2. Chapter Objectives
To understand the concept and functions of
new issue market
To explain the process of floating the shares
To know measures taken to protect the
interests of the investor
To learn the emerging trends in the primary
market
3. Concept of New Issue Market
It is a market in which the new securities or stocks are
issued.
It is also known as primary market.
The securities may be issued by a new or an existing
company.
It is used by the companies to acquire capital for the
purpose of setting up a new company for expanding
an existing company.
Investment bankers and brokers act as intermediaries
for selling the stocks to the public.
4. Functions of
New Issue Market
The three main functions of new issue market
are:
Origination: Deals with the origin of new
securities to be traded in the market.
Underwriting: Removes the element of
uncertainty in the subscription of
shares.
Distribution: Facilitates sale of securities to the
investors.
5. Parties Involved in
New Issue Market
The various parties involved in the new issue
market are as follows:
Managers to the issue: Lead managers are
appointed for managing the entire process of
issuing securities.
Registrars: They deal with the allocation of shares
to the applicants.
Underwriters: They give an assurance to the
company that they will buy the securities in case
the investors don’t buy them.
6. Parties Involved in
New Issue Market (Contd.)
Bankers: Selected banks are assigned with the
responsibility of collecting the application money
of the public issue.
Advertising agents: They promote the public
issue.
Financial institutions: They are responsible for
underwriting the securities and providing financial
assistance to the companies.
7. Placement of the Issue
It refers to the ways used by the issuer to issue
or float the shares.
The following are the ways through which the
shares can be floated:
Prospectus
Bought out deals
Private placement
Rights issue
Book building
8. Prospectus
It gives details regarding the company and
issue.
It specifies the terms and conditions on which
the shares and debentures are issued.
It helps the investor to assess the risks
involved in the issue.
9. Bought Out Deals
It is a method in which the shares are offered to
the investment banker who sells it to the public
at a later date.
Advantages:
The funds can be realised by the promoters
without any delay.
The cost of raising the funds is reduced.
It helps those entrepreneurs to raise funds who
are not familiar with the share market.
10. Private Placement
In this method, a company privately sells or places its shares
before a selected group of investors such as corporate bodies,
financial institutions and high networth individuals.
This group of investors sells the shares to the public at a later
date and at a suitable price.
This method is usually used both by the public and private
limited companies.
Equity shares, preference shares, debentures, bonds, etc. are
sold through private placement.
Some of the advantages of private placement are as follows:
Time effective Cost effective Access effective
11. Rights Issue
When a public company already listed in the
exchange issues new shares to the existing
shareholders in order to raise capital, it is
called rights issue.
The shareholders have the right to accept or
renounce the offer in favour of any person.
12. Book Building
It is a technique used for marketing the public
offer of equity shares of a company.
The likely demand for shares can be estimated
more realistically under book building.
Decision is taken by the company on the
amount of funds to be raised.
The merchant banker files a draft prospectus,
excepting issue price, with the Securities and
Exchange Board of India (SEBI).
13. Pricing of New Shares
It is a process of fixing the prices of shares.
The offer prices are fixed by the issuers and
the merchant bankers.
Pricing of shares must be done according to
the guidelines issued by SEBI.
Shares can be priced in two ways:
At premium At par value
14. Allotment of Shares
It means distributing the shares of the
company to the investors.
A company before allotting shares must first
invite the applications from the investors.
The allotment of shares is carried out on the
basis of the SEBI guidelines.
15. Investors Protection in
New Issue Market
The investors must be protected in order to
ensure smooth functioning of the new issue
market.
The following steps should be taken to protect
the interest of the investors:
1. Project appraisal: The technical and economic
feasibility of the project is evaluated so as to determine
whether or not the project should be financed.
2. Underwriting: The reputed institutions underwrite the
issue.
16. Investors Protection in
New Issue Market (Contd.)
3. Disclosures in the prospectus: All the data and information
contained in the prospectus is evaluated.
4. Clearance by the stock exchange: After the evaluation of
the prospectus it is cleared by the stock exchange.
5. Signing by board of directors: The Board of Directors of
the company sign the prospectus and it is made available to
the investors for inspection.
6. SEBI’s role: SEBI scrutinizes the offer documents carefully.
Any type of misleading information is deleted by the SEBI.
7. Redressal of investors grievances: The grievances and
complaints of the investors are addressed by the Registrar of
Companies.
17. Recent Trends in
New Issue Market
The following are the recent trends of the new
issue market:
Aggressive pricing
Poor liquidity
Low returns
Low volume
Economic slow down
18. Chapter Summary
By now, you should have:
Understood the concept of new issue market
Understood the process of floating the shares
Knowledge of the measures taken to protect
the interest of the investors
Learnt about the emerging trends in the
primary market
