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PRIMARY MARKET

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Primary Market

Meaning :The primary market provides the channel for sale of new securities.

Primary market provides opportunity to issuers of securities, Govt. as

well as corporates, to raise resources to meet their requirement of

investment &/or discharge some obligation.

DefinitionThe market for new securitiesissues. In the primary market the security

is purchased directly from the issuer. This differs from the secondarymarket.

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Significance of Primary Market

This is the market for new long term capital. The primary market is themarket where the securities are sold for the first time. Therefore it is alsocalled the new issue market (NIM).

In a primary issue, the securities are issued by the company directly to

investors.

The company receives the money and issues new security certificates tothe investors.

Primary issues are used by companies for the purpose of setting up new

business or for expanding or modernizing the existing business.

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Significance of Primary Market (Contd.)

The primary market performs the crucial function of facilitating capitalformation in the economy.

The new issue market does not include certain other sources of new long

term external finance, such as loans from financial institutions. Borrowersin the new issue market may be raising capital for converting privatecapital into public capital; this is known as "going public."

The financial assets sold can only be redeemed by the original holder.

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Development In Primary Market

New products or services to existing customers,

Existing products or services to new customers, or

New products or services to new customers

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Role of Primary Market

Channel for sale of new securities.

Opportunity to issuers of securities (Govt.,corporates)

To raise resources to meet their requirements of investment/

Discharge obligation

Issue securities at face value

Issue the securities in domestic & international market.

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I P O

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IPO (Initial Public offering)

Meaning: IPO is when an unlisted company makes either a fresh issue of securities

or an offer for sale of existing securities or both for the first time to the

public. This paves way for listing and trading of the issuers securities.

IPO is selling of the securities to the public in the primary market. The sale

of securities can be either through book building or through normal public

issue.

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Does NSE provide any facility for IPO

Yes, NSE electronic trading network spans across the country providing

access to investors in remote areas. NSE decided to offer this

infrastructure for conducting online IPOs through the book buildingprocess. NSE operates a fully automated screen based bidding system

called NEAT IPO that enables trading members to enter bids directly from

their offices through a sophisticated telecommunication network.

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Advantages of IPO

Book Building through the NSE system offers several advantages.

The NSE system offers a nation wide bidding facility in securities.

It provides a fair, efficient & transparent method for collecting bids using

the latest electronic trading systems.

Costs involved in the issue are far less than those in normal IPO

The system reduces the time taken for completion of the issue process.

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F P O

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Meaning

The basic difference between Initial Public Offer (IPO) and Follow onPublic Offer (FPO) is as the names suggest IPO is for the companies whichhave not listed on an exchange and FPO is for the companies which havealready listed on exchange but want to raise funds by issuing some moreequity shares.

Companies usually go to debt market for raising their short term needs.

Either they issue bonds or get loans. But if they have massive expansionplans they may not raise sufficient funds in the debt market and even ifthey could it costs more. Companies come with follow on offer torestructure the business or to raise funds for new business or to expandthe existing business.

Similar to an IPO a price band is fixed (usually with the help of Investment

banks) for the issue and interested investors can apply for it. Unlike thecorporate actions (such as bonus, rights issue; they are applicable only tothe existing stake holders) FPO is open to all investors. The price band forthe FPO depends on the market value of the existing company shares andthe reason for raising funds.

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Private Placement Market

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Defination

Private placement definition - finance

A group of people or institutions providing equity or debtcapital to a company. Private placements are privately offered

and are restricted to qualified individuals, which typicallymeans individuals with a net worth of at least $1 million.Those investing in the private placement consist of a relativelysmall group of people or companies, in contrast with publicofferings that are sold to thousands of investors. Privateplacements don't have to be registered by the Securities and

Exchange Commission. One advantage of the privateplacement market is that it offers confidentiality.

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Book Building

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Definition of Book Building

The process of determining the price at which

an Initial Public Offering will be offered. The

book is filled with the prices that investors

indicate they are willing to paypershare, andwhen the book is closed, the issue price is

determined by an underwriter by analyzing

these values.

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Concept Of Book Building

Recently, the Securities and Exchange Commission (SEC)

proposed to make new rules, and subsequently invited capital

market operators to send their comments on the proposednew rules. In this era of reduction in transaction costs, Book

Building is viewed as a less expensive and less time consuming

process of offering securities to the public in such a way that

the true value of the issuer is reflected.

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Process Of Book Building

The Issuer who is planning an offer nominates an investment banking

institution as 'book runners'.

The Issuer specifies the number of securities to be issued and the priceband for the bids It is not unusual for the upper price of the band to be a

maximum of 1.2 times the floor price.

The Issuer also appoints syndicate members with whom orders are to be

placed by the investors.

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The syndicate members input the orders into an 'electronic book'.- This

process is called 'bidding' and is similar to open auction.

The book normally remains open for a period of say! 5 days.

Bids have to be entered within the specified price band, else would berejected.

Bids can be revised by the bidders before the book closes.

On the close of the book building period, the book runners evaluate thebids

On the basis of the demand at various price levels.

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Limitations of Book Building

Book building is appropriate for mega issue only. In the case of the potentialinvestor the companies can adjust the attributes of the offer according to thepreference of the potential investors. It may not be possible in big issues sincethe risk-return preference of the investor cannot be estimated easily.

The issuer company should be fundamentally strong & well known to the

investors.

The book building system works very efficiently in matured market condition.

The investors are aware of the various parameters affecting the market price ofthe securities, But such conditions are not commonly found in practice.

There is possibility of price rigging on listing as promoters may try to bail outsyndicate members.