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Primary market- role and functions

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  1. 1. ANJALI M M COM PRIMARY MARKET- ROLE AND FUNCTIONS SEMINAR PRESENTATION
  2. 2. 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 economic growth.  Financial system consists of; i) Financial market ii) Financial instruments iii) Financial institutions iv) Financial services
  3. 3. FINANCIAL MARKET MONEY MARKET CAPITAL MARKET PRIMARY CAPITAL MARKET SECONDARY CAPITAL MARKET Organised Market Unorganised market
  4. 4. Primary 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 Market(NIM).  This entire process involves various intermediaries like Merchant Banker, Bankers to the Issue, Underwriters, and Registrars to the Issue etc.
  5. 5. 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  Underwriting  Distribution
  6. 6.  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 the issue.
  7. 7. 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
  8. 8.  The function of origination is done by Merchant bankers who may be commercial bank, all India financial institution or private firms. II. Underwriting 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.
  9. 9. 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.  Outright purchase The underwriter in this method makes outright purchase of shares and resell them to the investors.  Consortium Method Underwriting is jointly done by group of underwriters under this method. This method is adopted for large issues.
  10. 10. 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.
  11. 11.  The underwriters in India may be classified in to 2 categories; 1)Institutional Underwriters 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.
  12. 12. III. DISTRIBUTION  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 investors.
  13. 13. Issues Public Issue(PI) Rights Issue(RI) Preferential Issue Initial Public Offer (IPO) Further Public Offer (FPO) Fresh issue Offer for Sale Fresh Issue Offer for Sale
  14. 14. 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 (IPO).  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).
  15. 15. 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).
  16. 16. PRICING ISSUES  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 price  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.
  17. 17. 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:  pre-issue management  Post issue management
  18. 18. Pre issue management functions include  It includes: 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 issue, etc. 5. Arrange press and investors conference.
  19. 19. 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 securities.
  20. 20. Registrar to the issue Registrar are the important category of intermediaries who undertake all activities connected with new issue management. Functions  They receive the share application from various collection centres.  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
  21. 21. Role of underwriter  They stand as back up supporters.  They provide an insurance against possibility of inadequate subscription  They charge a commission for underwriting from the issuing company. 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
  22. 22. 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 publicity. 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 speculator
  23. 23. 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.
  24. 24. Recent trends in primary market  Aggressive pricing  Poor liquidity  Low return  Low volume of business
  25. 25. REFERENCES 1.Financial Market and services- Gorden and Natarajan, Himalaya Publishing House, page 76- 79 2. Indian Financial System – M Y Khan 3, Financial markets and institutions Dr S Guruswami
  26. 26. THANK YOU

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