Why were Primary Markets not active in India until the 80s?

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What is a Primary Market?

There are two forms of securities markets that are differentiated based on the type of issues of securities in them.

  • The primary market is for the new security issuance, while the secondary market is for the purchase and sale of already existing securities.

  • As the primary markets deal only in new securities, they are also called new issues markets.

Primary Market Vs Secondary Market

The issued securities are bought and sold in the secondary market that is also known as the stock market. The stock market is a second-hand security market that deals in all listed securities.

  • In a primary market, there is direct contact between the companies and the buyers of their securities.

  • In a secondary market, the issued securities are indirectly traded between the buyers and sellers of securities. The companies that issue the securities don't have any role to play in a secondary market.

  • The secondary market runs on the demand and supply of already issued securities.

Initial Public Offerings

The initial public offers (IPOs) that are the issue of new securities take place in primary markets. In an IPO, the companies list their stock prices for the first time and these are bought by investors in the primary market. Once the stock is listed, it is traded in the secondary market.

Capital Markets in India

Until 1980s, there was no visible enthusiasm among the private companies to sell their securities to the public. This was mainly due to the following reasons:

  • The size of operations was narrow and the base of capital was small.

  • Loan capital was easily available from term-lending institutions.

  • There was a fear of losing control of the company among owners.

  • The environment of the corporate scenario was highly regulated.

The 1980s, however, saw a drastic change in efforts of funds mobilization by the companies. Moreover, the environments were deregulated to a large extent by the government as well. The trend of participation of companies in the stock market to raise funds continued unabated since then.

In the 60s, the funds' mobilization was 700 million rupees and in the 70s, it was 900 million rupees which saw a sea change in 1990-91 when it reached a tune of 43,120 million rupees.

The funds-mobilization reached a phenomenal value of Rs 264,170 million in 1994-95. The funds mobilized in 1990-91 was 3.3% of gross domestic savings (GDS), while is was 10% in 1994-95.

The corporate sector raised a capital of Rs 340300 million in 2012-13, where the private placement was 49.3%, whereas public issues offered 1.2%.

Updated on 31-Mar-2022 08:49:23