The securities market has two interdependent segments: the Primary (new issues) market and the Secondary market. The primary market provides the channel for sale of new securities while the secondary market deals in securities previously issued.
The primary market provides the channel for sale of new securities. Primary market provides opportunity to issuers of securities; Government as well as corporates, to raise resources to meet their requirements of investment and/or discharge some obligation.
Issues may be classified as Public, Rights or Preferential issues (also known as private placements). While public and rights issues involve a detailed procedure, private placements or preferential issues are relatively simpler. The classification of issues is illustrated below:
Initial Public Offering (IPO) is when an unlisted company makes either a fresh issue of securities or an offer for sale of its existing securities or both for the first time to the public. This paves way for listing and trading of the issuer’s securities.
A Follow on Public Offering (FPO) is when an already listed company makes either a fresh issue of securities to the public or an offer for sale to the public, through an offer document.
A Rights Issue is when a listed company proposes to issue fresh securities to its existing shareholders as on a record date. The rights are normally offered in a particular ratio to the number of securities held prior to the issue. This route is best suited for companies who would like to raise capital without diluting stake of its existing shareholders.
A Preferential Issue is an issue of shares or of convertible securities by listed companies to a select group of persons under Section 81 of the Companies Act, 1956 which is neither a rights issue nor a public issue. This is a faster way for a company to raise equity capital. The issuer company has to comply with the Companies Act and the requirements contained in the Chapter pertaining to preferential allotment in SEBI guidelines which inter-alia include pricing, disclosures in notice etc.
The main financial products/instruments dealt in the Secondary market which may be divided broadly into Shares and Bonds: Shares: Equity Shares: An equity share represents the form of fractional ownership in a business venture.
Rights Entitlement: The issue of fresh securities to existing shareholders as a ratio of current holding, for a price. Eg. A 2:3 rights issue at Rs. 125, would entitle a shareholder to receive 2 shares for every 3 shares held at a price of Rs. 125 per share.
Bonus Shares: Shares issued by the companies to their shareholders free of cost based on the number of shares currently held by the shareholder owns.
Preference shares: Owners of these kinds of shares are entitled to a fixed dividend or dividend calculated at a fixed rate to be paid regularly before dividend can be paid in respect of equity share. They also enjoy priority over the equity shareholders in payment of surplus. But in the event of liquidation, their claims rank below the claims of the company’s creditors, bondholders/debenture holders.
Cumulative Preference Shares: A type of preference shares on which dividend accumulates if remained unpaid. All arrears of preference dividend have to be paid out before paying dividend on equity shares.
Cumulative Convertible Preference Shares: A type of preference shares where the dividend payable on the same accumulates, if not paid. After a specified date, these shares will be converted into equity capital of the company.
Bonds: Bonds are negotiable certificates evidencing indebtedness. They are normally unsecured. A debt security is generally issued by a company, municipality or government agency. A bond investor lends money to the issuer and in exchange, the issuer promises to repay the loan amount on a specified maturity date. The issuer usually pays the bond holder periodic interest payments over the life of the loan. The various types of Bonds are as follows:
Zero Coupon Bond: Bond issued at a discount and repaid at a face value. No periodic interest is paid. The difference between the issue price and redemption price represents the return to the holder. The buyer of these bonds receives only one payment, at the maturity of the bond.
Convertible Bond: A bond giving the investor the option to convert the bond into equity at a fixed conversion price.
Treasury Bills: Short -term (up to one year) bearer discount security issued by government as a means of financing their cash requirements.
A stock split strategy that includes the use of a reverse stock split followed by a forward stock split. A reverse/forward stock split is usually used by companies to cash out shareholders with a less-than-certain amount of shares. This is believed to cut administrative costs by reducing the number of shareholders who require mailed proxies and other documents.
A buyback can be seen as a method for company to invest in itself by buying shares from other investors in the market. Buybacks reduce the number of shares outstanding in the market. Buy back is done by the company with the purpose to improve the liquidity in its shares and enhance the shareholders’ wealth. Under the SEBI (Buy Back of Securities) Regulation.