PRIMARY MARKET

CAPITAL MARKET
• The market where investment instruments like bonds and equities are traded
is known as the capital market.
• The primal role of this market is to make investment from investors who have
surplus funds to the ones who are running a deficit.
• The capital market offers both long term and Short term funds.
• The different types of financial instruments that are traded in the capital
markets are:
• > equity instruments
• > insurance instruments,
• > foreign exchange instruments,
• > hybrid instruments
CAPITAL MARKET
INTRODUCTION-PRIMARY MARKET
• Also known as “New Issue Market”
• Success of the capital market depends on primary market
• Is the market for new issuers
• Can be directly bought from the shareholders
• Small and medium scale business, enter the primary market to raise
money from the public
• Accelerates the process of capital formation in a country's economy
FUNCTIONS OF PRIMARY MARKET
ORIGINATION
• It refers to the work of investigation, analysis and processing of new
project proposals.
• It starts before an issue is actually floated in the market.
• This function is done by merchant bankers who may be commercial
banks, all India financial institutions or private firms.
• At present, financial institutions and private firms also perform
this service.
UNDERWRITING
• It is an agreement whereby the underwriter promises to subscribe to a
specified number of shares or debentures or a specified amount of
stock in the event of public not subscribing to the issue.
• If a part of share issues remains unsold, the underwriter will buy
the shares or else he is not liable.
• Thus, underwriting is a guarantee for marketability of shares. There are
two types of underwriters in India - Institutional ( LIC, UTI, IDBI, ICICI)
and Non-institutional are brokers.
DISTRIBUTION
• It is the function of sale of securities to ultimate investors.
• This service is performed by brokers and agents who maintain a regular
and direct contact with the ultimate investors.
METHODS OF FLOATING NEW ISSUE
• Four methods to FLOAT issues in Primary Market
o Initial Public Offer (IPO),
o Rights Issue,
o Offer For Sale.
o Private Placement.
ISSUE THROUGH PROSPECTUS/PUBLIC ISSUE
• Under this methods, the issuing company directly offers to the general
public/institutions a fixed no. of shares at a stated price through a
document called prospectus.

• The Prospectus should contain:

1. Name of the company.
2. Address of the registered office of the company.
3. Existing and proposed activities.
4. Location of the company.
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5. Name of the directors
6. Authorized and issued capital to the public.
7. Dates of opening and closing the subscription.
8. Minimum subscription.
9. Names of the brokers/lead mangers/ merchant bankers/ registrar to
the issue.
10. Floor price and cap price of the share.
11. A statement by the company that it will apply to the stock exchanges
for quotations of its shares.
RIGHT ISSUE
• According to the section 81 of the companies Act 1956, if a public
company wants to increase its subscribed capital by allotment of further
share after two years from the date of its formation or one year from
the date of its allotment, whichever is earlier, should offer share first to
its existing shareholders in proportion to the share held by them at the
time of offer.
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CONDITIONS:
• A notice should be issued to specify the number of shares issued
• The time given to accept should not be less than 15 days
• Right of the share holders to renounce the offer in favor of others
OFFER FOR SALE
• Promoter places his shares with an investment banker (bought out
dealer or sponsor) who offer it to the public at a later date.
• Promoter Investment Banker Public.
• Hold on period is 70 days to more than a year
• Bought out dealer decides the price after analyzing the viability, the
gestation period, promoters’ background and future projections.
• Bought out dealer sheds the shares at a premium to the public
Investmen
promoter public
t banker
PRIVATE PLACEMENT
• Small number of financial intermediaries (like Unit Trust of India, mutual
funds, insurance companies, merchant banking subsidiaries of
commercial banks) purchase the shares and sell them to investors at a
later date at a suitable price.

ADVANTAGES:
1. Cost Effective - statutory and non-statutory expenses are avoided.
2. Time Effective Structure Effectiveness - flexible to suit the financial
intermediaries
3. Access Effective - issue of all sizes can be accommodated
PLAYERS IN THE NEW ISSUE MARKET
• Lead managers – They are appointed by the issuing company to manage the
public issue.
DUTIES:
1. Drafting Prospectus.
2. Preparing the budget related to issues.
3. Suggesting the appropriate timings of the public issues.
4. Assisting in the marketing of public issues.
5. Advising the company in the appointment of the Registrar of the issue,
underwriter, brokers, bankers to the issue, advertising agents, etc.
6. Directing the various agencies involved in the public issues.
PLAYERS IN THE NEW ISSUE MARKET
• Registrar to issue – Registrars are the important category of
intermediaries who undertake all activities connected with New Issue
Management.
• DUTIES:
1. They receive the share application from various collection centers.
2. They recommend the basis of allotment in consultation with the
regional stock exchanges.
3. They arrange for the dispatching of shares.
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1. They handover the details of the share allocation and other related
registers to the company.
2. Usually registrar to the issue retain records atleast for a period of
six months from the last date of dispatch of letters of allotment to
enable the investors to approach the registrars for redressal of their
complaints.
UNDERWRITERS
• Underwriting is a contract by means of which a person gives an assurance to
the issuer to the effect that the former would subscribe to the securities
offered in the event of non subscription by the person to whom they are
offered. The person who assures is called an underwriter.
DUTIES:
1. They Stand as back up supporters.
2. They provide an insurance against the possibility of in adequate
subscription.
3. They either may be Banks or FIs or may be brokers and approved
investment companies.
4. They charge a commission for underwriting from the issuing
company.
BANKER TO THE ISSUE
• They are responsible for collecting the application money along with the
application form.
• The banker to the issue generally charges commission besides the
brokerage, if any. As specified by the central government there are
numbers of collections centre and the banker to the issue should have
branches in the in these collection centers.
ADVERTISING AGENTS
• Advertising plays a key role in promoting public issues.
• This agency is given the responsibility to the issue on the suitable
media.
• These Media Includes Newspaper/magazines/hoardings/press
releases.
• The Financial institutions - Financial Institutions generally underwrite
the issue and lend term loans to the companies.
• Hence they normally go through the draft prospectus, study
the proposed programme for public issue and approve them.
BOOK BUILDING
• Book Building is actually a price discovery method. In this method, the company doesn't fix
up a particular price for the shares, but instead gives a price range, e.g. Rs 80-100.

• When bidding for the shares, investors have to decide at which price they would like to
bid for the shares, for e.g. Rs 80, Rs 90 or Rs 100. They can bid for the shares at any price
within this range.
• Based on the demand and supply of the shares, the final price is fixed. The lowest price (Rs
80) is known as the floor price and the highest price (Rs 100) is known as cap price.

• The price at which the shares are allotted is known as cut off price. The entire process
begins with the selection of the lead manager, an investment banker whose job is to bring
the issue to the public
PROCESS INVOLVES IN BOOK BULDING
1. The Issuer who is planning an offer nominates lead merchant
banker(s) as book runners.
2. The Issuer specifies the number of securities to be issued and the
price band for the bids.
3. The Issuer also appoints syndicate members with whom orders are to
be placed by the investors.
4. The syndicate members input the orders into an electronic book. This
process is called bidding and is similar to open auction.
5. The book normally remains open for a period of 5 days.
6. Bids have to be entered within the specified price band.
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1. Bids can be revised by the bidders before the book closes.
2. On the close of the book building period, the book runners evaluate
the bids on the basis of the demand at various price levels.
3. The book runners and the Issuer decide the final price at which the
securities shall be issued.
4. Generally, the number of shares are fixed, the issue size gets frozen
based on the final price per share.
5. Allocation of securities is made to the successful bidders. The rest get
refund orders.
PRICING OF NEW ISSUE
• According to the guidelines issued by the SEBI and controller of capital
issues Act 1947 the pricing of the issue is carried on.
GUIDELINES FOR ISSUE AT PREMIUM:
1. First issue of new companies set up by existing companies having a
track record.
2. First issue of existing privately/closely held or other existing unlisted
companies with three year track record of consistence profitability.
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1. First Public issue by existing privately/ closely held or other
existing unlisted companies without three year track record but
promoted by existing companies with a five year track record.
2. Existing privately/closely held or other existing unlisted company with
three year track record of consistent profitability, seeking
disinvestment by offers to public without issuing fresh capital.
3. Public issue by existing listed companies with the last three years of
dividend paying track record.
PRICING OF NEW ISSUE
GUIDELINES FOR NOT ISSUE AT PREMIUM:
1. First public issue by existing private, closely held or other existing
unlisted companies without three year track record of consistent
profitability.
2. Existing private/closing held and other unlisted companies without
three year track record of consistent profitability seeking
disinvestment offer to public without issuing fresh capital.