Page 80 - DCOM304_INDIAN_FINANCIAL_SYSTEM

Unit 5: Primary Market

In India, underwriting for public issues was compulsory till October 1994 in the sense that an Notes
issue had to be underwritten if the issuer opted for it while applying for permission to make an
issue, or if the SEBI felt that it has to be underwritten. The underwriting business was quite
lucrative and development on underwriters were small due to good public response till 1992-93.
But around 1992-93, many underwriters lost their money as many issues turned out to be dual;
development became enormous and underwriters backed out of their commitments. Since October
1994, the SEBI has made underwriting optional.

Notes The distribution function of the primary market facilitates the sale of securities to
ultimate investors. This function is performed by specialized agencies like brokers and
dealers in securities. They maintain a constant and close link with the issuers and the
ultimate investors on the one hand, and issuers and other agencies of capital market, on
the other. Finally, subscribers, who buy new issues floated in the market, constitute a
significant segment of the new issue market.

5.3 Methods of Distribution of Securities

Distribution of securities to prospective investors to mop up their surpluses is a highly specialized
activity that requires a lot of expertise and experience. As such, companies seeking to garner
funds from a large number of investors-both individuals and institutions-have to hire the services
of the specialized agencies such as underwriters, brokers, merchant bankers, etc. Besides, there
are other ways which can be employed for selling securities to the investing public. In India,
following methods are usually employed to garner funds from the public through floatation of
securities:
5.3.1 Public issue Through Prospectus

In this method, a public limited company invites the public at large through prospectus to
subscribe to the issue of securities. According to the SEBI norms, a minimum of 49% of the total
issue at a time is to be offered to public. A prospectus is a document that provides information
about the company and its proposed issue. The company and the directors signing this document
are personally liable for any false statement or misrepresentation of material facts in the
prospectus.
Public issue through prospectus may take the form of direct selling, sale through investment
intermediaries and underwriting of issues. Direct selling of securities method can be used when
a company intends to approach a small number of large individual or institutional investors.
However, there is no certainty of procuring the desired funds from investors through direct
selling. This is why companies may take the help of intermediaries and specialized agencies
such as brokers, merchant bankers, for selling such securities. These agencies charge commission
for their service. However, they do not provide any guarantee to the issue regarding the sale of
securities. To remove this deficiency and to ensure certainty of procurement of the desired
funds, companies approach underwriting firms who, in lieu of commission, undertake the
guarantee of buying the unsubscribed portion of the offer. Thus, an underwritten placement
method is relatively more safe method of acquiring funds from the public at large.

The pure prospectus method of selling securities is very popular method because it is useful to
both to the issuers as well as to the investors. The issuers have the benefit of wider diffusion of
ownership of securities, thus avoiding the possibility of concentration of controlling power in
the hands of a few. Investors have the advantage of getting detailed information about the
company and its issue through prospectus as per the SEBI requirements. This method also

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