Financial Markets

INSTITUTIONS
FINANCIAL MARKETS AND

Module1: Financial Markets
Primary Market - Meaning – Features - Players of Primary Market – Instruments in Primary Market (Names) – Procedure for issuing Equity
shares and Debentures - SEBI guidelines towards the issue of Equity Shares and Debentures - Merits and Demerits of Primary Markets.
Secondary Market – Meaning – Structure – Functions – Trading and Settlement System of Stock Exchange Transactions - Players in the Stock
Market – Merits and Demerits of Stock Markets – Reforms in Stock Market – OTCEI and NSE – Origin – Function – Merits – Demerits.
FINANCIAL MARKETS AND INSTITUTIONS
Module 2: Non-Banking Financial Intermediaries
Investment & Finance Companies - Merchant Banks - Hire Purchase Finance - Lease Finance - Housing Finance - Venture Capital Funds and
Factoring.
Module 3: Mutual Funds
Concept of Mutual Funds - Growth of Mutual Funds in India - Mutual Fund Schemes – Money Market Mutual Funds – Private Sector Mutual
Funds – Evaluation of the performance of Mutual Funds – Functioning of Mutual Funds in India.
Module 4: Recent Trends In Financial Services
Personalized Banking – ATM – Tele-banking & E-banking - Credit & Debit Card - Customization of Investment Portfolio - Financial Advisors.
Module 5: International Financial Markets
FII- Regulations governing FII in India – FDI: Meaning- advantages and disadvantages – GDR and ADR, Meaning and Evaluation – Issue
structure of GDR/ADR.

Course Instructor
Mohammed Umair | M.Com, PGDBA, NET
Mohammed Umair is a faculty member Department of Commerce, St. Joseph’s College, Bangalore. He specializes &
teaches Finance and Taxation Courses for Undergraduate and Post graduate programmes. He also teaches management
students at St. Joseph’s evening college and Students of MBA Executive programme offered by St. Joseph’s Institutions.
Prior to his academic career, he has worked for several MNCs, to name a few HSBC, ICICI, IBM, Cognizant and Honeywell
in different domains like recruitment, operations, training and finance. His passion towards teaching drove him to
education sector and in short span of 8 years he is recognized as a distinguished and committed teacher by the students
and colleagues. Mohammed Umair is also an enthusiast researcher and has presented & published research papers in
various international conferences and research journals. In addition to teaching and research he is also authored several
text books on subjects like Marketing, Financial Management, Income tax and International Business. Mohammed Umair
is also known for his quizzing skills and has conducted more than hundred quiz shows for various college fests. During
his student life he was a recipient of ‘Student of the Year’ award in graduation. He has also won many accolades as an
employee in ICICI and cognizant which includes ‘Performer of the Year’ award.
Feedback & Questions|mdumair@sjc.ac.in

Business
organizations
• Business organizations require capital for
commencing new business, expanding
business and sustaining business.
Governments
• Governments require funds to finance
infrastructure projects, provide important
public services and of course for national
security.
Individuals
• Individuals frequently want funds to fulfill
various needs such as shelter, hunger,
clothing and education.
Where can they get this money?
Fortunately, there are some individuals and firms with
incomes greater than their expenditures.

What is finance?
AIMS OF FINANCE FUNCTION
Finance function refers to
action performed by a
finance department that
involves acquiring and
utilizing funds of a
business.
What is finance Function? Estimating fund requirements
Identifying Sources of Funds
Evaluating various sources
Deciding capital structure
Procuring funds
Procuring
adequate funds
Mobilization of
funds
Acceleration of
profits
Maximize firm
value
Accounting and
Analysis
Financial
reporting
Key tasks performed by finance department in an organization.
Finance is the science and art of managing money and other assets.

Name of Firm Nature of Business
Funds
Procured
Issue
price
Current
Price
Avenue
Supermarts
The supermarket chain of DMart stores is owned and
operated by Avenue Supermarts Ltd.
Rs 1,870 Crore Rs. 299 Rs. 1,106
Coffee Day
Enterprises
Café Coffee Day is an Indian café chain owned by
Coffee Day Global Limited, a subsidiary of Coffee Day
Enterprises Limited.
Rs. 1,150 crore Rs. 328 Rs. 220
Dixon
Technologies
Dixon is leading manufacturer of lighting products of
CFL, LED bulbs, LED TVs and semi-automatic washing
machines in India.
Rs. 600 crore Rs. 1760 Rs. 2,683
Matrimony.com
Matrimony.com is engaged in providing online
matchmaking and marriage services. They offers their
services through Internet and mobile platforms.
Rs. 130 crore Rs. 985 Rs. 856
Maximize firm Value
Key tasks performed by finance department in an organization.

Factors influencing capital requirements
Nature of Business
Size of a Firm
The capital structure of a company is a particular combination of debt, equity and other sources of finance that
it uses to fund its long-term asset.
Stability in Earnings
Growth stage
Asset structure
Control factor
Risk apatite of management
Corporate taxes
Degree of competition
Cost of capital
Growth stage
Government policies
Floatation cost
Economic condition

Putting things in Perspective
What is a Market?
A market is a location where buyers and sellers come into contact to exchange goods or services.
Markets can exist in various forms depending on various factors.
Market is an avenue
whether physical or
virtual where the sellers
of a specific good or
service can interact with
the buyers of that goods
and service where there is
a possibility for a
transaction to take place.
Existence of an area
Buyers and sellers
Commodity
Competition
Price consideration

A financial market is a market in which people and entities can trade financial
securities, commodities, and other fungible items of value at low transaction
costs and at prices that reflect supply and demand.
What is a Financial Market?
Financial Markets→Business
→Government
→Individuals
Borrowers
→Business
→Government
→Individuals
Lenders
Financial institutions, Banks,
NBFCs, Stock markets, Financial
Intermediary
Investment Savings
The funds are exchanged by issue of financial assets or instruments.
Financial market is a mechanism that allows buyers and sellers participate in the trade of financial assets
such as equities, bonds, currencies and derivatives.
Financial markets facilitate exchange of funds between borrowers and lenders by issue of financial instruments.

CLASSIFICATION OF FINANCIAL MARKETFinancialMarket
Organized Market
Capital Market
Industrial Securities
Market
Primary Market
Secondary Market
Government Securities
Market
Long Term Loan Market
Term Loan Market
Market for Mortgage
Market for financial
Guarantees
Money Market
Call money market
Commercial bill market
Treasury bill market
Short term loan market
Unorganized Market Money lenders and
indigenous bankers

CLASSIFICATION OF FINANCIAL MARKET
The financial transactions which takes place outside a well established exchange constitutes an unorganized
capital market. The unorganized sector of the capital market consists of:
Unorganized Market
 INDIGENOUS BANKERS
Any individual or private firm receiving deposits and dealing in hundies or lending money"
 In Chennai, these bankers are called Chettys;
 In Northern India Sahukars, Mahajans and Khatnes;
 In Mumbai, Shroffs and Marwaris; and
 In Bengal, Seths and Banias.
1. As remittance instruments (to transfer funds from one place to another),
2. As credit instruments (to borrow money [IOUs]),
3. For trade transactions (as bills of exchange).
Hundis refer to financial instruments
Normal banker before organized banking institution

CONCEPT OF CAPITAL MARKETS
 The term capital in business and accounting means Money
invested in a business to generate income.
 On the other hand market means a medium that allows
buyers and sellers of a specific good or service to interact
in order to facilitate an exchange.
Capital market is market for financial assets which have a long or indefinite
maturity. It includes securities with long term maturity (i.e. above one year).
Classification of
capital Market
Industrial
Securities
Market
Government
Securities
Market
Long term
Loan Market
A Industrial Securities Market
The industrial securities market is an ideal market for
corporates to rise long term funds by issuing debt and
equity instruments.
Primary Market
New issue market
Secondary Market
Also called stock
market

CONCEPT OF CAPITAL MARKETS
The primary market is the part of the capital market that deals with issuing of new securities.
PRIMARY MARKET
FEATURES OF PRIMARY MARKET
It is related with New Issues
This is the market for new long term capital
Securities are issued by the company directly to investors
Capital is raised for inception and operations
It has No Particular Place
WAYS OF BORROWING FUNDS IN CAPITAL MARKETS or Instruments in Primary Market
WAYS OF BORROWING
FUNDS IN CAPITAL
MARKETS
Issue of Shares
Issue of Debt Securities
Instruments
in Primary
Market
Or

DEBENTURES
A debenture is a capital market securities which is used to raise long term funds from public. It
acknowledges a loan to the company and is executed under the common seal of the company.MERITS
• No dilution of control
• Low issue cost
• Long-term funds
• Lower interest
• Tax-deductible expense
DEMERITS
• Increased financial risk
• Rigid obligation
• Protective measures
TYPES OF DEBENTURES
Fully Convertible & Non-convertible Debentures
Redeemable and Irredeemable Debentures
Registered & Unregistered Debentures
Secured and Unsecured Debentures
Pricing of Debentures
Debentures can, be issued in three ways.
1. At par : it is equal to the nominal value
2. At Discount : less than the nominal value
3. At Premium : more than its nominal value

PROCEDURE TO ISSUE DEBENTURES UNDER THE COMPANIES ACT, 2013
• Call and hold Board meeting and decide which types of the debenture will be issued.
Conduct Meeting
• Draft debenture trust deed
• To act as debenture trustee, the entity should either be a scheduled bank carrying on
commercial activity, a public financial institution, an insurance company, or a body
corporate.
• The entity should be registered with SEBI to act as a debenture trustee.
Appointment of Debenture Trustee
Prepare offer letter
• Secured debentures will be permitted for public subscription.
Issue of Debentures
The power to issue debentures can be exercised on behalf of the Company as a meeting of the Board under the
provisions of Section 179 (3) of the Companies Act, 2013.

SEBI Guidelines for Issue of Debentures
Who can issue?
• Public company |Public sector undertaking |NBFCs
Purposes of Issue
• For starting new undertakings
• Expansion or diversification
• For modernization
• Merger/amalgamation which has been approved by financial institutions
• Restructuring of capital
• For acquiring assets
• For increasing resources of long-term finance
Quantum of issue
• Issue of debentures should not exceed more than 20% of gross current assets and also loans and advances. (in the case of
working capital requirements)
Debt-equity ratio
• Debt-equity ratio in issue of debentures should not exceed 2:1
Key values
• Interest rate: Shall not exceed 15 per cent per annum.
• Listed on the stock exchange

Credit Rating
Symbols Rating Definition Remarks
CRISIL AAA Highest Safety
Timely servicing of financial obligations-lowest credit
risk.
CRISIL AA High Safety
Timely servicing of financial obligations very- low credit
risk.
CRISIL A Adequate safety Adequate degree of safety- low credit risk.
CRISIL BBB Moderate Safety Carry moderate credit risk.
CRISIL BB Moderate Risk Risk of default -financial obligations
CRISIL B High Risk
CRISIL C Very High Risk
CRISIL D Default
An estimate of the ability of a person or organization to fulfil their financial commitments, based on previous dealings.

Issue of Debentures
Company Debenture Type Issue Size Remarks
Tata Power
Unsecured, non-cumulative,
redeemable
Rs. 1,500 Crore Private placement
Maturity is 7 years
Reliance Industries Unsecured, Non-convertible
& Listed
Rs. 5,000 Crore Private placement
Mahindra Finance Non-convertible debentures Rs. 2,000 crore Public offer
Muthoot Finance
Secured Redeemable Non-
Convertible Debentures
Rs. 200 crore Public offer
HDFC
Masala bonds Rs. 1,300 Will be listed on the London Stock
Exchange
Sundram Fasteners Non-convertible debentures Rs. 500 crore Private Placement
Axis Bank
Unsecured Redeemable
Non-Convertible
Rs. 5,000 crore To meet to Basel-III norms
Face value of ₹10 lakh each
Piramal Enterprises
Secured non-convertible
debentures
Rs. 500 crore Private placement

10 companies default on interest payments
Companies Issue size (Crore)
Amtek Auto 600
Bhushan Steel 305
Castex Technologies 200
Educomp Solutions 35
Essar Power 200
Gitanjali Gems 125
Jindal Steel & Power 1750
Metorpolitan Infrahousing 100
Spentex Industries 50
Transmission Corp of AP 200
Reliance Communications

METHODS OF FLOATING NEW ISSUE
Public Issue
1 1. Initial Public Offer
2. Follow on Public
3. Rights Issue
4. Bonus Issue
5. Fast Track Issue
6. Indian Depository Receipts
7. Offer For Sale
Private Placement
2
1. Preferential Allotment
2. Qualified institutional placement (QIP)
3. ESOP

Public issue implies to borrowing funds from public by issue of shares to public rather
than being privately funded by the companies own promoter(s), which may not be
enough capital for the business to start up, produce, or continue running.
SIGNIFICANT FACTORS AFFECTING IPO VALUATIONS
1 Initial Public Offer: IPO
 The first sale of stock by a company to the public for raising fund is called an IPO.
 When a company reaches a certain stage in its growth, it may decide to issue shares, or
go public, with an initial public offering (IPO).
A strong demand Timing of IPO Issue Industry Comparable
Future Growth Marketing Strategy of Business Key Executives & Consultants
Pending Legal Cases New & Innovative Products & Services

Public issue implies to borrowing funds from public by issue of shares to public.
WONDERLA’S ACCESS TO CAPITAL MARKET
The first sale of stock by a company to the public for raising fund is called an IPO.
 Currently, Wonderla Holidays own and operate two amusement parks under the brand name 'Wonderla', situated at
Kochi and Bangalore and are in the process of setting up their third amusement park in Hyderabad. They also own and
operate a resort beside the amusement park in Bangalore under the brand name 'Wonderla Resort' which has been
operational since March 2012.
 In April 2014, Wonderla decided to borrow funds from capital market to fuel its expansion, the summary of its
borrowing is as follows:
Incorporated in 2002, Wonderla Holidays Ltd is one of the largest
operators of amusement parks in India.
The Offer
 1.45 Crore shares (new). Takes total share capital to 5.65 cr. shares.
 Price band of Rs. 115 to Rs. 125 per share.
 Applications in multiples of 100 shares.
 Retail investors (upto Rs. 200,000) got 35% reservation.
What will they use the money for?
 They need the money to build a theme park in Hyderabad. They’ll use Rs. 173 cr. to build it, and it’ll cost around 220 cr. to
build. About 50 cr. of the money needed will be borrowed at around 12.5%. They have around 50 acres of land in Hyderabad.

IPOS WITHDRAWN DUE TO POOR RESPONSE
The first sale of stock by a company to the public for raising fund is called an IPO.
 Incorporated in 1998, Plastene India Limited is Gujrat based plastics packaging manufacturer.
 Plastene exports to around 30 countries and derives close to 49% sales from international customers.
Plastene India Limited
CONCERNS – Reasons for failure
1. Low Profit Margins - Plastene faces stiff competition from other packaging companies. This is reflected in the
PAT margins which have typically ranged from 2 to 4%. Raw material and currency movements add to margin
volatility.
2. Clients facing economic slowdown -The companies' key clients are in the fertilizer and cement industries. These
are vulnerable to a slowdown in government spending and an economic slowdown.
3. Listed peers trading at a cheaper valuation - Plastene's peers in the packaging industry are trading at P/E
below 5 while Plastene will be listed at a ratio of over 8 times earnings
4. Labour intensive business - The firm employed over 1,800 people and remains vulnerable to rising wage
inflation

IPOS WITHDRAWN DUE TO POOR RESPONSE
 Incorporated in 1998, Plastene India Limited is Gujrat based plastics packaging manufacturer.
Plastene India Limited
Number of Times Subscribed (BSE + NSE)
May 2012 QIB NII RII Employee Total
Shares Offered / Reserved 46,00,000 13,80,000 32,20,000 55,290 92,55,290
Day 1 0.0000 0.1100 0.0000 0.0000 0.0200
Day 2 0.0000 1.6000 0.0000 0.3900 0.2400
Day 3 0.0000 1.6500 0.0300 0.7000 0.2600
Day 4 0.0000 1.7600 0.0500 0.7500 0.2800
Day 5 0.0000 1.7600 0.0500 0.7500 0.2900
Avoid subscribing to the IPO of Plastene India as the underlying business of the company is volatile and the stock has been
valued above its listed peers.
 Plastene India public issue subscribed 0.2900 times on its final day of subscription.
 NII quota of the IPO subscribed most with bids received for 176% shares.
 The response in QIB and Retail Individual (RII) was worst. IPO didn't receive a single bid in QIB quota.

2 Follow on Public Offer: FPO
 When a company that is already listed on stock exchange further issues of shares to the public it is called
follow-on public offer. A company opts for the FPO route when it wishes to raise additional capital from the
shareholders and new investors.
FPOs CAN BE OF TWO TYPES
Dilutive FPO
In a dilutive FPO, the board of directors of a company agrees to increase the shares by selling more equity.
Non-dilutive FPO
A non-dilutive FPO means selling privately held shares of the directors or insiders of a company.
Point of Difference IPO FPO
 Concept First public issue Subsequent public issue
 Issuer Unlisted Company Listed Company
 Stage of issue Transitory growth Further growth
 Risk High Comparatively low
CRITERIA: As per the new norms, firms in which public shareholders own stocks worth Rs 1,000 crore will able to access this route
through a follow-on public offer (FPO).
Also called as Offer For Sale

MAINLINE IPO'S IN YEAR 2017 - IPO REPORT & ANALYSIS
Calendar Year: 2017 | Total Issue Succeeded: 35 | Total Issue Failed: 0 | Total Money Raised: 67,505.14
Issuer Company Issue
Type
Issue Size
(Crore Rs.)
Issue Price
(Rs.)
Listing Day
Close Price
(Rs.)
BSE Limited IPO BB 1,243.43 806 1069.2
Music Broadcast Ltd IPO BB 488.53 333 372.9
Avenue Supermarts Limited IPO BB 1,870.00 299 641.6
CL Educate Ltd IPO BB 238.95 502 422.1
Shankara Building Products Ltd IPO BB 345 460 632.45
S Chand and Company Ltd IPO BB 728.56 670 676
IRB InvIT Fund IPO BB 5,921.10 102 101.8
Housing and Urban Development Corporation Ltd IPO BB 1,224.35 60 72.55
PSP Projects Ltd IPO BB 211.68 210 199.5
IndiGrid InvIT Fund IPO BB 2,250.00 100 98.64
Tejas Networks Limited IPO BB 0 257 263.5
Eris Lifesciences Limited IPO BB 0 603 601.5
Central Depository Services (India) Limited IPO BB 523.99 149 261.6
GTPL Hathway Limited IPO BB 0 170 171.65

Au Financiers (India) Limited IPO BB 1,912.51 358 541.65
Salasar Techno Engineering Ltd IPO FP 35.87 108 262.5
Security and Intelligence Services (India) Ltd IPO BB 0 815 757.05
Cochin Shipyard Ltd IPO BB 0 432 528.15
Apex Frozen Foods Ltd IPO BB 152.25 175 212.1
Bharat Road Network Limited IPO BB 600.65 205 208.45
Dixon Technologies (India) Limited IPO BB 600 1,766.00 2891.55
Matrimony.com Limited IPO BB 0 985 904.65
Capacit'e Infraprojects Limited IPO BB 400 250 342.55
ICICI Lombard General Insurance Company Ltd IPO BB 5,700.94 661 681.2
SBI Life Insurance Company Ltd IPO BB 8,400.00 700 707.55
Prataap Snacks Limited IPO BB 0 938 1180.65
Godrej Agrovet Limited IPO BB 1,157.31 460 595.65
MAS Financial Services Ltd IPO BB 460.04 459 654.4
Indian Energy Exchange Ltd IPO BB 1,000.73 1,650.00 1629.15
General Insurance Corporation of India IPO BB 11,372.64 912 874.3
Reliance Nippon Life Asset Management Ltd IPO BB 1,542.24 252 284.4
Mahindra Logistics Limited IPO BB 829.36 429 429.5
The New India Assurance Company Limited IPO BB 9,600.00 800 727.1
Khadim India Limited IPO BB 0 750 688.85
HDFC Standard Life Insurance Company Ltd IPO BB 8,695.01 290 344.6
MAINLINE IPO'S IN YEAR 2017 - IPO REPORT & ANALYSIS

Year No. of IPOs Amount Raised
(in Rs. Crore)
Issue Succeeded Issue Failed
2007 108 33,946.22 104 4
2008 39 18,339.92 36 3
2009 22 19,306.58 21 1
2010 66 36,362.18 64 2
2011 40 6,043.57 37 3
2012 13 6,770.17 11 2
2013 5 1,283.95 3 2
2014 7 1,200.94 5 2
2015 21 11,362.30 21 0
2016 27 26,372.48 26 1
*2017 35 70,714.41 35 0
IPO's - Year Wise (IPO's in India Share Market)

When a company raises funds from its existing shareholders by selling (issuing)
them new shares / debentures, it is called as rights issue.
Convene a Board Meeting
Pass resolution for approving “Letter of offer”
Dispatch Letter of offer to all existing shareholders
Receive & document response from shareholders
Convene a Board Meeting for approving allotment and issue of shares.
File with Registrar a return of allotment
 After the rights announcement but before the record date, the shares are known as cum-rights.
 Even if you do not currently own the shares but if you buy them at that time, you will get the rights issue.
 On the record date, they become ex-rights.
 If you buy them after this day, you do not get the rights issue.
3 Rights Issue

When a company raises funds from its existingshareholdersby selling (issuing)them new shares/ debentures, it is called as rights issue.
3 Rights Issue
Company Announcement
date
Record Date Ratio Issue
Price
Market
Price
Amount
In Crore
Lakshmi Vilas Bank 27/09/2017 06/12/2017 1:3 122 179.95 800
Canara Bank 9/02/2016 20/2/2016 1:10 207 300 150
 The price of the shares was moving between Rs 80 to Rs 90 when the rights issue was first announced in February.
 The price of each share in this rights issue was only Rs 54.
 However, after the announcement of the rights issue, the share price fluctuated widely between Rs 75 and Rs 100.
Generally, the price will go up because investors now want to buy the shares so that they can avail of the rights issue.
Rights share are usually at a discount to the current market rate.
Let's take the example of the Bata India stock.
CRITERIA: The minimum public holding requirement for a rights offer is Rs 250 crore.

Under the 'fast-track' route, a listed company would not be required to file any draft offer document for its FPO or
rights issue and they can proceed with fund-raising programme without necessarily getting 'observations' from SEBI.
4 Fastrack IssueSEBI has decided on 24th August 2007 to introduce Fast Track Issuance of Securities (FTIs).
Listed on BSE or NSE, for at least three years
Excellent track record in redressing Shareholders / Investor Grievances
Average free float market capitalization of at least Rs.10,000 crore or more during last one year
Promoter group shares are necessarily held in dematerialized form
Annualized Trading Turnover of shares constitute at least 2% of total listed shares during the previous one year
No prosecution proceedings or show cause notice issued by SEBI is pending against the company / its promoters /
whole time directors.
FAST TRACK ISSUANCES- ELIGIBILITY CRITERIA

An IDR is a way for a foreign company to raise money in India.
Standard Chartered PLC became the first global company to file for an issue of Indian depository receipts in India.
5 Indian Depository Receipts
Conditions The overseas company intending to issue IDRs should have paid up
capital and free reserve of atleast $ 100 million.
Sales turnover: It should have an average turnover of $ 500 million during the last
three years.
Profits/dividend Such company should also have earned profits in the last 5 years and
should have declared dividend of at least 10% each year.
Debt equity ratio: The preissue debt equity ratio of such company should not be more
than 2:1
Minimum issue
size: $500 million
ELIGIBILITY CONDITIONS FOR OVERSEAS COMPANIES TO ISSUE IDR

 Private placement is the opposite of a public issue.
 In this method a company issues financial securities to a particular group of investors not
more than 49 in number.
1 Private Placement
Private placement can be of two types:
Preferential Allotment
 Preferential Allotment is the process by which allotment of securities/shares is done
on a preferential basis to a select group of investors.
 For instance, venture capitalists, existing shareholders like promoters.
Qualified institutional placement (QIP)
 Here shares are issued to qualified institutional buyer (QIB)
 Public financial institution ǀ Scheduled commercial banks ǀ Mutual funds
 Foreign institutional investor ǀ Venture capitalist ǀ Provident Funds
 Pension Funds ǀ Insurance Companies

 Popular Preferential allotment in the form of strategic stakes Preferential Allotment
 KTM is Austrian motorcycle and sports car manufacturer.
 Largest motorcycle manufacturer in Europe.
 By 2013, Bajaj Auto held a 47.97% stake in the company.
 Jet Airways is a major Indian international full-service airline.
 It operates over 300 flights daily to 68 destinations
 The second-largest airline in India after IndiGo with 17.8%
passenger market share.
 In 2013, 24% stake in the airline to Etihad for US$379 million.
3 Employee Stock Ownership Plan (ESOP)
ESOP is a type of employee benefit plan which is intended to encourage
employees to acquire stocks or ownership in the company.

MERITS & DEMERITS OF PUBLIC & PRIVATE ISSUE
PUBLIC VS. PRIVATE PLACEMENT
Acquisition of capital
Optimizes cost of capital
Public offerings refer to the issuance of securities to unspecified investors publicly, while private placements
refer to the issuance of specific investors privately.
Increased Goodwill
Wealth Maximization
Employee ownership
Pricing and Valuations
Liquidity
Loss of confidentiality
Regulatory Pressure
Accountability via reporting
Loss of control
Increased cost
Advantages of Going Public or
(Importance/Advantages of Primary Markets)
Disadvantages of Going Public or Primary Markets
Advantages of Private Placement
Less Expensive
Quick process
Structure effectiveness
Limited Investors
Low pricing
Short Selling
Disadvantages of Going Public

ISSUE MECHANISM
STEPS or PROCEDURE FOR ISSUE
OF SECURITIES
Appointment of Merchant Bankers
1
Checking Compliance with
Entry Norms of SEBI
2
Preparing and Filing
Prospectus 3
Appointment of Underwriters4
Appointment of Bankers
5 Appointment of
Brokers to the issue
6
Appointing Registrar to Issue
7
Filing of Documents
8
Price Discovery
9
Allotment of shares
10
Listing of shares
11

ISSUE MECHANISM
APPOINTMENT OF MERCHANT BANKERS
1
They are also called lead managers and are in charge of the issue process.
Lead managers are independent financial institutions appointed by the company going
public to manage the IPO.
Pre-issue Due diligence
Preparation of the Budget
Suggest on timing of issue
Prepare & design offer documents
Advice on appointment of registrar, underwriters, brokers, bankers & advertising agency.
Compliance (Stock Exchange, RoC, SEBI)
Post-issue Management of Escrow Account
Allotment of shares and refund
Finalization of trading
Dispatch and de-materialization
Redressal of investor grievances
FunctionsofMerchantBankersinissueprocess

ISSUE MECHANISM
SEBI REQUIREMENTS FOR ISSUING SHARES TO PUBLIC2
An unlisted company has to satisfy the following criteria to be eligible to
make a public issue (IPO).
Net Tangible Assets of at least Rs. 3 crores in each of the preceding three full years of
which not more than 50% are held in monetary assets.
However, the limit of fifty percent on monetary assets shall not be applicable in case the
public offer is made entirely through offer for sale.
1
What are Net Tangible Assets?
Net Tangible Assets = Total assets — Intangible assets — Liabilities (ExcludingEquity).
2 Minimum of Rs. 15 crores as average pre-tax operating profit in at least three of the
immediately preceding five years.
What is operating profit?
The profit earned from a firm's normal core business operations.
Operating profit= Sales — Variable Cost — Fixed Cost
Also known as "earnings before interest and tax" (EBIT) or "operating income".
If the company has changed its name within the last one year, at least 50% revenue for the preceding1 year should be from the activity suggested by the new name.

ISSUE MECHANISM
SEBI REQUIREMENTS FOR ISSUING SHARES TO PUBLIC
3 Net worth of at least Rs. 1 crore in each of the preceding three full years.
What is Net Worth?
Net worth can be a useful tool to measure your financial progress from year to year.
Net worth = Equity Capital + Reserves & Surplus + Any other shareholders fund
4
The aggregate of the proposed issue and all previous issues made in the same financial
year in terms of issue size does not exceed five times its pre-issue net worth as per the
audited balance sheet of the preceding financial year
Proposed Issue < 5 times pre-issue networth
Issue Size Networth 5 times Netwoth Max Money can be borrowed
20,000 shares × Rs .100 per share 20,00,000 2 Lakhs 5×2L=10L 10 No
10,000 shares × Rs .100 per share 10,00,000 5 Lakhs 5×5L=25L 25 Yes
5 The promoters of the issuer shall contribute in the public issue not less than twenty per
cent of the post issue capital.

ISSUE MECHANISM
SEBI REQUIREMENTS FOR ISSUING SHARES TO PUBLIC2
An unlisted company has to satisfy the following criteria to be eligible to
make a public issue (IPO).
Norms
1. Net Tangible Assets
2. Average pre-tax operating profit
3. Net worth
4. Issue size limit
5. Minimum promoters’ contribution
1. In case an unlisted company does not satisfy any of the above criterion, it can come
out with a public issue only through the Book-Building process.
2. In the Book Building process the company has to compulsorily allot at least sixty
percent (60%) of the issue size to the Qualified Institutional Buyers (QIBs),
failing which the full subscription monies shall be refunded.
What if a company fails to meet any of the prescribed Norms?

ISSUE MECHANISM
Preparing and Filing
Prospectus
3What is a Prospectus?
Any document in the form of a notice, circular, advertisement
inviting the public for the subscription or purchase of any
shares in, or debentures of, a body corporate;
 Any company making a public issue or a rights issue of securities of value more than Rs. 50 lakh is
required to file a draft offer document with SEBI for its observations.
 There is no requirement of filing any offer document / notice to SEBI in case of preferential allotment
and Qualified Institution Placement (QIP).
 In QIP, Merchant Banker handling the issue has to file the placement document with Stock Exchanges for
making the same available on their websites.
Is it necessary to issue prospectus
What SEBI does with prospectus?
1. After scrutinising the prospectus, SEBI issues an observation letter.
2. The validity period of SEBI’s observation letter is twelve months only
3. Submission of offer document to SEBI should not in any way be deemed or construed that the same has
been cleared or approved by SEBI.
4. The investors should make an informed decision purely by themselves based on the contents disclosed in
the offer documents.
SEBI

ISSUE MECHANISM
Preparing and Filing Prospectus3
TYPES OF PROSPECTUS
Prospectus means any document inviting the public for the
subscription of financial instruments.
Draft Offer document
• Offer document in draft stage.
• The Draft Offer document is available on the SEBI website for public comments for a period of 21 days from the
filing of the Draft Offer Document with SEBI.
• SEBI may specifies changes, if any, in the draft Offer Document and the issuer or the Lead Merchant banker shall
carry out such changes in the draft offer document
Offer document
• Once draft offer document is approved it becomes Offer document
• It is filed with Registrar of Companies (ROC) and Stock Exchanges.
• An offer document covers all the relevant information to help an investor to make his/her investment decision.
Draft Red Herring Prospectus (DRHP)
• Prospectus which does not have details of either price or number of shares being offered or the amount of issue.
• In such a case will notify the floor price or a price band by way of an advertisement one day prior to the opening
of the issue.
• Only on completion of the bidding process, the details of the final price are included in the offer document. The
offer document filed thereafter with ROC is called a prospectus.

SEBI puts Barbeque Nation’s IPO on hold
 The restaurant chain was founded in 2006 and had 81 outlets across the
country as on March 31, 2017.
 The proceeds of the IPO towards the expansion of Barbeque Nation
restaurants in the country and repayment of loans.
 Barbeque Nation restaurants, comprises a fresh issue of shares worth up to
Rs 200 crore, besides an offer for sale of up to 61.79 lakh.
ISSUE MECHANISM
Preparing and Filing Prospectus3 Liability for Mis-statements
Criminal Liability
Section 34
any statement which is untrue or misleading in form or context in which it is included or where
any inclusion or omission of any matter is likely to mislead, every person who authorizes the issue
of such prospectus shall be liable.
Imprisonment term: 6 months to 10 years.
Fine: not be less than the amount involved in the fraud, but which may extend to three times the amount involved
in the fraud
“pending regulatory action for past violations”

ISSUE MECHANISM
Preparing and Filing Prospectus3 Contents of Prospectus
1. RISK FACTORS
 Internal risk factors
 External risk factors
 Litigation
2. SUMMARY OF INDUSTRY
 Macroeconomic Overview
 Market Segmentation
 Structure of Industry
 Growth drivers
3. THE COMPANY PROFILE
 Overview
 Strengths
 Distribution network
 Business model
 Profitability
 Future plans
 Promoters
 Market overview
5. FINANCIAL INFORMATION
 Balance sheet
 Income statement
 Earnings per share
 Cash flows statement
 Capital Structure
4. THE OFFER
 Basis for offer price
 Monitoring utilization of funds
 Variation in objects
 Objects of the fresh issue
 Deployment of net proceeds
 Statement of tax benefits
4. GENERAL INFORMATION
 Registered and Corporate Office
 Registrar of Companies
 Board of Directors
 Cash flows statement
 Company Secretary
 Compliance Officer
 Chief Financial Officer
 Investor Grievances
 BRLM
 Indian Legal Counsel
 Auditors to our Company
 Registrar to the Offer
 Bankers to the Issue
 Bankers to Company
 Registered Brokers
 Underwriting Agreement

ISSUE MECHANISM
Price Discovery
4
How to fix the price of the shares?
 Price discovery is the process of determining the price of share in the
marketplace through the analysis of merchant bankers.
 Companies are allowed to freely price their issues.
 SEBI does not play any role in deciding the price for issues.
METHODS OF PRICING
Fixed Price Issues
 When the issuer at the outset decides the issue price and mentions it in the offer
document, it is in the offer document, it is commonly known as “Fixed price issue”.
 The order document justifies the price with qualitative and quantitative factors.
Differential pricing
 Where one category of investors is offered shares at a price different from the
other category, it is called differential pricing.
1. Retail investors: An issuer can allot the shares to retail individual investors
at a discount of maximum 10% to the price at which the shares are
offered to other categories of public.
2. Employees: An issuer company can offer the shares to employees at a
discount of maximum 10 % of the floor price at which the shares are
offered to other categories of public.

METHODS OF PRICING
Book Building Offer
 Book building is actually a price discovery method in which company doesn't fix up a
particular price for the shares, but instead gives a price range investors have to decide at
which price they would like to bid for the shares. Based on the demand and supply of the
shares, the final price is fixed.
ISSUE MECHANISM
Appointment of book
runner- BRLM
Selection of price
Band
Applicants then bid
for the shares.
Syndicate members
are hired to obtain
bids from the
investors.
Normally the issue is
kept open for 3 days.
In case price band
revision, the issue
can be extended up
to 10 days.
The final price is
then discovered
based on these bids.
Describe a price range in
a Book Building issue.
PRICE BAND
Lowest price is referred
to as the ‘floor price’
FLOOR PRICE
The highest, the
‘cap price’
CAP PRICE
Lot size is the quantity
multiple of the issue.
LOT SIZE
The price multiple within a
specified price band.
TICK SIZE
Issue price after book building is called "cut off price".
TICK SIZE

DIFFERENCES BETWEEN FIXED PRICE AND BOOK BUILDING
ISSUE MECHANISM
Factor Fixed Pricing Book Building
Knowledge of Price
Know to investor in Advance Only an indicative price range is
given
Demand
Demand for the issue is know only after
the closure of the issue
Demand for shares is known
everyday as the book is built
Payment
Payment is made at the time of
subscription. Refund is given after
allocation.
Payment is made only after
allocation.
Reservations
50 % of the shares offered are reserved
for applications below Rs. 1 lakh and the
balance for higher amount applications.
50 % of shares offered are
reserved for QIBS, 35 % for small
investors and the balance for all
other investors.

ISSUE MECHANISM
Withdrawal of IPO
 Emaar’s issue, was subscribed by 83%.
 The timing of the IPO appeared to be wrong.
 High valuation was one of the causes.
 6.44% by QIB & 51.92 by RII
 Initial price band Rs. 280 to Rs.310 & revised price band was Rs.225 to Rs.260. Extended by two days.
 Credit rating agency Crisil had accorded grade 4 to the IPO but still the issue failed.

ISSUE MECHANISM
Appointment of Underwriters5
What if the shares are not Subscribed?
Underwriting is guarantee given by underwriters to take up whole or part of the issue of
securities not subscribed by the public.
Underwriting of shares is optional.
IS UNDERWRITING COMPULSORY ?
 Under law, the company has to refund investors their money if 90% of the issue is not
subscribed.
 The company will, accordingly, refund investors in 15 days.
 Hard underwriting is when an underwriter agrees to buy his commitment before the
issue opens.
 Soft underwriting is when an underwriter agrees to buy the shares at a stage after the
issue is closed.
PROPORTION OF UNDERWRITING
 Min: In respect to every underwritten issue, the lead merchant banker(s) shall undertake a minimum underwriting
obligation of 5% of the total underwriting commitment or Rs 25 lacs, whichever is less.
 Max: Underwriting commitments of a merchant banker shall not exceed 20 times its net worth at any point of time.
 In the case of under subscription of an issue lead merchant bank responsible for underwriting arrangement shall
invoke underwriting obligations and within 60 days from the date of closure of the issue.
Underwriter

ISSUE MECHANISM
#
Rates of Underwriting
Commission
On amount
devolving
On
underwriters
On amount
subscribed
by
Public
1 Shares 2.5% 2.5%
2
Preference Shares and on non Convertible debentures
(a) For amount upto 5 lakhs 2.5% 1.5%
(b) For amount in excess of 5 lakhs 2.0% 1.0%
 These rates of commission are the maximum
ceiling rates, within which any company will be
free to negotiate with the underwriters.
 Underwriting commission will not be payable on
amounts of shares subscribed by promoters
group, employees, directors, their relatives and
friends and to business associates.
Firm Underwriting Sub-Underwriting Syndicate Underwriting
Agree to buy, securities not to be
taken up by the public.
Main enter UW enters into a the
contract wit other underwriters to
share the risk
Agreement between the issuing company
and 2-3 or more firms of underwriters to
underwriters a large issue.
Types of Underwriting
Underwriting is guarantee given by underwriters to take up whole or part of the issue of securities not subscribed by the public.
 Honor commitments within 60 days of closure of issue
 If an issue is not subscribed to 100%, the underwriters are obligated to take-up the unsubscribed portion

ISSUE MECHANISM
Underwriting is guarantee given by underwriters to take up whole or part of the issue of securities not subscribed by the public.
Green-shoe Option also referred to as over-allotment option
 Green Shoe option means an option of allocating shares in excess of the shares included
in the public issue.
 This is an arrangement wherein the issue would be over allotted to the extent of a
maximum of 15% of the issue size.
 IPO through the book-building mechanism can avail the green shoe option for stabilizing
the post-listing price of the shares.
 This involves purchase of equity shares from the market by the underwriting syndicate in
case the share price fall below issue price or goes significantly above the issue price.
Advantages of underwriting:
1. Relieved from the tension of marketing of securities and of uncertainties in the market.
2. Fulfilling the statutory regulation of minimum subscription.
3. Guarantee to adequacy of CapitaLand help companies in raising capital.
4. Quick sale of securities
Disadvantages of underwriting:
1. Very costly method
2. Provide secret information
3. Secure control on the company
Leading IPO Underwriters
1. Goldman Sachs
2. Morgan Stanley
3. Merrill Lynch

ISSUE MECHANISM
Bankers to Issue
The bankers to an issue collect money on behalf of the company
from the applicants and transfers to Escrow account.
Escrow Account:
In other words, the bankers to the issue keep the funds in the escrow account on behalf of the bidders.
A registrar is the institution, often a bank or trust company, responsible for keeping records of
bondholders and shareholders when an issuer sells securities to the public.
They play an administrative role in conducting a public issue.
1. Application management
2. Determine basis of allotment
3. Finalize allotment of securities
4. Processing refunds
5. They advise the company regarding the closure or extension of closing date of the issue.
Registrar to an Issue

ISSUE MECHANISM
Basis of allotment in a public issue
Aggregation under different categories
Calculation of over subscription ratios in each category
The over subscription ratio is then applied to the number of shares applied
The number of successful allottees is determined.
This process is followed in case of proportionate allotment. In case of allotment for QIBs, it is subject to the discretion of the post issue lead manager.
Firm Allotment
• In this shares are allotted as per the quantity applied by the investors. This method is used when there is an
under or full subscription
Proportional Allotment
• If the shares are oversubscribed then proportion of the number of specified shares applied for in respect of a
particular reserved category to the number of specified securities reserved for that category.
Lottery Allotment
• After making proportional allotment if shares are left, then allotment is then on lottery basis.
Allotment of shares
10

ISSUE MECHANISM
Basis of allotment in a public issue
No of shares issued No of applications
received
Over subscription ratio Lot size
1000 3000 3 times 30 & multiples thereof
Person Lot Applied Calculation How much he will
get?
Mr. X 30+30 (60)=2 Lots No.of share applied (in Lot) ÷No. of time of
oversubscription in particular category --60/3=20
Lottery Method
Mr. Y 30+30+30+30(120)=4 Lots 120/3=40 30 shares
PROPORTONATE ALLOTMENT
Allotment of shares
10

ISSUE MECHANISM
Listing of shares
11
 Listing refers to the admission of security of a public limited company
on a recognized stock exchange for trading.
 Listing of securities offered to public becomes compulsory.
Entry to stock Exchange 
How listing price is decided? [Why there is difference between issue & listing price?]
Answer: Through Call Auction in Pre Open session for IPOs (New listing) Scrips?
SESSION TIME ACTION
EXCHANGE
STATUS
Exchange Call auction in Pre Open session for
IPOs (New listing)
9:00am - 9:44/45am
(approx.)
Orders for new listings (IPO) can be placed /modified
/cancelled in the Call auction in Pre Open session.
Open
Exchange Call auction Pre Open session for IPOs
(New listing) Order Matching & Confirmation
Period.
9:45am - 9:55am
Order placement /modification /cancellation in the call
auction in Pre Open session will be stopped.
Opening price determination, order matching & trade
confirmation starts at Exchange.
Open
Buffer Period. 9:55am - 10:00am
To facilitate transition between call auction in pre open
and continuous trading session.
Open
Continuous Trading for IPOs (New listing) 10:00am - 3:30pm
Exchange would move all unmatched market orders to
the continuous session at the opening price.
Open
It is basically a mechanism to determine the Opening Price based on aggregated supply and demand for the underlying on
the first day of trading/ re-commencement of trading.
The price at which the maximum quantity is traded is fixed as the equilibrium or opening price.

Secondary Market
Part B
Unit 1
 Rule No.1: Never lose money.
 Rule No.2: Never forget rule No.1.
—Warren Buffett

What is a Stock Exchange?
An association , organization , or an individual which is established
for the purpose of assisting, regulating, and controlling business in
buying, selling and dealing in securities.”
Features
of Stock
Exchanges
Organized securities market
Constituent of capital market
Membership is not open to everybody
Only the members can trade
Operates under accepted code of conduct
Features of
NSE & BSE

What is a Stock Exchange?
An association , organization , or an individual which is established
for the purpose of assisting, regulating, and controlling business in
buying, selling and dealing in securities.”
Features of
Stock
Exchanges
Market for Securities
Deals in existing securities
Regulates trade in securities
Allows dealings only in listed securities
Transactions effected only through members
Organized Management
Recognition from Central Government
Working as per rules
Specific location
Financial Barometers
Features of
NSE & BSE

Structure of Stock Market/Exchange
Most of the stock exchanges in the country are incorporated as ‘Association of Persons’ of Section 25
companies under the Companies Act.
Organization structure of Stock
Exchange in India
Ownership &
Management
Regulatory
Framework Governing Body Membership
1. Ownership & Management Structure
In India stock exchanges ownership is corporatized.
“Corporatization” means stock exchange should be organized as a company. The idea is to separate ownership,
management and trading rights from each other.
In India stock exchanges management is Demutualized.
“Demutualization" means the segregation of ownership and management from the trading rights of the members of
a recognized stock exchange in accordance with a scheme approved by the Securities and Exchange Board of India.

Most of the stock exchanges in the country are incorporated as ‘Association of Persons’ of Section 25 companies under the Companies Act.
2. Regulatory framework
The five main legislations governing the securities market are:
The Securities Contracts (Regulation) Act, 1956
Provides for regulation of transactions in securities through control over stock exchanges.
The Companies Act, 2013
A uniform law relating to companies throughout India. Sets out the code of conduct for the corporate
sector in relation to issue, allotment and transfer of securities disclosures to be made to the public
issues.
The SEBI Act, 1992
For the protection of interests of investors and for promoting development of and regulating the
securities market.
The Depositories Act, 1996
Provides for electronic maintenance and transfer of ownership of dematerialized securities
The Prevention of Money Laundering Act, 2002
To prevents money laundering and provides for confiscation of property derived from or involved in
money laundering.
1
2
3
4
5
ReformsinStockMarket

3. Governing Body of Stock Exchange
 Governing body is a group of people who formulate the policy and direct the affairs of a stock exchange.
 The Governing Board has the responsibility to maintain an orderly and well regulated market.
 The members of the governing body elect the President and Vice –president.
Governing Body
Elected Directors
Government Nominee
Public Representative
Governing Body Consits13 members
 SEBI nominates persons not exceeding 3
 6 elected by the members of the stock exchange.
 The board nominates 3 public representatives
 The stock exchange appoints one Executive Director.

4. Membership in a Stock Exchange
 To be a member a person has to conform certain rules and regulations specified under the Securities
Exchange Board of India.
1. The person must be an Indian Citizen
2. The minimum are prescribed for the members is 12 years
3. The person must neither be a bankrupt nor compounded with the creditors
4. Must not be convicted for fraud or dishonesty
5. Should not be engaged in any other business connected with a company
6. Must not be a defaulter of any other stock exchange
7. The minimum educational qualification required is 12th pass.

Functions Stock Market/Exchange?
Role, Function, Merits and Importance of Stock Exchanges [NSE, BSE] or Stock Markets or Secondary Markets
Effective
Mobilization of
savings
Promoting Capital
formation
Wider Avenues of
investment
Liquidity of
investment
Wide Marketability
to Securities
Financial resources
for public and
private sectors
Indicator of
Industrial
Development
Barometer of
National Economy

Players in the Stock Market
1 Commission Broker
 A broker on the floor of an exchange who acts as agent for a particular brokerage house and buys and sells stocks for the
brokerage house on a commission basis. He acts as an agent for his customer and earns a commission for the service
performed.
2 Jobbers
 Jobbers are those security merchants that deal in shares, debentures at an independent level. Their job is to purchase and
sell securities at their own level and get the maximum profit. Jobbers cannot deal on the behalf of public and are barred
from taking commissions.
3 Floor Broker
 The floor broker buys and sells shares for other brokers on the floor of the exchange. He is an individual member owns his
own seat and receives commissions on the orders the executes.
4 Taraniwalla
 The Tarawaniwalas act both as jobbers and brokers. A tarawaniwala makes transactions on his behalf like a jobber but he
may also act as a broker on behalf of the public.
5 Odd Lot Dealer
 A broker who combines odd lots of securities from multiple buy or sell orders into round lots and executes transactions in
those round lots.

6 Budliwalla
 He is the financier in the stock market who provides credit facilities to the market in return for a fee. He
gives the loan for a short period time ranging from two to three weeks.
7 Arbitrageur
 He deals in securities in different stock markets and specializes in making a profit from the price
differences in different stock markets.
8 Primary Dealers
 These brokers deal only in government securities.
Types of Speculators
Speculation is an act of trading in an asset, or conducting
a financial transaction, that has a significant risk of losing
most or all of the initial outlay, in expectation of a
substantial gain.
Types of
Speculators
Bulls
Bears
StagsLame
Duck
Wolves

1 Bull (A bull is also called a ‘tejiwala’)
 A bull is a speculator who expects a price increase. Buy securities at current prices with the aim of selling them at a later
time, if prices rise.
2 Bear (A bull is also called a ‘tejiwala’)
 A bull is a speculator who expects a price increase. Buy securities at current prices with the aim of selling them at a later
time, if prices rise.
3 Lame Duck
 A speculator who makes poor trades and ends up with heavy losses over time is considered a "lame duck." When bear
fails to meet his obligations he struggles to meet finance like the Lame Duck.
4 Stag
 Stag is a speculator applies for shares in new companies and expects to sell them at a premium if he gets an allotment. He
is not willing to become an actual shareholder of the company.
5 Wolves
 These are brokers who are fast speculators, they are very quick to perceive changes in the trends of the market and trade
fast to make quick bucks. They are generally not caught in the wrong foot.

Stock Exchanges in India
Major Stock
Exchanges in
India
BSE NSE OTCEI
Regional
Stock
Exchnages

Bombay Stock Exchange
a. Bombay Stock Exchange (BSE), is a stock exchange located on Dalal Street, Mumbai India. It is the 11th largest stock
exchange in the world by market capitalization.
b. Bombay Stock Exchange Ltd. is the India's oldest Stock Exchange, one of Asia's oldest stock exchange and one of
India’s leading exchange groups.
c. BSE is a corporatized and demutualized entity, with a broad shareholder-base which includes two leading global
exchanges, Deutsche Bourse, Fuse and Singapore Exchange as strategic partners.
d. BSE provides an efficient and transparent market for trading in equity, debt instruments, derivatives, mutual funds.
e. BSE also provides a host of other services to capital market participants including risk management, clearing,
settlement, market data services and education.
f. BSE also provides depository services through its Central Depository Services Limited (CDSL) arm.
g. The BSE has computerized its trading system by introducing BOLT (Bombay Online Trading) since March 1995.
h. BSE’s popular equity index- SENSEX is India's most widely tracked stock market benchmark index. Sensex is a basket
of 30 constituent stocks representing a sample of large, liquid and representative companies.

National Stock Exchange
Formation of National Stock Exchange of India Limited (NSE) in 1992 is one important
development in the Indian capital market. The need was felt by the industry and investing
community since 1991.
a. The National Stock Exchange of India Ltd. (NSE) is the India’s leading stock exchange located in the financial
capital of Mumbai India.
b. National Stock Exchange (NSE) was established in the mid-1990s as a demutualized electronic exchange.
c. NSE provides a modern, fully automated screen-based trading system, its trading system, called National
Exchange for Automated Trading (NEAT).
d. NSE was started by a clutch of leading Indian financial institutions like Life Insurance Corporation of India, GIC,
State Bank of India and Infrastructure Development Finance Company (IDFC) etc.
e. NSE offers trading, clearing and settlement services in equity, debt and equity derivatives and it is India's
largest exchange, globally in cash market trades, in currency trading and index options.
f. NSE was also instrumental in creating the National Securities Depository Limited (NSDL) which allowed investors
to securely hold and transfer their shares and bonds electronically.

OTCEI
The Over The Counter Exchange of India was incorporated in October, 1990 as a
Company under the Companies Act 1956. It became fully operational in 1992 with
opening of a counter at Mumbai. It is recognized by the Government of India as a
recognized stock exchange under the Securities Control and Regulation Act 1956. It was
promoted jointly by the financial institutions like UTI, ICICI, IDBI, LIC, GIC, SBI, IFCI, etc.
a. OTCEI is a floorless exchange where all the activities are fully computerized.
b. Its promoters have been designated as sponsor members and they alone are entitled to sponsor a company for
listing there.
c. Trading on the OTCEI takes place through a network of computers or OTC dealers located at different places
within the same city and even across the cities. These computers allow dealers to quote, query & transact
through a central OTC computer using the telecommunication links.
d. A Company which is listed on any other recognized stock exchange in India is not permitted simultaneously for
listing on OTCEI.
e. OTCEI deals in equity shares, preference shares, bonds, debentures and warrants.

Concept of Trading
• To “trade” means to buy and sell in the jargon of the financial markets. The members
carrying on business are known as ‘brokers’ and can trade only on listed securities.
Locating a
Broker
Selecting method
of trading
Placement &
Execution of
Order
Selecting
patterns of trade
Preparation of
Contract Notes
Settlement of
Transactions

1. Locating a Broker
• The selection of a broker depends largely on the kind of services rendered by a particular broker as well as upon the kind of
transaction that a person wishes to undertake.
 Provide information:
A broker to be selected should be able to give information about the available investments.
These may be in the form of
 capital structure of companies’
 earnings,
 dividend policies and
 prospects.
These could also take the form of advice about
 taxes,
 portfolio planning and
 investment management.
 Availability of Investment Literature:
Secondly, a broker should be able to supply financial periodicals, prospectuses and reports. He should also prepare and analyses
valuable advisory literature to educate the investor.
 Appoint Competent Representatives:
Brokers should have registered competent representatives who can assist customers with most of their problems.

Popular Stock Brokers & Their fee
Fixed Price Broker Percentage Basis Brokers
• When you buy 100 share of RIL at Rs
1000 per share, the brokerage
charged by Fixed Price Broker will
still be Rs 20;
• while Percentage Basis Brokers will
charge Rs 500
• at the rate of 0.50% of 100,000
• (Rs. 1000 x 100 shares).
Fee types
Fixed Price
Broker
Percentage Basis
Brokers
The above example clearly show that the brokerage charged in flat fee share dealing is significantly low and simple
and this make a huge difference in the year end when you see your P&L account

Requirements of Trading in Stocks
Broker
A broker is a member of a
recognized stock exchange, who
is permitted to do trades on the
screen-based trading system of
different stock exchanges. He is
enrolled as a member with the
concerned exchange and is
registered with SEBI.
Application
Name
Date of birth
Photograph
Address
Education
Occupation
 Residential status
Bank account
If you are registered with any other broker, then the name of
broker and concerned Stock exchange and Client Code
Number.
Opening of account
In India, shares and securities are
held electronically in a
Dematerialized (or "Demat") account,
instead of the investor taking
physical possession of certificates.
Why should you have a Demat Account?
As per SEBI guidelines shares cannot be bought and sold in any form except in dematerialised form. Therefore, if you want to
buy and sell shares through the stock exchange, you necessarily have to have a demat account.

2.Selecting Method of Trading
Online Stock Trading Offline Stock Trading
• Doing stock trading with help of computer, internet
connection and with trading/demat account is called
Online Stock Trading.
• If you would like to do online stock trading then you
should have a computer, internet connection and
online trading account (DEMAT Account).
• Access to the Dematerialized account requires an
internet password and a transaction password.
• Transfers or purchases of securities can then be
initiated.
• Purchases and sales of securities on the
Dematerialized account are automatically made once
transactions are confirmed and completed.
• Doing stock trading with the help of broker or through
phone is called Offline trading.
• In other words trading will be done by another person
on your behalf based on the instructions given by you,
and then the other person can be a broker.
• The broker will do buying and selling of stocks on your
behalf depending on the instructions given by you.
• If you want to do offline stock trading then you need to
open the demat account.

3.Placement & Execution of order
• Market Order:
When you put buy or sell price at market rate then the price get executes at the
current rate of market.
 The market order get immediately executed at the current available price.
In market order there is no need to mention the price; the stocks will get executed at
the best current available price.
If you wish to buy or sell stocks at any specific price then market order is not suitable
for you then you have to go for limit order.
Market order is for those who want to buy or sell immediately at the current available
price.

 Limit Order:
An order placed with a broker to buy or sell a set number of shares at a specified
price or better.
Because the limit order is not a market order, it may not be executed if the price set
by the investor cannot be met during the period of time in which the order is left
open.
Limit orders also allow an investor to limit the length of time an order can be
outstanding before being canceled.
In day trading its risk because you have to close all your transactions before 3:30
PM.
Example of a limit order: Orders are limited by a fixed price. ‘Buy Reliance Petroleum at Rs. 50. Here, the order
has clearly indicated the price at which it has to be bought and the investor is not willing to give more than
Rs. 50.

How is a share price calculated at any given time?
• The calculation of prices is completely automated, software driven, and anonymous at both BSE and NSE, and
the price is calculated by electronically matching bids and offers for a particular share recorded an electronic
limit order book (ELOB).
Buy (bids) Sell (asks)
S.No. Quantity Price Quantity Price S.No.
1 1,000 3.5 2,000 4 5
2 1,000 3.4 1,000 4.05 6
3 2,000 3.4 500 4.2 7
4 1,000 3.3 100 4.25 8
 If you look at the above table, the left side are the bids and the right side are the asks. As it stands – there can’t be any
transaction because the highest price that the buyers are willing to pay is lower than the lowest price at which the sellers
are willing to sell.
 However, if you come in and put up a market order to buy 3,000 shares – your order will be executed and you will get
2,000 shares at Rs. 4.00 and the remaining 1,000 shares at Rs. 4.05.
 Similarly if you wanted to sell 2,000 shares – the first 1,000 will be sold at Rs. 3.50 and the second thousand will be sold
at Rs. 3.40.

 Stop loss order:
• The orders are given to limit the loss due to unfavorable price movements in the market.
• A particular limit is given for waiting. If the price falls below the limit, the broker is authorized to
sell the shares to prevent further loss.
• Ex. Sell BRC Ltd at Rs. 25, stop loss at Rs. 22.
 Order Execution
• Matching of Orders Once the order has been fed into the computer, the computer searches and
finds out the suitable matching order subject to the conditions placed by the investor or the
trader.
• The conditions are related to the price, volume and time of the trade.
• While matching the order, priority is given on the basis of price and time.
• If the matching order is found, the deal is struck, otherwise as per the instructions the order
would be kept pending or cancelled.

4. Selecting pattern of trade
• Day Trading: (Also called as Intra-day trading)
• It is a type of stock trading where both buying and selling of a financial instrument is
done on the same day and all the trading’s are closed before the market close for the
day.
• In other words whatever you buy today you have to sell it today OR whatever you sell
today you have to buy it today and very importantly during market hours that is 9.55 am
to 3.30 pm (Indian time).
• Traders who participate in day trading are called active traders or day traders.
• Day trading demands fast decision and fast action. This type of stock trading is not
advisable for a beginner.

Some of the methods of day trading are
1. Scalping: It is a technique of trading and profiting in stock market. It is a
day trading strategy and focuses on taking very small profits from
hundreds of trades. It involves taking quick and small profits, using the
ask and bid differences.
2. Pattern trading: As the stock prices move up and down, they tend to
form recognizable recurring designs or figurative diagrams, called chart
patterns. Trading these patterns gives us more consistent profitable
trades.
3. Momentum Day Trading: It is a method of stock trading, where in a
trade is made, when the stock is making a trending movement and the
trade is closed at the end of the day.

4. Selecting pattern of trade
• Inter day Trading: (Also Called as Delivery Trading)
• Delivery based trading involves buying shares on a market day and selling them only
after receiving the delivery of those shares in demat account.
• In other words, In Delivery Trading, as the name say, you have to take the delivery of
shares and after getting these shares in your demat account you can sell them at any
time or you can hold them till you want, there is no restriction.

Some of the methods of Inter day Trading are
1. Short Term Trading: A trade period of more than one day to a few weeks is
considered as short term trade. A stock is bought and held in position from one day to
a few weeks.
2. Medium Term Trading: A trade period from a few weeks to a few months is
considered as medium term trade.
3. Long Term Trading: In this type of stock trading, stock is held for many months to
many years. Profit from growth of the company, dividends and bonuses attracts this
type of stock trading.

5.Preparation of contract notes
• After a broker has executed your deal, his system will automatically generate and post a contract
note. This will show:
• Name of the company
• Date of the trade
• Number of shares traded
• Whether you have bought or sold
• Price
• Brokerage charged
• Stamp duty (if any)
• Panel of Takeovers and Mergers Levy (a flat charge on large trades only)
• Name of the account in which shares are held.
• Broker is supposed to send you the contract note within 24 hours. Thus a contract note is an
important document for investors transacting in shares and other listed securities on a recognized
stock exchange.
What is a contractnote?
A contract note is a legal record of trade transactioncarried
on a stock exchange through a broker.

6. Settlement of Transactions
(Settlement Procedure-NSE and BSE)
• This means actual transfer of securities. This is the last stage in the trading of securities done by the broker
on behalf of their clients.
• The National Securities Clearing Corporation Ltd. (NSCCL) carries out clearing and settlement functions as per
the settlement cycles provided in the settlement schedule.
• Rolling Settlement Cycle: RSC means when you will get your stocks in your Demat account or in physical
form. In a rolling settlement, each trading day(T) is considered as a trading period and trades executed during
the trading day(T) are settled on a T+2 basis i.e. trading day plus two working days.
Settlement Process
Day Timings Job performed
T(Trade Day) Market Timing (9.55am to 3.30pm) Buy/sell securities
T+1
By 11.00 am Confirmation of all trades
By 1.30 pm Processing and downloading of files to brokers
T+2 By 11.00 am Pay-in of securities and funds
By 1.30 pm Pay-out of securities and funds

Feedback & Questions|mdumair@sjc.ac.in

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