Problems faced in New Issue Market
The activities in the new issue market relate to underwriting and marketing of new issues. Financial institutions and brokers are actively engaged in these activities. Recently, banks have started their own division of merchant banking or their subsidiaries for undertaking activities in the new issue market. They are well versed in the requirements of Companies Act and the Securities Contracts (Regulation) Act, and listing requirements with regard to new issue market.
Despite the role of financial institutions, which competently handle all the issues relating to the new issue market, the new issue market suffers from certain problems. The problems can be summarized as follows:
1. Ineffective mobilization of savings
It is felt that the new issue market has not fared well in the recent past. Particularly, the new issue market could not mobilize adequate savings from the public. Hardly about 5% of financial savings of the household sector is mobilized for investment in shares and debentures. A larger portion of domestic savings goes to the private market or to the financial institutions.
2. Functional and institutional gap
The new instruments in the new issue market do not appeal to the investing public. The reason is that the merchant banking which is the major player in the new issue market is still in its infancy in India.
In fact, the merchant bankers are not playing any developmental role and they do not pay adequate attention to the preparation of project reports, though it is their responsibility to do so. As a result, the small investors are often deceived by the tall claims of the companies and they do not find the new issues attractive.
3. Risk aversion
Underwriters and financial institutions subscribe more for preference shares and debentures than for equity shares. The reason is that debentures, being fixed income bearing securities are more attractive to the investing public. So, they prefer debentures to equity shares.
Understandably, they hesitate to invest in equity shares as they do not fetch any fixed income. So, the companies themselves have shifted from equity financing to debt financing.
4. In ordinate delay in the allotment process
The average investor in semi urban and rural areas has to send the application form for shares to the centres where banks accept it. He has to incur some expenditure on securing a bank draft and postal charges for mailing it. Till the shares are allotted, he suffers loss of interest. If shares are not allotted, he has to pay collection charges in getting the refund of application money.
Moreover, even if shares are allotted, there are inordinate delays in receiving allotment letters, share certificates and also in effecting transfer of shares. Again, dividend warrants, refund orders interest payments etc,, are not enchashable at par in all cases.
All these problems cause hardships to the small investors, especially in the rural areas and the rural investors get discouraged and refrain from applying for new issues.
5. Problems of the company
The issuing companies also suffer from certain problems. They are often tempted to present a rosy picture about the projected figures of turnover, profits, dividends, etc., for the future, which can be avoided.
Secondly, some companies make exaggerated claims about their prospects to the public. Thirdly, their claims about over-subscription are often false. Apart from these, there are no fixed norms for appraisal of the projects prepared by the companies.