CHA PTE R 1:

PRICE BEH AVI OUR OF INITIAL

PUBLIC OFFERINGS (IPOs)
(A STUDY OF EQUITIES LISTED ON BSE & NSE)

ti Page Krishn a Chand ra Pandey

• INTRODUCTION:

C apital market is a market for raising the capital. It is an organized market

for meeting long term financial needs of the companies. In India, companies are one
of the important forms of business organization. These companies, particularly public
limited companies raise long-term capital by selling securities such as shares,

debentures or bonds. These companies are public and private sector companies. The
investors in the country buy these securities from the companies. The players in the

capital market are thus, borrowers of money who demand funds and the lenders of
money who supply funds. Borrowers are Joint Stock Companies and lenders are
Public i.e. investors. There are intermediaries who deal with the lenders on the one
hand and the borrowers on the other hand. The capital market is divided into two

parts.
(a) Primary Market, and

(b) Secondary Market.

In case of primary market the companies directly sell securities to the

investors in order to raise long term capital. There is a public issue of securities

through prospectus. These securities are transferable from person to person.

Therefore an arrangement is made to buy or sell these securities through the stock

market which is known as a secondary market. In the secondary market the

securities already issued by the companies are sold/ purchased/ exchanged. This

market also deals with securities of the central government, state government and
financial institutions such as IFCI, IDBI, SIDBI and SFCs.

2 1Page Krishna Chandra Pandey

l
 1.1 MEANING AND DEFINITION OF CAPITAL MARKET:

C apital market is a market for capital required for the companies for carrying

out business. It is an organized market for meeting long term financial needs of
companies.

According to H. T. Parekh, "Capital Market is a market for all the financial

instruments, short-term and long-term as also commercial, industrial and government
paper.

"Similarly, according to K. S. Sharma, "Capital Market refers to the facilities

and institutional arrangements for the borrowings and lending of long-term funds."

According to Arun K. Datta, "The Capital Market is a complex of institutions,

investment and practices with established links between the demand for and supply
of different types of capital."

According to F. Livingston, "Capital Market is to facilitate the main stream of

command over capital to the point of the highest yield."

Business organizations, especially, companies, raise capital from the public.

They sell securities such as shares, debentures and bonds. A public issue is made for
this purpose. The borrowers in the capital market are the companies who need funds
as capital for starting new business as well as expansion. The capital is raised by
selling securities such as shares, debentures and bonds. Investors are the buyers of

these securities. These investors are individuals as well as institutions. There are

many intermediaries in the process like brokers, underwriters, bankers, merchant

bankers, and issue-managers.

The capital market is divided into two parts. Primary market is a market in
which companies directly sell securities to the public for raising capital. These

securities are transferable; hence there is a secondary market for the securities sold in

the primary market. The stock exchange acts as a secondary market. It is also known

3 1P age Kri s hn a C handra Pandey

as an organized market. There is a primary market because of the existence ofwell-
developed secondary market. It provides liquidity and marketability to the investors
in the primary market. The following chart gives the composition of Indian capital
market.

Chart 1.1

Indian Capital Market

Industrial Securities Government Securities Development Financial

Financial
Market (Gilt-edged market) Institutions (DFis)
Intermediaries

I
Primary Market Secondary Market
(New Issue Market) (Stock Exchange)

IFCI ICICI IDBI UTI SFCs

Merchant Mutual Funds Leasing Venture Capital Brokers

Banks Companies Companies

(i) Industrial Securities Market is a market for securities issued by companies for

raising capital. It includes primary or new issue market and secondary market or
stock exchange.
(ii) The Government Securities Market is a market where the government

Securities are bought and sold. The government securities are bonds, treas_ury bills,
and special rupee securities in payment of India subscriptions. These securities are

issued by central government, state government and semi-government authorities. It

is also called as secondary market for government securities.

41 Pa g e Krishna Chandra Pandey

 (iii) Development Financial Institutions are the financial institutions who provide

long-term loans to the industries for their development. The government has

initiated steps to start these institutions in order to provide long-term finance for
development of new industries in the country. However, majority of these
institutions converted themselves in to commercial banks.

(iv) Financial Intermediaries are very much needed in order to assist the
companies as well as investors. Merchant bankers help the companies in making

public issue successful for raising the capital by issuing shares, debentures or bonds.

The mutual funds collect funds by selling units to the public and the amount is
invested in the primary, secondary and government securities market. They provide
regular and reasonable return to the mutual fund investors who are unaware of the

capital market. Leasing companies provide the fixed assets such as machines, vehicles

on lease basis so that the industries do not require investing large amounts in the fixed
assets. Venture capital companies provide risk/ seed capital to start new ventures and

then they take it back by selling the securities in the market or sell it back to owners
on predetermined price or on the basis of a predetermined formula to arrive at a
price, in future, if the venture becomes viable or successful. The amount of

investment is written off in case of unsuccessful ventures. Brokers act as a financial

intermediary in the primary as well as secondary market. All these intermediaries are
regulated by SEBI or RBI.

1.2 FUNCTIONS OF CAPITAL MARKET:

Capital market diverts resources from unproductive channels to productive

investments. The following are the functions of capital market:-

SI Page Kri s hna Chandra Pandey

 (1) Mobilization of surplus funds:
Capital market mobilizes savings of the people and put it to the productive and
profitable use. Surplus funds which remain unproductive in the country are actually
invested in the corporate securities which are offered by the companies for raising
capital.
(2) Provision of finance to the Business:
Most of the big business houses are companies. They require large amount of
capital. Therefore, they raise the capital through public issues by selling various types
of securities. Thus, financial needs of the business are provided by the capital market.
The industries in the country are developed with the help of the capital market.

(3) Link between investors and companies:

Capital market acts as a connecting link between investors and companies .
The companies need capital and the investors have surplus funds. Therefore, the
capital market acts as a link between the two. It also converts savings of the people
into profitable investmen t through its mechanism of primary and secondary markets.

(4) Rational allocation of resources:

Financial markets are divided into capital and primary markets. Capital
market provides long-term funds whereas money market provides short-term funds.
Both the markets are connected with each other. They facilitate the flow of funds
where they are urgently required and can be utilized fully and profitably. Thus, it
provides rational allocation of resources in the country.

(5) Provision of Liquidity:

Capital market provides liquidity to the investors and companies. The
securities sold in the primary market are exchanged in the secondary market and
liquidity can be provided to the investors. The companies can also maintain liquidity
by purchasing or selling these securities. Stock markets provide liquidity and
transferability or marketability to the securities issued in the primary market.

• 61 Page Krishna Chand r a Pandey

 (6) Profitable use of funds:
Capital market provides opportunities to the investors to invest in the
industrial securities through shares, debentures or bonds. It provides funds to the
industrial sector for meeting the needs of the business. The profit earned by the

industries is distributed to the investors in the form of dividend, interest and bonus.
Thus, the industries make profitable use of funds raised from the capital market.

(7) Capital formation:

The capital market facilitates optimum allocation of funds in the economy and
thereby accelerates the process of capital formation. Savings of the people are
invested into productive purpose. It mobilizes the savings and invests it in the
economy so that the needs of the capital of the industries are satisfied.

1.3 ROLE OF CAPITAL MARKET IN THE ECONOMY:

Capital market acts as a barometer of industrial and economic development.

It converts idle savings into profitable investment. Capital market is indispensable for
accelerating the pace of industrial growth. It also creates a sound financial system for

the economy as a whole. The rapid industrial development of a country depends

upon the efficiency of capital market. It facilitates the flow of funds to the corporate
sector for growth and diversification of business activities. It indirectly facilitates
employment generation in the country. The capital market also contributes to rural
development, sectoral development as well as the revival of sick industrial units.

Financial assistance is provided in time through the mechanism of capital market.

Thus, capital market makes positive contribution in capital formation; employment

generation, development of backward region, and overall economic development of

the country USA, UK, Japan have developed economically due to the contribution of
capital markets.

71 Pa ge Krishna Chand r a Pandey

 A healthy capital market facilitates economic growth. Long-term investment
facilitates economic growth. The growing needs of the industrial sector can be met

mainly through the institutional arrangements provided by the capital market.

Again, profitable and secured investment opportunities are provided to the investors

through the capital market. Companies can raise long term capital for the growth and
expansion of business. Capital market acts as a connecting link between savers and
investors. Individuals save money and put into the capital market through its

mechanism of primary and secondary markets. The corporate invest this savings in
the business and earn profit which is distributed to the savers. Stock market is an

important part of capital market. Investors can deal with the securities in primary
market as well as secondary market. The stock markets have grown substantially.

Stock markets also encourage and facilitate the flow of foreign capital. The inflow of
foreign capital through the capital market facilitates economic and industrial growth.

The capital market also facilitates the growth of financial institutions and
intermediaries such as merchant bankers, underwriters, brokers etc.

1.4 GROWTH OF CAPITAL MARKET IN INDIA:

The Indian capital market has undergone many significant changes since
independence. The volume of savings and investments has shown steady

improvement. Different types of encouragement and tax relief were given to promote
savings in the country. Steps have also been taken to protect the interest of the
investors. As important indicator in the growth of Indian capital market is the

growth of joint stock companies and corporate enterprises. In 1951, there were 28500

companies in India with a paid up capital of Rs. 775 crores while as on 31 s t March
1998 there were 2 lakhs companies with a paid up capital of Rs. 137959 crores. In

2007 the number of the companies rose to 743678 with a paid capital of Rs. 649490

81 Page Krishna Chandra Pandey

crores accounting for 15.7% of GDP. Thus, the growth of investment has been quite

phenomenal in accordance with the accelerated development of the Indian economy.

The Indian financial system is developed as well as integrated today.

Integration has been through a participatory approach in granting of loans as well as

in savings schemes. The expansion in size and number of institutions has led to a
considerable degree of diversification and increase in types of financial institutions
and instruments. The development banks, now, constitutes the backbone of the

Indian capital market. The growth of capital market in an economy is determined by

the following factors:
(1) Rapid industrialization
(2) Level of savings and investments of the household sector
(3) Technology advances
(4) Corporate performance
(5) Regulatory framework
(6) Participation of Foreign Institutional Investors
(7) Development of financial services
(8) Liquidity factors
(9) Political stability
(10) Globalization

(11) Financial Innovation

(12) Tax incentives
(13) NRI investments

Banks and financial institutions are important components of capital market.

They act as catalysts in the economic development of any country. These institutions
mobilize financial savings from household, corporate and other sectors of the

economy and channelize them into productive investments. They act as a reservoir of
resources and form the backbone of the economic and financial systems.

91 Page Krishna Chandra Pandey

 The rapid growth of the Indian capital market was noticed since 1991. The role of
•
new issue market and stock exchange is complementary to each other in the
infrastructure facilities provided for sale and purchase of securities in the market.
The amount of resources mobilized through public issues and right issues after
liberalization policy is shown in the table given .

Table 1.1
Capital raised through Public Issue 1991-2010
Year PUBLIC ISSUE RIGHT ISSUE TOTAL
No. of Amount No. of Amount No. of Amount
Issues INRin Issues INRin Issues INRin
Crores Crores Crores
1991-92 316 3851 512 5562
196 1,898
1992-93 488 12630 1015 18689
528 6,252
1993-94 384 9306 1154 21850
770 13,443
1994-95 324 6577 1866 27621
1,336 12,928
1995-96 299 6564 1725 20804
1,407 11,663
1996-97 112 2663 842 10424
697 11,388
1997-98 49 1708 111 4570
62 3,061
1998-99 24 2411 48 5013
32 7,911
1999-00 24 1125 79 5153
65 7,673
2000-01 5 160 43 516
119 6,518
2001-02 5 712 19 5692
19 6,423
2002-03 3 471 9 1678
14 5,732
2003-04 16 2715 11 495 27 3210

2004-05
NA NA
34 25,526 25,526 25,526
2005-06 102
NA NA
23,676 23,676 23,676
2006-07 85 24,993
NA NA
24,993 24,993
2007-08
NA NA
91 53,219 53,219 53,219
2008-09 22
NA NA
3,534 3,534 3,534
2009-10 (as NA NA
24,004 24,004 24,004
on 31/01/10) 30

lO IP age Kri s hn a C h a ndr a P a nde y

 Chart 1.l(a)
Capital raised through Primary Market Issues 1991-2010

GENERATWG CAPITAL

ll"ft lbOOtt)

17.■7
nm
l 0l9

Source: Prime Database/livemint

Chart 1.1 (b)

Graphical Representation of capital raised thru' Public Issue 1991-2004

30000 - - - - - - - - - - - -

25000
~ series1
20000 - series2
Series3
15000
~ Series4
10000 ---series5
- series6
5000

lll Pagc Kri,hna ChanlJra Pandey

 The data reveals that the primary market was quite encouraging till 1995-96, and
thereafter, the market was quite low due to securities scams. The Indian capital
market is one of the emerging and promising capital markets of the world. It has

witnessed vibrant growth during the period 1991-96. In this respect the contribution
of SEBI is very important. The emergence of the screen-based trading, depositories,
credit rating system, national stock exchange, rolling settlement and investor's

protection and some of the new concepts introduced in the Indian capital market.

The following factors are responsible for the development of Indian capital market:
1) Growth of Stock Exchanges in India
2) Growth of Financial Institutions
3) Growth of Mutual Funds

4) Growth of Merchant Banking in India

5) Growth of Multinationals growing public confidence

- 6) Growth of Entrepreneurs
7) Development of Venture Capital Funds

8) Development of Credit Rating Agencies

9) Setting up of SEBI

10) Setting up of National Securities Clearing Corporation

11) Setting up of Corporate Governance

12) Setting up of Clearing Corporation of India Limited

13) General Awareness

The India's economic outlook and projection indicates a positive trend and
expectations

India's Economic Outlook Projection

2007 2008 2009 2010

GDP Growth 9.40% 7.30% 5.40% 7.20%
CPI 6.40% 9.30% 5.50% 4.90%

121 P age Krishna Chandra Pandey

• Current Trends in the Primary Market:
During February 2009, there was one public issue (one Initial Public Offering) which
mobilized Rs. 23.84 crore. There was no rights issue during the month. During

February 2008, there were 4 public issues (all IPOs) which mobilised Rs. 1,893.21
Crore and 2 rights issues which mobilized Rs. 16,935.06 crore. During 2008-09 (April
- February), there were 21 public issues which mobilized Rs. 2,082.35 crore and 21
rights issues which mobilized Rs. 11,997.31 crore as compared to 88 public issues

which mobilized Rs. 54,017.68 crore and 26 rights issues which mobilized Rs.
30,454.10 crore during 2007-08 (April - February).

In February 2009, no QIP was issued, whereas in February 2008, there were 3 QIPs
which mobilized Rs. 2,017 crore. During February 2009, 24 preferentia l allotments
(Rs. 783.50 crore) were listed at BSE and 11 preferential allotments (Rs. 490.02 crore)
were listed at NSE. During 2008-09 (April - February), 350 preferentia l allotments
with issue value of Rs. 2, 07,884.15 crore were listed at BSE and 253 preferentia l

allotments with issue value of Rs. 40,227.73 crore were listed at NSE.

BSE Sensex closed at 8891.61 on February 27, 2009, as against 9424.24 on January 30,
2009, registering a fall of 532.63 points (5.65%). In terms of closing value, Sensex

recorded a high of 9647.47 on February 10, 2009 and a low of 8822.06 on February 24,

2009.

The market capitalization of BSE, was lower by 4.56% from Rs. 29,99,524.89 crore as
on January 30, 2009 to Rs. 28,62,871.48 crore as on February 27, 2009. The market
capitalizati on ofNSE was also lower by 4.40% from Rs. 27,98,706.54 crore as on
January 30, 2009 to Rs. 26,75,622.42 crore as on February 27, 2009.

131 Page Krish n a Chand r a Pandey

 The monthly turnover of BSE was lower by 22.95% from Rs. 70,509.50 crore in
January 2009 to Rs. 54,329.74 crore in February 2009. The monthly turnover of

NSE, too was lower by 21.62% from Rs. 1,91,183.52 crore in January 2009 to Rs.
1,49,857.46 crore in February 2009.The PIE ratio of BSE Sensex was 12.55 as on
February 27, 2009 against 12.85 as on January 30, 2009. The PIE ratio of S&P CNX

Nifty was 13.12 as on February 27, 2009 against 13.40 as on January 30, 2009.

The primary market segment of the domestic capital market witnessed a weak trend
during the third quarter of 2008-09. The resources raised through public issues
declined sharply to Rs.14,007 crore during April-December 2008 from Rs.49,215
crore during the corresponding period of 2007.

Global financial market conditions deteriorated substantially during the second

quarter of 2008. The failure of banks and financial institutions also broadened
geographically from the US to many European countries. As a result, funding
pressures in the inter-bank money market persisted, equity markets weakened further
and counterpart credit risk increased. Central banks continued to take action to
enhance the effectiveness of their liquidity facilities.

According to RBI, the financial markets in India , which remained largely orderly
from April 2008 to mid-September 2008, witnessed heightened volatility between
mid-September and mid-October 2008. In the foreign exchange market, the Indian
rupee generally depreciated against major currencies. Indian equity markets declined
in tandem with trends in major international equity markets. Liquidity conditions
tightened since mid-September 2008 reflecting adverse developments in international
financial markets, apart from domestic factors. Mobilisation of resources through
private placement declined by 15.7 per cent to Rs. 79,594 crore during April-
September 2008 as against an increase of 25.6 per cent during April-September 2007.
Public sector entities accounted for 51.5 per cent of total mobilisation as compared

141 Page Kri s hna Chandra Pandey

 with 38.5 per cent of total mobilisation during the corresponding period oflast year.
Resource mobilisation through financial intermediaries (both from public and private
sector) registered a decline of 34.8 per cent over the corresponding period of last year,
accounting for 50.9 per cent of the total mobilisation during April-September 2008.
Resources raised by non-financial intermediaries also registered a decline of 21.1 per
cent (49.1 per cent of total resource mobilisation) during April-September 2008 over
the corresponding period of last year

The primary market segment of the domestic capital market witnessed slackness in
resource mobilisation during the second quarter of 2008-09. Cumulatively, resources
raised through public issues declined sharply to Rs.12,361 crore during April-
September 2008 from Rs.31,850 crore during the corresponding period of 2007. The
number of issues also declined considerably to 32 from 60. Out of 32 issues during
April-September 2008, 19 were initial public offerings (IP Os) issued by private sector
companies, constituting 16.0 per cent of total resource mobilisation. Furthermore, all
the issues during April-September 2008 were equity issues by private non-financial
companies except one issue by private-financial company. The average size of public
issues declined to Rs.386 crore during April-September 2008 from Rs.531 crore during
April-September 2007.

The performance of the domestic stock markets during the first half of 2008-09
witnessed several phases. In the first phase between April 1 and May 21, 2008, the
markets staged recovery. On May 21, 2008, the BSE Sensex registered gains of 10.2
per cent over end-March 2008. The upward trend was attributed to better than

expected fourth quarter results of 2007-08 declared by IT majors, net purchases by

Flis in the Indian equity market and some easing of international crude oil prices. The
later phases saw a marked volatality in the market.

! The role played by Flis in the market becomes crucial. According to the data released
by the SEBI, Flis made net sales of Rs.32,298 crore (US$ 8,006 million) in the Indian

151 Page Kri s hna Cha ndr a Pandey

 equity market during 2008-09 (up to October 13, 2008) as against net purchases of
•
Rs.61,992 crore (US$ 15,061 million) during the corresponding period of the previous
year. Mutual funds, on the other hand, made net purchases of Rs.6,452 crore during
2008-09 (up to October 13, 2008) as compared with net purchases of Rs.3,265 crore
during the corresponding period of last year.
The sectoral ind.ices witnessed a downward trend during the current financial year
(up to October,2008). Selling pressure was witnessed across the board, viz., metal,
consumer durables, capital goods, auto, oil and gas, public sector undertakings,
banking, IT, fast moving consumer goods and healthcare sector stocks.
In tandem with the downward trend in stock prices, the price-earnings (PIE) ratios of
the 30 scrips included in the BSE Sensex declined from 20.1 at end-March 2008 to
16.2 at end-September 2008. The market capitalisation of the BSE also declined by
18.9 per cent between end-March 2008 and end-September 2008. The turnover of

both BSE and NSE in the cash segment during April-September 2008, however, rose
by 16. 7 per cent over that in the corresponding period of 2007. The turnover in the
derivative segment of both BSE and NSE also increased by 10.6 per cent during April-
September 2008 over the corresponding period of the previous year. The volatility in
the stock market measured as coefficient of variation, also increased during April-
September 2008.

1.4.1 SECURITIES MARKET:

Securities, as per the Securities Contracts Regulations Act (SCRA) 1956,

includes instrument s such as shares, bonds, scripts, stocks or other marketable
securities of similar nature in or of any incorporated company or body corporate
government securities, derivatives of securities, units of collective investmen t scheme,
interest and rights in securities and rights in securities, security receipt or any other
instruments so declared by the central government. Securities market is a place

161 Page Krish n a Chandra Pandey

 where buyers and sellers of securities can enter into transactions to purchase and sale

shares, bonds, debentures etc. It performs an important role of enabling corporate,

entrepreneurs to raise resources for their companies and business ventures through
public issues.

The market for industrial securities is known as securities market. It offers an

ideal market for corporate securities such as shares and debentures. Industrial
securities market is relatively much smaller in India than in other industrialized

countries. This is because of the industrial structure, investment habits and the level
of education of investors in India. During the planning period the role of public
sector companies has much increased in the business activity of the country.

Industrial securities are not a major source of funds even for private sector industrial
units. The volume of industrial securities in relation to government securities, their

role in financing the private sector and their significance as a savings medium indicate

that the industrial securities market in India can hardly be regarded as a barometer of
economic activity.

1.4.2 INDUSTRIAL SECURITIES MARKET:

Industrial securities are the securities (shares, debentures etc.) issued by

industrial enterprises for the collection of fixed/long term capital. Industrial

securities are also called corporate securities. Companies collect capital through such

securities. In addition, investors make profitable investment in the corporate sector

through the medium of such securities. Securities market acts as a platform for

buying and selling industrial securities. It provides mechanism or platform for the

collection of capital by industrial enterprises. Securities market also provides

liquidity to industrial securities as regular and continuous transactions (i.e. buying

and selling) in securities are possible through securities market.

171 Pa g e Kri s hn a Chand r a Pandey

 The Industria l Securities Market is a composite term embracin g buyers and
sellers of securities and includes all the agencies and institutions which assist the sale
and resale of securities (shares and debentures). According to Wheeler Securities
Market includes:

(1) All the activities relating to distributing and trading in securities .

(2) Organizations which facilitate the various activities in the securities market.
(3) Buyers and sellers of securities - both individual and institutio nal.
(4) Rules, Regulations, Customs and Practices that control the organization and

conduct of business in the securities market.

1.5 BUYERS AND SELLERS OF INDUSTRIAIJCORPORATE

SECURITIES

(a) Buyers/Purchasers of Securities:

Security buyers (also called investors) are those who are intereste d in
acquiring corporate securities. Such security buyers include (i) Institutio nal Buyers
and (ii) Individual Buyers.

(i) Institutio nal Buyers are investment agencies which invest their funds in
the corporate securities. They may be private or public institutions.
Private institutio nal buyers buy securities in their own name. They
include commercial banks, insurance companies, charitabl e and
investme nt trusts. The public institutional buyers include different
financial intermediaries such as IFCI, SFCs, UTI, IDBI, ICICI and Mutual
Funds. Institutio nal buyers are professional investme nt agencies. These
agencies collect savings of others (i.e. investing class) and invest the same
in the corporate sector. Some issuing companies offer preferent ial
allotmen t to institutio nal buyers. The following chart shows buyers of
industrial/corporate securities :

181 pa g C K ri s h n a C h an dr a P andey
 Chart 1.2
Classificati on of Security Buyers

A.,--- I ----- ----- -,.

----- --~- B

Individual Buyers Institution al Buyer

1.--------= 2~1----.-.. .__--r--_4. .____,

I
i i
Existing Genuine Speculators Creditors
Shareholder Investors
& Debentur
holders + •
Commercial Insurance Charitable &
•
Banks
i i i i Companies Investmen t
Trusts
Customers Suppliers Deposit Employees
holders i i i i i i i
IFCI SFC UTI IDBI ICICI LIC GIC

(ii) Individual Buyers purchase securities in their individual capacity. They

have limited surplus money (savings) and are interested in investing the
same in the corporate sector. They include existing shareholders or
debenture holders, deposit holders, creditors, customers and employees of

the company. Companies are interested in selling their securities to all

categories of buyers particularly to genuine and long term investors.
Genuine Buyers are different from other buyers called speculators.
Genuine buyers are interested in long term profitable investmen t. To
them safety of investment and attractive return on investmen t are equally

important. Speculators are interested in frequent buying and selling

securities for profit making only. They make their calculation s about future
price trends on the stock exchange and conduct their buying and selling of

191 Page Krishna Chandra Pandey

 securities. They get profit if their calculations prove correct. If not, they
suffer heavy financial loss.

(b) Sellers of Securities:

Sellers of Securities are joint stock companies engaged in either manufacturing
or marketing activities or both. Such companies need long term capital and introduce
their securities in the new issue market by completing necessary legal formalities.
Along with companies, there are other sellers of securities such as financial
institutions, public sector enterprises, UTI and mutual funds. Even railways and State
Governments sell bonds for the collection of capital for expansion and developme nt
activities. For example, Konkan Railway Bonds and Maharasht ra Krishna Valley
Developme nt Bonds are already sold in the market on a large scale. IDBI Fle:xi bonds
were also popular in the new issue market. ICICI Bonds (infra structure bonds) are
purchased by salaried and fixed income people for tax saving. Even the RBI issues tax
free relief bonds.

1.6 TYPES OF CORPORATE SECURITIES:

It is already noted that transaction in the securities market are related to

buying and selling securities of existing and new companies. Different types of
securities are used for such transactions. They include the following:

(a) Equity/ Ordinary Shares

(b) Preference Shares

(c) Debentures, and

(d) Bonds
a) Equity/Ord inary Shares
Companies collect major portion of fixed capital through the issue of equity
shares which are popular among large majority of investors. Such shares are also
called ordinary shares as they do not get preference about dividend payment and the

20 I P age Krishna Chandra Pandey

 repayment of capital in the case of winding up of the compan y. Equity shares get
dividend at variable rates, dependi ng on the profit made by the company. Their claim
for repaym ent of capital also comes after meeting all other claims. In this sense,
equity capital is treated as 'risk capital' and the equity shareholders are called 'risk
bearers'.

Equity holders invest their savings in the compan y without any

guarantee/security. They get good reward (high rate of dividend) only when their
company operates efficiently and earns substantial profits. Companies issue equity
shares to attract large number of investors and also to offer them benefits of
investm ent in the corporate sector.

Equity shares are issued initially. Thereafter right issue, bonus shares or new
equity shares are issued by companies for meeting additional long-ter m capital needs
for expansion and diversification. The interest of equity shareholders is now well

protected due to legal provision made in the Companies Act, 1956 and also due to
effective control of SEBI on companies, stock exchanges and intermediaries operating
on the stock exchange.

Advantages of Equity Shares (To the Issuing Company):

(1) Capital collected through equity shares remains as perman ent capital.

(2) There is no obligation on the company as regards to paymen t of dividen d or

repaym ent of capital collected through equity shares.

(3) A compan y with substantial paid up equity capital is regarded as a sound

company.
(4) Equity shares do not create any charge over the assets of the company.

211 Pa g e Kr is hn a C h a ndra P a n dey

... Advantage of Equity Shares (To the Shareholders):

(1) Equity shareholders get attractive dividend during the prosperit y period and
also when they invest in profitable companies.
(2) The benefit of capital appreciation is available to equity holders.
(3) Equity shareholders are the real owners of their company and are given full
powers regarding their company management.
(4) The benefit of bonus shares and rights issues is available to them.
(5) Their liability is limited to the extent their shareholding.

b) Preference Shares

Meaning of Preference Shares

As the same indicates, preference shares carry preferential rights as regards
dividend payment and repayme nt of capital in the case of liquidation of the issuing
company. Different types of preference shares can be issued. This gives wider choice
to investors and raises marketability of preference shares.

Advantages of Preference Shares

Preference shares offer various advantages to the shareholders. Here, dividend
payment is regular and also at a fixed rate decided at the time of issue. They also get
preference as regards repayme nt of capital in the case of winding up of the company.
For the company, the cost of collection of preference capital is low and the
redemption liability is nil in the case of irredeemable preference shares.

Llmitat:ions of Preference Shares

( 1) Preference Shareholders have no control on the managem ent of the

company.
(2) They get dividend at fixed rate and are normally not allowed to be partners in

the prosperit y of the company.

221 Pa g e Krishn a Chand ra Pandey

 c) Debentures
Debentures are issued for raising short, medium or long-term finance
depending on the period for which they are issued. Debentures are creditorship
securities which provide funds on loan basis. Debenture holders are not allowed to
participate in the managem ent of the company as they are the creditors of the
company and not the owners. However , they are given more security as regards
repayment of capital and regular payment of interest.

Types of Debentures
1) Registered and Bearer
2) Secured and Unsecured
3) Cumulative and Non-cumulative
4) Redeemable and Irredeemable.
5) Convertible and Non-convertible with single or multiple option of conversion
6) Participating and Non participating

Different types of debentures are issued on different term and conditions in

order to satisfy the needs of different categories of investors. The face value of
debentures is usually Rs. 100. At present debentures (particularly convertible) are
popular. Such debentures are converted into equity shares (partly or fully) on
maturity as per the terms already notified. Innovative securities having different
features e.g. Triple Option Convertible Bond (TOCD), Secured Premium Note (SPN)

etc. had also been issued in the capital market in addition to traditiona l securitirs.

Interest on Debentures
The interest rate on all types of debentures is stable and attractive to investors.
It is paid after every six months or in lump sum on maturity. The risk involved in the
purchase of debentur es is limited, as they are usually fully secured. The response

231 Page Kri s hn a C h a n d r a Pandey

 from investors is always encouraging to the companies issuing debentures.
Debentures occupy an import ant position in the financial structu re of compan
ies.
Convertible debent ures are popula r in Indian securities market.

Advantages of Debentures
1) Debentures are popula r with the investors and their response is normal ly
positive.
2) Debentures provid e capital withou t managerial control to the debent ure
holders.
3) It is an economical source of finance
4) Debentures facilitate trading on equity by the compa ny.
5) Debentures avoid the possibility of over capitalization.
6) Debentures provide adequate safety to investors particularly to cautious
investors.
d) Bonds
Along with debentures, bonds are also issued by companies for the collection
of medium and long term capital. It is a creditorship security with fixed rate
of
interes t decided at the time of issue of bonds. Bonds are used for transactions
in the
securities market as they are easily transferable like shares and debentures. Loans
can
be taken on the securit y of such bonds. Bonds are issued by financial i.p.stitutions
and
even by the RBI. Security and attractive interes t rate are two advantages of bonds.

1.7 Primary Market

Primar y market is a market for raising fresh capital in the form of shares and
debentures. Public Limited Companies who are desirous of raising capital funds
throug h the issue of securities, approach this market. The public limited and
government companies are the issuers and individuals, institutions and mutual
funds
are the investors in this market. The primary market allows for the formation
of
capital in the countr y and the accelerated industrial and economic development.

24 1Pa g e Kris hn a Chan d r a Pand ey

 Everywhere in the world capital markets have originated as the new issues
•
markets. Once industrial companies are set up in a big number and with them a

considerable volume of business comes into existence a market for outstanding issues

develops. In the absence of secondary market or the stock exchange, the capital

market will be paralyzed. This is on account of the reason that the business

enterprises borrow money from the capital market for a very long period but the

investors or savers whose savings are canalized through the capital market generally

wish to invest only for a short period. Existence of the stock exchange provides a
medium through which these two ends can be reconciled. It enables the investors to

sell their shares for money whenever they wish to do so. Thus, the business

enterprises keep the possession of permanent capital; the shares can keep on changing
hands.

In order to sell securities, the company has to fulfill various requirements and

decide upon the appropriate timing and method of issue. It is quite normal to obtain
the assistance of underwriters, merchant banks or special agencies to look after these
aspects.

Consequent upon the policy of liberalization adopted by the government in

July, 1991 and the subsequent abolition of capital issues control with effect from

May29, 1992, the primary market got a tremendous boost. The number of new
capital issues by private sector was only 364 in 1993-91 and the amount raised by

them was Rs. 4372 crores. The number of new capital issues rose to 1678 in 1994-95

and the amount raised by them to a phenomenal Rs. 26418 crores. However, the

capital market was sluggish and there was prolonged bearish trend in the market due

to the securities scam. The money raised from new capital issues reduced from Rs.

26418 crores in 1994-98 to Rs. 10409 crores in 1996-97 and to merely Rs. 3138 crores
in 1997-98. In the year 2000-01, the number of new capital issues was just 142 and
money raised was Rs. 4924 crores.

251 Page Krishna Chandra Pandey

.. Capital issues were in the form of shares or debentures. Debentures were
more popular means of raising long term funds and provided almost 70 percent of
more resources through new capital issues prior to 1992-93. However, after 1992-93,
the picture had changed. Shares provided 66 percent of the total resources raised
through new capital issues. Again in 1997-98 only 37 percent of the resources were
raised through shares and 63 percent of the resources were raised through debentures.
In the year 2000-01, 54 percent of the resources were raised through equity shares.
Public sector undertakings have been raising substantial resources through, the bonds
in recent years. The amount raised through public sector bonds increased from Rs.
354 crores in 1985-86 to Rs. 15588 crores in the year 2000-01. The mutual funds have
proved to be important in mobilizing resources in 1987-88, when the public sector
banks were allowed to set up subsidiaries to undertake mutual fund business. In
1997-98, the total numbers of mutual fund in the country were 34 and resources
mobilized by them amounted to Rs. 4064 crores. In 1999-00, mutual funds mobilized
Rs. 21971 crores.

Table 1.2
. ·a1pu bliC Of£enng
Irut1 . (IPO)
s
Year No. of issues Amount Rs. Crores
1989 106 234.17
1990 117 365.89
1991 135 668.68
1992 359 1907.00
1993 612 5306.43
1994 1086 7099.74
1995 1405 9598.93
1996 1101 5113.52
1997 114 1998.75
1998 17 313.31
1999 36 2117.19
2000 125 2982.91
2001 13 295.81
2002 6 1981.47
2003 14 2179.80
2001 34 30510.83
2005 72 22753.64
2006 92 24141.26

26 1Page Kri shna Chandra Pandey

• Chart 1.2
Initial Public Offering (IPOs)
35000 - . - - - - - - - - - - - - ~

30000

25000

20000 ~ series1
- series2
15000 Series3

10000

5000
0 ~-rl-::.~~~r_:--+--
-:_.;;::..__,·._.......
3 5 7 9 11 13 15 17

Table 2.2 reveals that the number of public issues has increased till 1995 and

the issue amount has also increased till 1995. This was due to the liberalization. The
highest number of issues and amount to issues were in 1995. However, the numbers
of issues and amounts have been reduced till the year 2003 due to the scams and
many other problems. The primary market has also started picking up from 2003,
with the lead from Government Companies. Despite an extremely bullish secondary

market for most of the year 2006 and a high return primary market has ended with a
mobilization of Rs. 24,141 crores through public issues which was 6 percent higher
than 2005. Book-building issues dominated in the year 2006. Out of92 issues, nearly
70 issues were with book-building route which collectively mobilized over 97percent

of the year's amount.

During the year 2006, there was a continued dominance of fresh capital which

goes into productive assets as against offers for sale where the proceeds goes to the
seller-promoters, funds and other investors and not to the company. Energy,
companies through three issues dominated with a 35 percent share at Rs. 8374 crore
followed by real estate sector with a 17 percent share at Rs. 3993 crore through 32

271 Page Kri~hna Chandra Pandey

 companies. There were no issues below Rs. 10 crore. There were 5 issues of over Rs.
1000 crore. The largest ever IPO was from Reliance Power for Rs. 11700.00 crore in
2008. The year was characterized by good quality issues. Strict entry norms of S.EBI
and stock exchanges combined with compulsory participation of QIBs are playing a

very important role. IPOs also gave impressive returns. All the IPOs were listed on
BSE andNSE.

In 2009-10, state-owned firms raised Rs 30,942 crore, or 66% of the total capital
raised during the year. The previous highest was Rs16,563 crore in 2003-04. Of the
money raised in 2009-10, Rs21,162 crore was through divestments and Rs9,780 crore
through fresh capital. Six firms entered the market during the year, led by NMDC Ltd
(Rs9,791 crore) and followed by NTPC Ltd (Rs8,480 crore), NHPC Ltd (Rs6,039
crore), Rural Electrification Corp. Ltd (Rs3,530 crore), Oil India Ltd (Rs2,777 crore)
and United Bank (Rs325 crore).

1.8 MARKETING SECURITIES IN THE PRIMARY MARKET:

There are various methods of marketing of financial securities. The following

are the usual methods adopted by the Indian Joint Stock Companies.

(1) Public Issue:

A public limited company can raise the amount of capital by selling its shares
to the public. It can also sell debentures and borrow money from the public.
Therefore, it is called public issue of shares or debentures: For this purpose it has to

prepare a 'Prospectus'. A prospectus is a document that contains information relating

to the company such as name, address, registered office and names and addresses of
Company Promoters, Managers, Managing Director, Directors, Company Secretary,
Legal Advisors, Auditors and Bankers. It also includes the details about project, plant
location, technology, collaboration, products, export obligations etc. The company
has to appoint brokers and underwriters to sell the minimum number of shares and it
has to fix the date of opening and closing of subscription list.

281 Page Krishna Chandra Pandey

 The new issue of shares or debentures of a company are offered for exclusive
subscription of general public. The prospectus should be approved by SEBI. A
minimum of 49 percent of the amount of the issue at a time is to be offered to public.
The company makes a direct offer to the general public to subscribe the securities of a
stated price. The securities may be issued at par, at discount or at a premium. An
existing company may sell the shares at a premium. There is no practice of selling
shares at a discount in India. The company has to make an application to the stock
exchange for listing of its shares. Public issue is a popular method of raising capital. It
provides wide distribution of ownership securities. It also promotes confidence of
investors through transparency and non-discriminatory basis of allotment. It satisfies
compliance with the legal requirements. However, the issue of securities through
prospects is time consuming because there are various formalities to be completed by
the company. The cost of raising capital is also very high due to underwriti ng,
commission, brokerage, publicity, legal and other administrative costs.

Chart 1.2

ISSUES

Public Rights Preferentia l

Initial Public Further Public

Offerings (IPOs) Offering (FPOs)

Fresh Issue Offer for Sale Fresh Issue Offer for Sale

291 P age Kri s hn a C h a nd r a P a nd ey

 (a) Further Public Offerings (FPOs): A further public offering is also called as a
follow on public offerings. It is an issue when an already listed company
makes either a fresh issue of securities to the public or an offer for sale to the

public through an offer document.

(b) Preferential Issue: A preferential issue is an issue of shares or of convertible
securities by listed company to a select group of persons under Section 81 of
the Companies Act. 1956 which is neither a right issue nor a public issue.
This is the quickest way for a company to raise equity capital. The issuer

company has to comply with the Companies Act.

(c) Issue Price: The price at which a company's shares are offered initially in the
primary market is called as the issue price. When the shares are traded in the
stock market, the price may be above or below the issue price.
(d) Market Capitalization: The market value of a quoted company, which is
calculated by multiplying its current shares price (market price) by the

number of shares in issue, is called as market capitalization. For example, A

Ltd. has 10 Lakh shares in issue. The current market price of the share is Rs.

120. Therefore, the market capitalization of the company is Rs. 1200 Lakhs.

(2) Private Placement:

A company makes the offer of sale to individual and institutions privately

without the issue of a prospectus. This saves the cost of issue of securities. The
securities are placed at higher prices to individuals and institutions. Institutional
investors play a very important role in the private placement. This has become
popular in recent days.

30 1Page Krishna Chandra Pandey

 This method is less expensive and time saving. The company has to comply a

very few formalities. It is suitable for small companies as well as new companies.
This method can be used when the stock market is dull. However, the private

placement helps to concentrate securities in the few hands. They can create artificial
scarcity and increase the prices of shares temporarily and then sell the shares in the
stock market and mislead the common and small investors. This method also
deprives the common investors of an opportunity to subscribe to the issue of shares.

(3) Offer for Sale

A company sells the securities through the intermediaries such as issue houses,
and stock brokers. This is known as an offer for sale method. Initially, the company
makes an offer for sale of its securities to the intermediaries stating the price and
other terms and conditions. The intermediaries can make negotiations with the
company and finally accept the offer and buy the shares from the company. Then
these securities or shares are re-sold to the general investors in the stock market
normally at a higher price in order to get profit. The intermediaries have to bear the
expenses of this issue. The object of this issue is to save the time, cost and get rid of
complicated procedure involved in the marketing of securities. The issues can also be

underwritten in order to ensure full subscription of the issue. The general public gets
the shares at a higher price. The middlemen are more benefited in this process.

1.9 Equity Culture

Among the corporate securities, Equity shares have only a little importance in
India. That means ownership securities are preferred less than debt securities by
Indian investors. There was not much demand for risk securities and the equity
culture was not much developed in India till 1980. In India, individual savers are
widely dispersed in rural areas which lack fast means of communication. However,

the picture has been changed after 1991. The stock market has become important

311 Pa g e Krishna Chandra Pandey

---
barometer of Indian Economy. Small investors have also started investing in stock
market. Thus, the equity culture has been developing in India.
Capital market deals with the grant of medium-term and long-term credit. It
is divided into the financial institutions and the securities market. Securities market
consists of capital market which is divided into the primary market and secondary
market. During 1990s the government initiated the following measurement to
strengthen the capital market.
(1) Setting up of the SEBI.
(2) Setting up of National Stock Exchange.
(3) Establishment of National Securities Clearing Corporation.
(4) Dematerialization of shares and Debentures or Bonds.
Securities and Exchange Board of India (SEBI) was set up in 1988 in order to
regulate the business of stock markets and registering and regulating the working of

stock brokers and other intermediaries associated with the securities market. The
capital market got a tremendous boost which is evident from the following table.

Table 1.3
Se1ectedS econdlary M ark et I n d.1cators
Year Market No. of listed Gross Annual Fil Net PIE
Capitalization Companies Turnover Investment Ratio
(Rs. Crores) (Rs. Crores) (Rs. Crores
1991-92 323363 6480 71777 - 44
1992-93 210952 6925 45696 13 29
1993-94 398432 7811 84536 5126 46
1994-95 468837 9077 67749 4796 30
1995-96 563748 9100 50063 6942 17
1996-97 505137 9890 124284 8574 14
1997-98 630221 9833 207644 5957 15
1998-99 619532 9877 371999 -1584 14
1999-00 912842 9871 685028 10122 22
2000-01 571553 9954 1000032 9934 19
2001-02 612224 9644 3072925 8755 16
2002-03 570568 9413 314073 2688 14

32 1Page Krishna Chandra Pandey

 Chart 1.3
Selected Secondary Market Indicators

-
3IIIIEQ)

"amm
"""""
1S>0000
--+-- 9rlal
- -ari.z
lllr-
IOOOll)I) --M-- a.i.«
- - -s.,;..s
SIDOIIO

-- 0

Table 1.3 revealed that there has been mixed trend in the growth of secondary

market in India. Market capitalization, number of listed companies and gross annual

turnover have increased till 1999-00 and then, reduced due to securities scams and

political instability. The similar trend has peen observed in case of FII net
investment.

1.10 STOCK EXCHANGES IN INDIA:

Stock Exchange is the most perfect type of market for securities. Purchase and

sale of securities are made under conditions of free market competition. Government

securities are traded in the form of over the counter sales or purchases. The first stock

exchange had started in India in the year 1875 at Bombay. The second Stock

Exchange was started at Ah.medabad in 1894. These were organized as voluntary

non-profit making associations of brokers to regulate and protect their interest.

Bombay Securities Contracts (control) Act was passed in 1925 and accordingly the

Bombay Stock Exchange was recognized in 1927 and Ah.medabad Stock Exchange was

recognized in 1937. After independence and passing the Companies Act in 1956 a

new Securities Contracts (Regulation) Act was passed in the Indian Parliament.

Thereafter, the Stock Exchanges are recognized by the Government under this Act.

Various provisions are incorporated in this Act, for the supervision and control on the

331 Page Kri..,hna Chandra Pandey

functioning of the Stock Exchanges. The broad based structure of secondary market

as on March 31•1 2002 is presented below:

Table 1.4
Structure of Secondary Market in India as on 31 st March 2002

Number of Stock Exchange 24

Exchange with screen based Trading System 23
Exchanges with Internet Trading 2
Exchanges with W AP Facility 1
Exchanges with Equity Trading 23
Exchanges with Debt Market SelITilent 2
Exchanges with Derivative Trading 2
Exchange with Clearing Corporation 1
Exchange with settlement Guarantee Fund. 16
Registered Members (Brokers) 9687
Registered Corporate Members 3862
ReE!istered sub-brokers 12208
Registered Flls 490
Listed Companies 9644
Estimated Market Capitalization Rs. 796076 Crore
Turnover during 2001-02 Rs. 895826 Crore

Source: BSE's Capital Market Module

There are 24 Stock Exchanges functioning in India. Bombay Stock Exchange

(BSE), National Stock Exchange (NSE) and Over The Counter Exchange of India
(OTCEI) and Interconnected Stock Exchange of India (!SE) have been operating at
the national level having nationwide trading network. There are other regional stock

exchanges particularly at Ahmedabad, Delhi, Kolkata and Chennai. Looking at the

progress made by the Stock Exchanges, Indian Stock Exchanges particularly BSE and

NSE are at par with International Stock Exchanges.

341 Page Krishna Chand r a Pandey

 1.10.1 RECOGNITION OF A STOCK EXCHANGE:

A Stock Exchange can operate only if it is recognized by the Central

Government or by SEBI under the Securities Contracts (Regulation) Act. 1956. A
stock exchange in India is recognized by the Central Government under section 4 of
Securities Contracts (Regulation) Act, 1956 (SCRA) for the purpose of assisting,
regulating or controlling the business of buying, selling or dealing in securities, after
it is satisfied that it would be in the interest of the trade and also in the public interest
to grant such recognition. This power to grant recognition to a stock exchange can
also be exercised by SEBI. Over a period of time, stock exchanges came to be set up
almost in every State. These stock exchanges set up regionally were known as the
Regional Stock Exchanges (RSEs). The objective of establishing the RSEs was to
enable regional companies in the respective geographical locations to raise capital and
to help spread the equity cult amongst the investors across the length and breadth of
the country. However, with the various ch anges in the capital market micro
structure, the scope of operations of the RS Es became limited. The trading in these
RSEs had also dwindled over the past several years.

NSE and BSE account for almost 100% of the total turnover. As far as RSEs are
concerned, except for the Calcutta Stock Exchange (CSE) and the Uttar Pradesh Stock
Exchange (UPSE), there is no trading on any other stock exchange and even on the

CSE and UPSE, the business is down to a trickle. The financial condition of the RSEs
is by and large weak. This state of affairs has been prevailing for the past several years.
Three factors have been primarily responsible for this:
(a) The advent of automated trading and extension of nationwide reach of BSE
and NSE which offered a large and liquid market to investors across the
country;

351 Page K r i s hn a C h a nd ra Pa nd ey
 (b) The introduct ion of uniform rolling settlemen t from June 2001 in place of

account period settlemen t with varying settlemen t cycles and

(c) The abolition of the concept ofregional listing.
The powers of the Central Government are far-reaching under the Act which are as
follows:
(1) Grant and withdraw al of recognition, approval or change of bye-laws.
(2) Call for periodical returns from any of the Stock Exchange.
(3) Direct enquiry of the member or the Stock Exchange.
(4) Submission of annual reports to the Government.

(5) Directing the Stock Exchanges to make certain rules.

(6) Suspend the Governing Board of the Stock Exchange.
(7) Supersede the Governing Board of the Stock Exchange.
(8) Impose any further condition or regulation for trading in the exchange.

(All these powers are now exercised by SEBn.

All exchanges have been corporatized and demutualised. Besides the above
matters, there are also bye-laws of each Stock Exchange which cover opening or
closing of Stock Exchanges, trading time, regulatio n of transfers, settlemen t periods,
fixation of margins, regulation of brokers, brokerage, charges, trading rules,

arbitration and settlemen t disputes and settlement and clearing system.

Stock Exchanges are given monopoly in certain areas under Section 19 of the
Securities Contract (Regulation) Act, to ensure that the control and regulation are
facilitated. Recognition can be granted to a stock exchange on satisfaction of certain
conditions. They have to supply the necessary information to the government.
Recognition can also be withdraw n, if necessary. Thus, the governm ent has complete
control over the Stock Exchanges. Under the Act, the Governm ent has formulated
the Securities Contracts (Regulation) Rules, 1957 for carrying into effect the objects of

361 P age Krishn a Chand ra P a ndey

 the legislation. These rules are statu tory and they constitute
a code of stand ard
regulations unifo rmly applicable to all the recognized stock
exchange.

The Stock Exchanges Act unde r the rules, buy-laws and

regulations duly
approved by the gove rnme nt and constitute and organized
mark et for securities.
They offer the most perfect type of market for various reaso
ns. Ther e is an active
bidding and in the case of shares and debentures a two-w
ay aucti on trading, so that
purchases and sales are made in the conditions of free and
perfe ct competition. The
bargains that are struc k by members of the exchanges are
usually at the fairest price
determined by the basic laws of supply and dema nd for secur
ities.

Governing Struc ture

The Governing Board, of a Stock Exchange , may be const

ituted in accordance with
the provisions of the Articles of Association of that Exch
ange, whic h are in force from
time to time, provi ded that -

(a) the repre senta tion of tradin g members does not excee
d 114th of the total
stren gth and the remaining directors are appointed in the
mann er as may be
specified by SEBI from time to time,
(b) the Chie f Executive officer of the exchange, by what
ever name called, is an ex-
officio director, and
(c) SEBI shall have the right to nominate as many directors
on the Governing
Board, as and when deemed fit, irrespective of the size of
the Gove rning Board
of the Stock Exchange.

371 Pag e Kris hna Cha ndra P and ey

 Ceiling on voting rights of shareh olders

No Shareholder, who is a tradin g member, shall have voting rights (taken

togeth er
with voting rights held by him and by persons acting in conce rt with
him) exceeding
5% of the voting rights of a Stock Exchange.

The Governing body of the Stock Exchange has wide govern menta l
and
administrative powers. It is the impor tant decision making body of
the Stock
Exchange. It has the power s, subject to govern menta l approval, to make,
amend,
demand, and suspen d the operat ion of the rules, buy-laws and regula
tions of the stock
exchange. It has also compl ete jurisdiction over all memb ers and in
practice, its
powers of manag ement and control are almost absolute. The govern
ing body has the
power to admit and expel members, to warn, censure, fine and suspen
d members
from tradin g in the Stock Marke t.

1.10.2 EMERGING ROLE OF STOCK EXCHANGES:

The Stock Exchange is an association of memb er brokers for the purpos

e of
facilitating and regula ting tradin g in securities. It is a self regula tory
organization.
The traditi onal emphasis is on regulation in the intere st of the invest
ors. The world -
wide trend is toward s greate r self-regulatio n along with coordi nating
and supervisory
role of the Gover nment . The invest or popula tion has been increasing
and their
interes t has becom e param ount for the reasons of promo ting capital
marke t. The
Stock Exchanges have been growi ng as public service institu tions by
provid ing a
variety of services to the investors. The Stock Exchanges have started
purcha sing
directo ry of corpor ate inform ation, which is useful for the scientific
assessment of the
fundamentals of the companies before makin g invest ment. They also
publis h the
share prices throug h their daily bulletins. They also publis h and supply
to public of
useful hando uts, books, and pamph lets giving out inform ation about
the stock marke t

381 Page Kris hna Cha ndr a Pand ey

 operations. The Stock Exchanges have also starte d organizing
inves tor educa tion and
traini ng programmes for the benef it of the investors. They have
opene d a separate
cell for attend ing to the inves tor complaints against listed comp
anies. Thus, the
future of the Stock Exchanges will be radically differ ent from
the present. Their
developmental role will be increasing much faster than their
regula tory role. With
increasing self-regulation and a stricte r enfor ceme nt of a code
of condu ct on the
members, the mode m Stock Exchanges will emerge as Public
Service institutions
catering to increasing dema nds of investors in the count ry. Educa
tion, traini ng and
research will domin ate in the years to come bringing the Stock
Exchange and the
public together. With the increasing emphasis on the National
Mark et System and
the growt h of autom ation, the new trend would be integr ation
and interl inkin g stock
exchanges at the nation al level. With the setting up of the Natio
nal Depository
System and National Clearing System and settle ment system there
will be paperless
trading which has already introd uced by some of the stock excha
nges.

1.10.3 STOC K MAR KET REGULATIONS:

Indian Stock Mark et is regulated by the following bodies:

(1) The Securities and Exchange Board of India.

(2) Depa rtmen t of Comp any Affairs (GOI).

(3) Depa rtmen t of Economic Affairs (GOI).
(4) Reserve Bank of India.

The significant amon g the legislations for the stock marke t are
the following:

(1) The SEBI Act, 1992 which established SEBI to prote ct inves
tors and develop
and regulate securities market.

391 Page Kris hna Cha ndra P a ndey

 (2) The Companies Act, 1956 which sets out the code of conduc t for the corporate

sector in relation to issue, allotme nt, transfer, disclosures to be made in public

issues and non paymen t of dividend.
(3) The Securities Contrac t (Regulation) Act 1956, provides for regulati on of

transactions in securities through control over Stock Exchange.

(4) The Depository Act, 1996, which provides for electron ic mainten ance and

transfer of ownersh ip of dematerialized securities.

The Securities and Exchanges Board of India was established in 1988 to

regulate and develop the growth of the capital market in India. It regulates the
working of Stock Exchanges and interme diaries such as stockbrokers, mercha nt

bankers, mutual funds, Registrars and Foreign Intuitio nal Investors SEBI also

promotes investor's educatio n and training of interme diaries in the securities market.

It prohibit s fraudule nt and unfair trade practices, relating to securities market and
insider trading in securities with the imposition of monetar y penalties, on erring

intermediaries. It also regulates substantial acquisition of shares and takeove r of

companies and can call for informa tion from , carry out inspecti on, conduct enquirie s
.
and audits of the Stock Exchanges and intermediaries in the market. SEBI has

introduc ed various reforms includin g improve d transpar ency, compute rization , and

enactme nts against insider trading, improve d capital adequac y and imposed

restrictions on forward trading. It has also enacted provisions to encoura ge corpora te

membership in the stock exchange. The stock exchanges have also laid down strict

compliance measures coverin g detectio n of irregula r trading practices through

sophisticated surveill ance system, managing, trading volume controls and set up

investor protecti on funds. They ensure compliance of brokers on a continu ous basis
through inspecti on and other measures.

401 Page Krish na Chand ra Pande y

 1.11 Chapter Scheme/Plans

Chapter First

Indian Capital Market

1. Capital market efficiency.

2. Indian Capital and Stock Markets.

3. New issue market.

4. Change of mindsets of Indian investors from physical to financial assets .

5. SEBI

6. SEBI Act.

7. ICRA

8. Investor Protectio n and SEBI Guideline s.

Chapter Second

India's Stock Exchanges: BSE and NSE

► Stock Exchanges in India - Developm ent and Operation s.

► BSE India's oldest and largest Stock Exchange

(i) Activity in Bombay Stock Exchange

(ii) BSE Indices

► BSE Technolo gy driven Stock Exchange

(i) Genesis of NSE

(ii) Objective s ofNSE

(iii) Emergen ce ofNSE

(iv) NSE Trading System

(v) NSE's Commun ication Network

(vi) Reductio n in spreads and costs

(i) Constitut ion of NSE

41 I P a g e K rish na C h a nd ra P andey
 Chapter Third

Issued Public Offerings {IPOs) in Indian Capital Market

► Issuance process of IPOs in India

► Recent measures to improve the sentime nts by tighteni ng the rules

► Post listing pricing behavio ur of IPOs

► Factors associated with pricing of IPOs

Chapter Fmirth

Review of Literature and Research Methodology

1. Review of Literatu re

2. Research Method ology

3. Questio nnaires
4. Statistical Tools and Techniq ues
5. Comput er Applications in Research Analysis

Chapter Fifth

Banking, Software, Pharma ceutical and Telecommunication Sector

IPOs Perform ance Evaluation and Analysis

1. IPOs having face value of Rs. 10/- listed in NSE/BSE

2. Returns of IPOs

3. Average Percent age Returns of IPOs over the years.

4. Mean and S.D. of NIFTY percenta ge returns and its compari son with

sectoral IPOs
5. Relationship between premium charged, issue size, times subscribed and

first day first month returns of IPOs

421 Page Krish na Chand ra Pande y

 Chapter Sixth

Entertai nment Sector, Enginee ring sector, Constru ction sector and Chemic al Sector

IPOs Perform ance Analysis and Evaluation

1. IPOs listed in NSFJBSE

2. Returns of IPOs

3. Average percenta ge returns of IP Os over the years

4. Mean and S.D. ofNIFI Y percenta ge returns and its compari son with sectoral

IPOs
5. Relationship between premium s charged, issue size, times subscrib ed and first

day/first month returns of IPOs.

Chapter Seventh

The Result

1. Average first day/firs t month returns in differen t sector IPOs

2. Sector wise average percenta ge first day returns on IPOs

3. Consolidated analysis

Chapter Eighth

Conclusions and Suggestions

43 1pa g C Krish n a Chand ra Pande y