Class 12 Finance Chapter 10 New Issue Market or Primary Market

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Class 12 Finance Chapter 10 New Issue Market or Primary Market

Also, you can read the NCERT book online in these sections Solutions by Expert Teachers as per Central Board of Secondary Education (CBSE) Book guidelines. ASSEB Class 12 Banking Question Answer are part of All Subject Solutions. Here we have given HS 2nd Year Finance Textual Solutions English Medium for All Chapters, You can practice these here.

New Issue Market or Primary Market

Chapter: 10

Unit – 3 Capital Market

A. Very Short Questions Answer:

1. Write the full form of NIM. 

Ans: NIM stands for Net Interest Margin. 

B. Short Answer Questions:

1. What are the two aspects of origination?

Ans: (i) Understanding the financial needs of the issuer.

(ii) Preparing and planning the issue of securities.

2. Write two methods of underwriting.

Ans: (i) Firm Underwriting.

(ii) Sub-underwriting.

3. State the distribution function of NIM.

Ans: NIM distributes new securities to investors through methods such as public issues, private placement, and offer for sale.

4. What is a public issue?

Ans: A public issue is a method of raising capital by offering securities to the general public through a prospectus.

5. Write two advantages of public issues.

Ans: (i) Raises a large amount of capital.

(ii) Increases the company’s public image and market reputation.

6. Write two disadvantages of public issues.

Ans:(i) It is costly and time-consuming.

(ii) It involves strict legal and regulatory formalities.

7. What is private placement?

Ans: Private placement is the sale of securities to a selected group of investors instead of offering them to the general public.

8. Write two advantages of private placement.

Ans: (i) It is quicker and less expensive than a public issue.

(ii) It involves fewer legal formalities.

9. Write two disadvantages of private placement.

Ans: (i) It raises funds from only a limited number of investors.

(ii) Securities are less widely distributed among the public.

10. What is Offer for Sale?

Ans: Offer for Sale is a method of issuing securities in which the issuing company sells its securities to intermediaries such as issue houses, stock brokers, banks, merchant banks, or investment banks, who then resell them to the public.

11. Write two advantages of Offer for Sale.

Ans: (i) The company can obtain funds with minimum cost without fear of under-subscription.

(ii) The company is relieved from the work of printing advertisements, prospectus, and allotment of shares.

12. Write two disadvantages of Offer for Sale.

Ans: (i) Securities are sold through intermediaries instead of directly to the public.

(ii) Intermediaries earn a profit (turn or spread), which increases the cost of the issue.

13. What is Right Issue?

Ans: Right Issue is a method of raising funds by an existing company in which new shares are offered to the existing shareholders in proportion to their existing shareholding at a specified price within a specified period.

14. Write two advantages of Right Issue.

Ans: (i) The cost of issue is minimum as there are no underwriting, brokerage, advertising, or prospectus expenses.

(ii) It ensures equitable distribution of shares among the existing shareholders.

15. What are the pre-issue management services?

Ans: (i) Public issue through prospectus, Offer for Sale and Private Placement.

(ii) Marketing and Underwriting.

(iii) Pricing of issues.

16. What are the post-issue management services?

Ans: (i) Collection of application forms and statements from bankers.

(ii) Screening of applications.

(iii) Deciding the allotment procedure.

(iv) Mailing of allotment letters.

(v) Issue of share certificates.

(vi) Sending refund orders.

17. State two functions of Registrar to an Issue.

Ans: (i) Collection of applications from investors.

(ii) Keeping records of applications and money received from investors.

18. Write two advantages of New Issue Market (NIM).

Ans: (i) It provides good avenues for investment in financial assets.

(ii) It mobilizes savings and diverts them into productive investments.

19. Write two disadvantages of New Issue Market (NIM).

Ans: (i) There is a possibility of misleading or cheating investors.

(ii) Delay in allotment of shares, refund orders, and share certificates causes inconvenience to investors.

C. Long Answer Questions (Type-I): 

1. Explain the origination or investigation services of NIM.

Ans: Origination or Investigation is the first function of the New Issue Market (NIM). It means the work of investigating, analysing and processing new project proposals before securities are issued.

There are two aspects of origination:

(i) Careful Study: A careful study of the technical, economic, financial and legal aspects of the project is undertaken to ensure its soundness.

(ii) Advisory Services: 

These services help in improving the quality and success of the issue. They include:

(a) Type of Issue.

(b) Size of Issue.

(c) Time of Issue.

(d) Pricing of Issue.

(e) Methods of Issue.

(f) Selling Technique of Securities.

These functions are performed by Merchant Bankers.

2. What is underwriting? What are the various methods of underwriting?

Ans: Underwriting is an agreement under which the underwriter guarantees to subscribe to the shares or debentures not subscribed by the public. It ensures the success of the issue.

Methods of Underwriting:

(i) Standing behind the Issue: The underwriter guarantees the sale of a specified number of shares and purchases the unsold shares.

(ii) Outright Purchase: The underwriter purchases the entire issue first and later resells it to investors.

(iii) Consortium Method: A group of underwriters jointly underwrites large issues of securities.

3. What is Public Issue? What are the particulars which a prospectus must state?

Ans: A Public Issue is a method in which the company offers its shares directly to the general public through a prospectus.

Particulars of a Prospectus:

(i) Company’s Name.

(ii) Address of the Registered Office.

(iii) Present and proposed activities of the company.

(iv) Location of the company.

(v) Names of Directors.

(vi) Details of authorised capital and proposed issue.

(vii) Opening and closing dates of subscription.

(viii) Minimum subscription.

(ix) Names of brokers, bankers, managers, underwriters and registrar.

(x) Statement regarding listing arrangements.

(xi) Other legal information regarding the company.

4. State the advantages and disadvantages of Public Issue.

Ans: Advantages:

(i) It invites a large number of investors through advertisements.

(ii) It is a direct method without intermediaries.

(iii) Shares are allotted on a non-discriminatory basis.

Disadvantages:

(i) It is an expensive method due to printing, advertisement and other expenses.

(ii) It is suitable only for large issues.

5. What is Private Placement? State the advantages of Private Placement.

Ans: Private Placement is a method in which shares are offered privately to issue houses or brokers instead of the general public.

Advantages:

(i) Suitable for small companies.

(ii) Avoids delays involved in public issue.

(iii) Issue expenses are low.

(iv) Faster than public issue.

(v) Suitable for first-generation entrepreneurs.

(vi) No entry barriers.

(vii) Terms of issue are easy and flexible.

(viii) Suitable where public response is uncertain.

6. State the advantages and disadvantages of Private Placement.

Ans: Advantages:

(i) Suitable for small companies.

(ii) Avoids delays.

(iii) Low issue cost.

(iv) Faster method.

(v) Suitable for first-generation entrepreneurs.

(vi) No entry barriers.

(vii) Flexible terms.

(viii) Suitable when public response is uncertain.

Disadvantages:

(i) Securities are not widely distributed.

(ii) A small group of investors may obtain majority control of the company.

7. What is Offer for Sale? What are the two stages of Offer for Sale? State the advantages of Offer for Sale.

Ans: Offer for Sale is a method in which the company sells securities to intermediaries, who then resell them to the public.

Two Stages of Offer for Sale:

(i) The issuing company sells securities to issue houses or brokers at an agreed price.

(ii) The intermediaries resell the securities to the ultimate investors.

Advantages:

(i) Funds can be obtained with minimum cost without fear of under-subscription.

(ii) The company is relieved from printing prospectus, advertisement and allotment work.

(iii) The company faces no difficulty in selling shares.

8. What is Right Issue? State the advantages of Right Issue.

Ans: Right Issue is a method of raising funds by offering new shares to the existing shareholders in proportion to their existing holdings at a specified price.

Advantages:

(i) Cost of issue is minimum.

(ii) It ensures equitable distribution of shares.

(iii) Directors cannot issue shares to themselves or relatives at a lower price.

9. State the advantages of NIM.

Ans: (i) Avenue for investment.

(ii) Savings mobilization.

(iii) Diverting savings for productive use.

(iv) Source of huge supply of funds.

(v) Rapid industrial growth.

(vi) Source for expansions and technological upgradation. .

10. State the disadvantages of NIM.

Ans: (i) Possibility of cheating/deceiving investors.

(ii) Inadequate institutional arrangement for project appraisal.

(iii) Investors not serious.

(iv) Role of merchant bankers not effective.

(v) Delay in the process of allotment. 

D. Long Answer Questions (Type-II):

1. Discuss the primary functions of NIM.

Ans: The New Issue Market (NIM) or Primary Market is a market where new securities are issued for the first time. Its primary function is to transfer funds from savers to entrepreneurs for productive purposes. The primary functions of NIM are Origination, Underwriting and Distribution.

(i) Origination (Investigation):

Origination means the investigation, analysis and processing of new project proposals. It includes a careful study of the technical, economic, financial and legal aspects of the project. It also provides advisory services regarding the type, size, timing, pricing, method and selling techniques of the issue. This function is performed by merchant bankers.

(ii) Underwriting:

Underwriting is a guarantee for the success of an issue. If the public does not subscribe to all the securities, the underwriter agrees to purchase the remaining shares or debentures. This gives confidence to the issuing company.

(iii) Distribution:

Distribution means the sale of securities to the ultimate investors. It is carried out by brokers and dealers who maintain regular contact with investors and help them in making investment decisions. Thus, Origination, Underwriting and Distribution are the three primary functions of the New Issue Market. 

2. Explain the various methods of issues in the NIM.

Ans: The New Issue Market (NIM) or Primary Market provides different methods through which companies can raise capital from investors. The various methods of issue in the NIM are Public Issue, Private Placement, Offer for Sale, and Right Issue.

(i) Public Issue (Through Prospectus): Under this method, the company directly offers its shares or securities to the general public through a prospectus. The prospectus contains all the important information about the company and the issue.

(ii) Private Placement: In this method, securities are offered privately to issue houses, brokers, financial institutions or selected investors. It is a faster and less expensive method than a public issue.

(iii) Offer for Sale: Under this method, the company first sells its securities to intermediaries such as issue houses, merchant banks or brokers. These intermediaries then resell the securities to the public at a higher price.

(iv) Right Issue: A Right Issue is a method by which an existing company offers new shares only to its existing shareholders in proportion to their existing shareholding at a specified price within a specified period.

Thus, the four methods of issues in the New Issue Market are Public Issue, Private Placement, Offer for Sale and Right Issue.

3. Describe about the various intermediaries in the NIM.

Ans: The New Issue Market (NIM) requires the services of several intermediaries to ensure the smooth issue and distribution of securities. 

The important intermediaries in the NIM are as follows:

(i) Merchant Bankers: Merchant bankers act as issue managers. They manage the entire issue process by providing pre-issue and post-issue management services. They also advise the company on pricing, marketing and underwriting of securities.

(ii) Underwriters: Underwriters guarantee the success of an issue. If the public does not subscribe to all the securities, they purchase the remaining shares or debentures.

(iii) Brokers to an Issue: Brokers help in marketing the new issues. They contact investors, distribute application forms and encourage them to subscribe to the securities.

(iv) Registrars to an Issue: Registrars collect application forms, maintain records, assist in the allotment of shares and dispatch allotment letters, refund orders and share certificates.

(v) Bankers to an Issue: Bankers accept application forms and application money, collect funds, refund excess money after allotment and assist in dividend payments.

(vi) Printers, Advertising Agencies and Mailing Agencies: These agencies print prospectuses and application forms, advertise the issue and dispatch important documents to investors.

Thus, Merchant Bankers, Underwriters, Brokers, Registrars, Bankers, and Printers/Advertising/Mailing Agencies are the major intermediaries in the New Issue Market.

4. State the advantages and disadvantages of NIM. 

Ans: The New Issue Market (NIM) or Primary Market plays an important role in mobilizing savings and providing long-term funds to companies. It offers several benefits to investors and industries, but it also has certain limitations.

Advantages of NIM:

(i) Avenue for Investment: It provides investors with opportunities to invest in new financial securities.

(ii) Savings Mobilization: It encourages individuals and institutions to invest their savings in productive activities.

(iii) Diverting Savings for Productive Use: It channels scattered savings into productive investments for economic development.

(iv) Source of Huge Supply of Funds: It helps companies raise large amounts of capital for establishing new industries and expanding existing ones.

(v) Rapid Industrial Growth: It promotes the growth of industries by providing funds for new projects and business expansion.

(vi) Source for Expansion and Technological Upgradation: It enables companies to raise funds for modernization, expansion and technological improvement.

Disadvantages of NIM:

(i) Possibility of Cheating or Deceiving Investors: Some companies may mislead investors by providing false or incomplete information.

(ii) Inadequate Institutional Arrangement for Project Appraisal: There is a lack of proper evaluation of new projects, making it difficult for investors to judge their profitability.

(iii) Investors Not Serious: Many investors do not monitor the performance of the company after investing.

(iv) Role of Merchant Bankers Not Effective: Merchant bankers may not properly examine the technical and financial feasibility of projects.

(v) Delay in the Process of Allotment: There may be delays in the allotment of shares, issue of share certificates and refund orders, causing inconvenience to investors.

Thus, while the New Issue Market is essential for capital formation and industrial development, it also faces certain limitations that need proper regulation and investor protection.