CAPITAL MARKET

S.CLEMENT

CAPITAL MARKET Capital market is a market for long-term

debt and equity shares. In this market, the capital funds

comprising of both equity and debt are issued and traded.

This also includes private placement sources of debt and equity as well as organized markets like stock exchanges.

Capital market can be further divided into primary and secondary markets

CAPITAL MARKET

PRIMARYSecurities issued to

The investors directlyIPO/FPO

SECONDARYTraded in exchanges

SEBI

Policy and Regulation

NSE/BSE/RSE

Players

Asset Classes

Rating Agencies

Accounting Standards

SEBI, RBI,IRDA

Electronic Trading,Settlement systems

MFs, FIIs, Hedge Funds, Pvt Equity investors, Prof Fund

Mgr, Pvt Bkg arms of Banks

Private equity, debt,Equities, derivatives

ICRA, FITCH,CARE, CRISIL

The drivers for transition

ICAI

Primary market - Trends

Free pricing – abolition of Controller of Capital issues

Entry norms- SEBI guidelines for corporates Disclosure – promoters contribution & lock in

period,risk factors,justification of premium. Book building– price discovery. Registration of intermediaries –

MB/Brokers/debenture trustees/Fi/Depository Increasing role of public sector

Secondary market - Trends Change in trading system – public out cry to

screen based trading. Depository – NSDL in & CDSL Clearing corporations – CCIL Settlement system – streamlined e.g.DVP Capital Adequacy for brokers/MB – business

connected with capital Regulation – Insider trading Price rigging/circuit breakers etc

Trends in capital market Introduction of Derivative products -

Index / Stock Futures & Options Margin Lending Securities Lending Institutionalization –major role –

MF/FI/FII/VCF/ - pressure on the company to perform/disclosure.

Globalization – opening of market to overseas player - E.g. FDI/portfolio management for FII/NRI etc. Indian corporate also access overseas market.

Trends in capital market Four products rolled out- Index / Stock -

Futures & Options Margining System - VAR based / Market

wide limits Client level computation of positions &

margining Emergence of institutions

–SEBI/NSE/NSDL/CDSL/CCIL etc. Modernization – use of technology for

trading/clearing/settlement etc. Role of IT for clearing, settlement, monitoring etc

Trends in capital market 1994-Equity Trading commences on NSE 1995-All Trading goes Electronic 1996- Depository comes in to existence 1999- FIIs Participation- Globalisation 2000- over 80% trades in Demat form 2001- Major Stocks move to Rolling Sett 2003- T+2 settlements in all stocks 2003 - Demutualisation of Exchanges

What had happened in 2009?- iniatives by SEBI

Satyam – disclosure of shares pledged by promoters.

Anchor investor – to benefit institutional investors. Lock in period 1 month.investor stands to benefit of full allotment which may not be available in book building route. Advantage for companies to get long term investor. Other wise, institutional investor sell the shares immediately to make profit.

Banning of entry loads in MFs. Freedom to exchanges to fix trading sessions.

It came in to effect from 4.01.10. Relaunching of interest rate Futures.

Qualified institutional buyers Generally perceived to possess

expertise and the financial muscle to evaluate and invest in the capital

markets. These entities are not required to be

registered with SEBI as QIBs. Any entities falling under the categories

specified above are considered as QIBs for the purpose of participating in primary issuance process.

Minimum net worth Re 2.5 cr

QIB

QIB ’ shall mean: a. Public financial institution as defined in section 4A

of the Companies Act, 1956; b. Scheduled commercial banks; c. Mutual funds; d. Foreign institutional investor registered with SEBI; e. Multilateral and bilateral development financial

institutions; f. Venture capital funds registered with SEBI. g. Foreign Venture capital investors registered with

SEBI. h. State Industrial Development Corporations. i. Insurance Companies registered with the Insurance

Regulatory and Development Authority (IRDA). j. Provident Funds with minimum corpus of Rs.25

crores k. Pension Funds with minimum corpus of Rs. 25 crores

EQUITY SHARES An equity share, commonly referred to as

ordinary share also represents the form of fractional ownership in which a shareholder, as a fractional owner, undertakes the maximum entrepreneurial risk associated with a business venture.

The holders of such shares are members of the company and have voting rights. A company may issue such shares with differential rights as to voting, payment of dividend, etc.

• Rights Issue-: The issue of new securities to existing shareholders at a ratio to those already held.

• Bonus Shares: Shares issued by the companies to their shareholders free of cost by capitalization of accumulated reserves from the profits earned in the earlier years.

Preference shares Owners of these kind of shares are entitled to a

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

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

But in the event of liquidation, their claims rank below the claims of the company’s creditors, bondholders / debenture holders.

• Cumulative Preference Shares.  A type of preference shares on which dividend accumulates if remains unpaid.  All arrears of preference dividend have to be paid out before paying dividend on equity shares.

• Cumulative Convertible Preference Shares: A type of preference shares where the dividend payable on the same accumulates, if not paid.  After a specified date, these shares will be converted into equity capital of the company.

• Participating Preference Share: The right of certain preference shareholders to participate in profits after a specified fixed dividend contracted for is paid.  Participation right is linked with the quantum of dividend paid on the equity shares over and above a particular specified level.

Perpetual preference shares

Preference shares

What is the role of SEBI in public issue?

Any company making a public issue or a listed company making a rights issue of

value of more than Rs.50 lakhs is required to file a draft offer document with SEBI for its observations

Company can proceed further on the issue only after getting observations from SEBI.

The validity period of SEBI’s observation letter is three months only i.e.. the company has to open its issue within three months period.

No requirement of nay other document in case of preferential placement or QIP placement.

Eligibility norms for public offer

Eligibility norms for public offer

Primary market

IPO by listed company Notification by SEBI – it is

necessary to maintain at least 25% of share holding with non promoter

Companies are given 2 years time for compliance

Currently there are 400 companies under this category. E.g. WIPRO

IPO norms QIBs are eligible for 50% out of that 50%,5% reserved for MF and MF can

bid in balance 45%. Retail investors @35% QIB shall put in margin of 10% as against nil in

previous norms Proportionate allotment (previously preferential)

to QIB like retail investors Protects small investors and create more depth

in the market. No discretionary bias for QIB. Quota – QIB 50%, Non Institutional Investors

(NII) – 15% and Retail Individual investors (RII)– 35%.

Private placement- SEBI guidelines dt 8.05.06.

Listed companies are permitted to issue or any other securities like fully/partly convertible debentures.

Each company can raise total funds only up to 5 times its net worth in one financial year.

It can be by private placement to QIB. No quota for HNI or retail investors.

Lock in period for QIB – 1 year IPO cannot be sold through this route.. 10 % to reserved for MFs. Issues of up to Re 250

crore should have minimum 2 investors In case of Re 250 crore & above, it should be

allotted to 5 investors & more. Companies not allowed to make placement for

more than 50% of the issue size to any single investor.

This guideline will enable corporate to raise funds in shortest time possible i.e. in matter of hours.

It will reduce the need for FCCB route where formalities are simpler to raise funds in overseas market. Move is aimed to raise funds locally and reduce export of capital from India.

Private placement- SEBI guidelines dt 8.05.06.

Exemptions from SEBI guidelines (a) Private Sector Banks (b) Public sector banks (c) An infrastructure company whose

project has been appraised by a FI or IDFC or IL&FS or a bank which was

earlier a FI and not less than 5% of the project cost is financed

by any of these institutions. (d) Rights issue by a listed company

Disclosure & Investor Protection - 2005 Primary issuances are governed by DIP issued

by SEBI Merchant bankers are expected to do due

diligence and ensure that all requirements of DIP are complied with.

Offer document should disclose all relevant information to enable investors to well-informed decision.

Offer document means prospectus in case of public issue and letter of offer in case of rights issue which is filed with ROC and SEs.

Book building Book Building is basically a capital issuance

process used in Initial Public Offer (IPO) which aids price and demand discovery.

It is a process used for marketing a public offer of equity shares of a company.

It is a mechanism where, during the period for which the book for the IPO is open, bids are collected from investors at various prices, which are above or equal to the floor price.

The process aims at tapping both wholesale and retail investors. The offer/issue price is then determined after the bid closing date based on certain evaluation criteria.

Book building process The Issuer who is planning an IPO nominates a lead

merchant banker as a 'book runner'. The Issuer specifies the number of securities to be

issued and the price band for orders. The Issuer also appoints syndicate members with whom

orders can be placed by the investors. Investors place their order with a syndicate member

who inputs the orders into the 'electronic book'. This process is called 'bidding' and is similar to open auction.

A Book should remain open for a minimum of 5 days. Bids cannot be entered less than the floor price. Bids can be revised by the bidder before the issue

closes. On the close of the book building period the 'book

runner evaluates the bids on the basis of the evaluation criteria which may include -

Price Investor quality Earliness of bids, etc.

Book building exercise The book runner and the company conclude the

final price at which it is willing to issue the stock and allocation of securities.

Generally, the number of shares are fixed, the issue size gets frozen based on the price per share discovered through the book building process.

Allocation of securities is made to the successful bidders.

Book Building is a good concept and represents a capital market which is in the process of maturing.

Reverse Book Building – share buy back. E.g. Essar oil, RIL, Philips India etc.

Fixed price offer through public issue

* price is known in advance and demand at the close of the issue.

An issuer company is allowed to freely price the issue. The basis of issue price is disclosed in the offer document where the issuer discloses in detail about the qualitative and quantitative factors justifying the issue price.

Red Herring prospectus Red Herring Prospectus” is a prospectus which does not have details

of either price or number of shares being offered or the amount of issue. This

means that in case price is not disclosed, the number of shares and the upper and

lower price bands are disclosed. On the other hand, an issuer can state the

issue size and the number of shares are determined later. An RHP for and FPO

can be filed with the RoC without the price band and the issuer, in such a case will

notify at a latter stage floor price or a price band by way of an advertisement one day prior to

the opening of the issue. In the case of book-built issues, it is a process of

price discovery and the price cannot be determined until the bidding

process is completed. Hence, such details are not shown in the Red Herring prospectus filed with ROC in terms of the provisions of the Companies Act. Only on completion of the bidding process, the details of the final price are

included in the Offer document filed thereafter with ROC is called a prospectus.

Placement/allotment

Finalization of allotment ( Fixed price issue)– with in 30 days from the closure of issue incase of fixed price issue and

For book building issue –Allotment with in 2 weeks from the date of closure.

Refund – D mat credit or refund with in 15 days from the closure of issue.

Listing on SE with in 7 days from the date of finalization of issue.

Settlement Abolition of badla system since 2002 Rolling Settlement – Settled on T+2 basis for corporate

securities. And T +1 For G-Sec. No delivery of shares (Default).

Procured through auction system.

Intermediaries Merchant bankers Brokers Under writers Registrars Bankers to the issue Portfolio managers

Merchant Banker

SEBI - merchant banker means any person who is engaged in the business of issue management either by making arrangement regarding selling , buying or subscribing to securities or acting as manager or consultant, adviser, or rendering corporate advisory services in relation to such issue management.

Registration with SEBI and it is valid for 3 years from the date of issue.

MB –Category

Category I -To carry any type of activity of issue management. Net worth Re 5.00 crores.

Category II – advisor, consultant, co-manger, under writer and portfolio manager.Net worth Re 50.00 lacs.

Category III – under writer, adviser, consultant to an issue. Net worth Re 20.00 lacs.

Category IV- advisor or consultant to an issue. Net worth NIL.

Merchant banking SEBI guidelines

Code of conduct – compliance of SEBI rules,secrecy,fairness in dealings,integrity etc

Diligence certificate - filing of certificate with SEBI at least 2 weeks before opening of subscription –about prospectus, compliance of legal requirements, fairness disclosure etc

Submission of documents – prospectus, literature given to investors- to be filed with SEBI

Suspension/cancellation of registration

Role of merchant bankers Issue Management

Prospectus

Financial Structure

Tie up of Finances

Allotment of Securities

Refund of subscription 

(contd..)

Role of Merchant Bankers

Underwriters

Advisory

Consultancy

Co-manager

Portfolio manager 

Consultants to issue 

Mobilization of Foreign Funds for companies

ROLE OF MERCHANT BANKER IN PUBLIC

ISSUE Furnishing Information

Maintenance of Books

Agreement with Issuing Company

Action by RBI

Code of Conduct

Having high integration in dealing with clients

Disclosure of all details to the authorities concerned

Avoiding making exaggerated statements

Disclosure of all the facts to its customers

Not disclosing any confidential matter of the clients to third parties

MANAGING PUBLIC ISSUE

No Merchant Banker is permitted to carry on business other than that in the

securities market with effect from December 1997

The maximum number of lead managers is related to the size of the issue. For

an issue of Rs 50 Crores, 2 Lead Managers are required

Between Rs. 50 to Rs. 100 Crores, 3 lead managers and Rs. 100 to Rs. 200

Crores 4 Lead Managers are to be appointed

5 or more Lead Managers are appointed, if the size of the issue is above Rs.

200 Crores.

 

RESPONSIBILITIES OF LEAD

MANAGERS

  Entering into an agreement with issuing company with regard to

rights, liabilities and obligations. A statement has to be submitted to

SEBI with regard to above facts.

A lead Merchant Banker must have certificate of registration with

SEBI.

He should not have any of connection with the issuing company.

Minimum underwriting commission can be 5% or Rs. 25 lakhs,

whichever is less.

MERCHANT BANKING ORGANISATIONS IN INDIA

Can be classified under 4 categories

Merchant Banking division of Commercial Banks – both Indian and

Foreign – SBI Capital Market, Citibank, etc.

Sub division of Commercial Banks – Can bank

Merchant Banking activities of Financial Institutions – IFCI, ICICI

Securities etc.

Merchant Banking by Financial Service Firms – Stock Brokers or others

independent companies – Karvey Consultants, J M Financial services,

Religare etc.

ACTION AGAINST MERCHANT BANKERS

Action can be taken against a merchant banker when he is found guilty of non-

compliance of regulations. The defaults committed by the Merchant Banker can

be categorized into

General – failure to submit the diligence certificate in the prescribed manner

to SEBI or failure to dispatch refund orders, etc.

Major – Underwriting not properly taken up or when there are excess

members of merchant bankers for an issue than the permissible limit.

Minor – consists of advertisements not being in conformity with prospectus,

delay in allotment of securities, etc

(contd..)

ACTION AGAINST MERCHANT BANKERS (contd..)

Serious defaults – unethical practice or non cooperation with SEBI.

For each of these defaults, there are points and accordingly action will be

taken by SEBI against the erring merchant bankers.

THANKS ANY ?