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New Issues Markets

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New Issues Markets

Uploaded by

zsyed2367
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Module :3 ( New Issues Market )

New issues markets in money markets refer to the platform where new short-term debt
instruments are issued. This typically includes:

1. Treasury Bills (T-Bills): Short-term government securities issued at a discount to


face value, maturing in a year or less.
2. Commercial Paper: Unsecured, short-term promissory notes issued by corporations
to finance their immediate cash flow needs, typically maturing in 1 to 270 days.
3. Certificates of Deposit (CDs): Time deposits offered by banks with specific maturity
dates and fixed interest rates.
4. Repurchase Agreements (Repos): Short-term loans for dealers in government
securities, where one party sells a security and agrees to repurchase it at a set date and
price.

Key Features:

 Short-Term: Generally maturities of one year or less.


 Liquidity: Instruments are usually highly liquid and can be sold easily in secondary
markets.
 Low Risk: Typically seen as low-risk investments, especially government-issued
securities.

Role in the Financial System:

 Provides a mechanism for entities to manage short-term funding needs.


 Offers investors a place to park funds safely while earning interest.
 Helps in liquidity management for financial institutions.

If you need more details or specific aspects of these markets, feel free to ask!

stock market meaning


The stock market is a collection of markets and exchanges where shares of publicly traded
companies are bought and sold. It serves as a platform for investors to trade ownership in
businesses and plays a crucial role in the economy. Here are some key aspects:

Key Features:

1. Equity Ownership: When you buy stocks, you purchase a share of ownership in a
company.
2. Public Companies: Stocks are primarily associated with publicly traded companies
that list their shares on exchanges.
3. Market Exchanges: Major stock exchanges include the New York Stock Exchange
(NYSE) and the NASDAQ, where trading occurs.
4. Price Determination: Stock prices fluctuate based on supply and demand, company
performance, market conditions, and investor sentiment.
5. Investment and Trading: Investors can hold stocks for long-term growth or trade
them for short-term profits.

Importance:

 Capital Raising: Companies can raise capital to fund growth by issuing shares.
 Wealth Creation: Investors can build wealth through capital appreciation and
dividends.
 Economic Indicator: Stock market performance is often seen as an indicator of
economic health.

Distinguish between Stock Market and New Issues market

Stock Market:

1. Definition: A marketplace where existing shares of publicly traded companies are


bought and sold.
2. Types of Transactions: Primarily secondary market transactions, where investors
trade shares among themselves.
3. Participants: Individual investors, institutional investors, traders, and market makers.
4. Purpose: Provides liquidity and allows investors to buy or sell shares easily.
5. Regulation: Regulated by government bodies, such as the SEC in the U.S., to ensure
fair trading practices.

New Issues Market (Primary Market):

1. Definition: A segment of the capital markets where new securities (stocks or bonds)
are issued and sold for the first time.
2. Types of Transactions: Primary market transactions, where companies sell new
shares (or bonds) directly to investors.
3. Participants: Issuing companies, underwriters (typically investment banks), and
initial investors.
4. Purpose: Allows companies to raise capital for expansion, operations, or other needs.
5. Regulation: Also regulated by government bodies, but with specific focus on
disclosure and compliance during the issuance process.

Summary:

 Focus: The stock market deals with trading existing shares, while the new issues
market focuses on the issuance of new shares.
 Timing: The new issues market occurs before stocks enter the secondary market
(stock market).
 Function: The stock market provides liquidity; the new issues market provides access
to capital for companies.

functions of New issues markets


The new issues market, also known as the primary market, plays several crucial functions in
the financial system. Here are the key functions:

1. Capital Raising

 Purpose: Companies issue new securities (stocks or bonds) to raise funds for
expansion, operations, research and development, or debt repayment.

2. Facilitating Investment

 Access for Investors: Provides investors with opportunities to purchase shares or


bonds directly from the issuer at the time of issuance, often at an attractive price.

3. Price Discovery

 Valuation of Securities: Helps in determining the market price of new securities


based on investor demand and supply, which can establish a benchmark for future
trading.

4. Market Information

 Transparency: Issuers must disclose relevant financial information and risks, helping
investors make informed decisions and contributing to market transparency.

5. Underwriting Services

 Support from Investment Banks: Underwriters assess the risk of issuing new
securities, set the initial price, and guarantee a certain amount of capital to the issuing
company.

6. Liquidity for New Issues

 Initial Trading Platform: The new issues market provides a venue for initial trades
of newly issued securities, helping to establish liquidity as they transition to the
secondary market.

7. Regulatory Compliance

 Oversight: Ensures that companies comply with legal and regulatory requirements,
protecting investors and maintaining market integrity.
8. Encouraging Economic Growth

 Funding Innovation: By facilitating capital raising for startups and growing


companies, the new issues market supports innovation and economic development.

9. Diversification for Investors

 Variety of Offerings: Investors have access to a range of securities from different


sectors, enhancing their ability to diversify their portfolios.

Floating new issues of shares : often referred to as an Initial Public


Offering (IPO) or subsequent offerings, involves several methods. Here are the main
approaches:

1. Public Offering:
o Fixed Price Offering: Shares are offered at a predetermined price.
o Book Building: Investors submit bids for shares within a price range. The
final price is set based on demand.
2. Private Placement:
o Shares are sold directly to a select group of institutional or accredited
investors, often at a discount. This method is quicker and less costly than a
public offering.
3. Rights Issue:
o Existing shareholders are given the right to purchase additional shares at a
specified price, usually below the current market price. This method helps
raise capital while allowing current shareholders to maintain their ownership
percentage.
4. Bonus Issue (Scrip Issue):
o Existing shareholders receive additional shares for free, based on their current
holdings, effectively increasing the total number of shares outstanding.
5. Employee Stock Options (ESOs):
o Companies may offer shares to employees as part of compensation packages,
incentivizing loyalty and performance.
6. Direct Listing:
o A company lists its shares on a stock exchange without conducting an IPO,
allowing existing shareholders to sell their shares directly to the public.
7. Shelf Registration:
o Companies can register a new issue of shares with the SEC but delay the
actual offering. This allows for flexibility in timing based on market
conditions.

Each method has its advantages and considerations, depending on the company's goals,
market conditions, and regulatory environment.
The Securities and Exchange Board of India (SEBI) has
laid down various guidelines for Initial Public Offerings
(IPOs):
to ensure transparency and protect investor interests. Here are some key aspects of the SEBI
guidelines for IPOs:

1. Eligibility Criteria:
o Companies must have a minimum net tangible asset of ₹3 crore in the last
three years.
o Minimum average operating profit of ₹15 crore in the preceding three years
(for certain categories).
o Compliance with listing requirements of the stock exchanges.
2. Draft Red Herring Prospectus (DRHP):
o Companies must file a DRHP with SEBI that contains detailed information
about the business, financials, and risks. This document is subject to scrutiny
by SEBI.
3. Minimum Subscription:
o The issue must receive a minimum subscription of 90% of the offer size;
otherwise, the proceeds must be refunded.
4. Price Band:
o A price band must be specified in the DRHP, and the final issue price is
determined through the book-building process.
5. Allotment:
o SEBI prescribes guidelines for fair allotment of shares, ensuring a certain
percentage is reserved for retail investors and other categories.
6. Disclosure Requirements:
o Comprehensive disclosures are mandated in the prospectus regarding financial
performance, risk factors, and business operations.
7. Promoter Contribution:
o Promoters must contribute a certain percentage of the issue size (typically
20% for three years).
8. Underwriting:
o Companies may choose to have the issue underwritten to provide assurance
that the issue will be fully subscribed.
9. Post-Issue Obligations:
o Companies are required to comply with various post-issue disclosures and
financial reporting obligations after listing.
10. Lock-in Period:
o A lock-in period is applicable for promoters and certain investors to ensure
stability in shareholding post-IPO.

These guidelines aim to enhance investor confidence and maintain the integrity of the
securities market. For the latest and most detailed regulations, it’s advisable to refer directly
to the SEBI website or the latest notifications from SEBI.
Recent trends in new issues markets :
Recent trends in new issues markets, particularly in the context of IPOs ( Initial Public
Offering ) have shown some notable developments. Here are some key trends:

1. Increased IPO Activity:


o There has been a surge in the number of IPOs as companies seek to capitalize
on favourable market conditions, often driven by strong investor sentiment.
2. Rising Participation of Retail Investors:
o Retail participation in IPOs has increased significantly, aided by digital
platforms that make investing more accessible. Many companies are catering
specifically to this segment with smaller issue sizes.
3. Focus on Technology and Startups:
o A substantial number of recent IPOs are from tech companies and startups,
reflecting the growing interest in digital and technology-driven businesses.
4. SPACs (Special Purpose Acquisition Companies):
o SPACs have gained popularity as an alternative route to going public,
allowing companies to merge with a publicly listed entity rather than
undergoing a traditional IPO.
5. Sustainability and ESG Factors:
o Companies are increasingly focusing on Environmental, Social, and
Governance (ESG) factors in their IPO pitches, appealing to socially
conscious investors.
6. Regulatory Changes:
o Regulatory bodies are adapting to the changing landscape by introducing new
guidelines to enhance transparency and protect investors, influencing how
companies approach IPOs.(Initial Public Offerings)
7. Pricing Strategies:
o There’s been a trend toward more strategic pricing, with many companies
using book-building methods to gauge demand more effectively before setting
final prices.
8. Shorter Timelines:
o Companies are aiming for quicker turnaround times from application to
listing, streamlining the IPO process to capitalize on favorable market
conditions.
9. Globalization of IPOs:
o Companies are exploring international markets for listings, diversifying their
investor base and seeking better valuations in global exchanges.
10. Use of Technology:
o Enhanced use of technology in marketing and conducting virtual roadshows
has become prevalent, allowing companies to reach a wider audience
efficiently.
These trends indicate a dynamic and evolving landscape in the new issues market, influenced
by investor behavior, technological advancements, and regulatory frameworks.

methods of floating new issues

Floating new issues, or issuing new securities to the public, can be done through various
methods. Here are some common approaches:

1. Initial Public Offering (IPO):


o A company offers its shares to the public for the first time.
o Involves underwriting by investment banks, which help set the price and sell
the shares.
2. Follow-On Offering (FPO):
o A public company issues additional shares after its IPO.
o Can be dilutive or non-dilutive, depending on whether new shares are created.
3. Private Placement:
o Securities are sold directly to a select group of investors, such as institutional
investors.
o Generally quicker and less expensive than public offerings but limited in terms
of investor reach.
4. Rights Issue:
o Existing shareholders are given the right to purchase additional shares at a
discount.
o Helps raise capital while allowing shareholders to maintain their proportional
ownership.
5. Direct Listing:
o A company lists its shares directly on an exchange without an underwriter.
o Shares can be sold by existing shareholders rather than issuing new ones,
allowing for price discovery through market demand.
6. Shelf Registration:
o A company registers a new issue of securities with the SEC but can sell them
in tranches over a period of time.
o Provides flexibility to raise capital as needed without going through the full
registration process each time.
7. Accelerated Bookbuild:
o A fast-track offering where an investment bank collects investor orders over a
short period.
o Often used for large institutional placements.
8. SPAC (Special Purpose Acquisition Company):
o A shell company raises capital through an IPO with the purpose of acquiring
an existing company.
o Allows the target company to go public through a merger rather than a
traditional IPO.

Each method has its pros and cons, and the choice depends on factors like market conditions,
the company's financial situation, and investor demand.
Advantages of primary market
The primary market offers several advantages for both issuers and investors. Here are some
key benefits:

For Issuers:

1. Capital Raising:
o Companies can raise significant capital for expansion, operations, or debt
repayment through the issuance of new securities.
2. Control:
o Companies can maintain greater control over their operations compared to
other financing methods, especially when issuing equity.
3. Enhanced Visibility:
o Going public or issuing securities can increase a company's profile, attracting
more customers and potential investors.
4. Market Valuation:
o An IPO provides a market-based valuation of the company, helping to gauge
its worth and potential for future growth.
5. Liquidity for Shareholders:
o Issuing shares can provide liquidity for early investors and founders, allowing
them to realize gains on their investments.

For Investors:

1. Investment Opportunities:
o Investors have the chance to buy securities at the ground level, often at a lower
price before they become publicly traded.
2. Potential for High Returns:
o Early investments in successful companies can lead to significant returns as
the company grows.
3. Diversification:
o The primary market allows investors to diversify their portfolios by adding
new companies or sectors.
4. Participation in Growth:
o Investors can support and benefit from the growth of innovative or emerging
companies.
5. Voting Rights and Ownership:
o Purchasing shares in the primary market often grants investors voting rights
and a say in company decisions, along with ownership in the company.

For the Economy:

1. Economic Growth:
o By facilitating capital raising, the primary market supports business growth,
innovation, and job creation.
2. Market Efficiency:
o The process encourages transparency and regulatory oversight, contributing to
a more efficient and trustworthy market environment.
Overall, the primary market plays a crucial role in the financial ecosystem by enabling capital
flow and fostering economic development.

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