Types of Financial Market

The financial market can be classified as primary market or secondary market based criterion whether the securities traded are newly issued or already outstanding and owned by capitalist. Primary market is the market for the purchasing and selling of new issues of securities. As  it deals in new issues of securities, it is also termed as new issues market.

On the other hand, the secondary market, deals already  issued securities and are owned by both individual and institutional capitalist. The buying and selling of already issued securities and outstanding take place in stock exchanges. Hence, stock exchanges comprise the secondary market in securities.

Participants in the Financial Market 

A financial market is basically a system by which financial securities are exchanged. This system is composed of securities, participants, regulations and market trading arrangements. The buyers and sellers are the major participants of securities or the capitalist and the issuers (who are the sellers of securities). Financial mediators are the second major class of players in the financial system. They play a important role in the smooth functioning of the financial system.

Regulatory Environment

In the form of various Acts passed by the legislative bodies, the financial system in a country is subjected to a set of rules and regulations. These rules and regulations  may differ from one country to another. In each country, assigned regulatory authorities employ the regulatory control of the financial system. In India,the Reserve Bank of India (RBI),the Securities and exchange Board of India (SEBI), the Ministry of Finance,   etc. are the major regulatory bodies employing supervision and  regulatory control  over the functioning of the financial system in the country.

Primary Market / New Issues Market

The primary market, also known as new issues market (NIM) does not have physical form or structure. All the agencies which participate  and provide the facilities in  the process of selling new issues to the capitalist constitute the NIM.

The NIM has three major functions. They are:

1.      Origination

2.      Underwriting

3.      Distribution 

Origination

Origination is the preliminary work in association with floatation of a new issue by a company. It deals with evaluating the feasibility of the project, economic, technical, and financial, as also making all agreements for the actual floatation of the issues. As part of the origination work, decisions may have to be taken on the following issues:

1.      Time of floating the issue

2.      Type of issue

3.      Price of the issue

Timings of the issue is important for its success. The type of issue whether debentures, equity, convertible securities or preference, has to be properly evaluated at the time of origination work. Pricing of the issue is a sensitive subject, as the public support market, the price of the issue to a large extent.

Underwriting

The second function performed by NIM is underwriting which is the process of rendering a guarantee to the issuer to ensure fruitful marketing of the issue. An underwriting is a institution or an  individual, which gives an undertaking to the stock issuing company to buy a specified number of shares of the company in the event of a shortage in subscription to the new issue.

Distribution

The new issue market executes a third function besides the functions of origination and underwriting. This third function is distribution of shares. It is carried out by agents, brokers and sub-brokers. New issues have to be advertised by using different mass media, such as  television, newspapers, magazines, internet, radio etc.

Methods of Floating New Issues 

The methods by which newly issued shares are floated in the primary market in India are:

1.       Public issue

2.       Rights issue

3.       Private placement

Public Issue

Public issue implies sale of securities to members of the public. The issuing company makes an offer for sale to the public directly of a fixed number of shares at a specific price. The offer is provided through a legal document termed as Prospectus.

Rights Issues

The rights issue implies selling of securities to the existing shareholders in proportion to their current holding.

Private Placement 

A private placement is the process of  a sale of securities, to a selected group of capitalist privately by a company. The securities are normally placed, in a private placement, with the mutual funds, institutional capitalist  or other financial institutions.

Principal Steps in Floating a Public Issue

In a public issue, capitalist are allowed to subscribe to the shares being issued by the company, during a specified period ranging from a minimum of three days to a maximum of ten days. The issue remains open during this period for subscription by the public. This is the primary activity in the process of a public issue. Thus, we can identify three discrete stages in the successful completion of a public issue.

1.       Pre issue tasks

2.       Opening and closing of the issue

3.       Post-issue tasks.

Pre issue Tasks

These are the preparatory responsibilities to be complied  before the actual opening of the issue.

Drafting and finalization of the prospectus
It is an important document in a public issue. It is the offer document which contains all the information concerning to the company which will be helpful to the capitalist to take at a proper decision regarding investing in the company.

Selecting the intermediaries and entering into agreements with them
In the process of a public issue, several intermediaries are involved. These intermediaries are to be registered with SEBI. Important classes of intermediaries are mentioned below:

1.       Merchant Banker

2.       Registrar to an issue

3.       Share transfer agent

4.       Banker to an issue

Attending to other formalities
The prospectus and application forms have to be printed and dispatched to all intermediaries and brokers for proper circulation among the investing public.

Opening and closing of the issue
The public issue is open for subscription by the public on the pre-announced opening date.

Post-issue tasks

Several processes are to be carried out to complete the process of public issue, after closing of the public issue. The activities are:

1.    All the application forms received have to be inspected, processed and tabulated.

2.    When the issue is not fully subscribed to, it becomes the financial obligation of the underwriters to subscribe to the shortage. The financial obligation of each underwriter has to be decided.

3.    When the issue is oversubscribed, the basis of allotment has to be determined in consultation with the stock exchange.

4.    Share certificate and allotment letters  have to be dispatched to the allottees. Refund orders also have to be dispatched to the applicants whose applications are disapproved.

5.    For trading, shares have to be listed in the stock exchange. For that, the issuing company has to do  a listing agreement with the stock exchange.

Book Building

The issue price is not fixed in advance in the book building process. It is decided by the offer of potential capitalist about the quote which they are willing to pay for the issue. The quote of the security is decided as the weighted average at which the majority of capitalist are willing to purchase the security. Therefore, in the book building process, the issue quote of a security is decided by the supply and demand coerces in the capital market.

Role of Primary Market

Primary market is the source for raising fresh capital in the form of debt and equity. It swabs resources from the common public (capitalist) and makes them available for meeting the long-term capital necessities of corporate industry and business. The primary market brings together the two principal components of the market, viz. the the seekers of capital and investors. The surplus funds  or savings with the capitalist are converted into productive capital to be used by companies for fruitful purpose. Thus, in the primary market capital formation takes place. The economic growth of a country is possible only through a vibrant and robust primary market.

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