CHAPTER 1 - Primary Market

A primary market is a marketplace where corporations imbibe a fresh

issue of shares for being contributed by the public for soliciting capital to
meet their necessary long-term funds like extending the current trade or
buying a unique entity. It plays a motivational part in the mobilisation of
savings in the economy.
Features of New Issue Market

Primary Market
1. It is the market for new long term capital.
2. The securities are issued by company for the first time directly to the
investors.
3. On receiving the
Features of New Issue Market

Primary Market
1. It is the market for new long term capital.
2. The securities are issued by company for the first time directly to the
investors.
3. On receiving the
FEATURES OF PRIMARY MARKETS
(i) 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).
(ii) in a primary issue, the securities are issued by the company directly
to investors.
(iii) The company receives the money and issues new security
certificates to the investors
(iv) Primary issues are used by companies for the purpose of setting up
new business or for expanding or modernizing the existing business.
(v) The primary market performs the crucial function of facilitating
capital formation in the economy.
(vi) 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 NEW ISSUE MARKET
A three service functions:
The main functions of a new issue sue market can divided into new
project.
1. Origination.

It refers to the work of investigation analysis and processing of new

project proposals.. It starts before an issue is actually floated in the
market. This function is done by merchant bankers who may be
commercial banks, all India financial institutions or private firms. At
present, financial institutions and private firms also perform this service
is highly important the success of the issue depends, to a large extent
on the efficiency of the market.
2. Underwriting.

It is an agreement whereby the underwriter promises to subscribe to

specified number of shares or debentures or a specified amount of
stock in the event of public not subscribing to the issue. If the issue is
fully subscribed, then there is no liability for the underwriter. If a part
of share issues remains unsold, the underwriter will buy the shares.
Thus, underwriting is a guarantee for marketability of shares. There are
two types of underwriters in India - Institutional (LIC, UTI, IDBI, ICICI)
and Non - institutional are brokers.

3. Distribution.
It is the function of sale of securities to ultimate investors. This service is
performed by specialized agencies like brokers and agents who maintain a
regular direct contact with the ultimate investors
PLAYERS IN THE NEW ISSUE MARKET
There are many players in the new issue market. The important them
are the following:

1. Merchant Bankers

They are the issue managers, lead managers, co - managers and are
responsible to the company and SEBI. Their functions and working are
described in a separate chapter.
2. Registrars to the Issue

Registrars are an important category of intermediaries who undertake

all activities connected with new issue management. They are
appointed by the company in consultation with the merchant bankers
to the issue. Registrars have a major role, next to merchant bankers, in
respect of servicing of investors. The role of Registrar in the pre - issue,
during the currency of issue, pre allotment, allotment and post
allotment are described below:

Role of Registrar in Pre - issue

1. Suggest draft application form to the merchant bankers.

2. Help identifying the collection centres. The choice of collection

centre and of collecting banker is critical to the success of the issue.
3. Assistin opening collection accounts with banks and lay
down procedure for operation of these accounts. Send instructions
 to collecting branches, for collection of application along with
cheques, drafts, stock invest separately and remittance of funds.

4. Workout modalities to receive the collection figures on a regular

basis until the subscription list is closed. and expertise, quality of
manpower, their track record, adequacy of infrastructure such as
computers, storage space etc. and capital adequacy
3. Collecting and Co - ordinating Bankers

Collecting bankers collect the subscriptions in cash, cheques, stock

invest etc. Co - ordinating bankers collect information on subscriptions
and co- ordinate the collection work. They monitor the work and keep
inform them to the registrars and merchant bankers. Collecting banker
and coordinating banker may be the same bank or different banks.
4. Underwriters

Normally investment bankers act as underwriters. They agree to take a

specified number of shares offered to the public. If the issue is not fully
subscribed by the public. Underwriters may be financial institutions,
banks. Mutual funds, brokers etc.

5. Brokers

Brokers along with the network of sub - brokers market the new issues.
They send their own circulars and applications to the clients and do
follow up work to market the securities.

6. Printers, advertising agencies and mailing agencies are other

Organisations involved in the new issue market operations
SERVICES OF MERCHANT BANKS
The financial institutions in India could not meet the demand for
long term funds required by the ever expanding industry and
trade. corporate sector enterprises, therefore, meet their
requirements ach issue of shares and debentures in the capital
market. To raise
money from capital market, promoters bank upon merchant
bankers manage the whole show by rendering multifarious services.
The merchant bankers also advise the investors of the incentives
available in the form of tax reliefs and other statutory obligations,
The services of merchant bankers are described in detail in
the following section :
(i) Corporate Counselling
Corporate counselling covers the entire field of merchant banking
activities viz. project counselling, capital restructuring, project
management, public issue management, loan syndication, working
capital, fixed deposit, lease financing, acceptance credit etc. The
scope of corporate counselling is limited to giving suggestions and
opinions
to the client and help taking actions to solve their problems. It is
provided to a corporate unit with a view to ensure better
performance, maintain steady growth and create better image
among investors

Project Counselling
 Project counselling includes preparation of project reports, deciding
upon the financing pattern to finance the cost of the project and
appraising project report with the financial institutions or banks.
Project reports are prepared to obtain government approval, get
financial assistance from institutions and plan for the public issue.
The financing mix is to be decided keeping in view the rules,
regulations and norms prescribed by the government or followed by
financial institutions. The projects are appraised, as to the location,
technical, commercial and financial viability of the project. Project
counselling

Loan Syndication
Loan syndication refers to assistance rendered by merchant banks to
get mainly term loans for projects. Such loans may be obtained from a
single development finance institution or a syndicate or consortium.
Merchant Bankers help corporate clients to raise syndicated loans from
commercial banks. Merchant Banks help clients approach financial
institutions for term loans. The decision as to which financial institution
should be approached depends on industry, location of the unit and
size of project cost.

The Merchant Bankers, first, make an appraisal of the project to satisfy

that it is viable. The next step is designing capital structure. determining
the promoter ' s contribution and arriving at a figure of approximate
amount of term loan to be raised. The Merchant Banker has to ensure
that the project adheres to the guidelines for financing industrial
projects. After verifications that the project would be eligible for term
 loan, a preliminary meeting is fixed with financial institution. If the
financial institution agrees to consider the proposal, the application is
filled in and submitted along with other documents. The Merchant
Bankers involvement enables the
company to state that it has exercised due diligence in the exercise of
obligations under variousregulations.
(iv) Issue Management

Management of issue involves marketing of corporate securities viz.,

equity shares, preference shares and debentures or bonds by offering
them to public. Merchant banks act as intermediary whose main job is to
transfer capital from those who own it to those who need it. The issue
function may be broadly dividend into pre – issue management and post
issue management. In both the stages, legal requirements have to be
complied with and several activities connected with the issue have to be
co - ordinated

The pre - issue management is divided into:

(i) Issue through prospectus, offer for sale and private placement.

(ii) Marketing and underwriting. (iii) Pricing of Issues,

(v) Underwriting of Public Issue

Underwriting is a guarantee given by the underwriter that in the event

of under subscription the amount underwritten, would be subscribed
by him. It is an insurance to the company which proposes to make
public offer against risk of under subscription. The issues packed by
 well-known underwriters generally receive a high premium from the
public. This enables the issuing company to sell securities quickly.
(vi) Managers, Consultants or Advisers to the Issue

The managers to the issue assist in the drafting of prospectus,

application forms and completion of formalities under the Companies
Act, appointment of Registrar for dealing with share applications and
transfer and listing of shares of the company on the stock exchange.
Companies are free to appoint one or more agencies as managers to the
issue. SEBI guidelines insist that all issues should be managed by atleast
one authorized merchant banker. Ordinarily, not more than two
merchant bankers should be associated as lead managers, advisers and
consultants to a public issue. In issues of over Rs. 100 crores, upto a
maximum of four merchant bankers could be associated as managers