Here is a comprehensive study note for the AHSEC Class 12 Finance textbook, focusing on Chapter 10: New Issue Market (NIM) or Primary Market.
Chapter 10: New Issue Market (NIM)
Summary Note
This chapter focuses on the Primary Market, also known as the New Issue Market (NIM). This is the segment of the capital market where new securities (like shares and debentures) are issued for the first time by companies to raise fresh capital.
- Meaning: The NIM is the market for new financial claims. It facilitates the transfer of funds directly from the savers/investors to the entrepreneurs/companies who need them for setting up new projects or for expansion, diversification, and modernization.
- Functions of the New Issue Market: The primary function of the NIM is to facilitate the transfer of funds from savers to users. This is achieved through three main services or functions:
- Origination (or Investigation): This is the preliminary work done before an issue is floated. It involves a careful study of the new project’s technical, economic, and financial viability. It also includes providing advisory services to the issuing company on the type, size, timing, and pricing of the issue. This function is typically performed by merchant bankers.
- Underwriting: This is a form of guarantee provided by underwriters (financial institutions) for the success of a new issue. The underwriter agrees to buy any portion of the securities that remains unsold to the public. This ensures that the company raises the minimum required capital.
- Distribution: This is the actual process of selling the securities to the ultimate investors. This function is handled by brokers and dealers who have direct contact with the investing public.
- Methods of Issuing Securities in the NIM: Companies can raise capital through several methods:
- Public Issue (through Prospectus): The company directly invites the general public to subscribe to its securities by issuing a prospectus, which contains all necessary details about the company and the issue.
- Private Placement: Securities are sold to a small, selected group of investors (usually institutional investors or high-net-worth individuals) instead of the general public. This method is faster and less expensive.
- Offer for Sale: The issuing company sells its securities to intermediaries like issue houses or stockbrokers at an agreed price. These intermediaries then resell the securities to the public, earning a spread or commission.
- Right Issue: An existing company offers new shares to its existing shareholders in proportion to their current holdings, usually at a privileged (lower) price.
- Intermediaries in the New Issue Market: Several intermediaries play a crucial role in the functioning of the NIM:
- Merchant Bankers: They are the lead managers of an issue, responsible for the entire process from origination to post-issue formalities.
- Underwriters: They guarantee the subscription of the issue.
- Brokers and Sub-brokers: They are involved in the distribution and marketing of the securities.
- Registrars to an Issue: They handle all application processing, allotment, and refund orders.
- Bankers to an Issue: They collect the application money from investors.
- Advantages and Disadvantages of NIM:
- Advantages: Provides an avenue for investment, mobilizes savings for productive use, helps in rapid industrial growth, and is a source of huge funds for companies.
- Disadvantages: Possibility of companies cheating investors with misleading information, inadequate project appraisal, and delays in the allotment and refund process.
Complete Textual Question Answers
Here are the answers to all the questions given at the end of Chapter 10.
A. Very Short Answer Questions (1 Mark each)
- Write the full form of NIM.
Ans: The full form of NIM is New Issue Market.
B. Short Answer Questions (2 Marks each)
- What are the two aspects of origination?
Ans: The two aspects of origination are: (i) Careful Study (investigation of the project’s viability) and (ii) Advisory Services (advising the company on the issue). - Write two methods of underwriting.
Ans: Two methods of underwriting are: (i) Standing behind the Issue (guaranteeing the sale) and (ii) Outright Purchase (purchasing the whole issue to resell). - State the distribution function of NIM?
Ans: The distribution function of the NIM is the process of selling new securities to the ultimate investors. This task is handled by intermediaries like brokers and dealers. - What is public issues?
Ans: A public issue is a method of raising capital where a company directly offers its securities (shares, debentures) to the general public for subscription by issuing a document called a prospectus. - Write two advantages of public issues.
Ans: Two advantages of public issues are:
i. It can invite a large section of the investing public through advertisement.
ii. Shares are allotted to a large section of investors on a non-discriminatory basis. - Write two disadvantages of public issues.
Ans: Two disadvantages of public issues are:
i. It is an expensive method due to costs like prospectus printing, advertisement, and underwriting commission.
ii. This method is suitable only when large issues are to be made. - What is private placement?
Ans: Private placement is a method of issuing securities where a company sells its shares or debentures to a select group of individuals or institutional investors rather than offering them to the general public. - Write two advantages of private placement.
Ans: Two advantages of private placement are:
i. The issue expense is low as it avoids costs like advertisement and underwriting.
ii. It is much faster than a public issue as it involves fewer formalities. - Write two disadvantages of private placement.
Ans: Two disadvantages of private placement are:
i. Securities are not widely distributed to the large section of individuals.
ii. A selected group of investors can buy a large number of shares and get a majority holding in the company. - What is offer for sale?
Ans: Offer for sale is a method of issuing securities where the issuing company sells the securities outright to intermediaries (like issue houses or brokers), who then resell them to the ultimate investors. - Write two advantages of offer for sale.
Ans: Two advantages of offer for sale are:
i. An issuer with a good project can obtain funds with minimum cost and without any fear of under-subscription.
ii. The company is relieved from the problem of printing a prospectus and making allotments. - Write two disadvantages of offer for sale.
Ans: Two disadvantages of offer for sale are:
i. The intermediaries (issue houses) may charge a high price from the public to earn a large profit (spread).
ii. There is a possibility of manipulation of prices by the intermediaries. - What is right issue?
Ans: A right issue is a method of raising funds where an existing company offers new shares to its existing shareholders at a privileged price, in proportion to their current shareholding. - Write two advantages of right issue.
Ans: Two advantages of right issue are:
i. The cost of the issue is minimum as there are no expenses for underwriting, brokerage, or advertising.
ii. This method ensures equitable distribution of new shares to all existing shareholders. - What are the pre-issue management services?
Ans: Pre-issue management services are the activities performed by a merchant banker before a public issue is made. They include advising on the type and pricing of the issue, marketing, and underwriting arrangements. - What are the post-issue management services?
Ans: Post-issue management services are the activities performed by a merchant banker after an issue is closed. They include the collection of application forms, deciding the allotment procedure, and arranging for the dispatch of allotment letters and refund orders. - State two functions of Registrar to an issue.
Ans: Two functions of a Registrar to an issue are:
i. Collection of application forms from the investors and keeping a record of them.
ii. Assisting the company in determining the basis of the allotment of shares. - Write two Advantages of NIM.
Ans: Two advantages of the New Issue Market are:
i. Avenue for investment: It provides good avenues for people to invest their savings in productive financial assets.
ii. Rapid industrial growth: It helps in rapid industrial growth by providing long-term funds for the establishment and expansion of companies. - Write two disadvantages of NIM.
Ans: Two disadvantages of the New Issue Market are:
i. Possibility of cheating/deceiving investors: Companies may attract investors by providing misleading information in the prospectus.
ii. Delay in the process of allotment: There can be in-ordinate delays in receiving allotment letters or refund orders, causing a loss of interest for investors.
C. Long Answer Questions (Type-I) (5 Marks each)
- Explain the origination or investigation services of NIM.
Ans: (This answer should detail the two aspects of origination: the careful study of the project’s feasibility and the advisory services provided to the issuing company on the type, size, timing, pricing, and selling techniques of the issue). - What is underwriting? What are the various methods of underwriting?
Ans: (First, define underwriting as a guarantee for the success of an issue. Then, explain the three methods: Standing behind the Issue, Outright Purchase, and Consortium Method). - What is public issues? What are the particulars which prospectus must state?
Ans: (First, define a public issue as explained in B.4. Then, list the key particulars a prospectus must contain, such as the company’s name and address, its activities, details of directors, authorized capital, and opening/closing dates of the issue). - State the advantages and disadvantages of public issues.
Ans: (Combine the answers from B.5 and B.6, elaborating on each point to meet the 5-mark requirement). - What is private placement? State the advantages of private placement.
Ans: (Combine the answer from B.7 and B.8, providing more detail on each advantage, such as speed, low cost, and suitability for small companies). - State the advantages and disadvantages of private placement.
Ans: (Combine the answers from B.8 and B.9, elaborating on each point. For disadvantages, explain the concentration of ownership and lack of wide distribution). - What is offer for sale? What are the two stages of offer for sale? State the advantages of offer for sale.
Ans: (Define Offer for Sale. Explain its two stages: direct sale to intermediaries and then resale to the public. Finally, list and explain its advantages as covered in B.11). - What is right issue? State the advantages of right issue.
Ans: (Combine the answers from B.13 and B.14, explaining the concept of a right issue and detailing its advantages like low cost and equitable distribution). - State the advantages of NIM.
Ans: (This is an expanded version of B.18. Discuss points like providing an avenue for investment, mobilizing savings, diverting savings to productive use, providing a huge supply of funds, and fostering rapid industrial growth). - State the disadvantages of NIM.
Ans: (This is an expanded version of B.19. Discuss points like the possibility of cheating investors, inadequate project appraisal, non-serious investors, ineffective role of merchant bankers, and delays in the allotment process).
D. Long Answer Questions (Type-2) (8 Marks each)
- Discuss the primary functions of NIM.
Ans: (For this answer, discuss the three primary functions—Origination, Underwriting, and Distribution—in detail. Explain what each function entails and which intermediaries are responsible for them). - Explain the various methods of issues in the NIM.
Ans: (For this answer, explain each of the four methods of issuing securities in detail: Public Issue through Prospectus, Private Placement, Offer for Sale, and Right Issue. Discuss the process, advantages, and disadvantages of each method). - Describe about the various intermediaries in the NIM.
Ans: (For this answer, describe the role of each key intermediary: Merchant Bankers (pre and post-issue management), Underwriters, Brokers, Registrars, and Bankers to an Issue. Explain the specific function each one performs in the issue process). - State the advantages and disadvantages of NIM.
Ans: (This is a comprehensive version of C.9 and C.10. Discuss the advantages like investment avenue, savings mobilization, and industrial growth. Then, discuss the disadvantages like the possibility of fraud, inadequate appraisal, and procedural delays, providing a balanced view of the New Issue Market).
Previous Year AHSEC Question Answers (2015-2025)
Short Questions (1-2 Marks)
- What is New Issue Market? (AHSEC 2015, 2019)
Ans: The New Issue Market (NIM), or Primary Market, is the part of the capital market where new securities are issued for the first time by companies to raise fresh capital from investors. - What is Underwriting? (AHSEC 2016, 2020)
Ans: Underwriting is an agreement where a financial institution (the underwriter) guarantees the sale of a new issue of securities by promising to buy any shares that remain unsold to the public. - What is a Right Issue? (AHSEC 2017)
Ans: A right issue is an offer of new shares by an existing company to its current shareholders in proportion to their holdings, usually at a discounted price. - Mention two methods of issuing securities in the primary market. (AHSEC 2018, 2022)
Ans: Two methods of issuing securities in the primary market are (i) Public Issue through Prospectus and (ii) Private Placement.
Long Questions (5-8 Marks)
- Discuss the functions of the New Issue Market. (AHSEC 2017)
Ans: (This answer is the same as the textual Long Answer Question D.1. Please refer to that answer above). - Explain the different methods of floating new issues in the primary market. (AHSEC 2018)
Ans: (This answer is the same as the textual Long Answer Question D.2. Please refer to that answer above).
10 Most Important Questions
- What is the main difference between the Primary Market and the Secondary Market?
Ans: The Primary Market deals with the issue of new securities for the first time to raise capital, while the Secondary Market deals with the trading (buying and selling) of existing, previously issued securities. - What is a prospectus?
Ans: A prospectus is a formal legal document issued by a company that contains all the particulars about the company and the securities it is offering to the public for subscription. - Who are Merchant Bankers and what is their role in the NIM?
Ans: Merchant Bankers are financial institutions that act as issue managers. Their role is to manage the entire process of a new issue, from advising the company and preparing documents (pre-issue) to handling allotment and refunds (post-issue). - Why is underwriting important for a new company?
Ans: Underwriting is important because it provides a guarantee that the company will raise the required amount of capital from its new issue. It eliminates the risk of under-subscription. - Differentiate between ‘Offer for Sale’ and ‘Public Issue’.
Ans: In a ‘Public Issue’, the company sells securities directly to the public. In an ‘Offer for Sale’, the company sells the securities to an intermediary (like an issue house) first, and then the intermediary sells them to the public. - What is the ‘Consortium Method’ of underwriting?
Ans: The Consortium Method is used for large issues where a group of underwriters jointly underwrites the issue to share the risk. - What is the role of a ‘Registrar to an Issue’?
Ans: A Registrar’s role is to manage all the administrative work related to an issue, such as collecting application forms, preparing the basis of allotment, and dispatching share certificates and refund orders. - Why is ‘Private Placement’ a cheaper method of raising capital?
Ans: It is cheaper because it does not involve the significant expenses associated with a public issue, such as advertisement costs, prospectus printing, and underwriting commissions. - What is the main disadvantage of a ‘Right Issue’ for a company?
Ans: A potential disadvantage is that if the existing shareholders do not have the funds or willingness to subscribe to the new shares, the company may not be able to raise the desired capital, as the offer is restricted to them. - What does the ‘Distribution’ function of the NIM involve?
Ans: The ‘Distribution’ function involves the actual sale and marketing of the new securities to the final investors, a task primarily handled by brokers and their network.
