Finance Chapter on Primary and Secondary Markets

Questions and Answers

What is a right issue?

A mandatory purchase of shares by current shareholders.

A method to increase capital through external investors.

An offer to existing shareholders to buy additional shares at a discounted price. (correct)

An issuance of shares to the general public at a market price.

What is a key characteristic of a bonus issue?

It generates new capital for the company.

It allows existing shareholders to sell their shares at a premium.

It provides cash dividends to shareholders.

It distributes profits as fully paid shares instead of dividends. (correct)

Which type of private placement can only be made for equity shares or securities convertible into equity shares?

Preferential Allotment (correct)

Public Offering

Secondary Market Transaction

Qualified Institutional Placement (QIP)

What does secondary market refer to?

The market for existing securities that have already been issued and listed. Signup and view all the answers

Which statement is true regarding private placements?

They are typically targeted at a small group of institutional investors. Signup and view all the answers

In a right issue, what can shareholders do if they choose not to accept the offer?

They can renounce their rights in favor of someone else. Signup and view all the answers

What is the SEC's Qualified Institutional Placement (QIP)?

A method for listed companies to issue shares to institutional buyers. Signup and view all the answers

What is the primary purpose of a bonus issue?

To reward shareholders by increasing their share capital without cash outflow. Signup and view all the answers

What kind of shares are typically involved in a preferential allotment?

Equity shares or securities convertible into equity shares. Signup and view all the answers

Study Notes

Primary Market

The primary market, also known as the new issue market, deals with the issuance of new securities.
It enables companies to raise long-term funds by issuing stocks and debentures for the first time.

Functions of the Primary Market

Origination: Involves investigating, analyzing, and processing new investment proposals by specialist agencies.
Underwriting: Investment companies guarantee the sale of new issues, mitigating risks from market uncertainty.
Distribution: Involves selling securities to final investors; successful issuance relies on effective distribution.

Major Reforms in the Primary Market Post-1991

Foreign Institutional Investors (FIIs) allowed to operate in the Indian market, enhancing equity and debt investment opportunities.
Indian companies gained access to global finance, benefiting from reduced borrowing costs.

Overview of Financial Markets

Financial markets encompass various segments, including money markets and capital markets.

Money Market Instruments

Call/Notice Money: Short-term borrowing and lending between banks.
Treasury Bills: Short-term government securities used to manage liquidity.
Commercial Bills: Short-term credit instruments issued by companies to finance their working capital.
Commercial Paper: Unsecured, short-term debt issued by corporations.
Certificate of Deposit: Time deposits with banks that pay interest.
Cash Management Bills: Short-term instruments used for managing short-term liabilities.

Capital Market

Capital markets facilitate the buying and selling of long-term securities.

Public, Rights, and Bonus Issues

Public Issue: Offering securities to the general public for the first time.
Right Issue: Allows existing shareholders to purchase additional shares at a discount; participation is optional.
Bonus Issue: Distributes additional shares to existing shareholders without new capital inflow, often as a means of distributing profits.

Private Placement

Involves issuing shares directly to a select group of investors, such as banks and mutual funds.
Preferential Allotment: A private placement method focusing on equity shares or equity-convertible securities.
Qualified Institutional Placement (QIP): Designed for listed companies to issue shares to Qualified Institutional Buyers (QIBs), established by SEBI in 2006.

Secondary Market

The secondary market comprises transactions involving existing securities, where all sales following the initial issuance occur.
Known for providing liquidity and price discovery for previously issued securities.

Description

This quiz focuses on understanding the key concepts of primary and secondary markets in finance. Explore how new securities are issued in the primary market and learn about the functions of the secondary market. Test your knowledge on terminology and market operations relevant to traders and companies.