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Primary Market

  • Definition:
    • The primary market is the market for new issues or new financial claims.
    • It's where securities are issued to the public for the first time.
    • In essence, it's the platform where borrowers exchange new financial securities for long-term funds.
  • Methods of Raising Capital in the Primary Market:
    • 1. Public Issue:
      • Securities are offered to the general public through a public offering.
      • This involves advertising the issue, inviting applications from the public, and allocating securities based on the applications received.
    • 2. Rights Issue:
      • Existing shareholders are given the right to subscribe to new shares in proportion to their existing holdings.
      • This gives existing shareholders the opportunity to maintain their proportionate ownership in the company.
    • 3. Private Placement:
      • Securities are sold privately to a select group of investors, such as institutional investors (insurance companies, pension funds) or high-net-worth individuals.
      • This method is typically faster and less expensive than a public issue.
  • Key Functions of the New Issue Market:
    • 1. Origination:
      • Involves the investigation, analysis, and processing of new project proposals.
      • Merchant bankers typically perform this function.
    • 2. Underwriting:
      • Underwriters agree to purchase a specified number of securities from the issuing company if the public does not subscribe to the entire issue.
      • This protects the issuing company from the risk of under-subscription.
    • 3. Distribution:
      • Involves the sale of securities to the ultimate investors.
      • This function is performed by brokers, agents, and other intermediaries who maintain contact with investors.

The primary market plays a crucial role in the economy by enabling companies to raise capital for growth, expansion, and other business activities.

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