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Indian Financial System

Notes and selling 'second hand' or existing securities are transacted. Stock market is the nickname of
the secondary market.

5.1 Functions of Primary Market in India

The major function being performed by primary market in India is to facilitate transmission of
funds of those who have surplus income and are willing to invest to entrepreneurs seeking to set
up new undertakings or expand, modernize and diversify the operations of the existing
enterprises. Since activity of the primary market connects savings and investment, the primary
market is indispensable for economic and industrial development of the country. Besides, the
primary market has directed the flow of investment into long-term channels. The capacity of the
market machinery to reach down all potential savers irrespective of size of their savings and
investing institutions existing in the market has a direct bearing on volume of savings that may
be channelled into industry.

To perform its functions, the primary market renders three main services, viz.,
1. investigating and processing of proposals for new issues,
2. underwriting of new security issues, and
3. distribution of new securities to ultimate investors.

These services are rendered by the specialized agencies like financial institutions, brokers and
dealers in securities.

5.2 Structure of Primary Market in India

The agencies associated with functions of originating underwriting and distributions constitute
the organization of the primary market in India. Subscribers also form part of the market.
Issuers of new securities include agencies connected with the floatation of initial issues and
those concerned with the floatation of existing issues. These agencies are known as promoters
who conduct detailed investigations about the venture to be set up, formulates financial plan,
prepares prospectus for capital issues, approaches underwriting and brokerage firms for
underwriting the issues and makes arrangements for advertising and circulating the prospectus
to procure subscriptions. Thus, a promoter is the issuer or supplier of new companies in the
market. In the case of existing enterprises, they themselves are the suppliers of new issues when
they float further issues. However, when the existing companies offer new security issues only
to their existing stockholders, they will not constitute the suppliers of new issues in the new
issue market. On the contrary, if they offer issues to public through prospectuses, they are
regarded as the suppliers of new issues in the market. In the case of existing enterprises, it is the
Board of Directors who take decisions as to why, how and when new issues will be floated. They
also enter into agreement with underwriters and brokers before floating public issues.
Underwriting is another important activity of primary market. In our country, all financial
institutions and brokers undertake this business. Commercial banks have also entered into this
market recently in a big way through their subsidiaries. Insurance and investment companies
are also important underwriters. Underwriters in India have been found to have subscribed
more for preference shares and debentures than for equity shares as the latter are more suited to
the investing public and thus devolve less on the underwriters. Brokers help in the floatation of
new issues not only through underwriting or as managing brokers but also as financial
consultants, advising on the proper capital structure, methods of raising capital and requirements
of the Companies Act and the Securities Contracts (Regulation) Act, and listing requirements.

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