chapter 3 capital market
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Capital Market
A market for long term fundsEquity & debt
Domestic & international
A market for new issues Leads to capital formation Nature of fund raising
Domestic • equity issues by corporates and FI• debt issues by corporates, government and FIInternational • equity issues through GDRs, ADRs • debt issue through ECBs
Other funds from international markets-• FDI- in equity and debt form• FII- in the form of portfolio investments• NRI - in the form of short and medium term
deposits
Primary Market
Fund Raising in the Primary Market Public issue by prospectus
Private placement
Rights issues
Primary Issues
Rights Issue Issue of new shares to existing shareholders on a pro-rata basis To be kept open for at least 30 days and not more than 60 days
Why rights? to reward shareholders to reflect the stock’s true worth to hike promoter’s stake
Private Placement Market Direct sale of securities to a few investors through merchant bankers.The investors are selected clients such as FIs, corporates, banks and HNIs. Subscription from less than 50 membersTime as well as cost of issue is low Tailor made issues Less formalities, disclosuresPopular for placement of Debt instruments
Preferential AllotmentAn issue of shares by a listed company to a select group of persons consisting of Promoters, Foreign partners, Technical collaborators, Private equity funds
Need not file offer document.
Three years lock-in period for promoters
Why preferential allotment? to enhance promoter’s holding as part of debt restructuring/conversion of loans to issue shares by way of ESOPs. quick fund raising at low cost
Public IssueInitial Public Offering (IPO)- It is an offering
of either a fresh issue of securities or an offer for sale of existing securities or both by an unlisted company for the first time to public.
Follow-on Public Offering(FPO)- It is an offering of either a fresh issue of securities or an offer for sale to the public by an already listed company through an offer document.
Merchant banker- should be registered with SEBI- Act as book running lead manager- Performs pre-issue and post-issue activities
Registrars to the issue- to finalise list of eligible allot tees,
ensure crediting of shares and dispatch refund orders
Bankers to the issue- collection of application amounts- transfer of this amount to escrow
account- dispatching refund amounts
Intermediaries to an Issue
Before 1992, Controller of Capital Issues regulated price
After 1992, the promoter and the merchant banker decide the pricing
Free Pricing Regime
Fixed Price Offerings Made to uninformed investors
Investors demand not taken into account
An alternative method, Book Building
A mechanism through which an offer price for IPOs based on the investor’s demand is determined.
Uses investors demand for shares at various prices
Basically an auction of shares
Investors can watch the ‘book being built’
The company appoints one or more merchant banker(s) who compulsorily underwrite the issue.
Company enters into an agreement with stock exchanges
Book runner appoints stock brokers
Collects information from potential buyer and attempts to build interest through road shows.
Book runner submits draft Red herring prospectus to SEBI and Registrar of Companies (ROC) which contain all the disclosures except have details of either price or number of shares being offered.
Book-building Process
Offer of shares at a specified price band
Public issue shall be kept open for 3 to 10 working days
Bidding process shall be through an electronically linked transparent bidding facility provided by stock exchanges
On-line graphical display of demand and bid prices
Based on the bids, issue price is determined by issuer
Retail individual investors may bid at ‘cut-off’ price
Final prospectus registered with ROC
Retail investors may pay through Application Supported by Blocked Amount (ASBA) system
ASBA is an application by an investor for subscribing to an issue, containing an authorisation to block the application money in a bank account.
Allotment of a Book-built Issue
Category-wise % of issue to be allotted on a
proportionate basis-
Not more than 50% to Qualified Institutional
Buyers
High Net-worth Individuals- atleast15%
Retail Investor-at least 35%
Retail investor – who bids in a book built issue
for a value not more than Rs 2,00,000
Allotment and refund shall be made within15
days from the closure of issue.
Listing within seven days from finalisation.
FDI and FIIFDI- Foreign Direct Investment• an investor which picks up more than 10% stake in a
company’s equity.• in the form of fully-owned subsidiary or a joint
venture, • stable, enhances management quality, transfer of
technology and generation of employment.
FII- Foreign Institutional Investment• An institution incorporated outside India as a
pension fund, mutual fund, bank, insurance company, foreign government agency, foreign central bank etc.
• In the form of portfolio investment• short to medium term investments• can invest only up to 10 percent of capital in a
company • unstable and volatile
Foreign Venture CapitalVenture capital is a source of funding for new
entrepreneurs and technology.FVCI is an investor incorporated/established outside
India who is registered under the SEBI(Foreign Venture Capital Investor) Regulations, 2000.
Flipkart- Tiger Global, Accel PartnersMyntra- Premji Invest, IDG Ventures India
Private Equity• PE are the investment banks who invest into proven businesses. • Exit strategy is usually the company going public or acquired.• PE funds attract capital from pension funds, insurance funds etc.• All PE from outside India are classified either as FDI, in unlisted companies, or as FII in listed companies.
Sep 04 2014 : The Economic Times (Delhi)Providence Set to Exit Idea with 3-Fold Return
ADRs and GDRs
Depository receipts are negotiable instruments denominated in U.S. dollars or another currency representing a publicly-traded issuer’s local currency equity shares.
Listed and traded on a foreign stock exchange
represent one or more shares of the issuing company
Indian GDRs are primarily sold to institutional investors
In US GDRs can be issued to qualified institutional buyers but ADRs can be sold both to institutional and retail investors
ADR listing requires comprehensive disclosures and greater transparency as compared to GDR listing
GDRs can be converted into ADRs
ECBsBorrowings raised from international markets by corporates
Can be raised from any international source
Supplement domestic resources
Low cost of borrowing
Borrower need to manage interest rate risk and forex risk.
FCCBs Bonds issued by Indian companies in foreign
currency
Fixed interest/coupon rate paid in foreign currency
partly or fully convertible into ordinary shares
Interest rates lower than domestic rates
Bonds listed and traded abroad
Exchange risk is more as interest is payable in foreign currency
Minimum maturity period is five years
IDRIndian Depository Receipts
Issued by foreign companies for raising equity funds from Indian market
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