Study Notes

Primary and Secondary

Markets
Primary and Secondary Markets

Primary Market

Financial markets are classified as Primary (direct) and secondary (indirect) markets. The
Primary markets deal in new financial claims or new securities and therefore, they are called the
new issue markets. In other words, the market, where the first public offering of equity shares or
convertible securities by a company takes place which is followed by the listing of a company’s
shares on a stock exchange is called a primary market. It is also known as an ‘initial public
offering’ (IPO).

Different types of issues in the Primary Markets

Private
Public Right Issue Bonus
Placement

Initial Public Preferential

Offer (IPO) Allottment

Further public
Offer (FPO) Qualified Institutional
Placement (QIP)

A. Public Issue: When shares or convertible securities are issued to new investors, it is
called a public issue. Public issue can be further sub-divided into Initial Public Offer
(IPO) and Further Public Offer (FPO).
 Initial Public Offer: The first time when the shares are offered to all the
members of the public, who are eligible to participate in the issue, by a company
is called an Initial Public Offer (IPO). When a company makes an IPO the shares
of the company become widely held and there is a change in the shareholding
pattern. The shares which were privately held by promoters are now held by
retail investors, institutions, promoters etc.
An IPO will lead to the listing of shares on a stock exchange for ease of trading of
these shares.
An IPO can either be a fresh issue of shares by the company or it can be an offer
for sale to the public by any of the existing shareholders, such as the promoters
or financial institutions.
Fresh Issue of Shares: New shares are issued by the company to public
investors. The issued share capital of the company increases. The percentage

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Primary and Secondary Markets

holding of existing shareholders will come down due to the issuance of new
shares.
Offer for Sale: Existing shareholders such as promoters or financial institutions
offer a part of their holding to the public investors. The share capital of the
company does not change since the company is not making a new issue of
shares. The proceeds from the IPO go to the existing shareholders who are
selling the shares and not to the company. The holding of the existing
shareholders in the share capital of the company will reduce to the extent of
shares sold to the public.
 Follow-on Public Offer (FPO): A follow-on public offer is made by an issuer that
has already made an IPO in the past and now makes a further issue of securities
to the public. When a company wants additional capital for growth or to
restructure its capital structure by retiring debt, it raises equity capital through a
fresh issue of capital in a follow-on public offer.

B. Right Issue: When an issue of shares or convertible securities is made by an issuer to

its existing shareholders on a particular date fixed by the issuer (i.e. record date), it is
called a right issue. The rights are offered in a particular ratio to the number of shares or
convertible securities held as on the record date

C. Bonus Issue: When an issuer makes an issue of shares to its existing shareholders
without any consideration based on the number of shares already held by them as on a
record date, it is called a bonus issue. In Bonus Issue, the shares are issued out of the
Company’s free reserve or share premium account in a particular ratio.

D. Composite Issue: When the issue of shares or convertible securities by a listed issuer
on a public cum-rights basis, wherein the allotment in both public issue and rights issue
is proposed to be made simultaneously, it is called a composite issue.

E. Private Placement: When an issuer makes an issue of securities to a select group of

people not exceeding 200 and which is neither a right issue or a public issue, is called
Private Placement. Private Placement of shares or convertible securities by a listed
issuer can be of two types.

 Preferential Allotment: Preferential Allotment is the process by which allotment

of securities/shares is done on a preferential basis to a select group of investors.
The Company makes bulk allotment of Shares/ Securities to individuals,
companies, venture capitalists, or any other person through a fresh issue of
shares.
 Qualified Institutional Placement: When a listed issuer issues equity shares or
non-convertible debt instruments along with warrants and convertible securities
other than warrants to Qualified Institutions Buyers only, it is called QIP

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Primary and Secondary Markets

Difference between Private Placement and Preferential Allotment

The term “Securities” play a crucial role in the interpretation of these two terms. Allotment of any
kind of security on a private basis that attracts provisions of Section 42 of the Companies Act is
called Private Placement of Securities

whereas allotment of equity shares or securities convertible into equity shares attracts both
Section 42 and 62(1)(c) and is called Preferential Allotment of securities.

 Section 42 deals with a provision regarding allotment of securities of any kind whereas
Section 62(1)(c) provides for a specific provision of allotment of equity shares or
securities convertible into equity shares.
 In Private Placement any security including Equity shares, Preference shares, or
Debentures can be issued. In Preferential Allotment, only Equity shares and other
securities convertible into Equity shares can be issued
 Private Placement can be made to any person as identified by the Board, on the other
hand, Preferential Allotment can be made to members, employees, or any other
persons

Conditions to be met for Qualified Institutional Placement by a listed issuer

 A special resolution has to be passed by the shareholders for approval of QIP

 The equity shares of the same class, which are proposed to be allotted through qualified
institutions placement, have been listed on a recognized stock exchange for a period of
at least one year prior to the date of issuance of notice to its shareholders for convening
the meeting to pass the special resolution.
 A qualified institutions placement shall be managed by merchant banker(s)
 The minimum number of allottees for each placement of eligible securities made under
qualified institutions placement shall not be less than a) two, where the issue size is less
than or equal to two hundred and fifty crore rupees; b) five, where the issue size is
greater than two hundred and fifty crore rupees. Provided that no single allottee shall be
allotted more than 50% of the issue size
 The tenure of the convertible or exchangeable eligible securities issued through qualified
institutional placement shall not exceed sixty months from the date of allotment.
 The issuer shall not make any subsequent qualified institutions placement until the
expiry of two weeks from the date of the prior qualified institution’s placement made
pursuant to one or more special resolutions.

Source: SEBI Website

Secondary Market

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Primary and Secondary Markets

A secondary market is a market in which the purchase and sale of securities that are already
issued to the public for the first time and listed on the stock exchange take place. Therefore,
secondary markets are called stock exchanges and the over-the-counter market. When the
securities are sold and purchased by the holders of these securities openly the securities are
said to be traded in the secondary market

 The secondary equity market is where securities are traded after being initially offered to
the public in the primary market and/or being listed on the stock exchange.
 The stock exchanges along with a host of other intermediaries provide the necessary
platform for trading in the secondary market, and also for clearing and settlement. The
securities are traded, cleared, and settled within the regulatory framework prescribed by
the exchanges and the SEBI.
 The secondary market operates through two mediums, namely, the over-the-counter
(OTC) market and the exchange-traded market. The OTC markets are informal markets
where trades are negotiated. Most of the trades in government securities take place in
the OTC market.
 All the spot trades where securities are traded for immediate delivery and payment occur
in the OTC market.
 The other option is to trade using the infrastructure provided by the organized stock
exchanges.

Prominent Stock Exchanges in India (Source: SEBI Website)

Name of the Recognized Location Segments permitted

Stock Exchange
Bombay Stock Exchange Ltd Mumbai  Equity
 Equity Derivatives
 Currency Derivatives
(including Interest
Rate Derivatives)
 Commodity
Derivatives
 Debt
National Stock Exchange of Mumbai  Equity
India Ltd  Equity Derivatives
 Currency Derivatives
(including Interest
Rate Derivatives)
 Commodity
Derivatives
 Debt
Multi Commodity Exchange Mumbai  Commodity
of India Ltd derivatives

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Primary and Secondary Markets

National Commodity and Mumbai  Commodity

Derivatives Exchange Ltd Derivatives

India International Exchange GIFT CITY, Gujarat  Equity Derivatives

(INX)  Commodity
Derivatives
 Currency Derivatives
 Debt
NSE IFSC Ltd GIFT-SEZ Gujarat  Equity Derivatives
 Currency Derivatives
 Commodity
Derivatives
 Debt (Masala Bonds)

Difference between Primary and Secondary Market

Particulars Primary Market Secondary Market

Market where long-term funds are
raised by issue of new securities Market for trading of already
Meaning
like shares, debentures, bonds, issued securities
etc.
Also known as New issue market After market
Direct Indirect
Type of Purchasing (securities purchased directly from (investors trade amongst
the issuer of securities) themselves)
It does not provide funding to
To issuer (i.e. company) for companies; investors trade for
Financing to
setting up or expanding business investment purpose and capital
appreciation
Buying and Selling
between Issuer (i.e. company) & Investors Investors

Sale proceeds
Issuer (i.e. Company) Investors
received by
No. of times security Only once
Multiple times
is sold
Underwriters, merchant bankers, Brokers, stock exchange,
Intermediary
banker to the issue, etc clearing corp., etc
Price determined through book Market driven (depending on the
Price
building process demand and supply)
Initial Public Offer (IPO), Offer for
Types of sale (OFS), Follow-on Public offer Trading on exchanges like NSE,
issues/Examples (FPO), Rights Issue, Private BSE
Placement
Trading of any listed securities
Any security like Equity shares, (Spot market)
Instruments/markets
Bonds, Debentures, etc. Trading of derivatives (F&O
market)

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Primary and Secondary Markets

The main difference between the two is that, in the primary market, the involvement of the
company is directly in the transaction, while in the secondary market, the company has no
involvement because the transactions take place between the investors.

Similarities between Primary and Secondary Market

Some of the similarities between Primary and Secondary Market are as follows:

(a) Listing: The securities issued in the primary market are listed on a recognized stock
exchange. Trading in the secondary market can also be carried out only through the
stock exchange platform. The listing on stock exchanges provides liquidity as well as
marketability to the securities and provides discovery of prices for them.
(b) Control by Stock Exchanges: Through the mechanism of Regulations provided, the
stock exchanges exercise considerable control over the new issues as well as securities
already listed on the stock exchange. Stock Exchanges ensure that there is continuous
compliance by the issuer company of the regulations provided in the Listing Obligations
and Disclosure requirements given by SEBI.