A good capital market is an essential prerequisite for the industrial and commercial development of a country. Capital market is a central coordinating and directing mechanism for free and balanced flow of financial resources into the economic system operating in a country. It helps the companies who require capital to expand, modernize or diversify their business. To get the capital that is required by the company it usually goes for the issue of shares and the process of issuing of shares is done in the primary market. The primary market in the simplest terms can be defined as a market where the securities are sold in order to raise the funds or the capital required by the company. It is a market for new issues i.e. a market for fresh capital. It provides the channel for sale of new securities. The securities can be in many forms such as equity shares, preference shares, debt instruments, bonds etc.
The primary issue market is that component of the capital markets that deals with the issuance of new securities. Companies, governments or public sector institutions can obtain funding through the sale of a new stock. In the case of a new stock issue, this sale is an initial public offering (IPO). Primary markets create long term instruments through which corporate entities borrow from capital market. Primary market provides opportunity to issuers of securities, government as well as corporate, to raise resources to meet their requirements of investments and/or discharge some obligation. Primary market also known as New Issue Market as it deals with new securities which are not previously available and are offered for the investment to the public for the first time. The primary market enjoys neither any tangible form nor any administrative organizational set-up and is not subject to any centralized control and administration for the execution of its business. It is recognized by the services that it renders to the lenders and borrowers of capital. As the new issue market directs the flow of savings into long term investments, it is of paramount importance for the economic growth and industrial development of a country. The availability of financial resources for corporate enterprises, to a great extent, depends upon the status of new issue market in the country.
Initial Public Offering (IPO)
A corporate may raise capital in the primary market by way of an initial public offer, rights issue or private placement. An Initial Public Offer (IPO) is the selling of securities to the public in the primary market. It is the largest source of funds with long or indefinite maturity for the company. Requirement of funds in order to finance the business activities motivates small entrepreneurs to approach the new issue market. Initial Public Offer (IPO) is a route for a company to raise capital from investors to meet the expenses for its projects and to get a global exposure by listed in the Stock Exchange. An Initial Public Offer (IPO) is the selling of securities to the public in the primary stock market. Company raising money through IPO is also called as company ‘going public’. From an investor’s point of view, IPO gives a chance to buy shares of a company, directly from the company at the price of their choice (In book build IPO’s). Many a times there is a big difference between the price at which companies decides for their shares and the price on which investor are willing to buy shares and that gives good listing gain for shares allocated to the investor in IPO. From a company’s perspective, IPO’s help them to identify their real value which is decided by millions of investors once their shares are listed on stock exchanges. IPO’s also provide funds for their future growth or for paying their previous borrowings.
“An initial public offering (IPO), referred to simply as an “offering” or “flotation”, is when a company (called the issuer) issues common stock or shares to the public for the first time.”
IPOs are often issued by smaller, younger companies seeking capital to expand, but can also be done by large privately owned companies looking to become publicly traded. When a company lists its securities on a public exchange, the money paid by investors for the newly-issued shares goes directly to the company (in contrast to a later trade of shares on the exchange, where the money passes between investors). An IPO, therefore, allows a company to tap a wide pool of investors to provide it with capital for future growth, repayment of debt or working capital. IPO can be used as both a financing strategy and an exit strategy. In a financing strategy the main purpose of the IPO is to raise funds for the company. In an exit strategy for existing investors, IPOs may be used to offload equity holdings to the public through a public issue. A company selling common shares is never required to repay the capital to investors. Once a company is listed, it is able to issue additional common shares via a secondary offering, thereby again providing itself with capital for expansion without incurring any debt. This ability to quickly raise large amounts of capital from the market is a key reason many companies seek to go public.
There are several benefits for being a public company, namely:
- Bolstering and diversifying equity base.
- Enabling cheaper access to capital.
- Exposure, prestige and public image.
- Attracting and retaining better management and employees through liquid equity participation.
- Facilitating acquisitions.
- Creating multiple financing opportunities: equity, convertible debt, cheaper bank loans, etc.
- Increased liquidity for equity holder.
The growing number of companies in the primary equity market represents the growth of the economy of the country itself. The growth of the primary equity market is remarkable in the developed countries. In the primary market, securities are issued on an exchange basis. The underwriters, that is, the investment banks, play an important role in this market: they set the initial price range for a particular share and then supervise the selling of that share. Investors can obtain news of upcoming shares only on the primary market. The issuing firm collects money, which is then used to finance its operations or expand business, by selling its shares. Before selling a security on the primary market, the firm must fulfill all the requirements regarding the exchange. After trading in the primary market the security will then enter the secondary market, where numerous trades happen every day. The primary market accelerates the process of capital formation in a country’s economy.