The primary market, also known as the new issue market, is a crucial segment of the capital market in India where new securities are issued and sold for the first time. This market enables companies and governments to raise capital to fund operations, expansions, and other financial needs. Key activities in the primary market include Initial Public Offerings (IPOs), Follow-on Public Offerings (FPOs), private placements, and rights issues. Each of these methods offers a different approach for raising funds
1. Initial Public Offerings (IPOs)
Definition: An Initial Public Offering (IPO) is the process by which a private company offers its shares to the public for the first time and becomes a publicly traded company.
Key Features:
- Capital Raising: Companies use IPOs to raise equity capital.
- Public Participation: The company’s shares become available to public investors.
- Regulation: IPOs are regulated by SEBI to ensure transparency and protect investors.
Example:
- Zomato IPO: In July 2021, Zomato, an online food delivery platform, launched its IPO to raise funds for growth and expansion. Zomato issued shares at a price range of ₹72-76 per share. The IPO was oversubscribed multiple times, reflecting strong investor interest. Upon listing, the shares began trading on the NSE and BSE, making Zomato a publicly traded company.
2. Follow-on Public Offerings (FPOs)
Definition: A Follow-on Public Offering (FPO) is an additional issue of shares by a company that is already publicly listed. It is used to raise more equity capital after an IPO.
Key Features:
- Capital Raising: Helps companies raise additional funds post-IPO.
- Dilution: Existing shareholders may experience dilution of their ownership.
- Market Pricing: Prices are often set at a discount to the current market price to attract investors.
Example:
- State Bank of India (SBI) FPO: In 2010, SBI launched an FPO to raise ₹20,000 crore to strengthen its capital base. The FPO was priced at ₹2,000-2,100 per share, with shares offered to retail investors at a discount.
3. Private Placements
Definition: Private placement involves the sale of securities to a select group of investors, typically institutional investors, rather than the general public.
Key Features:
- Select Investors: Securities are sold to a limited number of sophisticated investors.
- Quick Fundraising: Faster and less costly compared to public offerings.
- Less Regulatory Scrutiny: Subject to fewer regulatory requirements compared to public issues.
Example:
- Tata Motors Private Placement: Tata Motors raised ₹7,500 crore through private placement of non-convertible debentures (NCDs) to institutional investors. The funds were used to refinance existing debt and for general corporate purposes.
4. Rights Issue
Definition: A rights issue involves offering additional shares to existing shareholders at a discounted price on a pro-rata basis, allowing them to maintain their ownership percentage.
Key Features:
- Existing Shareholders: Only current shareholders can participate.
- Pro-rata Basis: Shares are offered in proportion to current holdings.
- Discounted Price: Usually offered at a discount to the current market price.
Example:
- Reliance Industries Rights Issue: In 2020, Reliance Industries launched a ₹53,125 crore rights issue, the largest in India. The company offered shares to existing shareholders at ₹1,257 per share, a discount to the market price, in a ratio of 1:15 (one new share for every 15 shares held).
5. Qualified Institutional Placement (QIP)
Definition: A Qualified Institutional Placement (QIP) is a method by which listed companies can raise capital by issuing equity shares, fully and partly convertible debentures, or any securities other than warrants that are convertible to equity shares to qualified institutional buyers (QIBs).
Key Features:
- Institutional Investors: Only QIBs like mutual funds, insurance companies, and foreign institutional investors can participate.
- Regulation: Governed by SEBI regulations to streamline fundraising for listed companies.
- Quick Process: Relatively faster process compared to other public offerings.
Example:
- HDFC Bank QIP: In 2018, HDFC Bank raised ₹15,000 crore through a QIP. The funds were used to augment the bank’s capital base and support growth in lending operations.
Process of Issuing Securities in the Primary Market
- Approval and Compliance:
- Companies must obtain approval from their board of directors and shareholders.
- SEBI’s approval is required for public issues (IPOs, FPOs) to ensure compliance with regulations.
- Drafting Prospectus:
- A detailed prospectus is prepared, providing information about the company, financials, risk factors, and the terms of the issue.
- The prospectus is filed with SEBI and the stock exchanges.
- Underwriting:
- Investment banks and financial institutions underwrite the issue, committing to subscribe to the securities if they are not fully subscribed by the public.
- Marketing:
- Roadshows and marketing campaigns are conducted to attract investors and create awareness about the issue.
- Subscription:
- Investors apply for shares or securities within a specified period.
- For IPOs, applications are collected, and shares are allotted based on demand.
- Allotment and Listing:
- Shares are allotted to investors, and the company receives the funds.
- The securities are then listed on the stock exchanges, and trading commences.
Conclusion
The primary market in India is a crucial platform for raising long-term capital through various instruments like IPOs, FPOs, private placements, rights issues, and QIPs. These methods provide companies with the necessary funds to grow and expand while offering investment opportunities to a range of investors. Examples such as the Zomato IPO, SBI FPO, Tata Motors private placement, Reliance Industries rights issue, and HDFC Bank QIP illustrate the diverse approaches companies use to access the capital market and the role of regulatory bodies in ensuring a transparent and efficient fundraising process.
