New Issue Markets
Companies periodically issue securities to raise funds for various financial needs, such as modernization, expansion, and diversification initiatives. These securities are offered directly to investors both individual and institutional through a mechanism known as the primary market or new issue market. When a company offers its securities to the public for the first time, this process is referred to as an Initial Public Offering (IPO).
The primary market plays a crucial role for both newly established and existing businesses. It serves as a platform that enables companies to mobilize capital by issuing various types of securities, thereby supporting industrial growth and development.
Features of the Primary Market
Market for New Long-Term Capital:
The primary market is where new securities are issued and sold for the first time. As such, it is also referred to as the New Issue Market (NIM).
Direct Issuance to Investors:
In the primary market, securities are issued directly by companies to investors. There is no involvement of intermediaries in the initial transfer.
Capital Raised Goes to the Company:
The funds raised through the issuance go directly to the issuing company. In return, the company provides new security certificates to the investors.
Purpose of Fundraising:
Companies use the primary market to raise funds for setting up new businesses, or for expanding, modernizing, or diversifying existing operations.
Facilitates Capital Formation:
The primary market plays a vital role in the economic development of a country by enabling capital formation, which is essential for industrial and infrastructural growth.
Does Not Include Institutional Loans:
The primary market does not cover other forms of long-term external finance, such as loans from financial institutions. Its focus is solely on the issuance of new securities.
Enables 'Going Public':
One key function of the primary market is to allow private companies to convert their ownership into public ownership by issuing shares to the public commonly known as going public.
Classification of New Issues in the Primary Market
The primary market plays a vital role in channeling funds from savers to borrowers by facilitating the issuance of new securities. New issues in the primary market can be classified into the following categories:
1.First Issue by Newly Established Companies (No Track Record):
These are initial public offerings (IPOs) by companies promoted by individuals or groups with no prior track record in business.
2.First Issue by New Companies Promoted by Existing Companies (With Track Record):
This category includes new ventures or subsidiaries launched by established companies that already have a proven track record.
3.First Issue by Existing Private or Closely Held Companies (Less Than 3 Years of Track Record):
These are offerings by relatively new private companies that have been operational for less than three years.
4.First Issue by Existing Private or Closely Held Companies (With At Least 3 Years of Track Record):
These issues come from private companies that have a minimum of three years of operational and financial performance history.
5. Public Issue by Existing Listed Companies:
These are additional public offerings made by companies that are already listed on a stock exchange. These issues could be for expansion, debt reduction, or other financial needs.
Methods of Issuing Securities in the Primary Market
Companies can raise capital in the primary market through various methods, depending on their structure, needs, and target investors. The main methods include:
1.Initial Public Offer (IPO):
This is the process through which a company offers its shares to the public for the first time. An IPO allows a private company to become publicly traded by listing its shares on a stock exchange. It is commonly used by new or growing companies to raise large-scale funding.
2.Rights Issue:
This method is available only to existing companies. A rights issue involves offering additional shares to existing shareholders in proportion to their current holdings, usually at a discounted price. It helps companies raise capital while giving current shareholders the opportunity to maintain their ownership percentage.
3.Preferential Issue:
A preferential issue is the allotment of shares or other securities to a selected group of investors (such as promoters, institutional investors, or strategic partners) at a pre-determined price. This method is quicker and often used when companies need to raise funds swiftly without going through a public offer.
Difference Between New Issue Market (NIM) and Secondary Market
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Aspect
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New
Issue Market (NIM)
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Secondary
Market
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Purpose
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Provides funds directly to companies for raising capital.
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Facilitates trading of existing securities among investors; no new
funds go to the company.
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Type of Securities
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Deals with freshly issued securities (e.g., IPOs).
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Deals with already existing or previously issued securities.
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Infrastructure
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Does not have a physical location; it operates through lead managers
and issuing companies.
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Has a well-established physical and digital infrastructure, like stock
exchanges (e.g., NSE, BSE).
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Availability of Securities
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Securities are available only during the subscription period.
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Securities can be bought or sold at any time during market hours.
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Participants
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Issuers (companies) and investors.
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Investors trading among themselves (buyers and sellers).
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Frequently Asked Questions (FAQs)
What is an Initial Public Offering (IPO)?
An IPO is a company’s first public issue of shares. It marks the transition from a private company to a publicly traded one, allowing investors to buy ownership in the company.
Who can invest in the New Issue Market?
Both individual investors and institutional investors (like mutual funds, banks, etc.) can invest in the primary market.
Is investing in the primary market risky?
Yes, like all investments, primary market investments carry risk. Since the issuing company might not have a trading history, evaluating the company's fundamentals and IPO prospectus is essential before investing.
