Stock Market Operation-I

As per the new syllabus of KSKV Kachchh University

(NEP-2020)

Bachelor of Commerce (NEP-2020)

Second Year Semester-III
Skill Enhancement Course (SEC)
Course Credit -02
English Language

By- Faysal Khatri

 Unit-1 Introduction

SECURITIES- MEANING
Securities are financial instruments issued to raise funds. The primary function of the
securities markets is to enable to flow of capital from those that have it to those that need it.
Securities market help in transfer of resources from those with idle resources to others who have a
productive need for them. Securities markets provide channels for allocation of savings to
investments and thereby decouple these two activities. As a result, the savers and investors are not
constrained by their individual abilities, but by the economy’s abilities to invest and save respectively,
which inevitably enhances savings and investment in the economy.

TYPES OF SECURITIES:
1. Equity Securities: Equity refers to stocks and shares. It represents the ownership interest
held by shareholders in a company. The earnings of a shareholder are usually in the form of
dividends. Also, listed equity securities are volatile and are the prices rise or fall as per the
market conditions.

2. Debt Securities: Debt or fixed income securities represent that the money is borrowed and
shall be repaid with interest upon maturity. These securities include government bonds,
certificate of deposits, corporate bonds, treasury bills etc. These are bought and sold with a
promise to repay the same with interest. Also, the debt agreement predetermines the rate of
interest, the amount borrowed, the maturity and renewal date.

3. Derivative Securities: The value of derivatives securities depends on the underlying asset.
The underlying asset can be stocks, bonds, interest rates, market indices, or goods. It is a
contract between two or more parties. Where the value of the investment is derived from
underlying financial assets. The main purpose of derivatives is to 2inimize risk. One can
achieve it by insuring against the price fluctuations. The different types of derivatives are
future, forwards, options, and swaps

4. Hybrid Securities: Hybrid security is a type of security that has both debt and equity
securities characteristics. Many institutions use hybrid securities to borrow money from
investors. Examples of hybrid securities are convertible bonds, where the bondholder can
convert to equity stocks during the bond tenure or at maturity. Preferred stocks, these allow
the holder to receive dividends prior to common stockholders.

CONCEPT OF RISK:
Risk is the degree of uncertainty or potential variability of returns associated with an investment. It
can arise from various factors, including market fluctuations, economic conditions, and specific
characteristics of the investment. All investments involve some degree of risk. In finance, risk refers
to the degree of uncertainty and/or potential financial loss inherent in an investment decision. In
general, as investment risks rise, investors seek higher returns to compensate themselves for taking
such risks.

DEFINITION OF RISK MANAGEMENT: Risk management is an integrated process of delineating

(define) specific areas of risk, developing a comprehensive plan, integrating the plan, and conducting
the Ongoing evaluation’ – Dr. P.K. Gupta.

TYPES OF RISKS:
1. Market Risk: The risk of losses in a portfolio due to movements in market variables, such as
interest rates, exchange rates, commodity prices, and equity prices.
a) Interest Rate Risk: The risk that changes in interest rates will affect the value of fixed
income securities.
b) Currency Risk (Exchange Rate Risk): The risk of losses due to changes in exchange
rates for investments denominated in foreign currencies.
c) Commodity Price Risk: The risk associated with fluctuations in the prices of
commodities, affecting industries reliant on these raw materials.

2. Credit Risk: The risk of loss arising from the default of a borrower or counterparty. It is
prevalent in lending and investing activities.
a) Default Risk: The risk that a borrower fails to repay the principal or interest on a loan.
b) Credit Spread Risk: The risk that the yield spread between a risky asset (e.g.,
corporate bonds) and a risk-free asset (e.g., government bonds) widens.

3. Operational Risk: The risk of loss resulting from inadequate or failed internal processes,
systems, people, or external events. It encompasses a wide range of factors, including human
error, fraud, and technology failures.
a) Human Error: Mistakes made by individuals within an organization.
b) Technology Risk: Risks associated with the use of technology, including cyber
security threats and system failures.
c) Fraud Risk: The risk of losses due to fraudulent activities by employees or external
parties.

4. Liquidity Risk: The risk that an asset cannot be bought or sold in the market without affecting
its price due to insufficient market depth or trading volume.
a) Market Liquidity Risk: The risk that an asset cannot be sold quickly at its current
market price.
b) Funding Liquidity Risk: The risk of being unable to meet short-term financial
obligations due to a lack of available funding.
 5. Political and Regulatory Risk: The risk arising from changes in government policies,
regulations, or political instability that can impact the economic environment and business
operations.
a) Policy Risk: The risk associated with changes in government policies affecting
industries or markets.
b) Regulatory Risk: The risk of adverse effects on an organization due to changes in
regulations

6. Legal Risk: The risk of legal actions or liabilities that can result in financial losses for an
organization.
a) Lawsuits: Legal actions filed against the company.
b) Regulatory Fines: Penalties imposed by regulatory authorities for non-compliance.

7. Environmental Risk: The risk associated with the impact of environmental factors on
businesses, investments, or projects.
a) Climate Change Risk: Risks arising from changes in climate patterns.
b) Natural Disasters: Risks associated with events like earthquakes, floods, or
hurricanes.

MEASUREMENT OF RISK:
In finance, the measurement of risk is a crucial aspect of decision-making, as it helps investors and
financial professionals assess the potential variability of returns and make informed choices about
investments. Various quantitative methods and metrics are employed to measure and quantify risk.

1. Volatility: Volatility measures the degree of variation of a trading price series over time.
Higher volatility indicates a greater potential for large price swings, representing increased
risk.

Measurement: Commonly calculated using standard deviation, which measures the

dispersion of returns around the average return.

2. Beta: Beta measures the sensitivity of an investment’s returns to market movements. A beta
greater than 1 indicates higher volatility than the market, while a beta less than 1 suggests
lower volatility.

Interpretation: A beta of 1 implies the investment moves in line with the market, while a beta
less than 1 suggests lower volatility, and a beta greater than 1 indicates higher volatility.

3. Value at Risk (VaR): VaR is a statistical measure that quantifies the maximum potential loss,
at a given confidence level, over a specific time horizon. It provides an estimate of the worst
expected loss under normal market conditions.
 Calculation: VaR is often calculated using historical simulation, parametric methods, or Monte
Carlo simulation.

4. Standard Deviation: Standard deviation measures the degree of variation of a set of values
from their mean. In finance, it is commonly used to quantify the historical volatility of an
investment.

Interpretation: A higher standard deviation indicates greater historical price volatility.

5. Sharpe Ratio: The Sharpe Ratio assesses the risk-adjusted return of an investment. It
compares the excess return of the investment over the risk-free rate to its volatility.

Interpretation: A higher Sharpe Ratio indicates a better risk-adjusted performance.

6. Covariance and Correlation:

Covariance: Measures the degree to which two variables (e.g., asset returns) move together.
Positive covariance indicates a positive relationship, while negative covariance suggests an
inverse relationship.

Correlation: Standardizes covariance, providing a measure between -1 and 1. A correlation of

1 indicates a perfect positive relationship, -1 indicates a perfect negative relationship, and 0
indicates no relationship.
7. Conditional Value at Risk (CvaR): CvaR, also known as Expected Shortfall, is an extension
of VaR that quantifies the expected loss given that the loss exceeds the VaR threshold.

Interpretation: It provides a measure of the potential severity of losses beyond the VaR level.

8. Risk-Adjusted Return: This metric adjusts the return of an investment for the level of risk
taken. Common measures include the Sharpe Ratio, Treynor Ratio, and Jensen’s Alpha.

Interpretation: Higher risk-adjusted return values are generally preferable, indicating better
performance relative to the amount of risk taken.

CONCEPT OF RETURN:
A return, also known as a financial return, in its simplest terms, is the money made or lost on an
investment over some period. A return can be expressed nominally as the change in dollar value of
an investment over time. A return can also be expressed as a percentage derived from the ratio of
profit to investment.

Definition: Return is the financial gain or loss made on an investment relative to the amount
invested. It is usually expressed as a percentage.
TYPES OF RETURN:

1. Capital Gain:
Definition: Capital gain is the profit made from the increase in the value of an investment. It is
realized when the investment is sold at a higher price than its purchase price.

Calculation: Capital Gain = Selling Price – Purchase Price

2. Dividend Yield:
Definition: Dividend yield is the income generated by an investment in the form of dividends,
expressed as a percentage of the investment’s current market price.

Calculation: Dividend Yield = (Annual Dividends per Share / Current Market Price) * 100

3. Interest Income:
Definition: Interest income is the return earned on fixed-income securities such as bonds or
certificates of deposit.

Calculation: Interest Income = Principal Amount * Interest Rate

4. Total Return:
Definition: As mentioned earlier, total return encompasses all components, including capital
gains, interest income, and dividends.

Calculation: Total Return = Capital Gain + Dividend Income + Interest Income

5. Real Return:
Definition: Real return is the return on an investment adjusted for inflation. It provides a more
accurate measure of purchasing power.

Calculation: Real Return = (1 + Nominal Return) / (1 + Inflation Rate) – 1

6. Risk-Adjusted Return:
Definition: Risk-adjusted return considers the level of risk taken to achieve a certain level of
return. Common measures include the Sharpe Ratio, Trey nor Ratio, and Jensen’s Alpha.

Calculation: Various formulas depending on the specific risk-adjusted measure.

7. Total Shareholder Return (TSR):

Definition: TSR measures the total return received by shareholders through capital
appreciation and dividends.
 Calculation: TSR = (Ending Share Price – Beginning Share Price + Dividends) / Beginning
Share Price

AN INTRODUCTION TO FINANCIAL MARKETS:

A financial market is a market in which people trade financial securities and derivatives such as
futures and options at low transaction costs. Securities include stocks and bonds, and precious
metals. The term “market” is sometimes used for what are more strictly exchanges, organizations that
facilitate the trade in financial securities, e.g., a stock exchange or commodity exchange. This may be
a physical location (like the NSE, BSE, LSE, and JSE) or an electronic system (like NASDAQ). Much
trading of stocks takes place on an exchange; still, corporate actions (merger, spinoff) are outside an
exchange, while any two companies or people, for whatever reason, may agree to sell stock from the
one to the other without using an exchange. A financial market is a market in which people and
entities can trade financial securities, commodities and other fungible assets at prices that are
determined by pure supply and demand principles. Markets work by placing the two counterparts,
buyers and sellers, at one place so they can find each other easily, thus facilitating the deal between
them.

DEFINITION:

Financial Market refers to a marketplace, where creation and trading of financial assets, such as
shares, debentures, bonds, derivatives, currencies, etc. take place. It plays a crucial role in allocating
limited resources, in the country’s economy. It acts as an intermediary between the savers and
investors by mobilizing funds between them.

FUNCTIONS OF FINANCIAL MARKET:

1. It facilitates mobilization of savings and puts it to the most productive uses.

2. It helps in determining the price of the securities. The frequent interaction between investors
helps in fixing the price of securities, based on their demand and supply in the market.
3. It provides liquidity to tradable assets, by facilitating the exchange, as the investors can readily
sell their securities and convert assets into cash.
4. It saves the time, money and efforts of the parties, as they don’t have to waste resources to
find probable buyers or sellers of securities. Further, it reduces cost by providing valuable
information, regarding the securities traded in the financial market.
5. Financial markets may be viewed as channels through which flow loanable funds directed from
a supplier who has an excess of assets toward a demander who experiences a deficit of
funds.
There are different types of financial markets and their characterization depends on the properties of
the financial claims being traded and the needs of the different market participants. We recognize
several types of markets, which vary based on the type of instruments traded and their maturity.

CAPITAL MARKET:

The capital market aids raising of capital on a long-term basis, generally over 1 year. It consists of a
primary and a secondary market and can be divided into two main subgroups – Bond market and
Stock market.

 The Bond market provides financing by accumulating debt through bond issuance and bond
trading.
 The Stock market provides financing by sharing the ownership of a company through stocks
issuing and trading

MONEY MARKET:

The money market enables economic units to manage their liquidity positions through lending and
borrowing short-term loans, generally less than 1 year. It facilitates the interaction between
individuals and institutions with temporary surpluses of funds and their counterparts who are
experiencing a temporary shortage of funds.

One can borrow money within a quite short period of time via a standard instrument, the so-called
“call money”. These are funds borrowed for one day, from 12:00 PM today until 12:00 PM on the next
day, after which the loan becomes “on call” and is callable at any time. In some cases, “call money”
can be borrowed for a period of up to one week.

FOREIGN EXCHANGE MARKET:

The foreign exchange market abets the foreign exchange trading. It’s the largest, most liquid market
in the world with an average traded value of more than $5 trillion per day. It includes all of the
currencies in the world and any individual, company or country can participate in it.

COMMODITY MARKET:

The commodity market manages the trading in primary products which takes place in about 50 major
commodity markets where entirely financial transactions increasingly outstrip physical purchases
which are to be delivered. Commodities are commonly classified in two subgroups.

 Hard commodities are raw materials typically mined, such as gold, oil, rubber, iron ore etc.
 Soft commodities are typically grown agricultural primary products such as wheat, cotton,
coffee, sugar etc.
DERIVATIVES MARKET:

It facilitates the trading in financial instruments such as futures contracts and options used to help
control financial risk. The instruments derive their value mostly from the value of an underlying asset
that can come in many forms – stocks, bonds, commodities, currencies or mortgages. The
derivatives market is split into two parts which are of completely different legal nature and means to
be traded.

EXCHANGE-TRADED DERIVATIVES:

These are standardized contracts traded on an organized futures exchange. They include futures,
call options and put options. Trading in such uniformed instruments requires from investors a
payment of an initial deposit which is settled through a clearing house and aims at removing the risk
for any of the two counterparts not to cover their obligations.

OVER-THE-COUNTER DERIVATIVES:

Those contracts that are privately negotiated and traded directly between the two counterparts,
without using the services of an intermediary like an exchange. Securities such as forwards, swaps,
forward rate agreements, credit derivatives, exotic options and other exotic derivatives are almost
always traded this way. These are tailor-made contracts that remain largely unregulated and provide
the buyer and the seller with more flexibility in meeting their needs.

INSURANCE MARKET:

It helps in relocating various risks. Insurance is used to transfer the risk of a loss from one entity to
another in exchange for a payment. The insurance market is a place where two peers, an insurer and
the insured, or the so-called policyholder, meet in order to strike a deal primarily used by the client to
hedge against the risk of an uncertain loss.

INTRODUCTION TO CAPITAL MARKET:

The term capital market refers to facilities and institutional arrangements through which long-term
funds; both debt and equity are raised and invested. It consists of a series of channels through which
savings of the community are made available for industrial and commercial enterprises and for the
public in general. An ideal capital market is one where finance is available at reasonable cost. The
process of economic development is facilitated by the existence of a well functioning capital market.
In fact, development of the financial system is seen as a necessary condition for economic growth. It
is essential that financial institutions are sufficiently developed and that market operations are free,
fair, competitive and transparent. The capital market should also be efficient in respect of the
information that it delivers, minimize transaction costs and allocate capital most productively.

DEFINITION:

Capital market can be defined as” an organized mechanism for transfer of money capital and
financial resources from investing parties to entrepreneurs engaged in industry and commerce.”

Need for and importance of capital market:

1. It is only with the help of the capital market; long-term funds are raised by the business
community.
2. It provides an opportunity for the public to invest their savings in attractive securities which
provide a higher return.
3. A well-developed capital market is capable of attracting funds even from foreign countries.
Thus, foreign capital flows in to the country through foreign investments.
4. Capital market provides an opportunity for the investing public to know the trend of different
securities and the conditions prevailing in the economy.
5. It enables the country to achieve economic growth as capital formation is promoted through
the capital market
6. Existing companies, because of their performance, will be able to expand their industries and
also go in for diversification of their activities due to the capital market.
7. Capital market is the barometer of the economy by which you are able to study the economic
conditions of the country and it enables the government to take suitable action.
8. Through different media, the public are informed about the prices of different securities that
enable them to take necessary investment decisions.
9. Capital market provides opportunities for different institutions such as commercial banks,
mutual funds, investment trust, etc., to earn a good return on the investing funds. They employ
financial experts who are able to predict the changes in the market and accordingly undertake
suitable portfolio investments.

Functions of Capital Market:

1. Mobilizing long term savings to finance long-term investments.

2. Providing risk capital in the form of equity and quasi-equity to entrepreneurs.
3. Provide liquidity with a mechanism enabling the investors to sell financial assets.
4. Lower the cost of transaction and information.
5. Improve the efficiency of capital allocation through the competitive price mechanism.
6. Enable quick valuation of financial instruments – both equity and debt.
 7. Provide insurance against market risk or price risk through derivative trading and default
risk through investor protection fund.
8. Enable wider participation by enhancing the width of the market by encouraging both
individual and institutional investors within and outside the country.
9. Provide operational efficiency through – a) simplified transaction procedure. B) Lowering
settlement timings and c) lowering transaction cost.
10. Develop integration among – a) Real and financial sectors. B) equity and debt instruments.
C)long term and short term funds. D) private and government sectors and domestic and
foreign funds.

CAPITAL MARKET IN INDIA

In India Capital market into:

1. Industrial Security Market
2. Government Securities Market

1. INDUSTRIAL SECURITIES MARKET:

The Industrial securities market refers to the market for shares and bonds of the existing companies,
as well as those of new companies. This market is further divided into New Issue Market (NIM) and
Old Issue Market. The New Issue Market is also called Primary Market. Likewise, the Old Issue
Market is also called Secondary Market or Stock Exchange. However, it is important to emphasize
that the New Issue Market and Stock Exchange are inter-linked and work in conjunction with each
other. Although they differ from each other in the sense that the New Issue Market deals with ‘new
securities’ issued for the first time to the public and Stock Exchange deals with those securities which
have already been issued once to the public.

2. GOVERNMENT SECURITY MARKETS:

Government securities refer to the marketable debt issued by the government of semigovernment
bodies. A government security is a claim on the government. It is a totally securer financial instrument
ensuring safety of both capital and income. That is why it is called gilt-edged security or stock.
Central Government securities are the safest among all securities.

Government securities are issues by:

 Central Government
 State Government
 Semi-Government authorities like local government authorities, e.g., city corporations and
municipalities
 Autonomous institutions, such as metropolitan authorities, port trusts, development trusts,
state electricity boards.
 Public Sector Corporations
 Other governmental agencies, such as SFCs, NABARD, LDBs, SIDCs, housing boards etc.

DEVELOPMENT OF SECURITIES MARKET IN INDIA:

The development of securities markets in India has been a significant aspect of the country’s
economic evolution. The Indian securities market has undergone several phases of development,
marked by regulatory reforms, technological advancements, and increased investor participation.
Here’s an overview of the key stages in the development of security markets in India:

1. Introduction of Stock Exchanges (19th Century):

The Bombay Stock Exchange (BSE) was established in 1875, making it one of the oldest
stock exchanges in Asia. Early trading in securities was characterized by informal gatherings
under banyan trees, which eventually evolved into more organized exchanges.

2. Formation of the Securities and Exchange Board of India (SEBI) – 1988:

SEBI was established in 1988 as an independent regulatory body to oversee and regulate the
securities market SEBI’s formation marked a crucial step toward ensuring transparency,
investor protection, and the efficient functioning of the securities market.

3. National Stock Exchange (NSE) – 1994:

The National Stock Exchange (NSE) was established in 1994 to provide a modern, electronic
trading platform with nationwide reach.NSE introduced the screen-based trading system,
replacing the open outcry system, which enhanced market efficiency.

4. Dematerialization and Central Depository System (1996-1998):

The process of dematerialization began in 1996, allowing investors to convert physical share
certificates into electronic form. The National Securities Depository Limited (NSDL) and
Central Depository Services Limited (CDSL) were established to facilitate electronic holding
and transfer of securities

5. Introduction of Derivatives (2000):

SEBI permitted the trading of equity derivatives in 2000, allowing investors to hedge their risks
and speculate on future price movements. This move added depth and liquidity to the market
and attracted a wider range of participants.

6. Liberalization and Foreign Institutional Investors (FIIs) – 1990s:

Economic reforms in the 1990s led to liberalization, allowing increased foreign participation in
Indian markets. The entry of FIIs brought in capital, expertise, and global best practices.

7. Introduction of Online Trading and Electronic Clearing – 2000s:

The adoption of online trading platforms in the early 2000s made stock trading more
accessible to retail investors. Electronic clearing systems, such as the National Electronic
Clearing Service (NECS), were introduced to streamline fund transfers.

8. Mutual Fund Industry Growth:

The mutual fund industry witnessed significant growth, offering investors diversified
investment options and professional fund management.

9. Initiatives for Investor Protection and Education:

SEBI has introduced various initiatives to enhance investor protection, such as Know Your
Customer (KYC) norms and investor education programs.

10. Listing of Companies and IPOs:

The listing of Indian companies on stock exchanges, along with Initial Public Offerings (IPOs),
has provided avenues for capital raising and increased market capitalization.
11. Regulatory Reforms and Market Infrastructure Development:
SEBI has continued to introduce regulatory reforms to enhance market integrity, transparency,
and investor confidence. Infrastructure development includes the establishment of market
segments like SME exchanges to support small and medium-sized enterprises.
 Unit-2: Primary Market

MEANING:
The Industrial securities market consists of new issue market and stock exchange. The new
issue market deals with the new securities which were not previously available to the investing public.
It is the market that is offering securities to the investing public for the first time.

The new issue market encompasses all institutions dealing in fresh claim. These may be in the
form of Equity shares, Preference shares, Debentures, Right issues, Deposits etc.

FEATURES OF PRIMARY MARKETS:

1. The securities are issued by the company directly to the investors.
2. The company receives the money and issues new securities to the investors.
3. The primary markets are used by companies for the purpose of setting up new ventures/
business or for expanding or modernizing the existing business.
4. Primary market performs the crucial function of facilitating capital formation in the economy.

FUNCTIONS OF PRIMARY MARKETS:

The main functions of a new issue market are to facilitate transfer of resources from savers to
the users. The main functions of a new issue market can be divided into a triple service functions:

1. Origination
2. Underwriting
3. Distribution

1. Origination:
Origination refers to the work of investigation, analysis and processing of new project
proposals. Origination starts before an issue is actually floated in the market. A careful study of the
viability of the project has to be studied to ensure soundness of the project in the preliminary stage.
The advisory services are also the functions of new issue market which improve the quality of capital
issues.
This origination function is done by merchant bankers who may be commercial banks, all India
financial institutions or private firms.

2. Underwriting:
Underwriting is one of the most important functions in the financial world wherein an individual
or an institution undertakes the risk associated with a venture, an investment, or a loan in lieu of a
premium. Underwriters are found in banking, insurance, and stock markets.
Underwriting is an agreement, whereby the underwriter promises to subscribe to a specified
number of shares or debentures or a specified amount of stock in the event of public not subscribing
to the issue. If the issue is fully subscribed, then there is no liability for the underwriter. If a part of
shares issues remains unsold, the underwriter will buy the shares. Thus, underwriting is a guarantee
for the marketability of shares.

Types of underwriting:

There are two types of underwriting. They are

 1. Institutional underwriting – IDBI, IFCI, UTI, SBI Capital Market
2. Non-Institutional underwriting – Any NBFC.

Institutional underwriting in India helps companies to raise capital in their early stages. In fact, many
companies which may not come to the notice of the public were promoted due to the support given
by institutional underwriters. Many institutional underwriters were responsible for the promotion of
infrastructure companies in the area of steel, chemicals, fertilizer, etc.

Advantages of underwriting:

1. Large issues could be undertaken successfully.

2. Companies with a long gestation period cannot raise capital without the support of
professional underwriters.
3. Underwriters undertake the burden of highly specialised function of distributing securities.
4. New projects in the market could be taken boldly
5. They provide expert advice with regard to timing of security issue, the pricing of issue, the
size and type of securities to be issued, etc.,
6. Public confidence on the issue is enhanced when underwriting is done by reputed
underwrites.

3. Distribution:
Distribution is the function of sale of securities to ultimate investors. This service is performed
by brokers and agents who maintain a regular and direct contact with the ultimate investors.

METHODS OF FLOATING NEW ISSUES IN THE PRIMARY MARKET

1. Public issue:

When a company raises funds by selling (issuing) its shares (or debenture / bonds) to the
public through issue of offer document (prospectus), it is called a public issue. Under this method the
issuing company directly offers to the general public/ institutions at a stated price through a document
is known as a public issue. The prospectus must contain all the information about the issue like
Name and address , Names of Directors, Dates of opening and closing the subscription list, Minimum
subscription. According to Companies Act 1956, every application form must be accompanied by a
prospectus. Now, it is no longer necessary to furnish a copy of the prospectus along with every
application form as per the Companies Amendment 1988.

Merits

 It has the advantage of inviting a large section of the investing public through advertisement.
 It is a direct method and no intermediaries are involved in it.

Demerits
 It is an expensive method.
 This method is suitable only for large issues.

2. Offer for sale:

 The method of offer of sale consists in outright sale of securities through the intermediary of
issue houses or share brokers. In other words, the shares are not offered to the public directly.
Institutional investors like venture funds, private equity funds etc., invest in unlisted company when it
is very small or at an early stage. Subsequently, when the company becomes large, these investors
sell their shares to the public, through issue of offer document and the company’s shares are listed in
stock exchange. This method consists of two stages. In the first stage is a direct sale by the issuing
company to the issue house and brokers at an agreed price. In the second stage, the intermediaries
resell the above securities to the ultimate investors. It is also called Bought Out Deals (BOD).

Advantages:
1. The company is relieved from the problem of printing and advertisement of prospectus and
making allotment of shares.
2. The intermediaries get higher return.
3. BOD enables an issuer with good project to obtain funds with a minimum cost without under
subscription.

Disadvantages:
1. The company will not be benefited when the shares are sold at a higher price by the
intermediaries.

3. Private Placement:

The shares of the companies are given to the investing public with the help of issue houses.
This method is adopted by certain companies as it prevents the presence of underwriters. The issue
houses are responsible for the sale of the shares and no prospectus is required under this system. It
also involves minimum expenditure. Here the brokers would make profit in the process of reselling to
the public. There is no need for a formal prospectus as well as underwriting agreement.

Advantages:
1. This method is suitable when small companies issue their shares.
2. There are no entry barriers for a company to access the private placement market.
3. The terms of issue is flexible since the issue deals with only few institutional investors.
4. There are no entry barriers for a company to access the private placement market.
5. This method is also suitable for first generation entrepreneurs.

Disadvantages:
1. The securities are not widely distributed to the large section of investors.
2. This method of private placement is used to a limited extent in India.

4. Rights issue (RI):

Right issue is a method of raising funds in the market by an existing company. When a
company raises funds from its existing shareholders by selling (issuing) those new shares /
debentures, it is called as rights issue. Right shares are offered to the existing shareholders in a right
proportion to their existing share ownership. The ratio in which the new share or debentures are
offered to the existing share capital would depend upon the requirement of capital. The offer
document for a rights issue is called as the Letter of Offer and the issue is kept open for 30-60 days.
Existing shareholders are entitled to apply for new shares in proportion to the number of shares
already held.
 Advantages:
1. The cost of issue is minimum. There is no underwriting, brokerage, advertising and printing
of prospectus expenses.
2. It prevents the directors from issuing new shares in their own name or to their relatives at a
lower price and get controlling right.

5. Initial Public Offering – IPO

The process of offering shares in a private corporation to the public for the first time is called an initial
public offering (IPO). Growing companies that need capital will frequently use IPOs to raise money,
while more established firms may use an IPO to allow the owners to exit some or all their ownership
by selling shares to the public. In an initial public offering, the issuer, or company raising capital,
brings in underwriting firms or investment banks to help determine the best type of security to issue,
offering price, amount of shares and time frame for the market offering.

Advantages of an IPO
The primary objective of an IPO is usually to raise capital for a business. However, a public
offering has other benefits as well.

 A public company can raise additional funds in the future through secondary offerings
because it already has access to the public markets through the IPO.
 Many companies will compensate executives or other employees through stock
compensation. Stock in a public company is more attractive to potential employees
because shares can be sold more easily. Being a public company may help a company
recruit better talent.

Disadvantages of an IPO
An IPO is expensive, and the costs of maintaining a public company are ongoing and usually
unrelated to the other costs of doing business. There are other disadvantages of an IPO as
well.

 Fluctuations in a company's share price can be a distraction for management, which

may be compensated and evaluated based on stock performance rather than real
financial results
 Strategies used to inflate the value of a public company's shares, such as using
excessive debt to buy back stock, can increase the risk and instability in the firm.
 A public company must file reports with the SEC that may reveal secrets and business
methods that could help competitors.
 Rigid leadership and governance by the board of directors can make it more difficult to
retain good managers willing to take risks.

PROCEDURE OF PUBLIC ISSUE:

Under public issue, the new shares/debentures may be offered either directly to the public
through a prospectus (offer document) or indirectly through an offer for sale involving financial
intermediaries or issue houses. The main steps involved in public issue are as follows:

1. Draft prospectus:
 A draft prospectus has to be prepared giving all required information. Any company or a listed
company making a public issue or a right issue of value more than Rs 50 lakh has to file a draft offer
document with SEBI for its observation. The company can proceed further after getting observations
from the SEBI. The company can open its issue within 3 months from the date of SEBI’s observation
letter.

2. Fulfillment of Entry Norms:

The SEBI has laid down certain entry norms (parameters) for accessing the primary market. A
company can enter into the primary market only if a company fulfils these entry norms.

3. Appointment of underwriters:
Sometimes underwriters are appointed to ensure full subscription.

4. Appointment of bankers:
Generally, the company shall nominate its own banker to act as collecting agent. The bankers
along with their branch network process the funds procured during the public issue.

5. Initiating allotment procedure:

When the issue is subscribed to the minimum level, the registrars initiate the allotment
procedure.

6. Appointment of brokers to the issue:

Recognized members of the stock exchange are appointed as brokers to the issue.

7. Filing of documents:
Documents such as draft prospectus, along with the copies of the agreements entered into
with the lead manager, underwriters, and bankers.

8. Printing of prospectus and application forms:

After filing the above documents, the prospectus and application forms are printed and
dispatched to all merchant bankers, underwriters and brokers to the issue.

9. Listing the issue:

It is very essential to send a letter to the stock exchange concerned where the issue is
proposed to be listed.

10. Publication in news papers:

The next step is to publish an abridged version of the prospectus and the commencing and
closing dates of issues in major English dailies and vernacular newspapers.

11. Allotment of shares:

After close of the issue, all application forms are scrutinized tabulated and then the shares are
allotted against those applications received.

FOLLOW-ON PUBLIC OFFER (FPO):

What Is a Follow-on Public Offer (FPO)?
A follow-on public offer (FPO) is the issuance of shares to investors by a company listed on a stock
exchange. A follow-on offering is an issuance of additional shares made by a company after an initial
public offering (IPO).

Follow-on offerings are also known as secondary offerings.

How a Follow-on Public Offer (FPO) Works

Public companies can also take advantage of an FPO through an offer document. FPOs should not
be confused with IPOs, the initial public offering of equity to the public. FPOs are additional issues
made after a company is established on an exchange. Proceeds from the sale go to the company
issuing the stock. Similar to an IPO, companies that want to execute a follow-on public offer must fill
out U.S. Securities and Exchange Commission (SEC) documents.

BOOK BUILDING AND ITS PROCESS:

Book building is a systematic process of generating, capturing, and recording investor demand for
shares during an initial public offering (IPO), or other securities during their issuance process, in
order to support efficient price discovery. Usually, the issuer appoints a major investment bank to act
as a major securities underwriter or book runner.

Book building is an alternative method of making a public issue in which applications are
accepted from large buyers such as financial institutions, corporations or high net-worth individuals,
almost on firm allotment basis, instead of asking them to apply in public offer. Book building is a
relatively new option for issues of securities, the first guidelines of which were issued on October 12,
1995 and have been revised from time to time since. Book building is a method of issuing shares
based on a floor price which is indicated before the opening of the bidding process.

Book Building in India:

The introduction of book-building in India was done in 1995 following the recommendations of an
expert committee appointed by SEBI under Y.H. Malegam. The committee recommended and SEBI
accepted in November 1995 that the book-building route should be open to issuer companies,
subject to certain terms and conditions. In January 2000, SEBI came out with a compendium of
guidelines, circulars and instructions to merchant bankers relating to issue of capital, including those
on the book-building mechanism.

The following are the important points in book building process:

1. The Issuer who is planning an offer nominates lead merchant banker(s) as ‘book runners’.
2. The Issuer specifies the number of securities to be issued and the price band for the bids.
3. The Issuer also appoints syndicate members with whom orders are to be placed by the
investors.
4. The syndicate members put the orders into an ‘electronic book’. This process is called
‘bidding’ and is similar to open auction.
5. The book normally remains open for a period of 5 days.
6. Bids have to be entered within the specified price band.
7. Bids can be revised by the bidders before the book closes.
 8. On the close of the book building period, the book runners evaluate the bids on the basis of
the demand at various price levels.
9. The book runners and the Issuer decide the final price at which the securities shall be
issued.
10. Generally, the number of shares is fixed; the issue size gets frozen based on the final price
per share.
11. Allocation of securities is made to the successful bidders. The rest bidders get refund
orders.

Price Fixation in Book building Process:

All the applications received till the last dates are analyzed and a final offer price, known as
the cut off price is arrived at. The final price is the equilibrium price or the highest price at which all
the shares on offer can be sold smoothly. If the price quoted by an investor is less than the final price,
he will not get allotment.
If price quoted by an investor is higher than the final price, the amount in excess of the final
price is refunded if he gets allotment. If the allotment is not made, full money is refunded within 15
days after the final allotment is made. If the investor does not get money or allotment in a month’s
time, he can demand interest at 15 per cent per annum on the money due.

Example:

In this method, the company doesn’t fix up a particular price for the shares, but instead gives a price
range, e.g., Rs. 80 to 100. When bidding for the shares, investors have to decide at which price they
would like to bid for the shares, e.g., Rs. 80, Rs. 90 or Rs. 100. They can bid for the shares at any
price within this range. Based on the demand and supply of the shares, the final price is fixed.

The lowest price (Rs. 80) is known as the floor price and the highest price (Rs. 100) is known
as cap price. The price at which the shares are allotted is known as cut off price. The entire process
begins with the selection of the lead manager, an investment banker whose job is to bring the issue
to the public.

Both the lead manager and the issuing company fix the price range and the issue size. Next,
syndicate members are hired to obtain bids from the investors. Normally, the issue is kept open for 5
days. Once the offer period is over, the lead manager and issuing company fix the price at which the
shares are sold to the investors.

If the issue price is less than the cap price, the investors who bid at the cap price will get a
refund and those who bid at the floor price will end up paying the additional money. For example, if
the cut off in the above example is fixed at Rs. 90, those who bid at Rs. 80, will have to pay Rs. 10
per share and those who bid at Rs. 100, will end up getting the refund of Rs. 10 per share. Once
each investor pays the actual issue price, the shares are allotted.

ISSUE PRICE

The issue price is the cost at which a new security is offered to the public when it first becomes
available for trading. This price is set by the issuing company in consultation with its financial
advisors and underwriters. The importance of the issue price lies in its ability to attract investors while
reflecting the company’s perceived value.
What Is Issue Price?

The issue price is the initial price at which a company’s shares are made available to the public
during an initial public offering (IPO) or other issuance. It represents a critical balance between the
company’s valuation aspirations and market demand. This pricing is not arbitrary; it involves
meticulous calculations and market assessments to ensure the offer is enticing yet realistic. Investors
willing to participate in IPOs must understand the importance of the issue price to make informed
investment decisions.

The issue price also plays a role in how the company is perceived in the market. If set too high, it
may deter potential investors; if it is too low, the company might not raise the funds it needs. The goal
is to find a ‘Goldilocks’ price that’s just right, ensuring a successful launch and a stable aftermarket
performance. This is the price at which they can first get their hands on the stock during an IPO.

PRIMARY MARKET INTERMEDIARIES:

The following market intermediaries are involved in the primary market:
1. Merchant Bankers/Lead Managers
2. Registrars and Share Transfer Agents
3. Underwriters
4. Lead Manager
5. Syndicate Member
6. Broker
7. Registrar
8. Bankers to the Issue
9. Debentures Trustees

1. Merchant Bankers:

Merchant Bankers play an important role in the issue management process. Merchant
Bankers are mandated by SEBI to manage public issues (as lead managers) and open offers in take-
over.
Apart from these, they have other diverse services and functions. These include organizing
and extending finance for investment in projects, assistance in financial management, acceptance
house business, raising Euro-dollar loans and issue of foreign currency bonds.
Lead Managers (Category 1 merchant bankers) has to ensure correctness of the information
furnished in the offer document.
They have to ensure compliance with the SEBI Rules and regulations and also guidelines for
Disclosure and Investor Protection. To this effect, they have are to submit to SEBI a Due Diligence
Certificate confirming that disclosures made in the draft prospectus or letter of offer are true, fair and
adequate to enable the prospective investors to make a wellinformed investment decision.

Regulation:
Merchant Bankers are one of the major intermediaries between the issuer and the investors,
hence their activities are regulated by
1. SEBI (Merchant Bankers) Regulations, 1992
2. Guidelines of SEBI and Ministry of Finance
3. Companies Act 1956.
4. Securities Contracts (Regulation) Act, 1956 and so on.
Criteria for Merchant Banker:
Regulation 3 of SEBI (Merchant Bankers) Regulations, 1992 lays down that the application by
a person desiring to become merchant banker shall be made to SEBI in the prescribed form seeking
a grant of a certificate of registration along with a non-refundable application fee as specified.

 The applicant shall be a body corporate other than NBFC

 The applicant has the necessary infrastructure like adequate office space, equipment’s and
manpower to effectively discharge his activities.
 The applicant has in his employment a minimum of two persons who have the experience to
conduct the business of the merchant banker.
 The applicant shall be a net worth of not less than 5 Crore rupees.
 The applicant, his director, partners, or principal officer is not involved in any litigation
connected to securities market
 The applicant, his director, partner, or principal officer has not any time been convicted for any
offence involving moral turpitude or has been found guilty of any offence.
 The applicant has the professional qualification from an institution recognized by the
Government of Finance, Law or Business Management.
 The applicant is fit and proper person
 Grant of certificate to the applicant is in the interest of investors

2. Registrars and transfer agents:

 R & T agents form an important link between the investor and issuer in the Securities Market.
 R & T agent is appointed by the issuer to act on its behalf to service the investors in respect of
all corporate actions like sending out notices and other communications to the investors as
well as dispatch of dividends and other non-cash benefits.
 R & T agents perform an equally important role in the depository system as well.
 R & T agents are registered with SEBI in the terms of SEBI (Registrars to the Issue and Share
Transfer Agents) Rules and Regulations, 1993.

3. Underwriters

 Underwriting services are provided by some large specialists financial institutions such as
banks, insurance or investment houses, whereby they guarantee payment in case of damage
or financial loss and accept the financial risk for liability arising from such guarantee.
 Securities underwriting is the process by which investment banks raise investment capital from
investors on behalf of corporations and governments that are issuing securities (both equities
and debt capital). The services are typically used during a public offering in the primary
market.
 Underwriters are required to register with SEBI in terms of SEBI (Underwriters) Rules and
Regulations, 1993

Types of underwriters

Insurance underwriter:
 Insurance underwriters play a vital role in the insurance industry by evaluating and
managing the risk associated with insuring individuals, businesses, or assets. Using a detailed
analysis of various factors, insurance underwriters determine the likelihood of a policyholder
filing a claim. This analysis includes assessing the applicant's health, age, lifestyle,
occupation, and other relevant information. Based on this evaluation, the underwriter sets the
premium—the amount the policyholder pays for insurance coverage. A higher risk profile may
result in a higher premium, reflecting the increased likelihood of a claim. The insurance
underwriter's responsibility is to strike a balance between attracting policyholders and ensuring
the financial stability of the insurance company.

Mortgage underwriter:
In the realm of real estate and lending, mortgage underwriters are instrumental in
evaluating the risk associated with providing mortgage loans to individuals seeking to
purchase homes or properties. Mortgage underwriters assess the creditworthiness of
applicants by scrutinizing their credit history, income, employment stability, and debt to-income
ratio. Additionally, they evaluate the value of the property being financed to ensure it aligns
with the loan amount requested. The goal is to determine whether the applicant poses an
acceptable level of risk for the lending institution. Once the risk assessment is complete, the
mortgage underwriter decides whether to approve the loan application, specifying the terms
and conditions of the loan, including the interest rate.

Loan underwriter:
Loan underwriters operate across various types of loans, including personal loans, auto
loans, and business loans. Their primary responsibility is to assess the creditworthiness of
loan applicants and determine the risks associated with lending money. Loan underwriters
analyze the applicant's credit history, income, employment status, debt levels, and other
relevant financial information. This comprehensive evaluation helps them make informed
decisions about whether to approve or deny the loan application. Additionally, loan
underwriters set the terms of the loan, including the interest rate and repayment schedule.
Their role is crucial in maintaining a balance between providing access to credit and managing
the financial risk for the lending institution.

Securities underwriter:
Securities underwriters play a key role in the issuance of securities, such as stocks and
bonds, into the financial markets. They work with companies or governments looking to raise
capital by issuing securities. Securities underwriters conduct thorough due diligence on the
issuer, assessing its financial health, business prospects, and overall market conditions.
Based on this evaluation, they assist in determining the terms of the securities, including the
offering price and quantity. Securities underwriters may also assume the risk of purchasing the
securities from the issuer and reselling them to investors. This process is particularly evident
during Initial Public Offerings (IPOs), where a private company transitions to a publicly traded
one. Securities underwriters help facilitate the efficient functioning of capital markets by
connecting issuers with investors and managing the associated financial risks.

4. Lead Manager
A lead manager is the merchant banker appointed by the issuer company to carry out the
entire IPO process. A lead manager is the merchant banker appointed by the issuer company to
carry out the entire IPO process. A lead manager is also known as the Book Running Lead
Manager (BRLM).
A merchant banker is a SEBI registered financial institution that assists the corporate with financial
solutions like helping in fundraising, providing consultancy services, acting as underwriters, and much
more.

A company can appoint one or more than one merchant bankers, of whom one acts as the lead
manager. The lead manager plays a very crucial role in an IPO as the lead manager is responsible
for the entire IPO process.

Lead manager's pre IPO activities include Drafting and design of Offer documents, Prospectus,
statutory advertisements and memorandum. Also they draw up the various marketing strategies for
the issue. The post issue activities of lead manager include coordinate non-institutional allocation,
intimation of allocation and dispatch of refunds to bidders, management of escrow accounts etc.

5. Syndicate Member

A syndicate member is an investment banker who gets the mandate to sell shares of an IPO to
eligible applicants. How do they get this mandate? The company going public approaches several
banks and asks them for a proposal on how they propose to take the company public. The company
then chooses the bank with the best proposal. The underwriters who take responsibility for making
sure the company can sell all of the shares are called the syndicates.

The chosen bank then forms a syndicate of several other banks, which help it sell the stock in
exchange for a commission. All banks that are part of this syndicate are called members of the same
syndicate. In most cases, the syndicate members can be from any part of the world and do not
necessarily have to fall under the same geographical location as the company.

A syndicate member can be a single individual or represent other business entities. They can also be
based on a particular industry and brought together by an investment bank with expertise in this field.
The syndicate members are selected based on their expertise, experience, and track record in the
industry.

Types of Syndicates

There are various types of syndicate members in an IPO with often similar, yet vital functions for
the success of the IPO:

 Lead Manager: The lead manager’s role as a syndicate manager is to be the marketer and
distributor of the new issue. This syndicate member is in charge of finalizing all details
regarding the issue and negotiating with the issuer to achieve a more beneficial agreement.
The lead manager will often share its profits with other banks that assist in promoting the issue
to their clients.
 Co-Manager: Syndicate members are a group of investment banks that also promote, but
generally on a smaller scale than lead managers. Co-managers do not have as much
influence on structuring and pricing but may provide advice to issuers during this process.
 Book Running Lead Manager: A book running lead manager typically functions as both a
lead manager and co-manager simultaneously. This person or company is responsible for
setting up financial records related to sales, providing information about distribution (when the
 shares will be available), and potentially organizing an underwriting syndicate (or group of
investors) for additional assistance and guidance throughout the process.

What is syndication risk?

Syndication risk is when an underwriter or the syndicate members of fixed-income security

cannot place the entire issue with investors. This can be a major concern for companies seeking to
issue large amounts of debt. For example, if Country X and trying to issue $100 billion in debt, it's
possible that even the best efforts won't find enough interested buyers to buy all of it at a comfortable
price. In such cases, underwriters may need to take back some of the debt on their balance sheets
before they can eventually sell it at a loss later on.

This outcome may seem untenable, but it is a common practice in the financial world. The
impact of this kind of situation varies depending on how much debt is involved and whether or not
there is any other market factors involved (such as an economic downturn).

If an underwriter takes back too much unsold debt from its clients over time, then its balance
sheet could become unmanageable in size or even insolvent. Likewise, other factors may prevent
them from selling off those securities quickly before they need more capital (like another recession).

Syndication risk is when an underwriter or the syndicate members of fixed-income security

cannot place the entire issue with investors. This can be a major concern for companies seeking to
issue large amounts of debt. For example, if Country X and trying to issue $100 billion in debt, it's
possible that even the best efforts won't find enough interested buyers to buy all of it at a comfortable
price. In such cases, underwriters may need to take back some of the debt on their balance sheets
before they can eventually sell it at a loss later on.

6. Broker:
A broker is an individual or firm that acts as an intermediary between an investor and a
securities exchange. Because securities exchanges only accept orders from individuals or firms who
are members of that exchange, individual traders and investors need the services of exchange
members.
Brokers provide that service and are compensated in various ways, either through
commissions, fees, or through being paid by the exchange itself. Investopedia regularly reviews all of
the top brokers and maintains a list of the best online brokers and trading platforms to help investors
make the decision of what broker is best for them.

Understanding brokers As well as executing client orders, brokers may provide investors with
research, investment plans, and market intelligence. They may also cross-sell other financial
products and services their brokerage firm offers, such as access to a private client offering that
provides tailored solutions to high net worth clients. In the past, only the wealthy could afford a broker
and access the stock market. Online brokering triggered an explosion of discount brokers, which
allow investors to trade at a lower cost, but without personalized advice.

7. Registrar

A registrar is an institution, often a bank or trust company, responsible for keeping records of
bondholders and shareholders after an issuer offers securities to the public. When an issuer needs to
make an interest payment on a bond or a dividend payment to shareholders, the firm refers to the list
of registered owners maintained by the registrar.
How a Registrar Works?

One role of the registrar is to make sure the amount of shares outstanding does not exceed
the number of shares authorized in a firm’s corporate charter. A corporation cannot issue more
shares of stock than the maximum number of shares that the corporate charter discloses.
Outstanding shares are those that shareholders currently hold.
A business may continue to issue shares periodically over time, increasing the number of
outstanding shares. The registrar accounts for all issued and outstanding shares, as well as the
number of shares owned by each individual shareholder.

Special Considerations

The registrar determines which shareholders are paid a cash or stock dividend. A cash
dividend is a payment of company earnings to each shareholder, and a stock dividend means
additional shares are issued to each shareholder. To pay a dividend, the corporation sets a record
date. The registrar verifies the shareholders who own the stock on the record date and the number of
shares owned as of that date. Both cash and stock dividends are paid based on the registrar’s list of
shareholders. The registrar changes this shareholder data based on current buy-and sell
transactions.

Types of Registrars

Broadly, registrars are record keepers. They exist outside of the stock market too. There are
registrars for schools and colleges that manage student records, while governments use registrars for
companies and businesses. Meanwhile, a registrar can mean a certain professor in medicine or a
type of technology—such as software in human resources or a domain name registrar.
Mutual funds operate using a transfer agent, which is a company that acts as the registrar and
also performs the duties of a transfer agent. While the registrar keeps records, the transfer agent
handles the mutual fund share purchases and redemptions.

8. Bankers to the Issue

Bankers to an Issue mean a scheduled bank carrying on all of the following activities:

 acceptance of application and application money

 acceptance of allotment of call money
 refund of application money
 Payment of dividends or interest warrants etc

The activities of the Banker to an issue in the Indian Capital Market are regulated by SEBI (Bankers
to an issue) Regulations, 1994

9. Debenture Trustees

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

 Debenture trustees call for periodical reports from the body corporate
  takes possession of trust property in accordance with the provisions of the trust deed
 enforce security in the interest of debenture holders
 do such acts as necessary in the event the security becomes enforceable
 Carry out such acts as are necessary for the protection of debenture holders and to do all
things necessary in order to resolve the grievances of the debenture holders.
 ascertain and specify that debenture certificates have been discharged within 30 days of
registration of the charge with ROC
 ascertain and specify that debenture certificates have been discharged in accordance with the
provisions of the Company Act
 Ascertain and specify that interest warrants for interest due on the debentures have been
dispatched to the debenture holders on or before the due date and so on.
 To inform SEBI in case of breach of Trust Deed and take measures accordingly.

The activities of Debenture Trustee in the Indian Capital Market are regulated by SEBI (Debenture
Trustees) Regulations, 1993.

APPLICATION SUPPORTED BY BLOCKED AMOUNT (ASBA)

Application Supported by Blocked Amount (ASBA) is a process used to apply for Initial Public
Offerings (IPOs) or Follow-on Public Offerings (FPOs) in India. Under this process, investors'
application money remains in their bank accounts but is temporarily blocked or reserved until the
shares are allotted. Once the shares are allotted, the blocked amount is debited from the investor's
account, and the remaining amount is unblocked or released. Investors may submit their ASBA
applications to these SCSB (Self Certified Syndicate Banks)

Process of ASBA:

1. Application Form:
Investors who want to apply for shares in an IPO or rights issue fill out the application form
provided by the issuer.

2. Bank Account:
Investors submit the application form to their designated banks that offer ASBA services. The
investors must have a bank account with a bank that provides ASBA services.

3. Blocking of Funds:
Instead of paying the entire application amount upfront, ASBA allows investors to authorize
their banks to block the application amount in their bank accounts. The funds are only blocked
and not debited from the account at the time of application.

4. Authorization:
The investor authorizes the bank to make the payment only if shares are allotted to them. This
ensures that the funds remain in the investor's account until the allotment process is
completed.

5. Allotment and Refund:

 After the allotment process is completed, only the amount for the allotted shares is debited
from the investor's account, and the remaining blocked amount is released. In case of non-
allotment, the blocked amount is entirely released.

Benefits of ASBA:

 No Need for Refund Processing: Since the funds are blocked and not debited until
allotment, there is any need for a refund process in case of non-allotment. This reduces the
hassle for investors and ensures a smoother process.
 Interest Earning: Investors continue to earn interest on the blocked amount until it is debited
from the account. This provides a financial benefit to the investors.
 Security: ASBA ensures that investors' funds are not misused during the application process,
as the funds remain in the investors' accounts until shares are allotted.
 Simplified Process: ASBA eliminates the need for writing multiple cheque or making multiple
payments for various applications, streamlining the application process.

ASBA has become a standard method for subscribing to IPOs and rights issues in India, offering a
convenient and secure way for investors to participate in primary market offerings.

LISTING OF SECURITIES

Listing means the admission of securities of a company to trading on a stock exchange. Listing is not
compulsory under the Companies Act. It becomes necessary when a public limited company desires
to issue shares or debentures to the public. When securities are listed in a stock exchange, the
company has to comply with the requirements of the exchange.

Objectives of Listing

The major objectives of listing are

1. To provide ready marketability and liquidity of a company’s securities.

2. To provide free negotiability to stocks.
3. To protect shareholders and investors interests.
4. To provide a mechanism for effective control and supervision of trading.

Listing requirements

A company which desires to list its shares in a stock exchange has to comply with the
following requirements:

1. Permission for listing should have been provided for in the Memorandum of Association and
Articles of Association.

2. The company should have issued for public subscription at least the minimum prescribed
percentage of its share capital (49 percent).

3. The prospectus should contain necessary information with regard to the opening of
subscription list, receipt of share application etc.
 4. Allotment of shares should be done in a fair and reasonable manner. In case of over
subscription, the basis of allotment should be decided by the company in consultation with the
recognized stock exchange where the shares are proposed to be listed.

5. The company must enter into a listing agreement with the stock exchange. The listing
agreement contains the terms and conditions of listing. It also contains the disclosures that
have to be made by the company on a continuous basis.

Minimum Public Offer

A company which desires to list its securities in a stock exchange should offer at least sixty percent of
its issued capital for public subscription. Out of this sixty percent, a maximum of eleven percent in the
aggregate may be reserved for the Central government, State government, their investment agencies
and public financial institutions.

The public offer should be made through a prospectus and through newspaper advertisements. The
promoters might choose to take up the remaining forty percent for themselves, or allot a part of it to
their associates.

Fair allotment

Allotment of shares should be made in a fair and transparent manner. In case of over
subscription, allotment should be made in an equitable manner in consultation with the stock
exchange where the shares are proposed to be listed.
In case, the company proposes to list its shares in more than one exchange, the basis of
allotment should be decided in consultation with the stock exchange which is located in the place in
which the company’s registered office is located.

Listing Procedure
The following are the steps to be followed in listing of a company’s securities in a stock
exchange:

1. The promoters should first decide on the stock exchange or exchanges where they want the
shares to be listed.

2. They should contact the authorities to the respective stock exchange/ exchanges where
they propose to list.

3. They should discuss with the stock exchange authorities the requirements and eligibility for
listing.

4. The proposed Memorandum of Association, Articles of Association and Prospectus should

be submitted for necessary examination to the stock exchange authorities

5. The company then finalizes the Memorandum, Articles and Prospectus

6. Securities are issued and allotted.

 7. The company enters into a listing agreement by paying the prescribed fees and submitting
the necessary documents and particulars.

8. Shares are then and are available for trading.

Advantages of listing:

1. It facilitates the issue of securities to raise new finance, making a company less dependent
upon retained earnings and banks.

2. The wider share ownership which results will increase the likelihood of being able to make
rights issues.

3. The transfer of shares becomes easier. Less of a commitment is necessary on the part of
shareholders. For this reason the shares are likely to be perceived as a less risky investment
and hence will have a higher value.

4. The greater marketability and hence lower risk attached to a market listing will lead to a
lower cost of equity and also to a weighted average cost of capital.

5. A market-determine price means that shareholders will know the value of their investment at
all times.

6. The share price can be used by management as an indicator of performance, particularly

since the share price is forward looking, being based upon expectations, whilst other
objectives measures are backward looking.

7. The shares of a quoted company can be used more readily as consideration in takeover
bids.

8. The company may increase its standing by being quoted and it may obtain greater publicity.

9. Obtaining a quotation provides an entrepreneur with the opportunity to realize part of his
holding in a company.

Disadvantages of Listing:

1. The cost of obtaining a quotation is high, particularly when a new issue of shares is made
and the company is small. This is because substantial costs are fixed and hence are relatively
greater for small companies. Also, the annual cost of maintaining the quotation may be high
due to such things as increased disclosure, maintaining a larger share register, printing more
annual reports, etc.

2. The increased disclosure requirements may be disliked by management.

3. The market-determined price and the greater accountability to shareholders that comes with
its concerning the company’s performance may not be liked by management.

4. Control of a particular group of shareholders may be diluted by allowing a proportion of

shares to be held by the public.
5. There will be a greater likelihood of being the subject of a takeover bid and it may be difficult
to defend it with wide share ownership.

6. Management conditions, management employees give themselves more salaries due to

prosperity obtained.