Module II Financial Markets (Capital

Market)

• Capital market:
• Primary market - meaning, role, intermediaries, activities and
procedures. :
• Issue of Corporate Securities: Public Issue through Prospectus,
Green shoe option, Offer for sale, Private Placement, Rights Issue,
On-Line IPO, Book Building of Shares.
• Secondary market- meaning, role, intermediaries, short selling
and Introduction to Stock Markets, Regional and Modern Stock
Exchanges, International Stock Exchanges.
 Capital market
The capital market is a market for financial assets which have a long or indefinite maturity.
Generally, it deals with long term securities which have a maturity period of above one year.
The trading is undertaken by participants such as individuals and institutions.
Capital market trades mostly in long-term securities. The magnitude of a nation’s capital markets
is directly interconnected to the size of its economy which means that ripples in one corner can
cause major waves somewhere else.
Types of Capital Market
Capital market consists of two types i.e. Primary and Secondary.
1.Primary Market
Primary market is the market for new shares or securities. A primary market is one in which a
company issues new securities in exchange for cash from an investor (buyer).It deals with trade
of new issues of stocks and other securities sold to the investors.
2.Secondary Market
Secondary market deals with the exchange of prevailing or previously-issued securities among
investors. Once new securities have been sold in the primary market, an efficient manner must
exist for their resale. Secondary markets give investors the means to resell/ trade existing
securities. Another important division in the capital market is made on the basis of the nature of
security sold or bought, i.e. stock market and bond market.
Indian Capital market
 FUNCTIONS OF CAPITAL MARKET

The major functions performed by a capital/ security market are:

1. Helps in capital formation.
The capital market plays an important role in mobilisation of savings and channel
them into productive investments for the development of commerce and industry. As
such, the capital market helps in capital formation and economic growth of the
country.
2. Act as link between savers and investors.
The capital market acts as an important link between savers and investors. The savers
are lenders of funds while investors are borrowers of funds. The savers who do not
spend all their income are called "Surplus units" and the borrowers are known as "
deficit units. The capital market is the transmission mechanism between surplus units
and deficit units. It is a conduit through which surplus unity lend their surplus funds
to deficit units.
3. Helps in increasing national income.
Funds come into the capital market from individuals and financial intermediaries and
are used by commerce, industry and government. It thus facilitates the transfer of
funds to be used more productively and profitability to increases the national
income.
 To be continued…..
4. Facilitates buying and selling.
Surplus units buy securities with their surplus funds and deficit wits ells securities to raise the funds
they need. Funds flow from lenders to borrowers either directly or indirectly through financial
institutions such as banks, unit trusts, mutual funds, etc. The borrowers issue primary securities
which are purchased by lenders either directly or indirectly through financial institutions.
5. Channelizes funds from unproductive to productive resources.
The capital market provides a market mechanism for those who have savings and to those who need
funds for productive investments. It divers resources from wasteful and unproductive channels such
as gold, jewelry, real estate, conspicuous consumption, etc, to productive investments
6. Minimises speculative activities.
It does so by providing capital to the needy al reasonable interest rates and helps in minimising
speculative activities.
7. Brings stability in value of stocks.
A well - developed capital market comprising expert banking and non - banking intermediaries
brings stability in the value of stocks and securities..
8. Promotes economic growth. The capital market encourages economic growth. The various
institutions which operate in the capital market give quantities and qualitative direction to the flow
of funds and bring rational allocation of resources. They do so by converting financial assets into
productive physical assets. This leads to the development of commerce and industry through the
private and public sector, thereby inducing economic growth.
 Capital Market Intermediaries

Financial Intermediaries are the organizations that help in the transfer or

channeling of funds from those who have surplus funds to those who are in need
of it. They act as a middleman in connecting the surplus parties to the deficit ones.
A classic example can be a bank that accumulates bank deposits and uses them to
provide bank loans.
The main Financial Intermediaries of India include:
• Stock Exchanges: These include the NSE (National Stock Exchange), BSE
(Bombay Stock Exchange), MCX (Multi Commodity Exchange), etc
• Banks
• Insurance Companies
• Pension Funds
• Mutual Funds
 Capital Market Instruments

The corporate securities that are dealt in primary market can

classified under two categories:
1. Ownership securities or capital stock.
2. Creditorship securities or debt capital
OWNERSHIP SECURITIES
Ownership securities, also known as capital stock or shares,
are the most common methods used by corporate,
government, and other big companies to raise funds to help
finance their operations. Section 2(46) of the companies act
1956 defines it is “a share in the share capital of a company
and including stock except where a distinction between
stock and shares is expressed or implied.”
 KINDS OF OWNERSHIP SECURITIES OR SHARES

1. EQUITY SHARES: An equity share, normally known as ordinary share is

a part ownership where each member is a fractional owner and initiates the
maximum entrepreneurial liability related with a trading concern. These
types of shareholders in any organization possess the right to vote.
2. PREFERENCE SHARES: Preference shares are a long-term source of
finance for a company. They are neither completely similar to equity nor
equivalent to debt. The law treats them as shares but they have elements of
both equity shares and debt. For this reason, they are also called ‘hybrid
financing instruments’. These are also known as preferred stock, preferred
shares, or only preferred in a different part of the world. There are various
types of preference shares used as a source of finance.
3. DEFERRED SHARES: Deferred shares are also called as founder shares
because these shares were normally issued to founders. The shareholders
have a preferential right to get dividend before the preference shares and
equity shares. No Public limited company or which is a subsidiary of a
public company can issue deferred shares. These shares are issued to the
founder shares to control over the management by the virtue of their voting
 CREDITORSHIP SECURITIES

DEBENTURE: Debenture is used to issue the loan by government and companies. The loan is issued at the fixed
interest depending upon the reputation of the companies. When companies need to borrow some money to expand
themselves they take the help of debentures.
Types of Debentures: There are various types of debentures that a company can issue.
a) Secured Debentures: These are debentures that are secured against an asset/assets of the company. This
means a charge is created on such an asset in case of default in repayment of such debentures. So in case,
the company does not have enough funds to repay such debentures, the said asset will be sold to pay such
a loan. The charge may be fixed, i.e. against a specific assets/assets or floating, i.e. against all assets of the
firm.
b) Unsecured Debentures: These are not secured by any charge against the assets of the company, neither
fixed nor floating. Normally such kinds of debentures are not issued by companies in India.
c) Redeemable Debentures: These debentures are payable at the expiry of their term. Which means at the
end of a specified period they are payable, either in the lump sum or in installments over a time period.
Such debentures can be redeemable at par, premium or at a discount.
d) Irredeemable Debentures: Such debentures are perpetual in nature. There is no fixed date at which they
become payable. They are redeemable when the company goes into the liquidation process. Or they can
be redeemable after an unspecified long time interval.
e) Fully Convertible Debentures: These shares can be converted to equity shares at the option of the
debenture holder. So if he wishes then after a specified time interval all his shares will be converted to
equity shares and he will become a shareholder.
f) Partly Convertible Debentures: Here the holders of such debentures are given the option to partially
convert their debentures to shares. If he opts for the conversion, he will be both a creditor and a
shareholder of the company.
g) Non-Convertible Debentures: As the name suggests such debentures do not have an option to be
converted to shares or any kind of equity. These debentures will remain so till their maturity, no
 Primary market / New Issue Market (Meaning,
Role, Intermediaries, Activities and Procedures.)
Primary market is a market for new issues or new financial claims. Hence, it is also called
New Issue market. The primary market deals with those securities which are issued to the
public for the first time. In the primary market, borrowers exchange new financial
securities for long term funds. Thus, primary market facilitates capital formation. There
are three ways by which a company may raise capital in a primary market.
FEATURES OF PRIMARY MARKETS
(i) This is the market for new long term equity capital. The primary market is the market
where the securities are sold for the first time. Therefore it is also called the new issue
market (NIM).
(ii) in a primary issue, the securities are issued by the company directly to investors.
(iii) The company receives the money and issues new security certificates to the investors
(iv) Primary issues are used by companies for the purpose of setting up new business or
for expanding or modernizing the existing business.
(v) The primary market performs the crucial function of facilitating capital formation in
the economy.
(vi) The new issue market does not include certain other sources of new long term external
finance, such as loans from financial institutions. Borrowers in the new issue market may
be raising capital for converting private capital into public capital, this is known as " going
public. "
 FUNCTIONS OF NEW ISSUE MARKET
A three service functions:
The main functions of a new issue sue market can divided into new project.
1. Origination.
It refers to the work of investigation analysis and processing of new project proposals.. It
starts before an issue is actually floated in the market. This function is done by merchant
bankers who may be commercial banks, all India financial institutions or private firms. At
present, financial institutions and private firms also perform this service is highly
important the success of the issue depends, to a large extent on the efficiency of the
market.
2. Underwriting.
It is an agreement whereby the underwriter promises to subscribe to specified number of
shares or debentures or a specified amount of stock in the event of public not subscribing
to the issue. If the issue is fully subscribed, then there is no liability for the underwriter. If a
part of share issues remains unsold, the underwriter will buy the shares. Thus, underwriting
is a guarantee for marketability of shares. There are two types of underwriters in India -
Institutional (LIC, UTI, IDBI, ICICI) and Non - institutional are brokers.
3. Distribution.
It is the function of sale of securities to ultimate investors. This service is performed by
specialized agencies like brokers and agents who maintain a regular direct contact with the
 SECONDARY MARKET
Secondary market is a market for secondary sale of securities. In other words, securities which have already
passed through the new issue market are traded in this market. Generally, such securities are quoted the Stock
Exchange and it provides a continuous and regular market to buying and selling of securities. This market
consists of all stock exchanges recognised by the Government of India. The stock exchanges in India are
regulated under the Securities Contracts (Regulation) Act 1956. The Bombay Stock Exchange is the principal
stock exchange in India which sets the tone of the other stock markets.
FUNCTIONS OF STOCK EXCHANGE
The stock exchanges play an important role in the economic development of a country.
The importance of stock exchange will be clear from the functions they perform and discussed as follows:
provide a place where shares and stock
1. Ensure Liquidity of Capital.
The stock exchanges where buyers and sellers are converted into cash. The exchanges provide a ready market.
Had are always available and those who are in need of hard cash can sell their holdings this not been possible
then many persons would have feared for blocking their savings in Securities as they can not again convert them
into cash.
2. Continuous Market for Securities.
The stock exchanges provide a ready market in securities. The securities once listed continue to be traded at the
exchanges irrespective the fact that owners go on changing. The exchanges provide a regular market for trading
in securities.
3. Mobilising Surplus Savings.
The stock exchanges provide a ready market for various securities. The investors do not have any difficulty in
investing their savings by purchasing shares, bonds etc, from the exchanges. If this facility is not there then
many persons who want to invest their savings will not find avenues to do so. In this way stock exchanges play
 To be continued…..
4. Helpful in Raising New Capital.
The new and existing concerns need capital for their activities. The new concerns raise capital for the first
time and existing units increase their capital for expansion and diversification purposes. The shares of new
concerns are registered at stock exchanges and existing companies also sell their shares through brokers etc,
at exchanges. The exchanges are helpful in raising capital both by nets old concerns.
5. Safety in Dealings.
The dealings at stock exchanges are governed by well - defined rules and regulations of Securities Contract
(Regulation) Act, 1956. There is no scope manipulating transactions. Every contact is done according to the
procedure laid down and there is no fear in the minds of contracting parties. The safety in dealings brings
confidence in the minds of all concerned parties and helps in increasing various dealings.
6. Listing of Securities.
Only listed securities can be purchased at stock exchanges. Every company desirous of listing its securities
will apply to the exchange authorities. The listing is allowed only after a critical examination of capital
structure, management and prospects of the company. The listing of securities gives privilege to the
company. The investors can form their own views about the securities because listing a security does not
guarantee the financial stability of the company.
7. Smoothens the Price Movements.
A stock exchange smoothens the price movements of stocks in the market by ensuring a continuous flow of
securities,
8. Investor Protection.
The stock exchange renders safeguarding activities for investors in securities. It provides a grievance
redressal mechanism for investors. Stock exchanges also operate a compensation fund for the protection of
 Recent Developments in the Indian Capital
Market
The Indian Capital Markets have been going through various developments over the years and the most
significant of them have been listed below: –
1. New Measures of Risk Management: Investments in Capital Markets are exposed to various risks.
Though some are systematic risks, others happen as a result of unsystematic market activities.
Measures to reduce Price Volatility: Volatility is the fluctuation of price movements. It is the rate of up
or down movement of the stock price. Volatility is regarded as a negative factor for the markets as it
represents uncertainty and risk. After the introduction of Index futures trading in 2000, there was a
relative reduction in the volatility of the prices.
Circuit Breakers: Circuit breakers were introduced to reduce large sell-offs and panic selling.
Sometimes it is also called a “collar”. If an Index or a particular stock rises or falls a certain percentage
of 10%, 15% or 20%, trading is halted by the exchange in that stock or index for a certain period of
time to curb the panic and check for market manipulations.
2. Investor Awareness Campaign: To make the markets more secure for the investors, SEBI
introduced the Investor Awareness Campaign by making an official site for this.
3. Investigations: In case of any violation of the rules and regulations of the SEBI Act 1992, the
investigation is carried out by SEBI.
4. T + 2 Settlement Cycle: Currently in the Indian Capital market, the settlement cycle is in the “T+2”
cycle. Here, ‘T’ means the trading day, and the ‘T+2’ settlement means the settlement and delivery of
the shares takes place on the 2nd trading day after the trade takes place
5. Ban on Insider Trading: Individuals possessing confidential information of a particular company
can use the information to unethically profit from the stock markets. SEBI has made it clear and
mandatory to restrict all kinds of insider trading in the Indian Capital Markets.
 Methods of floatation of securities in primary market

a) Public issue through prospectus: Under this method company issue a prospectus to inform
and attract general public
b) Offer for sale: Under this method new securities are offered to general public but not directly
by the company but by an intermediary who buys whole lot of securities from the company.
c) Private placement: Under this method the securities are sold by the company to an
intermediary at fixed price and in second step intermediaries sell these securities not to general
public but selected clients at higher price.
d) Right issue (for existing companies): This is the issue of new shares to existing
shareholders. It is called right issue because it is the pre-emptive right of shareholder that
company must offer them the new issue before subscribing to outsiders.
e) e- IPO (electronic initial public offer): it is the new method of issuing securities through
online system of stock exchange. In this company has to appoint registered brokers for the
purpose of accepting application and placing orders. A company proposing to issue capital to the
public through the on-line system of the stock exchange has to enter into an agreement with the
stock exchange. This is called an Initial Public Offer (IPO). SEBI registered brokers have to be
appointed for the purpose of accepting applications and placing orders with the company. The
issuer company should also appoint a registrar to the issue having electronic connectivity with
the exchange. The issuer company can apply for listing of its securities on any exchange other
than the exchange through which it has offered its securities. The lead manager coordinates all
the activities amongst intermediaries connected with the issue.
 Overview of Public Issues
A company relies on various methods to raise funds like public issues, debentures,
financial assistance from banks, etc. to meet its day-to-day business needs and
working capital requirements. The fund requirement of a company can either be
short term or long term, and depends upon the type of project it is working on.
The sources of funds available to a business in India can be classified as:
1. Public Issue
a) Initial Public Offer (IPO)
b) Further Public Offer (FPO)
c) Offer for Sale
2. Right Issue
3. Bonus Issue
4. Private Placement
a) Preferential Issue
b) Qualified Institutional Placement
 Public Issues
In India, Public Issues is one of the most prevalent forms of raising funds from a large group of
investors. In this process, a company offers prospectus to invite the general public to purchase its
shares by paying the share application money. It is a way of offering convertible shares or securities
in the primary market to attract new investors for the subscription.
Initial Public Offer(IPO): For Unlisted Companies
An unlisted company is a public company that is neither listed on a stock exchange nor its shares are
traded in any recognized stock exchange. It can also enter the primary market through Initial Public
Offer. IPO is the first time when an unlisted company offers its shares to the public. Therefore, the
process of IPO acts as a turning point for any unlisted company, as it helps in raising funds through
public subscriptions. However, this process is much riskier than Further Public Offer as a company
enters the market for the first time by issuing a prospectus.
Further Public Offer(FPO): For Listed Companies
When a listed company makes an offer for sale or comes out with a new issue of shares to the public
to increase capital, it is known as Further Public Offer. FPO means a company which is already listed
and has complied with the process of an IPO, is going to issue shares to the public. It is done to raise
subsequent public investment. FPO is not as risky as an Initial Public Offer, as the investors are
already aware of the company’s performance and have a fair idea about its growth opportunities.
Offer for Sale
The shareholders can offer a portion of their shareholding to the public in consultation with the BOD
(Board of Directors). The prospectus of a company is considered as its LOI (Letter of Offer). Also,
the shareholders of the Company reimburse any expenses regarding the offer. Hence, any dividend
paid or declared on these shares is paid to the transferee
 Types of Issuance in the Primary Market

Once securities are issued, investors can purchase them in various ways in the primary market. They are:
•Public Issue
It is one of the most common methods of issuing securities to the public at large. Done primarily through an
initial public offering (IPO) whereby companies raise capital for business, the securities are then listed on the
stock exchange for trading.
One of the features of the primary market is that a private limited company can become a publically-traded
entity through IPO. The capital raised by a company can also be deployed to improve the firm’s existing
infrastructure and repay debts, among others. It also improves a company’s liquidity.
The Securities and Exchange Board of India (SEBI) is the watchdog that monitors IPO, and before a firm
goes for an IPO, proper enquiry is done to establish its authenticity.
•Private Placement
Private placement happens when a company offers securities to a small group of investors. These primary
securities may be stocks, bonds, or any other type of security. In private placement, investors can be either
institutional or individual.
It’s easy to issue private placement compared to an IPO as the regulatory norms are significantly less. Also, it
incurs reduced cost and time. Private placement is more suitable for companies that have just commenced
operations and are in their formative years.
•Preferential Issues
It is one of the quickest methods through which companies can raise capital for their business. Here, both
listed and unlisted companies can issue securities to a particular select group of investors.
It is essential to note that preferential issues are neither public nor rights issue. In this type of issue,
preference shareholders are paid dividends before ordinary shareholders.
 To be continued…..
•Qualified Institutional Placement
It is another type of fundraising tool used by listed companies to raise capital by issuing primary
securities to qualified institutional buyers (QIBs). Capital market regulator SEBI introduced it to make
it easier for companies to raise capital in the domestic market.
Note that QIBs are investors who have the requisite expertise and financial knowledge to invest in the
capital markets. They are generally foreign institutional investors registered with SEBI, public financial
institutions, and scheduled commercial banks, among others.
Rights and Bonus Issues
This is another type of issuance in the primary market. Here the company issues securities to existing
investors by allowing them to buy more securities at a pre-fixed price (in case of rights issue) and avail
allotment of extra shares in the case of bonus issue.
In case of rights issue, investors have the choice of purchasing stocks at a discounted price within a
specific period. On the other hand, in the case of bonus issue, a firm's stocks are issued to its existing
shareholders.
Examples of Major Shares Sold in the Primary Market
In the past, several prominent companies went for IPOs in the primary market to raise capital. For
example, Facebook initiated an IPO in 2012, which was one of the largest in the technology sector.
Through its IPO, the company was able to raise USD 16 billion.
In India, Coal India undertook one of the largest IPOs in 2010, raising over ₹ 15,000 crores. Note that
the company offered a discount of 5% on the final price of the IPO to retail investors. It was also
offered to subsidiaries and employees of the firm.
The Government of India has also initiated the process to launch the IPO of the Life Insurance
 Procedure for Initial Public Offer
In India, the steps involved in the process for Initial Public Offer are as follows:
Select an Investment Bank
A company needs to hire an investment bank for seeking advice and guidance for Initial Public Offer.
After that, an underwriting agreement is signed between the parties which lays down all the details such
as:
Number of securities to be issued;
Price of the securities to be issued.
Register with SEBI
The Company needs to apply for registration with the SEBI by filing an application that includes the
complete details of the company’s business plan. It also needs to provide a declaration about the
utilization of the capital it raised from an IPO.
Red Herring Prospectus
The directors of the company need to file an initial prospectus that includes the details of the price
estimate of the shares. It is known as the Red Herring Prospectus because it contains the warning that it
is not the final prospectus.
Pricing of IPO
SEBI has no role in the pricing of shares. It is the issuer company that consults with the investment bank
while fixing the issue price based on the market's prevailing rates. A company considers the following
factor for determining the issue price:
• Employee Pension Scheme;
• Private Equity;
 To be continued…..
Further, a company can issue shares either through Fixed Price Issue or by Book-Built Issue. In a fixed
price method, a share is issued at a fixed price. Whereas in a Book-Built method, the shares will have a
price bracket within which an investor can bid.
Open Offer
A company can provide the application form and prospectus, both online and offline. The investors can
get the same from any designated bank. Further, the directors of the company need to submit an
application form and a cheque to the designated bank.
Completion of IPO
After deciding the issue price, a company discusses the number of shares an investor would get. However,
the company needs to make sure that the offer is fully subscribed. All the shares allotted are then credited
to the DEMAT (Dematerialised) Account of the investors. Once the company has allocated the shares, it is
ready to trade on the stock market.
Lock-in Requirement for Initial Public Offer
The promoter of a company must contribute at least 20% of the total post-issue capital. The lock-in period
for such a contribution is three years. However, the lock-in period for pre-issue capital is one year. For
determining the lock-in period, a company needs to consider the following dates:
• Date of Commencement of business;
• Date of Allotment of Public Issues.
Duration of Initial Public Offer
The duration of the Initial Public Offer depends upon the type of issue, such as:
Fixed Price Issue: It remains open for 3 to 10 working days;
Book Built Issue: It remains open for 3 to 7 working days;
 Green shoe option
What is a green shoe option?
The term green shoe originated in 1919 when the company named Green shoe manufacturing company, which is
now known as the Stride Rite Corporation, introduced a specific clause into their underwriting agreements. This
clause allowed the underwriters to purchase or sell some percentage of the company's total shares. This is over and
above the number of shares that are allotted in the IPO in the first place. This is done for regulating IPO prices and is
now known as the green shoe option.
Green shoe option in IPOs today
The green shoe option is not something rare in IPOs today. This has become a beneficial tool for new companies that
are going public.
Today, the green shoe option provides the company with an option of over-allotment of shares or buying shares from
the public. This helps the company intervene in the market and try to stabilise during the first 30 days after a
company's shares have gone public.
Over-allotment option
The over-allotment option helps the company meet the increased market demand for their shares. If the stocks are
oversubscribed, it may cause the stock price to inorganically rise when the listing opens. While a high price may
seem beneficial, it could cause many investors to redeem their stocks when the market opens, and it could cause the
company's share price to tremble. To make sure this doesn't happen, underwriters have an option to allocate 15%
more shares than what was planned. The underwriters will source these shares from founders and promoters, and this
will help the company dilute the shares to help them save themselves from a dangerously high opening price. Here,
the price at which the underwriters purchase shares from the promoters is predetermined.
Repurchasing shares from the public
At the same time, if the company's shares are falling post an IPO open, the underwriters can utilise their green
shoe option to intervene in the market to try and stabilise the stock price. For this, the underwriters can repurchase an
amount of share back from the public. This will help the company increase the demand for its shares in the stock
market, which can help increase its stock price.
 To be continued…..
Green shoe option example
Let's discuss the green shoe option with an example to make it easier for you to understand.
Suppose a company named ABC is planning an IPO. Their underwriters studied the company
thoroughly and came at a share price of Rs.15 each for the 1 lakh shares they are planning to sell.
Let's look at two possible instances here and how the green shoe option could help the company
then.
Let's suppose the company's shares are getting vastly oversubscribed in instance one. While it may
look like a good sign, a significant oversubscription could cause the shares to open at a very high
price, which may nudge investors to pocket their sudden profits, which in turn can cause the stock
price to fall. To avoid this, the company may allocate more shares to the public. This is about 15%
of the total number of shares in normal circumstances. In this case, about 15,000 shares.
Now in the second scenario, let's assume that the shares opened and the performance is not up to
the mark compared to expectations. This is a sore situation, and the company and its promoters
may be losing money, and quick intervention is needed. Here, the underwriters will go to the
market to repurchase some of the company's shares back. This move works in two ways. One - it
can increase the demand for the company's shares which will help increase its price, and two - it
will show the public the company's confidence in itself, making the investors see the company's
potential. In both situations, the market intervention is meant to tackle the doubts and stabilise the
stock price.
Green shoe option in India
In India, too, the securities and exchanges board of India (SEBI) has allowed the green shoe option
 Book Building of shares
Meaning of book building
Book Building is the process by which an underwriter determines the price at which the
shares must be sold in an Initial Public Offer (IPO). The process of price discovery
requires the underwriter to call forth bids from various institutional investors such as
fund managers and others. However, there always exists a risk of overpricing or
undervaluing the shares.
Book Building Process
• The issuing company hires an investment bank to act as an underwriter who decides
the price range of the security.
• The investment bank then, invites large scale buyers, fund managers and others, to
submit bids on the shares.
• The book is then built through the listing and evaluation of the aggregated demands
for the issue from the submitted bids. The final price of the security is termed as the
cut-off price.
• The underwriter publicises the details of the bids in order to maintain transparency
in the entire process.
• Shares are allocated to the accepted bidders, thereafter.
• The prices determined in the book building process does not suggest that the price is
the best price, nor is it mandatory for the company to use the said price in an IPO.
 To be continued…..
Accelerated Book Building
This method is resorted to when the company is in need of immediate financing. For
example, accelerated book building can be resorted to when the firm is looking to
acquire another firm.
The finances are raised from the equity and not the debt market.
The offer period stands only for a period of one or two days and there is little or no
marketing done.
The process is conducted in the form of an auction.
The issuer awards the contract to the person offering the highest backstop price.
Difference Between the Book Building Process and the Fixed Price Issue
In a book building process, the issue price is not disclosed in the beginning. In a fixed
price issue, the price is decided at the beginning itself.
The bids are made in a range in the book building process, whereas in a fixed price
process there is only one price that the investors can purchase the shares at.
The book building process is a more efficient price discovery mechanism.
Please note that the price determined in the reverse book building process is higher
than the market price.
 Secondary market
The secondary market is the market for the sale and purchase of previously issued or
secondhand securities. In secondary market securities are not directly issued by the
company to investors. The securities are sold by existing investors to other investors.
In secondary market companies get on additional capital as securities are bought and sold
between investors only so directly there is no capital formation, but secondary market
indirectly contributes to capital formation by providing liquidity to securities of the
company.
The trading of old securities occurs in the secondary market, which occurs after transacting
in the primary market. Both stock markets and over-the-counter trades come under the
secondary market. We also call this market the stock market or aftermarket.
The secondary market is also known as the stock market or stock exchange. It is a market
for the purchase and sale of existing securities. It helps existing investors to disinvest and
fresh investors to enter the market. It also provides liquidity and marketability to existing
securities. It also contributes to economic growth by channelising funds towards the most
productive investments through the process of disinvestment and reinvestment. Securities
are traded, cleared and settled within the regulatory framework prescribed by SEBI.
Advances in information technology have made trading through stock exchanges
accessible from anywhere in the country through trading terminals. Along with the growth
of the primary market in the country, the secondary market has also grown significantly
during the last ten years.
 Short selling
Short Selling occurs when an investor sells all the shares that he does not own at the time
of a trade. In short, a trader buys shares from the owner with the help of brokerage and
sells them at a current market price with the hope that prices will surge.
When the stock price falls, the seller buys the shares and books a profit. However, short
Selling comes with a high risk to reward ratio, and traders can either book profit from short
Selling or incur huge losses from it.
Short Selling is used in the stock market to make a quick sale and to earn a decent profit in
a short time. Long-term investors buy stocks and hope to rise in the future, while short-
sellers measure the price situation and profit from falling prices.
There are two primary reasons why investors would be involved in short-selling of shares:
1. Speculation – The investor may be speculating the prices of a particular company’s stock
to fall due to an impending earnings announcement or several other significant factors.
In this case, the investor buys the shares and sells them at a higher price and then when the
price falls, the investor repurchases them at the lower price and returns them to the lender
and books profits due to the price difference.
2. Hedging Risk – Another primary reason for short Selling is that an investor holds a long
position in some related security. To protect himself from the downside risk, he short sells
the same security to hedge the risk.
 Advantages of Short Selling
Advantages
• Provides liquidity to the market, which may reduce
stock prices, improve bid-ask spreads and assist in
price discovery.
• Ability to hedge an existing portfolio’s long-only
exposure and reduce the overall market exposure.
• Short Selling helps the manager use capital proceeds to
overweight the portfolio’s long-only component.
• Exposure to both short and long positions can
minimize a portfolio’s overall volatility and the ability
to add meaningful risk-adjusted returns.
 Disadvantages of Short Selling
Disadvantages
• Shorting stocks is considered highly volatile, while t’s possible for a
stock to fluctuate and go to zero, but this will be seen in a rare case.
Stock prices tend to revert, and this turnaround can be quick and
significant on the back of some events.
• Borrowing stock can be difficult if the amount of available stock in the
market is limited or less liquid names.
• Less liquid stocks can be expensive to buy, and the exchange may limit
or ban short Selling during volatile market conditions.
• Short sellers run the risk of borrowed stock recalled by their broker
when the short seller has limited control over the price of covering their
position.
• While the maximum potential for shorting a stock is 1x, a stock price
should be appreciated as there is no limit to the potential losses.
• Short squeezes, where rapid and high upward price fluctuates cause
short sellers to cover in mass, can push prices against short-sellers.
 What are the risks of short selling?
Apart from the risk of losing money from shorty selling, let’s look at some of the major risks of short selling:
Making a mistake in timing
The exercise of conducting short-selling depends on the proper timing of buying and selling the shares. However, the
stock prices may not immediately fall, and while a trader is waiting to book a profit from stock price, he is liable to
pay interest and margin.
Borrowing money
Short selling is known as margin trading, in which a trader borrows money from a brokerage by using an asset called
collateral. The brokerage firm made it compulsory for all traders to maintain a certain percentage in the account.
If a trader falls short at any point, they will be asked to meet the shortfall.
Selecting wisely
Several companies go through ups and downs but overcome them deftly. Wise administration can transform the
course of a company by increasing its share price instead of decreasing its value.
However, If a trader chooses the wrong company to bet on, they may lose profit in short selling when others gain by
taking a long position.
Returning Security
The primary duty of the seller must be to return the security to the owner within the stipulated period falling which
the seller will be subjected to scrutiny by the market regulator.
Regulations
Although market regulators permitted short selling, they can face a ban in a specific sector at any time to safeguard
and to avoid panic, which can lead to a rise in prices.
Betting against the trend
The stock prices generally fluctuate up and down in the long run. Short selling depends on prices moving down,
which is going against the drift.
 STOCK EXCHANGE
The Securities Contract and Regulation Act defines a stock exchange as “An
organisation or body of individuals, whether incorporated or established for the
purpose of assisting, regulating and controlling of business in buying, selling and
dealing in securities.” Every stock exchange has a specific location. In India there
are 24 recognized stock exchanges.
TYPE OF OPERATION IN STOCK EXCHANGE
a) Brokers: A broker is a member of stock exchange. He buys and sells securities
on behalf of outsiders who are not the members. He charges brokerage or
commission for his services.
b) Jobbers: A jobber is a member of stock exchange. He buys and sells securities
on his own behalf. He is specialized in one type of security and he makes profits by
selling the securities at a higher price.
c) Bulls: A bull is a speculator who expect rise in price. He buys securities with a
view to selling them in future at a higher price and making profit out of it.
d) Bears: A bear is a speculator who expects fall in price. He sells securities which
he does not possess.
e) Stag: A stag is also a speculator who applies for new securities in expectation
 Functions of Stock Exchange / Secondary
Market
a) Economic Barometer: It is a reliable barometer to measure the economic condition of
the country. The rise or fall in the share prices indicates the boom or recession cycle of the
economy
b) Pricing of Securities: The stock market helps to value the securities on the basis of
demand and supply factors.
c) 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.
d) 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
e) Spreading of Equity Cult: Stock exchange encourages people to invest in ownership
securities by regulating new issues, better trading practices and educating public about
investment.
f) Providing Scope for Speculation: To ensure liquidity and demand of supply of securities
the stock exchange permit healthy speculation of securities.
g) Liquidity: The main function of stock market is to provide ready market for sale and
purchase of securities. 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.
 NATIONAL ATIONAL STOCK EXCHANGE
OF INDIA (NSE)
The National Stock Exchange is the latest, most modern and technology
driven exchange. It was incorporated in 1992 and was recognised as a
stock exchange in April 1993. It started operations in 1994, with trading
on the wholesale debt market segment. Subsequently, it launched the
capital market segment in November 1994 as a trading platform for
equities and the futures and options segment in June 2000 for various
derivative instruments. NSE has set up a nationwide fully automated
screen based trading system. The NSE was set up by leading financial
institutions, banks, insurance companies and other financial
intermediaries. It is managed by professionals, who do not directly or
indirectly trade on the exchange. The trading rights are with the trading
members who offer their services to the investors. The Board of NSE
comprises senior executives from promoter institutions and eminent
professionals, without having any representation from trading members.
 OVER THE COUNTER EXCHANGE OF
INDIA (OTCEI)
The OTCEI is a company incorporated under the Companies Act 1956. It was set-up to
provide small and medium companies an access to the capital market for raising finance in
a cost effective manner. It was also meant to provide investors with a convenient,
transparent and efficient avenue for capital market investment. It is fully computerised,
transparent, single window exchange ‘which commenced trading in 1992. This exchange is
established on the lines of NASDAQ (National Association of Securities Dealers Automated
Quotations) the OTC exchange in USA. It has been promoted by UTI, ICICI, IDBI, IFCI, LIC,
GIC, SBI Capital markets and Can Bank Financial Services. Over the counter market may be
defined as a place where buyers seek sellers and vice-versa and then attempt to arrange
terms and conditions for purchase/sale acceptable to both the parties. It is a negotiated
market place that exists any where as opposed to the auction market place, represented
by the activity on securities exchanges. Thus, in the OTC exchange, trading takes place
when a buyer or seller walks up to an OTCEI counter, taps on the computer screen, finds
quotes and effects a purchase or sale depending on whether the prices meet their targets.
There is no particular market place in the geographical sense. The objectives of OTCEI are
to provide quicker liquidity to securities at a fixed and fair price, liquidity for less traded
securities or that of small companies, a simplified process of buying and selling and easy
and cheaper means of making public sale of new issues. However, the OTCEI has now
been withdrawn.
 BSE (BOMBAY STOCK EXCHANGE LTD.)

BSE Ltd (formerly known as Bombay Stock Exchange Ltd) was established in 1875 and was Asia’s first
Stock Exchange. It was granted permanent recognition under the Securities Contract (Regulation) Act,
1956. It has contributed to the growth of the corporate sector by providing a platform for raising
capital. It is known as BSE Ltd but was established as the Native Share Stock Brokers Association in
1875. Even before the actual legislations were enacted, BSE Ltd already had a set of Rules and
Regulations to ensure an orderly growth of the securities market. As discussed earlier, a stock
exchange can be set up as a corporate entity with different individuals (who are not brokers) as
members or shareholders. BSE is one such exchange set up as a corporate entity with a broad
shareholder base. It has the following objectives: (a) To provide an efficient and transparent market
for trading in equity, debt instruments, derivatives, and mutual funds. (b) To provide a trading
platform for equities of small and medium enterprises. (c) To ensure active trading and safeguard
market integrity through an electronically-driven exchange. (d) To provide other services to capital
market participants, like risk management, clearing, settlement, market data, and education. (e) To
conform to international standards. Besides having a nation-wide presence, BSE has a global reach
with customers around the world. It has stimulated innovation and competition across all market
segments. It has established a capital market institute, called the BSE Institute Ltd, which provides
education on financial markets and vocational training to a number of people seeking employment
with stock brokers. The exchange has about 5000 companies listed from all over the country and
outside, and has the largest market capitalisation in India.
 Stock Exchanges in India 2021

• Bombay Stock Exchange (BSE)

• National Stock Exchange of India (NSE)
• Calcutta Stock Exchange
• Metropolitan Stock Exchange of India
• India International Exchange (India INX)
• NSE International Exchange (NSE IFSC)
• National Commodity & Derivatives Exchange
• Multi Commodity Exchange of India (MCX)
• Indian Commodity Exchange (ICEX)
 Old Stock Exchanges in India

• Ahmedabad Stock Exchange

• Delhi Stock Exchange
• Gauhati Stock Exchange
• Jaipur Stock Exchange
• Madhya Pradesh Stock Exchange
• Pune Stock Exchange
• Mangalore Stock Exchange
• Vadodara Stock Exchange
• Uttar Pradesh Stock Exchange
• Bangalore Stock Exchange
• Madras Stock Exchange
• Cochin Stock Exchange
 International Stock Exchanges
The India International Exchange Limited (India INX) is India's first
international stock exchange which is under the ownership of Ministry of
Finance, Government of India. It is located at the International Financial Services
Centre, GIFT City in Gujarat.
It was inaugurated by Indian Prime Minister Narendra Modi on 9 January 2017.
The trading operations began on 16 January 2017. It operates on EUREX T7, an
advanced technology platform. It is the world's fastest exchange, with a turn-
around time of 4 microseconds. It operates 22 hours a day, six days a week. These
timings facilitate international investors and Non-Resident Indians to trade from
anywhere across the globe at their preferred time. Its daily turnover volume
crosses ₹74,509 crores.
Asian Development Bank lists the bonds on India International Exchange. In
early 2020, the bank raised $118 million from rupee-linked bonds and supporting
the development of financial market infrastructure in India.[