Capital Market

Chapter 7
Primary Market and Secondary Market
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

FUNCTION OF PRIMARY MARKET

ORIGINATIONS
 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.
Method of FLOAT New Issue
Initial Public Offer (IPO)
Capital Market

 IPO. The first sale of stock by a company to the public. The most common
reason for a company to initiate an IPO is in order to raise more capital.

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.

Offer for Sale

Condition

 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
 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

Private Placement
 Small numbers 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.

Advantage

 Cost Effective statutory and non-statutory expenses are avoided.

 Time Effective Structure Effectiveness - flexible to suit the financial
intermediaries.
 Access Effective-issue of all sizes can be accommodated

Place Allotment
Capital Market

 Preferential allotment offers shares to selected investors at a special price not

available to the general public.

Factors to be Considered by Investors

 Promoters Credibility
 Project Details
 Product
 Financial Data
 Risk Factors
 Auditors Report
Secondary Market
The secondary market is that market in which the buying and selling of the
previously issued securities is done.

The transactions of the secondary market are generally done through the
medium of stock exchange.

The chief purpose of the secondary market is to create liquidity in securities.

If an individual has bought some security and he now wants to sell it, he can
do so through the medium of stock exchange to sell or purchase through the
medium of stock exchange requires the services of the broker presently, their
are 24 stock exchange in India.

FEATURES OF PRIMARY MARKET

■It Creates Liquidity
■It Comes After Primary Market
■It Has A Particular Place
■It Encourage New Investments
■Aids in financing the industry
■Insures safe fair Dealing( MEDIA BROADCASTING)
Function of Secondary Market

■ Provides regular information about the value of security.

■ Helps to observe prices of bonds and their interest rates.

■ Offers to investors liquidity for their assets.

Capital Market

■ Secondary markets bring together many interested parties.

■ It keeps the cost of transactions low.