Chapter 3: Primary Market — Comprehensive Short Notes (Part 1 of 3)
3.1 Role of the Primary Market
3.1.1 Core Functions and Economic Role
- Primary Market Definition: The primary market serves as the principal channel for the sale and issuance of newly created financial securities.
- Resource Mobilisation: It provides an institutional platform for issuers—including corporate entities and governments—to raise fresh capital from investors to fund expansion, setup new projects, or meet statutory financial obligations.
- Issuance Formats: Securities in the primary market can be issued at face value, at a premium, or at a discount, across both domestic and international capital markets in forms such as equity or debt instruments.
3.1.2 Face Value (Par Value) of Securities
- Definition: Face value (also termed par value or nominal value) represents the stated denomination assigned to a security by the issuing entity.
- Equity Shares:
- For equity shares, face value is the original cost of the stock indicated on the share certificate.
- Equity shares are typically denominated in small amounts, such as Rs. 5 or Rs. 10 per share.
- The face value of an equity share bears minimal direct relationship to its prevailing market trading price, which can quote significantly higher (e.g., Rs. 100 or Rs. 1,000) based on market demand.
- Debt Securities:
- For debt instruments (such as corporate bonds and Government Securities), face value is the exact principal amount repaid to the holder at maturity.
- Standard debt securities generally carry a face value of Rs. 100.
- Trading prices of debt securities in the secondary market fluctuate based on economy-wide interest rate movements.
3.1.3 Premium and Discount in the Security Market
- Par Value Base: Securities are standardly issued in base face value denominations of Rs. 5, Rs. 10, or Rs. 100.
- Issue at Premium: When a security is sold to investors at a price higher than its face value, it is issued at a premium. In practice, most public issues are offered at a premium.
- Issue at Discount: When a security is offered at a price lower than its nominal face value, it is issued at a discount. Public issues offered at a discount are extremely rare in modern securities markets.
Key Comparison: Face Value, Premium, and Discount
| Parameter | Face Value (Par) | Issue at Premium | Issue at Discount |
|---|---|---|---|
| Meaning | Stated nominal value assigned by issuer | Issue price is greater than face value | Issue price is less than face value |
| Standard Denominations | Rs. 5, Rs. 10 (Equity) / Rs. 100 (Bonds) | Face Value + Premium Amount | Face Value - Discount Amount |
| Market Frequency | Benchmark baseline for accounting | Most common issuance method | Rarely executed in practice |
3.2 Issue of Shares
3.2.1 Why Companies Issue Shares to the Public
- Transition from Private Funding: Companies are generally established privately by promoters using personal capital and bank borrowings.
- Expansion Capital Need: As business operations expand, promoter equity and institutional loans become insufficient to meet long-term funding requirements.
- Public Issue Mechanism: To raise substantial equity capital, companies invite the general public to contribute towards share capital through a formal "Public Issue".
- Regulatory Allotment: Following a public issue, shares are allotted to applicants strictly in accordance with prescribed rules and regulations set by the Securities and Exchange Board of India (SEBI).
3.2.2 Classification and Types of Share Issues
Securities issues are broadly categorized into Public Issues, Rights Issues, and Preferential Issues (Private Placements).
| ISSUE TYPE | SUB-CATEGORY / FEATURE | KEY CHARACTERISTIC |
|---|---|---|
| 🏛️ Public Issue | IPO – Initial Public Offer | First public offering of securities by a company seeking listing on a stock exchange |
| Fresh Issue | New securities are issued; funds are raised by the company | |
| Offer for Sale (OFS) | Existing shareholders sell their securities; sale proceeds go to the selling shareholders, not the company | |
| FPO – Follow-on Public Offer | Public offer of securities by an already listed company | |
| Fresh Issue in FPO | New securities are issued and the company raises funds | |
| 👥 Rights Issue | — | Offer of securities to existing eligible shareholders, generally in proportion to their existing holdings, subject to applicable regulations and terms |
| 🎯 Preferential Issue | — | Issue of securities to identified persons/groups on a preferential basis, subject to applicable regulatory requirements |
| 🔒 Private Placement | — | Offer or invitation to subscribe to securities to a select group of identified persons, rather than the public |
1. Public Issue
A public issue involves offering securities to the general public and any investor at large through an official offer document.
- Initial Public Offering (IPO): Occurs when an unlisted company makes either a fresh issue of securities, an offer for sale (OFS) of existing holdings by promoters/investors, or a combination of both to the public for the first time. An IPO paves the way for listing and secondary market trading of the issuer's securities.
- Follow-on Public Offering (FPO / Further Issue): Occurs when an already listed company makes a fresh issue of securities or an offer for sale to the public through a formal offer document.
2. Rights Issue
- Target Audience: Fresh securities offered exclusively to existing shareholders of a listed company as on a designated record date.
- Proportional Ratio: Rights shares are offered in a pre-determined ratio relative to existing holdings (e.g., a 1:1 rights issue awards 1 new share for every 1 existing share held, doubling total shareholding).
- Non-Dilutive Capital Raising: This route enables listed companies to raise fresh equity capital without diluting the percentage ownership stake of existing shareholders.
3. Preferential Issue (Private Placement)
- Target Audience: Issue of shares or convertible securities by a listed company to a select, pre-identified group of persons under Section 62 of the Companies Act, 2013.
- Exclusion Clause: A preferential issue is neither a public issue nor a rights issue.
- Speed and Compliance: Provides a faster mechanism for corporate equity capital raising. Issuers must strictly comply with statutory provisions of the Companies Act and SEBI guidelines covering pricing, notice disclosures, and lock-in norms.
Summary Table: Types of Share Issues
| Issue Type | Target Audience | Primary Objective | Key Statutory Feature |
|---|---|---|---|
| Initial Public Offer (IPO) | General public at large | First-time public capital raise & exchange listing | Transforms unlisted company to listed entity |
| Follow-on Public Offer (FPO) | General public at large | Subsequent capital expansion for listed firms | Conducted through formal public offer document |
| Rights Issue | Existing shareholders on record date | Non-dilutive capital expansion | Issued in a fixed ratio (e.g., 1:1) |
| Preferential Issue | Select group of investors | Rapid capital infusion from targeted entities | Governed by Section 62, Companies Act, 2013 |
3.3 Issue Price and Market Capitalisation
3.3.1 Concept of Issue Price
- Definition: Issue price is the price per share at which a company's shares are initially offered to investors in the primary market.
- Secondary Market Price Divergence: Once listing takes place and secondary trading commences, the prevailing market price of the share may trade above or below its initial issue price based on market forces.
3.3.2 Market Capitalisation
-
Definition: Market capitalisation (Market Cap) represents the total aggregate market value of a publicly quoted company.
-
Calculation Formula:
Market Capitalisation = Current Share Price * Total Number of Shares in Issue
-
Numerical Practical Example:
- Company A has 120 million total issued shares.
- Current market price per share = Rs. 100.
- Market Capitalisation = 120 million shares * Rs. 100 = Rs. 12,000 million (Rs. 1,200 Crore).
3.3.3 Public Issue vs. Private Placement (50-Person Statutory Rule)
- Public Issue Scope: An issue open to all investors and the general public at large.
- Private Placement Scope: An issue made exclusively to a select, limited group of targeted individuals or entities.
- Statutory Threshold (Companies Act, 2013):
- An issue is legally classified as a Public Issue if allotment is made to 50 persons or more.
- An issue qualifies as a Private Placement if allotment is restricted to less than 50 persons.
- Exclusion Rule: In counting the 50-person threshold for private placement, allotments made to Qualified Institutional Buyers (QIBs) and shares offered under Employee Stock Options (ESOPs) are explicitly excluded.
Comparison Table: Public Issue vs. Private Placement
| Feature | Public Issue | Private Placement |
|---|---|---|
| Target Audience | General public & retail investors at large | Select group of pre-identified investors |
| Allotment Threshold | Allotment made to 50 persons or more | Allotment made to less than 50 persons |
| Exclusions in Counting | Not applicable | QIBs and ESOP allotments are excluded from the 50-person limit |
| Procedural Complexity | Comprehensive SEBI offer document process | Simplified procedure under Section 62, Companies Act, 2013 |
Key Exam-Relevant Terms
- Primary Market: The entry-level securities market facilitating the initial creation and sale of new debt and equity securities by issuers.
- Face Value (Par Value): The nominal, baseline accounting value assigned to a share or bond certificate by the issuing company.
- Issue at Premium: Issuance of a security at a price exceeding its face value.
- Initial Public Offering (IPO): The maiden public offering of equity shares by an unlisted company to list on stock exchanges.
- Rights Issue: A fresh issue of shares offered exclusively to existing shareholders in proportion to their holding on a record date.
- Preferential Allotment: Targeted issuance of equity or convertible securities to a select investor group under statutory rules.
- Market Capitalisation: Total market value of a listed corporate entity, derived by multiplying share price by total outstanding shares.
- 50-Person Rule: The statutory benchmark under the Companies Act, 2013 distinguishing a private placement (<50 allottees) from a public issue (>=50 allottees).