Chap 2. New Issue Market3

Chap 2. New Issue Market

Chapter 2. New Issue Market

Meaning of New Issue Market:

The new issue market deals with the new securities which were not previously

available to the investing public i.e. the securities that are offered to the investing public for the

first time. The market, therefore makes available a new block of securities for public

subscription. In other words, new issue market deals with raising of fresh capital by companies

either for cash or for consideration other than cash.

The new issue market encompasses all institutions dealing in fresh claim. The forms in

which these claims created are equity shares, preference shares, debentures, rights issues,

deposits etc. all financial institutions which contribute, underwrite and directly subscribe to the

securities are part of new issue market.

Stock Exchange:-

Stock Exchange may be defined as “An association, organization, or body of individuals,

whether incorporated or not, establish for the purpose of assisting, regulating and controlling

business in buying, selling and dealing in securities.”

The stock market is a pivotal institution in the financial system. A well organized Stock market

performs several economic functions like translating, short term and medium term investment

into long term funds for companies, directing the flow of capital in the most profitable channels

etc. Only those securities which are listed in the stock exchange are transacted in the stock

market.

Functions of Stock market:-

I. To provide a regular market:-

One of the most important functions of financial market is giving opportunity to sell

securities, whenever he wants to do so. Stock exchange provides a ready market where investors

can liquidate their investment quickly. Without stock market, purchases of new issues have to

hold security till its maturity or in case of common equity shares, indefinitely. Easy marketability

encourages the investors to invest in securities. Prepared by Dharmesh Bhikadiya

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II. To provide wide ownership of securities:

If the company’s securities are listed in stock market of the country, these securities will be

bought and sold by persons widely scattered all over the country. Country wide ownership of

capital allows the shareholders to share the business risk.

III. To help pooling of Funds:

It is not possible for an individual alone to provide the huge funds needed for the complex

businesses. Stock market helps pooling of funds from those who have surplus for financing big

investment proposals.

IV. To ensure safety in transaction:

Investors have great faith for the transactions done through stock exchanges as the transactions

are made publicly under well-defined rules, regulations and bye laws of the exchange.

V. To provide Regular valuation of securities:

The market price is always available for all these securities which are listed and regularly traded

on stock exchange. Valuation of securities is of immense use to companies, investors, bankers,

creditors as well as the tax collecting authorities.

VI. To promote capital formation:

By providing regular market for securities and ensuring adequate safeguard to innocent investors

against malpractices of stock brokers, the stock market instills confidence in the minds of

investors who are encouraged to save more.

DIFFERENCE BETWEEN NEW ISSUE MARKET & STOCK EXCHANGE

The distinctions between the new issue market and the stock exchange can be made on three

grounds:

i) Functional difference

ii) Organizational difference

iii) Nature of contribution to industrial finance

Prepared by Dharmesh Bhikadiya

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DIFFERENCE BETWEEN NEW ISSUE MARKET & STOCK EXCHANGE

New Issue Market Stock Exchange

Functional

Difference

1) The new issue market deals with

new securities which are issued for the

first time for public subscription.

1) The stock exchange provides

a ready market for buying and

selling of old securities.

Organizational

Difference

1) The new issue market enjoys

neither any tangible form nor any

administrative organizational set up nor

is subject to any centralized control and

administration for the execution of the

business.

2) New issue market is renders

service to the lenders and borrowers of

funds for the particular time.

3) The new issue market is

controlled by bankers & under writers.

1) The stock exchange has

physical existence and is located in

particular geographical areas.

2) The stock exchange is a place

where dealers of security meet

regularly at appointed time

announced by the market.

3) The stock exchange is

controlled by SEBI.

Nature of

contribution to

industrial

finance

The new issue market provides the

issuing company with funds for starting

a new enterprise or for either expansion

or diversification of an existing one by

making a direct link between companies

which requires funds and the investing

public. So, the contribution of new issue

market is direct.

The role of stock exchange in

providing capital is indirect as it

provides marketability to the shares.


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Functions OF NEW ISSUE MARKET

1. Origination:-

Origination refers to the work of investigation and analysis and processing of new

proposals. This can be in terms of

1. Preliminary investigation undertaken by the sponsors specialized agencies of the issue.

These involves the careful study of the technical, economic, financial and legal aspects

of issuing companies to ensure that it warrants the backing of issue house.

2. Service of an advisory nature which go to improve the quality of capital issue. This

service includes advice on such aspects of capital issue such as,

Determination of class of security to be issued and price of issue in terms of

market conditions.

Magnitude of issue

The timing of floating an issues.

Method of flotation.

Techniques of selling & so on.

The importance of the specialized service provided by the new issue market, organisation

in this respect can hardly be over emphasized. On the thoroughness of investigation and

soundness of judgment of sponsoring institutions depends to the large extent, the allocative

efficiency of market. The organization however thoroughly done will not itself guarantee success

of an issue.

(2) Underwriting

Underwriting is an agreement whereby the underwriter promises to subscribe to a specific

number of shares or debentures or a specified amount of stock in the event of public not

subscribing to the issue. If the issue is fully subscribed then there is no liability for the


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underwriter. If a part of share issues remain unsold, the underwriter will buy the shares. Thus

underwriting is a guarantee for the marketability of shares.

Method of underwriting:

An underwriting agreement may take any of the following three forms:

(i) Standing behind the Issue

Under this method, the underwriter guarantees the sale of a specified number of shares within a

specified period. If the public do not subscribe to the specified amount of issue, the underwriter

buys the balance in the issue.

(ii) Outright Purchase

The underwriter, in this method, makes outright purchase of shares and resells them to the

investors.

(iii) Consortium Method

Underwriting is jointly done by a group of underwriters in this method. The underwriters form

syndicate for this purpose. This method is adopted for large issues.

Types of underwriters:-

The underwriters in India may be classified into 2 categories:-

1. institutional underwriters

2. non- institutional underwriters

(1) institutional underwriters :-

They are some institutional underwriters

life insurance corporation of India (LIC)

unit trust of India (UTI)

industrial development bank of India (IDBI)

industrial credit and investment corporation of India (ICICI)

commercial bank and general insurance company

The patterns of underwriting of the above institutional underwriters differ vastly in India.


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LIC and UTI have purchased industrial securities from the new issue market with a view to

holding them on their own portfolio they have a performance for underwriting share in large and

well established firms.The development banks have given special attention to the issue in

backward sates and industries in the priority list.The thrust of the development banks is also

towards small and new issues which do not have adequate support from other institutions.

General insurance companies have shown preference in underwriting the securities of fairly new

issue

(2) Non-Institution underwritings:

The Non institutional underwriters are brokers.

They guarantee shares only with a view to earn commission from the company

floating the issue.

They are known to offload the shares later to makes a profit.

The brokers work with profit motive in underwriting industrial securities.

After the elimination of forward trading, stock exchange brokers have begun to

take an underwriting business.

The percentage of securities underwriting to the total private capital issue varies

between72% to 97%.

Advantages of underwriting:

Underwriting assume great significant as it offer the following advantage to the issuing

company.

The issuing company is received from the risk of finding buyer for the issue

offered to the public.

The company is assured of getting the minimum subscription within the stipulated

time a statutory obligation to be fulfilled by the issuing company.

Underwriters undertake the burden of highly specialized function of distributing

securities.

They provided expert advice with regard to pricing of issue the size of issue etc.

Public confidence on the issue enhanced when underwritten is done by reputed

underwriters.


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3. Distribution: Distribution is the function of sale of securities to ultimate investors this

services is performed by brokers and agents who maintain a regular direct contact with

ultimate investors E.X: Karvy


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Documents

Chap 2. New Issue Market3