Financial Markets & Services

S.R.DeepikaAssistant ProfessorDepartment of BBA

Kristu Jayanti College

Unit – I

Financial Markets

• Introduction to Financial Market

• Primary Market – Meaning, features, players, instruments

• Procedure for issuing equity shares and debentures

• SEBI guidelines for issue of securities

• Secondary Market – Meaning, features, functions, players,

merits and demerits; trading and settlement in stock exchanges

• Reforms in stock market; BSE, NSE, MCX-SX and OTCEI:

origin; functions.

Financial Markets

Financial Markets

• A market is an institution or arrangement that facilitates the

purchase and sale of goods and services

• Financial market is an institution or an arrangement that

facilitates the exchange of financial instruments.

• “It is a place where people and organizations wanting to borrow

money are brought together with those having surplus funds”

• It may or may not have a particular physical existence. E. g:

NASDAQ

Role of Financial Market in Economic Development

• Savings Mobilization

• Investment

• Entrepreneurship growth

• Industrial development

• National growth

Structure of Financial Market

A capital market is a market for securities

(Debt or equity), where business enterprises and governments can

raise long-term funds.

Capital Market

The nature of capital market

It has two segments

It deals in long-term securities

It creates dispersion in business ownership

It helps in capital formation

It helps in creating liquidity

Primary and Secondary Market• The primary market is the market where the

securities are sold for the first time.

In a primary issue, the securities are issued by the

company directly to investors.

• In secondary market investors purchase

securities or assets from other investors,

rather than from issuing companies themselves.

The national exchanges - such as the BSE and NSE

are secondary markets.

Quiz time

• By what name is the building “phiroze jeejeebhoy towers” better known as?

Clue….

Players in the Primary market (The three I’s )

Issuers

Intermediaries

Investors

• Individual Investors

• Corporate Investors; DIIs and FIIs

There are two main types of issuers namely

Corporate's issue both debt and equity securities

Government issue debt securities.

Intermediaries in Primary Market• SEBI (As a regulator)

• Merchant Bankers/ Lead Managers

– Bankers to the Issue

– Registrars to the issue and Share Transfer agents

– Brokers and bankers to the issue

– Underwriters

– Debenture Trustees

• Credit rating agencies

• Depositories, depository participants

• Stock Exchanges

• Share Brokers

Merchant Bankers/Lead Managers

• Determining the composition of the capital structure,

drafting of prospectus and application forms, compliance

with procedural formalities,

• Appointment of registrars to deal with the share

application and transfer, listing of securities, arrangement

of underwriting / sub-underwriting, placing of issues,

• Selection of brokers, bankers to the issue, publicity and

advertising agents, printers and so on.

Registrar to an Issue and share transfer agents

• Collecting applications from investors in respect of an issue;

• keeping a proper record of applications and money received from

investors

• Assisting to:

– Determining the basis of allotment of securities in consultation with the stock

exchange;

– Finalising of the list of persons entitled to allotment of securities

– Processing and despatching allotment letters, refund orders or certificates and

other related documents in respect of the issue

Bankers to an Issue• Bankers to the issue, as the name suggests, carries out all

the activities of ensuring that the funds are collected and

transferred to the Escrow accounts.

• The Lead Merchant Banker shall ensure that Bankers to the

Issue are appointed in all the mandatory collection centers

as specified in DIP (Disclosure and Investment Protection)

Guidelines 2000.

• The LM also ensures follow-up with bankers to the issue to

get quick estimates of collection and advising the issuer

about closure of the issue, based on the correct figures.

Brokers to an Issue

• Advertising (Publicity in suitable media) plays a key role

in promoting the Public issue

• Brokers are persons mainly concerned with the

procurement of subscription to the issue from the

prospective investors.

• The appointment of brokers is not compulsory and the

companies are free to appoint any number of brokers.

Underwriters• A set of all institutions and agencies that provide a

commitment to take up the issue of securities in the event of a

failure of the issue to get full subscription from the public are

known as underwriters

• They are compensated for this services by a payment of

commission as agreed upon between the issuing company and

the underwriter, and subject to the ceiling under the

companies act

• Brokers, investment companies, commercial banks provide this

service.

Debenture Trustees

•Trustees who are appointed to safeguard the interest of debenture

holders are called ‘Denture trustees’. They are appointed before the

issue of debenture by a company.

• They can call for periodical report from the company. Inspection of

books of accounts, records, registration of the company and the

trust property.

• Exercise due diligence to ascertain the availability of the assets of

the company by way of security as well as their adequacy

• Inform the SEBI immediately of any breach of trust deed

/provisions of law.

Credit Rating Agencies

• IPO grading is the professional assessment of a Credit

Rating Agency (CRAs) on the fundamentals of a company

in relation to the other listed equity shares in India.

• It is mandatory for the issuer company coming with

initial public offer (IPO) to obtain IPO grading from a

Credit Rating Agency and disclose the same on the cover

page of offer document and Application form.

Cont…The grades are allocated on a 5 point scale, the lowest being Grade

1 and highest Grade 5. Such grading is generally assigned on a five

point scale with a higher score indicating stronger fundamentals

and vice versa as below.

• IPO grade 1: Poor fundamentals

• IPO grade 2: Below average fundamentals

• IPO grade 3: Average fundamentals

• IPO grade 4: Above average fundamentals

• IPO grade 5: Strong fundamentals

Depositories - CDSL & NSDL

• National Securities Depository Limited (NSDL) and Central

Depository Services Limited (CDSL) are depositories.

• Depositories hold various securities like shares in electronic form.

• A DP (Depository Participant) is like an agent of these

depositories.

• Investors open their account with depositories via depository

participants. They don't deal directly with the depositories.

• It is mandatory for all listed companies to have their securities

admitted for dematerialisation with both the depositories viz CDSL &

NSDL.

Demat & Trading Account

• Demat Account : Account where your Shares are stored in electronic form .

• Trading Account : An account which is used to place orders for Buying and

Selling of shares .

• when you buy shares, amount is debited from your trading Account and

shares are stored in your Demat account .

• When you Sell shares, amount is credited to your trading account and

shares are taken away from your Demat Account and sold in the stock

market.

Why open a Demat account?

• Auto Credit - Shares arising out of bonus, split, consolidation, merger , IPO are

automatically credited into the Demat account of the investor.

• Lower Charges - Transactions involving physical securities are costlier than those involving

dematerialised securities (just like the transactions through a bank teller are costlier than

ATM transactions).

• Quick Transfer- Securities can be transferred at an instruction immediately.

• Elimination of Risks - Risks like forgery, thefts, bad delivery, delays in transfer etc,

associated with physical certificates are eliminated.

• Convenience-Any change in address or bank account details can be electronically intimated

to all companies in which investor holds any securities, without having to inform each of

them separately.

Investments: What u cant believe, But true…

If one would have bought 100 Wipro shares of Face Value Rs 100 in 1980….

1981 , 1 : 1 bonus = 200 shares

1985 , 1 : 1 bonus = 400

1986 split to Rs 10 = 4000

1987 , 1 : 1 bonus = 8000

1989 , 1 : 1 bonus = 16000

1992 , 1 : 1 bonus = 32000

1995 , 1 : 1 bonus = 64000

1997 , 2 : 1 bonus = 192000

1999 split to Rs 2 = 9,60,000

2004 , 2 : 1 bonus = 28,80,000

2005 , 1 ; 1 bonus = 57,60,000

2010 3 : 2 bonus = 1,44,00,000

Today’s rate is Rs. 560Your portfolio would have

been Rs. 537 crore

Current year dividend Rs. 4 per share. i. e: 4*1,44,00,000 = 5.76 crore

Stock Exchanges

• A stock exchange  provides a platform to trade company stock

and other securities

• A stock may be bought or sold only if it is listed on an

exchange

• Trade on an exchange is restricted to brokers who are members

of the exchange

• The two major stock exchanges in India are BSE and NSE

regulated by SEBI

Stock Brokers• A stockbroker, also called a Registered Representative,

investment advisor or simply, broker, is a professional individual

who executes buy and sell orders for stocks and other securities

through a stock market, for a fee or commission (brokerage).

• E.G.: Angel Broking, Motilal Oswal, India Bulls, Sharekhan, India

Infoline, Kotak Securities, etc.

SEBI

Established in 1992 “To protect the interests

of investors in securities and to promote the

development of, and to regulate the securities

market and for matters connected therewith

or incidental thereto”

Instruments

SharesI. Equity SharesII. Preference Shares1.Cumulative & Non-

Cumulative2. Redeemable &

Irredeemable 3. Convertible & Non-

Convertible4. Participating & Non-

ParticipatingIII. Preference Shares

with WarrantIV. Equity Shares with detachable Warrant

V. IDR (Indian Depository Receipt)

VI. ADR/ GDR

Debentures/ Bonds

Warrants

• Warrants are securities that give the holder the right,

but not the obligation, to buy a certain number of

securities at a certain price before a certain time

• One important characteristic of warrants is that they

are often detachable. That is, if an investor holds a

Share with attached warrants, he or she can sell the

warrants and keep the Share.

• Warrants are traded on the major exchanges.

IDR

• An Indian Depository Receipt (IDR) is a financial instrument

denominated in Indian Rupees in the form of a depository

receipt created by a Domestic Depository (custodian of securities

registered with the Securities and Exchange Board of India)

against the underlying equity of issuing company to enable

foreign companies to raise funds from the Indian securities

Markets.

• Standard Chartered became the first global company to file for an

issue of Indian depository receipts in India

ADR

• Investing in foreign stocks should be part of any investor's portfolio. Not only does

it diversify your holdings, it offers plenty of opportunities to profit from trends and

developments outside your home country.

• An American Depositary Receipt (ADR) is a negotiable certificate issued by a U.S.

bank representing a specified number of shares in a foreign (i.e. non-U.S.) stock

that is traded on a U.S. exchange.

• ADRs are denominated in U.S. dollars, with the underlying security held by a U.S.

financial institution overseas. 

• http://topforeignstocks.com/foreign-adrs-list/the-full-list-of-indian-adrs/

Secured Premium Notes (SPN)

• It is a secured debenture redeemable at

premium in different installments.

• Example: Rs.100 face value instrument is issued

at par, for 3 years there will be no interest.

• From 4th Year onwards till the 8th year it will be

redeemed at Rs.35 per annum

Types and Procedure for Issue of Equity

• IPO (Initial Public Offer)

• Subsequent Issue/ FPO (Follow Up Offer)

• Right Issue

• Bonus Issue

• Private Placement

• Bought Out deals (Offer for Sale)

• ESOP

IPO• Initial Public Offer (IPO), is the first sale of shares by the privately owned company

to the public.

• Usually underwritten to safeguard the interest of the issuers in the event of

unsatisfactory response from the public

• Prospectus is a document that contains information relating to the various aspects of

the issuing company. The document is circulated to the public

• Two Types issue – Fixed Price and Book Building method

• There are three categories of investors - 50% Qualified Institutional Buyers (QIB’s),

15% Non-Institutional Investors (> 2 lakh) and 35% Retail Investors (< 2 lakh).

• Advantage – Access to capital, liquidity to promoters, signals from markets

• Disadvantage – High issue cost, Time consuming, Dilution of Control, Loss of

flexibility, Accountability and Public pressure

IPO Process

• Appointment of merchant banker and other

intermediaries

• Registration of offer document with SEBI and Stock

Exchange

• Marketing of the issue

• Post- issue activities – Allotment & Listing in stock

exchange

• http://www.chittorgarh.com/ipo/ipo_list.asp?a=&For

mIPO_Page=1

Rights issue• When a company raises funds from its existing shareholders by selling

(issuing) them new shares / debentures, it is called as rights issue

• Existing shareholders are entitled to apply for new shares in proportion to

the number of shares already held. Illustratively, in a rights issue of 1:5 ratio,

the investors have the right to subscribe to one (new) share of the company

for every 5 shares held by the investor.

• E.g.: At the annual general meeting of Vijaya Bank, held on June 24, 2016,

the shareholders of the company has approved to allot equity shares of Rs.

900 crore by way of right issue of follow-on public offer

Bonus Issue The company issues new shares to its existing shareholders.

As the new shares are issued out of the company’s reserves (accumulated

profits), shareholders need not pay any money to the company for receiving

the new shares.

The net worth (owner’s money) of a company consist of its equity capital

and its reserves. After a bonus issue, there is an increase in the equity capital

of the company with a corresponding decrease in the reserves, while the net

worth remains constant.

In a bonus issue of 5:1 ratio, the investor will receive five new shares of the

company for each share the investor held

Private Placement Method

The private offering of a security to a small group of buyers.

A method of marketing securities whereby the issuer makes the offer of sale to

individuals and institutions privately without the issue of a prospectus is known as

‘private placement method’

While a public issue can be advertised, Company cannot do that for an issue offered

through the private placement route. 

Less expensive

Concentration of securities in a few hands

Apollo Tyres recently raised Rs.325 crore through private placement of

redeemable non-convertible debentures

HDFC raised Rs 1,500 crore via debentures on private placement

http://taxguru.in/company-law/procedure-private-placement-shares-companies-act-2013.html

Offer for sale (Bought Out Deal) method

Institutional investors like venture funds, private equity funds etc., invest

in unlisted company when it is very small or at an early stage.

Subsequently, when the company becomes large, these investors sell

their shares to the public, through issue of offer document and the

company’s shares are listed in stock exchange.

The proceeds of this issue go to the existing investors and not to the

company.

OFS, is for diluting promoter stake in a listed company. No new shares

are created.

http://www.businesstoday.in/moneytoday/stocks/working-of-the-offer-f

or-sale-mechanism/story/215115.html

ESOP

Company Grants an option to its employees to acquire shares

at a future date at a predetermined price.

Attracting, rewarding and motivating a talented employee are

the main purposes of Employee Stock Option Plans (ESOP).

The scheme is particularly useful in the case of companies

whose business activity is dominantly based on talent of the

employees, as in case of the software industry.

http://www.thehindubusinessline.com/info-tech/the-infosys-w

ay-of-creating-millionaires/article2029682.ece

Who?

SEBI guidelines towards the Issue of Equity Shares

• Entry Norm

• Minimum Promoters Contribution and Lock in period

• Registration of Intermediaries

• IPO Grading

• Filing of Prospectus

• Reservation & Firm Allotment

• Compliance Officer

• Entering in to listing agreement with stock exchange

• Redressal of Investors Grievances

Entry Norm

• Net Tangible Assets of atleast Rs. 3 crores in each of the preceding

3 full years

• Distributable profits in atleast 3 of the immediately preceding 5

years

• Pre-issue networth of the co. should not be less than Rs.1 crore in

each of the preceding 3 full years

• The issue size shall not exceed 5 times its pre-issue networth as per

the audited balance sheet of the last financial year.

• Filing of Prospectus: The purpose of prospectus is to invite the public for

subscription/purchase of any securities of a company

• It is meant to disclose clearly and honestly everything and anything which has happened or

is going to happen in the past and future of the company.

• Date of incorporation of the company

• Description of its core business

• Capital structure

• Particulars of the issue

• Risks involved with investing in the equity shares being offered

• Discourse of Outstanding litigations, criminal prosecution and defaults

• Financial Information and Auditors Report

• Declaration by the directors that all the relevant provisions of the companies Act and

guidelines issued by SEBI have been complied with.

Minimum Promoters Contribution and Lock in period

• In case of an Initial Public Offer (IPO) i.e. public issue by

unlisted company, the promoters has to necessarily offer at

least 20% of the post issue capital.

• The minimum contribution of promoters shall be locked in

for a period of 3 years

• In case the promoters contribution in the proposed issue

exceeds the required minimum contribution, such excess

contribution shall also be locked in for a period of one year.

Reservation and Firm Allotment

• Public issue should be atleast 25% of the post issue capital

• Allotment to QIBs and NIIs are done on a discretionary basis. Allotment to retail

investors is done on a proportionate basis

Compliance Officer

• Company is required to appoint compliance officer to directly liaise with SEBI/Stock

Exchanges to comply with various laws and investors complaint related matters

Listing agreement with stock exchange

• Listing means permission to quote share and debentures officially on the trading

floor of the stock exchange.

• The listed shares appear on the official list of securities for the purpose of trading

• Listing ensures free transferability of securities and open disclosure of trading

information

SEBI Guidelines for Issue of Debentures

1. Credit Rating (Issues greater than or equal to Rs.100 crores)

two ratings from different credit rating agencies shall be

obtained

2. Disclosure

3. Debenture Trustee

4. Debenture Redemption Reserve

5. Conversion

6. Listing

• Credit Rating:

Debt instruments should be rated by a credit rating agency

and the same shall be disclosed in the offer document. If the

issue is greater than or equal to 100 crores two ratings from

two different credit rating agencies shall be obtained

• Disclosure:

Debt-equity ratio, servicing behaviour of existing debentures,

payment of due interest on due dates on loans and

debentures and no- objection certificate from a banker

• Debenture Trustees: It is mandatory to appoint Debenture Trustees for

debenture with maturity of more than 18 months and their names

should be stated in the offer document

• Debenture Redemption Reserve (DRR): Company has to create DRR for

debentures with maturity of more than 18 months.

• Conversion: Issue of FCDs having a conversion period more than 36

months will not be permissible, unless conversion is made optional

with “Put” and “Call” option

• Listing: SEBI permits listing of debt instruments before equity provided

the rating of the instrument is not below minimum rating of ‘A’ or

equivalent

Advantages of Primary Market

• Avenue of Investment

• Mobilisation of savings

• Channelising Savings for Productive use

• Source of Large Supply of Funds

• Rapid Industrial Growth

• Source for Expansion and Technological Up gradation

Disadvantages of Primary Market

• Possibility for Deceiving Investors

• No fixed norms for project appraisal

• Lack of post-issue seriousness

• Ineffective role of merchant bankers

• Delay in allotment Process

• Poor mobilisation of savings and hesitancy to invest in

shares