FINANCIAL MARKETS

2,940,887.46

Financial System of any

country consists of
financial markets,
financial intermediation
and financial instruments
or financial products.

Financial Market where financial

securities like stocks and bonds
and commodities like valuable
metals are exchanged at efficient
market prices

Financial Assets represents

ownership over a claim to the
payment of a sum of money
sometime in the future. The claim
may be in term of interest or
dividend or capital appreciation.

Financial intermediaries include

banks, brokers and commission
agents

Financial Services

Data to impress
interveiewrs
Size of Indian Financial Market
financial services distribution and
advice market.
- Rs 23, 000 crore (US$ 4.44 billion) AMFI average Asset Under
Management (AUM) of all fund houses
about Rs 6,87,640 crore (US$ 132.77
billion) in the last quarter of 2011.
Till September 30, 2011, promoters of
life insurance companies Rs 32,720
crore (US$ 6.32 billion) as capital.
The value of M&A deals involving
Indian companies aggregated to US$
34.4 billion in 2011 involving 806
transactions.

Financial services industry

is the mainstay of any
economy as it mirrors the
financial health of the
country.
Indian financial markets
consists of :
Stock Markets
Commodity Futures
Insurance Sector
Banking Services
Mutual Funds Industry

Indian Financial Market

Rs.23000 cr.

MUTUAL FUND (Asset Under

Management )
Rs 6,87,640 crore
Govt Bonds
Rs. 41253
cr.

BSE Market
Cpitalisation
march 2012
Rs
2,940,887.4
6 cr.

M&A deals
US$ 34.4
billion in 2011
involving 806
transactions.

Insurance
Sector
Total
Premium
Collected at Rs
1,22,661
crore

IPO

Introduction

IPO refers to the process of selling

a stock by the promoters to the
public. It is also known as public
offer.

Companies offering an IPO are

sometimes new, young companies
(Groupon in the US markets and
PVR in the Indian markets), or
sometimes companies which have
been around for many years
(Google in the US markets and
MCX in the Indian Markets) but are
finally deciding to go public.

It is not about how

old the company is
.

It is about how much of critical

mass it can attractIt is about how
much of critical mass it can
attractIt is about how much of
critical mass it can attractIt is
about how much of critical mass it
can attractIt is

.It is all about

how many investors the
issue attracts

IPOs are often used as a way for a

young company to gain necessary
market capital. One day return is
supposed to be more than 50% in the
bullish market.
IPO is attractive for the investor
because IPOs are underpriced on the
first day.
IPOs are an ideal source of
investment for investors looking for
investment in short run

The main
Proponents of IPO
Trading

Venn diagram
connecting all
can be added

The market
When shares are bought in an IPO it is
termed primary market.
Investment Banker
A company that plans an IPO contacts an
investment banker who will in turn called
on securities dealers to help sell the new
stock issue.
Underwriting
The process of selling the new stock
issues to prospective investors in the
primary market with a guarantee to buy
stocks not sold is called underwriting
Prospectus:
The document containing details of the
issue to be filed with the Securities
Exchange Board of India for the purpose
of inviting investors.

AN I P O I S AS G O O D AS
ITS LEAD MANAGER

Selection of Investment Bank

The first thing that company

management must do when
they have taken a unanimous
decision to go public is to find
an investment bank or a
conglomerate of investment
banks that will act as
underwriters on behalf of the
company.
Underwriter's buy the shares
of the company and resell
them to the general public.

FLOW CHART SHOWING THE

STEPS NEED TO BE
ADDED

Steps in IPO Process

Step 1: Preparation of Registration Statement
To begin an IPO process, the company
involved must submit a registration statement
to the SEBI, which includes a detailed report
of its fiscal health and business plans.

The registration process is the first

step in a series of steps aimed at
protecting the interest of the
investors

SEBI scrutinizes this report and does its own

background check of the company.

It must also see that registration statement

fulfils all the mandatory requirements and
satisfies all rules and regulations.

PROOF OF THE QUALITY OF IPO

IS IN PROSPECTUS

Step 2: Getting the

Prospectus Ready

While awaiting the approval, the

company, with assistance from the
underwriters, must create a preliminary
'Red Herring' prospectus.

It includes detailed financial records,

future plans and the specification of
expected share price range.

This prospectus is meant for

prospective investors who would be
interested in buying the stock. It also
has a legal warning about the IPO
pending SEBI approval.

Steps in IPO Process

Step 3: The Roadshow

Roadshow provides the investors

a platform to interact with
management and know the
strengths and weakness of the
company

The next step is to make the

investors at large aware of the
strength of the company/
The underwriters and company
officials go on countrywide
'roadshows', visiting the major trade
hubs and promote the company's IPO
among select few private buyers
(Usually corporate or HNIs).
They are fed with detailed information
regarding company's future plans and
growth potential.
They get a feel of investor response
through these tours and try to woo big
investors.

Steps in IPO Process

Step 4: SEBI Approval & Go Ahead

Once SEBI is satisfied with the registration

statement, it declares the statement to be
effective, giving a go ahead for the IPO to
happen and a date to be fixed for the same.
Generally it asks for amendments to be
TO ERR IS HUMAN TO
made before giving its approval.
FIND WHERE YOU The prospectus cannot be given to the
HAVE ERRED IS public without the amendments suggested
by SEBI.
SEBIS
JOB
The process of amending and
The company needs to select a stock
making changes takes around
3 to 6 months depending on
exchange where it intends to sell its shares
the government regulation
and get listed.

Step 5: Deciding On Price Band &

Share Number
After the SEBI approval, the company,
with assistance from the underwriters
decide on the final price band of the
shares and also decide the number of
shares to be sold.
There are two types of issues: Fixed
Price and Book Building

In India most of the issues are

prepared based on book
building

A diagram showing BOOK

BUILDING and FIXED PRICE
BRANCHING OUT

Book Building

ABC Ltd issue of 10 lakh shares of

face value Rs. 10/- each at a price
band of Rs. 60 to 70 is available to
the public .
This implies that the company can
collect something between Rs. 6
crores to 7 crores depending on the
level of interest it is able to evince.
Here the amount generated
through the issue would depend on
the highest amount bid by most
investors.

A Book building issue helps the

company discover the price of the
issue.
The company decides a price band
and it gives the investor an option to
choose the price at which he/she
wishes to bid for the company shares.
Price Band provides the range
between which the interested buyers
can apply.

In a book-building issue,
the bid has to be made
between the floor price
and the ceiling price.

Let's say the band is Rs 800-850

and there are 100,000 shares in
the retail segment. Now, if
applications for 10 lakh (1 million)
shares come in at Rs 850, all the
retail segment shares will be
allotted on a proportional basis
among applicants at this price after
a lottery. Usually, oversubscription
is so overwhelming at the ceiling
price itself that allotment is
restricted to applicants at this price
only. Therefore, you can bid at the
ceiling price to increase chances of
allotment.

ABC Ltd public issue of 10 lakh

shares of face value Rs. 10/- each
at a premium of Rs. 55/- each is
available to the public thereby
generating Rs. 6.5 Crores.

Fixed Price In a Fixed price

issue the company decides the
price of the share issue and the
number of shares being sold.
Companies which are not very
confident of investors reaction
would prefer this method as they
would not like to give too much
of choice to investors.

Step 6: Available to Public for

Purchase

This period is important for the

company as data is available
on a daily basis.
Under subscription might
tarnish the image of the
company in the long run and
companies would like to avoid
such situation.

On the dates mentioned in the

prospectus, the shares are available to
public.
Investors can fill out the IPO form and
specify the price at which they wish to
make the purchase and submit the
application.
This open period usually lasts for 5
working days which is a SEBI
requirement.

Step 7: Issue Price Determination & Share

Allotment

Steps in IPO Process

In case of oversubscribed issues,

shares are not allotted to all
applicants.

Once the subscription period is over,

members of the underwriting banks,
share issuing company etc will meet and
determine the price at which shares are to
be allotted to the prospective investors.

The price would be directly determined by

the demand and the bid price quoted by
investors.

Once the price is finalized, shares are

allotted to investors based on the bid
amounts and the shares available.

Step 8: Listing & Refund

The last step is the listing in the stock
exchange. Investors to whom shares
were allotted would get the shares
credited to their DEMAT accounts and
for the remaining the money would be
refunded.

What makes IPO

Listing attractive

The objectives of the Fresh Issue of

MCX are (Pg. 59 of the prospectus
filed with SEBI by MCX):

Low Cost source of

Capital:

1. Expansion and

Enhancement of the
information technology
infrastructure of the
Exchange;
2. Setting up of the Commodity
Ecosystem Infrastructure;
3. Equity investment in
clearing corporation set up
by MCX;
4. Strategic investments and
acquisitions;
5. General corporate
purposes;
6. Meeting the Issue
expenses; and
7. Achieve the benefits of
listing.

An IPO allows a company

to raise capital at low cost

Objectives of raising
funds helps evince
interest from investors
Objective are mentioned
clearly. This evinces
interest from
knowledgeable investors.
Illustration

What makes IPO

Listing attractive

Infosys is known to use

stock options effectively to
increase motivation level of
employees

Liquidity
The shares once traded

have an assigned market

value and can be resold.
This is extremely helpful
as the company provides
the employees with stock
incentive packages and
the investors are provided
with the option of trading
their shares for a price.

Valuation:

What makes IPO

Listing attractive

It is easy to justify the

valuation of a listed company
compared to unlisted
companies

Azim Premji became the wealthiest

Indian on the back of rise in Wipro
Shares

The public trading of the shares

determines a value for the company
and sets a standard. This works in
favor of the company as it is helpful
in case the company is looking for
acquisition or merger. It also
provides the share holders of the
company with the present value of
the shares.
Illustration

Increased wealth for Promoters:

The founders of the companies

have an affinity towards IPO as it
can increase the wealth of the
company, without dividing the
authority as in case of partnership.
Illustration -

Criteria for raising funds

through IPO
Eligibility Criteria:
Net Tangible assets of Rs. 3.00 Crore in
each of the preceding 3 years.
Track record of Distributable profits at
least 3 out of 5 preceding years.
The Company has a Networth of Rs. 1.00
Crore in preceding 3 years.
The proposed issue should not exceed 5
times of its Pre-issue

Practicality of
dealing with IPO
Identical to what
appears in his
demat account.
Investors have
been divided
into different
categories and
the account in
favour of which
the
cheque/deman
d draft (DD) is
drawn depends
on the
category.

1. How to apply

Your client needs to have a

trading and a demat account to
bid in an IPO. He can apply
offline or online.
He needs to visit the distributor
of the IPO and collect the 'bidcum-application form.

Practicality of
dealing with IPO
Fill in the IPO Application
Form completely and correctly
in English
Fill in all the relevant details in
BLOCK LETTERS
Whenever your application
amount exceeds Rs.50,000/please ensure to mention your
Income Tax PAN/GIR number.
If you have applied and not
been allotted a PAN number
you need to clearly mention
"Not Allotted"
Do not forget to fill in your
bank details like the name of
your bank, account number
and branch details.

(ii) Instructions to be kept in

mind

The information asked for will include

the name of the applicant, his address,
his Permanent Account Number, the
category he is applying under, the
name of the depository participants
(DP), DP ID, beneficiary account
number, the number of equity shares
the applicant is bidding for, the price
per equity share he is willing to pay,
and the cheque/draft number.
Ascertain the category and mention
the correct account
Write the bid-cum-application form
number the reverse of the cheque/DD.

Practicality of
dealing with IPO

(iv) Companies issue IPOs in different

lots, each of them containing a
particular number of shares. Your bid
will have to be in denominations of lot
sizes.
(v)

(vi)

Lot Size for MCX issue is 6 and

in multiples of 6

(vii)

ask your cient to Photocopy the form

after filling it.

Submit the filled application form to

sub-syndicate/syndicate members
in case of book building and to the
bankers directly in case of fixed
price issue. Now, you will have to
wait to see if you get shares.
Take the acknowledgement slip and
keep it and the photocopy of the
application form with care till you
get the shares of your money back.

Practicality of
dealing with IPO

There are three categories of

investors: qualified institutional
investors (like banks, mutual funds
and insurance companies), noninstitutional investors (NIIs -individuals investing more than Rs
1 lakh) and retail investors
(individuals investing less than Rs
1 lakh

In case of delay in share allotment or

refund if shares are not allotted, write to
the registrar of the issue or its lead
managers or the compliance officer of
the company
4. Allotment process
If the NII and retail categories get
oversubscribed, a lottery is held among
applicants and then shares are allotted
on a proportional basis. So, if the retail
category is oversubscribed by 10 times
after the lottery, an investor who has
applied for 50 shares will get five shares.

Points to be
remembered while
making payments
Remember to attach separate
cheque/DD/stockinvest with each
form
Do not forget to write the
application number on the
reverse of your
cheque/DD/stockinvest
Ensure that your stockinvest is
filled up completely including
Issuing Branch Name, Issuing
Bank Name, Branch Manager's
Signature and Date
Stockinvests should be used
within 10 days of the issue of the
instrument

Under Section 269SS of the

Income Tax Act, if the amount
payable on application is
Rs.20,000/- or more such payment
should be made necessarily by
cheque/DD/stockinvest. If cash
payments are made in such
conditions then applications are
liable to be rejected.
Never use third party stock invests.
The first/sole applicant should be
one of the purchasers

Other Issues

Applications may be made

in single or joint names
(not more than three)

Thumb impressions or
signatures other than in
English/Hindi or any other
languages specified in the
8th Schedule of the
Constitution of India must
be attested by a
magistrate or a Notary
Public or a Special
Executive Magistrate
under his/her official seal.

Important Questions for

interviews

Some important questions

What will happen if the company does not receive a minimum

subscription of atleast 90% of the net offer to the public
including devolvement of underwriters within 60 days of issue
closure?
The company will have to refund the entire subscription

amount received within 8 days.

Can a company whose listing is due raise additional capital?

No.

Important Questions for

interviews

Should the Red Herring prospectus disclose the exact price of the
issue?

What is the maximum price in a price band?

No.

The cap price should not be more than 20% of the floor price.
For Ex: if the floor price is Rs. 100/- the cap price can be at
max Rs. 120/- an issue with price band Rs. 100 150 is not
possible

Can the issue price be revised?

Yes, provided the revision on either side is not beyond 20%

Important Questions for

interviews

What is the time limit an IPO may remain open?

If your net worth is Rs. 10 crores, how much

IPO can you go for?

An IPO cannot remain open for more than 7 working

days which can be extended to upto 10 days in case
the offer price band was revised

50 10 = 40 crores. You can go for upto 40 crores

to ensure that your post issue net worth does not go
beyond 5 times your pre issue worth.

Who should the investors approach in case of

delay of refund order?

SEBI

Important Questions for

interviews

What does a price band mean?

Price band comes into play when IPOs are done through a book-building process.

IPOs if they have gone for the book-building route will mention a price band.

For instance, Biocon which has declared a price band of Rs 270 to Rs 315 per
equity share of face value Rs 5. Or ONGC which has set a price band of Rs
680-750.

Book-building is a mechanism where, during the period for which the IPO is open, bids
are collected from investors at various prices which are above or equal to the floor
price (the minimum price). The final price of the share is determined after the bid
closing date, based on certain evaluation criteria.

Individual investors are encouraged to bid at the floor price. When all the bids are
received and the final price is decided, those who have got the allotments will have to
pay that price, irrespective of the price they had bid on. So price band indicates the
range which the investment bankers think that the share is likely to be priced in.

Important Questions for

interviews

If you apply for an IPO, are you guaranteed allotment of shares?

No. If the offer is oversubscribed by a few times then the

chances of getting an allotment are high. However, if it is
oversubscribed heavily (by over 15 times) then the chances of
getting an allotment progressively decrease. SEBI uses a
lottery system as well as a proportionate allotment formula. The
key is to remember that there is no guarantee that you will any
shares at all if you apply for an IPO.

When and how will you come to know if I have got an allotment?
If you have applied, you can know the status by calling the
registrar, whose name will be listed on the prospectus or the
application form, after 30 to 40 days from the closing date of
the issue. In a book-building issue, you can know the status by
calling the registrar after 20 days
What happens to my money if I haven't got an allotment?
You will get a refund 40-45 days from the closing date of the
issue. In a book-building issue, you will be getting the refund in
30-40 days from the closing date.

Illustration of IPO Information

MCX

MCX IPO
Oversubscription: 54.13X, Amount: Rs
35818.74 Cr
Offer Price: Rs 1032, Issue Size: Rs 663.31 Cr

The overwhelming response to the MCX

initial public offering appears to have
caused a temporary liquidity crunch with
over Rs 35,000 crore locked up for a few
days till investors get their refunds.

Returns companies make from

Ipo