Issuance and Trading of Securities

Security Issuance : Primary Market

• Issue Classification
• Entry requirements
• Offer Document
• Pricing
• Investor categories
 Classification of Issues: Equity Market

Rights Issue/ Private

Public Offer Placement
Bonus Issue

1) IPO (Initial Preferential

Public Offer) QIPs
Issue
2) FPO
(Further
Public Offer)

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 Public Issue

• When an issue / offer of securities is made to new investors for becoming part of
shareholders’ family of the issuer it is called a public issue.

• Public issue can be further classified into Initial public offer (IPO) and Further
public offer (FPO).

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 Initial Public Offering

• New offer of shares which was previously unlisted.

• Generally done by offering those shares to the public, which were held by the
promoters or the private investors.

• When Promoter held the shares, their share holding comes down post IPO.

• If new shares are issued, the shares, which are with the promoters, stay with
them.

• In both cases the share of the promoters in the total capital comes down.

• Direct Listing phenomenon for example Spotify Inc

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 Further public offer (FPO) or Follow on offer:

• When an already listed company makes either a fresh issue of securities to

the public or an offer for sale to the public, it is called a FPO.

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 Rights Issue

• Existing shareholders have rights to buy new shares issued by the company.

• Shares offered are proportion to existing ownership i.e. if you own 1% of the
shares of the company you have right to subscribe to 1% of the total shares
offered.

• You do not have obligation to purchase.

• Price is usually less than the current trading price.

• Post rights price is usually less than the pre-rights price.

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 Bonus Issue

• Existing shareholders get more shares in proportion to already held shares

• 2:1 bonus means that a shareholder gets two more shares for every one share
held.

• Leads to decrease in market price. For example in the above case the if the old
price was Rs.90, after bonus price is around Rs.30.

• Market understands it as a means to reward shareholders.

 Private Placement

• Issue of securities to a select group of persons

• Not exceeding 200 (modified from 49 before)
• Can be bonds, shares or Convertible securities

• Is of two types
• Preferential Allotment
• Qualified Institutions Placement (QIP)

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 Preferential allotment

• Issue of securities to a select group of persons, usually the promoters

• Issue price determined as higher of 90/10 days volume weighted average price.

• Can be shares or Convertible securities

• Lock-in period for both promoters (18 months) and non-promoters (6 months)
during which they cannot sell the shares so allotted.

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 Qualified Institutional Placement (QIP)

• Issue of securities to QIBs i.e institutional investors like mutual funds, Insurance
companies, etc

• Started from 2006 to provide flexibility to companies to raise Finance by having

minimal regulatory requirements.

• 2QIBs if the issue is less than 250 cr and at least 5 if issue size is greater than 250cr.

• Single investor can-not receive more than 50% of the issue

• Regulatory norms in case of fund raising through QIP is minimal in comparison to

preferential allotment.
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 Entry Requirements for Issuer

SEBI has laid down entry norms for entities making a

public issue/ offer.

1. Entry Norm I (commonly known as “Profitability Route”)

2. Entry Norm II (Commonly known as “QIB Route”)

 Entry Norm I (commonly known as “Profitability Route”)

The Issuer Company shall meet the following requirements:

 Net Tangible Assets (TA-Intangible assets) of at least Rs. 3 crores in each of

the preceding three full years of which not more than 50% are held in
monetary assets.
 Minimum of Rs.15cr as average pre-tax operating profit in at least three of
last 5 years
 Net worth of at least Rs. 1 crore in each of the preceding three full years.
 If the company has changed its name within the last one year, at least 50%
revenue for the preceding 1 year should be from the activity suggested by
the new name.
 The issue size does not exceed 5 times the pre‐ issue net worth as per the
audited balance sheet of the last financial year
 Entry Norm II (Commonly known as “QIB Route”)

 Issue shall be through book building route, with at least 75% to

be mandatory allotted to the Qualified Institutional Buyers
(QIBs).

Back
Other Mandatory Requirements for Unlisted company going for Public Issue

 The promoters shall contribute not less than 20% of the post issue capital which should
be locked in for a period of 3 years. “Lock‐in” indicates a freeze on the shares.

 The remaining pre issue capital should also be locked in for a period of 1 year from the
date of listing.

 This provision ensures that promoters of the company have some minimum stake in the
company for a minimum period after the issue or after the project for which funds have
been raised from the public is commenced.
 Offer Document

Contains all relevant information about :

• The Company
• Promoters
• Projects
• Financial Details
• Objects Of Raising The Money
• Terms Of The Issue Etc.

• Used for inviting subscription to the issue.

• Called “Prospectus” in case of a public issue.
• Called “Red Herring Prospectus” in case of Book built issue
• Offer for sale or “Letter of Offer” in case of a rights issue.

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Back
 Pricing

Fixed Price Issue:

• Issuer decides the price and mentions in the offer document.

Book built Issue:

• Issue price is discovered
• Prospective investors bid at various price levels

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 How Book Building works?
• A floor price or price band within which the bids can move is disclosed at
least two working days before opening of the issue in case of an IPO and at
least one day before opening of the issue in case of an FPO.
• The investors bid for the shares quoting the price and the quantity that
they would like to bid at.
• After the bidding process is complete, the ‘cutoff’ price is arrived at based
on the demand of securities.
• The basis of Allotment is then finalized and allotment/refund is undertaken.
The final prospectus with all the details including the final issue price and
the issue size is filed with ROC, thus completing the issue process.

• Only the retail investors have the option of bidding at ‘cutoff’.

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 Fixed Price Issue Vs. Book Building Issue
Difference Fixed Price Issue Book Building Issue

Offer Price Price of offer and Not more than 20 % price band
allotment is known in is offered for bidding and the
advance to the investors final price is determined by the
issuer only after closure of the
bidding.

Demand Known after the closure Known on a real time basis

of the Issue during bidding process

Payment 100% advance to be 10% advance for QIBs,

made while applying 100%advance for other

Categories
Reservations 50% of the shares Not more than 50% of the
reserved for retail shares are reserved for QIBs,
investors and the not less than 35% for retail
balance for higher investors(RII’s) and not less
amount applications than 15% for Non-Institutional 21
 Categories of Investors

Investors are broadly classified under following

categories :-

(i) Retail individual Investor (RIIs)

(ii) Non-Institutional Investors (NIIs)
(iii) Qualified Institutional Buyers (QIBs)

“Retail individual investor” means an investor who

applies or bids for securities for a value of not
more than Rs. 2,00,000.

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 Innovator’s Growth Platform (IGP)

• Platform introduced for capital raising by technology startups.

• Pre-issue holding restriction
• Allocation of upto 60% of shares on discretionary basis to eligible investors with a lock-in
of 30 days.
• Can issue superior voting rights shares to the promoters
• Minimum application size to be Rs.2 lakhs and its multiple.
• Company can migrate to main board if 50% of the capital is held by QIBs. (instead of 75%
for others)
• Minimum number of allottees to be 50.
• Minimum net offer to be at least 25%
• Open offer trigger at 49% instead of 25% for others.
• Concept of promoter replaced with founder.
 IGP (pre-issue holding restriction)

25% of the pre-issued capital of the Eligible Startups for at least one year should have been
held by the following:
• Qualified Institutional Buyers
• Family trust with net-worth of more than five hundred crore rupees;
• Category III Foreign Portfolio Investor
• A pooled investment fund with minimum assets under management of USD 150 million and
registered with a financial sector regulator in the jurisdictions where it is resident.
• Accredited Investors (AIs) for the purpose of IGP, to include:
• Any individual with total gross income of INR 50 lakhs annually and who has minimum
liquid net worth of INR 5 crores or
• Any body corporate with net worth of INR 25 crores
Green Shoe Option
Green shoe Option :

• Issue of shares in excess of the issue size, by a maximum of

15%.

• More probability of getting shares for investors.

• More stable listing price.

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 Public Issue of Debentures

 Draft offer document to be filed with SEBI.

 Credit rating of not less than investment grade should be

obtained from not less than two registered credit rating agencies
and disclosed in the offer document.

 All credit ratings obtained during the three years preceding the
public or rights issue of debt instruments in respect of listed
security are also to be disclosed;

 Appointment of debenture trustee.

 Duties of Debenture Trustee
 Call for periodical reports from the body corporate, i.e., issuer of
debentures.

 Enforce security in the interest of the debenture holders.

 Ensure on a continuous basis that the property charged to the

debenture is available and adequate at all times .

 Exercise due diligence to ensure compliance by the body corporate with

the provisions of the Companies Act, the listing agreement of the stock
exchange or the trust deed.

 To take appropriate measures for protecting the interest of the

debenture holders as soon as any breach of the trust deed or law comes
to his notice.
 To ascertain that the debentures have been converted or redeemed in
accordance with the provisions and conditions
 Attempt the Quiz titled “Primary Markets” in Socrative.

How?

1. Go to www.b.socrative.com
2. Click on “Login” (top right)
3. Click on “Student Login”
4. Room Name: SAIMTA2023/ SAIMTB2023
5. Student Name: Enter your enrolment id followed by first name
How securities are traded?
 Secondary Market

• Order Types
• Market Structure i.e. Order Driven or Quote Driven
• Market Mechanism i.e. Call or continuous
• Market Transparency
• Circuit Filters
• Algorithmic Trading
• Block and Bulk Deals
• SLBM: Short Sales
• Margin Buying
 Order Types

• Limit Order:
• Specify the price and no. of securities to buy/sell.

• Market Order:
• Specify only the no. of securities to buy/sell. Executed at the price available
in the market

• Stop loss Order:

• Initiated with the intention to limit the loss.
• If a day trader bought Reliance, for example, at Rs.1800 and can-not bear a
loss of more than 10% (should sell when it reaches Rs.1620)
• Suppose the price has reduced and share is trading at Rs.1680.
• To minimize the loss the trader would enter a stop loss order at Rs.1620.
• If the price in the market touches Rs.1620 this becomes a market order and
would be executed at the next best price available.
 Market Structures..

Order Driven: All orders (buy/sell) submitted are displayed in the order book. The
order get executed on price-time priority basis. Example is India
 ..Market Structures

Quote Driven: Specialist provide bid/ask quotes to the investor. Order matching
is done based on specialist and investor agreeing on the price. Example is forex
market, G-Sec market.

Hybrid: is both order as well as quote driven. Broker can choose to get the order
executed through the automated system or by a specialist. Example is NYSE.
 Market Mechanism

Call:
Refers to a mechanism wherein buy and sell orders on all the selected stocks (in this case,
Sensex and Nifty constituents) are collected over a fixed period of time and then
processed in the auction. The price at which the highest number of orders is executed is
chosen. Used for determination of market opening price in India.
 …Market Mechanism

Continuous:

Open limit order book collects and displays the buy and sell orders. The orders are
executed based on price-time priority.
 Market Transparency

Pre Trade Transparency

• Extent of Limit Order Book Disclosure

• Liquidity provider Identity
• Hidden Orders

Post Trade Transparency

• Delayed trade publication

 Trade Life Cycle

• Life-cycle of trade has three components of trade execution, clearing, and settlement.

• Clearing refers to the determination of obligations of counterparties post which

settlement is done where funds are transferred to the seller and securities to the buyer.

• The clearing house does the clearing function. It is independent from the stock exchange.

• After determining the obligations, the information is passed to the depository which
manages the pay-out
 Trade Execution, clearing, and settlement

Trade Execution

broker broker
Buyer Stock Exchange Seller

Determines net obligation for

Trade clearing & settlement
each party after confirmation
Sends trade
Stock Exchange information Clearing house Depository

Communicates pay-outs to
Buyer broker Buyer Seller broker buyer & Seller custodian who
custodian Seller increase/decrease the
(DP) custodian buyer/seller securities
(DP) account respectively
 Circuit Breakers
• Mechanism to stop trading subject to certain rise/fall in a particular security
• Price band of 2% / 5% / 10% or 20% on other scrips
• No Price Band on scrips available in derivatives segment or scrips included in
indices on which derivative products are available.
• Index circuit breaker at 10%,15% and 20%.
• Does it cause market volatility or curb it?

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 Algorithmic Trading

• Use of computer algorithms to automatically make certain trading decisions,

submit orders, and manage those orders after submission.

• Accounts for about 80-85% of the U.S. trading volume . For India it is around 50%
to 55%.

• Proprietary trading desks are mainly engaged in high frequency trading.

• Some exchanges allow high frequency traders to co-locate their servers next to the
exchanges’ servers so that orders can be quickly executed with minimum latency.

• On 20th April, 2012 Infosys futures crashed by 20% and quickly recovered, and
Nifty futures crashed by 6.7% from 5350 to 5000 and recovered to 5200.
 Securities Lending Borrowing Mechanism

• Automated screen based trading platform with online matching of trades based on
price- time priority.

• Tenure of lending and borrowing available upto a period of 12 months.

• A facility for placing early recall request for the securities lent is provided to the lender.

• A facility for the borrower to make an early repayment of securities and further relend
them

• Securities traded in F&O segment are eligible for lending & borrowing under the
scheme. The list has been expanded to include more securities.
 Bulk Trading

• Disclosure for all transactions in a scrip where total quantity of shares bought/sold
is more than 0.5% of the number of equity shares of the company.

• Bulk deal can be transacted by the normal trading window provided by brokers
throughout the trading hours in a day. Bulk deals are market-driven and take place
throughout the trading day.

• The stock broker, who facilitates the trade, is required to reveal to the stock
exchange about the bulk deals on a daily basis.

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 Block Deals

• Usually block deal happens when two parties agree to buy or sell securities at an agreed
price between themselves and inform the stock exchange.
• The orders in a block deal are not shown to the people who trade from normal trade
window.
• Trade for which the quantity traded is 5 lakh shares or above or the value of the trade is
Rs. 5 crore qualifies as a Block Trade.
• This window is open for only few minutes in the morning and after-noon trading hours.

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 Attempt the Quiz titled “Secondary Markets” in Socrative.

How?

1. Go to www.b.socrative.com
2. Click on “Login” (top right)
3. Click on “Student Login”
4. Room Name: SAIMTA2022/ SAIMTB2022
5. Enter your enrolment id followed by first name
 Margin Buying

• Margin refers to % of own money that needs to be invested

• Remaining money is borrowed from broker
• The shares serve as a collateral and are in broker’s account
• Broker sets a maintenance margin, if the margin falls below it, the
broker will issue a margin call.
• Margin call requires the investor to add new cash or securities to
the margin account.
• In case of loss, the shares are sold to recover the loan and
remaining is paid to the investor.

Own Money
M arg in 
Total value of stock
An Investor buys 100 shares of RIL on margin. The current stock price
is Rs.1000 and the initial margin is 50% while the maintenance margin
is 40%. Answer the following:

• If the price of RIL drops by 10%. What is the percentage loss? What
is the new margin position?
• At what price would the investor get a margin call?
%Loss=10,000/50,000=20%
Margin=40,000/90,000=44.44%

Solve for “P”

100 * P  50000
 40%
100 * P
P  833.3
 Short Sale

• What if you expect price of a share to go down? How can you

profit from it?

You could do the following:

• Borrow stock and sell it.
• Purchase the stock, once the price has gone down and return it to
the stock lender.
• In case the stock has given any dividend during the period of
borrowing, it also has to be paid back to the lender.
• Margin money also needs to be deposited with the broker to
cover the risk of increase in stock price.
An Investor instructs his broker to short 100 shares of RIL. The current
stock price is Rs.1000 and the initial margin is 50% while the
maintenance margin is 40%. Answer the following:

• If the price of RIL drops by 10%. What is the percentage gain?

What is the new margin position?
• If the price of RIL increases by 10%. What is the percentage loss?
What is the new margin position?
• At what price would the investor get a margin call?
Gain 20%
Margin 66.67%

Loss 20%
Margin 36.36%

150,000  100 * P
 40%
100 P
P  1071.43