03.

PRIMARY MARKET

INTRUDUCTION:

Introduction to Primary Market:

The primary market, also known as the new issue market, is the initial platform where
securities, such as stocks and bonds, are issued and sold for the first time by companies
or government entities to raise capital. In the primary market, issuers directly sell their
securities to investors. The primary market is crucial for companies seeking to raise
funds for expansion, projects, or other financial needs.

Introduction to Secondary Market:

The secondary market, also known as the stock market or the aftermarket, is where
previously issued securities are bought and sold among investors. In this market,
investors trade securities among themselves without the involvement of the issuing
company. The secondary market provides liquidity to investors and allows them to buy
or sell securities based on current market prices. Meaning of primary market

primary market is the place where securities are created. Companies float (in finance
lingo) new stocks and bonds in this market for the first time.

Or

In the primary market, companies and government entities sell new shares, bonds, note
bills in order to finance business improvements and expansions

Features of the primary market

The primary market, also known as the new issue market, has distinctive features that
distinguish it from other financial markets. Here are the key features of the primary
market:

1. New Securities Issuance: The primary market is the platform where new
securities, such as stocks, bonds, or other financial instruments, are issued and
sold for the first time by the issuing company or government entity.

2. Capital Formation: The primary market facilitates the process of capital

formation by enabling companies to raise funds for various purposes, including
expansion, infrastructure development, research, and debt repayment.

3. Direct Transaction Between Issuer and Investors: Transactions in the primary

market occur directly between the issuer (company or government) and the
investors. Investors purchase securities directly from the issuer.
 4. Initial Public Offering (IPO): The primary market is often associated with
Initial Public Offerings (IPOs) for stocks. During an IPO, a private company
becomes a public company by issuing shares to the public for the first time.

5. Underwriting: In many cases, investment banks or financial institutions play the

role of underwriters in the primary market. They commit to purchasing the unsold
shares if the public response is lower than expected, providing assurance to the
issuer.

6. Regulatory approval: The primary market is subject to regulatory oversight by

securities regulators and stock exchanges. Regulatory authorities ensure that
issuers adhere to disclosure norms, providing investors with necessary
information for informed decision-making.

7. Limited Role of Retail Investors: In some cases, the primary market may be
dominated by institutional investors, and retail investors may have limited access
to certain offerings. However, efforts are made to make IPOs inclusive and
accessible to retail investors.

8. Minimum Subscription Requirements: There may be minimum subscription

requirements for an issue to be considered successful. If the minimum
subscription is not achieved, the issue may be canceled, and funds returned to
subscribers.

9. Allocation of Securities: The process of allocating securities involves

distributing shares among various categories of investors, including institutional
investors, retail investors, and high-net-worth individuals.

Players in the primary market

The primary market involves various participants or players who play specific roles in
the process of issuing and acquiring new securities. Here are the key players in the
primary market:

1. Issuer: The issuer is the entity, such as a company or government, that seeks to
raise capital by issuing new securities. The issuer determines the type of securities
to be issued, the quantity, and the terms of the offering.

2. Investment Banks: Investment banks or underwriters act as intermediaries

between the issuer and the investing public. They play a crucial role in
underwriting the issue, providing financial advice, determining the issue price,
and assisting in the distribution of securities.

3. Registrar and Transfer Agents (RTA): RTAs maintain records of shareholders

and handle the transfer of ownership of securities from the issuer to the investors.
They ensure accurate record-keeping of share ownership.
 4. Regulatory Authorities: Securities regulators, such as the Securities and
Exchange Board of India (SEBI) in India, play a critical role in overseeing and
regulating the primary market. They ensure that issuers comply with disclosure
norms and protect the interests of investors.

5. Underwriters : In the case of larger issuances, an underwriting syndicate may be

formed, consisting of multiple underwriters who share the risk of the offering.
Each underwriter may have a specific role in marketing and distributing the
securities.

6. Retail Investors: Retail investors are individual investors who participate in the
primary market by purchasing newly issued securities. They can do so through
various channels, including initial public offerings or direct placements.

7. Institutional Investors: Institutional investors, such as mutual funds, insurance

companies, and pension funds, are major participants in the primary market. They
often subscribe to large quantities of securities and play a significant role in
determining the success of an offering.

8. Promoters and Existing Shareholders: In the case of an IPO, promoters

(founders and existing owners of the company) may sell a portion of their
holdings. Existing shareholders may also participate in the issuance by selling
their shares, especially in secondary offerings.

9. Credit Rating Agencies: In the case of debt issuances, credit rating agencies
assess the creditworthiness of the issuer and assign credit ratings to the debt
securities.
These ratings influence investor perception and interest rates.

10. Financial Printers: Financial printers are responsible for producing and
distributing the offering documents, prospectuses, and other legal documents
related to the issuance. They play a role in ensuring that investors have access to
accurate and timely information.

Instruments used in the primary market

n the primary market of India, various financial instruments are used for raising
capital. These instruments represent ownership or debt in the issuing entity and are
offered to investors during the initial issuance. Here are some common instruments
used in the primary market of India:

1. Equity Shares: Equity shares represent ownership in a company. Investors who

purchase equity shares become shareholders and have ownership rights,
including voting rights and a share in the company's profits. Initial Public
Offerings (IPOs) are a common way companies issue equity shares in the primary
market.
 2. Preference Shares: Preference shares are a type of equity security that combines
features of both equity and debt. They entitle holders to a fixed dividend before
equity shareholders and may have other preferential rights. Companies issue
preference shares to raise capital with specific terms and conditions.

3. Debentures/Bonds: Debentures and bonds are debt instruments issued by

companies or government entities to raise funds. Investors who purchase these
instruments are essentially lending money to the issuer in exchange for periodic
interest payments and the return of principal at maturity.

4. Commercial Papers (CP): Commercial Papers are short-term debt instruments

issued by corporations to meet short-term funding needs. They are unsecured and
have a maturity period of up to one year. Commercial Papers are typically issued
at a discount to face value.

5. Initial Public Offering (IPO): An IPO is a process by which a company makes

its shares available to the public for the first time. It involves the sale of new
shares to investors, and the proceeds are used for various corporate purposes,
such as expansion, debt reduction, or working capital.

6. Follow-on Public Offering (FPO): A Follow-on Public Offering is a subsequent

issuance of shares by a company that is already publicly listed. Like an IPO, it
involves the sale of additional shares to the public to raise capital.

7. Rights Issue: A rights issue is an offering of additional shares to existing

shareholders. Shareholders have the right to subscribe to new shares in
proportion to their existing holdings. It allows the company to raise capital from
its existing shareholder base.

8. Government Securities: The government also issues securities in the primary

market to fund its operations. These may include bonds, treasury bills, and other
debt instruments.

Advantages of Primary Market

• It can raise capital at relatively low cost,

• The securities so issued in the primary market provide high liquidity as the same can
be sold in the secondary market almost immediately.

• The primary market is an important source for mobilisation of savings in an economy.

• Funds are mobilised from commoners for investing in other channels.

• It leads to monetary resources being put into investment options.

• The chances of price manipulation in the primary market are considerably less when
compared to the secondary market.

• Such manipulation usually occurs by deflating or inflating a security price, thereby

deliberately interfering with fair and free operations of the market

. • The primary market acts as a potential avenue for diversification to cut down on risk.

• It enables an investor to allocate his/her investment across different categories

involving multiple financial instruments and industries.

• It is not subject to any market fluctuations.

• The prices of stocks are determined before an initial public offering, and investors
know the actual amount they will have to invest.

Disadvantages of Primary Market

• There may be limited information for an investor to access before investment in an
IPO

• since unlisted companies do not fall under the purview of regulatory and disclosure
requirements of the Securities and Exchange Board of India.

• Each stock is exposed to varying degrees of risk, but there is no historical trading data
in a primary market for analysing IPO shares

• because the company is offering its shares to the public for the first time through an
initial public offering.

• In some cases, it may not be favorable for small investors. If a share is oversubscribed,
small investors may not receive share allocation.

Methods used for floating new issues in the primary market

Companies and government entities use various methods to float new issues in the primary
market, allowing them to raise capital by issuing securities. The methods can vary based
on the type of security, the target audience, and the desired pricing strategy. Here are
common methods used for floating new issues in the primary market:

1. Initial Public Offering (IPO): An IPO is a common method for companies to

go public and make their shares available to the general public for the first time.
In an IPO, the company issues new shares to investors, and the proceeds go to
the company. The process involves regulatory approvals, underwriting, and the
determination of an offer price.
2. Rights Issue: A rights issue allows existing shareholders to purchase additional
shares directly from the company at a predetermined price. Shareholders are
given the right (but not the obligation) to subscribe to new shares in proportion
to their existing holdings. It is a way for companies to raise capital from their
existing shareholder base.

3. Follow-on Public Offering (FPO): An FPO is similar to an IPO but involves a

company that is already publicly listed. In an FPO, additional shares are offered
to the public, and the proceeds go to the company. The process is regulated and
typically requires approval from regulatory authorities.

4. Qualified Institutional Placement (QIP): QIP is a method of raising capital by

issuing securities to qualified institutional buyers (QIBs) without a public
offering. It is a faster way for companies to raise funds from institutional
investors. QIPs are often used by companies that are already listed on stock
exchanges.

5. Private Placement: Private placement involves the sale of securities directly to a

small group of institutional investors or high-net-worth individuals. This method is
not open to the general public. Private placements are often used for debt instruments
or equity shares issued to a select group of investors.

5. Preferential Allotment: Companies can make a preferential allotment of shares

or convertible securities to specific investors, including promoters, institutional
investors, or strategic partners. This method is regulated and subject to approval
by shareholders and regulatory authorities.

6. Employee Stock Option Plans (ESOPs): ESOPs involve the issuance of shares
to employees as part of their compensation. Companies grant employees the
option to purchase shares at a predetermined price, providing them with an
ownership stake in the company.

7. Book Building Process: In the book-building process, the issue price of

securities is not fixed. Instead, it is determined based on the demand generated
from investors during the book-building period. This method is often used for
IPOs and FPOs.

8. Fixed Price Method: In the fixed price method, the issue price is predetermined
and disclosed in the offer document. Investors subscribe to the issue at the fixed
price.
This method provides certainty to investors about the issue price.
Public Offer for Sale process works in the primary market
public issue through the Offer for Sale (OFS) mechanism is a method used by companies
to divest their existing shares to the public. In an OFS, the company's existing
shareholders, such as promoters, institutional investors, or others, sell their shares to the
public, and the proceeds from the sale go to the selling shareholders rather than the
company itself. Here's how the Offer for Sale process works in the primary market:

1. Selection of Selling Shareholders: The company identifies existing shareholders

who are willing to sell their shares to the public. These selling shareholders may
include promoters, venture capitalists, or other institutional investors.

2. Regulatory Approvals: The company, along with the selling shareholders, seeks
regulatory approvals from the Securities and Exchange Board of India (SEBI)
and other relevant authorities for the Offer for Sale.

3. Appointment of Intermediaries: The company appoints lead managers,

typically investment banks, to manage the Offer for Sale process. The lead
managers play a crucial role in coordinating the sale, determining the offer price,
and ensuring regulatory compliance.

4. Price Discovery: The selling shareholders and lead managers determine the floor
price or a price band at which the shares will be offered to the public. The price
may be determined through mechanisms such as a fixed-price method, a book-
building process, or a combination of both.

5. Filing of Draft Offer Document: The company, along with the selling
shareholders, files a draft offer document with SEBI. The offer document contains
details about the selling shareholders, the company, the offer size, the offer price,
and other relevant information.

6. SEBI Review and Approval: SEBI reviews the draft offer document to ensure
compliance with regulatory requirements. SEBI may provide observations and
seek clarifications before granting approval for the Offer for Sale.

7. Launch of Offer: Once SEBI approves the offer document, the company, along
with the selling shareholders and lead managers, launches the Offer for Sale. The
offer is made open to the public for a specific duration.

8. Investor Subscriptions: Investors, including retail, non-institutional, and

institutional investors, can submit their bids within the specified price band or at
the floor price. Investors indicate the quantity of shares they are willing to
purchase and the price they are willing to pay.

9. Allotment and Listing: After the closure of the offer period, the selling
shareholders and lead managers finalize the allotment of shares based on the bids
 received. The allotted shares are then credited to the demat accounts of successful
bidders.
Subsequently, the shares are listed on the stock exchanges.

10. Trading on Stock Exchanges: Once listed, the shares become tradable on the
stock exchanges. Investors can buy and sell the shares in the secondary market.

11. Proceeds to Selling Shareholders: The proceeds from the Offer for Sale go
directly to the selling shareholders. The company itself does not receive any funds
from this process.

Rights issues and Private placements in the primary market

Rights issues and private placements are two distinct methods used by companies to
raise capital in the primary market. Each method involves the issuance of securities, but
the target audience, purpose, and regulatory considerations differ. Here's an overview of
rights issues and private placements in the primary market:

Rights Issue:

Definition: A rights issue is a method through which a company offers additional shares to
its existing shareholders, providing them with the right (but not the obligation) to
subscribe to new shares in proportion to their existing holdings

Key Features:

1. Existing Shareholders Only: The offer is exclusively available to the company's

existing shareholders.

2. Proportionate Allotment: Shareholders have the right to subscribe to new shares

in proportion to their existing holdings, ensuring a proportionate allotment.

3. Pre-emptive Rights: Rights issues give existing shareholders pre-emptive rights,

allowing them to maintain their ownership percentage in the company.

4. Purpose: Companies use rights issues to raise capital for various purposes, such
as funding expansion projects, reducing debt, or meeting working capital
requirements.

5. Regulatory Approval: Rights issues require regulatory approval, and the

company must comply with regulatory norms and disclose relevant information in
the offer document.

6. Subscription Period: Shareholders are given a specific subscription period within

which they can exercise their right to subscribe to the new shares.
 7. Market Trading: Rights entitlements are tradable on the stock exchange,
providing shareholders with the option to sell their rights if they choose not to
subscribe to the new shares.

Private Placement:

Definition: Private placement involves the sale of securities directly to a select group
of investors, bypassing the public offering process. These investors may include
institutional investors, high-net-worth individuals, or strategic investors.

Key Features:

1. Limited Group of Investors: The offering is made to a limited number of

investors, often chosen by the company based on strategic considerations.

2. Customized Terms: Private placements allow for flexibility in terms of pricing

and structuring the offering based on negotiations with investors.

3. Exemption from Public Offer Requirements: Private placements are exempt

from certain regulatory requirements applicable to public offerings, as they are not
open to the general public.

4. Purpose: Companies may use private placements to raise capital, forge strategic
partnerships, or bring in specific investors who can contribute to the company's
growth.

5. Less Stringent Disclosure: While private placements require disclosure to

investors, the level of disclosure is generally less stringent compared to public
offerings.

6. Regulatory Compliance: Despite exemptions, private placements still need to

comply with certain regulatory guidelines, and approval from regulatory
authorities may be required.

7. Subscription Agreement: Investors typically enter into a subscription agreement

detailing the terms and conditions of the private placement.

8. No Tradability on Exchanges: Securities issued through private placements are

not immediately tradable on stock exchanges. There may be lock-in periods or
specific conditions before they can be freely traded.
Problems in the primary market in India
The primary market in India faces several challenges that impact the efficiency,
transparency, and attractiveness of the capital-raising process for companies. Some of
the key problems in the primary market in India include:

1. Volatility in Stock Prices: The primary market is influenced by the overall

volatility in stock prices, affecting the pricing of initial public offerings (IPOs)
and new issuances. Companies may delay or advance their IPOs based on market
conditions.

2. Market Sentiment: Investor sentiment plays a significant role in the success of

primary market offerings. Negative sentiment or uncertainties in the market can
lead to reduced investor appetite for new issuances.

3. Regulatory Delays: The regulatory approval process for new issuances, including
IPOs, can sometimes be time-consuming. Delays in obtaining regulatory
approvals may impact the timing and execution of offerings.

4. Stringent Regulatory Compliance: While regulatory oversight is essential,

stringent compliance requirements may pose challenges for companies,
particularly smaller enterprises, in terms of costs and administrative burden.

5. Limited Retail Participation: The participation of retail investors in primary

market offerings is often limited. Retail investors may be cautious or prefer to
invest in already listed securities rather than participating in new issuances.

6. Inadequate Due Diligence: In some cases, inadequate due diligence before an

IPO or new issuance may lead to issues such as corporate governance concerns,
financial mismanagement, or lack of transparency, impacting investor confidence.

7. Market Manipulation: Instances of market manipulation or price rigging can

negatively impact the primary market's integrity. This can lead to regulatory
scrutiny and impact investor trust.

8. Insufficient Investor Education: Lack of awareness and investor education

about the primary market and the investment process may hinder retail investor
participation.
Educating investors about the benefits and risks of new issuances is crucial.

9. Infrastructure Challenges: Infrastructure challenges, including issues related to

trading platforms, payment gateways, and other technological aspects, can impact
the smooth functioning of the primary market.
10. Mismatch in Pricing Expectations: There may be a mismatch between the
pricing expectations of issuers and investors. Companies may have high valuation
expectations, while investors may be cautious about overpriced offerings.

11. Unpredictable Market Conditions: The primary market is sensitive to economic

conditions, geopolitical events, and global market trends. Unpredictable factors
can influence investor confidence and impact the success of new issuances.

12. Liquidity Concerns: Investors may have concerns about the liquidity of newly
listed securities, especially in the case of smaller companies. Limited liquidity can
impact the tradability of shares in the secondary market.

13. Promoter Stake Dilution: Promoters looking to raise capital through primary
market offerings may face challenges related to the dilution of their stake,
potentially impacting their control over the company.