Page 45 - DCOM507_STOCK_MARKET_OPERATIONS

Stock Market Operations

Notes Elaborate primary market intermediaries in India
Discuss role of NSCCL

Introduction
The securities markets of our country, where securities of corporate enterprises are traded,
comprise two main markets, viz., primary market and secondary market. In the primary market,
new securities are floated and exchanged for cash, credit or other securities. New security issues
are floated both by the newly set up organizations and by the existing ventures. This market is
popularly designated as new issues market. Contrary to this, in the secondary market buying
and selling ‘second hand’ or existing securities are transacted. Stock market is the nickname of
the secondary market.
In this unit we will study about the various products in primary and secondary market and the
investment procedure involved.

3.1 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.

In India, underwriting for public issues was compulsory till October 1994 in the sense that an
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 devolvement on underwriters was 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;
devolvement 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.

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