PRIMARY MARKET SECONDARY MARKET DEBT MARKET

THE PRIMARY MARKET

Primary Market : meaning A market for new issues It is a market for fresh capital . Also called the new issues market.

Primary Market .
In India , new capital issues are floated by Government companies, non Govt. Limited companies, public sector undertakings, banks and financial institutions. Under section 67 of Companies Act 2000, an offer to

subscribe for shares or debentures is made to 50 or

more persons ,such an offer is deemed public offering and shall have to comply with all provisions of SEBI

relating to public offerings.

All public issues are open to the general public.

Free Pricing Regime

Prior to 1992 all new issues controlled by the CCI, and every co. had to obtain prior approval of the CCI for raising funds from the primary market. CCI decided the price, timing and quantum of the issue. New cos price at par, Existing companies with reserves price at premium. Post 1992 , CCI repealed. All controls on raising resources from the primary market removed. The co. with its merchant bankers decided the issue price. There fore emergence of FREE PRICING REGIME.

Free Pricing Regime impact

This led to very high premiums on most issues by dishonest
promoters and greedy merchant bankers. Moreover cos. With negative bottom line came back with repeated

issues at a premium. But on listing due to non performance of the

cos. They stock prices crashed. Of the 4000 issues that hit the market in 1992-96 , more than 3000

quoted , below the offer price on the day of listing.

The regulator therefore brought in strict regulations for merchant bankers, and others and guidelines for full disclosures for investor protection were brought in.

Methods for determining the Offer price

Fixed price : The firm and the merchant banker decided an offer price without taking into account the investors feedback.

Book Building : It is a process by which demand for the proposed issue is elicited and built-up and the price at which the securities will be issued is determined on the bases of bids received.

Allocation in Book Built Issue

If the issuer company makes an issue of 100% to public than: 1. 35% for the retail indv. 2. 15% for non institutional investor 3. 50% for the qualified institutional buyer

 QIBs are prohibited to withdraw their bids after the close of the IPO . Retail and non institutional bidders can withdraw till the date of allotment

QIBs
A public financial institutional as defined in section 4 A of the Company Act 1956. Scheduled comm. Bank Mutual funds Venture capital funds registered with the SEBI.

Benefits of Book Building Method

Aim of this process is to have the issue pre sold and decrease the chances of under subscription The cost and time of making public issue is lowered The public issue benefits the investor The possibility of price falling below par after listing is removed.

Limitations of Book Building

It relies on much interaction among firms , merchant bankers, and investors which is absent in India . Lack of transparency and absence of strong regulations Issuers may have to sell in cheap due to collective bargainig.

AUCTION BASED BOOK BUILDING

In this method bidders are free to bid at any price above the floor price and allotment would be on price priority basis and at differential prices. This method can be used only for FPOs.

REVERSE BOOK BUILDING

It is a price discovery mechanism for companies who wants to delist their shares or buy back shares from the shareholders.

GREEN SHOE OPTION

It is also referred as an over allotment options. It is a mechanism to provide post listing price stability to an IPO. GREEN SHOE company was the first to issue this type of option, hence the name green shoe option.

PRIMARY ISSUE
PUBLIC ISSUE IPO: Initial public offering
It is an offering either a fresh issue of securities or an offer for sales of existing securities or both by an unlisted co. for the first time to the public. ENTRY NORM I :- Profitability Route ENTRY NORM II :- QIB Route ENTRY NORM III:- Appraisal Route

 FPO: Follow on public offering

It is an offer of sale of security by listed co. It is also known as subsequent or seasonal public offering For such offering SEBI provide guidelines for listed co.

Listed co. issues FPO to finance their growth plan

 Rights Issue :
Rights issue is the issue of new shares in which existing shareholders are given rights to subscribe to the new issue on a pro-rata basis. Done by sending a letter of offer to the shareholders whose names are recorded in the books on a particular date . Share holder has a right to exercise his right in full or in part , renounce his rights and sell them in the open market or choose do nothing.

IDRs: Indian Depository Receipts

Foreign co. can issue their share to Indian national in India. The first ever issue of IDRs was by Standard Charted Bank on MAY 28th 2010 of 240 millions IDRs sold 36million IDRs were placed with Anchor Investors 10 IDRs of Standard charted = 1Share It enables foreign co. to raise capital in India It also enables Indian investors to diversify risk. Enables globalisation of Indian Stock exchanges

 Eligibility for issue of IDRs:1. Eligibility criteria is specified in rule 4of IDR Rules. 2. It should be listed in their home country . 3. It has not been prohibited to issue securities by any regulatory body. 4. It has good track record with respect to compliances with securities market regulation. 5. Minimum issue size should not be less than Rs. 50 crore.

Pvt. Placement
The direct sale of securities by a company to some select people or to institutional investors is called private

placement.
No prospectus is issued. Covers equity shares, preference shares and debentures. Quicker access to capital and inexpensive on account of absence of various issue expenses.

Private Placement Market :

Prolonged subdued conditions in the new issues market. The resources raised through private placement has increased by four times in the years from 1997-98 to

2000-01.
The share of resources raised from private placement in these years accounted for 88% of the total resources mobilized from the primary market.

 This indicates it is a preferred mode for raising resources

in the primary market for both public and private sector companies. Some other reasons being :

No lock in period , no compliance system for the

merchant bankers as in case of public issues, no limit on a Banks investment on debt, which has made this market more buoyant , organizations use this issue proceeds to repay outstanding loans to banks and FIs.

Etc.

Resource mobilization from International Capital Markets

Global Depository Receipts American Depository Receipts Foreign Currency Convertible Bonds External Commercial Borrowings

Global Depository Receipts

GDRs are essentially equity instruments issued abroad by authorized overseas
corporate bodies against the shares/bonds of Indian companies, held with nominated domestic custodian banks. GDR issue creates equity shares , which are kept with the designated bank. A GDR may represent one or more shares in a fixed ratio of the issuing company. The holder may convert the GDR into the shares at any time, and then they can be listed on domestic stock exchange and traded. GDRs are freely transferable outside India, and dividend on shares represented by the GDR are paid in Indian Rupees only. They are listed on a Foreign Stock Exchange. Indian GDRs are usually listed on the Luxemburg Stock Exchange/London Stock Exchange. They are primarily

sold to institutional investors in US, UK, Hongkong, Singapore, France and

Switzerland .

American Depository Receipts

ADRs are negotiable instruments, denominated in dollars and issued by the US Depository Bank. A non US company, which seeks to List in the US, can deposit shares with a bank and receive a receipt ,which enables the company to issue American Depository Shares . NO Technical and legal difference between the ADR and GDR. ADR issues offer access to the US institutional and retail markets while GDR offer access only to the US institutional market.

Process for issuing ADR/GDR

Board approval Tendering of the share by the share holders Conversion to ADRs/GDRs Sale of ADRs/GDRs to overseas investors Repartition of proceeds to India within one month Distribution of proceeds to share holders

EXTERNAL COMMERCIAL BORROWING(ECB)

These are the borrowing raise from the international market by the corporates It is governed by the ECB policy, which is administered by

the finance ministry along with RBI

It refers to commercial loan avail from non resident lenders Minimum maturity period is 3years

It can be accessed under two routes 1. Automatic route

For investment in real sector industrial and infrastructure i.e. they dont require RBI/ govt. approval Maximum amt of ECB can raised US $ 500

2. Approval route
ECBs do not come under the automatic route are considered by an empowered committee of RBI for approval

FOREIGN CURRENCY CONVERTIBLE BOND (FCCBs)

FCCBs are the bond issued by Indian co. to a non resident in foreign currency Carry fixed interest rate and are convertible into ordinary shares either in whole or in part These are listed and traded abroad Interest rate is low but exchange risk is high because interest is paid in foreign currency Foreign co. prefers FCCB while Indian companies prefer to issue GDR

SECONDARY MARKET
Secondary market is a market in which existing securities are sold or traded. Function:
To facilitates liquidity and marketability To contribute to economy growth through allocation of funds Provide instant evaluation (ROI) To ensure measures and safety and fair dealing. To induce to improve performance. Market price at exchange reflects performance

Post Reforms
Regional stock exchanges 19 The National Stock Exchange 1 The Over The Counter Exchange of India - 1

Regulation of Stock Exchange

SEBI- Security Exchange Board Of India Objective To protect investors interest in securities and to promote and regulate the security market.

Demutualisation of Stock Exchange

It is the process by which any member-owned organisation can become a shareholder owned company. It separate the ownership and control of stock exchange form trading rights of its member.

Listing of Securities
A company has to list its securities on the exchange so that they are available for trading. A company can list on more than one stock exchange but compulsory to list on nearest stock exchange to its registered office. CLA Central Listing Authority regulates prelisting and post listing procedure, monitor for which the funds are used.

Trading Arrangement
Open outcry system Electronic Trading system Features : transparency, information, efficiency, liquidity, platform

Circuit Breakers
To contain excessive volatility in price SEBI introduce scrip wise daily circuit breaker/price band. Circuit breakers dont halt but no order is permitted order is out of specified price range.

 Trading & settlement : Trading & settlement cycle timed from 14 days to 7 days. Dematerialisation of Securities: To prevent problems such as fake, transfer delay, paperwork. An electronic book entry form of holding and transferring securities has been introduced. Risk management Internet trading

Stock Market Index

It is most important indices of all as it measures overall market sentiment through a set of stock that are representative of market. Function : To serve as barometer of equity market. To serve as benchmark for portfolio of stock. To serves as under laying for future & option.

Methodology for calculating indices

(1) Market capitalisation weighted (a) Full market capitalisation (b) Free float market capitalisation (2) Price weighted index (3) Equal weighting index

 Global Stock Markets : Dow Jones, NASDAQ, NASDAQ 100, The MSCI indices. Major Indices in India : Sensex, S&P CNX exchange Badla (carry forward) : Badla is postponement of the delivery of or payment for purchase of securities from one settlement period to another. It increases trading activity of BSE. Types of Badla : Teji Badla & Mandi Badla.

Listing Categories
A group : consist large turn over and high floating stock with large market capitalisation. B group : includes scrip of quality companies with an equity above Rs. 3 crore with high growth potential and drawing frequency. B group : it includes companies with an equity below Rs. 3 crores.
1 2

National security clearing corporation ltd.

It has been set up in April 1995, a wholly owned subsidiary to undertake clearing & settlement at the exchange. Functions: Clear all trades Determine obligation of members Arranges for pay in & pay out of funds Receive funds & securities Collects & maintain margin Process for shortage in finds & securities

OTCEI
Promoted jointly by ICICI, UTI, IDBI, SBI Capital Markets Ltd., Canbank Financial Services Ltd., GIC & LIC. Recognized as Stock Exchange under Securities Contracts Act, 1956. Based on NASDAQ (National Association of Securities Dealers Automated Quotation) model. Set-up to provide small & medium companies an access to capital markets for raising finance. Allowed companies with paid-up capital as low as Rs. 30 lacs. Securities traded are divided into 3 categories: i. Listed ii. Permitted iii. Initiated

Market making is a unique concept of OTCEI.

Market makers are merchant bankers willing to make market in securities by continuously offering buy & sell quotes.
They act as dealers-cum-stockists & do not charge any commission or brokerage. The Spread between bid & offer price is their profit margin.

Causes of Decline of RSE

Abolition of Badla Introduction of uniform trading cycles at all the stock exchange, led to diminished opportunities for arbitrage transactions. Introduction of compulsory rolling settlements, accelerated the reduction in turnover at the RSEs. Major operators are all these exchanges acquired memberships of either NSE or BSE.

RSEs have managed to survive so far because of the annual listing fees that are being received from the listed companies.

ISEI
Promoted by 12 Regional Stock Exchanges It was the dwindling fortunes of RSEs that brought them together to establish the Inter-connected Stock Exchange of India Ltd. (ISE). ISE was launched with an objective of converting small, fragmented and illiquid markets into large, liquid national-level markets. Failure of ISE was, due to the bigger brokers of the participating RSEs failing to support any interest in trading on ISE due to commercial considerations. As a result, it becomes virtually impossible for ISE to create any worthwhile liquidity in its markets in competition with the breadth and depth of NSE and BSE.

Measures to boost Liquidity in the Market

Investment by FIIs in the market. Buy-back of shares Market Making System Stock Lending Rolling settlement Straight Through Processing Continuous Net Settlement

Investment by FIIs
Can Invest through three routes: i. Direct A broad based fund which has at least 20 shareholders and each has no more than 10% share or units of the fund. ii. P-notes

Instruments issued by registered FIIs to overseas investors without registering with market regulator SEBI.
i. Sub-Accounts Include foreign companies, foreign individuals, Institutions, funds or portfolio, etc. FIIs were initially allowed to invest only in equity shares. But were later allowed to invest in debt market, including dated government securities & Treasury bills.

Categories of FII in Bond Market:

I. I. 100 % Debt Funds Equity oriented FIIs which can buy up to 30 % of their investments in Debt.

FIIs & their Impact

Screen based trading & Depository Services. Corporate Governance Eased pressure on rupee from BOP position. First to identify potential in Indian Technology stocks. They play as trendsetters & market makers. Corporatization of broking firms. Rolling Settlement Introduced.

Buy Back of Shares

When a company repurchases its own shares, it is buy back.
A company with surplus cash can buy back because it carries minimum risk compared to other investment avenues. A company facing a threat of hostile takeover would buy back. A company may think to alter its capital structure. Panic driven fall can be arrested. A company intending to improve market quotes as it signals management confidence.

Buy Back Method

Tender Offer From the existing shareholders on a proportionate basis Open Market Book Building Stock Market
A company may buyback its shares without shareholders resolution, to the extent of 10% of its paid up equity capital and reserves. However, if a company intends to buyback its shares to the extent of 25% of its paid up capital and reserves/ then the same has to be approved by Shareholders Resolution as specified in Section 77 A of Companies Act, 1956.

Market Making System

Market Maker is an individual or firm who gives two way buy & sell quotes for a stock.
To provide liquidity to illiquid scrips, market makers are required. He makes buy & sell quotes simultaneously. Thus he creates a market for scrips wherein it can be easily bought & sold. This is called market making mechanism.

Stock Lending
Enables
a seller to borrow shares from SEBI registered intermediary & deliver them to a buyer against outstanding commitments.

When price declines, he replaces borrowed shares by buying from the market.
Borrowers pay lender interest on the value of securities.

Advantages of Stock Lending

Provide avenue for Institutional Investors to earn income by lending

idle stock.
Increases liquidity of the stock.

Enables investors to take arbitrage activities.

Rolling Settlement
It is a system of settling transaction in a fixed number of days after the trade is agreed. It was introduced in form of T + 5 settlement system where T is the trade date & 5 is the number of business days on which delivery of securities & cash payments are due for settlement.

Advantages of Rolling Settlement

Eliminates arbitrage opportunities. Lowers trading costs & reduces the risk of counter party failure. Helps in reducing volatility. Eliminates fluctuation of prices which takes place around settlement dates. Encourages wider participation s shorter delay in settlement. Reduces settlement risks & narrow the bid-ask spreads due to its transparent nature.

Straight Through Processing

Straight-through processing (STP) enables the entire trade process for capital markets and payment transactions to be conducted electronically without the need for re-keying or manual intervention. The goal was to minimize settlement risk for the execution of a trade and its settlement and clearing to occur simultaneously. When fully realized, STP provides financial services players with tremendous benefits, including greatly shortened processing cycles, reduced settlement risk and lower operating costs.

Continuous Net Settlement

Automated system of tracking securities and cash balances.

An automated accounting system that uses a central clearing house to clear and settle securities transactions, maintaining complete records of companies' money balances.

The Debt Market

What is Debt Market? The debt market is any market situation where the trading debt instruments take place. Examples of debt instruments include mortgages, promissory notes, bonds, and Certificates of Deposit. A debt market establishes a structured environment where these types of debt can be traded with ease between interested parties.
Roles : Efficient Mobilization and allocation of resources in the economy. Financing Development activities of the government Facilitating liquid management in tune with short-term and Longterm objectives Pricing of nongovernment Securities in financial markets

 Regulation of debt market : RBI regulates the govt.

securities and money market. Corporate debt market under SEBI.

Link between Money Market &Debt Market Money

market deals in short term debt instruments, while Debt market deals in long term debt, but former essential prerequisite for development of debt market.

Characteristics of Debt Market : competitive structure ,

low transaction cost, safe market infrastructure, high level market heterogeneity among market participants.

Participants of Debt Market

Central & State govts. Primary dealers Public sector undertakings Corporates Banks Mutual funds FIIs Provident Funds Charitable institutions and trusts

Primary & Secondary Segments of Debt Market

In Primary Mkt, Private Placement is very popular because of low cost of raising funds In 2006 US Private Placement Market was opened for Indian Companies NSE set up a separate segment for trading in debt securities known as Wholesale Debt Market (WDm) segment Two Markets Under it: Continuous Market Negotiated Merket

The Private Corporate Debt Market

It is a Market wherein debt securities of Corporate are issued and traded Its Investors include Banks, MFs, Insurance Companies as they seek Steady returns Debt is raised through issuance of Debentures which can be Convertible or Non-Convertible

Importance
Aids in Economic growth by Providing long-term Capital Supplements the Banking System A Stable Source of Finance Reduces Cost of Capital Fosters Market Discipline Enables Investors to hold a Diversified Portfolio

SEBI regulates Primary & Secondary Markets

Private Corporate Debt Market

A small segment of the Debt Market. Debt issues comprises debentures and bonds. Primary Market : Corporate sector can raise funds through prospectus or private placement. In recent years, the bond issue has dominated the primary corporate debt market. Bought out deals flooded the bond market in 2002, where the entire issue is picked up by a single investor, unlike a pvt. placement, where the where the debt paper is sold to several investors. It has infact become the preferred route for corporates , as funds raised within a short time and with little disclosure. Secondary Market : - corporate debt securities traded on WDM segment of NSE, OTCEI & BSE. -secondary market not yet fully developed in India

Private Corporate Debt Market

The volumes traded quite low. Reasons : -very low transparency in this market. - Absence of benchmark rate, restricts the development of new & innovative instruments. The corporate bond market needs well capitalized market makers. Cooperative banks and charitable trusts allowed on case to case basis only , to invest in corporate paper.

Measures to Promote Corporate Debt Market

Interest Rate Ceiling is removed Conversion has been made optional Listing of Privately placed debt paper in the secondary market is allowed It is possible for debt of Corporate to be listed even though Equity may not be listed FII is permitted to participate in CDM BSE and NSE have launched trading and reporting platforms to capture all Information relating to trading in corporate bonds Shut period in Corporate Bonds has been reduced to align it with that applicable to Government Securties Repo Transaction in Corporate Debt Securities is allowed

Public Sector Undertaking Bond Market

They are medium and long term obligations issued by public Sector undertakings, they are privately placed with Banks or Large Investors Many of these are issued by Infra Related Govt. Companies i.e. Railway and Power Companies PSUs are permitted to issue 2 types of Bonds: Taxable, Non-Taxable Interest on these Bonds are Calculated on actual /365 days PF were allowed to invest 30% of their Incremental Deposits in PSUs As Per Guidelines minimum maturity of tax free bonds should be 7 years Investors include NBFC, Banks, Insurance co. , PFs , Mfs and Individuals

Secondary Market in PSU Bonds

PSU Bonds are generally issued and traded in the form of Promissory notes or Certificates It dont require transfer deed for registration so no Stamp duty is levied Repos are Permitted if PSU Bonds are in Demat Form

The Government Securities Market

It is referred to as SLR Securities as they are Eligible for Maintenance of the SLR ratio by Banks Importance : Critical for bringing effective transmission channel for use of Indirect Instruments of Money Control .i.e. OMO & SLR. Provides Highest degree of Security Acts as benchmark for pricing debt Securities Facilitates government borrowings at reasonable cost

Issuers , Investors, Types of Govt Securities

G-secs are issued by Central, State, Semi-Govt. authorities including local Govt. Authorities Major Investors include Banks as they need to fulfill their reserve requirements Investors can be Classified into 1. Wholesale Market Segment : Banks, Financial Institutions, Insurance, MFs, Individuals 2. Middle Segment : PFs, NBFC, Small Coop having liquidity from 7-25 crores 3. Retail : Individuals Insurance Co. are 2nd Largest Investors as they need to fulfill their 20% assets of General Insurance & 25% of Life Insurance business as per rules by IRDA

G-securities are of 2 types Treasury Bills and Government dated Securities

Reforms in GOVT. Securities Market

Objectives
Increase Autonomy of RBI Improve Institutional Infrastructure Increase depth of Market by introducing new instruments Enable Sound Legal and Regulatory Framework Bring in Technology- related Improvements i.e. introducing RTGS Measures Undertaken in 1990 NSE started trading in Government Securities from June 30, 1994 A Delivery Versus Payment (DVP) system for transactions in government securities was introduced 1995 A Scheme of Ways and Means Advances (WMA) introduces from 1997 to accommodate temporary mismatches b/w Govt. receipts and Payments Limit for FII investment in G-secs is increased to USD 5 Bln

STRIPS in G-securities
Separate Trading for registered interest and Principal of Securities is a Process of Converting 1 underlying Security into number of zero-coupon securities It increases breadth and depth of the Market which helps improving liquidity It allows issuer to issue securities with long term maturity for any amount Banks can issue STRIPS against securities held by them

Guidlines
Any entity holding govt. Sec can strip these securities as notified by RBI from time to time, Demat account is necessary Holders of Govt Sec shall place their request for Strip/reconstruction with an authorized entity Can be done at any time between issuance and maturity of Security All Dated Govt sec having Coupon payment date on Jan 2 and July 2 , irrespective of year of maturity shall be eligible for stripping

Measures to Promote Retail Trading in Govt Securities

Bank allowed to freely buy and sell securities Exempted from TDS Support to Primary Dealers Setting up of mutual funds dealing exclusively in these securities A non-Competitive bidding facility Depositories are allowed to open 2nd SGL account