APITAL MARKET

Primary Market, Pricing of new issues,

Secondary Market, functions ,Mechanics of
Share Trading, Investor protection, Role of
SEBI
FINANCIAL MARKET

 Market for creation and exchange of financial

assets

 Functions
 Facilitate price discovery
 Provide liquidity
 Reduction in transaction costs (search & info)
Classification

 Nature of claim
 Maturity of claim
 Seasoning of claim
 Timing of delivery
 Organizational structure
CAPITAL MARKET
Capital market

equity market

Primary Secondary
CAPITAL MARKET
 Market for long-term capital.
 Demand - from the industrial, service sector
and government
 Supply - from individuals, corporates, banks,
financial institutions, etc.
 Classification
 Gilt-edged market
 Industrial securities market (new issues and stock
market
Industrial Securities Market

 Refers to the market for shares and

debentures of old and new companies
 New Issues Market- primary market- deals
with raising of new capital in the form of
shares and debentures
 Stock Market- secondary market- Deals with
securities already issued by companies
Industrial securities market
 Primary Market
 Instruments issued for first time
 Public issue
 IPO-Initial Public Offer
 FPO- Follow-on Public Offer
 Rights issue
 Preferential issue

 Secondary Market
 Trading of already issued
 Stock Exchange
 Participants
 Regulators
 Stock exchange
 Listed securities
 Depositories
 Brokers , primary dealers
 FII, MF, retail investor
 Merchant banker, Underwriter
 Registrar, custodians, banker,
 Debenture trustee, credit rating agencies
Primary Market

 Companies issue both equity and debt in the

primary market
 Governments, central and state, issue only
debt in the form of dated securities and
treasury bills in the primary market
Primary market
 Through the primary market issues,
governments and companies raise funds for
fresh investments and repayment of previous
loans taken from the public
 An issue can be a public issue or private
placement
 An issue where allotment is made to less
than 50 persons is a private placement.
SEBI – important changes

 Free pricing
 DIP guidelines
 Efficient Delivery mechanism
Ways to raise equity capital in NIM
 Public issue
 Process
 Methods
 Offer to public -Book building & fixed pricing
 Bought out deals
 Offer for sale
 Rights issue
 Procedure
 Preferential allotment
 To whom
SEBI guidelines

 A company making public issue must file a

draft prospectus with SEBI
 Listing is compulsory
 The company must enter in to an agreement
with a depository
 Demat/paper option should be given to the
investors
How to apply for a public issue?
 Get an application form from a share broker
 Fill up the form and submit it with the amount
to the collecting centre.
 You can receive the shares in your demat
account.
 If the application form is incomplete, it will be
rejected.
What factors to look for while applying for a
public issue?
 Promoters track record in terms of
experience, performance, reputation
 Risk factors in the offer document
 Financial forecasts for the business/project
 Issue price in relation to the face value
 The registrar, lead manager, bankers to the
issue
 Listing details
Issue price and face value

 Face value is the value printed on the

share/debenture certificate
 Different shares/debentures may have different face
values
Public issue pricing

 Till 1992, the price was fixed by the Controller

of Capital Issues. There was opportunity to
make handsome profits when the share was
listed.
 After SEBI was established in 1992, we have
moved to free pricing. The price is decided by
the company now with advice from the
merchant bankers.
Free pricing of a public issue

 Fixed-price: The issuer fixes the price well

before the actual issue. To ensure full
subscription, they fix slightly lower prices.

 Book-building: The price is decided through

the book-building process. The prices are
slightly higher than the fixed-price method.
Book building
 The company appoints a merchant banker as a
book runner
 The company issues a prospectus that has
information about issue size, business, promoters,
etc. but not the price. The price range is indicated.
 Period for bidding is indicated
 Bids are collected and the book is closed.
 On the basis of bids received, issue price is
decided.
Types of companies coming for
public issues
 Unlisted companies (Initial public offering,
IPO)
 When the company comes to the market for the
first time the issue is called Initial Public Offering
(IPO)
 Listed companies
 Companies that have tapped the market earlier
can tap the market again
Unlisted company – option 1
 It should have a track record of distributable profits for at least 3
out of immediately preceding 5 years and
 The pre-issue net worth (i.e. net worth before the issue) should
be at least Rs 1 crore in 3 out of 5 years, with the minimum net
worth in the immediately preceding 2 years.
 The issue size (includes offer to public, firm allotment, promoters’
contribution through offer document) should not exceed 5 times
its pre-issue net worth as per the last available audited accounts
Unlisted company – option 2
 If the 1st option is not satisfied, then the other option
is the book building process only.
 Book building process is permitted provided 60% of
the issue size is allotted to the Qualified Institutional
Buyers (QIB). If the company fails to allot 60% of the
issue size to QIB the entire money so received shall
be refunded.
Listed company
 All listed companies can come out with further public
issue provided the net worth of the company after
the proposed issue is less than 5 times the net
worth prior to the issue.
 In case the net worth is more than 5 times the net
worth prior to the issue, the company should comply
with any of the options as available for unlisted
companies. 
Role of the lead merchant banker

 Due diligence of the issue disclosures

 Making underwriting arrangements
 Setting up minimum number of collection
centers
 Taking care of allotment, refund and dispatch
of certificates
Performance of IPOs

 There is no guarantee that IPO performance

will always be profitable
 Last year’s IPO performance
 Last year’s preferential allotments
 Last year’s rights issues