It

is that market in which shares, debentures and other securities are sold for the first time for collecting longterm capital. This market is concerned with new issues. Therefore, the primary market is also called NEW ISSUE MARKET.

In this market, the flow of funds is from savers to borrowers (businesses). Hence, it helps in capital formation in the economy. The money collected from this market is generally used by companies/businesses to set up new projects, expansion, diversification, modernization of existing projects, mergers and takeovers, etc.

It Is Related With New Issues It Has No Particular Place It Has Various Methods Of Float Capital: Following are the methods of raising capital in the primary market: i) Public Issue ii) Offer For Sale iii) Private Placement iv) Right Issue v) Electronic-Initial Public Offer It comes before Secondary Market

Distinctions between new issue market and stock market

(G&N 27)

Functional difference Organizational difference Nature of contribution to industrial finance

Distinctions between new issue market and stock market

(G&N 27)

However the two are interlinked

Investors in primary market are encouraged to do so, as secondary market assures them of liquidity of their investments Companies which issue new shares, apply for listing of these share in stock exchanges Both are affected by common economic and non-economic factors, both national and international

Functions of new issue market

Main functions of new issue market include:

Origination Underwriting

Distribution

Functions of new issues market

1. Origination Origination refers to the work of investigation, analysis and processing of new project proposals

Company that wishes to issue additional stock or issue stock for the first time contacts IBF
Gets advice on the amount of issue & other details Helps determine stock price for first-time issues

IBF assists with SEBI filings

Registration statement Prospectussummary of registration statement given to prospective investors

Functions of new issues market

2. Underwriting stock

Issuer and investment bank negotiate the underwriting spread

The difference between the net price given to the company and the selling price to investors

The lead investment bank usually forms an underwriting syndicate

Other IBFs underwrite a part of the security offering Helps spread the underwriting risk among IBFs

Functions of new issues market

Distribution of stock

Distribution is the function of sale of securities to ultimate investors This service is performed by brokers and agents who maintain regular and direct contact with the ultimate investors

i) Public Issue ii) Offer For Sale iii) Private Placement iv) Right Issue v) Electronic-Initial Public Offer

Equity shares Preference shares Debentures

MEANING OF SHARES & SHARE CAPITAL

A share is one unit into which the total share capital is divided. Share capital of the company can be explained as a fund or sum with which a company is formed to carry on the business and which is raised by the issue of shares.

Shares are the marketable instruments issued by the companies in order to raise the required capital.
These are very popular investments which are traded every day in the stock market and the value of the share at the end of the day decides the value of the firm.
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The shares which are issued by companies are of two types: Equity Shares Preference Shares

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Equity Shares are securities that represent ownership interest in a company. Equity share holders only get dividend after preference shareholders & debenture holders.

The returns on the equity shares are not at all fixed. It depends on the amount of profits made by the company. The board of directors decides on how much of the dividends will be given to equity share holders. Share holders can accept or reject the offer during the annual general meeting.
Equity shareholders have the right to vote on any resolution placed before the company.
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ADVANTAGES
High Return Easily Transferable. These can be easily liquidated. Right to vote Right to choose the board of directors. Equity share holders have the right to oppose any of the decisions taken by the board of directors.

DISADVANTAGES
High Risk In worst cases less privilege given to equity share holders.

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These are other type of shares. The preference shares are market instrument issued by the companies to raise the capital. Preference shares have the characteristics of both equity shares and debentures. Fixed rate of dividends are paid to the preference share holders, irrespective of the profits earned by the company.

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TYPES OF PREFERENCE SHARES

Preference shares are divided into:

Cumulative & Non cumulative shares

Redeemable & Non-redeemable

Convertible & Non-convertible shares Participating and non-participating
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ADVANTAGES
These yield fixed rate of returns Its a hybrid instrument having some of the characteristics of debentures and equity shares.

DISADVANTAGES
They do not provide the investor with any of the voting rights. If the company gets huge profits then they wont get any extra bonus.
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Instrument of debt executed by the company A certificate of loan Company pays pre specified percentage of interest Part of the company's capital structure Debentures are generally secured against the companys assets Convertible debentures can be either fully or partly converted into Shares Convertible debentures may carry a lower rate of interest
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 Types of Debentures
1. Non-convertible debentures (NCDs): NCDs are pure debentures without a feature of conversion. They are repayable on maturity. The investor is entitled for interest and repayment of principal. 2. Fully-convertible debentures (FCDs): FCDs are converted into shares as per the terms of the issue, with regard to the price and time of conversion. 3. Partly-convertible debenture (PCDs): The investor has advantages of both convertible and non-convertible debenture blended into single debenture.

1. 2. 3. 4. 5.

Less costly (as interest paid on them is tax exempted) No ownership dilution Fixed payment of interest Reduced real obligation Debenture can be redeemed when company has surplus funds.

DISADVANTAGES
1. Common people cannot buy debenture as they are of high denominations. 2. Obligatory payments 3. Financial risk 4. Cash outflows
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CONCLUSION
No doubt equity shares have both advantages and disadvantages but the fact is that equity shares are the most sought financial instruments for both investment or for speculation.
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1. Merchant bankers 2. registrars of the issue 3. Bankers to the issue 4. underwriters 5. brokers 6. advertising agencies, Printers, and mailing agencies

Merchant Bankers

Merchant bankers, also known as Lead Managers, are institutions appointed by issuing company to manage the IPO campaign Their duties are:

1.drafting prospectus 2. preparing the budget of expenses related to the issue 3. suggesting appropriate timing of the public issue 4. assisting in marketing the public issue successfully 5.advising the company in the appointment of registrars to the issue, underwriters, brokers to the issue, advertising agents, etc. 6. directing various agencies involved in the public issue

Commercial banks, subsidiaries of commercial banks, non-banking companies act as Merchant bankers

SBI Capital Market Ltd ICICI Securities and Finance Company Ltd DSP Financial Consultant Ltd They are also called Investment Bankers

Registrars are the institutions appointed to handle operational functions associated with an issue.

Printing application Despatch of applications Collection of applications Collection of data and tabulation Despatch of certificates Refund to the non-allottees

It is some commercial bank Which accepts the responsibility of collecting the application money along with the application form They charge a commission for the service More than one banker can be there

Underwriting is a contract by means of which a person gives an assurance to the effect that the former would subscribe to the securities offered in the event of nonsubscription by the person to whom they were offered. The person who assures is called an underwriter They get a commission

Brokers are members of the recognised stock exchanges in different parts of the country. They can use the large body of their clients to market the shares that are being issued

advertising agencies, Printers, and mailing agencies

Prospectus Application Allotment

Repayment/ dividend

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Detail of a Company & Shares in Prospectus. 90 % application is necessary If excess applications are received then company issues shares by pro rata basis

full amount can be called up by company at the time of application or it can be paid up in installments also (calls)
share of the company may be issued in any of the following three ways: 1. At par; 2. At premium; and 3. At discount.

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Methods of floating new issues

i) Public Issue (IPOs Initial Public Offers) ii) Follow on Public offer (FPO) iii) Offer For Sale (bought out deals) iv) Private Placement v) Right Issue vi) Qualified institutional placement (QIP)

i) Public Issue (IPOs Initial Public Offers)

New unlisted companies raising capital ii) No track record, no published financial data iii) Reputed merchant bankers help
i)

ii) Follow-on Public offer (FPO)

for further expansion, M & A activity
easy to collect money, for a company with healthy image but the risk of share price decrease is there

Bulk selling to parties, such as merchant bankers There can be multiple parties also (syndicate) Investors buy in bulk after due diligence 1. Easy return of funds 2. Low cost 3. Useful for unfamiliar/ small firms 4. SEBI regulations can be bypassed 5. Low risk for investors too

This is for unlisted companies Advantages 1. Cost effective 2. Time effective 3. Structure effectiveness 4. Access effective

v) Right Issue these are shares issued to the existing share holders
Who possess preemptive right Shares are issued in some proportion Advantages include low cost of raising funds no brokers and intermediaries

These are for listed companies Designated institutions like IDBI, IFCI, other Banks,

Mutual Funds, Venture Capital Funds, FIIs, etc

Good source in times of bad market conditions