Primary Market and Capital Raising
This domain tests the routes for raising capital in India, the eligibility and pricing rules, and the sequence from offer document to listing. Questions often turn on which route fits a fact pattern and which approval or lock-in applies.
Routes
- Public issue: IPO by an unlisted company, FPO by a listed one. Governed by SEBI ICDR Regulations, 2018 and the Companies Act, 2013.
- Rights issue under Section 62(1)(a): offer to existing shareholders in proportion to holding.
- Bonus issue under Section 63: free shares from reserves, no consideration.
- Preferential allotment under Section 62(1)(c); private placement under Section 42 (maximum 200 persons, no public advertisement).
- QIP for listed companies to qualified institutional buyers; OFS for promoters through the exchange platform; SME IPO on the SME platform.
Mechanics
- Book building (price band, bids) versus fixed price.
- ASBA: application money stays blocked in the applicant's bank account until allotment.
- Anchor investors are allotted before the public opening, with lock-in.
- Minimum promoter contribution in an IPO is 20% of post-issue capital, locked in for 18 months; excess promoter holding is locked for 6 months.
Worked example
A shareholder holds 200 shares. A 1:4 rights issue at ₹150 when the market price is ₹200. Entitlement = 200 × 1/4 = 50 shares; cash needed = 50 × ₹150 = ₹7,500. Theoretical ex-rights price = (200 × 200 + 50 × 150) / 250 = (40,000 + 7,500) / 250 = ₹190. The value of the right is ₹40 per share (₹190 − ₹150). The shareholder's wealth is unchanged in theory before market reaction.
Traps
- Applying IPO lock-in to every share rather than to the minimum promoter contribution and excess promoter holding.
- Rights issue below face value: Section 53 prohibits issue at a discount except sweat equity.
- Confusing QIP with preferential allotment; QIP is to QIBs under ICDR Chapter VI.
- Forgetting that ASBA funds are blocked, not paid to the issuer on application.