Professional Documents
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Capital Market - Stock Market
Capital Market - Stock Market
Market‐ Stock Market
Market types
Primary Market‐ Capital raising
Secondary Market‐ Price Discovery
Need for capital market
1. Measures performance and financial positions of firms
2. Continuous valuation of shares and firms
3. Promotes liquidity
4. Platform for innovations
5. Allow risk diversification by providing variety of investment options
6. Attract foreign investment
7. Alternate finance when debt / bank loans are not available
Capital Market Structure
The Capital market represents the “Primary Market” and the “Secondary Market.
The primary market is used by issuers for raising fresh capital from the investors by making
initial public offers or rights issues or offers for sale of equity or debt.
A corporate may raise capital in the primary market by way of an initial public offer, rights issue
or private placement.
IPO: It is the largest source of funds with long or indefinite maturity for the company.
The secondary market promotes the growth of the primary market and capital formation, since
the investors in the primary market are assured of a continuous market where they have an
option to liquidate their investments.
Source: https://www.nseindia.com/products‐services/about‐initial‐public‐offerings
Primary Market
Source: Bhole and Mahakud, FIM book
Trends: IPO
Source: Prime database
Trends: Debt Issue
Source: Prime database
Other Trends
Source: Prime database
IPO Issue SEBI Guidelines
Source: https://www.sebi.gov.in/sebi_data/commondocs/subsection1_p.pdf
QIBs
Qualified Institutional Buyers are those institutional investors who are generally perceived to
possess expertise and the financial muscle to evaluate and invest in the capital markets. In
terms of clause 2.2.2B (v) of DIP Guidelines, a ‘Qualified Institutional Buyer’ shall mean:
Pricing of an Issue
Book building and Price Band
Investor type
Qualified Institutional Buyers (QIBs)
Allotment to various investors
In case of fixed price issue
Days an issue is required to be kept open
Intermediaries involved in the Issue Process
Merchant Bankers to the issue (known as Book Running Lead Managers (BRLM) in case of book
built public issues),
Registrars to the issue, and
Bankers to the issue &
Underwriters to the issue who are associated with the issue for different activities.
Intermediaries
Documents
(i) Draft offer document is an offer document filed with SEBI for specifying changes, if any, in it,
before it is filed with the Registrar of companies (ROCs). Draft offer document is made available
in public domain including websites of SEBI, concerned stock exchanges, or concerned Merchant
Banker for enabling public to give comments, if any, on the draft offer document.
(ii) Red herring prospectus is an offer document used in case of a book built public issue. It
contains all the relevant details except that of price or number of shares being offered.
(iii) Prospectus is an offer document in case of a public issue, which has all relevant details
including price and number of shares or convertible securities being offered.
(iv) Letter of offer is an offer document in case of a Rights issue of shares or convertible
securities and is filed with Stock exchanges before the issue opens
(v) Placement document is an offer document for the purpose of Qualified Institutional
Placement and contains all the relevant and material disclosures.
IPO In India
Tamilnad Mercantile Bank IPO: A Case
Tamilnad Mercantile Bank IPO Market Lot
The Tamilnad Mercantile Bank IPO minimum market lot is 28
shares with ₹14,700 application amount. The retail investors
can apply up-to 13 lots with 364 shares or ₹191,100 amount.
Rules and regulations in an OFS:
a) This facility is available only to the top 200 companies in the share market. The ranking is based
on market capitalisation.
b) Non‐promoter shareholders with more than 10% of share capital are also eligible to offer shares
through an OFS
c) The company has to inform the stock exchanges at least two days before the OFS
d) SEBI has mandated that at least 25% of shares in an OFS must be reserved for mutual fund and
insurance companies
e) In addition, a 10% reservation is made for retail buyers
Rights Issue
A rights issue is an offering of rights to the existing shareholders of a company that gives them
an opportunity to buy additional shares directly from the company at a discounted price rather
than buying them in the secondary market.
The number of additional shares that can be bought depends on the existing holdings of the
shareowners.
Terms: Right Ratio
The stock you purchased last month has just announced a rights issue in the ratio of 1:3. That
means that you get the right to purchase shares issued by your company in the ratio of 1 share
for 3 shares held by you.
Example‐
Features
1. The process enables the company to raise money without incurring underwriting fees.
2. A rights issue gives preferential treatment to existing shareholders, where they are given the
right (not obligation) to purchase shares at a lower price on or before a specified date.
3. The rights are traded in a similar way as normal equity shares.
4. Instead of opting for debt, they may like to go for equity to avoid fixed payments of interest.
To raise equity capital, a rights issue may be a faster way to achieve the objective.
Example: Value of a right
A company has decided to increase its existing share capital by issuing rights
issue to its existing shareholders. The company is offering one new share for
every two shares held by the shareholder. The market value of the share is Rs.
240 and the company is offering one share of Rs. 120 each.
Price of rights shares
Market value of the shares already held by
Rs. 480
shareholder (Rs. 240 x 2 shares)