INTRODUCTION

For starting any business an entrepreneur needs

investment in the form of capital. Depending upon
the size of the project capital varies. Entrepreneur
cannot go for investing his ow money in the
business. So he has to go for borrowing. Borrowing
money has many problems like paying interest
monthly, and that too if it is a long term project he
wont be able to pay interest regularly. Banks/
Financial Institution may demand a security for their
loans in the form of collaterals. The promoter may
choose to raise the capital by issuing shares to the
public, making them a offering on future.

DEFINITION

Capital Marketing is defined as”the process of

increasing the major part of financial capital required
for starting a business through issue of shares to
public”

The issue may be Shares, Debentures, Bonds etc.

Capital Market is a market for long term debts and

equity shares.

IMPORTANCE OF CAPITAL MARKET

 Pooling the capital resources and developing

the enterprises investors.
 Solving the problem of paucity of funds.
  Mobilize the small and shattered savings.
 Augment the availability of investible funds.
 Growth of Joint Stock business.
 Provide a number of profitable investment
opportunities for small savers.

TYPES OF CAPITAL MARKET

1. Primary capital market

2. Secondary capital market

PRIMARY CAPITAL MARKET

In primary market securities are offered to the public
for subscription for the purpose of raising capital or
fund.
The issue of securities in primary market is subject
to fulfillment of a number of pre-issue guidelines by
SEBI and compliance of various provision of the
Company Act.

An unlisted issuer making an public issue i.e.making

an IPO is required to satisfy the following provisions
(1) Net tangible asset of at least Rs. 3 crore in
each of the preceeding three full years.
(2) Distributable profits in at least three of the
immediately preceeding five years.
(3) Net worth of atleast Rs. 1 crore in each of
the preceeding three full years.
(4) If the company has changed its name
within last one year atleast 50% revenue of the
preceeding one year should be from the activity
suggested by the new name.
 (5) The issue size does not exceed 5 times the
pre-issue net worth as per the audited balance
sheet of the last financial year.

An listed issuer making an public issue is required

to satisfy the following provisions:

(1) If the company has changed its name within

last one year atleast 50% revenue of the
preceeding one year should be from the activity
suggested by the new name.
(2) The issue size does not exceed 5 times the
pre-issue net worth as per the audited balance
sheet of the last financial year.

CLASSIFICATION OF ISSUE
(1) PUBLIC ISSUE:

 It involves raising of funds directly from the

public and get themselves listed on stock
exchange.
 In case of new companies, the face value of
the securities is issued at par and in case of
existing companies face value of the
securities are issued at premium.

a) Initial Public Offering(IPO): when an unlisted

company makes either an fresh issue
securities or offer its existing securities for
sale or both for the first time to the public it is
called an IPO. This paves way for listing and
trading of the issuer’s securities in the Stock
Exchanges.
 b)Further Public Offering(FPO): when an already
listed company makes either an fresh issue of
securities to the public or an offer for sale to
the public, it is called FPO.

(2) RIGHT ISSUE:

 Right issue is the method of raising

additional finance from existing members by
offering securities to them on pre bases.
 The right offer should be kept open for a
period of 60 days and should be announced
within one month of the closure of books

(3) PRIVATE PLACEMENT:

 Private placement is an issue of shares by a
company to a selected group of persons
under the Setion 81 of the Companies Act
1956.
 It is the faster way for a company to raise
equity capital.

SECONDARY CAPITAL MARKET

Secondary market refers to a market where
securities are traded after being initially offered to
the public in the primary and/or listed on the stock
exchange
Secondary market comprises of Equity market and
Debt market.
It is the trading avenue in which the already existing
securities are traded among investors.
Banks facilitate secondary market transactions by
opening direct trading and demat accounts to
individuals and companies

FINANCIAL INSTRUMENTS DEALT IN SECONDARY

MARKET

a) Equity Shares:
An equity share is commonly referred to as an
ordinary share.
It is a form of fractional ownership in which a
shareholder as an fractional owner undertakes
the entrepreneurial risk associated with the
business venture.
Holders of the equity share are member of the
company and have voting rights.

Right shares:
This refers to the issue of new securities to the
existing shareholders,at a ratio to those shares
already held

Bonus Shares:
These shares are issued by the companies to their
shareholder free of cost by capitalization of the
accumulated reserves from the profit earned in the
earlier years.

Preference Shares:
These shareholders do not have voting rights.
Owners of these shares are entitled to a fixed
dividend or a dividend calculated at a fixed rate
 to be paid regularly before any dividend can be
paid in respect of equity shares.
These shareholders also enjoy priority over the
equity shareholders in the payment of surplus.

b)Debentures:
Debentures are bonds issued by a company
bearing a fixed rate of interest usually payable
half-yearly, on specific dates and the principal
amount repayable on a particular date on
redemption of the debentures.
Debentures are normally secured against the
asset of the company in favour of the debenture
holder

c) Bonds:
A Bond is a negotiable certificate evidencing
indebtedness. It is normally unsecured.
 SECURITIES AND EXCHANDE BOARD OF INDIA
(SEBI)

SEBI was set up on APRIL 12, 1988.

Objectives of SEBI:
SEBI seeks to creat an environment, which would
facilitated mobilization of adequate resources
through the securities market and its efficient
allocation. This environment would include rules and
regulations, institutions and their interrelationships,
instruments, practices, infrastructure within an
appropriate policy framework, should have an overall
air of fairness. The market must create confidence in
the minds of the investors.

BOOK BUILDING:

Book Building is essentially a process used by

companies raising capital through Public Offerings-
both Initial Public Offers (IPOs) or Follow-on Public
Offers ( FPOs) to aid price and demand discovery. It
is a mechanism where, during the period for which
the book for the offer is open, the bids are collected
from investors at various prices, which are within the
price band specified by the issuer. The process is
directed towards both the institutional as well as the
retail investors. The issue price is determined after
the bid closure based on the demand generated in
the process.

The Process:

• The Issuer who is planning an offer nominates

lead merchant banker(s) as 'book runners'.
• The Issuer specifies the number of securities to
be issued and the price band for the bids.
• The Issuer also appoints syndicate members
with whom orders are to be placed by the
investors.
• The syndicate members input the orders into an
'electronic book'. This process is called 'bidding'
and is similar to open auction.
• The book normally remains open for a period of
5 days.
• Bids have to be entered within the specified
price band.
• Bids can be revised by the bidders before the
book closes.
• On the close of the book building period, the
book runners evaluate the bids on the basis of
the demand at various price levels.
• The book runners and the Issuer decide the final
price at which the securities shall be issued.
• Generally, the number of shares are fixed, the
issue size gets frozen based on the final price
per share.
 • Allocation of securities is made to the successful
bidders. The rest get refund orders.

Guidelines for Book Building

SEBI Guidelines for IPOs

1. IPOs of small companies

Public issue of less than five crores has to be
through OTCEI and separate guidelines apply for
floating and listing of these issues.

2. Size of the Public Issue

Issue of shares to general public cannot be less
than 25% of the total issue, incase of information
technology,media and telecommunication sectors
this stipulation is reduced subject to the conditions
that:

• Offer to the public is not less than 10% of the

securities issued.
• A minimum number of 20 lakh securities is
offered to the public and
• Size of the net offer to the public is not less than
Rs. 30 crores.

3. Promoter Contribution
 • Promoters should bring in their contribution
including premium fully before the issue
• Minimum Promoters contribution is 20-25% of
the public issue.
• Minimum Lock in period for promoters
contribution is five years
• Minimum lock in period for firm allotments is
three years.

4. Collection centers for receiving

applications

• There should be at least 30 mandatory collection

centers, which should include invariably the
places where stock exchanges have been
established.
• For issues not exceeding Rs.10 crores (including
premium, if any), the collection centres shall be
situated at:-
 the four metropolitan centres viz. Bombay,
Delhi, Calcutta, Madras;
 at all such centres where stock exchanges
are located in the region in which the
registered office of

5. Regarding allotment of shares

• Net Offer to the General Public has to be at least

25% of the Total Issue Size for listing on a Stock
exchange.
• It is mandatory for a company to get its shares
listed at the regional stock exchange where the
registered office of the issuer is located.
 • In an Issue of more than Rs. 25 crores the issuer
is allowed to place the whole issue by book-
building
• Minimum of 50% of the Net offer to the Public
has to be reserved for Investors applying for less
than 1000 shares.
• There should be atleast 5 investors for every 1
lakh of equity offered (not applicable to
infrastructure companies).
• Quoting of Permanent Account Number or GIR
No. in application for allotment of securities is
compulsory where monetary value of Investment
is Rs.50,000/- or above.
• Indian development financial institutions and
Mutual Fund can be allotted securities upto 75%
of the Issue Amount.
• A Venture Capital Fund shall not be entitled to
get its securities listed on any stock exchange
till the expiry of 3 years from the date of
issuance of securities.
• Allotment to categories of FIIs and NRIs/OCBs is
upto a maximum of 24%, which can be further
extended to 30% by an application to the RBI -
supported by a resolution passed in the General
Meeting.

6. Timeframes for the Issue and Post- Issue

formalities

• The minimum period for which a public issue has

to be kept open is 3 working days and the
maximum for which it can be kept open is 10
working days. The minimum period for a rights
issue is 15 working days and the maximum is 60
working days.
• A public issue is effected if the issue is able to
procure 90% of the Total issue size within 60
days from the date of earliest closure of the
Public Issue. In case of over-subscription the
company may have the right to retain the
excess application money and allot shares more
than the proposed issue, which is referred to as
the ‘green-shoe’ option.
• A rights issue has to procure 90% subscription in
60 days of the opening of the issue.
• Allotment has to be made within 30 days of the
closure of the Public Issue and 42 days in case of
a Rights issue.
• All the listing formalities for a public Issue has to
be completed within 70 days from the date of
closure of the subscription list.

7. Despatch of Refund Orders

• Refund orders have to be dispatched within 30

days of the closure of the Public Issue.
• Refunds of excess application money i.e. for un-
allotted shares have to be made within 30 days
of the closure of the Public Issue.

8. Other regulations pertaining to IPO

• Underwriting is not mandatory but 90%

subscription is mandatory for each issue of
capital to public unless it is disinvestment in
which case it is not applicable.
• If the issue is undersubscribed then the collected
amount should be returned back (not valid for
disinvestment issues).
• If the issue size is more than Rs. 500 crores
voluntary disclosures should be made regarding
the deployment of the funds and an adequate
monitoring mechanism to be put in place to
ensure compliance.
• There should not be any outstanding warrants or
financial instruments of any other nature, at the
time of initial public offer.
• In the event of the initial public offer being at a
premium, and if the rights under warrants or
other instruments have been exercised within
the twelve months prior to such offer, the
resultant shares will not be taken into account
for reckoning the minimum promoter's
contribution and further, the same will also be
subject to lock-in.
• Code of advertisement specified by SEBI should
be adhered to.
• Draft prospectus submitted to SEBI should also
be submitted simultaneously to all stock
exchanges where it is proposed to be listed.

9. Restrictions on other allotments

• Firm allotments to mutual funds, FIIs and

employees not subject to any lock-in period.
• Within twelve months of the public/rights issue
no bonus issue should be made.
• Maximum percentage of shares, which can be
distributed to employees cannot be more than
5% and maximum shares to be allotted to each
employee cannot be more than 200.
 10. Relaxations to public issues by
infrastructure companies.
These relaxations would be applicable to
Infrastructure Companies as defined under Section
10(23G)
of the Income Tax Act, 1961, provided their
projects are appraised by any Developmental
Financial
Institution (DFI) or IDFC or IL&FS. The projects must
also have a participation of at least 5% of the
project cost (in debt and/or equity) by the
appraising institution.

• The infrastructure companies will be exempted

from the requirement of making a minimum
public offer of 25 per cent of its securities.
• The requirement of 5 shareholders per Rs. 1 lakh
of offer is also waived in case of offerings by
infrastructure companies.
• For public issues by infrastructure companies,
minimum subscription of 90% would no longer
be mandatory provided disclosure is made about
the alternate source of funding which the
company has considered, in the event of under
subscription in the public issue.
• Infrastructure companies are permitted to freely
price the offerings in the domestic market
provided that the promoter companies along
with Equipment Suppliers and other strategic
investors subscribe to 50% of the equity at the
same or a higher price than what is being
offered to the public. Adequate disclosures
 about the justification for the pricing will be
required to be made in the offer documents.
• The Infrastructure Companies would be allowed
to keep their issues open for 21 days. The
relaxation would give infrastructure companies
sufficient time to mobilise funds for their issues.
• Infrastructure Companies would not be required
to create and maintain a Debenture Redemption
Reserve (DRR) in case of Debenture Issues.

In keeping with the broad thrust of the ongoing

programs of economic reform, the mechanism of
administrative controls over capital issues has been
dismantled and pricing of capital issues is now
essentially market determined. Regulation of the
capital markets and protection of investor's interest
is now primarily the responsibility of the Securities
and Exchange Board of India (SEBI), which is
located in Bombay.

Accordingly, SEBI's functions include:

• Regulating the business in stock exchanges and

any other securities markets
• Registering and regulating the working of
collective investment schemes, including mutual
funds.
• Prohibiting fraudulent and unfair trade practices
relating to securities markets.
• Promoting investor's education and training of
intermediaries of securities markets.
• Prohibiting insider trading in securities, with the
imposition of monetary penalties, on erring
market intermediaries.
 • Regulating substantial acquisition of shares and
takeover of companies.
• Calling for information from, carrying out
inspection, conducting inquiries and audits of
the stock exchanges and intermediaries and self
regulatory organizations in the securities
market.

Keeping this in view, SEBI has issued a new set of

comprehensive guidelines governing issue of shares
and other financial instruments, and has laid down
detailed norms for stock-brokers and sub-brokers,
merchant bankers, portfolio managers and mutual
funds.

On the recommendations of the Patel Committee

report, SEBI on 27 July 1995, permitted carry forward
deals. Some of the major features of the revised
carry-forward transactions as directed by SEBI are:

• Carry forward deals permitted only on stock

exchanges which have screen based trading
system.
• Transactions carried forward cannot exceed 25%
of a broker's total transactions on any one day.
• 90-day limit for carry forward and squaring off
allowed only till the 75th day (or the end of the
fifth settlement).
• Daily margins to rise progressively from 20% in
the first settlement to 50% in the fifth.

On 26 January1995, the government promulgated an

ordinance amending the SEBI Act, 1992, and the
Securities Contracts (Regulation) Act, 1956.
In accordance with the amendment adjudicating
mechanism will be created within SEBI and any
appeal against this adjudicating authority will have to
be made to the Securities Appellate Tribunal, which
is to be separately constituted. These appeals will be
heard only at the High Courts.

The main features of the amendment to the

Securities Contract (Regulation) Act, 1956, are:

• The ban on the system of options in trading has

been lifted.
• The time limit of six months, by which stock
exchanges could amend their bye-laws, has
been reduced to two months.
• Additional trading floors on the stock exchanges
can be established only with prior permission
from SEBI.
• Any company seeking listing on stock exchanges
would have to comply with the listing
agreements of stock exchanges, and the failure
to comply with these, or their violation, is
punishable.

Fraudulent and Unfair Trade Practices

SEBI is vested with powers to take action against

these practices relating to securities market
manipulation and misleading statements to induce
sale/purchase of securities.

Inspection and Enforcement

SEBI has the powers of a civil court in respect of
discovery and production of books, documents,
records, accounts, summoning and enforcing
attendance of company/person and examining them
under oath. SEBI can levy fines for violations related
to failure to submit information to SEBI / to enter into
agreements with clients / to redress investor
grievances, violations by mutual funds/stock brokers
and violations related to insider trading, takeovers
etc.

Capital Issue Guidelines

Following the abolition of the office of Controller of

Capital Issues and the consequent removal of
administrative control over the pricing of new issues,
the capital markets now enjoy a considerable degree
of freedom. New companies, being set up by existing
companies; with a five year track record of
profitability, are free to price issues, provided the
participation of the promoters is not less than 25% of
the equity of the new company and the pricing is
made applicable to all new investors symmetrically.

Where a new company is set up by existing private

sector companies along with a state level agency, or
a government company, or a foreign collaborator, it
will be sufficient if the private sector companies
alone satisfy the requirements of five year track
record of profitability.

Existing profitable companies issuing capital for

augmenting their own capital base are free to price
their issue. At the same time, the practice of making
preferential allotment of shares, unrelated to the
prevailing market prices was stopped by SEBI.

In any capital issue to the public, there is a specified

minimum capital contribution to be made by the
promoters.

To reduce the cost of the issue, underwriting by

issues has been made optional, subject to the
condition that if an issue is not underwritten, and is
not able to collect 90% of the amount offered to the
public, the entire amount collected would be
refunded to the investors.

Where fully convertible debentures (FCDs) are to be

issued, the interest rate can be freely determined by
the issuer.

Companies are required to create a Debenture

Redemption Reserve (DRR) equivalent to 50% of the
amount of debenture issue before debenture
redemption commences.

The cost of issuing capital, as of December 1992,

was estimated at approximately 9-19% of the issue.
This included fees for issue management,
underwriting fees, stationary costs, advertisement
and publicity costs, mailing costs, brokerage, etc.
Companies have a variety of options which entail
lower issue costs, such as GDR issues, private
placement, and bought-out deals.

SEBI's intention of passing on some part of its

responsibility to the lead managers is reflected in the
the new guidelines announced in May 1995. The
major decisions were :

• SEBI has decided to stop vetting of rights issues

all together. The onus of this responsibility will
now rest with the lead managers. The procedure
for clearance would be that the merchant banker
would have to file the offer document with SEBI
six weeks prior to the proposed date of offer of
rights issue. If SEBI does not ask for clarifications
within 21 days from the date of filing, the
company and the lead manager can proceed
with the issue.
• SEBI revised the guidelines for reservation in
public issues. As per the new guidelines which
will take effect from 1 June 1995, half of the net
public offer should be reserved for small
applicants, i.e. those applying for less than 1,000
shares/securities. The other half would be
reserved for the corporate applicants.
 • A committee comprising chiefs of senior
executive directors of the five divisions of SEBI
has been formed which will clear all public issues
which are more than Rs. 100 crore. Formerly, all
the issues were cleared by the primary markets
division. Issues less than Rs. 20 crore would be
cleared by the division chiefs, those between Rs.
20 crore and Rs. 50 crore by the executive
directors and those between Rs. 50 crore and
Rs. 100 crore by the the senior executive
director.

NATIONAL STOCK EXCHANGE

The National Stock Exchange (NSE) is India's leading

stock exchange covering various cities and towns
across the country. NSE was set up by leading
institutions to provide a modern, fully automated
screen-based trading system with national reach.
The Exchange has brought about unparalleled
transparency, speed & efficiency, safety and market
integrity. It has set up facilities that serve as a model
for the securities industry in terms of systems,
practices and procedures.
NSE was set up with the objectives of:

• Establishing nationwide trading facility for all

types of securities
• Ensuring equal access to investors all over the
country through an appropriate
telecommunication network
 • Providing fair, efficient & transparent securities
market using electronic trading system
• Enabling shorter settlement cycles and book
entry settlements
• Meeting International benchmarks and standards

Within a very short span of time, NSE has been able

to achieve its objectives for which it was set up.
Indian Capital Markets are a far cry from what they
were 12 years back in terms of market practices,
infrastructure, technology, risk management,
clearing and settlement and investor service. To
ensure continuity of business, NSE has built a full
fledged BCP site operational for last 7 years.

NSE's markets

NSE provides a fully automated screen-based trading

system with national reach in the following major
market segments:-

• Equity OR Capital Markets {NSE's market share

is over 65%}
• Futures & Options OR Derivatives Market {NSE's
market share over 99.5%}
• Wholesale Debt Market (WDM)
• Mutual Funds (MF)
• Initial Public Offerings (IPO)

NSE's Capital Market Trading system was operational

on two machine split architecture using Fault
Tolerant mainframes and geared to handle 3 million
trades. However, the CM segment had started to
experience trades nearing 3 Million trades which
form a threshold. Based on the trends & expected
volumes, growth in the medium term is more than
thrice the current trading volume, i.e. about 10
Million transactions per day. However with the then
existing 2-machine split architecture, it was required
to improve the trading system transaction handling
capacity. The 3-machine split architecture project
was thus taken up to enhance the load handling
capacity of the system by introducing a 3-way split
Hardware, Application optimization and improving
the processes for achieving market volume of around
6 million transactions per day.

Project was completed as per schedule & is currently

operational since last 1 year.

Business Benefits

1. System scaled on 3 machines with

distribution of users and securities with
complete transparency to market participants.
2. System witnessed 3 million trades with faster
response time to members at significantly lower
system resource utilisation level.
3. Scalability to handle higher volumes (3 million to
6 million transactions per day).

Beneficiaries
Trading Members have experienced a faster
response time. The trading system is able to handle
higher volume of transactions which translates into
higher turnover. It therefore directly translates into
more opportunities and growth for the Entire Indian
Securities market.
the Bombay Stock Exchange (BSE), also known as
the Stock Exchange Mumbai, is one of the oldest
stock exchanges in all of Asia dating back to 1875
when it was known as the Native Share and Stock
Brokers Association. The exchange is home to about
4,900 listed companies with a total market
capitalization of around 81 trillion Rupees or nearly
$1.8 trillion.

The BSE is also one of the busiest stock

exchanges in the world, currently ranking around
number five in terms of annual transactions. The
exchange has experienced explosive growth with a
four-fold increase in trading volume over the last 15
years.