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Primary Market | Meaning, Functions, Features, Types, Advantages & Disadvantages

Primary Market

What is Primary Market ?

This denotes the New Issue Market i.e. where the shares are issued for the very first time. In other words, the same were never issued before in the market. Under this, the existing companies and the new entrants can bring the new issues. The basic objective is to procure funds from the investors and transfer the same to the new and existing entrepreneurs who are either establishing a new set up or expanding the existing one.

Primary market serves the dual purpose of investing the funds of the investors as well as meeting the financial requirements of the companies. The issuing companies are the ones who create the demand for the funds whereas the investors facilitate the supply function of the funds. To bring out a new issue in the market, services of various intermediaries, specialized, agencies, institutions are hired who undertake the activities of promotion, transferring, selling, underwriting etc.

Under this segment of the market, the savings are transformed into long-term debts or investments. This is a major contributor to the economic development and growth of the nation. The status of new issue, market vibes and expert opinions derive a new public offer towards success.

Functions of Primary Market

Primary market performs the following functions : 

1) Origination : 
It signifies that the issue is being carried out for the first time i.e., its origin with the primary market. The proposal for issue is further analysed by considering the size of issue, nature of security, flotation methods that are used and the timing when the issue was carried out.
Origination is carried out before an issue is brought in the market. So, it basically includes the home assignments that are done to ensure whether the ideal time exists for issuing new securities in the market. The factors that can influence and affect the issue are considered before hand to judge the viability of the project. Financial viability and economic viability are some of the major areas that have to be looked upon while deciding about the issue. The conditions that are to be considered for an issue are :

i) Time of Floating of an Issue: 
It comprises of the market sentiments and the present prevailing conditions. Timing is very important as it can affect the volume that is subscribed by the public.

ii) Type of Issue : 
Type of issue i.e. whether the issued security is preference, equity, bond or a debenture also decides the success of an issue to a large extent.

iii) Price : 
The price at which the issue is quoted in the market also influences the success of the issue. Some of the existing firms who have a reputation of distributing the dividend may even have a very high amount of premium while the ones who are issuing for the first time have to be at par with the market. There always exists a danger of price being over- or under-charged. This situation has to be eliminated.

2) Underwriting :
Under the underwriting agreements, services of the underwriters (institution or broking firm) are hired who agree to sell the shares of the company and even subscribe them in case the same are not taken up by the public.

3) Distribution : 
Finally, the distribution of the shares is put into execution. It means selling of shares and debentures to the public. This is often carried out by the agents and the brokers on behalf of the company. A list of frequent buyers is maintained by them, and they are contacted for sale of the securities.

Features of Primary Market

Points highlighting primary market's nature are as follows :
  1. It is a new source of procuring long-term capital. 
  2. Securities are brought for the first time in the market.
  3. Also termed as the New Issue Market (NIM). 
  4. The investors directly deal with new securities.
  5. Investors are issued the security certificates after the trading take place.
  6. Securities are issued by the new companies or the existing ones looking for their expansion.
  7. Economy experiences capital formation. 
  8. Fixed assets are purchased from the procured funds in this market.
  9. Those loans from financial institutions that are of long-term nature are not considered in this market.
  10. Under this, the private capital is converted into public capital.

Advantages of Primary Market 

Few of the major advantages of primary market are as follows :

1) Raising of Funds : 
A company can easily raise funds from this segment of the market. The new issues are most of the time capable of raising funds from the dull market if they are priced. adequately. Investment in the equity component leads to the economic development of the nation.

2) Safety : 
There is not much manipulation of the prices. So investing in the primary market is considered as a safe option.

3) Attractive Scheme : 
No taxes like service tax. securities transaction tax, stamp duty are leviable in the primary market, thereby making it attractive.

4) Opportunity for Existing and the New Companies : 
A company can either set-up a new business or diversify the existing one. Both the companies have the opportunity to raise funds from the market by new issue. The voluntary investors transfer their savings to the companies who are in need of the funds.

5) Long-Term Requirements : 
The long-term requirements of the companies are satisfied by raising money from the prospective investors.

6) Good Returns : 
Apart from the routine investment opportunities, the investors are provided with new options with better returns in terms of dividend and long-term appreciation.

7) Attracting Small Investors : 
It does not necessarily require big corporate investors. The savings of the small investors can be mobilized.

8) Setting up New Business : 
Those entities who are the new entrants also find the primary market quite attractive to raise funds and satisfy their requirements. 

9) Business Expansions : 
In case the company is looking for its expansion and diversification, it requires funds. In such case, either they have to borrow the funds from the banks or the financial institutions or float their shares in the market. Raising funds by issuing shares is considered as a better option as there is no burden of regular payment of interest for a newly set-up company.

10) Formation of Capital : 
As the investor's savings are mobilized, there accumulates a substantial portion of capital with the company. The company then utilizes the same for carrying out the production function and this substantially contributes to the economy.

Disadvantages of Primary Market

Following are the disadvantages of the primary market :

1) Slackness in the Economy : 
The general depression in the market in the late nineties did not encourage the fresh issues much. The main. reason behind economic slowdown was poor performance of the industry. Investors feel reluctant if there is poor response in the economy.

2) Reduced Fund Requirement : 
The reduction in demand for funds by the industries also hampers the confidence of the investors. Substantial reduction is noticed in the number of IPO's that are being offered to the public. As a result, the public has already made its own alternatives.

3) Sluggish Capital Market : 
Whenever the market faces depression, the growth of the market is likely to be affected. This also influences poor response of the investors towards primary market investments.

4) Lack of Confidence among Investors : 
The new issues were not welcomed with the same degree of trust and enthusiasm that earlier existed among the retail investors. Apart from this, because of poor show of the market, the investors had already incurred substantial losses and they felt reluctant for any fresh investments. The investors had now realized the exact functioning of the market and had clear knowledge of the same. They could now easily ascertain the fair prices and the overpriced issue thus goes unsubscribed.

5) Inadequate Disclosure : 
The companies were making an inadequate disclosure regarding the information that was required by the investors for decision-making. They could not fulfill the purpose of requirement publicly available. One can easily say that good corporate practice was missing. So, the investors often restrained themselves from investing.
As compared with the companies in the developed capital market. the domestic companies were not disclosing the requisite. information in the desired manner. Charges were imposed on the companies for diversion of the funds for other purpose than the one that were stated in the offer document.

6) Re-Structuring of Business : 
Cases of amalgamations and mergers were constantly reported as a result of globalization that took place in the nineties. That further boosted the concept of re-structuring among the corporate and they began to reorganize their businesses. The performances of the companies were noticeably declining and the investors were un-willing to spare their money for the money market.

7) Private Placement : 
Reduction in the issue cost and other allied costs took the company towards offering the shares by way of private placement Majority of the time, the investors were unaware of any new issue coming and that led to ignorance in this type of the market.

8) Lack of Liquidity : 
The primary market. movement is also influenced by the movement and trend in secondary market. Apart from few securities, the rest were not offering the liquidity to the investors and they were locked up in the secondary market and did not have idle funds for investing in the primary market. Factors that caused blockage of funds in the secondary market are :
  • The fluctuations in the market were based upon speculation and not on the performance. 
  • Unpopularity of the money market took investors towards the secondary market.
  • The speculators could not short sell as that was again a possibility if they were not able to lend the stock.

Methods of Raising Funds in Primary Market/Types of Primary Market

Following are the different methods of raising funds in primary market or instruments of primary market :

Methods of Raising Funds in Primary Market

Public Issue

Public issue refers to issuing securities to the general public and is one of the most commonly used methods in the primary market. Companies Act, 2013 governs and monitors the issues that are made to the general public. Apart from this, guidelines from SEBI are issued for the general protection of the investor's interest and drawing up of an agreement between the company and the exchanges for listing of the securities. Companies Act lays the procedure that should be followed while offering the shares to the public and the particulars of the information that should be made available to the investors.

Regulation of Public Issue

The Capital Issues (Control) Act, 1947 was revised on May 29, 1992. So, it became compulsory for the companies to reveal the information relating to issue and pricing of the shares to the public at the time of making an issue. To ensure this, SEBI has already issued certain guidelines which are required to be adhered to. These guidelines cover the companies who are issuing new securities for the first time and the existing ones that are used for raising money. So, such guidelines are applicable to all types of issues in the primary market.

Detailed guidelines have been issued by SEBI in relation to issuing securities to the public. These were issued first on 11 June, 1992 and subsequently amended from time to time. To take it further consolidated guidelines have been issued by SEBI known as SEBI (Disclosure and Investor Protection) Known Guidelines, 2000. Such guidelines will be made to both listed as well as unlisted applicables when they offer new securities and rights companies issue the public, with the only exception being that the rights issue, where the total value does not exceed 150 lacs. In order to issue securities, following three methods are used :
  • Historical method of receiving the applications via bankers and others
  • Book-building
  • Online system of stock exchange (e-IPO)

Classification of Public Issue

There are two types of public issues : 

1) Initial Public Offer (IPO) : 
When shares are offered to the public for the first time, it is referred to as IPO or public offering. They are basically carried out by the new and young companies who are targeting expansion and require capital for the same. Apart from this, IPO can also be carried out by large companies who require funds for their further expansion. The services of an underwriter may be hired by an issuer company for selling their shares in the market and timing the issue.
Investment in IPO can be a risky element. It is not always possible to make the correct prediction of the behavior of the stock while trading in the initial days and even later on. The companies are new to the market and have no track record based on which their performance can be judged. Also it is difficult to predict the future of the IPO of the existing companies who are in the phase of expansion.

Advantages of IPO :

Following are the advantages of Initial Public Offer : 

i) Creating Awareness Among the Public : 
IPO assists in marketing and making the public aware of the securities that are being offered by the company. This provides publicity to the company and the product appears on the shelves and the investors can have a detailed view.

ii) Maximizing the Capital : 
It is one of the best long-term sources of raising funds for satisfying the requirement of the company. By giving brief detail in the prospectus, the money can be raised for mergers. amalgamations, take-overs, research and development, working capital, etc.

iii) Liquidity : 
The allotted shares have a market value of their own. They can be further resold in the market to the willing buyers. So, the same can be transformed into money when desired. Even the same can happen on the first day of the listing.

iv) Valuation : 
When public trades in the shares. certain standards in terms of the base price are set for a share of a particular company. This situation is an ideal one for the company. A slight fall in the price will attract investors for purchasing the shares. Thus, the value of the company is maintained.

v) Increase in Wealth : 
Normally, it has been noticed that price at which the shares were initially offered to the public have grown many a times over the years and thereby contributing in maximizing wealth for the shareholders.

Disadvantages of IPO :

Following are the disadvantages of the Initial Public Offer : 

i) Significant Amount of Expenses : 
Issuing of an IPO does not guarantee improvement in the financial conditions of the company. Issuing of an IPO requires continuous infusion of funds at the inception by the company. Such expenses incurred may be in the nature of printing costs, advisory fees, legal-fees, accounting fees, ROC charges which are in relation with getting the IPO registered. The total of such expenditures may constitute a significant amount. Costs are one of the main factors, similarly, there may be other factors also that influence issuing of the IPO.

ii) Require Expert Personnel : 
Issuing of an IPO also requires services of an expert personnel from different fields, as there are of compliance's to be abided by.

iii) Invest Lot of Time : 
To ensure the execution of the IPO does not attract much trouble, many companies hire the services of experts who have years of experience in handling the inception of the IPO. Once the basic compliance's are done, then it becomes a routine activity. The CEO also needs to invest a lot of his time and getting the SEC regulations complied with. All these aspects need to be handled with utmost care; otherwise the same may cause serious disruption.

iv) Loss of Control : 
Some other disadvantages to the company may in terms of loss of control, flexibility and confidentiality. The companies are required to disclose all the information as required by the SEC to the general public. This information may at times contain sensitive elements as to profit margins, market share, future endeavors etc.

2) Follow on Public Offer (FPO) : 
A company which had already made a public issue at an earlier stage and is listed on the stock exchange, when makes another issue, it is known as the Follow on Public Offer (FPO). So, all the public offer of the existing listed company that comes after the IPO is termed as the FPO. Such FPO unlike IPO is also required to satisfy the listing and the other norms as directed by SEBI and other regulatory authorities from time to time.

Advantages of Public Issue 

Following are the advantages of the public issue :
  1. The issue and the company get noticed by the general public and get the desired publicity.
  2. The issue is highly characterized by transparency.
  3. There is adequate distribution of the issue among the public. This ensures equal distribution of the wealth.
  4. No discrimination is made among the applicants while issuing the securities.
  5. The prices are controlled, there is no artificial upward and downward movement of it.

Disadvantages of Public Issue

Following are the disadvantages of the public issue :
  1. The whole process involved with huge publicity costs. 
  2. Flotation Costs like underwriting expenses, brokerage, etc. also need to be incurred.
  3. Administrative costs like stationery and prospectus printing, postage etc. also need to be incurred.
  4. Legal costs like registration fees, stamp duty are also required to be incurred. 
  5. Due to involvement of huge costs, this mode is only beneficial for large issues.

Offer for Sale

The offer for sale refers to the invitation given to the public for buying existing shares of a company. The present shareholders take the benefit of flotation of shares by linking offers for sale with initial public offers for getting free from all or part of company holdings. The offer for sale is the sale of present share by owners which are of high net worth individuals who have till now invested a lot in the company to either a targeted group or the general public. It is done to diversify the risk. The offer for sale may be given in debt or equities. It is basically used by the private company for becoming public company or by public company for asking quotation on exchange. The share proceeds after the sale is given to the owner of the shares. The government can also use it for making attempt to divest the interest in the company. There are two main ways by which the company lists new share. They are as follows :
  1. Through offer for sale as it is a public invitation by a sponsoring intermediary, basically the investment bank.
  2. Through offer for subscription or direct offer which is a public invitation by the company issuing it itself. The price of the offer is fixed in advance or there can be tender where the investors are going to bid for price. Once all the bids are received, a strike price is set which is paid by all the investors.

Features of Offer for Sale Method

The features of offer for sale are as follows :
  1. It is a public invitation for buying new or existing securities given by sponsoring intermediary such as bank or broker. It is different from offer for subscription in which there is invitation directly from the issuer to subscribe.
  2. The prospectus of offer for sale is given in the national newspaper which contains all the information.
  3. It is the way of inviting the company to the stock market for trading by selling shares in the new issue. The company sponsor offers shares to the public by inviting subscription from investors :
  • By the offer for sale by fixed price. In this the sponsor fixes prices before the offer is made.
  • By the offer for sale by tender- In this the investor decides the price of offer. A strike price is fixed by the sponsor after receiving all the bids. Every investor has to pay the strike price. 

Advantages of Offer for Sale Method 

  1. It has the same advantages of that of public issue method.
  2. The offer for sale method helps the issue company to save the cost and also from various problems which may arise due to selling the shares to the public. 
  3. It helps in sale of new issue at the time when there are unfavorable circumstances in the market. 

Disadvantages of Offer for Sale Method

  1. It is the expensive method same as public issue method. 
  2. The issuing company may sell the shares at the premium price and the difference between the actual and premium price will be kept by the issuing company or the existing shareholders but not to the issuer company.

Rights Issue

Rights issue is the offering of new shares by the company in the primary market to its existing shareholders. As per Sec. 81 of Companies Act 1956, when an addition is made by the company in its equity share capital, it has to offer the existing shareholders to subscribe on pro-rata basis. A cut-off date is notified for making such subscription after which the right will cease to exist. The shareholders on the other hand may even sell their rights in the market for a certain sum.

Rules Regarding Rights Issue

The following conditions need to be satisfied by the company for making a rights issue as per Section 81 :
  • Those companies, whose shares are already issued in the market, can make a rights issue. 
  • Pro-rata method should be adopted for issuing the rights shares i.e. the existing shareholders are offered shares in proportion to their existing holdings.
  • The shareholders are generally served a notice for specifying the shares issued to them.
  • Minimum 15 days time to be given for acceptance of the rights shares.
  • The shareholders may subscribe, surrender or renounce their rights. 
  • If there are any unsubscribed shares left after the expiry of the stated period, the Board of Director may issue the same to the public.

Advantages of Rights Issue

The advantages of rights issue are as follows: 
  1. The capital can be raised in an economical manner.
  2. Even after issuing rights shares, the pattern of shareholding remains the same.
  3. There is certainty in offering rights issue over the public issue. 
  4. The shareholders are offered rights shares at a subsidized price. So, there is a monetary benefit involved for them.
  5. The shareholders prefer investing as they are well known to the company and the company is also a known investment for them.

Disadvantages of Rights Issue 

Following are the disadvantages of the rights issue:
  1. Rights issue can only be made by those companies who have made an earlier issue.
  2. The issue is offered only to the existing shareholders. 
  3. The wealth is accumulated only in limited hands.

Private Placement of Securities

Under private placement, the securities are not offered to the general public, rather the same are issued privately to investors like mutual funds, banks, venture capital funds, financial institutions etc.

In India, making an Institutional Placement is termed as Qualified Institutional Placements. This is another method of raising the capital wherein, an already listed company issues fully or partly convertible debentures, equity shares or other securities except warrants which can be converted into equity shares by a Qualified Institutional Buyer (QIB). Qualified institutional placement refers to the private selling of shares or other securities that are convertible into shares to the qualified institutional buyers as per the guidelines prescribed by SEBI.

Advantages of Private Placement

Following are the advantages of private placement securities : 

1) Cost Effective : 
Cost involved as compared to public issue is quite less. Public issue which was featured with printing, brokerage, promotion. mailing, etc. contributed around 10% of the total size of the issue. Whereas in case of private placement, majority of the expenses can be saved.

2) Time Effective : 
In case of public issue, approximately 6 months are required to comply with all the requisite formalities but the same is reduced to about 2-3 months in the case of the private placement.

3) Structure Effectiveness : 
The issue can be customized as per the will of the entrepreneurs. It suits both the requirements of the financial intermediaries and the entrepreneurs. For promoting the issue, further discounts can be offered to the intermediaries who are subscribing the issue. The same is not the case in public issue as it is governed by the fixed guidelines.

4) Access Effective : 
A listed as well as an unlisted company can mobilize its capital by way of a private placement. The issue size can be altered and the pricing can be modified to cater the requirements of everyone. While the same is not possible in case of public issue.

Disadvantages of Private Placement 

Following are the disadvantages of private placement securities :
  1. There are only few subscribers of the issue.
  2. The prices may be influenced by the intermediaries. 
  3. The public may not be confident enough about the prospects of the company.

Tender Method/Offer

In tender method, the Company A offers to tender the shares of Company B at a given price. The price is paid in cash only. There can only be stock or the combination of both cash and stock of Company B.

It uses the method in which the bidders have to put the offer direct to the shareholders of the target company. Once the offer is declared, the buyer stales the price then it is up to the shareholders of the target company to decide whether they agree to the terms and will give their shares in the offer or not. The buyer can also decide the form of payment of and the expiry date of offer.

The tender offer is basically friendly because the board of the buyer and the target company will agree on the terms of the offer. Thus, the tender offer is the method for the buyer to have direct interaction with the shareholders of the target firm and the way to adopt the fact of their own company avoiding the opinion of the board of directors and they are perfect method for unfriendly bids.

Bonus Shares 

Dividends are generally paid in the form of cash. However, due to paucity of liquid funds or some other reasons, a company may choose to distribute its profits in some other forms also. In such cases, the company may decide to issue Bonus Shares. Such shares may be issued in lieu or in addition to the payment of cash dividend. These shares are issued on Pro-rata basis of the current holding. It does not change equity ownership proportion.

Bonus shares defines as "a premium or gift, usually of stock, by a corporation to shareholders" or "an extra dividend paid to shareholders in a joint stock company from surplus profit".

However, the legal definition of bonus shares is slightly different. A bonus share is not a dividend as Section 205 of the Companies Act, 1956 prohibits the payment of dividend in any form other than cash. Similarly, bonus shares are not a gift either as these are the previous profits not claimed by the shareholders.

Features of Bonus Shares

The main features of Bonus Shares are as follows : 
  • Issue of Bonus Shares does not change the proportion of ownership. 
  • It leads to the fall of share price in the stock market.
  • Issue of bonus shares causes decline in book value of each share. 
  • The number of shares issued increases after the release of Bonus Shares. 
  • Per share income decreases after the issue of bonus shares.

Advantages of Issue of Bonus Shares 

Following are the main advantages of issuing bonus shares :

1) Advantages to the Company :

i) Proper Utilization of Cash : 
Bonus shares allow the company to reward its shareholders with dividend, without using its cash balance. The company can retain its cash for investment in lucrative activities and for maintaining its liquidity.

ii) Compliance with Stipulations : 
A company may be under restrictions inform its creditors regarding payment of dividends in cash. In such cases, the company may issue equity shares to keep its shareholders in confidence.

iii) Correcting Under-Capitalization : 
A company may rationalize its dividend payment rate by issuing bonus shares in-spite of payment of cash dividend as it brings down the effective rate. Thus, under-capitalization can be reduced by issuing bonus shares.

iv) Rationalizing Market Price : 
Issue of bonus shares brings down the market price per share. This helps in increasing its appeal to small investors. This may also help in increasing its turnover rate.

v) Economical : 
Issue of bonus shares is a relatively inexpensive exercise. Various expenses like brokerage and underwriting. commissions should be avoided at the time i of allocating bonus shares to the existing shareholders.

2) Advantages to Shareholders :

i) Tax Saving : 
Shareholders are not liable to pay tax on bonus shares as income whereas cash dividend is treated as income for shareholders.

ii) Increased Marketability : 
If certain shareholders are not interested in bonus shares but want cash instead, they can sell their shares for liquidity. Thus, marketability increases by issuing bonus shares.

iii) Increased, Future Profits : 
When the company's Board of Directors expect higher future profits, they declare bonus shares to pay-off outstanding shares. This payment indicates higher profitability of the company.

iv) Higher Future Dividends : 
If the company continues to pay same rate of dividend even after bonus issue, the shareholders are entitled to higher dividend in absolute terms.

v) Psychological Value : 
Bonus shares lead to increased confidence among shareholders as they facilitate robust health of the company.

Disadvantages of Issue of Bonus Shares 

Bonus shares have some shortcomings as well which are mentioned as below :

1) No Change in Shareholders' Wealth : 
Bonus shares do not increase overall wealth of a shareholder. While the number of shares held by a shareholder increases, the corresponding decrease in their market value leads to unchanged shareholders' wealth.

2) Expensive : 
Bonus shares have high cost to issue. It needs printing of new share certificates and corresponding postal charges. Some of the shareholders may sell their shares, increasing the number of shareholders requiring their name to be entered on the register.

3) Speculation : 
Issue of bonus share may lead to increased speculation.

4) Complicated Procedure : 
A company needs to obtain various approvals including approval of the SEBI before issuing bonus shares. These steps make the procedure of issue lengthy. exhaustive and complicated.

Methods of Determining Prices of New Shares

The Methods of Determining Prices of New Shares are as follows :

Methods of Determining Prices of New Shares

Fixed Offers Method

In fixed price offers, an issuer company has the right to price the issue. The essential of price is given in the offer document in which the issuer reveals about the qualitative and quantitative factors maintaining the issue price. In other words, when the company prepares the organised and real offer to its shareholders, there is fixed price offer done for offering the way to buy a particular number of shares at a pre-determined price. The fixed price is not too high for the investors.

The Issuer company should be at the price band of 20% (cap in the price band will not be in excess of 20% of the floor price) in the Draft offers documents filed with SEBI and actual price is decided at a later date prior to the filing of the final offer document with SEBU/ROC.

Book Building Method

In book-building method, the company offers the price range instead of fixing a particular price of shares. It is also known as price discovery method. The investors while bidding for the shares need to decide the price at which they would bid for shares. The bid is also in the range like Rs.80, 90 or 100.

The final price is determined according to the demand and supply of the shares. The flour price is the lowest price (Rs.80) and the cap price is the highest price (Rs.100). The cut off price is the price at which the shares are allotted. The process is started after choosing the lead manager and investment banker. The investment banker does the work of making the issue public.

The book building by the help of public bidding decides the demand and price of a proposed issue of securities of the company. It is done to determine the issue amount according to the price book-built. After the price and the amount of issue are decided by the issuer, the issue will be offered by private placement or the public offer category or by both according to the SEBI law.

Process of Book Building

The company can take two options for deciding the process of book building i.e. 75% book building and 100% book building. Both of these options are given by SEBI. The conditions of both the options are an follows :

1) 75 Percent Book-Building : 
In 75% of book building, the securities are given on the firm basis' in which minimum of 25% of securities is offered to the public. The basic conditions of this process are as follows:

i) Eligibility : 
The companies which are qualified for issuing public shares are also qualified for issuing capital by the book building process.

ii) Earmarking Securities : 
The decisions taken by the corporate for issuing the securities by the help of book building process and the used securities is earmarked separately by the help of book-building is known as the placement portion category in the prospectus. The excess securities left are referred as 'net offer to the public' category.

iii) Draft Prospectus : 
The draft prospectus to be filed with the SEBI should have all the information excluding the price of the issue. The actual mention is not done. The price band shows the price range according to which subscription of the securities is done. The prospectus at the final issue price is to be filled with the ROC within two days.

iv) Appointment of Book Runner : 
The issuing company should show in the prospectus the merchant banker which is appointed as book runner. The institutional buyers which are qualified for firm allotment and to the intermediaries which will work as underwriter and will invite them to issue securities are given the copy of draft prospectus to the book runner and he also keeps the record of the names and the number of securities being given to the intermediary buyer and the subscription price of the issue in the placement portion.
The information about the subscriptions received from underwriters and other intermediaries is accumulated by the book runner. The book runner totals the received subscriptions after the specified time period is over. The underwriters will make the payment for the total amount of the subscription of the issues. The underwriter and institutional buyer give the payment to the book runner by a day before the opening of the issue to the public. The payment also includes the application money of all the applications by which subscription of securities is done.

v) Price Setting : 
The issuing company and book runner decide the accurate price of the issue of the offer to the public according to the data collected from the intermediaries of the total order. The issue price is decided according to the various bids received by the book runner from the syndicate members which is formed and the issue price would be for both the private placement and public category. The number of securities to be issued is set according to the amount and issue price. It is shown as below :
Number of Securities = Amount of Issue + Price per Security

vi) Underwriting :
The underwriting agreement is made by the member of the syndicate for the whole offer so that it is not offered to the promoters, permanent employees and shareholders. The price and number of shares for underwriting is given in the agreement for book-building. It is important for the issues which are kept as the 'net offer to the public. The underwriters keep the record of the subscription received for the issue in the placement portion and give these records to the book runner. The book runner has to subscribe to the shares which would be taken by the underwriters if the underwriter is not in the position for taking the same number of shares as agreed.

vii) Bank Account : 
The issuer opens two bank accounts, one for collecting the application money by the private placement while the other for the 25% offer of the total issue made by the public.

viii) Allotment : 
The intermediaries whose bid price is at or above the determined issue price will be now suitable for the allotment of securities. The intimation is set to them for the subscription after the eligibility is decided The issuer might choose to allot securities under the book-building method for both private placement and public offer method on the same day if the allotment in the private placement category needs to be done two days prior to the closure date of the issue, Under the public offer method, the guidelines are given for the allotment of securities.
The orders in the private placement are to be used for filling public subscription if there is under-subscription to the public offer method. The individual investors are given preference in this process. In the same way, the spill over is allowed when there is deficient subscription to the private placement category from the public offer category. The issuer pays the interest for the period between the closure date of the issue and allotment date.

ix) Listing : 
The shares allotted in the private placement category are listed by the 11 day of issue closure after the collection of committed money from the underwriters and the other securities also which are issued under the public offer category is eligible for listing. The various securities which are offered on the internet are not listed.

x) Inspection : 
The inspection of the book building process is controlled by SEBI. The SEBI can inspect the books and records which are supported by intermediaries like book runner, underwriter and others.

2) 100 Percent Book-Building : 
The 100 percent of securities is offered according to the "firm basis or is retained for promoters, permanent employees of the issuer company in the 100 percent book-building process. The minimum required issue of capital is 25 crore. These shares are presented to the shareholder on the two basis i.e. competitive basis or firm allotment basis. The process for 100 percent book-building process is explained as follows :

i) Conditions : 
The following conditions need to be satisfied for 100 percent of book building which are as follows :
  • The required minimum capital is Rs.25 crore. 
  • The SEBI guidelines decide the reservation or firm allotment to promoters. In the issuer company, promoters can be the permanent employees and in the new company, the permanent employees of the promoting company are the promoters.
  • The allotment is done according to the competitive basis or the firm allotment basis. In the case of the new company, it is given to the shareholders of the promoting company and in the existing company to the shareholders of group companies
  • The lead book runner is the eligible merchant bankers. The draft prospectus should have the name of the merchant bankers to be filed with the SEBI.

ii) Lead Book Runner : 
The appointment of lead book runner is important for the 100 percent book-building process by the issuer and book runner does the work of book-building for estimating the accurate price and amount of issue. The syndicate which has the SEBI registered underwriters and another qualified merchant as the member is formed by the lead book runner. The lead merchant bankers need to manage the shortage if there is any under subscription of issue. The suggestion given by SEBI in the draft prospectus need to be done by the book runners. The book runner also maintains the records of the book-building process which is guided by SEBI for inspecting the way book building is done by the company.

iii) Draft Prospectus : 
The draft prospectus having the information about the required disclosure like the total size of issue according to the SEBI norms is to be filed. with SEBI by the lead book runner. It is not necessary to show the issue price and amount of The SEBI gives the suggestions on the draft prospectus within 21 days after receiving the draft prospectus.

iv) Essential Disclosures : 
The various information need to be disclosed in the draft prospectus prior to the filing to SEBI are :
  • The details of the member of the syndicate made by the lead book runner for objective of bidding for the issue.
  • The information of the registrars and bankers to the issue.
  • The information about the factors determining the issue price by the issuer and book runner.
  • The information about the accounting ratios like pre-issue EPS, P/E, average return on net worth, etc., of three years and also helps in the comparison with industry average. The ratio is calculated once the effect to the consequent rise in the capital according to the compulsory outstanding conversions.
  • The information of NAV per share according to the last balance sheet.

v) Advertisement : 
The advertisement according to the provision of Section 2A of the Companies Act is given in the national newspapers after getting the revised prospectus from SEBI. It is important for the issuing company to give 10% of the total issue to the public.

vi) Stock Brokers : 
The stock brokers which are SEBI registered are selected for placing orders with the company by the stock exchange which would be as the collection centers for the applications. The brokers should be such that they can take up the issue in case of the failure on behalf of their clients for fulfilling the commitment. The brokers are given commission to the issuer for their services.

vii) Bidding Process : 
The bidding is done by the syndicate for securities to be issued by the issuer. The process for bidding is as follows :
  • The advertisement of the bidding having the information of the date of opening and closing of the bidding, name address of the syndicate member bidding terms and conditions and way bidding is to be done.
  • The bidding is done by members who are present at the designated centers by the help of internet.
  • The SEBI guidelines decide the number of collection centers and bidding centers.
  • The individuals and institutions which are not the members of the syndicate can bid by the help of syndicate members.
  • The information about the investor, price and number of securities in the bidding is to be given.
  • The serial number of the bidding form will be system generated and will be stamped automatically.
  • The bidding form will be two which should be signed by the investor and countersigned by the book runner or syndicate member.

viii) Allotment Process : 
The allotment process of allotment of securities is as follows :
  • The minimum 15% of the issue will be kept for allotment to individual investors to a maximum of 10 trad-able lots by the syndicate member.
  • The individual investors who have not taken part in the book-building process will be allotted the minimum of 10% of the issue which is being reserved.
  • The proportionate allotment system decides the allotment to be done to individual investors.
  • In case there is under-subscription of issue, shares are kept for the individual investors and the issuer company does the allotment according the way it is fit.
  • Before the commitment, investor quality. price quoted, etc., the allotment of other categories of investors will be according to the book runner.
  • The allotment will be done within 15. days from the date of final closure of the issue. If the company will not be able to do so, then it will lead the company to pay interest 15% p.a. to the investors.

ix) Refund : 
If there is any unsuccessful applicants within 3 days of receipt of allotment, the broker will get the refund. The amount received from the successful applicants will be provided to the stock exchange by the help of electronic medium.

x) Certificate : 
After the completion of the procedure of the subscription and allotment, the registers issue post the share certificate to the applicants or will demat the shares by the help of depository.

Differences Between Fixed Offer Method and Book Building Method

Basis of Difference

Fixed Price Method

Book Building Method

Knowledge about Pricing


The price of the securities is known to the investors of the firm before the securities are offered or allotted.


The prices of the securities are not known in advance to the investors before the investors are offered or allocated. There is knowledge of only indicative price range.



After the closure of the issue, the demand of the securities is known.

The demand of the securities is known after the book building.



Payment is done at the time of subscription whereas refund is done after the allocation.

The payment is done after the allocation.

Pricing of Issue

In the fixed price method, the issue price is fixed before 60 to 70 days prior to the opening of the issue and the issuer does not have the knowledge about the market perception of estimated price.

In the book building, the issue price is fixed one or two weeks prior to the opening of the issue. Thus, the issue price is more accurate.


Over-Subscription and Under-Subscription


In the fixed price method, there is possibility of over subscription and under-subscription.


In the book building, there are less possibility of under-subscription and over-subscription. The issuer can exist from the market if the demand of the shares is not present.

Issue Cost

The fixed price issue has very high cost as it has a pre-issue cost of 2-3%.

In book building, issue cost is less.


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