Chap 2.

New Issue Market

Chapter 2. New Issue Market

Meaning of New Issue Market:

The new issue market deals with the new securities which were not previously
available to the investing public i.e. the securities that are offered to the investing public for the
first time. The market, therefore makes available a new block of securities for public
subscription. In other words, new issue market deals with raising of fresh capital by companies
either for cash or for consideration other than cash.

The new issue market encompasses all institutions dealing in fresh claim. The forms in
which these claims created are equity shares, preference shares, debentures, rights issues,
deposits etc. all financial institutions which contribute, underwrite and directly subscribe to the
securities are part of new issue market.

Stock Exchange:-

Stock Exchange may be defined as “An association, organization, or body of individuals,

whether incorporated or not, establish for the purpose of assisting, regulating and controlling
business in buying, selling and dealing in securities.”
The stock market is a pivotal institution in the financial system. A well organized Stock market
performs several economic functions like translating, short term and medium term investment
into long term funds for companies, directing the flow of capital in the most profitable channels
etc. Only those securities which are listed in the stock exchange are transacted in the stock
market.
Functions of Stock market:-

I. To provide a regular market:-

One of the most important functions of financial market is giving opportunity to sell
securities, whenever he wants to do so. Stock exchange provides a ready market where investors
can liquidate their investment quickly. Without stock market, purchases of new issues have to
hold security till its maturity or in case of common equity shares, indefinitely. Easy marketability
encourages the investors to invest in securities.

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II. To provide wide ownership of securities:

If the company’s securities are listed in stock market of the country, these securities will be
bought and sold by persons widely scattered all over the country. Country wide ownership of
capital allows the shareholders to share the business risk.
III.To help pooling of Funds:
It is not possible for an individual alone to provide the huge funds needed for the complex
businesses. Stock market helps pooling of funds from those who have surplus for financing big
investment proposals.
IV. To ensure safety in transaction:
Investors have great faith for the transactions done through stock exchanges as the transactions
are made publicly under well-defined rules, regulations and bye laws of the exchange.
V. To provide Regular valuation of securities:
The market price is always available for all these securities which are listed and regularly traded
on stock exchange. Valuation of securities is of immense use to companies, investors, bankers,
creditors as well as the tax collecting authorities.
VI. To promote capital formation:
By providing regular market for securities and ensuring adequate safeguard to innocent investors
against malpractices of stock brokers, the stock market instills confidence in the minds of
investors who are encouraged to save more.

DIFFERENCE BETWEEN NEW ISSUE MARKET & STOCK EXCHANGE

The distinctions between the new issue market and the stock exchange can be made on three
grounds:

i) Functional difference

ii) Organizational difference

iii) Nature of contribution to industrial finance

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 Chap 2. New Issue Market

DIFFERENCE BETWEEN NEW ISSUE MARKET & STOCK EXCHANGE

New Issue Market Stock Exchange

1) The new issue market deals with 1) The stock exchange provides
Functional new securities which are issued for the a ready market for buying and
Difference first time for public subscription. selling of old securities.

1) The new issue market enjoys 1) The stock exchange has

neither any tangible form nor any physical existence and is located in
administrative organizational set up nor particular geographical areas.
is subject to any centralized control and
administration for the execution of the
business.
2) New issue market is renders 2) The stock exchange is a place
Organizationa service to the lenders and borrowers of where dealers of security meet
l funds for the particular time. regularly at appointed time
Difference announced by the market.
3) The new issue market is 3) The stock exchange is
controlled by bankers & under writers. controlled by SEBI.

The new issue market provides the The role of stock exchange in
issuing company with funds for starting providing capital is indirect as it
a new enterprise or for either expansion provides marketability to the shares.
Nature of or diversification of an existing one by
contribution to making a direct link between companies
industrial which requires funds and the investing
finance public. So, the contribution of new issue
market is direct.

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 Chap 2. New Issue Market

Functions OF NEW ISSUE MARKET

1. Origination:-

Origination refers to the work of investigation and analysis and processing of new
proposals. This can be in terms of

1. Preliminary investigation undertaken by the sponsors specialized agencies of the issue.

These involves the careful study of the technical, economic, financial and legal aspects
of issuing companies to ensure that it warrants the backing of issue house.

2. Service of an advisory nature which go to improve the quality of capital issue. This
service includes advice on such aspects of capital issue such as,

 Determination of class of security to be issued and price of issue in terms of

market conditions.
 Magnitude of issue
 The timing of floating an issues.
 Method of flotation.
 Techniques of selling & so on.
The importance of the specialized service provided by the new issue market, organisation
in this respect can hardly be over emphasized. On the thoroughness of investigation and
soundness of judgment of sponsoring institutions depends to the large extent, the allocative
efficiency of market. The organization however thoroughly done will not itself guarantee success
of an issue.

(2) Underwriting

Underwriting is an agreement whereby the underwriter promises to subscribe to a specific

number of shares or debentures or a specified amount of stock in the event of public not
subscribing to the issue. If the issue is fully subscribed then there is no liability for the
underwriter. If a part of share issues remain unsold, the underwriter will buy the shares. Thus
underwriting is a guarantee for the marketability of shares.

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Method of underwriting:

An underwriting agreement may take any of the following three forms:

(i) Standing behind the Issue

Under this method, the underwriter guarantees the sale of a specified number of shares within a
specified period. If the public do not subscribe to the specified amount of issue, the underwriter
buys the balance in the issue.

(ii) Outright Purchase

The underwriter, in this method, makes outright purchase of shares and resells them to the
investors.

(iii) Consortium Method

Underwriting is jointly done by a group of underwriters in this method. The underwriters form
syndicate for this purpose. This method is adopted for large issues.

Types of underwriters:-
The underwriters in India may be classified into 2 categories:-
1. institutional underwriters
2. non- institutional underwriters
(1) institutional underwriters :-
They are some institutional underwriters
• life insurance corporation of India (LIC)
• unit trust of India (UTI)
• industrial development bank of India (IDBI)
• industrial credit and investment corporation of India (ICICI)
• commercial bank and general insurance company
The patterns of underwriting of the above institutional underwriters differ vastly in India.
LIC and UTI have purchased industrial securities from the new issue market with a view to
holding them on their own portfolio they have a performance for underwriting share in large and
well established firms.The development banks have given special attention to the issue in
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backward sates and industries in the priority list.The thrust of the development banks is also
towards small and new issues which do not have adequate support from other institutions.
General insurance companies have shown preference in underwriting the securities of fairly new
issue
(2) Non-Institution underwritings:
The Non institutional underwriters are brokers.

• They guarantee shares only with a view to earn commission from the company
floating the issue.
• They are known to offload the shares later to makes a profit.
• The brokers work with profit motive in underwriting industrial securities.
• After the elimination of forward trading, stock exchange brokers have begun to
take an underwriting business.
• The percentage of securities underwriting to the total private capital issue varies
between72% to 97%.
Advantages of underwriting:

Underwriting assume great significant as it offer the following advantage to the issuing
company.
• The issuing company is received from the risk of finding buyer for the issue
offered to the public.
• The company is assured of getting the minimum subscription within the stipulated
time a statutory obligation to be fulfilled by the issuing company.
• Underwriters undertake the burden of highly specialized function of distributing
securities.
• They provided expert advice with regard to pricing of issue the size of issue etc.
• Public confidence on the issue enhanced when underwritten is done by reputed
underwriters.
3. Distribution: Distribution is the function of sale of securities to ultimate investors this
services is performed by brokers and agents who maintain a regular direct contact with
ultimate investors E.X: Karvy

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