FINANCIAL MARKETS AND SERVICES

Dr. Nisha Mary Thomas

nishathomas@isme.in

BBA, Semester 5
October 2021
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OVERVIEW (UNIT 1- FINANCIAL MARKETS)

Primary Market

▪ Meaning, Features, Players, Instruments

▪ Issue of Equity Shares: Procedure and SEBI Guidelines
▪ Issue of Debentures: Procedure and SEBI Guidelines
▪ Merits and Demerits

Secondary Market:
▪ Meaning and Structure
▪ Functions: Trading and settlement system of stock exchange transactions
▪ Players in stock market
▪ Merits and Demerits of stock markets
▪ Reforms in stock markets
▪ OTCEI
▪ NSE: Origin, function, merits and demerits

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FINANCIAL MARKETS
What is ‘market’?
So, what is ‘financial market’?
A platform in which people and entities can trade financial securities at low transaction
cost and at prices that reflect demand and supply
Why is financial market required?
Objectives of financial market
• To create and allocate
credit and liquidity
• To act as intermediaries
for mobilization of
savings
• To assist for balanced
economic growth
• To provide financial
convenience

https://marketbusinessnews.com/finan
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cial-glossary/financial-market/
FINANCIAL MARKETS

Financial Market

Capital Market Money Market

New Issues Market

Primary Market
IPO, FPO, Rights Issue,
Preferential Issue

Secondary Market BSE, NSE

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FINANCIAL MARKETS

Financial Market

Capital Market Money Market

Features of Capital Markets

• Deals in long and medium term funds
• Covers both individual and institutional investors
• Makes funds available to industrial and commercial undertakings
What if we don’t have capital markets…No BSE, NSE, IPO?
Need of Capital Markets Function of Capital Markets
• Mobilize savings on a large scale • Links savers and investors
• Helps in capital formation • Encourages savings
• Distribution of funds for balanced • Encourages investment
economic growth • Promotes economic growth
• Provides continuous market for long • Stability in security prices
term funds • Investors: Marketability, Liquidity,
Investor protection rules 5
PRIMARY MARKETS
Meaning
A market where the, funds are raised by industrial and commercial enterprises from
investors through issue of shares, debentures and bonds

https://m.economictimes.com/tech/startups/zomato-gets-sebis-go-ahead-to-float-rs-8250-crore-ipo/articleshow/84142994.cms?_oref=cook

https://economictimes.indiatimes.com/markets/bonds/agel-lists-750-million-foreign-currency-green-bonds-on-india-inx-platform/printarticle/86081231.cms

https://www.indiatoday.in/business/story/oyo-hotels-and-rooms-ipo-key-details-all-you-need-to-know-1856203-2021-09-23

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PRIMARY MARKETS
Features
▪ New Issue Market: New long term capital
▪ Facilitates capital formation in the economy
▪ Financial assets sold can be redeemed by the original holder

Issues securities for the firs time

Receives money
For setting up business, expansion, modernization

Article 1 and Article 2

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PRIMARY MARKETS: PLAYERS

Regulator Regulator and Issuer of money Stock exchanges

market instruments on behalf
of Central Government

Cos. issuing shares Individual;

and debentures Institutional – Domestic and
Credit rating agencies Foreign
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PRIMARY MARKETS
Players in Initial Public Offering Zomato IPO
▪ Merchant Bankers
Advisor to the firm. Responsible to SEBI and the firm

▪ Bankers
Collect information on subscription and coordinate the
collection work

▪ Registrar to the offer

Undertake all activities connected with NIM

▪ Underwriters and Brokers

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PRIMARY MARKETS: INSTRUMENTS
1. Equity Shares
▪ Represents ownership capital
▪ Liability limited to capital contribution

Rights of Equity Shareholders

1. Right to Income ▪ Residual claim on income of the firm
▪ Income = PAT – Preference Dividend
▪ Income can be distributed as dividend or ploughed back
2. Right to Control ▪ ESH elect BoD, who in turn, elect management to manage
operations of the firm

3. Pre-emptive Right ▪ Companies have to give existing ESH the first opportunity
to purchase additional shares of equity capital

4. Right in Liquidation ▪ In case of liquidation, ESH have a residual claim over

assets of the firm
▪ Lenders and preference shareholders get the first 10
preference
PRIMARY MARKETS: INSTRUMENTS
2. Debentures/ Bonds
▪ Akin to promissory notes
▪ Unlike term loans, it offers more variety in terms of maturity, interest rate, security
and repayment
▪ A bond is a debt instrument that provides income to investors in the form of
regularly scheduled interest payments called coupons. At the maturity date of the
bond, the investors are repaid the full face value of the bond. Some corporate entities
issue a type of bond known as convertible bonds.

Features of Debentures
▪ Trustee: When debentures are issued, a trustee (typically a bank) is appointed to
ensure that borrowing firm meet its contractual obligations
▪ Security: Typically secured
▪ Interest Rate: May be fixed, floating or zero interest rate
▪ Convertibility: May issue debentures that can be converted into equity shares at the
option of debenture holders

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PRIMARY MARKETS: INSTRUMENTS
3. Preference Shares
▪ Characteristics of both equity and debt

Features of Equity Features of Debt

▪ Preference dividend paid out of ▪ Preference dividend rate is fixed

distributable profits
▪ Preference dividend is not tax
deductible
▪ Not a legal obligation to pay
preference dividend
▪ Claim of preference shareholders
prior to claim of ESH
▪ Preference capital is typically
repayable

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PRIMARY MARKETS: INSTRUMENTS
4. Foreign Currency Convertible Bonds
▪ A foreign currency convertible bond (FCCB) is a type of convertible bond issued in
a currency different than the issuer's domestic currency.
▪ In other words, the money being raised by the issuing company is in the form of
foreign currency.
▪ A convertible bond is a mix between a debt and equity instrument. It acts like a bond
by making regular coupon and principal payments, but these bonds also give the
bondholder the option to convert the bond into stock.
5. Depositary Receipts
▪ Depositary receipts are shares of a foreign company offered in another foreign market.
▪ Depositary receipts can be structured in multiple ways and allow foreign investors to
invest in foreign companies through their own domestic exchanges.
▪ If a company wants to offer its equity shares in a foreign market it must work with a
depositary bank. As an intermediary, the depositary bank manages the share issuance,
administration aspects of the share listing, and other details involved with the shares
being offered. The underlying company does not necessarily have direct access to
manage their depositary receipt shares in the same way that they manage their domestic
shares.
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ISSUE OF EQUITY SHARES:
PROCEEDURE & SEBI GUIDELINES

Pre Issue Management Activities Post Issue Management Activities

Approval from stock exchanges for MoU Confirm subscription of issue

and AoA

Finalizing Merchant Bankers, underwriters, Supervise and coordinate allotment procedure

Brokers, Bankers, Legal advisers

Drafting and obtaining approval for draft Issue of refund offer

prospectus

Publicity of the issue Ensure listing at stock exchanges

Article 3 and Article 4

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ISSUE OF EQUITY SHARES:
PROCEEDURE & SEBI GUIDELINES
Investor Categories

I. Retail Individual Investors (RII)

II. Qualified Institutional investors (QIBs)
III. Non Institutional Investors (NIIs)/ High Net worth Individuals
(HNI)

• I. “Retail individual investor (RII)” means an investor who applies or bids

for securities for a value of not more than Rs. 2,00,000.
II. Qualified Institutional Buyers (QIB) include

(i) a mutual fund, venture capital fund and foreign venture capital investor registered
with the Board;
(ii) a foreign institutional investor and sub-account (other than a sub-account which is a
foreign corporate or foreign individual), registered with the Board;
(iii) a public financial institution as defined in section 4A of the Companies Act, 1956;
(iv) a scheduled commercial bank;
(v) a multilateral and bilateral development financial institution;
(vi) a state industrial development corporation;
(vii) an insurance company registered with the Insurance Regulatory and Development
Authority;
(viii) a provident fund with minimum corpus of twenty five crore rupees;
(ix) a pension fund with minimum corpus of twenty five crore rupees;
(x) National Investment Fund set up by resolution no. F. No. 2/3/2005-DDII dated
November 23, 2005 of the Government of India published in the Gazette of India;
(xi) insurance funds set up and managed by army, navy or air force of the Union of
India;
(xii) insurance funds set up and managed by the Department of Posts, India
Non‐Institutional Investors (NII)/ HNI

• Investors who do not fall within the definition of the above two
categories are categorized as “Non‐Institutional Investors” .
ISSUE OF EQUITY SHARES:
PROCEEDURE & SEBI GUIDELINES

Issue Mechanism
The methods of raising capital in NIM include:
1. Public Issues (through Prospectus)
2. Rights Issue
3. Bonus Issues
4. Private placement
 1. Public Issues (through Prospectus)
• Under the prospectus/public issue method, issuing companies offer directly to the
general public, through a prospectus, a fixed number of shares, either through
Fixed price method or Book built method.
• To ensure success, issues are generally underwritten.
• It is, however, an expensive method and is, therefore, suitable only for larger issues
.
 Other methods
2. Rights Issue: The existing shareholders are offered the
right to subscribe to new shares in proportion to the
number of shares held in the issuing company in rights
issues (as on the record date). Ratio of 1:5

3. Bonus Issues: capitalization of free reserves of the

company.
Other methods
5. Private placement: When an issuer makes an issue
of shares or convertible securities to a select group of
persons , and which is neither a rights issue nor a
public issue, it is called a private placement.
ISSUE OF EQUITY SHARES:
SEBI GUIDELINES
1. Entry Norms regarding net tangible assets, net worth, issue size
2. Intermediaries like merchant bankers, bankers to the issue, underwriters, brokers
should be registered with SEBI
3. Filing of draft prospectus via merchant banker with SEBI
4. Merchant banker to fulfil many documentation requirements like statutory
advertisements, in-principle approval from stock exchange and many such
requirements
5. Minimum promoters contribution of atleast 20% of the post issue capital which
should be locked in for 3 years
6. Reservation and firm allotment for retail investors, employees, QIBs etc

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ISSUE OF DEBENTURES:
SEBI GUIDELINES
1. Credit rating required
2. Disclosure with respect to prospective DER, servicing terms of the debt instrument
3. Debenture trust if the maturity period is more than 18 months to protect the interest
of debenture holders
4. Debenture Redemption Reserve required in case maturity of the debenture is more
than 18 months
5. Conversion details
6. Listing requirements almost similar to equity shares

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SECONDARY MARKET
Financial Market where existing securities are traded

Functions of Secondary Market

Liquidity and • Allows sales and hence can be converted into cash
Marketability of
securities • Platform for buyers and sellers

Safety of investors’
• Strict rules to ensure safety of funds
funds

Availability of long
• Irrespective of the trading, long term funds for companies is
term funds for
assured
companies

Flow of Funds to • Prices indicative of the relative profitability and performance of

Profitable projects the firm

Promotion of
investment • Mobilize savings from public to corporates
opportunities

Availability of • Changing business environment is immediately reflected in the

business operation stock prices 24
TRADING AND SETTLEMENT SYSTEM OF STOCK
EXCHANGE TRANSACTIONS: ENTITIES INVOLVED
Depository
• Entities that hold your Demat accounts.
• All participants including investors, brokers, and clearing members need to have a Demat
account to trade in the stock exchange.
• National Securities Depository Ltd and Central Depository Services Ltd
Clearing Corporation
• Entity associated with a stock exchange that handles the confirmation, settlement, and
delivery of shares. It acts as a buyer for the seller and a seller for the buyer. NSCCL
Clearing Members and Custodians
• CMs ensure that the funds/ securities are available with clearing bank/ depository on the date
of settlement
• Custodians on behalf of trading members confirm if the trade will be settled or not. If trade
is confirmed then clearing corporation assigns that trade obligation to him
Clearing Bank
• Every clearing member has to open a clearing account with one of these banks.
• If the clearing member is settling a purchase transaction, then it needs to ensure that the
funds are made available in this account before the settlement.
• If it is settling a sale transaction, then the funds are received by the clearing member in the
clearing account.
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https://groww.in/blog/clearing-and-settlement-process-in-stock-market/
TRADING AND SETTLEMENT SYSTEM OF STOCK
EXCHANGE TRANSACTIONS: CORE PROCESSES

• Automatic recording of transactions in electronic trading system

Trade Recording
of exchanges

Trade Confirmation • Confirmation of trade (automatic) by the participants

Determination of • NSCCL is the central counterparty between the participants.

Obligation Determination of what the participants owe each other

• CMs make the securities available with the depositors. Depositor

Pay in of Funds and
transfers the securities to NSCCL. Then NSCCL instructs
Securities
clearing banks to debit CM’s accounts

Pay out of funds and • NSCCL sends electronic instructions to depositors/ clearing
securities banks to release payout of securities / funds

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TRADING AND SETTLEMENT SYSTEM OF STOCK EXCHANGE
TRANSACTIONS

https://www.angelone.in/knowledge-center/intraday-trading/what-is-trade-
settlement

https://www.bseindia.com/static/markets/equity/EQReports/tra_Settlement.aspx

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PLAYERS IN STOCK MARKET

1. Stock exchanges as facilitator of trading

2. SEBI as regulator
3. Depositories
4. Retail Investors
5. Brokers
6. Institutional Investors – Domestic and Foreign
7. Speculators
8. Arbitrageurs

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STOCK MARKET: MERITS AND DEMERITS
✓ Economic barometer of the country
✓ Provides continuous and ready market
for securities
✓ Ensures transparency in transactions
✓ Provides liquidity to existing
investments
✓ Facilitates better allocation of capital
✓ Promotes habit of savings and
investment
➢ Listed companies may become
vulnerable to market fluctuations
beyond their control
➢ Extreme downturn in market results in
capital erosion
➢ Vulnerability to scams
➢ Excessive speculation may be
dangerous
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OVER THE COUNTER EXCHANGE OF INDIA
OTCEI was incorporated in 1990 as a Section 25 company under the Companies Act 1956 and is
recognized as a stock exchange under Section 4 of the Securities Contracts Regulation Act, 1956.
The Exchange was set up to aid enterprising promoters in raising finance for new projects in a cost
effective manner and to provide investors with a transparent & efficient mode of trading.

http://www.otcei.net/about/

http://www.otcei.net/sitemap/

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NATIONAL STOCK EXCHANGE

1. To establish nationwide trading to all type of securities

2. The National Stock Exchange of India ensures equal access to all investors
across the country through an appropriate communication network
3. To provide a fair and transparent security market using an electronic trading
platform
4. Enabling shorter cycles and book entry settlements

• Nifty 50 index
• Nifty 100 index
• Nifty Next 50 index
• Nifty Midcap 50 index
• Nifty Smallcap 250 index
• India Vix index

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NATIONAL STOCK EXCHANGE
Comprehensive visibility –
This trading system is efficient in providing various trade and post-trade information. Investors
can easily look up the top buy and sell orders on the trading system, along with the total number
of securities available for a transaction. It helps investors to gauge the market’s depth easily.
Makes for a premier marketplace –
The volume of trading activity in this stock exchange helps to lower the impact cost on it, which
decreases the expenses of trading for investors. Additionally, the exchange’s automated trading
system helps to maintain transparency and consistency with an investor.
Biggest exchange in the country –
In terms of trading volume, the NSE National Stock Exchange is the country’s largest
exchange with its market capitalisation exceeding $2.25 Trillion.
Fast transactions –
The pace at which orders are processed in this Exchange helps investors to avail the best prices.
For instance, on May 19th 2009, the stock exchange recorded 11,260,392 trades, which was its
highest number in a day.
Trade statistics –
Listed companies can avail the provision of receiving trade statistics each month, to help track
the performance of companies listed on the exchange.
Thus, with the above benefits, NSE National Stock Exchange makes for a favourable facility
to conduct market transactions.

https://groww.in/p/national-stock-exchange/ 32