Module 3
Module 3
Methods of Raising Fund in the Primary Market (Methods of Floating New Issues): A
company can raise capital from the primary market through various methods. The methods
include public issues, offer for sale, private placement, right issue, and tender method.
a. Public Issues: This is the most popular method of raising long term capital. It means raising
funds directly from the public. Under this method, the company invites subscription from the
public through the issue of prospectus (and issuing advertisements in newspapers). Based on
offer in the prospectus, the investors apply for the number of securities they are willing to take.
In response to application for securities, the company makes the allotment of shares,
debentures etc.
Types of Public Issues: Public issue is of two types, namely, Initial Public Offer (IPO)
and Follow-on Public Offer (FPO).
Initial Public Offer (IPO): This is an offering of either a fresh issue of securities or an offer
for sale of existing securities or both by an unlisted company for the first time in its life to the
public. In short, it is a method of raising securities in which a company sells shares or stock to
the public for the first time.
(A) Fixed Price Offer Method: In this case, the company fixes the issue price and then
advertises the number of shares to be issued. If the price is very high, the investors will apply
for fewer numbers of shares. On the other hand, if the issue is underpriced, the investors will
apply for a greater number of shares. This will lead to huge over subscription.
The main steps involved in issue of shares under fixed price offer method are as follows:
1. Selection of merchant banker
2. Issue of a prospectus
3. Application for shares
4. Allotment of shares to applicants
5. Issue of Share Certificate
In short, book building means selling securities to investors at an acceptable price with
the help of intermediaries called Book-runners. It involves sale of securities to the public and
institutional bidders based on predetermined price range or price band. The price band cannot
exceed 20% of the floor price. The floor price is the minimum price at which bids can be made
by the investors. It is fixed by the merchant banker in consultation with the issuing company.
Thus, book building refers to the process under which pricing of the issue is left to the investors.
Today most IPOs in India use book-building method. As per SEBI’s guidelines 1997, the book
building process may be applied to 100 per cent of the issue, if the issue size is 100 crores or
more.
b. Offer for Sale Method: Under this method, instead of offering shares directly to the public
by the company itself, it offers through the intermediary such as issue houses / merchant banks
/ investment banks or firms of stock brokers. Under this method, the sale of securities takes
place in two stages.
In the first stage, the issuing company sells the shares to the intermediaries such as
issue houses and brokers at an agreed price. In the second stage, the intermediaries resell the
securities to the ultimate investors at a market related price. This price will be higher. The
difference between the purchase price and the issue price represents profit for the
intermediaries. The intermediaries are responsible for meeting various expenses. Offer for sale
method is also called bought out deal. This method is not common in India.
e. Other Methods of Issuing Securities: Apart from the above methods, there are some other
methods of issuing securities. They are:
1. Tender method: Under tender method, the issue price is not predetermined. The company
announces the public issue without indicating the issue price. It invites bids from various
interested parties. The parties participating in the tender submit their maximum offers
indicating the maximum price they are willing to pay. They should also specify the number of
shares they are interested to buy. The company, after receiving various offers, may decide about
the price
in such a manner that the entire issue is fairly subscribed or sold to the parties
participating in the tender.
2. Issue of bonus shares: Where the accumulated reserves and surplus of profits of a company
are converted into paid up capital, it is called bonus issue. It simply refers to capitalization of
existing reserves and surpluses of a company.
3. Offer to the employees: Now a day’s companies issue shares on a preferential basis to their
employees (including whole time directors). This attracts, retains and motivates the employees
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 must 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
lakhs must 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. Fulfilment 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, bankers, Registrars, and brokers
to the issue must be filed with the Registrar of Companies.
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 newspapers: 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.
1. Inadequate Disclosure
2. Insider Trading
Insider trading means sale or purchase of securities by persons who possess price sensitive
information about the company because of their fiduciary capacity. For instance, information
about the declaration of high rate of dividend, issue of bonus shares, rights share etc.,
information relating to financial results of the company, amalgamations, mergers and
takeovers, disposal of the undertaking and such other information.
3. Price Manipulation
It is а common practice that prices of shares of companies proposing to соmе out with а public
issue or right issue are artificially pushed up in the market. This is usually done by way of
giving large employment advertisements in the newspapers just before the public or right issue.
So that some form of respectability may be created and thereby the market price of shares of
that company may be pushed up.
5. Lack of Transparency
Lack of transparency is another shortcoming of the stock market. The investor does not know
the actual rate of the transaction. The investor should be informed about the rate and brokerage
by noting them on the contract.
6. Investor’s Grievance
Thousands of complaints are received from the investors against companies and brokers. The
complaints include non-receipt of refund orders, letters of allotment, dividends, brokerage,
underwriting commission etc.
Stock Exchange: In India the first organized stock exchange was Bombay Stock Exchange. It
was started in 1877. Later, the Ahmadabad Stock Exchange and Calcutta Stock Exchange were
started in 1894 and 1908 respectively. At present there are 24 stock exchanges in India. In
Europe, stock exchanges are often called bourses.
Meaning and Definition of Stock Exchange: It is an organized market for the purchase and
sale of securities of joint stock companies, government and semi- govt. bodies. It is the center
where shares, debentures and govt. securities are bought and sold.
According to Pyle, “Security exchanges are market places where securities that have
been listed thereon may be bought and sold for either investment or speculation”.
The Securities Contract (Regulation) Act 1956, defines a stock exchange as “an
association, organization or body of individuals whether incorporated or not, established for
the purpose of assisting, regulating and controlling of business in buying, selling and dealing
in securities”.
According to Hartley Withers, “a stock exchange is something like a vast warehouse
where securities are taken away from the shelves and sold across the countries at a price fixed
in a catalogue which is called the official list”. In short, stock exchange is a place or market
where the listed securities are bought and sold.
Characteristics of a Stock Exchange
➢ It is an organized capital market.
➢ It may be incorporated or non-incorporated body (association or body of individuals).
➢ It is an open market for the purchase and sale of securities.
➢ Only listed securities can be dealt on a stock exchange.
➢ It works under established rules and regulations.
➢ The securities are bought and sold either for investment or for speculative
➢ purpose.
The Bombay Stock Exchange is one of the largest securities markets. It is located on Dalal
Street, Mumbai and lists over 6000 companies.
BSE has contributed significantly to developing and shaping India's capital markets. Through
BSE, investors get the opportunity to trade in equities, mutual funds, debt instruments, etc.
It also offers capital market trading services that include investor education, risk management,
clearing, settlement, and many more.
Financial transactions in BSE are done online through an electronic trading system. Market
orders can be directly placed in BSE online without the requirement of external specialists
through direct market access. Due to the absence of such limit orders, the focus is shifted from
buyers/sellers to the total value of transactions in a day.
Trading in the BSE share market must be done through a brokerage agency against a stipulated
charge. However, direct investment access is given to certain preferential investors making
large transactions in the BSE stock market. BOLT- Bombay Online trading platform is used
by this stock exchange for efficient trading.
Transactions made in BSE online are done through a T+2 rolling settlement, wherein all
transactions are processed within two days. Securities and Exchange Board of India (SEBI) is
responsible for the regulation of this stock exchange, continuously updating rules for its smooth
operation.
BSE has an interesting backstory to it. In the 19th century, some traders, with businessman
Premchand Roychand, would gather under a Banyan tree in current Dalal Street. Popularly
Earlier, the BSE worked on a floor trading system in which a licensed broker stands in the ring
and calls out the rising price. The investors, who were outside the BSE, would only find out
about the stock prices in the newspapers. That is why the NSE, or the National Stock Exchange,
went digital, and the prices became public to all investors. Consequently, the NSE became the
favorite spot for investing.
Seeing the shift to digital, the board of BSE decided to change their system as well. In 1995,
BSE received technological aid from CMC Ltd and went digital. Today, the BSE trading area
is called BSE online trading.
The National Stock Exchange of India Limited is the country’s leading financial exchange,
with headquarters in Mumbai. It was incorporated in 1992 and, since then, has evolved into an
advanced, automated, electronic system offering trading facilities to investors across the
country.
In 2021, this exchange system ranked fourth in the world according to the metric of its trading
volume.
NSE established in 1994, began its operations at the behest of the Indian government to bring
transparency to the country’s capital market. Set up by an assembly of leading financial
institutions and at the recommendations formulated by Pherwani Committee, this stock
exchange comprised diverse shareholding assets from both global and domestic investors.
It was also the first stock exchange in the country to introduce electronic trading facilities, thus
facilitating the integration of investors throughout the country into a single base.
As of April 11, 2023, the total market capitalization of NSE is approximately USD 3.26 trillion,
putting it in 9th place on the list of the largest stock exchanges in the world.
However, unlike the USA, where trading from the corporate sector accounts for about 70% of
the country’s GDP, this sector in India accounts for only 12-14% of its total GDP. Out of this
entire corporate sector, around 7800 companies are listed, with about 4000 among those trading
at Indian stock exchanges. Thus, stock exchange trading accounts for a meagre of 4% of the
country’s GDP.
Functions of NSE
The NSE was established with the specific objective of performing the following functions:
• Creating a nationwide trading establishment for equities, debt, and hybrid instruments.
Enabling faster settlement cycles, book entry settlements systems, and fulfilling the latest
international norms of securities markets.
The OTCEI is based in Mumbai, India, and operates solely over a computer network. The
exchange is recognized by India's Securities Contract Regulation Act, meaning all listed stocks
on the OTCEI benefit equally as other listed securities on other exchanges in India.
The exchange was established in 1990 to provide investors and companies with an additional
way to trade and issue securities. It arose primarily from small companies in India finding it
difficult to raise capital through mainstream national stock exchanges because they could not
fulfill the stringent requirements to be listed on them.
The OTCEI has rules that are not as rigid as the national exchanges, allowing small companies
to gain access to the capital they need to grow. The objective is that once they grow to a certain
level and can meet the requirements to be listed on the national stock exchanges, they will
make the switch over and leave the OTCEI behind.
The OTCEI has some special features that make it a unique exchange in India as well as a
growth catalyst for small- to medium-sized companies. The following are some of its unique
features:
• Stock Restrictions: Stocks that are listed on other exchanges will not be listed on the
OTCEI and, conversely, stocks listed on the OTCEI will not be listed on other
exchanges.
• Minimum Capital Requirements: The requirement for the minimum issued equity
capital is 30 lakh rupees, which is approximately $40,000.
• Large Company Restrictions: Companies with issued equity capital of more than 25
crore rupees ($3.3 million) are not allowed to be listed.
• Member Base Capital Requirement: Members must maintain a base capital of 4 lakh
rupees ($5,277) to continue to be listed on the exchange.
Listing of securities
A listed security is a financial instrument that is traded through an exchange, such as the NYSE
or Nasdaq. When a private company decides to go public and issue shares, it will need to choose
OBJECTIVES AND LISTING OF SECURITIES: A stock exchange does not deal in the
securities of all companies. Only those securities that are listed are dealt with the stock
exchange. For listing of securities, a company must apply to the stock exchange. The stock
exchange will decide whether to list the securities of the company or not. If permission is
granted by the stock exchange to deal with the securities therein, then such a company is
included in the official trade list of the stock exchange. This is technically known as listing of
securities.
Thus, listing of securities means permission to quote shares and debentures officially
on the trading floor of the stock exchange. Listing of securities refers to the sanction of the
right to trade the securities on the stock exchange. In short, listing means admission of
securities to be traded on the stock exchange. If the securities are not listed, they are not allowed
to be traded on the stock exchange.
Objectives of Listing: The main objectives of listing are:
➢ To ensure proper supervision and control of dealings in securities.
➢ To protect the interests of shareholders and the investors.
➢ To avoid concentration of economic power.
➢ To assure marketing facilities for the securities.
➢ To ensure liquidity of securities.
➢ To regulate dealings in securities.
Advantages of Listing
A. Advantages to Company: -
➢ It provides continuous market for securities (securities include shares,
➢ debentures, bonds etc.)
➢ It enhances liquidity of securities.
➢ It enhances prestige of the company.
➢ It ensures wide publicity.
➢ Raising of capital becomes easy.
➢ It gives some tax advantage to the company.
B. Advantages to Investors: -
➢ It provides safety of dealings.
➢ It facilitates quick disposal of securities in times of need. This means that listing
enhances the liquidity of securities.
➢ It gives some tax advantage to the security holder.
➢ Listed securities command higher collateral value for bank loans.
➢ It provides an indirect check against manipulation by the management.
Disadvantages of Listing
➢ It leads to speculation
➢ Sometimes listed securities are subjected to wide fluctuations in their value. This may
degrade the company’s reputation.
➢ It discloses vital information such as dividends and bonus declared etc. to competitors.
➢ Company must spend heavily in the process of placing the securities with public.
Types of Members in a Stock Exchange: The various types of members of a stock exchange
are as follows: -
1. Jobbers: - They are dealers in securities in a stock exchange. They cannot deal on behalf of
public. They purchase and sell securities on their own names. Their main job is to earn profit
due to price variations.
2. Commission brokers: - They are nothing but brokers. They buy and sell securities no behalf
of their clients for a commission. They are permitted to deal with non-members directly. They
do not purchase or sell in their own name.
3. Tarawaniwalas: - They are like jobbers. They handle transactions on a commission basis
for their brokers. They buy and sell securities on their own account and may act as brokers on
behalf of the public.
4. Sub-brokers: - Sub brokers are agents of stock brokers. They are employed by brokers to
obtain business. They cannot carry on business in their own name.
5. Arbitrageurs: - They are brokers. They buy security in one market and sell the same in
another market to get opportunistic profit.
6. Authorized clerks: - Authorized clerks are those who are appointed by stock brokers to
assist them in the business of securities trading.
Exchange Rates:
The exchange rates of Indian Rupee keep fluctuating vis-à-vis other currencies. When the rupee
hardens in respect to other currencies it causes Indian goods to become expensive in foreign
markets, Companies that are highly affected are the ones involved in overseas operations.
Companies dependent on exports experience a drop-in demand for their goods abroad. Thus,
revenue from exports decline and stock prices of such companies in the home country fall.
On the other hand, softening of rupee vis-à-vis other currencies results in opposite effect, in
this, the stock price of exporters rises whereas, that of importer drops.
Politics:
Factors like election, budget, government intervention, stability, and other factors have a huge
impact on the economy and the financial markets. The political events and budget
announcements create tremendous levels of volatility in the market influencing the stock
market deeply.
Natural Disasters:
Natural disasters hamper the lives and the market equally. It impacts the company’s
performance and the capacity of people to spend the money. This will lead to lower levels of
consumption, lower sales and revenues ultimately hitting the company’s stock performance.
Economic Numbers:
Various economic indicators affect the overall economy, ultimately creating an impact on the
financial market. The movement of oil prices and GDP have a huge impact on the stock market.
A country that is dependent on imported oil, any price change is likely to impact the economy.
The movement of oil prices is one of the key determinants of the stock market. As and when
the prices rise, the expenses will increase and will lower the buyers’ ability to invest in the
market.
Similarly, Gross Domestic Product (GDP) looks at the aspect of total economic production of
the country and its overall economic health. It helps to showcase the economic developments
and the future direction of the market. A healthy GDP status will create a positive impact on
financial markets and investment.