Comprehensive Guide to Indian Primary Markets: Part 2
This second installment of our deep dive into Chapter 3 of the NISM Securities Markets Foundation Workbook focuses on the specific mechanisms of capital issuance, the diverse entities that seek funding, and the various categories of investors who provide it. Understanding these components is essential for grasping how capital is efficiently allocated across the Indian economy.
3.4 Types of Issues
Issuance of capital in the primary market is not limited to public offerings; it is classified into four broad categories based on the target audience and the terms of the offer.
1. Public Issue
Securities are offered to the general public, and any eligible investor can participate. This is the most common method for a company to "go public" and achieve a wide distribution of its shares.
2. Private Placement
Securities are offered to a select, pre-identified group of institutional or eligible investors. This is a wholesale issue of securities, often used for its cost-efficiency and speed compared to a public offer.
3. Preferential Issue
Securities are issued to an identified set of investors, such as promoters or strategic investors, on preferential terms. This can occur independently or alongside a public issue.
4. Rights and Bonus Issues
These are offers made exclusively to existing shareholders as of a specific record date.
- Rights Issue: Allows existing shareholders to buy more securities at a specific price, preventing the dilution of their stake.
- Bonus Issue: Additional shares are allotted to existing shareholders without any monetary consideration (free of cost).
3.5 Types of Issuers
The primary responsibility for meeting obligations associated with a security rests with the issuer. The following table summarizes the primary entities seeking capital:
| Issuer Type | Securities Issued | Specific Needs and Structures |
|---|---|---|
| Governments (Central/State/Local) | G-Secs, T-Bills, Sovereign Gold Bonds (SGB) | Only the Central Government issues T-bills; they do not issue equity; instruments carry a government guarantee. |
| Public Sector Units (PSUs) | Equity shares, Bonds | Often offer equity held by the government to the public as "disinvestment"; bonds may have special tax concessions. |
| Private Sector Companies | Equity, Preference shares, Bonds, CP, Securitized paper | High dependence on securities markets; often issue in international markets (ADRs/GDRs). |
| Banks & Financial Institutions | Equity, Preference shares, Bonds, CD, CP | Lower dependence on securities markets due to public deposits; may offer long-term bonds as Tier-2 capital. |
| Mutual Funds | Units | Capital is raised for specifically defined schemes (open-ended or closed-end). |
| Investment Trusts (REITs, InvITs) | Units | Capital is raised for specific schemes like real estate or infrastructure. |
3.6 Types of Investors
Both retail and institutional players participate in the primary market, though debt markets are traditionally dominated by institutional investors.
Categorization of Individual Investors
In the context of a single issue, individual investors are categorized based on their investment amount:
- Retail Individual Investors (RIIs): Those who invest not more than Rs. 2 lakhs.
- Non-Institutional Buyers (NIBs): Individual investors who invest more than Rs. 2 lakhs.
Institutional Investors
Institutional investors are also known as Qualified Institutional Buyers (QIBs). These include:
- Banks and Financial Institutions.
- Mutual Funds and Insurance Companies.
- Foreign Portfolio Investors (FPIs).
- Pension Funds and Provident Funds.
Other Eligible Participants
- Hindu Undivided Families (HUFs) and Minors through Guardians.
- Non-Resident Indians (NRIs) and Persons of Indian Origin (PIOs).
- Partnership Firms, Trusts, and Limited Liability Partnerships (LLPs).
Note on Foreign Investment: Foreign investors may use foreign currency to purchase securities, but their transactions are strictly governed by the prevailing foreign exchange rules and FEMA regulations.
Key Takeaways
- Issuer Accountability: The issuer is legally bound to meet all obligations, such as paying interest on bonds or dividends on shares.
- Private vs. Public: Private placements are faster and involve fewer regulatory hurdles because they target informed institutional investors.
- Investment Limits: The Rs. 2 lakh threshold is the critical dividing line between a "Retail" and a "Non-Institutional" individual investor.
- Offer Documents: Information regarding which specific investor categories can purchase a security is always detailed in the offer document.