

By – DIKSHYA MAHAPATRA
FINANCIAL SYSTEM

 Financial Assets

Marketable Assets Non – marketable Assets

• Shares : Equity Shares, • Fixed Deposits

Preferred Shares • Provident Funds
• Government Security Bonds
• LIC Schemes
• Government Debentures
• UTI Units • Post Office Certificates
• Mutual Fund Units
• Bearer Debentures
 Financial Intermediaries

 It bridges the gap between investors and savers.

ORGANISED UNORGANISED

• Capital Market • Loans from friends and

Intermediaries family
• Money Market • Indigenous bankers
• Traders and Landlords
Intermediaries • Chit funds
 FINANCIAL MARKET

A market in which people trade financial
securities at low transaction costs and at prices
that reflect supply and demand.

Types – 1) Unorganized Market

2) Organized Market
 Capital Market
 Money Market
 CAPITAL MARKET

CAPITAL MARKET

Industrial Securities Government Securities Long

term
Market Market
Loan Market
Ex – IPO,SEO Ex – Bonds
 Industrial Securities Market

Primary Secondary

Long term Loan Market

Term Loan Market Market for Mortgages Market for Financial

Guarantees
Importance of Capital Market

Productive use of savings
Capital Formation
Rational allocation of scarce resources
Stability of valuable securities
It serves as a source of technological up-
gradation.
It enhances economic welfare of the society
 MONEY MARKET

MONEY MARKET

Call Money Commercial Bills Treasury Bills

Short term
Market Market Market
Loan Market
 New Issue Market OR IPO
Market

 It deals with new securities which are not available previously to
the investing public.
 Functions of New Issue Market –
 Transfer of resources from the savers to users.
 Gives a requisite platform for economic growth, raising new
finance, to establish a new enterprise.
 Helpful for expansion, diversification and modernization of
existing firms.
 Origination – It refers to the investigation, analysis and
processing of new project proposals.
It gives two types of services (i) Preliminary Investigation (ii)
Advisory Services
Advisory Services –
(a) Types of issues
(b) Magnitude of issues
(c) Timing of Flotation
(d) Methods of issue Book Building Process

Fixed Price

 Underwriting – An agreement whereby the underwriter

promises to subscribe a specified no. of shares or
debentures, or a specified amount of stock in an event of
public not subscribing the issue.
 Distribution – It is the function of selling securities to
ultimate investors through brokers and agents who have
regular and direct contract with investors.
 UNDERWRITING
Methods

Standing behind issue
Outright purchase
Consortium method
Advantages
The company is relieved from the risk of under subscription or unsubscription.
Company assured about minimum subscription.
Underwriter takes the burden of distributing the securities.
They provide expert advice in regard to timing, price, size and type of
securities.
Public confidence on the issue is enhanced when it is done by a reputed
underwriter.
Types of Underwriter –
 Institutional Underwriter – UTI, LIC, IDBI, ICICI, GIC,
Commercial Banks
 Non – institutional underwriter – Generally, brokers
guarantee the shares only for getting commission from
the company. After purchasing the shares, they offload the
shares to the public with some profit.

DISTRIBUTION
How the shares are issued –
 Public issue
 Offer for sale
 Placement
 Right issue
 Contents of a company’s prospectus
(red herring prospectus)
• Name of the company
• Address of the register / corporate office
• Existing and proposed activities
• Location of the company
• Name of the directors
• Authorized and proposed issued capital
• Date of opening and date of closing
• Minimum subscription – 90%
• Names of the brokers, underwriters, investment
bankers/merchant bankers, registers, managers to the
issue
• A statement by the company that it will apply to the stock
exchange for quotation of its shares.
 Mechanics of an IPO

Green Shoe Option Lock up Period
 Many underwriting contracts
contain a Green Shoe Option
It will specify how
sometimes also called as the long insiders must wait
Over Allotment Option, after an IPO before
which gives the members of
they can sell some or
the underwriting group the
option to purchase additional all of their stock.
shares from the issuer at the Typically between 90
agreed price and allocate (in
case of over subscription).
to 180 days.
 PRICING OF AN IPO

 Fixed Price IPO- In a fixed price IPO the issue price
and the total capital to be raised is fixed and intimated to
the investor prior to the subscription.
 Book Building Mechanism – The problem of under
pricing in a Fixed Price IPO is addressed in this process
which helps in a better price and demand discovery for
the shares.

The underwriters work closely with the company to

come up with a price range that they believe provides a
reasonable valuation of the firm.
 WAYS TO ESTIMATE THE
VALUE OF THE COMPANY

Estimate the future cash flows and compute
the present value.
Estimate the value by examining
comparable companies.

 Most of the underwriters use both techniques,

however, when the estimates are substantially
different, the comparable method is often relied upon
 COST OF ISSUING EQUITY

Direct Expenses –
(i) Spread or fees of the underwriter
(ii) Filing fees, legal fees, etc.

Indirect Expenses –
(i) Cost of management time spent working on the new issue.
(ii) Under pricing – Deliberate under pricing by the
underwriter or the firm itself to ensure full subscription.
 
 General guidelines for
new Issue

The EPS of the last 3 years and comparison of
pre – issue price to earning ratio to the price
earning ratio of industry must be compared.
The company have to calculate NAV (Net Asset
Value) before issue.
The minimum return on increased net worth to
maintain pre – issue EPS.
 SEBI Guidelines for
PrimaryMarket
General guidelines for primary market

New Company
Those companies who have not completed 12
months of commercial production and doesn’t have
audited results, they have to issue only at par.
General guidelines for primary market (contd.)
(a) New company set up by existing company – They
can go for at least 50% equity in the new company.
They can go for Premium issue.

(b) Private and Closely Held Company – If they have

3 years of profit, they are free to price their issue.

(c) Existing Listed Company – These companies are

allowed to raise fresh capital by freely pricing,
provided the promoters contribution is 50% on first
100 crores, 40% on the next 200 crores, 30% on next
300 crores and 15% on balance issue amount.
Reservation of Issue
It changes from time to time.

Permanent Employee – 10%

Indian Mutual Fund – 20%
Foreign Institutional Investors – 15%
Development of Financial Institutions – 20%
Shareholders of Groups of Companies – 10%
Rest 25% – Public
 Guidelines for Public Issue

 Abridged prospectus should be attached to each
and every application.
 Risk factors should be highlighted in the
prospectus.
 Objective of issue and cost of project should be
mentioned.
 Justification for premium in case of premium
should be stated.
 Subscription list for public issue should be opened
for minimum 3 days and maximum 10 days.
 
The collection centres should be at least 30,
including all centres with stock exchange.
Collection agents are not to collect application
money in cash.
The quantum of issue shall not exceed than
the amount specified in the prospectus.
No retention of over subscription is possible
under any circumstances.
 
A compliance report in the prescribed form
should be submitted to SEBI within 45 days
from the date of closure of issue.
Minimum number of shares per application –
500 shares of face value Rs. 100.
If minimum subscription of 90% has not been
received, the entire amount is to be refunded
to investors within 120 days.
Underwriting has been made mandatory.
 Seasoned Equity Offering (SEO)

General Public Offering – It is issued to the
public.

Rights Offering – It is first issued

to the existing Shareholders. If the
Shareholders doesn’t take the shares,
then it is issued to the public.
 CHRONOGRAPH IN A
RIGHTS
 ISSUE
Announcement Date
Ex-Rights Date (Date after which the
option to exercise the rights expires)
Holder of Record Date or Record
Date (Within 2 days of Ex-Rights Date)
Offer of the Rights Date
Issues involved in a Rights
Offering

When the rights shares are offered to the
existing shareholders, 3 principal issues are
involved –
 The number of rights required to buy a
share.
 The theoretical value of a right.
 The effects of a right offering.
 Effects on Shareholder’s Wealth

When a rights issue is offered, an existing
shareholder is a given 3 options –
i. He exercise his rights and gets the new shares.
ii. He sells his rights to someone else.
iii. He does nothing that is he does not exercise or
sell the rights.
Secondary market (Aftermarket) – It is the
financial
market in which previously issued financial
instruments such as stock, bonds, options, and
futures are bought and sold.
Generally, such securities are quoted under
Stock Exchange and it provides a continuous
and regular market for buying and selling
securities.

Two top Stock Exchanges are –

1 – BSE – Bombay Stock Exchange
2 – NSE – National Stock Exchange
Trading Systems of BSE and NSE –

BSE – BSE Online Trading (BOLT)

NSE – National Exchange for Automated Trading
(NEAT)

Clearing Houses –

BSE – Bank Of India Shareholding Ltd. (BOISL)

NSE – National Securities Clearing Corporation
Ltd. (NSCCL)
Settlement – It is the process that involves
transfer of money from the buyer to the seller
and the transfer of securities from seller to
buyer.

Settlement must be done within T + 2 days.

T + 2 days is the time between the payment
must be made by the buyer. The seller also must
transfer the securities to the buyer within this 2
days.

A buyer and seller must always be present in the

market to keep it functioning. Such a person or
organization is known as MARKET MAKER (The