CLASSIFICATION OF FINANCIAL

MARKET
ORGANISED UN
MARKET
CAPITAL
MONEY MARKET
MARKET
CAL
INDUSTRIA LONG
GOVT. M
L TERM
SECURITIE COMM
SECURITIE LOANS
S MARKET M
S MARKET MARKET
PRIMARY TERM LOAN TREA
MARKET MARKET M
SECONDARY MARKET FOR
SHORT
MARKET MORTGAGES
MARKET FOR M
FINANCIAL
GUARANTES
  What is Primary market?
 Primary market is a market for new issues or new financial claims. Hence, it is also called New
Issue market.

The primary market deals with those securities which are issued to the public for the first time. In the
primary market, borrowers exchange new financial securities for long term funds. Thus primary market
facilitates capital formation.

 They are three ways by which a company may raise capital in a primary market. They are:

i. Public issue

ii. Right issue

iii. Private placement

iv. Offer for sale

The most common method of raising capital by new companies is through sale of securities to the
public. It is called PUBLIC ISSUE. When an existing company wants to raise additional capital, securities
are first offered to the existing shareholders on a pre-emptive basis. It is called RIGHT ISSUE. Private
placement is a way of selling securities privately to a small group of investors.

Difference Between Primary market and Stock Exchange :-

1. Functional Difference :- The New issue market deals with new securities which are
issued for the first time for public subscription. The stock exchange provides a ready
market for buying and selling of old securities.
2. Organizational Difference :-The stock exchange have physical existence and are located
in particular geographical areas. The stock exchange is a place where dealers of security
meet regularly at appointed time announced by the market. It is a well established
organization with rules and regulations for a smooth conduct of the business. The
membership are supplied with information about companies and daily changes in prices
of stock.
3. Nature of Contribution to Industrial Finance :- The new issue market provides the
issuing company with funds for starting a new enterprise or for either expansion or
diversification of an existing one by making a direct link between companies which
require funds and the investing public. So, the contribution of new issue market is
direct. The role of stock exchange in providing capital is indirect as it provides
marketability to the shares.

 Relationship Between New Issue Market and Stock Exchange :-

 The new issue market and stock exchange are inseparably connected and work in
conjunction with each other.
 The new issue first placed in the new issue market can be disposed off subsequently in
the stock exchange. The stock exchange provides the mechanism foe regular and
continuous purchase and sale of securities. This facility is of immense utility to potential
investors who are assured that they will be able to dispose off the allotment of shares at
any time. Thus, the two markets are complementary in nature.

 Both the markets are connected to each other even at the time of new issue. The
companies which makes new issue apply for listing of shares on a recognized stock
exchange.

 Listing of shares adds prestige to the firm and widens the market for the investors. The
companies which want stock exchange listing have to comply with statutory rules and
regulations of the stock exchange to ensure faire dealing in them. The stock exchanges,
thus, exercise considerable control over the organization of new issues.
• The new issue market and stock market are economically an integral part of a single
market, i.e., industrial securities market. Both are susceptible to the common influence
of the environmental conditions such as political stability, economic conditions,
monetary policy of the Central Bank and the fiscal policy of the government.
• The two markets act and react upon each other in the same direction. When the stock
prices go up in the market, the new issues increase and when the stock prices show a
downward trend the new issues decline.
• The new issue market also depends on the stock exchange to find out price movements
and general economic outlook and to forecast the climate for the success of new issues.

 Advantages of Listing new issuing market shares:-

1. Facilitates Buying and Selling Securities :- Listing paves way for easy buying and selling
of securities. Constant marketing facilities are assured for listed securities.
2. Ensures Liquidity :- The prices of listed securities are quoted daily in the market. Hence,
securities can be converted into cash readily at quoted prices and thus listing ensures
liquidity.
3. Offered wide Publicity :- Listed securities give wide publicity to the companies
concerned, It is so because the name of listed companies are frequently mentioned in
stock market reports, T.V., Newspapers, Radio, etc.
4. Assures Finance :- The very fact that a securities is listed in a recognized stock exchange
adds to the prestige of the company and it enables the company to raise the necessary
finance by the issues of such securities expeditiously.
5. Enables Borrowing :- Listed securities are preferred as collateral securities by
commercial banks and other lending institutions because they are rated high in market
quotation and there is a ready market for them also. Thus borrowings are made easier
against the securities of the listed companies.
6. Protects Investors :- Listing companies have to necessarily submit themselves to the
various regulatory measures by disclosing vital information's about their assets, capital
structure, profits, dividend policy, allotment procedure, bonuses etc. hence, listing aims at
protecting the interest of investors to a great extent.
 Reason for listing IPOs:-
• When a company lists its securities on a public exchange, the money paid by the
investing public for the newly issued shares goes directly to the company (primary
offering) as well as to any early private investors who option to sell all or a portion of
their holdings (secondary offering) as part of the larger IPO.
• An IPO, therefore, allows a company to tap into a wide pool of potential investors to
provide itself with capital for future growth, repayment of debt, or working capital. A
company selling common shares is never required to repay the capital to its public
investors.
• After the IPO, when shares trade freely in the open market, money passes between
public investors.
• For early private investors who choose to sell shares as part of the IPO process, the IPO
represents an opportunity to monetize their investment.

 Principal steps of a Public Issue :-

1. Draft Prospectus:-
2. Fulfillment of Entry Norms (EN) :-
3. Appointment of Underwriters :-
4. Appointment of Bankers :-
5. Initiating Allotment Procedure :-
6. Brokers to the Issue :-
7. Filling of Documents :-
8. Printing of Prospectus and Application Forms :-
9. Listing the issue :-
10. Publication in newspapers :-
11. Allotment of Shares :-
12. Underwriters Liability :-
13. Optional Listing :-
 Instruments of Issues :-
1. Secured Premium Notes with Detachable Warrants :-
2. Equity Shares with Detachable Warrants :-
3. Preference Shares with Warrants :-
4. Non-Convertible Debentures with Detachable Equity Warrants :-
5. Fully Convertible Cumulative Preference Share :-
6. Zero Interest Fully Convertible Debentures (FCDs) :-
 7. Fully convertible Debentures (FCDs) with Interest :-
8. Zero Interest Partly Convertible Debentures (PCDs) with Detachable and Separately
Tradable Warrants :-
9. Zero Interest Bond :-
10. Deep Discount Bonds :-
11. Option Bonds :-
12. Bonds with Warrants :-
13. Indian Depository receipt (IDR) :-
 Players in the New Issue Market :-
1. Merchant Bankers
2. Registrars
3. Collecting and Co-ordinating bankers
4. Underwriters and brokers
5. Printers, advertising agencies and mailing agencies
 Kinds Of Issues:-

Kinds of
issues

Preferential
IPO FPO Right Issues
Issues
 What is IPO ?
• An initial public offering (IPO) or stock market launch is a type of public offering where
shares of stock in a company are sold to the general public, on a securities exchange, for
the first time.
• Through this process, a private company transforms into a public company.
• Initial public offerings are used by companies to raise expansion capital, to possibly
monetize the investments of early private investors, and to become publicly traded
enterprises.
• In March 1602 the “Vereenigde Oost-Indische Companies (VOC), or Dutch East India
company was formed. The VOC was the first modern company to issue public shares,
and it is this issuance, at the beginning of the 17th century, that is considered the first
modern IPO.
• In the United States, the first IPO was the public offering of Bank of North America.
 Disadvantages of an IPO:-
 There are several disadvantages to completing an initial public offering:-
 1. Significant legal, accounting and marketing costs, many of which are ongoing

2. Requirement to disclose financial and business information

3. Meaningful time, effort and attention required of senior management

4. Risk that required funding will not be raised

5. Public dissemination of information which may be useful to competitors,suppliers and

customers.

 IPO ISSUING CURRENT COMPANIES:-

Issuer Company Issue Open Issue Closed Offer Price Issue Type Issue
Name Size(cror)
Bharti Infratel 11-12-2012 14-12-2012 210/- to 240/- IPO 3,966.90 –
Limited IPO 4,533.60
Bronze infra-tech 19-10-2012 23-10-2012 15/- IPO 8.56
Ltd IPO
Thejo Engineering 04-09-2012 06-09-2012 402/- to 430/- IPO 19
Ltd IPO
SRG Housing 22-08-2012 28-08-2012 20/- IPO 7.01
Finance Ltd IPO
Jointeca Education 16-08-2012 21-08-2012 15/- IPO 5.35
Solutions Ltd IPO
Jupiter Info media 30-07-2012 01-08-2012 20/- IPO 4.08
Ltd IPO
Tribhovandas 24-04-2012 26-04-2012 120/- to 126/- IPO 200
Bhimji Zaveri Ltd
IPO
 What is FPO?
 FPO is a process in which an already listed company raises additional capital from the
public.
 In short both IPO and FPO are process of raising funds from the public.
 A follow-on offering (often but incorrectly called secondary offering) is an issuance of
stock subsequent to the company's initial public offering. A follow-on offering can be
either of two types (or a mixture of both): dilutive and non-dilutive. A secondary offering
is an offering of securities by a shareholder of the company (as opposed to the company
itself, which is a primary offering). A follow on offering is preceded by release of
prospectus similar to IPO: a Follow-on Public Offer (FPO).
 For example, Google's initial public offering (IPO) included both a primary offering
(issuance of Google stock by Google) and a secondary offering (sale of Google stock
held by shareholders, including the founders).
 One example of a type of follow-on offering is an at-the-market offering (ATM offering), which
is sometimes called a controlled equity distribution. In an ATM offering, exchange-listed
companies incrementally sell newly issued shares into the secondary trading market through a
designated broker-dealer at prevailing market prices. The issuing company is able to raise capital
on an as-needed basis with the option to refrain from offering shares if unsatisfied with the
available price on a particular day.

 As with an IPO, the investment banks who are serving as underwriters of the follow-on offering
will often be offered the use of a green shoe or over-allotment option by the selling company.

 How follow on Public offering is different from initial public offering.

 IPO is made when company seeks to raise capital via public investment while FPO is
subsequent public contribution.

 First issue of shares by the company is made through IPO when company first becoming a
publicly traded company on a national exchange while Follow on Public Offering is the public
issue of shares for an already listed company.

 What is Right Issue?

• Right issue is a method of raising funds in the market by an existing company.
• A right means an option to buy certain securities at a certain privileged price within a
certain specified period. Shares, so offered to the existing shareholders are called rights
shares.
• Right shares are offered to the existing shareholders in a particular proportion to their
existing share ownership.
• Section 81 of the companies act deals with right issue. According to this section, where
a company increase its subscribed capital by the issue of new shares either after two years
of its formation or after one year of its first issue of share whichever is earlier, these have
to be first offered to the existing shareholders with the right to reserve them in favor of a
nominee.
• A company issuing rights is required to send a circular to all existing shareholders. The
circular should provide information on how additional funds would be used and their
effect on the earning capacity of the company.
 Advantages of Right Issue:-
1. The cost of Issue is minimum. There is no underwriting, brokerage, advertising and
printing of prospectus expenses.
2. It ensures equitable distribution of shares to all existing shareholders and so control
of company remains undisturbed as proportionate ownership in the company
remains the same.
3. It prevents the directors from issuing new shares in their own name or to their
relatives at a lower price and get controlling right.
 PREFERENTIAL ISSUES:-
• Preferential issue means issuance of equity shares to the promoters, promoter group
or selected group of persons or any investors on private placement basis.
 Proceed from Issue:-
 The details of all monies utilized out of preferential issue proceeds shall be disclosed under
appropriate heads in B/S indicating the purpose for which such monies have been utilized.

 The details of un utilized monies shall also be disclosed under a separate head in the B/S
indicating the form in which such unutilized monies have been invested.

 Details can be given in the notes to accounts.

 Principal Steps of Private Placement :-

1. Terms and Conditions :-
2. Credit Rating :-
3. Confidential Information Memorandum (CIM) :-
4. Trustees to the Issues :-
5. Pre-launching formality :-
6. Pricing the Issue :-
7. Post-Issue Steps :-
 The main Three Functions of New Issue Market :-
1) Origination: deals with origin of the new issue. The proposal is analyzed in terms
of the nature of the security, the size of the issued timings of the issue and flotation
method of the issue.
2) Underwriting: underwriting is a kind of guarantee undertaken by an institution or
firm of brokers ensuring the marketability of an issue. It is a method whereby the
guarantor makes a promise to the stock issuing company that he would purchase a
certain specific number of share in the event of their not being invested buy the
public.
3) Distribution: the third function is that of distribution of shares. Distribution means
the function of sale of share and debentures to the investors. This is performed by
brokers and agents. They maintain regular lists of clients and directly contact them
for purchase and sale of securities.

FUNCTIONS OF PRIMARY MARKET

Underwriting Distribution
Origination

Preliminary Methods :-
investigation Standing behind the issue.
Outright Purchase.
Methods :-
Public issues.
Consortium . Offer for sale.
Advisory services
.
Placement
Right issues.
  Types of Origination :-
1. A careful study of the technical, economic and financial viability to ensure soundness of the
project. This is a Preliminary Investigation Undertaken by the sponsors of the issue.

2. Advisory services which improve the quality of capital issues 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 Issues

f) Technique of selling the securities

 Methods of Underwriting :-
1. Standing Behind the issue :-

Under this method , the underwriter guarantees the sale of a specified number of shares within a
specified period. If the public do not subscribe to the specified amount of issue, the underwriter buys
the balance in the issue.

2. Outright Purchase :-

The underwriter, in this method, makes outright purchase of shares and resells them to the
investors.

3. Consortium Method :-

Underwriting is jointly done by a group of underwriters in this method. The underwriters from a
syndicate for this purpose. This method is adopted for large issues.

 Methods of Distribution :-
1. Public Issues :-

Under this method, the issuing company directly offers to the general public/institutions a fixed
number of shares at a started price through a document called prospectus. This is the most common
method followed by joint stock companies to raise capital through the issue of securities.
 2. Offer of Sale :-

The method of offer of sale consists outright sale of securities through the intermediary of Issue
Houses or share brokers. In other wards, the shares are not offered to the public directly.

3. Placement :-

Under this method, the issue Houses or brokers buy the securities outright with the intention of
placing them with their clients afterwards. Here the brokers act as almost wholesalers selling them in
retail to the public. The brokers would make profit in the process of reselling to the public. The Issue
Houses or brokers maintain their own list of clients and through customer contact sell the securities.
There is no need for a formal prospectus as well as underwriting agreement.

4. Rights Issue :-

Right issue is a method of raising funds in the market by an existing company.

A right means an option to buy certain securities at a certain privileged price within a certain
specified period. Shares, so offered to the existing shareholders are called right shares.