Securities Market Segments

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This is in continuation to the Chapter on Introduction to Indian Financial Markets.

Primary Market

The lesson begins with what a Primary Market is

Primary market is the market ..

where securities are first issued by a company, government, banks and financial institutions, mutual fund and others.

Most of us can recollect this with the IPOs.

A primary issue of securities may be ..

a public issue, where securities are issued to public investors,

or

a private placement where securities are issued to a select group of individual and institutional investors.

So, broadly speaking public issues and private placements keep the primary market busy.

A private placement by a listed company is called a preferential allotment.

A preferential allotment to qualified institutional buyers is called a qualified institutional placement.

Private placement of debt is similar to private equity or venture capital deals,

except that the security issued is debt in the former and equity in the latter case.

There are certain functions or expectations from the Primary market.

1. Wider Investor Participation

2. Foster Competitive Processes

3. Diversify Ownership

4. Better Disclosures

5. Evaluation by Investors

6. Exit for Early Investors

7. Liquidity for Securities

8. Regulatory Supervision

A primary market enables wider participation in the capital of the issuer and diversifies ownership.

Because of this, there will be improved liquidity..

enables better pricing of securities issued..

provides a platform for information of the issue and the issuer to be disseminated and

evaluated and a means for early investors to exit.

Not every one can make an issue.

The primary market issuances are regulated in terms of:

who can make an issue

who can invest

quantum of issue

disclosures and procedures to be followed and

timelines to be adhered to and usage of funds.

The first public offer of shares made by a company is called an Initial Public Offer (IPO).

An IPO may be through a fresh issue of shares or an offer for sale.

Now what is this Offer for Sale?

In an offer for sale,

existing shareholders such as promoters or financial institutions ..

offer a part of their holding to the public investors.

The share capital of the company does not change since the company is not making a new issue of shares.

Along IPO and OFS, there is one more related term: FPO

A follow-on public offer is made by an issuer ..

that has already made an IPO in the past and

now makes a further issue of securities to the public.

In a fixed price issue of shares to the public,

the company in consultation with the lead manager

would decide on the price at which the shares will be issued.

This used to be a thing of the past.

The alternative to Fixed price issue is the now popular Book building process

In a book building process, ..

the issue price is determined based on ..

the offers received for subscription at prices within a specified band or floor price.

The cut-off price is the price at which the issue is subscribed from the bids received.

Retail investors can subscribe to a book built offer by bidding at the cut-off.

They will be allotted shares at the cut-off price once it is discovered.

Bidding at the cut-off ensures that the investor’s application is always accepted.

Something like putting the order at upper circuit price so as to ensure our order gets bought.

Let us now see the time lines of a public issue.

A public issue will be open for a minimum of three working days and a maximum of 10 working days in the case of fixed price issues.

For book built issues, the offer will be open for a period between 3 to 7 days extendable by 3 days in case of a revision in price band.

Companies making a public offer of shares are required to get the IPO graded by a credit rating agency registered with SEBI.

Investors can apply for an issue when it is open based on the information provided in the prospectus.

Applications can be made physically or through the online bidding facility provided by stock exchanges.

In a book built offer investors must place bids for the minimum bid lot specified by the issuer so that ..

the minimum application value adheres to the SEBI prescribed range of Rs. 10,000 to Rs. 15,000.

Investors who bid a price can revise their bid at any time before the issue closing date.

Payment for applications made in a public issue must be made through a local cheque, demand draft or using the ASBA.

In an over-subscribed issue, the shares will be allotted to an investor on a proportionate basis.

A company can make a public issue of debt securities, such as, debentures by making an offer through a prospectus.

Debt instruments issued to the public has to be mandatorily credit rated, security has to be created and it must be in dematerialized form.

An Institution Placement Program is ..

an issue of shares ..

to qualified institutional buyers ..

to meet the requirement of minimum public shareholding specified by the listing requirements of stock exchanges.

We have seen this with private bank shares.. like Kotak Bank etc. had to offload shares so as to confirm to norms.

Hope you guys remember it.

Companies with share capital not exceeding Rs.25 crores can make a public issue of shares and list them on the SME Exchange.

Secondary Market

Secondary market is the market to trade in securities already issued.

Trades happen between investors and there is no impact on the capital of the company.

Someone was asking me earlier..

Will the company get any benefit because of increase in marketcap .. or because of increase in trading activity in it.

What should I answer?

Secondary markets provide

liquidity for investors;

enable price discovery,

information signaling and

a barometer of economic growth.

Secondary markets are regulated under the provisions of the Securities Contract Regulations Act, 1956 and SCR (Rules), 1957.

SEBI is authorized by law to implement the provisions of this act and its rules.

The stock exchange provides the trading platform for trading by investors through member of the stock exchange.

The trades are settled through the clearing and settlement agency of the stock exchange.

Issuers get their securities admitted to the depositories, where they are held as electronic entries against investor names.

Market capitalization (or market cap) of a company is the number of shares outstanding multiplied by the market price per share.

Large cap stocks represent established companies with stable earnings and prices.

Mid and small cap stocks represent companies with high potential for growth but also greater risks to performance and prices.

Market turnover of a stock indicates how much trading activity took place in it on a given business day.

A market index

tracks the market movement

by using the prices of a small number of shares

chosen as a representative sample.

The risks in secondary markets are managed by prescribing capital adequacy norms for members, margins, circuit breakers and penalties.

The clearing house is the counter party to all trades in the stock exchange.

A company announces a record date or book closure period..

and investors whose names appear on the records on this date ..

are eligible to benefit from the corporate action.

All of us saw how group members show increased attention in response of a corporate action.

Friends ask me if it is worthy to invest because the company is coming with a bonus.

The rights shares are offered

to the existing investors in a proportion as approved by the board of a company.

Investors can also choose to decline the offer or sell their entitlement to another.

A bonus issue of shares is made to the existing shareholders of a company without any consideration from them.

Dividends are the share of the profits of the company received by its shareholders.

Two types of dividends:

A company may declare interim dividends during the financial year and final dividend at the end of the year.

A stock split is a corporate action

where the face value of the existing shares is reduced in a defined ratio.

A company may buy back its shares listed on a stock exchange

from the investors

out of the reserves and surplus available with the company.

Have any one tendered shares in buy back offer?

Delisting of shares refers to the permanent removal of the shares of a company from being listed on a stock exchange.

Delisting may be compulsory or voluntary.

Stock exchanges force companies to delist if they do not confirm to listing norms..

such as not filing results or SHP on time etc.

Questions

1. Primary markets provide an exit option for promoters if they want to. Yes / No?

Yes

2. In regard to category of investors, NIB stands for ______

Non-institutional buyers

Any investor who invest more than Rs 2 lakhs in a single issue.

3. The issuer has to enter into an agreement with a depository for dematerialization of the securities proposed to be issued. Yes / No

Related Lessons

• Investment Adviser and Regulatory Environment
• Investment Products
• Investment Risk and its Measurement
• Measuring Investment Returns

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