wealth managment 1

8/9/2019 Wealth Managment 1

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Semester III

WEALTH-

MANAGEMENT

Prof. D. C. Pai


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STOCKS


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FINANCIAL STATEMENTS

MEANING

Financial statement consists of Balance Sheet, Profit and Loss Account, Sources and Uses of FundsStatements, and Auditors Notes to the financial statements. The Balance sheet shows the financial position

of the firm at a particular point of time. The profit and loss account (Income Statement) shows the financial

performance of the firm over a period of time. The sources and uses of funds statements reflect the flow of

funds through the business during a given period of time.

TYPES OF FINANCIAL STATEMENTS

Balance Sheet

The balance sheet of a company, according to the Companies Act, should be either in account form or the

report form.

Balance Sheet: Account Form

Liabilities Assets

Share Capital Fixed Assets

Reserves and Surplus Investments

Secured loans Current Assets, loans and Advances

Unsecured loans Miscellaneous expenditure

Current liabilities and provisions

Liabilities:

y Share Capital: Share capital has been divided into equity capital and preference capital. The sharecapital represents the contribution of owners of the company. Equity capital does not have fixedrate of dividend. The preference capital represents contribution of preference shareholders and hasfixed rate of dividend.


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y Reserves and Surplus: The reserves and surpluses are the profits retained in the company. Thereserves can be divided into revenue reserves and capital reserves. Revenue reserves representaccumulated retained earnings from the profits of business operations. Capital reserves are thosegained which are not related to business operations. The premium on issue of shares and gain onrevaluation of assets are examples of the capital reserves.

y Secured and Unsecured Loans: Secured loans are the borrowings against the security. They are inthe form of debentures, loans from financial institutions and loans from commercial banks. Theunsecured loans are the borrowings without a specific security. They are fixed deposits, loans andadvances from promoters, inter-corporate borrowings, and unsecured loans from the banks.

y Current Liabilities and Provisions: They are amounts due to the suppliers of goods and servicesbrought on credit, advances payments received, accrued expenses, unclaimed dividend, provisionsfor taxes, dividends, gratuity, pensions, etc.

Assets:

y Fixed Assets: These assets are acquired for long-terms and are used for business operation, but notmeant for resale. The land and buildings, plant, machinery, patents, and copyrights are the fixedassets.

y Investments: The investments are the financial securities either for long-term or short-term. Theincomes and gains from the investments are not from the business operations.

y Current Assets, Loans, and Advances: This consists of cash and other resources which can beconverted into cash during the business operation. Current assets are held for a short-term period.The current assets are cash, debtors, inventories, loans and advances, and pre-paid expenses.

y Miscellaneous Expenditures and Losses: The miscellaneous expenditures represent certain outlayssuch as preliminary expenses and pre-operative expenses not written off. Though loss indicates adecrease in the owners equity, the share capital can not be reduced with loss. Instead, Share capitaland losses are shown separately on the liabilities side and assets side of the balance sheet.

Balance Sheet: Report Form

I. Sources of Funds

1. Shareholders Funds


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(a) Share Capital

(b) Reserves & surplus

2. Loan Funds

(a) Secured loans

(b) Unsecured loans

II. Application of Funds

(i) Fixed Assets

(ii) Investments

(iii) Current Assets, loans and advances

Less: Current liabilities and provisions

Net current assets

(iv) Miscellaneous expenditure and losses

Profit and Loss Account

Profit and Loss account is the second major statement of financial information. It indicates the revenues and

expenses during particular period of time. The period of time is an accounting period/year, April-March. Theprofit and loss account can be presented broadly into two forms: (i) usual account form and (ii) step form.

The accounting report summarizes the revenue items, the expense items, and the difference between them

(net income) for an accounting period.

Mere statistics/data presented in the different financial statements do not reveal the true picture of a

financial position of a firm. Properly analyzed and interpreted financial statements can provide valuable

insights into a firms performance. To extract the information from the financial statements, a number of

tools are used to analyse such statements. The popular tools are:

1. Comparative Financial Statements,

2. Common Sized Statements, and

3. Ratio Analysis.

Comparative Financial Statements


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This involves putting statements for two periods/organizations in a comparative form and indicating

differences between them in terms of rupees and percentages.

Example 12: Financial statement of XYZ Ltd. for the years 2005 and 2006 are compared as under:

__________________________________________________________________________

Particulars Amount (in Rs. Lakh) Increase/Decrease

2005 2006 Amount_(%)______

Equity Share Capital 15.00 15.00 - -

Debentures 9.00 6.00 (-) 3.00 (-) 33.33

Current Liabilities 10.00 10.50 (+) 0.50 (+) 5.00

Land and Building 13.00 13.00 - -

Investments 8.00 10.00 (+) 2.00 (+) 25.00

Current Assets 13.00 8.50 (-) 4.50 (-) 34.62

__________________________________________________________________________

Common Size Statements

This involves putting statements for two years/organizations in a comparative form, where the items appear

in percentage to total, rather than in absolute rupee form. This indicates relative importance of each item in

the total and significant changes in the composition of the items.

Example 13: Common size statement of ABC Ltd. for the years 2005 and 2006 is as under:

__________________________________________________________________________

Particulars Amount (in Rs. Lakh) Percentage

2005 2006 2005 2006_____

Equity Share Capital 15.00 15.00 44.11 47.62

Debentures 9.00 6.00 26.47 19.05

Current Liabilities 10.00 10.50 29.42 33.33

Land and Building 13.00 13.00 38.23 41.27

Investments 8.00 10.00 23.53 31.75


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Current Assets 13.00 8.50 38.24 26.98

__________________________________________________________________________

Ratio Analysis

Financial ratio is a quantitative relationship between two items/variables. Financial ratios can be broadly

classified into three groups: (I) Liquidity ratios, (II) Leverage/Capital structure ratio, and (III) Profitability

ratios.

(I) Liquidity ratios

Liquidity refers to the ability of a firm to meet its financial obligations in the short-term which is less than a

year. Certain ratios which indicate the liquidity of a firm are: (i) Current Ratio, (ii) Acid Test Ratio, (iii)Turnover Ratios. It is based upon the relationship between current assets and current liabilities.

(i) Current ratio =sLiabilitieCurrent

AssetsCurrent

.

.

The current ratio measures the ability of the firm to meet its current liabilities from the current assets. Higher

the current ratio, greater the short-term solvency (i.e. larger is the amount of rupees available per rupee of

liability).

(ii) Acid-test Ratio =s

iabilitie urrent

ssetsQuick

.

.

Quick assets are defined as current assets excluding inventories and prepaid expenses. The acid-test ratio

is a measurement of firms ability to convert its current assets quickly into cash in order to meet its current

liabilities. Generally speaking 1:1 ratio is considered to be satisfactory.

(iii) Turnover Ratios:


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Turnover ratios measure how quickly certain current assets are converted into cash or how efficiently the

assets are employed by a firm. The important turnover ratios are:

-Inventory Turnover Ratio,

-Debtors Turnover Ratio,

-Average Collection Period,

-Fixed Assets Turnover and

-Total Assets Turnover

Inventory Turnover Ratio =InventotyAverage

SoldGoodsofCost

Where, the cost of goods sold means sales minus gross profit. Average Inventory refers to simple average

of opening and closing inventory. The inventory turnover ratio tells the efficiency of inventory management.

Higher the ratio, more the efficient of inventory management.

Debtors Turnover Ratio =)(Re Debtorsceivableounts

verage

cc

alesNet reditS

The ratio shows how many times accounts receivable (debtors) turns over during the year. If the figure fornet credit sales is not available, then net sales figure is to be used. Higher the debtors turnover, the greater

the efficiency of credit management.

Average Collection Period =lesly reditSa

verageDai

tors

verageDeb

Average Collection Period represents the number of days worth credit sales that is locked in debtors

(accounts receivable).

Please note that the Average Collection Period and the Accounts Receivable (Debtors) Turnover are related

as follows:

Average Collection Period =noverDebtorsTur

Days365


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Fixed Assets turnover ratio measures sales per rupee of investment in fixed assets. In other words, how

efficiently fixed assets are employed. Higher ratio is preferred. It is calculated as follows:

Fixed Assets turnover ratio = setsNetFixed

s

SalesNet.

Total Assets turnover ratio measures how efficiently all types of assets are employed.

Total Assets turnover ratio =al

ssets

verageTot

SalesNet.

(II) Leverage/Capital structure ratios

Long term financial strength or soundness of a firm is measured in terms of its ability to pay interest

regularly or repay principal on due dates or at the time of maturity. Such long term solvency of a firm can be

judged by using leverage or capital structure ratios. Broadly there are two sets of ratios: First, the ratios

based on the relationship between borrowed funds and owners capital which are computed from the

balance sheet. Some such ratios are: Debt to Equity and Debt to Asset ratios. The second set of ratios which

are calculated from Profit and Loss Account is: The interest coverage ratio and debt service coverage ratio

are coverage ratio for leverage risk.

(i) Debt-Equity ratio reflects relative contributions of creditors and owners to finance the business.

Debt-Equity ratio =Equity

Debt

The desirable/ ideal proportion of the two components (high or low ratio) varies from industry to industry.

(ii) Debt-Asset Ratio: Total debt comprises of long term debt plus current liabilities. The total assets

comprise of permanent capital plus current liabilities.


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Debt-Asset Ratio =AssetsTotal

DebtTotal

The second set or the coverage ratios measure the relationship between proceeds from the operations of thefirm and the claims of outsiders.

(iii) Interest Coverage ratio =Interest

TaxesandInterestBeforeEarnings

Higher the interest coverage ratio better is the firms ability to meet its interest burden. The lenders use this

ratio to assess debt servicing capacity of a firm.

(iv)Debt Service Coverage Ratio (DSCR) is a more comprehensive and apt to compute debt service capacity

of a firm. Financial institutions calculate the average DSCR for the period during which the term loan for the

project is repayable. The Debt Service Coverage Ratio is defined as follows:

loantermofpaymentloantermonInterest

loantermonInterestureshExpenditOther

oncaonDepreciatitaxafterofit

Re

.....Pr

(III) Profitability ratios

Profitability and operating/management efficiency of a firm is judged mainly by the following profitability

ratios:

(i) Gross Profit Ratio =SalesNet

ofit ross Pr

(ii) Net Profit Ratio =SalesNet

ofitNetPr

Some of the profitability ratios related to investments are:


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(iii) Return on Total Assets =Assets otalAverage

Income

et

(iv)Return on Capital Employed =Employed apital

ofit

etPr

(Here, Capital Employed = Fixed Assets + Current Assets - Current Liabilities)

Return on Shareholders Equity =NetWorthorEquityrsShareholdeTotalAverage

TaxAfterInco eNet

'

(Net worth includes Shareholders equity capital plus reserves and surplus)

A common (equity) shareholder has only a residual claim on profits and assets of a firm, i.e., only after

claims of creditors and preference shareholders are fully met, the equity shareholders receive a distribution

of profits or assets on liquidation. A measure of his well being is reflected by return on equity. There are

several other measures to calculate return on shareholders equity:

(i) Earnings Per Share (EPS): EPS measures the profit available to the equity shareholders per share, that is,the amount that they can get on every share held. It is calculated by dividing the profits available to the

shareholders by number of outstanding shares. The profits available to the ordinary shareholders are arrived

at by net profits after taxes and preference dividend.

It indicates the value of equity in the market.

EPS =ding utsShares rdinaryofNu

ber

ofitNet

tan

Pr

(ii) Price-earnings ratios = P/E Ratio =EPS

SharepericeMarketPr


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(iii) Cash Earnings per share (CPS/CEPS):

CPS/CEPS =SharesEquityofNu ber

onDepreciatiDividendeferenceofitNet PrPr

Illustration:

Balance Sheet of ABC Co. Ltd. as on March 31, 2006

(Amount in Rs. Crores)

Liabilities Amount Assets Amount

Share Capital 16.00 Fixed Assets (net) 60.00

(1,00,00,000 equity shares

of Rs.10 each)

Reserves & Surplus 22.00 Current Assets: 23.40

Secured Loans 21.00 Cash & Bank 0.20

Unsecured Loans 25.00 Debtors 11.80

Current Liabilities & Provisions 16.00 Inventories 10.60

Pre-paid expenses 0.80

Investments 16.60

Total 100 Total 100

Profit & Loss Account of ABC Co. Ltd. for the year ending on March 31, 2006:

Particulars Amount Particulars Amount


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Opening Stock 13.00 Sales (net) 105.00

Purchases 69.00 Closing Stock 15.00

Wages and Salaries 12.00

Other Mfg. Expenses 10.00

Gross Profit 16.00

Total 120.00 Total 120.00

Administrative and Personnel Expenses 1.50 Gross Profit 16.00

Selling and Distribution Expenses 2.00

Depreciation 2.50

Interest 1.00

Net Profit 9.00


Income Tax 4.00 Net Profit 9.00

Equity Dividend 3.00

Retained Earning 2.00


Market price per equity share - Rs. 20.00

Current Ratio = Current Assets / Current Liabilities

= 23.40/16.00 = 1.46

Quick Ratio = Quick Assets / Current Liabilities

=Current Assets-(inventory + prepaid expenses)/Current Liabilities

= [23.40-(10.60+0.8)]/16.00 = 12.00/16.00 = 0.75

Inventory Turnover Ratio = Cost of goods sold/Average Inventory


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= (Net Sales-Gross Profit)/ [(opening stock + closing stock)/2]

= (105-16)/ [(15+13)/2] = 89/14 = 6.36

Debtors Turnover Ratio= Net Sales/Average account receivables (Debtors)

=105/11.80 =8.8983

Average Collection period = 365 days / Debtors turnover

= 365 days/8.8983 = 41 days

Fixed Assets Turnover ratio = Net Sales / Net Fixed Assets

= 105/60 = 1.75

Debt to Equity Ratio = Debt/ Equity

= (21.00+25.00)/(16.00+22.00) = 46/38 = 1.21

Gross Profit Ratio = Gross Profit/Net Sales

= 16.00/105.00 = 0.15238 or 15.24%

Net Profit Ratio = Net Profit / Net Sales

= 9/105.00 = 0.0857 or 8.57 %

Return on Shareholders Equity = Net Profit after tax/Net worth

= 5.00/(16.00+22.00) =0.13157 or 13.16


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SECURITIES MARKET IN INDIA

The securities market in India is an important component of Indian Financial system.

FUNCTIONS OF SECURITIES MARKET:

Securities Markets is a place where buyers and sellers of securities can enter into transactions to purchase

and sell shares, bonds, debentures etc. Further, it performs an important role of enabling corporates,

entrepreneurs to raise resources for their companies and business ventures through public issues. Transfer

of resources from those having idle resources (investors) to others who have a need for them (corporates) is

most efficiently achieved through the securities market. Stated formally, securities markets provide channels

for reallocation of savings to investments and entrepreneurship.

Mobilization of savings and acceleration of capital formation

In developing countries like India, plagued by the paucity of resources and increasing demand forinvestments by industrial organizations and governments, the importance of the capital market is selfevident. In this market, various types of securities help mobilize savings from various sections of thepopulation. The twin features of reasonable return and liquidity in the stock exchange are definite incentivesto the people to invest in securities. This accelerates the capital formation in the country.

Promotion of industrial growth

The capital market is a central market through which resources are transferred to the industrial sector of theeconomy. The existence of such an institution encourages the people to invest in productive channels ratherthan in the unproductive sectors like real estate, bullion etc. Thus, it stimulates industrial growth andeconomic development of the country by mobilizing funds for investment in the corporate sector.

Raising long-term capital

The existence of a stock exchange enables companies to raise permanent capital. The investors cannot

commit their funds for a permanent period but companies require funds permanently. The stock exchangeresolves this clash of interests by offering an opportunity to investors to buy or sell their securities whilepermanent capital with the company remains unaffected.

Ready and continuous market


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The stock exchange provides a central convenient place where buyers and sellers can easily purchase andsell securities. The element of easy marketability makes investment in securities more liquid as compared toother assets.

Proper channelization of funds

An efficient capital market not only creates liquidity through its pricing mechanism but also functions toallocate resources to the most efficient industries. The prevailing market price of a security and relative yieldare the guiding factors for the people to channelise their funds in a particular company. This ensureseffective utilization of funds in the public interest.

Provision of a variety of services

The financial institutions functioning in the securities market provide a variety of services, the moreimportant ones being the following :

(i) grant of long-term and medium-term loans to entrepreneurs to enable them to establish, expandor modernize business units;

(ii) provision of underwriting facilities;(iii) assistance in the promotion of companies (this function is done by the developing banks like

IDBI);(iv) participation in equity capital(v) expert advice on management of investment in industrial securities.

MARKET SEGMENTS IN SECURITIES MARKET

The securities market has two interdependent and inseparable segments, the new issues (primary) marketand the stock (secondary) market.

PRIMARY MARKET

The primary market provides the channel for creation and sale of new securities, while the secondary marketdeals in securities previously issued. The securities issued in the primary market are issued by publiclimited companies or by government agencies. The resources in this kind of market are mobilized eitherthrough the public issue or through private placement route. It is a public issue if anybody and everybodycan subscribe for it, whereas if the issue is made available to a selected group of persons it is termed asprivate placement. There are two major types of issuers of securities, the corporate entities who issuemainly debt and equity instruments and the government (central as well as state) who issue debt securities(dated securities and treasury bills).

Secondary Market

The secondary market enables participants who hold securities to adjust their holdings in response tochanges in their assessment of risks and returns. Once the new securities are issued in the primary marketthey are traded in the stock (secondary) market. The secondary market operates through two mediums,namely, the over-the-counter (OTC) market and the exchange-traded market. OTC markets are informalmarkets where trades are negotiated. Most of the trades in the government securities are in the OTC market.All the spot trades where securities are traded for immediate delivery and payment take place in the OTCmarket. The other option is to trade using the infrastructure provided by the stock exchanges.

The secondary market is a market in which existing securities are resold or traded. This market is also


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known as the stock market. In India, the secondary market consists of recognised stock exchangesoperating under rules, bye laws and regulations of regulators. According to Securities Contracts(Regulation) Act 1956, a stock exchange is defined as any body of individuals, whether incorporated or not,constituted before corporatisation and demutualization or a body corporate incorporated under theCompanies Act 1956 whether under a scheme of corporatisation and demutualization or otherwise for thepurpose of assisting, regulating or controlling the business of buying, selling or dealing in securities.

The exchanges in India follow a systematic settlement period. All the trades taking place over a trading cycle(day=T) are settled together after a certain time (T+2 day). The trades executed on exchanges are cleared andsettled by a clearing corporation. The clearing corporation acts as a counterparty and guarantees settlement.A variant of the secondary market is the forward market, where securities are traded for future delivery andpayment. A variant of the forward market is Futures and Options market. Presently only two exchanges viz.,National Stock Exchange of India Ltd. (NSE) and Bombay Stock Exchange (BSE) provide trading in theFutures & Options.

HISTORY OF SECURITIES MARKET

The securities market in India dates back to the 18th century when the securities of the East India Companywere traded in Mumbai and Kolkata. The brokers used to gather under a Banyan tree in Mumbai and under a

neem tree in Kolkata for the purpose. However the real beginning came in the 1850s with the introduction of

joint stock companies with limited liability. The 1860s witnessed feverish dealings in securities and reckless

speculation. This brought brokers in Bombay together in July 1875 to form the first formally organised stock

exchange in the country viz. The Stock Exchange, Mumbai. Ahmedabad Stock Exchange in 1894, Calcutta in

1908 and Madras in 1937 and 22 others followed this in the 20th century. In order to promote the orderly

development of the stock market, the central government introduced a comprehensive legislation called the

Securities Contract (Regulation) Act, 1956.

The Calcutta Stock Exchange (CSE) was the largest stock exchange in India till the 1960s. However, during

the later half of the 1960s the relative importance of the CSE declined while that of the BSE increased

sharply.

Till the early 1990s, the Indian secondary market comprising of various regional stock exchanges was

plagued with the many problems like uncertainty of execution price, uncertain delivery and settlement

periods, lack of transparency, absence of risk management, herd mentality of brokers etc.

Emergence of NSE

The National Stock Exchange of India Limited (NSE) was conceptualized at a time when the industry suffered

from extreme infirmities of opacity, inefficiency of processes and poor infrastructure. It was the time when a

section of powerful brokerage firms mostly located in metropolitan cities dominated the securities industry.


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NSE wrote for itself the mandate to create a world-class exchange and use it as an instrument of change for

the industry as a whole through competitive pressure. NSE incorporated in 1992 was given recognition as a

stock exchange in April 1993 and started operation in June 1994 with the following objectives

(a) establish a nationwide trading facility for all types of securities,

(b)ensure equal access to all investors all over the country through an appropriate communication network,

(c) provide for a fair, efficient and transparent securities market using electronic trading system,

(d) enable shorter settlement cycles and book entry settlements, and

(e) meet the international benchmarks and standards. Within a short span of time, the above objectives have

been realized and the exchange has played a leading role as a change agent in transforming the Indian

Capital Markets to its present form.

The process of reforms has led to a pace of growth almost unparalleled in the history of any country.Securities market in India has grown exponentially as measured in terms of amount raised from the market,

number of stock exchanges and other intermediaries, the number of listed stocks, market capitalisation,

trading volumes and turnover on stock exchanges, investor population and price indices. Along with this,

the profiles of the investors, issuers and intermediaries have changed significantly. The market has

witnessed fundamental institutional changes resulting in drastic reduction in transaction costs and

significant improvements in efficiency, transparency and safety. Indian market is now comparable to many

developed markets in terms of a number of parameters, as may be seen from the table below.

Table: International Comparison: end December 2007

Particulars USA UK Japan

Ger-

many

Singa-

pore

Hong

Kong China India

No. of listed

Companies 5,130 2,588 3,844 658 472 1,029 1,530 4,887

Market

Capitalisation

(US $Bn.) 19,947 3,859 4,453 2,106 353 1,163 6,226 1,819

Market

Capitalisation

Ratio (%) 149 157.1 90.25 69.43 274.41 583.89 237.6 200.1

Turnover

( US $42,613 10,324 6,497 3,363 384 917 7,792 1,108


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Bn.)

Turnover Ratio

(%) 216.5 270.1 141.6 179.7 122 89.1 180.1 84

Note: Market Capitalisation Ratio is computed as a percentage of GNI 2006

There are very few countries that have higher turnover ratio than India. Market Capitalisation as a percentage

of GNP compares favorably even with advanced countries and much better than emerging markets. In terms

of number of companies listed on stock exchanges, India is second.

MARKET PARTICIPANTS IN SECURITIES MARKET

In every economic system, some units, individuals or institutions, are surplus-generating, who are calledsavers, while others are deficit- generating, called spenders. Households are surplus-generating andcorporates and Government are deficit generators. Through the platform of securities markets, the savingsunits place their surplus funds in financial claims or securities at the disposal of the spending communityand in turn get benefits like interest, dividend, capital appreciation, bonus etc. These investors and issuersof financial securities constitute two important elements of the securities markets. The third critical elementof markets is the intermediaries who act as conduits between the investors and issuers. Regulatory bodies,which regulate the functioning of the securities markets, constitute another significant element of securitiesmarkets. The process of mobilisation of resources is carried out under the supervision and overview of theregulators. The regulators develop fair market practices and regulate the conduct of issuers of securitiesand the intermediaries. They are also in charge of protecting the interests of the investors. The regulatorensures a high service standard from the intermediaries and supply of quality securities and non-manipulated demand for them in the market.

Thus, the four important participants of securities markets are the investors, the issuers, the intermediaries

and regulators.

Investors

An investor is the backbone of the capital markets of any economy as he is the one lending his surplusresources for funding the setting up of or expansion of companies, in return for financial gain.

Investors in Stock Markets can broadly be classified into Retail Investors and Institutional Investors.

MarketParticipants

Investors Issuers Intermediaries Regulators


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Retail Investors are individual investors who buy and sell securities for their personal account, and not for

another company or organization. This category also includes High Networth Individuals (HNI) which

comprise of people with large personal financial holdings.

Institutional Investors comprise of domestic Financial Institutions, Banks, Insurance Companies, MutualFunds and FIIs (Foreign Institutional investor is an entity established or incorporated outside India that

proposes to make investments in India).

Issuers

Both PSUs and private companies tap the securities market to finance capital expansion activity and growthplans. Even banks, financial institutions raise resources from securities market. Other important issuers aremutual funds which are important investment intermediaries which mobilize the savings of the smallinvestors. Funds can rise in the primary market from the domestic market as well as from internationalmarkets. After the reforms initiated in 1991, one of the major policy change was allowing Indian companiesto raise resources by way of equity issues in the international markets. Indian companies have raised

resources from international capital markets through Global Depository Receipts (GDRs)/AmericanDepository Receipts (ADRs), Foreign Currency Convertible bonds (FCCBs) and External CommercialBorrowings (ECBs). GDRs are essentially equity instruments issued abroad by authorized overseascorporate bodies against the shares/bonds of Indian companies held with nominated domestic custodianbanks. ADRs are negotiable instruments, denominated in dollars and issued by the US Depository Bank.FCCBs are bonds issued by Indian companies and subscribed to by a non-resident in foreign currency. Theycarry a fixed interest or coupon rate and are convertible into a certain number of ordinary shares at apreferred price. ECBs are commercial loans (in the form of bank loans, buyers, credit, suppliers credit,securitised instruments (floating rate notes and fixed rate bonds) availed from any internationally recognisedsource such as bank, export credit agencies, suppliers of equipment, foreign collaborators, foreign equityholders and international capital market. ECBs supplement domestically available resources for expansionof existing capacity as well as for fresh investment. Indian companies have preferred this route to raise

funds as the cost of borrowing is low in the international markets.

Intermediaries

The term market intermediary is usually used to refer to those who are in the business of managingindividual portfolios, executing orders, dealing in or distributing securities and providing informationrelevant to the trading of securities. The market mediators play an important role on the stock exchangemarket; they put together the demands of the buyers with the offers of the security sellers. A large varietyand number of intermediaries provide intermediation services in the Indian securities markets.

Stock Exchanges: The stock exchanges provide a trading platform whereby the buyers and sellers can meetto transact in securities. The Securities Contract (Regulation) Act, 1956 [SCRA] defines Stock Exchange as

any body of individuals, whether incorporated or not, constituted for the purpose of assisting, regulating or

controlling the business of buying, selling or dealing in securities. Stock exchange could be a regional stock

exchange whose area of operation/jurisdiction is specified at the time of its recognition or national

exchanges, which are permitted to have nationwide trading since inception. Currently, there are 20 stock

exchanges in India.


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Stock Exchanges in India

Ahmedabad Stock Exchange Ltd. MCX Stock Exchange Ltd

Bangalore Stock Exchange Ltd. National Stock Exchange of India Ltd.

Bhubaneswar Stock Exchange Ltd. OTC Exchange of India

Bombay Stock Exchange Ltd. Pune Stock Exchange Ltd.

Calcutta Stock Exchange Association Ltd., Uttar Pradesh Stock Exchange Association

Ltd.

Cochin Stock Exchange Ltd.

Delhi Stock Exchange Ltd.

Gauhati Stock Exchange Ltd.

Interconnected Stock Exchange of India

Ltd.

Jaipur Stock Exchange Ltd.

Ludhiana Stock Exchange Ltd.

Madhya Pradesh Stock Exchange Ltd

Madras Stock Exchange Ltd.

Clearing Corporation: A Clearing Corporation is a part of an exchange or a separate entity and performsthree functions, namely, it clears and settles all transactions, i.e. completes the process of receiving and

delivering shares/funds to the buyers and sellers in the market, it provides financial guarantee for all

transactions executed on the exchange and provides risk management functions. National Securities

Clearing Corporation (NSCCL), a 100% subsidiary of NSE, performs the role of a Clearing Corporation for

transactions executed on the NSE.

Stock Brokers and Subbrokers: Stock Broker means a member of a Stock Exchange and Sub-broker

means any person not being a member of Stock Exchange who acts on behalf of a Stock broker as an agent

or otherwise for assisting the investors in buying, selling or dealing in securities through such stockbrokers.

Depository : A bank or company which holds funds or securities deposited by others, and where exchangesof these securities take place.


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Depository Participant (DP): The Depository provides its services to investors through its agents calleddepository participants (DPs). These agents are appointed by the depository with the approval of SEBI.According to SEBI regulations, amongst others, three categories of entities, i.e. Banks, Financial Institutionsand SEBI registered trading members can become DPs.

Custodian: A Custodian is basically an organisation, which helps register and safeguard the securities of itsclients. Besides safeguarding securities, a custodian also keeps track of corporate actions on behalf of its

clients:

Maintaining a clients securities account Collecting the benefits or rights accruing to the client in respect of securities Keeping the client informed of the actions taken or to be taken by the issue of securities, having a

bearing on the benefits or rights accruing to the client.

Merchant Bankers: Merchant bankers means any person who is engaged in the business of issuemanagement either by making arrangements regarding selling, buying or subscribing to securities or acting

as a manager, consultant , adviser or rendering corporate advisory services in relation to such issue

management. Merchant Bankers. Merchant banks are also called investment banks and are most significant

institutions in the financial markets. The merchant banking activity in India is governed by SEBI (Merchant

Bankers) Regulations 1992. Each merchant banker is required to have capital adequacy with prescribed net

worth.

Foreign Institutional Investors: Foreign Institutional Investors means an institution established or

incorporated outside India which proposes to make investment in India in securities. Currently, entitieseligible to invest under the FII route are as follows:

a) As FII:

(i) an institution established or incorporated outside India as a pension fund, mutual fund, investment trust,

insurance company or reinsurance company;

(ii) an International or Multilateral Organization or an agency thereof or a Foreign

Governmental Agency, Sovereign Wealth Fund or a Foreign Central Bank;

(iii) an asset management company, investment manager or advisor, bank or institutional portfolio manager,

established or incorporated outside India and proposing to make investments in India on behalf of broad

based funds and its proprietary funds, if any;

(iv) a Trustee of a trust established outside India, and proposing to make investments in India on behalf of

broad based funds and its proprietary funds, if any


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(iv) university fund, endowments, foundations or charitable trusts or charitable societies broad based fund

means a fund established or incorporated outside India, which has at least twenty investor with no single

individual investor holding more hat fort-nine percent of the shares or units of the fund

(b) As Sub-accounts: Sub-accounts means any person resident outside India, on whose behalf investmentsare proposed to be made in India by a FII and who is registered as a Sub-account under SEBI (FII)

Regulations, 1995.

Mutual Funds: A mutual fund is a company that pools money from many investors and invests the money in

stocks, bonds, short-term money-market instruments, other securities or assets, or some combination of

these investments. Mutual Funds are essentially investment vehicles where people with similar investment

objective come together to pool their money and then invest accordingly. SEBI defines mutual funds as A

fund established in the form of a trust to raise money through the sale of units to the public or a section of

the public under one or more schemes for investing in securities, including money market instruments orgold or gold related instruments or real estate assets.

Collective Investment Scheme (CIS): A Collective Investment Scheme (CIS) is any scheme or arrangement

made or offered by any company, which pools the contributions, or payments made by the investors, and

deploys the same.

Venture Capital Funds: Venture Capital Fund (VCF) is a fund established in the form of a trust or a company

including a body corporate having a dedicated pool of capital, raised in the specified manner and invested in

Venture Capital Undertakings (VCUs). VCU is a domestic company whose shares is not listed on a stock

exchange and is engaged in a business for providing services, production, or manufacture of article. A

company or body corporate to carry on activities as a VCF has to obtain a certificate from SEBI and comply

with the regulations prescribed in the SEBI (Venture Capital Regulations) 1996.

Credit Rating Agency: Credit Rating Agency means a body corporate which is engaged in or proposes to be

engaged in the business of rating of securities offered by way of public or rights issues.

Debenture Trustee: Debenture Trustee means a trustee of a Trust deed for securing any issue of debentures

of a body corporate.

The table below presents an overview of market participants in the Indian securities market.

Market Participants As on March 31As on


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2007 2008

March 31,

2009

Securities Appellate Tribunal (SAT) 1 1 1

Regulators* 4 4 4

Depositories 2 2 2

Stock Exchanges

With Equities Trading 22 19 20

With Debt Market Segment 2 2 2

With Derivative Trading 2 2 2

With Currency Derivatives - - 3

Stock Brokers 9,443 9487 9628

Sub-brokers 27,541 44,074 60,947

FIIs 996 1319 1626

Portfolio Managers 158 205 232

Custodians 15 15 16

Registrars to an issue & Share Transfer

Agents 82 76 71

Primary Dealers 17 16 16

Merchant Bankers 152 155 134

Bankers to an Issue 47 50 51

Debenture Trustees 30 28 30

Underwriters 45 35 19

Venture Capital Funds 90 106 132

Foreign Venture Capital Investors 78 97 129

Mutual Funds 40 40 44

Credit Rating Agencies 4 5 5


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Collective Investment Schemes 0 0 0

* DCA, DEA, RBI & SEBI.

Source: SEBI Bulletin.

The market intermediary has a close relationship with the investor with whose protection the Regulator isprimarily tasked. As a consequence a large portion of the regulation of a securities industry is directed at themarket intermediary. Regulations address entry criteria, capital and prudential requirements, ongoingsupervision and discipline of entrants, and the consequences of default and failure.

One of the issue concerning brokers is the need to encourage then to corporatize. Presently, 44% of thebrokers are corporates. Corporatisation of their business would help them compete with global players incapital markets at home and abroad. Corporatisation brings better standards of governance and bettertransparency hence increasing the confidence level of customers.

Regulators

The absence of conditions of perfect competition in the securities market makes the role of regulatorextremely important. The regulator ensures that the market participants behave in a desired manner so thatsecurities market continues to be a major source of finance for corporate and government and the interest ofinvestors are protected.

The responsibility for regulating the securities market is shared by Department of Economic Affairs (DEA),Ministry of Company Affairs (MCA), Reserve Bank of India (RBI) and SEBI. The activities of these agenciesare coordinated by a High Level Committee on Capital Markets. The orders of SEBI under the securities lawsare appellable before a Securities Appellate Tribunal.

Most of the powers under the SCRA are exercisable by DEA while a few others by SEBI. The powers of theDEA under the SCRA are also con-currently exercised by SEBI. The powers in respect of the contracts forsale and purchase of securities, gold related securities, money market securities and securities derived from

these securities and ready forward contracts in debt securities are exercised concurrently by RBI. The SEBIAct and the Depositories Act are mostly administered by SEBI. The rules under the securities laws areframed by government and regulations by SEBI. All these are administered by SEBI. The powers under theCompanies Act relating to issue and transfer of securities and non-payment of dividend are administered bySEBI in case of listed public companies and public companies proposing to get their securities listed. TheSROs ensure compliance with their own rules as well as with the rules relevant for them under the securitieslaws.

COMPONENTS OF SECURITIES MARKET

Securities Market is classified into following markets and different types of instruments are traded in thesemarkets.

Cash/Equity Markets & Its Products

The equity segment of the stock exchange allows trading in shares, debentures, warrants, mutual funds and

ETFs. These products are explained in detail below.


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Shares:

Equity Shares: An equity share, commonly referred to as ordinary share, represents the form of fractionalownership in a business venture. Equity shareholders collectively own the company. They bear the risk and

enjoy the rewards of ownership. Equity shares are further classified into:

y Blue chip shares: Shares of large, well established and financially strong companies withan impressive record of earnings and dividends

y Growth shares: Shares of companies that have a fairly entrenched position in a growingmarket and which enjoy an above average rate of growth as well as profitability

y Income shares: Shares of companies that have fairly stable operations, relatively limitedgrowth opportunities and high dividend payout ratios.

y Cyclical Shares: Shares of companies that have a pronounced cyclicality to theiroperations.

y Speculative Shares: Shares that tend to fluctuate widely because there is lot speculativetrading in them.

y Defensive Shares: Shares of companies that are relatively unaffected by the ups anddowns in general business conditions.

Rights Issue/ Rights Shares: The issue of new securities to existing shareholders at a ratio to those

already held, at a price. For e.g. a 2:3 rights issue at Rs. 125, would entitle a shareholder to receive 2

shares for every 3 shares held at a price of Rs. 125 per share.

Bonus Shares: Shares issued by the companies to their shareholders free of cost based on the

number of shares the shareholder owns.

Preference shares: Owners of these kinds of shares are entitled to a fixed dividend or dividend

calculated at a fixed rate to be paid regularly before dividend can be paid in respect of equity share.

They also enjoy priority over the equity shareholders in payment of surplus. But in the event of

liquidation, their claims rank below the claims of the companys creditors, bondholders/debenture

holders.

Cumulative Preference Shares: A type of preference shares on which dividend accumulates if

remained unpaid. All arrears of preference dividend have to be paid out before paying dividend on

equity shares.


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Cumulative Convertible Preference Shares: A type of preference shares where the dividend payable

on the same accumulates, if not paid. After a specified date, these shares will be converted into

equity capital of the company.

Difference between Equity shareholders and Preferential shareholders:

Equity Shareholders are supposed to be the owners of the company, who therefore, have right to get

dividend, as declared, and a right to vote in the Annual General Meeting for passing any resolution.

The act defines a preference share as that part of share capital of the Company which enjoys preferential

right as to: (a) payment of dividend at a fixed rate during the life time of the Company; and (b) the return of

capital on winding up of the Company.

But Preference shares cannot be traded, unlike equity shares, and are redeemed after a pre-decided period.

Also, Preferential Shareholders do not have voting rights.

Debentures: An instrument for raising long term debt. Debentures in India are typically secured by tangible

assets.

Convertible debentures can be converted at the option of the holder into ordinary shares of the same

company under specified terms and conditions. Thus it has features of both debenture as well as equity.

Non Convertible debentures are pure debentures without a feature of conversion They are repayable on

maturity. These debentures are issued at a highly discounted issue price.

Partly Convertible debentures have features of convertible and non-convertible debentures.

Warrants: A company may issue equity shares or debentures attached with warrants. Warrants entitle an

investor to buy equity shares after a specified time period at a given price.


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PRIMARY MARKETThe primary market is a market for new issues i.e. a market for fresh capital. The primary market provides

the channel for sale of new securities. Primary market provides opportunity to issuers of securities;

government as well as corporates, to raise resources to meet their requirements of investment and/or

discharge some obligation.

They may issue the securities at face value, or at a discount/premium and these securities may take a variety

of forms such as equity, debt etc. They may issue the securities in domestic market and/or international

market.

The primary market issuance is done either through public issues or private placement. A public issue does

not limit any entity in investing while in private placement, the issuance is done to select people. In terms of

the Companies Act, 1956, an issue becomes public if it results in allotment to more than 50 persons. This

means an issue resulting in allotment to less than 50 persons is private placement. There are two major

types of issuers who issue securities. The corporate entities issue mainly debt and equity instruments

(shares, debentures, etc.), while the governments (central and state governments) issue debt securities

(dated securities, treasury bills).

The price signals, which subsume all information about the issuer and his business including associated

risk, generated in the secondary market, help the primary market in allocation of funds.

The issuers may issue securities in domestic market and international market through ADR / GDR route.

DIFFERENT KINDS OF ISSUESMost companies are usually started privately by their promoter(s). However, the promoters capital and the

borrowings from banks and financial institutions may not be sufficient for setting up or running the business

over a long term. So companies invite the public to contribute towards the equity and issue shares to

individual investors. The way to invite share capital from the public is through a Public Issue. Simplystated, a public issue is an offer to the public to subscribe to the share capital of a company. Once this is

done, the company allots shares to the applicants as per the prescribed rules and regulations laid down by

SEBI.

Issues can be classified as a Public, Rights or preferential issues (also known as private placements). While

public and rights issues involve a detailed procedure, private placements or preferential issues are relatively

simpler. The classification of issues is illustrated below:

Issues

Public Issue

IPO

Fresh Issue

FPO

Fresh Issue

RightsIssue

BonusIssue

PrivatePlacement

PreferentialIssue

QualifiedInst. Buyers


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PRIVATE PLACEMENT

When an issuer makes an issue of securities to a select group of persons not exceeding 49, and which is

neither a rights issue nor a public issue, it is called a private placement. Private placement of shares or

convertible securities by listed issuer can be of two types:

Preferential allotment

When a listed issuer issues shares or convertible securities, to a select group of persons in terms of

provisions of Chapter XIII of SEBI (DIP) guidelines, it is called a preferential allotment. The issuer is required

to comply with various provisions which inter alia include pricing, disclosures in the notice, lock in etc, in

addition to the requirements specified in the Companies Act.

Qualified institutions placement (QIP)

When a listed issuer issues equity shares or securities convertible in to equity shares to Qualified

Institutions Buyers only in terms of provisions of Chapter XIIIA of SEBI (DIP) guidelines, it is called a QIP.

Usually, the term private placement is used for unlisted companies and the term preferential issue is used

for listed companies. QIP is also for listed companies.

Funds mobilized in Primary Market

Particulars

2008-09 2007-08

No. of issuesAmount

No. of issuesAmount

(Rs. Cr.) (Rs. Cr.)

a) Public Issues 21 2082.35 92 54511

(I) IPOs 21 2082.35 85 42101.8

(ii) FPOs 0 0 7 11915.8

b) Rights Issues 25 12637.16 32 32518

c) QIP 2 188.82 36 25525


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TOTAL 48 14908.33 160 112554

* excluding preferential allotments

OFFER DOCUMENTS

Offer document is a document which contains all the relevant information about the company, promoters,

projects, financial details, objects of raising the money, terms of the issue etc and is used for inviting

subscription to the issue being made by the issuer.

Offer Document is called Prospectus in case of a public issue or offer for sale and Letter of Offer in case of a

rights issue.

The terms used for offer documents are defined below.

Draft offer document

Draft offer document is an offer document filed with SEBI for specifying changes, if any, in it, before it is filed

with the Registrar of companies (ROCs). Draft offer document is made available in public domain including

SEBI website, for enabling public to give comments, if any, on the draft offer document.

RED HERRING PROSPECTUS

Red herring prospectus is an offer document used in case of a book built public issue. It contains all the

relevant details except that of price or number of shares being offered. It is filed with RoC before the issue

opens.

PROSPECTUS

Prospectus is an offer document in case of a public issue, which has all relevant details including price and

number of shares being offered. This document is registered with RoC before the issue opens in case of a

fixed price issue and after the closure of the issue in case of a book built issue.

LETTER OF OFFERLetter of offer is an offer document in case of a Rights issue and is filed with Stock exchanges before the

issue opens.


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Abridged prospectus is an abridged version of offer document in public issue and is issued along with the

application form of a public issue. It contains all the salient features of a prospectus.

Abridged letter of offer is an abridged version of the letter of offer. It is sent to all the shareholders along

with the application form.

Shelf prospectus is a prospectus which enables an issuer to make a series of issues within a period of 1

year without the need of filing a fresh prospectus every time. This facility is available to public sector banks

/Public Financial Institutions.

PLACEMENT DOCUMENT

Placement document is an offer document for the purpose of Qualified Institutional Placement and contains

all the relevant and material disclosures.

UNDERSTANDING THE OFFER DOCUMENT

Cover Page

Under this head full contact details of the Issuer Company, lead managers and registrars, the nature,

number, price and amount of instruments offered and issue size, and the particulars regarding listing. Otherdetails such as Credit Rating, IPO Grading, risks in relation to the first issue, etc are also disclosed if

applicable.

Risk Factors

Under this head the management of the issuer company gives its view on the Internal and external risks

envisaged by the company and the proposals, if any, to address such risks. The company also makes a note

on the forward looking statements. This information is disclosed in the initial pages of the document and

also in the abridged prospectus. It is generally advised that the investors should go through all the risk

factors of the company before making an investment decision.

Introduction

Under this head a summary of the industry in which the issuer company operates, the business of the Issuer

Company, offering details in brief, summary of consolidated financial statements and other data relating to

general information about the company, the merchant bankers and their responsibilities, the details of


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Under this head, terms of the Issue, ranking of equity shares, mode of payment of dividend, face value and

issue price, rights of the equity shareholder, market lot, nomination facility to investor, issue procedure,

book building procedure in details along with the process of making an application, signing of underwriting

agreement and filing of prospectus with SEBI/ROC, announcement of statutory advertisement, issuance of

confirmation of allocation note("can") and allotment in the issue, designated date, general instructions,

instructions for completing the bid form, payment instructions, submission of bid form, other instructions,disposal of application and application moneys, , interest on refund of excess bid amount, basis of allotment

or allocation, method of proportionate allotment, dispatch of refund orders, communications, undertaking by

the company, utilization of issue proceeds, restrictions on foreign ownership of Indian securities, are

disclosed.

Other Information

This covers description of equity shares and terms of the Articles of Association, material contracts and

documents for inspection, declaration, definitions and abbreviations, etc.

REGULATION FOR DIFFERENT KINDS OF ISSUES

SEBI DIP GUIDELINES

SEBI (Disclosure & Investor Protection) Guidelines, 2000 are applicable to all public issues by listed and

unlisted companies, all offers for sale and rights issues by listed

companies whose equity share capital is listed, except in case of rights issues where the aggregate value of

securities offered does not exceed Rs.50 lakhs in case of the rights issue where the aggregate value of the

securities offered is less than Rs.50 lakhs, the company is required to prepare the letter of offer in

accordance with the disclosure requirements specified in the DIP guidelines and file the same with SEBI for

its information. Unless otherwise stated, all provisions in these guidelines are also applicable to public

issues by unlisted companies shall also apply to offers for sale to the public by unlisted companies.

SEBIs role in an Issue

Any company making a public issue or a rights issue of securities of value more than Rs 50 lakhs is required

to file a draft offer document with SEBI for its observations. The validity period of SEBIs observation letter is

twelve months only i.e. the company has to open its issue within the period of twelve months starting from

the date of issuing the observation letter.

There is no requirement of filing any offer document / notice to SEBI in case of preferential allotment and

Qualified Institution Placement (QIP). In QIP, Merchant Banker handling the issue has to file the placement

document with Stock Exchanges for making the same available on their websites.


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(a) Till the early nineties, Controller of Capital Issues used to decide about entry of company in the market

and also about the price at which securities should be offered to public. However, following the introduction

of disclosure based regime under the aegis of SEBI, companies can now determine issue price of securities

freely without any regulatory interference, with the flexibility to take advantage of market forces.

(b) The primary issuances are governed by SEBI in terms of SEBI (Disclosures and Investor protection)

guidelines. SEBI framed its DIP guidelines in 1992. The SEBI DIP Guidelines over the years have gone

through many amendments in keeping pace with the dynamic market scenario. It provides a comprehensive

framework for issuing of securities by the companies.

(c) Before a company approaches the primary market to raise money by the fresh issuance of securities it

has to make sure that it is in compliance with all the requirements of SEBI (DIP) Guidelines, 2000. TheMerchant Banker are those specialised intermediaries registered with SEBI, who perform the due diligence

and ensures compliance with DIP Guidelines before the document is filed with SEBI.

(d) Officials of SEBI at various levels examine the compliance with DIP guidelines and ensure that all

necessary material information is disclosed in the draft offer documents.

SEBI does not recommend any issue nor does it take any responsibility either for the financial soundness of

any scheme or the project for which the issue is proposed to be made. The submission of offer document toSEBI does not imply that the same has been cleared or approved by SEBI. The Lead manager certifies that

the disclosures made in the offer document are generally adequate and are in conformity with SEBI

guidelines for disclosures and investor protection in force for the time being. This requirement is to facilitate

investors to take an informed decision for making investment in the proposed issue. The investors are

required take an informed decision purely by themselves based on the contents disclosed in the offer

documents. SEBI is not associated with any issue/issuer. Investors are advised to study all the material facts

pertaining to the issue including the risk factors before considering any investment.

ISSUE REQUIREMENTS

SEBI has laid down eligibility norms for entities accessing the primary market through public issues. There

is no eligibility norm for a listed company making a rights issue as it is an offer made to the existing

shareholders who are expected to know their company. There are no eligibility norms for a listed company

making a preferential issue.


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A)Entry Norms

SEBI has laid down entry norms for entities making a public issue/ offer. Entry norms are different routes

available to an issuer for accessing the capital market.

(i)Anunlisted issuer making a public issue i.e. (making anIPO) is required to satisfy the following

provisions:

EntryNormI (commonlyknownasProfitabilityRoute)

The IssuerCompanyhastomeetthe following requirements:

(a)NetTangible Assetsof atleastRs. 3 Croresineach ofthe preceding three fullyears.

(b)Distributable profitsinatleastthree ofthe immediatelypreceding fiveyears.

(c)Networth of atleastRs. 1 crore ineach ofthe preceding three fullyears.

(d)Ifthe companyhaschanged itsname withinthe lastoneyear, atleast50%

revenue forthe preceding 1yearshould be fromthe activitysuggested bythe new name.

(e)The issue size doesnotexceed 5 timesthe pre] issue networth asperthe audited balance sheetofthe

lastfinancialyear.

To provide sufficient flexibility and also to ensure that genuine companies do not suffer on account of

rigidityof the Parameters, SEBI hasprovided twootheralternative routes tothe companiesnotsatisfying

anyofthe above conditions, for

accessing the primaryMarket, asunder:

EntryNormII (CommonlyknownasQIB Route)

(a) Issue should be through book building route, with at least50% tobe mandatoryallotted tothe Qualified

Institutional Buyers(QIBs).

(b)The minimumpost-issue face value capital shall be Rs. 10 Croresorthere shall be a compulsorymarket-

making foratleast2years.


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Entry Norm III (commonly known as Appraisal Route)

(a) The project is appraised and participated to the extent of 15% by Financial Institutions / Scheduled

Commercial Banks of which at least 10% comes from the appraiser(s).

(b) The minimum post issue face value capital shall be Rs. 10 Crores or there should be a compulsory

market-making for at least 2 years.

In addition to satisfying the aforesaid entry norms, the Issuer Company should also

satisfy the criteria of having at least 1000 prospective allotees in its issue.

(ii) A listed issuer making a public issue (FPO) is required to satisfy the following requirements:

(a) If the company has changed its name within the last one year, atleast 50% revenue for the preceding 1

year should be from the activity suggested by the new name.

(b) The issue size does not exceed 5 times the pre] issue net worth as per the audited balance sheet of the

last financial year. Any listed company not fulfilling these conditions shall be eligible to make a public issue

by complying with QIB Route or Appraisal Route as specified for IPOs.

(iii) Certain category of entities which are exempted from the aforesaid entry norms, are as under:

(a) Private Sector Banks

(b) Public sector banks

(c) An infrastructure company whose project has been appraised by a Public Financial Institution or IDFC or

IL&FS or a bank which was earlier a PFI and not less than 5% of the project cost is financed by any of these

institutions.

Mandatory Norms

An issuer making a public issue is required to inter alia comply with the following provisions mentioned inthe guidelines:

Minimum Promoters contribution and lock-in: In a public issue by an unlisted issuer, the promoters are

required to contribute not less than 20% of the post issue capital which should be locked in for a period of 3

years. Lock in indicates a freeze on the shares. The remaining pre issue capital should also be locked in


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for a period of 1 year from the date of listing. In case of public issue by a listed issuer [i.e. FPO], the

promoters are required to contribute not less than 20% of the post issue capital or 20% of the issue size.

This provision ensures that promoters of the company have some minimum stake in the company for a

minimum period after the issue or after the project for which funds have been raised from the public is

commenced.

IPO Grading: IPO grading is the grade assigned by a Credit Rating Agency registered with SEBI, to the initial

public offering (IPO) of equity shares or other convertible securities. The grade represents a relative

assessment of the fundamentals of the IPO in relation to the other listed equity securities. Disclosure of IPO

Grades, so obtained is mandatory for companies coming out with an IPO.

No unlisted company can make an IPO of equity shares or any other security which may be converted into or

exchanged with equity shares at a later date, unless the following conditions are satisfied as on the date of

filing of Prospectus (in case of fixed price issue) or Red Herring Prospectus (in case of book built issue) withROC:

y the unlisted company has obtained grading for the IPO from at least one credit rating agency;y disclosures of all the grades obtained, along with the rationale/ description furnished by the credit

rating agency(ies) for each of the grades obtained, have been made in the Prospectus (in case offixed price issue) or Red Herring Prospectus (in case of book built issue)

y the expenses incurred for grading IPO have been borne by the unlisted company obtaining gradingfor IPO.)

Other Conditions are:

y No unlisted company can make a public issue of equity share or any security convertible at laterdate into equity share, if there are any outstanding financial instruments or any other right whichwould entitle the existing promoters or shareholders any option to receive equity share capital afterthe initial public offering.

y No company can make a public or rights issue of equity share or any security convertible at laterdate into equity share, unless all the existing partly paid-up shares have been fully paid or forfeitedin a manner specified in clause

y No company shall make a public or rights issue of securities unless firm arrangements of financethrough verifiable means towards 75% of the stated means of finance, excluding the amount to beraised through proposed Public/ Rights issue, have been made.)

Credit Rating of Debt Instruments: No issuer company should make a public issue or rights issue of

convertible debt instruments, unless the following conditions are satisfied, as on date of filing of draft offer


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document with SEBI and also on the date of filing a final offer document with ROC/ Designated Stock

Exchange:

(i) credit rating is obtained from at least one credit rating agency registered with SEBI and should be

disclosed in the offer document;

(ii) The company should not be in the list of willful defaulters of RBI;

(iii) The company should not have defaulted in payment of interest or repayment of principal in respect of

debentures issued to the public, if any, for a period of more than 6 months.

If the credit ratings are obtained from more than one credit rating agencies, all the ratings, including the

unaccepted ratings, should be disclosed in the offer document. All the credit ratings obtained during the

three (3) years preceding the pubic or rights issue of debt instrument (including convertible instruments) for

any listed security of the issuer company should be disclosed in the offer document.

FAST TRACK ISSUES (FTI)

SEBI introduced FTI in order to enable well established and compliant listed companies satisfying certain

specific entry norms/conditions to access Indian Primary Market in a time effective manner. Such companies

can proceed with FPOs / Right Issues by filing a copy of RHP / Prospectus with the RoC or the Letter of Offer

with designated SE, SEBI and Stock Exchanges. Such companies are not required to file Draft Offer

Document for SEBI comments and to Stock Exchanges. Entry Norms for companies seeking to access

Primary Market through FTIs in case aggregate value of securities including premium exceeds Rs. 50 lakhs:

(i) The shares of the company have been listed on any stock exchange having nationwide terminals for a

period of at least three years immediately preceding the date of filing of offer document with RoC/ SE.

(ii) The average market capitalisation of public shareholding of the company is at least Rs. 10,000 Crores

for a period of one year up to the end of the quarter proceeding the month in which the proposed issue is

approved by the Board of Directors / shareholders of the issuer.

(iii) The annualized trading turnover of the shares of the company during six calendar months immediately

preceding the month of the reference date has been at least two percent of the weighted average number of

shares listed during the said six months period.


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(iv) The company has redressed at least 95% of the total shareholder / investor grievances or complaints

received till the end of the quarter immediately proceeding the month of the date of filing of offer document

with RoC/ SE.

(v) The company has complied with the listing agreement for a period of at least three years immediatelypreceding the reference date.

(vi) The impact of auditors qualifications, if any, on the audited accounts of the company in respect of the

financial years for which such accounts are disclosed in the offer document does not exceed 5% of the net

profit/ loss after tax of the company for the respective years.

(vii) No prosecution proceedings or show cause notices issued by the Board are pending against the

company or its promoters or whole time directors as on the reference date.

(viii) The entire shareholding of the promoter group is held in dematerialised form as on the reference date.

PRICING BY COMPANIES ISSUING SECURITIES

Public/Rights Issue by Listed Companies

A listed company whose equity shares are listed on a stock exchange, can freely price its equity shares andany security convertible into equity at a later date offered through a public or rights issue.

Public Issue by Unlisted Companies

An unlisted company eligible to make a public issue and desirous of getting its securities listed on a

recognised stock exchange pursuant to a public issue, may freely price its equity shares or any securities

convertible at a later date into equity shares.

Initial Public Issue by Banks

The banks (whether public sector or private sector) may freely price their issue of equity shares or any

securities convertible at a later date into equity share subject to the approval by the Reserve Bank of India.

Differential Pricing


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In case of Initial public offer by an unlisted company:

a. If the issue price is Rs. 500/- or more, the issuer company has a discretion to fix the face value below Rs.10/- per share subject to the condition that the face value however it should not be less than Rs. 1 per share.

However, this does not apply to initial public offer made by any government company, statutory authority or

corporation or any special purpose vehicle set up by any of them, which is engaged in infrastructure sector.

b. If issue price is less than Rs. 500 per share, the face value should be Rs. 10/- per share;

Indian primary market ushered in an era of free pricing in 1992. Following this, the guidelines have provided

that the issuer in consultation with Merchant Banker shall decide the price. There is no price formulastipulated by SEBI. SEBI does not play any role in price fixation. The company and merchant banker are

however required to give full disclosures of the parameters which they had considered while deciding the

issue price. There are two types of issues one where company and Lead Merchant banker fix a price (called

fixed price) and other, where the company and Lead Manager (LM) stipulate a floor price or a price band and

leave it to market forces to determine the final price (price discovery through book building process).

PRICING OF AN ISSUE

On the basis of Pricing, an issue can be further classified into Fixed Price issue or Book Built issue.

Fixed Price Issue: When the issuer at the outset decides the issue price and mentions it in the Offer

Document, it is commonly known as Fixed price issue.

Book built Issue: When the price of an issue is discovered on the basis of demand received from the

prospective investors at various price levels, it is called Book Built issue.

BOOK BUILDING

Book building is a process of price discovery. The issuer discloses a price band or floor price before

opening of the issue of the securities offered. On the basis of the demands received at various price levels

within the price band specified by the issuer, Book Running Lead Manager (BRLM) in close consultation with

the issuer arrives at a price at which the security offered by the issuer, can be issued.


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PriceBand

Thepricebandis a bandof pricewithinwhich investors canbid. Thespreadbetween thefloorandthecap

of thepricebandshouldnot bemorethan20%. Thepricebandcanberevised. Ifrevised, thebidding period

shall beextendedforafurtherperiodof threedays, subject to thetotal bidding periodnot exceeding thirteen

days.

Process of Book Building

Book building is aprocess of pricediscovery. A floorpriceorpricebandwithinwhich thebids canmoveis

disclosedat least two working days beforeopening of theissueincaseofanIPO andatleast oneday before

opening of theissueincaseofanFPO. Theapplicants bidfortheshares quoting thepriceandthequantity

that they would liketo bidat. Afterthebidding process is complete, the cut off priceis arrivedat basedon

thedemandof securities. Thebasis of Allotment is then finalizedandallotment/refund is undertaken. Thefinal prospectus with all thedetails including the final issuepriceandtheissuesizeis filedwith ROC, thus

completing theissueprocess. Only theretail investors havetheoptionof bidding at cutoff.

Cut off option is available foronly retail individual investors i.e. investors who areapplying for securities

worth up to Rs 1,00,000/ only. Such investors are required to tick thecut off optionwhich indicates their

willingness to subscribeto shares at any pricediscoveredwithinthepriceband. Unlikepricebids (wherea

specific price is indicated) which can be invalid, if price indicated by applicant is lower than the price

discovered, thecut off bids always remainvalidforthepurposeofallotment

Onecanchangeorrevisethequantity orpriceinthebidusing theform forchanging/revising thebidthat is

availablealong with theapplication form. However, theentireprocess ofchanging orrevising thebids is

requiredto becompletedwithinthedateofclosureof theissue. Onecanalso cancel thebidanytimebefore

thefinalizationof thebasis ofallotment by approaching/ writing/ making anapplicationto theregistrarto the

issue.

TYPES OF INVESTORS & ALLOTMENTS MADE TO THEM

Allotment ofissues is madeto different categories of Investors. Let us understandthetypes ofinvestors for

allotment purpose.

Retail individual Investor(RIIs)


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Retail individual Investor (RIIs) means an investor who applies or bids for securities for a value of not more

than Rs. 1,00,000.

Qualified Institutional Buyer

Qualified Institutional Buyer means:

a) a public financial institution as defined in section 4A of the Companies Act, 1956;

b) a scheduled commercial bank;

c) a mutual fund registered with the Board;

d) a foreign institutional investor and sub]account registered with SEBI, other than a sub account which is

a foreign corporate or foreign individual;

e) a multilateral and bilateral development financial institution;

f) a venture capital fund registered with SEBI;

g) a foreign venture capital investor registered with SEBI;

h) a state industrial development corporation;

i) an insurance companyregistered with the Insurance Regulatory

and Development Authority(IRDA);

j) a provident fund with minimum corpus of Rs. 25 Crores;

k) a pension fund with minimum corpus of Rs. 25 Crores);

l) National Investment Fund

Non Institutional Investors (NIIs)

Non Institutional Investors are those who do not fall under the categories of Retail Individual Investor and

Qualified Institutional Investor.

ALLOTMENT TO VARIOUS KINDS OF INVESTORS

In case of Book Built issue

1. In case an issuer companymakes an issue of 100% of the net offer to public through 100% book building

process


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(a) Not less than 35% of the net offer to the public shall be available for allocation to retail individual

investors;

(b) Not less than 15% of the net offer to the public shall be available for allocation to Non institutional

investors i.e. investors other than retail individual investors and

Qualified Institutional Buyers;

(c) Not more than 50% of the net offer to the public shall be available for allocation to Qualified Institutional

Buyers:

2. In case of compulsory Book Built Issues at least 50% of net offer to public being allotted to the Qualified

Institutional Buyers (QIBs), failing which the full subscription money will be refunded.

3. In case the book built issues are made pursuant to the requirement of mandatory allocation of 60% toQIBs in terms of Rule 19(2)(b) of Securities Contract (Regulation) Rules, 1957, the respective figures are 30%

for RIIs and 10% for NIIs.

In case of fixed price issue

The proportionate allotment of securities to the different investor categories in a fixed price issue is as

described below:

1. A minimum 50% of the net offer of securities to the public shall initially be made available for allotment to

retail individual investors, as the case may be.

2. The balance net offer of securities to the public shall be made available for allotment to:

a. Individual applicants other than retail individual investors, and

b. Other investors including corporate bodies/ institutions irrespective of the number of securities applied

for.

FIRM ALLOTMENT INVESTOR CATEGORIES

SEBI (DIP) guidelines provide that an issuer making an issue to public can allot shares on firm basis to some

categories as specified below:


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(i) Indian and Multilateral Development Financial Institutions,

(ii) Indian Mutual Funds,

(iii) Foreign Institutional Investors including Non]Resident Indians and Overseas Corporate Bodies and

(iv) Permanent/regular employees of the issuer company.

(v) Scheduled Banks

OCBs are prohibited by RBI to make investment.

Reservation on Competitive Basis is when allotment of shares is made in proportion to the shares applied

for by the concerned reserved categories. Reservation on competitive basis can be made in a public issue to

the following categories:

(i) Employees of the company.

(ii) Shareholders of the promoting companies in the case of a new company and shareholders of group

companies in the case of an existing company.

(iii) Indian Mutual Funds.

(iv) Foreign Institutional Investors (including non resident Indians and overseas corporate bodies).

(v) Indian and Multilateral development Institutions.

(vi) Scheduled Banks.

In a public issue by a listed company, the reservation on competitive basis can be made for retail individual

shareholders and in such cases the allotment to such shareholders shall be on proportionate basis

There is no discretion in the allotment process. All allotees are allotted shares on a proportionate basis

within their respective investor categories.

INTERMEDIARIES INVOLVED IN THE ISSUE PROCESS

Intermediaries which are registered with SEBI are Merchant Bankers to the issue (known as Book Running

Lead Managers (BRLM) in case of book built public issues), Registrars to the issue, Bankers to the issue &


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Underwriters to the issue who are associated with the issue for different activities. Their addresses,

telephone/fax numbers, registration number, and contact person and email addresses are disclosed in the

offer documents.

Merchant Banker

Merchant banker does the due diligence to prepare the offer document which contains all the details about

the company. They are also responsible for ensuring compliance with the legal formalities in the entire issue

process and for marketing of the issue.

Registrars to the Issue

They are involved in finalizing the basis of allotment in an issue and for sending refunds, allotment etc.

Bankers to the Issue

The Bankers to the Issue enable the movement of funds in the issue process and therefore enable the

registrars to finalize the basis of allotment by making clear funds status available to the Registrars.

Underwriters

Underwriters are intermediaries who undertake to subscribe to the securities offered by the company in case

these are not fully subscribed by the public, in case of an underwritten issue.

ASBA

To make the existing public issue process more efficient, SEBI introduced a supplementary process ofapplying in public issues, viz, the Applications Supported by Blocked Amount (ASBA) in July 2008. ASBA isan application containing an authorization to block the application money in the bank account, forsubscribing to an issue. If an investor is applying through ASBA, his application money is debited from thebankaccount only if his/her application is selected for allotment after the basis of allotment is finalized, orthe issue is withdrawn/failed .In case of rights issue his application money is debited from the bankaccountafter the receipt of instruction from the registrars. The ASBA process is available in all public issues madethrough the bookbuilding route. In September 2008, the ASBA facility was extended to Rights Issue.

Meaning

ASBA stands for Application Supported by Blocked amount. ASBA is an application containing an

authorization to blockthe application money in the bankaccount, for subscribing to an issue. If an investor

is applying through ASBA, his application money will be debited from the bank account only if his/her

application is selected for allotment after the basis of allotment is finalized, or the issue is withdrawn/failed


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.In case of rights issue his application money shall be debited from the bank account after the receipt of

instruction from the registrars.

ASBA Investor

ASBA Investor means an Investor who intends to apply through ASBA process and is a Resident Retail

Individual Investor, is bidding at cut-off, with single option as to the number of shares bid for; is applying

through blocking of funds in a bank account with the SCSB; has agreed not to revise his/her bid; is not

bidding under any of the reserved categories.

An investor can apply through ASBA process in a public issue through book building route provided he/

she:

a. is a Resident Retail Individual Investor i.e. applying for shares/ securities up.

b. is bidding at cut off, with single option as to the number of shares bid for.

c. is applying through blocking of funds in a bank account with theSCSB;

d. has agreed not to revise his/her bid;

e. is not bidding under any of the reserved categories.

SEBI has permitted ASBA process in rights issue on pilot basis. All shareholders of the company as on

record date are permitted to useASBA for making applications in rights issue provided he /she:

a. is holding shares in dematerialised form and has applied for entitlements or additional shares in the issue

in dematerialised form;

b. has not renounced its entitlements in full or in part;

c. is not a renouncee to the Issue;

d. applies through a bank account maintained withSCSBs.

Advantages ofASBA


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Premium and Discount

Securities are generally issued in denominations of 5, 10 or 100. This is known as the Face Value or ParValue of the security as discussed earlier. When a security is sold above

wealth managment 1

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