Page 304 - DMGT207_MANAGEMENT_OF_FINANCES

Unit 14: Capital Market and Financial Institutions

2. The capital market instruments among the following is: Notes
(a) Share certificate
(b) Secured premium notes
(c) Inter-bank call money
3. The major player in the Indian money market is:
(a) Indigenous banks
(b) Reserve Bank of India
(c) State Bank of India

14.2 Primary Market

The primary market is that part of the capital markets that deals with the issuance of new
securities. Companies, governments or public sector institutions can obtain funding through
the sale of a new stock or bond issue. This is typically done through a syndicate of securities
dealers. The process of selling new issues to investors is called underwriting In the case of a new
stock issue; this sale is an Initial Public Offering (IPO). Dealers earn a commission that is built
into the price of the security offering, though it can be found in the prospectus.
Features of primary markets are:
1. This is the market for new long term capital. The primary market is the market where the
securities are sold for the first time. Therefore it is also called the new issue market (NIM).
2. In a primary issue, the securities are issued by the company directly to investors.
3. The company receives the money and issues new security certificates to the investors.

4. Primary issues are used by companies for the purpose of setting up new business or for
expanding or modernizing the existing business.
5. The primary market performs the crucial function of facilitating capital formation in the
economy.
6. The new issue market does not include certain other sources of new long term external
finance, such as loans from financial institutions. Borrowers in the new issue market may
be raising capital for converting private capital into public capital; this is known as “going
public.”
7. The financial assists sold can only be redeemed by the original holder.

14.2.1 Methods of issuing Securities in the Primary Market

The different methods of share issues are discussed below:

Public Issue through Prospectus

A common method followed by corporate enterprises to raise capital through the issuing of
prospectus to public. Under this method, the issuing company directly made the offer to public.
The offer can be on face value for new issuing companies and can be on premium for the existing
companies. The contents of the prospectus should include the following: (i) Name and registered
office of the issuing company (ii) Existing and proposed activities (iii) Board of directors
(iv) Location of the industry (v) Authorized, subscribed and proposed issue of capital to public
(vi) Dates if opening and closing of subscription list (vii) Name of broker, underwriters, and

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