UNTI-II

MEANING OF MERCHANT BANK:

Merchant banker is one who underwriters corporate securities and advises
clients on issues like corporate mergers. The merchant banker may be in the form of a
bank, a company, a firm or even a proprietary concern.

It is basically services banking which provides non financial services such as

arranging for funds rather than providing them. The merchant banker understands the
requirements of the business concern and arranges finance with the help of financial
institutions banks, stock exchanges and, money market.

DEFINITIONS:
According to Charles’s.Kindleberges, “Merchant banking is the development
of banking from commerce which frequently encountered a prolonged intermediate
stage known in England originally as merchant banking.”

,,According to the Securities and Exchange Board of India (SEBI) (Merchant

Bankers) rules, 1992. “A merchant bankers has been defined as any person who is
engaged in the business of issue management either by making arrangements
regarding selling, buying or subscribing to securities or acting as managers consultant,
adviser or rendering corporate advisory services in relation to such issue
management.”

MERCHANT BANKING ORGANISATION IN INDIA:-

It comes under four categories:-

 Merchant banking division of commercial banks-both Indian and foreign.

Example:-SBI Capital Market, Grind lays Banks, Citi Bank, etc.
 Sub division of commercial banks. Examples: -can bank.
 Merchant banking activities of financial institutions. Example:-ICICI and IFCI.
 Merchant banking by financial services firms-stock brokers or other
independent companies. Example: kotak Mahindra, Fair Growth financial
Company, CRB Capital Market.
FUNCTIONS:-
Corporate Counseling:-
Corporate Counseling refers to a set of activities under taken to ensure efficient
running of a corporate enterprise at its maximum potential through effective
management of finance. It aims at rejuvenating old-line companies and ailing units,
and guiding the existing units in locating areas/ activities of growth and
diversification.

 Providing guidance in areas of diversification based on the government’s

economic and licensing policies.
 Arranging for the approval of the financial institutions banks for the
schemes of rehabilitation in involving financial relief, etc.
 Providing assistance in getting soft loans from financial institutions for
capital expenditure, and the requisite credit facilities from the bank.

Project Counseling:-
 Project counseling is a part of corporate counseling, and relates to project
financing.
 It broadly covers the study of the project.
 It offers advisory assistance on the viability and procedural steps for its
implementation.
 Undertaking the general review of the project ideas projects profile.
 Providing advice on procedural aspects of project implementation.
 Conducting review of technical feasibility of the project on the basis of
the report prepared by own experts or by outside consultants.
 Arranging and negotiating foreign collaborations, amalgamations
mergers, and take over’s.
 Advising and assisting clients in preparing applications for financial
assistance to various national financial institutions, state level
institutions, banks,etc.

Preinvestment Studies:-
  Activities that are connected with making a detailed feasibility
exploration to evaluate alternative avenues of capital investmentin terms
of growth and profit prospectus are called ‘Pre-investment Studies’.
 Carrying out an in-depth investigation of environment and regulatory
factory, location of raw material suppliers demandsprojections, and
financial requirements in order to assess the financial and economic
viability of a project.
 Conducting each studies as many be required for foreign companies
wishing to participate in joint ventures in India.

Capital Restructuring Services:-

Activities that are carried out to assist projects in achieving their
maximum potential through effective capital structuring and to suggest various
strategies to widen and restructure the capital base, diversify operations and
implement schemes for amalgamations, merger or change in business states are
collectively known as “Capital Restructuring Services”

 Examining the capital structure of the client company to determine the

extent of capitalization required
 Preparing a memorandum covering valuation of shares and justifying the
level of premium applied for.
 Capital restructuring may cover mergers, take over’s and amalgamations,
involving modernization or diversification of the existing production
systems and the units.

Credit Syndication:-
Activities connected with joint credit procurement and project financing,
aimed at raising Indian and foreign currency loans from banks and financial
institutions, are collectively known as ‘credit syndication’ Estimating the total cost of
the project to be undertaken.

Issue Management and underwriting:-

 Issue management and underwriting are the activities connected the
management of the public issues of corporate securities, viz, equity shares, preference
shares, and debentures or bonds, and are aimed at mobilization of money from the
capital market.

 Preparation of an action plan

 Preparation of budget for the total expenses for the issue
 Drafting of prospectus
 Selection of issue houses and advertizing agencies for undertaking pre
and post- issue publicity.
 Co-ordination with the underwriters, brokers and bankers the issue and
the stock exchange.

Portfolio Management:-
 Undertaking investment in securities
 Undertaking review of provident fund investment, trust investment,etc.
 Providing advice on selection of investment
 It involves making the right choice of investment, aimed at obtaining an
optimum investment mix, taking into account factors such as the
objectives of the investment, tax bracket of the investor, need for
maximizing yield and capital appreciation, etc.

Working Capital Finances:-

The finance required for meeting the day -to -day expenses of an
enterprise is known as “Working Capital Finance”

 Assessment of working capital requirements

 Preparing the necessary application to negotiations for the sanction of
appropriate credit facilities.
 Advising on the issue of debentures for argument long –term
requirements of working capital.

Acceptance Credit and Bill Discounting:-

Activities relating to the acceptance and the discounting of bills of
exchange, besides the advancement of loans to business concerns on the strength of
such instruments, are collectively known as” Acceptance Credit and Bill Discounting.
It is the integral part of a developed money market.

Merger and Acquisition:-

This is a specialized services provided by the merchant banker who
arranges for negotiating acquisitions and mergers by offering expert valuation
regarding the quantum and the nature of consideration, and other related matters.

 Examining the pros and cons of proposals and formulating schemes for
financial reconstruction, merger, and acquisition.
 Obtaining approvals from shareholders, depositors, creditors, government
and other authorities.
 Monitoring the implementation of merger and amalgamation schemes.
 Identifying organizations with matching characteristics .
Venture Financing:-
A specially designed capital, as a form of equity financing for funding
high risk and high rewards projects, is known as ‘Venture capital’.

In India, venture capital companies have largely contributed to the

technological and industrial revolution.

A large number of Indian and international companies are engaged in

venture capital funding for high-risk projects. A number of leading national
developments financial institutions such as IFCI, IDBI and ICICI are engaged in
venture capital financing , and have developed a number of special schemes for this
purpose.

Lease Financing:-

A merchant banking activity whereby financial facilities are provided to

companies that undertake leasing, is known as ‘Lease financing’. Leasing involves
letting out assets on lease for a particular times period for use by the lessee.

 Providing advice on the viability of leasing as an alternative source for

financing capital investment projects.
 Providing advice on the choice of a favorable rental structure.
  Providing assistance in establishing lines of lease for acquiring capital
equipment, including preparation of proposals, documentations etc.

Foreign currency Financing:-

The finance provided to fund foreign trade transactions is called ‘Foreign
Currency Finance’. The provision of foreign currency finance takes the form of export
import trade finance,curo currency loans, Indian joint ventures abroad, and foreign
collaborations.

 Providing assistance in opening and operating bank accounts abroad.

 Arranging foreign currency loans under buyer’s credit scheme for
importing goods.

Brokering Fixed Deposits:-

 Computation of the amount that could beraised by a company in the form
of deposits from the public and loans from shareholders.
 Drafting of advertisement for inviting deposits.
 Filling a copy of advertisement with the resistor of company for
registration
 Arranging for the issue of advertisement in newspapers, as required by
the company act.
 Drafting and printing of application forms.
 Making arrangements for the collection of deposits at the bank’s
branches.
 Submission of periodical statements to companies concerned.
 Making arrangements for payment of interest amounts
 Helping the company to observe all the rules and regulation in this
connection.
 Assisting in maintenance of records and registers for the purpose.

Mutual Fund:-
Institutions and agencies that are engaged in the mobilization of the
savings of innumerable small investors for the purpose of channeling them into
productive investment of a wide variety of corporate and other securities, are called
‘mutual funds’. Some of the services rendered by mutual funds are as follows:-

 Mopping up public savings

 Investing the funds in a diversified portfolio of shares and debentures
belonging to well- managed and growing companies.
 Making investment in any commercial paper floated by the central
government, RBI, any local authority, any foreign Government, foreign
bank or any other authority outside India and approved by RBI.

Relief To Sick Industries:-

 Rejuvenating old- lives and ailing units by appraising their technology
and process, assessing their requirements, and restructuring their capital
base.
 Evolving rehabilitation packages which are acceptable to financial
institutions and banks.
 Monitoring the implementation of rehabilitation schemed, mergers and or
amalgamations.

Project Appraisal:-
The evaluation of industrial projects in terms of alternative variants in
technology, raw materials, production capacity, and location of plant is known as
‘Project Appraisal’.

 The various components of project appraisal are financial appraisal,

technical appraisal and economic appraisal.

Financial Markets
It deals about the raising of finance by various institutions through the
issue of various securities. Every business concern requires two types of finance. They
are short-term or working capital requirements and long term or fixed capital
requirements. The short-term or working capital requirements are raised or borrowed
in the money market through the issue of different securities such as bills, promissory
notes etc.
NEED FOR OR IMPORTANCE OF CAPITAL MARKET:-
 It is only with the help of capital market, long-term funds are raised by
the business community.
 It provides opportunity for the public to invest their savings in attractive
securities which provide a higher return.
 A well developed capital market is capable of attracting funds even from
foreign country. Thus, foreign capital flows into the country through
foreign investments capital market provides and opportunity for the
investing public to know the trend of different securities and the
conditions prevailing in the economy.
 It enables the country to achieve economic growth as capital formation is
promoted through the capital market.
 Existing companies, because of their performance will be able expand
their industries and also go in for diversification of their activities due to
the capital market.
 Capital market is the barouceter of the economy by which you are able to
study the economic conditions of the country and it enables the
government to take suitable action.
 Through the press and different media, the public are informed about the
prices of different securities that enable them to take necessary
investment divisions.
 Capital market provides opportunities for different institutions such as
commercial banks, mutual funds, investment trust, etc to earn a good
return on the investing funds.

CAPITAL MARKET IN INDIA:-

It is divided into

a) Gilt-edged market

b) Industrial security market

CLASSIFICATION OF CAPITAL MARKET:-

Capital Market
 Gilt-edge market Industrial Security Market

Primary market Secondary Market

a. Gilt-edge Market:- The gilt-edge market refers to government securities.

They are called gilt-edged because the documents will have yellow border on
the sides, so that they can be distinguished as government securities. These are
preferred as they are guaranteed by the government, both for the principal and
interest. It is called sovereign guarantee.
b. Industrial Security Market:-This refers to the securities of the companies
consisting of shares and debentures of old and new companies. The industrial
security market is divided into new issue market and old capital market.
(1) Primary market and (2) secondary market. A primary market is one in which
new securities are offered to the investing public for the first time. Hence it
is also called new issue market.

PRIMARY MARKET (NEW ISSUE MARKET )

A primary market is one in which new securities are offered to the investing public for
the first time. Hence, it is also called new issue Market.

Advantages of the primary market or the New issue market

1) It provides opportunity for new investors to start new enterprises. Persons with
technical know – how may resort to promote new ventures which are profit –
oriented. The new issue market gives them an opportunity to materialize their
ideas.
2) Existing companies will be in apposition to expand their activies; when the
existing companies find their products obsolete, they would like to venture into
new areas of production for which they require additional capital. The issue
market helps them raise the required funds.
3) Promotion of partnership firm into Public Limited companies or merger of
companies or facilitates buy – back of shares: When new ventures are started, a
management may wish to have a control on the owner ship and for this purpose,
 they would like to enter into a buy – back arrangement. By this arrangement,
the shares will be issued to a group of persons (NRIs)for a specific period after
which they will be bought back from out of the profits. This ensures the
retention of ownership and prevents any changes in management.

Securities dealt in the new issue market or primary market are

classified as
Primary Market

Equity Shares Preference Shares Debentures

Equity shares
These are shares issued by companies for raising capital. The owners of
these shares are shareholders. Normally, the face value of the shares may be Rs.
10 or Rs. 100/-. A group of fully paid shares are called stock and these can be
transferred. The shareholders are entitled for profit, which are distributed to
them in the formof dividend. The share capital will be refunded to them only
during the winding up of the company, provided the company has sufficient
assets.
Preference shares
Preference shares are similar to equity shares but are given on a
preference basis to certain share holders like promoters, auditors, etc., There are
cumulative, non – cumulative, participating redeemable, irredeemable,
convertible and non – convertible preference shares. The preference
shareholders will get the first preference in the distribution of dividend over
equity shareholders. The same condition applies in the repayment of capital at
the time of winding up.

Debentures
It is a loan obtained by the company from the public for a fixed interest rate for
a fixed period. Those investors who do not want to take any risks will prefer
debentures as they have less risk on the repayment compared to shares. There are
debentures which have mortgage charge on the assets of the company and these
debentures holders are assured of the repayment.

Functions of New Issue Market:

Functions of New Market

Origination Underwriting Distribution

The main function of the new issue market involves (a) Origination, (b)
Underwriting and (c) Distribution.

Origination:

Under this study, the company takes up (i) investigation, (ii) analysis; and (iii)
processing of new proposals.

(i) Investigation involves a study of technical, economic, financial and legal

aspects of the issuing company. Based on this, (Issue House will back the
company for issue of shares it may be merchant banking company also.)
(ii) Analysis : Here quality of capital is analyzed. This includes
determination of the class of security , price of the issue on the basis of
market condition
(iii) Processing of new proposals involves the study of timing and magnitude
(volume) of issue method of flotation and technique of selling. Here the
new issue market plays a major role.
Distribution(Methods of marketing securities)
Distribution functions of new issue market

Prospectus offer for sale private rights issue bonus book

Placement Shares building

Prospectus:- This is method by which a company directly sells its share to the
public. Through the media the company advertises and interested persons are given
the prospectus which carry full details about the company. Based on this, the public
apply to the company and shares of the new company are allotted at the face value.
The old companies may issue shares at the market value with the due permission of
authorities concerned, (SEBI). The issue of shares is guaranteed by an underwriter
who ensures certain minimum quantity of sales of shares.

Offer of Sale:- Here the company resorts to the sale of shares through
intermediaries who are stock brokers or issue houses. By this method the company is
able to promote the sale of shares and the sale is also guaranteed with the help of
underwriters. Intermediaries will take more interest in the sale of shares as they are
offered to them at a lesser price and they in turn will sell them at a higher price to the
public. The difference in the price will be the profit earned by the intermediaries. The
drawback of this system is that the company will not be benefited when the shares are
sold at a higher price by the intermediaries.

Private Placement:- The shares of the companies are given to the investing
public with the help of issue houses. This method is adopted by certain companies as
it prevents the presence of underwriters. The issue houses are responsible for the sale
of the shares and no prospectus is required under this system. It also involves
minimum expenditure.
Rights issue:- When a company wishes to expand its capital base, it prefers to issue
shares to the existing shareholders which are called rights shares. But before the
issuing of the rights shares, the company should get permission of the government
(SEBI) and a resolution has to be passed by the board of directors. The rights issue
will be based on a proportion of existing shares held by the shareholders. A company
can issue rights shares only after two years of its formation or after one years of its
first issue of shares, whichever is earlier. There is no need for issue of prospectus or
advertisements and this can be adopted only by and existing company and not a new
company. The price of rights shares may be fixed at apremium also, subject to the
permission of the Government (SEBI)

Bonus shares :
When a company decides to capitalize its profit, it will issue bonus shares
which will be available only to the existing share holders. Bonus shares can be issued
only by companies which earned profit, which is a commercial profit arising out of
their business operations, if a company earns profit by the sale of assets. It will not be
construed as profit. For the issue of bonus shares, the company must fulfill statutory
obligations of providing various reserves and declaring dividend to the existing
shareholders. After meeting the statutory regulations, if the remaining profit is more
than 40 % then the company with the prior permission of Government (SEBI), can go
in for the issue of bonus shares. It will be issued on a proportion to existing shares
held by the shareholders.

Book Building
When a company, instead of offering shares directly to the public, invites bids
from the merchant bankers for the sale of shares, it is called book building. The
merchant bankers will take the full responsibility for the issue of the shares. The entire
procedure of allotment of listing of shares will be undertaken by the merchant
bankers. The share price depends on the demand for the shares in the market. The
book runner or the merchant banker will select any stock exchange and register the
shares for the issue. If the stock exchange is having an on – line computer facility,
then the merchant banker will make available the shares through the on – line system.
The closing date for the sale of shares will be fixed by the merchant banker after
consulting with the stock exchange concerned. Depending upon the offers received
after the date of closure, the price will be fixed. On finalisation of the share price, the
shares will be allotted.

Investment Decision by the investor in New Issue Market

In the new issue market, an investor’s decision is based on three factors –

1) Company’s ability for a good performance.

2) The underwriter behind the issue.
3) The method of distribution of shares
1) Company’s ability for a good performance
The investor will analyse the ability of the company from the point of
view of (a) financial capacity, (b) economic independence, (c) technical
competence, (d) efficient management ; and (e ) market prospects.
2) The underwriter behind the issue
The reputation of the underwriter behind the issue also counts for the
purchase of new shares. The confidence of the investor goes up when he finds a
familiar underwriter, underwriting the shares of a new company. From the point
of view of the company the underwriter not only guarantees the sale of certain
percentage of issue of shares but also takes those shares in case of short falls.
3) The method of distribution of shares
As per the law, a certain percentages of the shares newly issued should be
offered to the public. Normally, the stock broker undertakes the sale of shares.
Depending upon the reliability of the brokers, the sale of shares will take place.
It is true that the newly promoted companies find it difficult to sell the shares
through reputed share brokers and underwriters. So, there is a need for a special
institution for the promotion of the new issue of shares belonging to newly
promoted small companies.

Role of New Issue market in industrial financing

1. Many of the FMCG ( fast moving consumer goods – such as cosmetics )
manufacturing companies could raise funds through new issue market.
2. Agro – based companies ( such as sugar factories ) could raise their funds
through the new issue market with the support of professional underwriters.
3. Merchant bankers are also responsible for the development of new issue
market.
4. Some of the foreign financial institutions such as Morgan Stanley, Merry lynch
are also instrumental for strengthening the new issue market
5. Development banks showed a keen interest in promoting more new companies
which had technically sound projects.
6. Different types of debt instruments of new companies are subscribed by
investing companies in the public and private sectors which also strengthened
new issue market.
7. The creation of some new Apex financial institutions such as NABARAD,
Exim Bank, SIDBI is another development in this regards, as they are lending a
good support to new issue market.

Reasons for poor performance of New Issue Market

1. In the Bombay Stock Exchange, out of the 5000 odd listed companies, only 800
company shares are actively traded. This works out to roughly 16 % of the
listed companies only, It means that the capital invested in remaining 84 %
companies are either blocked or lost due to inefficient management of
companies.
2. The effect of stock scam of 1992 has sent wrong signals about the poor
conditions of capital market in India.
3. In the absence of credit rating and ineffective control of SEBI, the new issue
market lost its vigour.
4. The delay in the government’s policy of disinvestment also affected the new
issue market.
5. UTI fiasco has also affected the new issue market. Here, many of the
investments made by UTI has either failed or the market value of such
instruments has declined below the par value.
DIFFERENT BETWEEN NEW ISSUE MARKET AND
SECONDARY MARKET

S.no Feature New Issue Market Secondary Market

1 Issue of New Issue Market deals Deals in existing securities.

securities with new or fresh issue of
securities.
2 Locations No fixed geographical Need a fixed place to house
location needed the secondary market activity
viz., trading
3 Transfer of Securities are created and Securities are transferred
Securities transferred from corporate from one investor to another
to investors for the first through the stock exchange
time mechanism.
4 Entry All companies can enter For these securities to enter
new issue market and make the portals of stock exchange
fresh issue of securities for the purpose of trading
,listing is maudatory
5 Administration Has no tangible form of Has a definite administration
administrative set-up set-up that facility trading
securities.
6 Regulation Subject to regulations Subject to regulation both
mostly from outside the from within and outside the
company-SEBI, stock stock exchange framework.
exchange, companies act
7 Price Stock price movement in Both macro and micro facts
movement secondary market influence the stock price
influences pricing of new movement.
issues
SEBI (Securities Exchange Board of India)

Even though we have 23 stock exchange in India, a major part of the transactions is controlled by
Bombay Stock Exchange. This has led to enormous speculation, rigging and cornering of shares by a few
speculators. To prevent these malpractices by companies, brokers and merchant bankers, the government
constituted Securities Exchange Board of India in April 1982 for regulating and promoting the stock market
in the country. SEBI came into existence by the Act of Parliament on 1 st April 1982.

Main objects of SEBI

1. To deal with development and regulation of stock market in India.

2. To promote fair dealings by the issue of securities and ensure a market place where they can raise
funds.
3. To provide protection to the investors.
4. Regulate and develop a code of conduct for brokers, merchant bankers, etc.
5. To have check on preferential allotment to promoters at a very low price.
6. To prevent deviation and violations of rules prescribed by stock exchanges
7. To verify listing requirements, listing procedures, and ensure compliance of the same by the
companies, so that only financially sound companies are listed.
8. To prescribe required standards for merchant bankers.
9. The promote healthy growth of security market for the development of capital market in the country.

Main features of SEBI

SEBI is body corporate with head office at Bombay. The Chairman and the board members are
appointed by the Central government. SEBI has two major functions. They are:

1. Regulatory; and
2. Developmental

1. Regulatory

(a) Registering the brokers and sub-brokers

(b) Registration of mutual funds

© Regulation of stock exchanges

(d) Prohibition of fraudulent and unfair trade practice

(e) Controlling insider- trading, take- over bids and imposing penalties

2. Developmental

(a) Educating investors

(b) Training intermediaries in stock transactions

(c) Promoting fair transactions

(d) Undertaking research and publishing useful information to all

Powers of SEBI

As per the Act , SEBI has powers

(a) To file complaints in court

(b) To regulate companies in the issue and transfer of shares including bonus and rights shares.

© It can levy penalties on companies and on brokers for violating transactions.

(d) Power to summon any broker or intermediaries and call for documents.

(e) It can issue directions to all brokers for protecting the interests of investors.

In addition to the above powers,

(a) It can call for periodical returns from stock exchange

(b) Seek any information from stock exchange

© It can enquire into the functioning of stock exchange

(d) It can grant permission for the change of bye-laws of any stock exchange

(e) It can compel listing of securities of public company

(f) It can control and regulate stock exchanges

(g) Granting registration to market intermediaries, prohibit insider-trading and prohibit

Fraudulent unfair trade practices.

(h) Promoting investor –education, and trading of intermediaries in capital market.

(i) Regulating purchase of shares and take-over of companies.

SEBI Guidelines for issue of fresh share capital

1. All applications should be submitted to SEBI in the prescribed form

2. Applications should be accompanied by true copies of industrial licence
3. Cost of the project should be furnished with scheme of finance
4. Company should have the shares issued to the public and listed in one or more recognized stock
exchanges.
5. Where the issue of equity share capital involves offer for subscription by the public for the first time,
the value of equity capital, subscribed capital privately held by promoters, and their friends shall be
not less than 15% of the total issued equity capital
6. An equity – preference ratio of 3:1 is allowed
7. Capital cost of the projects should be as per the standard set with a reasonable debt-equity ratio
 8. New company cannot issue shares at a premium. The dividend on preference shares should be within
the prescribed list.
9. All the details of the underwriting agreement
10. An allotment of shares to NRIs is not allowed without the approval of RBI.
11. Details of any firm allotments in favour of any financial institutions.
12. Declaration by secretary or director of the company.

SEBI Guidelines for first issue by new companies (Primary market)

1. A new company which has not completed 12 months of commercial operations will not be allowed to
issue shares at a premium.
2. If an existing company with a 5-years track record of consistent profitability, is promoting a new
company, then it is allowed to price its issue.
3. A draft of the prospectus has to be given to the SEBI before public issue.
4. The shares of the new companies have to be listed either with OTCEI or any other stock exchange

SEBI guidelines for Secondary market

1. All the companies entering the capital market should give a statement regarding fund utilization of
previous issue
2. Brokers are to satisfy capital adequacy norms so that the members firms maintain adequate capital in
relation to outstanding positions
3. The stock exchanges authorities have to alter their bye-laws with regard to capital adequacy norms
4. All the brokers should submit with SEBI their audited accounts
5. The brokers must also disclose clearly the transactions price of securities and the commission earned
by them. This will bring transparency and accountability for the brokers
6. The brokers should issue within 24 hours of the transaction contract notes to the clients.
7. The brokers must clearly mention their accounts details of funds belonging to clients and that of their
own.
8. Margin money on certain securities has to be paid by claims so that speculative investments are
prevented
9. Market makers are introduced for certain scrips by which brokers become responsible for the supply
and demand of the securities and the price of the securities is maintained.
10. A broker cannot underwrite more than 5% of the public issue
11. All transactions in the market must be reported within 24 hours to SEBI.
12. The brokers of Bombay and Calcutta must have a capital adequacy of Rs.5 lakhs and for Delhi and
Ahmadabad it is Rs.2 lakhs.
13. Members who are brokers have to pay securities deposit and this is fixed by SEBI.

STOCK EXCHANGE:-
Meaning:- A specialized marketplace that facilitates the exchanges of
securities that already exist, is known as a stock exchange or the stock market. It is
also called a ‘secondary market’ for securities.
Definition:-
According to section2 (3) of the securities contract regulation act 1956.”The
stock exchange has been defined as anybody of individuals whether incorporated or
not, constituted for the purpose of assisting, regulating or controlling the business of
buying , selling or dealing in securities.

FUNCTIONS/SERVICES/FEATURES/ROLE:-
 Common, trading platform:-A stock exchange provides an ideal and
convenient meeting place and a common platform for sellers and buyers of
securities.
 Mobilization of savings:-Stock exchange help in the mobilization of
savings and surplus funds of individuals, firms and other institutions.
 Safety to Investors:-One of the fundamental functions of a stock exchange
is to provide adequate safety to the genuine investors and save them for fraud
and manipulation caused due to activities of speculator.
 Distribution of new securities:-Stock exchanges also help in distribution
of new securities. Existing companies, which wish to raise additional capital,
my sell securities through stock exchange.
 Ready Market:-An important function of a stock exchange is provide a
continuous, ready, open and a broad-based market for securities.
 Liquidity:-It is an important indicator for judging the efficiency of an
exchange as it concerns with sale and purchase of securities quickly,easily and
at reasonable prices, which is near to the previous one.
 Capital formation:-As an essential adjunct of joint stock enterprise, stock
exchanges allow for quick capital formation to take place. This in turn
contributes to the development and promotion of the economy through
accelerated industrial development.
 Speculative trading:-An efficient functioning of stock market motivates
investors to save more and invest in high yielding securities, and thus, promotes
those industrial units that show best productive and financial performance.
Speculation also plays a dominant role in mobilization of saving in a economy.
 Efficient Channeling Of Savings:-The stock exchange mechanism
enables judicious use of national savings by allowing the flow of savings into
the profitable and desirable areas of investments. It allows corporate to mobilize
capital in a free and equitable manner.
 Optical Resource Allocation:-Stock exchange serves as an ideal tool of
allocating the national savings to promising issue and thereby, ensures most
effective and optimum allocation and utilization of scarce financial resources in
industry and commerce for maximum social advantage.
 Platform For Public Debt:-Stock exchange act as platform for mopping
up public debt to execute the schemes of planned projects. It works as an over-
the-counter market, consisting of dealers of dealers and brokers in government
securities. Banks, LIC, provident fund and pension fund institutions are the
chief buyers of government securities.
 Clearing House Of Business Information:-Stock exchange to serve as a
clearing house of business information. Besides, the formation provided by the
corporate by way of financial statements annual reports and other reports etc,
helps ensure maximum publicity of corporate operations and working.
 Sound Price Setting:-Stock exchanges help in determining current market
prices of various securities. The prices at which transactions take place are
recorded and made public in the form of market quotations, which help the
investors to know the current market prices.
 Economic Barometer:-Stock exchanges serve as a barometer of the
economy. The price movement of securities on a stock exchange indicates the
state of health not only of industrial companies but also of the economy of the
nation as a whole.
 Dissemination Of Market Data:-Stock exchange serve as information
hub of trade and industry of an economy. They dissemination information about
share prices, volume of trade, industry- wise, scrip-wise etc.
 Perfect Market Conditions:-Perfect market conditions prevail in the stock
exchange .They are well regulated by institutions of government. They facilitate
a free and limitless competition among the dealers and the brokers of securities .
  Seasoning of securities:-Stock market players such as underwriter dealers,
brokers and speculators temporarily hold securities issued by anew companies.
This is called ‘Seasoning of Securities’.
 Evaluation Of Securities:-Another important function of the stock
exchange is to allow for an opportunity to determine a reasonable and fair price
of various scrip traded on its floor through the market forces of demand and
supply.
 True Market Mechanism:- A stock exchange assists in determining the
stock prices near to their ‘true and fair’ market worth and prevents form violent
and erratic fluctuations in such prices. A stock exchange, thus facilities free
market mechanism providing for marketability, stability and continuity in
prices.
 Investor Education:-Stock exchanges play a significant role in educating
the mass through various communication media by providing information
relating to principles and advantages of investing in shares, debentures, bonds
and other avenues. They also educate the people in selecting the securities and
designing their own portfolio.
 Fair Price Determination:-The prices in the stock market are determined
by the interplay of the forces of supply and demand. The two-way auction
trading taking place in the stock exchange facilitates a fair price determination.
 Industrial financing:-Stock exchange provides for an ideal ground for the
corporate enterprise to mobilize the capital required for undertaking industrial
activities.
 Company Regulation:-The requirements of ‘listing’ on a stock exchange
make it possible for the stock exchange to rein in on the corporate enterprise.

Stock exchange traders

Only the registered members are permitted to carry out trading on the floor of a stock exchange. However, for
reasons of convenience some other persons are also permitted to enter the premises and transact business on
behalf of the members. They are:

Remisiers
The sub-brokers employed by a member (share-broker) to secure business are called’Remisiers. As the share
brokers are prohibited to get business by advertisement, the role of remisiers assumes importance. Remisiers
are not permitted to enter the trading floor for exchange dealings. Remisiers are engaged by the full-fledged
member of the BSE in order to secure business for them. They act as agents of the members. The members
pay them commission on the business procured by them and for this reason remisiers are best known as “half
commission men’. The remisiers are practically under the same restrictions as their principals.

Authorized clerks
Authorized clerks are the people who assist a member in transacting business, especially at time where the
volume is heavy. The employees of a member of a stock exchange are called ‘authorized clerks’. These clerks
or assistants are authorized to transact business on behalf of their member-employer, but they cannot make
any bargain in their own name. Such persons can signs on behalf of their employers where they are provided
with the power of attorney. They also assist the member in conducting the exchange transactions. Besides,
they are authorized to enter the trading floors of the stock exchange for carrying out buying and selling of
scrips on behalf of their employers. They cannot buy or sell on their own account. The number of authorized
clerks permitted for each member varies between exchanges. For instance, in the Bombay Stock Exchange,
five authorized clerks are permitted per member; the Calcutta Exchange allows eight authorized clerks or
member assistants per member, and the Madras Exchange provides three authorized clerks for a members.

Brokers and Jobbers

In a stock exchange, the actions of brokers and jobbers are interrelated. Both the broker and the jobber
perform important functions. A broker acts as an expert agent of the ordinary investors who is hardly
competent to deal with skilled jobbers directly. A jobber renders a useful service by executing orders without
delay. The immediate execution of orders helps make the price fluctuations smooth. He uses his experience
and specialized knowledge to name the price at which a security should pass form one investor to another.
Although there is a clear-cut distinction between brokers and jobbers in the London Stock Exchange, no such
difference exists between them in India. For instance, brokers are commission agents who transact business in
securities on behalf of nonmembers; they work on commission basis. A broker’s commission on his business
is fixed.

A broker serves as link between the general public and the jobber. Since a broker acts for a larger
number of his non-member clients, he deals in a wide variety of securities. Brokers are competent to enter
into transactions in an exchange. Brokerage charges are collected for the services rendered by them. Brokers
place orders on behalf of their client- shareholders, collect the share certificate from the seller-broker and
deliver the same to the buyer-broker. It is the brokers through whom transactions are dealt in by a stock
exchange. Brokers trade in their own account, besides placing orders on behalf of their clients. The actions of
brokers infuse liquidity in stock exchanges all over the world. Stock broking business in India is a traditional
family business. With the initiation of economic reforms, international investors and foreign brokerage houses
entered the Indian capital market. A great deal of change has since taken place in the profile of the market
participants. Corporate broking houses are now common, which is an international norm.

Tarawaniwalas
Tarawaniwalas are dealers in securities in the BSE who transact business in their own name and on their own
behalf as well. Such dealers usually specialize in one or two securities only. They resemble the jobbers of the
London Exchange in as far as the method of transacting business is concerned. A typical dealer like the
tarawaniwala is not prohibited from acting as a broker although it might prove objectionable form the point of
view of the public as it gives him a chance to purchase securities form clients at lower prices or sell his own
securities to them at higher prices.

Dealers
Dealers are market-makers. They are important intermediaries in the stock exchange. Dealers buy and sell
inventory of stocks. Through this process, they absorb excessive buying or selling pressures, thereby
providing liquidity and immediacy in the exchange. Such intermediaries are not very common in the Indian
capital market.

WEAKNESSES

Although rapid strides have been made in the Indian stock markets, there are many irritants that continue to
afflict the functioning of the stock exchanges. Following are the principle weakness of the Indian stock
exchanges:

1. Raging speculation
2. Insider trading menace
3. Neglect of small investors
4. Restrictions on forward trading
5. Bad trading practice
6. Lack of integration
7. Lack of interface
8. Ineffective banking system
9. Inadequacy of investor service
10. Inadequate infrastructure

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SECURITIES CONTRACTS (REGULATION)ACT,1956
The Securities contracts (Regulation)act was passed in 1956 by parliament and
it came into force in February 1957. The main objects of this act are-

 Defining the term ‘Securities’ for transacting

 Procedure for transacting securities in the stock exchange
 Laying down procedure for listing securities of companies
 Regulating the operations of brokers with regard to purchase and sale of
securities
 Protecting the interest of investors.

Definitions:-
Sections 2 of the securities contracts (Regulation) act has recognized the
following as securities-

a. Shares, stocks, bonds ,debentures,scrips, or any other marketable securities of

incorporated companies
b. Derivatives
c. Any other instrument issued by any collective investment scheme
d. Government securities
e. Rights share, bonus share,etc.

POWER OF CENTRAL GOVERNENMENT (SEBI) OVER STOCK

EXCHANGE (SECTION 6)
1. All recognized stock exchanges have to submit periodical returns with regard to
its activities to SEBI.
2. Books of accounts, for a period of 5 years have to be preserved by members as
well as stock exchanges.
3. The books of accounts can be inspected by SEBI at any time.
4. SEBI can call for additional information or explanation from any stock
exchange or any member with regard to any matter.
 5. SEBI can appoint one or more persons for making enquiries regarding the
affairs of the governing body of stock exchange or any member of the stock
exchange and submit a report within the specified time.
6. During such enquiry, every individual in the stock exchange will have to submit
documents pertaining to the stock exchange and furnish whatever information
called for.
7. Stock exchanges should furnish a copy of its annual report to SEBI
8. Restriction of voting rights: Any restrictions imposed on the voting rights of the
members or any regulation in the voting rights or any restriction in the rights of
any member by the stock exchange will be valid only when it is approved by
SEBI
9. SEBI can direct all or any particular stock exchange to make rules or amend
rules after an inquiry being conducted on the affairs of the stock exchange.
10. When a stock exchange fails to comply with the orders of SEBI, then the
government may stipulate time for complying with the conditions.

Powers of the stock Exchange

A recognized stock exchange will have the following powers with the approval
of SEBI-

1. Prescribing hours of trade

2. Procedure for clearing house for settlement of transactions, delivery and
payment for securities
3. Submission of report by the clearing house periodically to SEBI with regard to
details of various classes of securities
4. Rules pertaining to prohibition of blank transfer. When securities are traded, the
buyer must receive the security and send it for transfer in his name after signing
the transfer document. However, if the buyer, keeps the transfer document
blank and further sells it to other buyer, then it is a blank transfer
5. Different classes of contract and the payment to the clearing house.
6. Fixing, altering or postponing settlement dates.
7. Fixing of prices such as opening, closing, high and low
8. Prescribing margin requirements for different contracts
9. Regulating termination of contracts between members
 10. In case of default or insolvency of seller or buyer, procedure for dealing with
such contracts
11. Procedure for listing securities in stock exchange
12. Settlement of disputes
13. Fixing of fees, fined and penalties
14. Fixing broker commission
15. In case of syndicate transaction or cornering or pool which is illegal, fixing of
prices on securities
16. Separating the functions of jobbers and brokers
17. Limiting the volume of trade by individual members
18. Obligation on the part of members to furnish information as required by the
governing body.

LISTING OF SECURITIES
Introduction
For trading in the stock market, a company has to list its securities in the stock
exchange. It means that the name of the company is registered in the stock exchange.
The company has the fulfill certain conditions according to companies act. The
company has to offer its shares of debentures to the public for subscription according
to section 73 of the companies act. Only then, the company will be allowed to list its
security in the stock exchange. For listing shares in the stock exchange, a company
must have minimum of Rs.5 crores as its equity capital and 60% of this i.e., Rs.3
crores is offered to the public.

Conditions for listing

Before listing securities, a company has to fulfill the following conditions:

1. Shares of the company must be offered to the public through a prospectus and
25% of each class of securities must be offered.
2. The prospectus should clearly mention opening of subscription, receipt of
application, etc.
3. The capital structure of the company should be broad-based and there should be
public interest in securities.
4. The minimum issued capital must be Rs.3crores of which Rs.1.80crores must
be offered to the public.
5. There must be at least five public shareholders for every Rs.1lakhs of fresh
issue of capital and 10 shareholders for every Rs.1lakh of offer for sale of
existing capital. On the excess application money, the company will have top
pay interest from 4% to 15%, if there is delay in refund and delay should not be
more than 10 weeks from the date of closure of subscription list.
6. A Company with paid up capital of more than Rs.5 crores should get itself
listed in more than one stock exchange, it includes the compulsory listing on
regional stock exchange.
7. The auditor or secretary of the company applying for listing should declare that
the share certificates have been stamped so that shares belonging to the
promoter’s quots cannot be sold or hypothecated or transferred for a period of 5
years.
8. Articles of Association of the company must have the following provisions:-
 A common form of transfer shall be used
 Full paid shares be used
 No lien on fully paid shares
 Calls paid in advance will not carry a right to dividend and will not be
forfeited before the claim becomes time-barred
 Option to call off shares shall be given only after sanction by the general
meeting.
9. Letter of allotment, letter of regret and letter of rights shall be issued
simultaneously.
10. Receipts of all the securities deposited, whether for registration or split and no
charges will be made for the services.
11. The company will issue consolidation and renewal certificates for split
certificate, letter of allotment, letter of rights and transfer, etc. when required.
12. The stock exchange should be notified by the company regarding the date of
board meeting, change in the composition of board of directors, and any new
issue of securities, in place of reissue of forfeited shares.
13. Closing the transfer books for the purpose of declaration of dividend, rights
issue or bonus issue. And for this purpose, due notice should be given to stock
exchange.
 14. Annual return of the company to be filed soon after the annual general body
meeting
15. The company will have to comply with conditions imposed by the stock
exchange now and then for listing of security.

TYPES OF LISTING:-

1. Initial listing:- Here, the shares of the company are listed for the first time
on a stock exchange.
2. Listing for public issue:- When a company which has listed its shares on a
stock exchange comes out with a public issue.
3. Listing for rights issue:- When the company which has already listed its
shares in the stock exchange issue securities to the existing share holders on
rights basis.
4. Listing of bonus shares:- When a listed company in a stock exchange is
capitalizing its profit by issuing bonus shares to the existing shareholders.
5. Listing for merger or amalgamation:- When the amalgamated company
issues new shares to the shareholders of amalgamated company, such shares are
listed.

BENEFITS OF LISTING:-
 By listing its security in a stock exchange, a company is able to raise its
required capital easily.
 Listed securities enjoy wider market.
 Listing helps the company to diversify its shareholdings especially on a
geographical distribution.
 Banks will prefer listed securities as collateral securities for loans.
 A wide publicity is given to the companies as securities prices are quoted
in newspapers, television and other magazines.
  The interest of investors is now protected as the stock exchange regulates
and controls the company.
 Listed securities provide liquidity to the stock holder as he can convert
them easily into cash.
 The correct value of the securities is given in the press which enables the
prospective investor to take a right division for investment.

DEFECTS OF LISTING:-
 It is only an indication of financial soundness.
 It does not guarantee for the securities of the company.
 Listing May encourages speculation in the market.
 Due to speculation, genuine investors may not enter the market.
 Directors and promoters may take advantage of listing and may go in for
personal gain.
 The management of the company may change as substantial
shareholdings are controlled by a few interested groups.

PROCEDURE FOR LISTING REQUIREMENTS:-

For listing the shares in the stock exchange, the public limited company will
have to submit supporting documents. They are:

1. Certified copies of memorandum, articles of association, prospectus and

agreements with underwriters.
2. All particulars regarding capital structure.
3. Copied of advertisements offering securities for sale during the last 5 years.
4. Copies of balance sheet, audited accounts and auditors’ report for the last 5
years.
5. Specimen copies of shares and debenture, certificate letter of allotment, and
letter of regret.
6. A brief history of the company since incorporation with any changes in capital
structure, borrowings,etc.
7. Details of shares and debentures issued for consideration other than cash.
 8. Statement showing distribution of shares and particular of commission,
brokerage, discounts or special terms towards the issue of shares.
9. Any agreement with financial institutions.
10. Particulars of shares forfeited.
11. Details of shares of debentures of which permission to deal with is applied for.
12. Certified copy of consent form SEBI.

PROCEDURE AT THE STOCK EXCHANGE

After the application is made the Listing Committee of the stock exchange will
scrutinize the application form of the company. Here, the stock exchange will ensure
the following-

a. The financial position of the company is sound

b. Solvency and liquidity positions are good
c. The issue is large and broad based to generate public interest.

If the application for listing is accepted, the listed company will be called to
execute listing agreement with the stock exchange. The company must follow
certain obligations which are.

a. The company will treat all the applications with equal fairness.
b. In case of over subscription, the allotment will be decided in consultation with
stock exchange; and
c. The company will notify to the stock exchange any change in its management,
business, and capital structure or bonus or rights issue of shares.

TERMS USED IN THE STOCK EXCHANGE

 Broker:- A broker is a commission agent who buys and sells securities on
behalf of clients. He is given commission as a percentage of the value of
securities transacted.
 Jobber:- He is a person who buys and sells securities in his own name. Any
profits made in the transaction are solely enjoyed by the jobber. The difference
in the selling price is his profit.
 Authorized Dealers:- They are appointed by the members to assist them but
they cannot do business on their own.
  Remisiers or sub- brokers:- They are appointed by the brokers for
securing business. Each broker is allowed to have five sub-brokers.
 Bull:- A bull is a speculator who buys the share at a lower price with a view to
sell on a future day at a higher price. Hence earns profit when the share price
goes up to a higher level. The market is said to be bullish when the prices of
shares are going up.
 Bear:- A bear is quite opposite to bull where he sells the share at a higher
price and purchases at a lowers price. A market is said to be bearish a when
there is more sale of shares due which the price falls.
A bull purchases a share with an expectation that the price will go up so
that he can sell. A bear sells the share so that he can avoid any further fall
in the price and prevent any loss.
 Stage:- When a person purchases shares of a new company with the view to
sell them at a higher price.
 Lame duck:- When a bear is unable to buy a share at a lower price or is
unable to fulfill his commitment due to changing price in the market.
 Cover:- It is deposit of cash or securities left with the broker by the client.
 Cornering:- When a bear is unable to meet selling obligations on the date of
delivery.
 Kerb trading:- When transactions are taking place outside the market and
outside the trading hours, it is kerb trading. It is illegal. They will not be
reported in the stock market. It is a parallel market.
 Arbitrage:- It is difference between the price prevailing in two different
markets. It may be buying in one market at a lower price and selling the same
at a higher price in a different market.

UNDERWRITING
Meaning:-
Underwriting is an act of guarantee by an organisal for the sale of certain
minimum amount of shares an debentures issued by public limited company.
According to the companies act, when a person agrees to take up shares specified in
the underwriting agreement when the public or other failed to subscribe for them, it is
called underwriting agreement.

Definitions:-
According to Gerstuberg,” underwriting is an agreement entered into before the
shares are brought by the public that in the event of the public not taking up the whole
of them the underwriter will take an allotment of such part of the shares the public has
not applied for”.

DIFFERENT FORMS OF UNDERWRITERS:-

Underwriters in India are in different forms. There are

 Development banks such as IDBI, IFCI, and SFC etc.

 Investment institutions such as LIC, UTI, etc
 Commercial banks such as SBI, Canara Bank, etc
 Stock brokers who also undertake underwriting.

MERITS OF UNDERWRITING:-
 It ensures the success of the proposed issue of share it provides and
insurance against the risk
 It enables the company to get the minimum subscribed required as even if
the public fails to subscribe, the underwriting will fulfill their
commitment
 The reputation of the underwriters acts as a confidence investors. The
underwriters who are called the load managed provide financial
soundness to the company, whose shares are issued to the public.

SEBI’s Guidelines:-
According to SEBI, the number of underwritersshould be decided well in
advance by the issuer and he must obtain prior permission from SEBI. Permission will
be granted by SEBI only after finding out the net worth of the underwriters and their
outstanding commitments. The stock exchange, where the security is to be listed must
also be informed about the arrangements made with the underwriters.
 25% of each class of securities must be offered to the public and in the
remaining 75% ,the following method of firm allotment could be adopted.

FIRM ALLOTMENT
After issuing certain percentage of shares to the public, the remaining shares
are allotted to different categories of investors, such an allotment is known as firm
allotment.

Firm allotment are allotments made as per SEBI regulations to different

categories of investors. Given below is the percentage of shares that can be allotted to
different categories of investors.

1. Foreign financial institutional investors(30%)

2. Development financial institutions(20%)
3. Indian mutual funds(20%)
4. Permanent regular employees(10%)
5. 5% for lead bankers
6. 10% for employees of the promoting companies. The balance can be taken by
the promoters.

All these above regulations were made by SEBI through a circular dated
11.10.1993.
TYPES OF UNDERWRITERS
Types of Underwriters

Institutional Underwriters Non-Institutional Underwriters

IDBI ICICI UTI SBI Capital Market Any NBFC

RESPONSIBLILITIES OF UNDERWRITERS

1. An underwriter, not only has to underwrite the securities but has to subscribe
within 45 days that part of shares which remain unsubscribed by the public.
2. His underwriting obligations should not exceed, at any time, 20 times of his
new worth.
3. The underwriter cannot derive any other benefit except the underwriting
1
commission which is 5% for shares and 2 % for debentures.
2