INDIAN CAPITAL MARKETINDIAN CAPITAL MARKET

Market of Long-Term Funds.Market of Long-Term Funds. Issue of primary securities in the primary Issue of primary securities in the primary

marketmarket Issue of secondary securities in the primary Issue of secondary securities in the primary

marketmarket Secondary market transactions in outstanding Secondary market transactions in outstanding

securities which facilitate liquidity.securities which facilitate liquidity.

Functions of Capital marketFunctions of Capital market

Disseminate information efficientlyDisseminate information efficiently Quick valuation of financial instrumentsQuick valuation of financial instruments Enabling wider participationEnabling wider participation Developing integration among long term & Developing integration among long term &

short term funds, private sector & government short term funds, private sector & government sector etc.sector etc.

Primary Capital MarketPrimary Capital Market

Primary issues of the corporate sector lead to Primary issues of the corporate sector lead to capital formationcapital formation

Domestic funding through equity & debt Domestic funding through equity & debt instrumentsinstruments

External funding of equity through Global External funding of equity through Global Depository Receipts and American Depository Depository Receipts and American Depository Receipts & Debt instruments through External Receipts & Debt instruments through External Commercial Borrowings & other ECB through Commercial Borrowings & other ECB through FDI, FII & NRI dEPOSITSFDI, FII & NRI dEPOSITS

Why do companies need to issue shares to the public?

What are the different kinds of issues? Initial Public OfferingInitial Public Offering Right IssueRight Issue Private PlacementPrivate Placement

What is meant by Issue price? What is meant by Market Capitalisation? What is initial public offer? Who decides the price of an issue? the issuer in consultation with the Merchant Banker

shall decide the price. other, where the company and the Lead Manager

(LM) stipulate a floor price or a price band and leave it to market forces to determine the final price.

Book Building ProcessBook Building Process

Appointment of book Runner (Merchant Appointment of book Runner (Merchant Banking)Banking)

Submission of draft to SEBISubmission of draft to SEBI Issuer & book runner decide the offer priceIssuer & book runner decide the offer price Offer at different price level from syndicate Offer at different price level from syndicate

members. Also deciding about the opening & members. Also deciding about the opening & closing dates for bidsclosing dates for bids

Deciding min. Cut-Off rateDeciding min. Cut-Off rate Final prospectus filed with ROCFinal prospectus filed with ROC

Placement portion opens for subscription onlyPlacement portion opens for subscription only Public issue portionPublic issue portion

Cut-Off PriceCut-Off Price

The actual discovered issue price can be any price in the price band or any price above the floor price. This issue price is called “Cut-Off Price”.

What is minimum number of days for which a bid should remain open during book building?

How does one know if shares are allotted in an IPO/offer for sale? What is the timeframe for getting refund if shares not allotted?

How long does it take to get the shares listed after issue?

What is the role of a ‘Registrar’ to an issue? Does NSE provide any facility for IPO?

What is a Prospectus?

This disclosure includes information like the reason for raising the money, the way money is proposed to be spent, the return expected on the money etc. This information is in the form of ‘Prospectus’ which also includes information regarding the size of the issue, the current status of the company, its equity capital, its current and past performance, the promoters, the project, cost of the project, means of financing, product and capacity etc.

What is an ‘Abridged Prospectus’? Who prepares the ‘Prospectus’/‘Offer

Documents’? What does ‘Draft Offer document’ mean? What does one mean by ‘Lock-in’?

Listing of Securities Admission of securities of an issuer to trading

privileges on a stock exchange through a formal agreement also called Listing Agreement

Delisting of securities What is SEBI’s Role in an Issue? Does it mean that SEBI recommends an

issue? Does SEBI tag make one’s money safe?

Foreign Capital Issuance

Can companies in India raise foreign currency resources?

a) Issue of foreign currency convertible bonds known as ‘Euro’ issues

b) Issue of ordinary shares through depository receipts namely ‘Global Depository Receipts (GDRs)/American Depository Receipts (ADRs)’ to foreign investor

American Depository Receipts (ADRs)

ADR is a U.S. negotiable Instrument in the form of a certificate denominated in US Dollars representing ownership in non-U.S. companies.

Shares are issued by the issuing company with the depository bank.

Depository Bank in turn tenders DRs to the investors. It is a non-voting equity holding. EX: New York Stock Exchange (NYSE) , National

Association of Securities Dealers Automated Association (NASDAQ), American Stock Exchange (AMEX)

Global Depository Receipts (GDRs)Global Depository Receipts (GDRs)

a global finance vehicle that allows an issuer to raise capital simultaneously in two or markets through a global offering.

The underlying shares correspond to the GDRs in a fixed ratio say 1 GDR=10 shares.

GDRs may be used in public or private markets inside or outside US.

GDR issues listed on the Luxembourg Stock Exchange & the London Stock Exchange.

Foreign Currency Convertible Foreign Currency Convertible Bonds ( FCCBs)Bonds ( FCCBs)

FCCBs are bonds subscribed by non-residents FCCBs are bonds subscribed by non-residents in foreign currency.in foreign currency.

Carry fixed interest rate & option of Carry fixed interest rate & option of convertibility.convertibility.

Interest is paid in dollars & redemption is also Interest is paid in dollars & redemption is also in dollars.in dollars.

Interest is low but exchange risk is more.Interest is low but exchange risk is more.

External Commercial Borrowings External Commercial Borrowings (ECBs)(ECBs)

Indian corporates are allowed to raise foreign Indian corporates are allowed to raise foreign loans for financing infrastructure projects.loans for financing infrastructure projects.

Ex: Reliance petroleum raised $125 million in Ex: Reliance petroleum raised $125 million in the form of ECB’s in August 1996 carrying the form of ECB’s in August 1996 carrying low coupon rate of 7.84%low coupon rate of 7.84%

Private PlacementPrivate Placement

Involves issue of securities, equity or debt, to a Involves issue of securities, equity or debt, to a limited no. of subscribers, such as banks, FIs, limited no. of subscribers, such as banks, FIs, MFs, and high net worth individuals.MFs, and high net worth individuals.

Privately placed issue is one seeking Privately placed issue is one seeking subscription from max. 50 members. subscription from max. 50 members.

Secondary MarketSecondary Market

Secondary market is an equity trading venue in which already existing/pre-issued securities are traded among investors.

Secondary market could be either auction or dealer market.

Consists of recognized stock exchanges operating under rules, by-laws and regulations duly approved by the government.

Role of a Stock Exchange in buying and selling shares?

Trading platform provided by NSE is an electronic one and there is no need for buyers and sellers to meet at a physical location to trade.

Demutualisation of stock exchanges Legal structure of an exchange whereby the ownership, the management and the trading rights at the exchange are segregated from one another.