PRIMARY MARKET

BY:Bhumika Harsimran

MEANING
Capital markets facilitates the free trading (buying & selling) in all sceurities. It has two mutually supportive and indivisible segments. The Primary Market and the Secondary Market. In the Primary Market, companies issue new securities to raise funds. Companies interact directly with investors while in the secondary market investors interact with themselves.

FEATURES
This is the market for new long term equity 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. 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."

Private sector did not show much enthusiasm to offer capital to the public till 1980, because of the following factors: Small size of operations Availability of loan capital Fear of losing control Highly regulated environment

The decade of 80s , however, witnessed a sea change in fund mobilisation efforts of companies through public issue of debt and equity, encouraged by deregulation of capital markets and other economic reforms.

FINANCIAL INSTRUMENTS
Ordinary Shares Preference Shares Debentures Convertible Debentures Warrants Cumulative Convertible Preference Shares(CCPS) Derivatives Securities

METHODS OF NEW ISSUE

Right Issue Private Placement IPO FPO Euro Issues

GOVT SECURITIES
Both the central and state govt borrow large sums of money from the primary market by issuing dated securities (long time securities) and Treasury bills. A large part of central govts borrowing goes in financing the fiscal deficit. RBI has created a primary auction market with authorised primary dealers.

PRICING OF NEW ISSUES

Until 1992, the Controller of Capital Issues (CCI) used to decide the prices of securities to be offered to the public. CCI does not exist now and it has been replaced by SEBI. Companies can freely price share issues, subject to SEBI guidelines. In case of listed company, CURRENT MARKET PRICE method is used

ALTERNATIVE METHOD
BOOK BUILDING AND PRICE DISCOVERY It is the process of offering securities at various bid prices from investors. There is a price band with the floor price and the ceiling price. The demend for the security is assessed and the price is discovered based on bids made by investors.

It involves the following steps Planning Appointment of issue manager as book runner Issue of prospectus Appointment of intermediaries Bidding process Allocation & Allotment

Bids should remain open for atleast 5 days and the demand should be displayed at the end of every day. It enables faster issue of securities at lesser cost trading can commence quite early within 15 days from the closure of the issue. Price under this method is the price that the market can bear and is usually higher than the price under the fixed pricing method.

PROBLEMS
Withdrawl of IPOs cornering of shares Grey markets & Manipulations