Methods and Needs of issue of Shares in Primary Market

The issue of shares in the Primary Market refers to the process by which companies raise fresh capital by offering new shares to investors for the first time. It is the market where securities are issued directly by the company to the public, institutions, or existing shareholders. The main methods of issuing shares include Public Issue, Rights Issue, Private Placement, and Preferential Allotment. Funds raised through this process are used for business expansion, debt repayment, or new projects. The Securities and Exchange Board of India (SEBI) regulates these issues to ensure transparency and investor protection. Once the shares are issued, they are listed on stock exchanges and become eligible for trading in the secondary market.

Methods of issue of Shares in Primary Market:

• Public Issue

Public Issue is the most common method of raising funds in the primary market. Under this method, a company offers its shares to the general public for the first time through a Prospectus. When a company issues shares to the public for the first time, it is called an Initial Public Offering (IPO). If the company is already listed and offers additional shares to the public, it is called a Further Public Offer (FPO). The process involves appointing merchant bankers, underwriters, and registrars to manage the issue. Investors apply for shares through online or offline applications. The issue price can be fixed (Fixed Price Issue) or determined through Book Building. After allotment, the shares are listed on recognized stock exchanges like BSE or NSE, making them tradable in the secondary market. Public issues help companies raise large amounts of capital and increase public participation in ownership. SEBI regulates the process to ensure transparency, protect investors, and prevent fraudulent practices.

• Private Placement

In a Private Placement, a company sells its shares directly to a select group of investors such as financial institutions, banks, mutual funds, or high-net-worth individuals (HNIs) instead of offering them to the general public. This method is quicker, less costly, and involves fewer regulatory formalities compared to a public issue. The company issues a private placement offer letter to potential investors and negotiates the price and quantity of shares privately. It is governed by Section 42 of the Companies Act, 2013, and the funds are generally raised for expansion or strategic partnerships. Since private placements involve limited investors, they reduce the risks of under-subscription and ensure faster capital mobilization. However, they are less transparent than public issues, as the shares are not offered openly to all investors. SEBI and the Ministry of Corporate Affairs monitor private placements to ensure compliance with disclosure and reporting norms.

• Rights Issue

Rights Issue is a method in which a company offers additional shares to its existing shareholders in proportion to their current holdings. This issue gives shareholders a “right” to purchase more shares before the company offers them to outsiders, usually at a discounted price. The main objective of a rights issue is to raise additional capital while maintaining existing ownership control. It is governed by Section 62 of the Companies Act, 2013. Shareholders can either subscribe to their rights, renounce them in favor of others, or ignore the offer. This method is cost-effective since it avoids underwriting and advertisement expenses associated with public issues. Rights issues are particularly useful for companies seeking funds for expansion, debt repayment, or strengthening their balance sheets without diluting promoter control. SEBI ensures that the rights issue process is fair, transparent, and timely disclosed to all shareholders.

• Preferential Allotment

Preferential Allotment refers to the issue of shares to a specific group of investors chosen by the company, which may include promoters, venture capitalists, financial institutions, or strategic partners. Unlike public or rights issues, preferential allotment is not open to all shareholders or the general public. It allows companies to raise funds quickly for expansion, acquisitions, or restructuring. This method is governed by Section 62(1)(c) of the Companies Act, 2013, and SEBI (Issue of Capital and Disclosure Requirements) Regulations. The price of shares in preferential allotment is determined according to SEBI guidelines to ensure fairness and prevent undervaluation. Preferential allotments are beneficial because they enable companies to bring in trusted investors or strategic partners who can contribute expertise along with capital. However, since it involves selective allotment, transparency and regulatory compliance are crucial to protect the interests of existing shareholders.

• Bonus Issue

Bonus Issue refers to the distribution of free additional shares to existing shareholders by a company, in proportion to their current shareholding. Instead of paying cash dividends, the company converts its accumulated reserves or profits into share capital and issues bonus shares. For example, a 1:2 bonus issue means that for every two shares held, a shareholder receives one extra share free of cost. Bonus issues are governed by Section 63 of the Companies Act, 2013 and the SEBI (Issue of Capital and Disclosure Requirements) Regulations.
This method strengthens investor confidence and signals the company’s strong financial health. It also increases the total number of outstanding shares, which may reduce the market price per share and make it more affordable for investors. Bonus issues do not bring in fresh capital but improve liquidity in the market. They reward long-term shareholders, enhance the company’s image, and align with shareholder interests without affecting the firm’s cash position.

• Employee Stock Option Plan (ESOP)

An Employee Stock Option Plan (ESOP) is a method through which a company offers its employees the right to purchase shares at a predetermined price, usually lower than the market price. It is designed to motivate and retain employees by giving them an ownership stake in the company’s growth. ESOPs align employee interests with those of shareholders, encouraging better performance and loyalty. They are governed by Section 62(1)(b) of the Companies Act, 2013, and SEBI (Share Based Employee Benefits) Regulations, 2014.
ESOPs are usually granted with a vesting period, after which employees can exercise their options. This method is commonly used by startups and large corporations to attract talent without immediate cash outflow. While ESOPs dilute equity to some extent, they foster a sense of belonging and accountability among employees. Thus, ESOPs are an effective tool for employee motivation, wealth creation, and long-term business growth.

Needs of issue of Shares in Primary Market:

• Raising Capital for Growth and Expansion

The most fundamental need for a company to issue shares in the primary market is to raise substantial long-term capital. This equity capital is crucial for financing major growth initiatives that are beyond the scope of internal accruals or debt. Companies require these funds to launch new projects, expand production capacity, enter new geographic markets, or acquire other businesses. Unlike debt, which requires regular interest payments and has a fixed repayment schedule, equity capital is permanent and does not burden the company with mandatory payouts, providing a stable financial base for ambitious growth strategies.

• Enhancing Net Worth and Debt Capacity

Issuing shares directly strengthens a company’s balance sheet by increasing its equity base and net worth. This improved financial health is critical for enhancing the company’s borrowing capacity. A stronger balance sheet with a lower debt-to-equity ratio makes the company more creditworthy in the eyes of lenders and creditors. It can then negotiate loans at more favorable interest rates and better terms. This need is particularly important for companies looking to leverage both equity and debt optimally to finance large-scale projects without becoming over-leveraged and financially risky.

• Meeting Listing Requirements and Gaining Visibility

A primary need for a private company is to become publicly listed on a stock exchange, which requires an initial public offering (IPO). Listing provides significant visibility and prestige, enhancing the company’s brand image and credibility among customers, suppliers, and partners. It places the company on the radar of analysts and the financial media, generating ongoing publicity. This public profile can be a powerful competitive tool, helping to attract better business opportunities, more talented employees, and a larger, more diverse customer base, thereby contributing to long-term business success beyond just the capital raised.

• Facilitating Exit for Existing Investors

The primary market provides a crucial mechanism for existing investors, such as founders, venture capital funds, and private equity investors, to partially or fully monetize their investment. Through an Offer for Sale (OFS) within an IPO, these early investors can sell their shares to the public, realizing a return on their investment and freeing up capital for new ventures. This need for a profitable and organized exit is vital for the health of the startup and investment ecosystem, as it incentivizes risk-taking and provides the capital that fuels innovation and entrepreneurship from the ground up.

• Improving Corporate Governance and Discipline

The process of issuing shares to the public necessitates a transformation in the company’s operations, creating a need for enhanced corporate governance and financial discipline. To comply with regulations from SEBI and the stock exchanges, the company must adopt transparent accounting practices, establish independent board committees, and make regular financial disclosures. This shift subjects the company to scrutiny from regulators, investors, and analysts, fostering greater accountability and operational efficiency. This discipline often leads to better decision-making and improved long-term performance, protecting the interests of all stakeholders.

• Broadening and Diversifying the Shareholder Base

A company may need to issue shares to move away from a concentrated ownership structure, typically held by promoters and a few private investors. A public issue democratizes ownership by distributing shares among thousands of retail and institutional investors. This broad, diversified shareholder base reduces the company’s reliance on a small group of financiers, enhances the stock’s liquidity in the secondary market, and can lead to a more stable share price. It also mitigates the risk of control being held by a single entity and aligns the company’s objectives with a wider public interest.