue on a pro-rata basis.

• A share holder will have 4 options: - Exercise right to buy the shares - Renounce the right & sell them in the open market - Accept part and Renounce the balance - Choose to do nothing

Bonus issue:

• When an issuer makes an issue of securities to its existing shareholders as on a record date, without any consideration from them, it is called a bonus issue. The shares are issued out of the Company’s free reserve or share premium account in a particular ratio to the number of securities held on a record date.

• It is one of the ways to increase the capital, but it does not bring in any fresh capital.

• Some companies distribute profits to the to existing share holders by way of fully paid up bonus shares instead of paying them a dividend.

• Bonus shares are issued in the ratio of shares held.• Bonus shares enable the company to restructure the capital.

Private placement:

• When an issuer makes an issue of securities to a select group of persons not exceeding 49, and which is neither a rights issue nor a public issue, it is called a private placement.

• The direct sale of securities by a company to some select people or to institutional investor is called private placement.

• No prospectus is issued in private placement.• It covers equity shares, Preference shares & debentures• It offers quick access to capital market than the public issue

and is inexpensive.

Issue Management- Policy/ Procedure

• In order to protect the interest of Investors & for orderly growth of Capital market, SEBI put in place ground rules under

Disclosure & Investor Protection(DIP) Guidelines 2000.• SEBI guidelines are applicable for all public issues.• The companies issuing offer document( prospectus in the

case of public issue OR Letter of offer in the case of Rights issue) shall comply with SEBI guidelines.

• There are 3 categories of participants in the Primary market. - The Issuer company - The investor - The Intermediaries.

New Issues- Procedure

SEBI has categorized the companies into 8 to remove issue anomalies and to protect the interest of the investors.• Category A: New companies with operation of less than 12 months. Here at

least 25%( if the issue size is Rs 100crore & above) OR 20% (if the issue size is less than Rs 100 crore) shall be subscribed through promoters by Friends, Relatives, etc. The 1st public issue shall be at par.

• Category B: Existing companies with good track record of profits for the last 5 years, who are making 1st public issue. The company is free to price the issue at par or at premium.

• Category C: Existing companies making profits for the last 3 years out of 5 years. The company can issue shares at a premium subject to [providing justification to SEBI.

• Category D: Unlisted closely held company without consistent profits.

New Issues- Procedure

• Category E : Company with inconsistent profitability, but supported by profitable group companies.

• Category F : Existing listed company going in for public issue.

• Category G : Existing closely held un listed company going in for dis investment by reducing the promoters share holding.

• Category H : Existing unlisted company not making profits going in for public issue by diluting the stake of existing promoters. Such issues can be at par only.

New Issues

• Types of Offer Documents (ODs) ‘Offer document’ is a document which contains all the relevant

information about the company, promoters, projects, financial details, objects of raising the money, terms of the issue etc and is used for inviting subscription to the issue being made by the issuer.

Prospectus is an offer document in case of a public issue, which has all relevant details including price and number of shares being offered. This document is registered with RoC before the issue opens in case of a fixed price issue and after the closure of the issue in case of a book built issue.

Red Herring Prospectus: This is a prospectus to be filed under Book Building Route. It does not give details of the price of the shares that are offered to the public

• Offer document: Prospectus in case of a public issue or offer in case of a rights issue, which is filed with Registrar of Companies (ROC) and Stock Exchanges.

• An offer document covers all the relevant information to help an investor to make his/her investment decision.

• Draft Offer document: The offer document in draft stage. The draft offer documents are filed with SEBI, atleast 21 days prior to the filing of the Offer Document with ROC/ SEs. SEBI may specifiy changes, if any, in the draft Offer Document and the issuer or the Lead Merchant banker shall carry out such changes in the draft offer document before filing the Offer Document with ROC/ SEs.

• The Draft Offer document is available on the SEBI website for public comments for a period of 21 days from the filing of the Draft Offer Document with SEBI.

Filing of Offer Document

• For any public issue or a Rights issue in excess of Rs 50 lacs, a draft prospectus shall be filed with SEBI through a Merchant Banker at least 21 days prior to filing with RoC.

• Any changes suggested by SEBI shall be carried out before filing with Roc.

• The issuing company should apply to Stock Exchange/s for listing in stock exchanges upon successful closure of issue.

• Issuing companies must enter into an agreement with SEBI regd Depositories for Demating of the shares.

New Issues – Eligibility Norms: UNLISTED COMPANY

• Net Tangible Assets of at least Rs. 3 crores in each of the preceding 3 full years.

• Distributable profits in atleast 3 of the immediately preceding 5 years.

• Net worth of at least Rs. 1 crore in each of the preceding 3 full years.

• The issue size does not exceed 5 times the pre issue net ‐worth as per the audited balance sheet of the last financial year.

Eligibility Norms- Exemption

An unlisted company if it does not comply with any of the norms mentioned, it can still go for public issue subject to:• The issue is made through Book Building Process• At least 50% of the shares are allotted to Qualified

Institutional Buyers(QIBs)• The minimum post issue face value shall be Rs 10 crore.

• The eligibility norms are not applicable for: - Public/Private sector banks - Infrastructure companies - Rights issue by a listed company.

New issues- Eligibility norms for a LISTED COMPANY for making a public issue.

A listed company is eligible to make a public issue if the issue size i.e. the aggregate of the proposed issue and all previous issues made in the same financial year does not exceed 5 times its pre-issue networth as per the ABS of the last FY.

If the issue size is more than or equal to 5 times of pre-issue networth, then the listed company has to take the book building route and allot 60% of the issue size to the Qualified Institutional Buyers (QIBs), failing which the full subscription monies shall be refunded.

New Issues- Credit Rating

• All IPO issues w.e.f 01.05.2007 are necessarily required to be rated by an external SEBI approved rating agency.

• The IPO grading is to be done on a scale of 5. IPO grading has been introduced as an endeavor to make additional information available for the investors in order to facilitate their assessment of equity issues offered through an IPO.

• IPO grade 1: Poor fundamentals• IPO grade 2: Below-average fundamentals• IPO grade 3: Average fundamentals• IPO grade 4: Above-average fundamentals• IPO grade 5: Strong fundamentals

 IPO grading can be done either before filing the draft offer documents with SEBI or thereafter. However, the Prospectus/Red Herring Prospectus, must contain the grade/s given to the IPO by all the CRA.

IPO – Credit Rating

• The areas listed below are generally looked into by the rating agencies, while arriving at an IPO grade

- Business Prospects and Competitive Position - Industry Prospects• Company Prospects– Ø Financial Position– Ø Management Quality– Ø Corporate Governance Practices– Ø Compliance and Litigation History– Ø New Projects—Risks and Prospects

New Issuance Norms

Minimum Promoter’s contribution and lock in: ‐

• Unlisted issuer: The promoters shall contribute not less than 20% of the post issue capital which should be locked in for a period of 3 years. “Lock‐in” indicates a freeze on the shares. Where the promoters contribution is more than 20% then the excess capital (beyond 20%)should also be locked in for a period of 1 year from the date of listing.

• Listed issuer : The promoters shall contribute not less than 20% of the

post issue capital or 20% of the issue size with lock in period of 3 years.• This provision ensures that promoters of the company have some

minimum stake in the company for a minimum period after the issue or after the project for which funds have been raised from the public is commenced.

Promoters’ Contribution before public issue

• Promoters should bring in their entire contribution at least 1 day before the issue opening day.

• Exemption from Promoter’s contribution: - A company already listed in a stock exchange for 3 years &

having dividend payment record for the preceding 3 years. - Where no identifiable promoter or promoter group exists. - Rights issue.• However, the complete information will have to be furnished

in the offer document.

Pricing of an Issue

• Before 1992, the CCI regulated the new issue market and the price of the issue was to be decided by them(CCI).

• New companies could issue IPO at par only.• For existing companies, the premium formula fixed by CCI

was restrictive leading to under pricing of the issue.• In 1992 the CCI act 1947 was repealed whereby the issuing

companies have been given the freedom to price the issue.• The free pricing also led to overpricing by greedy companies

and Merchant bankers.• Now, the companies need to justify the issue price to the

investors and SEBI.

New Issuance- Norms

Pricing of an Issue SEBI does not play any role in price fixation. The issuer in

consultation with the Merchant banker on the basis of market demand decides the price. The offer document contains full disclosures of the parameters which are taken in to account by Merchant Banker and the issuer for deciding the price. The Parameters include EPS, PE multiple, return on net worth and comparison of these parameters with peer group companies.

In the case of banks, RBI approval is necessary for pricing the issue.

New Issuance Norms

• Fixed Price Issue: When the issuer decides the issue price and

mentions it in the Offer Document, it is commonly known as “Fixed price issue”.

• Book built Issue: When the price of an issue is discovered on the basis

of demand received from the prospective investors at various price levels, it is called “Book Built issue”.

Book Building Mechanism

• In a CCI controlled regime, the price was fixed by the company/merchant banker with the permission of CCI. Therefore, the investors feed back was not factored while pricing the issue.

• In a free regime also, the company & Merchant banker fixed the price of the issue and here also the investors feed back was not obtained.

• In both the above cases, the investors interest was not fully factored. With the result many issues were overpriced and the investors incurred huge losses shaking their confidence in the capital market.

• Considering the above, an alternative method, viz. Book Building Route was introduced in India, w.e.f 01.11.1995 which has gained huge popularity.

Book Building Mechanism

• Under Book building route, the offer price of the issue is based on the demand of the investors.

• Globally, Book building route is adopted extensively for pricing the shares.

• Book building is a process of price discovery. The issuer discloses a price band or floor price before opening of the issue of the securities offered. On the basis of the demands received at various price levels within the price band specified by the issuer, Book Running Lead Manager (BRLM) in close consultation with the issuer arrives at a price at which the security offered by the issuer, can be issued.

Price Band

The spread between the floor and the cap of the

price band shall not be more than 20%. The price band can be revised. If revised, the bidding period shall be extended for a further period of 3 days, subject to the total bidding period not exceeding 13 days.

Differential Pricing

• It is the issue of shares at different prices.• COs may issue shares in the firm allotment category at a price

different from the price at which the shares are offered to the public.

• Such pricing shall be higher than the price offered to the general public

• This case would arise in the case of composite issue of capital i.e public & Rights issue through a single offer document

• However, justification for the price differential should be given in the offer document.

IPO- Denomination of Shares

• Public/rights issue of equity shares can be made in any denomination.

• In the case of IPO by an un-listed company, if the issue price is Rs 500 or more, then the company has a discretion to fix the FV below Rs 10 subject to a minimum of Rs 1/-.

• If the issue price is less than Rs 500, then the FV should be Rs 10/-

• The price of the share shall be disclosed in the offer document.

• In the case of companies whose shares are already listed, the price can be split or consolidated at their discretion.

IPO- Denomination of Shares

• The issue of shares in any denomination or change in the denomination is subject to:

- The shares should not be issued in the decimal of a rupee - At any time, there is only one denomination of shares - The company should disclose this to SEBI & Investors.

Book Building- Procedure

Book building is a process of price discovery. A floor price or price band within

which the bids can move is disclosed at least 2 working days before opening of the issue in case of an IPO and atleast 1 day before opening of the issue in case of an FPO. The applicants bid for the shares quoting the price and the quantity that they would like to bid at.

After the bidding process is complete, the ‘cut off’ price is arrived at based on‐ the demand of securities. The basis of Allotment is then finalized and allotment/refund is undertaken. The final prospectus with all the details including the final issue price and the issue size is filed with ROC, thus completing the issue process. Only the retail investors have the option of bidding at ‘cut off’.‐

Retail Investors & QIBs

Investors are broadly classified under following categories :‐

(i) Retail individual Investor (RIIs)(ii) Non Institutional Investors (NIIs)‐(iii) Qualified Institutional Buyers (QIBs)• “Retail individual investor” means an investor who applies or bids

for securities for a value of not more than Rs. 1,00,000.• “Qualified Institutional Buyer” in Indian context shall mean: A public financial institution as defined in section 4A of the

Companies Act, 1956; A scheduled commercial bank; A mutual fund registered with the Board;

Allotment of Shares among Investors

• Book Built issue: In case an issuer company makes an issue of 100% of the net offer to public through 100% book building process:

- Not less than 35% of the net offer to the public shall be available for allocation to retail individual investors;

- Not less than 15% of the net offer to the public shall be available for allocation to non institutional investors i.e. ‐investors other than retail individual investors and Qualified Institutional Buyers;

- Not more than 50% of the net offer to the public shall be available for allocation to Qualified Institutional Buyers:

Allotment of Shares under Fixed Price Issue

• A minimum 50% of the net offer of securities to the public shall initially be made available for allotment to retail individual investor.

• The balance net offer of securities to the public shall be made available for allotment to:

• a. Individual applicants other than retail individual investors, and

• b. Other investors including corporate bodies/ institutions irrespective of the number of securities applied for.

Basis of Allotment of Shares

• After the closure of the issue, for eg a book built public issue, the bids received are aggregated under different categories i.e., firm allotment, Qualified Institutional Buyers (QIBs), Non Institutional Buyers (NIBs), Retail, etc.‐

• The oversubscription ratios are then calculated for each of the categories as against the shares reserved for each of the categories in the offer document.

• Within each of these categories, the bids are then segregated into different buckets based on the number of shares applied for.

• The oversubscription ratio is then applied to the number of shares applied for and the number of shares to be allotted for applicants in each of the buckets is determined. Then, the number of successful allottees is determined.

• This process is followed in case of proportionate allotment. Thus allotment to each investor is done based on proportionate basis in both book built and fixed price public issue.

Opening/Allotment /Refund of the Issue

• How many days an issue is required to be kept open?

• Fixed price public issues: 3 10 working days‐• Book built public issues: 3 7 working days extendable by 3 days in case of ‐

a revision in the price band• For Rights issues : 15 30 days.‐• Allotment/ Refund of shares:• For Fixed price public issues: 30 days of the closure of the issue• For Book built public issues : 15 days of the closure of the issue• For Rights issues : 15 days of the closure of the issue• Listing Of Shares: In book built public issue the listing of shares will be

done within 3 weeks after the closure of the issue. • In case of fixed price public issue, it will be done within 37 days after

closure of the issue.

Book Building

• It is a process of inviting tenders for public offer.• It is a mechanism of price discovery.• Prior to the Book building, the Merchant Banker fixes the floor price

in consultation with the issuer company.• The floor price is the minimum price at which bid can be made &

there is no maximum price.• Eligible investors can submit the application by quoting the bid

price within the prescribed period.• The bids have to be open for 5 days• Upon closure of the bid period, the Merchant banker assesses the

response, ascertain the highest price at which demand is sufficient to match the size of the issue & decides the final subscription price in consultation with the issuer & works out the pattern of allotment.

Intermediaries of the Issue Process

• Intermediaries which are registered with SEBI are Merchant Bankers to the issue (known as Book Running Lead Managers (BRLM) in case of book built public issues), Registrars to the issue, Bankers to the issue & Underwriters to the issue who are associated with the issue for different activities. Their addresses, telephone/fax numbers, registration number,and contact person and email addresses are disclosed in the offer documents

Intermediaries of the Issue Process

• Merchant Banker: Merchant banker does the due diligence to prepare the offer document which

contains all the details about the company. They are also responsible for ensuring compliance with the legal formalities in the entire issue process and for marketing of the issue.

• Registrars to the Issue: They are involved in finalizing the basis of allotment in an issue and for

sending refunds, allotment etc.

• Bankers to the Issue: The Bankers to the Issue enable the movement of funds in the issue process

and therefore enable the registrars to finalize the basis of allotment by making clear funds status available to the Registrars.

• Underwriters: Underwriters are intermediaries who undertake to subscribe to the securities

offered by the company in case these are not fully subscribed by the public, in case of an underwritten issue

SEBI’s Role

• Any company making a public issue or a rights issue of securities of value more than Rs 50 lakhs is required to file a draft offer document with SEBI for its observations. The validity period of SEBI’s observation letter is twelve months only i.e the company has to open its issue within the period of twelve months starting from the date of issuing the observation letter.

• There is no requirement of filing any offer document / notice to SEBI in case of preferential allotment and Qualified Institution Placement (QIP). In QIP, Merchant Banker handling the issue has to file the placement document with Stock Exchanges for making the same available on their websites.

New Terms

• Green shoe Option‐ Green Shoe Option is a price stabilizing mechanism in which shares are issued in

excess of the issue size, by a maximum of 15%. From an investor’s perspective, an issue with green shoe option provides more probability of getting shares and also that post listing price may show relatively more stability as compared to market volatility.

• Safety Net In a safety net scheme or a buy back arrangement the issuer company in consultation

with the lead merchant banker discloses in the RHP that if the price of the shares of the company post listing goes below a certain level the issuer will purchase back a limited number of shares at a pre specified price from each allottee.

• Open book/closed book In an open book building system the merchant banker along with the issuer ensures

that the demand for the securities is displayed online on the website of the Stock Exchanges. Here, the investor can be guided by the movements of the bids during the period in which the bid is kept open. Indian Book building process provides for an open book system.

Basis for Allotment

• Basis of Allocation/Basis of Allotment

After the closure of the issue, for eg a book built public issue, the bids received are aggregated under different categories i.e., firm allotment, Qualified Institutional Buyers (QIBs), Non Institutional Buyers (NIBs), Retail, etc. ‐

The oversubscription ratios are then calculated for each of the categories as

against the shares reserved for each of the categories in the offer document. Within each of these categories, the bids are then segregated into different buckets based on the number of shares applied for. The oversubscription ratio is then applied to the number of shares applied for and the number of shares to be allotted for applicants in each of the buckets is determined.

Then, the number of successful allottees is determined. This process is followed in

case of proportionate allotment. Thus allotment to each investor is done based on proportionate basis in both book built and fixed price public issue.

Greenshoe Option

• It is an option of allotting shares in excess of the published number on account of surplus subscription.

• In such cases, Not more than 15% of the total issue size can be allotted under this route.

ASBA- Application Supported by Blocked Amount

• ASBA is an application containing an authorization to block the application money in the bank account, for subscribing to an issue.

• If an investor is applying through ASBA, his application money shall be debited from the bank account only if his/her application is selected for allotment after the basis of allotment is finalized, or the issue is withdrawn/failed.

• An individual investor can apply through ASBA process provided he/ she is a “Resident Retail Individual Investor” i.e applying for shares/ securities up to RS 1,00,000/‐