Primary and Secondary Markets

Raghavendra Senior Lecturer Dept. of MBA MITE

Primary Market ( New Issue Market)   

The main function of a financial system is the collection of savings and their distribution for investment, thereby stimulating capital formation, accelerating the process of economic growth. Primary market deals with the µnew securities¶ issued for the first time to the public. Functions as a µdirect link¶ between the companies which require funds and the investing public.

Objectives of Primary Issue 

To promote a new company To expand an existing company To diversify the production To meet the regular working requirements To capitalise the reserves


Functions of New Issue Market 

Origination, that is, Investigation, analysis and processing of new issue proposals
Is the work which begins before an issue is actually floated in the market. Many factors need to be analysed to assess the technical feasibility and its economic and financial viability. Also, The time of floating an issue Type of Issue, i.e equity, preference, debentures etc. Price  

Underwriting in terms of Guarantee that the issue would be sold irrespective of public response Distribution of securities to the investors

Mechanics of floating New Issues 

Public Issues Offer for Sale Private Placement Rights Issue

Parties involved in New Issue 

Lead Managers to the Issue Registrar to the Issue Underwriters Bankers to the Issue Advertising agents The financial institutions


Approval of the board of directors Approval of shareholders Appointment of the lead manager Due diligence by the lead manager Appointment of other intermediaries like co-managers, advisors, underwriters, bankers, brokers, and registrars Preparation of the draft prospectus Filing of the draft prospectus with SEBI Application for listing in stock exchanges Filing of the prospectus (after any modifications suggested by SEBI) with the Registrar of Companies Promotion of the issue Printing and distribution of applications Statutory announcement Collection of applications Processing of applications Determination of the liability of underwriters Finalisation of allotment Giving of demat credit and refund orders Listing of the issue

Book building is a method of offering shares to investors in which the issue price is not fixed in advance (as is done in a fixed price offer) but is determined through a bidding process.


The issue of G-secs or Treasury securities is done by the Reserve Bank of India (RBI) which serves as the merchant banker to the central and state governments. The RBI announces the auction of G-secs through a press notification and invites bids from prospective investors. Two systems of treasury auctions are widely used all over the world: (a) French auction. (b) Dutch auction In a French auction (or discriminatory price auction), successful bidders pay the actual price (yield) they bid for. In a Dutch auction successful bidders pay a uniform price which is usually the cut off price (yield).    


Banks are the largest holders of G-secs. Other investors are insurance companies, provident funds, mutual funds, trusts, primary and satellite dealers. The RBI provides the facility of Subsidiary General Ledger (SGL) account to large banks and financial institutions so that they can hold their investment in G-secs and treasury bills in the electronic book entry form. These institutions can settle their trades in securities through DVP (delivery versus payment) mechanism. Primary dealers are important intermediaries in the G-secs market. They serve as underwriters in the primary market, act as market makers in the secondary market, and enable investors to access the SGL account.  


THE PROCESS OF ISSUE OF CORPORATE SECURITIES ISSUANCE INVOLVES THE FOLLOWING STEPS : Board meeting and approval for issue at the AGM Credit rating of the issue Creation of security for the said bonds/debentures through appointment of debenture trustees Appointment of advisors and investment bankers for issue management Finalisation of the initial terms of issue Preparation of the offer document (for public issue) and information memorandum (for private placement) SEBI approval of offer document for public issue Listing agreement with stock exchanges Offer the issue to prospective investors and/or book building Acceptance of application money / advance deposits for the issue Allotment of the issue Issue of letters of allotment and certificates/depository confirmation Collect final amounts from investors Refund excess application money/interest on application money 



Money market is the market for short-term debt funds. It comprises of the call and notice money market, repo market, and the market for debt instruments such as treasury bills that have an original maturity of less than one year. The money market does not exist in a specific physical location or follow a single set of rules or post a single set of prices. Rather, it represents a web of borrowers and lenders, linked by telephones and computers, dealing with short-term debt funds.

In a repo transaction two parties exchange securities and cash with a simultaneous agreement to reverse the transaction after a given period. Thus a repo represents a collateralised short-term lending transaction. The party which lends securities (or borrows cash) is said to be doing the repo and the party which lends cash (or borrows securities) is said to be doing a reverse repo.


Treasury bills are short-term debt instruments of the central government. Treasury bills are sold through an auction process according to a calendar announced by RBI. Treasury bills are issued at a discount and redeemed at par. Most buyers of treasury bills hold them till maturity and hence the secondary market activity is limited.   

Secondary Market


Outstanding securities allotted in the primary issue are traded in the secondary market, commonly known as stock market. Growth of primary market depends on the secondary market. The health of the economy is reflected by the growth of the stock market. Considered as the barometer of the economy. 

Stock markets refer to a market place where investors can buy and sell stocks. The price at which each buying and selling transaction takes is determined by the market forces (i.e. demand and supply for a particular stock).

History of the Indian Stock Market The Origin 

One of the oldest stock markets in Asia, the Indian Stock Markets have a 200 years old history. 18th Century: East India Company was the dominant institution and by end of the century, busuness in its loan securities gained full momentum 1830's : Business on corporate stocks and shares in Bank and Cotton presses started in Bombay. Trading list by the end of 1839 got broader 1840's : Recognition from banks and merchants to about half a dozen brokers 1850's : Rapid development of commercial enterprise saw brokerage business attracting more people into the business 1860's : The number of brokers increased to 60 1860-61: The American Civil War broke out which caused a stoppage of cotton supply from United States of America; marking the beginning of the "Share Mania" in India 1862-63: The number of brokers increased to about 200 to 250 1865 :A disastrous slump began at the end of the American Civil War (as an example, Bank of Bombay Share which had touched Rs. 2850 could only be sold at Rs. 87) 



Pre-Independence Scenario Establishment of Different Stock 1874: With the rapidly developing share trading business, brokers used to Exchanges gather at a street (now well known as "Dalal Street") for the purpose of transacting business.
1875: "The Native Share and Stock Brokers¶ Association" (also known as "The Bombay Stock Exchange ") was established in Bombay 1894: Establishment of "The Ahmedabad Share and Stock Brokers' Association³ 1908: "The Calcutta Stock Exchange Association" was formed 1920: Madras witnessed boom and business at "The Madras Stock Exchange" was transacted with 100 brokers. 1923: When recession followed, number of brokers came down to 3 and the Exchange was closed down 1937: Re-organisation and set up of the Madras Stock Exchange Limited (Pvt.) Limited led by improvement in stock market activities in South India with establishment of new textile mills and plantation companies. 1947: "Delhi Stock and Share Brokers' Association Limited" and "The Delhi Stocks and Shares Exchange Limited" were established and later on merged into "The Delhi Stock Exchange Association Limited" 


Post Independence Scenario 

The depression witnessed after the Independence led to closure of a lot of exchanges in the country. Lahore Stock Exchange was closed down after the partition of India, and later on merged with the Delhi Stock Exchange. Bangalore Stock Exchange Limited was registered in 1957 and got recognition only by 1963. Most of the other Exchanges were in a miserable state till 1957 when they applied for recognition under Securities Contracts (Regulations) Act, 1956. Eight Exchanges were recognized under the Act: Bombay, Calcutta, Madras, Ahmedabad, Delhi, Hyderabad, Bangalore and Indore Stock Exchanges. Many more stock exchanges were established during 1980's, namely: Cochin Stock Exchange, Uttar Pradesh Stock Exchange (at Kanpur), Pune, Ludhiana, Gauhati, Kanara Stock Exchange Limited (at Mangalore, 1985), Magadh, Jaipur, Bhubaneswar, Saurashtra Kutch, Vadodara, Coimbatore and Meerut Stock Exchange.

Current Scenario 

As of January 2001 there were 23 stock exchanges recognised by the central government. The most important development in the Indian stock market was the establishment of the National Stock Exchange (NSE) in 1994. Within a short period it emerged as the largest stock exchange surging ahead of the Bombay Stock Exchange (BSE). With NSE and BSE becoming prominent exchanges with a nationwide presence, other regional stock exchanges lost their importance and, as of now, are either non-functional or are acting as subsidiaries of NSE and BSE.   


The NSE is a ringless, national, computerised exchange. The NSE has two segments: The Capital Market Segment and the Wholesale Debt Market Segment. Trading members in the Capital Market Segment are linked through VSATs. The trading members in the Wholesale Debt Market are linked through leased lines. The NSE has opted for an order-driven system. All trades on NSE are guaranteed by the National Securities Clearing Corporation Limited (NSCCL).    


The BSE switched from the open outcry system to the screen-based system in 1995. Jobbers play an important role on the BSE. A jobber is a broker who offers a two-way quote or a bid-ask quote. Since both jobbers and brokers feed their orders, the BSE has adopted a µquote-driven¶ system and an µorder-driven¶ system.  

Secondary market for G-SECs 

As soon as they are issued, G-secs are deemed to be listed and eligible for trading. G-secs market is the largest segment of the debt market. The NSE has a wholesale Debt Market (WDM) for high value debt transactions. Two kinds of trades occur on the WDM : Repo trades and Non-repos trades. Despite the WDM, the wholesale market in G-secs is by and large a telephone market. After a deal is done, it is reported on the Negotiated Dealing System (NDS) of NSE. The secondary market for corporate debt has been historically rather dull.     

For more information«

Sign up to vote on this title
UsefulNot useful