PRIMARY MARKET NEW ISSUE MARKET (NIM):

♦ Every company needs funds. Funds may be required for

short term or long term. Short term requirements of funds can be met through banks, lenders, institutions etc.
When company wishes to raise long term capital, it goes to the .primary market.

♦ Primary market is an important constituent of a capital market. In the primary market the security is
purchased directly from the issuer.

♦ The primary market is a market for new issues. It is also called new issue market. It is a market for
fresh .capital. It deals with the new securities which were .not previously available to the investing public.

♦ Corporate enterprises and Government raises long term funds from the primary market by issuing financial
securities. Both the new companies and the existing companies can issue new securities on the primary
market.

♦ It also covers raising of fresh capital by government or its agencies. The primary market comprises of all
institutions dea0ling in fresh securities. These securities may be in the form of equity shares, preference shares,
debentures, right issues, deposits etc.

FEATURES OF PRIMARY MARKET:·

(1) The first important feature of the primary market i that it is related with the new issues. Whenever a
company issues new shares or debentures, it is known as Initial Public Offer (IPO). new shares or
debentures, it is known as Initial Public Offer (IPO).

(2) The main players of primary markets are thpe rivate and public companies that offer equity or debt based
securities such as stocks and bonds in order to raise money for their operations such as business expansion,
modernization and so on.
(3) Primary market transactions are carded out.before secondary market operations.

(4) There are various methods of raising funds from primary markets: public issue, right issue, tender offer,
private placement and offer for sale.

Instruments in Primary Market:

Primary instruments are instruments that are directly issued by the ultimate investors to the ultimate savers.
For example, shares and debentures directly issued to the public.
 FUNCTIONS OF PRIMARY MARKET:

The main function of a primary market can be divided into three service functions. They are: origination,
underwriting and distribution.

(1) Origination: Origination refers to the work of investigation, analysis and processing of new project
proposals. Origination begins before an issue is actually floated in the. market. The function of origination is
done by merchant bankers who may be commercial banks, all India financial institutions or private firms.

(2) Underwriting: When a company issues shares to the public it is not sure that the whole shares will be
subscribed by the public. Therefore, in order to ensure the full subscription of shares (or at least 90%) the
company may underwrite its shares or debentures. The act of ensuring the sale of shares or debentures of a
company even before offering to the public is called underwriting. It is a contract between a company and
an underwriter (individual or firm of indivi1uals) by which he agrees to undertake that part of shares or
debentures which has not been subscribed by the public. The firms or persons who are engaged in
underwriting are called underwriters.

(3) Distribution: This is the function of sale of securities to ultimate investors. This service is performed by
brokers and agents. They maintain a direct and regular contact with the ultimate investors.

PLAYERS OR PARTICIPANTS OR INTERMEDIARIES IN THE PRIMARY MARKET/ CAPITAL MARKET:

There are many players (intermediaries) in the primary_ market (or capital market). Important players are as
follows:

(1) Merchant bankers: Merchant bankers play a vital role in attracting public money to capital issues. They act as
issue managers, lead managers or co- managers.
(2) Registrars to the issue: Registrars are intermediaries who undertake all activities connected with new issue
management. They are appointed by the company in consultation with the merchant bankers to the issue.
(3) Bankers: Some commercial banks act as collecting agents_'and some act as coordinating bankers. Some bankers
act as merchant bankers and some are br6kers. They play an important role in transfer, transmission and safe
custody of funds.
(4) Brokers: They act as intermediaries in purchase and sale of securities in the primary and secondary. markets.
They have a network of sub brokers spread throughout the length and breadth of the country.
(5) Underwriters: Generally investment bankers act as underwriters. They agreed to take a specified number of
shares or debentures offered to the public, if the is_sue s not fully subscribed by the public. Underwriters may
be financial institutions, banks, mutual funds, brokers etc.
 ROLE OF MERCHANT BANKER AND' SERVICES OFFERED BY THEM IN PRIMARY MARKET:
♦'Merchant Banker' means any person engaged in the business of issue management by making arrangements
regarding selling buying or subscribing to securities or acting as manager/consultant/advisor or rendering
corporate advisory services in relation to such issue management. Among the important financial interm
_diaries are the merchant bankers.
♦ They are the key intermediary between the company and issue of capital. It is quite con:imon to come across
reference,. to Merchant Banking and financial services as though they are distinct categories.
♦ The services provided by Merchant Bankers depend on their inclination and resources - technical and
financial. Merchant bankers (Category I) are mandated by SEBI to manage public issues (as lead managers) and
open offers in take-over.
♦ These two activities have major implications for the integrity of the market. They affect investors' interest
and, 0therefore, transparency has to be ensured.
♦ Merchant Bankers are rendering diverse services and functions. These include organizing and extending
finance for investment in projects, assistance in financial management, raising Eurodollar loans and issue of
foreign currency bonds.
♦ Different merchant bankers specialised in different services. SEBI has advised that merchant Bankers shall
undertake only those activities which relate to securities market.
a. Managing of public issue of securities
b. Underwriting connected with the aforesaid public issue management business.
c. Managing/Advising on debt/equity i.e. GDR, instruments; international offerings of ADR, bonds and
other instruments
d. Private place ent of securities;
e. Primary or satellite dealership of government securities;
f. Corporate advisory services related to securities market including takeovers, acquisition and
disinvestment;
g. Stock broking;
h. Advisory services for projects;
i. Syndication of rupee term loans;
j. International financial advisory service .
The activities of the Merchant Bankers in the India capital market are regulated by SEBI (Merchant
Bankers) ·Regulations, 1992.

PROBLEMS WITH India PRIMARY MARKET:

The India primary market has the following problems:

1. The new issue market is not able to mobilise adequate savings from the public. Only 10%··of the savings of the
household sector go to the primary market.
2. The merchant bankers do not play adequate attention to the technical, managerial and feasibility aspects
while appraising the project proposal. In fact, they do not seem to play a development role. As a result, the
small investors are duped by the companies.
3. There is inordinate delay in the allotment process. Th s will discourage the small investors to approach the
primary market for investing their funds
4. Generally there is a tendency on the part of the investors to. prefer fixed income bearing securities like
preference shares and debentures. They hesitate to invest in equity shares. There is a risk aversion in the new
issue market. This stands in the way of a healthy primary market.
5. There is a functional and institutional gap in the new issue market. A wholesale market is yet to develop for
new issue or primary market.
6. In the, case of investors from semi-urban and rural areas, they have to incur more expenses for sending · the
application forms to centres where banks are authorized to accept them. The expenses in connection with this
include bank charges, postal expenses and · so on. All these will discourage the small investors in rural areas.
Over the years, SEBI, and Central Government have come up with a series of regulatory measures to give a
boost to new issue market.

METHODS OF RAISING FUND IN THE PRIMARY MARKET (METHODS OF FLOATING NEW ISSUES):

A company can raise capital from the primary market through various methods. The methods include public
issues, offer for sale, private placement, right issue, and tend r method.

Methods of Raising Funds:

(a) Public Issues:

♦ This is the most popular method of raising long term capital. It means raising funds directly from the public.

♦ Under this method, the company invites subscription from the public through the issue of prospectus (and
issuing advertisements in newspapers). On the basis of offer in the prospectus, the investors apply for the
number of securities they are willing to take. In response to application for securities, the company makes the
allotment of shares, debentures etc.

♦ Initial Public Offering (IPO): This is an offering of either a fresh issue of securities or an offer for sale of
existing securities or both by an unlisted company for the first time in its life to the public. In short, it is a
method :of raising securities in which a company sells shares or stocks to the general public for the first time.
♦ e-IPOs: A company proposing to issue capital to public through the on-line system of the stock exchanges has to
enter into an agreement with the stock exchange(s). SEBI registered brokers should be appointed for the
purpose of accepting applications and placing orders with the company. The issuer company should also
appoint a Registrar to the Issue having electronic connectivity with the Exchanges. The issuer company can
apply for listing of its securities on any Exchange other than the Exchange through which it has offered its
securities. The lead manager coordinates all the activities amongst various intermediaries connected in the
issue/system.
.' ..
♦ . Follow-on Public Offering (FPO): This is an offer of sale of securities by a listed company. This is an offering
of either a fresh issue of securities or an offer for sale to the public by an already listed company through an
offer document.

Different Terms Associated With Public Offering:

-.-.--- '
♦ Issuer: The company or the organization that issues the equity shares.

♦ Investment Banker (also known as Merchant Banker): The institutional- player that facilitates the entire process
of the public offering for the issuer. They are also known as lead manager and with help of them companies
appoint underwriters to the issues. The underwriters underwrite to subscribe to the issue in case of under-
subscription.

♦ Registrar: They are appointed by the company to act as transfer agents and handle investor queries. Registrars
process application, allots shares as per rules of the regulator, ensure transfer shares to the investors and
money to the issuing company.
♦ Bankers: The institution that collects the cash on behalf of the issuing company from the applicants.
♦ Brokers: These are registered members of stock exchanges through whom the investors transact.
♦ Prospectus: An offer document covers all the relevant information to help an investor to make his/her
investment decision. The document needs to vetted by the regulator (SEBI) for adequate disclosure of
information.
♦ Issue Price: The price at which shares are offered for subscription by potential investors. The price can be
fixed or within a band of floor and cap. One can observe that at present companies opt for price band instead
of fixed price. The upper band is capped at a certain percentage above the lower band. The final price is fixed
depending upon the bids made by investors for different prices within the band.
♦ Book Building and Book Runner: This process ensures generation, and recording of investor demand for
shares at different prices during an IPO or a FPO. It is now a common practice for public offering. Book building
process is expected to ensure transparency and price discovery. The party undertaking this exercise is known as
book runner.
♦ Dutch Auction: After the closure of bid by the investors, the price of the share is _fixed at a value where all the
shares get subscribed. In case of Dutch auction, the price is uniform for all the investors irrespective of the
higher bid price stated by them. The investors who have bid low are not allotted any shares.
♦ Greenshoe Option: While going for public issue, the issue size is stated by the issuer. However, with a
greenshoe option, the issuer can retain over subscription upto certain limit as specified during the
announcement of the
♦
♦ offer.
♦ Pro rata Allotment: When number of shares applied is more than the number of shares offered, the
investors are made the allotment proportionately.
♦ -ASBA (Application Supported by Blocked Amounts) in Application for Shares in IPOs/ FPOs: Earlier, while
applying for equity shares the money get transferred to the issuing company whether the investors are finally
successful in getting allotment of shares or not. If unsuccessful, the investors get back: their money after
sometime. As a result, the investors loose the interest. As pet ASBA, the amount in the investor's bank account
gets blocked and not transferred to the issuing company. The money gets transferred only when shares allotted
to the applicant.

IPO PROCESS:
0The IPO process is ultimately regulated by the Securities and Exchange Board of India (SEBI), since the end
state is the sale of common stock in the company "going public

Intermediary
Definition

Intermediary by definition, in any field, is an individual who is in the role of a mediator facilitating an
agreement or reconciliation. Accordingly, intermediaries of SEBI too are the bridges or links between
the investor and the stock exchange and/or SEBI.

Section 11 and section 12 of SEBI Act, 1992 defines an Intermediary as, Stockbrokers, sub- brokers,
portfolio managers, depositories, investment advisers, share transfer agents, merchant bankers,
underwriters, registrars to an issue, foreign institutional investors, custodians of securities, venture
capital funds, mutual funds, asset management companies, credit rating agencies, those in
 connection and associated with the securities market in any manner, are all broadly categorized as
‘Intermediaries of SEBI’.

ROLE OF SECURITIES MARKET INTERMEDIARIES

The primary need for market intermediaries in the securities market is to match its demand and supply
forces. In other words, intermediaries facilitate economies in confronting the critical challenge of the
allocation of savings to investment opportunities, as shown in below chart

Flow of Funds in the Capital Market

Economies that are able to match their available resources/savings to appropriate investment
opportunities are successful in the creation of novel business avenues and the generation of more
wealth and progress. Thus, to say that intermediaries are capable of making or breaking economies
would not be an overstatement. Further, investors and issuers are no longer homogenous; issuers and
investors today are diverse and depict heterogeneous characteristics. To connect and manage such
diverse groups, a mature market with sophisticated middlemen is essential.

 Intermediaries play a vital role for promoting and smooth functioning of the securities market
 all intermediaries provide different financial services to the investors and they are an integral part of
securities marker
 they bring efficiency to corporate fund raising by developing expertise in pricing new issues and
marketing them to the investors
 Intermediaries can be categorized in two segments as primary market and secondary market
intermediaries. SEBI will provide the regulatory frame work for all these intermediaries through
regulations
Additionally, in contemporary securities markets, investors and issuers rely heavily on intermediaries
to operate on well-informed decisions. Investors, especially retail investors, do not have adequate
information, knowledge, or expertise, and issuers do not have adequate resources to reach out to
individual investors spread across the country and the globe. Therefore, intermediaries have a very
crucial and sensitive role to play in making the market matrix especially anonymous order-driven
trading platforms work smoothly.

The roles of the following intermediaries are as follows; MERCHANT BANKERS

Merchant bankers play an important role in issue management process. Lead managers (category I
merchant bankers) have to ensure correctness of the information furnished in the offer document. They
have to ensure compliance with SEBI rules and regulations as also Guidelines for Disclosures and
Investor Protection. To this effect, they are required to submit to SEBI a due diligence certificate
confirming that the disclosures made in the draft prospectus or letter of offer are true, fair and adequate
to enable the prospective investors to make a well informed investment decision. The role of merchant
bankers in performing their due diligence functions has become even more important with the
strengthening of disclosure requirements and with SEBI giving up the vetting of prospectuses. SEBI's
various operational guidelines issued during the year to merchant bankers primarily addressed the
need to enhance the standard of disclosures.

It was felt that a further strengthening of the criteria for registration of merchant bankers was
necessary, primarily through an increase in the net worth requirements, so that their capital would
 be commensurate with the level of activities undertaken by them. With this in view, the net worth
requirement for category I merchant bankers was raised in 1995-96 to Rs. 5 crore. In 1996-97, the
SEBI (Merchant Bankers) Regulations, 1992 were amended to require the payment of fees for each
letter of offer or draft prospectus that is filed with SEBI. Part III gives further details of the registration
of merchant bankers during 1996-97.

Functions

Merchant Banks in India and around the world perform the following functions as part of their standard
operations
● Issue management: Merchant Bankers advice their clients on the issuing of different types of shares
such as equity shares, preference shares, and debentures, which are a type of debt instrument.
● Credit Syndication: The Merchant Banks provide loans to a specific set of clients for setting up or
executing various projects.
● Portfolio Counseling: Merchant Banks also help their clients in investing and managing Portfolios,
which are large investments consisting of a number of various financial instruments and investments.
● Project Counseling: Clients are advised on various procedural and financial aspects of their short or
long-term projects.
● Brokering in Stock Exchange: Many Merchant Banks act as brokers of stock exchanges. They buy
and sell shares of different types on behalf of their clients.
● Advice on Expansion and Management: Some Merchant Banks also provide advice to their
customers on the expansion and modernization of their businesses. They advise on mergers,
acquisitions and takeovers too.

● Services to Private & Public Sector Units: Merchant Bankers also offer many services to public &
private sector units like helping in raising funds, marketing of securities, foreign collaborations and
managing long-term finances.
● Management of Interests and Dividends: Merchant Banks also help their clients in the management
of interest on and dividends on their invested shares, and regarding the rate of dividend as well as their
timing.
● Leasing Services: Some Merchant Banks also help in leasing services where the lessor
allows the use of specific assets to the lessee for a certain period on behalf of rentals.

STOCK BROKERS

All stock brokers dealing in securities are registered with SEBI in terms of SEBI (Stock Brokers and
Sub Brokers) Regulation 1992. During 1996-97, 391 additional brokers were registered with SEBI
making the total registered membership to 8,867 as on March 31, 1997.

Most stockbrokers work for a brokerage firm and handle transactions for a number of individual and
institutional customers. Stockbrokers are often paid on a commission basis although compensation
methods vary by employer. Brokerage firms and broker-dealers are also sometimes referred to as
stockbrokers. This includes both full-service brokers and discount brokers, who execute trades but do
not offer individualized investing advice. Most online brokers are discount brokers, at least at their
basic levels of service, in which trades are executed for free or for a small set-price commission. Many
online brokers now offer premium-level services with higher fees.

Services Provided by Stock Brokers as Share Market Intermediary

 The brokers have the rights to buy or sell company shares. So, they allow trading stocks in the market
for a brokerage fee.
 Most stock broking companies nowadays offer online trading platforms
 It is the job of the brokers to issue the Contract Note, which contains all the details of all the stock
trading activities that been done in a day.
 The brokers carry out and validate every fund transfer that you may need to make from your bank
account to your trading account.
 Most stock broking companies either develop an in-house backend panel or hire a 3rd party company
so that you can access all your stocks’ data with ease.
 SYNDICATE MEMBERS
Syndicate members are commercial or investment banks responsible for underwriting IPO's. Syndicate
members are usually registered with SEBI or registered as brokers with BSE / NSE Stock Exchanges.

They work as intermediaries for Issuer Company and the buyers of the IPO stocks. Investors submit
their bids for IPO shares through Syndicate Members appointed by the Issuer Company. They are also
known as 'The Members of the Syndicate'. The Members of the Syndicate circulate copies of the Red
Herring Prospectus along with the bid cum application form to potential investors. They are also
responsible for accepting the bids, payments and application forms for the public issue.

After receiving the bid for IPO Shares from an investor, Syndicate Member enters bidding detail into
the electronic bidding system and generates a Transaction Registration Slip ('TRS') for each price and
demand option and gives the same to the bidder.

The Bidder can make the revision to the bid any number of times during the Bidding Period. However,
for any revision(s) in the Bid, the Bidders should use the services of the same member of the Syndicate
through whom he or she had placed the original Bid.

At the time of registering each Bid, the members of the Syndicate enters the following details of the
investor in the on-line system:

 Name of the investor.

 Investor Category - Individual, Corporate, NRI, FII, or Mutual Fund etc.
 Numbers of Equity Shares bid for.
 Bid Amount.
 Bid cum Application Form number.
 Whether Margin Amount has been paid upon submission of Bid cum Application Form.
 Depository Participant Identification Number and Client Identification Number of the beneficiary
account of the Bidder.
 The Members of Syndicate deposit all the money received from investors to the Escrow Account
opened by the Issuer Company. The Bid cum Application Form along with other supporting documents
is then send to the registrar of the issue for further processing.

REGISTRAR TO AN ISSUE AND SHARE TRANSFER AGENTS

Registrars to an issue (RTI) and share transfer agents (STA) are registered with SEBI in terms of the
SEBI (Registrar to the Issue and Share Transfer Agent) Rules and Regulations, 1993. Under these
regulations, registration commenced in 1993-94 and is granted under two categories: category I - to act
as both registrars to the issue and share transfer agent and category II - to act as either registrar to an
issue or share transfer agent. With the setting up of the depository and the expansion of the network of
depositories, the traditional work of registrars is likely to undergo a change.

An intermediary plays a notable role when it comes to certain businesses, and has made their presence
count. Intermediaries could be anyone who facilitates the supply of a service between two or more
persons. A SEBI guideline makes it mandatory to appoint RTI and STA, in relation to the management
of public offer introduced by the body corporate in general public, and to service the shareholders.

Registrar to an Issue

The role of a ‘Registrar to an issue’ would be the following:

 Collecting applications from investors with respect of an issue.

 Proper maintenance of applications, and any monies received from investors or paid to the seller of
securities, and
 Assisting the body corporate in terms of; determining the basis of allotment of securities in consultation
with the stock exchange, finalizing the list of persons entitled to allotment of securities and; processing
and dispatching allotment letters, refund orders or certificates and other related documents in respect of
the issue.

The merchant banker co-ordinates with the Registrar to ensure the proper execution of the process.
 Share Transfer Agent

‘Share transfer agent’ is an agent who, on behalf of the body corporate, maintains recorders of holders
of securities issued by such body corporate and deals with the processes of transfer and redemption of
securities.

Certain roles, as per SEBI guidelines, must only be performed by a ‘Share transfer agent’. These
activities are:

 Endorsement of certificates/for allotment/call monies.

 Transmission, consolidation, sub-division of securities.
 Dispatch of transferred securities and securities received for
transmission/consolidation/sub-division etc, directly to the investors.
 Cancel the name and certificate of the shareholder who had sold the shares of securities, and replace it
with the new shareholder.

UNDERWRITERS

Underwriters are required to register with SEBI in terms of the SEBI (Underwriters) Rules and
Regulations, 1993. In addition to underwriters registered with SEBI in terms of these regulations, all
registered merchant bankers in categories I, II and III and stockbrokers and mutual funds registered
with SEBI can function as underwriters. Part III gives further details of registration of underwriters. In
1996-97, the SEBI (Underwriters) Regulations, 1993 were amended mainly pertaining to some
procedural matters.

Underwriters play an important role at the time of listing any new companies because they agree to buy
all the securities if the share issue is not fully subscribed. They make sure that the share issue is fully
subscribed by themselves or by others. Underwriters are appointed by the companies in consultation
with merchant bankers.

Investors benefit a lot from the underwriting process as the information provided by an underwriting
agency can help them take a more informed buying decision. An underwriter who
 holds a large chunk of the securities of a particular company or is the market maker for such a
security provides the core liquidity for the security and enhances price stability and distribution.

Types of Underwriters

 Mortgage Underwriters: The most common type of underwriter is a mortgage loan underwriter.
Mortgage loans are approved based on a combination of an applicant's income, credit history, debt
ratios, and overall savings. Mortgage loan underwriters ensure that a loan applicant meets all of these
requirements, and they subsequently approve or deny a loan. Underwriters also review a property's
appraisal to ensure that it is accurate and the home is worth the purchase price and loan amount.
Mortgage loan underwriters have final approval for all mortgage loans. Loans that are not approved can
go through an appeal process, but the decision requires overwhelming evidence to be overturned.
 Insurance Underwriters: Insurance underwriters, like mortgage underwriters, review applications for
coverage and accept or reject an applicant based on risk analysis. Insurance brokers and other entities
submit insurance applications on behalf of clients, and insurance underwriters review the application
and decide whether or not to offer insurance coverage. Insurance underwriters advise on risk
management issues, determine available coverage for specific individuals, and review existing clients
for continued coverage analysis.
 Equity Underwriters: Underwriters administer the public issuance and distribution of securities in the
form of common or preferred stock from a corporation or other issuing body in the equity markets.
Perhaps the most prominent role of an equity underwriter is in the IPO process. IPO underwriters are
financial specialists who work closely with the issuing body to determine the initial offering price of
the securities, buy the securities from the issuer, and sell the securities to investors via the underwriter's
distribution network. IPO underwriters are typically investment banks that have IPO specialists on
staff. These investment banks work with a company to ensure that all regulatory requirements are
satisfied. To gauge interest in the investment, the IPO specialists contact a large network of investment
organizations such as mutual funds and insurance companies. The amount of interest received by these
large institutional investors helps an underwriter set the IPO price
 of the company's stock. The underwriter also guarantees that a
specific number of shares will be sold at that initial price and
purchase any surplus.

Debt Security Underwriters: Underwriters purchase debt securities

such as government bonds, corporate bonds, municipal bonds, or
preferred stock from the issuing body (usually a company or
government agency) to resell them for a profit. This profit is known
as the "underwriting spread." An underwriter may resell debt
securities directly to the marketplace or to dealers (who will then sell
them to other buyers). When the issuance of debt security requires
more than one underwriter, the resulting group of underwriters is
known as an underwriter syndicate.

BANKERS TO AN ISSUE

Scheduled banks acting as bankers to an issue are required to be

registered with SEBI in terms of the SEBI (Bankers to the Issue)
Rules and Regulations, 1994. These regulations lay down eligibility
criteria for bankers to an issue and require registrants to meet periodic
reporting requirements. Part III gives further details of registration of
bankers to an issue.
Bankers to the issue are financial intermediaries who are responsible
for banking-related processes like:-
 Acceptance of application and application amount
 Transfer of funds to the promoters of the company
 Managing refunds for rejected applications
 Payment of dividend
In the IPO process, the bankers play a critical role by enabling the
movement of funds and making clear funds status available to the
registrars to finalize the basis of allotment.

Notes will be continued in ppt & follow

class notes.