Financial

Markets
By:
Deepika Sahdev
Asstt. Prof. (MBA)

Introduction
A financial market is a market in which people and entities
can trade financial securities, commodities, and other
fungible items of value at prices that reflect supply and
demand.
Securities include stocks and bonds, and commodities include
precious metals or agricultural goods.

Types of Financial market

Capital markets which consist of:

Stock markets: issuance of shares or common stock.

Bond markets: issuance of bonds
Commodity markets: trading of commodities.
Money markets: providing short term debt financing and

investment.
Derivatives markets: the management of financial risk.
Futures markets: provide standardized forward contracts for
trading products at some future date.
Insurance markets: facilitate the redistribution of various risks.

 Financial market can also be categorized as:

Primary Market
Secondary Market.
Primary Market: Newly formed (issued) securities are bought
or sold in primary markets, such as during initial public

offerings (IPOs).
Secondary Market: Secondary markets allow investors to buy
and sell existing securities. It is commonly known as Stock
Markets or Stock Exchanges.

Primary Market
The primary market is the part of the capital market that
deals with issuing of new securities.
Companies, governments or public sector institutions can
obtain funds through the sale of a new stock or bond

issues through primary market.

This is typically done through an underwriter (investment
bank) or finance syndicate of securities dealers.

Features of Primary Market

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

market where the securities are sold for the first time. Therefore
it is also called the New Issue Market (NIM).
The primary market provides a direct link between the company
and the investor.

Primary issues are used by those companies which are setting

up new business or for expanding/modernizing their existing
business.
The primary market performs the crucial function of facilitating
capital formation in the economy.

Functions of the Primary Market

Origination: Origin of a new Issue. The proposal is analyzed in
terms of the nature of the security, the type & size of the
issue, its timing etc.
Underwriting: This contract makes the share predictable and
removes the element of uncertainty in the subscription.

Distribution: it refers to the sale of securities to investors. It is

carried out by the lead mangers or brokers to the issue.

Modes of raising money

Initial public offer: Method of raising funds through the issue of
shares to investors in the primary market by companies
Rights issue: It means issue of capital offered by company to its
existing shareholders.

Preferential allotment: When listed companies issue securities

to a select group of persons under sec 81 of The Companies Act,
1956, it is called preferential issue. The select group can be FIs,
mutual funds or high net worth Individuals.

 Private Placement: Acc. to companies act, 2013, it means an

offer of securities or invitation to subscribe securities made to
the select group of persons or institutions other than by way

of pubic offer through issue of private placement offer letter.

It holds inherent advantages such as:
Cost effective: In public issue there are underwriting, brokerage,
printing, mailing charges while Private placement avoid such charges.

Time effective: In public issue , time reqd. to complete the formalities

is usually 6 months or more, while in private placement the
requirements to be fulfilled are less and time reqd. is less, usually 2-3

months.

Initial Public Offers (IPO)

An issue made by a new company in the capital market is
called an initial public offering. If an unlisted company makes
a public issue for the first time, it is an IPO.

MEANING:
It is a means of collecting money from the public by a
company for the first time in the market to fund its projects.
In return, the company gives shares to the investors in the
company.

The Necessity for an IPO

Expansion activities

Acquisitions / mergers

Entry into new business avenues

Working capital requirements

To provide liquidity to the existing shareholders

Listing of existing shares

Managers
to the
issue
Registrar
to the
Issue

Govt.
Agencies

Financial
institutions

Parties
involved in
the NEW
ISSUE

Advertising
Agencies

Underwriters

Bankers

1. Managers to the issue

Companies appoint lead managers to manage a
public issue.
Main duties of the lead managers includes:
Drafting the prospectus;

Preparing a budget of expenses related to the issue;

Suggesting an appropriate timing of the public issue;
Assisting in marketing the public issue successfully;
Advising the company in the appointment of registrars to
the issues, underwriters, brokers, bankers to the issue,

advertising agents etc.

2. Registrar to the issue

Registrar is appointed in consultation with the lead managers.
They usually receive the share applications from various

collection centers.
They arrange to dispatch the share certificates.
They hand over the details of share allocation to the company.
Registrar has to keep the record of the issue of allotment till 6
months from the last date of allotment of shares for the

redressal of the shareholders complaints.(if any)

3. Underwriters
Underwriting is a contract in which underwriter gives an
assurance to the issuer that he will subscribe to the securities

offered in the event of non subscription by the persons to

whom they are offered.
Underwriter do not buy or sell securities. They stand as backup supporters and its done for a commission.
Underwriters can be of 2 types:
Financial institutions and banks
Brokers or approved investment companies.

4. Bankers to the issue

Bankers are responsible for collecting the application money
along with the application form. They charge commission
besides the brokerage.

When the size of the issue is large, 3 or 4 banks are appointed

as bankers of the issue.
The bankers to the issue should have branches in specified
collection centers which are designated as the collecting

branch for the acceptance of money.

5. Advertising Agents
Advertising plays a role in promoting an issue.
Advertising agencies take responsibility for giving publicity to
the issue through various appropriate platforms.

These could be newspapers, magazines, hoardings, press

releases or combination of all.

6. Financial Institutions
Financial institutions underwrite the issue or provide term
loans to the companies. They give financial assistance.
They usually scrutinize the draft prospectus, study the

proposed programme for the public issue and approve them.

Financial institutions like: IDBI, IFCI, ICICI, LIC, GIC.

Government/Statutory Agencies
There are various regulatory bodies associated with a
public issue:
SEBI
RBI

Registrar of companies
Stock exchanges where the issue is going to be listed
Industrial licensing authorities

Eligibility Guidelines for the issuers

in Primary Market
The guidelines provide norms relating to the eligibility for
companies issuing securities, pricing of issues, listing
requirements, disclosure norms, lock-in period for promoters
contribution, contents of offer documents, pre and post-issue
obligations.

SEBI has prescribed capital adequacy norms for companies

wanting to make a public issue. Some of the eligibility
conditions are discussed further:

 Eligibility Norms:
A company making a public issue of securities has to file a draft
prospectus with SEBI, through an eligible merchant banker, at least 21

days prior to the filing of prospectus with the Registrar of companies.

An application for listing of those securities with stock exchange(s) is
also to be made.

The company must enter into an agreement with the depository for
dematerialization of its securities and should give an option to
subscribers/shareholders/investors to receive the security certificates

either in physical or in dematerialized form.

Contributions of Promoters
In case of public issues by listed companies, promoters should
contribute to the extent of 20% of the proposed issue.

The minimum promoters contribution should be locked in for a

period of 3 years in case of all types of issues.
However, if the promoters contribution exceeds the required
minimum, then the excess is locked in for a period of one year.

The lock-in period starts from the date of allotment in the

proposed public issue and the last date of the lock-in is to be
reckoned/considered as three years from the date of
commencement of the public issue.

Sweat Equity
Sweat Equity means shares issued to its employees or
directors at discount for consideration other than cash for
providing know how to the employees.

The idea behind Sweat Equity is that an employee or director

works best when is he has the sense of belongingness and is
amply rewarded. One of the ways of rewarding him is by
offering him shares of the company at low prices.

The purpose of sweat equity is to ensure more loyalty &

participation of the employees.