How do companies raise funds to start or expand their businesses? And how do investors get access to new securities and benefit from their growth potential? The answer to all these questions lies in the primary market. It is the market where new securities are created and sold for the first time by the issuers. It is also known as the new issue market, as it offers new opportunities for both the issuers and the investors.
Let us understand the features and the function of a primary market in India.
What is the Primary Market?
It is the place where the creation and sale of new securities take place. It enables the issuers to raise funds from the investors. This is done by offering them a stake in their business or a claim on their future cash flows.
Do you know?
The primary market is also known as the New Issue Market. This is because it’s where firms or governments issue stocks or bonds for the first time to raise capital.
They can then use it for various purposes like expanding their business, investing in new projects, or paying off debt.
Features of Primary Market
Companies come to the New Issue Market to create and sell new stocks or bonds for the first time.
Here are the main features of primary market:
- New Securities: Companies issue fresh shares or bonds to raise money.
- Direct Sale: These securities are sold straight from the company to investors.
- Raising Capital: Companies use this market to get funds for growth or new projects.
- Regulation: The Securities and Exchange Board of India (SEBI) oversees to ensure fairness and rule compliance.
- Investors: Anyone from individuals to institutions can buy these new securities.
A primary market example is an Initial Public Offering (IPO), where a company issues new shares directly to the public for the first time to raise capital.
Investors who participate in the primary market by buying these newly issued shares are buying them directly from the company.
This is different from the secondary market.
In the secondary market, investors buy and sell shares among themselves. The money exchanged doesn’t go to the company directly.
Functions of Primary Market
The functions of the primary market are manifold.
Let’s take a look!
• New Issue Offer: It organises the offer of new securities that have not been traded before.
The new issue offer can be in different forms:
- An IPO
- A follow-on public offer (FPO)
- A rights issue
- A preferential issue, a private placement, etc.
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• Underwriting Services: It provides underwriting services to the issuers. Here, an underwriter, usually an investment bank, guarantees the sale of the new securities. He bears the risk of unsold securities.
The underwriter charges a commission or a fee for its services, which is a percentage of the issue size.
• Distribution of New Issue: It facilitates the distribution of the new issue to the investors. This is done through various channels, such as brokers, dealers, agents, etc.
The distribution of the new issue is done with the help of a prospectus. It contains all the relevant information about the issuer, the securities, the financial statements, etc.
Types of Primary Market Issues
The primary market issues can be classified into different types based on the method of issuing and distributing the new securities.
Some of the types of primary market issuance are:
• Public Issue
A public issue is the most common method of issuing securities to the public at large. It can be done through an IPO, an FPO, or a rights issue.
- In an IPO, a company offers its shares to the public for the first time and gets listed on a stock exchange.
- In an FPO, a company offers additional shares to the public after being listed on a stock exchange.
- In a rights issue, a company offers shares to its existing shareholders in proportion to their holdings at a discounted price.
• Private Placement
A private placement means issuing securities to a selected group of investors. This can be institutional investors or high-net-worth individuals without involving the public.
A private placement is faster and cheaper than a public issue. It involves less regulatory compliance and disclosure requirements.
• Preferential Issue
A preferential issue means issuing securities to a specific class of investors. This can be promoters, strategic partners, creditors, etc., on a preferential basis.
A preferential issue requires a special resolution from the shareholders and a disclosure to the stock exchange.
It helps meet the urgent financial needs of the issuer or to improve its capital structure.
• Qualified Institutional Placement (QIP)
Listed companies issue securities to Qualified Institutional Buyers (QIBs) in a streamlined process.
It includes entities like Foreign Institutional Investors and Mutual Funds.
• Rights and Bonus Issues
Existing investors can purchase additional securities at a set price (rights issues) or receive free shares (bonus issues).
This helps enhance control and reward shareholders without additional costs.
Advantages of Primary Market
The primary market offers various advantages to the issuers, investors, and the economy.
Some of the advantages of the primary market are:
• For the issuers, the primary market provides a source of raising long-term funds from a large pool of investors.
The primary market also enhances the reputation and visibility of the issuers. It enables the issuers to reduce their dependence on debt financing.
• For the investors, the primary market offers an opportunity to invest in the new securities of the issuers and share their future profits and growth.
It also provides investors with a fair mechanism for the allocation of securities.
It protects the investors’ interests by ensuring compliance.
• For the economy, the primary market contributes to economic development and growth. The savings are channelled into productive sectors.
It also creates employment and wealth by generating economic activity and enhancing the capital market.
Disadvantages of Primary Market
The primary market has some disadvantages that may affect the issuers, investors, and the economy.
• High Costs: It involves high costs for the issuers. This includes underwriting fees, regulatory fees, marketing expenses, legal expenses, and accounting fees.
These costs reduce the net proceeds of the issue and may affect the profitability of the issuers.
• Overvaluation: It may result in overvaluation of the securities, especially in the case of IPOs.
This occurs where the demand may exceed the supply.
• Risk and Uncertainty: The primary market involves risk and uncertainty for both the issuers and the investors.
This may affect their credibility and financial position.
• Limited Information about the company: Investors may face a scarcity of information regarding the company’s financial performance and future prospects.
Joining the Primary Market
In India, new investors can easily participate in the primary market through the following:
- Online Platforms
- Financial Institutions and Brokers
Primary Market vs Secondary Market
There is a significant difference between the features of the primary market and those of the secondary market.
Let us take a look!
| Basis | Primary Market | Secondary Market |
| Function | New securities are issued and sold for the first time. | Previously issued securities are traded among investors. |
| Transactions | Initial sale of securities directly from issuer to investor. | Buying and selling of securities among investors; issuer not involved. |
| Role in Financial Ecosystem | Raises new capital for companies and governments. | Provides liquidity and determines market value of securities. |
| Participants | Issuers, investors, underwriters. | Retail investors, brokers, dealers, and market makers. |
| Examples | IPOs, bonds, and government securities. | Stock exchanges like BSE and NSE. |
Conclusion
The primary market is the starting line for securities in India. It’s where companies first introduce their shares or bonds to the world, looking to gather funds for their big dreams. For the investors, it offers a chance to be part of a company’s journey right from the beginning.
Remember, every great investment story starts somewhere, and for many companies and investors, that ‘somewhere’ is the primary market.
FAQs | New Issue Market in India
The primary market is where new securities are sold for the first time. On the flipside, the secondary market is where these securities are traded among investors.
The secondary market is a platform where investors buy and sell securities that have already been issued.
The key players in the primary market include companies issuing new securities, underwriters, institutional investors, retail investors, and regulatory bodies.
The secondary market’s players are broker-dealers, investors, banks, financial institutions, etc.
In the new issue market, important players are coporations, underwriters, registrars, brokers, investors, etc.
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Disclaimer: Investments in the securities market are subject to market risks; read all the related documents carefully before investing.