CENTRAL UNIVERSITY OF SOUTH BIHAR

Financial Market Regulation

PROJECT-TOPIC
“Function and Problem of New Market Issue”

Submitted To Course Instructor Submitted By Student

Ms. Kumari Nitu Divya Meghna

Assistant Proffesor BA.LLB.(Hons)
School of Law & Governance VIIIthSemester
Central University of South Enrollment No. CUSB1613125016
Bihar

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 ACKNOWLEDGEMENT

At this point of time I would like to express my gratitude to all those who gave me their support
to complete this project.

I am grateful to my teacher Ms Kumari Nitu, for giving me permission to commence this project
in the first instance and to do necessary study and research. I want to thank law faculty members
and other faculty members for all their professional advice, value added time, effort and
enterprise help, support, interest and valuable hints that encouraged me to go ahead with my
project.

I am deeply indebted to my colleagues for their meticulous planning, layout, presentation and
above all for their consideration and time.

My heartfelt appreciation also goes to seniors and my classmate for their stimulating suggestions
and encouragement which helped me at each level of my research and in writing of this project.

Especially, I would like to give my special thanks to my parents, family members and god whose
patient love enabled me to complete this project.

I have tried my best to enclose practical approach on the topic assigned to me and also
theoretical approach to my project.

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 Table of Contents

 Acknowledgement………………………………….. 2
 Introduction…………………………………………. 4
 Functions of New Issue Market…………………….. 4
 Problems of New Issue Market……………………... 6
 Conclusion………………………………………….. 8

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 INTRODUCTION

Primary market or New Issue Market is the part of capital market where issue of new securities
takes place. The issuer may be a new company or may be an existing company. The issues may
be of new types or the securities used in the past. The main function of the New Issue Market is
to facilitate the ‘transfer of resources’. It provides attractive issue to the potential investors and
with this company can raise capital at lower costs. As the securities issued in primary market can
be immediately sold in secondary market the rate of liquidity is higher. Many financial
intermediaries invest in primary market; therefore there is less risk if there is failure in
investment as the company does not depend on a single investor. The diversification of
investment reduces the overall risk. Prospectus containing all details about the securities are
given to the investors hence reducing the cost is searching and assessing the individual securities.
The main function of the New Issue Market, i.e. channeling of investible funds, can be divided,
from the operational stand-point, into a triple-service function: (a) Origination (b) Underwriting
(c) Distribution. Problems faced in new issue markets are ineffective mobilization of savings,
functional and institutional gap, risk aversion, inordinate delay in allotment process, and
problems of the company. In this project the function and problems of new issue market has been
discussed.

Functions of the New Issue Market

The ability of the New Issue Market to cope with the growing requirements of the expanding
corporate sector would depend on this triple-service function. The main function of the New
Issue Market, i.e. channeling of investible funds, can be divided, from the operational stand-
point, into a triple-service function: (a) Origination (b) Underwriting (c) Distribution

a) Origination – It refers to the work of investigation, analysis, and processing of new

project proposal. Therefore origination is the origin of new issues. This in turn may be:
(i) A preliminary investigation undertaken by the sponsors (specialised agencies) of the
issue. This involves a careful study of the technical, economic, financial and legal aspects
of the issuing companies to ensure that it warrants the backing of the issue house. (ii)
Services of an advisory nature which go to improve the quality of capital issues. These
services include advice on such aspects of capital issues as: determination of the class of

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 security to be issued and price of the issue in terms of market conditions; the timing and
magnitude of issues; method of flotation; and technique of selling and so on. The
importance of the specialised services provided by the New Issue Market organisation in
this respect can hardly be over-emphasized. On the thoroughness of investigation and
soundness of judgement of the sponsoring institution depends, to a large extent, the
allocative efficiency of the market. The origination, however, thoroughly done, will not
by itself guarantee success of an issue.
b) Underwriting – A second specialised service i.e. “Underwriting” is often required.
Underwriting entails an agreement whereby a person or organisation agrees to take a
specified number of shares or debentures or a specified amount of stock offered to the
public in the event of the public not subscribing to it, in consideration of a commission
the underwriting commission. If the issue is fully subscribed by the public, there is no
liability attaching to the underwriters; else they have to come forth to meet the shortfall to
the extent of the under- subscription. The underwriters in India may broadly be classified
into the following two types: (i) Institutional Underwriters; (ii) Non-Institutional
Underwriting. Institutional Underwriting in our country has been development oriented.
It stands as a major support to those projects which often fail to catch the eye of investing
public. These projects rank high from the points of view of national importance e.g. steel,
fertilizer, and generally receive higher priority by such underwriters. Thus institutional
underwriting may be broadly recognised, in the context of development credit, as playing
a decisive role in directing the economic resources of the country towards desired
activities. One of the principal advantages they offer is that resource-wise they are
undoubted. They are in a position to fulfill their underwriting commitments even in the
worst foreseeable situations. The public financial institutions namely IDBI, IFCI, ICICI,
LIC and UTI, underwrite a portion of the issued capital. Usually, the underwriting is done
in addition to granting term finance by way of loans on debentures. These institutions are
usually approached when one or more of the following situations prevail: (i) The issue is
so large that broker-underwriting may not be able to cover the entire issue. (ii) The
project is weak, inasmuch as it is being located in a backward area. (iii) The project is in
the priority sector which may not be able to provide an attractive return on investment.
(iv) The project is promoted by technicians. (v) The project is new to the market. The

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 quantum of underwriting assistance varies from institution to institution according to the
commitments of each of them for a particular industry.
c) Distribution – Distribution is the sale of securities to the ultimate investors. It is another
specialised job, which can be performed by brokers and dealers in securities who
maintain regular and direct contact with the ultimate investors.1
Problems in the New Issue Market

The activities in the new issue market are related to underwriting and marketing of new issues.
Financial institutions and brokers are actively engaged in these activities. Recently, banks have
started their own division of merchant banking or their subsidiaries for undertaking activities in
the new issue market. They are well versed in the requirements of Companies Act and the
Securities Contracts (Regulation) Act, and listing requirements with regard to new issue market.
Despite the role of financial institutions, which competently handle all the issues relating to the
new issue market, the new issue market suffers from certain problems. However, institutional
underwriting suffers from the problem of institutional handling of procedural delays which
sometimes dampen the initiative of the corporate managers or promoters and the disadvantage
that the institutions prefer to wait and watch the results to fulfill their obligations only where they
are called upon to meet the deficit caused by under subscription. The common problems can be
summarized as follows:

1. Ineffective mobilization of Savings

It is felt that the new issue market has not fared well in the recent past. Particularly, the new
issue market could not mobilize adequate savings from the public. Hardly about 5% of financial
savings of the household sector is mobilized for investment in shares and debentures. A larger
portion of domestic savings goes to the private market or to the financial institutions.

2. Functional and institutional gap

The new instruments in the new issue market do not appeal to the investing public. The reason is
that the merchant banking which is the major player in the new issue market is still in its infancy

1
What are the chief functions of New Issue Market, available at,
http://www.yourarticlelibrary.com/investment/what-are-the-chief-functions-of-the-new-issue-market/1271 (last
visited on April 11, 2020)

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in India. In fact, the merchant bankers are not playing any developmental role and they do not
pay adequate attention to the preparation of project reports, though it is their responsibility to do
so. As a result, the small investors are often deceived by the tall claims of the companies and
they do not find the new issues attractive.

3. Risk Aversion

Underwriters and financial institutions subscribe more for preference shares and debentures than
for equity shares. The reason is that debentures, being fixed income bearing securities are more
attractive to the investing public. So, they prefer debentures to equity shares. Understandably,
they hesitate to invest in equity shares as they do not fetch any fixed income. So, the companies
themselves have shifted from equity financing to debt financing.

4. Inordinate delay in the allocation

The average investor in semi urban and rural areas has to send the application form for shares to
the centres where banks accept it. He has to incur some expenditure on securing a bank draft and
postal charges for mailing it. Till the shares are allotted, he suffers loss of interest. If shares are
not allotted, he has to pay collection charges in getting the refund of application money.
Moreover, even if shares are allotted, there are inordinate delays in receiving allotment letters,
share certificates and also in effecting transfer of shares. Again, dividend warrants, refund orders
interest payments etc, are not enchashable at par in all cases. All these problems cause hardships
to the small investors, especially in the rural areas and the rural investors get discouraged and
refrain from applying for new issues.

5. Problems of the Company

The issuing companies also suffer from certain problems. They are often tempted to present a
rosy picture about the projected figures of turnover, profits, dividends, etc., for the future, which
can be avoided. Secondly, some companies make exaggerated claims about their prospects to the
public. Thirdly, their claims about over-subscription are often false. Apart from these, there are
no fixed norms for appraisal of the projects prepared by the companies.2

2
Problems faced by New Issue Market, available at, https://mymbaguide.com/problems-faced-in-new-issue-
market/ (last visited on April 11, 2020)

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 Conclusion

The New Issue Market is a set-up that assist the industry to raise their funds through issue of
securities. The security can be issued directly either to the person or institution through the
primary market or the new issue market. The function of the Primary market is to facilitate the
resource transfer from savers to user, meaning it mobilize the idle savings. The main functions of
the New Issue market is three fold which are origination, underwriting and distribution. There
are also several problems faced in the primary market which is related to ineffective mobilization
of savings, functional and institutional gap, risk aversion, inordinate delay in allotment process,
and problems of the company.

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