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Intermediaries Involved In Primary Market Issue
The efficient operation of the primary market is possible by a host of financial intermediaries and institutions that facilitate the efficient sourcing and investment of funds for new issues. Following is the different types of participants in primary markets:
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- Regulators: RBI, SEBI, FMC, Ministry of Company Affairs, Ministry of Finance.
- Issuers of Securities: Companies (Promoters), Government Mutual Funds, Banks.
- Intermediaries: Merchant Bankers (Lead Manager), Registrar to an Issue, Bankers to an Issue, Credit Rating Agencies and Depositories, Underwriters.
- Appellate Tribunals: SAT, National Company’s Law Appellate Tribunal.
- Investors: Retail or individual investors, Partnership/HUF, Societies and Trusts, Companies, Mutual Funds, Financial Institutions and Foreign Institutional Investors.
Other important entities which interact with the issuing company and the merchant banker include:
- Underwriters who take the responsibility of buying the shares from the companies.
- Brokers who manage the issuance at retail level.
- Banker who manage funds.
- Advertising agencies – critical for communication of the primary markets issue.
- Printers.
- Auditors.
- Legal advisors.
In the following sections, we shall discuss the role of each of the intermediaries in detail:
Merchant Banker
The term “Merchant Banker” refers to “any entity which is engaged in the business of issue management either by making arrangement regarding selling, buying or subscribing to securities as manager, consultant, advisor or rendering corporate advisory services in relation to such issue management”. Merchant Bank is the agency at the apex level, which plans, coordinates and controls the entire issue activity and directs different agencies to contribute to the successful marketing of securities. The merchant banker should be registered with the SEBI as per the SEBI (Merchant Bankers) regulations, 1992 to act as a Book Running Lead Manager to an issue. The lead merchant banker performs most of the pre-issue and post-issue activities. The pre-issue activities of the lead manager include due diligence of company’s operation / management / business plan / legal, etc., drafting and designing the offer document, finalizing the prospectus, drawing up marketing strategies for the issue and ensuring compliance with stipulated requirements and completion of prescribed formalities with the stock exchanges and the registrar of Companies (ROC).
Issuers Of Securities
Issuers of publicly traded securities are subject to direct regulation relating to issues such as the voting rights of securities holders, information disclosure, prohibition of insider trading, and accounting and auditing procedures.
Intermediaries
An intermediary is a third party that offers intermediation services between two trading parties. Examples: Banks, Brokers, Institutions like Investments Banks.
Regulators
Regulators protect investors and their money. They also educate and regulate and promote the market. Promotion includes introducing new product, policies from time to time. Any company must be authorized and registered with the regulator. These firms are required to ensure all the people who work for them meet the standards laid down by the regulator.
Country And Regulatory Authorities:-
- Australia: Australian Securities and Investment Commission.
- Canada: Ontario Securities Commission.
- France: Commission des Operation de Bourse.
- Hong Kong: Securities and Future Commission.
- India: Securities and Exchange Board of India (SEBI).
- UK: Financial Services Authority.
- USA: SEC.
Securities Appellate Tribunal (SAT)
Securities Appellate Tribunal is a quasi judicial authority which deals with judicial matter between SEBI and companies.
- Registrar to the Issue: The role of the registrar is to finalize the list of eligible allottees, ensure crediting of shares to the demat accounts of the eligible allottees and dispatch refund orders.
- Bankers to the Issue: They are appointed in all the mandatory collection centers, and by the lead merchant banker to carry out activities relating to collection of application amount, transfer of this amount to the escrow account and despatching refund amount.
Auditors of the company and the Solicitors also play a very important role in the launch of a primary market issue.
Intermediaries Involved In Trading And Investment
If a retail investor wants to invest funds in the equity markets, he has several options. He can even apply for membership at the stock exchange. But this is usually expensive proposition and has many regulatory compliance procedures such as minimum net worth criteria, deposits to be maintained, admission fee, etc. Alternatively, a layman investor can approach an established member-broker such as Kotak Securities, ICICI Direct, Angel Broking, Indiabulls, India-Infoline etc. for participating in equity markets.
The retail investor can also invest through a mutual fund. Mutual funds are established by Asset Management Companies, which are in turn set up by trusts. They play a very important role by sourcing capital from investors and collectively investing the same in securities markets.
Retail investors need to identify a reputed broker or mutual fund before investing funds. Different types of mutual funds enable investors to access the different markets. It is a practice for the mutual fund to publicly announce the nature of investments – whether in debt market, equity markets, which segment of markets and the proportion of investments, etc.
Retail investors may also invest in Insurance companies such as LIC, ICICI Prudential, Birla Sunlife, etc. in different insurance products. Some of these insurance products facilitates investment of a portion of the insurance amount paid in equity and bond markets – for example “Unit Linked Plans”. LIC and GIC have played a very important role in providing credit to corporate and investment in the capital markets.
Retail Investors, Corporate, High Networth Individuals (HNI), financial institutions, banks, insurance companies and other market participants invest in Mutual Funds in a major way. They may also directly invest through the members of the stock exchanges – often called “Trading Members” of the exchange. Each exchange has different classification of membership.
Owing shares gives investors the right to vote at company meetings and to obtain dividends that the company pays out. In some international markets, they may even qualify for shareholders perks, such as discounts off the company’s products. Shareholders are usually split into two types: 1- Institutional 2- Individual. Institutional holders are companies who may, for example, invest the pension schemes of their staff in shares. They can also be mutual fund managers who run investment schemes such as unit trusts or investments trusts. Institutions have the biggest influence on the market’s performance simply because they have millions or billions to invest. If they, for example, own a reasonable percentage of a company’s shares, selling them will have a significant influence on the price. Individual shareholders are individual investors, often investing relatively small sums.
For the purpose of investing in new issues offered in the primary markets, SEBI has classified investors under following categories.
- Retail Individual Investor (RIIs): An investor who bids for securities for a value of not more than Rs. 100,000. If the investor bids for a greater amount, then such bids will be classified under the High Net-worth Individual (HNI) category.
- Qualified Institutional Buyers (QIBs): As defined in clause 2.2.2B (v) of DIP Guidelines, QIB shall mean public financial institution as defined in section 4A of the Companies Act, 1956, scheduled commercial banks, mutual funds, SEBI registered foreign institutions, SEBI registered Indian or foreign venture capital funds, State Industrial Development Corporation, insurance Companies registered with the Insurance Regulatory and Development Authority (IRDA), Provident Funds and Pension Funds with minimum corpus of Rs. 25 Crores, National Investment Fund as defined by the government.
- Non-Institutional Investors (NIIs): Investors who do not fall within the definition of the above two categories are categorized as “Non-Institutional Investors”. These include Companies, Overseas Corporate Bodies (OCB), Non-Resident Indian (NRI), High Net-worth Individual (HNI), Hindu Undivided Families (HUF), societies and trusts.
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