New Issue Market

Chapter Objectives

To understand the concept and functions of new issue market To explain the process of floating the shares To know measures taken to protect the interests of the investor To learn the emerging trends in the primary market

Concept of New Issue Market

It is a market in which the new securities or stocks are issued. It is also known as primary market. The securities may be issued by a new or an existing company. It is used by the companies to acquire capital for the purpose of setting up a new company for expanding an existing company. Investment bankers and brokers act as intermediaries for selling the stocks to the public.

Functions of New Issue Market

The three main functions of new issue market are:

Origination:

Deals with the origin of new securities to be traded in the market. Underwriting: Removes the element of uncertainty in the subscription of shares. Distribution: Facilitates sale of securities to the investors.

Parties Involved in New Issue Market

The various parties involved in the new issue market are as follows:

Managers to the issue: Lead managers are appointed for managing the entire process of issuing securities. Registrars: They deal with the allocation of shares to the applicants. Underwriters: They give an assurance to the company that they will buy the securities in case the investors dont buy them.

Parties Involved in New Issue Market (Contd.)

Bankers: Selected banks are assigned with the responsibility of collecting the application money of the public issue. Advertising agents: They promote the public issue. Financial institutions: They are responsible for underwriting the securities and providing financial assistance to the companies.

Placement of the Issue

It refers to the ways used by the issuer to issue or float the shares. The following are the ways through which the shares can be floated:

Prospectus Bought out deals Private placement Rights issue Book building

Prospectus

It gives details regarding the company and issue. It specifies the terms and conditions on which the shares and debentures are issued. It helps the investor to assess the risks involved in the issue.

Bought Out Deals

It is a method in which the shares are offered to the investment banker who sells it to the public at a later date. Advantages:

The funds can be realised by the promoters without any delay. The cost of raising the funds is reduced. It helps those entrepreneurs to raise funds who are not familiar with the share market.

Private Placement

In this method, a company privately sells or places its shares before a selected group of investors such as corporate bodies, financial institutions and high networth individuals. This group of investors sells the shares to the public at a later date and at a suitable price.

This method is usually used both by the public and private limited companies.
Equity shares, preference shares, debentures, bonds, etc. are sold through private placement. Some of the advantages of private placement are as follows:
Time effective Cost effective Access effective

Rights Issue

When a public company already listed in the exchange issues new shares to the existing shareholders in order to raise capital, it is called rights issue. The shareholders have the right to accept or renounce the offer in favour of any person.

Book Building

It is a technique used for marketing the public offer of equity shares of a company. The likely demand for shares can be estimated more realistically under book building. Decision is taken by the company on the amount of funds to be raised. The merchant banker files a draft prospectus, excepting issue price, with the Securities and Exchange Board of India (SEBI).

Pricing of New Shares

It is a process of fixing the prices of shares. The offer prices are fixed by the issuers and the merchant bankers. Pricing of shares must be done according to the guidelines issued by SEBI. Shares can be priced in two ways:

At premium

At par value

Allotment of Shares

It means distributing the shares of the company to the investors. A company before allotting shares must first invite the applications from the investors. The allotment of shares is carried out on the basis of the SEBI guidelines.

Investors Protection in New Issue Market

The investors must be protected in order to ensure smooth functioning of the new issue market. The following steps should be taken to protect the interest of the investors:
1.

2.

Project appraisal: The technical and economic feasibility of the project is evaluated so as to determine whether or not the project should be financed. Underwriting: The reputed institutions underwrite the issue.

Investors Protection in New Issue Market (Contd.)

3. 4.

5.

6.

7.

Disclosures in the prospectus: All the data and information contained in the prospectus is evaluated. Clearance by the stock exchange: After the evaluation of the prospectus it is cleared by the stock exchange. Signing by board of directors: The Board of Directors of the company sign the prospectus and it is made available to the investors for inspection. SEBIs role: SEBI scrutinizes the offer documents carefully. Any type of misleading information is deleted by the SEBI. Redressal of investors grievances: The grievances and complaints of the investors are addressed by the Registrar of Companies.

Recent Trends in New Issue Market

The following are the recent trends of the new issue market:

Aggressive pricing Poor liquidity Low returns Low volume Economic slow down

Chapter Summary
By now, you should have: Understood the concept of new issue market Understood the process of floating the shares Knowledge of the measures taken to protect the interest of the investors Learnt about the emerging trends in the primary market