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Financial Markets & Services
S.R.Deepika
Assistant Professor
Department of BBA
Kristu Jayanti College
Unit – I
Financial Markets
• Introduction to Financial Market
• Primary Market – Meaning, features, players, instruments
•...
Financial Markets
Financial Markets
• A market is an institution or arrangement that facilitates the
purchase and sale of goods and services...
Role of Financial Market in Economic
Development
• Savings Mobilization
• Investment
• Entrepreneurship growth
• Industria...
Structure of Financial Market
A capital market is a market for securities
(Debt or equity), where business enterprises and governments can
raise long-te...
The nature of capital market
 It has two segments
 It deals in long-term securities
 It creates dispersion in business ...
Primary and Secondary Market
• The primary market is the market where the
securities are sold for the first time.
In a pri...
Quiz time
• By what name is the building “phiroze
jeejeebhoy towers” better known as?
Clue….
Players in the Primary market
(The three I’s )
 Issuers
 Intermediaries
 Investors
• Individual Investors
• Corporate I...
Intermediaries in Primary Market
• SEBI (As a regulator)
• Merchant Bankers/ Lead Managers
– Bankers to the Issue
– Regist...
Merchant Bankers/Lead Managers
• Determining the composition of the capital structure, drafting
of prospectus and applicat...
Registrar to an Issue and share transfer agents
• Collecting applications from investors in respect of an issue;
• keeping...
Bankers to an Issue
• Bankers to the issue, as the name suggests, carries out all
the activities of ensuring that the fund...
Brokers to an Issue
• Advertising (Publicity in suitable media) plays a
key role in promoting the Public issue
• Brokers a...
Underwriters
• A set of all institutions and agencies that provide a
commitment to take up the issue of securities in the ...
Debenture Trustees
• Trustees who are appointed to safeguard the interest of debenture
holders are called ‘Denture trustee...
Credit Rating Agencies
• IPO grading is the professional assessment of a Credit
Rating Agency (CRAs) on the fundamentals o...
Cont…
The grades are allocated on a 5 point scale, the lowest being
Grade 1 and highest Grade 5. Such grading is generally...
Depositories - CDSL & NSDL
• National Securities Depository Limited (NSDL) and Central
Depository Services Limited (CDSL) ...
Demat & Trading Account
• Demat Account : Account where your Shares are stored in electronic
form .
• Trading Account : An...
Why open a Demat account?
• Auto Credit - Shares arising out of bonus, split, consolidation, merger , IPO are
automaticall...
Investments: What u cant believe, But
true…
If one would have bought 100 Wipro shares of Face Value Rs 100 in 1980….
1981 ...
Stock Exchanges
• A stock exchange provides a platform to trade company
stock and other securities
• A stock may be bought...
Stock Brokers
• A stockbroker, also called a Registered Representative,
investment advisor or simply, broker, is a profess...
SEBI
Established in 1992 “To protect the interests
of investors in securities and to promote the
development of, and to re...
Instruments
Shares
I. Equity Shares
II. Preference Shares
1.Cumulative & Non- Cumulative
2. Redeemable & Irredeemable
3. C...
Warrants
• Warrants are securities that give the holder the right,
but not the obligation, to buy a certain number of
secu...
IDR
• An Indian Depository Receipt (IDR) is a financial
instrument denominated in Indian Rupees in the form of
a depositor...
ADR
• Investing in foreign stocks should be part of any investor's portfolio. Not only does
it diversify your holdings, it...
Secured Premium Notes (SPN)
• It is a secured debenture redeemable at
premium in different installments.
• Example: Rs.100...
Types and Procedure for Issue of Equity
• IPO (Initial Public Offer)
• Subsequent Issue/ FPO (Follow Up Offer)
• Right Iss...
IPO
• Initial Public Offer (IPO), is the first sale of shares by the privately owned
company to the public.
• Usually unde...
IPO Process
• Appointment of merchant banker and other
intermediaries
• Registration of offer document with SEBI and Stock...
Rights issue
• When a company raises funds from its existing shareholders by selling
(issuing) them new shares / debenture...
Bonus Issue
 The company issues new shares to its existing shareholders.
 As the new shares are issued out of the compan...
Private Placement Method
 The private offering of a security to a small group of buyers.
 A method of marketing securiti...
Offer for sale (Bought Out Deal) method
 Institutional investors like venture funds, private equity funds etc.,
invest in...
ESOP
 Company Grants an option to its employees to acquire shares
at a future date at a predetermined price.
 Attracting...
Who?
SEBI guidelines towards the Issue of Equity Shares
• Entry Norm
• Minimum Promoters Contribution and Lock in period
• Regi...
Entry Norm
• Net Tangible Assets of atleast Rs. 3 crores in each of the preceding 3
full years
• Distributable profits in ...
• Filing of Prospectus: The purpose of prospectus is to invite the public for
subscription/purchase of any securities of a...
Minimum Promoters Contribution and Lock in period
• In case of an Initial Public Offer (IPO) i.e. public issue by
unlisted...
Reservation and Firm Allotment
• Public issue should be atleast 25% of the post issue capital
• Allotment to QIBs and NIIs...
SEBI Guidelines for Issue of
Debentures
1. Credit Rating (Issues greater than or equal to Rs.100
crores) two ratings from ...
• Credit Rating:
Debt instruments should be rated by a credit rating agency
and the same shall be disclosed in the offer d...
• Debenture Trustees: It is mandatory to appoint Debenture
Trustees for debenture with maturity of more than 18 months and...
Advantages of Primary Market
• Avenue of Investment
• Mobilisation of savings
• Channelising Savings for Productive use
• ...
Disadvantages of Primary Market
• Possibility for Deceiving Investors
• No fixed norms for project appraisal
• Lack of pos...
Unit 1   primary market
Unit 1   primary market
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Unit 1 primary market

  1. 1. Financial Markets & Services S.R.Deepika Assistant Professor Department of BBA Kristu Jayanti College
  2. 2. Unit – I Financial Markets • Introduction to Financial Market • Primary Market – Meaning, features, players, instruments • Procedure for issuing equity shares and debentures • SEBI guidelines for issue of securities • Secondary Market – Meaning, features, functions, players, merits and demerits; trading and settlement in stock exchanges • Reforms in stock market; BSE, NSE, MCX-SX and OTCEI: origin; functions.
  3. 3. Financial Markets
  4. 4. Financial Markets • A market is an institution or arrangement that facilitates the purchase and sale of goods and services • Financial market is an institution or an arrangement that facilitates the exchange of financial instruments. • “It is a place where people and organizations wanting to borrow money are brought together with those having surplus funds” • It may or may not have a particular physical existence. E. g: NASDAQ
  5. 5. Role of Financial Market in Economic Development • Savings Mobilization • Investment • Entrepreneurship growth • Industrial development • National growth
  6. 6. Structure of Financial Market
  7. 7. A capital market is a market for securities (Debt or equity), where business enterprises and governments can raise long-term funds. Capital Market
  8. 8. The nature of capital market  It has two segments  It deals in long-term securities  It creates dispersion in business ownership  It helps in capital formation  It helps in creating liquidity
  9. 9. Primary and Secondary Market • The primary market is the market where the securities are sold for the first time. In a primary issue, the securities are issued by the company directly to investors. • In secondary market investors purchase securities or assets from other investors, rather than from issuing companies themselves. The national exchanges - such as the BSE and NSE are secondary markets.
  10. 10. Quiz time • By what name is the building “phiroze jeejeebhoy towers” better known as? Clue….
  11. 11. Players in the Primary market (The three I’s )  Issuers  Intermediaries  Investors • Individual Investors • Corporate Investors; DIIs and FIIs There are two main types of issuers namely  Corporate's issue both debt and equity securities  Government issue debt securities.
  12. 12. Intermediaries in Primary Market • SEBI (As a regulator) • Merchant Bankers/ Lead Managers – Bankers to the Issue – Registrars to the issue and Share Transfer agents – Brokers and bankers to the issue – Underwriters – Debenture Trustees • Credit rating agencies • Depositories, depository participants • Stock Exchanges • Share Brokers
  13. 13. Merchant Bankers/Lead Managers • Determining the composition of the capital structure, drafting of prospectus and application forms, compliance with procedural formalities, • Appointment of registrars to deal with the share application and transfer, listing of securities, arrangement of underwriting / sub-underwriting, placing of issues, • Selection of brokers, bankers to the issue, publicity and advertising agents, printers and so on.
  14. 14. Registrar to an Issue and share transfer agents • Collecting applications from investors in respect of an issue; • keeping a proper record of applications and money received from investors • Assisting to: – Determining the basis of allotment of securities in consultation with the stock exchange; – Finalising of the list of persons entitled to allotment of securities – Processing and despatching allotment letters, refund orders or certificates and other related documents in respect of the issue
  15. 15. Bankers to an Issue • Bankers to the issue, as the name suggests, carries out all the activities of ensuring that the funds are collected and transferred to the Escrow accounts. • The Lead Merchant Banker shall ensure that Bankers to the Issue are appointed in all the mandatory collection centers as specified in DIP (Disclosure and Investment Protection) Guidelines 2000. • The LM also ensures follow-up with bankers to the issue to get quick estimates of collection and advising the issuer about closure of the issue, based on the correct figures.
  16. 16. Brokers to an Issue • Advertising (Publicity in suitable media) plays a key role in promoting the Public issue • Brokers are persons mainly concerned with the procurement of subscription to the issue from the prospective investors. • The appointment of brokers is not compulsory and the companies are free to appoint any number of brokers.
  17. 17. Underwriters • A set of all institutions and agencies that provide a commitment to take up the issue of securities in the event of a failure of the issue to get full subscription from the public are known as underwriters • They are compensated for this services by a payment of commission as agreed upon between the issuing company and the underwriter, and subject to the ceiling under the companies act • Brokers, investment companies, commercial banks provide this service.
  18. 18. Debenture Trustees • Trustees who are appointed to safeguard the interest of debenture holders are called ‘Denture trustees’. They are appointed before the issue of debenture by a company. • They can call for periodical report from the company. Inspection of books of accounts, records, registration of the company and the trust property. • Exercise due diligence to ascertain the availability of the assets of the company by way of security as well as their adequacy • Inform the SEBI immediately of any breach of trust deed /provisions of law.
  19. 19. Credit Rating Agencies • IPO grading is the professional assessment of a Credit Rating Agency (CRAs) on the fundamentals of a company in relation to the other listed equity shares in India. • It is mandatory for the issuer company coming with initial public offer (IPO) to obtain IPO grading from a Credit Rating Agency and disclose the same on the cover page of offer document and Application form.
  20. 20. Cont… The grades are allocated on a 5 point scale, the lowest being Grade 1 and highest Grade 5. Such grading is generally assigned on a five point scale with a higher score indicating stronger fundamentals and vice versa as below. • IPO grade 1: Poor fundamentals • IPO grade 2: Below average fundamentals • IPO grade 3: Average fundamentals • IPO grade 4: Above average fundamentals • IPO grade 5: Strong fundamentals
  21. 21. Depositories - CDSL & NSDL • National Securities Depository Limited (NSDL) and Central Depository Services Limited (CDSL) are depositories. • Depositories hold various securities like shares in electronic form. • A DP (Depository Participant) is like an agent of these depositories. • Investors open their account with depositories via depository participants. They don't deal directly with the depositories. • It is mandatory for all listed companies to have their securities admitted for dematerialisation with both the depositories viz CDSL & NSDL.
  22. 22. Demat & Trading Account • Demat Account : Account where your Shares are stored in electronic form . • Trading Account : An account which is used to place orders for Buying and Selling of shares . • when you buy shares, amount is debited from your trading Account and shares are stored in your Demat account . • When you Sell shares, amount is credited to your trading account and shares are taken away from your Demat Account and sold in the stock market.
  23. 23. Why open a Demat account? • Auto Credit - Shares arising out of bonus, split, consolidation, merger , IPO are automatically credited into the Demat account of the investor. • Lower Charges - Transactions involving physical securities are costlier than those involving dematerialised securities (just like the transactions through a bank teller are costlier than ATM transactions). • Quick Transfer- Securities can be transferred at an instruction immediately. • Elimination of Risks - Risks like forgery, thefts, bad delivery, delays in transfer etc, associated with physical certificates are eliminated. • Convenience-Any change in address or bank account details can be electronically intimated to all companies in which investor holds any securities, without having to inform each of them separately.
  24. 24. Investments: What u cant believe, But true… If one would have bought 100 Wipro shares of Face Value Rs 100 in 1980…. 1981 , 1 : 1 bonus = 200 shares 1985 , 1 : 1 bonus = 400 1986 split to Rs 10 = 4000 1987 , 1 : 1 bonus = 8000 1989 , 1 : 1 bonus = 16000 1992 , 1 : 1 bonus = 32000 1995 , 1 : 1 bonus = 64000 1997 , 2 : 1 bonus = 192000 1999 split to Rs 2 = 9,60,000 2004 , 2 : 1 bonus = 28,80,000 2005 , 1 ; 1 bonus = 57,60,000 2010 3 : 2 bonus = 1,44,00,000 Today’s rate is Rs. 560 Your portfolio would have been Rs. 537 crore Current year dividend Rs. 4 per share. i. e: 4*1,44,00,000 = 5.76 crore
  25. 25. Stock Exchanges • A stock exchange provides a platform to trade company stock and other securities • A stock may be bought or sold only if it is listed on an exchange • Trade on an exchange is restricted to brokers who are members of the exchange • The two major stock exchanges in India are BSE and NSE regulated by SEBI
  26. 26. Stock Brokers • A stockbroker, also called a Registered Representative, investment advisor or simply, broker, is a professional individual who executes buy and sell orders for stocks and other securities through a stock market, for a fee or commission (brokerage). • E.G.: Angel Broking, Motilal Oswal, India Bulls, Sharekhan, India Infoline, Kotak Securities, etc.
  27. 27. SEBI Established in 1992 “To protect the interests of investors in securities and to promote the development of, and to regulate the securities market and for matters connected therewith or incidental thereto”
  28. 28. Instruments Shares I. Equity Shares II. Preference Shares 1.Cumulative & Non- Cumulative 2. Redeemable & Irredeemable 3. Convertible & Non- Convertible 4. Participating & Non- Participating III. Preference Shares with Warrant IV. Equity Shares with detachable Warrant V. IDR (Indian Depository Receipt) VI. ADR/ GDR Debentures/ Bonds 1. 1. Secured/Mortgage Debentures 2. Unsecured/ Naked Debentures 3. Non Convertible Debentures 4. Fully Convertible Debentures 5. Partly Convertible Debentures 6. SPN (Secured Premium Notes) 7. Zero Interest Debentures 8. Floating Rate Debentures
  29. 29. Warrants • Warrants are securities that give the holder the right, but not the obligation, to buy a certain number of securities at a certain price before a certain time • One important characteristic of warrants is that they are often detachable. That is, if an investor holds a Share with attached warrants, he or she can sell the warrants and keep the Share. • Warrants are traded on the major exchanges.
  30. 30. IDR • An Indian Depository Receipt (IDR) is a financial instrument denominated in Indian Rupees in the form of a depository receipt created by a Domestic Depository (custodian of securities registered with the Securities and Exchange Board of India) against the underlying equity of issuing company to enable foreign companies to raise funds from the Indian securities Markets. • Standard Chartered became the first global company to file for an issue of Indian depository receipts in India
  31. 31. ADR • Investing in foreign stocks should be part of any investor's portfolio. Not only does it diversify your holdings, it offers plenty of opportunities to profit from trends and developments outside your home country. • An American Depositary Receipt (ADR) is a negotiable certificate issued by a U.S. bank representing a specified number of shares in a foreign (i.e. non-U.S.) stock that is traded on a U.S. exchange. • ADRs are denominated in U.S. dollars, with the underlying security held by a U.S. financial institution overseas. • http://topforeignstocks.com/foreign-adrs-list/the-full-list-of-indian-adrs/
  32. 32. Secured Premium Notes (SPN) • It is a secured debenture redeemable at premium in different installments. • Example: Rs.100 face value instrument is issued at par, for 3 years there will be no interest. • From 4th Year onwards till the 8th year it will be redeemed at Rs.35 per annum
  33. 33. Types and Procedure for Issue of Equity • IPO (Initial Public Offer) • Subsequent Issue/ FPO (Follow Up Offer) • Right Issue • Bonus Issue • Private Placement • Bought Out deals (Offer for Sale) • ESOP
  34. 34. IPO • Initial Public Offer (IPO), is the first sale of shares by the privately owned company to the public. • Usually underwritten to safeguard the interest of the issuers in the event of unsatisfactory response from the public • Prospectus is a document that contains information relating to the various aspects of the issuing company. The document is circulated to the public • Two Types issue – Fixed Price and Book Building method • There are three categories of investors - 50% Qualified Institutional Buyers (QIB’s), 15% Non-Institutional Investors (> 2 lakh) and 35% Retail Investors (< 2 lakh). • Advantage – Access to capital, liquidity to promoters, signals from markets • Disadvantage – High issue cost, Time consuming, Dilution of Control, Loss of flexibility, Accountability and Public pressure
  35. 35. IPO Process • Appointment of merchant banker and other intermediaries • Registration of offer document with SEBI and Stock Exchange • Marketing of the issue • Post- issue activities – Allotment & Listing in stock exchange • http://www.chittorgarh.com/ipo/ipo_list.asp?a=&Form IPO_Page=1
  36. 36. Rights issue • When a company raises funds from its existing shareholders by selling (issuing) them new shares / debentures, it is called as rights issue • Existing shareholders are entitled to apply for new shares in proportion to the number of shares already held. Illustratively, in a rights issue of 1:5 ratio, the investors have the right to subscribe to one (new) share of the company for every 5 shares held by the investor. • E.g.: At the annual general meeting of Vijaya Bank, held on June 24, 2016, the shareholders of the company has approved to allot equity shares of Rs. 900 crore by way of right issue of follow-on public offer
  37. 37. Bonus Issue  The company issues new shares to its existing shareholders.  As the new shares are issued out of the company’s reserves (accumulated profits), shareholders need not pay any money to the company for receiving the new shares.  The net worth (owner’s money) of a company consist of its equity capital and its reserves. After a bonus issue, there is an increase in the equity capital of the company with a corresponding decrease in the reserves, while the net worth remains constant.  In a bonus issue of 5:1 ratio, the investor will receive five new shares of the company for each share the investor held
  38. 38. Private Placement Method  The private offering of a security to a small group of buyers.  A method of marketing securities whereby the issuer makes the offer of sale to individuals and institutions privately without the issue of a prospectus is known as ‘private placement method’  While a public issue can be advertised, Company cannot do that for an issue offered through the private placement route.  Less expensive  Concentration of securities in a few hands  Apollo Tyres recently raised Rs.325 crore through private placement of redeemable non-convertible debentures  HDFC raised Rs 1,500 crore via debentures on private placement  http://taxguru.in/company-law/procedure-private-placement-shares-companies- act-2013.html
  39. 39. Offer for sale (Bought Out Deal) method  Institutional investors like venture funds, private equity funds etc., invest in unlisted company when it is very small or at an early stage. Subsequently, when the company becomes large, these investors sell their shares to the public, through issue of offer document and the company’s shares are listed in stock exchange.  The proceeds of this issue go to the existing investors and not to the company.  OFS, is for diluting promoter stake in a listed company. No new shares are created.  http://www.businesstoday.in/moneytoday/stocks/working-of-the- offer-for-sale-mechanism/story/215115.html
  40. 40. ESOP  Company Grants an option to its employees to acquire shares at a future date at a predetermined price.  Attracting, rewarding and motivating a talented employee are the main purposes of Employee Stock Option Plans (ESOP).  The scheme is particularly useful in the case of companies whose business activity is dominantly based on talent of the employees, as in case of the software industry.  http://www.thehindubusinessline.com/info-tech/the-infosys- way-of-creating-millionaires/article2029682.ece
  41. 41. Who?
  42. 42. SEBI guidelines towards the Issue of Equity Shares • Entry Norm • Minimum Promoters Contribution and Lock in period • Registration of Intermediaries • IPO Grading • Filing of Prospectus • Reservation & Firm Allotment • Compliance Officer • Entering in to listing agreement with stock exchange • Redressal of Investors Grievances
  43. 43. Entry Norm • Net Tangible Assets of atleast Rs. 3 crores in each of the preceding 3 full years • Distributable profits in atleast 3 of the immediately preceding 5 years • Pre-issue networth of the co. should not be less than Rs.1 crore in each of the preceding 3 full years • The issue size shall not exceed 5 times its pre-issue networth as per the audited balance sheet of the last financial year.
  44. 44. • Filing of Prospectus: The purpose of prospectus is to invite the public for subscription/purchase of any securities of a company • It is meant to disclose clearly and honestly everything and anything which has happened or is going to happen in the past and future of the company. • Date of incorporation of the company • Description of its core business • Capital structure • Particulars of the issue • Risks involved with investing in the equity shares being offered • Discourse of Outstanding litigations, criminal prosecution and defaults • Financial Information and Auditors Report • Declaration by the directors that all the relevant provisions of the companies Act and guidelines issued by SEBI have been complied with.
  45. 45. Minimum Promoters Contribution and Lock in period • In case of an Initial Public Offer (IPO) i.e. public issue by unlisted company, the promoters has to necessarily offer at least 20% of the post issue capital. • The minimum contribution of promoters shall be locked in for a period of 3 years • In case the promoters contribution in the proposed issue exceeds the required minimum contribution, such excess contribution shall also be locked in for a period of one year.
  46. 46. Reservation and Firm Allotment • Public issue should be atleast 25% of the post issue capital • Allotment to QIBs and NIIs are done on a discretionary basis. Allotment to retail investors is done on a proportionate basis Compliance Officer • Company is required to appoint compliance officer to directly liaise with SEBI/Stock Exchanges to comply with various laws and investors complaint related matters Listing agreement with stock exchange • Listing means permission to quote share and debentures officially on the trading floor of the stock exchange. • The listed shares appear on the official list of securities for the purpose of trading • Listing ensures free transferability of securities and open disclosure of trading information
  47. 47. SEBI Guidelines for Issue of Debentures 1. Credit Rating (Issues greater than or equal to Rs.100 crores) two ratings from different credit rating agencies shall be obtained 2. Disclosure 3. Debenture Trustee 4. Debenture Redemption Reserve 5. Conversion 6. Listing
  48. 48. • Credit Rating: Debt instruments should be rated by a credit rating agency and the same shall be disclosed in the offer document. If the issue is greater than or equal to 100 crores two ratings from two different credit rating agencies shall be obtained • Disclosure: Debt-equity ratio, servicing behaviour of existing debentures, payment of due interest on due dates on loans and debentures and no- objection certificate from a banker
  49. 49. • Debenture Trustees: It is mandatory to appoint Debenture Trustees for debenture with maturity of more than 18 months and their names should be stated in the offer document • Debenture Redemption Reserve (DRR): Company has to create DRR for debentures with maturity of more than 18 months. • Conversion: Issue of FCDs having a conversion period more than 36 months will not be permissible, unless conversion is made optional with “Put” and “Call” option • Listing: SEBI permits listing of debt instruments before equity provided the rating of the instrument is not below minimum rating of ‘A’ or equivalent
  50. 50. Advantages of Primary Market • Avenue of Investment • Mobilisation of savings • Channelising Savings for Productive use • Source of Large Supply of Funds • Rapid Industrial Growth • Source for Expansion and Technological Up gradation
  51. 51. Disadvantages of Primary Market • Possibility for Deceiving Investors • No fixed norms for project appraisal • Lack of post-issue seriousness • Ineffective role of merchant bankers • Delay in allotment Process • Poor mobilisation of savings and hesitancy to invest in shares

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