Primary Market

What is meant by Face Value?

The nominal or stated value (in Rs.) assigned to a security by the issuer is called as Face Value. For shares, it is the original cost of the stock shown on the share certificate, and for bonds it is the amount paid to the holder on the maturity. For an equity share, the face value can be Rs. 10/5/2/1.

What do you mean by the term Premium and Discount in a Security?

Securities are generally issued in denominations of Rs 1/2/5/10 of Face Value per share. If the shares are issued at a price higher than face value then the shares are said to be issued at premium.

If the share are issued at a price lower than face value then the shares are said to be issued at discount.

What are the different kinds of issues?

A.Public Issue- When an issue or offer of securities is made to public to subscribe to the securities offered through a prospectus is called a public issue. A public issue can further be classified into initial public offer (IPO) or follow on public offer (FPO):

1. Initial Public Offer (IPO) – When an unlisted company makes either a fresh issue of securities or offer for sale of its existing securities or both for the first time to the general public. This paves way for listing and trading of the issuer’s securities in the stock exchange.
2. Follow on public offer (FPO) - Is done when an already listed company makes either fresh issue of securities or offer for sale.

B. Rights issue – When a listed company makes an issue of fresh securities only to its existing shareholders. The rights are normally offered in a ratio of number of shares held by the investor.

C. Preferential issue - Is an issue of financial instruments by a listed company to a select group of individuals. This is a faster way for a company to raise capital.

Why do companies need to issue shares to the public?

1, Promoters’ capital and the borrowings from banks and financial institutions may not be sufficient for setting up or running or expanding the business over a period of time.

2, From a long term perspective the amount of money required to run day to day business activities will not be enough to run the operations smoothly.

3, Owners capital provides the flexibility to the management to run the business efficiently without worrying about the interest expenditure and principal repayment.

What is meant by Issue price?

The price at which a company’s shares are offered initially in the primary market is called as the issue price. When they begin to be traded, the market price may be above or below the issue price.

What is meant by Market Capitalisation?

The market value is of a quoted company, which is calculated by multiplying its current share price (market price) by the number of shares in issue is called as market capitalization. E.g. Company A has 120 million shares in issue. The current market price is Rs. 100. The market capitalization of company A is Rs. 12000 million.

Market Capitalization=Current market price X Total number of shares issued by the company.

What is the difference between public issue and private placement?

When an issue is open to the general public and any other investor at large, it is a public issue. But if the issue is made to a select set of people, it is called private placement.

As per Companies Act, 1956, an issue becomes public if it results in allotment to 50 persons or more. This means an issue can be privately placed where an allotment is made to less than 50 persons.

Who decides the price of a share in a public issue?

The issuer in consultation with Merchant Banker shall decide the price of a share.

What does ‘price discovery through Book Building Process mean?

Book Building is basically a process used in IPOs for efficient price discovery. It is a mechanism where, during the period for which the IPO is open, bids are collected from investors at various prices, which are above or equal to the floor price. The offer price is determined after the bid closing date.

What is a Price Band in a book built IPO?

The prospectus may contain either the floor price for the securities or a price band within which the investors can bid. The spread between the floor and the cap of the price band shall not be more than 20%. In other words, it means that the cap should not be more than 120% of the floor price.
Ex: If the price band decided by a company in an IPO is Rs 100 – Rs 110. Then 100 is called as floor price and 110 is called as Cap price. And the difference between the floor and cap price shall not be more than 20%.

What is Cut-Off Price?

In a Book building issue, the issuer is required to indicate either the price band or a floor price in the prospectus. The actual discovered issue price can be any price in the price band or any price above the floor price. This issue price at which shares are issued is called Cut-Off Price.

What is minimum number of days for which a bid should remain open during book building?

The Book should remain open for a minimum of 3 days.

How long does it take to get the shares listed after issue?

The shares have to be listed within 10 working days after the bidding is closed for the shares in an IPO.

What is the role of a ‘Registrar’ to an issue?

Registrar is an entity which finalizes the list of eligible allottees and ensures that the shares are credited to their demat account. They also ensure credit to their demat account for various corporate action such as dividend, bonus, stock split etc.

What is a Prospectus?

Document which gives information to the public, as to why the company is raising money, and the way money is proposed to be spent, the return expected on the investment etc. The document also includes information about the size of the issue, the current status of the company, its equity capital, its current and past performance, the promoters, the project, cost of the project, means of financing, product and capacity etc. This helps investors to evaluate short term and long term prospects of the company.

What is an ‘Abridged Prospectus’?

‘Abridged Prospectus’ is a shorter version of the Prospectus and contains all the salient features of a Prospectus.

Who prepares the ‘Prospectus’/‘Offer Documents’?

Generally, the public issues of companies are handled by ‘Merchant Bankers’ who are responsible for getting the project appraised, finalizing the cost of the project, profitability estimates and for preparing of ‘Prospectus’. The ‘Prospectus’ is submitted to SEBI for its approval.

What is meant by ‘Listing of Securities’?

Listing means admission of securities of an issuer to trading on a stock exchange through a formal agreement. The prime objective of admission to dealings on an exchange is to provide liquidity and marketability to securities.

What does ‘Delisting of securities’ mean?

If a company is delisted, the securities of a particular company would no longer be traded on a stock exchange. A company can voluntarily ask to be delisted to become privately traded. Otherwise, a particular stock may be removed from an exchange because the company for which the stock is issued is not in compliance with the listing requirements of the exchange.