Capital Market

A market for long term fundsEquity & debt

Domestic & international

A market for new issues Leads to capital formation Nature of fund raising

Domestic • equity issues by corporates and FI• debt issues by corporates, government and FIInternational • equity issues through GDRs, ADRs • debt issue through ECBs

Other funds from international markets-• FDI- in equity and debt form• FII- in the form of portfolio investments• NRI - in the form of short and medium term

deposits

Primary Market

Fund Raising in the Primary Market Public issue by prospectus

Private placement

Rights issues

Primary Issues

Rights Issue Issue of new shares to existing shareholders on a pro-rata basis To be kept open for at least 30 days and not more than 60 days

Why rights? to reward shareholders to reflect the stock’s true worth to hike promoter’s stake

Private Placement Market Direct sale of securities to a few investors through merchant bankers.The investors are selected clients such as FIs, corporates, banks and HNIs. Subscription from less than 50 membersTime as well as cost of issue is low Tailor made issues Less formalities, disclosuresPopular for placement of Debt instruments

Preferential AllotmentAn issue of shares by a listed company to a select group of persons consisting of Promoters, Foreign partners, Technical collaborators, Private equity funds

Need not file offer document.

Three years lock-in period for promoters

Why preferential allotment? to enhance promoter’s holding as part of debt restructuring/conversion of loans to issue shares by way of ESOPs. quick fund raising at low cost

Public IssueInitial Public Offering (IPO)- It is an offering

of either a fresh issue of securities or an offer for sale of existing securities or both by an unlisted company for the first time to public.

Follow-on Public Offering(FPO)- It is an offering of either a fresh issue of securities or an offer for sale to the public by an already listed company through an offer document.

Merchant banker- should be registered with SEBI- Act as book running lead manager- Performs pre-issue and post-issue activities

Registrars to the issue- to finalise list of eligible allot tees,

ensure crediting of shares and dispatch refund orders

Bankers to the issue- collection of application amounts- transfer of this amount to escrow

account- dispatching refund amounts

Intermediaries to an Issue

Before 1992, Controller of Capital Issues regulated price

After 1992, the promoter and the merchant banker decide the pricing

Free Pricing Regime

Fixed Price Offerings Made to uninformed investors

Investors demand not taken into account

An alternative method, Book Building

A mechanism through which an offer price for IPOs based on the investor’s demand is determined.

Uses investors demand for shares at various prices

Basically an auction of shares

Investors can watch the ‘book being built’

The company appoints one or more merchant banker(s) who compulsorily underwrite the issue.

Company enters into an agreement with stock exchanges

Book runner appoints stock brokers

Collects information from potential buyer and attempts to build interest through road shows.

Book runner submits draft Red herring prospectus to SEBI and Registrar of Companies (ROC) which contain all the disclosures except have details of either price or number of shares being offered.

Book-building Process

Offer of shares at a specified price band

Public issue shall be kept open for 3 to 10 working days

Bidding process shall be through an electronically linked transparent bidding facility provided by stock exchanges

On-line graphical display of demand and bid prices

Based on the bids, issue price is determined by issuer

Retail individual investors may bid at ‘cut-off’ price

Final prospectus registered with ROC

Retail investors may pay through Application Supported by Blocked Amount (ASBA) system

ASBA is an application by an investor for subscribing to an issue, containing an authorisation to block the application money in a bank account.

Allotment of a Book-built Issue

Category-wise % of issue to be allotted on a

proportionate basis-

Not more than 50% to Qualified Institutional

Buyers

High Net-worth Individuals- atleast15%

Retail Investor-at least 35%

Retail investor – who bids in a book built issue

for a value not more than Rs 2,00,000

Allotment and refund shall be made within15

days from the closure of issue.

Listing within seven days from finalisation.

FDI and FIIFDI- Foreign Direct Investment• an investor which picks up more than 10% stake in a

company’s equity.• in the form of fully-owned subsidiary or a joint

venture, • stable, enhances management quality, transfer of

technology and generation of employment.

FII- Foreign Institutional Investment• An institution incorporated outside India as a

pension fund, mutual fund, bank, insurance company, foreign government agency, foreign central bank etc.

• In the form of portfolio investment• short to medium term investments• can invest only up to 10 percent of capital in a

company • unstable and volatile

Foreign Venture CapitalVenture capital is a source of funding for new

entrepreneurs and technology.FVCI is an investor incorporated/established outside

India who is registered under the SEBI(Foreign Venture Capital Investor) Regulations, 2000.

Flipkart- Tiger Global, Accel PartnersMyntra- Premji Invest, IDG Ventures India

Private Equity• PE are the investment banks who invest into proven businesses. • Exit strategy is usually the company going public or acquired.• PE funds attract capital from pension funds, insurance funds etc.• All PE from outside India are classified either as FDI, in unlisted companies, or as FII in listed companies.

Sep 04 2014 : The Economic Times (Delhi)Providence Set to Exit Idea with 3-Fold Return

ADRs and GDRs

Depository receipts are negotiable instruments denominated in U.S. dollars or another currency representing a publicly-traded issuer’s local currency equity shares.

Listed and traded on a foreign stock exchange

represent one or more shares of the issuing company

Indian GDRs are primarily sold to institutional investors

In US GDRs can be issued to qualified institutional buyers but ADRs can be sold both to institutional and retail investors

ADR listing requires comprehensive disclosures and greater transparency as compared to GDR listing

GDRs can be converted into ADRs

ECBsBorrowings raised from international markets by corporates

Can be raised from any international source

Supplement domestic resources

Low cost of borrowing

Borrower need to manage interest rate risk and forex risk.

FCCBs Bonds issued by Indian companies in foreign

currency

Fixed interest/coupon rate paid in foreign currency

partly or fully convertible into ordinary shares

Interest rates lower than domestic rates

Bonds listed and traded abroad

Exchange risk is more as interest is payable in foreign currency

Minimum maturity period is five years

IDRIndian Depository Receipts

Issued by foreign companies for raising equity funds from Indian market