The primary market, also known as the new issue market or IPO (Initial Public Offering) market, plays a crucial role in the capital formation process for companies. It is the market where new securities are issued and offered to the public for the first time. Various participants operate and facilitate different operations in the primary markets in India. Here, we will explore the roles of these participants, emphasizing their contributions to the primary market ecosystem.
1. Issuer:
The issuer is the entity that seeks to raise capital by issuing new securities in the primary market. Issuers can be corporations, government entities, or special purpose vehicles. They play a central role in the primary market as the source of new securities.
Role:
- Fundraising: The primary purpose of the issuer is to raise capital for various purposes such as expansion, debt refinancing, research and development, or working capital needs.
- Compliance: Issuers need to adhere to regulatory requirements and provide accurate and transparent information to potential investors.
- Decision-Making: Decisions related to the type of securities to be issued, the timing of the issuance, and the pricing strategy are critical responsibilities of the issuer.
2. Underwriter:
Underwriters are financial institutions or investment banks that assist issuers in bringing their securities to the primary market. They play a crucial role in managing the issuance process and ensuring a successful offering.
Role:
- Risk Assumption: Underwriters assume the risk of purchasing the securities from the issuer and reselling them to the public. This provides the issuer with a guaranteed source of funds.
- Pricing: Underwriters determine the offering price of the securities based on market conditions, demand, and the issuer's financial health.
- Due Diligence: Underwriters conduct due diligence on the issuer to assess its financial health, business prospects, and risks associated with the securities being offered.
- Market Making: After the securities are listed on the secondary market, underwriters may act as market makers, facilitating liquidity.
3. Registrar and Transfer Agent (RTA):
The RTA is an entity responsible for maintaining an updated record of shareholders and managing the transfer of securities from the seller to the buyer.
Role:
- Record Maintenance: RTAs maintain accurate records of the ownership of securities issued by the company.
- Transfer of Securities: They facilitate the smooth transfer of securities from sellers to buyers during primary market transactions.
- Dividend Distribution: RTAs also play a role in distributing dividends and other entitlements to shareholders.
4. Bankers to the Issue:
Bankers to the issue are financial institutions, often banks, appointed by the issuer to manage the collection of application money from investors during the IPO.
Role:
- Collection of Funds: Bankers to the issue collect application money from investors during the subscription period of the IPO.
- Refund Processing: In case of oversubscription or under-subscription, bankers to the issue process refunds to investors.
- Escrow Account Management: They manage the escrow account where the application money is held until the allotment process is completed.
5. Stock Exchanges:
Stock exchanges play a critical role in the primary market as the platforms where securities are listed and traded after the IPO.
Role:
- Listing Approval: Exchanges review and approve the listing of securities based on compliance with regulatory requirements.
- Secondary Market Trading: Once listed, securities are traded on the secondary market, providing liquidity to investors.
- Market Surveillance: Exchanges monitor trading activities to ensure fairness, transparency, and compliance with market regulations.
6. Securities and Exchange Board of India (SEBI):
SEBI is the regulatory authority overseeing the securities market in India. It plays a vital role in ensuring the integrity and fairness of the primary market.
Role:
- Regulatory Oversight: SEBI formulates rules and regulations governing the issuance of securities in the primary market, ensuring investor protection and market integrity.
- Approval Process: SEBI reviews and approves the offer documents, ensuring that they comply with disclosure norms and provide investors with adequate information.
- Market Surveillance: SEBI monitors the market to detect and prevent fraudulent activities, insider trading, and market manipulation.
7. Depositories:
Depositories, such as the National Securities Depository Limited (NSDL) and the Central Depository Services Limited (CDSL), play a critical role in the dematerialization and safekeeping of securities.
Role:
- Dematerialization: Depositories convert physical securities into electronic form, making them easier to trade and transfer.
- Custody Services: Depositories provide secure custody of electronic securities, reducing the risk of loss or theft.
- Transfer of Ownership: The transfer of ownership of securities in the primary market is facilitated through the depository system.
8. Investors:
Investors are the end-users of the securities issued in the primary market. They include individual retail investors, institutional investors, and foreign investors.
Role:
- Capital Allocation: Investors allocate their capital by purchasing securities, providing the issuer with the necessary funds.
- Risk Assessment: Investors assess the risks and potential returns associated with the securities being offered in the primary market.
- Market Participation: Investors contribute to the demand for securities during the subscription period, influencing the overall success of the offering.
9. Credit Rating Agencies:
Credit rating agencies assess the creditworthiness of issuers and the securities being offered in the primary market.
Role:
- Risk Evaluation: Credit rating agencies evaluate the financial health of the issuer and assign a credit rating, indicating the level of risk associated with the securities.
- Investor Guidance: Investors use credit ratings as a tool for making informed decisions about the credit quality of the securities they intend to purchase.
10. Legal Advisors and Auditors:
Legal advisors and auditors play a crucial role in ensuring legal compliance and financial transparency during the issuance process.
Role:
- Legal Compliance: Legal advisors ensure that the offer documents comply with relevant laws and regulations.
- Due Diligence: Auditors conduct financial audits and due diligence to verify the accuracy of the issuer's financial statements and disclosures in the offer documents.
11. Merchant Bankers:
Merchant bankers are financial institutions that provide a range of services related to the issuance of securities, including underwriting, financial advisory, and overall management of the IPO process.
Role:
- Underwriting: Merchant bankers underwrite the securities issued by the issuer, assuming the risk of purchasing and reselling them.
- Advisory Services: They provide financial and strategic advice to the issuer, helping in decision-making related to the offering.
Conclusion:
The primary market in India is a dynamic ecosystem with multiple participants playing distinct yet interconnected roles. From the issuer seeking capital to the underwriters managing the offering process, investors providing funds, and regulatory bodies ensuring fairness and transparency, each participant contributes to the functioning and success of the primary market. The collaboration and synergy among these participants create an environment that facilitates capital formation, economic growth, and wealth creation. Understanding the roles of these participants is essential for all stakeholders involved, fostering confidence and efficiency in the primary market operations. As the Indian primary market continues to evolve, the roles and contributions of these participants will adapt to meet the changing needs and dynamics of the financial landscape.
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