Primary Market: Basic Concepts
Primary Markets are where firms issue new shares or bonds to the public for the first time. The primary market is where the IPO (Initial Public Offering) of shares takes place. The primary market also facilitates bond offerings for both – public sector and private sector companies.
Issues made by a company can be classified into different types. Given below are the different types of issues:
Initial Public Offering (IPO)
When an unlisted company makes either a fresh issue of shares or convertible securities for the first time to the public, it is called an IPO. This allows for listing and trading of the issuer’s shares or convertible securities on the stock exchange. In an IPO, the issuer obtains the assistance of an underwriting firm, which determines what type of security to issue, the best offering price, the number of shares to be issued and the time to bring it to market
Follow-on Public Offering (FPO)
When an already listed company makes either a fresh issue of shares or convertible securities to the public or an offer for sale to the public, it is called a FPO. A company doing an FPO has already gone through the IPO process before. FPO’s aim to raise additional equity capital for the company.
A Rights Issue is when an issue of shares or convertible securities is made by an issuer to its existing shareholders as on a particular date fixed by the issuer. A rights issue entitles only the existing shareholders to buy additional shares in proportion to their existing holdings within a fixed time-frame.
In private placement, the issuer makes an issue of shares or convertible securities to a select group of investors. Private placement is of 3 types:
- a)Preferential allotment
Allotment of shares is done on a preferential basis to a select group of investors. This is one of the fastest methods of raising funds.
- b)Qualified Institutional Placement (QIP)
A listed company can issue equity shares, non-convertible and convertible debentures other than warrants to Qualified Institutional Buyers only.Qualified Institutional Buyers are those institutional investors who are generally perceived to possess expertise and the financial muscle to evaluate and invest in the capital markets.
- c)Institutional Placement Program (IPP)
An Institutional Placement Program is basically an FPO made by the promoters of a company to Qualified Institutional Buyers only. The main purpose of doing an IPP is to achieve minimum public shareholding as required by the regulatory body.
The first step in an IPO is the offer document. An offer document contains information about the company, promoters and various details about the IPO. Different types of documents are used during different stages of the IPO.
1) Draft Offer Document
It is the offer document at the draft stage. The Draft Offer Document is filed with SEBI at least 21 days before the filing of the offer document with the Registrar of Companies. Changes can be made to the draft offer document before the filing of the actual offer document.
2) Letter of offer
The offer document in case of Rights Issue is called as letter of offer and is filed with the stock exchange.
3) Red Herring Prospectus
A Red Herring prospectus is used in case of a book built issue. Book building is a process used to identify the right price for the issue. The red herring prospectus contains information about a company’s operations and prospects, but does not include key details such as the price and the number of shares offered.
A draft of this document is called as the Draft Red Herring Prospectus (DRHP). SEBI has made it mandatory to file a DHRP. After the document is reviewed and the final approval is given the document then becomes a Red Herring Prospectus. The name ‘Red Herring’ is derived from a bold disclaimer in red on the cover page of the prospectus. The red herring prospectus is issued to potential investors who can then express an indication of interest in the issue. Through this way an issuer tries to gauge the interest for the security and determine the right price band for the issue. After this process, a final prospectus is issued that contains the final price for the IPO and the issue size.
It is the final document which has all relevant details including price of the share and the issue size. This document is registered with Registrar of Companies 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.