Financial Markets & Services
Department of BBA
Kristu Jayanti College
Unit – I
• 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:
• 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:
Role of Financial Market in Economic
• Savings Mobilization
• Entrepreneurship growth
• Industrial development
• National growth
A capital market is a market for securities
(Debt or equity), where business enterprises and governments can
raise long-term funds.
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
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.
• By what name is the building “phiroze
jeejeebhoy towers” better known as?
Players in the Primary market
(The three I’s )
• 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.
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
– Debenture Trustees
• Credit rating agencies
• Depositories, depository participants
• Stock Exchanges
• Share Brokers
Merchant Bankers/Lead Managers
• Determining the composition of the capital structure, drafting
of prospectus and application forms, compliance with
• 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.
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
• Assisting to:
– Determining the basis of allotment of securities in consultation with the
– 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
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)
• 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.
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
• The appointment of brokers is not compulsory and
the companies are free to appoint any number of
• 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
• Brokers, investment companies, commercial banks provide
• 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
• 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.
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
• 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.
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
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
• 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 &
Demat & Trading Account
• Demat Account : Account where your Shares are stored in electronic
• 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
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
• 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
Investments: What u cant believe, But
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
• 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
• 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
• 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
• E.G.: Angel Broking, Motilal Oswal, India Bulls, Sharekhan,
India Infoline, Kotak Securities, etc.
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”
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
V. IDR (Indian Depository Receipt)
VI. ADR/ GDR
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
• 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.
• 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
• 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.
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
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)
• 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
• Appointment of merchant banker and other
• Registration of offer document with SEBI and Stock
• Marketing of the issue
• Post- issue activities – Allotment & Listing in stock
• 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
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
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.
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
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
OFS, is for diluting promoter stake in a listed company. No new shares
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.
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
• Net Tangible Assets of atleast Rs. 3 crores in each of the preceding 3
• Distributable profits in atleast 3 of the immediately preceding 5
• 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.
• 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.
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.
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
• Company is required to appoint compliance officer to directly liaise with
SEBI/Stock Exchanges to comply with various laws and investors complaint
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
SEBI Guidelines for Issue of
1. Credit Rating (Issues greater than or equal to Rs.100
crores) two ratings from different credit rating agencies
shall be obtained
3. Debenture Trustee
4. Debenture Redemption Reserve
• 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
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
• 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
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
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