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Chapter 3

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Chapter 3

Uploaded by

abhicbiofficer
Copyright
© © All Rights Reserved
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Download as DOCX, PDF, TXT or read online on Scribd
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Chapter 3: Primary Market

1. Introduction to Primary Market:

 Definition: The primary market is the financial market where new securities (stocks,
bonds, etc.) are issued and sold for the first time. It is also known as the New Issue
Market (NIM).
 Purpose: The main purpose of the primary market is to facilitate capital formation by
enabling companies to raise funds directly from investors.

2. Features of the Primary Market:

 New Securities: Only new securities are issued in the primary market. These
securities are issued by companies, governments, or public sector institutions.
 Direct Fundraising: Companies directly raise funds from investors, typically through
the issuance of shares or bonds.
 No Trading: Unlike the secondary market, securities in the primary market are not
traded among investors. Once purchased, these securities can only be traded in the
secondary market.
 Regulation: The primary market is regulated to protect investors from fraud and
ensure transparency. In India, the Securities and Exchange Board of India (SEBI)
regulates the primary market.

3. Methods of Issuing Securities in the Primary Market:

 Public Issue: The company issues its shares to the general public through a
prospectus. It can be of two types:
o Initial Public Offering (IPO): When a company offers its shares to the public
for the first time.
o Follow-on Public Offering (FPO): When a company, already listed on the
stock exchange, issues additional shares to the public.
 Private Placement: Securities are sold to a select group of investors and not to the
public. This method is quicker and less expensive compared to a public issue.
 Rights Issue: Existing shareholders are given the right to purchase additional shares
at a discounted price, usually in proportion to their existing holdings.
 Preferential Allotment: Shares are issued to a selected group of people, usually at a
price lower than the market price, but higher than the face value.

4. Role of Intermediaries in the Primary Market:

 Underwriters: Financial institutions that guarantee the purchase of all or part of the
new issue. If the issue is not fully subscribed by the public, the underwriters buy the
remaining shares.
 Merchant Bankers: Assist companies in issuing new securities, including
preparation of the prospectus, compliance with regulatory requirements, and
marketing of the issue.
 Registrars: Manage the process of share application and allotment, ensuring that
investors receive their shares.
 Brokers: Facilitate the buying and selling of securities for investors.
5. Importance of the Primary Market:

 Capital Formation: Helps in raising capital for long-term projects, leading to


economic growth.
 Investment Opportunities: Provides investors with the opportunity to invest in new
and growing companies.
 Resource Allocation: Efficiently allocates resources to the most productive uses,
supporting economic development.
 Price Discovery: The process of issuing securities helps in determining the fair
market price for new securities.

6. Challenges in the Primary Market:

 Regulatory Compliance: Companies must comply with stringent regulations, which


can be time-consuming and costly.
 Market Conditions: Poor market conditions can affect investor sentiment and the
success of new issues.
 High Costs: The process of issuing new securities involves significant costs,
including underwriting, legal, and marketing expenses.
 Information Asymmetry: Investors may not have access to all relevant information,
leading to misinformed investment decisions.

7. Recent Trends in the Primary Market:

 Technology Integration: Use of technology for online IPO applications and faster
processing.
 Green Bonds: Issuance of environmentally sustainable bonds to finance green
projects.
 Increased Retail Participation: Efforts to encourage retail investors to participate in
primary market issues.

These notes cover the fundamental aspects of the primary market, its features, methods of
issuing securities, role of intermediaries, importance, challenges, and recent trends. Let me
know if you need further details or specific examples for any section.

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