MBA – III

SECURITY ANALYSIS AND PORTFOLIO MANAGEMENT –

SAPM – 306 F-2

UNIT 1 INTRODUCTION

Introduction to Investments – Meaning, Objectives and Elements

Concept of Investment

Investment is the employment of funds with the aim of getting return on it. In general terms,
investment means the use of money in the hope of making more money. In
finance, investment means the purchase of a financial product or other item of value with an
expectation of favorable future returns.

Investment of hard earned money is a crucial activity of every human being. Investment is the
commitment of funds which have been saved from current consumption with the hope that
some benefits will be received in future. Thus, it is a reward for waiting for money. Savings
of the people are invested in assets depending on their risk and return demands.

Investment refers to the concept of deferred consumption, which involves purchasing an

asset, giving a loan or keeping funds in a bank account with the aim of generating future
returns. Various investment options are available, offering differing risk-reward tradeoffs. An
understanding of the core concepts and a thorough analysis of the options can help an
investor create a portfolio that maximizes returns while minimizing risk exposure.

There are two concepts of Investment:

1. Economic Investment: The concept of economic investment means addition to the capital
stock of the society. The capital stock of the society is the goods which are used in the
production of other goods. The term investment implies the formation of new and
productive capital in the form of new construction and producer’s durable instrument such
as plant and machinery. Inventories and human capital are also included in this concept.
Thus, an investment, in economic terms, means an increase in building, equipment, and
inventory.
2. Financial Investment: This is an allocation of monetary resources to assets that are
expected to yield some gain or return over a given period of time. It means an exchange of
financial claims such as shares and bonds, real estate, etc. Financial investment involves
contracts written on pieces of paper such as shares and debentures. People invest their
funds in shares, debentures, fixed deposits, national saving certificates, life insurance
policies, provident fund etc. in their view investment is a commitment of funds to derive
future income in the form of interest, dividends, rent, premiums, pension benefits and the
appreciation of the value of their principal capital. In primitive economies most
investments are of the real variety whereas in a modern economy much investment is of
the financial variety.
 The economic and financial concepts of investment are related to each other because
investment is a part of the savings of individuals which flow into the capital market either
directly or through institutions. Thus, investment decisions and financial decisions interact
with each other. Financial decisions are primarily concerned with the sources of
money where as investment decisions are traditionally concerned with uses or budgeting of
money.

Elements of Investment

The Elements of Investments are as follows:

1. Return: Investors buy or sell financial instruments in order to earn return on them.
The return on investment is the reward to the investors. The return includes both current
income and capital gain or losses, which arises by the increase or decrease of the security
price.
2. Risk: Risk is the chance of loss due to variability of returns on an investment. In case of
every investment, there is a chance of loss. It may be loss of interest, dividend or principal
amount of investment. However, risk and return are inseparable. Return is a precise
statistical term and it is measurable. But the risk is not precise statistical term. However,
the risk can be quantified. The investment process should be considered in terms of
both risk and return.
3. Time: Time is an important factor in investment. It offers several different courses of
action. Time period depends on the attitude of the investor who follows a ‘buy and hold’
policy. As time moves on, analysis believes that conditions may change and investors may
revaluate expected returns and risk for each investment.
4. Liquidity: Liquidity is also important factor to be considered while making an investment.
Liquidity refers to the ability of an investment to be converted into cash as and when
required. The investor wants his money back any time. Therefore, the investment should
provide liquidity to the investor.
5. Tax Saving: The investors should get the benefit of tax exemption from the investments.
There are certain investments which provide tax exemption to the investor. The tax saving
investments increases the return on investment. Therefore, the investors should also think
of saving income tax and invest money in order to maximize the return on investment.

Investment Objectives

Investing is a wide spread practice and many have made their fortunes in the process. The
starting point in this process is to determine the characteristics of the various investments and
then matching them with the individuals need and preferences. All personal investing is
designed in order to achieve certain objectives. These objectives may be tangible such as
buying a car, house etc. and intangible objectives such as social status, security etc. similarly;
these objectives may be classified as financial or personal objectives. Financial objectives are
safety, profitability, and liquidity. Personal or individual objectives may be related to
personal characteristics of individuals such as family commitments, status, dependents,
educational requirements, income, consumption and provision for retirement etc.

The objectives can be classified on the basis of the investors approach as follows:
1. Short term high priority objectives: Investors have a high priority towards achieving
certain objectives in a short time. For example, a young couple will give high priority to
buy a house. Thus, investors will go for high priority objectives and invest their money
accordingly.
2. Long term high priority objectives: Some investors look forward and invest on the basis
of objectives of long term needs. They want to achieve financial independence in long
period. For example, investing for post retirement period or education of a child etc.
investors, usually prefer a diversified approach while selecting different types of
investments.
3. Low priority objectives: These objectives have low priority in investing. These objectives
are not painful. After investing in high priority assets, investors can invest in these low
priority assets. For example, provision for tour, domestic appliances etc.
4. Money making objectives: Investors put their surplus money in these kinds of investment.
Their objective is to maximize wealth. Usually, the investors invest in shares of companies
which provide capital appreciation apart from regular income from dividend. Every
investor has common objectives with regard to the investment of their capital.

The importance of each objective varies from investor to investor and depends upon the age
and the amount of capital they have. These objectives are broadly defined as follows.

1. Lifestyle – Investors want to ensure that their assets can meet their financial needs over
their lifetimes.
2. Financial security – Investors want to protect their financial needs against financial risks at
all times.
3. Return – Investors want a balance of risk and return that is suitable to their personal risk
preferences.
4. Value for money – Investors want to minimize the costs of managing their assets and their
financial needs.
5. Peace of mind – Investors do not want to worry about the day to day movements of
markets and their present and future financial security.

Achieving the sum of these objectives depends very much on the investor having all their
assets and needs managed centrally, with portfolios planned to meet lifetime needs, with one
overall investment strategy ensuring that the disposition of assets will match individual needs
and risk preferences.

The Investment Management Process

Saga Select follows a rigorous investment management process where clients will enjoy the
benefits of a structured approach while at the same time allowing for customization, as the
situation requires. Our management team is supervised by our Investment Committee, which
reviews portfolios performance and defines our investment policy. More specifically, our
investment process is composed of a four-stage cycle:
Stage 1: Definition of the Objectives
We will take the time to listen and understand client's specific goals and vision, and to assess
his risk profile.
Stage 2: Asset Allocation
In light of the elements defined in step 1, we will determine the asset allocation that will suit
client's portfolio objectives and constraints.
Stage 3: Portfolio Construction
Now that the investment strategy has been delineated, we will proceed to its implementation
by selecting the appropriate securities.
Step 4: Feedback
The Feedback is typically done at two levels:
Each portfolio is monitored on a daily basis in order to ensure appropriate risk remains under
control. We follow continuously the positions in the portfolio, as well as the relevant markets.
During the monthly (or when required by market conditions) reunion of our Investment
Committee, which decides of the optimal asset allocation in the portfolios, given the macro-
economic climate and the different risk profiles.
At each of these levels, or when required, changes to the portfolio will be done to reflect its
long-term objectives, as well as the decisions of the Investment Committee.

1.1 INVESTMENT V/S SPECULATION V/S GAMBLING

There is often some confusion between the terms investment, speculation
and gambling. This confusion is often linked with investments made in the
stock market. Investing is NOT gambling. Gambling is putting money at risk
by betting on an uncertain outcome with the hope that you might win money.
Part of the confusion between investing and gambling, however, may come
from the way some people use investment vehicles. For example, it could be
 argued that buying a stock based on a ‘hot tip’ is essentially the same as
placing a bet at a casino.
A ‘real’ investor does not simply throw his money at any random
investment. S/he first analyses the situation. If there is a reasonable
expectation then only s/he invests.
Many people believe that certain investments are speculative in nature.
Are they? An investment may be said to be speculative in nature when the
investor takes a position on the timing of making the investment and exiting
from the same. The time horizon may be as short as a day or sometimes
several weeks. Investments are deemed to be speculative because there is
usually no firm basis other than a hunch or intuition for making that
investment decision.
Examples of such speculative investments include buying and selling
shares in what is called an intra-day trade. Mr Tradewallah may buy a share
in the morning when the market opens at say 176 and hope to sell it by the
end of the day at 188. Since nothing fundamentally can explain this
investment decision, this may be speculative. There is the possibility that Mr
Tradewallah has tracked the performance of this stock or has received a tip
from Mr Brokerbhai and has taken this decision. Even in such a case, the
investment is speculative. If the share finds buyers at 188 or more, the
speculation has been profitable. However if the price falls and Mr
Tradewallah has to exit i.e. sell the share at a lower value than his purchase
price, it is speculation that results in a loss.
UNIT 2

FINANCIAL SECURITIES – DEFINITION

A financial security is a document of a certain monetary value. Traditionally, it used to be a

physical certificate but nowadays, it is more commonly electronic. It shows that one owns a
part of a publicly-traded corporation or is owed a part of a debt issue. In the most common
parlance, financial securities refer to stocks and bonds which are negotiable. Derivatives are
also considered as a common type of financial security, with its growing popularity in recent
years. In current usage, financial securities are no longer an evidence of ownership. Rather,
they refer to the financial product themselves i.e. stock, bond, or other product of investment.
They are also known as financial instruments or financial assets

FEATURES OF FINANCIAL SECURITIES

One of the most important features of financial securities is that they are trade-able i.e. one
can convert them into cash quite easily. Holding a financial security gives a right to the
holder to receive future monetary benefits under a stated set of conditions. Except for
derivatives, securities let you own the underlying asset without taking physical possession.
The price of the securities indicates the value of an underlying asset. More the price, higher is
the value of the asset.

TYPES OF FINANCIAL SECURITIES

Classification of Securities

 Debt Securities: Tradable assets which have clearly defined terms and conditions are
called debt securities. Financial instruments sold and purchased between parties with
clearly mentioned interest rate, principal amount, maturity date as well as rate of
returns are called debt securities.
 Equity Securities: Financial instruments signifying the ownership of an individual in
an organization are called equity securities. An individual buying equities has an
ownership in the company’s profits and assets.
 Derivatives: Derivatives are financial instruments with specific conditions under
which payments need to be made between two parties.

What is Security Analysis ?

The analysis of various tradable financial instruments is called security analysis. Security
analysis helps a financial expert or a security analyst to determine the value of assets in a
portfolio.
Security analysis is a method which helps to calculate the value of various assets and also
find out the effect of various market fluctuations on the value of tradable financial
instruments (also called securities).

Classification of Security Analysis

Security Analysis is broadly classified into three categories:

1. Fundamental Analysis
2. Technical Analysis
3. Quantitative Analysis

What is Fundamental Analysis ?

Fundamental Analysis refers to the evaluation of securities with the help of certain
fundamental business factors such as financial statements, current interest rates as well as
competitor’s products and financial market.

What are Financial Statements ?

Financial statements are nothing but proofs or written records of various financial
transactions of an investor or company.

Financial statements are used by financial experts to study and analyze the profits, liabilities,
assets of an organization or an individual.

Primary Markets

The primary market is a financial market where new securities are issued and become
available for trading by individuals and institutions. The trading activities of the capital
markets are separated into the primary market and secondary market.
The primary market is a place where companies issue a new security that didn’t previously
exist or trade on any exchange. A company offers securities to the general public to raise
funds and fulfill its long-term goals. It can also be called the New Issue Market (NIM). In
these markets, securities are directly issued by the companies to the investors. The ways
securities are issued is either by an Initial Public Offer (IPO) or Further Public Offer (FPO).

An IPO is a process by which a company makes a public offer for the very first time to the
investors and ask them to invest in the shares of the company. Through an IPO, the company
is able to raise funds and investors are able to invest in a company for the first time. The
investors become the shareholders or owners of the company for that much share. Similarly,
an FPO is a process by which already listed companies offer fresh equity in the company.
Companies use FPO to raise additional funds from the general public.

Raising Funds from the Primary Market

Below are some of the ways by which companies raise funds from the primary market:

1. Public Issue
It is one of the most popular ways to issue securities to the general public. Through an IPO,
the company is able to raise funds, and the securities are listed on the stock exchange for
trading purposes.
2. Rights Issue
At a time when a company decides to raise more capital from existing shareholders, it offers
the shareholders more shares at a discounted rate than the prevailing market price. The
number of shares offered is on pro-rata basis, and this process is known as a Rights Issue.

3. Preferential Allotment
When a listed company issues shares to a few individuals at a price that may or may not be
related to the market price, it is termed as a preferential allotment. The company decides the
basis of allotment and is not dependent on any mechanism such as pro-rata or anything else.

Secondary Market
The secondary market is a place where existing shares, debentures, bonds, etc. are traded
among investors. The securities that are offered first in the primary market are then traded
between each other on the secondary market. The trade is carried out between a buyer and a
seller with the stock exchange facilitating the same. In this process, the issuing company is
not involved in any way.
Primary Market vs. Secondary Markets

Primary Market Secondary Market

It is a way of issuing fresh shares in the market. It is It is a place where already issued or existing
also called New Issue Market. A major component of shares are traded. It is called After Issue
the primary market is the IPO. Market.

The amount received from the issue of shares goes to The amount invested by the buyer of shares
the company for their business expansion purposes. goes to the seller, and hence the company
doesn’t receive anything.

Securities are issued by the companies to the Securities are exchanged between buyers and
investors. sellers, and stock exchanges facilitate the
trade.

The securities are all issued at one price for all Securities are exchanged at the market price.
investors participating in the offering.

The primary market doesn’t provide liquidity for the The secondary market provides liquidity to
stock. the stock.

Underwriters act as intermediaries. Brokers act as intermediaries.

On the primary market, security can be sold just once. On the secondary market, securities can be
sold innumerable times.
Some of the Important Functions of Stock Exchange/Secondary Market are listed
below:

1. Economic Barometer:
A stock exchange is a reliable barometer to measure the economic condition of a country.

Every major change in country and economy is reflected in the prices of shares. The rise or
fall in the share prices indicates the boom or recession cycle of the economy. Stock exchange
is also known as a pulse of economy or economic mirror which reflects the economic
conditions of a country.

2. Pricing of Securities:
The stock market helps to value the securities on the basis of demand and supply factors. The
securities of profitable and growth oriented companies are valued higher as there is more
demand for such securities. The valuation of securities is useful for investors, government
and creditors. The investors can know the value of their investment, the creditors can value
the creditworthiness and government can impose taxes on value of securities.

3. Safety of Transactions:
In stock market only the listed securities are traded and stock exchange authorities include the
companies names in the trade list only after verifying the soundness of company. The
companies which are listed they also have to operate within the strict rules and regulations.
This ensures safety of dealing through stock exchange.
4. Contributes to Economic Growth:
In stock exchange securities of various companies are bought and sold. This process of
disinvestment and reinvestment helps to invest in most productive investment proposal and
this leads to capital formation and economic growth.

5. Spreading of Equity Cult:

Stock exchange encourages people to invest in ownership securities by regulating new issues,
better trading practices and by educating public about investment.

6. Providing Scope for Speculation:

To ensure liquidity and demand of supply of securities the stock exchange permits healthy
speculation of securities.

7. Liquidity:
The main function of stock market is to provide ready market for sale and purchase of
securities. The presence of stock exchange market gives assurance to investors that their
investment can be converted into cash whenever they want. The investors can invest in long
term investment projects without any hesitation, as because of stock exchange they can
convert long term investment into short term and medium term.

8. Better Allocation of Capital:

The shares of profit making companies are quoted at higher prices and are actively traded so
such companies can easily raise fresh capital from stock market. The general public hesitates
to invest in securities of loss making companies. So stock exchange facilitates allocation of
investor’s fund to profitable channels.

9. Promotes the Habits of Savings and Investment:

The stock market offers attractive opportunities of investment in various securities. These
attractive opportunities encourage people to save more and invest in securities of corporate
sector rather than investing in unproductive assets such as gold, silver, etc.

Stock Exchanges

Stock Exchange market is a vital component of a stock market. It facilitates the

transaction between traders of financial instruments and targeted buyers. A stock
exchange in India adheres to a set of rules and regulations directed by Securities and
Exchange Board of India or SEBI. The said authoritative body functions to protect the
interest of investors and aims to promote the stock market of India.

The stock exchange in India serves as a market where financial instruments

like stocks, bonds and commodities are traded.

It is a platform where buyers and sellers come together to trade financial tools during
specific hours of any business day while adhering to SEBI’s well-defined guidelines.
However, only those companies who are listed in a stock exchange are allowed to
trade in it.

There are eight active stock exchanges in India. BSE Ltd., Calcutta Stock
Exchange Ltd., Indian Commodity Exchange Limited, Metropolitan Stock Exchange
of India Ltd., Multi Commodity Exchange of India Ltd., National Commodity &
Derivatives Exchange Ltd., National Stock Exchange of India Ltd. and NSE IFSC Ltd.
BSE (Bombay Stock Exchange)
BSE Limited, also known as the Bombay Stock Exchange (BSE), is an Indian stock
exchange which is located on Dalal Street in Mumbai. Established in 1875 by cotton
merchant Premchand Roychand, a Jain businessman, it is the oldest stock exchange
in Asia, and also the tenth oldest in the world. The BSE is the 6th largest stock
exchange with an overall market capitalisation of more
than ₹276.713 lakh crore or US$3.56 trillion, as of January 2022.
There are 7,400 companies are listed of which 4000 are traded on the stock exchanges
at BSE and NSE. Hence the stocks trading at the BSE and NSE account for around
10% of the Indian economy, which derives most of its income-related activity from
the unorganized sector and household spending.
NSE (National Stock Exchange)
National Stock Exchange of India Limited (NSE) is one of the leading stock
exchanges in India, based in Mumbai. It is the world's largest derivatives exchange by
number of contracts traded and the fourth largest in cash equities by number of
trades for the calendar year 2021. NSE is under the ownership of various financial
institutions such as banks and insurance companies. NSE was established in 1992 as
the first dematerialized electronic exchange in the country and the first exchange in
the country to provide a screen-based electronic trading system to investors. Ashish
kumar Chauhan is the Managing Director and Chief Executive Officer of NSE.
National Stock Exchange has a total market capitalization of more than US$3.4
trillion, making it the world's 9th-largest stock exchange as of August 2021. NSE's
flagship index, the NIFTY 50, a 50 stock index is used extensively by investors
in India and around the world as a barometer of the Indian capital market. The NIFTY
50 index was launched in 1996 by NSE.
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.

Different kinds of issues

The classification of issues is as illustrated below: a) Public issue (i) Initial

Public offer (IPO) (ii) Further Public offer (FPO) b) Rights issue c) Composite
Issue d) Bonus issue e) Private placement (i) Preferential issue (ii) Qualified
institutional placement (iii) Institutional Placement Programme

(a) Public issue: When an issue / offer of shares or convertible securities is

made to new investors for becoming part of shareholders’ family of the issuer
(Entity making an issue is referred as “Issuer”) it is called a public issue. Public
issue can be further classified into Initial public offer (IPO) and Further public
offer (FPO). The significant features of each type of public issue are illustrated
below:
Initial public offer (IPO): When an unlisted company makes either a fresh issue
of shares or convertible securities or offers its existing shares or convertible
securities for sale or both for the first time to the public, it is called an IPO. This
paves way for listing and trading of the issuer’s shares or convertible securities
on the Stock Exchanges.

(ii) Further public offer (FPO) or Follow on offer: When an already listed
company makes either a fresh issue of shares or convertible securities to the
public or an offer for sale to the public, it is called a FPO.

(b) Rights issue (RI): When an issue of shares or convertible securities is made
by an issuer to its existing shareholders as on a particular date fixed by the
issuer (i.e. record date), it is called a rights issue. The rights are offered in a
particular ratio to the number of shares or convertible securities held as on the
record date.

c) Composite issue: When the issue of shares or convertible securities by a

listed issuer on public cum-rights basis, wherein the allotment in both public
issue and rights issue is proposed to be made simultaneously, it is called
composite issue.

(d) Bonus issue: When an issuer makes an issue of shares to its existing
shareholders without any consideration based on the number of shares already
held by them as on a record date it is called a bonus issue. The shares are issued
out of the Company’s free reserve or share premium account in a particular ratio
to the number of securities held on a record date.

(e) Private placement: When an issuer makes an issue of shares or convertible

securities to a select group of persons not exceeding 49, and which is neither a
rights issue nor a public issue, it is called a private placement. Private placement
of shares or convertible securities by listed issuer can be of three types:

(i) Preferential allotment: When a listed issuer issues shares or convertible

securities, to a select group of persons in terms of provisions of Chapter VII of
SEBI (ICDR) Regulations, 2009, it is called a preferential allotment. The issuer
is required to comply with various provisions which inter ‐alia include pricing,
disclosures in the notice, lock‐in etc, in addition to the requirements specified in
the Companies Act.

(ii) Qualified institutions placement (QIP): When a listed issuer issues equity
shares or non-convertible debt instruments along with warrants and convertible
securities other than warrants to Qualified Institutions Buyers only, in terms of
Page 4 of 32 provisions of Chapter VIII of SEBI (ICDR) Regulations, 2009, it is
called a QIP.

(iii) Institutional Placement Programme (IPP): When a listed issuer makes a

further public offer of equity shares, or offer for sale of shares by
promoter/promoter group of listed issuer in which the offer, allocation and
allotment of such shares is made only to qualified institutional buyers in terms
Chapter VIII A of SEBI (ICDR) Regulations, 2009 for the purpose of achieving
minimum public shareholding, it is called an IPP.

Book Building & Fixed Price Issues

Book Building is essentially a process used by companies raising capital through

Public Offerings-both Initial Public Offers (IPOs) and Follow-on Public Offers
(FPOs) to aid price and demand discovery. It is a mechanism where, during the period
for which the book for the offer is open, the bids are collected from investors at
various prices, which are within the price band specified by the issuer. The process is
directed towards both the institutional as well as the retail investors. The issue price is
determined after the bid closure based on the demand generated in the process.

Issue Type Offer Price Demand Payment Reservations

50 % of the
Demand for 100 %
Price at which the shares offered
the advance
securities are are reserved for
securities payment is
offered and would applications
Fixed Price offered is required to be
be allotted is below Rs. 1 lakh
Issues known only made by the
made known in and the balance
after the investors at
advance to the for higher
closure of the time of
investors. amount
the issue. application.
applications.
Book Building A 20 % price 50 % of shares
Issues band is offered by offered are
the issuer within Demand for 10 % reserved for
which investors the advance QIBS: 35 % for
are allowed to bid securities payment is small investors
and the final price offered , required to be and 15% shall be
is determined by and at made by the available for
the issuer only various QIBs along non-institutional
after closure of prices, is with the investors.
the bidding. available on application,
a real time while other
basis on the categories of
 investors
BSE have to pay
website 100 %
during the advance
bidding along with
period.. the
application.

The Process

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

BSE’s Book Building System

 BSE offers a book building platform through the Book Building software that runs
on the BSE Private network.
 This system is one of the largest electronic book building networks in the world,
spanning over 350 Indian cities through over 7000 Trader Work Stations via
leased lines, VSATs and Campus LANS.
 The software is operated by book-runners of the issue and by the syndicate
members, for electronically placing the bids on line real-time for the entire
bidding period.
 In order to provide transparency, the system provides visual graphs displaying
price v/s quantity on the BSE website as well as all BSE terminals.
SEBI GUIDELINES FOR AN IPO

1. Increased transparency on objective of the issue -

According to the new rule, companies raising money for inorganic growth objectives
will have to specify acquisition or investment targets clearly, if they are unable to
specify the targets, the amount reserved for acquisitions/ investments cannot exceed
25% of the total amount raised.

In addition to this, combined total for inorganic growth and general corporate
spending cannot exceed 35% of the total amount raised.

How does it help investors?

According to market analysts, many companies were taking benefit of the IPO frenzy,
and even in the absence of specific requirements were raising money owing to the
bullish secondary market and high demand for IPOs. Now companies eyeing IPO
fundraising cannot be vague about usage of funds.
2. Increased lock in period for anchor investors -

Anchor investors can sell only 50% of the investments after 30-day lock-in, for selling
remaining 50% anchor investors will have to wait 90 days.

How does it help investors?

Many IPO bound companies were allotting shares to anchor investors to ensure higher
traction for the IPO; option to exit after 30-day lock in and bull run of IPOs provided a
safety net to the anchor investors. This led to sharp dip in share prices of recently
listed companies once 30-day lock in was over. Anchor investors will have to be more
cautious since 50% of their investment will be locked for 90 days going forward.
3. Separate sub-categories within NII category -

One-third of the portion available to NIIs will be reserved for application size between
Rs.2-10 lakhs. Rationale for this is to create a sub-category for investors who are not
small enough but doesn’t fit the tag of HNI either.

With NII category oversubscription ranging upto 900X, it was nearly impossible for
investors in the category INR 2-10 lacs to receive any allotment. This move will
reduce the edge that big HNIs due to their ability to borrow heavily and bid.

4. Restriction on Offer for Sale –

According to new SEBI rule, existing shareholders owning more than 20% of pre-
issue cannot sale more than 50% of their holding and shareholders with less than 20%
pre-issue holding cannot sale more than 10% of their holding.

It was observed that, many IPO bound companies were not in requirement of funds for
business reasons, but it was more of an exit opportunity for promoters and existing
shareholders, especially private equity and venture capital funds. These IPOs were
being offered at very high valuations; early investors were gaining at the cost of IPO
investors.
5. Minimum price band for book-built issues -

Going forward, upper price band has to be minimum 105% of the lower price band,
which means if the lower price band is Rs.1,000 upper price band has to be minimum
Rs.2,050. SEBI’s aim here is to ensure proper price discovery. Till now, price
discovery rules were being followed only on paper not in practice, most of the IPOs,
even the ones which listed at a discount were allotted at upper price band.

Paytm had a price band of Rs.2,080-2,150 but shares were allotted at Rs.2,150; Paytm
got listed at 27.25% discount at a listing price of Rs.1,564. A wider price band will
ensure proper price discovery and companies will be forced to price their issues more
realistically.
6. Pricing of preferential share issue -

Floor price for preferential share issue will be maximum of volume weighted average
price (VWAP) for past 10 trading days and past 90 trading days. Major reason for this
amendment is to ensure companies do not issue cheap shares to preferred investors in
quid pro quo arrangements which is often at the cost of minority shareholders.

7. Monitoring and reporting on utilization of IPO proceeds -

Credit rating agencies registered with the board, will now be permitted to act as
monitoring agency instead of Scheduled Commercial Banks and Public Financial
Institutions.

This monitoring will continue till 100% utilization of the fund, also amount raise for
general corporate spending will be in the purview of monitoring agency report. This
move is aimed to curb the misuse of funds raised for IPOs.

What is bolt in share market?

The Bombay Online Trading System (BOLT) enabled the oldest stock exchange in
India to expand trading activities to 118 cities across the country. BOLT has at present
capacity to handle 5,00,000 trades in a seven hour trading session per day. The on-line
trading system of BSE is known as BOLT. BOLT is a screen-based automated trading
platform. It can be referred as a centralized exchange-based trading system of BSE. It
helps the investors to trade from anywhere in the world on BSE trading platform.