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Stock and Commodity Market

CHAPTER 1 - AN OVERVIEW OF CAPITAL AND COMMODITIES MARKET

Financial system refers to the process which is used by a firms’ management to exercise financial control and

accountability. Without the financial system the economy in the world cannot function. The financial system

implies a set of complex and closely connected or intermixed institutions, markets, transactions, claims, agents,

practices and liabilities in the economy.

IMPORTANCE [or] ADVANTAGES OF FINANCIAL SYSTEM-

1. It acts as an intermediary between lenders and borrowers.

2. It helps the investors to choose the best investment opportunity.

3. It helps in mobilisation of capital.

4. It helps in sustainable economic growth.

5. It facilities the flow of funds from the area of surplus to the area of deficit.

6. It provides mechanism of control risk and uncertainties.

7. It promotes self-employment and improves employment level.

8. It helps in providing financial information.

9. It provides required capital to the business Organisation to carry out the activities.

10. Helps in generating income.

11. A sound and robust financial system is very much essential to mobilise capital,

Functions of Financial System

The functions of financial system are –

1. It helps in mobilising the huge financial resources.

2. It accelerates the rate of economic development.

3. It ensures effective allocation of financial resources to the profitable investment channels. 4. It helps in

passing on financial information

5. It provides mechanism to control risks and uncertainties.

6. It generates disposable income in the hands of the people.

COMPONENTS OF INDIAN FINANCIAL SYSTEM

A financial system comprises of the following:

1] Financial institutions. 2] Financial instruments. 3] Financial services. 4] Financial markets.

1] Financial institutions: Financial institutions are those intermediaries which facilitate smooth functioning of

the financial system by making investors and borrowers meet.

Types of financial institutions: Financial institutions can be classified in to a 2 categories: VVN

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A. Banking institutions: Indian banking is subject to the control of the central bank it includes:

Organised sector consists of commercial banks, cooperative banks regional rural banks foreign banks etc....

Unorganised sector includes money lenders and indigenous banks.

B. Non-banking institutions: It includes

organised market

unorganised market.

2] Financial instruments: Financial instruments represent a claim against the future income and wealth of others.

They include primary and secondary securities.

3] Financial services: Financial service organisations render-services to industrial enterprises and ultimate

consumer market. It includes

Asset based services,

Fee based / advisory services.

4] Financial markets: Financial markets are those which facilitate buying and selling of financial assets claims

and services.

Financial markets-

A financial market is an institutions or arrangement those facilities the exchange of financial instruments like

shares, debentures, loans etc....

Definition

According to "BRIGHAM EUGENE.F "The place where people and organisation wanting to borrow money are

bought together with those having surplus funds is called a financial market.

Role of financial market:

Financial market plays an important role:

1. Transfer of resources: It facilities the transfer of resources from one person to another

2. Growth in income: The interest and dividends are paid to lenders and investors on their surplus investible

funds contributing to the growth in their income.

3. Productive usage: Financial markets allow productive use of funds. The funds are invested in profitable

projects.

4. Capital formation: Financial market helps in capital formation of a country they provide a channel for new

savings.

5. Price discovery: Financial markets allows for price determination of traded financial asset.

6. Sales mechanism: Financial markets provide mechanism for selling of financial asset by the investor. It offers

the benefit of marketability and liquidity.

7. Information availability: The financial market provides useful information to the parties taking part in the

financial market.

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FUNCTIONS OF FINANCIAL MARKETS:

Functions of financial markets are classified in to 2 categories:

A] Economic functions and B] Financial functions,

A] Economic functions:

1. It facilities the transfer of real economic resources from lenders to borrowers,

2. It increases the earnings of the lenders as lenders earn interest or dividend on their surplus funds

3. It helps the borrowers to invest in new assets hence increasing their income and standard of living.

4. It helps the borrowers to use the borrowed funds productively.

5. It provides a channel for a new savings.

6. It facilities smooth capital formation in the economy.

7. Financial markets provide a mechanism for an investor to sell a financial asset and liquidate the funds

invested.

8. It helps in the interaction of buyers and sellers in price discovery of financial assets.

9. Financial market reduces the search and information cost of transacting financial instruments.

10. It serves the economy and finally the welfare of general public in the country.

B] Financial Functions:

1. It provides borrowers with the funds they want to invest.

2. It provides for liquidity of funds.

3. It provides the lenders with productive assets they can invest.

4. Provide financial convenience.

Classification of financial markets [or] Types of financial markets [or] Components of financial markets

1. Organised market and unorganised market

2. Foreign exchange markets

3. Global Financial Markets

4. Money and capital market

5. Primary and secondary market

1] Organised market and unorganised market

Organised market - The organised markets are those with the standardised rules and regulations governing the

financial dealings.

Unorganised market - The unorganised market includes the money lenders and indigenous bankers.

2] Foreign Exchange market – The foreign exchange market is for transactions between different countries.

Foreign institutional investment has an important role to play in the Country

3] Global Financial markets -- All the financial markets of all the countries of the World together form the

Global Financial Markets. The financial markets play a major role in the global economy as it helps businesses

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to raise capital.

4] Money market and Capital market

Money market:

Money market refers to an activity which involves borrowing and lending of short term funds against short

term credit instruments such as treasury bills, bill of exchange, short term government securities etc.

Definition; According to G. CROWTHER "A Money market is the collective name given to the various firms

and institutions that deal in the various grades of near money".

Features of Money Market –

1. The transaction here takes place without the help of brokers

2. It is a single homogeneous market which comprises call money market and bill market,

3. The components are commercial banks and acceptance houses

4. The transactions take place in a formal way,

5. There is liquidity and marketability.

Functions of money market:

1. The money market facilities the adjustment of liquidity position of commercial banks and business

corporations.

2. It serves as a medium through which central bank can exercise control over creation of Credit.

3. It offers a channel to nonbanking financial institutions.

4. It helps in raising funds through short term funds through the issue of treasury bills,

5. It plays a vital role in the flow of funds.

Objectives of money market:

1. To provide a place to short term surplus funds.

2. To provide overcoming of short term deficits.

3. To provide the users of short term finds to meet the requirement.

4. To regulate liquidity in the economy.

5. To provide reasonable access to users of short term funds.

Significance of money market-

Money market is significant due to the following reasons:

1. It provides short term funds to various borrowers like business men and industrialists.

2. It provides the outlet for commercial banks.

3. It helps the investors to deal with their short term surplus funds.

4. It constitutes a highly efficient mechanism to control credit.

5. It plays a vital role in the flow of funds to meet the working capital needs.

6. It enables the business men to invest their temporary surplus for shorter period.

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Instruments issued in money market –

The instruments which are issued in the money market are discussed below:

a. Commercial papers.

b. Treasury bills.

c. Certificate of deposit.

d. Repurchase agreement (REPOS).

e. Bankers’ acceptance.

A] Commercial papers. It is a short term unsecured loan issued by the corporation financing for the day to day

operation.

Features of commercial papers: Following are the salient features of commercial papers:

1. They are negotiable by endorsement and delivery.

2. They are flexible as well as liquid instruments.

3. It can be issued with varying maturities as required by the issuing Company

4. They are unsecured instruments as they are not backed by any assets of the company

5. They are sold directly by the issuing company to the investors or else the issuer also can sell it to the dealer

who in turn will sell it in the market.

6. It helps the highly rated company as they can get cheaper funds from commercial paper rather than

borrowing from the banks.

Advantages

1. It is quick and cost effective way of raising working capital.

2. Best way to the company to take advantages of short term interest rate fluctuation in the market.

3. It provides the exit option to the investors to quit the investment.

4. It is cheaper than a bank loan.

5. It is unsecured and thus does not create any liens on assets of the company.

6. It has a wide range of maturity.

Disadvantages

1. It is available only to a few selected blue chip and profitable companies.

2. By issuing commercial paper, the credit available from the banks may get reduced.

3. Issue of commercial paper is very closely regulated by the RBI guidelines.

B] Treasury bills (T - bills) –

They are most marketable money market securities. They are popular money market instruments,

Features of Treasury bills

a. Treasury bills offer short-term investment opportunities, generally up to one year.

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b. They are useful in managing short term liquidity.

c. Types of treasury bills through auctions are 14-day,91-Day, 182-day and364-day treasury bills.

d. The degree of their liquidity is greater.

e. To arrange short term financial instruments according to their liquidity, the descending order would be cash,

cash loans, treasury bills and commercial bills.

Advantages of treasury bills

a. It has no tax deducted at source,

b. It is highly liquid money market instrument.

c. It gives better returns especially in the short term.

d. There is simplified settlement.

e. It facilitates meeting unplanned financial requirements.

f. It has ready availability.

g. It has less transaction cost.

Disadvantages

a. There is Poor yield

b. There is absence of competitive bids

c. Sometimes there is absence of active trading

3]. Certificate of deposit –

A Certificate of deposit is a time deposit with fixed maturity period.

Features -

1. Certificate of deposits is considered as risk-less and hence it’s safe for investors.

2. Certificate of deposits is highly liquid and marketable

3. The investors can buy or sell it whenever they desire to do so.

4. They are transferable from one party to another

5. It is a time deposit that restricts holders from withdrawing the money before maturity.

6. A certificate of deposits may be payable to the bearer or registered in the name of the investors.

Advantages of certificate of deposit

1. Certificates of deposit typically offer a higher rate of interest than treasury bills

2. As the rate of interest is fixed, the return on investment is ensured despite of interest rate fluctuations in the

market.

3. Certificates of deposit are a good investment option.

4. Certificate of deposit is a risk-free investment,

5. The return on certificate of deposit is assured and helps in financial planning. VVN

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6. It's very easy to purchase a certificate of deposit.

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4] Repurchase agreement (REPOS) –

Repo is a form of overnight borrowing and is used by those who deal in government securities. They are

usually very short term repurchases agreement and they provide lenders with extremely low risk. Repos are safe

collateral for loans.

5] Banker's acceptance [BA] - A Banker’s Acceptance (BA) is a short -- term credit investment created by a

non-financial firm. It acts as a negotiable instrument for financing imports and exports.

Capital market:

The capital market is a market for financial assets which have long or indefinite maturity. It deals with long

term securities.

Features of capital market:

1. It deals with the long and medium term funds.

2. It consists of both primary and secondary market

3. It covers both industrial and institutional investors.

4. It takes funds available for industrial undertakings,

5. It makes funds available for commercial undertakings.

Functions of capital market:

The capital market performs the following functions:

1. Mobilisation of savings - It helps in mobilisation of financial resources on a nationwide scale. It is one

important source for mobilising idle savings from the economy.

2. Middlemen - The capital market acts as a middleman between the investor and the entrepreneur.

3. Capital formation - It helps in capital formation. The mobilised savings are made available for agriculture and

industries.

4. Long term funds - The capital market provides long term funds to public and local bodies, Central and State

Government companies for development program.

5. Continuous market - It provides a continuous market for long term funds. There is net addition in the existing

stock of capital.

6. Speed up economic growth and development - It helps in promoting balanced economic development. It

enhances production and productivity in the national economy.

7. Highest possible return - The capital market investment sometimes gives highest possible returns with low

risk.

8. Effective allocation of financial resources. - It helps in effective allocation of mobilised financial resources.

The investment is made on profitable projects.

9. Proper regulation of funds - Capital markets not only help in fund mobilisation but also help in proper

regulation of funds in a qualitative manner.

10. Link between savers and investors -It acts as a link between the savers and the investors. VVN

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11. Encouragement of savings and investment – It encourages the habit of savings and investment of the

investors.

12. Benefits to investors - The investment in the capital market instruments help the investors to get better

return.

13. Stability in security prices - In the capital market there is stability in the prices of the

Securities offered.

14. Service provision - Capital market provides various types of services like underwriting, consultancy services

and export finance.

15. Technological up gradation -Capital market serves as an important source for technological up gradation in

the industrial sector.

16. Employment – Due to capital market more and more industries are set up and this increases the employment

opportunities.

Objectives of capital market:

1. To ensure best possible balance between the flow of savings and flow of investment.

2. To see that there is direct flow of savings to most profitable channels.

3. To promote economic growth.

4. To encourage savings and investment

5. To provide useful information to the investors.

Need or Importance of capital market

1. It mobilises the savings of the people and invest in profitable projects.

2. It leads to economic growth and development.

3. It helps the industries to get long term funds.

4. It leads to technological up gradation.

5. It helps the investors to get better returns

6. A healthy capital market consists of expert intermediaries.

Types of capital markets:

A. Government securities market: In this market the government securities issued by central and state

government securities that are guaranteed by government are traded. These securities are backed by RBI.

Government securities offer a good source of raising inexpensive finance. The government securities are in the

forms like:

1. Stock certificate. 2. Promissory note. - 3. Bearer bonds. 4. Treasury bills.

B. Financial intermediaries, Securities or long term loans market - Development banks and commercial banks

play an important role in this long term loans to corporate customers. It includes:

1. Term loan market - Here medium and long term loans are granted to companies.

2. Mortgage market -- Here mortgage loan which is loan against mortgage of immovable property is granted,

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3. Financial guarantees markets - Here finance is provided against the guarantee of a reputed person.

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C. Industrial securities market: It is a market where industrial concerns raise their capital or debt by issuing

appropriate instruments like shares and debentures. 10 years. They have a fixed interest called coupon rate.

Difference between capital market and money market:

Money market

| Capital market

1. It provides finance for short term 1. It provides finance for long term investment

2. Central and Commercial banks play 2. Stock exchange act as an investment market a major role

here

3. Money market instruments do not have

secondary markets

3. Capital market instruments have secondary markets.

4. Underwriting is the secondary 4. Underwriting is one of its primary activity function here:

5. The finance provided here are used for

working capital requirement.

5. The finance provided here are used for both fixed and

working capital requirements.

6. There is borrowing and lending of funds here 6. Here there is mobilisation of resources.

Instruments issued in capital market –

The following are the instruments issued in the capital market.

1. Debt instruments: A debt instrument is used by either companies or governments to generate funds for

capital-intensive projects. It can be obtained either through the primary or secondary market.

2. Equities (also called common stock) - This instrument is issued by companies only and can also be obtained

either in the primary market or the second market

3. Preference shares - This instrument is issued by corporate bodies and the investors rank second on the scale

of preference when a company goes under liquidation. It includes Cumulative preference shares, Non-

cumulative preference shares, Redeemable preference shares, Irredeemable preference shares, Participating

preference shares and Non-participating preference shares.

4. Derivatives - They are the financial instruments issued in the secondary market. Some examples of

derivatives are Forward, Futures, Options and Swaps

5. Mutual Fund - Mutual fund is an investment vehicle that is made up of a pool of funds collected from many

investors for the purpose of investing in securities such as stocks, bonds, money market instruments and similar

assets,

6. Debentures - Debentures are the debt instruments. They are issued with the legal obligation of paying

interest. It includes secured debentures, unsecured debentures, bearer debentures, registered debentures,

convertible and non convertible debentures.

7. Bonds - Bonds are the debt instruments with a stated maturity value.

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PRIMARY MARKET [OR] NEW ISSUE MARKET:

Primary market is a market for new issues or new financial claims. Primary market deals with the new issues of

securities. In primary market the government or Corporate sector issues securities that change hands from issuer

to owner.

Characteristics/features of primary market -

1. This is the market for new long term equity capital.

2. The primary market is the market where the securities are sold for the first time. Therefore it is also called

the new issue market.

3. In a primary issue, the securities are issued by the company directly to investors.

4. The company receives the money and issues new security certificates to the investors.

5. Primary issues are used by companies for the purpose of setting up new business or for expanding or

modernizing the existing business.

6. The primary market performs the crucial function of facilitating capital formation in the economy.

Services of primary market:

The services rendered by primary market are as follows:

1. Transfer: It allows the transfer of resources from investors to entrepreneurs who establish new companies.

2. Investigative services: It helps in economic analysis, technical analysis and financial analysis of the

companies where an investor wants to invest.

3. Advisory and information services: Various advisory services are available in the primary market related to

securities,

4. Guarantee: There is underwriting which aims at guaranteeing the subscription of public issue.

5. Distribution: There is scale of securities from company to investors through brokers and dealers in securities.

Functions of primary market –

The functions of primary markets are given below:

1. Formation of capital -- The main function of the primary market is to facilitate capital growth. It enables the

individuals to convert their savings into investments. It facilitates companies to issue new shares to raise the

funds.

2. Household savings - Companies raise the funds in the primary market by issuing Initial public offering [IPO).

These offerings help the general public to make their investments and gain the benefit.

3. Global investments - The primary market enables business expansion and growth for domestic and foreign

companies.

4. Sale of Government securities – the Government directly issues securities to the general public in the

primary market.

5. Primary market participants - There are merchant bankers, registrars, collecting bankers and underwriters

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6. Risk -- There is caution about the, IPOs which are risky by the Securities and Exchange Commission.

Importance [or] Significance of primary market –

The primary market assumes lot of importance because of its active role

1. Capital formation – It helps in capital formation by providing attractive issues to the potential investors.

2. Liquidity - As the securities issued in the primary market can be immediately sold in the secondary market,

the rate of liquidity is higher.

3. Diversification – Many financial intermediaries invest in the primary market and the company does not

depend on the single investor. The diversification of investment reduces overall risk.

4. Reduction in cost -- It helps in reducing the cost of searching for securities.

5. Business expansion – The primary market enables business growth and expansion for domestic and foreign

companies.

SECONDARY MARKET:

The financial market where the existing securities are traded is called as secondary market. Process of

Secondary Market - There are three important processes here:

1. Recognition of stock exchange – The stock exchanges need to be recognised by regulatory authority. The

securities issued in the primary markets are recognised in the secondary market.

2. Listing of securities in stock exchange - The securities like shares, debentures etc which are to be traded has

to be listed in the stock exchanges,

3. Registration of brokers. The intermediaries who facilitate smooth trading like brokers and sub-brokers are

recognised by the secondary markets.

Functions or services of secondary market (stock market):

The functions [or] services of secondary market are:

1. Liquidity of securities: Stock exchanges provide liquidity to securities since securities can be converted in to

cash at any time. There is liquidity of the securities offered in the secondary market.

2. Marketability to securities: Secondary markets facilities buying and selling of securities at listed price.

3. Safety of funds belonging to investors: Stock exchange helps in maintaining of safety of funds invested by

investors,

4. Availability of long term finds to companies; The Company is guaranteed of long term availability of funds

because of stock exchange.

5. Flow of funds in profitable projects: The popularity and profitability of companies are reflected in stock

prices. It facilities flow of capital in to profitable channels.

6. Motivation for improved performance by companies. The performance of the company is reflected in stock

prices quoted in stock market. The secondary market act as a motivation to improve the company's

performance.

7. Promotion of investment opportunities stock exchange mobilise the savings of the public and promote

investment.

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8. Availability of business information: Booms and depression can be identified through the dealings on the

stock exchange...

9. Promotion marketing of new issues by companies: If the new issues are listed in stock exchanges they are

readily acceptable to the public,

10. Other services: Stock Exchange enables the investors to reduce their risks by diversified portfolio of

investment.

Difference between primary and secondary markets: |

Primary Market

Secondary market

| 1. It deals with new issues made by

companies

1. It deals with existing securities already issued by the companies

2. No fixed geographical location for

primary market.

2. Need fixed place for trading. Eg – NSE, BSE

3. All companies can enter primary market

3. Only those companies which have issued securities in primary

market can enter

4. Create long term instruments for savings

4. Provides liquidity for the instruments which are already issued.

5. No administrative set up is available.

5. It has an administrative set up by stock Exchanges.

6. For the first time securities are available.

6. Securities are transferred from one person to another person.

Objectives of capital issue:

The main objectives of capital issues are:

1. To promote a new company.

2. To expand an existing company.

3. To diversify the production.

4. To meet the regular working capital requirements.

5. To capitalise the reserves.

ISSUE MECHANISM OR METHODS OF NEW ISSUE OR METHODS OF FLOATATION –

The funds are raised to establish a new enterprise, for expansion, diversification and modernisation. The new

issue market plays an important role of mobilising the funds.

Issue Mechanism

Origination- VVN

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It refers to the work of investigation, analysis and processing of new project proposals. Origination starts

before an issue is actually floated in the market. It includes a careful study of the technical, economic and

financial viability to ensure soundness of the project and provides advisory services.

Underwriting-

It is an agreement whereby the underwriter promises to subscribe to a specified number of shares or

debentures in the event of public not subscribing to the issue. This is a guarantee to the marketability of shares.

Advantages of underwriting:

1. Assured at raising adequate capital.

2. Public confidence on the issue is enhanced.

3. Provide export advice with regard to timing of security issue, pricing of issue etc....

4. Relieves from risk as the issue is large.

5. It helps the project with long gestation period.

Disadvantages of underwriting:

1. There are procedural delays.

2. Institutions want to wait and watch the result in case of under subscription and that is not possible here.

Distribution-

It is a function of sale of securities to the ultimate investors. Brokers and dealers who maintain regular and

direct contact with ultimate investors, provide this service.

Methods of issue mechanism for New issue for Flotation:

A company raise the finance in the different form like:

A. Public issue {or} Public issue through prospectus

B. Initial public offering [IPO].

C. Follow on public offering (FPO).

D. Seasoned equity offering [SEO]: markets where firms which are already trading raise additional capital.

E. Rights issue.

F. Private placement.

G. Preferential placement.

H. Bought out deals or offer for sale.

I. Book building

A. Public issue {or} Public issue through prospectus – Public issue is a most popular method of raising long

term funds. This involves inviting subscription from the public through prospectus.

B. IPO - Initial public offer: If the company is issuing the shares for the first time it is referred to as initial

public offer. It is having the access to capital, liquidity to promoters and there is investor’s recognition. VVN

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Benefits of going public

1. Access to capital

2. There is liquidity.

3. There is an opportunity for investors.

4. There is investor recognition

5. There is signal from markets.

Parties involved in IPO or Players in the Primary Market

1. Merchant Bankers -They are the one who render wide range of services like corporate counselling, project

counselling and issue management.

2. Managers to issue or lead managers: Lead managers are appointed by the company to manage IP0.

The duties of lead managers are:

Drafting of prospectus.

Preparing the budget of expenses related to the issue.

Assisting in marketing the public issue successfully

Advising the company in the appointment of registrars to the issue, underwriters, brokers, bankers to the issue,

advertising agents etc

Directing the various agencies involved in the public issue

3. Registrar to the issue: Registrar receives the share application from various collection centres and

recommends the basics of allotment.

Appointed in consultation with lead managers

Receive the share application from various collection centers.

Recommend the basis of allotment in consultation with regional stock exchange.

Arrange for dispatching of share certificate.

Handover the details of share allocation & other related registers to the company

Retain the issuer records at least for 6months from the last date of dispatch of letters of allotment for redressal

of complaints

4, Underwriters: The underwriters stand as back up supports and undertaking is done for Commission.

Methods of underwriting-

Standing behind the issue-Guarantees the sale of specified number of shares within a specific period.

Outright purchase-Purchases outright and resells them to the investor.

Consortium method-Jointly done by a group of underwriters.

5. Bankers to the issue: They have the responsibility of collecting application money.

Responsibility of collecting the application money along with the application form.

Charge commission besides the brokerage, if any.

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Depending on the size of the issue more number of bankers can be appointed(3-4)

6. Advertising agents: They play a key role in promoting the public issue.

Plays a key role in promoting the issue.

Media used newspapers/ magazines/hoardings/ press release or combinations.

7. Financial institutions. They also undertake the issue.

Underwrite and give financial assistance (lend term loans).

Go through the draft of prospectus, study the proposed program for public issue and approve them.

8. Government and statutory agencies- Various regulatory bodies related with public issue. SEBI, Registrar of

companies, RBI ( if foreign investment is involved), Stock exchange, Industrial licensing authority.

C. Follow on public offer (FPO]: When the existing company makes the fresh offer of securities to public

such offer is called FPO. FPO is popular method to raise additional equity capital in the capital markets.

Conditions to be fulfilled

The company should be listed in stock exchange for atleast 3years.

The company needs to have a track record of payment of dividend for atleast 3 years immediately proceeding

the year of issue.

D. Seasoned equity offering [SEO]: It is that market where the firms which are already trading raise funds for

additional capital.

E. Right issue: Rights means an option to buy certain securities at a certain privileged price within a specified

period. Shares so offered to existing shareholders are called rights shares.

Features of right issues:

1. The numbers of rights to subscribe as additional shares is determined by issue Company.

2. The number of rights is equal to the number of shares held by the shareholders.

3. Price per share is determined by the company.

4. Existing shareholders can exercise the rights.

5. Rights can be sold.

6. Rights can be exercised only during a fixed period (usually one month)

Merits of rights issue

1. It is less expensive compared to direct public issue

2. Management of application and allotment is less.

3. Existing shareholders are given first preference.

4. Existing shareholder pattern is not disturbed.

5. The rights are saleable in the market.

Demerits of rights issue

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1. Can be issued only by existing company.

2. This method is not suitable for new companies

3. Cannot be used for larger issues.

4. Subscription of issues is limited to the existing shareholders.

E. Private placement of shares: Private placement involves allotment of shares by a company to selected

sophisticated investors like mutual funds, insurance companies’ etc. brokers act as wholesalers selling shares in

retail to the public.

It has certain advantages:

1. Cost effective: It is a cost effective. Here several statutory and non-statutory expenses

like printing. brokerage. commission are avoided.

2. Time effective: Time required in this method to place the issue is less. In this public issue the time required

for completing legal formalities is less.

3. Structure effectiveness - It is structured to suit the needs of the entrepreneurs. It is also flexible to suit the

needs of the entrepreneurs and here the discount is provided to make the issue attractive.

4. Access effectiveness: Public limited company can mobilise capital easily.

F. Preferential allotment: It is an issue of equity by a listed company to selected investors at a price with may

or may not relate to prevailing market price. This kind of preferential allotment is made mainly to promoter or

their friends and relative.

G. Bought out deals or offer for sale: In this shares are not offered to public directly but through the

intermediaries of issue houses or stock brokers. The company is realised from the problem of prospectus and

making allotment of shares.

H. Book building: It is a mechanism through which the IPO takes place. In this process the price determination

is based on orders placed and investors have an opportunity to place orders at different prices

Issue management activities [or] Steps for public issue for New issue

Public issue refers to new shares to public the procedure to be followed in public issue is ilie

Pre-issue management - Pre-issue activities are as follows:-

a) Obtain stock exchange approval to MOA and AOA

b) Follow SEBI guidelines

c) Prepare the prospectus

d) Obtain approval of draft prospectus by legal advisors, financial institution.

e) Obtain consent from agencies and parties to issue prospectus.

f) Approval of prospectus from SEBI.

g) Filling of prospectus with registrar of companies.

h) Making an application for investment in stock exchange.

i) Publicity of issue with advertisement.

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Post issue activities:

a) To verify the issue subscribed.

b) To supervise and co-ordinate allotment procedure of registrar to issue as prescribed SEBI guidelines.

c) To ensure issue of allotment letter and certificate.

d) To ensure listing of securities al stock exchange.

e) To attend investor grievances regarding the public issue

Buv back of shares:

The repurchase of outstanding shares by a company in order to reduce the number of shares in the market and

to increase the value of shares still available is called buy back of shares. Reasons for buy back of shares: The

reasons are as follows-

1) Unused cash: If the company has huge cash reserve and may not have many new profitable projects to invest.

2) Tax gains: Since dividends are taxed at higher rates than capital gains companies prefer buy back to reward

their investors.

3) Market perception: By buying their shares at a price higher than prevailing market price company signals that

its share valuation should be higher.

4) Exit option: If a company wants to exist a particular country or wants to close the Company.

5) Escape monitoring of accounts and legal controls: If a company wants to avoid the regulations of the market

regulator by delisting.

6) Show good financial results: Companies try to use buy back method to show better financial results.

7) Increase promoters stake: Some companies buy back stock as it increase promoters stakes.

Conditions to be satisfied to buy back of shares / restrictions or buy back:

1. The buy back must be authorised by articles.

2. All the shares for buy back must be fully paid up.

3. A special resolution shall be passed in the general meeting of the company.

4. The buyback of listed securities must be according to SEBI regulations.

5. The buyback of unlisted securities must be accordance with central government.

6. A declaration of solvency has to be filed with SEBI,

Methods of buyback

There are 4 ways here -

1. Dutch quotation: Here the company states the range of prices for which its willing to buy and accept the bid.

2. Tender offer: Shareholders are presented with a tender offer where they have the option to submit a portion or

all shares within a certain time period and at usually a price higher than the current market value.

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4. Open market – Here buy back is done following the guidelines of SEBI.

SEBI GUIDELINES ON BUYBACK OF SHARES:

The following are the guidelines -

1, Company should make public announcement in at least one national daily.

2. Date of dispatch of offer letter shall not be less than 30 days and more than 45 days.

3. There should be the information of the registered office of the company.

4. SEBI shall be informed by the company within seven working days from the date of Public announcement.

5. The offer for buyback shall remain open to the members for a period of not less than 15 days and not

exceeding 30 days.

6. The company shall verify the offers within 15days from the date of closure.

Restrictions on buyback of shares –

1. A special resolution has to be passed in the general meeting of shareholders.

2. A declaration of solvency has to be filed with SEBI.

3. The shares bought back should be physically destroyed.

4. A declaration of solvency has to be filed with the registrar of companies.

5. A company should not make further issue of securities within 2 years.

Advantages of buyback of sharcs:

1. The buy back option helps the company to manage its cash effectively,

2. Buyback hclps the company to reduces its share capital.

3. It avoids high financial risk.

4, It ensures maximum returns to the shareholders.

5. Companies with large amount of free returns are free to use funds for acquiring shares.

6. It helps in improvement in the value of shares

7. It helps the promoters in increasing their stake..

Disadvantages of buyback of shares:

1. All the control of buyback will be in the hands of promoters and position of minority shareholders is weak.

2. High buyback lead to artificial manipulations of stock prices.

3. Buyback many lead to abnormal increases of prices also.

4. The promoters before buyback may highlight unfavourable factors affecting the earnings.

Precautionary measures to be followed before accepting company's buyback:

1. To know about share price movement before buyback.

2. If there are more publicity by the company.

3. The companies hugely under debt are unlikely to have free cash.

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4. If the company has just come to the capital market.

Commodity and commodity market:

Commodity:

It refers to any material which can be bought and sold. Commodities: Commodities represent the fundamental

elements of utility for human begins.

Commodity markets:

It refers to markets that trade in primary rather than manufactured products. Eg; wheat, coffee, rubber, etc... A

commodity market is a commodity exchange that is regulated by the state to allow sellers and buyers to trade in

specified commodities like oil, pluses, grains, metals, etc...

Difference between Stock and Commodities market:

Stock Market Commodities Market

1. The stocks are traded here.

1. The commodities like oil, sugar, pulses are traded

here.

2. Brokers are engaged here

2. Traders are engaged here.

3. It is more liquid

3. It is less liquid.

4. Volatility is less here.

4. Volatility is more here

5. Shares and debentures of various companies are

traded here.

5. Different types of commodities are traded here

6. Deals in financial assets.

6. Deals in physical delivery of commodities

7. There is transfer of ownership of financial assets. 7. Ownership of raw materials is traded here

Depository: Depository means one who receives a deposit of money, security, instruments or other property for

safe custody. Here the securities are held in electronic form.

Features of depositaries

It holds securities in accounts.

It transfers securities in accounts.

It transfers without handling securities.

It undertakes safeguarding of securities.

Depositories: In India depositary is a new concept which have been introduced in 1996, A depositary is an

organisation which holds securities like shares, debentures, bonds, mutual funds, etc. of investors through a

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registered depositary participant:

Objectives of depository:

1. To eliminate forgery of certificates.

2. To avoid tearing and mutilation of scripts due to reckless handling.

3. To avoid loss of certificates by postal authorities/ registrars/investors.

4. To ensure liquidity.

5. To liberate the Indian securities market from the paper work grid.

6. To reduce the paper handling cost in the capital market.

7. To standardize the Indian settlement practice.

8. To increase the growth potential of Indian capital market.

9. To implement an achievable clearing, settlement, and depositary solution which is not expensive to develop and

maintain.

10. Increase in competitiveness in global market.

Functions of Depositary

1. It enables the surrender and withdrawal of securities to and from the depositary.

2. To maintain investors holding in the electronic form.

3. Effects settlement of securities traded on the exchanges.

4. Pledging of dematerialized securities.

5. Nomination facility is made easy.

6. Facilitates securities lending and borrowing if the depositary is registered.

7. Receiving on behalf of DEMAT account holders , non cash corporate benefits such as allotment of bonus and

rights shares in the electronic form.

8. Any change in address of correspondence i.e, registered with the depositary automatically gets registered with

all the companies in which an individual holds share.

Depository system in India:

This system brings transparency to the issue of scripters.

There is transfer of ownership through electric media.

Restoration of faith in capital market.

Considerably reduction in delay registration.

Dematerialisation: It is the process of conversion of certificate into dematerialised holdings at the request of

the investor.

Rematerialisation. It is a process of conversion of dematerialisation holding back to the certificate. Pricing of

new shares: Pricing of public issue is a according to the guidelines of SEBI. It can be issued:

1. At premium. 2. At par values.

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