Primary market instruments

These are the tools or securities used by companies to raise fresh capital directly from investors for the first
time.

1. Equity Shares

• Represent ownership in a company.

• Shareholders get voting rights and a share of profits (dividends).
Types:
❖ Ordinary Equity Shares – regular voting rights.
❖ Equity Shares with Differential Rights (DVR) – limited or no voting rights but higher dividends.

2. Preference Shares

• Give shareholders a fixed dividend before equity shareholders are paid.

• Priority in repayment if the company winds up.
Types:
❖ Cumulative / Non-cumulative
❖ Redeemable / Irredeemable
❖ Participating / Non-participating

3. Debentures & Bonds

• Long-term debt instruments acknowledging a loan taken by the company.

• Debenture holders get fixed interest, regardless of profits.
Types:

❖ Convertible Debentures (can be converted into equity shares)

❖ Non-convertible Debentures (pure debt instruments)

Euro Issues
When an Indian company wants to collect money from investors in other countries, it can sell its shares (or
similar certificates) in the international market, usually in a foreign currency like US Dollars.
Euro issues instruments

1. Global Depository Receipt (GDR)

A certificate issued by an overseas depository bank that represents ownership of a certain number of shares
in a foreign company. Traded in international stock exchanges (outside the USA), e.g., London Stock
Exchange, Luxembourg Stock Exchange.
How it works:

[Link] Indian company issues shares to an overseas depository bank.

[Link] bank holds the shares in custody (through a domestic custodian bank in India).
[Link] bank issues GDRs to foreign investors.
[Link] holders get benefits like dividends, but usually limited voting rights.
2. American Depository Receipt (ADR)

• Same concept as GDR, but specific to the USA.

• Traded in American stock markets like NYSE or NASDAQ.
• Denominated in US Dollars.
How it works:

• An Indian company deposits shares with a US depository bank.

• The bank issues ADRs to American investors.
3. Foreign Currency Convertible Bond (FCCB)

• A bond issued in a foreign currency by a company.

• Investors receive fixed interest in foreign currency.
• After a fixed period, they can convert the bonds into equity shares of the issuing company at a pre-
set price.

Advantages:

• Lower interest rate compared to regular loans (because of conversion option).

• Helps raise money internationally without immediate equity dilution.
4. Offshore Mutual Fund

• A mutual fund that invests money outside the investor’s home country.
• Allows investors to gain exposure to foreign companies, assets, and markets.
• An Offshore Mutual Fund is set up in a foreign country but invests in Indian securities (for foreign
investors), or vice versa.

Intermediaries in the New Issue Market

They act as a link between the company and investors.

[Link] Banker

A Merchant Banker is a financial institution or company that provides professional services to companies for
raising capital in the primary market. In India, they are regulated by SEBI (Merchant Bankers) Regulations,
1992 and must be registered with SEBI. They are also called Lead Managers when they
handle public issues.

Functions of Merchant Banker

• Plan the public issue – decide price, size, and timing.

• Prepare documents – draft prospectus and get SEBI approval.
• Promote the issue – through ads, brokers, and investor meetings.
• Coordinate with others – registrars, bankers, underwriters, stock exchanges.
• Check all information – due diligence to ensure facts are correct.
• Advise the company – best way to raise funds.
• Underwrite the issue – guarantee minimum subscription if needed.
• Post-issue work – allot shares, refund money, list shares on exchange.
Role of Merchant Banks in Issue Management

❖ Pre-Issue Management (Before selling the shares)

▪ Plan the issue – decide size, price, timing, and method.
▪ Prepare draft prospectus and get SEBI approval.
▪ Do due diligence – check all company details are correct.
▪ Arrange underwriting (guarantee minimum subscription).
▪ Promote the issue – ads, roadshows, and investor meets.
▪ Coordinate with registrars, bankers, and brokers.
❖ Post-Issue Management (After selling the shares)
▪ Monitor application money collection.
▪ Finalise allotment of shares to investors.
▪ Arrange refunds for unsuccessful applicants.
▪ Ensure listing of shares on the stock exchange.
▪ Prepare post-issue compliance reports for SEBI.

[Link] to the Issue

A Registrar to the Issue is a company or agency that handles all the paperwork and record-keeping for a
public issue of shares or debentures.

• Applications from investors are collected and recorded.

• Shares are allotted to the right people.

• Refunds are sent to those who didn’t get shares.

• Share certificates or Demat credits are given to successful applicants.

Functions of Registrar to the Issue

A. Pre-Issue Functions (Before shares are sold)

1. Help in designing the application forms.

2. Arrange printing of forms and prospectus.

3. Set up systems to collect investor applications.

4. Coordinate with bankers to receive applications and money.

B. Post-Issue Functions (After shares are sold)

1. Count and verify all applications received.

2. Finalise the list of people who will get shares.

3. Arrange refunds for those who don’t get shares.

4. Send share certificates or credit shares to Demat accounts.

5. Keep records of all investors for future reference.

3. Underwriters

Underwriters are people or organisations that promise to buy the shares if the public does not buy them fully.
This ensures the company will get the money it needs.

If a company issues shares worth ₹100 crore but only ₹80 crore is bought by the public, the underwriter will
buy the remaining ₹20 crore worth of shares.

Functions:

• Guarantee full subscription of the issue.

• Reduce the company’s risk of failure in raising money.

• Sometimes also help in promoting the issue.

4. Brokers to the Issue

Brokers are agents who help sell the shares to investors in the primary market. They connect the company
with potential buyers.
Simple Example:
When an IPO opens, brokers (like Angel One, Zerodha) invite and help investors apply for the shares.

Functions:

• Encourage investors to subscribe to the issue.

• Distribute application forms and explain the process.

• Sometimes assist in marketing the issue.

5. Bankers to the Issue

These are banks appointed by the company to collect the money from investors during a public issue.

Simple Example:
When you apply for an IPO through your bank account, the banker to the issue holds your money until
shares are allotted or refunded.

Functions:

• Accept application money from investors.

• Maintain proper records of all funds received.

• Transfer the money to the company after allotment.

• Help process refunds to investors who did not get shares.

Recent Trends in the Primary Market

❖ Increase in IPOs – Many companies, especially tech startups, are coming out with public issues to
raise funds.
❖ Digital IPO Applications – Investors can now apply online through UPI and demat accounts without
paper forms.
❖ SME Platforms Growing – Small and Medium Enterprises are raising money through special SME
stock exchange platforms.
 ❖ Book Building Method Popular – Most big IPOs now use book building to decide the share price
based on investor demand.
❖ Oversubscription – Many popular IPOs are getting applications many times higher than the number
of shares available.
❖ Anchor Investors – Big institutional investors are investing in IPOs before they open for the public,
creating trust.
❖ Global Participation – Foreign investors are actively participating through instruments like GDRs
and FCCBs.
❖ Green Shoe Option – Some issues allow selling extra shares if demand is high.
❖ Focus on Compliance & Transparency – SEBI has made stricter rules to protect investors.

Reasons for Poor Performance in the Primary Market

❖ Weak Economy – When the economy slows down, investors avoid new issues.
❖ Market Volatility – Unstable stock market makes people afraid to invest in IPOs.
❖ Overpricing of Issues – If share prices in the IPO are too high, investors lose interest.
❖ Poor Company Fundamentals – Weak business model, low profits, or high debt reduce investor
confidence.
❖ Lack of Awareness – Many small investors don’t know about new issues or how to apply.
❖ Past Negative Experience – If earlier IPOs gave poor returns, investors become cautious.
❖ Regulatory Delays – Slow approvals and compliance issues discourage companies from coming to
the market.
❖ Competition from Other Investments – Investors may prefer gold, real estate, or fixed deposits over
IPOs.
❖ Political or Global Uncertainty – Events like elections, wars, or global crises reduce risk-taking.