GETTINNG STARTED
Before you actually start investing and trading, it would be advisable to undestand a few basic concepts related to business and finance. Presented in the simplest terms, these would give you an insights that can improve your investing decisions...
1. What are Markets?
A stock market is a market for the trading of company stock/ shares, and derivatives. This includes securities listed on a stock exchange as well as those only traded privately. Market is a place where buyers and sellers of securities can enter into transactions to purchase and sell shares, bonds, debentures etc.
It also enables corporates, entrepreneurs to raise resources for their companies and business ventures through public issues. As a result, idle resources (of investors) are transferred to those who need them (corporates). Markets, thus, provide channels for reallocation of savings to investments and entrepreneurship.
- 1.1 Primary markets:
The primary market is that part 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 or bond issue. This is typically done through a syndicate of securities dealers. The process of selling new issues to investors is called underwriting. In the case of a new stock issue, this sale is an initial public offering (IPO)
What are the types of issues in primary market?
Primary market Issues can be classified into four types.
- Initial Public Offer
- Follow on Offer
- Rights Issue
- Preferential Issue
Introduction to Primary Markets
Most listed companies are usually started privately by their promoter(s). However, the promoters’ capital and the borrowings from banks and financial institutions may not be sufficient for setting up or running the business over a long term. So, companies invite the public to contribute towards the equity and issue shares to individual investors. The way to invite the public to subscribe to the share capital of the company is through a ‘Public Issue’. Once this is done, the company allots shares to the applicants as per the prescribed guidelines laid down by SEBI.
The Primary Market is, hence, the market that provides a channel for the sale of new securities to issuers, which may can be the Government or corporates, to raise resources to meet their fund raising requirements. The securities may be issued at face value, or at a discount/premium and may take a variety of forms such as equity, debt etc. They may be issued in the domestic and/or international market.
ssue at Face Value:
The nominal value of the share, assigned to it by the issuer, is called the Face Value or Par Value. It is the original cost shown on the share certificate and the extent to which the shareholder is liable to the company. In case of equity shares, the value is generally quite small; for instance Rs 1, Rs 2, Rs 5, Rs 10 etc. Hence, if shares are offered at this value then it is said they are being offered at Face Value or at Par.
Issue at a premium or at a discount:
When shares are offered at more than the Face Value, then it is said that the issue is at a premium. The premium is the amount charged over the Face Value. Conversely, if shares are offered at a price lower than Face Value, then the issue is at a discount. The difference between the Face Value and the Offer Price is the discount.
What Are The Types of Issues?
Primary market Issues can be classified into four types.
- Initial Public Offer
- Follow on Offer
- Rights Issue
- Preferential Issue
Initial Public Offer (IPO):
When an unlisted company makes either a fresh issue of securities or an offer for sale of its existing securities or both, for the first time to the public, the issue is called as an Initial Public Offer.
Follow On Public Offer (FPO):
When an already listed company makes either a fresh issue of securities to the public or an offer for sale of existing shares to the public, through an offer document, it is referred to as Follow on Offer (FPO).
Rights Issue:
When a listed company proposes to issue fresh securities to its existing shareholders, as on a record date, it is called as a rights issue. The rights are normally offered in a particular ratio to the number of securities held prior to the issue. This route is best suited for companies who would like to raise capital without diluting stake of its existing shareholders.
A Preferential issue:
A Preferential Issue is an issue of shares or of convertible securities by listed companies to a select group of persons under Section 81 of the Companies Act, 1956, that is neither a rights issue nor a public issue. This is a faster way for a company to raise equity capital. The issuer company has to comply with the Companies Act and the requirements contained in the chapter, pertaining to preferential allotment in SEBI guidelines, which inter-alia include pricing, disclosures in notice etc.
Who Are The Various Intermediaries In A Public Issue?
AThe Issuing Company has to appoint various intermediaries for the issue process. The various intermediaries involved are:
- Book Running Lead Managers (BRLMs)
- Bankers to the Issue
- Underwriters
- Registrars to the Issue etc.
What Is The Role Of The Intermediaries?
Book Running Lead Managers:
The Company issuing shares appoints the BRLM or the Lead Merchant Bankers. The role of the BRLM can be divided into two parts, viz., Pre Issue and Post Issue. The Pre Issue role includes compliance with the stipulated requirements of the SEBI and other regulatory authorities, completion of formalities for listing on the Stock Exchanges, appointing of various agencies such as advertising agencies, printers, underwriters, registrars, bankers etc.
Post Issue activities include management of escrow accounts, deciding the final issue price, final allotment, ensuring proper dispatch of refunds, allotment letters and ensuring that each agency is carrying out their part properly.
Bankers to the Issue:
Bankers to the issue, as the name suggests, carry out all the activities of ensuring that the funds are collected and transferred to the Escrow accounts.
Registrars to the Issue:
The Registrar finalizes the list of eligible allottees after deleting invalid applications and ensures that the corporate action for crediting shares to the demat accounts of the applicants is done and the refund orders, where applicable, are sent.
Underwriters to the Issue:
An investment banking firm enters into a contract with the issuer to distribute securities to the investing public. They get an Underwriting Commission for their services. In case of under subscription, they have the obligation to subscribe to the left over portion.
Underwriters to the Issue:
An investment banking firm enters into a contract with the issuer to distribute securities to the investing public. They get an Underwriting Commission for their services. In case of under subscription, they have the obligation to subscribe to the left over portion.
Benefits & and Drawbacks of Investing in the Primary Market:
Investing in the primary market has its own benefit and drawbacks. Some of the key benefits are:
- It is safer to invest in the primary markets than in the secondary markets as the scope for manipulation of price is smaller.
- The investor does not have to pay any kind of brokerage or transaction fees or any tax such as service tax, stamp duty and STT.
- No need to time the market as all investors will get the shares at the same price.
Some of the major drawbacks are as following:
- In case of over subscription, the shares are allotted in proportionate basis. Thus, small investors hardly get any allotment in such a case.
- Money is locked for a long time and the shares are allotted after a few days where as in case of purchase from the secondary market the shares are credited within three working days.
Classification of Issue
Procedure of arriving at the issue price:
- Fixed Price
Fixed Price:
Any IPO can be priced by two methods. Firstly, where the issuing company, in consultation with the BRLM, arrives at a fixed price at which it offers the shares to the public. In the second method, the company and the BRLM fix a floor and cap price for the issue. This range is called the price band. Investors are free to bid at any price in this range. The final price is determined by market forces according to the demand for the issuing company’s shares. This is called the Book Building Process.
In case of a book building IPO, the offer must be open for at least three days. The BRLM declares the issue price before the allotment, which must be completed within 15 days from the closure of the IPO. The shares should get credited to the respective bidders’ de-mat account within two working days from the date of allotment. The refund orders are also dispatched within this time.
Category of investors who can invest in an IPO:
As far as the IPO is concerned, there are three categories of investors.
- Qualified Institutional Bidders.
- Non-Institutional Investors.
- Retail Investors.
Under this head, financial institutions such as Banks, Mutual funds, Insurance companies, Foreign Institutional investors etc. are permitted to bid for the shares. A mMaximum of 50% of the issue can be kept reserved for investors falling under the QIB category. Out of the 50% shares, 5% are reserved for Mutual Funds.
Non-Institutional Investors:
Under this category, resident Indian individuals, HUFsS, companies, corporate bodies, NRIs, societies and trusts whose application size in terms of value is more than Rs 1 lakh are allowed to bid. At least 15% of the total issue has to be reserved for Non-Institutional Bidders.
Retail Investors:
Under this category, only Individuals, both Resident and NRIs along with HUFs are allowed to bid. At least 35% of the issue has to be reserved for such investors. The size in terms of value should not exceed Rs 1 lakh if one wants to apply under this category
