Presentation on Capital Market & Primary Market & Secondary Market

By:BHAVESH SHAH (2845) UPENDRA THAKORE ( 2856)

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Capital Market
Market for long term funds both equity and debt. Funds raised within and outside the country. Help to boost economic growth by mobilizing the savings.

Functions of a Capital Market

Mobilize long-term savings to finance longterm investments Provide risk capital in the form of equity to entrepreneurs Improve the efficiency of capital allocation through a competitive pricing Enables wider participation Lower the cost of transactions Provide insurance against market risk through derivative trading 3

Capital Market
(1) Primary Market -A market for new issues -A market for a fresh capital (2) Secondary Market -A market where outstanding or existing securities are traded. -Also known as the stock market.
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Primary Market
Enables Issuers (Government and Corporate sector) to Mobilize savings from investors for their projects / expansion resulting in development of economy, employment, tax collection, creation of wealth. Subsequently these securities get listed and traded on the stock exchanges Domestic Equity issue and debt instruments External GDR, ADR & ECB
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Primary Market- Contd.

There are three ways by which a company may raise capital in primary market. - The most common method of raising capital by the new companies is through sale of securities to the public called Public Issue - Securities are first offered to the existing share holders on a pre-emptive basis is called as Right Issue -Private placement is a way of selling securities privately to a small group of investors.
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Merchant Banking-An Overview

They also known as a book running lead manager(BRLM) They performs the pre-issue and post-issue activities and appoints the Syndicate Members. Merchant bankers act as intermediaries between the issuers of capital and the ultimate investors who puchase these securities. Merchant banking is the financial intermediation that matches the entities that need capital and those that have capital. 7

IPO Registrar-An Overview

Independent financial institutions registered with stock exchanges and appointed by the company They keep record of the issue and ownership of company shares.

Responsibility of a registrar
Processing of IPO applications Allocate shares to applicants based on SEBI guidelines Process refunds and transfer allocated shares to investors demat accounts.
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Syndicate Members - An Overview

Syndicate members are commercial or investment banks responsible for underwriting IPO's. Work as intermediaries for Issuer Company and the buyers of the IPO stocks. Deposit all the money received from investors to the Escrow Account opened by the Issuer Company.
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Bankers to the issue - An Overview

They carries out all the activities of ensuring that the funds are collected and transferred to the Escrow accounts. Lead Manager ensures follow-up with bankers to the issue to get quick estimates of collection

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Free Pricing Regime

Controller of Capital Issues (CCI) regulated the new issues before 1992 CCI decided the timing, quantum and pricing of the issues New companies could issue shares only at par while the existing companies could issue shares at premium Premium set by the CCI through prescribed formula & resulted in underpricing of many issues. 11

Free Pricing Regime-Contd.

In 1992, CCI Act was replaced All the controls relating to raising of resources from the market were removed The Promoter and Merchant Bnaker together decide the price of the issue called as a Free Pricing. Issues came with unreal projections and sold at very high premiums. During the 1992-96, out of the 4000 issues 3000 quoted below their offer price. 12

Modes of Offering Shares to Public

Fixed Price Offering
Through the Book Building Process

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Fixed Price Offering

Firm and merchant banker didnt consider the investors demand. Long time between the date of pricing and issued opened. Raised the possibility of price fluctuations. Results in high cost of capital for firms due to underpricing.
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Book Building
It is basically an auction of shares Price of the Issue is not fixed by the Company. Mechanism through which an offer price for IPO based on the investors demand is determined. Book Building is a process of discovering price for issue of Securities to Investors. Bidding is done at or above the floor price. Price Band also specified by the co. Spread between the floor and the cap of the price band should not be more than 20%. Bid is usually open for minimum 5 working days 15

Book Building- Contd.

Books can be two types: Open book Closed book Online display of the demand & bids during the bidding period in open book. Investors bid without information in closed book An individual investor can bid upto Rs.1,00,000 If an individual investor bids in excess of this value, he will come under the Hith Net Worth Individual(HNI) category. 16

Book Building- Contd.

Features Fixed Price process Pricing Price is known in advance to the investor. Book Building process Price is not known in advance to the investor. Only an indicative price range is known. Demand for the securities offered can be known everyday as the book is built. Payment only after allocation.

Demand

Demand for the securities offered is known only after the closure of the issue Payment made at the time of subscription where in refund is given after allocation.

Payment

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Book Building- Contd.

Book building options: 1) 75% book building 2) 100% book building

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Book Building- Contd.

75 % book building :-

Issue price shall not be less than 25 crores. Placement offered to the public through the syndicate. 75% available to all corporate. Remaining 25% has to be compulsorily offered in the general market. Focus on 3 to 4 centers to collect bids.
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Book Building- Contd.

100 % book building : Issue price shall be more than 25 crores. Issue has to be fully underwritten. Allotted in demat form only. Focus on nation wide collection centers to collect bid due to retail participation.

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Reverse Book Building

Process for companies who want to delist or buy-back their shares from the shareholders. Delisting of securities means permanent removal of securities of a listed company from a stock market. Similar to reverse auctions. Difficult & costly process.
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Green-Shoe Option
Referred to as an over-allotment option. Provide post-listing price stability for IPO. Promoters & Pre-issue share-holders lend their shares. Small investors protection measure during the post-listing period.
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Initial Public Offering(IPO)

Sell securities in the primary market. Offer either a fresh issue of securities or an offer for sale of existing securites. Enables listing and trading of securities. Minimum 25 % of post-issue capital to be offered to the Public. Offer Documents to be made available to the Public. Issue to be kept open for a min. of 3 days. Mandatory Collection Centers at 4 metros and regional centers for collection of the applications. Minimum 90% of the issue to be subscribed. 23

Online IPO
Reduce the time taken for the issue process. Online IPO enables faster access to funds. Via the electronic network of exchanges Allotment within 15 days from the closure of the issue, failing that interest @15%
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Folow-on Public Offering(FPO)

Offer of Sale of securities by a listed company. Also known as subsequent or Seasoned Public Offring(SPO). listed companies issue FPOs to finance their growth plans. Companies with good track record find it easier to raise funds.
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Right Issues
An offer of new securities by a listed company to its existing shareholders .

This route is best suited for companies who would like to raise capital without diluting stake of its existing shareholders.

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Private Placement
Direct sale of newly issued securities to a small number of investors Through merchant bankers Investors are Financial Instititions, corporate, banks and HNI Less complicated and ease of compliance formalities Less costly and time saving

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Preferential Issue
An issue of shares or of convertible securities by listed companies to a select group of persons under Section 81 of the Companies Act, 1956. Neither a rights issue nor a public issue. Allotments are made to groups including promotors, foreign partners, technical collaborators & private equity funds.
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Mutual funds
Institutions for providing small investors opportunities to invest in capital market Motive of reducing risk & earning high rate of returns Number & types of mutual funds Open end, close end

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Thank you

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