securites market

1. Markets for corporate Securities
The securities market is the market for
equity, debt, and derivatives.
The debt market, in turn, may be
divided into three parts, viz., the
government securities market, the
corporate debt market, and the money
market.
The derivatives market may divided into
two parts, viz., the option market and the
futures market.

2. Financial Market
The transfer of funds between primary
lenders and ultimate borrowers takes place
through the creation of securities or
financial assets.
If the investor deposits the money in the
fixed deposit of a commercial bank, the
bank issues him a fixed deposit receipt
which is a financial asset.
Issue of share certificate by the company
is also the example of financial asset.

3. Financial Market
The commodity being exchanged is a
financial asset instead of a physical asset.
The lender of funds (or investor) is the buyer
of the asset and the borrower of funds is the
seller of the asset (or issuer of the security).
The mechanism or system through which
financial assets are created and transferred is
known as the financial market.
When the financial assets transferred are
corporate securities and government
securities, the mechanism of transfer is known
as securities market.

4. Segments of Financial
Market
Different types of securities are traded in
the securities market.
These may include ownership securities,
debt securities, short-term securities, long-
term securities, government securities,
non-government or corporate securities.
On the basis of the maturity period of
securities traded in the market, the
securities market is segmented into money
market and capital market.

5. Types of Financial Market
The financial market may be classified
as primary market or secondary market.
Primary Market: The market
mechanism for the buying and selling of
new issues of securities is known as
primary market. This market is also
termed as new issues market because it
deals in new issues of securities.

6. Types of Financial Market
Secondary Market: It deals with securities
which have already been issued and are
owned by investors, both individual and
institutional.
These may be traded between investors.
The buying and selling of securities
already issued and outstanding take place
in stock exchanges.
Stock exchanges constitute the secondary
market in securities.

7. Participants in the Financial
Market
The major participants are the buyers and
sellers of securities or the investors and the
issuers.
Financial intermediaries are the second major
class of participants in the financial system.
There are two types of financial intermediaries
in the financial system, namely banking
financial intermediaries and non-banking
financial intermediaries such as insurance
companies, housing finance companies, unit
trusts and investment companies.

8. Participants in the Financial
Market
Another group of participants in the
financial system comprises the
individuals and institutions who facilitate
the trading or exchange process in the
system.

9. Participants in the Financial
Market
Stock Exchanges: A stock exchange is an
institution where securities that have
already been issued are bought and sold.
Presently there are 23 stock exchanges in
India, the most important ones being the
NSE and BSE.
Listed Securities: Securities that are listed
on various stock exchanges and hence
eligible for being traded there are called
listed securities. Presently about 10000
securities are listed on all the stock
exchanges in India put together.

10. Participants in the Financial
Market
Depositories: A depository is an
institution which dematerializes physical
certificates and effects transfer of
ownership be electronic book entries.
Presently there are two depositories in
India, viz., the National Securities
Depository Limited (NSDL) and the
Central Securities Depository Limited
(CSDL).

11. Participants in the Financial
Market
Brokers: Brokers are registered
members of the stock exchanges
through whom investors transact. There
are about 10000 brokers in India.
Foreign Institutional Investor (FII):
Institutional investors from abroad who
are registered with SEBI to operate in
the Indian capital market are called
foreign institutional investors.

12. Participants in the Financial
Market
Merchant Bankers: Firms that specialize
in managing the issue of securities are
called merchant bankers. They have to
be registered with SEBI.
Primary Dealers: Appointed by the RBI,
primary dealers serve as underwriters in
the primary market and as market
makers in the secondary market for
government securities.

13. Participants in the Financial
Market
Mutual funds: A mutual fund is a
vehicle for collective investment. It
pools and manages the funds of
investors.
Custodians: A custodian looks after the
investment back office of a mutual fund.
It receives and delivers securities,
collects income, distributes dividends,
and segregates the assets between
schemes.

14. Participants in the Financial
Market
Registrars: Also known as a transfer
agent, a registrar is employed by a
company or a mutual fund to handle all
investor-related services.
Underwriters: An underwriter agrees to
subscribe to a given number of shares in
the event the public subscription is
inadequate.
Bankers to an Issue: The bankers to an
issue collect money on behalf of the
company from the applicants.

15. Participants in the Financial
Market
Debenture Trustees: When debentures
are issued by a company, a debenture
trustee has to be appointed to ensure
that the borrowing firm fulfills its
contractual obligations.
Credit Rating Agencies: A credit rating
agency assigns ratings primarily to debt
securities.

16. Primary Market / New Issue
Market
New securities are directly issued by
the issuing companies to the investors.
All the participants in this process of
issuing new shares to investors together
constitute the primary market or new
issue market.
When a new company is floated, its
shares are issued to the public in the
primary market as an Initial Public Offer
(IPO).

17. Primary Market / New Issue
Market
The NIM does not have a physical
structure or form.
All the agencies which provide the
facilities and participate in the process of
selling new issues to the investors
constitute the NIM.

18. Functions of NIM
Origination
Underwriting
Distribution

19. Origination
Origination is the preliminary work in
connection with floatation of a new issue by
a company.
It deals with assessing the feasibility of the
project, technical, economic and financial,
as also making all arrangements for the
actual floatation of the issue.
As a part of the origination work, decisions
may have to be taken on the following
issues:

20. Origination
Time of floating the issue
Type of issue: The type of issue whether
equity, preference, debentures has to be
properly analyzed at the time of the
origination work.
Price of the issue: The price of the
security is determined by the issuer and
not by the market. New issues are made
either at par or at premium.
The origination function in the NIM is now
being carried out by merchant bankers.

21. Underwriting
Underwriting is the activity of providing
a guarantee to the issuer to ensure
successful marketing of the issue.
An underwriter is an individual or
institution which gives an undertaking to
the stock issuing company to purchase
a specified number of shares of the
company in the event of a shortfall in the
subscription to the new issue.

22. Underwriting
Underwriting activity in the NIM is
performed by large financial institutions
such as LIC, UTI, IDBI, general
insurance companies, commercial
banks and also by brokers.

23. Distribution
The distribution function is carried out by
brokers, sub-brokers and agents.
New issues have to be publicised by using
different mass media, such as newspapers,
magazines, television, radio, internet, etc.
New issues are also publicised by mass
mailing.
It has become a general practice to
distribute prospectus, application forms
and other literature regarding new issues
among the investing public.

24. Mechanism of new issue
market
Public Issue
Rights Issue
Private Placement

25. Public Issue
It involves sale of securities to members
of the public.
The issuing company makes an offer for
sale to the public directly of a fixed
number of shares at a specific price.
The offer is made through a legal
document called prospectus.
Public issues are mostly underwritten
by strong public financial institutions.

26. Public Issue
This is the most popular method for
floating securities in the new issue
market.
The company has to incur expenses on
various activities such as
advertisements, printing of prospectus,
bank’s commission, underwriting
commission, agent’s fees, legal charges,
etc.

27. Rights Issue
The rights issue involves selling of
securities to the existing shareholders in
proportion to their current holding.
As per Sec.81 of the Companies Act,
1956, when a company issues additional
equity capital it has offered first to the
existing shareholders on pro rata basis.
It is an inexpensive method of floatation of
shares as the offer is made through a
formal letter to the existing shareholders.

28. Private Placement
A private placement is a sale of securities
privately by a company to a selected group of
investors.
The securities are normally placed, in a
private placement, with the institutional
investors, mutual funds or other financial
institutions.
A formal prospectus is not necessary in the
case of private placement.
Underwriting arrangements are also not
required in private placement.
This method is useful to small companies.

29. Merchant banking
Merchant banking is to facilitate the issuers of securities (companies) to raise capital
from the financial market by selling the securities. It offers a package of services
related to the capital raising activity.
ROLE OF MERCHANT BANKING IN INDIA
• Issue Management: The management of issues for raising
funds through various types of instruments by companies is
known as issue management.
• Banker to the issue: The Lead Merchant 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.

30. • Underwriting Underwriting refers to the process by
which investment banks raise investment capital from
investors on behalf of corporations and governments that are
issuing securities (both equity and debt capital). In banking,
underwriting is the practice by which investment bankers
represent corporate and government entities in the initial
public offering of their securities. The investment bankers
cover the risk of selling the securities to the public. The
securities underwriting process requires at least two
participants, including a client, such as a corporation or a
government entity, and a merchant bank. When an issuer,
such as the company or government, needs to raise money, it
turns to the capital markets to either sell equity or debt. In
order to execute the sale, one or more merchant banks are
hired for the securities underwriting process. The merchant
bank is responsible for underwriting those securities, a process
that includes pricing, buying, and reselling those shares back

31. • Corporate Counselling Corporate counseling is the beginning of
the merchant banking services. Every industrial unit either new or existing
needs it.
• Project Counselling Project counseling has originated from
corporate counseling. It relates to project finance and includes preparation
of project reports, cost of the project and also arranging the financing
pattern
Leading merchant bankers in India In India,
There are public sector, private sector as well as foreign players in the merchant
banking industry. Some of the key players are listed below. Public sector: SBI
Capital Markets, Punjab National bank, IFCI Financial Services Private sector:
ICICI Securities, Axis Bank, Bajaj Capital, Tata Capital Markets, Yes Bank, Kotak
Mahindra Capital Company, Reliance Securities Foreign merchant bankers:
Goldman Sachs (India) Securities, Morgan Stanley India, Barclays Securities
(India), Bank of America, Citigroup Global Markets India.