9) It provides commercial loans, real estate loans and mortgage loans: The next

important function of a commercial bank is to grant loans and advances. Such loans and
advances are given to members of the public and to the business community at a higher
rate of interest than allowed by banks on various deposit accounts. The commercial
banks provide loans and advances in various forms. They are Overdraft, Cash credit,
Discounting of Bills, Loans and Advances, Housing finance, Educational Loan
Scheme, Loans against Shares / Securities, Loans against Savings Certificates,
Consumer Loans & Advances, Securitization of Loans and other types of loans and
advances.

10) Financial institutions keep money flowing through the economy among
consumers, businesses and government: Mobilization of funds and circulation of
same mobilized funds are the main function and objectives of financial institutions.
Funds are intermediated by banks and other credit institutions, and directly via various
depository systems from banks and financial markets through the issuance of securities.
An efficient allocation of funds, together with financial stability, contributes to
economic growth and prosperity. Thus, money keep on flowing among consumers,
businesses and government.

2.6 NEW ISSUE MARKETS

The primary market, also known as the new issue market, is that segment of the capital
market where securities are issued to investors for the first time. For instance, when a
company decides to launch an Initial Public Offering (IPO), its equity shares are first issued
to successful subscribers in the primary market.

E. METHODS OF ISSUING NEW SECURITIES

The following are the methods of issuing new securities:

1. Public Issue

a) Concept of Public Issues

Public issue is the most common method of issuing securities of a company to the
public at large. It is mainly done via Initial Public Offering (IPO) resulting in
companies raising funds from the capital market. These securities are listed in the stock
exchanges for trading.

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 The Securities and Exchange Board of India is the regulatory body that monitors
IPO. As per its guidelines, a requisite due enquiry is conducted for a company’s
authenticity, and the company is required to mention its necessary details in the
prospectus for a public issue.

b) Types of Public Issues

There are two types of Public Issues

1) Initial Public Offer (IPO): When shares are offered to the public for the first time,
it is referred to as IPO or public offering. They are basically carried out by the new
and young companies who are targeting expansion and require capital for the same.
Apart from this, IPO can also be carried out by large companies who require funds
for their further expansion.

2) Follow on Public Offer (FPO): A company which had already made a public issue
at an earlier stage and is listed on the stock exchange, when makes another issue, it
is known as the Follow-on Public Offer (FPO). So, all the public offer of the existing
listed company that comes after the IPO is termed as the FPO. Such FPO unlike IPO
is also required to satisfy the listing and the other norms as directed by SEBI and
other regulatory authorities from time to time.

2.7 ROLE OF NEW ISSUE MARKETS

The following are the role of new issue markets

1. Origination:

Origination is the work which begins before an issue is actually floated in the market. It
is the stage where initial ‘spade work’ is conducted to find out the investment climate
and to be sure that if the issue is floated it will be subscribed by the public. The factors
which have to be carefully analysed are regarding the soundness of the project.
Soundness of the project refers to its technical feasibility backed by its economic and
financial viability. It is also concerned with background factors which facilitate the
success of an issue.

The underlying conditions are:

(a) The Time of Floating of an Issue: This determines the mood of the investment
market. Timing is crucial because it has a reflection on the subscription of an issue.

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 Periods of buoyancy will clearly show over-subscription to even ordinary quality
issues and are marked by the general lack of public support during depression.

(b) Type of Issue: This refers to the kind of securities to be issued whether equity,
preference, debentures or convertible securities. These have significance with the
trends in the investment market. Sometimes, there is a sudden spurt of new issue of
shares marked with government support and tax incentives.

Investors are keen buyers of such an issue. The success of one encourages issues of
these kinds to be floated. In these times, the market will have little support from
even sound and good issues of other types of securities. The kind of marketability of
the issue is an important analysis at the time of origination.

(C) Price: The encouragement of public to a particular issue will largely depend on the
price of an issue. Well established firms of some group connections may be able to
sell their shares at a premium at the time of a new issue but relatively unknown firms
will have to be cautious of the price. At present, the price of an issue is fixed through
bidding and building the price of the share.

2. Underwriting:

Underwriting is a kind of guarantee undertaken by an institution of firm of brokers

ensuring the marketability of an issue. It is a method whereby the guarantor makes a promise
to see the stock issuing company that he would purchase a certain specified number of shares
in the event of their not being invested by the public. Subscription is thus guaranteed even if
the public does not purchase the shares for a commission from the issuing company.

The LIC and UTI had emerged as the most important institutional underwriters in the
capital market in India. Their underwriting pattern is marked by the policy of underwriting
firm, i.e., purchasing industrial securities from the new issue market with the view of holding
the securities on their own portfolio.

3. Distribution and Mechanics of Floating New Issues:

The New Issue Market has a third function besides the function of origination and
underwriting. The third function is that of distribution of shares. Distribution means the
function of floatation of new issues and their pre and post allotment procedures to the
investors. This is performed by brokers and agents. They maintain regular lists of clients and
directly contact them for purchase and sale of securities.

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 The objective of the New Issue Market is to centre its activities towards floatation of New
Issues. The methods by which the new issues are placed in the market are: Public Issues,
Offer for Sale, Placement, and Right Issues.

2.8 METHODS OF FLOATING NEW ISSUE MARKET

There are many ways and means by which an Indian company can issue its shares in
the financial market. They are as follows:

Method 1: Public Issue

As the name suggests, this method allows anyone belonging to any part of India to
subscribe for the securities or invest in the particular company’s stocks. When an offer is
made by the company so that more and more people become a part of the shareholder’s
family, it is known as a public issue.

Public Issue is further divided into:

· Initial Public Offer (IPO): Through Initial Public Offer or IPO, only a certain amount
of the securities that the company has fixed is made public. The specific securities are
available for subscription to the public for the very first time. The Initial Public
Offering had many methods makings it public, including fixed price method, book
building method, or an amalgamation of both.
· Further Public Offer (FPO): It also goes by the name, Seasoned or Subsequent
Public Offer. Through this, an Indian company makes a fresh set of securities available
to the public for subscription. It is also termed as “Follow on Public Offer”.

Method 2: Private Placement

As per the name, private placement is the method of placing the shares from an Indian
company to a selected number of people. The number of people should not exceed 50 or as
prescribed in any case. When the issuing of the shares by the issuer is not a public issue nor a
rights issue, it is termed as a private placement in the primary market. Since the issuing of the
shares is private and limited, mainly brokers buy these securities and further sell them to their
clients. The brokers are wholesalers of the stocks here. The promoters can sell a portion of
the securities to their family members, friends, or well-wishers. However, the promoters have
to make a minimum contribution before the issue is made public. Mutual funds, financial
institutions, and other such organisations subscribe to private placement orders. The private
placement in the primary and secondary market can be of two kinds:

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 · Preferential Issue/Allotment: Preferential Issue deals with issuing securities to a
selected or specific group of people. It is done on a private placement basis. The issue
price should be higher than the average high or low of the closing price.
· Qualified Institutions Placement (QIP): As the name suggests, the Qualified
Institutions Placement is only made to the renowned institutions in the financial sector.
The shares can be converted to equity.

Method 3: Rights Issue

The shares that are being offered to the existing shareholders of any company are
termed as a rights issue in the primary market. However, the shares are offered in a particular
proportion and not haphazardly. This is an effective way of fundraising for successful
companies. The amount of funds needed by the company decides the proportion of the
securities to be sold to the shareholders.

Method 4: Bonus Reserves

Through bonus reserves, the securities are distributed to the existing shareholders by
the free reserves present in the company. It is served as a bonus to the shareholders, and they
do not have to pay any extra amount for these shares. The various Indian companies are
interested in this method as it brings up the value of shares.

Method 5: Employees Stock Option Plan (ESOP)

As the name suggests, through this method, the employees of a company can have a
share of the securities. Many ways and means are specified for the employees to receive the
company’s stocks in the primary market. The Employee Stock Option Plan is provided to the
employees at a higher position, including the director, chairman, manager, and so on. The
stocks are made available to them at a predetermined price and the date for the purchase is
also specified. The ESOP is provided to the employees so that they can avail this service. The
employees can buy the stocks directly, or they can receive them as a bonus. The last option is
the Employees Stock Option Plan or ESOP.

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2.9 SEBI GUIDELINES FOR ISSUE OF SECURITTIES IN NEW ISSUE MARKET
A. LAWS GOVERNING SEBI GUIDELINES FOR IPO OR INITIAL PUBLIC OFFER IN
INDIA

The Securities Exchange Board of India plays a pivotal role in regulating the Indian
corporate securities market. Established in 1988, SEBI has evolved to become the primary
authority overseeing market operations.

In addition to SEBI ICDR Regulations, other laws governing SEBI guidelines for
IPO include:

1. Securities Contract (Regulation) Act, 1957: This Act provides the legal framework for
the securities market in India.
2. Securities Contract (Regulation) Rules, 1957: These rules offer specific guidelines and
procedures for conducting transactions within the securities market.
3. Companies Act, 2013: The Companies Act of 2013 contains provisions pertaining to the
issuance of securities by companies, including those related to public offerings.

B. WHAT ARE THE SEBI GUIDELINES FOR IPO?

SEBI guidelines for IPOs are bifurcated into two distinct processes, catering
to unlisted and listed companies. These guidelines dictate the various requirements,
disclosures, and compliance measures that companies must adhere to when planning and
executing an IPO. They encompass aspects such as the issuance of prospectuses, pricing of
securities, disclosures to investors, and the role of intermediaries, among others.

1. SEBI Guidelines for IPO for Unlisted Companies

Unlisted companies in India have several options to conduct their initial public
offerings in adherence to SEBI guidelines. These options are defined by specific routes, each
with its own set of requirements. The SEBI guidelines for IPO for unlisted companies are:

Profitability Route – Entry Norm 1

The Profitability Route, governed by SEBI guidelines for IPO, entails certain criteria
that companies must meet to go public. These criteria encompass financial parameters and
performance benchmarks over a designated period:

1. The issuer must have a minimum net worth exceeding INR 1 Crore in each of the
previous three years.

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