Get AHSEC Class 12 Finance Chapter: 10 NEW ISSUE MARKET OR PRIMARY MARKET Important Questions Answers 2025.
In this Post we have provided HS 2nd Year Finance Chapter: 10 NEW ISSUE MARKET OR PRIMARY MARKET Important Notes with Marked/highlighted previous year questions asked in AHSEC Examination.
AHSEC Class 12 Finance Notes
Chapter: 10 NEW ISSUE MARKET OR PRIMARY MARKET
NEW ISSUE MARKET OR PRIMARY MARKET
1. What do you mean by New Issue Market?
Ans: The Primary Market, also called the New Issue Market(NIM), handles new securities from either new or existing companies. When new companies issue securities, it’s called Initial Public Offerings (IPOs) and when existing companies do it, it’s called Seasoned Equity Offerings (SEOs). These securities can be equity shares,preference shares, debentures, bonds, or even unique types like deep discount bonds and zero-interest bonds.
2. Discuss the functions of New Issue Market.
Ans: The New Issue Market has a crucial role in connecting people who save money with those who need it for various purposes. Savers can be individuals, banks, or insurance companies, while those who require funds are typically public companies or the government. This market helps gather money from savers and channel it to borrowers for productive projects, primarily for long-term investments.
The functions of the New Issue Market can be divided into three services:
(a) Origination or Investigation
(b) Underwriting
(c) Distribution
(a) Origination: This involves investigating, analyzing and processing new project proposals. Specialized agencies may examine these proposals. There are two main aspects to origination:
(i) Careful Study: This involves a thorough investigation of the technical, economic, financial and legal aspects of the issuing companies to ensure the soundness of the project. This is usually done by the sponsors of the issue.
(II) Advisory Services: These services help improve the quality and success of capital issues. They cover aspects like the type of securities to be issued (e.g., shares, debentures), the size of the issue, the timing of the issue, pricing (whether shares are issued at par or at a premium), the method of issuing and selling techniques. Merchant bankers, which can be commercial banks, financial institutions, or private firms, typically handle this function.
(b) Underwriting: Underwriting acts as a safety net for the success of an issue. If an issue is fully subscribed (all shares are sold), underwriters have no liability. However, if some shares remain unsold to the public, underwriters step in to buy them. In simple terms, underwriting is an agreement where the underwriter promises to buy a specified number of shares or debentures if the public doesn’t subscribe to them.
Underwriting Methods include:
(i) Standing behind the Issue: Underwriters guarantee the sale of a specific number of shares within a certain period and purchase unsold shares if needed.
(ii) Outright Purchase: Underwriters buy the shares first and then resell them to investors.
(iii) Consortium Method: A group of underwriters jointly underwrite large issues of securities.
(c) Distribution: Distribution involves selling securities to the ultimate investors. Brokers and securities dealers handle this part. They are experts in dealing with securities and have direct contact with investors. Brokers assist investors in making informed investment decisions and often have regular clients who rely on their guidance.
3. What are the advisory services played by NIM?
Ans: Advisory services play a critical role in enhancing the quality and success of capital issues. These services cover several important aspects and they are provided by professionals known as merchant bankers. Merchant bankers can be commercial banks, all India financial institutions, or private firms.
The key advisory services offered by them are:
(a) Type of Issue: This involves deciding what kind of securities should be issued. Securities can take variousforms, such as equity shares, preference shares, debentures, or convertible debentures. The choice depends on the company’s needs and financial goals.
(b) Size of Issue: Determining the size of the issue is crucial. It involves deciding how many securities (e.g.shares or debentures) will be offered to the public. This decision is based on the company’s funding requirements and market conditions.
(c) Time of Issue: Timing is essential in the stock market. Deciding when to release the shares to the public is crucial. Advisory services help determine the best time for the company to issue its securities, taking into account market trends and economic conditions.
(d) Pricing of Issue: Setting the price at which the securities will be offered is another critical decision. Companies can choose to issue shares at their nominal value (par) or at a premium, which is a higher price.
The advisory team assists in making this pricing decision.
(e) Methods of Issue: There are various methods for issuing securities, such as initial public offerings (IPOs), rights issues, or preferential allotments. Advisory services help companies select the most suitable method based on their goals and circumstances.
(f) Selling Technique of the Securities: Once the securities are issued, they need to be effectively marketed and sold to investors. Advisory services provide guidance on the strategies and techniques for promoting and selling the securities to attract potential investors.
Thus, advisory services provided by merchant bankers cover essential aspects of a capital issue, including the type of securities, issue size, timing, pricing, issuance method and selling techniques etc.
4. Explain the Methods of Issuing Securities in the New Issue Market.
Ans: The following are the methods of issuing securities in the New Issue Market:
1. Public Issues (Through Prospectus): In this method, a company offers a fixed number of shares at a specified price directly to the general public or institutions. The company invites subscriptions from the public by issuing a prospectus, which is a comprehensive document containing all the essential details about the company. Investors rely on the prospectus as evidence when considering an Investment in the company.
Required Particulars in Prospectus:
a. Company Name
b. Registered Office Address
c. Current and Planned Activities of the Company
d. Location of the Company or Industry
e. Names of Directors
f. Details of Authorized Capital and Proposed Public Offering Subscription Period Start and End Dates
h. Minimum Subscription Amount
2. Names of Brokers, Barkers, Managers, Underwriters and Registrarsb Information about Listing Arrangements
k. Other Legal Information about the Company
Advantages:
a. Effective for reaching a broad range of investors through advertising.
b. A direct method with no intermediaries involved.
c. Shares are allocated to a diverse group of investors on a non-discriminatory basis.
Disadvantages:
a. High costs involved, including expenses for prospectus printing, advertising, bank commissions, underwriting fees, legal charges, stamp duty, listing fees and registration charges.
b. Most suitable for large-scale issuances.
3. Private Placement: Private placement is a method of issuing securities without the need for a formal prospectus. Instead, shares are offered privately to issue houses or brokers. Typically, issue houses acquire shares or securities from a specific company first and then sell them to individual and Institutional investors. These intermediaries maintain their own lists of clients and transfer shares to Investors with a margin. Private placement is cost-effective because it avoids various expenses such as brokerage, underwriting, advertising and printing costs.
Advantages of Private Placement: [AHSEC 2024]
a. Suitable for smaller companies locking to issue shares.
b. Eliminates the delays associated with public offerings.
c. Low issuance expenses compared to public offerings.
d. Faster process than public issuance.
e. Appropriate for first-time entrepreneurs.
f. No entry barriers for companies seeking access to the private placement market.
g. A suitable option when a public response to a prospectus is uncertain.
Disadvantages of Private Placement:
a. Securities are not widely distributed to a broad range of individuals.
b. This method can result in a selected group of small investors acquiring a significant majority of shares in a company.
3. Offer for Sale: Offer for sale involves the direct sale of securities through intermediaries, which can include issue houses, stockbrokers, banks, merchant banks and investment banks. Unlike public offerings, where shares are sold directly to the public, offer for sale follows a two-stage process:
a) Direct Sale to Intermediaries: In the first stage, the issuing company sells securities directly to the intermediaries (such as issue houses and brokers) at an agreed-upon price.
b) Resale by Intermediaries: In the second stage, these intermediaries resell the acquired securities to the ultimate investors. The intermediaries buy the securities at a negotiated price and then sell them at a higher price. The difference between the buying and selling price of the equity is known as the ‘turn’ or ‘spread,” which serves as remuneration for the issue houses or brokers.
Advantages of Offer for Sale:
a. Companies with strong projects can raise funds at minimal costs without worrying about under- subscription.
b. The issuing company is relieved from the complexities of printing prospectuses, advertising and managing share allotments.
c.The company faces fewer challenges in selling its shares, as intermediaries handle this task.
4. Right Issue: Right issue is a method of raising funds in the market employed by existing companies. It offers existing shareholders the option to purchase specific securities at a privileged price within a defined period. These shares, when offered to existing shareholders in this manner, are termed “right shares.” Existing shareholders are given the opportunity to subscribe to new shares in proportion to their current shareholdings, with the offer communicated through a circular.
In short when an existing company issues additional shares to its existing shareholders in order to raise funds, it is known as right issue.
Advantages of Right Issue:
a. Cost Efficiency: Right issue minimizes the cost of issuance since it eliminates expenses related to underwriting, brokerage, advertising and prospectus printing.
b. Equitable Distribution: This method ensures that new shares are distributed fairly among all existing shareholders, preventing any favoritism.
c. Preventing Unfair Practices: Directors are restricted from issuing new shares of the company to themselves or their relatives at a lower price, promoting fairness and transparency.
5. Who are the different intermediaries in the NIM?
Ans: The New Issue Market involves various intermediaries who play important roles in the process. Some of the important intermediaries are:
I. Merchant Bankers: Merchant bankers serve as issue managers, lead managers, or co-managers. They have responsibilities towards both the issuing company and the Securities Exchange Board of India (SEBI). Services:
Pre-issue Management:
a. Handling public issues through prospectus, Offer for Sale and Private Placement.
b. Marketing and underwriting of the issues.
c. Determining the pricing of the securities.
a. Collecting application forms and statements of account from bankers.
Post-issue Management:
b. Screening and processing applications.
c. Deciding the allotment procedure.
d. Sending out allotment letters, share certificates and refund orders.
II. Underwriters: Underwriters provide a guarantee to buy unsold shares in case of under-subscription during the issue. They help in reducing the risk for the issuing company.
III.Brokers: Brokers facilitate the buying and selling of securities in the secondary market. In the context of new issues, they may assist in distributing and trading the newly issued securities.
IV. Registrars: Registrars maintain records of shareholders, process share transfers and manage the Issuance of share certificates. They ensure accurate record-keeping for the company’s shares.
The functions of Registrar to an issue are:
a) Collection of application from the investors
b) Keeping record of the applications,
c) Keeping record of money received from the investors or money paid to the sellers of the shares
d) Assisting the companies in determining the basis of the allotment of the shares
e) Helping in the dispatch of the allotment letters, refund orders, share certificates.
f) Bankers to an Issue: Bankers to an issue play a vital role in the New Issue Market or Primary Market. They serve as a key intermediary responsible for various financial aspects of the issuance process. Their functions include:
a. Accept applications and funds from investors.
b. Handle refunds and dividend payments.
c. Provide SEBI with information about the number of applications received, their role in various issues and application forwarding dates.
Printers, Advertising Agencies and Mailing Agencies: These agencies are responsible for various aspects of communication and documentation related to the new issue. Printers handle the printing of prospectuses and application forms. Advertising agencies manage the promotion and advertisement of the issue. Mailing agencies assist in sending out allotment letters and other communications to investors.
6. What are the advantages of NIM?
Ans: The following are the advantages and disadvantages of New Issue Market:
a. Avenue for Investment: The primary market offers opportunities for investing in financial assets, which are often more productive than physical assets.
b. Savings Mobilization: A well-developed primary market provides incentives such as dividends or interest, attracting investors to invest their savings.
e. Diverting Savings for Productive Use: It helps mobilize scattered savings and directs them towards productive purposes.
d. Source of Huge Funds: Large-scale industries require substantial funds, which can be raised in the primary market by issuing new shares.
e. Rapid Industrial Growth: The primary market facilitates the establishment of new companies, contributing to increased production and productivity, thus promoting industrial growth.
f. Source for Expansion and Technological Upgradation: It aids in raising funds for industrial expansion and technological upgrades.
Disadvantages of New Issue Market:
a. Possibility of Deception: There is a risk of attracting investors with misleading information, potentially harming innocent investors.
b. Inadequate Project Appraisal: Inadequate institutional arrangements for project appraisal make it challenging for investors to assess a project’s actual profitability. . Lack of Investor Accountability: Many investors do not monitor a company’s performance after investing in its shares.
d. Ineffective Role of Merchant Bankers: Merchant bankers may not sufficiently consider technical, managerial and feasibility aspects when appraising project proposals, leading to issues for small investors.
e. Delay in Allotment Process: Delays in receiving allotment letters, share certificates, refund orders and share transfers can result in loss of interest for investors.
These above said factors can discourage small investors from participating in the primary market.
7. What is the meaning of ‘turn or spread’ in the context of securities issuance through offer for sale?
Ans: In the second stage of the offer for sale, the intermediaries resell the acquired securities to the ultimate investors. The intermediaries buy the securities at a negotiated price and then sell them at a higher price. The difference between the buying and selling price of the equity is known as the ‘turn’ or ‘spread,’ which serves as remuneration for the issue houses or brokers.
8. Distinguish between Primary Market and Secondary Market.
| Aspect | Primary Market | Secondary Market |
| Nature of Transactions | – Involves the issuance of new securities. | – Involves the trading of existing securities. |
| Participants | – Issuers (companies) and investors (buyers). | – Investors (buyers and sellers). |
| Purpose | – Raising capital for the issuer. | – Providing liquidity to existing securities holders. |
| Types of Securities | – New shares, bonds, IPOs (Initial Public Offerings). | – Pre-existing shares, bonds, derivatives, etc. |
| Regulation | – More regulated due to the issuance process. | – Still regulated but with a focus on trading activities. |
| Price Determination | – Initial price often set by the issuer. | – Prices determined by supply and demand in the market. |
| Risk | – Generally, higher risk for investors since they are investing in new, untested securities. | – Generally, lower risk compared to the primary market as securities are already established. |
| Frequency of Trading | – Infrequent trading, as new issuances occur less frequently. | – Frequent trading, as securities change hands regularly. |
| Role in the Economy | – Facilitates capital formation and economic growth. | – Provides liquidity to investors and allows price discovery. |
9. Write advantages and disadvantages of underwriting. [AHSEC 2024]
Answer: Underwriting refers to the process of evaluating and assuming financial risk for insurance or investment purposes. In insurance, underwriters assess the risk associated with insuring a person or entity and determine the terms, conditions, and premiums of the insurance policy. In investment banking, underwriters assess the risk of issuing securities and determine their pricing and distribution strategy.
Advantages of underwriting: [AHSEC 2024]
1. The company is sure of getting the value of shares issued
2. It enhances goodwill of the company
3. It facilitates wide distribution of securities
4. The company gets expert advice from underwriters in the matter of marketing securities
5. It fulfills requirement of minimum subscription
Disadvantages of underwriting:
1. Costly: Underwriting can be expensive for companies due to the fees paid to underwriters and associated expenses such as legal and administrative costs.
2. Time-consuming: The underwriting process can be lengthy, delaying the issuance of securities and potentially affecting the company’s ability to raise funds quickly.
3. Market risk: If market conditions change unfavorably during the underwriting process, it can lead to difficulties in selling securities at the desired price, resulting in financial losses for the issuing company.
4. Loss of control: Underwriters may impose conditions or requirements on the issuing company, potentially leading to a loss of control over certain aspects of the offering or the company’s operations.
5. Disclosure requirements: Underwriting typically involves extensive disclosure requirements, which may necessitate the public disclosure of sensitive information that the company would prefer to keep confidential.
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