Primary Market

LAJPAT RAI COLLEGE
Affiliated to C.C.S. University, Meerut
PRIMARY CAPITAL MARKET
Submitted by :
Submitted to :
Kapil Kumar
Mr. Shyam Pandey
MCOM IV SEMESTER
Introduction – primary market
The primary market is the part of

the capital market, that deal with
the issuance and sale of equity-
backed securities to investors
directly by the issuer. Investors
buy securities that were never
traded before.
Difference between primary market
and secondary market
Basics Primary Market Secondary Market
Securities Only new securities are subscribed Existing securities are traded
Trading Between investor and issuer Between investor and another

investor via securities firm
Cash flow From investor to issuer From investor to investor
Purpose Issuer raise funds to fulfill long term Investor are able to generate capital
investment requirement. Such as gain or receive dividends.
expanding business operation.
Functions of primary market
Functions of primary market
Origination -Origination refers to the investigation and analysis and processing of
new issue proposals. One aspect is the preliminary investigation, entailing a
careful study of the technical, economic, financial and legal aspects of the
issuer to ensure that the issue is a sound one. To improve the quality of the
capital issue, the sponsor also renders services of an advisory natures such as
type and price, timing and magnitude of issues, methods of flotation and so on.
Underwriting services - Underwriting is an essential aspect while offering a new

issue. An underwriter’s role in a primary marketplace includes purchasing unsold
shares if it cannot manage to sell the required number of shares to the public. A
financial institution may act as an underwriter, earning a commission on
underwriting. Investors rely on underwriters for determining whether undertaking
the risk would be worth its returns. It may so thus happen that an underwriter
ends up buying all the IPO issue, and subsequently selling it to investors.
• Distribution of new issue - The sale of new securities to the
ultimate investors is known as distribution. A new issue is also
distributed in a primary marketing sphere. Such distribution is
initiated with a new prospectus issue. It invites the public at large
to buy a new issue and provides detailed information on the
company, issue, and involved underwriters
Capital market investment institutions
• National level institutions: A wide variety of financial institutions have
been set up at the national level. These institutions cater to the diverse
financial requirements of the entrepreneurs. They include development
banks like IDBI, SIDBI, FIs like IFCI, IIBI; TFCI and Insurance Companies
like LIC, GIC, UTI; etc.
• State level institutions: Several financial institutions have been set up at
the State level which supplement the financial assistance provided by the
all India institutions. They act as a catalyst for promotion of investment
and industrial development in the respective States. They broadly consist
of ‘State financial corporations’ and ‘State industrial development
corporations’.
• Qualified institutional buyers: QIBs are investment institutions who buy
the shares of a company on a large scale. Qualified Institutional Buyers are
those Institutional investors who are generally perceived to possess
expertise and the financial proficiency to evaluate and to invest in the
Capital Markets.
• Foreign portfolio investors: Foreign Portfolio Investor (FPI) means a person who
satisfies the eligibility criteria prescribed under SEBI (Foreign Portfolio Investors)
Regulations, 2014 and has been registered under Chapter II of these regulations,
which shall be deemed to be an intermediary in terms of the provisions of the SEBI
Act, 1992. All existing Foreign Institutional Investors (FIIs) and QFIs are to be merged
into one category called FPI.
• Angel fund: An angel investor or angel (also known as a business angel, informal
investor, angel funder, private investor, or seed investor) is an affluent individual who
provides capital for a business start-up, usually in exchange for convertible debt or
ownership equity. A small but increasing number of angel investors invest online
through equity crowd funding or organize themselves into angel groups or
angel networks to share research and pool their investment capital, as well as to
provide advice to their portfolio companies.
• High net worth individuals: A high net worth individual or HNI is a category of investor
in the Indian stock market. Although there are no official criteria that an investor must
meet to be classified as a HNI, individuals with a net worth exceeding ₹5 crore are
widely considered to be in this category. As far as Initial Public Offerings (IPOs) are
concerned, the Securities and Exchange Board of India (SEBI) categorizes individual
investors who invest more than ₹2 lakhs in a public issue as Non-Institutional Investors
(NIIs), which includes HNIs
• Venture capital: Venture Capital is one of the innovative financing resource for a
company in which the promoter has to give up some level of ownership and control of
business in exchange for capital for a limited period, say, 3-5 years. Venture Capital is
generally equity investments made by Venture Capital funds, at an early stage in
privately held companies, having potential to provide a high rate of return on their
investments. It is a resource for supporting innovation, knowledge based ideas and
technology and human capital intensive enterprises. In India, software sector has been
attracting a lot of venture finance. Besides media, health and pharmaceuticals, agri-
business and retailing are the other areas that are favored by a lot of venture
companies.
• Pension funds: Pension Fund means a fund established by an employer to facilitate
and organize the investment of employees’ retirement funds which is contributed by
the employer and employees. The pension fund is a common asset pool meant to
generate stable growth over the long term, and provide pensions for employees when
they reach the end of their working years and commence retirement. Pension funds
are commonly run by some sort of financial intermediary for the company and its
employees like N.P.S. scheme is managed by UTIAMC (Retirement Solutions),
although some larger corporations operate their pension funds in-house. Pension
funds control relatively large amounts of capital and represent the largest
institutional investors in many nations.
Capital market instruments
• Equity shares: Equity shares are long-term financing sources for any company.
These shares are issued to the general public and are non-redeemable in nature.
Investors in such shares hold the right to vote, share profits and claim assets of a
company. The value in case of equity shares can be expressed in various terms
like par value, face value, book value and so on. Equity shares have the right to
share the profits of the company in the form of dividend (cash) and bonus shares.
However, even equity shareholders cannot demand declaration of dividend by the
company which is left to the discretion of the Board of Directors.
• Equity shares with differential voting rights: Equity shares with differential
voting rights (DVRs) are the kind of shares issued by a company that offers
shareholders varying levels of the voting power. This means that some
shareholders have more voting power than others and this can significantly
impact the control and decision-making capabilities of the company. In India, the
Securities and Exchange Board of India (SEBI) first introduced the concept of
DVRs in 2000. However, they are not so popular in India.
• Preference shares: the preference shares are those shares which have rights of
preference over equity shares in the case of distribution of dividend and distribution of
surplus in the case of winding up. They generally carry a fixed rate of dividend and
redeemable after specific period of time. Preference shares carry preferential rights
over equity shares with respect to : (a) payment of dividend, either as a fixed
amount or an amount calculated at a fixed rate, which may either be free
of or subject to income-tax; and (b) repayment, in the case of a winding up
or repayment of capital, of the amount of the share capital paid- up or
deemed to have been paid-up, whether or not, there is a preferential right
to the payment of any fixed premium or premium on any fixed scale,
specified in the memorandum or articles of the company
• Debentures: Debenture is a document evidencing a debt or
acknowledging it and any document which fulfils either of these conditions
is a debenture. Debentures have a fixed rate of interest, and such interest
amount is payable yearly or half-yearly. It usually creates a charge on the
assets of the company. And the company has to pay the interest due on
the debentures whether the company has earned profit or incurred a loss.
The interes paid on the debentures can be claimed as deduction under
the income tax Act for the taxation purposes. Debentures can be classified
• Foreign currency exchangeable bonds: A Foreign Currency Exchangeable
Bond refers to a bond expressed in foreign currency by an Indian company, the
principal and interest in respect of which is payable in foreign currency.
The key feature of these bonds is that they are issued by an Issuing Company,
subscribed by a person who is a resident outside India, and are exchangeable
into equity shares of another company which is called the Offered Company.
• Indian depository receipt: An Indian Depository Receipt is an instrument
denominated in Indian Rupee in the form of a depository receipt
created by a domestic depository (Custodian of securities registered
with SEBI) against the underlying equity of issuing company to enable
foreign companies to raise funds from Indian Securities Markets. In an
IDR, foreign companies would issue shares, to a domestic (Indian)
depository, which would in turn issue depository receipts to investors in
India. The actual shares underlying the IDRs would be held by an
Overseas Custodian, which shall authorize the Indian depository to
issue the IDRs. To that extent, IDRs are derivative instruments because
they derive their value from the underlying shares.
• Derivatives: A derivative is a financial instrument that derives its value from an
underlying asset. This underlying asset can be stocks, bonds, currency,
commodities, metals and even intangible, assets like stock indices. Derivatives can
be of different types like futures, options, swaps, caps, floor, collars etc. The most
popular derivative instruments are futures and options.
• Warrants: Warrant means an option issued by a company whereby the
buyer is granted the right to purchase a number of shares (usually one) of
its equity share capital at a given exercise price during a given period. The
holder of a warrant has the right but not the obligation to convert them
into equity shares. Thus in the true sense, a warrant signifies optional
conversion.
Aspects of primary market
• Book building : Book building means a process undertaken to elicit demand and to
assess the price for determination of the quantum or value of specified securities
or Indian Depository Receipts, as the case may be. The book building process in
India is very transparent. All investors including small investors can see
demand for the shares of the company at various price points on the
website of the Exchange before applying. According to this method,
share prices are determines on the basis of real demand for the shares at
various price levels in the market.
• Green shoe option: Green Shoe Option means an option of allocating
shares in excess of the shares included in the public issue and operating a
post-listing price stabilizing mechanism in accordance with the provisions
of Regulation 45 of SEBI (ICDR) Regulations, 2009.

Primary Market

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LAJPAT RAI COLLEGE

Affiliated to C.C.S. University, Meerut

PRIMARY CAPITAL MARKET

The primary market is the part of

Trading Between investor and issuer Between investor and another

Cash flow From investor to issuer From investor to investor

Underwriting services - Underwriting is an essential aspect while offering a new

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