Financial markets.

What is it???
• Financial market may be defined as ‘a
transmission mechanism between investors
(or lenders) and the borrowers (or users)
through which transfer of funds is
facilitated’.
• It consists of individual investors, financial
institutions and other intermediaries who
are linked by a formal trading rules and
communication network for trading the
various financial assets and credit
instruments.

Arun Chandran Security Analysis and Portfolio Management 2

 Features.
• It provides facilities for interaction between the investors
and the borrowers.
• It provides pricing information resulting from the
interaction between buyers and sellers in the market when
they trade the financial assets.
• It provides security to dealings in financial assets.
• It ensures liquidity by providing a mechanism for an
investor to sell the financial assets.
• It ensures low cost of transactions and information.

Arun Chandran Security Analysis and Portfolio Management 3

Segments.
• A financial market consists of two major
segments:
• Money Market.
• Capital Market.
• While the money market deals in short-term
credit, the capital market handles the medium
term and long-term credit.

Arun Chandran Security Analysis and Portfolio Management 4

Money Market.
• The money market is a market for short-term funds, which deals in
financial assets whose period of maturity is up to one year.
• It should be noted that money market does not deal in cash or
money as such but simply provides a market for credit instruments
such as bills of exchange, promissory notes, commercial paper,
treasury bills, etc.
• These financial instruments are close substitute of money.
• Money market does not imply to any specific market place. Rather it
refers to the whole networks of financial institutions dealing in
short-term funds, which provides an outlet to lenders and a source
of supply for such funds to borrowers.
• The Reserve Bank of India is the leader of the money market in
India. Some Non-Banking Financial Companies (NBFCs) and financial
institutions like LIC, GIC, UTI, etc. also operate in the Indian money
market

Arun Chandran Security Analysis and Portfolio Management 5

 Money market instruments.
• Call Money: Call money is mainly used by the banks to meet their
temporary requirement of cash. They borrow and lend money
from each other normally on a daily basis. It is repayable on
demand and its maturity period varies in between one day to a
fortnight. The rate of interest paid on call money loan is known as
call rate.
• Treasury Bill: A treasury bill is a promissory note issued by the RBI
to meet the short-term requirement of funds. Treasury bills are
highly liquid instruments, that means, at any time the holder of
treasury bills can transfer of or get it discounted from RBI. These
bills are normally issued at a price less than their face value; and
redeemed at face value. So the difference between the issue price
and the face value of the treasury bill represents the interest on
the investment. These bills are secured instruments and are
issued for a period of not exceeding 364 days. Banks, Financial
institutions and corporations normally play major role in the
Treasury bill market.
Arun Chandran Security Analysis and Portfolio Management 6
 Money market instruments.
• Commercial Paper: Commercial paper (CP) is a popular instrument for
financing working capital requirements of companies. The CP is an
unsecured instrument issued in the form of promissory note. It can be
issued for period ranging from 15 days to one year. Commercial papers
are transferable by endorsement and delivery. The highly reputed
companies (Blue Chip companies) are the major player of commercial
paper market.
• Certificate of Deposit: Certificate of Deposit (CDs) are short-term
instruments issued by Commercial Banks and Special Financial
Institutions (SFIs), which are freely transferable from one party to
another. The maturity period of CDs ranges from 91 days to one year.
These can be issued to individuals, co-operatives and companies.
• Trade Bill: Trade bill is an instrument, which enables the drawer of the
bill to get funds for short period to meet the working capital needs.
When trade bills are accepted by Commercial Banks it is known as
Commercial Bills.

Arun Chandran Security Analysis and Portfolio Management 7

 Capital Market.
• Capital Market may be defined as a market dealing in medium and
long-term funds. It is an institutional arrangement for borrowing
medium and long-term funds and which provides facilities for
marketing and trading of securities.
• So it constitutes all long-term borrowings from banks and financial
institutions, borrowings from foreign markets and raising of capital
by issue various securities such as shares debentures, bonds, etc.
• The market where securities are traded known as Securities market.
It consists of two different segments namely primary and secondary
market.
• The primary market deals with new or fresh issue of securities and
is, therefore, also known as new issue market; whereas the
secondary market provides a place for purchase and sale of existing
securities and is often termed as stock market or stock exchange.

Security Analysis and Portfolio Management Arun Chandran 8

 Primary Market

• Primary market is the financial market in which a security is

first sold by the issuer and bought by investors, before
further changing hands (or owner). New bonds and
securities issued in the capital market are issued by the
primary market.
• In the primary market, new securities are offered for the
first time for sale to increase the capital. And because of
that, it is also known as New Issue Market. In this market,
the company sells the stocks directly to the investor. There
are various intermediaries involved in a primary market,
which includes merchant banks, brokers, debenture
trustees, and portfolio managers.
Arun Chandran Security Analysis and Portfolio Management 9
 Features
• Primary markets deal with new and initial issues of a particular security. Any
issue of new securities by companies first float over the primary market.
• The primary market always comes before the secondary market with regards to
the turn of transactions.
• The primary market has no physical existence like secondary markets exist in the
form of stock exchanges.
• Primary markets have various methods of raising funds.
• Primary Markets typically deal with primary instruments. Primary financial
instruments are financial securities whose price is directly referred to its market
value.
• Primary markets do not deal with derivatives, such as futures and options.
Derivatives and other secondary instruments are traded on stock exchanges or
over-the-counter.

Arun Chandran Security Analysis and Portfolio Management 10

 Primary Market in India.
• The primary market in India is regulated by the Securities Exchange Board of India
(SEBI).
• SEBI has listed various norms for issuing securities in the primary market, such norms
have to be strictly followed by companies raising capital in the primary market.
• Primary markets also help the Government carry out its disinvestment programs.
• The primary market of India was established in India after Independence in 1947.
• The market was regulated as per the provisions of the Controller of Capital Issues, 1947
Act.
• The Act had several structural issues that kept the markets from functioning efficiently
and transparently.
• It was only post-liberalization and formalization of SEBI as a statutory authority in 1992
that India’s markets were equipped to raise large amounts of capital.

Security Analysis and Portfolio Management Arun Chandran 11

 Book building

Offer through prospectus

IPO Fixed Price

Public issue Offer through sales

FPO

Preferential Allotment

Private issue
Methods of raising funds Qualified institutional
in primary market. Placement
Rights issue

Bonus shares

ESOP

Security Analysis and Portfolio Management

Arun Chandran 12
 Methods of raising funds.
• Public Issue: A public issue is an issue where anybody and everybody can
subscribe for the securities. When an issue or offer of securities is made to
new investors for becoming part of shareholders’ family of the issuer it is
called a public issue.
• IPO means an offer of specified securities (i.e. equity shares and convertible
securities) by an unlisted issuer to the public for subscription (including an offer for
sale of its existing securities) for the first time. It is the first sale of stock by a company
to the public. The Initial Public Offering can be made through the fixed price
method, book building method or a combination of both. IPO enables listing and
trading of the issuers securities in the securities market.
• FPO When a listed company makes either a fresh issue of securities to the public or in
offer for sale to the public, it is called a FPO. It is also called Follow on Public Offer. It
is the subsequent public offer of securities of a listed company. FPO is also known as
Seasoned or Subsequent Public offer.

Security Analysis and Portfolio Management Arun Chandran 13

 IPO methods: Offer through prospectus
Public issue through prospectus is the most popular method of distribution
of shares of a company.
• Prospectus is an offer document containing the details of the company. The name
of the company, address, location of the industry, authorized, paid up and
subscribed capital, date of opening and closing of subscription list, names of lead
merchant banker, brokers and underwriters, name of the board of directors,
activities of the company and other important data must be included in the
prospectus.
• After going through these details, the public can decide either to subscribe or not
to subscribe the shares. The draft of the prospectus must be approved by the board
of directors, financial institutions, designated stock exchange etc. An abridged
prospectus is being annexed to every share application form.

Arun Chandran Security Analysis and Portfolio Management 14

 IPO methods: Offer through prospectus
• The permission of SEBI is mandatory for the issue. SEBI also prescribes that application for
listing in stock exchanges should be submitted before a company going for public issue.
Moreover, there should be an agreement with a depository for dematerialization of shares.
• The issuer should appoint one or more merchant bankers, at least one of whom should be a
lead merchant banker. He then appoints other intermediaries (underwriters, brokers, bankers
to issue, syndicate members etc.) to the issue in consultation with the lead merchant banker.
The issuer can determine the price of shares. The justification for the same should be given in
the offer document. There are two methods of issue pricing viz., Fixed Price Issue and Book
Built Issue.
• In fixed price issue, the issuing company, in consultation with the lead merchant banker decides the
price of the issue. The issue will be subscribed by the public on the basis of the issue price fixed and
shares are allotted accordingly.
• In book built issue, the issuer stipulates only a price band consisting of a floor price and a cap price,
and the final price will be decided on the basis of demand for the issue. On the basis of final price
decided by market demand the bids are evaluated and successful bidders get allotment.

Security Analysis and Portfolio Management Arun Chandran 15

Advantages and Disadvantages of issue
through prospectus.
Advantages Disadvantages
• Large number of investors could • It is suitable only for large issues.
be contacted through • The company has to incur
prospectus. additional expenses on
• Services of intermediaries are advertisement, bank’s
not necessary for this. commission, underwriting
• Concentration of shares in few commission, listing fee, legal
hands is avoided as the shares charges etc.
are dispersed over a number of
people.

Arun Chandran Security Analysis and Portfolio Management 16

IPO methods: Offer through sales
• This is outright sale of shares through intermediaries like issue houses,
brokers etc. Shares are not offered to the public directly.
• The intermediaries, after buying the entire shares, resell them to the
investing public. Then it can be called offer for sale.
• In this case the issue houses act as agents of the company.
• The advantage of this method is that the company need not be
bothered about the printing and advertisement of prospectus,
allotment of shares etc.
• Foreign companies who want to participate in the share market and
Indian investors and promoters who want to sell their shares usually
adopt this method.
Security Analysis and Portfolio Management Arun Chandran 17
IPO methods: Private placements.
• Shares can be distributed through outright sale by companies to select
group of persons (u/s 80 of the Companies Act 1956). This is known as
placement or private placement.
• When an issuer makes an issue of securities to a select group of persons
not exceeding 49, and which is neither a rights issue nor a public issue, it is
called a private placement.
• In this case, the issue houses or brokers can buy the securities from the
company and sell them to his own clients.
• The brokers here act as wholesalers. They may resell them at a margin.
• In private placement the promoters may sell a portion of issue to the
friends and well-wishers. The promoters have to make a minimum
contribution before the issue goes to the public. Financial institutions,
mutual funds, investment bank etc. subscribe to placement orders.

Security Analysis and Portfolio Management Arun Chandran 18

 IPO methods: Private placements.
• Preferential Issue/Allotment: Preferential Issue means an issue of specified securities by a listed issuer
to any select person or group of persons on a private placement basis. An issuer can make preferential
issue of specified securities only if, a special resolution by the shareholders has been passed.
• Qualified Institutions Placement (QIP): When a listed issuer issues/allots equity shares or securities
convertible in to equity shares to Qualified Institutions Buyers on private placement basis, it is called a
QIP. An issuer can make a QIP only if a special resolution approving the qualified institutions placement
has been passed by its shareholders.
• The QIP should be made at a price not less than the average of the weekly high and low of the closing
prices of the equity shares of the same class quoted on the stock exchange during the two weeks
preceding the relevant date. Placement method is useful, when the market is depressed. The issue cost
is very low. Small companies may also find it useful as they cannot spend huge money on prospectus and
advertisement. The disadvantage of this method is that the shares may be concentrated in few hands
who may take control of the company.

Security Analysis and Portfolio Management Arun Chandran 19

IPO methods: Rights issue
• Shares offered to the existing shareholders of a company are called rights issues. The
shares are offered in a particular proportion to the existing share ownership. The
proportion may be decided on the basis of capital requirement of the company. Such
shares are marketable in the market by the owners. Successful companies adopt this
method for fund raising.
• According to section 81 of the Companies Act 1956, a company can make a rights issue after the
expiry of two years from the date of formation or at any time after the expiry of one year from the
date of allotment of shares for the first time after its formation, whichever is earlier.
• An issuer making a rights issue shall announce a record date for the purpose of determining the
shareholders eligible to apply for specified securities in the proposed rights issue.
• The issue price should be decided before determining the record date.
• The company should send a circular to all existing shareholders stating the fact of rights issue. The
circular should include information on how the additional fund collected is going to be used.
• The company should normally give a time limit of at least 15 days to one month to shareholders to
raise their right before it is offered to the public.
• If the rights are not fully taken up- the balance is to be equitably distributed among the applicants for
additional shares.

Security Analysis and Portfolio Management Arun Chandran 20

 IPO methods: Bonus issue.
• Bonus issue is the issue of shares to the existing shareholders out of the free reserves of the company. The
existing shareholders get this as a bonus without payment of any money. Companies usually adopt this
method to bring up the value of shares with market value. As the free reserves are capitalized there is an
increase of equity capital.
• A listed company can issue bonus shares if:
• It is authorized by its articles of association for issue of bonus shares
• It has not defaulted in payment of interest/ principal in respect of fixed deposits/debt securities issued by it.
• It has not defaulted in respect of the payment of statutory dues of the employees.
• It has made partly paid up shared fully paid up.
• SEBI Regulations on Bonus Issue: Chapter IX of SEBI ICDR Regulations 2009 discusses the conditions with
respect to bonus issue.
• The articles of association should contain provision for issue of bonus shares.
• It should be made out of free reserves built out of genuine profits/securities premium collected in cash only. Reserves
created by revaluation of fixed assets are not capitalized.
• The declaration of bonus issue, in lieu of dividend, is not to be made.
• The bonus issue should be implemented within 15 days from the date of its approval by the Board of Directors (BoD) of
the issuer.
• Bonus issue shall not dilute the value or rights of debenture holders.
• A bonus issue once announced cannot be withdrawn.

Security Analysis and Portfolio Management Arun Chandran 21

IPO methods:Employees Stock Option Plan (ESOP):

• An Employee Stock Option Plan (ESOP) is a way in which employees of a

company can own the share of the company they are working. There are
different ways in which employees can receive stocks and shares of their
company. Employees can receive them as a bonus, buy them directly from the
company, or receive them through an ESOP. A stock option is an opportunity
to buy stock at a pre-set price sometime in the future. The main purpose of an
ESOP is to reward and motivate employees.
• Employee Stock Option is an option given to the whole time directors, officer
or employees of a company to purchase the securities offered by the company
at a predetermined price, at a future date.
• The option granted to an employee shall not be transferable to any person-
the option can only be exercised by the employee to whom the option is
granted. Shares can be issued under employee stock option only with the
approval of shareholders by way of Special Resolution.

Security Analysis and Portfolio Management Arun Chandran 22

 Book building process.
• SEBI guidelines defines Book Building as "a process undertaken by which a demand for the securities proposed
to be issued by a body corporate is elicited and built-up and the price for such securities is assessed for the
determination of the quantum of such securities to be issued by means of a notice, circular, advertisement,
document or information memoranda or offer document".
• Book Building is basically a process used in Initial Public Offer (IPO) for efficient price discovery. It is a mechanism
where, during the period for which the IPO is open, bids are collected from investors at various prices, which are
above or equal to the floor price. The offer price is determined after the bid closing date.
• In Book Building securities are offered at prices above or equal to the floor prices, whereas securities are offered
at a fixed price in case of a public issue. In case of Book Building, the demand can be known everyday as the book
is built. But in case of the public issue the demand is known at the close of the issue.

Arun Chandran Security Analysis and Portfolio Management 23

Arun Chandran Security Analysis and Portfolio Management 24
Parties involved in new issue.
Merchant Bankers (Managers to the Issue):
• SEBI regulations 1992 prescribes that all public issues should be managed by at least one
merchant banker functioning as Lead manager or Managers to the Issue.
• “Merchant banker means any person/institution who is engaged in the business of issue
management either by making arrangements regarding selling, buying or subscribing to
securities as manager, consultant, advisor or rendering corporate advisory services in
relation to such issue management.” .
• If the size exceeds Rs. 400 crores there can be five or more managers as agreed by SEBI.
• These Managers to the issue assist the promoters in designing the capital structure, drafting
the prospectus and application forms, listing of shares, appointment of registrars and other
operators in the new issue, arrangement of long term loans- marketing of public issues etc.
• The lead manager prepares Draft Red Herring Prospectus (RHP) and is responsible for any
irregularities in the same. The company should enter into a memorandum of understanding
with the managers to the issue in the form prescribed by SEBI.
• The lead merchant bankers appointed by the Issuer Company are referred to as the Book
Running Lead Managers (BRLM) or Book Runners (If the issue is through book building
process).
Security Analysis and Portfolio Management Arun Chandran 25
Parties involved in new issue.
Underwriters to the Issue:
• Underwriters are financial institutions who make a firm
commitment that they will take up the shares up to a certain
amount if the public does not subscribe to it. This is an agreement
with one or more institutions and a guarantee of the marketability of
shares. Under writing is mandatory for the Public Issue.
Underwriters are appointed by the company in consultation with the
managers to the issue. Financial institutions, bankers, members of
stock exchanges, investment companies, trusts etc. can act as under
writers.

Arun Chandran Security Analysis and Portfolio Management 26

 Types of Underwriting
• An underwriting agreement may take any of the following forms:
• Standing behind the Issue: Under this method the underwriter
guarantees the sale of a specified number of shares within a specified
period. If the public do not subscribe to the specified amount of issue, the
underwriter will buy the balance. It is also called full underwriting.
• Outright Purchase: In this method the underwriters purchases the entire
issues at an agreed price and sell them to investors.
• Consortium Method: In mega issues several underwriters join together to
underwrite. They form a consortium/syndicate for this purpose. It is also
called syndicate underwriting.

Arun Chandran Security Analysis and Portfolio Management 27

 Types of Underwriting
• Partial Underwriting: The underwriter undertakes the guarantee for only a part
of the issue offered to the public and his liability is limited to the extent of
unsubscribed portion of the issue underwritten by him under this method.
• Joint Underwriting: The issuing company may enter into underwriting agreement
with more than one underwriter in case of large issues. Each under-writer
undertakes the guarantee for the issue of a certain portion of the whole issue
offered to the public and shares the risk.
• Firm Underwriting: Under this method, the underwriter undertakes to buy or
subscribe a certain number of shares irrespective of the subscription from the
public. Underwriter will be liable for shares underwritten as well as that part of
issue unsubscribed by the public.
• Sub-Underwriting: Under this method, the underwriter enters into agreement
with some other underwriters to undertake guarantee for the issue of whole or
part of the issue under-written by him.
Arun Chandran Security Analysis and Portfolio Management 28
Parties involved in new issue.
Brokers to the issue.
• Brokers are persons authorized to market the issues. Companies can engage
any number of brokers to market the new issue.
• The brokers may engage sub-brokers and they send their own circulars, publicity
materials and applications to the clients and follow up the work for canvassing
the subscription.
• Brokers to the issue are not compulsory for public issues, but their expertise
and contacts with investors could be used for marketing the issue.
• Remuneration to the broker and terms and conditions of brokerage is fixed by
SEBI. There are 10,000 brokers and more than 70,000 sub-brokers registered
with SEBI.

Arun Chandran Security Analysis and Portfolio Management 29

Parties involved in new issue.
Registrars to the Issue (Registrar and Share Transfer (R&T) Agents):
• Registrars are persons appointed in consultation with lead managers to assist the issue
management functions. Their work relates to pre-issue management, management
during the currency of issue, pre- allotment Work, allotment work and post allotment
work.
• It is their duty to collect the application forms from bankers to the issue, process them for
allotment and issue certificate of allotment.
• Major functions of registrars can be listed as follows:
• Design and draft the format of application form for the merchant banker or lead manager.
• Collect application forms from banks.
• Scrutinize application forms.
• Finalize the allotment as per the basis approved by the stock exchange.
• Ensures that the corporate action for crediting of shares to the demat accounts of the applicants is
done
• Print refund orders and letters of allotment.
• Submit all statements to the company for their final approval.
• Help the company in getting the shares listed.
Security Analysis and Portfolio Management Arun Chandran 30
 Parties involved in new issue.
Bankers to the Issue:
• Bankers to the issue collect the application forms and the money in cash, cheque or ASBA. Depending on
the size of the issue there may be many collection centers and many bankers. They are appointed in
consultation with lead manager. Infrastructure facilities available, manpower, past experience, location of
branches, efficiency and cost effectiveness etc. are parameters for selection of bankers to the issue.
• The Lead Merchant Banker shall ensure that Bankers to the Issue are
appointed in all the mandatory collection centers. The Lead manager 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
actual figures.

Arun Chandran Security Analysis and Portfolio Management 31

 Parties involved in new issue.

Application Supported By Blocked Amount (ASBA):

• ASBA is an application containing an authorization to block the application money in the bank account,
for subscribing to an issue. If an investor is applying through ASBA, his application money shall be
debited from the bank account only if his/her application is selected for allotment after the basis of
allotment is finalized.

Arun Chandran Security Analysis and Portfolio Management 32

 Parties involved in new issue.
Syndicate Members:
• Syndicate Members are commercial or investment banks registered with
SEBI who also carry on the activity of underwriting in IPO.
• They work as intermediaries for Issuer Company and the buyers of the IPO
stocks. Investors submit their bids for IPO shares through Syndicate
Members appointed by the Issuer Company. They are also known as ‘the
Members of the Syndicate’.
• The Members of the Syndicate circulate copies of the Red Herring
Prospectus along with the bid cum application form to potential
investors.
• After receiving the bid for IPO Shares from an investor, Syndicate Member
enters bidding detail into the electronic bidding system and generates a
Transaction Registration Slip (TRS) for each price and demand option and
gives the same to the bidder.
Security Analysis and Portfolio Management
Arun Chandran 33
Advantage.
• Companies can raise capital at relatively low cost, and the securities so issued in
the primary market provide high liquidity as the same can be sold in the
secondary market almost immediately.
• The primary market is an important source for mobilization of savings in an
economy. Funds are mobilized from commoners for investing in other channels. It
leads to monetary resources being put into investment options.
• Chances of price manipulation in the primary market are considerably less when
compared to the secondary market. Such manipulation usually occurs by
deflating or inflating a security price, thereby deliberately interfering with fair and
free operations of the market.
• The primary market acts as a potential avenue for diversification to cut down
on risk. It enables an investor to allocate his/her investment across different
categories involving multiple financial instruments and industries.
• It is not subject to any market fluctuations. The prices of stocks are determined
before an initial public offering, and investors know the actual amount they will
have to invest.
Security Analysis and Portfolio Management
Arun Chandran 34
Disadvantage.
• There may be limited information for an investor to access before
investment in an IPO since unlisted companies do not fall under the
purview of regulatory and disclosure requirements of the Securities
and Exchange Board of India.
• Each stock is exposed to varying degrees of risk, but there is no
historical trading data in a primary market for analyzing IPO shares
because the company is offering its shares to the public for the first
time through an initial public offering.
• In some cases, it may not be favorable for small investors. If a share
is oversubscribed, small investors may not receive share allocation.

Arun Chandran Security Analysis and Portfolio Management 35

Activity.
• Each group select 5 different company that is going to do IPO. (Using
the link below)
• https://www.moneycontrol.com/ipo/ipo-snapshot/upcoming-
issues.html?classic=true
• Study their profile.
• Do a video presentation.
• Deadline: E.O.D 13/09/2021 Monday.

Arun Chandran Security Analysis and Portfolio Management 36

 Thank you ☺

Arun Chandran Security Analysis and Portfolio Management 37

Additional reads
• https://www.moneycontrol.com/news/business/ipo/these-ipos-
likely-to-hit-dalal-street-in-september-but-pricing-could-be-reworked-
after-recent-market-nervousness-7406361.html
• https://economictimes.indiatimes.com/markets/ipos/fpos/get-ready-
for-sept-fest-of-ipos-9-cos-plan-to-raise-12500-
cr/articleshow/85778976.cms
• https://www.news18.com/news/business/softbank-backed-snapdeal-
in-talks-over-400-million-ipo-4160768.html

Arun Chandran Security Analysis and Portfolio Management 38