New Issues Market

Normally there are two distinct trends in resource mobilization from the primary market through prospectus and rights issues. It indicates an increasing trend from 1991-92 to 1994-95 and a decreasing trend from 1995-96 onwards with un-sustained spells of revival in 1998-99. The growth rate of new capital issues through prospectus and rights was the highest (232 percent) in 1992-93 a year immediately after the reforms were initiated. This growth was partly a result of the abolition of the Capital Issues (Control) Act with effect from May 1992 and the freeing of the pricing of issues that followed as a consequence. Huge resources were raised in the following two years also. This was due to a spurt in equity issues with premium and a wide variety of innovative / hybrid instruments.

The primary market has been quite depressed since 1995-96. This overall decline can be attributed to factors operating on the demand and supply sides. The scams which took place in the secondary market adversely affected the primary market. Many fraudulent promoters cheated investors which led to loss in investor confidence. Moreover, prices of many issues floated at a high premium declined upon listing. All these factors drove away investors from the primary market. Moreover, strict disclosure standards and entry point norms prescribed by SEBI and an overall slowdown in the economy and in the industry partly led to deceleration in the primary market.

The decline in resources raised by public sector through prospectus and rights was much sharper as both the government companies and non-financial PSUs did not tap this market for three consecutive years. The public sector preferred the private placement route for raising resources.

Private Placement Market:

In the primary capital market, corporates can raise resources through public issues, and private placement. In the case of public issues, securities are allotted to the general public. In the case of rights issues, securities are allotted to the existing shareholders on a pro-rata basis. In contrast, private placement refers to the direct sale of newly issued securities by the issuer to a small number of investors through merchant bankers. These investors are selected clients such as financial institutions, corporates, banks and high net worth individuals. Company law defines a privately placed issue to be the one seeking subscription from 50 members.

The private placement route offers several advantages to the issuer for raising resources. The time taken by as well as the cost of issue for the private placement route is much less for the issuer as compared to the public and rights issues. Privately placed issues can be tailor made to suit the requirements of both the issuer and the investor to give tem greater flexibility than public or rights issues. Moreover, private placement does not require detailed compliance of formalities, rating and disclosure norms as required in public or rights issues. These advantages make the market quite popular in USA where generally, debt instruments are privately placed.

Available data indicates that private placement has become the preferred route for raising resources by both private and public sector companies. In India, this route has gained immense importance during the last few years, in view of the prolonged subdued conditions in the new issues market.

The factors that led to private placement becoming a favored route for Indian corporates and financial institutions area as follows:

1) The prolonged subdued conditions in the primary market since 1995-96
2) Private placements in India are not bound by any regulatory system. It is an informal market where deals are struck through negotiations between the borrowers and lenders. Companies are free to fix the quantum of private placement and only follow the rule of pricing for preferential allotment as stipulated by SEBI.
3) Private placements have no lock-in period except when it is in favor of promoters
4) There is no compliance system for merchant bakers in private placement as in the case of public issues.
5) The limit on a bank’s investment on debt has been removed which has made this market more buoyant.
6) Through private placements, issuing banks can raise their Tier II capital in order to prop up the capital adequacy ratio.
7) Many corporate issuers of debt are defaulters with the subscribing banks and financial institutions. These to repay the interest and principal of term loans so that the issuing company is not classified as a non performing asset in the books.
8) Benefits of operational flexibility and attractive pricing.
9) The private sector taps this market to raise funds for the retirement of old expensive debt or acquisitions.
10) Short term debentures are more popular with issuers and investors in this market.