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A Study of Perception of Retail Investors of Surat City about Factors affecting Primary

Market Mechanism in India

- Mrunal Joshi1, Divya Chawla2


The primary market is that part of the capital markets that deals with the issue of new securities. Companies, governments or public sector
institutions can obtain funding through the sale of a new stock or bond issue. With the reforms of industrial policy, public sector, financial
sector and the many developments in the Indian money market and capital market, primary market which has become an important gateway
for the retail investors to make their investment, is also influenced by various factors. Hence, this study has made an attempt to find out the
perception of retail investors about factors influencing Indian primary. This study is based on primary data collected through a well designed
structured questionnaire from 175 retail investors from Surat City. In this study it has been observed that the most important factors while
investing in Primary Market according to Investors are Companys Goodwill, Current Financial Position of company, Corporate Profile,
Government holding in company and Promoters stake in the company. While the least important factors are Size of the IPO Issued, Disclosure
by market participants and Minimum Investment amount required. The study reveals that retail investors opinion is similar on majority
aspects relevant to IPOs. Saving ratio of investors is only demographic factor affecting perception of retail investors about various factors
affecting primary market. SEBI is already alert about few issues immerging in primary market though few problems related to IPOs were
unfolded during the study. Major problems out of the mentioned are Refund related Problems, Delay in allotment of shares and Lack of

Keywords: - Investment decision, Primary Market, Retail Investors.

Assistant Professor, BRCM College of Business Administration, Surat, Gujarat. Contact No. 9824434320, email add:
Management Student, DBIM, Veer Narmad South Gujarat University Surat, Gujarat

There is a flourishing market for public issues in India. Public issues are made by both private and public sector companies. Unlike
many other countries, where issues are privately placed, public issues in India are directly marketed to retail investors all over the country. An
IPO is the first sale of stock by a private company to the public and the consequential listing on a stock exchange. Initial public offering (IPO)
which includes using the stock exchange to sell the companys shares to public investors is also one of the main equity financing sources Going
public allows firms to raise and access funds necessary to accelerate growth in order to achieve market leadership. In addition, the liquidity
created by going public provides initial inventors, owners, founders and (or) shareholders with an opportunity to collect on their investment.

Indian Financial Market

Development of an economy is based on sound financial system. Its a well-known fact that finance is the lifeline for any business
enterprise. The efficient functioning and success of business operations depend upon the availability of adequate fund at the right time and
required amount of funds as and when required. Financial Market is divided into Money market and Capital market. Money market refers to
open market operations in highly marketable short-term debt instruments and the capital market deals in long-term debt issues and stocks.
Capital market is the backbone of any countrys economy. It facilitates conversion of savings to investments. Capital market can be classified
as Primary market and Secondary market

The fresh issue of securities takes place in primary markets and trading among investors takes place in secondary markets. Primary
market is also known as new issues market. Equity investors first enter capital markets though investment in primary markets. Thus, whenever
a company has to raise funds, it approaches the primary market with one of the three options: Public Issue, Rights Issue and Private Placement.
When the company issues shares to the general public, it can be classified into two ways.

Initial Public Offering (IPO): When an unlisted company makes a fresh issue of its shares to the public. In this way a company also
gets listed in the stock exchange. Further Issue: When an already listed company makes a fresh issue to the public.

Rights Issue: When a listed company offers new shares to its existing shareholders generally in proportion to the number of securities
already held by the shareholders.

Preferential Issue: When a listed company offers new shares to a selected set of people. For this, the company has to fulfill certain
criteria of SEBI.

Importance of primary market for the growth of economy

Theoretical links between stock market development and economic growth may be analyzed from the microeconomic or
macroeconomic perspective. In the first approach, the research subject is individual companies financing decisions, e.g. the decision to sell
shares to investors and become public instead of bank borrowing and their impact on firms financial standings. Most common argument in
favor of stock issuance is minimizing WACC (weighted average cost of capital) by creating optimal financing structure combining debt and
equity. Costs linked with higher financial leverage (higher share of debt in total firms capital) that can be partially limited by issuing stocks are
for example costs of financial distress (costs of possible insolvency due to obligatory debt repayments) and asymmetric information (investors
favor companies with less leverage as debt financing decreases access to information available for owners, e.g. stockholders).

From the macroeconomic point of view, equity markets, apart from mobilizing and transferring savings, have a few other functions
different from other segments of the financial system. Firstly, they provide a potential exit mechanism for investors, e.g. private equity funds
(for example through IPO) which lead to increased general entrepreneurial activity. Secondly, equity markets attract foreign portfolio
investments that can be used to overcome emerging markets capital deficits. Thirdly, well-developed stock markets influence the term
structure of financial investment by encouraging investors to transfer their funds from short term assets to long term capital market. As a result,
companies are able to finance long-term and indivisible projects, often with high risk levels. As the number of invertors is very high, each of
them accepts only a small portion of the total risk. Last but not least, equity markets supply various market participants with important
information on particular companies as well as on the condition of the economy as a whole. Such information is used by owners of listed firms
to evaluate their management and leads to improved efficiency of listed companies, e.g. when unsuccessful board of directors is replaced by a
new one. For other entities, stock market data provides various benchmarks for more efficient valuation of business assets. In order to fulfill the
functions described above, stock markets need to be well-developed.

Table 1: Fund Generated Through IPO from 1993 2012 in India

Year No. of IPOs Amount (Rs. crore) Year No. of IPOs Amount (Rs. crore)
1993-94 692 7864 2003-04 21 3434
1994-95 1239 16572 2004-05 23 13749
1995-96 1357 10924 2005-06 79 10936
1996-97 717 5959 2006-07 77 28504
1997-98 52 1048 2007-08 85 42595
1998-99 18 404 2008-09 21 2,082
1999-2000 51 2719 2009-10 39 24,696
2000-01 114 2722 2010-11 53 35,559
2001-02 7 1202 2011-12 54 41,515
2002-03 6 1039
(Source: Handbook of statistics on the Indian securities market 2012)

The above table reveals the number of IPOs during period 1993-2012 and also funds generated from the IPO market. The share
market operations are fine during the period. The economic crises and international market trend has been forcing thread both secondary
market and primary market. The statistics revels that the number of IPOs has been reduced considerable amount during 2001-02. During the
year 2009 IPOs in India again dried up all of a sudden after a small pick up to 2008. Investment banker Uday Kotak has said the IPO market,
lackluster for the last two years, can get a boost only after the upcoming general elections."My sense is that we have to wait for the elections
and we need to see more stability and more visibility, both in markets and the economy, for seeing IPO markets come back".

Table 2: Foreign investment inflows

(Rs. Crore)
Year Direct investment Portfolio Investment Total
1990-91 174 11 185
1991-92 316 10 326
1992-93 965 748 1713
1993-94 1838 11188 13026
1994-95 4126 12007 16133
1995-96 7172 9192 16364
1996-97 10015 11758 21773
1997-98 13220 6696 19916
1998-99 10358 -257 10101
1999-2000 9338 13112 22450
2000-01 18406 12609 31015
2001-02 29235 9639 38874
2002-03 24367 4738 29105
2003-04 19860 52279 72139
2004-05 27188 41854 69042
2005-06 34188 55306 89494
2006-07 88446 31713 120159
2007-08 139,400 110,600 250,000
2008-09 190,600 -65000 125,600
2009-10 P 157,800 15400 173,200
2010-11 P 118,100 139,400 257,500
2011-12 P 155,000 85600 240,600

1. Data for 2009-10, 2010-11 and 2011-12 are provisional.

2. Data from 1995-96 onwards include acquisition of shares of Indian companies by non-residents under Section 6 of FEMA,
1999. Data on such acquisitions are included as part of FDI since January 1996.
3. Data on FDI have been revised since 2000-01 with expanded coverage to approach international best practices.
4. Negative (-) sign indicates outflow.
5. Direct Investment data for 2006-07 include swap of shares of 3.1 billion.

(Source: Handbook of statistics on the Indian securities market 2012)

The above table revels that even though the foreign direct investment increased considerably over a period of time the investment in
portfolio i.e. in stock market has been reduced considerably during 2006 onwards. This indicates the economic recession has affected
considerably the flow of foreign investment in the stock market.
Literature Review
Swarup K. S. (October 2003) had studied Measures for Improving Common Investor Confidence in Indian Primary Market and indicated that
there is a decrease in preference for equity due to the losses made in investments by the investors in equity markets. These losses in primary
market are due to lower market price after listing. The study conducted on investor confidence also indicated the importance of issue price and
market price, which was given overall first and third, ranks respectively. Study indicated that investors prefer personal analysis to brokers
advice. For carrying out personal analysis, information is required. Thus information plays an important role in investment decisions and needs
of the investors in this area also need to be addressed.

Mishra S. K. (May 2010) in their study acknowledged Investors Confidence in Primary Market which indicated that the new issue market in
India is not fully developed as compared to other advanced countries like U.S.A., U.K. and Germany. But there has been tremendous growth in
the sphere of new issue activity in India in the 1980s and 2009s. The knowledge of secured investment practice is now no more a nightmare to
the investors. Publicly available information and rich literatures have provided the all the requisites right form selection to valuation of
securities and portfolios to match with their changing expectations. Gone are those days when small investors had to depend on the brokerage
firms and individuals to possess the stocks of their choices. Now, with the introduction and successful implementation of new sophisticated
technology investors have online trading practices.

Gade S. & Rao S. K. (July 2011) in their study examined retail investors perception towards initial public Offers (IPOs) in India which
reveals that retail investors opinion is similar on majority aspects relevant to IPOs at the same time study did find that there are some problems
with IPOs, major problem was the adequacy of 35 percent reservation for retail investors. Majority of the investors want SEBI to fix a greater
responsibility on the merchant bankers and hold them responsible for the promoters dubious acts. Also they want SEBI to create legal
provisions to pull up the promoters for their misdeeds and proceed against them under criminal laws and confiscate all their ill gotten wealth.

Manjunatha T. and Gopi K. T. (2013) in their study examined factors influencing retail investors in Indian primary market and their findings
suggest that wealth-maximization criteria are important to retail investors while investing in the primary market, even though retail investors
employ diverse criteria when choosing investment avenues. The recommendations of brokerage houses, analysts, issue price, IPOs grading,
promoters reputation and other factors go largely heed in the primary market. The investment decision process appears to incorporate a
broader range of items. Furthermore, each investor may view the broad criteria differently in terms of relative importance.

Obamuyi T. M. (2013) in their study examined factors influencing investment Decisions in capital market and how these factors are related to
the investors socio-economic characteristics. The study finds that the socio-economic characteristics of investors (age, gender, marital status
and educational qualifications) statistically and significantly influenced the investment decisions of investors. The study recommends that the
investment climate and the market environment be made friendly and conducive to attract investors by creatively developing programmers and
policies that impact on investors decisions in order to maximize the value of the firms and enhance the wealth of the investors. The market
players should re-organize the market and implement accommodating policies which will eliminate fraud and resolve the leadership crisis in
the market.

Abraham R. (February 2014) has observed that Indias initial public offering (IPO) market is going through its driest patch in years as no IPO
is scheduled in the near future even eight months after the last IPO by Just Dial hit the market in June. India has continued to struggle
primarily due to its own domestic concerns. The Indian market has really not been IPO-friendly for the past three years due to a variety of
factors. This includes overall poor sentiments, secondary market volatility, promoters not getting the valuations they think they deserve,
apprehensions of regulators views on valuations and lack of appetite for equity of big-time issuers from the infrastructure sector, especially
power, telecom and real estate. In addition, the government has also been unable to push through its divestment programme,

Research Methodology
Objectives: The study is aimed at working on the following objectives:

Primary Objective: To study the perception of retail investors of Surat City regarding factors affecting Primary Market mechanism in India

Secondary Objective

To study the retail investors perception for factors affecting primary market.
To study the effect of demographic profile of retail investors on their perception for factors affecting primary market.
To examine the problems facing by the retail investors during investment through IPOs.

Research Design: Descriptive research is used to collect information about retail investors perception. Therefore, it is used in the study to
describe the characteristics or behaviors of a particular population in a systematic and accurate fashion. In descriptive also Cross Sectional
design will be used. In cross sectional research designs sample taken out of population is analyzed only once at a particular time interval.

Population: For the present study undertaken the population is retail investors of Surat city investing in stocks and shares.

Sampling: The nonprobability respondents have been researched by selecting the persons who do the stock trading using convenient
sampling technique.
Sample Size: The sample size is restricted to only 175 respondents.

Scope of the study: The study is conducted during the year 2013-14 at Surat city. Hence the scope is limited to Surat city for the year 2013-14.

Data Collection: Primary Information:-The nature of present study is highly based on information collected from the various respondents
through a complete questionnaire.

Secondary data has also taken into consideration for understanding the topic in better way. It gives conceptual clarity about the study. This
source is used to collect the data through website, journals, articles and other available related literatures on the topic.

Instrument: Questionnaire is used for the research work. Questions used in this research are Ranking Questions, Scaling questions Likert
Scale, Open ended questions, multiple choice single questions and Single choice single question.

Personal Survey Method In-home Personal Survey Method is used to collect responses through Questionnaire. Respondents are contacted in
their Offices and homes in order to collect information from them.

Electronic Survey Method Mail Survey Method is also used by sending e-mails of Questionnaire and making it filled by the Respective
Respondent through e-mail.

Data Analysis: For the analysis in this study first of reliability test is conducted to check reliability of list of factors. Then factor analysis is
done to group various factors affecting primary market. ANOVA is used to check the effect of demographic profile on perception of investors
on their perception about factors affecting primary market. Frequency distribution is used to analyze various difficulties felt in primary market.


Few respondents might be hesitant to divulge personal and financial information which can affect the validity of all responses.
The respondents are less interested in answering the questionnaire, as they felt that it is an interruption to their regular work.

Scope for the future Study

The study is limited to the investors of Surat city only. So it can provide better results if conducted in other cities of India in order to analyze the
behavior of retail investors towards primary market.

Demographic Profile

Table 3: Demographic profile of respondents

Variable Investors Grouping Frequency Percent

Gender Male 147 85.47
Female 25 14.53
Age 19-25 years 39 22.2
26-35 years 76 44.2
36-45 years 35 20.3
45 and more 22 12.8
Occupation Businessman 58 34.12
Employees 76 44.71
Professional 23 13.53
Educational Qualification Up to Schooling 20 12.2
Graduate 86 52.4
Post Graduate & Professionals 58 35.4
Number of dependents Up to 3 106 79.10
More than 3 28 20.90
Annual Income Below 1 lakh 20 12.12
1 lakh to 2.5 lakh 65 39.39
2.5 lakh to 5 lakh 52 31.52
Above 5 lakh 28 17
Percentage of Savings Up to 10% 26 18.1
10-25% 59 41
25-40% 43 29.9
More than40 % 16 11.1
Interpretation and Analysis of Data

Factors considered by investors while investing in primary market

Table 4: Factors affecting performance of primary market

Factors Score Rank

Company Goodwill. 673 1
Current Financial Position of company. 651 2
Corporate Profile. 611 3
Government holding in company. 607 4
Promoters stake in the company. 605 5
Dividend history. 604 6
Current market price of new issue in stock market. 594 7
Liquidity Position of the Company. 593 8
Promoters Profile. 592 9
Historical Background. 582 10
Information availability about IPO. 578 11
Secondary market Performance. 577 12
Competitive Position. 572 13
Grading of IPOs. 571 14
Size of the IPO Issued. 558 15
Disclosure by market participants. 528 16
Minimum Investment amount required. 523 17

From the above Table, the most important factors while investing in Primary Market according to Investors are Company Goodwill,
Current Financial Position of company, Corporate Profile, Government holding in company and Promoters stake in the company. While the
comparatively less important factors are Size of the IPO Issued, Disclosure by market participants and Minimum Investment amount required.

Reliability Test

Table 5: Reliability Statistics

Cronbach's Alpha Number of Items

1.000 17
The value of Cronbachs Alpha is 1 and the accepted (0.70), we reject the null hypothesis and we may say that the instrument is reliable and
can be used with other statistical procedures for factor analysis.

Factor analysis

Table 6: KMO and Bartlett's Test

Kaiser-Meyer-Olkin Measure of Sampling Adequacy. .981

Bartlett's Test of Sphericity Approx. Chi-Square 17308.787
Df 136
Sig. .000
Figure 1:

The KMO and Bartletts Tests table displays the results for interpreting the adequacy of data for factor analysis. Kaiser-Meyer-Olkin
(KMO) is a measure of sampling adequacy and its value should be greater than 0.6 for our sample to be adequate for undertaking factor
analysis. Also, the p-value of Bartletts test of sphericity should be less than ) 0.05. Since in our study, the value of KMO test is 0.981 (higher
than 0.6) and the p-value of Barletts test is 0.000 (less than 0.05), factor analysis can be undertaken using this data.

The Scree Plot is used to determine the optimal number of components. The component beyond the point at which the curve changes
its direction and becomes horizontal contributes very little to variation and therefore they can be eliminated. In our study only one components
lie on the steeper side of the curve and all other lie on the flat portion of the curve. Therefore, scree plot suggests that optimal number of
components is one. We can group all this factors under on factors companies strengths.

To check the effect of demographic factors like occupation and education and various factors (Single factor derived from factor analysis:
Strength of Companies) we need to check following hypothesis.

H0: There is no significant relation between demographic factors of respondents and their perception about various strengths of companies
while investing in primary market.

H1: There is significant relation between demographic factors of respondents and their perception about various strengths of companies while
investing in primary market.

Table 7: ANOVA

Demographic Factor F test Sig. Demographic Factor F test Sig.

Gender 0.254 0.615 Age 0.289 0.833
Occupation 1.764 0.175 Number of dependents 0.835 0.363
Education 0.804 0.450 Savings Ratio 4.013 0.009
Income 0.840 0.474 (Sig.)

From the above testing it can be concluded that none of demographic factors other than saving ratios of investors significantly related to
their perception about strengths of the companies while investing in primary market. Hence we cannot accept null hypothesis incase of other
demographic factors than saving ratios, as their test statistic values are more than 0.05. The retail investors opinion is similar on majority aspects
relevant to IPOs (Gade S. & Rao S.K., July 2011).

In case of savings ratio of investors is significantly related with their perception about strength of companies while investing primary
market. As test static is 0.009 which is less than 0.05, we cannot accept null hypothesis.
Sector-wise preference for investment in Primary Market

Table 8: Preference for sector-wise investment in Primary Market

Preference for Frequency Percentage

Sector-wise Figure 2: Preference for sector-wise investment in
Investment Primary Market
Yes 71 40.80
No 103 59.20
Grand Total 174 100.00
No 41%

From the table 8, it can be observed that 71 Respondents out of 174 Respondents Considers Sectors before Investing in Primary Market.
While majority of Respondents does not considers Sectors while making Investments. The major ten Sectors which Respondents Consider while
investing is shown in the table 9. Out of which Banking, Pharmaceuticals and IT are the top three sectors which majority of respondents have
given preference while investing in primary market. At the same time Steel, Media and Metal are least preferred sectors while investing through
primary market.

Table 9: Top 10 sectors considered by investors while making investment

Sectors Frequency Sectors Frequency

Banking 54 Oil & Gas 18

Pharmaceuticals 40 Power 13

IT 36 Metal 8

FMCG 29 Media 8

Automobile 23 Steel 3

Table 10: Difficulties faced by Investors after applying in Public issues

Difficulties Frequency
Refund related Problems. 76
Delay in allotment of shares. 54
Payment of 100% of the bid amount at the time of applying for IPOs 52
Lack of Transparency. 53
Delay in information availability. 42
Procedure for IPOs is difficult. 25
Procedure for IPOs is lengthy. 39
Procedure for IPOs is complicated. 33
Problems related to service provided by brokers or banks. 41
Dominant role of QIBs 25
Grand Total 440

From the table 10 it can be observed that the major difficulties faced by the Investors are Refund related Problems, Delay in allotment of
shares, Lack of Transparency with maximum percentages and 100% payment in many cases of Public issues. Moreover, other difficulties like
Problems related to service provided by brokers or banks, etc have also received considerable percentages. All these difficulties may discourage
investors to invest through primary market. So, proper measures should be taken by SEBI in order to reduce difficulties faced by Investors in
IPOs so as to persuade Investors to do investment through Primary Market.
Investment decisions of investors in Surat city are influenced by certain identified factors. The most important factors while investing in
Primary Market according to Investors are Company Goodwill, Current Financial Position of company, Corporate Profile, Government holding
in company and Promoters stake in the company and they give a high level of preference to these factors before investing in primary market.
These factors are not influenced by demographic factors of investors other than their savings ratio. It means investors having different saving
ratios have different perception about factors affecting primary market.

Retail investors opinion is similar on majority aspects relevant to Public issues at the same time study did find that there are few problems
with Public issues, The major three difficulties faced by the Investors are Refund related Problems, delay in allotment of shares and Lack of
Transparency while applying in primary market. Measures should be taken by SEBI in order to reduce difficulties faced by Investors in IPOs
so as to encourage Investors to do investment in Primary Market.


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