Do you want to double the money in a day?? Isn’t it a Great Opportunity??
Well that’s possible with Primary Market!!
So how do we do it? Just apply for an IPO.
Just in 2020, at least three Dalal Street debutants have given 100 per cent returns on the listing day – Burger King, Mrs. Bectors and Happiest Minds Technologies.
There were some with 86 per cent (Route Mobile), 75 per cent (Rossari Biotech) and 72 per cent (Chemcon Speciality Chemicals) returns too.
How can you make that kind of money? The first step is to know what is primary market?
Let’s get started!
Primary Market / New Issue Market Meaning
A primary market is a place where fresh/new shares are issued to the public by either a Private or Public company. It is also called a New Issue Market too.
Private Company: These companies are issuing fresh/new shares to the public for the first time. This process is called an IPO.
Public Company: These companies have already issued their shares to the public before and are again issuing fresh/new shares to the public via follow on public offer (FPO), private placement, bonus or rights issue.
Don’t worry! We have covered all of it later in the article.
Why do companies issue Fresh shares? You guessed it right, to raise money from the public.
Primary market securities could also be treasury notes, bills and government and corporate bonds. In this article, we shall stick to shares of companies.
Functions of Primary Market / New Issue Market
The role of the primary market is simple. It is to help a company raise funds for various purposes by issuing shares to the public. These purposes could either be business expansion, meeting debt obligations or giving an exit route to the private equity (PE) investors and venture capitalists (VCs).
The role of the primary market can be divided among three steps:
A company has to seek Sebi’s nod to file for an IPO. Once that happens, a merchant banker is appointed, who acts as a middleman between the issuing company and the public.
He will investigate the company on various parameters such as promoters’ stake, financial ratios (liquidity and debt-to-equity ratio etc) and risks in the business. This process is called origination.
The company has to ensure that its public issue is subscribed/bought fully. For that, it appoints underwriters such as investment banks or financial institutions.
In case the issue is undersubscribed, that is, not many investors have bought the shares, the underwriters are supposed to buy the unsold shares.
For example, ICICI Securities, SBI Capital Markets and IIFL Securities were the underwriters in Mrs Bectors IPO. They are also called book-running lead managers.
Distribution is selling securities to investors. Investors have to fill in an application form to make their bids. The detailed process is explained later in the article.
Primary Market Instruments / Types Of Primary Market
A company can resort to various types of primary market issues to raise funds. These are called primary market instruments.
There are two types of public issues: Initial Public Offering (IPO) and Follow on Public Offer (FPO)
IPO is when an unlisted/private company comes to the primary market for listing.
FPO is when an already listed company is reissuing shares. FPOs could either be via fresh issuance of shares or sale of promoters holdings or big shareholders.
A private placement is when the issuing company offers shares to select investors such as large banks, mutual funds/AMCs, and insurance companies. The companies do it to avoid cumbersome public issue processes. There are two types of private placements:
- Preferential Allotment
In preferential allotment the company issues shares to select investors of its choice. The shares could be placed with anyone including the promoters at a price not less than Sebi determined price.
- Qualified Institutions Placement (QIP)
In Qualified Institutions Placement, shares are issued only to registered institutional investors known as Qualified Institutional Buyers (QIBs) at a price not less than SEBI determined price.
Rights issue involves fresh issuance of shares to existing shareholders in proportion to the number of shares they already hold. The new shares are offered at a discount to the market price and the record date is announced well in advance.
When a company is unable to pay a dividend to its shareholders due to a shortage of funds, it rewards them with bonus shares. The company allows additional shares in proportion to shares already owned by them.
Primary Market Example
If you are a keen primary market follower, you would know the government-owned Indian Railway Finance Corporation (IRFC) is coming out with a public issue on January 18 to raise Rs 4,633.4 crore. The company has set the price band at Rs 25-26 per share.
Burger King and Mrs. Bectors had launched IPOs in December. Both the public issues were oversubscribed by 157 times and 199.4 times, respectively.
Advantages of Primary Market
- Main importance of the Primary Market is, It is an efficient and cost-effective way of raising funds from the public.
- Shares bought in the primary market can be easily sold in the secondary market when the stock gets listed. So there is no question of illiquidity.
- There is no price manipulation in the primary market as the issue price is fixed, whereas in the secondary market the price can be manipulated by big buyers/sellers.
- There is no brokerage or transaction fees or stamp duty.
Disadvantages of Primary Market
- Sometimes the private companies may opt for IPOs only to give an exit route to the shareholders that invested during the commencement of the company.
- Since many companies coming up with IPOs may not have listed competitors, it is difficult to evaluate if the issue prices quoted is more or less.
- By simply reading the financial statements, It’s pretty hard for laymen to evaluate if he/she should subscribe to the IPO or not.
How to apply for the issues in the Primary Market
- First you need to open an account with Aliceblue. Check out the detailed process of how to open a trading and demat account here.
- Once you have opened the account successfully. Login with Alice IPO.
- After logging in, you will see the Upcoming and Live IPOs.
- Choose the IPO you want to apply for and click on Bid. You will be redirected to the bidding/order page.
- Fill in the UPI ID, Quantity, Cutoff-price, and click on Submit to place your bid/order. (You can place up to 3 bids per IPO)
- Once the bid is successfully submitted, you will get a notification on your UPI App for UPI Mandate.
- Approve the UPI Mandate to successfully place the order. Once you place the order UPI App will block funds in your Bank account proportional to the bid (Till the allotment date).
- If the shares are allotted to you, the money will be debited from your account.
- If the shares are not allotted, blocked funds will be released.
- It is exciting to make money in the primary market. But few things must be kept in mind. If some IPOs are listed in the secondary market with a huge premium, then there are the loss-making ones too.
- When an IPO is announced one needs to look for the objective of the issue. Is it to give existing investors an exit route or to expand the business or pay loan etc
- The role of the primary market is to help a company raise funds for various purposes by issuing shares to the public.
- First, the company has to seek the SEBIs nod to file for an IPO, appoint an underwriter to make sure the issue is subscribed fully, and distribute the shares to the public.
- Company can raise funds via various primary market issues like:
- Public issue
- Private placement
- Rights issue
- Bonus issue
- Applying for IPO is now a child’s play with Aliceblue’s UPI-based application. Open your account now!