Financial

Markets

By:

Deepika Sahdev

Asstt. Prof. (MBA)

Introduction

• A financial market is a market in which people and entities

can trade financial securities, commodities, and other

fungible items of value at prices that reflect supply and

demand.

• Securities include stocks and bonds, and commodities include

precious metals or agricultural goods.

Types of Financial market

• Capital markets which consist of:

– Stock markets: issuance of shares or common stock.

– Bond markets: issuance of bonds

• Commodity markets: trading of commodities.

• Money markets: providing short term debt financing and

investment.

• Derivatives markets: the management of financial risk.

• Futures markets: provide standardized forward contracts for

trading products at some future date.

• Insurance markets: facilitate the redistribution of various risks.

• Financial market can also be categorized as:

– Primary Market

– Secondary Market.

• Primary Market: Newly formed (issued) securities are bought

or sold in primary markets, such as during initial public

offerings (IPOs).

• Secondary Market: Secondary markets allow investors to buy

and sell existing securities. It is commonly known as Stock

Markets or Stock Exchanges.

Primary Market

• The primary market is the part of the capital market that

deals with issuing of new securities.

• Companies, governments or public sector institutions can

obtain funds through the sale of a new stock or bond

issues through primary market.

• This is typically done through an underwriter (investment

bank) or finance syndicate of securities dealers.

Features of Primary Market • This is the market for new long term equity capital. It is the

market where the securities are sold for the first time. Therefore

it is also called the New Issue Market (NIM).

• The primary market provides a direct link between the company

and the investor.

• Primary issues are used by those companies which are setting

up new business or for expanding/modernizing their existing

business.

• The primary market performs the crucial function of facilitating

capital formation in the economy.

Functions of the Primary Market

• Origination: Origin of a new Issue. The proposal is analyzed in

terms of the nature of the security, the type & size of the

issue, its timing etc.

• Underwriting: This contract makes the share predictable and

removes the element of uncertainty in the subscription.

• Distribution: it refers to the sale of securities to investors. It is

carried out by the lead mangers or brokers to the issue.

Modes of raising money

• Initial public offer: Method of raising funds through the issue of

shares to investors in the primary market by companies

• Rights issue: It means issue of capital offered by company to its

existing shareholders.

• Preferential allotment: When listed companies issue securities

to a select group of persons under sec 81 of The Companies Act,

1956, it is called preferential issue. The select group can be FIs,

mutual funds or high net worth Individuals.

• Private Placement: Acc. to companies act, 2013, it means an

offer of securities or invitation to subscribe securities made to

the select group of persons or institutions other than by way

of pubic offer through issue of private placement offer letter.

• It holds inherent advantages such as:

– Cost effective: In public issue there are underwriting, brokerage,

printing, mailing charges while Private placement avoid such charges.

– Time effective: In public issue , time reqd. to complete the formalities

is usually 6 months or more, while in private placement the

requirements to be fulfilled are less and time reqd. is less, usually 2-3

months.

Initial Public Offers (IPO)

• An issue made by a new company in the capital market is

called an initial public offering. If an unlisted company makes

a public issue for the first time, it is an IPO.

MEANING:

• It is a means of collecting money from the public by a

company for the first time in the market to fund its projects.

In return, the company gives shares to the investors in the

company.

The Necessity for an IPO

• Expansion activities

• Acquisitions / mergers

• Entry into new business avenues

• Working capital requirements

• To provide liquidity to the existing shareholders

• Listing of existing shares

Parties involved in the NEW

ISSUE

Managers to the issue

Registrar to the Issue

Under-writers

Bankers Advertising

Agencies

Financial institutions

Govt. Agencies

1. Managers to the issue

• Companies appoint lead managers to manage a public issue.

• Main duties of the lead managers includes:

– Drafting the prospectus;

– Preparing a budget of expenses related to the issue;

– Suggesting an appropriate timing of the public issue;

– Assisting in marketing the public issue successfully;

– Advising the company in the appointment of registrars to

the issues, underwriters, brokers, bankers to the issue,

advertising agents etc.

2. Registrar to the issue

• Registrar is appointed in consultation with the lead managers.

• They usually receive the share applications from various

collection centers.

• They arrange to dispatch the share certificates.

• They hand over the details of share allocation to the company.

• Registrar has to keep the record of the issue of allotment till 6

months from the last date of allotment of shares for the

redressal of the shareholders complaints.(if any)

3. Underwriters

• Underwriting is a contract in which underwriter gives an

assurance to the issuer that he will subscribe to the securities

offered in the event of non subscription by the persons to

whom they are offered.

• Underwriter do not buy or sell securities. They stand as back-

up supporters and its done for a commission.

• Underwriters can be of 2 types:

– Financial institutions and banks

– Brokers or approved investment companies.

4. Bankers to the issue

• Bankers are responsible for collecting the application money

along with the application form. They charge commission

besides the brokerage.

• When the size of the issue is large, 3 or 4 banks are appointed

as bankers of the issue.

• The bankers to the issue should have branches in specified

collection centers which are designated as the collecting

branch for the acceptance of money.

5. Advertising Agents

• Advertising plays a role in promoting an issue.

• Advertising agencies take responsibility for giving publicity to

the issue through various appropriate platforms.

• These could be newspapers, magazines, hoardings, press

releases or combination of all.

6. Financial Institutions

• Financial institutions underwrite the issue or provide term

loans to the companies. They give financial assistance.

• They usually scrutinize the draft prospectus, study the

proposed programme for the public issue and approve them.

• Financial institutions like: IDBI, IFCI, ICICI, LIC, GIC.

Government/Statutory Agencies

• There are various regulatory bodies associated with a

public issue:

– SEBI

– RBI

– Registrar of companies

– Stock exchanges where the issue is going to be listed

– Industrial licensing authorities

Eligibility Guidelines for the issuers in Primary Market

• The guidelines provide norms relating to the eligibility for

companies issuing securities, pricing of issues, listing

requirements, disclosure norms, lock-in period for promoters’

contribution, contents of offer documents, pre and post-issue

obligations.

• SEBI has prescribed capital adequacy norms for companies

wanting to make a public issue. Some of the eligibility

conditions are discussed further:

• Eligibility Norms:

– A company making a public issue of securities has to file a draft

prospectus with SEBI, through an eligible merchant banker, at least 21

days prior to the filing of prospectus with the Registrar of companies.

– An application for listing of those securities with stock exchange(s) is

also to be made.

– The company must enter into an agreement with the depository for

dematerialization of its securities and should give an option to

subscribers/shareholders/investors to receive the security certificates

either in physical or in dematerialized form.

Contributions of Promoters

• In case of public issues by listed companies, promoters should

contribute to the extent of 20% of the proposed issue.

• The minimum promoters’ contribution should be locked in for a

period of 3 years in case of all types of issues.

• However, if the promoters’ contribution exceeds the required

minimum, then the excess is locked in for a period of one year.

The lock-in period starts from the date of allotment in the

proposed public issue and the last date of the lock-in is to be

reckoned/considered as three years from the date of

commencement of the public issue.

Sweat Equity

• Sweat Equity means shares issued to its employees or

directors at discount for consideration other than cash for

providing know how to the employees.

• The idea behind Sweat Equity is that an employee or director

works best when is he has the sense of belongingness and is

amply rewarded. One of the ways of rewarding him is by

offering him shares of the company at low prices.

• The purpose of sweat equity is to ensure more loyalty &

participation of the employees.