Primary Market

The primary market in the Indian stock market is where securities are issued for the first time, enabling companies to raise capital directly from investors. Let's consider a hypothetical example with "Bhuvan Pvt Ltd." to understand this process:

1. Deciding to Go Public: Bhuvan Pvt Ltd., a private company, decides to issue shares to the public to raise capital.

2. Submission to SEBI: The company needs to prepare and submit a Draft Red Herring Prospectus (DRHP) to the Securities and Exchange Board of India (SEBI). This document includes detailed information about the company, its business model, financial statements, risks involved, and the purpose of raising funds.

3. Financial Requirements:

   • Balance Sheets: Bhuvan Pvt Ltd. must provide its balance sheets for the last three years, showcasing its financial performance and health.

   • Authorized Capital: This is the maximum amount of capital that the company is authorized to raise through the issuance of shares. It's a part of the company's charter.

   • Issued Capital: The part of authorized capital which the company decides to issue to the public to raise funds.

4. Hiring Experts:

   • Merchant Bankers/Book Running Lead Managers (BRLMs): They guide the company through the IPO process, including pricing the shares, underwriting the issue, and ensuring regulatory compliance.

   • Legal Advisors and Auditors: For legal compliance and financial auditing.

5. Approval and Listing: Once SEBI approves the DRHP, Bhuvan Pvt Ltd. can proceed with the IPO. The company will decide on the pricing of shares through the book-building process or a fixed price method.

6. Public Offering: Bhuvan Pvt Ltd. makes its shares available to the public. Investors can subscribe to these shares within the IPO period.

7. Listing on Stock Exchange: After the IPO, the shares of Bhuvan Pvt Ltd. get listed on a stock exchange like BSE or NSE, where they can be traded.

8. Post-IPO Requirements: Post-listing, the company must adhere to continuous disclosure and regulatory requirements as mandated by SEBI and the stock exchange.

This simplified example provides an overview of the primary market process in the Indian stock market, including the necessary steps and entities involved. Actual processes may involve more detailed and specific requirements based on the company's size, industry, and market conditions.

Merchant Bankers or Book Running Lead Managers role:

In an Initial Public Offering (IPO), Book Running Lead Managers (BRLMs) play a critical role. They are primarily responsible for guiding the issuing company through the complex IPO process. This includes advising on the timing and pricing of the IPO, ensuring regulatory compliance, conducting due diligence, preparing necessary documents like the IPO prospectus, and managing the book-building process for price discovery. BRLMs also engage in marketing the IPO to potential investors, often through roadshows. Their expertise and actions are crucial in ensuring the IPO is successfully executed and complies with all legal and regulatory requirements.

Book Building process:

The book-building process is a method used in IPOs to determine the issue price of shares. It involves a few key steps:

1. Setting the Price Band: The BRLM and issuing company set a price range (e.g., ₹90-₹93), within which investors can place their bids.

2. Bidding: Investors bid for shares at various prices within the band. The bids indicate the number of shares they're willing to buy and at what price.

   | Price (₹) | Bids (Percentage) | | --- | --- | | 90 | 3% | | 91 | 51% | | 92 | 44% | | 93 | 2% |

   • We start from the highest bid and add percentages cumulatively until we cross the 90% threshold.

   • At ₹93: 2% of shares are bid for.

   • Adding ₹92: 2% (at ₹93) + 44% (at ₹92) = 46%.

   • Adding ₹91: 46% (previous) + 51% (at ₹91) = 97%.

   • The cut-off point is ₹91, as at this price and above, the bids cover 97% of the shares, exceeding the 90% threshold.

3. Determining the Issue Price: After the bidding period, the BRLM analyzes the bids to determine the issue price. They aim to satisfy the 90% subscription rule, choosing the lowest price at which the IPO is fully subscribed. In this example, ₹91 would be the issue price, as cumulative bids at and above ₹91 meet the required subscription level.

4. Allotment of Shares: Shares are allotted to investors who bid at or above the issue price. Those who bid below the issue price receive refunds.

Parties involved include the issuing company, BRLM, investors, and regulatory bodies like SEBI. The process ensures a market-driven, transparent mechanism for price discovery in IPOs.

prospectus

The IPO prospectus is prepared by the issuing company, often with assistance from its underwriters and legal advisors. It's essential for investors as it provides a thorough overview of the company, including its financial performance, management team, business operations, and growth strategies. This information helps investors assess the company's prospects and potential risks, enabling them to make more informed investment decisions. Additionally, the prospectus includes details about the IPO itself, such as the number of shares being offered, the price range, and how the raised funds will be used, further aiding investors in evaluating the investment opportunity.

ESCROW Account

An escrow account is a temporary holding account used during large transactions, such as IPOs, where funds are securely held until all conditions of the deal are met. In the context of an IPO, funds raised from investors are held in an escrow account until the company is successfully listed on the stock exchange. Once the listing is confirmed and all regulatory conditions are met, the funds are released to the company. This mechanism ensures security and trust, as investors' money is safeguarded until the successful completion of the IPO process.

ASBA (Applications Supported by Blocked Amount):

ASBA (Applications Supported by Blocked Amount) is a process in the Indian IPO framework that has streamlined and secured the application process for public offerings.

Before ASBA, investors had to pay the full amount when applying for an IPO. This money would leave their accounts immediately, often weeks before share allocation. If they didn't receive the shares, refunds took time.

With ASBA, investors' funds remain in their bank accounts, but are blocked for the IPO. Only if shares are allocated, the relevant amount is deducted. This means less capital lock-in and quicker refunds, making the IPO process more investor-friendly.

Raising Capital: From Private Placement to IPO in the Indian Stock Market

ABC Tech's Journey to Growth

1. Starting with Private Placement: ABC Tech, beginning with an initial investment of $500,000 by the promoter, reached a point where additional funds were needed for expansion. Opting for private placement, the company targeted sophisticated investors, raising $300,000. This was achieved by issuing new shares valued at a market price above their face value. Let's say, for simplicity, each share was issued at $40, amounting to 7,500 new shares. This private placement was attractive due to its flexibility, confidentiality, and lower regulatory burden compared to public offerings. However, it resulted in the dilution of the promoter's original ownership stake.

2. Transition to an Initial Public Offering (IPO): As ABC Tech flourished over two years, it decided to further expand its capital base by entering the stock market with an IPO, aiming to raise an additional $400,000. The process was intricate:

• Choosing an Investment Bank: A crucial first step, the bank helped navigate the IPO process, advising on pricing and selling the shares.

• Regulatory Compliance: In India, this involved filing a detailed registration statement with SEBI (Securities and Exchange Board of India), covering financials, management, and business model.

• Auditing and Road Show: Mandatory auditing ensured financial transparency, while the roadshow helped drum up investor interest.

• Pricing the Shares: The IPO pricing, typically higher than private placement, reflected the company's growth, market potential, and investor demand. In this case, let's assume the shares were priced higher than the private placement price, acknowledging the company’s progress and market conditions.

• Public Offering: The actual selling of shares marked ABC Tech's official entry into the public market, diversifying its shareholder base beyond the initial private investors.

3. Post-IPO Dynamics: Post-IPO, ABC Tech faced new responsibilities as a publicly-traded entity. These included regular financial disclosures, shareholder meetings, and adherence to public company regulations.

Conclusion: A Strategic Path to Growth ABC Tech's journey from private placement to an IPO in the Indian stock market illustrates a strategic approach to raising capital. Each stage had its own benefits and challenges, but by carefully navigating these, the company successfully expanded its financial base and shareholder community.

The Journey of Raising Capital: From Inception to IPO

1. Initial Capital Formation: Our journey starts with the formation of a company with an initial capital of ₹8 lakhs, contributed by myself (₹3 lakhs) and two friends (₹2.5 lakhs each). In this setup, I am the promoter, and my friends are investors, given their financial contribution without involvement in management.

2. Equity Distribution: To represent our investments, we issued shares. Assuming we created 80,000 shares at a face value of ₹10 each, the equity was divided based on contribution:

• My share: 30,000 shares (37.5% ownership).

• Each friend: 25,000 shares (31.25% ownership each).

3. Business Success and Profit Generation: Over two years, the company performed well, generating a profit of ₹10 lakhs. As shareholders, we decided to distribute this profit as dividends:

• My dividend: ₹3.75 lakhs.

• Dividend for each friend: ₹3.125 lakhs.

4. Expansion and IPO Decision: With the company growing, we aimed to raise an additional ₹5 lakhs. Choosing the IPO route, we prepared for a journey into the public market.

5. IPO Process:

• Appointed an investment bank for underwriting.

• Ensured regulatory compliance with SEBI.

• Conducted a valuation, setting the IPO price band between ₹50 to ₹60 per share.

• Finalized the IPO price at ₹55 per share through the book building process, issuing approximately 9091 new shares.

• Listed the shares in the secondary market, with an opening price of ₹70 per share.

6. Post-IPO Valuation and Shareholding Dilution:

• Post-IPO company valuation: ₹20 lakhs.

• My ownership diluted to 28.13%.

• Increased market price led to a notional gain in the value of my shares.

calculation of ownership dilution from 37.5% to 28.13%:
Certainly! In the example, your ownership dilution from 37.5% to 28.13% can be calculated as follows:

1. Original Ownership: You initially owned 37.5% of the company.

2. Pre-IPO Valuation: Let's assume it was ₹15 lakhs.

3. Post-IPO Valuation: After raising an additional ₹5 lakhs through the IPO, the new valuation is ₹20 lakhs (₹15 lakhs + ₹5 lakhs).

4. Calculation of New Ownership Percentage:

   • Your original stake in monetary terms: 37.5% of ₹15 lakhs = ₹5.625 lakhs.

   • Your new ownership percentage: (Your original stake in monetary terms / Post-IPO valuation) = (₹5.625 lakhs / ₹20 lakhs) = 28.13%.

So, after the IPO, your ownership percentage in the company decreased to 28.13% due to the dilution effect of issuing new shares.