The primary market is utilised by companies (issuers) for lifting fresh capital from the investors.
Primary market offerings may be a public offering or an offer to a choice group of investors in a confidential assignment program.
The shares offered may be new shares issued by the company, or it may be an offer for sale, where an existing large investor/investors or promoters offer a part of their holding to the public.
The various terms used in the Primary Market:
Public issue : Securities were issued to the members of the public, and any person suitable to invest can join in the issue. This is primarily a retail issue of securities.
Initial Public Offer (IPO)- An initial public offer of sharesor IPO is the first sale of corporate common shares to investors’ at large scale.
The chief purpose of an IPO is to raise equity capital for extradevelopment of the business.
Eligibility criteria for raising capital from the public investors are defined by SEBI in its regulations and comprise minimum wants for net tangible assets, profitability and net-worth.
SEBI’s regulations also force timelines within which the securities should be issued and other essentials such as a mandatory listing of the shares on a national stock exchange and offering the shares in dematerialized form etc.
Follow on Public Offer (FPO) : When apreviously listed company makes either a fresh issue ofsecurities to the public or an offer for sale to the public, it is called FPO.
When a company wants extra capital for expansion or wishes to rebuild its capital structure by retiring debt, it raises equity capital through a fresh issue of capital in a FPO.
A FPO offer may also be in the course of an offer for sale, which generally occurs when it is essential to increase the public shareholding in the company to meet the regulatory requirements.
Private Placement–It can be said as a private placement when an issuer makes an issue of securities to a choice group of personsand which is neither a rights issue nor a public issue.
This is chiefly a wholesale issue of securities to institutional investors. It could be in the structure of a Qualified Institutional Placement (QIP) or a preferential allotment.
According to Companies Act 2013, an offer to subscribe to securities, made to less than 50 persons, is known as private placement of securities.
The requirements of SEBI’s regulations with value to a public issue will not be relevant to a private placement.
A privately placed security can look for listing on a stock exchange provided it meets up the listing requirements of SEBI and the stock exchange.
Private placement of securities can be done by a company no matter it has made a public offer of shares or not.
Qualified Institutional Placements (QIPs):Qualified Institutional Placement (QIP) is a privateplacement of shares made by a listed company to certain identified group of investors called as Qualified Institutional Buyers (QIBs).
QIBs contain mutual funds, financial institutions and banks among others.SEBI has defined the eligibility standard for corporates to be able to raise capital through QIP and other conditions of issuance under QIP such as quantum and pricing etc.
Preferential Issue: Preferential issue means an issue of specified securities by a listed issuer toany choice person or group of persons on a private placement basis and does not comprise an offer of specific securities made through a public issue, rights issue, bonus issue, employee stock option scheme, employee stock purchase scheme or qualified institutions placement or the issue of depository or sweat equity shares issued in a country outside India or foreign securities.
The issuer is required to comply with various provisions defined by SEBI, which inter-alia include pricing, disclosures in the notice, lock-in, totalling to the requirements specified in the Companies Act.
Rights and Bonus Issues: Securities are issued to existing shareholders of the company as on aparticular cut-off date, allowing them to buy more securities at a particular price in case of rights or with no concern in case of bonus.
Both bonus shares and rights were offered in a certain ratio to the number of securities held by investors as on the record date.
It is also significant to comprehend that rights are like options and investors may or may not choose to exercise their rights. They can choose to either accept or not in case additional shares are offered to them.
On the other hand, in case of bonus, additional shares are conferred on to the existing shareholders (without any consideration) by capitalization of reserves in the balance sheet of the company.
Onshore and Offshore Offerings While raising capital, issuers can either issue the securities inthe domestic market and raise capital or approach investors outside the country.
It is known as onshore offering,if capital is raised from domestic market and if capital is raised from the investors outside the country, it is known as offshore offering.
Offer for Sale (OFS):An Offer for Sale (OFS) is a type of share sale where the shares offered inan IPO or FPO are not fresh shares issued by the company, but an offer by existing shareholders to sell shares that have previously been allotted to them.
An OFS does not result in increase in the share capital of the company as there is no fresh issuance of shares.
The advances from the offer go to the offerors, who may be a promoter(s) or other large investor(s).
An example of OFS is the disinvestment program of the Government of India, where the government offers shares held by it in Public Sector Undertakings (PSUs),
It may be stated that OFS is a secondary market transaction done through the primary market direction.
Whilst the primary market is used by issuers for raising fresh capital from the investors through issue of securities, the secondary market gives liquidity to these instruments.
An active secondary market supports the expansion of the primary market and capital formation, as the investors in the primary market are assured of a continuous market where they have an option to liquidate/exit their investments.
Consequently, in the primary market, the issuers have direct contact with the investors, at the same time as in the secondary market, the dealings are between investors and the issuers do not come into the picture. Secondary market can be largely divided into two subdivisions:
Over-The-Counter Market (OTC Market markets) are the markets where trades were directly arranged between two or more counterparties.In such type of market, the securities were settled and traded over the counter among the counterparties directly.
Exchange Traded Markets : The other choice of trading in securities is through the stockexchange direction, where trading and settlement is done through the stock exchanges. The trades executed on the exchange are settled through the clearing corporation, which performs as counterparty and guarantees the settlement of the trades to both buyers and sellers.
Trading :Trading is a formal contract to buy/sell securities. As defined above, trading can be done either in the Exchange Traded Market or the Over-The-Counter (OTC) market.
Stock exchanges in India feature an electronic order-matching system that helps efficient and speedy execution of trades.
Clearing and Settlement: Clearing and settlement are post trading activities that comprise thecore part of equity trading series.
Clearing action is all about establishing the net obligations of buyers and sellers for a definite time period.
Settlement is the subsequent step of settling obligations by buyers and settlers - Paying money - if transaction is a buy transaction or delivering securities - if it is a sell transaction.
Whilst OTC transactions are settled directly between the counterparties, clearing house or corporation is the entity through which settlement of securities takes place for all the trades done on stock exchanges.
The particulars of all transactions carried out by the brokers are made available to the Clearing house by the Stock exchange.
The Clearing House gives an obligation report to Brokers and Custodians who are requisite to settle their money or securities obligations within the specific deadlines, failing which they are required to pay penalties.
The clearing corporation offers full notation of contracts between buyers and sellers, which means it acts as buyer to every seller and seller to every buyer. the operational risk of the transaction has substantially reduced as a result.
Risk Management: In OTC transactions, counterparties are expected to take care of the creditrisk on their own.
The clearing corporation offers settlement guarantee of trades to the counterparties (all buyers and sellers).
This depicts the clearing corporation to the risk of default by the buyers and sellers. To handle this risk, the clearing corporation charges various types of margins, most important among these margins are Initial or upfront margin and mark to market (MTM) margins.
Initial margin is a percentage of transaction value arrived at based on idea of “Value at Risk” viewpoint and MTM margin is the estimated loss which an outstanding trade has experienced during a specified period on account of price movements.