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Raghavendra
Senior Lecturer
Dept. of MBA
MITE
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þ The main function of a financial system is the

collection of savings and their distribution for
investment, thereby stimulating capital
formation, accelerating the process of
economic growth.
þ Primary market deals with the µnew securities¶
issued for the first time to the public.
þ Functions as a µdirect link¶ between the
companies which require funds and the
investing public.
ô


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þ To promote a new company

þ To expand an existing company
þ To diversify the production
þ To meet the regular working capital
requirements
þ To capitalise the reserves
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, that is, Investigation, analysis and
processing of new issue proposals
P Is the work which begins before an issue is actually floated
in the market.
P Many factors need to be analysed to assess the technical
feasibility and its economic and financial viability. Also,
P The time of floating an issue
P Type of Issue, i.e equity, preference, debentures etc.
P Price
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 in terms of Guarantee that the issue
would be sold irrespective of public response
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 of securities to the investors




  

þ Public Issues
þ Offer for Sale
þ Private Placement
þ Rights Issue
| 

 
 

þ Lead Managers to the Issue

þ Registrar to the Issue
þ Underwriters
þ Bankers to the Issue
þ Advertising agents
þ The financial institutions
 | !
þ Approval of the board of directors
þ Approval of shareholders
þ Appointment of the lead manager
þ Due diligence by the lead manager
þ Appointment of other intermediaries like co-managers, advisors, underwriters,
bankers, brokers, and registrars
þ Preparation of the draft prospectus
þ Filing of the draft prospectus with SEBI
þ Application for listing in stock exchanges
þ Filing of the prospectus (after any modifications suggested by SEBI) with the
Registrar of Companies
þ Promotion of the issue
þ Printing and distribution of applications
þ Statutory announcement
þ Collection of applications
þ Processing of applications
þ Determination of the liability of underwriters
þ Finalisation of allotment
þ Giving of demat credit and refund orders
þ Listing of the issue
ôô "

Book building is a method of offering shares

to investors in which the issue price is not
fixed in advance (as is done in a fixed price
offer) but is determined through a bidding
process.
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þ The issue of G-secs or Treasury securities is done by the
Reserve Bank of India (RBI) which serves as the merchant
banker to the central and state governments.

þ The RBI announces the auction of G-secs through a press

notification and invites bids from prospective investors.

þ Two systems of treasury auctions are widely used all over the
world: (a) French auction. (b) Dutch auction

þ In a French auction (or discriminatory price auction), successful

bidders pay the actual price (yield) they bid for.

þ In a Dutch auction successful bidders pay a uniform price which

is usually the cut off price (yield).
|!%|!%%'"&!#%

þ Banks are the largest holders of G-secs. Other investors are

insurance companies, provident funds, mutual funds, trusts,
primary and satellite dealers.

þ The RBI provides the facility of Subsidiary General Ledger (SGL)

account to large banks and financial institutions so that they can
hold their investment in G-secs and treasury bills in the electronic
book entry form. These institutions can settle their trades in
securities through DVP (delivery versus payment) mechanism.

þ Primary dealers are important intermediaries in the G-secs

market. They serve as underwriters in the primary market, act as
market makers in the secondary market, and enable investors to
access the SGL account.
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þ Money market is the market for short-term debt

funds. It comprises of the call and notice money
market, repo market, and the market for debt
instruments such as treasury bills that have an
original maturity of less than one year.
þ The money market does not exist in a specific
physical location or follow a single set of rules or
post a single set of prices. Rather, it represents a
web of borrowers and lenders, linked by telephones
and computers, dealing with short-term debt funds.
#|ô!#%

In a repo transaction two parties exchange securities and cash

with a simultaneous agreement to reverse the transaction after a
given period. Thus a repo represents a collateralised short-term
lending transaction. The party which lends securities (or borrows
cash) is said to be doing the repo and the party which lends cash
(or borrows securities) is said to be doing a reverse repo.
%#!#$!#%

þ Treasury bills are short-term debt instruments of the

central government.

þ Treasury bills are sold through an auction process

according to a calendar announced by RBI.

þ Treasury bills are issued at a discount and

redeemed at par.

þ Most buyers of treasury bills hold them till maturity

and hence the secondary market activity is limited.

  
 

(((

þ Outstanding securities allotted in the primary

issue are traded in the secondary market,
commonly known as stock market.
þ Growth of primary market depends on the
secondary market.
þ The health of the economy is reflected by the
growth of the stock market.
þ Considered as the barometer of the economy.
þ Stock markets refer to a market place where
investors can buy and sell stocks. The price
at which each buying and selling transaction
takes is determined by the market forces (i.e.
demand and supply for a particular stock).
 '
  

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þ One of the oldest stock markets in Asia, the Indian Stock Markets have a 200
years old history.

þ 18th Century: East India Company was the dominant institution and by end of
the century, busuness in its loan securities gained full momentum
þ 1830's : Business on corporate stocks and shares in Bank and Cotton presses
started in Bombay. Trading list by the end of 1839 got broader
þ 1840's : Recognition from banks and merchants to about half a dozen brokers
þ 1850's : Rapid development of commercial enterprise saw brokerage business
attracting more people into the business
þ 1860's : The number of brokers increased to 60
þ 1860-61: The American Civil War broke out which caused a stoppage of cotton
supply from United States of America; marking the beginning of the "Share
Mania" in India
þ 1862-63: The number of brokers increased to about 200 to 250
þ 1865 :A disastrous slump began at the end of the American Civil War (as an
example, Bank of Bombay Share which had touched Rs. 2850 could only be
sold at Rs. 87)
 | & )  


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1874: With the rapidly developing share trading business, brokers used to
þ
*
 
gather at a street (now well
transacting business.
known as "Dalal Street") for the purpose of

þ 1875: "The Native Share and Stock Brokers¶ Association" (also known as "The
Bombay Stock Exchange ") was established in Bombay
þ 1894: Establishment of "The Ahmedabad Share and Stock Brokers' Association³
þ 1908: "The Calcutta Stock Exchange Association" was formed
þ 1920: Madras witnessed boom and business at "The Madras Stock Exchange"
was transacted with 100 brokers.
þ 1923: When recession followed, number of brokers came down to 3 and the
Exchange was closed down
þ 1937: Re-organisation and set up of the Madras Stock Exchange Limited (Pvt.)
Limited led by improvement in stock market activities in South India with
establishment of new textile mills and plantation companies.
þ 1947: "Delhi Stock and Share Brokers' Association Limited" and "The Delhi
Stocks and Shares Exchange Limited" were established and later on merged
into "The Delhi Stock Exchange Association Limited"
| )  



þ The depression witnessed after the Independence led to closure of a lot
of exchanges in the country.
þ Lahore Stock Exchange was closed down after the partition of India,
and later on merged with the Delhi Stock Exchange.
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þ Most of the other Exchanges were in a miserable state till 1957 when
they applied for recognition under Securities Contracts (Regulations)
Act, 1956.
þ Eight Exchanges were recognized under the Act: Bombay, Calcutta,
Madras, Ahmedabad, Delhi, Hyderabad, Bangalore and Indore Stock
Exchanges.
þ Many more stock exchanges were established during 1980's, namely:
Cochin Stock Exchange, Uttar Pradesh Stock Exchange (at Kanpur),
Pune, Ludhiana, Gauhati, Ã  
 

 
 %  &!), Magadh, Jaipur, Bhubaneswar, Saurashtra Kutch,
Vadodara, Coimbatore and Meerut Stock Exchange.
 



þ As of January 2001 there were 23 stock exchanges recognised

by the central government.

þ The most important development in the Indian stock market was

the establishment of the National Stock Exchange (NSE) in 1994.

þ Within a short period it emerged as the largest stock exchange

surging ahead of the Bombay Stock Exchange (BSE).

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þ The NSE is a ringless, national, computerised exchange.

þ The NSE has two segments: The Capital Market Segment and
the Wholesale Debt Market Segment.

þ Trading members in the Capital Market Segment are linked

through VSATs. The trading members in the Wholesale Debt
Market are linked through leased lines.

þ The NSE has opted for an order-driven system.

þ All trades on NSE are guaranteed by the National Securities

Clearing Corporation Limited (NSCCL).
ô!$%ô+'!"

þ The BSE switched from the open outcry system to
the screen-based system in 1995.

þ Jobbers play an important role on the BSE. A jobber

is a broker who offers a two-way quote or a bid-ask
quote.

þ Since both jobbers and brokers feed their orders,

the BSE has adopted a µquote-driven¶ system and
an µorder-driven¶ system.

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þ As soon as they are issued, G-secs are deemed to be listed and
eligible for trading.

þ G-secs market is the largest segment of the debt market.

þ The NSE has a wholesale Debt Market (WDM) for high value debt
transactions.

þ Two kinds of trades occur on the WDM : Repo trades and Non-repos
trades.

þ Despite the WDM, the wholesale market in G-secs is by and large a

telephone market. After a deal is done, it is reported on the Negotiated
Dealing System (NDS) of NSE.

þ The secondary market for corporate debt has been historically rather
dull.
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,

þ www.nseindia.com
þ www.bseindia.com