Primary Market in India
The Capital Market is divided into two parts – Primary Market and Secondary Market. Primary Market is also called the New/First issue market because the securities are traded here for the first time. Hence, it is sometimes referred as Primary Securities Market.
It is a place where governments and businesses list their new securities on a stock exchange for the first time. Also, the companies which are issuing securities for the first time or are already trading on the secondary market, both can issue new securities in the primary market through private placements, rights issue, bonus issue, qualified institutional placement, and private issue.
For example, Ujjivan Small Finance Bank (USFB) Limited recently raised money from the public through the primary market, and their securities are listed on the secondary market. So, the primary market is where the securities were issued for the first time and now they can be bought and sold on the secondary market.
Functions of Primary Market
There are three major functions of the primary market –
- New Issue Offering – In a new issue offering, a company issues its securities which have not been traded on any other exchange for the first time. So this market offers those securities to the general public to buy and helps the companies to raise money.
- Underwriting Services – Many times, the securities issued by the organizations remain undersubscribed, so due to this, the issue may get canceled. Now the underwriters buy the remaining securities to meet the minimum subscription requirement of SEBI, which is 90% for an Initial Public Offer (IPO).
- Distribution Services – Before a new issue, every organization has to issue a prospectus stating why they are raising money. The primary market helps the organization to distribute these documents to the investors.
How to Buy and Sell in a Primary Market
In the primary market, the organizations hire an Investment Bank to offer their securities to the public. So the organizations give the possession of the securities to the investment bank which on behalf of the organization further sells or distributes them to the public. The price of such securities is determined by the organizations based on fundamental and technical analysis. Mostly, the book value of the shares is considered the offer price. Usually, the minimum subscription amount is Rs.15000/-.
The investors can buy the securities through their Bank or Demat Account by filling a form online or offline with your broking company. Once the allotment of securities takes place, the amount gets deducted from your bank account, and then the securities will be shown in your Demat account on the day of listing. Now on the day of listing the securities on the stock exchange, these securities can only be bought and sold on the secondary market.
Types of Primary Market Issue
- Public Issue – It is one of the most common methods companies use to offer their securities to the public. When a privately held company wants to become public, they issue shares through an Initial Public Offer (IPO). Companies raise money through an IPO for meeting their financial requirements for activities related to future expansion. SEBI is the regulatory body that monitors any IPO.
- Private Placement – When a company offers securities like stocks, bonds, or any other securities to a small group of individual or institutional investors, it is called Private Placements. These have fewer regulatory stipulations, and companies can save cost and time as compared to an IPO.
- Preferential Issue – Preferential issue is one of the quickest methods used by listed and unlisted companies to raise capital. These are issued to a selected group of investors, who receive the dividends before equity shareholders, and also they get the preference over equity shareholders when the company gets dissolved.
- Qualified Institutional Placement – It is a type of private placement where listed companies issue securities to Qualified Institutional Buyers (QIB) in the form of equity shares or partly or wholly convertible debentures apart from warrants convertible into equity shares. QIB’s are those who have good financial knowledge and expertise in investing in the capital market. This placement does not involve any regulatory procedure from SEBI and is, therefore, less costly and less time-consuming. Some of the QIB’s are Mutual Funds, Pension Funds, Venture Capital Investors, etc.
- Rights Issue – In a rights issue, the company gives the existing shareholders an option to buy additional shares at a predestined price. The company does not have to bear any cost in such an issue.
- Bonus Issue – In a bonus issue, the company offers an additional allotment of shares to the existing shareholders. These are a gift to the existing shareholders. Many companies also give these shares in the place of dividends, which does not raise any new fresh capital for the company.
Regulation in the Primary Market
The primary market is regulated by the Securities and Exchange Board of India (SEBI). SEBI was established under the SEBI Act, 1992 to regulate the stock exchanges in India. Their primary functions are to protect investors’ interests and promote and regulate India’s securities market.
Primary Market reforms in India
- Disclosure of All Material Facts is made Compulsory
- Increase of Popularity to Private Placement Market
- Encouragement to Initial Public 0ffers
- Underwriting has made Optional
- Issue of Due Diligence Certificate
- Conditions regarding Application Size etc.
- Regulation of Merchant Banking
- Imposition of Compulsory Deposit on Companies making Public Issues
- Reforms as to Mutual Funds
- Vetting of Offer Document
Advantages of Primary Market
- Low Cost – The capital can be raised at a relatively low cost in the primary market.
- High Liquidity – The shares issued in the primary market through IPO/rights issue/bonus issue, provide high liquidity.
- Resource Allocation – Investors mobilize their savings into the securities traded in the primary market and this leads to savings being converted to investments.
- No Manipulation – As the price is decided by the company and investment bank, manipulation of prices is difficult.
Disadvantages of Primary Market
- Limited Information – There is very little information to the investors about the issue because unlisted companies do not have to follow the guidelines of SEBI. The main source of information is the red herring prospectus.
- High Risk – Every stock has a certain amount of degree associated with it and there is no historical data that the investors can use to analyze the stock.
- Allocation of Shares – When the issue is oversubscribed, it is very difficult for small investors to share allocation.