01 July 2018

What are the different types of issues in Primary capital Market?

What are the different types of issues in Primary capital Market?

There are different ways for offering new issues in the primary capital market. Primary issues made by Indian Companies can be classified as follows:

a. Public Issue
This is one of the important and commonly used methods for issuing new issues in the primary capital market. When an existing company offers its shares in the primary market, it is called public issue. It involves direct sale of securities to the public for a fixed price. In this kind of issue, securities are offered to the new
investors for becoming part of shareholders’ family of the issuer. If everybody can subscribe to the securities issued by a company, such an issue is termed as a public issue. In terms of the Companies Act of 1956, an issue becomes public if it is allotted to more than 50 persons. SEBI defined public issue as “an invitation by a company to public to subscribe to the securities offered through a prospectus.” Public issue can be further classified into two:

I). Initial Public Offer (IPO)
An IPO is referred simply an offering or flotation of issue of shares to the public for the first time. Initial Public Offer is the selling of securities to the public in the primary market. When an unlisted company makes either a fresh issue of securities or offers its existing securities for sale or both for the first time to the public, it is called an Initial Public Offer (IPO).
The sale of securities can either be through book building or through normal public issue. IPOs are made by companies going through a transitory growth period or by privately owned companies
looking to become publicly traded. IPO paves the way for listing and trading of the issuer’s securities in the stock exchanges. Initial Public Offering can be a risky investment. For the individual investor, it is tough to predict the value of the shares on its initial day of trading and in the near future since there is often little historical data with which to analyse the company.

ii). Further Public Offer (FPO)
When an already listed company makes either a fresh issue of securities to the public or an offer for sale to the public it is called FPO is otherwise called as Follow on Offer.

Often Initial Public Offer (IPO) and Further Public Offer (FPO) are used interchangeably. When the company offers its shares to the investors for the first time it is called initial public offering (IPO). At the time of IPO the companies’ shares are not listed on any stock exchange. When an existing company subsequently issue more new shares in the primary market, it is called Further Public Issue (FPO) and is not considered to be an IPO.

b. Rights Issue
When a listed company which proposes to issue fresh securities to its existing shareholders existing as on a particular dated fixed by the issuer (I.e. record date), it is called as right issue. The rights are offered in a particular ration to the number of
securities held as on the record date. The route is best suited for companies who would like to raise capital without diluting stake of its existing shareholders.

c. Bonus Issue
When an issuer makes an issue of shares to its existing shareholders as on a record date, without any consideration from them, it is called a bonus issue. The shares are issued to the existing shareholders out of company’s free reserves or share premium account in a particular ratio to the number of securities held on a record date.

d. Private Placement
When a company offers its shares to t select group of persons not exceeding 49, and which is neither a rights issue nor a public issue, it is called a private placement. Often a combination of public issue and private placement can be used by the companies for the issue of securities in the primary market. Privately placed securities are often not publicly tradable and may only be bought and sold by sophisticated qualified investors. As a result, the secondary market is not liquid as in the case of a private issue. There are SEBI guidelines, which regulate the private placement of securities by a company. Private placement is the fastest way for a company to raise equity capital. Private placement can be of two types viz., preferential allotment and qualified institutional placement.

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