The primary market is where companies issue new securities to raise capital. There are different types of capital issues in the primary market, each with its own features and characteristics. Here are some of the types of capital issues in the primary market:
- Initial Public Offering (IPO): An IPO is the first time a company issues shares to the public. IPOs are usually undertaken by private companies looking to raise capital and become publicly traded. In an IPO, the company raises capital by selling shares to the public at a predetermined price. The price is usually set through a book-building process, where investment bankers assess the demand for the shares and determine the price.
- Follow-on Public Offering (FPO): A follow-on public offering is when a company that is already publicly traded issues new shares to the public. FPOs are usually undertaken when the company needs to raise additional capital for expansion, acquisitions, or debt reduction. The price of the shares is determined through a book-building process, similar to an IPO.
- Rights Issue: A rights issue is when a company issues new shares to its existing shareholders in proportion to their current shareholdings. In a rights issue, shareholders have the option to buy the new shares at a discounted price, which is usually lower than the market price. The purpose of a rights issue is to raise capital from existing shareholders and avoid diluting the value of their existing shares.
- Preferential Allotment: A preferential allotment is when a company issues shares to a select group of investors, such as institutional investors, private equity firms, or strategic partners. The shares are issued at a negotiated price, which is usually higher than the market price. The purpose of a preferential allotment is to raise capital from strategic investors who can add value to the company’s operations.
- Qualified Institutional Placement (QIP): A QIP is when a listed company issues shares to institutional investors, such as mutual funds, insurance companies, and pension funds. QIPs are usually undertaken to raise capital quickly and efficiently without the need for a lengthy public offering process. The shares are issued at a negotiated price, which is usually lower than the market price.
- Bonus Issue: A bonus issue is when a company issues additional shares to its existing shareholders at no cost. The purpose of a bonus issue is to reward shareholders by increasing the number of shares they hold without diluting the value of their existing shares. Bonus issues are usually undertaken when the company has accumulated a large amount of reserves or profits.
In conclusion, the primary market is where companies issue new securities to raise capital. There are different types of capital issues in the primary market, including IPOs, FPOs, rights issues, preferential allotments, QIPs, and bonus issues. Each type of capital issue has its own features and characteristics, and companies choose the appropriate type of issue based on their capital-raising needs and the market conditions.