Stock Exchange

The Securities Contract (Regulation) Act, 1956 [SCRA] defines 'Stock Exchange' as any body of
individuals, whether incorporated or not, constituted for the purpose of assisting, regulating or
controlling the business of buying, selling or dealing in securities. Stock exchange could be a regional
stock exchange whose area of operation/jurisdiction is specified at the time of its recognition or
national exchanges, which are permitted to have nationwide trading since inception. NSE was
incorporated as a national stock exchange.

'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 300,00,000 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.

'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 y 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.

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.

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 and government 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.
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.

Depository

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

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).

SECURITIES

The definition of 'Securities' as per the Securities Contracts Regulation Act (SCRA), 1956, includes
instruments such as shares, bonds, scrips, stocks or other marketable securities of similar nature in
or of any incorporate company or body corporate, government securities, derivatives of securities,
units of collective investment scheme, interest and rights in securities, security receipt or any other
instruments so declared by the Central Government.

What is the function of Securities Market?

Securities Markets is a place where buyers and sellers of securities can enter into transactions to
purchase and sell shares, bonds, debentures etc. Further, it performs an important role of enabling
corporates, entrepreneurs to raise resources for their companies and business ventures through
public issues. Transfer of resources from those having idle resources (investors) to others who have a
need for them (corporates) is most efficiently achieved through the securities market. Stated
formally, securities markets provide channels for reallocation of savings to investments and
entrepreneurship. Savings are linked to investments by a variety of intermediaries, through a range
of financial products, called 'Securities'.

Which are the securities one can invest in?

■ Shares

■ Government Securities

■ Derivative products

■ Units of Mutual Funds etc., are some of the securities investors in the securities market can invest
in.

2.1 Regulator

Why does Securities Market need Regulators?

The absence of conditions of perfect competition in the securities market makes the role of the
Regulator extremely important. The regulator ensures that the market participants behave in a
desired manner so that securities market continues to be a major source of finance for corporate and
government and the interest of investors are protected.

Who regulates the Securities Market?

The responsibility for regulating the securities market is shared by Department of Economic Affairs
(DEA), Department of Company Affairs (DCA), Reserve Bank of India (RBI) and Securities and
Exchange Board of India (SEBI).

What is SEBI and what is its role? The Securities and Exchange Board of India (SEBI) is the regulatory
authority in India established under Section 3 of SEBI Act, 1992. SEBI Act, 1992 provides for
establishment of Securities and Exchange Board of India (SEBI) with statutory powers for (a)
protecting the interests of investors in securities (b) promoting the development of the securities
market and (c) regulating the securities market. Its regulatory jurisdiction extends over corporates in
the issuance of capital and transfer of securities, in addition to all intermediaries and persons
associated with securities market. SEBI has been obligated to perform the aforesaid functions by
such measures as it thinks fit.

In particular, it has powers for:

■ Regulating the business in stock exchanges and any other securities markets

■ Registering and regulating the working of stock brokers, sub-brokers etc.

■ Promoting and regulating self-regulatory organizations

■ Prohibiting fraudulent and unfair trade practices

■ Calling for information from, undertaking inspection, conducting inquiries and audits of the stock
exchanges, intermediaries, self-regulatory organizations, mutual funds and other persons associated
with the securities market.

2.2 Participants

Who are the participants in the Securities Market?

The securities market essentially has three categories of participants, namely, the issuers of
securities, investors in securities and the intermediaries, such as merchant bankers, brokers etc.
While the corporates and government raise resources from the securities market to meet their
obligations, it is households that invest their savings in the securities market.

Is it necessary to transact through an intermediary? It is advisable to conduct transactions through

an intermediary. For example you need to transact through a trading member of a stock exchange if
you intend to buy or sell any security on stock exchanges. You need to maintain an account with a
depository if you intend to hold securities in demat form. You need to deposit money with a banker
to an issue if you are subscribing to public issues. You get guidance if you are transacting through an
intermediary. Chose a SEBI registered intermediary, as he is accountable for its activities. The list of
registered intermediaries is available with exchanges, industry associations etc.

What are the segments of Securities Market?

The securities market has two interdependent segments: the primary (new issues) market and the
secondary market. The primary market provides the channel for sale of new securities while the
secondary market deals in securities previously issued.

3. PRIMARY MARKET

What is the role of the 'Primary Market'?

The primary market provides the channel for sale of new securities. Primary market provides
opportunity to issuers of securities; Government as well as corporates, to raise resources to meet
their requirements of investment and/or discharge some obligation. They may issue the securities at
face value, or at a discount/premium and these securities may take a variety of forms such as equity,
debt etc. They may issue the securities in domestic market and/or international market.

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.

3.1 Issue of Shares Why do companies need to issue shares to the public?

Most companies are usually started privately by their promoter(s). However, the promoters' capital
and the borrowings from banks and financial institutions may not be sufficient for setting up or
running the business over a long term. So companies invite the public to contribute towards the
equity and issue shares to individual investors. The way to invite share capital from the public is
through a 'Public Issue'. Simply stated, a public issue is an offer to the public to subscribe to the share
capital of a company. Once this is done, the company allots shares to the applicants as per the
prescribed rules and regulations laid down by SEBI.

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: 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 (Further Issue) 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. Rights Issue 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. 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 pertaining to preferential
allotment in SEBI guidelines which interalia include pricing, disclosures in notice etc. Classification of
Issues

What is meant by Issue price?

The price at which a company's shares are offered initially in the primary market is called as the Issue
price. When they begin to be traded, the market price may be above or below the issue price.

What is meant by Market Capitalisation?

The market value of a quoted company, which is calculated by multiplying its current share price
(market price) by the number of shares in issue is called as market capitalization. E.g. Company A has
120 million shares in issue. The current market price is Rs. 100. The market capitalisation of company
A is Rs. 12000 million.

What is the difference between public issue and private placement?

When an issue is not made to only a select set of people but is open to the general public and any
other investor at large, it is a public issue. But if the issue is made to a select set of people, it is called
private placement. As per Companies Act, 1956, an issue becomes public if it results in allotment to
50 persons or more. This means an issue can be privately placed where an allotment is made to less
than 50 persons.

What is an Initial Public Offer (IPO)?

An Initial Public Offer (IPO) is the selling of securities to the public in the primary market. It 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. The sale of securities can be either through book building or through normal public issue.

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 price. There are two types of issues, one where company and
Lead Merchant Banker fix a price (called fixed price) and other, where the company and the Lead
Manager (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).

What does 'price discovery through Book Building Process' mean?

Book Building is basically a process used in IPOs for efficient price discovery. It is a mechanism where,
during the period for which the IPO is open, bids are collected from investors at various prices, which
are above or equal to the floor price. The offer price is determined after the bid closing date.
What is the main difference between offer of shares through book building and offer of shares
through normal public issue?

Price at which securities will be allotted is not known in case of offer of shares through Book Building
while in case of offer of shares through normal public issue, price is known in advance to investor.
Under Book Building, investors bid for shares at the floor price or above and after the closure of the
book building process the price is determined for allotment of shares. In case of Book Building, the
demand can be known everyday as the book is being built. But in case of the public issue the
demand is known at the close of the issue.

What is Cut-Off Price?

In a Book building issue, the issuer is required to indicate either the price band or a floor price in the
prospectus. The actual discovered issue price can be any price in the price band or any price above
the floor price. This issue price is called "Cut-Off Price". The issuer and lead manager decides this
after considering the book and the investors' appetite for the stock

What is the floor price in case of book building?

Floor price is the minimum price at which bids can be made.

What is a Price Band in a book built IPO?

The 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 a press release and also indicating the change on the
relevant website and the terminals of the trading members participating in the book building
process. 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 ten days.

Example of a Price Band

As an example of how underwriters use the price band to build the books, imagine a company wants
to issue 10,000 shares in its IPO, and the price band is set at $35 to $42. The bids that are received
from investors are:
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. What is minimum number of days for which a bid should remain open during
book building? The Book should remain open for a minimum of 3 days.

Can open outcry system be used for book building?

No. As per SEBI, only electronically linked transparent facility is allowed to be used in case of book
building.

Can the individual investor use the book building facility to make an application?

Yes.

How does one know if shares are allotted in an IPO/offer for sale? What is the timeframe for
getting refund if shares not allotted?
As per SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009 the Basis of Allotment
should be completed with 8 days from the issue close date. As soon as the basis of allotment is
completed, within 2 working days the details of credit to demat account / allotment advice and
despatch of refund order needs to be completed. So an investor should know in about 11 days time
from the closure of issue, whether shares are allotted to him or not. How long does it take to get the
shares listed after issue? It takes 12 working days after the closure of the book built issue.

What is the role of a 'Registrar' to an issue?

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.

Does NSE provide any facility for IPO?

Yes. NSE's electronic trading network spans across the country providing access to investors in
remote areas. NSE decided to offer this infrastructure for conducting online IPOs through the Book
Building process. NSE operates a fully automated screen based bidding system called NEAT IPO that
enables trading members to enter bids directly from their offices through a sophisticated
telecommunication network.

Book Building through the NSE system offers several advantages:

■ The NSE system offers a nation wide bidding facility in securities It provide a fair, efficient &
transparent method for collecting bids using the latest electronic trading systems

■ Costs involved in the issue are far less than those in a normal IPO

■ The system reduces the time taken for completion of the issue process The IPO market timings are
from 10.00 a.m. to 5.00 p.m.

What is a Prospectus?

A large number of new companies float public issues. While a large number of these companies are
genuine, quite a few may want to exploit the investors. Therefore, it is very important that an
investor before applying for any issue identifies future potential of a company. A part of the
guidelines issued by SEBI (Securities and Exchange Board of India) is the disclosure of information to
the public. This disclosure includes information like the reason for raising the money, the way money
is proposed to be spent, the return expected on the money etc. This information is in the form of
'Prospectus' which also includes information regarding the size of the issue, the current status of the
company, its equity capital, its current and past performance, the promoters, the project, cost of the
project, means of financing, product and capacity etc. It also contains lot of mandatory information
regarding underwriting and statutory compliances. This helps investors to evaluate short term and
long term prospects of the company.

What does * Draft Offer document' mean?

'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 with the Registrar of Companies (ROC) and Stock Exchanges (SEs).
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 30 days prior to the registration of red herring prospectus or prospectus
with ROC. SEBI may specify 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. 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.

What is an ^Abridged Prospectus'?

'Abridged Prospectus' is a shorter version of the Prospectus and contains all the salient features of a
Prospectus. It accompanies the application form of public issues.

Who prepares the "Prospectus'/^Offer Documents'? Generally, the public issues of companies are
handled by 'Merchant Bankers' who are responsible for getting the project appraised, finalizing the
cost of the project, profitability estimates and for preparing of 'Prospectus'. The 'Prospectus' is
submitted to SEBI for its approval.

'Lock-in' indicates a freeze on the sale of shares for a certain period of time. SEBI guidelines have
stipulated lock-in requirements on shares of promoters mainly to ensure that the promoters or main
persons, who are controlling the company, shall continue to hold some minimum percentage in the
company after the public issue.

What is meant by 'Listing of Securities'?

Listing means admission of securities of an issuer to trading privileges (dealings) on a stock exchange
through a formal agreement. The prime objective of admission to dealings on the exchange is to
provide liquidity and marketability to securities, as also to provide a mechanism for effective control
and supervision of trading.

What is a 'Listing Agreement'?

At the time of listing securities of a company on a stock exchange, the company is required to enter
into a listing agreement with the exchange. The listing agreement specifies the terms and conditions
of listing and the disclosures that shall be made by a company on a continuous basis to the exchange.

What does 'Delisting of securities' mean?

The term "Delisting of securities' means permanent removal of securities of a listed company from a
stock exchange. As a consequence of delisting, the securities of that company would no longer be
traded at that stock exchange.

What is SEBI's Role in an Issue?

Any company making a public issue or a listed company making a rights issue of value of more than
Rs 50 lakh is required to file a draft offer document with SEBI for its observations. The 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.

Does it mean that SEBI recommends an issue?

SEBI does not recommend any issue nor does take any responsibility either for the financial
soundness of any scheme or the project for which the issue is proposed to be made or for the
correctness of the statements made or opinions expressed in the offer document. SEBI mainly
scrutinizes the issue for seeing that adequate disclosures are made by the issuing company in the
prospectus or offer document.

Does SEBI tag make one's money safe?

The investors should make an informed decision purely by themselves based on the contents
disclosed in the offer documents. SEBI does not associate itself with any issue/issuer and should in
no way be construed as a guarantee for the funds that the investor proposes to invest through the
issue. However, the investors are generally advised to study all the material facts pertaining to the
issue including the risk factors before considering any investment. They are strongly warned against
relying on any 'tips' or news through unofficial means.