MODULE III
THE PRIMARY MARKET OR NEW ISSUE MARKET
It is the part of the capital market that deals with issuing of new securities. A market where
new securities (Shares or Bonds or debentures) that have never been previously issued are offered.
Primary markets create long term instruments through which corporate entities (new and existing)
raise funds from the capital market . In a primary market, companies, governments or public sector
institutions can raise funds through- Issue of bond or debentures and also through the sale of new
stock. This is often done through an investment bank or finance syndicate of securities dealers.
Features of Primary Market
This is the market for new long term equity capital. The primary market is the market where
the securities are sold for the first time. Therefore, it is also called the new issue market
(NIM).
In a primary issue, the securities are issued by the company directly to investors.
The company receives the money and issues new security certificates to the investors.
Primary issues are used by companies for the purpose of setting up new business or for
expanding or modernizing the existing business.
The primary market performs the crucial function of facilitating capital formation in the
economy.
The new issue market does not include certain other sources of new long term external
finance, such as loans from financial institutions. Borrowers in the new issue market may be
raising capital for converting private capital into public capital; this is known as "going public
FUNCTIONS OF PRIMARY MARKET
1.Organisation of New Issues:
The organisation of new issues requires investigation of viability and prospects of new projects.
An important element of the organisation of new shares is the knowledge about adequacy and
structure of financial arrangements.The structure of financial arrangements involves requirements
and availability of promoter’s equity, equity from public, debt-equity ratio short term funds, liquidity
ratio, and foreign exchange requirement. All this requires a careful study of the new issue by
competent and well trained staff.
2.Underwriting of New Issues:
The term underwriting means guaranteeing purchase of a specified amount of new issue at a
fixed price. The purchase may be for sale to the public, for only one’s portfolio or for both the
,purposes.If the underwriter fails to sell the guaranteed amount of shares to public, it will have to
purchase the unsold shares by itself. The underwriter is paid a commission for underwriting the new
issue. Mostly underwriting of a new issue is undertaken by a group of financial institutions
3.Distribution of New Issue:
Distribution of new issues means the sale of the stock to the public. Ways of selling the new
issue to the public-
Prospectus.
Private placement.
Public Offering.
Right Issue.
Bonus Share.
Book Building.
Employee Stock Option.
METHODS OF FLOATING NEW ISSUES
A company can meet its long –term requirements by way of issuing securities like shares and
debentures. The important methods to issue securities to raise long-term capital requirements are-
1. Pure Prospectus Method
The most common form of raising capital. Under this method a fixed number of shares at a
stated price are offered to the public by the issuing company through a document called prospectus.
This is a method by which a company directly sells its share to the public or through some
intermediaries such as brokers, investment bankers and underwriters ,etc.Through the media, the
company advertises and interested persons are given the prospectus which carry full details about
the company. Based on this, the public apply to the company and shares of the new company are
allotted at the face value.
A prospectus is a formal legal document that is required by and filed with the Securities and
Exchange Commission that provides details about an investment offering for sale to the public.
The preliminary prospectus is the first offering document provided by a security issuer and includes
most of the details of the business and transaction in question; the final prospectus, containing
finalized background information including such details as the exact number of shares/certificates
issued and the precise offering price, is printed after the deal has been made effective.The issue of
shares is guaranteed by an underwriter who ensures certain minimum quantity of sale of shares.A
copy of the prospectus should be submitted to SEBI for approval before coming out to the public.
Methods of Issue-
, Direct selling of securities by the company.
Sale through investment intermediaries.
Underwritten placement.
Usually employed if the company wants to approach only a small number of institutional or large
investors.
Advantages
The pure prospectus method offers advantages to the issuer and the investors alike:
a)Benefits to investors:
1.Serves as an excellent mode of disclosure of all the information pertaining to the issue.
2.It facilitates satisfactory compliance with the legal requirements of transparency.
b)Benefits to issuers:
a).The pure prospectus method is the most popular method among the larger issuers.
b).It provides for wide diffusion of ownership of securities contributing to reduction in the
concentration of economic and social power.
Drawbacks
a) High issue costs: A major drawback of this method is that it is an expensive mode of raising funds
from the capital market
b) Time Consuming: The issue of securities through prospectus takes more time, as its requires the
due compliance with various formalities before an issue could take place.
2.Private Placement Method
It is Non-public offering .Under this method the securities are sold by issuing companies to certain
intermediaries such as brokers , issue houses or financial institutions ,etc. so as to be privately
placed to their clients or kith and kin without giving any public notice.Also done by selling securities
privately to relatives , friends or financial institutions with or without the help of intermediaries.No
need of prospectus. Only investment agreement is needed.
Advantages of using Private Placements
There are several advantages to using private placements to raise finance for business.
Allow the issuer to choose his own investors - this increases the chances of having investors
with similar objectives and means they may be able to provide business advice and
assistance, as well as funding.
Allow the issuer to remain a private company, rather than having to go public to raise
finance.
THE PRIMARY MARKET OR NEW ISSUE MARKET
It is the part of the capital market that deals with issuing of new securities. A market where
new securities (Shares or Bonds or debentures) that have never been previously issued are offered.
Primary markets create long term instruments through which corporate entities (new and existing)
raise funds from the capital market . In a primary market, companies, governments or public sector
institutions can raise funds through- Issue of bond or debentures and also through the sale of new
stock. This is often done through an investment bank or finance syndicate of securities dealers.
Features of Primary Market
This is the market for new long term equity capital. The primary market is the market where
the securities are sold for the first time. Therefore, it is also called the new issue market
(NIM).
In a primary issue, the securities are issued by the company directly to investors.
The company receives the money and issues new security certificates to the investors.
Primary issues are used by companies for the purpose of setting up new business or for
expanding or modernizing the existing business.
The primary market performs the crucial function of facilitating capital formation in the
economy.
The new issue market does not include certain other sources of new long term external
finance, such as loans from financial institutions. Borrowers in the new issue market may be
raising capital for converting private capital into public capital; this is known as "going public
FUNCTIONS OF PRIMARY MARKET
1.Organisation of New Issues:
The organisation of new issues requires investigation of viability and prospects of new projects.
An important element of the organisation of new shares is the knowledge about adequacy and
structure of financial arrangements.The structure of financial arrangements involves requirements
and availability of promoter’s equity, equity from public, debt-equity ratio short term funds, liquidity
ratio, and foreign exchange requirement. All this requires a careful study of the new issue by
competent and well trained staff.
2.Underwriting of New Issues:
The term underwriting means guaranteeing purchase of a specified amount of new issue at a
fixed price. The purchase may be for sale to the public, for only one’s portfolio or for both the
,purposes.If the underwriter fails to sell the guaranteed amount of shares to public, it will have to
purchase the unsold shares by itself. The underwriter is paid a commission for underwriting the new
issue. Mostly underwriting of a new issue is undertaken by a group of financial institutions
3.Distribution of New Issue:
Distribution of new issues means the sale of the stock to the public. Ways of selling the new
issue to the public-
Prospectus.
Private placement.
Public Offering.
Right Issue.
Bonus Share.
Book Building.
Employee Stock Option.
METHODS OF FLOATING NEW ISSUES
A company can meet its long –term requirements by way of issuing securities like shares and
debentures. The important methods to issue securities to raise long-term capital requirements are-
1. Pure Prospectus Method
The most common form of raising capital. Under this method a fixed number of shares at a
stated price are offered to the public by the issuing company through a document called prospectus.
This is a method by which a company directly sells its share to the public or through some
intermediaries such as brokers, investment bankers and underwriters ,etc.Through the media, the
company advertises and interested persons are given the prospectus which carry full details about
the company. Based on this, the public apply to the company and shares of the new company are
allotted at the face value.
A prospectus is a formal legal document that is required by and filed with the Securities and
Exchange Commission that provides details about an investment offering for sale to the public.
The preliminary prospectus is the first offering document provided by a security issuer and includes
most of the details of the business and transaction in question; the final prospectus, containing
finalized background information including such details as the exact number of shares/certificates
issued and the precise offering price, is printed after the deal has been made effective.The issue of
shares is guaranteed by an underwriter who ensures certain minimum quantity of sale of shares.A
copy of the prospectus should be submitted to SEBI for approval before coming out to the public.
Methods of Issue-
, Direct selling of securities by the company.
Sale through investment intermediaries.
Underwritten placement.
Usually employed if the company wants to approach only a small number of institutional or large
investors.
Advantages
The pure prospectus method offers advantages to the issuer and the investors alike:
a)Benefits to investors:
1.Serves as an excellent mode of disclosure of all the information pertaining to the issue.
2.It facilitates satisfactory compliance with the legal requirements of transparency.
b)Benefits to issuers:
a).The pure prospectus method is the most popular method among the larger issuers.
b).It provides for wide diffusion of ownership of securities contributing to reduction in the
concentration of economic and social power.
Drawbacks
a) High issue costs: A major drawback of this method is that it is an expensive mode of raising funds
from the capital market
b) Time Consuming: The issue of securities through prospectus takes more time, as its requires the
due compliance with various formalities before an issue could take place.
2.Private Placement Method
It is Non-public offering .Under this method the securities are sold by issuing companies to certain
intermediaries such as brokers , issue houses or financial institutions ,etc. so as to be privately
placed to their clients or kith and kin without giving any public notice.Also done by selling securities
privately to relatives , friends or financial institutions with or without the help of intermediaries.No
need of prospectus. Only investment agreement is needed.
Advantages of using Private Placements
There are several advantages to using private placements to raise finance for business.
Allow the issuer to choose his own investors - this increases the chances of having investors
with similar objectives and means they may be able to provide business advice and
assistance, as well as funding.
Allow the issuer to remain a private company, rather than having to go public to raise
finance.
