Primary market Primary capital market is a conduct of a new securities. New or listed companies may make the public issue of securities by new companies for the first time. In the IPO or public offerings by the established companies securities are sold to the public all individual and institutional investors.
The decade of eighties, however,with eased a sea change in the funds mobilization effects of companies through, public issues of equity an debt encouraged by the deregulation of capital markets and other economic.
Primary market instruments
Equity and debt are the two basic instrument of raising capital from the primary market.
Companies in practice offer a number of variation of equity and debt securities.
–>Ordinary shares-Ordinary shares represent the ownership position in a company. The holder of the equity shares are the owner of the company asset. They provide permanent capital. They have voting rights and receive dividend at the discretion of the directors.
–>Preference share-The holder of the preference shares have a preference over the equity in the event of liquidation of the company. The preference dividend rate in fixed and known and is payable before paying dividend in the ordinary share capital.
A preference share may also provide for the accumulation of dividend.It called cumulative preference share.
–>Debenture-Debenture represent long-term debt given by the holders of debenture to the company. Debenture may be secured or unsecured.Secured debenture also known as bonds. Debenture may be issued without an interest rate.They are called zero-interest debenture.
–>Convertible debenture-A debenture may be issued with the feature of being convertible into equity shares after a specified period of time at a given price.
–>Warrants-> A company may issue equity share or debentures attached with warrants entitle an investor to buy equity shares after a specified time period at a given price.
–>Derivative securities-Securities with option to buy or sell are called derivative securities CDs,CPs, and warrants are example of derivative securities.
–>Borrowing from financial institutions-In India,besides issuing debenture companies raise debt capital through borrowing from the financial institution and banks. Banks are the important source of working capital for companies.
Type of primary market issuance
1)Euro issues-The increasing use of euro issues by the Indian companies also indicates that Indian capital market is integrating with the international capital markets companies in India have also started raising funds via euro issues, in the foreign capital markets.
Euro issues included foreign currency convertible bonds.Global depository receipt (ADR),ADRs and GDRs are like share and they are trade in the overseas stock exchange.
2)Government securities-Both the central and state government borrow large sum of money from the primary market by issuing dated securities and Treasury Bills (T-bills),T-bill in India are issued for short duration.
The total issues government securities has increased over years.
3)Pricing of new Issues -A Company required to issue prospectus when it issues share to the public .The prospectus should disclose fall information including the risk factor in the issue to the investor to be able to appraise the pricing and form a judgment.
4)Book Building and price discounting-In the case of normal public issue the price fixed and known in advance at the close of subscription the company known the number of share applied for .
Book building is an alternative to the traditional fixed price method of security issue.