1.

Introduction to Stock Market and Stock Exchanges Stock Market: The market in which shares are issued and traded either through exchanges or over-the-counter markets. Also known as the equity market, it is one of the most vital areas of a market economy as it provides companies with access to capital and investors with a slice of ownership in the company and the potential of gains based on the company's future performance. This market can be split into two main sections: the primary and secondary market. The primary market is where new issues are first offered, with any subsequent trading going on in the secondary market. Stock Exchanges: A market place in which securities, commodities, derivatives and other financial instruments are traded. The core function of an exchange - such as a stock exchange - is to ensure fair and orderly trading, as well as efficient dissemination of price information for any securities trading on that exchange. An exchange may be a physical location where traders meet to conduct business or an electronic platform. Exchanges are located all around the globe, with some of the more famous ones being the New York Stock Exchange (NYSE), NASDAQ and the Tokyo Stock Exchange. More and more trading is being done on electronic exchanges as markets become more advanced and as the exchanges themselves are able to ensure fair trading without requiring all members to be on the same trading floor. Different Stock Exchanges in India: Bombay Stock Exchange (BSE) National Stock Exchange (NSE) Over the counter Exchange of India (OTCEI) Multi Commodity Stock Exchange (MCX) Regional Stock Exchange Inter-Connected Stock Exchange of India (ISE)

1.1 History of stock exchange in India: Indian stock market marks to be one of the oldest stock market in Asia. 18th century: East India Company used to transact loan securities. 1830s: Trading on corporate stocks and shares in Bank and Cotton presses took place in Bombay. 1840 1850: Though the trading was broad but the brokers were hardly half dozen during 1840 and 1850. Mid 1850S: An informal group of 22 stockbrokers began trading under a banyan tree opposite the Town Hall of Bombay from the mid-1850s, each investing a (then) princely amount of Rupee 1. This banyan tree still stands in the Horniman Circle Park, Mumbai. 1860: The exchange flourished with 60 brokers. In fact the 'Share Mania' in India began with the American Civil War broke and the cotton supply from the US to Europe stopped. Further the brokers increased to 250. The informal group of stockbrokers organized themselves as The Native Share and Stockbrokers Association which, in 1875, was formally organized as the Bombay Stock Exchange (BSE). BSE was shifted to an old building near the Town Hall. In 1928, the plot of land on which the BSE building now stands (at the intersection of Dalal Street, Bombay Samachar Marg and Hammam Street in downtown Mumbai) was acquired, and a building was constructed and occupied in 1930. Premchand Roychand (Founder of BSE) was a leading stockbroker of that time, and he assisted in setting out traditions, conventions, and procedures for the trading of stocks at Bombay Stock Exchange and they are still being followed. NSE History : The National Stock Exchange of India was set up in 1993, at a time when PV Narasimha Rao was the Prime Minister of India and Dr. Manmohan Singh was the finance minister. It was set up to bring in transparency in the markets. Promoted by leading Financial institutions essentially led by IDBI at the behest of the Government of India, it was incorporated in November 1992 as a tax-paying company. In April 1993, it was recognised as a stock exchange under the Securities Contracts (Regulation) Act, 1956. The Capital market (Equities) segment of the NSE commenced operations in November 1994, while operations in the Derivatives segment commenced in June 2000.

2. Capital Markets
They are divided into primary market and secondary market. 2.1 Primary market : A market that issues new securities on an exchange. Companies, governments and other groups obtain financing through debt or equity based securities in order to expand business, upgradation technology or to take a new venture. Companies can also finance throught rights issue and private placement. Also known as "new issue market" (NIM). The primary markets are where investors can get first crack at a new security issuance. The issuing company or group receives cash proceeds from the sale, which is then used to fund operations or expand the business. Exchanges have varying levels of requirements which must be met before a security can be sold. Rights Issue: An issue of rights to a company's existing shareholders that entitles them to buy additional shares directly from the company in proportion to their existing holdings, within a fixed time period. In a rights offering, the subscription price at which each share may be purchased in generally at a discount to the current market price. Rights are often transferable, allowing the holder to sell them on the open market. Private Placement : The sale of securities to a relatively small number of select investors as a way of raising capital. Investors involved in private placements are usually large banks, mutual funds, insurance companies and pension funds. Private placement is the opposite of a public issue, in which securities are made available for sale on the open market.

Initial Public Offering (IPO) : The first sale of stock by a private company to the public. IPOs are often issued by smaller, younger companies seeking the capital to expand, but can also be done by large privately owned companies looking to become publicly traded. In an IPO, the issuer obtains the assistance of an underwriting firm, which helps it determine what type of security to issue (common or preferred), the best offering price and the time to bring it to market. Also referred to as a "public offering." In order to obtain finance for a company, a company can apply for a bank loan for which interest is to be paid and in the case of loss; the whole money applied for and an extra amount is to be repayed to the bank. So, to lessen this burden companies go for IPO.

Why IPOs? 1. For Funding Needs Funding Capital Requirements for Organic Growth Expansion through Projects Diversification Funding Global Requirements Funding Joint Venture and Collaborations needs Funding Infrastructure Requirements, Marketing Initiatives and Distribution Channels Financing Working Capital Requirements Funding General Corporate Purposes Investing in businesses through other companies Repaying debt to strengthen the Balance Sheet Meeting Issue Expenses 3. For Non-funding Needs Enhancing Corporate Stature Retention and incentive for Employees through stock options Provide liquidity to the shareholders A company to apply for an IPO, there are three basic pre-requisites: 1. Company should be in existence from three years or more. 2. It should have three years consecutive profit. 3. The turnover of the company should be atleast twenty crores. A red herring prospectus, as a first or preliminary prospectus, is a document submitted by a company (issuer) as part of a public offering of securities (either stocks or bonds). Most frequently associated with an initial public offering (IPO). "Red-herring prospectus" means a prospectus that does not have complete particulars on the price of the securities offered and quantum of securities offered. The red herring statement contains:

1. 2. 3. 4. 5. 6. 7. 8.

purpose of the issue; disclosure of any option agreement; underwriter's commissions and discounts; promotion expenses; net proceeds to the issuing company (issuer); balance sheet; earnings statements for last 3 years, if available; names and address of all officers, directors, underwriters and stockholders owning 10% or more of the current outstanding stock; 9. copy of the underwriting agreement; 10. legal opinion on the issue; 11. copies of the articles of incorporation of the issuer. The IPO Process in India: The IPO issue is only for three days and applicants can apply for a particular companys share within these three days. The IPO process in India consists of the following steps: 1. Appointing a Merchant Banker : One of the crucial steps for successful implementation of the IPO is the appointment of a merchant banker. A merchant banker should have a valid SEBI registration to be eligible for appointment. A merchant banker can be any of the following lead manager, co-manager, underwriter or advisor to the issue. 2. Bankers to the Issue: Any scheduled bank registered with SEBI can be appointed as the banker to the issue. There are no restrictions on the number of bankers to the issue. The main functions of bankers involve collection of application forms with money, maintaining a daily report , transferring the proceeds to the share application money account maintained by the controlling branch, and forwarding the money collected with the application forms to the registrar. 3. Underwriters to the Issue: Underwriting involves a commitment from the underwriter to subscribe to the shares of a particular company to the extent it is under subscribed by the public or existing shareholders of the corporate. An underwriter should have a minimum net worth of 20 lakhs, and his total obligation at any time should not exceed 20 times the underwriters net worth. A commission is paid to the writers on the issue price for undertaking the risk of under subscription. The maximum rate of underwriting commission paid is as follows:

Nature of Issue

On amount Devolving On Underwriters Equity shares, 2.5% preference shares and debentures Issue amount 2.5% upto Rs.5 lakhs Issue amount 2.0% exceeding %

On amounts subscribed by public 2.5%

1.5% 1.0%

4. Broker To the Issue: Any member of a recognised stock exchange can become a broker to the issue .A broker offers marketing support, underwriting support, disseminates information to investors about the issue and distributes issue stationery at retail investor level. 5. Registration Of The Offer Document : For registration,10 copies of the draft prospectus should be filed with SEBI. The draft prospectus filed is treated as a public document. The lead manger also files the document with all listed stock exchanges. Similarly, SEBI uploads the document on its website www.sebi.com. Any amendments to be made in the prospectus should be done within 21days of filing the offer document. Thereafter the offer document is deemed to have been cleared by SEBI. 5.1. Lock-in Requirement: The minimum promoters contribution will be locked in for a period of 3 years. The lockin period commences from the date of allotment or from the date of commencement of commercial production, whichever is earlier. 6. Timing of the Issue : An appropriate decision regarding the timing of the IPO should be made, keeping in mind the general sentiments prevailing in the investor market. For example, if recession is prevailing in the economy (the investors are pessimistic in their approach), then the firm will not be able to get a good pricing for its IPO, as investors may not be willing to put their money in stocks. 7. Formalities Associated With Listing: The SEBI lists certain rules and regulations to be followed by the issuing company. These rules and regulations are laid down to protect the

interests of investors. The issuing company should disclose to the public its profit and loss account, balance sheet, information relating to bonus and rights issue and any other relevant information. IPO Processs is regulated by : MCA (Minister Of Corporate Affairs) SEBI (Securities Exchange Board Of India) Companies Act, 1956: Provisions Relating to Prospectus, Provisions on Minimum Subscription, Return on Allotment There are two types of Public Issue : Type Offer Price Price at which the securities are offered and would be allotted is made known in advance to the investors Demand Demand for the securities offered is known only after the closure of the issue Demand for the securities offered , and at various prices, is available on a real time basis on the BSE website during the bidding period.. Payment 100 % advance payment is required to be made by the investors at the time of application. 10 % advance payment is required to be made by the QIBs along with the application, while other categories of investors have to pay 100 % advance along with the application. Reservations 50 % of the shares offered are reserved for applications below Rs. 1 lakh and the balance for higher amount applications.

Fixed Price Issues

BookBuildingIssues

A 20 % price band is offered by the issuer within which investors are allowed to bid and the final price is determined by the issuer only after closure of the bidding.

50 % of shares offered are reserved for QIBS, 35 % for small investors and the balance for all other investors.

DEMAT Account: The move from physical certificates to electronic book keeping. Actual stock certificates are slowly being removed and retired from circulation in exchange for electronic recording.With the age of computers and the Depository Trust Company, securities no longer need to be in certificate form. They can be registered and transferred electronically. Every shareholder will have a Dematerialized account for the purpose of transacting shares. Access to the Dematerialized account requires an internet password and a transaction password. When an applicant applies for a shares of a company during IPO, the shares are transferred directly to the applicants demat account. A demat account helps avoid problems typically associated with physical share certificates, for example: delivery failures caused by signature mismatch, postal delays and loss of certificate during transit. Further, it eliminates the risks associated with forgery and due to damaged stock certificates. Demat account holders also avoid stamp duty (as against 0.5 per cent payable on physical shares) and filling up of transfer deeds. Listing Of a Company In Stock Exchange : Listing means admission of securities to dealings on a recognised stock exchange. The securities may be of any public limited company, Central or State Government, quasi governmental and other financial institutions/corporations, municipalities, etc. The objectives of listing are mainly to : provide liquidity to securities; mobilize savings for economic development; protect interest of investors by ensuring full disclosures. For a company to be listed in a stock exchange, it takes 21 days after the issue of IPO. The eligibility criteria, rules, fees changes from stock exchange to exchange. In India, listing charges, norms to be followed are more liberal in BSE than NSE. The BSE Limited has a dedicated Listing Department to grant approval for listing of securities of companies in accordance with the provisions of the Securities Contracts (Regulation) Act, 1956, Securities Contracts (Regulation) Rules, 1957, Companies Act, 1956, Guidelines issued by SEBI and Rules, Bye-laws and Regulations of BSE.

2.2 Secondary Market :

A market where investors purchase securities or assets from other investors, rather than from issuing companies themselves. The national exchanges - such as the New York Stock Exchange, NASDAQ, NSE, BSE are secondary markets.

A newly issued IPO will be considered a primary market trade when the shares are first purchased by investors directly from the underwriting investment bank; after that any shares traded will be on the secondary market, between investors themselves. In the primary market prices are often set beforehand, whereas in the secondary market only basic forces like supply and demand determine the price of the security. Functions Of Secondary Market :

1. It Creates Liquidity: The most important feature of the secondary market is to create liquidity in securities. Liquidity means immediate conversion of securities into cash. This job is performed by the secondary market. 2. It Comes after Primary Market: Any new security cannot be sold for the first time in the secondary market. New securities are first sold in the primary market and thereafter comes the turn of the secondary market. 3. It has a Particular Place: The secondary market has a particular place which is called Stock Exchange. However, it must be noted that it is not essential that all the buying and selling of securities will be done only through stock exchange. Two individuals can buy or sell them mutually. This will also be called a transaction of the secondary market. Generally, most of the transactions are made through the medium of stock exchange. 4. It Encourages New Investment: The rates of shares and other securities often fluctuate in the share market. Many new investors enter this market to exploit this situation. This leads to an increase in investment in the industrial sector of the country.