Primary and Secondary Market

Issues

Primary Issues Secondary Transactions

Exchange Intermediated OTC Auction

 Rights issue

• Fresh securities to its existing shareholders first

• Rights issue provide right to buy shares at a discount to the current
market price
• This right is offered in proportion to existing holdings
• Rights may be allowed to be detached from the equity shares for
their separate trading
 Private placements
• Private placement by unlisted companies
– Sale of securities to limited investors with no public offering

• Preferential issue (Private placement by listed companies)

– A preferential issue shares or of convertible securities by listed companies to a

select group under Section 81 of the Companies Act, 1956 which is neither a
rights issue nor a public issue.

– Issuing company has to comply with the requirements contained in Chapter

XIII of SEBI (DIP) Guidelines.

• Qualified Institutions Placement (QIP)

– QIP is a private placement of equity shares or convertible securities by a listed
company to Qualified Institutional Buyers (QIB) only in terms of provisions of
New Issue market- IPO
 Overview
• The functions of new issue market
• The instruments of issue
• Functionaries of new issue market
• Mechanism of new issue.
 Capital Market
• Primary or new issue market: plays a vital role
in mobilizing funds from savers to
entrepreneurs who seek to establish new
enterprises or to carry out expansion/
diversification / modernization of existing ones.
• Savers are individuals, commercial banks,
insurance company etc. The users are public
limited companies and the government
• Secondary or stock exchange:
 Functions of New Issue Market
a) Origination: work of investigation, analysis and processing
of new project proposals.
• This function starts before an issue is actually floated in the
market.
• A careful study of the technical, economic and financial
viability is necessary to ensure soundness of the project.
• Advisory services, which improve the quality of capital
issues and ensure its success.
• Usually, done by merchant bankers who may be commercial
banks, all India financial institutions or private firms.
 Functions of New Issue Market
b) Underwriting: An agreement whereby the
underwriter promises to subscribe to a specified
number of shares or debentures or a specified
quantity 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 the unsold shares.
 Functions of New Issue Market
c) Distribution: Distribution is the function of
sale of securities to ultimate investors.
• This service is performed by brokers and
agents who maintain regular and direct
contact with the ultimate investors.
 Designing the Instrument
1. Purpose of the Offer: Tangible assets are more readily financed by debt
while growth opportunities which involve intangible assets such as
intellectual property rights are better financed with equity.
2. Debt Servicing: Debt securities help in leveraging the firm's earnings
per share, it also entails the additional financial risk of not being able
to meet future obligations
3. Tax Considerations: Debt instruments, the amount of interest paid is
tax-deductible to the issuer. Issuer has to pay a special dividend tax on
the amount distributed as dividends
4. Asset Cover: Debtors normally insist on adequate security. Therefore,
companies without adequate asset cover are forced to issue equity.
5. Dilution of Ownership: Companies susceptible to takeover threats
prefer issuing debt to equity
Functionaries in the New Issue Market
1. Merchant Bankers
2. Promoters: Modern industrial enterprises require
large amount of capital which can be raised only by
resorting to the joint stock form of organization.
• Company promoters and syndicates do the work of
establishing a joint stock company.
• It is the promoter who is responsible for conception or
discovery of the idea to exploit the possibility of some
industrial proposition
3. Underwriters
4. Registrars also called the "Issue House“
• Responsible normally for receiving the share
applications from various collection centers
analyzing them, recommending the basis of
allotment, in consultation with the managers
to the regional stock exchanges, for approval,
arranging for dispatch of allotment letters and
preparing the register of members etc.
• Their job normally starts with the opening of
the subscription list and continues till the
share certificates are dispatched.
5. Brokers: Brokers are the people who actually
bring the prospective investors and the company
together.
- They are members of recognized stock
exchanges.
6. Red Herring Prospectus
– Provides information on issue of securities
 Role of secondary capital market
• Where the primary issues are traded
– Expands primary market
– Price discovery
– Liquidity
– Efficient distribution of capital
 Perfect Markets
• Large number of buyers and sellers
• Buyers and sellers are price takers
• Traded item is homogeneous
• Market is frictionless with no transactions
costs, taxes and other impediments
• Ability to sell short

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 Market Friction
• Transaction cost
• Liquidity
• Information asymmetry
• Trading restrictions and regulatory constrains
• Asymmetric taxes

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 Market Efficiency
• Operational Efficiency
– Offers investors reasonably priced services related
to buying and selling securities
• Pricing Efficiency
– Prices fully reflect all available information
relevant to the valuation of securities

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 Participants
• Investors and investment intermediaries
• Regulator
– Financial markets regulator (SEBI)
• Markets and facilitation
– NSE, BSE, NCDEX, MCX,
– Depositories; Trading, Clearing & settlement
services; Information services