Financial market zealots are well-aware of primary markets. For them, it is a place where securities in the form of bonds and stocks are publicly sold initially. New securities are issued on the primary market by companies that have never been traded on any exchange before.
In order to finance its long-term goals, a company issues securities to the public. Alternatively, the primary market is known as the New Issue Market (NIM). Companies directly give securities to investors in the primary market. Security can be issued as an initial public offering (IPO) or a further public offering (FPO).
Here, a trader has the privilege of purchasing security directly from the issuer. The issues by a primary market can be classified into the following types:
Initial Public Offer (IPO)
An Initial Public Offer (IPO), monitored by the Securities and Exchange Board of India (SEBI), refers to the “first stock” appearance of a company in the stock market. Being the most common way of issuing company securities publicly, an IPO is one of the most lucrative ways of raising capital for a company via trading. This capital is then used for a variety of purposes, including business remodeling, machinery upgrades, and business expansion, to name a few. In addition to these, an IPO can enhance a company's liquidity, thus paving the way to the issuance of more shares soon.
As compared to IPOs, these are much easier to regulate as well as to issue. On top of that, these are economical and time-saving in nature. Given that a company can remain private, this type of primary market issuance stands out to be ideal for new companies and start-ups.
Qualified Institutional Placement
A subset of private placements, these help companies in trading debentures as well as equity shares. They exclude convertible equity share “warrants” as well as those debentures that end up getting purchased by those with expertise to invest in the capital-raising securities and who the financial market deems as the Qualified Institutional Buyer (QIB).
This is regarded as one of the swiftest methods of garnering capital. You can offer convertible securities or shares to a particular group of traders or investors, regardless of whether your company is listed or unlisted. The issuance of securities on this primary market is not a rights issue or a public offering.
Bonus and Rights Issue
Existing investors are enticed by the prospect of receiving additional free share allotment in the context of a bonus issue and purchasing additional securities at predetermined prices under the right issue.
However, this isn’t the end of the story. Since primary markets function individually, they are earmarked by financial terminologies that cease to exist in other markets. Wondering what these are? Well, FYERS brings to you the most lucidly expounded primary market terminologies that can help you in understanding the intricacies of these markets in an efficacious manner:
When the number of applicants is high, then allotment is derived with the help of a lottery system called the “allotment process”. The allotment will decrease with a rise in demand for shares and can even be nil, in the worst-case scenario.
Application Supported by Blocked Amount (ASBA)
ASBA is a facility extended by SEBI that enables the investors to block the bid amount without paying it. Moreover, investors can apply for a particular IPO and only after an allotment or a rejection that they are bound to pay or unblock.
Book Building Process
This is the process under which everyday demand of a share can be obtained based on which the investors can predict potential allotments.
Book Running Lead Managers (BRLM)
Relegated with the responsibility of completing the formalities for the issuance and marketing of the company’s securities, BRLMs, or simply merchant bankers, are entities that are duly registered with SEBI.
The price receiving the highest number of bids during the book-building process is the "cut-off price." It is also known as the "cap price" and is also determined by the in-demand trend amongst prospective buyers.
Since yester years, the work of keeping security certificate records has been a daunting one. This gave birth to dematerialization, which means holding a share electronically. Dematerialization has made share-holding seamless.
Holding security in its dematerialized format makes the security a depository. As of now, under the banner of SEBI, two kinds of depositories function in India – the National Securities Depository Limited (NSDL) and the Central Depository Services India Limited (CDSL). Any company that opts to offer an IPO of size greater than 10 crores INR is bound to offer shares as depositories.
Draft Red Herring Prospectus (DRHP)
Also known as the offer document, it consists of a company's requisite financial information. The price details as well as the issue period are excluded from the DPHP. It is usually filed with SEBI.
Face Value (FV)
Also known as the “par value” or “at par”, it is the original or the nominal cost of an issued share.
Referred to as the “normal public issue”, here, the company and the BRLM decide upon the price of the issue. Now, this concept has been constricted to Small and Medium Enterprises (SMEs).
This is the lowest price that is bid during the book-building process. It helps give the investor a range of prices to pave the way for allotment.
It is the share price offered publicly before getting listed in the secondary market trading exchange.
The promoters of a company refer to an individual or a team of individuals who are shouldered with the responsibility of carrying out the company's daily operations including capital-raising via trading. On top of that, any corporate body that is responsible for raising a meagre 10 percent of the company’s equity share capital can be tantalizingly deemed as the promoter.
Red Herring Prospectus (RHP)
Once SEBI as well as the Registrar of Companies (ROC), gives a green single, the DRHP takes the shape of a proper RHP. It is used for advertising the company's IPO whenever and wherever required.
Registrar and Transfer Agents (RTA)
The RTA is responsible for allotting and recording the shares to the applicants as per the devised formula. In addition, the RTA is liable for on-ground corporate action between the investors/traders and the company.
The financial institutions and BRLMs who agree to the terms and conditions of underwriting are referred to as underwriters. Here, the entity or the person agrees to bring in money for subscribing to the remaining shares.
So, these were a handful of the most essential terminologies for primary market issuance. We hope these will help you garner a good trading experience in this market. In the simplest ways possible, FYERS will assist you in gaining a better understanding of the market. For a comprehensive understanding of all pertinent topics, please visit the School of Stocks.
Happy trading with FYERS!