NEW ISSUE MARKET Definition:

The primary market is that part of the capital markets that deals with the issuance of new securities. Companies, governments or public sector institutions can obtain funding through the sale of a new stock or bond issue. This is typically done through a syndicate of securities dealers. The process of selling new issues to investors is called underwriting. In the case of a new stock issue, this sale is an initial public offering (IPO). Dealers earn a commission that is built into the price of the security offering, though it can be found in the prospectus. Primary markets creates long term instruments through which corporate entities borrow from capital market.

Features of primary markets are:

This is the market for new long term equity capital. The primary market is the market where the securities are sold for the first time. Therefore it is also called the new issue market (NIM). In a primary issue, the securities are issued by the company directly to investors. The company receives the money and issues new security certificates to the investors. Primary issues are used by companies for the purpose of setting up new business or for expanding or modernizing the existing business. The primary market performs the crucial function of facilitating capital formation in the economy. The new issue market does not include certain other sources of new long term external finance, such as loans from financial institutions. Borrowers in the new issue market may be raising capital for converting private capital into public capital; this is known as "going public." The financial assets sold can only be redeemed by the original holder.

Functions of new issue market:

The most important function of the new issue market is to facilitate transfer of resources from the savers to the entrepreneurs who are seeking funds for setting up new enterprises, or for expanding or diversifying an existing one. it will also help convert the existing proprietary concerns or private companies into public limited companies by the sale of their shares to the investing public: New companies-also called initial issues

 Old companies-also called further issues

New securities are issued mainly for the purpose of obtaining money or capital funds. such issues of securities are called new money issues. It provides funds to entrepreneurs for fresh capital investments or for expansion and diversification. But sometimes, it may be used to pay off previous debts of the company. In such cases they are excluded from the category of new issues. They are: 1. Issue of bonus shares for capitalising part of the reserves held by the company. it represents only bookkeeping entries. 2. Exchange issues by which shares of one company are exchanged for securities of another. This takes place when a dominant company takes over another company or when two companies belonging to the same group merge. From the operational standpoint, the main function of the new issue market can be classified into three : 1. Origination 2. Underwriting 3. Distribution

Origination : Origination refers to the work of investigation, analysis and processing of new proposal. Every new proposal is carefully investigated, analysed and processed by a specialised agency known as the issue house .The success of a new issue depends on the investment climate .A preliminary investigation has to be conducted by the specialised agency. It carefully studies the technical, economic, financial and legal aspects of the companies which want to raise funds from the market is well managed, strongly based, has good market prospects and is worthy of stock exchange quotation. The services of these issue houses are of advisory in nature. These services include advice as to the time of flotation of an issue, and the type, the method and the price of an issue. when shares are issued during periods of prosperity,

there will be oversubscription, and during periods of depression there will be no public support for the issue. So, the most opportune time for the issue should be determineds The type of issue refers to the kind of securities to be issued. There are equity, preference, debenture and convertible securities. The decision regarding this depends on the market trend. Thus, a study regarding the possibility of marketing different types of securities may be made.

Underwriting : When shares issued by a company in the capital market, some times all of them may not be taken by the public. If the company fails to receive minimum subscription, it will have to return the application money. Every company has to face such uncertainties when they make new issues. To help such companies, some specialised agencies have up into the field. They are generally called underwriters. In case of underwriting, the underwriter guarantees that the shares underwritten by him will be sold. In case these shares are not taken by the public, he will himself purchase the remaining shares and thus company will be able to obtain subscription for all the shares issued. Underwriting agreements are mainly of three types: 1. The underwriters may undertake to purchase the securities which are offered by the issuing company to the public and are not purchased by the investing class within a stipulated time. 2. The underwriters may purchase the issue outright for the purpose of resale through their organization. 3. When the issue is very large, a single underwriter may not be able to underwrite the whole issue. Under such circumstances, few underwrite the issue. This is known as syndicate underwriting. In India, underwriting can be classified into: i. ii. Institutional and Non- institutional underwriting.

 Institutional underwriting:
In India, there are a large number of institution which undertake the underwriting of shares. They mainly underwrite shares of projects which have high national importance, for example, the projects aimed at producing steels, fertilizers etc. Institutional underwriting in India is, therefore, development-oriented. But the institutional underwriters are not prevented from underwriting the issues of projects to which the public readily subscribe. In fact, their main concern is to support projects in the priority sector. The following institutions underwrite the issuing projects which have some national importance: Life insurance corporation of India Unit trust of India Industrial development bank of India Industrial finance corporation of India Industrial credit and investment corporation of India General insurance companies Commercial banks

In addition to underwriting, these institutions grant term finance by way of loans on debentures. The institutional underwriters are approached under the following circumstances: 1. When the issue is very large and the broker underwriters are unable to cover the entire issue. 2. When the gestation period is long. 3. When the project is weak. 4. When the project is in the priority sector and it may not be possible for it to offer an attractive return on investment. 5. When the project is promoted by technicians. 6. When the project is new to the market.

Non institutional underwriting:

 Brokers who are members of recognised stock exchanges. Private investment trust, investment companies and individuals.

Distribution :
The third function of the new issue market is distribution of shares. Distribution is the function of sale of shares and debentures to the investors. This job is performed by brokers and dealers in securities. They maintain regular and direct contact with the ultimate investors.

Methods of flotation of new issues:

A company can raise the required capital in the primary market by the following methods: a. Public issue b. Right issue c. Bonus issue d. Private placement e. Offer to the employees.

Public issue : Public issue is the most popular method of raising capital. It involves raising of funds direct from the public. The capital of a company can be divided into: 1. 2. 3. 4. 5. Authorised capital, Issued capital, Subscribed capital, Called-up capital, Paid up capital.

These are now briefly described. Authorised capital : It is the maximum amount of capital that a company is permitted to collect as per its memorandum of association . A company cannot collect capital over and above the amount mentioned in the memorandum.

Issued capital : A company may not require the entire capital mentioned in the memorandum as authorised capital. In the initial stages only a portion of the capital will be required by a company. Therefore, only a part of the shares will be issued to the public. The issued capital is that portion of the authorised capital which is issued to the public for subscription. Subscribed capital: It refers that portion of the capital for which the public has applied. Called-up capital: It represents the amount that is actually required to be paid by the shareholders. Paid up capital: It is the actual amount of money received from the shareholders. This amount is arrived at by deducting calls- in- arrears from the called-up capital.

Public issue through prospectus:

Public limited companies in India, which raise the required funds in the new issue market, commonly adopt prospectus method especially where the purpose of raising the new capital is to finance some capital expenditure. Legally, no public limited company can issue shares to the public without issuing prospectus. Steps to be ataken before the issue of prospectus. A company which makes a public issue through prospectus has to follow certain procedure. First of all, after obtaining the certificate of incorporation, the affairs of the company are taken over by the first directors appointed in accordance with the provisions of law. They will elect one of their members as the chairman of the board of directors, if none is named in the articles of association. The board attends to the following: Appointment of various expert agencies such as bankers, auditors, and secretary. Entering into underwriting contract, brokerage contract, etc. Making arrangements for the listing of shares on stock exchanges.

 Drafting a prospectus for the purpose of issue to the public. Definition of prospectus: As per sec 2(36), a prospectus means any document described or issued as prospectus and includes any notice, circular, advertisement or other document inviting offers from the public for subscription or purchase of any share in or debentures of a body corporate. So, a prospectus is an invitation to the public to subscribe towards shares or debentures of a company.

Contents of prospectus: Sec 56 of the companies act lays down that the matters and reports stated in schedule II to the act must be included in a prospectus. Its contents are the following: 1. General information. It include the following details. a. Name and address of the registered office of the company b. Names of stock exchanges where the application for listing is made. c. Activities of the company d. Location of the industry e. Minimum subscription f. Date of opening of the issue g. Date of closing of the issue h. Names and addresses of auditor and lead managers i. Names and addresses of the underwriters and the amount underwritten by them.

2. Capital structure of the company. a. Authorised, issued, subscribed and paid-up capital. b. Size of the present issue. 3. Terms of the present issue a. Terms of payment b. How to apply c. Any special tax benefits. 4. Particulars of the issue, such as:

a. Objects b. Project cost c. Means of financing. 5. Company management and project 6. Management perception of risk factor A company making a public issue inform the public through statutory announcements in the newspapers. The application forms are made available through stock brokers and others. The subscription is kept open for a period of 3-7 days. Minimum subscription: Minimum subscription is the minimum amount which, in the opinion of the directors, must be raised by the issue of shares to provide the sums in respect of each of the following: 1. The purchase price of any property purchased or to be purchased which is to be paid for out of the proceeds of the issue; 2. The preliminary expenses and commission payable by the company 3. Repayment of any money borrowed by the company for the above purposes 4. The working capital and 5. Any other expenditure, stating the nature and purpose thereof and the estimated amount in each case.

Right issue :
Right issue is a method of raising additional finance from existing shareholders by offering securities to them on pro-rata basis. wellestablished companies which pay regular dividends for many years would like to offer new shares and debentures to existing to shareholders. The shares of these companies are already listed in the stock exchange and are traded regularly in the stock exchange. The rights issue may be made either at par or at a premium. The right shares are offered at a price much lower than the market price. They are proposed to the existing shareholders through a circular. Normally, the right shares are not underwritten. In case the shareholders are not willing to subscribe towards the right issue, they renounce the right in favour of another person.

A company making a rights issues sends a letter of offer along with an application form which consists of four forms marked A,B,C and D. Form A is used for acceptance of the rights and application for additional shares. Form B can be used to renounce the offer in favour of another. Form C is meant to be used as an application by the person in whose favour the rights have been renounced, and Form D is used to make a request for split forms. All these forms are to be sent to the company within the stipulated period which is usually 30 days. This method of issuing securities is considered to be inexpensive as it does not require any underwriters or brokers. So the underwriting commission and the brokerage commission can be saved. Bonus issue : Bonus shares are share issued to the existing shareholders out of accumulated profits. These shares are issued as fully paid up shares in lieu of dividend. Because shares are issued in the ratio of existing shares held. The shareholders are not required to pay any additional amount for these shares. Bonus share are also known as stock dividend because these are the dividends are paid in the form of shares. These shares may be issued in the form of preferences or equity shares. The amount may also be used in paying up any amount for the time being unpaid on any shares. Stock dividend is capitalisation of profits and not distribution of profits to shareholders. The two other sources fro which bonus shares may be issued are share premium account and capital redemption reserve account.

Limitations of bonus issues:

The issue of bonus shares is considered to be valuable by most shareholders. But, in reality, the bonus shares do not affect their wealth. They, being only capitalisation of past earnings, merely divide the ownership of the company into a large number of share certificates. In fact, the stock dividend does not give any extra or special benefit to the shareholders. To a company, the main disadvantage of the issue of bonus share is that it is costlier to administer than cash dividend.

Private placement:

Private placement means the direct sale by a company of its securities to a limited number of sophisticated investors. The issue is sold mainly to institutional investors. The issues include public limited and private limited companies of both private and public sectors. The investors include Unit Trust of India, Life insurance corporation, General insurance of India, Army Group Insurance, Navy Group Insurance, Air Force Group insurance, and State Level Financial instrument offered in the private placement market are equity shares, preference shares, cumulative convertible preference shares, convertible and non- convertible debentures, and so on. The private placement market accommodates smaller debt financing than the public market. The companies that do not wish to disclose information to the public resort to this type of market .A small amount Rs.50 lakhs can be raised in the private placement market, whereas the public issue market requires a minimum of Rs.1.80 crore.

Offer To Employees:
Here, stock option or offering shares to the employees has gained much popularity in many countries of the world. This method enables employees to u relations, wider distribution of shares, lower labour turnover, and higher efficiency.

Operators in the new issue market:

1. 2. 3. 4. 5. Brokers to the issue Managers to the issue Bankers to the issue Registrars Underwriters

Brokers to the issue:

When shares are issued through offer for sale method, stock brokers or salesmen are engaged by companies to find suitable market for the securities who do not guarantee the sale of securities. commission or brokerage is paid only on the amount applications received with their signatures. This method suffers from uncertainty of market. Managers to the issue In recent years, managers to the issue have played a very important role in the marketing of company securities in India. Some of their important functions are: 1. Advise about the terms and the time of issue so as to avoid clash with other issues. 2. Advise about listing and acting as liaison between the company and the stock exchange. 3. Find out the possibility of securing loans by approaching financial institutions. 4. Advise about pre-issue publicity. 5. Help in drafting and printing of the prospectus. 6. Maintain day-to-day contact on various details relating to the issues in order to get the support of the brokers. 7. Advise on the capital structure of the company.

Bankers to the issue:

When shares are to be issued by public issue, it is appoint bankers to issue. Their important functions are: 1. Distribution of application forms of issue through their branches all over the country . 2. Collection of money from the application on behalf of the company either in cash or by cheque. 3. Collection and co-ordination of application forms and monitor the same to the registrars and issue managers.

Registrars:

Registrars is another important operator in the new issue market. They perform a large number of functions ,such as the following:

1. Collect applications forms from the bankers to the issue and scrutinise the same. 2. Finalise of basis of allotment. 3. Issue and depends allotment letters 4. Issue share certificates and refund orders within the stipulated time. 5. Satisfy listing requirements and get the shares listed on one or more stock exchange.

Underwriters : It is the responsibility of the underwriters to see that the shares or debenture of the company offered to the public are taken up. If any portion of shares or debentures is not taking up by public, sthe underwriters will have to buy them.