CAPITAL MARKET

The Capital Market is a market for financial investments that are direct or indirect claims to capital. The capital
market is a market for financial assets which have a long or indefinite maturity.
Generally, it deals with long term securities which have a maturity period of above one year.
• Important component of Financial System
• Market for long term funds (More than 1 Years)
• Facilitate borrowing and lending of funds
FEATURES
• Helps in raising capital
• Involves both individual and Institutional Investors
• Involve intermediaries

1. Industrial Securities Market: Industrial securities market is a market where industrial concerns or private
entrepreneurs try to raise their capital or fund by issuing appropriate instruments. It is also known as private
securities market. It can further be divided into two categories. They are

Primary Market or It is that part of capital market where those securities are traded which are issued to
New Issue Market the investors for the first time.
Thus, primary market deals in new securities only. Hence, it is called new issue
market.
As the new issues are placed to the public for the first time, this market is also called
initial public offer (IPO).
Secondary Market Secondary market is that part of capital market which deals in already existing
or Stock Exchange securities.
This is also known as stock exchange or stock market.

2. Government Securities Market: Government securities market is a market where government securities
(that is, securities issued by government or PSUs) are traded.
It is also known as gilt-edged securities market.
Technically gilt-edged securities imply those credit papers which are most reliable and bear least risk
3. Long-term Loans Market: Long-term loans market is the market where long-term loans are available.
Development banks and commercial banks are important players in this market. They supply long-term loans
to the corporate sector.
Long-term loans market may be classified into three sub-markets.
It comprises industrial financial institutions both at the national and regional
Term Loans Market levels. They supply long-term and medium-term loans to the corporate sector
directly as well as indirectly.
As the very name suggests, mortgage market supplies mortgage loan to individual
Mortgage Market customers. A mortgage loan is a loan against the security of immovable property
such as land, building, plant, etc.
Financial This market provides finance against the guarantee of a reputed person or
Guarantees Market organisation in the financial circle.

FUNCTIONS OF CAPITAL MARKET

The capital market acts as an important link between savers and investors. The
savers are lenders of funds while investors are borrowers of funds. The savers who
Link between
do not spend all their income are called “Surplus units” and the investors/borrowers
savers and
are known as “deficit units”. The capital market is the transmission mechanism
investors
between surplus units and deficit units. It is a conduit through which surplus units
lend their surplus funds to deficit units
Basis for Capital market generates long term funds, which are essential for the establishment
industrialization of industries. Thus, capital market acts as a basis for industrialization.
Easy and smooth availability of funds for medium and long period encourages the
Accelerating the entrepreneurs to take profitable ventures/businesses in the field of trade, industry,
pace of growth commerce and even agriculture. It results in the all round economic growth and
accelerates the pace of economic development.
Liquidity means convertibility into cash. Shares of the public companies are
Generating transferable i.e., in case of financial requirements these shares can be sold in the
liquidity stock market and the cash can be obtained. This is how capital market generates
liquidity.
Funds flow into the capital market from individuals and financial intermediaries
Increase the which are absorbed by commerce, industry and government. It thus facilitates the
national income movement of stream of capital to be used more productively and profitability to
increase the national income.
The capital market prides incentives to savers in the form of interest or dividend to
transfer their surplus fund into the deficit units who will invest it in different
Capital formation
businesses. The transfer of funds by the surplus units to the deficit units leads to
capital formation.
The capital market provides a mechanism for those who have savings transfer their
Productive savings to those who need funds for productive investments. It diverts resources
investment from wasteful and unproductive channels such as gold, jewelry, conspicuous
consumption, etc. to productive investments
A welldeveloped capital market comprising expert banking and non-banking
Stabilization of the intermediaries brings stability in the value of stocks and securities. It does so by
value of securities providing capital to the needy at reasonable interest rates and helps in minimizing
speculative activities.
Encourages The capital market encourages economic growth. The various institutions which
economic growth operate in the capital market give quantities and qualitative direction to the flow of
 funds and bring rational allocation of resources. They do so by converting financial
assets into productive physical assets. This leads to the development of commerce
and industry through the private and public sector, thereby encouraging/inducing
economic growth.
In today’s day and age, capital markets have become increasingly accessible, with
Ease of Access and investors able to trade off their mobiles. The advancement of technology has made
Exit capital markets almost universally available. People can also exit the market as
easily as they joined.
One of the key functions of capital markets is to ensure the price of an asset is
Regulate Prices accurate. The price of a share can increase rapidly following good news, or tank
badly in reaction to a poor annual report.

STRUCTURE OF INDIAN CAPITAL MARKET

1. BANKS
Commercial banks, Cooperative banks, RRBs (FROM CHAPTER 1 or 2)
2. GILT EDGED SECURITY MARKET
➢ These also known as the government securities market
➢ As the securities are risk free, they are known as gilt-edged i.e. the best quality securities
➢ The investors in the gilt-edged market are predominantly institutions such as commercial banks, LIC,
GIC, and the provident funds
 ➢ The transactions in the government securities market are very large. Each transaction may run into
several crores or even hundred crores of rupees
➢ RBI plays a dominant role in the gilt-edged market through its ‘Open Market Operations’.

3. PRIMARY VS SECONDARY MARKET (See difference discussed later)

4. DEVELOPMENT FINANCIAL INSTITUTION
The development finance institutions or development finance companies are organizations owned by the
government or charitable institution to provide funds for low-capital projects or where their borrowers are
unable to get it from commercial lenders.

IFCI FCI was the first development bank established in 1948 in the country for
providing medium- and long-term credits to industrial concerns, particularly in
such circumstances where normal banking accommodation is inappropriate or
resource to capital issue method is impracticable.
Major functions of IFCI are as follow:
1. To guarantee loan raised by industrial concerns.
2. To under write the issue of stocks, shares, bonds or debentures by industrial
concerns.
3. To subscribe directly to the stock or shares of any industrial concern.
4. To grant loans and advances to or subscribe to the debentures of industrial
concerns.
5. To extend guarantee in respect of deferred payments by importers.
SFCs The State Finance Corporations (SFCs) are the integral part of institutional
finance structure in the country. SFC promotes small and medium industries of
the states. Besides, SFCs are helpful in ensuring balanced regional development,
higher investment, more employment generation and broad ownership of
industries.
Functions
1. grant loans mainly for acquisition of fixed assets like land, building, plant
and machinery
2. The SFCs provide financial assistance to industrial units whose paid-up
capital and reserves do not exceed Rs. 3cr (or such higher limit up to Rs.
30cr as may be specified by the central government).
3. The SFCs underwrite new stocks, shares, debentures etc., of industrial
concerns.
4. The SFCs provide guarantee loans raised in the capital market by scheduled
banks, industrial concerns, and state co-operative banks to be repayable
within 20 years.
SIDBI ➢ SIDBI stands for Small Industries Development Bank of India
➢ An independent financial institution aimed to aid the growth and development
of micro, small and medium scale enterprises in India
➢ Set up in 1990 through an act of parliament, it was incorporated initially as a
wholly owned subsidiary of Industrial Development Bank of India (IDBI)
Mission:
 To empower the Micro, Small and Medium Enterprises (MSME) sector with a
view to contributing to the process of economic growth, employment generation
and balanced regional development.
Vision:
To emerge as a single window for meeting the financial and developmental needs
of the small-scale sector to make it strong, vibrant and globally competitive, to
position SIDBI Brand as the preferred and customer -friendly institution and for
enhancement of share -holder wealth and highest corporate values through
modern technology platform.
IIBI The Industrial Investment Bank of India Ltd. (IIBI) was formed by transforming
the Industrial Reconstruction Bank of India (IRBI).
It was set up by IDBI at the instance of the Government of India in April 1971
for rehabilitation of sick industrial companies.
Functions
➢ Term-loan assistance for project finance.
➢ Short duration non-project asset – backed financing working capital/ other
short Term loans to companies.
➢ Equity Subscription Asset Credit.
➢ Equipment finance.
➢ Investments in Capital Market and Money market instruments
NIDC National Industrial Development Corporation (NIDC) Limited is one of the
foremost of the public sector undertakings India. The National Industrial
Development Corporation Limited was set up as a financial institution which was
a part of the Ministry of Commerce and industry under the Government of India.
Objectives
Encourage & assist medium and large-scale industries whose development is
essential for economy of the country.
Functions
• Promote, establish and execute enterprises for manufacture and production
of plant, machinery etc.
• To aid, assist & finance industrial undertakings owned by government or
private persons for prosecution of its work & business
• To promote & establish companies for the prosecution of industrial
undertakings
• To procure capital for machinery, equipment etc., to any company whose
activity relate to industrial development of country
NABARD National Bank for Agriculture and Rural Development (NABARD) was
established on July 12, 1982. It is an apex institution in rural credit structure for
providing credit for promotion of agriculture, small scale industries, cottage and
village industries, handicrafts etc.
Functions
1. Credit Functions (Framing policy and guidelines for rural financial
institutions, Providing credit facilities to issuing organizations).
2. Development and Promotional Functions
3. Supervisory Functions
4. Institutional and Capacity building
5. Role in Training (maintain expert staff to study all problems relating to
agriculture and rural development)
5. NON-BANKING FINANCIAL INSTITUTIONS

Merchant banks A merchant bank is a financial institution that conducts underwriting, loan
services, financial advising, and fundraising services for large corporations and
high-net-worth individuals (HWNIs). Merchant banks specialize in international
trade, providing services for multinational corporations.
The most popular world merchant banks include J.P. Morgan, Citigroup,
Goldman Sachs
Mutual Fund A mutual fund is a company that pools money from many investors and invests
companies the money in securities such as stocks, bonds, and short-term debt. The combined
holdings of the mutual fund are known as its portfolio. Investors buy shares in
mutual funds. Tata Equity PE Fund. HDFC Asset Management Company
Limited
Leasing companies A leasing company provides a physical asset or service for use by a commercial
client or individual for an established period of time (sometimes with provisions
to purchase asset at the end of the contract) in return for regular payments, known
as financial leasing. Mahindra Finance IBM GLOBAL FINANCING
Credit rating A credit rating agency (CRA, also called a ratings service) is a company that
companies assigns credit ratings, which rate a debtor's ability to pay back debt by making
timely principal and interest payments and the likelihood of default. An agency
may rate the creditworthiness of issuers of debt obligations, of debt instruments
and in some cases, of the servicers of the underlying debt, but not of individual
consumers. Credit Rating Information Services of India Limited (CRISIL),
Credit Analysis and Research limited (CARE) .
Hire purchase and The Hire-Purchase Company is yet another non-banking finance company that
consumer finance principally deals in the business of hire-purchase transactions and the financing
companies of such activities. The Hire-Purchase means buying the goods on an instalment
plan.
Consumer finance companies engage primarily in making personal loans to
consumers and are identified and defined by their operations under state small-
loan laws. Muthoot Finance Ltd , Bajaj Finance , Tata Capital Financial
Services Ltd.

DIFFERENCE BETWEEN MONEY MARKET AND CAPITAL MARKET

BASIS MONEY MARKET CAPITAL MARKET

A random course of financial institutions,
A kind of financial market where the
bill brokers, money dealers, banks, etc.,
company or government securities are
wherein dealing on short-term financial generated and patronised with the intention
Definition
tools are being settled is referred to as
of establishing long-term finance to
Money Market coincide with the capital necessary is
called Capital Market.
Market Nature Money markets are informal in nature. Capital markets are formal in nature.
Commercial Papers, Treasury Certificate Bonds, Debentures, Shares, Asset
Instruments
of Deposit, Bills, Trade Credit, etc. Secularisation, Retained Earnings, Euro
involved
Issues, etc.
 Commercial banks, non-financial Stockbrokers, insurance companies,
Investor Types
institutions, central bank, chit funds, etc. Commercial banks, underwriters, etc.
Market Money markets are highly liquid. Capital markets are comparatively less
Liquidity liquid.
Due to the short-term nature of the money In capital market securities, the risk of the
market and the stable financial position of repayment of the principal amount is high.
Risk Involved
issuers, the risk of repayment is low in the
money market.
Maturity of Instruments mature within a year Instruments take longer time to attain
Instruments maturity
To achieve short term credit requirements To achieve long term credit requirements
Purpose served
of the trade. of the trade.
Functions Increasing liquidity of funds in the Stabilising economy by increase in savings
served economy
Returns Due to the short-term nature of the money Due to the long-term nature of the capital
Expected market, the returns gained here are low. market, the returns gained here are high.
In the money market, transactions mostly In the capital market, transactions take
Formal Market
take place over phone and there is no place at a formal place, for example, stock
place
formal market place. exchange.
In the money market, transactions have to In the capital market, transactions have to
Brokers/dealers be conducted without the help of brokers. be conducted only through authorised
dealers.

Inter-relationship between Money Market and Capital Market

These factors reflect the interdependence of the two markets. They are mentioned as follows:

1. Lenders may choose to invest their funds to one or both markets. That depends on the availability of
funds, the rate of return, their investment policies, etc.
2. Borrowers may obtain their funds from either or both markets according to their requirements. A firm
may borrow short-term funds by selling commercial papers or get long-term funds by fl oating
additional shares or bonds.
3. Some financial institutions operate in both money and capital markets by buying and selling both short-
term and long-term securities.
4. All long-term securities become short-term instruments at the time of maturity. So, some capital
market instruments also become money market instruments at the time of maturity.
5. Funds flow between the capital market and the money market. For example, suppose a bank received
the proceeds of a long-term loan after maturity. Now, the bank gave credit to a fi rm out of that
proceeds for a short period.
6. Yields in the money market are related to yields in the capital market. Rates or yields in the two markets
generally move in the same direction. However, short-term interest rates in money market are more
sensitive than long-term interest rates in the capital market.
DIFFERENCE BETWEEN PRIMARY MARKET AND SECONDARY MARKET

BASIS PRIMARY MARKET SECONDARY MARKET

A primary market is a marketplace where A secondary market is a prototype of the

corporations imbibe a fresh issue of shares
for being contributed by the public for
Definition
soliciting capital to meet their necessary
long-term funds like extending the current
trade or buying a unique entity.
capital market where debentures, current
shares, options, bonds, treasury bills,
commercial papers, etc., of the enterprises
are patronised amongst the investors.

Also known as New issue market (NIM) Aftermarket

Purchasing Direct purchase from the issuer Indirect purchase

type

Parties of Buying and selling takes place between the Buying and selling takes place between the
buying and company and the investors. investors.
selling

To whom it It provides financing to the existing It does not provide any kind of financing.
provides companies for facilitating growth and
financing expansion.

Intermediaries Underwriters are involved in the Brokers are involved in the intermediary
involved intermediary process process.

The prices in the primary market do not On the other hand, the prices fluctuate a lot
Price levels fluctuate, i.e., they are fixed. in the secondary market because of the
demand and supply.

Government A company issues shares and the There is no involvement of the government
involvement government interferes in the process in the process.

The frequency of buying and selling is Multiple times buying and selling
Frequency of
limited, i.e., the investors can invest once in
buying/selling
the market.

The major disadvantage of the primary The major disadvantage of the secondary
Disadvantage market is that it is very time-consuming and market is that the investors can incur huge
costly. losses due to price fluctuation.

The products in a primary market are Shares, debentures, warrants, derivatives,

limited, i.e., they include initial public etc., are the kind of products offered in the
Products
offering (IPO) and Follow-on Public Offer secondary market.
(FPO).
 CAPITAL MARKET INSTRUMENTS
Financial Instruments that are used for raising capital resources in the capital market are known as capital
market instruments. The capital market instruments are usually used by the Government, Corporations and
Companies.

Factors effecting the preferences for choosing any instruments:

ISSUER INVESTOR
Cost Return
Post Tax Cost of Capital Tax on return received
Servicing Yield
Debt-equity ratio and debt service capabilities Risk reward ratio
Giving up the control in case of equity Gaining control in case of equity
Company Law, SEBI Regulations etc Marketability and liquidity

CLASSIFICATION OF INSTRUMENTS

Equity shares, preference shares and debentures/ bonds which were issued with
Pure Instruments their basic characteristics in tact without mixing features of other classes of
instruments are called Pure instruments.
Hybrid instruments are those which are created by combining the features of
equity with bond, preference and equity etc. Examples of Hybrid instruments
Hybrid Instruments
are: Convertible preference shares, convertible debentures, partly convertible
debentures etc.
Derivatives are contracts which derive their values from the value of one or
more of other assets (known as underlying assets). The derivative itself is
merely a contract between two or more parties. Its value is determined by
Derivatives
fluctuations in the underlying asset. The most common underlying assets
Instruments
include stocks, bonds, commodities, currencies, interest rates and market
indexes. Some of the most commonly traded derivatives are futures, forward,
options and swaps.

1. EQUITY SHARES
Equity share is fractional ownership in a company listed in the stock market. Equity shares are shares which
do not enjoy any preferential right in the matter of payment of dividend or repayment of capital.
 The equity shareholder gets dividend only after the payment of dividends to the preference shares.
 There is no fixed rate of dividend for equity shareholders.
Features of Equity shares capital: -
1. No preferential (special) rights: -Equity share holders get dividend only after the dividend is paid to
preference shareholders. Similarly, at the time of winding up of the company, the claim of equity shares is
considered at the end.
2. No fixed rate of dividend: -Company does not commit any fixed rate of dividend on equity shares. The
rate of dividend keeps changing from year to year as per company’sshares held by him. They can vote on all
the matters placed before the meeting.
4. No claim on unpaid dividend: -If a company incurs loss or earns less profit in a particular year then it
does not pay any dividend to equity share holders. The equity shareholders cannot claim this dividend in
future.
5. Irredeemable nature: -Company does not repay the money raised through equity shares during its
lifetime. This money is repaid only at the time of winding up of the company.
6. Chances of prosperity (richness): -Equity shareholders are paid dividend at fluctuating rate as per the
profits of the company. They claim the entire amount of residual (remaining) of distributable profits. So, if
company earns well, the equity shareholders also prosper along with the company.
7. Privileges (rights): - It is the privilege and right of equity shareholders to have priority in purchasing
shares in case of further public issue of shares. It is called as Right Issue. Equity shareholders are also
entitled to receive bonus shares which are issued by companies as a gift.
8. Less face Value : - As compared to preference shares, the equity shares are of less face value like Rs 10/-
or even Rs 1/-

2. PREFERENCE SHARES
3. CORPORATE BONDS AND DEBENTURES
Corporate bonds are medium or long-term securities of private sector companies which obligate the issuer
to pay interest and redeem the principal at maturity. Corporate bonds that are not backed by a specific asset
are called debentures.
Debentures are medium or long term, interest-bearing bonds issued by private sector companies, banks and
other financial institutions that are backed only by the general credit of the issuer. Debentures are usually
issued by large, well-established institutions. The holders of debentures are considered creditors and are
entitled to payment before shareholders in the event of the liquidation of the issuing company.

Features of debentures/bonds

1. Maturity: The debentures have fixed maturity period. They are to be repaid at a definite time as stipulated
during the issue of debentures.
2. Claim on Income: The company is obligated to the debenture holder interest payment in priority
irrespective of the condition of profit or loss in their business.
3. Claim on assets: Debentures can be secured against the assets of the companies even if the company
becomes insolvent debenture holders will get their money by selling the assets of the company.
4. No voting rights: Debenture holders are the creditors of the company; thus, have no right to say or
make a vote on any internal matters of the company until their rights are being affected or the company
asks their opinion in special circumstances.
5. Fixed rate of interest: It is always issued with a fixed rate of interest which is payable once in every
six months or annually to the investors as decided by the shareholders in the annual general meeting.

ADVANTAGES DISADVANTAGES
1. Debentures are debt instruments issued by the 1. The payment of interest and principal becomes a
company that promises a fixed interest rate on financial burden for the company in case of no
the due date. profits.
2. one of the most effective ways to raise funds
compared to equity or preference shares.
3. These instruments are liquid and can be traded
on the stock exchange.
4. do not have voting rights, it does not dilute the
interest of equity shareholders.
5. During inflation, issuing debentures can be
advantageous as they offer a fixed interest rate.
6. minimum risk because interest is payable even
in case of loss of the company
7. The company can quickly redeem funds when
they have surplus funds
2. he debenture holders are the creditors of the
company. They cannot claim profits beyond the
interest rate and principal amount.
3. During the depression, the company’s profit
declines, and it becomes difficult to pay interest.
4. have no voting rights, hence do not have control
over management decisions.
5. During the redemption process of debenture,
there is a large amount of cash outflow.
6. Default payment has adverse effects on the
creditworthiness of the company.

Types of debentures

Secured debenture creates a charge on the assets of the company, thereby

Secured and
mortgaging the assets of the company.
Unsecured
Unsecured debenture does not carry any charge or security on the assets of the
debentures
company.
A registered debenture is recorded in the register of debenture holders of the
Registered and company. A regular instrument of transfer is required for their transfer.
Bearer debentures In contrast, the debenture which is transferable by mere delivery is called bearer
debenture.
Convertible debenture can be converted into equity shares after the expiry of a
Convertible and
specified period.
Non-Convertible
On the other hand, a non-convertible debenture is those which cannot be converted
debentures
into equity shares.
In fully convertible debentures, at the expiration of the time period provided, the
investors may completely convert these debentures into equity shares. The holders
Fully and Partly of these debentures eventually become shareholders of the firm after being
Convertible converted.
Debentures Debt instruments known as partially convertible debentures allow investors to
convert only a portion of their investment into business equity shares at the end of
the pre-determined period.
A debenture which is repaid before the other debenture is known as the first
First and Second debenture.
debentures The second debenture is that which is paid after the first debenture has been paid
back.
Redeemable debentures carry a specific date of redemption on the certificate. The
company is legally bound to repay the principal amount to the debenture holders on
Redeemable and that date.
Irredeemable Irredeemable debentures, also known as perpetual debentures, do not carry any date
Debentures of redemption. This means that there is no specific time of redemption of these
debentures. They are redeemed either on the liquidation of the company or as per
the terms of the issue
Fixed and Fixed rate debentures have a fixed interest rate over the life of the debentures.
Floating rate Floating rate debentures have the floating rate of interest which is dependent on
debentures some benchmark PLR (Prime Lending Rate), etc. For example, the RBI issued a
 floating rate bond in 2020 with interest payable every six months. After six
months, the interest rate is re-fixed by the RBI.

Some other debentures/bonds

Zero coupon bonds are bonds that do not pay interest during the life of the bonds.
Zero coupon
Instead, investors buy zero coupon bonds at a deep discount from their face value,
bonds
which is the amount the investor will receive when the bond "matures" or comes due.
Equity warrants are instruments that give upon the holder of the instrument the right to
Equity buy a particular stock at a predetermined price within a stipulated time frame.
warrants However, to gain this right, the buyer of such warrants usually needs to make an
upfront payment to the warrants issuer.
These instruments are issued with detachable warrants and are redeemable after a
notified period say 4 to 7 years.
The warrants enable the holder to get equity shares allotted provided the secured
premium notes are fully paid. It combines the feature of both debt and equity.
During the lock in period no interest is paid. The holder has an option to sell back the
Secured
SPN to the company at par value after the lock in period. If the holder exercises this
premium notes
option, no interest/premium is paid on redemption.
In case the holder keeps it further, he is repaid the principal amount along with the
additional interest/premium on redemption in installments as per the terms of issue.
The conversion of detachable warrants into equity has to be done within the specified
time.
IDBI and SIDBI had issued this instrument. For a deep discount price of ` 2,700/- in
Deep discount IDBI the investor got a bond with the face value of ` 1,00,000. The bond appreciates to
bond its face value over the maturity period of 25 years. Alternatively, the investor can
withdraw from the investment periodically after 5 years.
Foreign A Foreign Currency Convertible Bond (FCCB) is a quasi-debt instrument which is
currency issued by any corporate entity, international agency or sovereign state to the investors
convertible all over the world. They are denominated in any freely convertible foreign currency.
bond (FCCB)
Inflation Bonds in which both the interests as well as the principal amount is adjusted in line
adjusted bonds with the inflation rate.
Bond that can be called in and paid off by issuer at a price called as “Call price” as
Callable bonds mentioned in the bond contract. It is beneficial if market interest rates fall below the
bond’s interest rate.

4. DERRIVATIVES
A derivative is a financial instrument which derives its value from some other financial price. This ‘other
financial price’ is called the underlying. The most important derivatives are futures and options. These are
derivative instruments traded on the stock exchange.

The instrument has no independent value, with the same being ‘derived’ from the value of the underlying
asset.
The asset could be securities, commodities or currencies.
Its value varies with the value of the underlying asset.
The contract or the lot size is fixed. For example, a Nifty futures contract has 50 stocks.

a) Forward contracts: A forward contract is a customized contract between two parties where settlement
takes place on a specific date in the future at a price agreed today. They are over-the-counter traded
contracts. Forward contracts are private agreements between two financial institutions or between a
financial institution and its corporate client.
In a forward contract, one party takes a long position by agreeing to buy the asset at a certain specified
date for a specified price and the other party takes a short position by agreeing to sell the asset on the
same date for the same price.
 They are bilateral contracts wherein all the contract details, such as delivery date, price,
and quantity, are negotiated bilaterally by the parties to the contract.
 Each contract is custom designed in the sense that the terms of a forward contract are
individually agreed between two counter-parties. Hence, each contract is unique in
Features
terms of contract size, expiration date, and the asset type and quality.
 As each contract is customized, the contract price is generally not available in public
domain.
 The contract has to be settled by delivery of the asset on the expiry date.

b) Future Contracts: Futures markets are designed to solve the problems that exist in forward markets. A
futures contract is an agreement between two parties to buy or sell an asset at a certain time in the
future, at a certain price.
But unlike forward contracts, futures contracts are standardised and stock exchange traded. It is a
standardised contract with a standard underlying instrument, a standard quantity and quality of the
underlying instrument that can be delivered, (or which can be used for reference purposes in settlement)
and a standard timing of such settlement.

c) Options: Options are contracts that give the holder the option to buy/sell specified quantity of the
underlying assets at a particular (strike) price on or before a specified time period. The word ‘option’
implies that the holder of the options has the right but not the obligation to buy or sell underlying assets.
Call options Call is the right but not the obligation to purchase the underlying asset at
the specified price by paying a premium.
Put options Put is the right but not the obligation to sell the underlying asset at the
specified price by paying a premium.
European-style European-style options can be exercised only on the maturity date of the
options option, which is known as the expiry date
American-style American-style options can be exercised at any time before and on the
options expiry date.
 PRIMARY MARKET INTERMEDIARIES

Kinds of Capital Market Intermediaries:

1. Merchant banker
2. Lead Merchant banker / Lead Manager
3. Registrars and Share Transfer agents (RTA)
4. Underwriters
5. Debenture trustee
6. Bankers to an issue
7. Portfolio Manager
8. Stock broker and Sub broker
9. Investment advisors
10. Research analysts

1. Merchant banker
He is the person who
• Is engaged in the business of issue management or
• Acts as a manager, advisor or consultant in relation to issue management.
Activities:
In the business of issue management
• Preparation of prospectus
• Preparation of other information regarding issue
• Tie up with financiers
• Final allotment and refund of application money

2. Lead manager / Lead merchant banker:

An issue can be managed by a merchant banker as said before. But all public issues and rights issues
should be managed by Lead merchant banker / Lead manager
Activities:
• In the business of issue management
• Financial structure determination
• Issue size determination
• Preparation of prospectus
• Meeting the prospective investors
• Tie-up with financiers
• Manager, advisor, consultant, underwriter and portfolio manager.
Example: Kotak Mahindra Capital Company Limited:
Kotak Mahindra Capital was one of the book-running lead managers for Zomato's IPO in 2021.

3. Registrars and Share transfer agents (RTA)

RTA is a combination of two expressions: Registrar to an issue (Primary market) and Share transfer agent
(Secondary market)
Registrar to an issue (Primary market):
He is the person authorized by the company to
➢ Collect applications from investors along with application money
➢ Keep record of collected applications and moneys received
➢ Assist company in allotment stage, how to allot, when to be allotted and sending allotment
letter

Share transfer agent (Secondary market)

He is the person appointed by the company to
➢ Maintain records of existing shareholders of the company
➢ Deal with transfer or redemption of securities
Examples: Karvy Computershare Pvt. Ltd.: Karvy Computershare is one of the largest and most well-
known RTAs in India. Examples of companies served by Karvy Computershare include HDFC Bank,
Reliance Industries, Tata Motors, and Sun Pharmaceuticals.

4. Underwriters:
Underwriting is an agreement between underwriter and the company stating that the underwriter would
subscribe, with or without conditions, to the securities of the company, when existing shareholders or public
doesn’t subscribe for the securities offered to them.
Underwriter is a person who engages in the business of underwriting an issue of securities of a company.
Banks, Financial institutions, merchant bankers, etc do the work of underwriting.
Examples: HDFC Bank, one of India's largest private sector banks, also has a strong underwriting
division. They have been involved in underwriting various debt issuances, including corporate bonds and
commercial papers for companies like Tata Motors and Reliance Industries.

5. Debenture trustee:
It means a trustee of a trust deed for securing the issue of debentures of a company.
Scheduled commercial banks, PFI, Insurance Company, a body corporate do the work of a debenture trustee
Example: Reliance Industries Limited:
Debenture Trustee: Axis Trustee Services Limited
Reliance Industries is a conglomerate with diverse business interests, including petrochemicals,
telecommunications, and retail. They have issued debentures and bonds for financing their operations
and have appointed trustees to oversee these issues.

6. Bankers to an issue:
Bankers to an issue means any scheduled bank which
➢ Accepts application money
➢ Accepts allotment and call money
➢ Refunds the application money
➢ Pays the dividend / interest
Kotak Mahindra Capital Company Limited has been involved in Bharti Airtel's various fund-raising
initiatives.

7. Portfolio manager (PM):

He is the person who advices, directs and manages the portfolio of securities of his client.
• Discretionary PM: He manages the portfolio of his client independently and with his full discretion.
• Non-discretionary PM: He manages the portfolio of his client by the instructions of his client.
• Portfolio: Portfolio refers to the total holdings of securities belonging to the person.
• Managing: Managing means to decide on whether to invest in new funds or old funds or in what mix
the investment should be made on various scrips. These depend on market situation, fluctuation and
expectation.
HDFC Portfolio Management Services: HDFC is one of India's largest financial institutions, and they
offer portfolio management services to individual and institutional investors.

8. Stock broker / Sub broker:

• Stock broker is a person registered with SEBI, as a member, to help both seller and buyer of securities
to enter into a transaction. This means he acts as a communication channel between company and the
investor.
• Sub broker is a person, not registered with SEBI as a member, but authorized by SEBI to assist stock
broker in executing his broking services
Example: HDFC Securities, Sharekhan, Zerodha etc.

9. Investment Advisers:
• “Investment Adviser” means any person, who for consideration, is engaged in the business of
providing investment advice to clients or other persons or group of persons and includes any person
who holds out himself as an investment adviser, by whatever name called
• Investment advisers are those, who guide one about his or her financial dealings and investments.
Basically Investment adviser give advice and provide services related to the investment management
process. The Investment adviser shall done the risk profiling for clients to assess their risks
HDFC Securities: HDFC Securities is one of the leading stockbrokers in India and offers a wide range of
investment and trading services. They provide research reports and investment advice to help clients make
informed decisions.

10.Research Analysts
“Research analyst” means a person who is primarily responsible for,
a) preparation or publication of the content of the research report; or
b) providing research report; or
c) making ‘buy/sell/hold’ recommendation; or
d) giving price target;
e) offering an opinion concerning public offer, with respect to securities that are listed or to be
listed in a stock exchange, whether or not any such person has the job title of ‘research
analyst’ and includes any other entities engaged in issuance of research report or research
analysis.
ICICI Securities: ICICI Securities is a leading brokerage firm in India that employs research analysts to
offer equity research reports, market analysis, and investment strategies to their clients.
PRICING OF NEW ISSUE
1. Fixed Pricing
2. Book Building Process

FIXED PRICING METHOD

In a fixed price issue, the IPO price is fixed. In other words, the merchant banker and the company going for
an IPO together decide the price at which the public can subscribe to the company’s shares. Before
concluding the price, the merchant banker assesses the company’s risk levels, assets, liabilities, existing
value, and future prospects.

In a fixed price offering, investors do not have to wait until the allocation date to know the price of each
share. The price is disclosed at the time of announcing the IPO itself. Thus, investors pay the total price
while subscribing. Unlike book building issues, the status of a subscription in a fixed price issue is not
known until after the issue closes.

BOOK BUILDING PRICING

In a book building issue, the price of the IPO is determined by the investment banker. After a thorough
analysis of the company and discussions with the company officials, the investment banker will decide on a
price band. The pricing band is often within a 20% range.
To place bids, investors may select any price within the price band. Therefore, investors are free to choose
the price they wish to pay for the IPO. However, it must be within the price range/ band.
The maximum price in the price band is referred to as the ‘Cut-Off Price.’
On the other hand, the minimum price is referred to as the ‘Floor Price.’

Basis Fixed Pricing Book Building

Under this method, the issue price of shares
is mentioned in the prospectus and investors
Meaning have to buy shares at that price only.
The exact price of shares is known in
advance and it is mentioned in the
Price of Shares
prospectus
Company has to issue a prospectus
Prospectus
which contains all the details.
Company comes to know the public demand
Determination of
for its shares only after closure of the issue
Demand
Payment of Application money or entire money has to be
Application paid by the investor at the time of submitting
Money his application for shares.
Under this method, the issue price is determined
by a bidding process. The investors are given a
price band and are asked to bid at a price within
the band. This way company arrives at a price at
which it will sell its share.
The price of shares is not known in advance. Only
the minimum price and maximum price at which
the company is willing to sell the shares is known
in advance
Company has to issue a Red herring
prospectus
The company can know the public demand for its
shares every day. The bids are registered in the
book every day until the closure of the issue.
Only application money has to be paid at the time
of bidding. The money will be collected only
after the issue price has been fixed.
GREEN SHOE OPTION:
A green shoe option is an over-allotment option. In the context of an initial public offering (IPO), it is a
provision in an underwriting agreement that grants the underwriter the right to sell investors more shares
than initially planned by the issuer if the demand for a security issue proves higher than expected.

SWEAT EQUITY SHARES

 LISTING OF SECURITIES
To sell a share or any security in the secondary market or stock exchange, the share or the security is to be
enlisted in a stock exchange.
Listing of securities is the process whereby the securities (shares, debentures, bonds, units, etc.) are
included in the official list of a recognised stock exchange for the purpose of trading.
Every stock exchange maintains an official list of securities which can be purchased or sold on its floor.
When a security is included in this list, it is said to be listed.

1. Provide ready marketability and impart liquidity and free transferability to

OBJECTIVES securities
OF LISTING 2. Ensure proper supervision and control of dealings
3. Protect the interest of shareholders and the general investing public.

PROCEDURE FOR LISTING OF SECURITIES

1. Application for listing:
The Companies (Amendment) Act, 1988 stipulates that every company for selling its securities shall apply
to the SEBI. Thus, listing has become compulsory in relation to any public issue of a security. The company
concerned which wants to enlist its securities on a stock exchange has to apply in the prescribed form.
Necessary documents and fee must be submitted along with the application.

Documents required
 Certified copies of Memorandum and Articles of Association, Prospectus, Underwriting agreements,
etc.
 Specimen copies of share and debenture certificates (security certificates).
 Particulars of dividends and bonuses paid during the last 10 years.
 Statement of arrear dividends and interest, if any.
 A brief history of the company mentioning its activities.
 Particulars regarding the capital structure of the company.
 Copies of balance sheets and audited accounts for the last 5 years.
 Particulars of shares and debentures for which enlisting is applied for.

2. Scrutinization of the application:

The stock exchange authorities will scrutinise the application and the relevant documents. If they are
satisfied, they will call upon the company to execute a listing agreement.

3. Listing Agreement:
A listing agreement is, in a sense, the code of discipline which the stock exchange(s) impose on a company
as a condition precedent to listing its securities. Every listing company has certain obligations and is
required to comply with the various clauses of the listing agreement. It is executed at the time of initial
listing of securities of the company. Though it is signed only by the company (and not by the stock
exchange), it is binding on the company.
Some of the important obligations of the listed company are mentioned below. The company must notify the
following matters to the stock exchange:
 The date of Board meeting in which dividend, issue of rights or bonus shares will be discussed.
 Any change in the company’s management.
 Any change in the company’s capital structure.
  Any change in the company’s nature of business.

MERITS OF LISTING

1. Listing increases the goodwill and standing of the company. Transactions in listed securities are
reported in newspapers. Hence, listed companies get wide publicity.
2. Listing helps to diversify the shareholding. It becomes easier for the company to sell new
securities.
3. A listed company is treated as a widely held company. It enjoys certain advantages under the
Income Tax Act.
4. Listed companies have to submit quarterly financial results to the stock exchanges. These are also
published in newspapers. So, investors get ready reports on the financial health of a company.
5. Prices of listed securities are reported in newspapers. An investor can know the daily worth of his
securities.
6. Listing ensures marketability and liquidity of securities.
7. Stock exchanges exercise regulation and control on listed companies. So, listing provides safeguards
to investors regarding their holding of securities.
8. A listed security carries a high collateral value for raising loans.

DEMERITS OF LISTING
1. Listing leads to speculation. It helps to manipulate the values of securities. This may be
detrimental to the interests of the company.
2. The stock market may not reflect the true picture of a listed company.
3. The managerial personnel may themselves indulge in speculative activities with regard to listed
securities. They may misuse the internal information available to them. This is called insider
trading which is an illegal activity in India.
4. Sometimes listed securities are subject to wide fluctuations in their values. During depression,
values of listed securities fall very much. But unlisted securities are free from this difficulty. This
may hamper the reputation of the listed company.
5. To enlist securities, a company has to disclose vital information, such as, dividend and bonus rates,
sales, remuneration of managers, etc. Thus, vital information is leaked out. Then trade unions may
demand higher wages and bonus. Thus, listing may prove disadvantageous to a company.

A recognised stock exchange may delist securities if:

1. The listed company (a) has incurred losses/its networth has been reduced to less
than its paid-up capital, (b) has failed to comply with the requirements of the listing
agreement or provi-sions of any law, (c) fails to redress investors grievances;
2. The securities of the listed company have not been continuously traded;
3. The listed company/its promoters/directors indulge in insider trading/unfair trade
DELISTING practices in securities;
OF 4. The promoters/its directors/persons in management indulge in malpractices
SECURITIES 5. The addresses of promoters/directors of a company are not known/are false or the
company changes its registered office in contravention of the provisions of the
Companies Act;
6. Trading in securities of the company has remained suspended for more than 6
months;
7. Shareholdings of the company held by the public has come below the limit
specified in the listing agreement under the Securities Contracts (Regulation) Act.
SECONDARY MARKET: STOCK EXCHANGE MARKET
Securities issued by a company for the first time are offered to the public in the primary market. Once the
IPO is done and the stock is listed, they are traded in the secondary market.
Secondary market is a market where shares initially issued are traded. Trading of securities takes place
when securities are purchased or sold. This market is also known as stock market.
In India the secondary market consists of recognized stock exchanges operating under rules, by-laws and
regulations duly approved by the government. These stock exchanges constitute an organized market where
securities issued by the central and
state governments, public
bodies, and joint- stock companies are
traded.

1. Market for already existing long-term securities

2. Only those securities, which are listed in the stock exchanges, are traded
Features of
3. Transactions must accord to the rules and bylaws framed by the stock exchange to
secondary
regulate its day-to-day operations.
market
4. The secondary market can be wholesale (professionals, including institutional
investors) and retail (individual investors).

Functions of secondary market

The secondary market provides for a ready and continuous market where those
Provide Liquidity and
desiring to deal in securities assemble to buy and sell securities during the
Marketability
business hour.
Secondary market helps in the valuation of securities through its demand and
Valuation of Securities
supply.
Contributes to It contributes to economic growth through allocation of funds to the most
economic growth efficient sector through the process of disinvestment to reinvestment.
A well-organised and regulated secondary market ensures a greater measure of
Provide safety in
safety and fair dealings to the average investors because transactions are made
dealings
publicly under well-defined rules, regulations and bylaws of the exchange.
Motivating people to Efficient secondary market motivate people to invest in the securities market.
invest People are less apprehensive about the riskiness of the stock market.
Every major change in the economy either due to government policy or any
Economic Indicator
major international event has a effect on the secondary/stock market. So, if the
 stock market is doing well, it is an indicator that economy is more or less in a
stable position.

STOCK EXCHANGE/STOCK MARKET/SHARE MARKET

Though there is some theoretical difference between stocks and shares of a company, in general sense,
shares and stocks are used interchangeably. Shares of a joint stock company are also called stocks. Hence,
stock market or stock exchange is also known as share market.
As per the Securities Contract Regulation Act, 1956, “stock exchange” means 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.

 Organised market
 Provides a market for existing and approved securities
CHARACTERSTICS/  Transactions take place between its members or their authorised agents
FEATURES  Transactions are regulated by rules and by laws
 Complete information available to public in regard to prices and volume of
transactions

Functions of stock exchanges (Add functions of secondary in this)

By providing a place where listed securities can be bought and sold regularly
Provides ready and
and conveniently, a stock exchange ensures a ready and continuous market for
continuous market
various shares, debentures, bonds and government securities.
A stock exchange maintains complete record of all transactions taking place in
Provides information different securities every day and supplies regular information on their prices
about prices and sales and sales volumes to press and other media. Ex. Information about minute to
minute movement in prices on TV channels like CNBC, Zee News, NDTV etc.
Transactions on the stock exchange are conducted only amongst its members
with adequate transparency and in strict conformity to its rules and regulations
Ensure Safety of Funds which include the procedure and timings of delivery and payment to be
followed. This provides a high degree of safety to dealings at the stock
exchange.
The stock exchanges provide liquidity and profitability to dealings and
investments in shares and debentures. It also educates people on where and how
Helps in mobilisation of
to invest their savings to get a fair return. This encourages the habit of saving,
savings and capital
investment and risk-taking among the common people. Thus it helps mobilising
formation
Surplus savings for investment in corporate and government securities and
contributes to capital formation.
Stock exchanges reflect the changing conditions of economic health of a
country, as the shares prices are highly sensitive to changing economic, social
Barometer of economic and political conditions. It is observed that during the periods of economic
and business conditions prosperity, the share prices tend to rise. Conversely, prices tend to fall when
there is economic stagnation and the business activities slow down as a result of
depressions.
Better Allocation of As a result of stock market transactions, funds flow from the less profitable to
funds more profitable enterprises and they avail of the greater potential for growth.
Financial resources of the economy are thus better allocated.

LISTING, TRADING AND SETTLEMENT OF SECURITIES

Listing of securities: Full topic discussed earlier

Trading of securities: Process

Investor can either choose to trade online or via a stockbroker or investment firm or an agent. One needs to
take following steps to conduct trade in secondary market in India:

STEP 1: Open a Bank Account

The first step towards investing in Indian stock market is to open a bank account. A bank account is required
to hold the funds which would be investing in secondary market.

STEP 2: Open a Demat Account

Demat (Dematerialized) account refer to an account which an Indian citizen must open with the depository
participant (banks or stock brokers) to trade in listed securities in electronic form.
At present in India there are two depositories: NSDL (National Securities Depository Ltd.) and CDSL
(Central Depository Services Ltd.) There is no direct contact between depository and investor. Depository
interacts with investors through depository participants only.
Depository participant will maintain securities account balances of investor and intimate investor about the
status of their holdings from time to time.

STEP 3: Open a trading account

After opening a Demat account, a trading account is required to trade in securities market. A
trading/brokerage account allows you to purchase stocks, bonds, mutual funds, and other units by paying the
broker to do the trading on your behalf.

STEP 4: Trading Mechanism

With the advent of technology, trading at stock exchanges are now taking place through an open electronic
limit order book, in which order matching is done by the trading computer. Investors buy/sell securities on
stock exchange platform by placing buy/sell orders through their stock brokers with whom they are
registered as client.

This activity of buying/selling of securities on the stock exchange platform on specific days which is known
as trading day. This activity is referred to as trading and is carried out by stock exchanges for a specific
period called trading hours. After the trading activity is completed, the process of delivering securities by
the seller and payment of funds by the buyer is called securities pay-in/funds pay-in respectively. This
activity also has to be conducted within a stipulated time period. After the pay-in process is completed
successfully, the buyer will get shares and the seller will get money. The above mentioned activities of, pay-
in and, payout are collectively referred to as settlement process. Each settlement is identified by a unique
number called settlement id/Settlement number.

STEP 5: Payment to Broker for purchase of shares/securities:

The payment for the shares purchased is required to be done prior to the pay-in date for the relevant
settlement or as otherwise provided in the Rules and Regulations of the Exchange.
STEP 6: Delivery of shares to the broker for sale:
The delivery of shares has to be done prior to the pay- in date for the relevant settlement or as otherwise
provided in the Rules and Regulations of the Exchange and agreed with the broker/sub broker in writing.

STEP 7: Receipt of money for a sale transaction and receipt of shares for a buy transaction:
Brokers were required to make payment or give delivery within two working days of the pay - out day.
However, as settlement cycle has been reducedfromT+3 rolling settlement to T+2, the pay out of funds and
securities to the clients bythe broker will be made within 24 hours of the payout.

Settlement of securities
Rolling settlement is basically settlement of transaction in stock market in a certain number of days after the
trade is agreed. Rolling settlement can be explained with the help of following table:

T stands for trading. Trading can be done during the entire day i.e. from 9.00 A.M.
to 3.30 P.M. Trading can be done on any working day (except Saturday and Sunday
Trading Day (T and other holidays as intimated by the stock exchange from time to time). During
Day) the trading process, one investor buys the shares and other investor sells the shares.
After the execution of trading, the buyer receives the shares and the seller receives
money for the shares he parted.
Clearing is a process of determination of obligations, after which obligations are
discharged by settlement. On the T+1 day i.e. one day after the trading day, first of
all, the National Securities Clearing Corporation Ltd. (NSCCL) confirms the trade
Clearing executed during the day from the Stock Exchange which helps it to determine the
Activities (T+1 obligation of each member (broker) in terms of funds and securities. After that, the
day) netting of obligations is done. This entire process of determining the obligation is
done by the custodians/clearing corporation which works under the NSCCL. Once
the netting of obligation is done, all the files are processed and downloaded so that
each broker knows what he has to pay-in and receive.
Suppose, an investor buys 100 shares @ ` 2000 each on Monday and sell those
shares @ 2500 each on the same day. His net obligation in terms of funds and
securities will be calculated on Tuesday. In terms of securities, his net obligation is
Netting explained nil as he has sold all the shares he bought. So, he will neither receive nor give any
security. On the other hand, his net monetary obligations will be calculated taking
into account his buying and selling amount. In this case, the net amount he is
receiving is ` 50000 (100 shares x ` 2500 – 100 shares x ` 2000).This pay-in and
 pay-out of funds are calculated on T+2 day i.e. on Wednesday.
On the second working day i.e. T+2 day, all the brokers has to pay-in the required
Settlement funds and securities to the NSCCL by 10.30 A.M. giving the required instructions
Activities (T+2 to the respective clearing banks and members on the same day. Moreover, by 1.30
Day) on the same day, brokers get the required funds through the NSCCL. This is called
pay-out of funds.
Pay-in of securities means that shares that the shareholder wants to sell are picked
up from their Demat account and transferred to the broker's account. All these
Pay-in and pay- shares are then delivered to the clearing corporation.
out of securities In pay-out of securities, the shares that the investor wants to buy are received from
the clearing corporation and then transferred to the broker's account. After that, the
shares are transferred from the broker’s account to the buyer’s demat account.
Pay-in of funds take place when NSCCL gives the required funds to the clearing
corporation by giving instructions to the clearing bank which credits the account of
clearing corporation and debit the accounts of clearing bank. This is called pay-in of
Pay-in and pay-
funds.
out of funds
After that, the NSCCL gives electronic instructions to the clearing banks to credit
accounts of clearing members and debit accounts of the clearing corporation. This is
called pay-out of funds and it completes the settlement cycle.
Initiative by SEBI The Securities and Exchange Board of India (SEBI) has set the ball rolling for a
recently to faster trade settlement in the Indian stock market. The capital markets regulator has
introduce T+1 sounded out clearing corporations of stock exchanges and custodian banks on the
Settlement feasibility of cutting down the settlement cycle to T+1 — an abbreviation for Trade
plus one day — from the existing T+2.
 Methods of Marketing Securities

1. Public issue by prospectus

a) Direct selling: If a company intends to raise a capital by issuing it only to small numbers of
institutional or large investors, the company may convince such investors through conferences,
personal meeting, and advertisement. They raise their fund by issuing it to confine subscribers.
b) Sale through investment intermediaries: A company can take assistance of intermediaries and
specialized agency in marketing of securities. These intermediaries are brokers or merchant bankers.
c) Underwriting: A company may approach a firm of underwriters to subscribe to their issue their
issue. These underwritings’ guarantee the issue of securities for a fix commission payable to them.

The essential steps involved in this method of marketing of securities are as follows:
1. Order: Broker receives order from the client and places orders on behalf of the client with the issuer.
2. Share allocation: The issuer finalizes share allocation and informs the broker regarding then same.
3. The client: The broker advises the successful clients of the share allocation. Clients then submit the
application forms for shares and make payment to the issuer through the broker.
4. Primary issue account: The issuer opens a separate escrow account (primary issue account) for the
primary market issue. The clearing house of the exchange debits the primary issue account of the broker
and credits the issuer’s account.
5. Certificates: Certificates are then delivered to investors. Otherwise depository account may be
credited.
Example:* In 2019, Indian company IRCTC (Indian Railway Catering and Tourism Corporation)
conducted an IPO. They offered shares to the public, allowing investors to buy a stake in the company.

2. Offer for Sale Method

Where the marketing of securities takes place through intermediaries, such as issue houses,
stockholders and others, it is a case of Offer for sale Method.
Under this method, the sale of securities takes place in two stages.
Stage 1: The issuer company makes an en-block (Large group) sale of securities to intermediaries such
as the issue houses and share brokers of an agreed price.
Stage 2: The securities are re-sold to ultimate investors at a market-related price.
The difference between the purchase price and the issue price constitutes ‘profit’ for the intermediaries.

Example: Axis Bank Ltd. - 2020: Axis Bank, one of India's prominent private sector banks, conducted an
OFS to reduce the stake held by certain promoters and increase public shareholding.

Advantages Disadvantages
It saves the issuing company the hassles This method is expensive for the investor as it
involved in selling the shares to the public involves the offer of securities by issue houses at
directly through prospectus very high prices.
 3. Private Placement Method
A method of marketing of securities whereby the issuer makes the offer of sale of individuals and
institutions privately without the issue of a prospectus is known as Private Placement Method.
Features
• securities are offered directly to large buyers with the help of share brokers.
• This method works in a manner similar to the ‘Offer for Sale Method’ whereby securities are
first sold to intermediaries such as issues houses, etc. They are in turn placed at higher prices
to individuals and institutions.

Example:* In 2021, Indian fintech company Paytm raised capital through a private placement. They
secured investments from various institutional investors and high-net-worth individuals.

Advantages Disadvantages
1. Less expensive as various types of costs 1. Concentration of securities in a few hands
associated with the issue are borne by the 2. Creating artificial scarcity for the securities
issue houses and other intermediaries thus increasing the prices temporarily and
2. Less troublesome for the issuer as there is not misleading general public
much of stock exchange requirements 3. Depriving the common investors of an
concerning contents of prospectus and its opportunity to subscribe to the issue, thus
publicity, etc to be complied with affecting their confidence levels
3. Placement of securities suits the requirements
of small companies.
4. The method is also resorted to when the stock
market is dull and the public response to the
issue is doubtful

4. Rights Issue Method

Where the shares of an existing company are offered to its existing shareholders, it takes the form of ‘rights
issue’. In a rights issue, a company offers its existing shareholders the opportunity to purchase additional
shares at a discounted price. This method allows the company to raise capital from its current shareholders.
The relevant guidelines issued by the SEBI in this regard are as follows:
1. Shall be issued only by listed companies.
2. Announcement regarding rights issue once made, shall not be withdrawn and where withdrawn,
no security shall be eligible for listing up to 12 months.
3. Underwriting as to rights issue is optional and appointment of Registrar is compulsory.
 4. Appointment of category I Merchant Bankers holding a certificate of registration issued by SEBI
shall be compulsory.
5. Rights share shall be issued only in respect of fully paid share.
6. Letter of Offer shall contain disclosures as per SEBI requirements.
7. Issue shall be kept open for a minimum period of 30 days and for a maximum period of 60 days.
Advantages Disadvantages
1. Economy: Rights issue constitutes the 1. Restrictive: The facility of rights issue is
most economical method of raising fresh available only to existing companies and
capital, not to new companies.
as it involves no underwriting andbrokerage 2. Against society : the issue of rights shares
costs. runs counter to the overall societal
2. Easy: The issue management procedures consideration of diffusion of share
connected with the rights issue are easier as ownership forpromoting dispersal of wealth
only a limited number of applications areto and economic power.
be handled.
3. Advantage to shareholders : Issue of
rights shares does not involve any dilution
of ownership of existing shareholders.

Example:* In 2020, Reliance Industries, one of India's largest conglomerates, conducted a rights issue to
raise capital. Existing shareholders were given the option to purchase additional shares at a discounted
price.

5. Bonus Issues Method

Where the accumulated reserves and surplus of profits of a company are converted into paid up capital, it
takes the form of issue of ‘bonus shares’. It merely implies capitalization of existing reserves and surplus
of a company. The issue of bonus shares is subject to certain rules and regulations. The issue does not in
any way affect the resources base of the enterprise. It saves the company enormously of the hassles of
capital issue.
SEBI Guidelines
1. Reserves: The bonus issue shall be made out of free reserves built out of the genuine profits or share
premium collected in cash only.
3. Dividend mode: The declaration of bonus issue, in lieu of dividend, is not made.
4. Fully paid: The bonus issue is not made unless the partly paid shares, if any are made fully paid-up.
5. No default: The Company has not defaulted in payment of interest or principal in respect of fixed
deposits and interest on existing debentures of principal or defaulted in respect of the payment of statutory
dues of the employees such as contribution to provident fund, gratuity, bonus, etc.
 6. Implementation: A company that announces its bonus issue after the approval of the Board of Directors
must implement the proposal within a period of 6 months from the date of such approval and shall not
have the option of changing the decision.
7. The articles: The Articles of Association of the company shall contain a provision for capitalization of
reserves, etc. If there is no such provision in the Articles, the company shall pass a resolution at its general
body meeting making provisions in the Articles of Associations for capitalization.
8. Resolution: Consequent to the issue of bonus shares if the subscribed and paid-up capital exceeds the
authorized share capital, the company at its general body meeting for increasing the authorized capital
shall pass a resolution.
Example: Tata Motors, a leading automobile manufacturer in India, declared a 1:1 bonus issue in 2017.
This decision was made to celebrate the 70th anniversary of the company and to share its success with
shareholders.

6. Book-Building Method

A method of marketing the shares of a company whereby the quantum and the price of the securities to be
issued will be decided on the basis of the bids received from the prospective shareholders by the lead merchant
bankers is known as book-building method.

Steps

The key steps involved in a book built issue are enumerated below:

1. The Company must file the Red Herring Prospectus with the RoC at least 3 days before the Bid/ Issue
Opening Date.
2. The Company and the BRLMs must declare the Bid/ Issue Opening Date, Bid/ Issue Closing Date and
Price Band at the time of filing the Red Herring Prospectus with RoC.
3. The Bids should be submitted on the prescribed Bid-cum-Application Form only.
4. The Bidding Period shall be open for at least 3 working days and not more than 7 working days. In
case the price band is revised, the revised price band will be published in two widely circulated
newspapers and the Bidding period will be extended for a further period of three days, subject to the
total Bidding period not exceeding 10 working days.
5. The Bidder can revise the Bid through the Revision Form.
6. Each bid option is entered into the electronic bidding system as a separate Bid and a Transaction
Registration Slip (“TRS”) is generated for each price and demand option and given to the Bidder.
7. The Price Band can be revised during the Bidding Period in which case the maximum revisions on
either side of the Price Band shall not exceed 20% fixed initially and as disclosed in the Draft Red
Herring Prospectus. In addition to this, the cap on the Price Band should not be more than 20% of the
floor of the Price Band.
8. The Bidder can bid at any price within the Price Band. The Bidder has to bid for the desired number
of Equity Shares at a specific price.
9. The Bids are registered using the on-line facilities of the NSE and the BSE. NSE and BSE offer a
screen-based facility for registering Bids for the Issue.
Example:* The IPO of SBI Cards and Payment Services in 2020 used the book-building process to
determine the offer price. Investors submitted bids, and the final price was set based on the demand.
7. Employees Stock Option Scheme (ESOP)

A method of marketing the securities of a company whereby its employees are encouraged to take up shares
and subscribe to it is known as ‘stock option’. It is a voluntary scheme on the part of the company to encourage
employees’ participation in the company. The scheme also offers an incentive to the employees to stay in the
company.

SEBI Guidelines

1. Issue at discount: Issue of stock options at a discount to the market price would be regarded as another
form of employee compensation.

2. Approval: The issue of ESOP s is subject to the approval by the shareholders through a special resolution.

3. Maximum limit: There would be no restriction on the maximum number of shares to be issued to a single
employee.

4. Minimum period: A minimum period of one year between grant of options and its vesting has been
prescribed.

6. Eligibility: ESOP scheme is open to all permanent employees and to the directors of the company but not
to promoters and large shareholders.

7. Director s report: The Director s report shall make a disclosure of the following:
a. Total number of shares as approved the shareholders
b. The pricing formula adopted
c. Details as to options grated, options vested, options exercised and options forfeited, extinguishments
or modification of options etc

8. IPO: SEBI s stipulations prohibiting initial public offerings by companies having outstanding options
should not apply to ESOP.

Example: Zomato, a prominent food delivery and restaurant aggregator platform in India, introduced an
ESOP buyback program in 2021, allowing employees to encash their stock options.

8. Bought-out Deals

A method for marketing of securities of a body corporate whereby the promoters of an unlisted company make
an outright sale of a chunk of equity shares to a single sponsor or the lead sponsor is known as bought-out
deals .

Features

1. Parties: There are three parties involved in the bought-out deals. They are promoters of the company
sponsors and co-sponsors who are generally merchant bankers and investors.
 2. Outright Sale: Under this arrangement, there is an outright sale of a chunk of equity shares to a single
sponsor or the lead sponsor.

3. Syndicate: Sponsor forms a syndicate with other merchant bankers for meeting the resource requirements
and for distributing the risk.

4. Sale price: The sale price is finalized through negotiations between the issuing company and the purchaser.

5. Listing: The investor-sponsor make a profit, when at a future date, the shares get listed and higher prices
prevail.

6. OTCEI: Sale of these share at Over-the-Counter Exchange of India (OTCEI) or at a recognized stock
exchanges, the time of listing these securities and off-loading them simultaneously are being generally decided
in advance.

Example: Walmart's Acquisition of Flipkart: In one of the largest e-commerce deals globally, Walmart
acquired a 77% stake in Flipkart for $16 billion in 2018. This deal allowed Walmart to enter the Indian e-
commerce market and compete with Amazon.