BBA THIRD SEMESTER

INTRODUCTION TO CAPITAL MARKET

The Capital market is a market for financial investments that are direct or indirect claims to capital. It is
wider than the Securities Market and embraces all forms of lending and borrowing, whether or not
evidenced by the creation of a negotiable financial instrument. The Capital Market comprises the
complex of institutions and mechanisms through which intermediate term funds and long-term funds are
pooled and made available to business, government and individuals. The Capital Market also
encompasses the process by which securities already outstanding are transferred.

The Securities Market, however, refers to the markets for those financial instruments/claims/obligations
that are commonly and readily transferable by sale.

The Securities Market has two interdependent and inseparable segments, the new issues (primary)
market and the stock (secondary) market.

The Primary market provides the channel for sale of new securities. The issuer of securities sells the
securities in the primary market to raise funds for investment and/or to discharge some obligation.

The Secondary market deals in securities previously issued. The secondary market enables those who
hold securities to adjust their holdings in response to charges in their assessment of risk and return.
They also sell securities for cash to meet their liquidity needs.

The price signals, which subsume all information about the issuer and his business including associated
risk, generated in the secondary market, help the primary market in allocation of funds.

This secondary market has further two components.

First, the spot market where securities are traded for immediate delivery and payment.

The other is forward market where the securities are traded for future delivery and payment. This forward
market is further divided into Futures and Options Market (Derivatives Markets).

In futures Market the securities are traded for conditional future delivery whereas in option market, two
types of options are traded. A put option gives right but not an obligation to the owner to sell a security
to the writer of the option at a predetermined price before a certain date, while a call option gives right
but not an obligation to the buyer to purchase a security from the writer of the option at a particular price
before a certain date.

The securities market is divided into two interdependent segments:

 The primary market provides the channel for creation of funds through issuance of new securities
by companies, governments, or public institutions. In the case of new stock issue, the sale is known
as Initial Public Offering (IPO).

 The secondary market is the financial market where previously issued securities and financial
instruments such as stocks, bonds, options, and futures are
Lets now understand these markets in broader sense.

Securities Markets in India: An Overview: The process of economic reforms and liberalization was set
in motion in the mid-eighties and its pace was accelerated in 1991 when the economy suffered severely
from a precariously low foreign exchange reserve, burgeoning imbalance on the external account,
declining industrial production, galloping inflation and a rising fiscal deficit. The economic reforms, being
an integrated process, included deregulation of industry, liberalization in foreign investment, regime,
restructuring and liberalization of trade, exchange rate, and tax policies, partial disinvestments of
government holding in public sector companies and financial sector reforms. The reforms in the real
sectors such as trade, industry and fiscal policy were initiated first in order to create the necessary
macroeconomic stability for launching financial sector reforms, which sought to improve the functioning
of banking and financial institutions (FIs) and strengthen money and capital markets including securities
market. The securities market reforms specifically included:

 Repeal of the Capital Issues (Control) Act, 1947 through which Government used to expropriate
and allocate resources from capital market for favored uses;
 Enactment of the Securities and Exchange Board of India Act, 1992 to provide for the
establishment of the Securities and Exchange Board of India (SEBI) to regulate and promote
development of securities market;
 Setting up of NSE in 1993, passing of the Depositories Act, 1996 to provide for the maintenance
and transfer of ownership of securities in book entry form;
 Amendments to the Securities Contracts (Regulation) Act, 1956 (SCRA) in 1999 to provide for
the introduction of futures and option.
 Other measures included free pricing of securities, investor protection measures, use of
information technology, dematerialization of securities, improvement in trading practices, evolution
of an efficient and transparent regulatory framework, emergence of several innovative financial
products and services and specialized FIs etc.
These reforms are aimed at creating efficient and competitive securities market subject to effective
regulation by SEBI, which would ensure investor protection.

Structure and Size of the Markets: Today India has two national exchanges, the Bombay Stock
Exchange (BSE) and the National Stock Exchange (NSE). Each has fully electronic trading platforms
with around 9400 participating broking outfits. Foreign brokers account for 29 of these. There are some
9600 companies listed on the respective exchanges with a combined market capitalization near
$125.5bn. Any market that has experienced this sort of growth has an equally substantial demand for
highly efficient settlement procedures. In India 99.9% of the trades, according to the National Securities
Depository, are settled in dematerialized form in a T+2 rolling settlement The capital market is one
environment. In addition, the National Securities Clearing Corporation of India Ltd (NSCCL) and Bank of
India Shareholding Ltd (BOISL), Clearing Corporation houses of NSE and BSE, guarantee trades
respectively. The main functions of the Clearing Corporation are to work out (a) what counter parties owe
and (b) what counter parties are due to receive on the settlement date.

Furthermore, each exchange has a Settlement Guarantee Fund to meet with any unpredictable situation
and a negligible trade failure of 0.003%. The Clearing Corporation of the exchanges assumes the
counter-party risk of each member and guarantees settlement through a fine-tuned risk management
system and an innovative method of online position monitoring. It also ensures the financial settlement of
trades on the appointed day and time irrespective of default by members to deliver the required funds
and/or securities with the help of a settlement guarantee fund.

Style of Operating: Indian stock markets operated in the age-old conventional style of fact-to-face
trading with bids and offers being made by open outcry. At the Bombay Stock Exchange, about 3,000
persons would mill around in the trading ring during the trading period of two hours from 12.00 noon to
2.00 p.m. Indian stock markets basically quote-driven markets with the jobbers standing at specific
locations in the trading ring called trading posts and announcing continuously the two-way quotes for the
scrips traded at the post. As there is no prohibition on a jobber acting as a broker and vice versa, any
member is free to do jobbing on any day. In actual practice, however, a class of jobbers has emerged
who generally confine their activities to jobbing only. As there are no serious regulations governing the
activities of jobbers, the jobbing system is beset with a number of problems like wide spreads between
bid and offer; particularly in thinly traded securities, lack of depth, total absence of jobbers in a large
number of securities, etc. In highly volatile scrips, however, the spread is by far the narrowest in the
world being just about 0.1 to 0.25 percent as compared to about 1.25 per cent in respect of alpha stocks,
i.e. the most highly liquid stocks, at the International Stock Exchange of London. The spreads widen as
liquidity decreases, being as much as 25 to 30 per cent or even more while the average touch of gamma
stocks, i.e. the least liquid stocks at the International Stock Exchange, London, is just about 6 to 7 per
cent. This is basically because of the high velocity of transactions in the active scrips. In fact, shares in
the specified group account for over 75 percent of trading in the Indian stock markets while over 25
percent of the securities do not get traded at all in any year. Yet, it is significant to note that out of about
6,000 securities listed on the Bombay Stock Exchange, about 1,200 securities get traded on any given
trading day.

The question of automating trading has always been under the active consideration of the Bombay Stock
Exchange for quite sometime. It has decided to have trading in all the non-specified stocks numbering
about 4,100 totally on the computer on a quote-driven basis with the jobbers, both registered and roving,
continuously keying in their bids and offers into the computer with the market orders getting automatically
executed at the touch and the limit orders getting executed at exactly the rate specified.

In March 1995, the BSE started the computerized trading system, called BOLT - BSE on-line trading
system. Initially only 818 scripts were covered under BOLT. In July 1995, all scripts (more than 5,000)
were brought under the computerized trading system. The advantages realized are: (a) improved trading
volume; (b) reduced spread between the buy-sell orders; c) better trading in odd lot shares, rights issues
etc.

Highlights of the Highly Attractive Indian Equity Market: Two major reasons why Indian securities
are now increasingly regarded as attractive to international investors are the relatively high returns
compared with more developed global markets as well as the low correlation with world markets.
DEBT MARKET
The National Stock Exchange started its trading operations in June 1994 by enabling the Wholesale
Debt Market (WDM) segment of the Exchange. This segment provides a trading platform for a wide
range of fixed income securities that includes central government securities, treasury bills (T-bills), state
development loans (SDLs), bonds issued by public sector undertakings (PSUs), floating rate bonds
(FRBs), zero coupon bonds (ZCBs), index bonds, commercial papers (CPs), certificates of deposit
(CDs), corporate debentures, SLR and non-SLR bonds issued by financial institutions (FIs), bonds
issued by foreign institutions and units of mutual funds (MFs).

To further encourage wider participation of all classes of investors, including the retail investors, the
Retail Debt Market segment (RDM) was launched on January 16, 2003. This segment provides for a
nation wide, anonymous, order driven, screen based trading system in government securities. In the first
phase, all outstanding and newly issued central government securities were traded in the retail debt
market segment. Other securities like state government securities, T-bills etc. will be added in
subsequent phases. The settlement cycle is same as in the case of equity market i.e., T+2 rolling
settlement cycle.

REFORMS IN INDIAN CAPITAL MARKET

Indian Capital Market is exposed to tremendous reforms in the last decade. The reforms are
triggered by changes in policy by Union Government and the same is accepted and stimulated by
introduction of new financial products by stock exchanges, better legal frame work by the regulator
and active participation by depository participants, share brokers, domestic as well as foreign
investors.
Primary Market IPO is the major source of raising finance for a corporate. Investor sentiment
towards the corporate as well as the share price plays a major role in the success of IPOs. SEBI
played a mojor role in the development of IPOs. Indian IPO market witnessed maximum growth and
success from 2000 to 2007. The growth in major indices in India, viz, SENSEX and NIFTY and
positive sentiment towards Indian stock market supported by domestic as well as foreign
institutional investors are the main reason for the IPO boom between 2000 and 2007. This boom
continued till the sub prime crises in 2008 and the investor sentiment became negative after that.
The following table gives the details of IPO market in India in the last few years:
Secondary Market BSE is the oldest stock exchange in India which is stared in the year 1875.
SENSEX is the index of BSE (created based on the average price movement of 50 stocks) is the
representative of stock performance of the shares listed at BSE as well as considered the
representative of price movement of the Indian stock market. The introduction of derivatives
changed the scenario and now NSE is leading in the Indian market. MCXSX (stock trading wing of
Multi Commodities Exchange which is now called Metropolitan Stock Exchange of India Ltd) also
started its operation last year and it’s yet to capture the market. NIFTY (which shows the average
price movement of 50 stocks) and SX-40 (price movement of 40 stocks) are the indices of NSE and
MCXSX respectively. The reforms in the area of capital market can be broadly classified in to 3
heads, viz;
1. Capital Market Reforms from the angle of Regulator’s
2. Capital Market Reforms from the angle of Products’, and
3. Other Initiatives All the 3 sectors contributed positively for the growth of capital market segment in
India as well positively contributed to the interest of market’s stakeholders
Securities Contracts (Regulation) Amendment Act, 2007

The Securities Contracts Regulation Act, 1956 has been amended to include securitization
instruments under the definition of "securities" and provide for disclosure based regulation for issue
of the securitized instruments and the procedure thereof. This has been done keeping in view that
there is considerable potential in the securities market for the certificates or instruments under
securitization transactions. The development of the securitized debt market is critical for meeting the
humungous requirements of the infrastructure sector, particularly housing sector, in the country.
Replication of the securities markets framework for these instruments would facilitate trading on
stock exchanges and in turn help development of the market in terms of depth and liquidity.

Permanent Account Number (PAN) PAN is made compulsory for dealing in stock market. It has
become the unique proof of identity as well as proof of signature. This helped a lot in avoiding lots of
frauds liked with IPO as well as in proper accounting of income and wealth.

IPO Grading SEBI has made it compulsory for companies coming out with IPOs of equity shares to
get their IPOs graded by at least one credit rating agency registered with SEBI from May 1, 2007.
This measure is intended to provide the investor with an informed and objective opinion expressed
by a professional rating agency after analyzing factors like business and financial prospects,
management quality and corporate governance practices etc.

Investor Protection and Education Fund (IPEF) SEBI has set up the Investor Protection and
Education Fund (IPEF) with the purpose of investor education and related activities. SEBI has
contributed a sum of Rs.10 crore toward the initial corpus of the IPEF from the SEBI General Fund.
In addition following amounts will also be credited to the IPEF namely: i. Grants and donations given
to IPEF by the Central Government, State Governments or any institution approved by SEBI for the
purpose of the IPEF; ii. Interest or other income received out of the investments made from the
IPEF; and iii. Such other amount that SEBI may specify in the interests of the investors.

American Depository Receipt (ADR) & Global Depository Receipt (GDR) Government had set
up an Expert Committee under the Chairmanship of Mr. Saumitra Choudhury, Member Economic
Advisory Council to Prime Minister to review the extant ADR / GDR. The committee has recently
submitted its report to the Government. The recommendations of the Committee are under
consideration.
Strengthening of Credit Rating Agencies In order to have a greater enforceability of the
regulatory framework relating to issue of capital by companies and to streamline the disclosures
while also taking into account changes in market design, the erstwhile SEBI (Disclosure and
Investor Protection) guidelines (DIP Guidelines) governing public offerings were replaced by the
SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009 (ICDR). There were certain
changes made in the ICDR regulations vis-a-vis the provision contained in DIP Guidelines, on
account of: (a) Removal of redundant provisions contained in DIP Guidelines, (b) Modifications on
account of change in market design, and (c) Bringing more clarity in the existing provisions of the
DIP Guidelines.

Capital Market Reforms in the angle of Products’ Products always play an important role in any
market. Indian capital market has seen a positive growth in the variety of financial products
introduced successfully.

Stocks – Delivery Based Trading Delivery based stock trading is the primitive product in capital
market segment. This base product is also in growth face in the last 10 years. The following table
shows the movement of SENSEX in the last 5 years which is also a reason for the increase in
delivery volume

Buy Today Sell Tomorrow (BTST) BTST is a facility provided by the stock broker with the
permission of exchange. T+2 is the settlement cycle followed in India, i.e., if you buy a stock today
then the stock will be credited to your Demat account after 2 day. For example; if you buy a stock on
Monday then the stock will be credited to your account by Wednesday (provided Monday, Tuesday
and Wednesday are not trading holidays). BTST provides the option to sell the stock before the
stock is credited to the investors account. If any default happens in crediting the stock then the
broker buys the stock through auction which makes the product riskier.

Mutual Funds Mutual Funds are one of the oldest products traded in the market. Mutual Funds
eliminate the basic two limitations of Indian investors, viz; lack of big money and lack of knowledge
regarding the price movements. The following table shows the growth in Assets under Management
(AUM) of a few major Asset Management Companies (AMCs) in India in the last few years:
 INDIAN CAPITAL MARKET REGULATORY FRAMEWORK

SEBI: Securities and Exchange Board of India (SEBI) was set up as an administrative arrangement in 1988.In
1992, the SEBI Act was enacted, which gave statutory status to SEBI. It mandates SEBI to perform a dual
function: investor protection through regulation of the securities market and fostering the development of this
market. SEBI has been vested most of the functions and powers under the Securities Contract Regulation
(SCR) Act, which brought stock exchanges, their members, as well as contracts in securities which could be
traded under the regulations of the Ministry of Finance. It has also been delegated certain powers under the
Companies Act. In addition to registering and regulating intermediaries, service providers, mutual funds,
collective investment schemes, venture capital funds and takeovers, SEBI is also vested with the power to
issue directives to any person(s) related to the securities market or to companies in areas of issue of capital,
transfer of securities and disclosures. It also has powers to inspect books and records, suspend registered
entities and cancel registration.

RBI: Reserve Bank of India (RBI) has regulatory involvement in the capital market, but this has
been limited to debt management through primary dealers, foreign exchange control and liquidity
support to market participants. It is RBI and not SEBI that regulates primary dealers in the
Government securities market. RBI instituted the primary dealership of Government securities in
March 1998. Securities transactions that involve foreign exchange transactions need the permission
of RBI.
Stock Exchanges: SEBI issued directives that require that half the members of the governing
boards of the stock exchanges should be non broker public representatives and include a SEBI
nominee. To avoid conflicts of interest, stock brokers are a minority in the committees of stock
exchanges set up to handle matters of discipline, default and investor-broker disputes. The
exchanges are required to appoint a professional, non member executive director who is
accountable to SEBI for the implementation of its directives on the regulation of stock exchanges.
SEBI has introduced a mechanism to redress investor grievances against brokers. Further, all
issues are regulated through a series of disclosure norms as prescribed by SEBI and respective
stock exchanges through their listing agreement. After a security is issued to the public and
subsequently listed on a stock exchange, the issuing company is required under the listing
agreement to continue to disclose in a timely manner to the exchange, to the holders of the listed
securities and to the public any information necessary to enable the holders of the listed securities
to appraise its position and to avoid the establishment of a false market in such listed securities.
The powers and functions of regulatory authorities for the securities market seem to be diverse in
nature. SEBI is the primary body responsible for regulation of the securities market, deriving its
powers of registration and enforcement from the SEBI Act. There was an existing regulatory
framework for the securities market provided by the Securities Contract Regulation (SCR) Act and
the Companies Act, administered by the Ministry of Finance and the Department of Company Affairs
(DCA) under the Ministry of Law, respectively. SEBI has been delegated most of the functions and
powers under the SCR Act and shares the rest with the Ministry of Finance. It has also been
delegated certain powers under the Companies Act. RBI also has regulatory involvement in the
capital markets regarding foreign exchange control, liquidity support to market participants and debt
management through primary dealers. It is RBI and not SEBI that regulates primary dealers in the
Government securities market. However, securities transactions that involve a foreign exchange
transaction need the permission of RBI. So far, fragmentation of the regulatory authorities has not
been a major obstacle to effective regulation of the securities market. Rather, lack of enforcement
capacity by SEBI has been a more significant cause of poor regulation.
A security, in a financial context, is a certificate or other financial instrument that has monetary value
and can be traded. Ownership securities are the instruments or insiders funds in which an investor
has full control and influence over operating decisions of the company. One who purchases the
ownership securities has various rights to take decisions of the company affairs.
On the other hand, creditor ship securities are those instruments or outsiders funds in which an
investor does not have the control and influence over the decisions of the company.
A joint stock company divides its capital into units of equal denomination. Each unit is called a
share. These units i.e. shares are offered for sale to raise capital. This is termed as issuing shares.
A person who buys share/ shares of the company is called a shareholder and by acquiring share or
shares in the company he/she becomes one of the owners of the company Thus, a share is an
indivisible unit of capital. It expresses the proprietary relationship between the company and the
shareholder. The denominated value of a share is its face value. The total capital of a company is
divided into number of shares. Kinds of shares According to the Companies Act, a company can
issue the following types of Shares: (i) Preference shares (ii) Equity shares

(i) Preference shares A preference share is one which carries following preferential rights over
other type of shares called equity shares in regard to the following:
l Payment of dividend
2 Repayment of capital at the time of winding up of the company.
(ii) Equity shares All shares which are not preference shares are equity shares. Holders of these
shares receive dividend out of the profits of the company after the payment of dividend has been
made to the preference shareholders. Equity shareholders have the right to elect directors of the
company. Equity shares are the permanent source of capital.

Debenture is an instrument of debt owed by a company. As an acknowledgement of debt, such

instruments are issued under the seal of a company and duly signed by authorized signatory. The
debenture instrument specifies nominal/par value, the rate of interest, periodicity of payment, the
tenure of the debentures and terms of redemption.

Bond is similar to that of debenture, both in terms of contents and texture. Traditionally, bonds had
been issued by the government, but these days bonds are also being issued by semi-government
and non-government organizations as an acknowledgment of debt. The significant difference
between bonds and debentures is with respect to the issue condition, i.e., bonds can be issued
without predetermined rate of interest as is in case of deep discount bonds. A deep discount bond is
issued without prefixed rate of interest which is implicitly in-built in the terms of payment.
A capital market is a market for securities (debt or equity), where business enterprises and
government can raise long-term funds. It is defined as a market in which money is provided for
periods longer than a year, as the raising of short-term funds takes place on other markets (e.g., the
money market). The capital market is characterized by a large variety of financial instruments:
equity and preference shares, fully convertible debentures (FCDs), non-convertible debentures
(NCDs) and partly convertible debentures (PCDs) currently dominate the capital market, however
new instruments are being introduced such as debentures bundled with warrants, participating
preference shares, zero-coupon bonds, secured premium notes, etc.
ROLE AND IMPORTANCE OF CAPITAL MARKET IN INDIA:-

Capital market has a crucial significance to capital formation. For a speedy economic development
adequate capital formation is necessary. The significance of capital market in economic
development is explained below:-

1. Mobilization Of Savings And Acceleration Of Capital Formation :-

In developing countries like India the importance of capital market is self evident. In this market,
various types of securities helps to mobilize savings from various sectors of population. The twin
features of reasonable return and liquidity in stock exchange are definite incentives to the people to
invest in securities. This accelerates the capital formation in the country.

2. Raising Long - Term Capital :-

The existence of a stock exchange enables companies to raise permanent capital. The investors
cannot commit their funds for a permanent period but companies require funds permanently. The
stock exchange resolves this dash of interests by offering an opportunity to investors to buy or sell
their securities, while permanent capital with the company remains unaffected.

3. Promotion Of Industrial Growth :-

The stock exchange is a central market through which resources are transferred to the industrial
sector of the economy. The existence of such an institution encourages people to invest in
productive channels. Thus it stimulates industrial growth and economic development of the country
by mobilizing funds for investment in the corporate securities.

4. Ready And Continuous Market :-

The stock exchange provides a central convenient place where buyers and sellers can easily
purchase and sell securities. Easy marketability makes investment in securities more liquid as
compared to other assets.

5. Technical Assistance :-

An important shortage faced by entrepreneurs in developing countries is technical assistance. By

offering advisory services relating to preparation of feasibility reports, identifying growth potential
and training entrepreneurs in project management, the financial intermediaries in capital market play
an important role.

6. Reliable Guide To Performance :-

The capital market serves as a reliable guide to the performance and financial position of corporate,
and thereby promotes efficiency.
7. Proper Channelization Of Funds :-

The prevailing market price of a security and relative yield are the guiding factors for the people to
channelize their funds in a particular company. This ensures effective utilization of funds in the
public interest.

8. Provision Of Variety Of Services :-

The financial institutions functioning in the capital market provide a variety of services such as grant
of long term and medium term loans to entrepreneurs, provision of underwriting facilities, assistance
in promotion of companies, participation in equity capital, giving expert advice etc.

9. Development Of Backward Areas :-

Capital Markets provide funds for projects in backward areas. This facilitates economic development
of backward areas. Long term funds are also provided for development projects in backward and
rural areas.

10. Foreign Capital :-

Capital markets makes possible to generate foreign capital. Indian firms are able to generate capital
funds from overseas markets by way of bonds and other securities. Government has liberalized
Foreign Direct Investment (FDI) in the country. This not only brings in foreign capital but also foreign
technology which is important for economic development of the country.

11. Easy Liquidity :-

With the help of secondary market investors can sell off their holdings and convert them into liquid
cash. Commercial banks also allow investors to withdraw their deposits, as and when they are in
need of funds

EQUITY SHARE
Equity, also called shares or scrips, is the basic building blocks of a company. A company’s ownership is
determined on the basis of its shareholding. Shares are, by far, the most glamorous financial instruments
for investment for the simple reason that, over the long term, they offer the highest returns. Predictably,
they’re also the riskiest investment option.

The BSE Sensex is the most popular index that tracks the movements of shares of 30 blue-chip
companies on a weighted average basis. The rise and fall in the value of the Sensex, measured in
points, broadly indicates the price-movement of the value of shares. Of late, technology has played a
major role in enhancing the efficiency, safety, and transparency of the markets. The introduction of online
trading has made it possible for an investor to trade in equities at the click of a mouse.

DEBENTURES/BONDS
A Bond is a loan given by the buyer to the issuer of the instrument. Companies, financial institutions, or
even the government can issue bonds. Over and above the scheduled interest payments as and when
applicable, the holder of a bond is entitled to receive the par value of the instrument at the specified
maturity date.

Bonds can be broadly classified into:

 Tax-Saving Bonds
 Regular Income Bonds
Tax-Saving Bonds offer tax exemption up to a specified amount of investment, examples are:
a. ICICI Infrastructure Bonds under Section 88 of the Income Tax Act, 1961
b. REC Bonds under Section 54EC of the Income Tax Act, 1961
c. RBI Tax Relief Bonds

Regular-Income Bonds, as the name suggests, are meant to provide a stable source of income at
regular, pre-determined intervals, examples are:
a. Double Your Money Bond
b. Step-Up Interest Bond
c. Retirement Bond
d. En-cash Bond
e. Education Bonds
f. Money Multiplier Bonds/Deep Discount Bond

Tax-Saving Bonds
Some bonds have a special provision that allows the investor to save on tax. These are termed as Tax-
Saving Bonds, and are widely used by individual investors as a tax-saving tool. Examples of such bonds
are:

a. Infrastructure Bonds under Section 88 of the Income Tax Act, 1961

b. Capital Gains Bonds under Section 54EC of the Income Tax Act, 1961
c. RBI Savings Bonds (erstwhile, RBI Relief Bonds)
d.
e. What are Tax Saving Infrastructure Bonds? Infrastructure bonds are available through issues
of ICICI Bank and IDBI, brought out in the name of ICICI Safety Bonds and IDBI Flexi bonds.
These provide tax-saving benefits under Section 88 of the Income Tax Act, 1961, up to an
investment of Rs.1, 00,000, subject to the bonds being held for a minimum period of three years
from the date of allotment.

Unit –II Primary Market

PRIMARY MARKETS

Companies raise funds to finance their projects through various methods. The promoters can bring their
own money of borrow from the financial institutions or mobilize capital by issuing securities. The funds
maybe raised through issue of fresh shares at par or premium, preferences shares, debentures or global
depository receipts. The main objectives of a capital issue are given below:

 To promote a new company

 To expand an existing company
 To diversify the production
 To meet the regular working capital requirements
 To capitalize the reserves

Stocks available for the first time are offered through primary market. The issuer may be a new company
or an existing company. These issues may be of new type or the security used in the past. In the primary
market the issuer can be considered as a manufacturer. The issuing houses, investment bankers and
brokers act as the channel of distribution for the new issues. They take the responsibility of selling the
stocks to the public.

THE FUNCTION
The main service functions of the primary market are origination, under writing and distribution.
Origination deals with the origin of the new issue. The proposal is analyzed in terms of the nature of the
security, the size of the issue, timing of the issue and floatation method of the issue. Underwriting
contract makes the share predictable and removes the element of uncertainty in the subscription
(underwriting is given in the latter part of this chapter). Distribution refers to the sale of securities to the
investors. This is carried out with the help of the lead managers and brokers to the issue.

Primary Markets

Companies raise funds to finance their projects through various methods. The promoters can bring
their own money of borrow from the financial institutions or mobilize capital by issuing securities.
The funds may be raised through issue of fresh shares at par or premium, preferences shares,
debentures or global depository receipts. The main objectives of a capital issue are given below:
To promote a new company
To expand an existing company
To diversify the production
To meet the regular working capital requirements
To capitalize the reserves Stocks available for the first time are offered through primary market. The
issuer may be a new company or an existing company. These issues may be of new type or the
security used in the past. In the primary market the issuer can be considered as a manufacturer.
The issuing houses, investment bankers and brokers act as the channel of distribution for the new
issues. They take the responsibility of selling the stocks to the public.

The Function

The main service functions of the primary market are origination, under writing and distribution.
Origination deals with the origin of the new issue. The proposal is analyzed in terms of the nature of
the security, the size of the issue, timing of the issue and floatation method of the issue.
Underwriting contract makes the share predictable and removes the element of uncertainty in the
subscription (underwriting is given in the latter part of this chapter). Distribution refers to the sale of
securities to the investors. This is carried out with the help of the lead managers and brokers to the
issue.
To ensure healthy growth of primary market, the investing public should be protected. The term
investor's protection has a wider meaning in the primary market. The principal ingredients of
investor protection are:
 Provision of all the relevant information,
 Provision of accurate information and
 Transparent allotment procedures without any bias.
To provide the above-mentioned factors several steps have been taken. They are project appraisal,
under writing, clearance of the issue document by the stock exchange and SEBI's scrutiny of the
issue document.

Primary market intermediaries

The following market intermediaries are involved in the Securities Market:

 Merchant Bankers
 Registrars and Share Transfer Agents
 Underwriters
 Bankers to issue
 Debenture Trustees
 Portfolio managers
 Syndicate members
 Stock-brokers and sub-brokers
 Custodians
 Investment Advisers
 Credit Rating Agencies
 Depository Participant

MERCHANT BANKERS ‘Merchant Banker’ means any person engaged in the business of issue
management by making arrangements regarding selling buying or subscribing to securities or acting
as manager/consultant/advisor or rendering corporate advisory services in relation to such issue
management.

REGISTRARS AND SHARE TRANSFER AGENTS ‘Registrar to an Issue’ means the person
appointed by a body corporate or any person or group of persons to carry on the following activities
on its or his or their behalf i.e.:
(i) Collecting application for investor in respect of an issue;
(ii) Keeping a proper record of applications and monies received from investors or paid to the seller
of the securities;
(iii) Assisting body corporate or person or group of persons in determining the basis of allotment of
the securities in consultation with the stock exchange.
‘Share Transfer Agent’ means: (i) any person who on behalf of anybody corporate, maintains the
records of holders of securities issued by such body corporate and deals with all matters connected
with the transfer and redemption of its securities; (ii) the department or division, by whatever name
called, of a body corporate performing the activities as share transfer agents if at any time the total
number of holders of its securities issued exceed one lakh.

UNDERWRITERS Underwriter means a person who engages in the business of underwriting of an

issue of securities of a body corporate. Underwriting is an arrangement whereby certain parties
assure the issuing company to take up shares, debentures or other securities to a specified extent
in case the public subscription does not amount to the expected levels. For this purpose, an
arrangement (agreement) will be entered into between the issuing company and the assuring party
such as a financial institution, banks, merchant banker, broker or other person

DEBENTURE TRUSTEES ‘Debenture Trustee’ means a trustee of a trust deed for securing any
issue of debentures of a body corporate. Debentures, Bonds and other hybrid instruments in most
cases unless otherwise specified, carry securities for the investors unlike in the case of equity and
preference shares. It is necessary that the company makes proper arrangements to extend
assurances and comply with legal requirements in favor of the investors who are entitled to this type
of security.

PORTFOLIO MANAGERS Portfolio manager means any person who pursuant to contract or
arrangement with the client, advises or directs or undertakes on behalf of the client (whether as a
discretionary portfolio manager or otherwise) the management or administration of a portfolio of
securities or the funds of the clients as the case may be. “Discretionary portfolio manager” is defined
as one who exercises or may exercise, under a contract relating to portfolio management, any
degree of discretion as to the investment or the management of the portfolio of the securities or the
funds of the client. “Portfolio” means the total holdings of securities belonging to any person.

SYNDICATE MEMBERS Syndicate Member means an intermediary registered with SEBI and who
is permitted to carry on the activity as an underwriter. The Book Runner(s) may appoint those
intermediaries who are registered with the SEBI and who are permitted to carry on activity as an
‘Underwriter’ as syndicate members. The syndicate members are mainly appointed to collect the
entire bid forms in a book built issue.
STOCK BROKERS & SUB-BROKER Stock-broker means a member of stock exchange and they
are the intermediaries who are allowed to trade in securities on the exchange of which they are
members. They buy and sell on their own behalf as well as on behalf of their clients. A sub-broker is
one who works along with the main broker and is not directly registered with the stock exchange as
a member. Sub-broker means any person not being a member of stock exchange who acts on
behalf of a stock broker as an agent or otherwise for assisting the investors in buying, selling or
dealing in securities through such stock brokers

CUSTODIANS A custodian is a person who carries on the business of providing custodial services
to the client. The custodian keeps the custody of the securities of the client. The custodian also
provides incidental services such as maintaining the accounts of securities of the client, collecting
the benefits or rights accruing to the client in respect of securities.

INVESTMENT ADVISER “Investment Adviser” means any person, who for consideration, is
engaged in the business of providing investment advice to clients or other persons or group of
persons and includes any person who holds out himself as an investment adviser, by whatever
name called. Investment advisers are those, who guide one about his or her financial dealings and
investments.

CREDIT RATING AGENCY Credit Ratings Agency means a body corporate engaged in or
proposes to be engaged in the business of rating of securities offered by way of public or rights
issue. Credit ratings establish a link between risk and return. They thus provide a yardstick against
which to measure the risk inherent in any instrument. An investor uses the ratings to assess the risk
level and compares the offered rate of return with his expected rate of return (for the particular level
of risk) to optimize his risk-return trade-off.

DEPOSITORY PARTICIPANT The Depositories Act, 1996 defines a depository to mean “a

company formed and registered under the Companies Act, 2013 and which has been granted a
certificate of registration under sub-section (IA) of section 12 of the Securities and Exchange Board
of India Act, 1992. A Depository Participant (DP) is described as an agent of the depository. They
are the intermediaries between the depository and the investors. The relationship between the DPs
and the depository is governed by an agreement made between the two under the Depositories Act,
1996. In a strictly legal sense, a DP is an entity who is registered as such with SEBI under the
provisions of the SEBI Act. As per the provisions of this Act, a DP can offer depository related
services only after obtaining a certificate of registration from SEBI.
METHODS OF RAISING CAPITAL IN PRIMARY MARKET

1. Public Issue

Here prospectus is issued, and a public appeal is made to subscribe the new shares / debentures
issued by the company. Shares are allocated in response to application received. Some companies
sell shares directly to the public while some take help of share brokers. The company appoints an
advertising agency to advertise about the issue of shares.

2. Rights Issue

Rights issue means new shares are offered to the existing shareholders on the pro-rata basis.
When company wants to raise additional capital, securities are first offered to the existing
shareholders. If the shareholders do not want to buy shares, then the company can sell the shares
to the outside public.

3. Private Placement

Private Placement of shares means the company sells its shares to a small group of investors. It
can sell to banks, insurance companies, financial institutions, etc. It is an economical and quick
method of selling securities. The company does not sell its shares to the public.

REFORMS IN SECONDARY MARKET

Establishment of SEBI: The Securities and Exchange Board of India (SEBI) was established in
1988. It got legal status in 1992. SEBI was primarily set up to regulate the activities of the merchant
banks, to control the operations of mutual funds, to work as a promoter of the stock exchange
activities and to act as a regulatory authority of new issue activities of companies. The SEBI Act,
1992 was enacted to empower SEBI with statutory powers for (a) protecting the interests of
investors in securities) promoting the development of the securities market, and (c) regulating the
securities market. Its regulatory jurisdiction extends over corporate in the issuance of capital and
transfer of securities, in addition to all intermediaries and persons associated with the securities
market. It can conduct enquiries, audits, and inspection of all concerned, and adjudicate offences
under the Act. It has the powers to register and regulate all market
intermediaries, as well as to penalize them in case of violations of the provisions of the Act, Rules,
and Regulations made the under. SEBI has full self-government and the authority to regulate.

Establishment of Creditors Rating Agencies: Three creditors rating agencies viz. The Credit
Rating Information Services of India Limited (CRISIL - 1988), the Investment Information and Credit
Rating Agency of India Limited (ICRA - 1991) and Credit Analysis and Research Limited (CARE)
were set up in order to assess the financial health of different financial institutions and agencies
related to the stock market activities. It is a guide for the investors also in evaluating the risk of their
investments. Among the credit rating agencies in India, CRISIL is one of the leading credit ratings
agencies which cover extensive sectors of industries and follow procedures for fair rating through
substantial analyses in India. CRISIL was established as an independent body in 1992, and became
affiliates of S & P in 1996. CRISIL was taken over by S&P in 2004, which holds stake of 51% of
CRISIL. As one of the major characteristics of CRISIL on credit ratings and default study, CRISIL
has default rate for company analyses in credit rating exercises. Other credit rating agencies are
mainly focusing on failures of debt. Unlike ICRA (affiliate of Moody’s), CRISIL has an independent
committee on the local credit ratings and not much involved by S&P in local bond ratings. The rating
methods have been established through the relatively long experience of credit rating. To cater for
uniform valuations CRISIL launched the CRISIL Bond Valuation Matrix (CRISIL BVM), which has
since been mandated by SEBI/AMFI as a uniform pricing standard for the mutual fund industry. As
of date nearly Rs. 80,000 crore (US $ 18 billion) of fund portfolio holdings are marked-to-market
every day, based on the CRISIL Bond Valuation Matrix. The launch of the CRISIL BVM has not only
set a uniform pricing standard but has also led to a considerable deepening of the corporate bond
market and helped develop the broader concept of identifying and pricing “risk” inherent in securities
of a portfolio.

Increasing of Merchant Banking Activities: Many Indian and foreign commercial banks have set
up their merchant banking divisions in the last few years. These divisions provide financial services
such as underwriting facilities, issue organizing, consultancy services, etc.

Using Electronic Transactions: Due to technological development in the last few years. The
physical transaction with more paper work is reduced. It saves money, time and energy of
investors. Thus it has made investing safer and hassle free encouraging more people to join the
capital market.
Rowing Mutual Fund Industry: The growing of mutual funds in India has certainly helped the
capital market to grow. Public sector banks, foreign banks, financial institutions and joint mutual
funds between the Indian and foreign firms have launched many new funds. A big diversification in
terms of schemes, maturity, etc. has taken place in mutual funds in India. It has given a wide choice
for the common investors to enter the Capital market.

Rowing Stock Exchanges: The numbers of various Stock Exchanges in India are increasing.
Initially the BSE was the main exchange, but now after the setting up of the NSE and the OTCEI,
stock exchanges have spread across the country. Recently a new Inter-connected Stock Exchange
of India has joined the existing stock Exchanges.

Investor’s Protection: Under the purview of the SEBI the Central Government of India has set up
the Investors Education and Protection Fund (IEPF) in 2001. It works in educating and guiding
investors. It tries to protect the interest of the small investors from frauds and malpractices in the
capital market.

Growth of Derivative Transactions: Since June 2000, the NSE has introduced the derivatives
trading in the equities. In November 2001 it also introduced the future and options transactions.
These innovative products have given variety for the investment leading to the expansion of the
capital market.

Creating Investment Opportunities For Small Investors: As opposed to other businesses that
require huge capital outlay, investing in shares is open to both the large and small stock investors
because a person buys the number of shares they can afford. Therefore the Stock Exchange
provides the opportunity for small investors to own shares of the same companies as large
investors.

Bombay Stock Exchange (BSE): BSE is the oldest stock exchange in Asia. The extensiveness of
the local equity broking industry in India led to the formation of the Native Share Brokers Association
in 1875, which later became Bombay Stock Exchange Limited (BSE). BSE is widely recognized due
to its pivotal and preeminent role in the development of the Indian capital market. , In 1995, the
trading system transformed from open outcry system to an online screen-based order driven trading
system.
Primary market facilitates government as well corporate in raising capital to meet their requirements
of capital expenditure and/or discharge of other obligation such as exit opportunity for venture
capitalist/ Private Equity firm. The most common primary mechanism for raising capital is an Initial
Public Offer (IPO), under which shares are offered to common public as precursor to the trading in
secondary market of an exchange. When securities are exclusively offered to the existing
shareholders of company, as opposed to the general public it is called Rights Issue. Another
mechanism whereby a listed company can issue equity shares, fully and partly convertible
debentures which can be converted into equity shares later on, to a Qualified Institutional Buyer
(QIB) is termed as Qualified Institutional Placement. Apart from raising capital in domestic market,
companies can also issue securities in international market through ADR/GDR/ECB route and raise
capital.
TRADING AND SETTLEMENT OF SECURITIES:

Clearing: the process of transmitting, reconciling and, in some cases, confirming payment orders or
security transfer instructions prior to settlement, possibly including the netting of instructions and the
establishment of final positions for settlement.

Settlement: the completion of a transaction, wherein the seller transfers securities or financial
instruments to the buyer and the buyer transfers money to the seller
Capital market could be defined as a financial market that works as a conduit for demand and
supply of (primarily) long-term debt and equity capital. It channels the money provided by savers
and depository institutions (banks, credit unions, insurance companies, etc.) to borrowers and
investees through a variety of financial instruments (bonds, notes, stocks) called securities. A capital
market is not a compact unit, but a highly decentralized system made up of three major parts:

(1) Stock market,

(2) Bond market, and
(3) Money market.

Some entities within the Capital Market: ·

 Securities & Exchange Commission – The Regulator ·
 Stock Exchange – Self Regulatory Organization (SRO) ·
 Central Securities Depository (CSD) ·

Other operators such as: Brokers; Settlement Banks; Custodians; Registrars; Lawyers etc.
Securities & Exchange Commission: The mission of any Securities and Exchange Commission is
to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation The
SEC has broad authority over the securities industry. This includes the power to register, regulate,
and oversee brokerage firms, transfer agents, and clearing agencies as well as the nation's self
regulatory organizations (SROs). The SEC oversees the key participants in the securities world,
including securities exchanges, securities brokers and dealers, investment advisors, and mutual
funds. Here the SEC is concerned primarily with promoting the disclosure of important market-
related information, maintaining fair dealing, and protecting against fraud.

Stock Exchange: ·

 Established for the purpose of assisting, regulating and controlling business of buying, selling and
dealing in securities ·
 Provides a market for the trading of securities to individuals and organizations seeking to invest
their saving or excess funds through the purchase of securities ·
 Provides a physical location for buying and selling securities that have been listed for trading on
that exchange ·
 Establishes rules for fair trading practices and regulates the trading activities of its members
according to those rules · The exchange itself does not buy or sell the securities, nor does it set
prices for them.

Central Securities Depository – basic functions: ·

 Maintaining register of securities.

 Issuance of international securities identification number (ISIN) for all issues of securities.
 Clearance and settlement of securities on the principle "Delivery versus Payment.
 Provision of additional services to issuer of securities

Historically, stock markets were physical locations where buyers and sellers met and negotiated.
With the improvement in communications technology in the late 20th century, the need for a
physical location became less important, as traders could transact from remote locations. Stock
trading is the process of buying or selling of shares on a stock exchange, where investors are
represented by stock brokers. A company that floats its stocks is called a public company and is
listed on a stock exchange. Stock trading can be done either physically or virtually (online).

Stock Trading: Approaches

There are two main approaches to stock trading:

Active approach: This is the more common of the two approaches. The decision to buy stocks
involves analyzing the company, reviewing the historical share price trends and understanding the
current forecasts. Active investors are guided by the growth and intrinsic value of the stocks. This
approach is mostly applied by the investment managers who manage mutual funds, pension funds
and separately managed individual accounts.

Passive approach: This approach is opted for by investors who prefer low-risk, high-yielding stocks
and invest money in them mainly for their retirement accounts. This approach assumes the
efficiency of markets in the longer term. It is, however, not synonymous with the strategy of ‘buy-
and-hold.’ Rather, it implies buying at low prices and selling when the stocks have reached a high
price level.

Some Trading methods:

Open outcry is the name of a method of communication between professionals on a Stock

exchange or futures exchange which involves shouting and the use of hand signals to transfer
information primarily about buy and sell orders. The part of the trading floor where this takes place is
called a pit. Examples of markets which used this system are the New York Mercantile Exchange,
the Chicago Mercantile Exchange, the Chicago Board of Trade, the Chicago Board Options
Exchange.
A "trading floor" is a trading venue. This expression often refers to a place where traders or stock
brokers meet in order to buy and sell equities, also called a pit. Sometimes, the expression "trading
floor" is also used to refer to the "trading room" or "dealing room", i.e. the office space where market
activities are concentrated in investment banks or brokerage houses.

Electronic trading: It is sometimes called Etrading. It is a method of trading securities (such as

stocks and bonds), foreign currency, and exchange traded derivatives electronically. It uses
information technology to bring together buyers and sellers through electronic media to create a
virtual market place. Etrading is widely believed to be more reliable than older methods of trade
processing.

LISTING OF SECURITIES:
Listing refers to the admission of the securities of a company on a recognized stock exchange for
trading. Listing of securities is undertaken with the primary objective of providing marketability,
liquidity and transferability of shares. Listing is done as per the compliance of SEBI, companies act,
SCRA (securities contract regulation act), rules and regulations of exchange etc.

Objectives of Listing

 Provide ready marketability

 liquidity & negotiability to securities
 Mobilize savings for economic development
 Ensure proper supervision and control of dealing
 Protect interest of investors by ensuring full disclosures.
 Transparency in dealing with securities
 To gain national importance and widespread recognition.

Listing is done with the help of an application filed with the necessary documents with regional stock
exchange. For this purpose companies have been classified into 2 groups:- 1. Large Cap
Companies (minimum issue size of Rs.10 Crores and market capitalization of not less than Rs.25
Crores) 2. Small Cap Companies (minimum issue size of Rs.3 Crores and market capitalization of
not less than Rs.5 Crores. The SEC and SEBI decide whether the security of the company qualifies
for listing or not.

Procedure to list securities:

The process of security listing on the Exchange consists of several steps and process is specific to
stock exchange. Preliminary discussion with stock exchange followed by articles of association
approval. Draft prospectus approval is the essential pre-requisite for the security to be listed.
1. As per S. 73 of the companies Act, 1956, a company seeking listing of its securities on a stock
exchange is required to submit a Letter of application to all the stock exchanges where
it proposes to have its securities listed before filing the prospectus with the registrar of companies.
2. Every issuer, depending on the category and type of security has to submit supporting documents
required for specific stock exchange along with application.
3. All listing are subject to compliance with Bye laws, Rules and other requirements framed by the
Exchange from time to time in addition to the SEBI and other statutory requirements.
4. Companies making public/rights issues are required to deposit 1 % of the issue amount with the
designated stock exchange before the issue price.
5. On getting an in-principle consent of the exchange the issuer has to enter into a listing agreement
specific to Stock Exchange.
6. On getting an in-principle consent of the exchange the issuer has to enter into a listing
agreement.
7. The companies are also required to pay to the exchange some listing fee as prescribed by the
exchange every financial year.

STOCK MARKET INDEX

A stock index or stock market index is a measurement of the value of a section of the stock
market. It is computed from the prices of selected stocks (typically a weighted average). It is a tool
used by investors and financial managers to describe the market, and to compare the return on
specific investments. Stock market index is a method of measuring a section of the stock market.
Many indices are cited by news or financial services firms and are used as benchmarks, to measure
the performance of portfolios such as mutual funds. Alternatively, an index may also be considered
as an instrument (after all it can be traded) which derives its value from other instruments or indices.
The index maybe weighted to reflect the market capitalization of its components, or may be a simple
index which merely represents the net change in the prices of the underlying instruments. Most
publicly quoted stock market indices are weighted. Stock market indices are useful in understanding
the level of prices and the trend of price movements of the market. A stock market index is created
by selecting a group of stocks that are capable of representing the whole market or a specified
sector or segment of the market. The change in the prices of this basket of securities is measured
with reference to a base period. There is usually a provision for giving proper weights to different
stocks on the basis of their importance in the economy. A stock market index act as the indicator of
the performance of the economy or a sector of the economy.
There are various indexes of stocks but in India we have only two.
 NIFTY 50
 SENSEX

Nifty is the index of National stock Exchange operating 50 stocks of the companies in India. Nifty 50
checks the price fluctuations based on weighted average on daily basis.
Whereas sensex is the index of Bombay Stock Exchange operating 30 stocks of the companies in
India. Sensex also applies the same method.
Market capitalization is the total worth of all outstanding (issued) shares of a company. It represents
the total worth of a company. Market capitalization=No of shares outstanding x market price of
share Free Float Market Capitalization Free float concept is an index construction methodology
which makes use of free float shares in the market. Free float market capitalization is the total worth
of all shares of a company which are available for trading in the open market. Theses hares are
called free float shares and are available for trading by anyone.

SEBI TO INCREASE LIQUIDITY IN THE STOCK MARKET

The SEBI regulation of stock exchanges and their members had started as early as February 1992
and the reforms later introduced have been on a continuous basis. It was started with the licensing
and registration of brokers and sub-brokers in the recognized stock exchanges. This was later
extended to underwriters, portfolio managers and other categories of players in the stock market
including foreign securities firms, FFIs, OCBs, FIIs, Debenture Trustees, Collecting Bankers, etc.
The other reforms are briefly summarized below:
 Compulsory audit and inspection of stock exchanges and their member brokers and their
accounts.
 Transparency in the prices and brokerage charged by brokers by showing them in their contract
notes.
 Broker accounts and client accounts are to be kept separate and clients' money is to be
separately maintained in bank's accounts and the same to be reported to the stock exchanges.
 Board of Directors of stock exchanges has to be reconstituted so as to include non-brokers,
public representative, and Government representatives to the extent 126 of 50% of the total number
of members.
 Capital adequacy norms have been laid down for members of various stock exchanges
separately and depending on their turnover of trade and other factors.
 Guidelines have been laid down for dealings of FIIs and Foreign broker firms in the Indian stock
exchanges through Indian brokers.
 New guidelines for corporate members have been laid down with limited liability of directors and
opening up of their membership to more than one stock exchange without the limiting requirement
of experience of five years in one exchange, as imposed earlier.

The term "Investor Protection" is a wide term encompassing various measures designed to protect
the investors from malpractices of companies, brokers, merchant bankers, issue managers,
Registrars of new issues, etc. "Investors Beware" should be the watchword of all programs for
mobilization of savings for investment. As all investments have some risk element, this risk factor
should be borne in mind by the investors and they should take all precautions to protect their
interests in the first place. If caution is thrown to the winds and they invest in any venture without a
proper assessment of the risk, they have only to blame themselves. But if there are malpractices by
companies, brokers etc., they have every reason to complain. Such grievances have been
increasing in number in recent years.
The complaints of investors come from two major sources:
 Against member broker of Stock Exchanges;
 Against companies listed for trading on the Stock Exchanges.

Besides, there can be complaints against sub-brokers, agents, merchant bankers, issue managers,
etc., which cannot be entertained by the stock exchanges as per their rules.

INVESTORS PROTECTION IN THE PRIMARY MARKET

To ensure healthy growth of primary market, the investing public should be protected. The term
investor’s protection has a wider meaning in the primary market. The principal ingredients of investor
protection are:

 Provision of all the relevant information,

 Provision of accurate information and
 Transparent allotment procedures without any bias.

To provide the above-mentioned factors several steps have been taken. They are project appraisal,
under writing, clearance of the issue document by the stock exchange and SEBI’s scrutiny of the issue
document.

Project Appraisal: This is the first step in the entire process of the project. Technical and economic
feasibility of the project is evaluated. If the project itself is not technically feasible and economically
viable, whatever may be the other steps taken to protect the investors are defeated. Appraisal shows
whether the project is meaningful and can be financed. The investors’ protection starts right from the
protection of the principal amount of investment. Based on the appraisal, the project cost is finalized. The
cost should be neither understand nor overstated. The profitability of the project should be estimated and
given. To ensure fair project appraisal, SEBI has made it mandatory for the project appraisal body to
participate a certain amount in the forthcoming issue.

Underwriting: Once the issue is finalized the under writing procedure starts. Reputed institutions and
agencies, providing credibility to the issue normally underwrite the issue. If the lead managers participate
more than 5 percent of the minimum stipulated amount offered to the public, it would increase the
confidence of the public regarding the pricing and sale ability of the issue.

Disclosures in the Prospectus: SEBI has issued stringent norms for the disclosure of information in the
prospectus. It is the duty of the lead manager to verify the accuracy of the data provided in the
prospectus. The pending litigation should be given clearly. The promoters’ credibility in fulfilling the
promises of the previous issues (if any) should be stated. A clear version of the risk factors should be
given. Any adverse development that affects the normal functioning and the profit of the company should
be highlighted in the risk factor.

Clearance by the Stock Exchange: The issue document has to be cleared by the stock exchange on
which the proposed listing is offered. The stock exchanges verify the factors related with the smooth
trading of the shares. Any bottleneck in this area will be eliminated since the transferability is the basic
right of the shareholders. Trading of the shares helps the investor to liquidate his share at anytime. If the
issues were not traded in the secondary market at a good price, they would dampen the spirit of the
investor. According to a study conducted by Mr. Prithvi Haldea, between April 1992 and March 1996 out
of 3,872 issues, 2,987 were traded below the offer price. As on January 14, 1997 nearly 205 shares were
not traded at all and another 118 companies just proved to be fly by night operators.

Signing by Board of Directors: The Board of Directors should sign the prospectus. A copy is also filed
with the office to the Registrar of the Companies. This along with the other material documents referred
to in the prospectus are available for inspection by the members of the public. The minimum amount to
be subscribed by the promoters and maintained for a minimum number of years also safeguards the
interest of the investors.

SEBI’s Role: (a) SEBI scrutinizes the various offer documents from the viewpoint of investors’ protection
and full disclosure. It has the power to delete the unsubstantiated claims and ask for additional
information wherever needed. This makes the lead manager to prepare the offer document with due care
and diligence; (b) When the disclosure of the information is complete, wide publicity has to be given in
the newspapers; (c) In the allotment procedure to make sure of transparency, SEBI’s nominee is
appointed apart from the stock exchange nominee in the allotment committee. Inclusion of valid
applications and rejection of invalid applications are checked. The representative of the SEBI see to it
that un-due preference is not given to certain group of investors.

Redressal of Investors Grievances: The Department of Company Affairs has introduced computerized
system of processing the complaints to handle it effectively. The companies are requested to give feed
back regarding the action taken on each complaint within a stipulated time period. If the companies do
not respond and are slow in the process of settlement of complaints, penal action can be taken against
the companies under the provisions of the Companies Act. If the performance of the Registrar to the
issue is not satisfactory in settling the complaints, SEBI can take appropriate action against such
Registrar. Several Investors Associations are also functioning to help the investors complaints redressed
promptly.

MEASURES TAKEN TO REVIVE THE MARKET

 A listed company having immediate three years of dividend paying track record only can access
the market.
 If a manufacturing company did not have such a track record, it could access the public issue
market provided the financial institution or a scheduled commercial bank appraised its project and
such appraising entities also participated in the project fund.
 The companies were required to complete the allotment of securities within 30 days of the closure
of the issue.
 It would be necessary for a corporate body making a public issue to have at least five public
shareholders who has been made a net capital offer to the tune of Rs.1 lakh forever.
 SEBI does not vet offer documents of companies having track record of 3 years dividend payment.
 Removal of mandatory requirement of 90 per cent subscription clause in cases of offer for sale.
 Reducing the minimum application size for subscribing to a public issue from Rs.5000 to Rs.2000.
 In case of no-underwritten public issues, promoters could bring in their own money or procure
subscription from elsewhere within 60 days of the closure of the issue subject to such disclosures
in the offer documents.
 SEBI lifted the provision of the lock in period for promoters’ contribution in case of listed companies
with 3 years track record of dividend.
 SEBI has made it mandatory to disclose un-audited results of companies for every quarter. Timely
information would now be available to the public.
 SEBI has directed different stock exchange to segregate the cash flow statement of all companies
that came out with IPO since 1992-93 and have asked the exchange to have a check over these
companies.
 SEBI abolished the fixed par value concept and, instead companies can fix the par value of the
shares. HCL Technologies IPO has a par value of Rs.4 per share, offered at Rs.580 per share.
Placement of the IPO
Initial public offers are floated through Prospectus; Bought out deals/offer for sale; Private Placement;
Right Issue and Book Building.

OFFER THROUGH PROSPECTUS

According to Companies (Amendment) Act 1985, application forms for shares of a company should be
accompanied by a Memorandum (abridged prospectus). In simple terms a prospectus document gives
details regarding the company and invites offers for subscription or purchase of any shares or
debentures from the public. The draft prospectus has to be sent to the Regional Stock Exchange where
the shares of the company are to be listed and also to all other stock exchanges where the shares are
proposed to be listed. The stock exchange scrutinizes the draft prospectus. After scrutiny if there is any
clarification needed, the stock exchange writes to the company and also suggests modification if any.
The prospectus should contain details regarding the statutory provisions for the issue, program of public
issue – opening, closing and earliest closing date of the issue, issue to be listed at, highlights and risk
factors, capital structure, board of directions, registered office of the company, brokers to the issue, brief
description of the issue, cost of the project, projected earnings and other such details. The board, lending
financial institutions and the stock exchanges in which they are to be listed should approve the
prospectus. Prospectus is distributed among the stock exchanges, brokers and underwriters, collecting
branches of the bankers and to the lead managers.

Salient Features of the Prospectus:

General Information  Name and address of the registered office of the company.
 The name(s) of the stock exchange(s) where applications have been
made for permission to deal in and for official quotations of
shares/debentures.
 Opening, closing and earliest closing dates of the issue.
 Name and address of lead managers.
 Name and address of Trustees under Debenture Trust Deed (in case of
debenture issue).
 Rating for debenture/preference shares, if any, obtained from CRISIL or
any other recognized rating agency.

Capital Structure of  Issued, subscribed and paid-up capital.

the Company  Size of the present issue giving separately reservation for preferential
allotment to promoters and others.
 Paid-up capital – (a) After the present issue and (b) After conversion of
debentures (if applicable).
 Details regarding the promoter’s contribution.

Terms of the  Authority for the issue, terms of payment, procedure and time schedule
Present Issue for allotment, issue of certificate and rights of the instrument holders.
 How to apply – availability of forms, prospectus and mode of payment.
 Special tax benefits to the company and share holders under the
Income Tax Act, if any.

Particulars of the  Object of the issue

Issue  Project cost
 Means of financing (including promoter’s contribution).

Company,  History, main objects and present business of the company.

Management and  Subsidiary (ies) of the company, if any.
Project
 Promoters and their background.
 Names, addresses and occupation of managing directors and other
directors including nominee directors and whole-time directors.
 Location of the project.
 Plant and machinery, technological process etc.
  Collaboration, any performance guarantee or assistance in marketing by
the collaborators.
 Infrastructure facilities for raw materials and utilities like water, electricity
etc.
 Schedule of implementation of the project and progress so far, giving
details of land acquisition, civil works, installation of plant and
machinery, trail production, consumer production etc.
 The Product – (a) Nature of the products – Consumer or Industrial and
the end users; (b) Approach to marketing and proposed marketing set-
up; (c) Export possibilities and export obligations, if any.
 Future prospects – expected capacity utilization during the first three
years from the date of commencement of production and the expected
year when the company would be able to earn cash profit and net profit.
 Stock market data for shares, debentures of the company (high – low
price for each of the last years in consideration).
 Particulars regarding the other listed companies under the same
management, which have made any capital issues during the last three
years.

Outstanding  Details of the outstanding litigations pertaining to matters likely to affect

Litigations the operations and finances of the company including disputed tax
liabilities of any nature, any other default and criminal prosecution
launched against the company.

Risk Factors  Management perception of risk factors like sensitivity to foreign

exchange rate fluctuations, difficulty in the availability of raw materials or
in marketing of products, cost, time over-run etc.

Justification of the The justification for price is given, taking into account the following
issue premium parameters:
 Performance of the company – reflected by earnings per share and
book value of shares for the past five years.
 Future projections in terms of EPS and book value of shares in the next
three years.
 Stock market data.
 Net asset value as per the latest audited balance sheet.
If the projections are not based on the past data, appraisal made by a
banker or financial institution should be specifically stated.

Financial  Financial performance of the company for last five years should be
Information given from the audited annual accounts in tabular form.
 Balance sheet date – equity capital, reserves (revaluation reserve, the
year of revaluation and its monetary effect on assets) and borrowings.
 Profit and loss data – sales, gross profit, net profit, and dividend paid, if
any.
 Any change in the accounting policy during the last three years and its
effect on the profit and reserves of the company.

Statutory and other  Minimum subscription.

information  Details of the fee payable to Advisers, Registrar, Managers, Trustees of
the debenture holders and underwriters.
 Details regarding the previous issues, if any.

BOUGHT OUT DEALS (OFFER FOR SALE)

Here, the promoter places his shares with an investment banker (bought out dealer or sponsor) who
offers it to the public at a later date. In other works in a bought out deal, an existing company off-loads a
part of the promoters’ capital to a wholesaler instead of making a public issue. The wholesaler is
invariably a merchant banker or some times just a company with surplus cash. In addition to the main
sponsor, there could be individuals and other smaller companies participating in the syndicate. The
sponsors hold on to these shares for a period and at an appropriate date they offer the same to the
public. The hold on period may be as low as 70 days or more than a year.

In a bought out deal, proving is the essential element to be decided. The bought out dealer decides the
price after analyzing the viability, the gestation period, promoters’ background and future projections. A
bough out dealer sheds the shares at a premium to the public. There are many advantages for the
issuing company:

 Firstly, a medium or small sized company, which is already facing working capital shortage,
cannot afford to have long lead-time before the funds could be mobilized from the public. Bought
out deal helps the promoters to realize the funds without any loss of time.
 Secondly, the cost of raising funds is reduced in bought out deals. For issuing share to the public
the company incurs heavy expenses, which may invariably be as high as 10 percent of the cost of
the project, if not more.
 Thirdly, bought out deal helps the entrepreneurs who are not familiar with the capital market but
have sound professional knowledge to raise funds. Sponsors of the deal are mostly concerned with
the promoters’ background and government policies than about the past track record or financial
projections. This helps the new entrepreneur to raise adequate capital from the market.
 Fourthly, for a company with no track record of projects, public issues at a premium may pose
problems, as SEBI guidelines come in the way. The stipulations can be avoided by a bought out
deal. Companies sell the shares at a premium to the sponsors and they can off-load the shares to
the public at a higher premium.
 Fifthly, to the investors bought out deals possess low risk since the sponsors have already held
the shares for a certain period and the projects might have been completed or may be in the verge
of completion, the investors need not wait for returns

The major disadvantage of the bought out deals is that the sponsors are able to create a positive image
about the shares and sell them at a hefty premium. Single investment banker gives scope for
manipulation of the results. Insider trading and price rigging could be carried out, which can be neither
detected nor penalized.

PRIVATE PLACEMENT

In this method the issue is placed with a small number of financial institutions, corporate bodies and high
net worth individuals. The financial intermediaries purchase the shares and sell them to investors at a
later date at a suitable price. The stock is placed with issue house client with the medium of placing letter
and other documents which taken together contribute a prospectus, giving the information regarding the
issue. The special feature of the private placement is that the issues are negotiated between the issuing
company and the purchasing intermediaries. Listed public limited company as well as closely held
private limited company can access the public through the private placement method. Mostly in the
private placement securities are sold to financial institutions like Unit Trust of India, mutual funds,
insurance companies, and merchant banking subsidiaries of commercial banks and so on.

Through private placement equity shares, preference shares, cumulative convertible preference shares,
debentures and bonds are sold. In India private placement market is witnessing the introduction of
several innovative debt market instruments such as step-down/step-up debentures, liquid debentures,
bonds etc. Private placement has several inherent advantages:

 Cost Effective: Private placement is a cost-effective method of raising funds. In a public issue
underwriting, brokerage, printing, mailing and promotion account for 8 to 10 percent of the issue
cost. In the case of the private placement several statutory and non-statutory expenses are
avoided.

 Time Effective: In the public issue the time required for completing the legal formalities and other
formalities takes usually six months or more. But in the private placement the requirements to be
fulfilled are less and hence, the time required to place the issue is less, mostly 2 to 3 months.

 Structure Effectiveness: It can be structured to meet the needs of the entrepreneurs. It is flexible
to suit the entrepreneurs and the financial intermediaries. To make the issue more attractive the
corporate can provide discounts to the intermediaries who are buying it. This is not possible with
the public issue with stringent rules and regulations. In the case of debentures the interest ceiling
cannot be breached in a public issue. Here the terms of the issue can be negotiated with
purchasing institutions easily since they are few in number.
  Access Effective: Through private placement a public limited company listed or unlisted can
mobilize capital. Like-wise issue of all size can be accommodated through the private placement
either small or big where as in the public issue market, the size of the issue cannot fall below a
certain minimum size.

RIGHTS ISSUE

According to Sec 81 of the Companies Act 1956, if a public company wants to increase its subscribed
capital by allotment of further shares after two years from the date of its formation or one year from the
date of its first allotment, which ever is earlier should offer share at first to the existing share holders in
proportion to the shares held by them at the time of offer. The shareholders have no legal binding to
accept the offer and they have the right to renounce the offer in favor of any person. Shares of this type
are called right shares. Generally right shares are offered at an advantageous rate compared with the
market rate.

According to Section 81, the company has to satisfy certain conditions to issue right shares.

 Right shares must be offered to the equity shareholders in the proportion to the capital paid on
those shares.
 A notice should be issued to specify the number of shares issued.
 The time given to accept the right offer should not be less than 15 days.
 The notice also should state the right of the shareholders to renounce the offer in favor of others.
 After the expiry of the time given in the notice, the Board of Directors has the right to dispose the
unsubscribe shares in such a manner, as they think most beneficial to the company.

BOOK BUILDING

Book building is a mechanism through which the initial public offerings (IPOS) take place in the U.S. and
in India it is gaining importance with every issue. Most of the recent new issue offered in the market has
been through Book Building process. Similar mechanisms are used in the primary market offerings of
GDRs also. In this process the price determination is based on orders placed and investors have an
opportunity to place orders at different prices as practiced in international offerings.

The recommendations given by Malegam Committee paved way for the introduction of the book building
process in the capital market in Oct 1995. Book building involves firm allotment of the instrument to a
syndicate created by the lead managers who sell the issue at an acceptable price to the public. Originally
the potion of book building process was available to companies issuing more than Rs.100 cr. The
restriction on the minimum size was removed and SEBI gave impression to adopt the book building
method to issue of any size. In the prospectus, the company has to specify the placement portion under
book building process. The securities available to the public are separately known as net offer to the
public. Nirma by offering a maximum of 100 lakh equity shares through this process was set to be the
first company to adopt the mechanism.

Among the lead managers or the syndicate members of the issue or the merchant bankers as member.
The issuer company as a book runner nominates this member and his name is mentioned in the draft
prospectus. The book runner has to circulate the copy of the draft prospectus to be filed with SEBI
among the institutional buyers who are eligible for firm allotment. The draft prospectus should indicate
the price band within which the securities are being offered for subscription.

The offers are sent to the book runners. He maintains a record of names and number of securities
offered and the price offered by the institutional buyer within the placement portion and the price for
which the order is received to the book runners. The book runner and the issuer company finalize the
price. The issue price for the placement portion and offer to the public should be the same. Underwriting
agreement is entered into after the fixation of the price.

One day earlier to the opening of the issue to the public, the book runner collects the application forms
along with the application money from the institutional buyers and the underwriters. The book runner and
other intermediaries involved in the book building process should maintain records of the book building
process. The SEBI has the right to inspect the records.
BOOK BUILDING THROUGH ONLINE IPO
Book building as discussed earlier is a process of offering securities in which bids at various prices from
investors through syndicate members are collected. Based on bids, demand for the security is assessed
and its price discovered. In case of normal public issue, investor knows the price in advance and the
demand is known at the close of the issue. In case of public issue through book building, demand can be
known at the end of everyday but price is known at the close of issue.

An issuer company proposing to issue capital through book building has two options viz., 75% book
building route and 100% book building route. In case of 100% book building route is adopted, not more
than 60% of net offer to public can be allocated to QIBs (Qualified Institutional Buyers), not less than
15% of the net offer to the public can be allocated to non-institutional investors applying for more than
1000 shares and not less than 25% of the net offer to public can be allocated to retail investors applying
for up to 1000 shares. In case 75% of net public offer is made through book building, not more than 60%
of the net offer can be allocated to QIBs and not less than 15% of the net offer can be allocated to non-
institutional investors. The balance 25% of the net offer to public, offered at a price determined through
book building, are available to retail individual investors who have either not participated in book building
or have not received any allocation in the book built portion. Allotment to retail individual or non-
institutional investors is made on the basis of proportional allotment system. In case of under
subscription in any category, the un-subscribed portions are allocated to the bidder in other categories.
The book built portion, 100% or 75%, as the case may be, of the net offer to public, are compulsorily
underwritten by the syndicate members or book runners.

Other requirements for book building include:

 Bids remain open for at least 5 days.
 Only electronic bidding is permitted.
 Bids are submitted through syndicate members.
 Bids can be revised.
 Bidding demand is displayed at the end of every day.
 Allotments are made not later than 15 days from the closure of the issue etc.

The 100% book building has made the primary issuance process comparatively faster and cost effective
and trading can commence from T+16.

The SEBI guidelines for book building provides that the company should be allowed to disclose the floor
price, just prior to the opening date, instead of in the Red herring prospectus, which may be done by any
means like a public advertisement in newspaper etc. Flexibility should be provided to the issuer company
by permitting them to indicate a 20% price band. Issuer may be given the flexibility to revise the price
band during the bidding period and the issuers should be allowed to have a closed book building i.e. the
book will not be made public. The mandatory requirement of 90% subscription should not be considered
with strictness, but the prospectus should disclose the amount of minimum subscription required and
sources for meeting the shortfall. The Primary Market Advisory Committee recommended the practice of
‘green-shoe option’ available in markets abroad which is an ‘over allotment’ option granted by the issuer
to the underwriter in a public offering. This helps the syndicate member to over allocate the shares to the
extent of option available and to consequently purchase additional shares from the issuer at the original
offering price in order to cover the over-allotments.

ON-LINE INITIAL PUBLIC OFFERS (IPO)

A company proposing to issue capital to public through on-line system of the stock exchange has to
comply with Section 55 to 68A of the Companies Act, 1956 and SEBI Guideline, 2000. The company is
required to enter into an agreement with the stock exchange(s), which have the requisite system for on-
line offer of securities. The agreement should cover rights, duties, responsibilities and obligations of the
company and the stock exchanges inter-se, with provision for a dispute resolution mechanism between
the company and the stock exchange. The issuer company appoints a Registrar to the Issue having
electronic connectivity with the stock exchanges. The issuer company can apply for listing of its
securities at any exchange through which it offers its securities to public through on-line system, apart
from the requirement of listing on the regional stock exchange. The stock exchange appoints brokers for
the purpose of accepting applications and placing orders with the company. The lead manager would co-
ordinate all the activities amongst various intermediaries connected in the system.

In addition to the above, the SEBI guidelines also provide details of the contents of the offer document
and advertisement, other requirements for issues of securities, like those under Rule 19(2)(b) of SC(R)
Rules, 1957. The guidelines also lay down detailed norms for issue of debt instruments, Issue of capital
by designated financial institutions and preferential/bonus issues.
BOOK BUILDING THROUGH ON-LINE IPO SYSTEM

Book building is basically a process used in IPO for efficient price discovery, wherein during the period
for which the IPO is open, bids are collected from investors at various prices, which are above or equal
to the floor price. The offer price is determined after the bid closing date. In it’s strive to continuously
improve Indian Securities Market; NSE offers its infrastructure for conducting online IPOs through book
building. It helps to discover price as well as demand for a security to be issued through a process of
bidding by investors. The advantages of this new system are:

 The investor parts with money only after allotment,

 It eliminates refunds except in case of direct applications and,
 It reduces the time taken for issue process.

The securities get listed within 15 days from the closure of the issue. Though the guidelines for book
building were issued in 1995, it is being used for IPOs from 1999. Till June 2003, 19 issuers have used
this route for making IPO issues. During 2002-03, two issuers used the on-line IPO system of NSE to
issue 71.66 lakh shares.

PRICING OF ISSUES
The Controller of Capital Issues Act governed issue of capital prior to May 27, 1992 1947. Under the Act,
the premium was fixed as per the valuation guidelines issued. The guidelines provided for fixation of a
fair price on the basis of the net asset value per share on the expanded equity base taking into account,
the fresh capital and the profit earning capacity.

The repealing of the Capital Issue Control Act resulted in an era of free pricing of securities. Issuers and
merchant bankers fixed the offer prices. Pricing of the public issue has to be carried out according to the
guidelines issued by SEBI.

At Premium: Companies are permitted to price their issues at premium in the case of the following:

 First issue of new companies set up by existing companies with the track record.
 First issue of existing private/closely held or other existing unlisted companies with three-year track
record of consistent profitability.
 First public issue by exiting private/closely held or other existing unlisted companies without three-
year track record but promoted by existing companies with a five-year track record of consistent
profitability.
 Existing private/closely held or other existing unlisted company with three-year track record of
consistent profitability, seeking disinvestments by offers to public without issuing fresh capital
(disinvestments).
 Public issue by existing listed companies with the last three years of dividend paying track record.

At Par Value: In certain cases companies are not permitted to fix their issue prices at premium. The
prices of the share should be at par. They are for:

 First public issue by existing private, closely held or other existing unlisted companies without
three-year track record of consistent profitability and
 Existing private/closely held and other unlisted companies without three-year track record of
consistent profitability seeking disinvestments offer to public without issuing fresh capital
(disinvestments).

FIXED VERSUS BOOK BUILDING ISSUES

The main difference between offer of shares through book building and offer of shares through normal
public issue can be identified on the following parameters:

 Price at which securities will be allotted is not known in case of offer of shares through Book
Building while in case of offer of shares through normal public issue, price is known in advance to
 investor. Under Book Building, investors bid for shares at the floor price or above and after the
closure of the book building process the price is determined for allotment of shares.

 In case of Book Building, the demand can be known everyday as the book is being built. But in
case of the public issue the demand is known at the close of the issue.

AMERICAN DEPOSITORY RECEIPTS (ADRs)/ GLOBAL DEPOSITORY RECEIPTS (GDRs)

Indian companies are permitted to raise foreign currency resources through two main sources:

 Issue of Foreign Currency Convertible Bonds (FCCBs)

 Issue of Ordinary equity shares through depository receipts, namely, Global Depository Receipts/
American Depository Receipts to foreign investor’s i.e. institutional investors or investors residing
abroad.

A Depository Receipt (DR) is any negotiable instrument in the form of a certificate denominated in US
dollars. The certificate is issued by an overseas depository bank against certain underlying
stocks/shares. The shares are deposited by the issuing company with the depository bank. The
depository bank in turn tenders DRs to the investors. A DR represents a particular bunch of shares on
which the receipt holder has the right to receive dividend, other payments and benefits which company
announces from time to time for the shareholders. However, it is non-voting equity holding. DRs facilitate
cross border trading and settlement, minimize transaction cost and broaden the potential base,
especially among institutional investors. More and more Indian companies are raising money through
ADRs and GDRs these days.

WHAT ARE ADRs OR GDRs?

American Depositary Receipts (ADRs) are securities offered by non-US companies who want to list on
any of the US exchange. Each ADR represents a certain number of a company's regular shares. These
are deposited in a custodial account in the US. ADRs allow US investors to buy shares of these
companies without the costs of investing directly in a foreign stock exchange. ADRs are issued by an
approved New York bank or trust company against the deposit of the original shares. When transactions
are made, the ADRs change hands, not the certificates. This eliminates the actual transfer of stock
certificates between the US and foreign countries.

Global Depositary Receipts (GDRs) are negotiable certificate held in the bank of one country
representing a specific number of shares of a stock traded on the exchange of another country. This is a
financial instrument used by the companies to raise capital in either dollars or Euros. GDRs are also
called European Depositary Receipt. These are mainly traded in European countries and particularly in
London.

However, ADRs and GDRs make it easier for individuals to invest in foreign companies, due to the
widespread availability of price information, lower transaction costs, and timely dividend distributions.

WHY DO COMPANIES GO FOR ADRs OR GDRs?

Indian companies need capital from time to time to expand their business. If any foreign investor wants
to invest in any Indian company, they follow two main strategies. Either the foreign investors can buy the
shares in Indian equity markets or the Indian firms can list their shares abroad in order to make these
shares available to foreigners.

But the foreign investors often find it very difficult to invest in India due to poor market design of the
equity market. Here, they have to pay hefty transaction costs. This is an obvious motivation for Indian
firms to bypass the incompetent Indian equity market mechanisms and go for the well-functioning
overseas equity markets. When they issue shares in forms of ADRs or GDRs, their shares commanded
a higher price over their prices on the Indian bourses.

Another problem faced by the foreign investors is restrictions on equity ownership by foreigners. Only
foreign institutional investors can buy shares in India whereas in case of ADRs or GDRs, anyone can
buy this. FIIs face restrictions of ceilings or stakes in Indian companies. In contrast, there is no such
restriction on GDRs or ADRs, and hence GDRs or ADRs generally enjoy a premium.
WHICH INDIAN COMPANIES ARE LISTED ABROAD?

Infosys Technologies was the first Indian company to be listed on NASDAQ in 1999. However, the first
Indian firm to issue sponsored GDR or ADR was Reliance industries Limited. Beside, these two
companies there are several other Indian firms are also listed in the overseas bourses. These are
Satyam Computer, Wipro, MTNL, VSNL, State Bank of India, Tata Motors, Dr Reddy's Lab, Ranbaxy,
Larsen & Toubro, ITC, ICICI Bank, Hindalco, HDFC Bank and Bajaj Auto.

WHAT ARE THE PRICES OF INDIAN ADRs & GDRs?

The ADR and GDR prices of the Indian companies are much higher compared to the prices on the Indian
bourses. While, Infosys trades at $72.14 at NASDAQ, it quotes at Rs 2,245 on the BSE. Satyam at
$24.25, Wipro at $21.50, Tata Motors at $10.20, MTNL at $6.34, Dr Reddy's Lab at $16.27, HDFC Bank
at $41.94, Bajaj Auto at $28.14, RIL at $24.83 and ITC at $35.30 were all quoting at a higher price than
their Indian peers.

HOW TO TRADE IN ADRs?

ADRs can be traded either by trading existing ADRs or purchasing the shares in the issuer's home
market and having new ADRs created, based upon availability and market conditions.

When trading in existing ADRs, the trade is executed on the secondary market on the New York Stock
Exchange (NYSE) through Depository Trust Company (DTC) without involvement from foreign brokers or
custodians. The process of buying new, issued ADRs goes through US brokers, Helsinki Exchanges and
DTC as well as Deutsche Bank.

WHAT ARE THE NORMS FOR INDIAN ADRs AND GDRs?

There are no ceilings on investment in ADRs or GDRs. An applicant company seeking the government's
approval in this regard should have a consistent good track record for a minimum period of 3 years. This
condition can be relaxed for infrastructure projects such as power generation, telecomm, petroleum
exploration and refining, ports, airports and roads.

There is no restriction on the number of GDRs or ADRs to be floated by a company or a group of

companies in a financial year. The government has also relaxed the conversion and re-conversion (i.e.
two-way conversion or fungibility) of shares of Indian companies into depository receipts listed in foreign
bourses.

The companies have been allowed to invest 100 per cent of the proceeds of ADR or GDR issues for
acquisitions of foreign companies and direct investments in joint ventures.

PRIVATE PLACEMENT
The private placement involves issue of securities, debt or equity, to selected subscribers, such as
banks, FIs, MFs and high net worth individuals. It is arranged through a merchant/investment banker,
who acts as an agent of the issuer and brings together the issuer and the investor(s). Since these
securities are allotted to a few sophisticated and experienced investors, the stringent public disclosure
regulations and registration requirements are relaxed. The Companies Act, 1956, states that an offer of
securities to more than 50 persons is deemed to be public issue.

In sharp contrast to a shrinking public issues market for corporate securities, the last few years have
witnessed huge resource mobilization through private placement. According to Prime Database
estimates, a total of 114 issuers (institutional and corporate) raised Rs.5,51,838 million through 319
privately placed issues in 2004-05. 176 issues out of 319 were made by the government sector units,
which together mobilized 82% of the total. The amount raised through the private placement of debt
issues have been on an increasing trend over the past few years (Chart 2.1).
Mostly, debt securities were privately placed. Though, there were some instances of private placements
of equity shares, there is no comprehensive data coverage of this. The two sources of information
regarding private placement market in India are Prime Database and RBI. The former data set, however,
pertains exclusively to debt issues. RBI data, which is compiled from information gathered from
arrangers, covers equity private placements also. RBI estimates the share of equity in total private
placements as rather insignificant. Some idea, however, can be derived from the equity shares issued by
NSE-listed companies on private placement basis. A total of 96 companies privately placed equities
mobilizing around Rs.58,982 million during 2004-05.

Of the 319 debt private placements, 176 (55%) were from the government/banking sector that together
mobilized 82% of the total amount mobilized. The All India Financial Institutions (AIFIs) & Banks
continued to top the list with 59% (Rs.326,522 million), followed by the Private Sector Undertakings with
18% share (Rs.101,910 million). The top ‘10’ issuers accounted for 53.9% of total private placement
during 2004-05.

UNIT-III
MEANING, NEED AND BENEFITS OF DEPOSITORY SYSTEM

Depositories The Indian Capital Markets were notorious for their outdated ways of doing business. It
was a major relief when NSE and BSE had introduced on line trading that transformed the trading
from scream based to screen based. But the clumsy procedures of handling share certificates and
the recurring problem of bad deliveries made life horrendous not for just an amateur investor but
even for a professional broker. With the paper work nightmare looming large, securities business
was never a pleasant job. That's till; the new method of holding stocks in the electronic form was
introduced in 1996. The new system called a depository was put in place to hold stocks of all
companies in electronic form on behalf of the investors and maintain a record of all "buy" and "sell"
transactions. Technology had made it possible to provide bank like ease and convenience. As it
alleviated the hardships associated with handling physical stocks, investors experiencing the relief,
have begun to slowly come back to the stock markets. Investing in stocks has now become much
more convenient and safe.
The organization responsible for holding and handling securities on behalf of investors is known as
a Depository. It caters to both large and small investors through a network of intermediaries called
Depository Participants or DPs for short. Well-developed capital markets all over the world have
depositories.

In India, National Securities Depository Limited (NSDL) as a joint venture between IDBI, UTI and the
National Stock Exchange has set up the first depository. The second depository has been set up by
Central Depository Services Limited (CDSL), which was promoted by the Bombay Stock Exchange
and Bank of India. Both the depositories have a network of Depository Participants (DPs) who are
electronically connected to the depository and serve as contact points with the investors.
Dematerialization: Dematerialization or Demat for short, is a process where securities held by you in
physical form are cancelled and credited to your DP account in the form of electronic balances.
Cost of transactions would be less, as you don't have to pay for the stamp duty on transfer of
shares. As there are no bad deliveries, you need not waste time and money unlike in physical
segment where shares keep coming back to the seller due to Company Objections. You would save
expenses associated with notarization and follow up.
For convenience, there is nothing like Demat holding. It offers you a host of possibilities just like a
bank account does. You can convert your physical stock into electronic form
(Dematerialization) or reconvert electronic holdings into physical certificates (Rematerialization),
transfer your shares to some other account and ensure settlement of all your trades through a single
account by simply giving the necessary instructions to your Depository Participant.
 DIFFERENCE DMAT ACCOUNT s.no PHYSICAL
BETWEEN DMAT ACCOUNT
AND PHYSICAL
ACCOUNT S no
It maintains the record 1 It maintains the
1 of securities records of securities
electronically physically
2 It requires less paper 2 Lot of paper work is
work for opening required.
3 Less prone to errors 3 More prone to errors
in handling large
records
4 Convenient and easy 4 Less convenient
to operate
5 Less human effort is 5 More human effort is
required required
6 More accurate 6 Less accurate

IMPORTANCE OF DEBT MARKET IN CAPITAL MARKET

Debt markets are markets for the issuance, trading and settlement of various types and features of
fixed income securities. Fixed income securities can be issued by any legal entity like central and
state governments, public bodies, statutory corporations, banks and institutions and corporate
bodies.
The debt market in India comprises mainly of two segments viz.,
 the Government securities market consisting of Central and State Governments securities, Zero
Coupon Bonds (ZCBs), Floating Rate Bonds (FRBs), T-Bills and

 The corporate securities market consisting of FI bonds, PSU bonds, and Debentures/Corporate
bonds. Government securities form the major part of the market in terms of outstanding issues,
market capitalization and trading value

The trading of government securities on the Stock exchanges is currently through Negotiated
Dealing System using members of Bombay Stock Exchange (BSE) / National Stock Exchange
(NSE) and these trades are required to be reported to the exchange. The bulk of the corporate
bonds, being privately placed, were, however, not listed on the stock exchanges. Two
Depositories, National Securities Depository Limited (NSDL) and Central Depository Services
(India) Limited (CDSL) maintain records of holding of securities in a dematerialized form. Records of
holding of government securities for wholesale dealers like banks/Primary Dealers (PDs) and other
financial institutions are maintained by the RBI.
The key role of the debt markets in the Indian Economy stems from the following reasons:

 Efficient mobilization and allocation of resources in the economy

 Financing the development activities of the Government
 Transmitting signals for implementation of the monetary policy
 Facilitating liquidity management in tune with overall short term and long term objectives
 Reduction in the borrowing cost of the Government and enable mobilization of resources at a
reasonable cost.
 Provide greater funding avenues to the public-sector and private sector projects and reduce the
pressure on institutional financing.
 Enhance mobilization of resources by unlocking illiquid retail investments like gold.
 Development of heterogeneity of market participants
 Assist in the development of a reliable yield curve.

PARTICIPANT IN THE DEBT MARKET

Primary Dealers Primary dealers (PDs) are important intermediaries in the government securities
markets. They act as underwriters in the primary market, and as market makers in the secondary
market. PDs underwrite a portion of the issue of government security that is floated for a
predetermined amount. The underwriting commitment of each PD is broadly decided on the basis of
its size in terms of its net owned funds, its holding strength, the committed amount of bids and the
volume of turnover in securities.

Brokers play an important role in secondary debt market by bringing together counterparties and
negotiating terms of the trade. It is through them that the trades are entered on the stock
exchanges. The brokers are regulated by the stock exchanges and also by SEBI.
TYPES OF INSTRUMENT TREATED IN THE DEBT MARKET

Corporate debenture

A Debenture is a debt security issued by a company, which offers to pay interest in lieu of the
money borrowed for a certain period. In essence it represents a loan taken by the issuer who pays
an agreed rate of interest during the lifetime of the instrument and repays the principal normally,
unless otherwise agreed, on maturity. These are long-term debt instruments issued by private
sector companies, in denominations as low as ` 1000 and have maturities ranging between one and
ten years. Debentures enable investors to reap the dual benefits of adequate security and good
returns. Unlike other fixed income instruments such as Fixed Deposits, Bank Deposits, Debentures
can be transferred from one party to another. Debentures can be divided into different categories on
the basis of convertibility of the instrument and Security. The debentures issued on the basis of
Security includes

 Non-Convertible Debentures (NCDs)

 Partly Convertible Debentures (PCDs)
 Fully convertible Debentures (FCDs)
 Optionally Convertible Debentures (OCDs)
 Secured Debentures
 Unsecured Debentures

FIXED INCOME PRODUCTS

Deposit: Deposits serve as medium of saving and as a means of payment and are a very important
variable in the national economy. A bank basically has three types of deposits, i.e. time deposit,
savings deposit and current account.

Fixed Deposit: Fixed Deposits are sums accepted by most of the NBFCs and banks. The amount
of deposits that may be raised by NBFCs is linked to its net worth and rating. However, the interest
rate that may be offered by a NBFC is regulated. The deposits offered by NBFCs are not insured
whereas the deposits accepted by most banks are insured up to a maximum of `1,00,000.

INTEREST BASED BONDS

Coupon Bonds Coupon Bonds typically pay interest periodically at the pre specified rate of interest.
The annual rate at which the interest is paid is known as the coupon rate or simply the coupon.
Interest is usually paid half-yearly though in some cases it may be monthly, quarterly, annually or at
some other periodicity. The dates on which the interest payments are made, are
known as the coupon due dates. Zero Coupon Bonds A plain bond is offered at its face value,
earns a stream of interest till redemption and is redeemed with or without a premium at maturity. A
zero coupon bond is issued at a discount to its face value, fetches no periodic interest and is
redeemed at the face value at maturity.

MONEY MARKET INSTRUMENTS

Call Money Call/Notice money is an amount borrowed or lent on demand for a very short period. If
the period is more than one day and up to 14 days it is called ‘Notice money’ otherwise the amount
is known as Call money. No collateral security is required to cover these transactions. The call
market enables the banks and institutions to even out their day to day deficits and surpluses of
money. Commercial banks, Co-operative Banks and primary dealers are allowed to borrow and lend
in this market for adjusting their cash reserve requirements.

Treasury Bills In the short term, the lowest risk category instruments are the treasury bills. RBI
issues these at a prefixed debt and a fixed amount. These include 91-day T-bills, 182-Day T-bills,
and 364-day T-bills. The usual investors in these instruments are banks who invest not only to part
their short-term surpluses. These T-bills, which are issued at a discount, can be traded in the
market. The transaction cost on T-bills is nonexistent and trading is considerably high in each bill,
immediately after its issue and immediately before its redemption.

Term Money Market Inter-bank market for deposits of maturity beyond 14 days and up to three
months is referred to as the term money market.

Certificates of Deposits (CDs) after treasury bills, the next lowest risk category investment option
is the certificate of deposit (CD) issued by banks and Financial Institutions. CDs are issued by
banks and FIs mainly to augment funds by attracting deposits from corporate, high net worth
individuals, trusts, etc. The foreign and private banks, especially, which do not have large branch
networks and hence lower deposit base use this instrument to raise funds.

Commercial Papers (CP) CPs are negotiable short-term unsecured promissory notes with fixed
maturities, issued by well rated companies generally sold on discount basis. Companies can issue
CPs either directly to the investors or through banks / merchant banks (called dealers). These are
basically instruments evidencing the liability of the issuer to pay the holder in due course a fixed
amount i.e. face value of the instrument, on the specified due date. These are issued for a fixed period
of time at a discount to the face value and mature at par.
 UNIT-IV

A development bank is like a living organism that reacts to the social economic environment and its
success depends on reacting most aptly to that environment”Development Bank Development
banks are unique financial institution that act as catalytic agents in promoting balanced development
of the country and thereby aid in the economic growth of the country. Development Bank is a
financial institution dedicated to fund new and upcoming businesses and economic development
projects by equity capital or loan capital. Development banks are those financial institutions
engaged in the promotion and development of industry, agriculture and other key sectors.
Development banks were set up in India at various points of time starting from the late 1940s to
cater to the medium to long term financing requirements of industry as the capital market in India
had not developed sufficiently. The endorsement of planned industrialization at the national level
provided the critical enticement for organization of Development banks at both all India and state
levels. In order to perform their role, Development Banks were extended funds in the shape of Long
Term Operations (LTO) Fund of the Reserve bank of India and government guaranteed bonds,
which constituted main sources of their funds. Funds from these sources were not only available at
concessional rates, but also on a long term basis with their maturity period ranging from 10-15
years.

Development Banks in India:

1 Industrial Finance Corporation of India (IFCI)-1948.

2. The industrial Development Bank of India (IDBI)-1964

3. The Industrial Reconstruction Bank of India (IRBI)-1971

4. The Industrial Credit and Investment Corporation of India (ICICI)-1955 Etc.

Features and role of a Development Bank

 A development bank does not accept deposits from the public like commercial banks and other
financial institutions who entirely depend upon saving mobilization.
 It is a specialized financial institution which provides medium term and long-term lending facilities.
 It is a multipurpose financial institution. Besides providing financial help it undertakes promotional
activities also. It helps enterprises from planning to operational level.
 It provides financial assistance to both private as well as public sector institutions.
 The role of a development bank is of gap filler. When assistance from other sources is not
sufficient then this channel helps. It does not compete with normal channels of finance.
 Development banks primarily aim to accelerate the rate of growth. It helps industrialization
specific and economic development in general.
 The objective of these banks is to serve public interest rather than earning profits.

Functions of development banks

Development banks have been started with the motive of increasing the pace of industrialization.
The traditional financial institutions could not take up this challenge because of their limitations. In
order to help all round industrialization development banks were made multipurpose institutions.
Besides financing they were assigned promotional work also. Some important functions of these
institutions are discussed as follows:

 Financial Gap Fillers Development banks do not provide medium term and long-term loans only
but they help industrial enterprises in many other ways too. These banks subscribe to the bonds
and debentures of the companies, underwrite to their shares and debentures and, guarantee the
loans rose from foreign and domestic sources. They also help 'undertakings to acquire machinery
from within and outside the country.

 Undertake Entrepreneurial Role Developing countries lack entrepreneurs who can take up the job
of setting up new projects. It may be due to lack of expertise and managerial ability. Development
banks were assigned the job of entrepreneurial gap filling. They undertake the task of discovering
investment projects, promotion of industrial enterprises,
provide technical and managerial assistance, undertaking economic and technical research,
conducting surveys, feasibility studies etc. The promotional role of development bank is very
significant for increasing the pace of industrialization.

 Commercial Banking Business Development banks normally provide medium and long-term funds
to industrial enterprises. The working capital needs of the units are met by commercial banks. In
developing countries, commercial banks have not been able to take up this job properly. Their
traditional approach in dealing with lending proposals and assistance on securities has not helped
the industry. Development banks extend financial assistance for meeting working capital needs to
their loan if they fail to arrange such funds from other sources. So far as taking up of other functions
of banks such as accepting of deposits, opening letters of credit, discounting of bills, etc. there is no
uniform practice in development banks.

 Joint Finance Another feature of development bank's operations is to take up joint financing along
with other financial institutions. There may be constraints of financial resources and legal problems
(prescribing maximum limits of lending) which may force banks to associate with other institutions
for taking up the financing of some projects jointly. It may also not be possible to meet all the
requirements of a concern by one institution, So more than one institution may join hands. Not only
in large projects but also in medium-size projects it may be desirable for a concern to have, for
instance, the requirements of a foreign loan in a particular currency, met by one institution and
under writing of securities met by another.

 Refinance Facility Development banks also extend refinance facility to the lending institutions. In
this scheme there is no direct lending to the enterprise. The lending institutions are provided funds
by development banks against loans extended' to industrial concerns. In this way the institutions
which provide funds to units are refinanced by development banks. In India, Industrial Development
Bank of India provides reliance against ('term loans granted to industrial 'concerns by state financial
corporations. commercial banks and state cooperative banks.
 Credit Guarantee The small scale sector is not getting proper financial facilities due to the
clement of risk since these units do not have sufficient securities to offer for loans, lending
institutions are hesitant to extend them loans. To overcome this difficulty many countries including
India and Japan have devised credit guarantee scheme and credit insurance scheme.

 Underwriting of Securities Development banks acquire securities of industrial units through either
direct subscribing or underwriting or both. The securities may also be acquired through promotion
work or by converting loans into equity shares or preference shares. So development banks may
build portfolios of industrial stocks and bonds. These banks do not hold these securities on a
permanent basis. They try to disinvest in these securities in a systematic way which should not
influence market prices of these securities and also should not lose managerial control of the units.

 Development banks have become worldwide phenomena. Their functions depend upon the
requirements of the economy and the state of development of the country. They have become well
recognized segments of financial market. They are playing an important role in the promotion of
industries in developing and underdeveloped countries.
MUTUAL FUNDS

Mutual funds are investment companies that use the funds from investors to invest in other
companies or investment alternatives. They have the advantage of professional management,
diversification, convenience and special services such as cheque writing and telephone account
service. It is generally easy to sell mutual fund shares/units although you run the risk of needing to
sell and being forced to take the price offered. Mutual funds come in various types, allowing you to
choose those funds with objectives, which most closely match your own personal investment
objectives. A load mutual fund is one that has sales charge or commission attached. The fee is a
percentage of the initial investment. Generally, mutual funds sold through brokers are load funds
while funds sold directly to the public are no-load or low-load. As an investor, you need to decide
whether you want to take the time to research prospective mutual funds yourself or pay the
commission and have a broker who will do that for you. All funds have annual management fees
attached. Mutual Fund Schemes may be classified on the Basis of its Structure and its Investment
Objective.

Open - Ended Mutual Funds An open-ended mutual fund is the one whose units can be freely sold
and repurchased by the investors. Such funds are not listed on bourses since the Asset
Management Companies (AMCs) provide the facility for buyback of units from unit-holders either at
the NAV, or NAV-linked prices. Instant liquidity is the USP of open-ended funds: you can invest in or
redeem your units at will in a matter of 2-3 days. In the event of volatile markets, open-ended funds
are also suitable for investment appreciation in the short-term. This is how they work: if you expect
the interest rates to fall, you park your money in an open-ended debt fund. Then, when the prices of
the underlying securities rise, leading to an appreciation in your fund’s NAV, you make a killing by
selling it off. On the other hand, if you expect the Bombay Stock Exchange Sensitivity Index – the
Sensex – to gain in the short term, you can pick up the right open-ended equity fund whose portfolio
has scrips likely to gain from the rally, and sell it off once its NAV goes up.

Closed-ended mutual funds have a fixed number of units, and a fixed tenure (3, 5, 10, or 15
years), after which their units are redeemed or they are made open-ended. These funds have
various objectives: generating steady income by investing in debt instruments, capital appreciation
by investing in equities, or both by making an equal allocation of the corpus in debt and equity
instruments.