PRIMARY MARKET

Primary Market
Meaning :
The primary market provides the channel for sale of new securities. Primary market provides opportunity to issuers of securities, Govt. as well as corporates, to raise resources to meet their requirement of investment &/or discharge some obligation.

Definition
The market for new securities issues. In the primary market the security is purchased directly from the issuer. This differs from the secondary market.

Significance of Primary Market

This is the market for new long term 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.

Significance of Primary Market (Contd.)

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." The financial assets sold can only be redeemed by the original holder.

Development In Primary Market

New products or services to existing customers, Existing products or services to new customers, or

New products or services to new customers

Role of Primary Market

Channel for sale of new securities. Opportunity to issuers of securities (Govt.,corporates) To raise resources to meet their requirements of investment/ Discharge obligation Issue securities at face value Issue the securities in domestic & international market.

IPO

IPO (Initial Public offering)

Meaning:
IPO is when an unlisted company makes either a fresh issue of securities or an offer for sale of existing securities or both for the first time to the public. This paves way for listing and trading of the issuers securities. IPO is selling of the securities to the public in the primary market. The sale of securities can be either through book building or through normal public issue.

Does NSE provide any facility for IPO

Yes, NSE electronic trading network spans across the country providing access to investors in remote areas. NSE decided to offer this infrastructure for conducting online IPOs through the book building process. NSE operates a fully automated screen based bidding system called NEAT IPO that enables trading members to enter bids directly from their offices through a sophisticated telecommunication network.

Advantages of IPO
Book Building through the NSE system offers several advantages. The NSE system offers a nation wide bidding facility in securities. It provides a fair, efficient & transparent method for collecting bids using the latest electronic trading systems. Costs involved in the issue are far less than those in normal IPO The system reduces the time taken for completion of the issue process.

FPO

Meaning
The basic difference between Initial Public Offer (IPO) and Follow on Public Offer (FPO) is as the names suggest IPO is for the companies which have not listed on an exchange and FPO is for the companies which have already listed on exchange but want to raise funds by issuing some more equity shares. Companies usually go to debt market for raising their short term needs. Either they issue bonds or get loans. But if they have massive expansion plans they may not raise sufficient funds in the debt market and even if they could it costs more. Companies come with follow on offer to restructure the business or to raise funds for new business or to expand the existing business. Similar to an IPO a price band is fixed (usually with the help of Investment banks) for the issue and interested investors can apply for it. Unlike the corporate actions (such as bonus, rights issue; they are applicable only to the existing stake holders) FPO is open to all investors. The price band for the FPO depends on the market value of the existing company shares and the reason for raising funds.

Private Placement Market

Defination
Private placement definition - finance
A group of people or institutions providing equity or debt capital to a company. Private placements are privately offered and are restricted to qualified individuals, which typically means individuals with a net worth of at least $1 million. Those investing in the private placement consist of a relatively small group of people or companies, in contrast with public offerings that are sold to thousands of investors. Private placements don't have to be registered by the Securities and Exchange Commission. One advantage of the private placement market is that it offers confidentiality.

Book Building

Definition of Book Building

The process of determining the price at which an Initial Public Offering will be offered. The book is filled with the prices that investors indicate they are willing to pay per share, and when the book is closed, the issue price is determined by an underwriter by analyzing these values.

Concept Of Book Building

Recently, the Securities and Exchange Commission (SEC) proposed to make new rules, and subsequently invited capital market operators to send their comments on the proposed new rules. In this era of reduction in transaction costs, Book Building is viewed as a less expensive and less time consuming process of offering securities to the public in such a way that the true value of the issuer is reflected.

Process Of Book Building

The Issuer who is planning an offer nominates an investment banking institution as 'book runners'. The Issuer specifies the number of securities to be issued and the price band for the bids It is not unusual for the upper price of the band to be a maximum of 1.2 times the floor price. The Issuer also appoints syndicate members with whom orders are to be placed by the investors.

 The syndicate members input the orders into an 'electronic book'.- This process is called 'bidding' and is similar to open auction.

The book normally remains open for a period of say! 5 days.

Bids have to be entered within the specified price band, else would be rejected.

Bids can be revised by the bidders before the book closes.

On the close of the book building period, the book runners evaluate the bids

On the basis of the demand at various price levels.

 The book runners and the Issuer decide the final price at which the securities shall be issued. Generally, the number of shares is fixed; the issue size gets frozen based on the final price per share. Allocation of securities is made to the successful bidders The rest get refund orders.

Limitations of Book Building

Book building is appropriate for mega issue only. In the case of the potential investor the companies can adjust the attributes of the offer according to the preference of the potential investors. It may not be possible in big issues since the risk-return preference of the investor cannot be estimated easily. The issuer company should be fundamentally strong & well known to the investors.

The book building system works very efficiently in matured market condition.
The investors are aware of the various parameters affecting the market price of the securities, But such conditions are not commonly found in practice.

There is possibility of price rigging on listing as promoters may try to bail out syndicate members.