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What is Primary Market

What is Primary Market

Deepak Sharma 22 Aug 2020

Primary Market

—  The primary market refers to the market where equity or debt funds are raised by companies, institutions, and Government from ‘outside’ investors through an offer of securities.

—  It is also called the “new issue market” since the securities are issued for the first time by the company to the investors

—  In Equity issues of shares, it leads to the capital formation as new additional shares are issued to the investors as well as leads to equity dilution of promoters and early investors.

What are the Functions of Primary Market?

—  Wider Investor Participation:  Companies move away from known sources of funding that may be restrictive in terms of the amount available or the terms at which capital may be made available. They may be able to raise the funds they require at much more competitive terms.

—  Foster Competitive Processes: Securities are issued for public subscription, at a price that is determined by the demand and supply conditions in the market and the perceived fundamental strengths of the issuer to honor their commitments.

—  Diversify Ownership: The stakes of existing shareholders reduce and the ownership of the business becomes more broad-based and diversified. This enables the separation of ownership and management of an enterprise, where professional managers will be brought in to work in the broad interest of a large group of diverse shareholders.

—  Better Disclosures: A business that seeks to raise capital from new investors. has to meet higher standards of disclosure and transparency.

—  Evaluation by Investors: An issuer that raises money from outside investors will be open for evaluation by a large number of prospective investors, who would assess the information provided. Publicly disclosed financial statements, reports, prospectus, and other information also come up for scrutiny and discussion by analysts, researchers, activists, and media apart from investors.

—  Exit for Early Investors: Primary markets provide an exit option for promoters, private, and inside investors who subscribed to the initial capital and early requirements for the capital of a business. Such investors will be able to realize the value of the investment made by offering their shares, fully or partly, when the company makes an issue in the primary market as the security needs to be compulsory issue security in the secondary market.

—  Liquidity for Securities: Primary market issue distributes the securities to a large number of investors and it is mandatory to list a public issue of securities in the stock exchange. This opens up the secondary market where the securities can be bought and sold between investors, without impacting the capital raised and used by the business.

—  Regulatory Supervision: The issuing process, intermediaries involved, the disclosure norms, and every step of the primary issue process is subject to regulatory provisions and supervision. The objective is to protect the interest of investors who contribute capital to a business. 

What are the types of Issues?

Issuance of capital in the primary market can be classified under four broad heads:

—  Public issue: Securities are issued to the members of the public and anyone eligible to invest can participate in the issue. This is primarily a retail issue of securities.

—  Private placement: Securities are issued to a select set of investors who can bid and purchase the securities on offer. This is primarily a wholesale issue of securities to institutional investors by an unlisted company.

—  Preferential issue: A private placement of securities by a listed company is called a preferential issue. Securities are issued to an identified set of investors, on preferential terms, along with or independent of a public issue.

—  Qualified Institutional Placement (QIP): A private placement of securities by a listed company to a set of institutional investors termed as qualified institutional buyers. Qualified institutional buyers include institutions such as mutual funds.

—  Rights and Bonus issues: Securities are issued to existing investors as on a specific cut-off date, enabling them to buy more securities at a specific price (rights) or get an allotment of additional shares without any consideration (bonus).

Who can be an Issuer of Securities?

—  An issuer in the primary market has to be eligible to raise capital under the provisions of the law that governs it.

—  The issuer has to meet the eligibility conditions specified by the concerned regulator before making an issue.

—  The primary responsibility to meet the obligations associated with the security being issued rests on the issuer.

Issue of securities in the primary market may be made by the following entities:

—  Central, State, and Local Governments: They raise funds to meet their fiscal deficits by issuing bonds called government securities (G-secs) and treasury bills. The central government can issue Treasury bills for different maturities such as 91 days, 182 days, and 364 days.

—  Public Sector Units: These are companies registered under the Companies Act, 2013, in which the government is the majority shareholder. These companies may make an issue of shares where the government offers a portion of the shares held by them to the public. This is called disinvestment.

—  Private Sector Companies: They raise equity and debt funds from the markets by issuing securities. They may issue ordinary equity shares, preference shares and convertible instruments. For this category of issuers, the securities market is the principal source of funds.

—  Banks, Financial Institutions and Non-banking Finance Companies: They raise funds by issuing equity shares, preference shares, bonds, convertible bonds, commercial paper, certificates of deposits and securitized paper. However, financial institutions and NBFCs raise short term and long-term capital through the issue of securities.

—  Mutual Funds: They make a new fund offer (NFO) of units in the domestic markets to raise funds for a defined scheme. The funds may be raised for a specific period after which the current value of the units will be returned to the investors (Closed-end fund) or it may be for perpetuity with investors being given the option to exit at any time at the prevailing value of the units.

What are the regulations for issuing securities?

—  The primary markets are regulated by the Companies Act, 2013, Securities and Contract Regulation Act, 1956, SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009 for the issue of equity and debt securities by companies.

The provisions of these Acts regulate the following with respect to public issues:

—  Eligibility to make a public issue

—  Information to be provided to the public and regulators

—  Reservation for different categories of investors

—  Methods of making the offer to investors

—  Timelines for the issue process

—  Usage of funds raised in issues

—  Continued involvement and accountability of promoters and other inside investors in case of equity issuances.

—  Provision for investors to continuously evaluate the investment and execute investment and exit decisions.

—  The securities issued through public issue need to compulsory list the security in the secondary market.

 

 

 

 

 

 

 

 

 

 

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