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CAPITAL MARKET

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The capital market is the market forlong term funds bothequityand

debt. Funds are raised from within and outside the country. The two

segments of the capital market are the primarymarket and the secondary

market.

Mobilize long term savings to finance long-term investments

provide risk capital in the form of equity and quasi-equity

Encourage broader ownership of productive assets

Provide liquidity with a mechanism enabling the investor to sell financial

assets.

Disseminating information efficiently

Enable quick valuation of financial instruments

Provide operational efficiency through simplified transaction procedures ;

lowering settlement timings and lower transaction cost Develop integration among real and financial sectors; equity and debt

markets; long-tern and short-term fund market; domestic and external

market; private and government sectors.

Improve efficiency of capital allocation.

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Nature of Fund Raising

ExternalDomestic Other External

Borrowing

Equity Issues by

Corporates and FI

Debt Instruments by

Govt , Corporates and FI

Equity Issues through

GDR , ADR

Debt through

ECB

FDI equity and debt

FII- portfolio investment

NRI-short-term and

medium-term deposits

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PRIMARY MARKETPRIMARY MARKET

Primarymarket is themarket forthe long term sources offinance (equityand debt).

New issues ofequity and debt are arranged in the form of anew floatation , either publically or privately or in the for of rightsoffer, to the existing shareholders.

Companies raise newcash in exchange forfinancial claims.The financial claims may take the form of shares or debentures.

Public sector undertakings also issue securities.

The transactions in the primary market result in capitalformation. It leads to creating productivecapacities,increasing efficiencyand creating job ,this in turngenerates wealth.

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Primary Issues

Public Issue Rights Issue Private Issue

Initial Public

Offer [IPO]

A first time

offer of sale of

securities by an

unlisted

company

Follow onPublic Offer

[FPO]

An offer of sale

of securities by

a listed

company

An offer of

sale of

securities to

the existing

shareholders

P

rivateP

lacement[unlisted

companies]

Direct sale of

securities to some

selected people or

to financial

institutions

P

referentialIssue

Allotment of

shares to

some select

group of

persons

QualifiedInstitutions

Placement

[for listed

companies]

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Initial Public Issue / Initial Public Offer[IPO]

Is an offering of either a fresh issue of securities or an offer for sale of existing

securities or both by an unlisted company for the first time to the public.

These are issues of shares forthe firsttime either after : incorporation or

conversion from private ltd to public ltd company.

Issuer has to get IPO grading done by atleast one credit rating agency.

Entry Norm I net tangible asset atleast Rs 3 crores for three full year, of which notmore than 50% is held in monetary assets; distributable profits in atleast three out of

preceding five years; net worth of atleast Rs 1 crore in three years; The issue sizeshould not exceed 5 times the pre-issue net worth as per the audited balance sheetof the last financial year.

Entry Norm II use BB route with atleast 50% of the issue mandatorily allotted toqualified institutional buyers, failing which the money shall be refunded. OR

Entry Norm III project is appraised and participated to the extent of 15% byFIs/scheduled commercial banks of which 10% comes from the appraiser (s). Inaddition, atleast 10% of the issue size shall be alloted to QIBs, failing which the fullsubscription shall be refunded. Should atleast have 1,000 prospective allottees in itsissue.

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FurtherIssue / Follow-on-Public Offering

Issue of securities by listed companies to finance their growth plan

This can be in the form ofpublic issues , rights issue , composite issue .

These may be offered forcash subscription or for consideration other thancash such as change of ownership eitherof physical assets ortechnicalknowhow.

The aggregate issue size of the proposed issue along with all the previousissues made during the same financial year in terms of size should notexceed 5 times its pre-issue networth as per the audited balance sheet ofthe last financial year.

Promoters shall contribute not less than 20% of the post-issue capital or

20% of the issue size.

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Rights Issue

It is the issue of new shares in which existing shareholders

are given pre-emptive rights to subscribe to new issue on pro-rata

basis. Companies offerrights issueto expand , diversify, restructuretheirbalance sheet orraisethe promoters stake.

Here the existing shareholder are entitled to subscribe to new share incertain proportion to the shares already held by them.

Companies offer rights issue at attractive prices often at a discount to themarket price so as to reward their shareholders.

No issuer shall make a rights issue of equity shares if it has outstanding fullyor partly convertible debt instrument at the time of making rights issue unlessit has made reservation of equity shares in favour of the holders of suchoutstanding convertible debt instrument in proportion of the convertible partthereof.

The issue is kept open for 15-30 days.

A shareholder has 4 options : exercise his right ; renounce his right and sellthem in open market; exercise part of his right and renounce the remainder ;lastly choose to do nothing.

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Exchange Issue

It is one in which shares of one company are exchanged for anotheras

in the case of takeovers and mergers. Exchange issues do notadd to the funds ofthecompanymaking the

exchange

Althoughthemergermayresult in synergy.

In HLL-TOMCO merger 2 HLL shares were exchanged for 15 TOMCO

shares.

Composite Issue

It consists ofrightand public issues.

Existing companies can resort to differential pricingof their share.

The price at which the shares are offered to public may differfrom the

price at which they are offered to the rights shareholders.

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Preferential Issue

Issue of shares on preferential basis and/or through privateplacement made by the company under section 81 of theCompanies Act 1956 to strategic group such as promoters

and their relatives ; foreign partners; technical collaboratorsand private equity funds.

Equity shares, PCD,FCD, any otherfinancial instrumentconvertible

into Equity shares

Lock in period

To enhance promoters holding

Financial restructuring [debtrestructuring / conversion of loans]

Strategic investment by foreign investors [techcollaborators etc-tooutside investors aftera special resolution].

Quick fund raising

Lowcost

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Private Placement (PP)

The direct sale of securities bycompanies to small numberofinvestors is called Private Placement.

PP covers shares, preference shares and debentures. The issuer can be public limited companyand private limited

company.

No prospectus is issued.

The numberof investors can go upto 50.

The intermediaries such as credit rating agencies, financial advisors

such as merchant bankers play important role in preparing an offermemorandum and negotiating with investors.

The investors include : FIs, Corporates, Banks , Provident Fund , MutualFunds and high net worth individuals

Merits :

Offeraccess to capital morequicklythan public offer

Lowcost

Confidential

Greaterstabilityand continuity

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Public Issuethrough Prospectus

General Guidelines

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BOOK BUILDING

It is a process by which a demand for securities

proposed to be issued by a body corporate is

elicited and built up and the price for such

securities is assessed for the determination of thequantum of such securities to be issued by means

of a notice / advertisement / offer document .

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Features Fixed Price process Book Building process

Pricing Price at which thesecurities areoffered/allotted is knownin advance to theinvestor.

Price at which securitieswill be offered/allotted isnot known in advance tothe investor. Only anindicative price range isknown.

Demand Demand for thesecurities offered isknown only after theclosure of the issue

Demand for thesecurities offered can beknown everyday as thebook is built.

Payment Payment of applicationmoney if made at thetime of applying forsubscription.

Payment of the completesubscribed amount at thetime of application.

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OfferDocument

Offer document is a document which contains all the relevant informationabout the company, promoters, projects, financial details, objects of raisingthe money, terms of the issue etc and is used for inviting subscription to theissue being made by the issuer.

Offer Document is called Prospectus in case of a public issueorofferforsale and

Letterof Offer in case of a rights issue.

Placement Document is an offer document for the purpose ofQualifiedInstitutional Placement and contains all the relevant and materialdisclosures.

Prospectus

Sec 2(36) defines prospectus as any document that includes any notice,circular, advertisement or other document inviting deposits from thepublic or inviting offers from the public for the subscription of

purchase of any shares in or debentures of a body corporate.

A document is not a prospectus unless it is an invitation to the public tosubscribe for shares in or debentures of a company.

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Content of prospectus

main objects ofthecompanyand particulars about signatories tothememorandumand the no. of shares owned bythem

numberand classes of shares

numberofredeemable preference shares

qualification share of directors and theirremuneration

particulars aboutthe directors and managing directors

minimum subscription of shares

thetime of opening and closing of subscription

theamount payable on application and allotment on each share

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particulars ofany option to subscription forshares

shares issued forconsideration otherthan cash

name of underwriters and underwriting commission

particulars ofauditors

voting and dividend rights

specification oftimeand place forinspection of balance sheetand

profitand loss account

particulars of vendors of property purchased orproposed to be

purchased bythecompany

the prospectus has to set outtheauditreport byauditors and a

report bytheaccountants on the profits and loss in the business

forthe last fiveyears.

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Categories of Investors

(1) Retail Individual Investor (RIIs) means an investor who applies or bidsfor securities for a value of not more than Rs. 1,00,000.

(2) Qualified Institutional Buyer (QIBs) shall mean:

**public financial institution

**scheduled commercial bank;

**mutual fund ;

**foreign institutional investorregistered with SEBI,**development financial institution;

**venturecapital fund registered with SEBI;

**foreign venturecapital investorregistered with SEBI;

**state industrial developmentcorporation;

**insurancecompanyregistered with (IRDA)

**provident fund withminimumcorpus of Rs. 25 crores;

**pension fund withminimumcorpus of Rs. 25 crores;

(3) Investors who do not fall within the definition given above are Non-Institutional Investors (NIIs)

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Allotment of securities to the different investorcategories

In case of fixed price issue

The proportionate allotment of securities to the different investor categories

in an fixed price issue is as described below:

1. A minimum 50% of the net offer of securities to the public shall initially bemade available for allotment to retail individual investors, as the casemay be.

2. The balance net offer of securities to the public shall be made available forallotment to:

a. Individual applicants otherthan retail individual investors, and

b. Otherinvestors including corporate bodies/ institutions irrespective of

the numberof securities applied for.

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Allotmentto various investorcategories is provided in the guidelines andis detailed below:

In case ofBookBuilt issue

1. In case an issuer company makes an issue of 100% of the net offer to publicthrough 100% book building process

(a) Not less than 35% of the net offer to the public shall be available forallocation to retail individual investors;

(b) Not less than 15% of the net offer to the public shall be available forallocation to non-institutional investors i.e. investors other than retailindividual investors and

(c) Not more than 50% of the net offer to the public shall be available forallocation to Qualified Institutional Buyers

2. The option of 75% book building is available subject to the following : The option of BB is available to all body corporates that are otherwise

eligible to make an issue of capital to the public as an alternative to , and tothe extent of , the percentage of issue , which can be reserved for firm

allotment. The securities available to the public should be separately identified as net

offer to the public.The requirement ofminimum 25% of the securities to beoffered to the public is also applicable.

Underwriting is mandatory to the extent of the net offer to the public.

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Period forwhichan issue is required to bekept open

Fixed price public issues: 3-10 working days

Book built public issues : 3-7working days extendable by 3 days in

case ofarevision in the price band

Rights issues : 15-30 days.

Allotment/ refund of shares

Fixed price public issues: 30 days oftheclosure ofthe issue

Book built public issues : 15 days oftheclosure ofthe issue

Rights issues : 15 days oftheclosure ofthe issue

Listing ofthe Shares

Fixed price public issue: within 37 days afterclosure ofthe issue.

Book built public issue : within 3 weeks aftertheclosure ofthe issue.

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MinimumNumberof Shares [fixed price issue]

Incase of public issue at par , the minimum number of shares for which theapplication is to be made should be fixed at 200 shares of face value of Rs.10 each.

Where the issue is at a premium or comprise of debenture , the amountpayable by each applicant shall not be less the Rs. 5000, irrespective of thesize of premium. It is subject to applications dealing with multiple of tradablelots.

Application Money [fixed price issue]

The minimum application money to be paid shall not be less than 25 % ofthe issue price .

Minimum Subscription

Minimum requirement of90% subscription is also mandatory for each issue

If the company does not receive 90% of the issue amount from publicsubscription plus accepted deployment from underwriters , within 60 days ofthe opening of the issue , the company should refund the amount ofsubscription.

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PriceBand

The issuer / issuing companies can mention a price band of 20% (cap in the

price should not exceed 20% of the floor price) in the offer documentfiled with the SEBI and the actual price can be determined at a later date

before filing it with the ROCs.

If the BOD of the issuing company has been authorized to determine the

offer price within a specified price band , a resolution would have to be

passed by them to determine such a price. The lead merchant bankershould ensure that in the case of listed

companies , a 48 hour notice of the meeting of the BOD , for passing

the resolution for determination of price , is given to the designated

stock exchange .

The final offer document should contain only one price and one set of

financial projections , if applicable.

The price band can berevised. If revised, the bidding period shall be

extended for a furtherperiod of 3 days, subject to the total bidding period

notexceeding thirteen days.

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Procedure ofBidding

The bid should be open forat least 5 days and not more than 10 days , which maybe extended to 13 days incase the price band is revised.

Individuals as well as QIBs should place their bids only through brokers who wouldhave the right to vet the bids.

During the bid period the applicant should approach the broker to place an order forbidding.

Enter the buy order in the systems on behalf of the client .The details required are :name , address , telephone no. , category of applicant , no. of shares applied for ,amount paid , beneficiary ID , DP code bid-cum application form no. ,bid price etc

The broker may collect 100%of the application money as margin money, the amount

so collected should be deposited in the escrow account . The book runner and the issue company determine the issue price based on the bids

received .

On the determination of the price , the number of securities to be offeredshould be determined ( issue size divided by the price that has beendetermined).

Once the final price (cut-off price) is determined , all those bidders whosebids have been found to be successful ( i.e. at and above the final price )would be entitled for the allotment of securities .

The final prospectus containing all disclosures , including the price and thenumber of securities proposed to be issued , should be filed with the ROCs .

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Regulations on Issueand Listing of debt Securities

An issuer cannot make any public issue of debt securities if it is restrained or

debarred by Sebi

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