FINANCIAL MARKET

WHAT IS A FINANCIAL MARKET?

When an enterprise is in need of funds, it
approaches the investing public, both individuals
and institutions, to subscribe to its issue of
capital or funds.
Financial markets facilitate the flow of funds and
thereby allow financing and investing by
households, firms, and government agencies.
It is a market that facilitates flow of funds from

SURPLUS UNITS to DEFICIT UNITS.

Market
Those who have
Those who
facilitates
excess fund
need funds
(Surplus units)
(Deficit units)

FINANCIAL MARKET

WHAT IS A FINANCIAL MARKET?

Funds are transferred in financial markets when
one party purchases financial assets previously
held by another party.
Each financial market is created to satisfy
particular preferences of market participants.
Period for which they want to deposit
short-term period or long term period
Level of risk they are willing to tolerate
Some may prefer to borrow, whereas others
may prefer to issue stocks

MONEY AND CAPITAL MARKETS

WHAT ARE TYPES OF FINANCIAL MARKET?

The financial markets that facilitate the transfer of debt
securities are commonly classified by the maturity of the
securities.

One that facilitates the flow of funds of short-term funds

(with maturities less than one year) is known as money
market.

One that facilitates the flow of long-term funds is known as

capital market.

The securities floated by the issuing companies are

subsequently purchased and sold among the individual and
institutional investors.
Two stages

Acquiring the securities from the issuing companies

Purchased and sold continuously among the investors

without any involvement of the companies

PRIMARY AND SECONDARY MARKETS

Depending upon of transactions further classification as

Primary market and Secondary Market
Primary market (NIM)

Secondary market

Facilitates issuance of new

Facilitates trading of existing (old)

Here transactions provide funds to

Here transactions do not provide funds.

It is not rooted in any particular

Stock exchanges have organizationally

securities. Issuance of new

corporate stocks (or new Treasury
securities) is its transaction.
the initial issuer of securities. Thus
the contribution to company
financing is direct.
spot and has no geographical
existence.

It has neither any tangible form nor

any administrative organisational

setup like that of stock exchanges
nor is it subjected to any centralised
control and administration for the
consummation of its business.

securities. Sale of existing corporate

stock (or treasury securities) is its
transaction
Hence in no circumstances SM can
supply additional funds to the company
as it is not involved in transaction.
speaking, physical existence and are
located in a particular geographical
area.

PRIMARY MARKET

CLASSIFICATION OF NEW ISSUES

Based on whether by a new or an old company
INITIAL ISSUES
The securities issued by companies for the first time
either after the incorporation or conversion from
private to public companies are designated as initial
issues.

OLD OR FURTHER ISSUES

Those issued by companies which already have
stock exchange quotation, either by public issues or
by rights to existing shareholders, are referred to as
old or further issues.

PRIMARY MARKET

CLASSIFICATION OF NEW ISSUES

Based on companies seeking quotations
NEW MONEY ISSUES
Refers to the issues of capital involving newly
created shares.
This provides funds to enterprises for additional
capital investment or for wholly or partly repay debt.
New money refers to the sum of money equivalent to
the number of newly created shares multiplied by the
price per share minus all the administrative cost
associated with the issues

NO NEW MONEY ISSUES

Represents the sale of securities already in
existence and sold by their holders

PRIMARY MARKET

FUNCTIONS OF NEW ISSUES/PRIMARY

MARKET
Channeling of investible funds into industrial
enterprises through the triple-service function
Origination
Underwriting
Distribution

PRIMARY MARKET

FUNCTIONS OF NEW ISSUES/PRIMARY

MARKET

Origination

Refers to the work of investigation and analysis and processing of

new proposals. Preliminary investigation refers to a careful study of
technical, economical, financial and legal aspects of the issuing
companies.
It warrants the backing of the issue houses in the sense of lending
their name to the company and thus gives the issue the stamp of
respectability. Earns good market prospects.
In the process of origination, the sponsoring organisation render the
following services.

Determination of class of security to be issued and the price

of the issues in the light of market conditions

Timing and magnitude of issues

Methods of floatation

Techniques of selling

PRIMARY MARKET

FUNCTIONS OF NEW ISSUES/PRIMARY

MARKET

Underwriting

Refers to contractually guaranteeing subscription to shares or

other securities. An underwriting agreement serves as back-up in
the event of inadequate subscription to a public subscription.
The adequate institutional arrangement for underwriting is of
crucial importance both to the issuing companies as well as
investing public. In India, merchant bankers, stockbrokers, banks
and financial institutions offer underwriting commitments and
receive commission on the amount underwritten. In some
western countries, underwriting means purchase of securities
from a company by investment bankers, who subsequently sell it
to investors,
In the context of insurance, this term refers to the function of
assuming the risk of financial loss due to death or a mishap, in
return fro Premium.

PRIMARY MARKET

FUNCTIONS OF NEW ISSUES/PRIMARY

MARKET

Distribution

Success of an issue depends on the issues being acquired

by the investing public.
The sale of securities to ultimate investors is called as
distribution,
It is a specialist job which can be performed by brokers and
dealers in securities, who maintain regular and direct
contact with the ultimate investor.

PRIMARY MARKET

ISSUE MECHANISM
Public issue through prospectus
Tender/book building
Offer for sale
Placement/Private placement
Rights issue

PRIMARY MARKET

PUBLIC ISSUE THROUGH PROSPECTUS

Corporate enterprise raise capital through
issue of securities by means of prospectus
Issuing companies themselves offer directly
to the general public a fixed number of
shares at a stated price, which
o in the case of new companies is invariably
the face value of the securities (issue at par),
and
o in the case of existing companies, it may
include a premium amount, if any (issue at
premium)

PRIMARY MARKET

PUBLIC ISSUE THROUGH PROSPECTUS

Another feature of this method is that
generally the issues are underwritten to
ensure success arising out of public
response.
Advantage

Transaction is carried on in the full light of publicity

coupled approach to entire investing public

Allotted among applicants on a non-discriminatory basis

Share ownership is widely diffused, thereby contributing to

the prevention of concentration of wealth and economic
power

Because of the increased scrutiny, public companies can

usually get better rates when they issue debt.

PRIMARY MARKET

PUBLIC ISSUE THROUGH PROSPECTUS

Advantage

Being on a major stock exchange carries a considerable

amount of prestige.

As long as there is market demand, a public company can

always issue more stock. Thus, mergers and acquisitions
are easier to do because stock can be issued as part of the
deal.

Disadvantage

It is a highly expensive method

In view of high cost involved in raising capital, it is suitable

for large issues and not for small issues

PRIMARY MARKET

PROSPECTUS
DEFINITION
Any document described or issued as prospectus
and includes any notice, circular, advertisement or
other document inviting deposits from public or
inviting offers from the public for the subscription or
purchase of any shares in or debenture of a body
corporate (Sec 2(36) of the Company Act)
Two essential features
o It invites subscription to shares or debentures or invites
deposits
o The invitation is made to public

PRIMARY MARKET

PROSPECTUS
CONTENTS
(Sec 56 of the Company Act and SEBI Guidelines 2000)

Three parts
o Part 1 (General information)
o Part 2 (Detailed information)
o Part 3 (Explanation of certain terms and
expressions used under Part I and Part II)

PRIMARY MARKET

PROSPECTUS
Part I (General information)
1. General information
2. Capital Structure of the company
3. Term of the present issue
4. Particular of the issue
5. Company management and project
6. Certain prescribed particulars in regard to the
company
7. Outstanding litigation relating to financial matters,
criminal proceedings against the company or directors
8. Management perception of risk factor (e.g. FE rate
fluctuation, difficulty is availability of raw materials, etc.

PRIMARY MARKET

PROSPECTUS
GENERAL INFORMATION
a) Name and address of registered office of the company
b) Name (s) of the stock exchanges where application for listing is
made
c) Declaration about refund of issue if minimum subscription of 90%
is not received within 120 days from the closure of the issue
d) Declaration about the issue of allotment letter/refunds within
period of 10 weeks and interest in case of default at the
prescribed rate given in S-73
e) Dates of opening and closing of the issue
f) Names and addresses of auditors and lead managers
g) Rating from CRISIL and any rating agency
h) Names and addresses of the underwriters and the amount
underwritten by them

PRIMARY MARKET

PROSPECTUS
CAPITAL STRUCTURS OF THE COMPANY
a) Authorised, issued, subscribed and paid-up capital
b) Size of the present issue, giving separately reservation
for preferential allotment to promoters and others
TERMS OF THE PRESENT ISSUE
a) Terms of payment
b) How to apply
c) Any special tax benefit
PARTICULARS OF THE ISSUE
a) Objects
b) Project cost
c) Means of financing (including contribution of promoters)

PRIMARY MARKET

PROSPECTUS
COMAPANY MANAGEMENT AND PROJECT
a) History ad main objects and present business of the
company
b) Promoters and their background
c) Location of the project
d) Collaboration, if any
e) Nature of product (s) and export possibilities
f) Future prospects
g) Stock market date. For share/debenture of the company
high and low price in each of the last three years
including monthly high and low during the last six
months, if applicable.

PRIMARY MARKET

PROSPECTUS
PART II (Detailed information)

Sub part I: General information

Sub part II: Financial information

Sub part III: Statutory and other information

GENERAL INFORMATION
a) Consent of directors, auditors, solicitors, managers
to the issue, Registrar to the issue, bankers of the
company and experts
b) Change, if any, in directors and auditors, during the
last 3 years and reasons therefor
c) Procedure and time schedule for allotment and
issue of certification

PRIMARY MARKET

PROSPECTUS
GENERAL INFORMATION
d) Names and addresses of Company Secretary, ,
Legal Adviser, Lead Manager, Co-manager,
Auditors, Bankers to the issue
e) Authority for the issue and details of resolution
passed therefor
FINANCIAL INFORMATION
a) Reports of the auditors of the company with respect
to profits and losses and assets and liabilities and
the dividends paid during the last 5 years
immediately preceding the issue of prospectus
b) Report by the accountant on the profits and losses
for the preceding 5 years (this must not be more
than 120 days before date of issue of prospectus)

PRIMARY MARKET

PROSPECTUS
STATUTORY AND OTHER INFORMATION
a) Minimum subscription
b) Expenses of the issue
c) Underwriting commission and brokerage
d) Previous public or rights issue, if any, giving particulars
about date of allotment, premium/discount, etc.
e) Issue of shares (sweat equity) other than for cash
f) Commission or brokerage on previous issue
g) Particulars about purchase of property, if any
h) Revaluation of assets, if any
i) Debentures and redeemable preference shares or
other instrument issued but remaining outstanding on
the date of prospectus and terms of their issue.

PRIMARY MARKET

ABRIDGED PROSPECTUS
Sec 56(3) requires that no one shall issue any form of
application for shares in or debenture of a company
unless the same is accompanied by a memorandum
containing such salient features as may be prescribed.
Thus instead of appending full prospectus, only an abridged
prospectus need only be appended to the application
form. However, for full version of prospectus can be seen
from the lead managers offices.
Special features of abridged prospectus
It shall not contain matters which are extraneous to
the contents of the prospectus
It shall be printed at least in point 7 size with proper
spacing and enough space should be provided for
investors to fill in the details

PRIMARY MARKET

RIGHTS ISSUE
It is the issue of new shares in which the existing
shareholders are given preemptive rights to
subscribe to the new issue on a pro-rata basis
The right is given in the form of an offer to existing
shareholders to subscribe to a proportionate number
of fresh, extra shares at a price. A shareholder has
four options
1. Exercise his rights and buy new shares at the offered
price.
2. Renounce the right and sell them in open market
3. Renounce part of his rights and exercise the
remainder
4. Choose to do nothing.

PRIMARY MARKET

A FEW PRIMARY MARKET TERMS

Pricing of issues
Differential pricing
Firm allotment
Offer to public

Price band
Floor and cap prices
Composite issue and justification

Payment of discount or commission

Denomination of share (as specified by SEBI)
If the issue price Rs 500 then face value can be
below Rs 10 subject to a minimum of Re 1 per share
If the issue price Rs 500 then face value would be
Rs 10

PRIMARY MARKET

A FEW PRIMARY MARKET TERMS

Denomination of shares
Disclosure about the face value of the share,
including a statement about the issue price being
X times the face value in the offer/advertisement
Shares should not be issued in a denomination of a
decimal of a rupee
At any given time, there should be only one
denomination for the share of the company
Company can change the denomination if their
memorandum and articles of association permit so.
But, denomination of the share cannot be altered to
a decimal of a rupee
Company should adhere to the disclosure and
accounting norms specified by SEBI from time to
time.

PRIMARY MARKET

A FEW PRIMARY MARKET TERMS

Promoters contribution
For unlisted companies: 20% of the postissue capital
For listed company: 20% of the proposed
issue capital or to ensure shareholding to
the extent of20% of the post-issue capital
For composite issues: At the option of the
promoters, the contribution would be
either 20% of the proposed public issue
capital or 20% of the post-issue capital
excluding the rights issue component

PRIMARY MARKET

A FEW PRIMARY MARKET TERMS

Exemption from Promoters contribution
Public issue by a company listed on a
stock exchange for at least 3 years and
having a track record of dividend payment
for at least 3 immediately preceding years
Rights issue
Where no identifiable promoter/promoter
group exists????

Lock-in requirements of promoters

contribution

PRIMARY MARKET

A FEW PRIMARY MARKET TERMS

Lock-in requirements of promoters
contribution
Minimum period of 3 years
The lock-in period would start from the
date of allotment in the proposed issue or
from the date of commercial production
whichever is later.
Other requirements
Pledge of security with the banks/FIs
Inscription of non-transferability during the
lock-in period

PRIMARY MARKET

BOOK BUILDING
It is a process used to ascertain and record the
indicative subscription bids of interested investors to a
planned issue of securities. It is a mechanism through
which an offer price for IPOs based on investors
demand is determined.
It is basically an auction of shares.
SEBI requirements
75 percent book building process
100 percent book building process

PRIMARY MARKET

BOOK BUILDING PROCESS

1.

The company appoints a book runner, a merchant

bank.

2.

The book runner prepares draft documents and

submitted to SEBI and obtains acknowledgement card.

3.

The issuer and the book runner decide to offer shares

at a price within a specified price band (range).

4.

Offers regarding the demand for securities at different

price levels are invited from the syndicate members
consisting of eligible brokers, merchant bankers,
underwriters, financial institutions, mutual funds, and
others in the form of a bid. Ad should mention the
opening and the closing dates for the bids. The bid is
normally open for five working days.

PRIMARY MARKET

BOOK BUILDING PROCESS

5.

Based on the bids received, the issuer arrives at a

final cut-off rate and the final allocation in consultation
with the book runner and lead manager.

6.

The issuer and the book runner may impose restriction

on the number of shares that can be allotted to each
client so as to avoid any future takeover threat.

7.

The final prospectus is filed with the Registrar of

Companies (ROC) along with the procurement
agreement.

8.

The placement portion opens for subscription only

after the prospectus is filed with the ROC.

PRIMARY MARKET

BOOK BUILDING PROCESS

9.

The placement portion closes a day before the public

issue portion.

10. The public portion opens and the allotment and listing
of this portion is done. The price determined in the book
building process is applicable to the public portion.
11. In case the public portion stands oversubscribed, then
the allotment is made on a proportionate basis. In case,
the public portion remains undersubscribed, the
shortfall is distributed amongst those who have opted
for placement. In case the placement portion is
undersubscribed, the size of the public issue is
enhanced.
Thus the book building enables issuers to reap benefits
arising from price and demand discovery.

PRIMARY MARKET

A FEW PRIMARY MARKET TERMS

INITIAL PUBLIC OFFERING (IPO)
The first sale of stock by a private company to the
public, i.e., if the company has never issued equity to
the public, it's known as an IPO.

DIRECT PUBLIC OFFERING (DPO)

Where a company raises capital by marketing its shares
directly to its own customers, employees, suppliers,
distributors and friends in the community. DPOs are an
alternative to underwritten public offerings by securities
broker-dealer firms where a company's shares are sold
to the broker's customers and prospects.
Direct public offerings are considerably less expensive
than traditional underwritten offerings. On the other
hand, a DPO will typically raise much less than a
traditional offering.

PRIMARY MARKET

A FEW PRIMARY MARKET TERMS

GREENSHOES OPTIONS
An option that allows the underwriting of an IPO
to sell additional shares to the public if the
demand is high.

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

PRIMARY MARKET

A FEW PRIMARY MARKET TERMS

NEGOTIATED UNDERWRITING
A process in which both the purchase price
and the offering price for a new issue are
negotiated between the issuer and a
single underwriter.
The underwriter pays the issuer a purchase price,
and the public pays the offering price. The spread
between the purchase price and the public
offering price represents the proceeds to the
underwriter.

PRIMARY MARKET

A FEW PRIMARY MARKET TERMS

FREE PRICING REGIME a regime after
1992

BOOK BUILDING
It is a mechanism through which an offer
price for IPOs based on investors demand is
determined.
It is basically an auction of shares.

PRIMARY MARKET

A FEW PRIMARY MARKET TERMS

PLACEMENT PORTION
It is the portion of the issue offered to the public
through the syndicate by way of the book building
process. That is all the investors are free to have
share in the public portion but they can do so
through the syndicate members.

PUBLIC PORTION
It refers to the offer to the public. By and large, it
is responded to by retail offering. The price
arrived at in the book building method is
applicable to the public offer.

FINANCIAL SECURITY
A Security is a certificate that represents
a claim on the issuer.
Money market securities
Maturity less than a year
High degree of liquidity
Low expected return but also a low degree of
risk

Capital market securities

Capital market securities

Bonds/Debentures and Mortgages

Bonds/debentures are long-term debt obligations issued by

corporations and government agencies to support operation, whereas
mortgages are long-term debt obligations created to finance the
purchase of real estate.
If investors does not want to hold it, or requires money, debt securities
can be sold in the secondary market
Provide a return to investor in the form of interest income at a given rate
and periodicity. At maturity, investors are paid the principal amount
Expected return is higher than money market securities, but has more
risk as well.

Stocks

They are certificates representing partial ownership in the corporations

that issued them
It has no maturity so they are classified as capital market securities.
Some co. provide income to the stockholders by distributing a portion
of their earnings, while may retain and reinvest all or part of their
earnings for subsequent expansion or growth.
Investors can earn a capital gain from selling the stocks for a higher
price than they paid for it, if co is doing well. Alternatively, they lose if co
is not well.
Exhibit higher degree of risk

Capital market securities

Sweat Equity
Equity shares allotted to certain employees
of a company either on discount or for
consideration other than cash, as a reward
for providing know-how or sharing
intellectual rights or some other value
addition to the company.