Capital Markets
Nishant Dhruv
Department of Management
Atmiya Institute of Tech. & Science
Contents :
 Capital Market : Primary & Secondary
 Primary Market: Public Issue, Right Issue & Private
Placement
 Eligibility Norms, Procedures for IPOs.
 Book Building Process
 Green Shoe Option
 Fund Raising from International Market : ECB, FCCBs,
ADRs.
 Dematerialization of Securities
 Rolling Settlement
Instructor : Nishant Dhruv, Atmiya Institute of Technology & Science
Segments of the Capital Market
 Primary market
-Channel for creation of new securities
 Secondary market
-The new securities issued in the primary
market are traded the secondary market
Instructor : Nishant Dhruv, Atmiya Institute of Technology & Science
Primary Market
 The primary market is the market for new
issues/shares.
 Primary market provides opportunity to issuers of
securities; Government as well as corporates, to raise
resources to meet their requirements of investment.
 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.
 Company may issue the securities in domestic market
and/or international market.
Instructor : Nishant Dhruv, Atmiya Institute of Technology & Science
Classification of Issues
Private Placement
Private Placement
Instructor : Nishant Dhruv, Atmiya Institute of Technology & Science
Preferential Issue
Public Issue
 Public issue means an invitation by a company
to the public to subscribe the securities/shares
Instructor : Nishant Dhruv, Atmiya Institute of Technology & Science
Initial Public Offer
 Initial Public Offering (IPO) is when an unlisted
company makes a fresh issue of securities for the first
time to the public. This paves way for listing and trading
of the issuer’s securities.
 A Follow-On Public Offering (Further Issue) is
when an already listed company makes a fresh issue of
securities (additional new shares) to the public.
Instructor : Nishant Dhruv, Atmiya Institute of Technology & Science
Eligibility Norms for raising funds
through IPOs and FPOs.
 Entry Norm I :

Net tangible assets : 3 crores for three full
years (out of which monetary assets should
not be more than 50 %)

Distributable Profit : 3 out of 5 years.

Net worth : At least Rs. 1 crore in three
years

Issue Size : Should not exceed 5 times of
net worth.
Instructor : Nishant Dhruv, Atmiya Institute of Technology & Science
 Entry Norm II :



Issue shall be through book building root.
At least 50% of the issue is mandatorily
allotted to QIB (qualified institutional
investors).
Minimum post issue face value capital shall
be Rs. 10 crores.
Instructor : Nishant Dhruv, Atmiya Institute of Technology & Science
 Entry Norm III


The project is being appraised and
participated by FIs/Scheduled Commercial
Banks.
Minimum post issue face value capital shall
be Rs. 10 crores.
Instructor : Nishant Dhruv, Atmiya Institute of Technology & Science
Procedure – Offer Documents
 Offer documents means prospectus in case of a public
issue.


Pre-Issue EPS, P/E Ratio, Avg. Net worth.
Other information like credit rating, risk involved –
internal & external, schedule of implementation of
projects.
 The company needs to submit ‘offer documents’ to
SEBI.
 After 21 days, ‘offer documents’ will be filed to ROC,
SEs.
Instructor : Nishant Dhruv, Atmiya Institute of Technology & Science
 The issuer (company) is allowed to freely price
the issue.
Instructor : Nishant Dhruv, Atmiya Institute of Technology & Science
Pricing of an IPO/Issue/shares
 Fixed Price
 Book Building (Price discovery through Book Building
Process)
Instructor : Nishant Dhruv, Atmiya Institute of Technology & Science
Book Building Process
 Book Building is basically a process used in IPOs for
efficient price discovery.
 It is a mechanism where, during the period for which
the IPO is open, bids are collected from investors at
various prices, which are above or equal to the floor
price. The offer price is determined after the bid closing
date.
Instructor : Nishant Dhruv, Atmiya Institute of Technology & Science
 The issue price is called the ‘cut off rate’.
 After the closure of Issue, the bids are
segregated under different categories e.g.
QIB, Non-institutional investors, Retailers.
 QIB, qualified institutional buyers, refers
to mutual fund, FIIs, Scheduled banks
registered with SEBI.
Instructor : Nishant Dhruv, Atmiya Institute of Technology & Science
 No companies can make public issue of debt
instruments, unless it fulfills the two
conditions :

Credit Rating

It should not be in defaulters list of RBI.
Instructor : Nishant Dhruv, Atmiya Institute of Technology & Science
Rights Issue
 Rights Issue is when a listed company which
proposes to issue fresh securities to its
existing shareholders (on pro-rata basis.)
 It is generally issued at a price lower than the
currently traded market price of the share.
 In addition to this, right issue has to be kept
open for 30 days.
Instructor : Nishant Dhruv, Atmiya Institute of Technology & Science
Private Placement
 A Private Placement is the direct sale of newly issued
securities, to a limited number of subscribers such as
banks,financial institutions,mutual funds and high net
worth individuals.
 Private placement can be done through the subscription
of 50 investors.
 Advantages : *
Time and Cost * Tailor made
* Disclosure and compliance norms
 Disadvantage : * Hostile takeover
Instructor : Nishant Dhruv, Atmiya Institute of Technology & Science
Preferential Issue
 A Preferential issue is an issue of shares by listed
companies to a select group of persons which is neither
a rights issue nor a public issue.
 The allotment is made to various STRATEGIC GROUPS
(promoters, foreign partners, technical collaborators)
 This is a faster way for a company to raise equity
capital.
Instructor : Nishant Dhruv, Atmiya Institute of Technology & Science
 SEBI Norms :

Lock in period for 3 years for promoters.

The amount utilised should be disclosed.

PRICE @ which share allotment should be done ?
 Advantages :


Company prefer to allot shares to its promoters (to
pledge shares with banks and get cash)
Raising the commitment towards the company.
Instructor : Nishant Dhruv, Atmiya Institute of Technology & Science
Green Shoe Option
 It is a mechanism to provide post-listing price stability.
 A Green Shoe Option means allocating shares in excess
of shares included in public-issue.
 The company should appoint merchant banker who will
be working as SA (Stabilizing Agent).
 The SA will be responsible for price stabilization
process.
 The price stabilization period should not exceed more
than 30 days.
Instructor : Nishant Dhruv, Atmiya Institute of Technology & Science
International Markets – Fund Raising
1. External Currency Borrowing (ECB)
2. Foreign Currency Convertible Bond (FCCB)
3. American Depository Receipts (ADRs)
Instructor : Nishant Dhruv, Atmiya Institute of Technology & Science
External Commercial Borrowing (ECB)
(- one type of loan)
 It refers to commercial loans (e.g. bank loans, seller’s
credit) availed from non-resident lenders with minimum
average maturity of 3 years.
 When the company will go for ECB ?
 What is the risk associated with ECB ? – Interest risk and
currency risk
 The first floating rate ECB was issued by Global
Telesystems in the year 1996.
 What is the regulatory formality ? – 1. Automatic Route
2. Approval Route
Instructor : Nishant Dhruv, Atmiya Institute of Technology & Science
Foreign Currency Convertible Bonds
 A bond issued by an Indian company and subscribed by
non-resident in foreign currency (dollars) for a
minimum period of 5 years.
 They carry a fixed interest and are convertible into
ordinary shares.
 Till the conversion take place, the company has to pay
interest in dollars.
 If the conversion into shares does not happen then
company has to pay (redeem) back principal amount in
dollars (foreign currency in which it’s being issued)
Instructor : Nishant Dhruv, Atmiya Institute of Technology & Science
FCCB - How can it be issue ?
 Regulatory Requirement :



Bonds upto $50 mn – No approval
required.
Bonds upto $100 mn – RBI approval
required.
Bonds above $ 100 mn – Approval
required from Finance Ministry.
Instructor : Nishant Dhruv, Atmiya Institute of Technology & Science
American Depository Receipts (ADRs)
 A non-US company that seeks to list in US,
deposit its shares with bank which ultimately
enable the company to issue ADRs.
Wipro wants to list
Non- Us Company
?
US
(Nasdaq/
DowJones)
1
2
The company will deposit its
shares with US bank
The bank issue receipts
which enables the
Instructor : Nishant Dhruv, Atmiya Institute of Technology
& Science
company
to issue ADR)
Assignments
 ADR/GDR/IDR – Difference ?
 Reverse Book Building
 BRLM (Book Running Lead Manager)
 Red Herring Prospectus
Instructor : Nishant Dhruv, Atmiya Institute of Technology & Science
Review of Chapter
CHECK ……
Instructor : Nishant Dhruv, Atmiya Institute of Technology & Science
Questions
1. State the reasons for the growth of Private Placement
market in India.
2. What is Green-shoe option ? What are the advantages
and drawbacks of Green-shoe option ?
3. Briefly explain the different methods the company is
adopting for fixing the price of IPOs.
4. How are funds mobilised from International Markets ?
5. Explain Terms : i) FPO ii) Right Issue iii) Reverse Book
Building iv) Book Running Lead Manager (BRLM) v) Red
Herring Prospectus
6. More company prefers to bring Public Issue during boom
period of economy. – Explain
Instructor : Nishant Dhruv, Atmiya Institute of Technology & Science