24 carat financial services- The Primary Market

The capital of a company is brought in by the promoters and their

associates in the initial stages. As the requirement for additional funds

go up, it may be necessary to source funds from a wider group of

investors. The primary market refers to the market where equity or debt

funds are raised by companies from ‘outside’ investors through an offer

of securities. ‘Outside’ investors refer to investors who are not

associated with the promoters. They may be individual investors or

institutional investors. It is called the primary market because investors

purchase the security directly from the issuer. It is also called the "new

issue market" since these securities are issued for the first time by the

company. The process of expanding the ability of an issuer to raise

capital from public investors, who may not have been associated with

the initial stages of the business, is also known as "going public." The

issuance of securities in the primary markets expands the reach of an

issuer and makes long-term capital available to the issuer from a larger

number of investors.

Raising capital for a company may also be conducted through a

syndicate of institutional investors who buy equity or debt securities

from equity cash market or debt market through a private placement.

This is also a primary market activity but the investors in these securities

are a few pre-identified institutional investors. These investors may also

seek sale of their holdings, conversion of debt to equity, or may offload

their holdings in a public issue on a later date. Private placement of debt

is similar to private equity or venture capital deals, except that the

security issued is debt in the former and equity in the latter case.

The ability of a company to raise funds from external sources will

depend upon the performance of the company in the past and the

expected performance in the future.

Outside investors will require protection against a possible default on

getting their dues or their rights getting diluted. This protection is

available to them when they fund the company through investing in

securities rather than one-on one agreement with the promoters. This

is because securities are issued under regulatory overview, which also

imposes obligations on the issuer of securities, to honor the

commitments made at the time of raising funds. Investors may also

require the flexibility to review their investment and exit the investment

if need be. A security provides this facility as it may be listed on the

exchanges, where key information about the company has to be

periodically disclosed. The expectation for its performance tends to

reflect in the prices at which its securities trade.

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