Unit – 2 Notes [Financial Markets]

INDIAN CAPITAL MARKET-PRIMARY MARKET

Primary Market – Primary Market System
1. Introduction
The Primary Market is the segment of the financial market where new securities are issued and sold to investors for
the very first time. It serves as the platform through which corporations, governments, and institutions raise capital
directly from investors. Unlike the secondary market (stock exchanges), where existing securities are traded among
investors, the primary market deals with fresh issues.
This market is crucial for:
o Financing business expansion
o Funding infrastructure projects
o Supporting government expenditure
o Strengthening capital formation in the economy

2. Primary Market System – Key Features

1. Issuance of New Securities: Companies issue shares, bonds, debentures, or other financial instruments for
the first time.
2. Direct Fund Raising: Funds flow directly from investors to the issuing entity (company/government).
3. Regulatory Oversight: In India, the Securities and Exchange Board of India (SEBI) regulates the primary
market; globally, regulators like the SEC (U.S.) or FCA (U.K.) monitor it.
4. Methods of Issue: Public issues, rights issues, private placements, preferential allotments.
5. Role of Intermediaries: Investment banks, underwriters, merchant bankers, and brokers facilitate the process.
6. Price Discovery: Through book building or fixed-price methods.
7. One-time Sale: Each security can be issued only once in the primary market; afterward, it trades in the
secondary market.

3. Mechanisms of the Primary Market System

a) Public Issue (Initial Public Offering – IPO)
• The most common method where companies issue shares to the public for the first time.
• Global Example:
o Saudi Aramco (2019) – raised ~$29.4 billion, the world’s largest IPO.
o Alibaba (2014, NYSE) – raised $25 billion.
• Indian Example:
o LIC IPO (2022) – raised ₹21,000+ crore, India’s largest IPO.
o Zomato (2021) – one of India’s first major tech unicorns to go public, raised ₹9,375 crore.

b) Rights Issue
• Existing shareholders are given the right to buy additional shares, usually at a discount.
• Global Example:
o HSBC Holdings (2009, U.K.) raised £12.5 billion via rights issue post-global financial crisis.
• Indian Example:
o Reliance Industries (2020) raised ₹53,125 crore through rights issue; India’s largest ever rights issue.

c) Private Placement
• Securities are sold directly to select institutional investors (e.g., banks, pension funds, insurance companies).
• Global Example:
o Airbnb (2020, U.S.) raised $2 billion in private placements before IPO.
• Indian Example:
o HDFC Bank often raises capital via Qualified Institutional Placements (QIP) to institutional
investors.

1
d) Preferential Allotment
• Shares are issued to a select group of investors, usually promoters or strategic investors.
• Global Example:
o Tesla (2015, U.S.) – issued preferential convertible bonds to fund expansion.
• Indian Example:
o Yes Bank (2020) – issued preferential shares to State Bank of India and other investors during its
restructuring.

e) Book Building Process

• A price discovery mechanism where investors bid within a price band, and the final price is decided based on
demand.
• Global Example:
o Facebook IPO (2012) – used book-building to raise $16 billion.
• Indian Example:
o Infosys, TCS, and ICICI Bank IPOs used book building to determine offer price.

4. Intermediaries in the Primary Market System

1. Merchant Bankers / Lead Managers – handle the issue process (e.g., Kotak Mahindra Capital in India,
Goldman Sachs globally).
2. Underwriters – guarantee subscription by agreeing to purchase unsold shares.
3. Registrars & Transfer Agents – process applications and maintain records.
4. Bankers to the Issue – manage application money.
5. Brokers – help investors subscribe.

5. Importance of Primary Market System

• For Corporates: Source of long-term capital for expansion.
• For Government: Funds for infrastructure, development projects, fiscal deficit management.
• For Economy: Encourages capital formation and resource mobilization.
• For Investors: Provides opportunities to participate in corporate growth stories at an early stage.

6. Recent Trends in the Primary Market

• Globally: Rise of tech IPOs (Airbnb, Uber, Snowflake), SPACs (Special Purpose Acquisition Companies).
• India: Surge in start-up listings (Nykaa, Paytm, Policybazaar), digital book-building, SME platforms on
NSE and BSE.

7. Conclusion
The Primary Market System acts as the gateway of capital formation by channelling savings into productive
investments. Whether through IPOs, rights issues, or private placements, it fuels both corporate growth and national
economic development.
• Global perspective: IPOs like Alibaba and Aramco showcase how corporations leverage markets for global
expansion.
• Indian perspective: Issues like LIC, Reliance Rights Issue, and Zomato highlight how India’s primary
market has matured into a robust platform, attracting both domestic and global investors.

2
Types of Scrips in Financial Markets
1. Introduction
In stock markets, the term scrip refers to the shares or securities of a company listed and traded on a recognized
stock exchange. Investors classify scrips based on their market capitalization, financial performance, growth
potential, volatility, and industry sector.
This classification helps:
o Investors make informed portfolio decisions
o Analysts assess risk–return profiles
o Regulators and exchanges categorize companies for indices

2. Types of Scrips
(A) Based on Market Capitalization
Market capitalization = Current share price × Total outstanding shares.
1. Large-Cap Scrips
o Represent companies with high market capitalization, stable earnings, and strong fundamentals.
o Lower risk, moderate returns.
o Global Example: Apple Inc. (U.S.), Microsoft, Nestlé (Switzerland).
o Indian Example: Reliance Industries, TCS, Infosys, HDFC Bank.
2. Mid-Cap Scrips
o Represent mid-sized companies with growth potential.
o Higher risk than large-caps, but with better upside potential.
o Global Example: Spotify (Sweden/U.S.), Zoom Video Communications.
o Indian Example: Aditya Birla Capital, L&T Technology Services, Mphasis.
3. Small-Cap Scrips
o Smaller companies with relatively low market capitalization.
o Very high growth potential but also high volatility.
o Global Example: Beyond Meat (U.S.), DraftKings.
o Indian Example: Tanla Platforms, Brightcom Group.

(B) Based on Investment Style

1. Growth Scrips
o Belong to companies with rapidly increasing revenues and earnings, often reinvesting profits.
o High price-to-earnings ratios.
o Global Example: Tesla (U.S.), Amazon (U.S.) in its early years.
o Indian Example: Zomato, Nykaa, Infosys (during its growth phase).
2. Value Scrips
o Underpriced relative to fundamentals; attract investors seeking long-term value.
o Lower P/E ratios and stable dividends.
o Global Example: Coca-Cola, IBM.
o Indian Example: ITC, Coal India, ONGC.
3. Dividend/Payout Scrips
o Belong to companies that distribute a large share of profits as dividends.
o Suitable for income-focused investors.
o Global Example: Procter & Gamble (U.S.), Unilever (U.K./Netherlands).
o Indian Example: Hindustan Unilever (HUL), Infosys (dividend consistent), Coal India.

(C) Based on Risk & Volatility

1. Blue-Chip Scrips
o Financially sound, industry leaders, stable performance.
o Lower risk, long-term stability.
o Global Example: Johnson & Johnson, Microsoft.
o Indian Example: HDFC Bank, Reliance Industries, TCS.

3
 2. Speculative Scrips
o Extremely volatile, driven by market speculation, not fundamentals.
o Risky but may deliver short-term gains.
o Global Example: Meme stocks like GameStop (U.S.), AMC Entertainment.
o Indian Example: Penny stocks like Vodafone Idea (in speculative phases), Suzlon Energy (during
turnaround speculation).

(D) Based on Sector/Industry

• Tech Scrips – Apple, Alphabet, Infosys, Wipro.
• Pharma Scrips – Pfizer, Johnson & Johnson, Sun Pharma, Dr. Reddy’s.
• Banking/Finance Scrips – JPMorgan Chase, HSBC, HDFC Bank, ICICI Bank.
• Energy Scrips – ExxonMobil, Shell, Reliance Industries, ONGC.

(E) Other Classifications

1. Defensive Scrips
o Perform steadily even during downturns; essential goods/services.
o Global Example: Walmart (U.S.), Nestlé (Switzerland).
o Indian Example: HUL, Dabur, ITC.
2. Cyclical Scrips
o Performance linked to economic cycles (boom and recession).
o Global Example: Ford Motors, Boeing.
o Indian Example: Tata Motors, Larsen & Toubro.
3. Penny Scrips
o Very low-priced, high-risk stocks with uncertain fundamentals.
o Global Example: OTC-listed companies in U.S.
o Indian Example: Ruchi Soya (before Patanjali acquisition), Alok Industries (before Reliance
takeover).

3. Importance of Classifying Scrips

• Helps investors match their risk appetite.
• Assists fund managers in portfolio diversification.
• Aids regulators and exchanges in index composition (NIFTY 50, S&P 500).
• Provides insights into sectoral trends and macroeconomic cycles.

4. Conclusion
The classification of scrips—by size, growth potential, dividend policy, or risk profile—acts as a compass for
investors in navigating the stock market.
• Global Perspective: Apple, Tesla, GameStop, and Coca-Cola show how scrips can represent different
categories from blue-chip to speculative.
• Indian Perspective: Reliance, TCS, HDFC Bank, Nykaa, and ITC highlight how the Indian market mirrors
global practices, while also showcasing unique opportunities in emerging sectors.
Thus, knowing the types of scrips enables investors, policymakers, and corporates to align strategies with risk,
return, and growth objectives.

4
Issue of Capital: Process, Regulation, Pricing of Issue
The issue of capital refers to the process by which companies raise funds from investors by offering shares,
debentures, or other securities. This is a critical mechanism for:
• Financing expansion and diversification
• Reducing debt dependence
• Supporting new projects and acquisitions
The issue of capital takes place mainly in the Primary Market, under strict regulations to protect investor interests
and ensure fair pricing.

2. Process of Issue of Capital

The process varies slightly across countries but broadly follows these steps:
(a) Preparation & Approvals
• The company decides the quantum of capital to be raised.
• Prepares a Draft Red Herring Prospectus (DRHP) with details of operations, financials, and risks.
• Files with regulatory authority (e.g., SEBI in India, SEC in the U.S., FCA in the U.K.).
Examples:
• Airbnb (U.S., 2020) filed its prospectus with SEC before its IPO, raising $3.5 billion.
• LIC (India, 2022) filed DRHP with SEBI before its mega IPO of ₹21,000+ crore.
(b) Appointment of Intermediaries
• Lead Managers / Merchant Bankers: Manage issue process (Goldman Sachs, Kotak Mahindra Capital).
• Underwriters: Assure minimum subscription by purchasing unsold shares.
• Registrars: Handle investor applications and allotments.
Examples:
• Facebook (2012 IPO) – Morgan Stanley, J.P. Morgan, and Goldman Sachs acted as lead underwriters.
• Zomato (2021 IPO) – Kotak Mahindra Capital, Morgan Stanley, and Credit Suisse were book-running lead
managers.
(c) Regulatory Clearance
• Draft prospectus reviewed by regulator for compliance.
• Mandatory disclosures ensure transparency and prevent fraud.
Examples:
• Uber (2019 IPO) – faced regulatory scrutiny from SEC over disclosures.
• Yes Bank (India, 2020) – required SEBI and RBI approval for preferential allotment during its restructuring.
(d) Marketing & Roadshows
• Companies and bankers present growth story to institutional investors.
• Creates demand and builds market sentiment.
Examples:
• Alibaba (2014, NYSE) – conducted global roadshows, leading to record $25 billion IPO.
• Nykaa (India, 2021) – engaged in aggressive pre-IPO marketing to attract retail and institutional investors.
(e) Issue Opening & Subscription
• Issue opened for a fixed period (usually 3–5 days).
• Investors apply via ASBA (Application Supported by Blocked Amount) in India or equivalent systems
abroad.
(f) Allotment & Listing
• Securities allotted based on demand and pricing.
• Listed on stock exchange for secondary trading.
Examples:
• Snowflake (U.S., 2020 IPO) – priced at $120/share, jumped 111% on listing day.
• Paytm (India, 2021 IPO) – raised ₹18,300 crore but listed at a discount due to overpricing concerns.

Regulation of Capital Issues

(a) Global Regulators
• U.S.: Securities and Exchange Commission (SEC).
• U.K.: Financial Conduct Authority (FCA).
• EU: European Securities and Markets Authority (ESMA).

5
(b) India’s Regulatory Framework
• SEBI (Securities and Exchange Board of India) is the apex regulator.
• Key regulations:
o SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 (ICDR).
o Companies Act, 2013.
o RBI guidelines (for foreign participation).
(c) Objectives of Regulation
• Ensure fair play and transparency.
• Protect investor interests.
• Prevent fraudulent and manipulative practices.
Examples:
• WeWork (U.S., 2019) – IPO pulled back due to SEC’s concerns over governance and disclosure.
• Reliance Industries Rights Issue (2020) – closely monitored by SEBI to ensure fair pricing and allotment.

4. Pricing of Capital Issues

Pricing is a critical step, as it determines demand, investor participation, and market performance post-listing.
(a) Fixed Price Issue
• Price decided by the company in consultation with lead managers.
• Transparent but may lead to mispricing if demand is misjudged.
Examples:
• Infosys IPO (1993, India) – fixed price at ₹95 per share.
• Google IPO (2004, U.S.) – initially considered fixed-price but switched to auction-style book building.
(b) Book Building Process
• Price discovered through investor bids within a price band.
• Widely used in modern IPOs for fair demand-based pricing.
Examples:
• Facebook IPO (2012, U.S.) – used book building, raised $16 billion.
• Zomato IPO (India, 2021) – price band ₹72–76; discovered price ₹76.
(c) Premium Pricing
• Applied when companies have strong fundamentals and high investor demand.
• Shares issued at a premium over face value.
Examples:
• Tesla (U.S.) consistently issued equity at premium valuations due to strong growth expectations.
• HDFC Bank (India) frequently issues shares at a premium due to robust fundamentals.
(d) Discount Pricing (Underpricing)
• Often used to attract investors, especially in volatile markets.
• Creates a “listing gain” for initial subscribers.
Examples:
• Snowflake (U.S., 2020) – underpriced at $120, surged to $245 on debut.
• IRCTC IPO (India, 2019) – priced at ₹320; listed at ₹644, delivering 100% listing gain.

Challenges in Capital Issue

o Overpricing Risks – Paytm (India, 2021) faced criticism for inflated valuation.
o Under-subscription Risks – smaller IPOs often fail to attract sufficient demand.
o Regulatory Delays – can impact timing (e.g., WeWork IPO cancellation).
o Market Conditions – global recession, inflation, or interest rate hikes can delay issues.

The issue of capital is a lifeline for corporates, enabling them to access funds from a wide investor base. The process
(prospectus, intermediaries, subscription, and listing), the regulations (SEC, FCA, SEBI), and the pricing
mechanisms (fixed, book building, premium, discount) together form the foundation of an efficient primary market.
• Global Lessons: Airbnb, Alibaba, and Snowflake showcase how pricing and timing can determine success.
• Indian Lessons: LIC, Reliance, and Zomato highlight how regulation and investor appetite shape capital
raising.

6
Methods of Floating New Issues
1. Introduction
When a company needs funds for expansion, diversification, or working capital, it can raise resources by floating
new issues of securities in the primary market. Floating new issues means offering new shares, debentures, or bonds
to investors for the first time.
Different methods exist, depending on:
• The company’s financial strength
• Investor appetite
• Regulatory framework
• Market conditions

2. Methods of Floating New Issues

(A) Public Issue through Prospectus (IPO/FPO)
• The most common method, where companies invite the public to subscribe to shares via a prospectus.
• Includes Initial Public Offer (IPO) for first issue and Follow-on Public Offer (FPO) for subsequent issues.
Global Examples:
• Alibaba (2014, NYSE) – world’s largest IPO at $25 billion.
• Facebook (2012, NASDAQ) – raised $16 billion.
Indian Examples:
• LIC (2022 IPO) – India’s largest, raised ₹21,000 crore.
• Zomato (2021 IPO) – India’s first major food delivery tech IPO, raised ₹9,375 crore.
(B) Private Placement
• Securities offered to a select group of investors (e.g., institutional investors, HNIs, mutual funds).
• Faster and less regulatory burden compared to public issue.
Global Examples:
• Airbnb (2020) – raised $2 billion via private placement before IPO.
• SpaceX frequently raises funds through private placements to venture capital and sovereign funds.
Indian Examples:
• HDFC Bank raised funds via Qualified Institutional Placements (QIP).
• Yes Bank (2020) – preferential allotment to SBI and others during restructuring.
(C) Rights Issue
• Existing shareholders are given the right to subscribe to additional shares, usually at a discount.
• Helps companies raise funds while protecting shareholder control.
Global Example:
• HSBC (2009, U.K.) – raised £12.5 billion through rights issue after the financial crisis.
Indian Examples:
• Reliance Industries (2020) – raised ₹53,125 crore through rights issue, India’s largest.
• Bharti Airtel (2019) – ₹25,000 crore rights issue for debt reduction and expansion.
(D) Offer for Sale (OFS)
• Promoters or large shareholders offer their shares to the public through the stock exchange platform.
• A quicker and cost-effective method regulated by exchanges.
Global Examples:
• U.S. Treasury OFS for selling stakes in bailed-out companies during the 2008 financial crisis.
Indian Examples:
• Coal India (2015) – Government used OFS to divest stake, raising over ₹22,500 crore.
• NTPC, ONGC, and Hindustan Aeronautics Ltd. (HAL) – frequent OFS used for government disinvestment.
(E) Preferential Allotment
• Shares issued to a specific group of investors, usually at a predetermined price.
• Often used in strategic deals or corporate restructuring.
Global Example:
• Tesla (2015, U.S.) issued preferential convertible bonds to select investors.
Indian Examples:
• Yes Bank (2020) – preferential allotment to SBI, LIC, and other institutions.
• Vodafone Idea (2022) – preferential issue to Government of India against AGR dues.

7
(F) Book Building Method
• A price discovery mechanism where investors bid within a price band.
• The final price is fixed based on demand.
• Used widely in IPOs and FPOs.
Global Examples:
• Google IPO (2004) – used auction-style book building.
• Facebook (2012 IPO) – raised $16 billion through book building.
Indian Examples:
• Zomato IPO (2021) – price band ₹72–76; discovered price ₹76.
• Infosys and TCS IPOs used book building to determine issue price.
(G) Bonus Issue (Capitalization of Reserves)
• Instead of raising new money, companies issue free additional shares to existing shareholders by capitalizing
reserves.
• Does not bring fresh funds but increases liquidity and investor confidence.
Global Example:
• Apple (2014) – 7-for-1 stock split/bonus issue to improve liquidity.
Indian Examples:
• Infosys (2015) – 1:1 bonus issue.
• Wipro (2017) – 1:1 bonus issue.
(H) Shelf Prospectus & Green Shoe Option
1. Shelf Prospectus: Enables companies to issue securities in multiple tranches without filing a fresh
prospectus each time.
o Global Example: U.S. shelf registration (Rule 415 by SEC).
o Indian Example: NTPC filed a shelf prospectus for debt securities.
2. Green Shoe Option: Allows issuing company to allot more shares than originally planned if demand is high.
o Global Example: Alibaba (2014 IPO) exercised green shoe, raising extra funds.
o Indian Example: IRCTC IPO (2019) – SEBI allowed green shoe option to stabilize post-listing
volatility.

Comparative Table of Methods

Method Key Feature Global Example Indian Example
Public Issue Offer to general public via Alibaba (2014) LIC (2022), Zomato (2021)
(IPO/FPO) prospectus
Private Placement Offered to select investors Airbnb (2020), SpaceX HDFC Bank QIP, Yes Bank
(2020)
Rights Issue To existing shareholders HSBC (2009) Reliance (2020), Airtel (2019)
Offer for Sale Promoters/Govt. sell via U.S. Treasury OFS Coal India (2015), ONGC
(OFS) exchange (2008)
Preferential Allotment To specific group/investors Tesla (2015) Yes Bank (2020), Vodafone
Idea
Book Building Price discovery via bidding Facebook (2012) Zomato (2021), Infosys
Bonus Issue Free shares by capitalizing Apple (2014) Infosys (2015), Wipro (2017)
reserves
Shelf Prospectus / Tranche issue / extra shares U.S. SEC Rule 415, NTPC, IRCTC IPO
Green Shoe allowed Alibaba

The methods of floating new issues provide companies with multiple avenues to raise capital depending on their
objectives, market conditions, and regulatory approvals.
• Global examples (Alibaba, Airbnb, Tesla, Facebook) highlight how innovative methods like book building
and green shoe options dominate mature markets.
• Indian examples (LIC, Reliance, Zomato, Coal India) show how India has embraced global best practices
while tailoring them through SEBI regulations.
Thus, an efficient mix of issue methods ensures capital formation, investor participation, and economic growth.

8
Primary Market Intermediaries
1. Introduction
o The Primary Market enables companies and governments to raise funds by issuing new securities. However,
companies rarely deal directly with millions of investors. Instead, they rely on intermediaries who manage,
regulate, and execute the issue process.
o These primary market intermediaries include merchant bankers, underwriters, registrars, bankers to the issue,
brokers, credit rating agencies, and depositories. They ensure smooth capital raising, investor protection,
transparency, and regulatory compliance.

Primary Market Intermediaries – Detailed Explanation

(A) Merchant Bankers / Lead Managers
• Registered with SEBI (India) or SEC (U.S.).
• Act as lead coordinators for an issue.
• Draft the prospectus/DRHP, design the capital structure, decide issue timing, and liaise with regulators and
stock exchanges.
• Also coordinate roadshows and investor marketing.
Global Example:
• Goldman Sachs & Morgan Stanley were lead managers for Facebook’s IPO (2012) and Airbnb (2020).
Indian Examples:
• Kotak Mahindra Capital, Axis Capital, and ICICI Securities were lead managers for the LIC IPO (2022).
• Morgan Stanley and Credit Suisse co-managed Zomato IPO (2021).

(B) Underwriters
• Guarantee minimum subscription of securities.
• If the issue is undersubscribed, underwriters purchase the unsubscribed portion.
• Reduce risk for issuing companies.
Global Example:
• J.P. Morgan & Goldman Sachs underwrote Uber’s IPO (2019), ensuring subscription despite volatile market.
Indian Examples:
• SBI Capital Markets and ICICI Securities acted as underwriters for Yes Bank’s FPO (2020).
• Axis Capital frequently underwrites IPOs in India.

(C) Registrars and Transfer Agents (RTAs)

• Handle the back-end operations of an issue.
• Process applications, check investor eligibility, maintain e-records, and finalize allotments & refunds.
• Post-issue, they maintain shareholder records for dividend, bonus, or rights issue.
Global Example:
• Computershare is one of the world’s largest registrars, handling IPO allotments, and shareholder services.
Indian Examples:
• KFin Technologies and Link Intime India Pvt. Ltd. are leading registrars.
• Both handled large issues like Reliance Rights Issue (2020) and Nykaa IPO (2021).

(D) Bankers to the Issue

• Collect application money from investors through designated bank branches.
• Maintain escrow accounts and ensure refunds if necessary.
• Work closely with RTAs and stock exchanges.
Global Example:
• CitiBank, HSBC, J.P. Morgan Chase often act as bankers to issues in global IPOs.
Indian Example:
• SBI, HDFC Bank, ICICI Bank, Axis Bank regularly act as bankers to IPOs (e.g., LIC IPO, 2022).

(E) Brokers to the Issue

• Help investors submit applications.
• Act as a bridge between issuers and retail investors.

9
 • Important in retail-heavy markets like India.
Global Example:
• Robinhood (U.S.) enabled retail investors to participate in IPOs like Rivian (2021).
Indian Examples:
• Zerodha, Angel One, ICICI Direct, HDFC Securities allow online IPO applications via ASBA (Application
Supported by Blocked Amount).
• These brokers helped retail participation in IRCTC IPO (2019).

(F) Credit Rating Agencies (CRAs)

• Assess creditworthiness of companies issuing debt instruments (bonds, debentures).
• Ratings influence investor decisions and interest rates.
Global Example:
• Moody’s, S&P Global, Fitch Ratings rate corporate and sovereign bonds worldwide (e.g., Apple bond
issues).
Indian Examples:
• CRISIL, ICRA, CARE Ratings assess issues like SBI Bonds, Reliance Debentures.
• Reliance Jio’s NCD issues were rated by CRISIL.

(G) Depositories & Depository Participants (DPs)

• Ensure securities are held in dematerialized (Demat) form.
• Provide electronic transfer and settlement.
• In India: NSDL (National Securities Depository Ltd.) and CDSL (Central Depository Services Ltd.).
Global Example:
• DTCC (Depository Trust & Clearing Corporation, U.S.) handles clearing and settlement for U.S. securities.
Indian Example:
• NSDL & CDSL played a central role in dematerializing shares in Infosys, TCS, and HDFC Bank IPOs.

(H) Stock Exchanges (as facilitators in primary issues)

• Provide electronic platforms for book building, bidding, and allotment.
• Ensure fair practices and transparency.
Global Example:
• NYSE (New York Stock Exchange) hosted mega listings like Alibaba ($25 billion IPO).
Indian Example:
• NSE & BSE E-IPO platforms handle book building for IPOs (e.g., Zomato, Nykaa).

3. Why Primary Market Intermediaries Matter ?

• Ensure smooth execution of issue process.
• Protect investors via regulatory compliance.
• Enhance credibility of issuers by independent checks.
• Promote transparency and fairness in pricing and allotment.

4. Conclusion
Primary market intermediaries are the backbone of the capital raising process.
• Globally, intermediaries like Goldman Sachs (merchant banker), Computershare (registrar), DTCC
(depository) enable smooth execution.
• In India, Kotak Mahindra Capital, SBI, NSDL, CDSL, CRISIL, and Link Intime showcase how SEBI-
regulated intermediaries have built a strong ecosystem that supports both retail and institutional
participation.
Without these intermediaries, companies would struggle to connect with investors, and investors would face higher
risks in subscribing to new issues.

10
Commercial Banks
1. Introduction
A commercial bank is a financial institution that accepts deposits from the public, provides loans, and offers a range
of financial services to individuals, corporates, and governments.
• They are profit-oriented institutions, distinct from central banks (like the RBI or Federal Reserve).
• Their main purpose is to act as financial intermediaries, channelling savings into productive investments.
Commercial banks form the backbone of the financial system, influencing credit creation, liquidity, and economic
growth.

2. Functions of Commercial Banks

(A) Accepting Deposits
• Types: Savings deposits, current accounts, fixed deposits, recurring deposits.
• Deposits form the primary source of funds for banks.
Examples:
• Global: JPMorgan Chase (U.S.), Barclays (U.K.), BNP Paribas (France).
• Indian: State Bank of India (SBI), HDFC Bank, ICICI Bank.

(B) Providing Loans and Advances

• Banks lend money to individuals, corporates, and governments.
• Types of credit: personal loans, corporate loans, working capital finance, overdraft facilities.
Examples:
• Global: Citibank financing Microsoft’s global expansion projects.
• Indian: SBI providing loans for Reliance Industries’ expansion projects; HDFC Bank offering retail loans to
households.

(C) Credit Creation

• By lending more than the actual cash reserves (keeping a reserve ratio), banks create credit and increase
money supply in the economy.
• This process fuels economic growth.

(D) Agency Functions

• Issuing drafts, cheques, letters of credit.
• Collecting bills, dividends, insurance premiums.
• Acting as trustees or executors for clients.
Examples:
• HSBC acts as a custodian bank for multinational corporations.
• ICICI Bank provides escrow services for M&A deals in India.

(E) Investment Services

• Banks invest in government securities, bonds, and corporate debentures.
• They act as underwriters in public issues.
Examples:
• Global: Goldman Sachs underwriting Airbnb IPO (2020).
• Indian: Axis Bank and ICICI Securities underwriting Zomato IPO (2021).

(F) Facilitating International Trade

• Issue letters of credit, foreign exchange services, export-import finance.
• Crucial for globalization and cross-border trade.
Examples:
• Global: Standard Chartered Bank provides trade finance solutions for exporters in Asia and Africa.
• Indian: SBI and Bank of Baroda provide letters of credit for Indian exporters like Tata Steel and Infosys.

11
(G) Digital & Modern Banking Services
• Online banking, mobile apps, UPI payments, net banking, card services.
• Investment and wealth management products.
Examples:
• Global: JPMorgan Chase’s mobile banking app is used by millions worldwide.
• Indian: HDFC Bank and Kotak Mahindra Bank are leaders in UPI and mobile banking.

3. Types of Commercial Banks

1. Public Sector Banks – Owned by government.
o India: State Bank of India (SBI), Punjab National Bank.
o Global Parallel: Royal Bank of Scotland (partially government-owned during 2008 crisis).
2. Private Sector Banks – Owned by private individuals/corporates.
o India: HDFC Bank, ICICI Bank, Axis Bank.
o Global: JPMorgan Chase, Citibank, HSBC.
3. Foreign Banks – Operate in multiple countries.
o India: Standard Chartered, Citi India, HSBC India.
o Global: Deutsche Bank (Germany), BNP Paribas (France).
4. Regional Rural Banks (RRBs) – Operate in rural areas (India-specific).
o Example: Prathama Bank, sponsored by Syndicate Bank.

4. Role in the Economy

• Mobilize savings into investments.
• Provide liquidity and credit to businesses.
• Support government borrowing by investing in government securities.
• Enhance financial inclusion through rural and digital banking.
Global Case:
• During COVID-19, U.S. banks like Bank of America extended credit facilities under government relief
packages.
Indian Case:
• SBI and Canara Bank extended emergency credit lines to MSMEs during the pandemic.

5. Challenges Faced by Commercial Banks

• Non-Performing Assets (NPAs) (major issue in India).
• Cybersecurity risks in digital banking.
• Competition from fintechs and neobanks.
• Regulatory compliance costs.

6. Conclusion
Commercial banks are the pillars of modern financial systems, ensuring smooth flow of funds between savers and
investors.
• Globally, giants like JPMorgan Chase, HSBC, and Citi showcase scale and innovation.
• In India, banks like SBI, HDFC Bank, and ICICI Bank play a dual role: supporting corporate giants like
Reliance and Tata while promoting financial inclusion in rural India.
They remain the engine of economic growth, continuously adapting to globalization and digital disruption.

12
Development Banks
A Development Bank is a specialized financial institution established to provide long-term finance for projects that
promote industrial, agricultural, or infrastructural development.
• Unlike commercial banks, which focus on short-term lending and profit-making, development banks focus
on nation-building, industrialization, and socio-economic development.
• They provide funding for sectors that involve high risk, long gestation periods, and require large capital
investments.

Characteristics of Development Banks

o Provide medium- and long-term finance.
o Support industrialization, infrastructure, agriculture, and social projects.
o Offer not only finance but also technical, managerial, and advisory support.
o Fund projects that are often ignored by commercial banks due to risk.
o Operate under the guidance of government and international bodies.

Functions of Development Banks

(A) Financing Industrial Development
• Provide loans for setting up new industries and expanding existing ones.
• Finance high-capital sectors like steel, power, oil, and heavy engineering.
Global Examples:
• Japan Development Bank (JDB) financed industrial rebuilding after WWII, helping Toyota, Mitsubishi, and
Sony grow globally.
• KfW (Germany) funded post-war reconstruction and renewable energy projects.
Indian Examples:
• Industrial Finance Corporation of India (IFCI) financed projects in power, transport, and infrastructure.
• Industrial Development Bank of India (IDBI) financed Tata Steel, BHEL, and Indian Oil projects.

(B) Promoting Infrastructure Projects

• Funding large infrastructure like roads, ports, airports, and power plants.
Global Example:
• Asian Development Bank (ADB) funded Delhi Metro and renewable energy projects across Asia.
• World Bank finances global infrastructure (e.g., energy and water projects in Africa).
Indian Example:
• Power Finance Corporation (PFC) and Rural Electrification Corporation (REC) finance power generation
and distribution in India.
• NABARD supports rural infrastructure like irrigation and rural roads.

(C) Agricultural & Rural Development

• Provide credit for irrigation, warehousing, rural transport, and farming technology.
Global Example:
• International Fund for Agricultural Development (IFAD) supports rural farmers in Africa, Asia, and Latin
America.
Indian Example:
• NABARD supports rural banking, cooperative societies, and agri-infrastructure.
• Example: NABARD’s support for Amul Dairy Cooperative model in Gujarat.

(D) Entrepreneurship Promotion

• Provide venture capital for new entrepreneurs.
• Offer training and managerial guidance.
Global Example:
• European Investment Bank (EIB) supports small and medium enterprises (SMEs) across Europe.
Indian Examples:
• SIDBI (Small Industries Development Bank of India) supports MSMEs and startups.
• Example: SIDBI’s support in financing startups like Paytm and Ola through venture capital funds.

13
(E) Rehabilitation of Sick Units
• Assist financially distressed industries to revive and protect employment.
Indian Example:
• IDBI and ICICI (before its conversion into a commercial bank) played roles in rehabilitating sick industrial
units in the 1970s and 80s.

(F) Export-Import Promotion

• Provide export-import finance, guarantee facilities, and foreign exchange support.
Global Example:
• U.S. EXIM Bank finances U.S. companies exporting aircraft, heavy machinery, etc. (Boeing aircraft exports)
Indian Example:
• EXIM Bank finances exports of Indian companies like Larsen & Toubro and BHEL in overseas projects.

Major Development Banks

(A) Global Development Banks
➢ World Bank Group – finances infrastructure, poverty reduction, and social projects globally.
➢ Asian Development Bank (ADB) – funds projects in Asia-Pacific (energy, transport, education).
➢ African Development Bank (AfDB) – funds African infrastructure and agriculture.
➢ KfW (Germany) – supports climate finance and post-war industrial growth.
(B) Indian Development Banks
o IDBI (Industrial Development Bank of India) – Industrial finance (now a commercial bank, but origin was as
a development bank).
o IFCI (Industrial Finance Corporation of India) – First development bank in India (1948).
o ICICI (Industrial Credit and Investment Corporation of India) – Initially development finance, later
converted to ICICI Bank.
o SIDBI (Small Industries Development Bank of India) – Focus on MSMEs.
o NABARD – Agricultural and rural development finance.
o Export-Import Bank of India (EXIM Bank) – Export-import support for Indian businesses.

Importance in Economic Growth

• Support industrialization and infrastructure creation.
• Promote employment and entrepreneurship.
• Provide funding in underdeveloped and high-risk areas.
• Balance regional growth (avoiding concentration of industries in urban hubs).
• Encourage exports and foreign exchange earnings.

Challenges for Development Banks

• Rising Non-Performing Assets (NPAs) due to high-risk lending.
• Political interference in project funding.
• Competition from private equity and commercial banks.
• Need for modernization and digital transformation.

Development banks are engines of long-term economic growth, bridging the gap between commercial viability and
social need.
• Globally, institutions like World Bank, ADB, and KfW show how targeted finance can rebuild nations and
promote sustainable growth.
• In India, banks like NABARD, SIDBI, and EXIM Bank have played a transformative role in agriculture,
MSMEs, and global trade.
They remain essential for achieving inclusive growth, industrial competitiveness, and sustainable development in
both emerging and developed economies.

14
Merchant Banker
1. Introduction
A Merchant Banker is a financial intermediary that provides advisory and capital-raising services to companies,
governments, and high-net-worth clients.
• They do not provide traditional banking services like accepting deposits.
• Instead, they specialize in issue management, underwriting, M&A advisory, corporate restructuring, and
private placements.
• In India, the role of merchant bankers is governed by SEBI (Merchant Bankers) Regulations, 1992.
In global terms, merchant bankers are very similar to investment banks.

2. Key Functions of Merchant Bankers

(A) Issue Management (IPO/FPO)
• Manage public issues of equity or debt.
• Draft prospectus, decide timing, pricing, and ensure SEBI/SEC compliance.
• Coordinate with registrars, brokers, underwriters, and stock exchanges.
Examples:
• Global: Goldman Sachs & Morgan Stanley were lead managers for Facebook’s IPO (2012).
• India: Kotak Mahindra Capital, Axis Capital, and ICICI Securities managed the LIC IPO (2022).

(B) Underwriting of Issues

• Guarantee subscription by purchasing unsold securities.
• Reduces risk for issuing companies.
Examples:
• Global: JPMorgan underwrote Uber’s IPO (2019).
• India: SBI Capital Markets and Axis Capital underwrote Yes Bank’s FPO (2020).

(C) Advisory for Mergers & Acquisitions (M&A)

• Provide valuation, structuring, negotiation, and financing advice.
• Act as advisors to both acquirer and target companies.
Examples:
• Global: Goldman Sachs advised Disney on its acquisition of 21st Century Fox.
• India: JM Financial and Morgan Stanley advised Flipkart’s stake sale to Walmart (2018).

(D) Private Placement of Securities

• Help companies raise funds by privately selling securities to institutional investors (PE funds, insurance
companies, pension funds).
Examples:
• Global: Credit Suisse helped Tesla raise funds via private placements before its IPO.
• India: ICICI Securities facilitated private placements of bonds for HDFC Ltd.

(E) Corporate Restructuring & Advisory

• Advise on debt restructuring, capital restructuring, buybacks, delistings, and spin-offs.
Examples:
• Global: Lazard is globally renowned for restructuring advisory (e.g., advising General Motors during
bankruptcy).
• India: Edelweiss Financial Services advised Jet Airways’ debt restructuring.

(F) Project Finance Advisory

• Help companies arrange long-term finance for infrastructure or industrial projects.
• Assist in preparing feasibility studies and financial models.
Examples:
• Global: HSBC structured project finance for energy projects in the Middle East.
• India: SBI Capital Markets structured finance for NTPC’s power projects.

15
(G) Portfolio Management Services (PMS) (India-specific for SEBI-registered merchant bankers)
• Some merchant bankers also manage investments for wealthy individuals and institutions.
Example:
• Motilal Oswal Investment Advisors and ICICI Securities provide PMS for HNIs.

3. Categories of Merchant Bankers in India (as per SEBI)

1. Category I – Can manage public issues, act as lead managers, underwrite, and provide corporate advisory.
(E.g., Kotak Mahindra Capital, ICICI Securities)
2. Category II – Advisory and underwriting (not issue management).
3. Category III – Underwriting, portfolio management.
4. Category IV – Advisory services only.

4. Global Examples of Merchant Bankers

• Goldman Sachs (USA) – Global leader in IPOs and M&A advisory.
• Morgan Stanley (USA) – Managed mega IPOs like Airbnb and Alibaba.
• HSBC (UK) – Strong in global project finance and trade finance.
• Lazard (France/USA) – Specializes in restructuring advisory.

5. Indian Examples of Merchant Bankers

• Kotak Mahindra Capital – Lead manager for LIC IPO, Zomato IPO.
• ICICI Securities – Strong in IPO management and private placements.
• Axis Capital – Lead manager for Nykaa and PolicyBazaar IPOs.
• SBI Capital Markets – Involved in large infrastructure and PSU disinvestment deals.
• JM Financial – Involved in Flipkart–Walmart and Adani Group fundraisings.

6. Importance of Merchant Bankers

• Provide expertise in raising capital.
• Bridge the gap between investors and issuers.
• Help corporates navigate complex regulations.
• Enhance investor confidence in the primary market.
• Support M&A, restructuring, and globalization of companies.

7. Conclusion
Merchant bankers are the architects of capital markets, playing a dual role:
• Globally, they shape IPOs and mega M&A deals (Goldman Sachs, Morgan Stanley).
• In India, they ensure smooth functioning of IPOs, disinvestments, and corporate restructuring (Kotak
Mahindra Capital, ICICI Securities, SBI Capital).
By combining financial expertise, advisory services, and risk management, merchant bankers drive both corporate
growth and capital market development.

16
Issue Managers
1. Introduction
An Issue Manager is a SEBI-registered intermediary (in India) or equivalent regulator-approved intermediary
globally, responsible for managing the process of raising capital by a company through public issues (IPOs, FPOs,
rights issues, or debt issues).
• In India, issue managers are usually Category I Merchant Bankers authorized by SEBI.
• They act as the link between the issuing company, regulators, investors, and other intermediaries.
• They ensure that the issue complies with all regulatory guidelines and is successfully subscribed.
In global terms, Issue Managers are the same as Lead Managers / Book Running Lead Managers (BRLMs), often
performed by investment banks.

2. Core Functions of Issue Managers

(A) Pre-Issue Management
1. Drafting and filing the Draft Red Herring Prospectus (DRHP) with SEBI/SEC.
2. Advising the company on issue size, timing, pricing (fixed price or book-building).
3. Coordinating with underwriters, registrars, bankers, and credit rating agencies.
4. Marketing the issue (roadshows, advertisements, investor presentations).
Examples:
• Global: Goldman Sachs was the lead issue manager for Alibaba’s IPO (2014, $25 billion).
• India: Kotak Mahindra Capital and Axis Capital were issue managers for Zomato IPO (2021).

(B) Book Building & Pricing

• Collect bids from institutional and retail investors.
• Discover the price band through demand analysis.
• Finalize the issue price.
Examples:
• Global: Morgan Stanley was the book-running lead manager for Airbnb IPO (2020).
• India: ICICI Securities, SBI Capital Markets, and JM Financial managed the LIC IPO (2022).

(C) Regulatory Compliance

• Ensure disclosures comply with SEBI, RBI, and stock exchange rules (in India) or SEC rules (in the U.S.).
• Act as the company’s compliance advisor during the issue.
Examples:
• Global: Citi acted as lead manager ensuring SEC compliance for Spotify’s direct listing (2018).
• India: JM Financial ensured compliance for Adani Wilmar IPO (2022).

(D) Post-Issue Management

o Oversee allotment of shares with registrars.
o Ensure timely refunds for unsuccessful applicants.
o Ensure smooth listing on stock exchanges.
o Submit post-issue reports to SEBI and stock exchanges.
Examples:
• Global: JPMorgan coordinated the share allotment and NYSE listing of Uber IPO (2019).
• India: Link Intime and KFintech worked with issue managers for Nykaa IPO (2021) to finalize allotments.

3. Categories of Issue Managers in India

• Lead Managers (Book Running Lead Managers - BRLMs): Manage the entire issue, act as the primary point
of contact with SEBI, stock exchanges, and investors.
• Co-Managers: Assist in marketing and distribution but do not handle regulatory filings.
• Advisory Role Only: Provide structuring and financial advice without full execution responsibility.

17
4. Global Examples of Issue Managers
• Goldman Sachs, Morgan Stanley, JPMorgan Chase – Global leaders managing IPOs of Apple, Google, Uber,
Airbnb.
• Citi, Barclays, HSBC – Manage both equity and debt issues globally.
• Lazard, Credit Suisse – Specialists in IPOs and private placements.

5. Indian Examples of Issue Managers

• Kotak Mahindra Capital – Issue manager for Zomato, Nykaa, and LIC IPOs.
• ICICI Securities – Lead manager for Avenue Supermarts (DMart) IPO.
• Axis Capital – Managed PolicyBazaar and SBI Cards IPO.
• SBI Capital Markets – Involved in PSU disinvestments and LIC IPO.
• JM Financial – Advised Flipkart’s Walmart deal and managed IPOs of Adani Group firms.

6. Importance of Issue Managers

• Ensure compliance with securities laws.
• Provide credibility to the issue, enhancing investor confidence.
• Facilitate price discovery and ensure fair allocation of shares.
• Manage end-to-end execution, reducing risk for the issuing company.
• Act as a bridge between companies and investors.

7. Conclusion
Issue Managers are the architects of the capital raising process.
• Globally, they are synonymous with investment banks like Goldman Sachs and Morgan Stanley, who
manage billion-dollar IPOs.
• In India, Kotak Mahindra Capital, ICICI Securities, Axis Capital, and SBI Capital Markets dominate as
SEBI-approved Issue Managers.
By managing everything from regulatory filings → pricing → investor marketing → allotment → listing, they
ensure that the primary market functions efficiently and transparently.

18
Rating Agencies
1. Introduction
• A Rating Agency is an independent organization that assesses the creditworthiness of entities (corporates,
governments, financial institutions) and their debt instruments (bonds, debentures, commercial papers).
• Ratings act as a benchmark for investors to evaluate the risk of default.
• Higher rating = Lower risk, Lower rating = Higher risk.
• Ratings affect the cost of borrowing (interest rates) for companies and governments.
Globally, the "Big Three" rating agencies are:
o Moody’s Investors Service (USA)
o Standard & Poor’s (S&P Global, USA)
o Fitch Ratings (USA/Europe)
In India, major agencies include:
o CRISIL (Credit Rating Information Services of India Ltd.)
o ICRA (Investment Information and Credit Rating Agency of India)
o CARE Ratings (Credit Analysis and Research Ltd.)
o India Ratings (a Fitch Group company)

2. Functions of Rating Agencies

(A) Credit Rating of Debt Instruments
• Assess bonds, debentures, commercial papers, government securities.
• Helps investors know if the issuer is likely to repay debt on time.
Examples:
• Global: Moody’s rated Apple’s bonds at Aa1, reflecting high safety.
• India: CRISIL rated Reliance Jio’s NCDs (Non-Convertible Debentures) as AAA (highest rating).

(B) Sovereign Ratings

• Assess the creditworthiness of countries (their ability to repay sovereign debt).
• Impacts foreign investment, borrowing costs, and currency stability.
Examples:
• Global: S&P rated the U.S. sovereign rating AA+ (downgraded from AAA in 2011).
• India: India’s sovereign rating (2025) stands at BBB- (S&P & Fitch) and Baa3 (Moody’s) – the lowest
investment grade.

(C) Corporate Credit Ratings

• Assess the financial health and repayment capacity of corporates.
• Used by banks, investors, and regulators before lending or investing.
Examples:
• Global: Moody’s downgraded Tesla’s rating in 2017, later upgrading as financials improved.
• India: CARE downgraded IL&FS (2018) from AAA to junk after its default, shaking market confidence.

(D) Structured Finance & Securitization Ratings

• Rate asset-backed securities (ABS), mortgage-backed securities (MBS), and collateralized debt obligations
(CDOs).
• Example (Global): S&P rated mortgage-backed securities in the U.S. before the 2008 financial crisis (later
criticized for overrating toxic assets).
• Example (India): ICRA rates securitized pools of housing loans for HDFC Ltd.

(E) Industry & Market Research

• Provide detailed reports on sectors, economies, and financial trends.
Examples:
• Global: Fitch publishes global banking sector outlook reports.
• India: CRISIL Market Intelligence reports are widely used by corporates and investors.

19
3. Rating Scales
Global Ratings (S&P, Moody’s, Fitch)
• Investment Grade: AAA, AA, A, BBB (safe to moderate risk).
• Speculative Grade (Junk): BB, B, CCC, CC, C, D (high risk to default).
Indian Ratings (CRISIL, ICRA, CARE, India Ratings)
• AAA – Highest safety (lowest credit risk).
• AA, A, BBB – Varying safety levels.
• BB & Below – High risk/junk.
• D – Default.

4. Global Examples of Rating Agencies in Action

• Moody’s upgraded Microsoft bonds due to strong cash reserves.
• S&P downgraded Greece’s sovereign rating to junk during the Eurozone crisis (2010).
• Fitch downgraded Russia’s rating to "C" after sanctions in 2022.

5. Indian Examples of Rating Agencies in Action

• CRISIL rated Infosys and TCS bonds at high investment grades.
• ICRA rated HDFC Bank’s bonds as AAA.
• CARE downgraded DHFL (Dewan Housing Finance Limited) after it defaulted in 2019.
• India Ratings downgraded Vodafone Idea bonds due to its financial distress.

6. Importance of Rating Agencies

• For Investors: Helps assess safety of investment.
• For Issuers: A good rating lowers borrowing cost.
• For Regulators: Maintain transparency in financial markets.
• For Economy: Build investor confidence and support capital market growth.

7. Criticisms of Rating Agencies

• Conflict of Interest: Agencies are paid by the issuers they rate.
• Failure in 2008 Crisis: Overrated toxic mortgage-backed securities, contributing to the global meltdown.
• Lag in Downgrades: IL&FS in India and Lehman Brothers in the U.S. were downgraded only after default.

8. Conclusion
Rating agencies are the watchdogs of credit markets, providing independent assessments that guide investor
decisions and influence borrowing costs.
• Globally, Moody’s, S&P, and Fitch remain dominant, shaping sovereign and corporate funding.
• In India, CRISIL, ICRA, CARE, and India Ratings play a vital role in building investor confidence in bonds,
debentures, and IPO-linked debt.
Despite criticisms, rating agencies remain indispensable for ensuring transparency, trust, and stability in the
financial system.

20
Role of Primary Market
1. Introduction
The Primary Market (also known as the New Issue Market) is the segment of the capital market where securities are
issued for the first time.
• Corporates, governments, or financial institutions raise funds directly from investors.
• Investors buy securities directly from issuers, not from other investors (that happens in the Secondary
Market).
Key purpose: Mobilize long-term capital to fuel business expansion, infrastructure projects, and economic growth.

2. Major Roles of Primary Market

(A) Capital Formation
• Provides companies with fresh capital for expansion, diversification, R&D, and acquisitions.
• Encourages savings to be channelled into productive investments.
Examples:
• Global: In 2014, Alibaba’s IPO in the U.S. raised $25 billion, the world’s largest IPO at the time. Funds
were used to expand e-commerce, cloud computing, and global operations.
• India: Reliance Industries’ Rights Issue (2020) raised ₹53,000 crore, helping the company reduce debt and
fund digital/telecom expansion (Jio Platforms).

(B) Direct Financing to Companies & Governments

• Corporates issue shares, debentures, bonds to raise capital.
• Governments issue sovereign bonds to fund infrastructure, defense, and welfare schemes.
Examples:
• Global: The U.S. Treasury regularly issues bonds to finance fiscal deficits.
• India: The Government of India issues Treasury Bills and dated securities through RBI auctions in the
primary market.

(C) Wealth Creation & Investor Participation

• Provides retail and institutional investors an opportunity to invest in growth stories.
• Encourages broader financial inclusion and distribution of wealth.
Examples:
• Global: Investors in Google’s IPO (2004) saw exponential wealth creation as the stock multiplied over years.
• India: Infosys IPO (1993) was oversubscribed and early investors saw massive long-term wealth creation as
Infosys became an IT giant.

(D) Price Discovery & Benchmarking

• Through mechanisms like Book-Building, the market determines the fair price of securities.
• Sets a benchmark for secondary market trading.
Examples:
• Global: Facebook (Meta) IPO in 2012 raised $16 billion; though initially volatile, it established a pricing
benchmark for social media companies.
• India: Zomato IPO (2021), priced via book-building, set the benchmark for tech startups in India’s capital
market.

(E) Promotes Transparency & Regulation

• Issuance requires strict compliance with disclosure norms, prospectus filing, and SEBI/SEC guidelines.
• Builds investor confidence and market integrity.
Examples:
• Global: SEC regulations in the U.S. mandate full disclosure of financials before IPOs.
• India: SEBI ensures IPOs follow disclosure norms (e.g., LIC IPO 2022 with ₹21,000 crore raised, India’s
largest).

21
(F) Supports Industrial & Economic Growth
• By channelling capital to productive sectors, the primary market boosts GDP, employment, and innovation.
Examples:
• Global: Tesla’s capital raising through share issues (2010–2020) funded its EV revolution, battery tech, and
Gigafactories.
• India: Adani Enterprises’ FPO (2023 attempted) was aimed at funding green hydrogen and renewable
projects (though later withdrawn due to market volatility).

(G) Facilitates Foreign Investment

• Global investors can participate in primary issues of emerging economies, boosting foreign capital inflows.
Examples:
• Global: Saudi Aramco’s IPO (2019) raised $29.4 billion, attracting global institutional investors.
• India: HDFC Bank’s QIP (Qualified Institutional Placement) attracted global investors like GIC Singapore
and BlackRock.

(H) Investor Protection & Confidence Building

• Regulatory oversight ensures that issuers disclose risks, reducing fraud and malpractices.
• Boosts confidence in the financial system.
Examples:
• Global: Post-2008, rating agencies and IPO processes were tightened in the U.S. to protect investors.
• India: SEBI mandated anchor investors in IPOs (e.g., in Paytm IPO 2021) to build investor trust.

3. Limitations & Criticisms

• Overpricing of IPOs (e.g., Paytm in India, WeWork’s failed IPO globally).
• Speculative oversubscription creates volatility.
• Small investors often lose money if issues are mispriced.

4. Conclusion
The Primary Market acts as the foundation of capital markets, bridging the gap between investors and issuers. It:
• Mobilizes long-term capital,
• Fuels industrial & infrastructure growth,
• Creates wealth for investors,
• Strengthens the economy through transparent and regulated financing.
Globally, IPOs of Alibaba, Tesla, and Aramco illustrate its transformative role, while in India, Infosys, Reliance,
and LIC IPOs show how the primary market drives corporate growth and investor participation.

22
Regulation of Primary Market
1. Introduction
The Primary Market deals with the first-time issuance of securities (shares, debentures, bonds, etc.) to raise capital.
o Since investors commit money to new issues without prior trading history, regulation is essential to ensure
fairness, transparency, and protection.
o Primary market regulation is handled by securities regulators and stock exchanges in each country.
Global Regulators:
• USA: Securities and Exchange Commission (SEC)
• UK: Financial Conduct Authority (FCA)
• EU: European Securities and Markets Authority (ESMA)
• Japan: Financial Services Agency (FSA)
India: Securities and Exchange Board of India (SEBI) is the apex regulator.

2. Objectives of Regulation in the Primary Market

o Protect investors – prevent fraud, misstatements, and mis-selling.
o Ensure fair pricing – avoid overpricing or underpricing of IPOs/FPOs.
o Mandate disclosures – issuers must publish accurate financial & risk details.
o Promote market integrity – encourage participation of retail & institutional investors.
o Maintain transparency – use standardized processes like book-building, electronic bidding.

3. Key Aspects of Primary Market Regulation

(A) Eligibility & Approval of Issuers
• Companies must meet net worth, profitability, and compliance requirements before raising funds.
Examples:
• Global: The SEC blocked WeWork’s IPO (2019) after irregular disclosures in its prospectus.
• India: SEBI regulations required LIC IPO (2022) to disclose solvency ratio, embedded value, and actuarial
reports before approval.

(B) Disclosure Norms (Prospectus & Draft Red Herring Prospectus)

• Issuers must disclose financials, risks, management details, objects of the issue.
• Prevents misleading investors.
Examples:
• Global: Facebook IPO (2012) had to revise its prospectus multiple times after SEC’s intervention regarding
revenue forecasts.
• India: Paytm IPO (2021) DRHP highlighted business model risks, but despite compliance, overpricing led to
stock crash post-listing (investor cautionary tale).

(C) Pricing of Issues

• Regulators monitor fixed price issues and book-building process.
• Prevents artificial manipulation of issue prices.
Examples:
• Global: SEC scrutinized Tesla’s 2020 capital raising to ensure price integrity.
• India: SEBI mandated that in Zomato IPO (2021), at least 75% was reserved for Qualified Institutional
Buyers (QIBs) to ensure fair price discovery.

(D) Role of Intermediaries

• Merchant bankers, underwriters, registrars, and credit rating agencies must be registered and follow
compliance standards.
Examples:
• Global: In the U.S., Goldman Sachs and Morgan Stanley were penalized by SEC for irregularities in MBS
(Mortgage-Backed Securities) issues.
• India: SEBI fined merchant bankers of Yes Bank’s AT-1 bond issue (2020) for mis-selling to retail investors.

23
(E) Investor Protection Mechanisms
• Allotment rules (e.g., proportionate allotment, reservation for retail investors).
• Refund guidelines if oversubscription occurs.
• Lock-in periods for promoters to prevent quick exits.
Examples:
• Global: SEC ensures retail investors receive allocations in IPOs (not just institutions).
• India: SEBI mandates that anchor investors in IPOs must have a 30-day lock-in (applied in Nykaa IPO 2021)

(F) Monitoring Use of Funds

• Issuers must declare objects of issue and provide post-issue monitoring reports.
• Prevents diversion of funds.
Examples:
• Global: SEC monitored Uber IPO (2019) proceeds, ensuring funds were deployed for global expansion and
R&D.
• India: SEBI required Adani Green Energy to disclose utilization of FPO proceeds for renewable projects
(2023)

(G) Regulation of Misleading Ratings & Overvaluation

• Credit rating agencies and merchant bankers face strict penalties for wrong disclosures.
Examples:
• Global: Credit rating agencies (Moody’s, S&P) faced lawsuits for AAA ratings on toxic assets before 2008.
• India: SEBI took action against CARE and ICRA for faulty ratings in the IL&FS default case (2018).

4. Global vs Indian Framework

Aspect Global (SEC, FCA, ESMA, etc.) India (SEBI)
Prospectus Mandatory under SEC rules DRHP & RHP filing with SEBI & stock exchange.
(S-1 filing in USA).
Pricing Strict oversight of underwriters & SEBI regulates IPO price bands & reservations.
book-building.
Intermediaries Registered with SEC/FCA Registered with SEBI
(e.g., Goldman Sachs, JP Morgan). (e.g., Axis Capital, Kotak Mahindra).
Investor Class action lawsuits, lock-in periods. Proportionate allotment, lock-in for promoters.
Protection
Fund Post-issue monitoring reports to SEC. Mandatory monitoring by SEBI/stock exchanges.
Utilization

5. Real-World Regulatory Interventions

Global:
o SEC vs. Theranos (2018): Prevented fraudulent fundraising through misleading disclosures.
o FCA (UK) fined banks for mis-selling IPO-linked structured products.
India:
o SEBI vs. Sahara (2012): Sahara raised ₹24,000+ crore via OFCDs (optionally fully convertible debentures)
without SEBI approval. The Supreme Court ruled against Sahara, ordering refund to investors.
o SEBI action on NSE co-location scam (2019): Strengthened IPO regulations to avoid unfair advantages.

The regulation of the primary market ensures that:

• Investors get transparent, fair, and credible opportunities.
• Companies raise capital with accountability.
• The market develops with stability and global investor trust.
Globally, SEC, FCA, ESMA have shaped IPOs of companies like Facebook, Uber, and Alibaba.
In India, SEBI’s regulations on IPOs (Infosys, Reliance, LIC, Zomato, Nykaa) show how the regulator balances
corporate financing needs with investor protection.

24