MODULE- IV

Ms. Alfia Thaha

Module - IV

Equity securities – Equity and Preference shares –

Capital market – Functions - Primary and secondary
market – Participants in the primary market – Book
building –Methods of primary issue –
Secondary/stock market – Market participants –
Stock exchanges – BSE, NSE - Listing - Trading
Mechanism – Online trading, Dematerialization and
depository system – Stock Market Indices.
Self Study topics
• Equity Securities
• Equity and Preference shares
CAPITAL MARKET

• Capital Market is a market for financial assets

which have a long or indefinite maturity.
• Deals with long term securities which have a
maturity period above one year.
• Classified into –
– Industrial Securities Market
– Government Securities Market
– Long term loans market
Industrial Securities Market

• Deals with securities like equity shares,

preference shares and debentures/bonds.

• Further divided into – Primary or new issue

market and Secondary market or stock
exchanges.
Primary Market

• It is the market for new issues or new financial claims.

• Also called as New Issue Market.
• Deals with securities issued to the public for first time.
• It facilitates capital formation
• Ways of raising capital –
– Public Issue – sale of securities to the public by the new
companies for raising capital
– Rights Issue – existing company raise additional capital,
securities are first offered to the existing shareholders on a
pre emptive basis.
– Private placement – way of selling securities privately to a
small group of investors.
Secondary Market

• Market for secondary sale of securities

• Quoted in Stock exchange and it provides
regular market for buying and selling of
securities.
• Stock exchanges in India are regulated under
the Securities Contracts (Regulation) Act, 1956
Government Securities Market

• Also called as Gilt edged securities

• Types of govt securities – short term and long term.
• Long term are traded in capital market while short
term traded in money market.
• Govt securities are issued in denominations of Rs.100.
• Interest is payable half yearly and carry tax
exemptions.
• Role of brokers is limited and major participant is
commercial banks.
Government Securities Market (contd.)

• Most common from of G-secs are Stock

certificates or inscribed stocks, Promissory
notes, bearer bonds.
• Govt securities are sold through the Public debt
office of RBI while Treasury bills are sold
through auctions.
Long Term Loans Market

• Term Loans Market – Govt has set up finacial

institutions to supply long term and medium term
loans to corporate customers. Ex: IDBI, IFCI, ICICI.
• Mortgages Market – mortgages refers to those
centres which supply mortgage loan mainly to
individual customers. Mortgage loan is a loan
against the security of immovable property like
real estate. There is Equitable Mortgage and Legal
Mortgage.
Long Term Loans Market(Contd.)

• Financial Guarantees Market – Guarantee is a

contract to discharge the liability of a third party
in case of his default. It acts as a security from
the creditors point of view.
– Financial Guarantee – only financial contracts
– Performance Guarantee – earnest money, retention
money, advance payment etc
• Provided mainly by commercial banks,
development banks, guarantee institutions etc.
Importance/Functions of Capital Market

• Serves as an important source for the productive use

of the economy’s savings
• Provides incentive to savings and facilitates capital
formation by offering suitable rate of interest
• Facilitates increase in production and productivity in
the economy.
• Induces economic growth
• Provides stability in values of securities representing
capital fund
• Source of technological upgradation
 Primary Market /New Issue Market
• Deals with new securities which were not
previously issued in the market.
• Raising of fresh capital by companies either for
cash or for consideration other than cash.

• Difference of Primary market & Secondary

market – self study topic
 Functions of New issue market
• Transfer of resources from savers to users
• Support for expansion, diversification and
modernisation of enterprises
• IPO – Initial Public offer
• Origination
• Underwriting
• Distribution
 Methods of New issue market
• Prospectus – Red Herring prospectus

• Public Issue

• Offer for Sale

• Placement – Private placement and QIP

• Book building
 Book Building
• Is a systematic process of generating, capturing, and recording
investor demand for shares during an initial public offering (IPO),
or other securities during their issuance process, in order to
support efficient price discovery. 

• The issuer appoints a major investment bank to act as a

major securities underwriter or bookrunner.

• Alternative method of making a public issue in which applications

are accepted from large buyers such as financial institutions,
corporations or high net-worth individual, almost on firm
allotment basis, instead of asking them to apply in public offer.
 Methods of Book Building
• Open book systems - the issuers and merchant
bankers are required to ensure online display of the
demand and bids during the bidding period. The
investors can know the movement of the bids during
the period in which the bid is kept open.

• Closed book systems - the book is not made public.

The investors will have to make bids without having
any information of the bids submitted by other
bidders.
 Steps involved in book building
• Appointment of book runner.
• Advertisements
• Members bid.
• Issue of Red herring Prospectus.
• Issue of Draft Prospectus to institutional buyers.
• Analysis of bids.
• Firming of underwriting contracts.
• Submission of prospectus to the ROC (Registrar of
Companies)
• Collection of application forms with money.
• Allotment of securities.
Green shoe option

• If the issue is over subscribed, the issuing

company can allocate up to 15% shares over
and above the original issue size.
– Amount raised should be used to post listing price
stabilizing mechanism.
– Details of green shoe option should be disclosed in
the prospectus and should be made available for 30
days from the date of listing.
Qualified Institutions Placement (QIP)

• Form of private placement

• Attempt by SEBI to encourage Indian companies
to raise money domestically rather than going
outside for FCCB, ADRs or GDRs.
• Those companies which are listed on stock
exchanges having nation wide trading terminals
are allowed to raise funds by selling their
securities to QIB
QIP Structure

• Placement size of QIP shall not exceed 5 times the pre

issue net worth as per the audited BS of the previous
financial year.
• Minimum 10% of specified securities shall be allotted
to mutual funds.
• There should be at least 2 allottees for an issue of size
upto Rs 250 crore and at least five allottees for an
issue size of Rs 250 crore.
• No single allottee can be allotted more than 50 % of
the issue size.
Investors

• Qualified Institutional Investors – commercial

banks, mutual funds, FII, venture capitalist, IRDA
• Non-institutional investors – individuals, HUF,
companies, corporate bodies, NRIs, societies
and trusts.
• Retail investors – defined in terms of the value
of the primary issue applied by them. Value of
the applied shares should not exceed Rs 1 lakh.
Intermediaries

• Lead mangers – merchant bankers are

appointed to manage the issue and are called
lead managers. Depending on the size of issue ,
a company may appoint more than one
merchant banker.
– Pre issue duties of a merchant banker
– Post issue duties of a merchant banker
Intermediaries (contd.)
• Underwriters
• Bankers to the issue – banks which accept
application forms and money on behalf of the public
are called bankers to the issue. Funds are transferred
through escrow account(designated account in
which funds can be used only a specified purpose)
• Registrar to the issue
• Share transfer agents
• Stock brokers and sub brokers
• Depositories
IPO grading

• SEBI has made grading mandatory.

• Grading of IPO is the assessment of the
fundamentals o the issuer concerned on a
relative grading scale.
• Checks the qualitative and quantitative factors of
the concerned company
• Grades are assigned on a five point scale where
Grade 5 IPO indicates highest and grade 1
lowest.
IPO Grading process

• Issuer company sends a formal request to the grading

agency.
• Agency seeks information on the company’s existing
operations as well as proposed projects through a
questionnaire.
• Site visit and discussions
• Agency meets bankers,auditors,merchant bankers and
appraising authorities
• Detailed grading report is submitted
• Issuer company should disclose the grades and also publish
it in red herring prospectus.
Grading Methodology

• Industry prospects
• Competitive position
• Risks and prospects
• Financial performance
• Management quality
• Corporate governance
IPOs – Current market

• http://www.moneycontrol.com/ipo/ipoissues/ip
oissues.php

• https://investorzone.in/ipo/hdfc-amc-limited-ip
o-hdfc-mutual-fund-ipo
/

• https://
www.livemint.com/Money/DKu8WJonP8mhdA
w6IZW2lJ/HDFC-AMC-latest-share-price-news-li
sting-gains-for-IPO-inves.html