PRIMARY MARKET- ROLE AND FUNCTIONS
The main function of financial system is the collection of savings and
their distribution for industrial investment and there by stimulating
the capital formation and, to that extent accelerating the process of
Financial system consists of;
i) Financial market
ii) Financial instruments
iii) Financial institutions
iv) Financial services
MONEY MARKET CAPITAL MARKET
PRIMARY CAPITAL MARKET SECONDARY CAPITAL
Organised Market Unorganised market
The primary market need not have a physical structure or
form, All the agencies which provide the facilities and
participate in the process of selling new issue to investors
constitute a new issue market
The primary market deals with those securities which are issued
to the public for the first time.
It is a market for new issue, so it is also called as New Issue
This entire process involves various intermediaries like Merchant
Banker, Bankers to the Issue, Underwriters, and Registrars to the
Functions of primary market
The main function of primary market is to facilitate transfer of
resources from savers to users.
The main functions are:
Origination :It refers to the work of Investigation
analysis and processing of new project proposal.
Therefore origination is the origin of new issue.
Origination starts before an issue floated in the market.
There are 2 aspects of this function:
1. A careful study of technical financial and economic
viability to ensure soundness of the project. This is a
preliminary investigation undertaken by the sponsors of
2. Advisory services which improve quality of capital
issue and ensure its success.
The advisory services include:
a) Type of issue
b) Magnitude of issue
c)Time of floating an issue
d)Pricing of an issue
e)Methods of issue
f)Techniques of selling the securities
The function of origination is done by Merchant
bankers who may be commercial bank, all India
financial institution or private firms.
It is an agreement between the underwriter and the issuer
where by the underwriter promises to subscribe to a
specified number of securities in the event public not
subscribing to it.
Methods of underwriting :
Standing behind the issue
Under this method the underwriter guarantees the sale of
specified number of shares within a specified period. If the
public do not subscribe to the specified amount of issue ,
the underwriter buy the balance in the issue.
The underwriter in this method makes outright purchase of
shares and resell them to the investors.
Underwriting is jointly done by group of underwriters
under this method. This method is adopted for large issues.
Advantages of Underwriting
The issuing company relieved from the risk of finding
buyers for the issue offered to the public. The company
is assured of raising adequate capital.
The company is assured of getting minimum
subscription within the stipulated time, a statutory
obligation to be fulfilled by the issuing company
Underwriters undertake the burden of highly
specialised function of distributing securities.
Public confidence on the issue enhances when
underwritten by reputed underwriters.
The underwriters in India may be classified in to 2
2) Non-institutional underwriters
Institutional underwriters include;
Life Insurance corporation of India, UTI , IDBI, ICICI,
commercial bank and general insurance companies.
Non institutional underwriters are brokers.
It is the sale of securities to the ultimate investors.
This service is performed by brokers and agents who
maintain regular and direct contact with the ultimate
Fresh issue Offer for Sale Fresh Issue
Offer for Sale
Types of issue:
Public Issue: When a company raises funds by selling (issuing) its
shares (or debenture / bonds) to the public through issue of offer
document (prospectus), it is called a public issue.
Initial Public Offering: When a (unlisted) company makes a
public issue for the first time and gets its shares listed on stock
exchange, the public issue is called as initial public offering
Further Public Offering: When a listed company makes
another public issue to raise capital through an offer document,
it is called further public / follow-on offering (FPO).
Right Issue: When an existing company wants to raise
additional capital, securities are first offered to the existing
shareholders on a pro-rata basis.
Preferential Issue: This is an issue of shares by listed
companies to a selected group of persons (U/S 81 of
Companies Act 1956).
Fixed Price Offer: An issuer company is allowed to
freely price the issue. The basis of issue is disclosed in the
offer document where the issuer discloses in detail about
the qualitative and quantitative factors justifying the issue
Pricing through book building ;
where the company and the Lead Manager stipulate a
floor price or a price band and leave it to market forces to
determine the final price.
Free pricing : Fixation of price on the basis of market
forces and it tend to be fair price of shares. It would boost
up govt policies regarding globalization and
liberalisation.But sometimes the price may be exorbitanly
high if companies are allowed to fix price freely.
Players in the new issue market
Merchant Bankers- They are appointed by the issuing company
to manage the public issue.
Role of merchant bankers in new issue market
The issue functions can be classified under 2 heads:
Post issue management
Pre issue management functions include
1. To obtain SEBI,s approval for the issue.
2. To arrange underwriting for the proposed issue.
3. To draft and finalize prospectus.
4. Selection of registrar to issue. advertising agencies, brokers to
5. Arrange press and investors conference.
Post issue management
Collection of application money.
Send complaints report to SEBI
Obtain approval on the basis of allotment from stock exchange.
Publish copy of basis of allotment in two national dailies.
Confirm the completion of listing formalities.
To make arrangement to obtain permission for dealing in
Registrar to the issue
Registrar are the important category of intermediaries who
undertake all activities connected with new issue
They receive the share application from various
They recommend the basis of allotment in consultation
with the regional stock exchanges.
They arrange for despatching of shares.
They handover the details of the share allocation and
other related registers to the company
Role of underwriter
They stand as back up supporters.
They provide an insurance against possibility of inadequate
They charge a commission for underwriting from the issuing
Role of Bankers to issue
They are responsible for collecting the application money
along with the application form.
The bankers to the issue generally charges commission
besides the brokerage if any
Brokers to an issue
Responsible for procuring the subscription to the issue from
the prospective investors. Functions include:
1. Underwrite and markets the new issue by giving pre
2. After receiving license from SEBI they can act as
merchant bankers , lead managers, etc.
3. Brokers can act as a principal, as an agent and as a
Role of Primary Market
1. Primary market is a medium for raising fresh capital in the
form of debt and equity.
2. It mops up resources from the public and make them available
for meeting the long term capital requirement of corporate
business and industry.
3. Primary market brings together two constituent of market
namely investors and seekers of capital.
4. The capital formation take place in Primary market.
Recent trends in primary market
Low volume of business
1.Financial Market and services- Gorden and
Natarajan, Himalaya Publishing House, page 76-
2. Indian Financial System – M Y Khan
3, Financial markets and institutions Dr S