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A regulatory framework for Primary Market Transactions


The primary market is part of the capital market. It is a market where securities are created. It’s in this market that firms sell new stocks and bonds to the public for the first time. It enables the government, companies, and other institutions to raise additional funds through the sale of debt and equity-related securities. Investors typically pay less for securities on the primary market than on the secondary market. Some examples of primary market securities are notes, bills, govt. bonds, corporate bonds, and stock of companies. 

Types of primary market issues:

  • Public issue
  • Initial Public offer 
  • Bonus issue
  • Further public offer or fellow offer
  • Preferential issue
  • Qualified institutional placement 
  • Private Placement 
  • Rights issue

Concepts related to primary market:

A regulatory framework for Primary Market Transactions

Offer Document:

A Offer document means prospectus of the company which has all the important information about the company. Offer document is issued by the companies while raising funds from the public and it is issued just in the case of a public issue or offer for sale. For a right issue, a letter of offer is issued. The company files the offer document with the registrar of the companies and stock exchange.

Price band:

The price band of an IPO is the offer price of the company’s share. It is determined by looking at the company’s valuation and prospects. The company announces its price band, and then investors make their bid. Once the company receives the request, it decides a particular price for listing of shares. The spread between the floor price and the cap price shall not be more than 20%. The price band can be revised. If the price revises, then the bidding period also extends for three more days. 

Cut-off price:

The retail investors pay the highest price while placing the bid at the cut-off price. If the company chooses the final price lower than the highest price, the remaining amount is returned to the investor. The retail investors are allowed to bid at the cut-off price. The company’s employees are eligible to bid in the employee reservation portion.  

Floor price:

Floor price is lowest price in the share price band. It is the price at and above investors can place their bids whereas the highest price is called the cap-price. 

Face Value:

The face value of the share is the value at which the shares are list at the stock market it is also the par value. It determine when the company issues share to raise capital. Hence, the face value cannot calculated. It remains fixed. 

Regulatory Framework:

A regulatory framework for Primary Market Transactions

In India the market is regulate and monitor by The Securities and Exchange Board of India, The Ministry of Finance and The Reserve Bank of India. The Ministry of Finance regulates the capital market and is responsible for making policies for orderly growth and development of securities market as well as protect the interest of investors.

It is responsible for:
  • building regulatory and market institutions
  • providing efficient regulatory framework for securities market
  • institutional reforms in securities market
  • strengthening investors protection mechanism
The statutes involved are:
  • Depositories Act, 1996
  • Securities Contract (Regulation) Act,1956
  • Securities and Exchange Board of India Act, 1992.

Regulatory measures of SEBI for the Primary Market in India:

A regulatory framework for Primary Market Transactions

Encouragement to Initial Public Offers:

In order to encourage IPO in the primary market SEBI has permitted companies to determine the par of shares issued by them. SEBI has allowed issues of IPOs to go for reserve and allot shares to individual investors. But the issuer will have to disclose the price, the issue size and the number of securities to offer to the public.

Increase of popularity to Private Placement Market:

In recent years, the private placement market has become popular with issues because of stringent entry and disclosure norms of Public issues.

Issue of due Diligence Certificate:

The lead manager has to issue due diligence certificate, which has now been part of offer document.

Imposition of Compulsory Deposits on the companies making Public Issue:

In order to induce companies to exercise greater care and diligence for timely action in matters relating to the public issue of capital, SEBI has advised stock exchanges to collect from companies making public issues, a deposit of one percent of the issue amount which could be for forfeited in case of non-compliance of the provisions of the listing agreement.

Vetting of Offer Documents:

SEBI vets offer documents to make sure that the company listing the shares has made all disclosures in it. All the guidelines and regulatory measures of capital issues are mean to promote healthy and efficient functioning of the issue market. 

Under Writing has made optional:

To reduce the cost of issue in primary market, SEBI has made under writing of issue optional. However, a condition that if an issue is not underwritten and not able to collect 90% of amount offer to the public, the entire amount collect will refund to the investor still in force. 

Disclosure of all material facts is compulsory:

SEBI has made compulsory for the companies to disclose all the facts and risk factors regarding the project undertaken by the company. SEBI also advises the code of ethics for advertising in media regarding the public issue.

Conditions regarding Application size:

SEBI has raised the minimum application size and also the proportion of each issue allowed for firm allotment to institution such as mutual funds.

Regulation of Merchant Banking:

SEBI has brought merchant banking under its regulatory framework. They now have a greater accountability in the offer document and issue process. 


When an investor decides to invest in the stock market, they need to keep an eye on primary market too. Also, the investors do a thorough study of the company they select to invest in. One needs to study the Companies financial, past performance, reason behind raising funds etc. It is the duty of SEBI to protect the rights of the investors and keep a check on the company. 


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