All You Need to Know About Primary Stock Market in India

Primary stock market enables companies and other institutions to raise money through the sale of the share of companies or the sale of debt instruments. There are many instruments of the primary market such as government bonds, corporate bonds, notes, bills, and stocks of companies. When a company issues its share to purchase for the general public for the first time, it is done in the primary stock market through Initial Public Offering (IPO). There are mainly five types of primary markets in India. Let’s discuss different types of primary stock market issues one by one briefly.

Different Types of Primary Stock Market Issues

Public Issue in Stock Market

Public issue is the most popular way of raising money from the general population through issuing IPO in the capital market. The stocks are made available for the public to trade after IPO. The process of IPO is monitored by the Securities and Exchange Board of India (SEBI). The company, which wants to issue its share to the public, asked to provide all the necessary details of the company in its prospectus. After the IPO, a privately owned company converts a part of it for the public to own.  It’s a win situation for both the company and investors as the company gets money for further expansion of its company and the investors get part ownership in a growing company.

Rights Issue and Bonus Issue

When a company decides to offer its existing shareholders additional shares at a predefined price which is generally lower than the market price that is known as a right issue. On the other hand, when the company offers some shares to its shareholders for free is known as a bonus issue. Rights issues are chosen based on whether the investor wants to purchase shares or not it’s his own choice. However, in the case of bonus issue share are given to existing shareholders as a gift. Although, in the bonus issue there is no additional capital is added to the company.

Preferential Issue

A preferential issue is an issue where bulk shares are issued to a specific group of people such as venture capitalists, companies, etc. It is different from the right issue or public issue. The preferential shares issue is considered one of the best options to raise funds under the primary market.  Preferential shareholders are the safest investor as when the company gets bankrupt then these shareholders will get their money first among all. Although, it is expensive for issuing companies if compared to debt issues.

Private Placement

When a company is offered funds from a small group of investors in exchange for its shares, it is called private placement. The investors could be anyone from an individual to institutional and the securities could be either bonds, stocks, or other securities. It is easy to raise funds through private placement as compared to Initial Public Offerings (IPO) as a regulatory prerequisite is less. There are other benefits also such as less time and cost.

Qualified Institutional Placement (QIP)

Qualified Institutional Placement (QIP) allows listed companies to raise funds without having to submit legal paperwork to market regulators. It is very common in India and the shares are issued to Qualified Institutional Buyers (QIBs). Here are some of the QIBs in India-

• Foreign Institutional Investors (FII) registered with SEBI.

• Foreign Venture Capital investors

• Mutual Funds

• Alternate Investment Funds

• Insurers

• Pension Funds

• Scheduled commercial banks

Bottom Line

Primary market is also a critical part of the financial market. A significant amount of money is raised through the primary market. Among all IPO is most popular and a lot of people invest through IPOs.

About Author