What are the regulations of Primary Markets?

NOTE : This is second part of our artical What Is Primary Market .

What are the regulations of Primary Markets?

The primary markets are regulated by the Companies Act, 2013, Securities and Contract Regulation Act, 1956, SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009 for issue of equity and debt securities by companies.

The provisions of these Acts regulate the following with respect to public issues:

Eligibility to make public issue

Information to be provided to the public and regulators

Reservation for different categories of investors

Methods of making the offer to investors

Timelines for the issue process

Usage of funds raised in issues

Continued involvement and accountability of promoters and other inside investors in case of equity issuances.

Provision for investors to continuously evaluate the investment and execute investment and exit decisions.

What are the Types of Investors?

The following are the various categories of investors who buy securities in the primary markets:

Resident individuals

Hindu undivided family (HUF)

Minors through guardians

Registered societies and clubs

Non-resident Indians (NRI)

Persons of Indian Origin (PIO)

Qualified Foreign investors (QFI)

Banks

Financial institutions

Association of persons

Companies

Partnership firms

Trusts

Foreign institutional investors (FIIs)

Limited Liability Partnerships (LLP)

Individual investors are further categorized based on the amount invested as retail, who invests less than Rs.2 lakhs in a single issue

Non-institutional buyers (NIBs) who invest more than Rs. 2 lakhs in a single issue.

The other categories of investors are classified as institutional investors and are also known as qualified institutional buyers (QIBs).

What are the types of public issue?

Initial Public Offer (IPO)

Fresh Issue of Shares

Offer for Sale

Follow-on Public Offer

Initial Public Offer (IPO)

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

When a company makes an IPO the shares of the company becomes widely held and there is a change in the shareholding pattern. The shares which were privately held by promoters are now held by retail investors, institutions, promoters etc.

An IPO can either be a fresh issue of shares by the company or it can be an offer for sale to the public by any of the existing shareholders.

Fresh Issue of Shares: New shares are issued by the company to public investors. The issued share capital of the company increases. The percentage holding of existing shareholders will come down due to the issuance of new shares.

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.

Follow-on Public Offer: 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. When a company wants additional capital for growth or to redo its capital structure by retiring debt, it raises equity capital through a fresh issue of capital in a follow-on public offer.

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How is the pricing of an issue done?

SEBI’s Regulations allow an issuer to decide the price at which the shares will be allotted to investors in a public issue.

Fixed Price Issue:

In a fixed price issue of shares to the public, the company in consultation with the Investment Banker would decide on the price at which the shares will be issued. The company justifies the price based on the expected performance of the company and the price of shares of comparable companies in the market.

Book Built Issue:

The objective of a book-building process is to identify the price that the market is willing to pay for the securities being issued by the company.

The company and its issue managers/Investment Bankers will specify either a floor price or a price band within which investors can bid.

When the issue opens, investors will put in bid applications specifying the price and the number of securities bid at that price. The price bid should be above the floor price or within the price band, as applicable.

The issuer will decide on the cut-off price at which the issue gets subscribed.

All allottees who bid at or above the cut-off price are successful bidders eligible for allotment in the respective categories.

In a book-built offer, not more than 50% shall be offered to the QIBs, of which 5% shall be reserved for mutual funds, not less than 15% to non-institutional investors, and not less than 35% to retail investors.

For fixed price offers, a minimum of 50% of the net offer of securities to the public shall be initially made for allotment to retail individual investors and the balance to HNIs and other investors.

What are the Regulatory Norms of SEBI for Public Issue of Shares?

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

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

Companies making a public offer of shares are required to get the IPO graded by a credit rating agency registered with SEBI. The grading is done based on the industry's prospects, the company's competitive strength, and business risks.

Major Credit Rating agencies are S&P, Fitch, Moodys, Crisil, ICRA, CARE.

A public issue is open for subscription during a limited period as notified by the company.

The application forms are available with the brokers and syndicate members and with collection banks appointed as constituents to the issue.

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.

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

If the issue is oversubscribed, then the shares will be allotted to an investor proportionately.