V.V.S.N.MURTHY

1226113158

PRIMARY AND SECONDARY MARKETS

SUMMARY: Lack of sustained buoyancy in the secondary market has contributed to the poor investor interest in the primary market. Measures taken by the Government as well as SEBI in regard to buy-back of shares have therefore been designed to boost investor interest in the share market. Other measures aimed at raising the level of investor confidence in the secondary market include amendment of SEBI Takeover Regulations, extension of demat trading to more scrips.  A stable government after the general elections, steady secondary markets and improving corporate earnings growth will give a fillip to money-raising through primary market stock sales by companies as they are expected to renew their expansion plans. Companies refrained from raising money from the public for about three years in the wake of volatile markets and a slowing economy. Primary market issuances include initial share sales, follow-on public offerings, or FPOs, qualified institutional placements, or QIPs, and rights issues.

INTRODUCTION: Typically, primary markets follow the secondary market. In the

secondary market, the 30-share benchmark index of BSE, the Sensex, rose 9.1% during 2013

and the 50-share broader market index of NSE, the Nifty, gained 6.92%. The IPO Index of

BSE, however, fell 19%. 34 companies raised Rs.1, 626.58 crore through initial public

offerings or IPOs in 2013, compared with 24 companies mopping up Rs.6, 953.32 crore in

2012. On the other hand, 13 firms raisedRs.4, 084.48 crore through rights issues during 2013,

down from Rs.7, 202.64 crore raised by 16 firms in the previous year. The trend is poised to

reverse in 2014. The easiest way to invest in these (secondary market) bonds is to subscribe

at the time of the issue. However, there is no guarantee of allotment, as some of the issues get

fully subscribed on the opening day itself. In such a scenario, the secondary market offers yet

another avenue to buy bonds. For existing investors too, it is important to track the

performance of their bonds in the secondary market. This is because switching to other bonds

may at times provide better returns, although most investors prefer to hold till maturity.

Though the secondary market movements have factored in political uncertainties, companies

are awaiting the outcome of general elections due by May to draw their expansion plans and

sell shares to the public. As investments often depend on the nature of the political party

leading the new government, large primary market floats are likely to be on hold till the

outcome of elections.

PROBLEMS OF INDIAN PRIMARY MARKET:

There are several problems of the Indian primary market.

WITHDRAWL`OF IPO’S:

Another problem lies in the fact that these days, IPOs are increasingly being withdrawn.

There is no point expressing disappointment in the withdrawal of the IPOs because it may be

taken not as an indication of failure of the company and hence the primary market but it may

be considered as a disagreement of price between the seller and the buyer. 

The primary markets are undulating the world over. The incidents occurring in the primary

markets are reflections of what is actually happening in the secondary markets. 

It was fathomed that the IPOs, which were lately taken back had very "aggressive" price

bands. The price bands could have been aligned as per existing conditions of the market. The

lead managers responsible for the IPOs may also be blamed for the catastrophe. 

Few are of the opinion that lack of judgment may have led to the withdrawal. "Investors

fatigue is being accounted for in the withdrawals. 

CORNERING OF SHARES:Recently, there was an instance when investors "cornered" shares, which were to be allotted

to the public. The investor was actually a big investor who camouflaged as a small investor

cornered many shares. 

GREY MARKETS AND MANIPULATION: 

Other problems of Indian primary markets include over subscription of shares. There are

instances when the grey markets usually have high premia, which collapse as soon as the

issues are listed. These indicate that for vested interests manipulation in the markets are

rampant. 

SOLTIONS TO THE PROBLEMS:

The practice of part payment of shares may be removed.

The process of application money pertaining to the shares could become uniform among

different investor categories.

Restricting a company's entry into the primary market if that company had withdrawn shares

from the market at least for a span of 12 months.

Making the process of book building more effective as well as making the book builders

more efficient.

LOOK TO THE SECONDARY MARKETS:

The easiest way to invest in these bonds is to subscribe at the time of the issue. However,

there is no guarantee of allotment, as some of the issues get fully subscribed on the opening

day itself. In such a scenario, the secondary market offers yet another avenue to buy bonds.

For existing investors too, it is important to track the performance of their bonds in the

secondary market.

This is because switching to other bonds may at times provide better returns, although most

investors prefer to hold till maturity. Here’s what you should know when trading in the

secondary markets:

CHOOSING AMONG BONDS:

When an issue opens in the primary market, the coupon rate on the bond is clearly stated,

which is the annual rate of return. But in the secondary market, the coupon rate does not

matter. This is because the bond in the secondary market may trade below or above its issue

price. What matters is the yield to maturity.

Yield to maturity (YTM) - is the effective return you can earn on a bond by way of interest

and repayments, by buying it at its current price. As bond prices fall, yields rise and hence

there is an inverse relationship between the two. YTM is calculated by arriving at the

discount rate which equates the sum of all future cash flows from the bond (interest and

principal) to the current price of the bond. This can be done with the help of a financial

calculator or excel.

Let us understand this with some examples. The Rs 1,000 tax-free bonds issued by Rural

Electrification Corporation in March 2012, at 7.93 per cent for 10 years, is now quoting at Rs

986 on the BSE, at a 1.3 per cent discount. Here, the YTM works out to 8.2 per cent and this

is your return on the bond if you hold till maturity. Hence, we can see that although the

coupon rate is lower, the yields in the secondary market have aligned themselves to the

current rates. If you have not subscribed to the recent public issue, you can buy in the

secondary market instead, since the returns are comparable.

We should also compare other options in the secondary market. Power Finance

Corporation (PFC) bond issued in Feb 2012, at 8.2 per cent interest is now trading at 2 per

cent discount — YTM works out to 8.5 per cent. Since this bond is also AAA rated and offers

attractive yields, this could be another option in the secondary market.

THE LIMITATIONS:

Ideally in case of a rising interest rate scenario such as now, the price on existing bonds falls

and there is an opportunity to invest in the secondary market. However, there are other

aspects to consider too. One is the credit risk of the issuer. In spite of the attractive price and

yield, investors must refrain from investing in low rated bonds. Particularly as the macro

environment is riddled with challenges, it is best to stick to AAA or AA+ rated bonds for

now.

The perception of risks attached to a particular issuer may also alter the pricing of bonds in a

similar category. For instance, India Info line issued its NCD for 72 months in September

2012 offering 12.75 per cent. This bond in fact is trading at a premium of 4 per cent at Rs

1,035. The YTM works out to 12 per cent; closer to its recent public issue.

On the other hand, Muthoot Finance NCD which offered 12 per cent for a five-year tenure in

Nov 2012, is now trading at a discount of 3 per cent. In spite of similar rating on both these

bonds (AA-) one trade at a premium while the other at a discount as the market perceives the

risk on both issuers differently. The second factor to consider is the liquidity. Unlike equity o

that trade on the exchanges under an order matching system, corporate bonds in the

secondary market are traded over the phone via a broker. Hence, when you need to buy or

sell a particular bond for a particular tenure, the broker gives you the quotes available in the

market. However, as the liquidity is negligible in most cases, actual trades happen at

negotiated prices which are different from quoted prices, a majority of the time.

Finally, the trend in the interest rates is also a deciding factor. While older bonds are now

trading at a discount, there is further possibility of a price correction as new issues may offer

higher rates.

In such a scenario, it will be better to adopt a wait-and-watch approach till interest rates

stabilise.

Indian Corporate Debt Markets – Secondary market issues:

The absence of secondary markets for corporate bonds in India is arguably the single most

important reason for this market not seeing the kind of growth one would expect. The public

(government securities or GSecs) debt market with an outstanding issue size close to Rs.

19,74,467 crores (USD 421.35 billion), had a secondary market turnover of around Rs. 30

lakh crores (USD 640.20 billion) for the year 2009. Besides the G-Secs market, there is a

market for corporate debt papers in India which trades in short term instruments such as

commercial papers and certificate of deposits issued by banks and also in long term

instruments such as debentures, bonds, zero coupon bonds, step up bonds etc. The

outstanding issue size of listed corporate debt was Rs. 2.2 lakh crores (USD 46.95 billion) in

2009. The corporate debt turnover in the secondary market was roughly 1.5 lakh crores (USD

31.6 billion) during the year 2009. To put things in context, by the end of 2008, the Indian

equity market turnover was roughly $ 1.05 trillion.

Investors have stayed away from the fixed income secondary market as the market lacks

liquidity, transparency and depth. Some of the key issues that have traditionally plagued the

secondary markets in long term debt in India are: 1) Absence of market makers and liquidity;

2) Preference to bank deposits, postal savings schemes, NSCs etc over bonds because of

liquidity risk.

REFERENCES:

1. 2013, A look at primary and secondary markets.

http://www.investopedia.com/articles/02/101102.asp

2. 2013, October, Choosing bonds in secondary markets.

http://www.thehindubusinessline.com/money-wise/choosing-bonds-in-secondary-

markets/article5268473.ece

3. Pdf on secondary markets by indianbudget.nic.in.

4. 2013, Primary markets may be on road to revival after lacklusture.

http://www.livemint.com/Money/pRx1naKclAvo7t2tAtCWyK/Primary-market-may-

be-on-road-to-revival-after-lacklustre-20.html

5. Problems of INDIAN primary market.

http://finance.mapsofworld.com/primary-market/problems-indian.html