Primary Market - Concept, Functions Etc.

MODULE- III
PRIMARY MARKET/CAPITAL MARKET

MEANING
Capital Market is basically a part of financial market where buying and selling of long-term debt or
equity takes place. The main role of capital market is providing a platform where long term funds
are raised. This fund-raising exercise through the capital market is tapped by the governments,
banks and corporates through the capital market. Therefore, the organizations which need money
can raise funds with the help of the capital market by issuing shares and debentures. The
investors then invest in the capital market by purchasing those shares and debentures.
Therefore, it appears from the above that capital market acts as a link between savers and
investors. It plays an important role in mobilizing the savings of the investors and channelizing
them for productive purposes. So, the capital markets serve an important purpose as it helps in
diverting the resources from where surplus funds are available to areas where there is dearth of
funding and money is needed on urgent basis.
So, we can say that capital market is the soul of an economy through which savings of people are
invested in basically corporate form of organizations. And, corporates utilize such invested
amounts by putting them to their most effective use by allocating them in profitable opportunities.
Therefore, a vibrant capital market benefits both the investor as well as the corporate form of
organization and it is an important indicator of economic health of a country.
In order to ensure that capital market work in an orderly manner, Securities and Exchange Board
of India (SEBI) act as a watchdog to protect investors against market manipulation, unfair trading
and fraud amongst others. The job of SEBI is to protect the interests of investors and guide them
to make wise investment decisions. The task of SEBI is also to ensure that the companies follow
it’s rules, regulations and guidelines diligently and help to make the Indian Capital Market best in
the world in terms of transparency and investor friendly measures.
The Indian Capital Market is very old. It started in 18th Century when the Indian securities are
traded in Mumbai and Kolkata. However, the actual trading of securities in Indian Capital Market
started with the setting up of The Stock Exchange of Bombay in July 1875 and Ahmedabad Stock
Exchange in 1884. The evolution and development of Indian Capital Market can be discussed
under two categories:
(i) Indian Capital Market – Before 1990’s
(ii) Indian Capital Market – After 1990’s
Indian Capital Market – Before 1990’s
The Indian Capital Market was very inactive till 1990. The requirements of loan term loan of
corporate sector was funded by Development Financial Institutions (DFI’s) namely IDBI, IFCI,
ICICI as well as by other investment institutions like LIC, UTI, GIC etc. Working capital
requirements were funded by the Commercial Banks through an elaborate network of bank
branches spread all over the country.
The scope of capital market was limited because of easy availability of loans from banks and
financial institutions. The structure of interest rate was entirely controlled. But, three important
legislations, namely, Capital Issues (Control) Act 1947, Securities Contracts (Regulation) Act,
1956, and Companies Act, 1956 (Now, Companies Act, 2013) were somehow managed to give a
proper structure for the development of capital market in India. However, the market was a highly
regulated one. The pricing of the securities which were issued to the public for the first time was
decided by the Office of the Controller of Capital Issues. There were few stock exchanges and the
dominant one was Bombay Stock Exchange (BSE). The BSE provided the trading platform under
which the secondary market transactions operate under an open outcry system.
Indian Capital Market – After 1990’s
The Indian capital markets have witnessed a major transformation and structural change during
the past two and a half decades, since the early 1990’s. The Financial Sector Reforms in general
and the Capital Market Reforms were initiated in India in a big way from 1991 – 1992
onward. These reforms have enabled the capital market to improve its efficiency, to enhance
transparency in market operations, to check unfair trade practices and bring the Indian capital
market in accordance with the International Standards. The Capital Issues (Control) Act, 1947 was
repealed in May 1992, and the office of the Controller of Capital Issues was abolished in the same
year. The incorporation of National Stock Exchange was happened in 1992. After that it was
recognized as a Stock Exchange in April 1993. It has been playing a lead role as a change agent
in transforming the Indian Capital Market to its present form.
The Securities and Exchange Board of India (SEBI) was set up in 1988 and acquired the statutory
status in 1992. Since 1992, SEBI has emerged as an autonomous and independent statutory body
with definite mandate such as:
(a) to protect the interests of investors in securities,
(b) to promote the development of securities market, and
(c) to regulate the securities market.
In order to achieve these objectives, SEBI has been exercising power under the Securities and
Exchange Board of India Act, 1992; Securities Contracts (Regulation) Act, 1956; Depositories Act,
1996 and delegated powers under the Companies Act, 2013. Indian Capital Market has made
commendable progress since the inception of SEBI and has been transformed into one of the most
dynamic capital markets of the world.
Functions of the capital market:
The major functions of capital market are:

1. To mobilize resources for investments.
2. To facilitate buying and selling of securities.
3. To facilitate the process of efficient price discovery.
4. To facilitate settlement of transactions in accordance with the predetermined time schedules.
Major constituents of the capital market/ Authority Governing Capital Market in India,
1. SEBI (regulator)
2. Stock exchanges
3. Clearing corporations (cc)/ clearing houses
4. Depositories and depository participants
5. Custodians
6. Stockbrokers and their sub-brokers
7. Mutual funds
8. Merchant bankers
9. Credit rating agencies
10. Financial institutions
11. Foreign institutional investors
12. Non-banking institutions
13. Issuers/ registrar and transfer agents
14. Investors
Primary Market
Primary market is a market where buying and selling of new securities are taken place for the first
time. In other words, the market, where the first public offering of equity shares or convertible
securities by a company take place which is followed by the listing of a company’s shares on a
stock exchange is called a primary market. It is also known as ‘initial public offering’ (IPO). Issue of
further capital by companies whose shares are already listed on the stock exchange also comes
within the ambit of Primary market.
There are different types of intermediaries operating in this segment of capital market by providing
a variety of services. For example, merchant bankers, brokers, bankers to issues, debenture
trustees, portfolio managers, registrars to issues and share transfer agents, etc. They are also
regulated by SEBI. Their contribution is immense in the development of capital market.
CAPITAL MARKET/PRIMARY MARKET INSTRUMENTS
Financial instruments (e.g. bonds and stocks) whose maturity is more than one year are traded in
the capital market. They are a very large source of funds with bonds having long maturity and
shares having indefinite maturity. It also helps in increasing capital formation in the country. The
following instruments are available for investors in the capital market: -
– Equity shares
– Shares with Differential Voting Rights
– Preference Shares
– Debentures – Bonds
– Foreign Currency Convertible Bonds
– Foreign Currency Exchangeable Bonds
– Indian Depository Receipts
– Derivatives
– Warrant

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MODULE- III

PRIMARY MARKET/CAPITAL MARKET

Indian Capital Market – Before 1990’s

Functions of the capital market:

The major functions of capital market are:

CAPITAL MARKET/PRIMARY MARKET INSTRUMENTS

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