UNIT II SECURITIES MARKETS

Financial Market - Segments – Types - - Participants in financial Market – Regulatory

Environment, Primary Market – Methods of floating new issues, Book building – Role of
primary market – Regulation of primary market, Stock exchanges in India – BSE, OTCEI ,
NSE, ISE, and Regulations of stock exchanges – Trading system in stock exchanges –SEBI.

Table of content

2.1 Financial Market……………………………………………………………………. 1

2.2 Financial Market segment and Types………………………………………………. 2
2.3 Participants in financial market…………………………………………………….. 6
2.4 Regulatory Environment……………………………………………………………. 11
2.5 Methods of Floating New Issues…………………………………………………… 11
2.5.1 Pure Prospectus Method……………………………………………………. 11
2.5.2 Offer For Sales Method…………………………………………………….. 12
2.5.3 Private Placement Method………………………………………………….. 13
2.5.4 Initial Public Offer Method…………………………………………………. 14
2.5.5 Rights Issue Method………………………………………………………… 15
2.5.6 Bonus Issue Method………………………………………………………… 16
2.5.7 Book Building Method……………………………………………………... 17
2.5.8 Stock Option Method………………………………………………………. 21
2.5.9 Bought Out Method………………………………………………………… 23
2.6 Stock Exchanges in India…………………………………………………………… 23
2.6.1 Bombay stock Exchange (BSE)…………………………………………...... 24
2.6.2 Over-the-Counter Exchange of India (OTCEI)……………………………... 25
2.6.3 National Stock Exchange (NSE)……………………………………………. 27
2.6.4 Inter connected Stock Exchange (ISE)……………………………………… 28
2.7 Trading systems in stock exchanges………………………………………………... 30
2.8 Security Exchange Board of India………………………………………………….. 33
2.1 FINANCIAL MARKETS

➢ In economics, a financial market is a mechanism that allows people to buy and sell
(trade) financial securities (such as stocks and bonds), commodities (such as precious
metals or agricultural goods), and other fungible items of value at low transaction
costs and at prices that reflect the efficient-market hypothesis. Financial markets can
be domestic or they can be international.
➢ In finance, financial markets facilitate:

• The raising of capital (in the capital markets)

• The transfer of risk (in the derivatives markets)
• International trade (in the currency markets)

- And are used to match those who want capital to those who have it.

Financial market functions:

Financial markets serve six basic functions. These functions are briefly listed below:

• Borrowing and Lending: Financial markets permit the transfer of funds (purchasing
power) from one agent to another for either investment or consumption purposes.
• Price Determination: Financial markets provide vehicles by which prices are set both
for newly issued financial assets and for the existing stock of financial assets.
• Information Aggregation and Coordination: Financial markets act as collectors and
aggregators of information about financial asset values and the flow of funds from
lenders to borrowers.
• Risk Sharing: Financial markets allow a transfer of risk from those who undertake
investments to those who provide funds for those investments.
• Liquidity: Financial markets provide the holders of financial assets with a chance to
resell or liquidate these assets.
• Efficiency: Financial markets reduce transaction costs and information costs.

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1.2 TYPES OF FINANCIAL MARKETS

The financial markets can be divided into different subtypes:

Financial
Market

Capital Market Money Market

Foreign Government
Exchange securities
Market Market

Derivatives Insurance Commodity

Market Market Market

(A) Capital Market:

• The capital market deals in long term funds (shares and debentures). Companies raise
their capital through the issue of shares and debentures.
• Capital markets which consist of:

Capital
Market

Stock Bond
Market Market

• Stock markets, which provide financing through the issuance of shares

or common stock, and enable the subsequent trading thereof.
• Bond markets, which provide financing through the issuance of bonds,
and enable the subsequent trading thereof.

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Another classification of capital market is as follows:

Capital
Market

Primary Secondary
Market Market

Primary Market:

• Primary market refers to the sale of shares, directly by the company at the time of
promotion and the investors directly buy the shares from the company through
application.
• Newly formed (issued) securities are bought or sold in primary markets.
• The share price will be mostly at par.

Secondary Market:

• Secondary markets allow investors to sell securities that they hold or buy existing securities.
• Here sale and purchase of securities will take place through the recognized stock exchanges.
• Only authorized persons are allowed to deal in the securities in the secondary market, who
are known as brokers.
• Only listed securities will be traded in the stock exchanges.
(B) Money markets:

• Money market deals in short term funds which provide short term debt financing and
investment.
• In fact there is no fixed place as money market.

• The term money market refers to a collective name given to all the institutions which are
dealing in short term funds.
• Money market provides working capital.

This material is proprietary to KV Institute of Management, a Nationally Ranked B School in Coimbatore and cannot be copied or duplicated for
use outside of KV. Violators will face infringement proceedings of copyright laws.
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Money Market

Organised
Indian Money
Market
Unorganised

Unorganised
Money
Market

Indigenous Money
Bankers Lenders

Promissory
Hundies
Note
 Organised Money Market
Trade Bills or
Finance Bills Treasury Bills Foreign Bills
Commercial Bills

(C) Commodity Market & Derivative market& Insurance Market:

• Commodity markets, which facilitate the trading of commodities

• Derivatives markets, which provide instruments for the management of financial risk.
• Futures markets, which provide standardized forward contracts for trading
products at some future date; see also forward market.
• Insurance markets, which facilitate the redistribution of various risks.
(D) Foreign exchange markets
• Foreign exchange markets, which facilitate the trading of foreign exchange. Foreign
exchange is bought and sold and the different forms of foreign currency are dealt. In
India, foreign exchange is held by Reserve bank of India which is the exchange
controlauthority. We have then Foreign Exchange Regulation Act which is now
renamed as Foreign Exchange Management Act (FEMA) to deal with Foreign
exchange.

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 Authorised
Dealers

Foreign banks
Foreign
Exchange RBI
market
Importers
Exporters&

Money Changers

(E) Government Securities Market:

It can be divided as follows:

Government
securities Market

Treasury
Bills

Bonds

When government is in need of funds to meet its budgetary deficits, it goes for the issue of
treasury bills and bonds.

Treasury bills and bonds:

Treasury bills are issued for raising short term funds and mainly to meet revenue
expenditure. Bonds are issued for raising long term loans and these are repayable over a
period of 15 or 20 years. Normally they are subscribed by financial institutions as these
securities carry attractive interest rates and they can be sold easily in the market. It is for
this reason; they are called as liquid assets.

1.3 PARTICIPANTS IN FINANCIAL MARKET:

In the financial markets, there is a flow of funds from one group of parties (funds-
surplus units) known as investors to another group (funds-deficit units) which require funds.
However, often these groups do not have direct link. The link is provided by market
intermediaries such as brokers, mutual funds, leasing and finance companies, etc. In all,

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 there is a very large number of players and participants in the financial market.
Brokers:

A broker is a commissioned agent of a buyer (or seller) who facilitates trade by

locating a seller (or buyer) to complete the desired transaction. A broker does not take a
position in the assets he or she trades -- that is, the broker does not maintain inventories in
these assets. The profits of brokers are determined by the commissions they charge to the
users of their services (the buyers, the sellers, or both). Examples of brokers include real
estate brokers and stock brokers.

Diagrammatic Illustration of a Stock Broker:

Dealers:

Like brokers, dealers facilitate trade by matching buyers with sellers of assets; they
do not engage in asset transformation. Unlike brokers, however, a dealer can and does "take
positions" (i.e., maintain inventories) in the assets he or she trades that permit the dealer to
sell out of inventory rather than always having to locate sellers to match every offer to buy.
Also, unlike brokers, dealers do not receive sales commissions. Rather, dealers make profits
by buying assets at relatively low prices and reselling them at relatively high prices (buy
low - sell high). The price at which a dealer offers to sell an asset (the "asked price") minus
the price at which a dealer offers to buy an asset (the "bid price") is called the bid-ask
spread and represents the dealer's profit margin on the asset exchange. Real-world examples
of dealers include car dealers, dealers in U.S. government bonds, and NASDAQ stock
dealers.

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Investment Banks:

An investment bank assists in the initial sale of newly issued securities (i.e., in IPOs =
Initial Public Offerings) by engaging in a number of different activities:

• Advice: Advising corporations on whether they should issue bonds or stock, and, for
bond issues, on the particular types of payment schedules these securities should offer;
• Underwriting: Guaranteeing corporations a price on the securities they offer, either
individually or by having several different investment banks form a syndicate to
underwrite the issue jointly;
• Sales Assistance: Assisting in the sale of these securities to the public.

Some of the best-known U.S. investments banking firms are Morgan Stanley, Merrill Lynch,
Salomon Brothers, First Boston Corporation, and Goldman Sachs.

Financial Intermediaries:
Unlike brokers, dealers, and investment banks, financial intermediaries are financial
institutions that engage in financial asset transformation. That is, financial intermediaries
purchase one kind of financial asset from borrowers -- generally some kind of long-term
loan contract whose terms are adapted to the specific circumstances of the borrower (e.g., a
mortgage) -- and sell a different kind of financial asset to savers, generally some kind of
relatively liquid claim against the financial intermediary (e.g., a deposit account). In
addition, unlike brokers and dealers, financial intermediaries typically hold financial assets
as part of an investment portfolio rather than as an inventory for resale. In addition to
making profits on their investment portfolios, financial intermediaries make profits by
charging relatively high interest rates to borrowers and paying relatively low interest rates to
savers.

Types of financial intermediaries include: Depository Institutions (commercial banks,

savings and loan associations, mutual savings banks, credit unions);Contractual Savings
Institutions (life insurance companies, fire and casualty insurance companies, pension funds,
government retirement funds); and Investment Intermediaries (finance companies, stock and
bond mutual funds, money market mutual funds).

The individuals:
These are net savers and purchase the securities issued by corporate. Individuals
provide funds by subscribing to these security or by making other investments.
 The Firms or corporate:
The corporate are net borrowers. They require funds for different projects from time
to time. They offer different types of securities to suit the risk preferences of investors
Sometimes, the corporate invest excess funds, as individuals do. The funds raised by issue
of securities are invested in real assets like plant and machinery. The income generated by
these real assets is distributed as interest or dividends to the investors who own the
securities.
Government:
Government may borrow funds to take care of the budget deficit or as a measure of
controlling the liquidity, etc. Government may require funds for long terms (which are
raised by issue of Government loans) or for short-terms (for maintaining liquidity) in the
money market. Government makes initial investments in public sector enterprises by
subscribing to the shares, however, these investments (shares) may be sold to public
through the process of disinvestments.
Regulators:
Financial system is regulated by different government agencies. The relationships
among other participants, the trading mechanism and the overall flow of funds are managed,
supervised and controlled by these statutory agencies. In India, two basic agencies regulating the
financial market are the Reserve Bank of India (RBI ) and Securities and Exchange Board of
India (SEBI). Reserve Bank of India, being the Central Bank, has the primary responsibility of
maintaining liquidity in the money market It undertakes the sale and purchase of T-Bills on
behalf of the Government of India. SEBI has a primary responsibility of regulating and
supervising the capital market. It has issued a number of Guidelines and Rules for the control
and supervision of capital market and investors protection. Besides, there is an array
of legislations and government departments also to regulate the operations in the financial
system.

Market Intermediaries:
There are a number of market intermediaries known as financial intermediaries or
merchant bankers, operating in financial system. These are also known as investment managers
or investment bankers. The objective of these intermediaries is to smoothen the process of
investment and to establish a link between the investors and the users of funds. Corporations and
Governments do not market their securities directly to the investors. Instead, they hire the
services of the market intermediaries to represent them to the investors. Investors, particularly
small investors, find it difficult to make direct investment.

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 A small investor desiring to invest may not find a willing and desirable borrower. He
may not be able to diversify across borrowers to reduce risk. He may not be equipped to assess and
monitor the credit risk of borrowers. Market intermediaries help investors to select investments by
providing investment consultancy, market analysis and credit rating of investment instruments. In
order to operate in secondary market, the investors have to transact through share brokers. Mutual
funds and investment companies pool the funds(savings) of investors and invest the corpus in
different investment alternatives.

Some of the market intermediaries are:

• Lead Managers
• Bankers to the Issue
• Registrar and Share Transfer Agents
• Depositories
• Clearing Corporations

• Share brokers
• Credit Rating Agencies
• Underwriters
• Custodians
• Portfolio Managers
• Mutual Funds
• Investment Companies
These market intermediaries provide different types of financial services to the
investors. They provide expertise to the securities issuers. They are constantly operating in
the financial market. Small investors in particular and other investors too, rely on them. It is
in their (market intermediaries) own interest to behave rationally, maintain integrity and to
protect and maintain reputation, otherwise the investors would not be trusting them next
time. In principle, these intermediaries bring efficiency to corporate fund raising by
developing expertise in pricing new issues and marketing them to the investors.

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1.4 REGULATORY ENVIRONMENT:
Financial system is regulated by different government agencies. The relationships
among other participants, the trading mechanism and the overall flow of funds are managed,
supervised and controlled by these statutory agencies. In India, two basic agencies
regulating the financial market are the Reserve Bank of India (RBI ) and Securities and
Exchange Board of India (SEBI).
Reserve Bank of India, being the Central Bank, has the primary responsibility of
maintaining liquidity in the money market It undertakes the sale and purchase of T-Bills on
behalf of the Government of India. SEBI has a primary responsibility of regulating and
supervising the capital market. It has issued a number of Guidelines and Rules for the
control and supervision of capital market and investors protection. Besides, there is an array
of legislations and government departments also to regulate the operations in the financial
system.

1.4.1 METHODS OF FLOATING NEW ISSUES:

Methods of Marketing Securities

Following are the various methods being adopted by corporate entities for marketing
the securities in the New Issue Market:

1. Pure Prospectus Method

2. Offer for Sale Method
3. Private Placement Method
4. Initial public Offers (IPOs) Method
5. Rights Issue Method
6. Bonus Issue Method
7. Book-building Method
8. Stock Option Method and
9. Bought-out Deals Method
1.5.1 Pure prospectus

The method whereby a corporate enterprise mops up capital funds from the
general public by means of an issue of a prospectus is called Pure Prospectus Method .
It is the most popular method of making public issue of securities by corporate
enterprises.

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Features
• Exclusive subscription: Under this method, the new issues of a company are
offered for exclusive subscription of the general public.

• Issue Price: Direct officer is made by the issuing company to the general public to
subscribe to the securities as a stated price.

• Underwriting: Public issue through the pure prospectus method is usually underwritten.
This is to safeguard the interest of the issuer in the event of an unsatisfactory response
from the public.

• Prospectus: A document that contains information relating to the various aspects of the
issuing company, besides other details of the issue is called a Prospectus . The document
is circulated to the public. The general details include the company s name and address of
its registered office, the names and addresses of the company s promoters, manager,
managing director, directors, company secretary, legal adviser, auditors, bankers, brokers.

Advantages

The pure prospectus method offers the following advantages to the issuer and the investors alike:

• Benefits to investors: The pure prospectus method of marketing the securities serves as an
excellent mode of disclosure of all the information pertaining to the issue. Besides, it also
facilitates satisfactory compliance with the legal requirements of transparency, etc.

• Benefits to issuers: The pure prospectus method is the most popular method among the
larger issuers. In addition, it provides for wide diffusion of ownership of securities
contributing to reduction in the concentration of economic and social power.

Drawbacks

The raising of capital through the pure prospectus method is fraught with a number of drawbacks
as specified below:

• High issue costs: A major drawback of this method is that it is an expensive mode of
raising funds from the capital market. Costs of various hues are incurred in mobilizing
capital.

• Time Consuming: The issue of securities through prospectus takes more time, as its
requires the due compliance with various formalities before an issue could take place.

1.5.2 Offer for Sale

Where the marketing of securities takes place through intermediaries, such as issue
houses, stockholders and others, it is a case of Offer for sale Method .

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Features
Under this method, the sale of securities takes place in two stages. Accordingly, in the
first stage, the issuer company makes an en-block sale of securities to intermediaries such
as the issue houses and share brokers of an agreed price. Under the second stage, the
securities are re-sold to ultimate investors at a market-related price.

The issue is also underwritten to ensure total subscription of the issue. The biggest
advantage of this method is that it saves the issuing company the hassles involved in selling
the shares to the public directly through prospectus.

1.5.3 Private Placement

Method Meaning
A method of marketing of securities whereby the issuer makes the offer of sale of
individuals and institutions privately without the issue of a prospectus is known as Private
Placement Method.

Features

Under this method, securities are offered directly to large buyers with the help of
share brokers. This method works in a manner similar to the Offer for Sale Method
whereby securities are first sold to intermediaries such as issues houses, etc.

Advantages

Private placement of securities offers the following advantages:

1. Less expensive as various types of costs associated with the issue are borne by the issue
houses and other intermediaries.
2. Placement of securities suits the requirements of small companies.
3. The method is also resorted to when the stock market is dull and the public response to the
issue is doubtful.

Disadvantages
The major weaknesses of the private placement of securities are as follows:
1. Concentration of securities in a few hands.
2. Creating artificial scarcity for the securities thus jacking up the prices temporarily and
misleading general public.

3. Depriving the common investors of an opportunity to subscribe to the issue, thus affecting
their confidence levels.

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1.5.4 Initial Public Offer (IPO) Method

The public issue made by a corporate entity for the first time in its life is called Initial
public Offer (IPO), Under this method of marketing, securities are issue to successful
applicants on the basis of the orders placed by them, through their brokers.

When a company whose stock is not publicly traded wants to offer that stock to the
general public, it takes the form of Initial public offer . The job of selling the stock is
entrusted to a popular intermediary, the underwriter. The underwriters charge a fee for their
services.

Stocks are issued to the underwriter after the issue of prospectus which provides
details of financial and business information as regards the issuer.

The issuer and the underwriting syndicate jointly determine the price of a new issue.
IPO stock at the release price is usually not available to most of the public. Good
relationship between, the broker and the investor is a pre-requisite for the stock being
acquired.

Full disclosure of all material information in connection with the offering of new
securities must be made as part of the new offerings. A statement and preliminary prospectus
(also known as a red herring) containing the following information is to be filled with the
Registrar of Companies:

1. A description of the issuer s business.

2. The names and addresses of the Key company officers, with salary and a 5 year business
history on each.
3. The amount of ownership of the key officers
4. Any legal proceedings that the company is involved in

The essential steps involved in this method of marketing of securities are as follows:
1. Order: Broker receives order from the client and places orders on behalf of the client with
the issuer.
2. Share Allocation: The issuer finalizes share allocation and informs the broker regarding
the same.
3. The Client: The broker advises the successful clients of the share allocation. Clients then
submit the application forms for shares and make payment to the issuer through the broker.
4. Primary issue account: The issuer opens a separate escrow account (primary issue
account) for the primary market issue. The clearing house of the exchange debits the
primary issue account of the broker and credits the issuer s account.
5. Certificates: Certificates are then delivered to investors. Otherwise depository account
may be credited.

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1.5.5 Rights issue Method
Where the shares of an existing company are offered to its existing shareholders. It takes the
form of rights issue. Under this method, the existing company issues shares to its existing
shareholder sin proportion in the number of shares already held by them.

The relevant guidelines issued by the SEBI in this regard are as follows:

1. Shall be issued only by listed companies.

2. Announcement regarding rights issue once made, shall not be withdrawn and where
withdrawn, no security shall be eligible for listing upto 12 months.
3. Underwriting as to rights issue is optional and appointment of Registrar is compulsory.
4. Appointment of category I Merchant Bankers holding a certificate of registration issued by
SEBI shall be compulsory.
5. Rights share shall be issued only in respect of fully paid share.
6. Letter of Offer shall contain disclosures as per SEBI requirements.
7. Issue shall be kept open for a minimum period of 30 days and for a maximum period of 60
days.
8. A No complaints Certificate is to be filed by the Legal Merchant Banker with the SEBI
after 21 days from the date of issue of the document.
9. Obligatory for a company where increase in subscribed capital is necessary after two years
of its formation of after one year of its first issue of shares, whichever is earlier (this
requirement may be dispensed with by a special resolution).

Advantages
Rights issue offers the following advantages

1. Economy: Rights issue constitutes the most economical method of raising fresh capital, as
it involves no underwriting and brokerage costs.
2. Easy: The issue management procedures connected with the rights issue are easier as only
a limited number of applications are to be handled.
3. Advantage to shareholders: Issue of rights shares does not involve any dilution of
ownership of existing shareholders.

Drawbacks
The method suffers from the following limitations:

1. Restrictive: The facility of rights issue is available only to existing companies and not to
new companies.
2. Against society: the issue of rights shares runs counter to the overall societal consideration
of diffusion of share ownership for promoting dispersal of wealth and economic power.

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1.5.6 Bonus Issues Method

Where the accumulated reserves and surplus of profits of a company are converted into paid
up capital, it takes the form of issue of bonus shares. It merely implied capitalization of existing
reserves and surplus of a company.

Issue under Section 205 (3) of the companies Act, such shares is governed by the guidelines
issued by the SEBI (applicable of listed companies only) as follows:

SEBI Guidelines

Following are the guidelines pertaining to the issue of bonus shares by a listed corporate enterprise:

1. Reservation: In respect of FCDs and PCDs, bonus shares must be reserved in proportion
to such convertible part of FCDs and PCDs. The shares so reserved may be issued at the
time of conversion(s) of such debentures on the same terms on which the bonus issues were
made.
2. Reserves: the bonus issue shall be made out of free reserves built out of the genuine profits
or share premium collected in cash only.
3. Dividend mode: the declaration of bonus issue, in lieu of dividend, is not made.
4. Fully paid: The bonus issue is not made unless the partly paid shares, if any are made fully
paid-up.
5. No default: The Company has not defaulted in payment of interest or principal in respect
of fixed deposits and interest on existing debentures or principal on redemption thereof and
has sufficient reason to believe that it has not defaulted in respect of the payment of
statutory dues of the employees such as contribution to provident fund, gratuity, bonus, etc.
6. Implementation: A company that announces its bonus issue after the approval of the
Board of Directors must implement the proposal within a period of 6 months from the date
of such approval and shall not have the option of changing the decision.
7. The articles: The articles of Association of the company shall contain a provision for
capitalization of reserves, etc. if there is no such provision in the articles, the company
shall pass a resolution at is general body meeting making provision in the Articles of
Association for capitalization.
8. Resolution: consequent to the issue of bonus shares if the subscribed and paid-up capital
exceeds the authorized share capital, the company at its general body meeting for
increasing the authorized capital shall pass a resolution.

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1.5.7 Book-building Method

A method of marketing the shares of a company whereby the quantum and the price of the
securities to be issued will be decided on the basis of the bids received from the prospective
shareholders by the lead merchant bankers is known as book-building method .

The option of book-building is available to all body corporate, which are otherwise eligible
to make an issue of capital of the public. The initial minimum size of issue through book-building
route was fixed at Rs.100 crores.
The book-building process involves the following steps:
1. Appointment of book-runners: the first step in the book-building is the appointment by
the issuer company, of the book-runner, chosen from one of the lead merchant bankers.
The book-runner in the forms a syndicate for the book building. A syndicate member
should be a member of National Stock Exchange (NSE) or Over-the-Counter Exchange of
India (OTCEI). Offers of bids are to be made by investors to the syndicate members,
who register the demands of investors.
2. Drafting prospectus: The draft prospectus containing all the information except the
information regarding the price at which the securities are offered is to be filed with SEBI
as per the prevailing SEBI guidelines. The offer of securities through this process must
separately be disclosed in the prospectus, under the caption placement portion category .
3. Circulating draft prospectus: A copy of the draft prospectus filed with SEBI is to be
circulated by the book-runner to the prospective institutional buyers who are eligible for
firm allotment and also to the intermediaries who are eligible to act as underwriters.
4. Maintain offer records: The book-runner maintain a record to the offers received. Details
such as the name and the number of securities ordered together with the price at which
each institutional buyer or underwriter is willing to subscribed to securities under the
placement portion must find place in the record. SEBI has the right to inspect such
records.
5. Intimation about aggregate orders: The underwriters and the institutional investors shall
give intimation on the aggregate of the offers received to the book-runner.
6. Bid analysis: The bid analysis is carried out by the book-runner immediately after the
closure of the bid offer date. An appropriate final price is arrived at after a careful
evaluation of demands at various prices and the quantity.
7. Mandatory underwriting: Where it has been decided to make offers of shares to public
under the category of Net offer of the Public , it is incumbent that the entire portion
offered to the public is fully underwritten.
8. Filling with ROC: A copy of the prospectus as certified by the SEBI shall be filed with
the Registrar of Companies within two days of the receipt of the acknowledgement card
from the SEBI.
9. Bank accounts: The issuer company has to open two separate accounts for collection of
application money, one for the private placement portion and the other for the public
subscription.

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 10. Collection of completed applications: The book-runner collects from the institutional
buyers and the underwriters the application forms along with the application money to the
extent of the securities proposed to be allotted to them or subscribed by them.
11. Allotment of securities: Allotment for the private placement portion may be made on the
second day from the closure of the issue. The issuer company, however, has the option to
choose one date for both the placement portion and the public portion.
12. Payment schedule and listing: The book-runner may require the underwriters to the net
offer to the public to pay in advance all moneys required to be paid in respect of their
underwriting commitment by the eleventh day of the closure of the issue.
13. Under-subscription: In the case of under-subscription in the net offer to the public
category, any spillover to the extent of under subscription is to be permitted from the
placement portion category subject to the condition that preference is given to the
individual investors.

BOOK BUILDING PROCESS

Book Building is basically a capital issuance process used in Initial Public Offer (IPO)
which aids price and demand discovery. It is a process used for marketing a public offer of equity
shares of a company. It is a mechanism where, during the period for which the book for the IPO is
open, bids are collected from investors at various prices, which are above or equal to the floor
price. The process aims at tapping both wholesale and retail investors. The offer/issue price is then
determined after the bid closing date based on certain evaluation criteria.

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The Process:

➢ The Issuer who is planning an IPO nominates a lead merchant banker as a 'book runner'.

➢ The Issuer specifies the number of securities to be issued and the price band for orders.

➢ The Issuer also appoints syndicate members with whom orders can be placed by the
investors.

➢ Investors place their order with a syndicate member who inputs the orders into the
'electronic book'. This process is called 'bidding' and is similar to open auction.

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➢ A Book should remain open for a minimum of 5 days.

➢ Bids cannot be entered less than the floor price.

➢ Bids can be revised by the bidder before the issue closes.

➢ On the close of the book building period the 'book runner evaluates the bids on the basis of
the evaluation criteria which may include -
• Price Aggression
• Investor quality
• Earliness of bids, etc.

➢ The book runner the company concludes the final price at which it is willing to issue the
stock and allocation of securities.

➢ Generally, the numbers of shares are fixed; the issue size gets frozen based on the price per
share discovered through the book building process.

➢ Allocation of securities is made to the successful bidders.

➢ Book Building is a good concept and represents a capital market which is in the process of
maturing.

Book-building is all about letting the company know the price at which you are willing to buy
the stock and getting an allotment at a price that a majority of the investors are willing to pay.
The price discovery is made depending on the demand for the stock.
Regulations of primary Market

▪ Entry Barriers for unlisted companies modified as dividend payment in

immediately preceding 3 years

▪ A listed company required to meet entry form if post issue net worth is higher than
pre issue net worth

▪ Full payment before making a public/ rights issue

▪ The promoter s contribution for public issues made uniform at 20% irrespective of
the issue size

▪ Written consent from shareholders for promoter s contribution

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 ▪ Appointment of Registrar

▪ Promoters and their background -Promotors details

▪ The SEBI rules and regulations 1993 have been amended for the relationship
between issuer and Registrar

▪ SEBI allowed debt instruments to the stock exchanges

▪ Only body corporate to be allowed to function as Merchant bankers- only on entity

▪ NBFCs such as Accepting deposits, leasing, bill discounting etc., will not be
allowed to be undertaken by a Merchant banker.

Advantages of book-building

Book building process is of immense use in the following ways:

1. Reduction in the duration between allotment and listing

2. Reliable allotment procedure
3. Quick listing in stock exchanges possible
4. No price manipulation as the price is determined on the basis of the bids received.

1.5.8 Stock Option or employees Stock Option Scheme (ESOP)

A method of marketing the securities of a company whereby its employees are encouraged
to take up shares and subscribe to it is known as stock option . It is a voluntary scheme on the part
of the company to encourage employees participation in the company. The scheme also offers an
incentive to the employees to stay in the company.

SEBI Guidelines
Company whose securities are listed on any stock exchange can introduce the scheme of
employees stock option. The offer can be made subject to the conditions specified below:

1. Issue at discount: Issue of stock options at a discount to the market price would be
regarded as another form of employee compensation and would be treated as such in the
financial statements of the company regardless the quantum of discount on the exercise
price of the option.
2. Approval: The issue of ESOP s is subject to the approval by the shareholders through a
special resolution.

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 3. Maximum limit: There would be no restriction on the maximum number of shares to be
issued to a single employee.
4. Minimum period: A minimum period of one year between grant of options and its vesting
has been prescribed. After one year, the company would determine the period during which
the option can be exercised.
5. Superintendence: The operation of the ESOP Scheme would have to be under the
superintendence and direction of a Compensation Committee of the Board of Directors in
which there would be a majority of independent directors.
6. Eligibility: ESOP scheme is open to all permanent employees and to the directors of the
company but not to promoters and large shareholders.
7. Director s report: The Director s report shall make a disclosure of the following:

a. Total number of shares as approved the shareholders

b. The pricing formula adopted
c. Details as to options grated, options vested, options exercised and options forfeited,
extinguishments or modification of options, money realized by exercise of options,
total number of options in force, employee-wise details of options granted to senior
managerial personnel and to any other employee who received a grant in anyone year
of options amounting to 5 percent or more of options granted during that year.
d. Fully diluted EPS computed in accordance with the IAS
8. IPO: SEBI s stipulations prohibiting initial public offerings by companies having
outstanding options should not apply to ESOP.

Stock Option Norms for Software Companies

The relevant guidelines issued by the SEBI as regards employees stock option for software
companies are as follows:

1. Minimum issue: A minimum issue of 10 percent of its paid-up capital can be made by a
software company which has already floated American Depository Receipts (ADRs) and
Global Depository Receipts (GDRs) or a company which is proposing to float these is
entitled to issue ADR/GDR linked stock options to its employees.
2. Mode of Issue: Listed stock options can be issued in foreign currency convertible bonds
and ordinary shares (through depository receipt mechanism) to the employees of
subsidiaries of Info Tech Companies.
3. Permanent employees: Indian IT companies can issue ADR/GDR linked stock options to
permanent employees, including Indian and overseas directors, of their subsidiary
companies incorporated in India or outside.
4. Pricing: The pricing provisions of SEBI s preferential allotment guidelines would not
cover the scheme. The purpose is to be enable the companies to issue stock options to its
employees at a discount to the market price which serves as another form of compensation.

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 5. Approval: Shareholders approval through a special resolution is necessary for issuing the
ESOPs. A minimum period of one year between grant of option and its vesting has been
prescribed. After one year, the company would determine the period in which option can
be exercised.

1.5.9 Bought-out
Deals Meaning
A method for marketing of securities of a body corporate whereby the promoters of
an unlisted company make an outright sale of a chunk of equity shares to a single sponsor or
the lead sponsor is known as bought-out deals .

Features

1. Parties: There are three parties involved in the bought-out deals. They are promoters of
the company sponsors and co-sponsors who are generally merchant bankers and investors.
2. Outright Sale: Under this arrangement, there is an outright sale of a chunk of equity
shares to a single sponsor or the lead sponsor.
3. Syndicate: Sponsor forms a syndicate with other merchant bankers for meeting the
resource requirements and for distributing the risk.
4. Sale price: The sale price is finalized through negotiations between the issuing company
and the purchaser, the sale being influenced by such factors as project evaluation,
promoters image and reputation, current market sentiments, prospects of off-loading these
shares at a future date, etc.
5. Listing: The investor-sponsor make a profit, when at a future date, the shares get listed
and higher prices prevail. Listing generally takes place at a time when the company is
performing well in terms of higher profits and larger cash generations from projects.
6. OTCEI: Sale of these share at Over-the-Counter Exchange of India (OTCEI) or at a
recognized stock exchanges, the time of listing these securities and off-loading them
simultaneously are being generally decided in advance.

1.6 STOCK EXCHANGES IN INDIA:

It is an organized market for the purchase and sale of industrial and financial security. It is also
known as Secondary market or stock market

FUNCTIONS OF STOCK EXCHANGES

1. Ensure Liquidity of Capital

The stock exchanges provide a place where shares and stocks are converted in to cash.

2. Continuous Market for securities:

The stock exchanges provide a ready market for securities.

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 3. Evaluation of securities:
The investors can evaluate the worth of their holdings from the prices quoted at different
exchanges for those securities.

4. Mobilizing surplus savings:

Ready market-The investors do not have any difficulty in investing their savings by
purchasing shares, bonds etc., from the exchanges.

5. Helpful in raising New capital:

The new concerns raise the capital for the first time and existing concerns
increase their capital

6. Safety in Dealings:
Rules governed by Securities contract(Regulation ) Act, 1956

7. Listing of Securities:
Listed securities can purchase in market

8. Platform for public debt:

Stock exchanges for organized markets of government securities

9. Clearing House of Business Information:

The listed companies must provide financial statements, annual reports etc.,

Stock Exchanges in India

1.6.1 Bombay stock Exchange (BSE)

The Bombay Stock Exchange (BSE) is an Indian stock exchange located at Dalal
Street, Kala Ghoda, Mumbai (formerly Bombay), Maharashtra, India.

Established in 1875, the BSE is Asia’s first stock exchange, It claims to be the world's fastest
stock exchange, with a median trade speed of 6 microseconds, The BSE is the world's 11th largest
stock exchange with an overall market capitalization of $1.83 Trillion as of March, 2017. More than
5500 companies are publicly listed on the BSE. Unlike countries like the United States where 70% of
the GDP is derived from larger companies and the corporate sector, the corporate sector in India
accounts for only 12-14% of the national GDP. Of these, as of November 2016, there are only 7,800
listed companies of which only 4000 trade on the stock exchanges at BSE and NSE. Hence the
stocks trading at the BSE and NSE account for only about 4% of the Indian economy.

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 Session Timing

Pre-open Trading Session 09:00 – 09:15

Trading Session 09:15 – 15:30

Position Transfer Session 15:40 – 16:00

Closing Session 15:40 – 16:00

Option Exercise Session 17:07

▪ It is the oldest stock exchange in Asia

▪ It has established as The Native share and stock Brokers in 1875

Features of BSE

▪ Largest stock Exchange in Asia

▪ Fifth largest stock market in the world

▪ More than 6, 000 Indian companies are listed in BSE

▪ It used BOLT ( BSE online Trading system) as the stock trading system in the world

1.6.2 OTCEI
The OTC Exchange Of India (OTCEI), also known as the Over-the-Counter
Exchange of India, is based in Mumbai, Maharashtra. It is India's first exchange for small
companies, as well as the first screen-based nationwide stock exchange in India. OTCEI was
set up to access high-technology enterprising promoters in raising finance for new product
development in a cost-effective manner and to provide a transparent and efficient trading
system to investors.

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 OTCEI is promoted by the Unit Trust of India, the Industrial Credit and Investment
Corporation of India, the Industrial Development Bank of India, the Industrial Finance
Corporation of India, and other institutions, and is a recognised stock exchange under the
SCR Act.
The OTC Exchange Of India was founded in 1990[3] under the Companies Act
1956 and was recognized by the Securities Contracts Regulation Act, 1956 as a stock
exchange.
All stock exchanges have a specific place for trading their securities through counters.
But, OTCEI is connected through a computer network and the transactions are taking place
through computer operations.
• It uses the model as NASDAQ ( National association of security Dealers automated
Quotations)

Features of OTCEI

Ringless Trading : Screen based trading

National network : wide network and grater liquidity

Totally computerized: Transparent and quick market

Exclusive List of companies: Exclude other stock exchange companies

Two ways of making a public offer: Direct

offer : offer shares directly to public
Indirect offer: offer shares indirectly to public ie., to sponsors

Fast Transfers: fast settlement called counter receipt

Trading Mechanism: Export and Import Shares. The parties are Investor, counter, settler
registered custodian, company and bank

Objectives of OTCEI
• To provide a nation wide investor base to small companies

• To encourage public issues

• To enable small companies to raise capital at low cost

• To offer quick settlement and transparent facilities

• To provide a single trading platform for investors

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Benefits of OTCEI
To Investors:
• Easy Accessibility

• Improved Liquidity

• Transparency

• Immediate transfer of shares

• Speedy settlement of Trades

Benefits for Issuing companies:

• Low cost of Issuing shares

• Beneficial for small companies

• Benefit on account of the image Market maker

1.6.3 NSE(National Stock Exchange)

NSE was promoted by IDBI, ICICI, IFCI, GIC, LIC, State bank of India, SBI capital
markets limited, SHCIL and IL & FS as a joint stock company under the companies Act 1956.

Features of NSE

• India s largest exchange

• Equity capital : 25 crores

• Head quarters in Mumbai and back office in Chennai

• It is a joint stock company and tax paying company

• Strict in disclosure and listing norms

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 Advantages of NSE

• Wider accessibility

• Screen based trading

• Non disclosure of trading members identity

• Transparent of transactions

• Matching of orders

• Effective settlement of corporate benefit

• Trading in dematerialized form

• SGL ( subsidiary General Ledger) facility in debt market

1.6.4 ISE ( Inter connected Stock Exchange)

Inter-connected Stock Exchange of India Limited (ISE) is a national-level stock exchange,

providing trading, clearing, settlement, risk management and surveillance support to its Trading
[Link] incorporated as a company limited by guarantee in January - 1998. It has 791 Trading
Members, who are located in 84 cities spread across 18 states. These intermediaries are
administratively supported through the regional offices at Delhi, Kolkata, Patna, Ahmedabad,
Coimbatore and Nagpur, besides Mumbai.

ISE aims to address the needs of small companies and retail investors by harnessing the
potential of regional markets, so as to transform them into a liquid and vibrant market using state-of-
the art technology and networking.

• It is a national level stock exchange, providing trading, clearing, settlement, risk

management and surveillance support to its trading members.

• Aims to address small companies

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 Features of ISE
• Accountability
• Integrity
• Innovation
• Knowledge
• It has 841 trading members
• It has floated ISS ( Interconnected Securities & services limited)
• Trading members of ISE can access NSE & BSE by registering themselves as sub brokers
of ISS

Features of ISE

• Accountability
• Integrity
• Innovation
• Knowledge

Functions of ISE
➢ Create a single integrated national level solution by high cost services

➢ Create markets for listed companies and small capital companies in particular

➢ Optimally utilizing the existing infrastructure

➢ Provide clear settlements

Advantages of ISE
➢ Moderate fees

➢ Easy compliance

➢ Improved visibility

➢ Infrastructure

➢ IPO distribution system- Primary market.

➢ Additional facility

➢ Investor Protection

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Relationship between NSE & OTCEI

❖ Ringless No trading floor

❖ Screen based trading-

computerized Transparency-can
check the exact price

1.7 TRADING SYSTEM IN STOCK EXCHANGES

1. Finding a broker

2. Opening an account with broker

3. Placing the order

4. Making the contact

5. Preparing contact note

6. Settlement of transaction

1. Finding a broker

The shares are brought through a stock broker who is a licensed member of a recognised stock
exchange.

Services

1. Provide in formations: capital structures, earnings, dividend policies and prospects

2. Supply investment Literature: Education to investors, providing financial

periodicals, prospectus and reports of companies

3. Availability of competent Representatives:

appointing sufficient incharges

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2. Opening an account with the broker:

The broker opens an account in the name of the protectiveness client only if the broker is
satisfied about the creditworthiness of the investors and his intention to trade in the market.

3. Placing the orders

▪ Market orders- urgent desire

▪ Limit orders: Maximum or minimum price at which the investors is willing

to buy or sell shares

▪ Stop loss orders: conditional market order to stop loss

▪ Cancel order: Execute immediately

▪ Discretionary order: Execution for the best

▪ Open order: No time or limit for the execution

▪ Fixed price order: client specifies the price at which the shares are to be
purchased

a. Other orders
• Day orders: Unless registration
• Good Till cancelled(GTC) Order: Order remains open until executed or cancelled.

• Not held order: Gives discretion to the floor brokers

• Participate but do not Initiate (PNI): The floor brokers is instructed to participate in
trading but not to become aggressive

All or None Order (AON): The order wants to be executed by customer

Fill or kill order(FOK): Complete execution

Immediate or cancel(IOC): Part of the order which is not executed will be

cancelled

3. Making the contract : Announcement by slip in a box

4. Preparing Contact note: Parties will record all details in contract

5. Settlement of Transaction: Settlement by the payment of buyers

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Contracts:

i. Ready Delivery contracts: Immediate delivery of contacts and cash payment

ii. Forward Delivery contacts: carrying over the transactions to the next
settlement day

Settlements:

• Fixed settlement:
o It starts on a particular day and ends after five days

• Rolling settlement:
o fifth working day settlement

• Trading on margin

It refers to the use of borrowed funds to supplement the investor's own money. Investors will do
Partial money settlement by own and part from broker

Advantages

• It provides more profit with less investment

• Increases buying power

• Suitable for experienced traders

Short selling:
It s the practice of selling borrowed securities.

Advantages
• Profit and price decline

• It became as highly conservative investment strategy

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1.8 SECURITIES EXCHANGE BOARD OF INDIA

• In 1988, SEBI was established by the government of India through an executive

resolution.

• In May 1992, SEBI was granted legal status. SEBI is a body corporate having a
separate legal existence and perpetual succession.

Objectives

1. To regulate the activities of stock exchange.

2. To protect the rights of investors and ensuring safety to their investment.

3. To prevent fraudulent and malpractices by having balance between self regulation of business
and its statutory regulations.

4. To regulate and develop a code of conduct for intermediaries such as brokers, underwriters, etc.

Management of the Board

o Chairman
o Two members from central government dealing with finance and Law
o One member from Reserve bank of India
o Two other members from central government

Functions of SEBI:
a. Protective functions
1. It Checks Price Rigging
2. It Prohibits Insider trading
3. SEBI prohibits fraudulent and Unfair Trade Practices
4. SEBI undertakes steps to educate investors
5. SEBI promotes fair practices and code of conduct

b. Developmental functions

1. SEBI promotes training of intermediaries of the securities market.

2. SEBI has permitted internet trading through registered stock brokers.

3. SEBI has made underwriting optional to reduce the cost of issue.

4. Even initial public offer of primary market is permitted through stock exchange

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c. Regulatory function SEBI has framed rules and regulations and a code of conduct to
regulate the intermediaries such as merchant bankers, brokers, underwriters, etc.

(ii) SEBI registers and regulates the working of stock brokers, sub-brokers, share transfer agents,
trustees, merchant bankers and all those who are associated with stock exchange in any manner.

(iii) SEBI registers and regulates the working of mutual funds etc.

(iv) SEBI regulates takeover of the companies.

(v) SEBI conducts inquiries and audit of stock exchanges.

Powers of SEBI

▪ Power to seek information

▪ Powers of Inspection

▪ Powers of civil court Exercisable by SEBI

▪ Powers of SEBI where an enquiry or investigation is ordered

▪ Power to issue directions

▪ Power of search and seizure

▪ Power to order cease and desist

▪ Power to SEBI under SCRA Service members Civil Relief Act

Role of SEBI in regulating the capital market

o Market index act as a barometer for market behavior

o Market index is used to benchmark portfolio performance

o Market index is used in derivative instruments like index futures and index options

o Market index can be used for passive fund management as in case of index funds.

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Roles
o To make rules for controlling stock exchanges

o To provide License to dealers and brokers

o To stop fraud in capital market

o To control the merger, acquisition and takeover of the companies

o To audit the performance of stock market

o To make new rules on carry forward transactions

o To create relationship with ICAI(Institute of Chartered Accountants of. India )

o Introduction of derivative contracts on volatility index

o To require report of portfolio Management activities

o To educate the investors

o To integrate the securities Market

o To diversify the trading products

Role of SEBI in secondary market

▪ Providing a centralized redressal mechanism

▪ Establishing the separate investment awareness division

▪ Displaying the names of defaulting companies on the SEBI website

▪ Providing helpline facility for investor assistance