What are the various types of financial markets?

The financial markets can broadly be divided into money and capital market.

Money Market: Money market is a market for debt securities that pay off in the short
term usually less than one year, for example the market for 90-days treasury bills. This
market encompasses the trading and issuance of short term non equity debt instruments
including treasury bills, commercial papers, bankers acceptance, certificates of deposits,
etc.

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.

What is meant by the secondary market?

Secondary market refers to a market where securities are traded after being initially
offered to the public in the primary market and/or listed on the Stock Exchange. Majority
of the trading is done in the secondary market. Secondary market comprises of equity
markets and the debt markets.

For the general investor, the secondary market provides an efficient platform for trading
of his securities. For the management of the company, Secondary equity markets serve as
a monitoring and control conduit—by facilitating value-enhancing control activities,
enabling implementation of incentive-based management contracts, and aggregating
information (via price discovery) that guides management decisions.

What is the difference between the primary market and the secondary market?

In the primary market, securities are offered to public for subscription for the purpose of
raising capital or fund. Secondary market is an equity trading avenue in which already
existing/pre- issued securities are traded amongst investors. Secondary market could be
either auction or dealer market. While stock exchange is the part of an auction market,
Over-the-Counter (OTC) is a part of the dealer market.

What are securities?

Securities are financial instruments that represent a creditor relationship with a

corporation or government. Generally they represent agreements to receive a certain
amount depending on the terms contained within the agreement.

What is an ‘Equity’/Share?
Total equity capital of a company is divided into equal units of small denominations,
each called a share. For example, in a company the total equity capital of Rs 2,00,00,000

1
is divided into 20,00,000 units of Rs 10 each. Each such unit of Rs 10 is called a Share.
Thus, the company then is said to have 20,00,000 equity shares of Rs 10 each. The
holders of such shares are members of the company and have voting rights.

What is a ‘Debt Instrument’?

Debt instrument represents a contract whereby one party lends money to another on pre-
determined terms with regards to rate and periodicity of interest, repayment of principal
amount by the borrower to the lender. In the Indian securities markets, the term ‘bond’ is
used for debt instruments issued by the Central and State governments and public sector
organizations and the term ‘debenture’ is used for instruments issued by private corporate
sector.

What is a Derivative?
Derivative is a product whose value is derived from the value of one or more basic
variables, called underlying. The underlying asset can be equity, index, foreign exchange
(forex), commodity or any other asset. Derivative products initially emerged as hedging
devices against fluctuations in commodity prices and commodity-linked derivatives
remained the sole form of such products for almost three hundred years. The financial
derivatives came into spotlight in post-1970 period due to growing instability in the
financial markets. However, since their emergence, these products have become very
popular and by 1990s, they accounted for about two-thirds of total transactions in
derivative products.

What is a Mutual Fund?

A Mutual Fund is a body corporate registered with SEBI (Securities Exchange Board of
India) that pools money from individuals/corporate investors and invests the same in a
variety of different financial instruments or securities such as equity shares, Government
securities, Bonds, debentures etc. Mutual funds can thus be considered as financial
intermediaries in the investment business that collect funds from the public and invest on
behalf of the investors. Mutual funds issue units to the investors. The appreciation of the
portfolio or securities in which the mutual fund has invested the money leads to an
appreciation in the value of the units held by investors. The investment objectives
outlined by a Mutual Fund in its prospectus are binding on the Mutual Fund scheme. The
investment objectives specify the class of securities a Mutual Fund can invest in. Mutual
Funds invest in various asset classes like equity, bonds, debentures, commercial paper
andgovernment securities. The schemes offered by mutual funds vary from fund to fund.
Some are pure equity schemes; others are a mix of equity and bonds. Investors are also
given the option of getting dividends, which are declared periodically by the mutual fund,
or to participate only in the capital appreciation of the scheme.

What is an Index?
An Index shows how a specified portfolio of share prices are moving in order to give an
indication of market trends. It is a basket of securities and the average price movement of
the basket of securities indicates the index movement, whether upwards or downwards.

What is a Depository?

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A depository is like a bank wherein the deposits are securities (viz. shares, debentures,
bonds, government securities, units etc.) in electronic form.

What is Dematerialization?
Dematerialization is the process by which physical certificates of an investor are
converted to an equivalent number of securities in electronic form and credited to the
investor’s account with his Depository Participant (DP).

How is a depository similar to a bank?

A Depository can be compared with a bank, which holds the funds for depositors. An
analogy between a bank and a depository may be drawn as follows:
BANK DEPOSITORY
Holds funds in an account Hold securities in an account
Transfers funds between accounts on the Transfers securities between accounts on
instruction of the account holder the instruction of the account holder.
Facilitates transfers without having to Facilitates transfers of ownership without
handle money having to handle securities.
Facilitates safekeeping of money Facilitates safekeeping of shares.

What are the benefits of participation in a depository?

The benefits of participation in a depository are:
 Immediate transfer of securities
 No stamp duty on transfer of securities
 Elimination of risks associated with physical certificates such as bad delivery,
fake securities, etc.
 Reduction in paperwork involved in transfer of securities
 Reduction in transaction cost

What are fixed income securities?

Fixed-income securities are investments where the cash flows are according to a
predetermined amount of interest, paid on a fixed schedule.

What is the yield on a security?

Yield on a security is the implied interest offered by a security over its life, given its
current market price.

What is maturity?
Maturity indicates the life of the security i.e. the time over which interest flows will
occur.

What are coupon payments?

Coupon payments are the cash flows that are offered by a particular security at fixed
intervals. The coupon expressed as a percentage of the face value of the security gives the
coupon rate.

Why is there a difference between coupon rate and yield?

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The difference between coupon rate and yield arises because the market price of a
security might be different from the face value of the security. Since coupon payments
are calculated on the face value, the coupon rate is different from the implied yield.

What is a Debenture?
A Debenture is a debt security issued by a company (called the Issuer), which offers to
pay interest in lieu of the money borrowed for a certain period. In essence it represents a
loan taken by the issuer who pays an agreed rate of interest during the lifetime of the
instrument and repays the principal normally, unless otherwise agreed, on maturity.
These are long-term debt instruments issued by private sector companies. These are
issued in denominations as low as Rs 1000 and have maturities ranging between one and
ten years. Long maturity debentures are rarely issued, as investors are not comfortable
with such maturities
Debentures enable investors to reap the dual benefits of adequate security and good
returns. Unlike other fixed income instruments such as Fixed Deposits, Bank Deposits
they can be transferred from one party to another by using transfer from. Debentures are
normally issued in physical form. However, corporates/PSUs have started issuing
debentures in Demat form. Generally, debentures are less liquid as compared to PSU
bonds and their liquidity is inversely proportional to the residual maturity. Debentures
can be secured or unsecured.

What is a difference between a bond and a debenture?

Long-term debt securities issued by the Government of India or any of the State
Government’s or undertakings owned by them or by development financial institutions
are called as bonds. Instruments issued by other entities are called debentures. The
difference between the two is actually a function of where they are registered and pay
stamp duty and how they trade.

Debenture stamp duty is a state subject and the duty varies from state to state. There are
two kinds of stamp duties levied on debentures viz issuance and transfer. Issuance stamp
duty is paid in the state where the principal mortgage deed is registered. Over the years,
issuance stamp duties have been coming down. Stamp duty on transfer is paid to the state
in which the registered office of the company is located. Transfer stamp duty remains
high in many states and is probably the biggest deterrent for trading in debentures in
physical segment, resulting in lack of liquidity.

On issuance, stamp duty is linked to mortgage creation, wherever applicable while on

transfer, it is levied in accordance with the laws of the state in which the registered office
of the company in question is located. A debenture transfer, has to be effected through a
transfer form prescribed for under Companies Act.

Issuance of stamp duty on bonds is under Indian Stamp Act 1899 (Central Act). A bond
is transferable by endorsement and delivery without payment of any transfer stamp duty.

What are T-Bills? Who issued it ? Who can invest in it ?

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Treasury bills are actually a class of Central Government Securities. Treasury bills,
commonly referred to as T-Bills are issued by Government of India against their short
term borrowing requirements with maturities ranging between 14 to 364 days. The T-Bill
of below mentioned periods are currently issued by Government/Reserve Bank of India
in Primary Market 91-day and 364-day T-Bills. All these are issued at a discount-to-face
value. For example a Treasury bill of Rs. 100.00 face value issued for Rs. 91.50 gets
redeemed at the end of it's tenure at Rs. 100.00. 91 days T-Bills are auctioned under
uniform price auction method where as 364 days T-Bills are auctioned on the basis of
multiple price auction method.

What are various types of T-bills?

Treasury Bills are short term GOI Securities. They are issued for different maturities viz.
14-day, 28 days (announced in Credit policy but yet to be introduced), 91 days, 182 days
and 364 days. 14 days T-Bills had been discontinued recently. 182 days T-Bills were not
re-introduced.

Who can invest in T-Bill ?

Banks, Primary Dealers, State Governments, Provident Funds, Financial Institutions,

Insurance Companies, NBFCs, FIIs (as per prescribed norms), NRIs & OCBs can invest
in T-Bills.

What are G-Secs?

G-Secs or Government of India dated Securities are Rupees One hundred face-value units
/ debt paper issued by Government of India in lieu of their borrowing from the market.
These can be referred to as certificates issued by Government of India through the
Reserve Bank acknowledging receipt of money in the form of debt, bearing a fixed
interest rate (or otherwise) with interests payable semi-annually or otherwise and
principal as per schedule, normally on due date on redemption

What are ‘Gilt edged’ securities?

The term government securities encompass all Bonds & T-bills issued by the Central
Government, state government. These securities are normally referred to, as "gilt-edged"
as repayments of principal as well as interest are totally secured by sovereign guarantee.

’Gilt Securities’ are issued by the RBI, the central bank, on behalf of the Government of
India. Being sovereign paper, gilt securities carry absolutely no risk of default.

What is Government of India dated securities (G-Secs) & What type of new G-Secs
are issued by Government of India?
Like Treasury Bills, G-Secs are issued by the Reserve Bank of India on behalf of the
Government of India. These form a part of the borrowing program approved by the
parliament in the ‘union budget’. G- Secs are normally issued in dematerialized form
(SGL). When issued in the physical form they are issued in the multiples of Rs. 10,000/-.
Normally the dated Government Securities, have a period of 1 year to 20 years.
Government Securities when issued in physical form are normally issued in the form of

5
Stock Certificates. Such Government Securities when are required to be traded in the
physical form are delivered by the transferor to transferee along with a special transfer
form designed under Public Debt Act 1944.

The transfer does not require stamp duty. The G-Secs cannot be subjected to lien. Hence,
is not an acceptable security for lending against it. Some Securities issued by Reserve
Bank of India like 8.5% Relief Bonds are securites specially notified & can be accepted
as Security for a loan.

What is Commercial Paper ?

Commercial Papers are short term borrowings by Corporates, FIs, PDs, from Money
Market.

Features

· Commercial Papers when issued in Physical Form are negotiable by endorsement and
delivery and hence highly flexible instruments
· Issued subject to minimum of Rs 5 lakhs and in the multiples of Rs. 5 Lac thereafter,
· Maturity is 15 days to 1 year
· Unsecured and backed by credit of the issuing company
· Can be issued with or without Backstop facility of Bank / FI

What are Certificates of deposit (CD)

CDs are short-term borrowings in the form of Usance Promissory Notes having a
maturity of not less than 15 days up to a maximum of one year. CD is subject to payment
of Stamp Duty under Indian Stamp Act, 1899 (Central Act). They are like bank term
deposits accounts. Unlike traditional time deposits these are freely negotiable instruments
and are often referred to as Negotiable Certificate of Deposits

Features of CD
· All scheduled banks (except RRBs and Co-operative banks) are eligible to issue CDs
· Issued to individuals, corporations, trusts, funds and associations
· They are issued at a discount rate freely determined by the issuer and the
market/investors.
These are issued in denominations of Rs.5 Lacs and Rs. 1 Lac thereafter. Bank CDs have
maturity up to one year. Minimum period for a bank CD is fifteen days. Financial
Institutions are allowed to issue CDs for a period between 1 year and up to 3 years. CDs
issued by AIFI are also issued in physical form (in the form of Usance promissory note)
and is issued at a discount to the face value.

What is the difference between a fixed income security and equity?

Holders of fixed-income securities are creditors of the issuer, not owners. Equity
represents a share in the ownership of the issuer.

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What is meant by Face Value of a share/debenture?
The nominal or stated amount (in Rs.) assigned to a security by the issuer. For shares, it is
the original cost of the stock shown on the certificate; for bonds, it is the amount paid to
the holder at maturity. Also known as par value or simply par. For an equity share, the
face value is usually a very small amount (Rs. 5, Rs. 10) and does not have much bearing
on the price of the share, which may quote higher in the market, at Rs. 100 or Rs. 1000 or
any other price. For a debt security, face value is the amount repaid to the investor when
the bond matures (usually, Government securities and corporate bonds have a face value
of Rs. 100). The price at which the security trades depends on the fluctuations in the
interest rates in the economy.

What do you mean by the term Premium and Discount in a Security Market?
Securities are generally issued in denominations of 5, 10 or 100. This is known as the
Face Value or Par Value of the security as discussed earlier. When a security is sold
above its face value, it is said to be issued at a Premium and if it is sold at less than its
face value, then it is said to be issued at a Discount.

What is an ADS?
An American Depositary Share ("ADS") is a U.S. dollar denominated form of equity
ownership in a non-U.S. company. It represents the foreign shares of the company held
on deposit by a custodian bank in the company's home country and carries the corporate
and economic rights of the foreign shares, subject to the terms specified on the ADR
certificate. One or several ADSs can be represented by a physical ADR certificate. The
terms ADR and ADS are often used interchangeably. ADSs provide U.S. investors with a
convenient way to invest in overseas securities and to trade non-U.S. securities in the
U.S. ADSs are issued by a depository bank, such as JPMorgan Chase Bank. They are
traded in the same manner as shares in U.S. companies, on the New York Stock
Exchange (NYSE) and the American Stock Exchange (AMEX) or quoted on NASDAQ
and the over-the-counter (OTC) market. Although ADSs are U.S. dollar denominated
securities and pay dividends in U.S. dollars, they do not eliminate the currency risk
associated with an investment in a non-U.S. company.

What is meant by Global Depository Receipts?

Global Depository Receipts (GDRs) may be defined as a global finance vehicle that
allows an issuer to raise capital simultaneously in two or markets through a global
offering. GDRs may be used in public or private markets inside or outside US. GDR, a
negotiable certificate usually represents company’s traded equity/debt. The underlying
shares correspond to the GDRs in a fixed ratio say 1 GDR=10 shares.

What are the different kinds of issues?

Primarily, issues can be classified as a Public, Rights or preferential issues (also known
as private placements). While public and rights issues involve a detailed procedure,
private placements or preferential issues are relatively simpler. The classification of
issues is illustrated below:

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Initial Public Offering (IPO) is when an unlisted company makes either a fresh issue of
securities or an offer for sale of its existing securities or both for the first time to the
public. This paves way for listing and trading of the issuer’s securities.

A follow on public offering (FPO) is when an already listed company makes either a
fresh issue of securities to the public or an offer for sale to the public, through an offer
document. An offer for sale in such scenario is allowed only if it is made to satisfy listing
or continuous listing obligations.

Rights Issue (RI) is when a listed company which proposes to issue fresh securities to its
existing shareholders as on a record date. The rights are normally offered in a particular
ratio to the number of securities held prior to the issue. This route is best suited for
companies who would like to raise capital without diluting stake of its existing
shareholders unless they do not intend to subscribe to their entitlements.

A preferential issue is an issue of shares or of convertible securities by listed companies

to a select group of persons under Section 81 of the Companies Act, 1956 which is
neither a rights issue nor a public issue. This is a faster way for a company to raise equity
capital. The issuer company has to comply with the Companies Act and the requirements
contained in Chapter pertaining to preferential allotment in SEBI (DIP) guidelines which
inter-alia include pricing, disclosures in notice etc.

What are the eligibility norms for making these issues”?

SEBI has laid down eligibility norms for entities accessing the primary market through
public issues. There is no eligibility norm for a listed company making a rights issue as it
is an offer made to the existing shareholders who are expected to know their company.
The main entry norms for companies making a public issue (IPO or FPO) are
summarized as under:
Entry Norm I (EN I): The company shall meet the following requirements:
(a) Net Tangible Assets of at least Rs. 3 crores for 3 full years.
(b) Distributable profits in atleast three years
(c) Net worth of at least Rs. 1 crore in three years
(d) If change in name, atleast 50% revenue for preceding 1 year should be from the new
activity.
(e) The issue size does not exceed 5 times the pre- issue net worth

To provide sufficient flexibility and also to ensure that genuine companies do not suffer
on account of rigidity of the parameters, SEBI has provided two other alternative routes
to company not satisfying any of the above conditions, for accessing the primary Market,
as under:

Entry Norm II (EN II):

(a) Issue shall be through book building route, with at least 50% to be mandatory allotted
to the Qualified Institutional Buyers (QIBs).
(b) The minimum post-issue face value capital shall be Rs.10 crore or there shall be a
compulsory market-making for at least 2 years

8
OR
Entry Norm III (EN III):
(a) The “project” is appraised and participated to the extent of 15% by FIs/Scheduled
Commercial Banks of which at least 10% comes from the appraiser(s).
(b) The minimum post-issue face value capital shall be Rs. 10 crore or there shall be a
compulsory market-making for at least 2 years. In addition to satisfying the aforesaid
eligibility norms, the company shall also satisfy the criteria of having at least 1000
prospective allotees in its issue.

What is the difference between an offer document, RHP, a prospectus and an

abridged prospectus? What does it mean when someone says “draft offer doc”?
“Offer document” means Prospectus in case of a public issue or offer for sale and Letter
of Offer in case of a rights issue which is filed Registrar of Companies (ROC) and Stock
Exchanges. An offer document covers all the relevant information to help an investor to
make his/her investment decision.
“Draft Offer document” means the offer document in draft stage. The draft offer
documents are filed with SEBI, atleast 21 days prior to the filing of the Offer Document
with ROC/ SEs. SEBI may specifies changes, if any, in the draft Offer Document and the
issuer or the Lead Merchant banker shall carry out such changes in the draft offer
document before filing the Offer Document with ROC/ SEs. The Draft Offer document is
available on the SEBI website for public comments for a period of 21 days from the filing
of the Draft Offer Document with SEBI.

“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 the 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. The
offer document filed thereafter with ROC is called a prospectus.
“Abridged Prospectus” means the memorandum as prescribed in Form 2A under sub-
section (3) of section 56 of the Companies Act, 1956. It contains all the salient features of
a prospectus. It accompanies the application form of public issues.

Who decides the price of an issue?

Indian primary market ushered in an era of free pricing in 1992. Following this, the
guidelines have provided that the issuer in consultation with Merchant Banker shall
decide the price. There is no price formula stipulated by SEBI. SEBI does not play any
role in price fixation. The company and merchant banker are however required to give
full disclosures of the parameters which they had considered while deciding the issue

9
price. There are two types of issues one where company and LM fix a price (called fixed
price) and other, where the company and LM stipulate a floor price or a price band and
leave it to market forces to determine the final price (price discovery through book
building process).

How does Book Building work?

The logic:
Book building is a process of price discovery. Hence, the Red Herring prospectus does
not contain a price. Instead, the red herring prospectus contains either the floor price of
the securities offered through it or a price band along with the range within which the
bids can move. The applicants bid for the shares quoting the price and the quantity that
they would like to bid at. Only the retail investors have the option of bidding at ‘cut-off’.
After the bidding process is complete, the ‘cut-off’ price is arrived at on the lines of
Dutch auction. The basis of Allotment is then finalized and letters allotment/refund is
undertaken. The final prospectus with all the details including the final issue price and the
issue size is filed with ROC, thus completing the issue process.

What is a price band?

As stated above, the red herring prospectus may contain either the floor price for the
securities or a price band within which the investors can bid. The spread between the
floor and the cap of the price band shall not be more than 20%. In other words, it means
that the cap should not be more than 120% of the floor price. The price band can have a
revision and such a revision in the price band shall be widely disseminated by informing
the stock exchanges, by issuing press release and also indicating the change on the
relevant website and the terminals of the syndicate members. In case the price band is
revised, the bidding period shall be extended for a further period of three days, subject to
the total bidding period not exceeding thirteen days.

Who decides the price band?

It may be understood that the regulatory mechanism does not play a role in setting the
price for issues. It is up to the company to decide on the price or the price band, in
consultation with Merchant Bankers. The basis of issue price is disclosed in the offer
document. The issuer is required to disclose in detail about the qualitative and
quantitative factors justifying the issue price.

What is firm allotment?

A company making an issue to public can reserve some shares on “allotment on firm
basis” for some categories as specified in DIP guidelines. Allotment on firm basis
indicates that allotment to the investor is on firm basis. DIP guidelines provide for
maximum % of shares which can be reserved on firm basis. The shares to be allotted on
“firm allotment category” can be issued at a price different from the price at which the
net offer to the public is made provided that the price at which the security is being
offered to the applicants in firm allotment category is higher than the price at which
securities are offered to public.

What is reservation on competitive basis?

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Reservation on Competitive Basis is when allotment of shares is made in proportion to
the shares applied for by the concerned reserved categories. Reservation on competitive
basis can be made in a public issue to the Employees of the company, Shareholders of the
promoting companies in the case of a new company and shareholders of group companies
in the case of an existing company, Indian Mutual Funds, Foreign Institutional Investors
(including non resident Indians and overseas corporate bodies), Indian and Multilateral
development Institutions and Scheduled Banks.

Is there any preference while doing the allotment?

The allotment to the Qualified Institutional Buyers (QIBs) is on a discretionary basis. The
discretion is left to the Merchant Bankers who first disclose the parameters of judgment
in the Red Herring Prospectus. There are no objective conditions stipulated as per the
DIP Guidelines. The Merchant Bankers are free to set their criteria and mention the same
in the Red Herring Prospectus.

Who is eligible for reservation and how much? (QIBs, NIIs, etc.,)
In a book built issue allocation to Retail Individual Investors (RIIs), Non Institutional
Investors (NIIs) and Qualified Institutional Buyers (QIBs) is in the ratio of 35: 15: 50
respectively. In case the book built issues are made pursuant to the requirement of
mandatory allocation of 60% to QIBs in terms of Rule 19(2)(b) of SCRR, the respective
figures are 30% for RIIs and 10% for NIIs. This is a transitory provision pending
harmonization of the QIB allocation in terms of the aforesaid Rule with that specified in
the guidelines.

How is the Retail Investor defined as?

‘Retail individual investor’ means an investor who applies or bids for securities of or for
a value of not more than Rs.1,00,000.

Can a retail investor also bid in a book-built issue?

Yes. He can bid in a book-built issue for a value not more than Rs.1,00,000. Any bid
made in excess of this will be considered in the HNI category.

Is there anything like “online bidding”?

A company proposing to issue capital to public through the on-line system of the stock
exchange for offer of securities can do so if it complies with the requirements under
Chapter 11A of DIP Guidelines. The appointment of various intermediaries by the issuer
includes a prerequisite that such members/registrars have the required facilities to
accommodate such an online issue process. An investor may place his bids through the
online terminals offered by some of the brokers.

Where can I get a form for applying/ bidding for the shares?
The form for applying/bidding of shares is available with all syndicate members,
collection centers, the brokers to the issue and the bankers to the issue.

Who are the intermediaries in an issue?

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Merchant Bankers to the issue or Book Running Lead Managers (BRLM), syndicate
members, Registrars to the issue, Bankers to the issue, Auditors of the company,
Underwriters to the issue, Solicitors, etc. are the intermediaries to an issue. The issuer
discloses the addresses, telephone/fax numbers and email addresses of these
intermediaries. In addition to this, the issuer also discloses the details of the compliance
officer appointed by the company for the purpose of the issue.

Who is eligible to be a BRLM?

A Merchant banker possessing a valid SEBI registration in accordance with the SEBI
(Merchant Bankers) Regulations, 1992 is eligible to act as a Book Running Lead
Manager to an issue.

What is the role of a Lead Manager? (pre and post issue)

In the pre-issue process, the Lead Manager (LM) takes up the due diligence of company’s
operations/ management/ business plans/ legal etc. Other activities of the LM include
drafting and design of Offer documents, Prospectus, statutory advertisements and
memorandum containing salient features of the Prospectus. The BRLMs shall ensure
compliance with stipulated requirements and completion of prescribed formalities with
the Stock Exchanges, RoC and SEBI including finalisation of Prospectus and RoC filing.
Appointment of other intermediaries viz., Registrar(s), Printers, Advertising Agency and
Bankers to the Offer is also included in the pre-issue processes. The LM also draws up
the various marketing strategies for the issue. The post issue activities including
management of escrow accounts, coordinate non-institutional allocation, intimation of
allocation and dispatch of refunds to bidders etc are performed by the LM. The post Offer
activities for the Offer will involve essential follow-up steps, which include the
finalization of trading and dealing of instruments and dispatch of certificates and demat
of delivery of shares, with the various agencies connected with the work such as the
Registrar(s) to the Offer and Bankers to the Offer and the bank handling refund business.
The merchant banker shall be responsible for ensuring that these agencies fulfill their
functions and enable it to discharge this responsibility through suitable agreements with
the Company.

What is the role of a registrar?

The Registrar finalizes the list of eligible allottees after deleting the invalid applications
and ensures that the corporate action for crediting of shares to the demat accounts of the
applicants is done and the dispatch of refund orders to those applicable are sent. The Lead
manager coordinates with the Registrar to ensure follow up so that that the flow of
applications from collecting bank branches, processing of the applications and other
matters till the basis of allotment is finalized, dispatch security certificates and refund
orders completed and securities listed.

What is the role of bankers to the issue?

Bankers to the issue, as the name suggests, carries out all the activities of ensuring that
the funds are collected and transferred to the Escrow accounts. The Lead Merchant
Banker shall ensure that Bankers to the Issue are appointed in all the mandatory
collection centers as specified in DIP Guidelines. The LM also ensures follow-up with

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bankers to the issue to get quick estimates of collection and advising the issuer about
closure of the issue, based on the correct figures.

Differential pricing
Pricing of an issue where one category is offered shares at a price different from the other
category is called differential pricing. In DIP Guidelines differential pricing is allowed
only if the securities to applicants in the firm allotment category is at a price higher than
the price at which the net offer to the public is made. The net offer to the public means
the offer made to the Indian public and does not include firm allotments or reservations
or promoters’ contributions.

Basis of Allocation/Basis of Allotment

After the closure of the issue, the bids received are aggregated under different categories
i.e., firm allotment, Qualified Institutional Buyers (QIBs), Non-Institutional Buyers
(NIBs), Retail, etc. The oversubscription ratios are then calculated for each of the
categories as against the shares reserved for each of the categories in the offer document.
Within each of these categories, the bids are then segregated into different buckets based
on the number of shares applied for. The oversubscription ratio is then applied to the
number of shares applied for and the number of shares to be allotted for applicants in
each of the buckets is determined. Then, the number of successful allottees is determined.
This process is followed in case of proportionate allotment. In case of allotment for QIBs,
it is subject to the discretion of the post issue lead manager.

What is the traditional structure of the stock exchanges in India?

There are 22 recognised stock exchanges in India. Mangalore Stock Exchange has
recently been derecognised.

In terms of legal structure, the stock exchanges in India could be segregated into two
broad groups – 19 stock exchanges which were set up as companies, either limited by
guarantees or by shares, and the 3 stock exchanges which are functioning as associations
of persons (AOP) viz. BSE, ASE and Madhya Pradesh Stock Exchange. The 19 stock
exchanges which are companies are: the stock exchanges of Bangalore, Bhubaneswar,
Calcutta, Cochin, Coimbatore, Delhi, Gauhati, Hyderabad, Interconnected SE, Jaipur,
Ludhiana, Madras, Magadh, NSE, Pune, OTCEI, Saurashtra-Kutch, Uttar Pradesh, and
Vadodara. Apart from NSE, all stock exchanges whether established as corporate bodies
or Association of Persons (AOPs), are non-profit making organizations.

What is meant by corporatisation of stock exchanges?

Corporatisation is the process of converting the organizational structure of the stock

exchange from a non-corporate structure to a corporate structure.

Traditionally, some of the stock exchanges in India were established as “Association of

persons”, e.g. the Stock Exchange, Mumbai (BSE), Ahmedabad Stock Exchange (ASE)

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and Madhya Pradesh Stock Exchange (MPSE). Corporatisation of such exchanges is the
process of converting them into incorporated Companies.

What is demutualisation of stock exchanges?

Demutualisation refers to the transition process of an exchange from a “mutually-owned”

association to a company “owned by shareholders”. In other words, transforming the
legal structure of an exchange from a mutual form to a business corporation form is
referred to as demutualisation. The above, in effect means that after demutualisation, the
ownership, the management and the trading rights at the exchange are segregated from
one another.

How is a demutualised exchange different from a mutual exchange?

In a mutual exchange, the three functions of ownership, management and trading are
intervened into a single Group. Here, the broker members of the exchange are both the
owners and the traders on the exchange and they further manage the exchange as well. A
demutualised exchange, on the other hand, has all these three functions clearly
segregated, i.e. the ownership, management and trading are in separate hands.

Currently are there any demutualised stock exchanges in India?

Currently, two stock exchanges in India, the National Stock Exchange (NSE) and Over
the Counter Exchange of India (OTCEI) are not only corporatised but also demutualised
with segregation of ownership and trading rights of members.

What is “Securities Lending Scheme”?

Securities Lending and Borrowing is a scheme which enables lending of idle securities by
the investors to the clearing corporation and earning a return through the same. For
securities borrowing and lending system, clearing corporations of the stock exchange
would be the nodal agency and be registered as the “Approved Intermediaries”(AIs). The
clearing corporation can borrow, on behalf of the members, securities for the purpose of
meeting shortfalls. The defaulter selling broker may make the delivery within the period
specified by the clearing corporation. In the event of the defaulted selling broker failing
to make the delivery within the specified period, the clearing corporation has to buy the
securities from the open market and return the same to the lender within seven trading
days. In case of an inability to purchase the securities from the market, the transaction
shall be closed out.

What is Margin Trading Facility?

Margin Trading is trading with borrowed funds/securities. It is essentially a leveraging
mechanism which enables investors to take exposure in the market over and above what
is possible with their own resources. SEBI has been prescribing eligibility conditions and
procedural details for allowing the Margin Trading Facility from time to time.

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Corporate brokers with net worth of at least Rs 3 crore are eligible for providing Margin
trading facility to their clients subject to their entering into an agreement to that effect.
Before providing margin trading facility to a client, the member and the client have been
mandated to sign an agreement for this purpose in the format specified by SEBI. It has
also been specified that the client shall not avail the facility from more than one broker at
any time.

The facility of margin trading is available for Group 1 securities and those securities
which are offered in the initial public offers and meet the conditions for inclusion in the
derivatives segment of the stock exchanges.

For providing the margin trading facility, a broker may use his own funds or borrow from
scheduled commercial banks or NBFCs regulated by the RBI. A broker is not allowed to
borrow funds from any other source.

The "total exposure" of the broker towards the margin trading facility should not exceed
the borrowed funds and 50 per cent of his "net worth". While providing the margin
trading facility, the broker has to ensure that the exposure to a single client does not
exceed 10 per cent of the "total exposure" of the broker.

Initial margin has been prescribed as 50% and the maintenance margin has been
prescribed as 40%.

In addition, a broker has to disclose to the stock exchange details on gross exposure
including name of the client, unique identification number under the SEBI (Central
Database of Market Participants) Regulations, 2003, and name of the scrip.

If the broker has borrowed funds for the purpose of providing margin trading facility, the
name of the lender and amount borrowed should be disclosed latest by the next day.

The stock exchange, in turn, has to disclose the scrip-wise gross outstanding in margin
accounts with all brokers to the market. Such disclosure regarding margin-trading done
on any day shall be made available after the trading hours on the following day.

The arbitration mechanism of the exchange would not be available for settlement of
disputes, if any, between the client and broker, arising out of the margin trading facility.
However, all transactions done on the exchange, whether normal or through margin
trading facility, shall be covered under the arbitration mechanism of the exchange.

Extracted from the faq sections of SEBI and FIMMDA’s sites. For a more
comprehensive set of questions please do visit their sites at www.fimmda.org,
www.sebi.gov.in

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