Primary Markets: IPOs, FPOs, Rights Issues and Disclosure
What the exam tests
Primary-market questions test the legal route for raising capital, the documents investors receive, and the distinction between IPO, FPO, rights issue, preferential allotment and QIP. The governing framework includes the Companies Act, 2013 and SEBI ICDR Regulations.
Core rules
- An IPO is a first public offer by an unlisted company. A FPO is a further public offer by an already listed company. Both use a prospectus/red herring prospectus and ASBA (Application Supported by Blocked Amount).
- A rights issue offers securities first to existing shareholders in proportion to holding, usually at a discount. The letter of offer states the ratio, price, record date and last date; rights are renounceable unless the articles restrict it.
- Preferential allotment/QIP supplies capital to select investors under ICDR pricing and lock-in rules; shareholder approval and disclosure apply.
- Disclosure must cover risk factors, objects of the issue, use of proceeds, capital structure, financials, management, litigation, related-party transactions and auditor reports. The RHP omits the final price but contains the band; the prospectus is filed after pricing.
Worked example
A shareholder holds 240 shares. A 1-for-4 rights issue is announced at ₹150. Entitlement = 240 × 1/4 = 60 shares; subscription cost = 60 × ₹150 = ₹9,000. If the market price is ₹180, the theoretical ex-rights price is [(240×180)+(60×150)]/300 = ₹174; the value of the right is about ₹24 per rights share. The shareholder may subscribe, renounce or let the entitlement lapse, subject to the offer terms.
Traps
A rights issue is not a public issue and does not need an IPO prospectus. The RHP is not the final prospectus. Do not assume all issues are book-built; fixed-price issues exist. Do not ignore the distinction between minimum public offer and continuing minimum public shareholding.