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Chapter 2 Types of Markets

Introduction to Primary Market

Primary market is a market wherein corporates issue new securities in order to raise funds. The company which issues its shares is called issuer and the process of issuing shares to public is known as public issue or Initial Public Offer (IPO). This entire process involves various intermediaries such as Merchant Banker, Bankers to the Issue, Underwriters, and Registrars to the Issue. All these intermediaries are registered with SEBI.

Steps to be followed by companies going for an IPO

  • The company appoints a merchant banker for the IPO process. The merchant banker assists the company in the IPO process.

  • The company has to apply to SEBI with a registration statement. This statement has details about the business of the company, reason for coming out with an IPO and the financial details of the company.

  • Once SEBI receives the registration statement, it decides whether the company should be allowed to go for an IPO or not.

  • After the company gets initial approval from SEBI, it needs to prepare the Draft Red Herring Prospectus (DRHP). DRHP is a document which consists of information about the business of the company and the industry that it operates in. This document gets circulated to the public. It includes details such as estimated size of the IPO , estimated number of shares being offered to public, how does the company plan to utilize the funds, financial statement of the company, promoter details etc.

  • The company now has to advertise about the IPO through TV and print advertisements in order to build awareness about the company and its IPO offering. This process is called as the IPO road show.

  • The company or the issuer of the IPO has to decide the price band between which the company would like to go public. For example, the company has decided a price band of Rs 200-205. So, if an investor wishes to invest in the IPO, he can choose to buy shares at a price anywhere between 200 and 205.

  • After the price band is fixed, the company has to officially open the window so that public can subscribe for shares. The subscribers can bid for an IPO within the price band decided by the company. This is also called as Book Building.

  • After the subscribing window is closed (which is generally open for 2-3 days), the price point at which the issue gets listed is decided. The shares are then listed on the respective stock exchanges.

Procedure to apply for an IPO

  • The subscriber compulsorily needs a DEMAT account to apply for an IPO. He also needs to apply for ASBA (Applications Supported by Blocked Amount) through the bank to which he has linked his trading and DEMAT account.

  • One can apply for an IPO offline as well as online.

  • In offline mode, the subscriber needs to collect the IPO form from the stock broker and submit the duly filled form. The broker will then submit the form to your bank to which you have linked the trading account.

  • In online mode, one can directly login to net banking services of the bank to which he has linked his trading account and apply for the IPO.

Secondary Market

The secondary market is where the securities issued in primary market are bought and sold on the stock exchanges - Bombay Stock Exchange (BSE), National Stock Exchange (NSE) and others. BSE and NSE are the most widely traded exchanges in India with a market capitalisation of Rs 1,25,18,954 crore and Rs 12,282,127 crore respectively.

Key Takeaways

  • Primary market is a market wherein corporates issue new securities in order to raise funds.

  • The secondary market is where the securities/shares issued in primary market are bought and sold on the stock exchanges.

  • The company which issues its shares is called issuer and the process of issuing shares to public is known as public issue or Initial Public Offer (IPO).

  • Any individual who subscribes for an IPO needs to compulsorily have a DEMAT account. He also needs to apply for ASBA.

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