New Issue Market

(NIM)
Dr. Amitabha Maheshwari
Professor
• Objectives
• Introduction
• Relationship between the primary and secondary market.
• Difference between new issue market and secondary market
• Functions of NIM
• Participants in the NIM
• Issue Mechanism
• Pricing of new issues
• Allotment of shares
• Factors considered in selecting public issue
• Investors Protection in the new issue market
Introduction
• New Issue Market (NIM) comprises all people, institutions, methods/ mechanism,
services and practices involved in raising fresh capital for both new and existing
companies.
• This market is also called Primary Market.
• NIM helps raising resources from the investors by issuing them only new or fresh
securities. Thus, NIM facilitates direct conversion of savings into corporate
investment or diversion of resources from the rest of the system to the corporate
sector.
• Primary market deals in only new securities i.e., which were not available
previously. They are offered to the investors for the first time.
• The issuing houses, investment bankers, and brokers act as the channel of
distribution for the new issues.
• Secondary market or stock market or stock exchanges deal in existing securities, i.e.,
securities which have already been issued by companies and are listed with the stock
exchanges.
New Issue Market (NIM)
• This Initial Public Offering can be made through the fixed price
method, book-building method or a combination of both.
• In case the issuer chooses to issue securities through the book-building
route, then as per SEBI guidelines, an issuer company can issue
securities in the following manner:
1. 100% of the net offer to the public through the book-building route.
2. 75% of the net offer to the public through the book-building process
and 25% through the fixed price portion.
Relationship between the primary and secondary
market
• 1. The primary/new issue market cannot function without the secondary market. The
secondary market or the stock market provides liquidity for the issued securities. The
issued securities are traded in the secondary market offering liquidity to the stocks at a
fair price.
• 2. The new issue market provides a direct link between the prospective investors and
the company. By providing liquidity and safety, the stock markets encourage the public
to subscribe to the new issues. The marketability and the capital appreciation provided
in the stock market are the major factors that attract the investing public towards the
stock market. Thus, it provides an indirect link between the savers and the company.

• 3. The stock exchanges through their listing requirements, exercise control over the
primary market. The company seeking for listing on the respective stock exchange has
to comply with all the rules and regulations given by the stock exchange.
• 4. Though the primary and secondary markets are complementary to each other, their
functions and the organisational set up are different from each other. The health of the
primary market depends on the secondary market and vice versa.
Functions of New Issue Market
• The main function of new issue market is to facilitate transfer resources
from savers to the users.
• The savers are individuals, commercial banks, insurance company etc. the
users are public limited companies and the government.
• The new issue market plays an important role in mobilizing the funds from
the savers and transferring them to borrowers for production purposes, an
important requisite of economic growth.
• the new market can be classified as:
1. A market where firms go to the public for the first time through Initial
Public Offering (IPO).
2. A market where firms which are already trade raise additional capital
through Seasoned Equity Offering (SEO).
Functions of New Issue Market
• The main function of new issue market can be divided into three
service functions:
1. Origination
2. Underwriting
3. Distribution
Functions of New Issue Market
• Origination: Origination refers to the work of investigation, analysis
and processing of new project proposals. Origination starts before an
issue is actually floated in the market.
• There are two aspects in these functions:
A. A careful study of the technical, economic and financial viability to
ensure soundness of the project. This is a preliminary investigation
undertaken by the sponsors of the issue.
B. Advisory services which improve the quality of capital issues and
ensure its success. The advisory services include:
Functions of New Issue Market
• (i) Type of issue this refers to the kind of securities to be issued
whether equity share, preference share, debenture or convertible
debenture.
• (ii) Magnitude of issue
• (iii) Time of floating an issue
• (iv) Pricing of an issue - whether shares are to be issued at per or at
premium
• (v) Methods of issue
• (vi) Technique of selling the securities
Functions of New Issue Market
• The function of origination is carried out by merchant bankers, who
may be commercial banks,
• all Indian financial institutions, or private firms. Initially, specialized
division of commercial banks provided this service.
• At present, financial institutions and private firms also perform this
service.
• Though this service is highly important, the success of the issue
depends, to a large extent, on the efficiency of the market.
• The origination itself does not guarantee the success of the issue.
Underwriting, a specialized service is required in this regard.
Underwriting
Underwriting is an agreement whereby the underwriter promises to
subscribe to a 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 remain unsold, the underwriter will buy these
shares. Thus underwriting is a guarantee for the marketability of shares.
Method of Underwriting
• An underwriting agreement may take any of the following three
forms:
A. Standing behind the issue: Under this method, the underwriter
guarantees the sale of a specified number of shares within a
specified period. If the public do not subscribe to the specified
amount of issue, the underwriter buys the balance in the issue.
B. Outright purchase: The underwriter, in this method, makes outright
purchase of shares and resells them to the investors.
C. Consortium method: Underwriter is jointly done by a group of
underwriters in this method. The underwriters form syndicate for
this purpose. This method is adopted for large issue.
Advantages of Underwriting
• Underwriting assumes great significance as it offers the following advantages
to the issuing company.
• (a) The issuing company is relieved from the risk of finding buyers for the
issue offered to the public. The company is assured of raising adequate capital.
• (b) The company is assured of getting minimum subscription within the
stipulated time, a statutory time, a statutory obligation to be fulfilled by the
issuing company.
• (c) Underwriters undertake the burden of highly specialized function of
distributing securities.
• (d) Provide expect advice with regard to timing of security issue, the pricing
of issue, the size and type of securities to be issued etc.
• (e) Public confidence on the issue enhances when underwritten by reputed
underwriters.
Methods of Floating New Issues

• The various methods which are used in the floating of securities in the
new issue market are:
• 1. Public issues
• 2. Offer for sale
• 3. Placement
• 4. Rights issues
Public issues
• Under this method, the issuing company directly offers to the general public/ institutions a fixed
number of shares at a stated price through a document called prospects.
• This is the most common method followed by join stock companies to raise capital through the
issues of securities.
• (a) Name of the company
• (b) Address of the registered office of the company
• (c) Existing and proposed activities
• (d) Location of the industry
• (e) Names of directors
• (f) Authorized and proposed issue capital to the public
• (g) Dates of opening and closing the subscription list
• (h) Minimum subscription
• (i) Names of brokers/underwriters/bankers/managers and registrars to the issue.
• (j) A statement by the company that it will apply to stock exchange for quotations of its shares.
Public issues
• According to the Companies Act, 1956 every application form must be
accompanied by a prospects. Now, it is no longer necessary to furnish
a copy of the prospectus along with every application forms as per the
Companies Amendment Act, 1988. Now, an abridged prospectus is
being annexed to every share application form.
Merits of Issue through Prospectus
• (a) Sale through prospectus has the advantage of inviting a large
section of the investing public through advertisement.
• (b) It is a direct method and no intermediaries are involved in it.
• (c) Shares, under this method, are allotted to a large section of
investors on a non-discriminatory basis. This procedure helps in wide
dispersion of shares and to avoid concentration of wealth in few
hands.
Offer for sale
• The method of offer for sale consists in outright sale of securities through the
intermediary of issue houses or share brokers. In other words, the shares are not
offered to the public directly. This method consists of two stages:
• The first stage is a direct sale by the issuing company to the issue house and brokers at
an agreed price. In the
• second stage, the intermediaries resell the above securities to the ultimate investors.
The issue houses or stockbrokers purchase the securities at a negotiated price and resell
at a higher price.
• The difference in the purchase and sale price is called turn or spread. One chief
advantage of this method is that the company is relieved from the problem of printing
and advertisement of prospectus and making allotment of shares. Offer for sale is not
common in India. This method is used generally in two instances:
• (a) Offer by a foreign company of a part of it to Indian investors
• (b) Promoters diluting their stake to comply with requirements of stock exchange at the
time of listing of shares.
• Reliance 100%
• ½ 51% 57%
• 41% 49%
• 2/3 66.67 33.33
Placement
• Under this method, the issue houses or brokers buy the securities
outright with the intention of placing them with their clients
afterwards. Here, the brokers act as almost wholesalers selling them in
retail to the public. The brokers would make profit in the process of
reselling to the public. The issue houses or brokers maintain their own
list of client and through customer contact sell the securities.
Placement
• Placement has the following advantages:
• (a) Timing of issue is important for successful floatation of shares. In a
depressed market conditions when the issues are not likely to draw public
response though prospectus, placement method is a useful method of floatation
of shares.
• (b) This method is suitable when small companies issue their shares. The main
disadvantage of this method is that the securities are not widely distributed to a
large section of investors. A selected group of small investors are able to buy a
large number of shares and get majority holding in a company.
• This method of private placement is used to a limited extent in India. The
promoters sell the shares to their friends, relatives and well-wishers to get
minimum subscription which is a precondition for issue of shares to the public.
Rights Issues
• If an existing company intends to raise additional funds, it can do so
by borrowing or by issuing new shares. One of the most common
methods for a public company to use is to offer existing shareholders
the opportunity to subscribe further shares.
• This mode of raising finance is called 'Rights Issues'. The existing
shareholders have right to entitlement of further shares in proportion
to their existing shareholding.
Rights Issues
• The rights of entitlement of a shareholder, who does not want to buy
the right shares, can be sold to someone else. The price of rights shares
will be generally fixed above the nominal value, but below the market
price of the shares.
• The issue of quoted shares at below the nominal value is not allowed,
and it would be rare for this to happen for unquoted shares. Section 81
of the Companies Act provides for the further issue of shares to be first
offered to the existing members of the company, such shares are
known as 'right shares' and the right of the members to be so offered is
called the 'right of pre-emption.'
Rights Issues (Section 81 of the Companies Act, 1956 )
• (a) Any company
• (i) Which has completed two years after its incorporation or
• (ii) Which has completed one year from the first allotment of shares after its
incorporation
• (b) Whichever is earlier, if it proposes to increase its subscribed capital by
allotment of further shares, then the subsequent provisions shall apply.
• (c) Those further shares shall be first be offered to the existing shareholders in
proportion to the shares held by them in the paid up capital, on the date of such
offer.
• (d) At least 15 days notice shall be given from the date of offer. The notice shall
specify the number of shares offered and the limiting time of the offer.
• (e) The notice shall mention that if the offer is not accepted within the time of
offer, will be deemed to have been declined.
• (f) Unless the articles of the company otherwise mention, such offer has
the right of renunciation.
• (g) The notice of offer shall contain a statement a renunciation.
• (h) If it is declined to accept the offer, the board of directors may
dispose of those shares in such manner, as they deem most beneficial to
the company.
• Reasons for a Rights Issue
• The main reasons of making a rights issue by a company are as follows:
• (a) In times of inflation, the replacement costs of assets will be high;
unless the company can retain cash from substantial profits, the only
alternative is to raise cash from afresh issue of shares.
Advantages of Rights Issue
• To Companies: The company benefits from lower issue costs, in that
administration and underwriting costs are lower and the issue is made at the
discretion of the directors rather than via a general meeting of the company. This
is because issues of equity through the stock exchange will alter the balance of
ownership.
• To the shareholders: The main attraction of the rights issue for current
shareholders is that they are able to maintain their original proportion of share
ownership. Furthermore, any transfer of wealth away from them due to an equity
issue being under-priced, is avoided. In order to make a rights issue the company,
when making the offer, must detail the reasons for the issue, the terms of the offer,
the capital structure of the company at the time of issue, the future prospects for
the company, and forecasts of future dividends. The Board of Directors sets the
number of shares needed to be bought under the pre-emptive right by the existing
shareholders in proportion to their existing shares held. The ratio is determined
using a simple calculation.
Long-dated Rights
• The long-dated rights are a dilutive anti-takeover device in which
rights are automatically distributed to existing stockholders during
hostile takeover. These 'poison pills' are automatically exercised when
during a hostile takeover, a company or an investor acquires a certain
percentage of shares, thereby diluting the takeover.
Non-voting Shares
• Non-voting Shares (NVS) are an innovative instrument for raising funds,
although prevalent in many developed countries for years. The non-voting
shares are closely akin to preference shares that do not carry any voting rights
nor is the dividend payable pre-determined.
• However, unlike preference capital, non-voting shares do not carry a pre-
determined dividend. The payoff to the investor for the assumption of higher
risk levels and the compensation for loss of control is the high rate of
dividends payable to them.
• Companies that are shy of exposure over leveraged companies, new
companies and closely held companies can find NVS useful. It may find
favour with small investors, non-resident Indians, overseas corporate bodies,
mutual funds etc.
• The investor gains in terms of higher dividends, purchase at advantageous
low price, liquidity and capital appreciation.
Non-voting Shares
• Advantages
• Various advantages envisaged for corporate entities and investors
could be as follows:
• 1. Promoters of companies are likely to find favour with this
instrument since it protects their controlling interest. The promoting
groups of many companies generally do not expand as fast as they
would like to because of their inability to raise large equity resources
without losing control of the company. With the introduction of this
new instrument, the promoters would be able to undertake large
projects and implement them, thus giving boost to industrialisation.
The availability of NVS would simultaneously reduce the existing
management's fears of a hostile takeover.
Non-voting Shares
• Advantages
• Various advantages envisaged for corporate entities and investors could be
as follows:
• 2. A large number of average investors who hardly exercise their voting
rights, especially in the case of companies, with a good dividend track
record, or otherwise would find non-voting shares of well-managed
companies and companies having reputed promoters an attractive instrument
of savings. Additional dividend may also be offered as compensation.
• 3. Non-resident Indians/eligible corporate bodies in excess of the portfolio
investment limits prescribed for them can also use NVS for investment. In
view of the constraints of raising funds from domestic sources and larger
requirement of finance, NRIs can be motivated to Notes invest in Indian
companies through the mechanism of this instrument.
Non-voting Shares
• Advantages
• 4. The mobilisation of funds through this instrument would also help
companies to reduce their debt-equity ratio and thereby enhance their
financial health and profitability. It will give them more leverage.
• 5. Increased borrowing power may be granted to companies.
• 6. It will give a new financial tool to the managements who do not
want to shed their control or voting rights, as it enables the promoters
to retain control over management while expanding equity base.
• 7. Lower cost of capital for companies
Stock Exchanges
• A stock exchange is a corporation or mutual organization which provides
"trading" facilities for stock brokers and traders, to trade stocks and other
securities.
• Stock exchanges also provide facilities for the issue and redemption of
securities as well as other financial instruments and capital events including
the payment of income and dividends.
• The securities traded on a stock exchange include: shares issued by
companies, unit trusts, derivatives, pooled investment products and bonds.
To be able to trade a security on a certain stock exchange, it has to be listed
there. Trade on an exchange is by members only. The initial offering of
stocks and bonds to investors is by definition done in the primary market
and subsequent trading is done in the secondary market. A stock exchange
is often the most important component of a stock market.
Nifty 50
1Day 2Day 3Day 5Day 6Day

A 200 220 240

B 50 48 52
C 65 63 75
D 1000 980 130
E 250 280 260
F 550 500 525
50 380 420 410
2495 2511 1692 1832 1939 2030
Index 100 2511/ 1692/2 1832/2 84 85 11000
2495* 495*1 495*10
100=1 00=67. 0=73.4
00.64 81 2
 Stock Market in India
• From scattered and small beginnings in the 19th Century, India's stock market
has risen to great heights. In 1990, we had 18(Now23) stock exchanges in the
country. There were around 6000(Now6,800) listed companies and the
invested population stood around 15 million. Organizations and institutions,
whether they are economic, social or political, are products of history events
and exigencies. The continually replace and/or reform the existing
organizations, so as to make them relevant and operational in contemporary
situations. It is, therefore, useful to briefly acquaint ourselves origin and
growth of the stock market in India. 1800-1865: The East India Company and
few commercial banks floated shares sporadically, through a recognized
brokers. The year 1850 marked a watershed. A wave of company flotations
took over the market the number of brokers spurted to 60. The backbone of
industrial growth and the resulting boom in share marked the general
personality of the financial world, (Premchand Rouchand).
Stock Market Indices
• An Index is used to give information about the price movements of products in the financial,
commodities or any other markets. Financial indexes are constructed to measure price
movements of stocks, bonds, T-bills and other forms of investments. Stock market indexes
are meant to capture the overall behaviour of equity markets. A stock market index is created
by selecting a group of stocks that are representative of the whole market or a specified
sector or segment of the market. An Index is calculated with reference to a base period and a
base index value. Stock market indexes are useful for a variety of reasons. Some of them are:
1. They provide a historical comparison of returns on money invested in the stock market
against other forms of investments such as gold or debt.
2. They can be used as a standard against which to compare the performance of an equity
fund.
3. It is a lead indicator of the performance of the overall economy or a sector of the economy
4. Stock indexes reflect highly up to date information
5. Modern financial applications such as Index Funds, Index Futures, Index Options play an
important role in financial investments and risk management
Importance of indexes
• If you invest in mutual funds or individual stocks then it’s important to
measure the performance of your investments against a relevant market
index. If your investments consistently lag behind the index then it might be
time to come up with a new investing strategy.
• BSE: Bombay Stock Exchange is the oldest stock exchange in Asia
• What is now popularly known as the BSE was established as “The Native
Share & Stock Brokers’ Association” in 1875.
• Over the past 135 years, BSE has facilitated the growth of the Indian
corporate sector by providing it with an efficient capital raising platform.
• Today, BSE is the world’s number 1 exchange in the world in terms of the
number of listed companies (over 4900). It is the world’s 5th most active in
terms of number of transactions handled through its electronic trading
system.
Importance of indexes
• BSE is in the top ten of global exchanges in terms of the market
capitalization of its listed companies (as of December 31, 2009). The
companies listed on BSE command total market capitalization of
USD Trillion 1.28 as of Feb, 2010. BSE is the first exchange in India
and the second in the world to obtain an ISO 9001:2000 certifications.
It is also the first Exchange in the country and second in the world to
receive Information Security Management System Standard BS 7799-
2-2002 certification for its BSE On-Line trading System (BOLT)
Importance of indexes
• If you invest in mutual funds or individual stocks then it’s important to measure the performance of your
investments against a relevant market index. If your investments consistently lag behind the index then it might be
time to come up with a new investing strategy.
• BSE: Bombay Stock Exchange is the oldest stock exchange in Asia What is now popularly known as the BSE was
established as “The Native Share & Stock Brokers’ Association” in 1875. Over the past 135 years, BSE has
facilitated the growth of the Indian corporate sector by providing it with an efficient capital raising platform.
Today, BSE is the world’s number 1 exchange in the world in terms of the number of listed companies (over 4900).
It is the world’s 5th most active in terms of number of transactions handled through its electronic trading system.
And it is in the top ten of global exchanges in terms of the market capitalization of its listed companies (as of
December 31, 2009). The companies listed on BSE command total market capitalization of USD Trillion 1.28 as
of Feb, 2010. BSE is the first exchange in India and the second in the world to obtain an ISO 9001:2000
certifications. It is also the first Exchange in the country and second in the world to receive Information Security
Management System Standard BS 7799-2-2002 certification for its BSE On-Line trading System (BOLT).
Presently, we are ISO 27001:2005 certified, which is a ISO version of BS 7799 for Information Security. The BSE
Index, SENSEX, is India’s first and most popular Stock Market benchmark index. Exchange traded funds (ETF) on
SENSEX, are listed on BSE and in Hong Kong. Futures and options on the index are also traded at BSE. The
launch of SENSEX in 1986 was later followed up in January 1989 by introduction of BSE National Index (Base:
1983-84 = 100). It comprised 100 stocks listed at five major stock exchanges in India - Mumbai, Calcutta, Delhi,
Ahmedabad and Madras. The BSE National Index was renamed BSE-100 Index from October 14, 1996 and since
then, it is being calculated taking into consideration only the prices of stocks listed at BSE. BSE launched the
dollar-linked version of BSE-100 index on May 22, 2006.