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What is Primary Market? Research Team | Posted On Thursday, October 15,2009, 07:04 PM

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What is Primary Market?



Primary market is that market where Companies raise capital by issuing securities in the form of equity or debt. It’s called the primary market as investors purchase securities directly from the issuer. It’s an excellent way for Companies to raise capital as they can reach a large number of investors. Primary market is great for investors as it is subject to Government regulations. SEBI is the capital market regulator.

Companies can raise funds through Private Placement. A Company may start running solely on family money or a loan. As it grows, it needs more funds. This is when it opts for private placement. This is the sale of securities to a relatively small number of investors. These may be banks, mutual funds, insurers and even pension funds.

So what do you understand by primary market? Primary market helps a Company raise capital or finance. Let’s learn more on primary markets. Want to know more on IPO? We at will make it easy for you. Just give us a missed call on 022 6181 6111 to explore our unique Free Advisory Service. is not a seller of any financial products. We only provide FREE financial advice/education to ensure that you are not misguided while buying any kind of financial products.

What Is Primary Market?

Retail investors (ordinary investors like you and me who purchase securities for own account) and institutional investors, participate in the primary market. Retail investors participate heavily in equity and institutional investors in debt. Take a look at the participants in the primary market.

  • Association of Persons (AOP)
  • Banks
  • Companies
  • LLPs (Limited Liability Partnerships)
  • Foreign Portfolio Investors (FPIs)
  • Hindu Undivided Families. (HUFs)
  • Minors through guardians
  • Non Resident Indians (NRIs)
  • Persons of Indian Origin
  • Resident Individuals
  • Partnership firms
  • Trusts

What are qualified institutional buyers (QIBs)?

Qualified institutional buyers or QIBs are a group of investors who follow rules and regulations laid down by SEBI and the Companies Act 2013. According to SEBI, a QIB is one who has the expertise and financial knowledge to make an investment in capital markets. Take a look at some of the QIBs.

  • Mutual Funds
  • Scheduled Commercial Banks
  • FIIs (Foreign Institutional Investors) who are registered with SEBI
  • Insurers
  • Foreign Venture Capital Investors
  • Pension Funds with a minimum corpus of Rs 25 Crores
  • Public Financial Institutions.
  • Alternate Investment Funds (AIF)

So what is a qualified institutional placement or QIP? QIP is similar to private placement where a Company issues securities to certain QIBs like insurers or mutual funds. Only those Companies registered with SEBI issue securities to QIBs in qualified institutional placement or QIP.

Some terms and conditions for QIP:

  • A special resolution is passed by shareholders of that Company approving the QIP.
  • Shares which would be issued to shareholders must be listed on a Stock Exchange like NSE.
  • Listing must be done at least a year prior to the QIP.

Pricing of the QIP: The price of the QIP cannot be lower than the average of the highest price of the equity share and lower than the lowest prices on the stock exchange in that week which is 2 weeks before the relevant QIP date. At least 10% of the eligible securities must be offered to mutual funds and if they don’t take it up, they can be offered to other QIBs.

Functions of the primary market:

  • Organization of a new issue:

This demands a thorough investigation of the viability of the project. Financial arrangements are required vis-à-vis promoter’s equity, debt-equity ratio, liquidity ratio and foreign exchange requirement.

  • Underwriting of a new issue:

Underwriting is very important in a new issue. If the underwriter doesn’t sell the requisite number of shares to the public (A specific amount of the new issue at a fixed price is guaranteed by the underwriter), then the underwriter must purchase the unsold shares. An underwriter may be a financial institution who earns a commission on the underwriting.

  • Distribution of the new issue:

One of the main steps in the distribution of the new issue is the issue of the prospectus. The prospectus is an invitation to the public to purchase the issue. You get details on the Company, issue and the underwriters.

See Also: Mutual funds with High Returns

Features of the primary market

A Company makes a new issue to get long term capital. Securities are issued directly to investors without any intermediaries. The Company gets money and then issues security certificates to investors. The Company uses the money for growth and expansion.

You can participate in the primary market with:

Different types of issue:

Public issue: The Company issues a prospectus encouraging the general public to purchase its shares and debentures.

Offer for sale (OFS): A venture fund invests in an unlisted Company when it is small. This Company grows with time and when it’s big, the investors like a venture fund, sell their shares to the public and the Company gets listed on a stock exchange like BSE or NSE. The money goes to the investors and not the Company.

Initial Public Offer or IPO: When Company’s shares are available to the general public for the first time, it’s called an IPO. The shares get listed on the stock exchange.

Follow On Offer or FPO: When a listed Company makes another public issue to raise more capital, it’s called an FPO.

Right Issue: When an existing Company issues more shares, the first invite goes to existing shareholders. This is a right issue and the shareholder may accept this offer or assign a part/all of it, to another person.

Preferential Issue: Shareholders with preference shares enjoy preference when it comes to dividend distribution.

Primary market instruments

Non Convertible Debentures: (NCDs)

Companies issue NCDs to raise money from the public. NCDs have a specific tenure and Companies pay interest on this investment. You cannot convert NCDs into equity shares. On maturity you get the Principal back. NCDs may be secured against Company assets or unsecured. Rating agencies like CRISIL, ICRA or CARE rate NCDs. Interest offered on NCDs is around 8-11%. Opt for NCDs with a high rating. Many investor pick up NCDs in the primary market.

Indian Depository Receipts (IDR):

Let’s say a foreign Company listed abroad wants to raise money from Indian investors. It issues shares which are held in a trust at a foreign custodian bank. A domestic custodian bank issues an instrument against this called Indian Depository Receipt.

Advantages of primary market

  • Companies get to raise capital at low costs.
  • Securities issued in the primary market can be sold immediately in the secondary market. This means high liquidity.
  • It’s an excellent method of diversification to reduce risk.
  • Price manipulation is low compared to secondary markets.
  • There’s no brokerage, transaction fees and stamp duty.
  • There are no market fluctuations in the primary market.
  • It’s a vehicle for direct foreign investment.
  • It mobilizes savings.
  • Capital can be raised through the sale of treasury bonds.

Disadvantages of primary market

  • In case of oversubscription, small investors don’t get an allocation.
  • Money gets locked in for a long time.

Primary market vs Secondary market

  • In a primary market fresh shares are issued. In a secondary market, existing shares are traded.
  • The amount received from the issue of shares goes to the Company in a primary market. In the secondary market, the buyer buys the shares and the seller gets the money. The Company doesn’t get anything.
  • Securities are issued at one price in the primary market. Securities are exchanged at market price in the secondary market.

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