WHAT IS A FINANCIAL MARKET?

When an enterprise is in need of funds, it

approaches the investing public, both individuals
FINANCIAL MARKET

and institutions, to subscribe to its issue of

capital or funds.
Financial markets facilitate the flow of funds and
thereby allow financing and investing by
households, firms, and government agencies.
 It is a market that facilitates flow of funds from

SURPLUS UNITS to DEFICIT UNITS.

Market
Those who have Those who
facilitates
excess fund need funds
(Surplus units) (Deficit units)
 WHAT IS A FINANCIAL MARKET?
• Funds are transferred in financial markets when
one party purchases financial assets previously
FINANCIAL MARKET

held by another party.

• Each financial market is created to satisfy
particular preferences of market participants.
• Period for which they want to deposit –
short-term period or long term period
• Level of risk they are willing to tolerate
• Some may prefer to borrow, whereas others
may prefer to issue stocks
 WHAT ARE TYPES OF FINANCIAL MARKET?
MONEY AND CAPITAL MARKETS

The financial markets that facilitate the transfer of debt

securities are commonly classified by the maturity of the
securities.
 One that facilitates the flow of funds of short-term funds
(with maturities less than one year) is known as money
market.
 One that facilitates the flow of long-term funds is known as
capital market.
The securities floated by the issuing companies are
subsequently purchased and sold among the individual and
institutional investors.
Two stages
• Acquiring the securities from the issuing companies
• Purchased and sold continuously among the investors
without any involvement of the companies
PRIMARY AND SECONDARY MARKETS Depending upon of transactions further classification as
Primary market and Secondary Market
Primary market (NIM) Secondary market
• Facilitates issuance of new securities. • Facilitates trading of existing (old)
Issuance of new corporate stocks (or securities. Sale of existing corporate stock
new Treasury securities) is its (or treasury securities) is its transaction
transaction.
• Here transactions provide funds to • Here transactions do not provide funds.
the initial issuer of securities. Thus Hence in no circumstances SM can supply
the contribution to company additional funds to the company as it is
financing is direct. not involved in transaction.
• It is not rooted in any particular spot • Stock exchanges have organizationally
and has no geographical existence. speaking, physical existence and are
located in a particular geographical area.
• It has neither any tangible form nor
any administrative organisational
setup like that of stock exchanges nor
is it subjected to any centralised
control and administration for the
consummation of its business.
 CLASSIFICATION OF NEW ISSUES
Based on whether by a new or an old company
INITIAL ISSUES
PRIMARY MARKET

• The securities issued by companies for the first time

either after the incorporation or conversion from
private to public companies are designated as initial
issues.

OLD OR FURTHER ISSUES

• Those issued by companies which already have
stock exchange quotation, either by public issues or
by rights to existing shareholders, are referred to as
old or further issues.
 CLASSIFICATION OF NEW ISSUES
Based on companies seeking quotations
NEW MONEY ISSUES
PRIMARY MARKET

• Refers to the issues of capital involving newly

created shares.
• This provides funds to enterprises for additional
capital investment or for wholly or partly repay debt.
• New money refers to the sum of money equivalent to
the number of newly created shares multiplied by the
price per share minus all the administrative cost
associated with the issues

NO NEW MONEY ISSUES

• Represents the sale of securities already in
existence and sold by their holders
 FUNCTIONS OF NEW ISSUES/PRIMARY
MARKET
PRIMARY MARKET

Channeling of investible funds into industrial

enterprises through the triple-service function
• Origination
• Underwriting
• Distribution
 FUNCTIONS OF NEW ISSUES/PRIMARY
MARKET
Origination
• Refers to the work of investigation and analysis and processing of
PRIMARY MARKET

new proposals. Preliminary investigation refers to a careful study of

technical, economical, financial and legal aspects of the issuing
companies.
• It warrants the backing of the issue houses in the sense of lending
their name to the company and thus gives the issue the stamp of
respectability. Earns good market prospects.
• In the process of origination, the sponsoring organisation render the
following services.
• Determination of class of security to be issued and the price
of the issues in the light of market conditions
• Timing and magnitude of issues
• Methods of floatation
• Techniques of selling
 FUNCTIONS OF NEW ISSUES/PRIMARY
MARKET
Underwriting
• Refers to contractually guaranteeing subscription to shares or
PRIMARY MARKET

other securities. An underwriting agreement serves as back-up in

the event of inadequate subscription to a public subscription.
• The adequate institutional arrangement for underwriting is of
crucial importance both to the issuing companies as well as
investing public. In India, merchant bankers, stockbrokers, banks
and financial institutions offer underwriting commitments and
receive commission on the amount underwritten. In some
western countries, underwriting means purchase of securities
from a company by investment bankers, who subsequently sell it
to investors,
• In the context of insurance, this term refers to the function of
assuming the risk of financial loss due to death or a mishap, in
return fro Premium.
 FUNCTIONS OF NEW ISSUES/PRIMARY
MARKET
Distribution
• Success of an issue depends on the issues being acquired
PRIMARY MARKET

by the investing public.

• The sale of securities to ultimate investors is called as
distribution,
• It is a specialist job which can be performed by brokers and
dealers in securities, who maintain regular and direct
contact with the ultimate investor.
 ISSUE MECHANISM
• Public issue through prospectus
PRIMARY MARKET

• Tender/book building
• Offer for sale
• Placement/Private placement
• Rights issue
 PUBLIC ISSUE THROUGH PROSPECTUS
• Corporate enterprise raise capital through
issue of securities by means of prospectus
PRIMARY MARKET

• Issuing companies themselves offer directly

to the general public a fixed number of
shares at a stated price, which
o in the case of new companies is invariably
the face value of the securities (issue at par),
and
o in the case of existing companies, it may
include a premium amount, if any (issue at
premium)
 PUBLIC ISSUE THROUGH PROSPECTUS
• Another feature of this method is that
generally the issues are underwritten to
PRIMARY MARKET

ensure success arising out of public

response.
Advantage
 Transaction is carried on in the full light of publicity
coupled approach to entire investing public
 Allotted among applicants on a non-discriminatory basis
 Share ownership is widely diffused, thereby contributing to
the prevention of concentration of wealth and economic
power
 Because of the increased scrutiny, public companies can
usually get better rates when they issue debt.
 PUBLIC ISSUE THROUGH PROSPECTUS
Advantage
 Being on a major stock exchange carries a considerable
PRIMARY MARKET

amount of prestige.
 As long as there is market demand, a public company can
always issue more stock. Thus, mergers and acquisitions
are easier to do because stock can be issued as part of the
deal.

Disadvantage
 It is a highly expensive method
 In view of high cost involved in raising capital, it is suitable
for large issues and not for small issues
 PROSPECTUS
DEFINITION
• Any document described or issued as prospectus
PRIMARY MARKET

and includes any notice, circular, advertisement or

other document inviting deposits from public or
inviting offers from the public for the subscription or
purchase of any shares in or debenture of a body
corporate (Sec 2(36) of the Company Act)
• Two essential features
o It invites subscription to shares or debentures or invites
deposits
o The invitation is made to public
 PROSPECTUS
CONTENTS
(Sec 56 of the Company Act and SEBI Guidelines 2000)
PRIMARY MARKET

• Three parts
o Part 1 (General information)
o Part 2 (Detailed information)
o Part 3 (Explanation of certain terms and
expressions used under Part – I and Part – II)
 PROSPECTUS
Part – I (General information)
1. General information
PRIMARY MARKET

2. Capital Structure of the company

3. Term of the present issue
4. Particular of the issue
5. Company management and project
6. Certain prescribed particulars in regard to the
company
7. Outstanding litigation relating to financial matters,
criminal proceedings against the company or directors
8. Management perception of risk factor (e.g. FE rate
fluctuation, difficulty is availability of raw materials, etc.
 PROSPECTUS
GENERAL INFORMATION
a) Name and address of registered office of the company
b) Name (s) of the stock exchanges where application for listing is
PRIMARY MARKET

made
c) Declaration about refund of issue if minimum subscription of 90%
is not received within 120 days from the closure of the issue
d) Declaration about the issue of allotment letter/refunds within
period of 10 weeks and interest in case of default at the
prescribed rate given in S-73
e) Dates of opening and closing of the issue
f) Names and addresses of auditors and lead managers
g) Rating from CRISIL and any rating agency
h) Names and addresses of the underwriters and the amount
underwritten by them
 PROSPECTUS
CAPITAL STRUCTURS OF THE COMPANY
a) Authorised, issued, subscribed and paid-up capital
PRIMARY MARKET

b) Size of the present issue, giving separately reservation

for preferential allotment to promoters and others
TERMS OF THE PRESENT ISSUE
a) Terms of payment
b) How to apply
c) Any special tax benefit
PARTICULARS OF THE ISSUE
a) Objects
b) Project cost
c) Means of financing (including contribution of promoters)
 PROSPECTUS
COMAPANY MANAGEMENT AND PROJECT
a) History ad main objects and present business of the
company
PRIMARY MARKET

b) Promoters and their background

c) Location of the project
d) Collaboration, if any
e) Nature of product (s) and export possibilities
f) Future prospects
g) Stock market date. For share/debenture of the company
high and low price in each of the last three years
including monthly high and low during the last six
months, if applicable.
 PROSPECTUS
PART – II (Detailed information)
• Sub part I: General information
PRIMARY MARKET

• Sub part II: Financial information

• Sub part III: Statutory and other information

GENERAL INFORMATION
a) Consent of directors, auditors, solicitors, managers
to the issue, Registrar to the issue, bankers of the
company and experts
b) Change, if any, in directors and auditors, during the
last 3 years and reasons therefor
c) Procedure and time schedule for allotment and
issue of certification
 PROSPECTUS
GENERAL INFORMATION
d) Names and addresses of Company Secretary, ,
Legal Adviser, Lead Manager, Co-manager,
PRIMARY MARKET

Auditors, Bankers to the issue

e) Authority for the issue and details of resolution
passed therefor
FINANCIAL INFORMATION
a) Reports of the auditors of the company with respect
to profits and losses and assets and liabilities and
the dividends paid during the last 5 years
immediately preceding the issue of prospectus
b) Report by the accountant on the profits and losses
for the preceding 5 years (this must not be more
than 120 days before date of issue of prospectus)
 PROSPECTUS
STATUTORY AND OTHER INFORMATION
a) Minimum subscription
b) Expenses of the issue
PRIMARY MARKET

c) Underwriting commission and brokerage

d) Previous public or rights issue, if any, giving particulars
about date of allotment, premium/discount, etc.
e) Issue of shares (sweat equity) other than for cash
f) Commission or brokerage on previous issue
g) Particulars about purchase of property, if any
h) Revaluation of assets, if any
i) Debentures and redeemable preference shares or
other instrument issued but remaining outstanding on
the date of prospectus and terms of their issue.
 ABRIDGED PROSPECTUS
Sec 56(3) requires that no one shall issue any form of
application for shares in or debenture of a company
unless the same is accompanied by a memorandum
PRIMARY MARKET

containing such salient features as may be prescribed.

Thus instead of appending full prospectus, only an abridged
prospectus need only be appended to the application
form. However, for full version of prospectus can be seen
from the lead manager’s offices.
Special features of abridged prospectus
• It shall not contain matters which are extraneous to
the contents of the prospectus
• It shall be printed at least in point 7 size with proper
spacing and enough space should be provided for
investors to fill in the details
 RIGHTS ISSUE
• It is the issue of new shares in which the existing
shareholders are given preemptive rights to
subscribe to the new issue on a pro-rata basis
PRIMARY MARKET

• The right is given in the form of an offer to existing

shareholders to subscribe to a proportionate number
of fresh, extra shares at a price. A shareholder has
four options
1. Exercise his rights and buy new shares at the offered
price.
2. Renounce the right and sell them in open market
3. Renounce part of his rights and exercise the
remainder
4. Choose to do nothing.
 A FEW PRIMARY MARKET TERMS
• Pricing of issues
 Differential pricing
PRIMARY MARKET

 Firm allotment
 Offer to public

 Price band
 Floor and cap prices
 Composite issue and justification

 Payment of discount or commission

 Denomination of share (as specified by SEBI)
 If the issue price ≥ Rs 500 then face value can be
below Rs 10 subject to a minimum of Re 1 per share
 If the issue price ≤ Rs 500 then face value would be
Rs 10
 A FEW PRIMARY MARKET TERMS
 Denomination of shares
 Disclosure about the face value of the share,
PRIMARY MARKET

including a statement about the issue price being

“X” times the face value in the offer/advertisement
 Shares should not be issued in a denomination of a
decimal of a rupee
 At any given time, there should be only one
denomination for the share of the company
 Company can change the denomination if their
memorandum and articles of association permit so.
But, denomination of the share cannot be altered to
a decimal of a rupee
 Company should adhere to the disclosure and
accounting norms specified by SEBI from time to
time.
 A FEW PRIMARY MARKET TERMS
• Promoters’ contribution
 For unlisted companies: 20% of the post-
PRIMARY MARKET

issue capital
 For listed company: 20% of the proposed
issue capital or to ensure shareholding to
the extent of20% of the post-issue capital
 For composite issues: At the option of the
promoters, the contribution would be
either 20% of the proposed public issue
capital or 20% of the post-issue capital
excluding the rights issue component
 A FEW PRIMARY MARKET TERMS
• Exemption from Promoters’ contribution
 Public issue by a company listed on a
PRIMARY MARKET

stock exchange for at least 3 years and

having a track record of dividend payment
for at least 3 immediately preceding years
 Rights issue
 Where no identifiable promoter/promoter
group exists????
• Lock-in requirements of promoters’
contribution
 A FEW PRIMARY MARKET TERMS
• Lock-in requirements of promoters’
contribution
PRIMARY MARKET

 Minimum period of 3 years

 The lock-in period would start from the
date of allotment in the proposed issue or
from the date of commercial production
whichever is later.
 Other requirements
 Pledge of security with the banks/FIs
 Inscription of non-transferability during the
lock-in period
 BOOK BUILDING
• It is a process used to ascertain and record the
indicative subscription bids of interested investors to a
planned issue of securities. It is a mechanism through
PRIMARY MARKET

which an offer price for IPOs based on investor’s

demand is determined.
• It is basically an auction of shares.
• SEBI requirements
 75 percent book building process
 100 percent book building process
 BOOK BUILDING PROCESS
1. The company appoints a book runner, a merchant
bank.
PRIMARY MARKET

2. The book runner prepares draft documents and

submitted to SEBI and obtains acknowledgement card.
3. The issuer and the book runner decide to offer shares
at a price within a specified price band (range).
4. Offers regarding the demand for securities at different
price levels are invited from the syndicate members
consisting of eligible brokers, merchant bankers,
underwriters, financial institutions, mutual funds, and
others in the form of a bid. Ad should mention the
opening and the closing dates for the bids. The bid is
normally open for five working days.
 BOOK BUILDING PROCESS
5. Based on the bids received, the issuer arrives at a
final cut-off rate and the final allocation in consultation
with the book runner and lead manager.
PRIMARY MARKET

6. The issuer and the book runner may impose restriction

on the number of shares that can be allotted to each
client so as to avoid any future takeover threat.
7. The final prospectus is filed with the Registrar of
Companies (ROC) along with the procurement
agreement.
8. The placement portion opens for subscription only
after the prospectus is filed with the ROC.
 BOOK BUILDING PROCESS
9. The placement portion closes a day before the public
issue portion.
PRIMARY MARKET

10. The public portion opens and the allotment and listing
of this portion is done. The price determined in the book
building process is applicable to the public portion.
11. In case the public portion stands oversubscribed, then
the allotment is made on a proportionate basis. In case,
the public portion remains undersubscribed, the
shortfall is distributed amongst those who have opted
for placement. In case the placement portion is
undersubscribed, the size of the public issue is
enhanced.
Thus the book building enables issuers to reap benefits
arising from price and demand discovery.
 A FEW PRIMARY MARKET TERMS
INITIAL PUBLIC OFFERING (IPO)
• The first sale of stock by a private company to the
PRIMARY MARKET

public, i.e., if the company has never issued equity to

the public, it's known as an IPO.

DIRECT PUBLIC OFFERING (DPO)

• Where a company raises capital by marketing its shares
directly to its own customers, employees, suppliers,
distributors and friends in the community. DPOs are an
alternative to underwritten public offerings by securities
broker-dealer firms where a company's shares are sold
to the broker's customers and prospects.
• Direct public offerings are considerably less expensive
than traditional underwritten offerings. On the other
hand, a DPO will typically raise much less than a
traditional offering.
 A FEW PRIMARY MARKET TERMS
GREENSHOES OPTIONS
• An option that allows the underwriting of an IPO
PRIMARY MARKET

to sell additional shares to the public if the

demand is high.

UNDERWRITING
• New issues are usually brought to market by an
underwriting syndicate in which each firm takes
the responsibility (and risk) of selling their specific
allotment. The process by which investment
bankers raise investment capital from investors
on behalf of corporations and governments that
are issuing securities (both equity and debt).
• The process of issuing insurance policies.
 A FEW PRIMARY MARKET TERMS
NEGOTIATED UNDERWRITING
• A process in which both the purchase price
PRIMARY MARKET

and the offering price for a new issue are

negotiated between the issuer and a
single underwriter.
• The underwriter pays the issuer a purchase price,
and the public pays the offering price. The spread
between the purchase price and the public
offering price represents the proceeds to the
underwriter.
 A FEW PRIMARY MARKET TERMS
FREE PRICING REGIME – a regime after
1992
PRIMARY MARKET

BOOK BUILDING
• It is a mechanism through which an offer
price for IPOs based on investor’s demand is
determined.
• It is basically an auction of shares.
 A FEW PRIMARY MARKET TERMS
PLACEMENT PORTION
• It is the portion of the issue offered to the public
PRIMARY MARKET

through the syndicate by way of the book building

process. That is all the investors are free to have
share in the public portion but they can do so
through the syndicate members.

PUBLIC PORTION
• It refers to the offer to the public. By and large, it
is responded to by retail offering. The price
arrived at in the book building method is
applicable to the public offer.
 FINANCIAL SECURITY
A Security is a certificate that represents
a claim on the issuer.
Money market securities
– Maturity less than a year
– High degree of liquidity
– Low expected return but also a low degree of
risk
Capital market securities
 Capital market securities
Bonds/Debentures and Mortgages
– Bonds/debentures are long-term debt obligations issued by
corporations and government agencies to support operation, whereas
mortgages are long-term debt obligations created to finance the
purchase of real estate.
– If investors does not want to hold it, or requires money, debt securities
can be sold in the secondary market
– Provide a return to investor in the form of interest income at a given rate
and periodicity. At maturity, investors are paid the principal amount
– Expected return is higher than money market securities, but has more
risk as well.
Stocks
– They are certificates representing partial ownership in the corporations
that issued them
– It has no maturity so they are classified as capital market securities.
– Some co. provide income to the stockholders by distributing a portion
of their earnings, while may retain and reinvest all or part of their
earnings for subsequent expansion or growth.
– Investors can earn a capital gain from selling the stocks for a higher
price than they paid for it, if co is doing well. Alternatively, they lose if
co is not well.
– Exhibit higher degree of risk
 Capital market securities
Sweat Equity
– Equity shares allotted to certain employees
of a company either on discount or for
consideration other than cash, as a reward
for providing know-how or sharing
intellectual rights or some other value
addition to the company.