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Capital Market -1(Primary or New Issue Market)

Introduction and Meaning

The new issue market represents the primary market where new securities, i.e. shares or bonds that have never been previously issued, are offered. Both the new companies and the existing ones can raise capital on the new issue market. The prime function of the new issue market is to facilitate the transfer of funds from the willing investors to the entrepreneurs setting up new corporate enterprises or going in for expansion, diversification, growth or modernisation. Besides, helping corporate enterprises in securing their funds, the new issue market channelises the savings of individuals and others into investments.

The two facets of this market, i.e. supply and demand, are represented by the issuing companies and the investors respectively. But then the organisation of the new issue market is not complete without the specialised agencies, intermediaries and institutions, etc., which promote issues of new securities and help in selling, transferring, underwriting etc. These agencies include financial institutions, underwriters, brokers, merchant bankers, etc.

As the new issue market directs the flow of savings into long-term investments, it is of paramount importance for the economic growth and industrial development of a country. The availability of financial resources for corporate enterprises, to a great extent, depends upon the status of the new issue market of the country.

It must also be noted that although the functions and organisation of the new issue market are quite different from that of the secondary (stock) market, the sentiment in the stock market influences the activity in the new issue market. The stock market is more sensitive and reacts fast to the changes in the economic, political and business conditions of a country. But then this affects the new issue market also. The historical study of the activity in the two market show that whenever there has been boom in the stock market, there has been increased activity in the new issue market also.

The new issue market deals with the new securities which were not previously available to the investing public, i.e., the securities that are offered to the investing public for the first time. The market, therefore, makes available a new block of securities for public subscription. All financial institutions which contribute, underwrite and directly subscribe to the securities are part of new issue market. There are various intermediaries like registrars, custodians and merchant bankers that are involved in this activity of issuing new securities. The main function of a new issue market is to facilitate transfer of resources from savers to the users. The savers are individuals, commercial banks, insurance companies etc. The users are public limited companies and the government. It is not only a platform for raising finance to establish new enterprises but also for growth/expansion/diversification/modernization of existing units. From a retail investor's point of view, investing in the primary market is the first step towards trading in stocks and shares.

On this basis the new issue market can be classified as:

1. Market where firms go to the public for the first time through initial public offering (IPO).

2. Market where firms which are already trading raise additional capital through seasoned equity offering (SEO)

FEATURES OF NEW ISSUE MARKET

(1) It is the market for the new long term capital.

(2) Here the securities are issued by company for the first time directly to the investors.

(3) On receiving the money from the new issues, the company will issue the security certificates to the investors.

(4) The amount obtained by the company after the new issues are utilized for expansion of the present business or for setting up new ventures.

(5) External finance for longer term such as loan from financial institutions is not included in new issue market. There is an option called 'going public' in which the borrowers in new issue market raise capital for converting private capital into public capital.

(6) The financial assets sold can only be redeemed by the original holder of security.

FUNCTIONS OF NEW ISSUE MARKET

The main functions of a new issue market can be divided into a three service functions :

1.Origination. It refers to the work of investigation, analysis and processing of new project proposals. It starts before an issue is actually floated in the market. This function is done by merchant bankers who may be commercial banks, all India financial institutions or private firms. At present, financial institutions and private firms also perform this service. Though this service is highly important, the success of the issue depends, to a large extent on the efficiency of the market.

2.Underwriting. It is an agreement whereby the underwriter promises to subscribe to a specified number of shares or debentures or a specified amount of stock in the event of public not subscribing to the issue. If the issue is fully subscribed, then there is no liability for the underwriter. If a part of share issues remain unsold, the underwriter will buy the shares. Thus, underwriting is a guarantee for marketability of shares. There are two types of underwriters in India-institutional (LIC, UTI, IDBI, ICICI) and Non-institutional are brokers.

3.Distribution. It is the function of sale of securities to ultimate investors. This service is performed by specialized agencies like brokers and agents who maintain a regular and direct contact with the ultimate investors.

ROLE OF NEW ISSUE/PRIMARY MARKET

1.Capital Formation. It provides attractive issue to the potential investors and with this company can raise capital at lower costs.

2.Liquidity.As the securities issued in primary market can be immediately sold in secondary market. Thus the rate of liquidity of securities is higher.

3.Diversification of Risk. Many financial intermediaries invest in primary market, therefore there is less risk of failure in investment as the company does not depend on a single investor. The diversification of investment reduces the overall risk.

4.Reduction in Cost. Prospectus containing all details about the securities are given to the investors hence reducing the cost in searching and assessing the individual securities.

GROWTH AND DEVELOPMENT OF NEW ISSUE MARKET IN INDIA

The new issue market in India is not fully developed as compared to other advanced countries like U. S. A., U. K. and Germany. But there has been tremendous growth in the sphere of new issue activity in India in the 1980s and 1990s. The trend in the amount of capital raised by non-government public limited companies on the new issue market in India. The total amount of capital raised during 1961 was only Rs74.0crores which increased to Rs87.7crores during 1971 and to Rs301.1crore during 1981. The amount of capital annually raised continued its increasing trend upto the year 1987. Then there was a temporary decline in the volume of capital raised during 1988.The new issue (primary capital) market received an encouragement in the year1976 in the form of a number of issues raised for the purpose of dilution of foreign equity holding under FERA. Subsequently the liberalisation of industrial and new capital issue policies in 1984-85 gave a real shot in the arm to the securities market. Further the relaxation of norms relating to foreign investments and incentives provided by the government helped to sustain the impetus of growth in the market.

In the recent years, a number of new instruments such as PCDs, FCDs, PSBs and CCPs, etc. have been introduced in the securities market resulting into and upsurge in the new issue market. The securities scam during 1991 caused a temporary set back to the growing new issue market in India. But the new economic policy of the Narsimha Rao government and the setting up of Securities and Exchange Board of India to promote orderly and healthy growth of securities market providing investor protection has to be regarded as one of the most important developments on the securities market of India in recent years. As a result of these developments, the institutional investors and the mutual funds have gained importance, both in the primary as well as secondary market. Another recent development that took place in the market is the setting up of Over-the Counter Exchange of India (OTCEI) which began its operations in 1992 permitting smaller companies to raise capital. During the year 1993, there has been a tremendous growth in the new issue activity resulting into Rs 19,825 crores of capital raised by non-government public limited companies in India.

In 1994-95 and 1995-96 , the new issues market remained subdued due to number of reasons, including political uncertainty.

Despite the maintenance of pace of primary market reforms aimed at providing greater flexibility to the issuers and strengthening the criteria for the entry of first time issuers to the primary market, the downward trend in primary markets continued in the year 1996-97. The primary market was characterised by a reduced number of issues and lower amounts raised. The capital raised through new issues during the period of April to December 1996, was down to Rs10,369.21 crore from Rs14,151.1 crore raised in the corresponding period of the previous year. In a similar trend, the number of issues rose from 12.5crore to Rs13.07 crore. the main reasons behind this downtrend in the primary market issuance include the strict eligibility criteria introduced by SEBI and the general downtrend in the secondary market.

The down trend in the capital market continued in 1997-98 also despite the fact that SEBI took a number of measures designed to boost investor confidence. The primary market remained depressed with substantial decline in number of issues and amount raised. Capital raised through new issues during 1997-98 registered a steep decline to Rs4,570 crore from Rs14,726 crore in 1996-97. The number of issues also fell substantially to 111 in 1997-98 from 882 in 1996-97 and 1726 in 1995-96.

During April-December, 1999, a sum of Rs5,723 crore was raised through public and rights issues from the primary market. This represented an increase of 46 percent over the amount raised in the same period of the previous year. During this period, the proportion of resources raised through public issues declined to 75.8 percent from 89.6 percent in the corresponding period of 1998-99. The share of initial public offers (IPOs) increased from 7.8 percent to 31.9 percent, indicating improvement in the prospectus of new/unlisted companies for resources mobilisation from primary market. Most of the resources mobilisation from primary market in 1999-2000 has been by the private sector .

A number of initiatives were taken of further rationalise the Initial Public Offer (IPO) norms during the year 2000-2001. Despite these initiatives, the year witnessed a noticeable decline in resources mobilisation from the primary market. During April-December, 2000, resource mobilisation through public and rights issues registered a significant decline by 25.9 percent to Rs4.240 crore through 124 issues from Rs5.723 crore through 60 issues during the corresponding period of 1999-2000. However, resource mobilisation from public issues accounted for 91 percent of the total resource mobilisation from primary market as against 75.8 percent last year.

Resource mobilisation through public and rights issues during the first nine months of 2001-2002 amounted to Rs3,777 crore, which constituted 89.1 percent of the relatively modest amount of Rs4,240 crore raised during the corresponding period of the previous financial year. Resource mobilisation through IPOs accounted for only 5.5 percent of the total resource mobilisation during April-December 2001 compared to 56.7 percent in the corresponding last year.

The outcomes on the primary market in 2001-02 and in the first seven month of the year 2002-03.Public offerings are classified into Initial Public Offerings (IPOs) , where a company goes public for the first time, Rights Issues, where a company sells additional shares to existing shareholders, and Seasoned Equity Offerings (SEOs), where a listed company sells shares to the public.

It is revealed that primary market activity in the first seven months of the year has been fairly subdued, compared with the low levels experienced in the previous year. There is a substantial scale of securities issuance taking place through the private placement route. The private placement route has become a mechanism where securities can be placed with a few wholesale buyers of securities, without incurring the overheads of the public issue.

The volume of public issues rose by roughly 5 times to a level of Rs35,859 crore in 2004 out of which equity issuance amounted to Rs33,475 crore. It was the highest ever level of public equity issuance in India's history, over two times higher than the previous peak of 1995. The public debt continued to remain at low levels. A major development in the Indian primary market has been the introduction of 'screen based book building', where securities are auctioned through an anonymous screen based system, and the price at which securities are sold is discovered on the screen. This eliminates the delays, risks and implementation difficulties associated with traditional procedures. Resource mobilisation through book building rose steadily from 25 percent of public equity offerings in 2001 to 53 percent in 2002, 64 percent in 2003 and 99 percent in 2004.

In 2005, Rs30,325 crore of resources were raised on the primary market of which Rs9,918 crore were made up by 55 companies which were listed for the first time (IPOs). The primary issuance of debt securities fell to a low of Rs66 crore in 2005 which reflects the far reaching difficulties of the debt market.

The primary capital market has remained upbeat during the year 2006 and 2007. The aggregate resource mobilisation in the market especially through IPOs and private placement was much higher in calendar year 2006 than during the previous year. The total equity issues mobilised in 2007 was Rs58,722 crore of which Rs33,912 crore was accounted for by the Initial Public Offerings (IPOs).

During financial year 2011-12 (upto 31 December 2011) resource mobilisation through the primary market witnessed a sharp decline over the year 2010-11 as shown in table given below. The cumulative amount mobilised as on 31st December 2011 through equity public issues stood at Rs9,683 crore as compared to Rs48,654 crore in 2010-11. The mean IPO size for year 2011-12 was Rs168 crore as compared to Rs671 crore in 2010-11. Further, only Rs4,791 crore was mobilised through debit issue as compared to Rs9,451 crore in 2010-11.

During financial year 2012-13 (upto 31Dec., 2012) resource mobilization through primary market (equity issue) witnessed an upward movement. The cumulative amount mobilised as on 31Dec.2012 through equity public issues stood at Rs 13,050 crore. During 2012-13,20 new companies [initial public offers(IPOs) ] with resource mobilisation amounting to Rs6.043 crore were listed at the National Stock Exchange (NSE) and Bombay Stock Exchange(BSE) with mean IPO size of Rs302 crore. However, in the public issue of corporate debt category, Rs4,974 crore was mobilised through debt issue in 2012-13 compared to Rs35,611 crore in 2011-12.