Companies issue securities from time to time to raise funds in order to meet their financial requirements for modernisation, expansions and diversification programmes. These securities are issued directly to the investors (both individuals as well as institutional) through the mechanism called primary market or new issue market. The primary market refers to the set-up which helps the industry to raise the funds by issuing different types of securities. This set-up consists of the type of securities available, financial institutions and the regulatory framework. The primary market discharges the important function of transfer of savings especially of the individuals to the companies, the mutual funds, and the public sector undertakings. Individuals or other investors with surplus money invest their savings in exchange for shares, debentures and other securities. In the primary market the new issue of securities are presented in the form of public issues, right issues or private placement.
Firms that seek financing, exchange their financial liabilities, such as shares and debentures, in return for the money provided by the financial intermediaries or the investors directly. These firms then convert these funds into real capital such as plant and machinery etc. The structure of the capital market where the firms exchange their financial liabilities for long-term financing is called the primary market. The primary market has two distinguishing features :
- It is the segment of the capital market where capital formation occurs; and
- In order to obtain required financing, new issues of shares, debentures securities are sold in the primary market. Subsequent trading in these securities occurs in other segment of the capital market, known as secondary market.
The efficient operation of the primary market is made possible by the financial intermediaries and the financial institutions that arrange long-term financial transactions for their clients. The services they provide are so important that firms who seek long-term external financing, invariably turn to these firms in order to take advantage of their knowledge and ability to market the securities.
The securities which are often resorted for raising funds are equity shares, preference shares, bonds, debentures, warrants, cumulative convertible preference shares, zero interest convertible debentures, etc. Public issues of securities may be made through (i) prospectus, (ii) offer for sale, (iii) book building process and (iv) private placement. The securities offered to public through a prospectus are directly subscribed by the investors. Wide publicity about the public offer is generally made by the company through different media.