SATHYABAMA UNIVERSITY

DEPARTMENT OF MANAGEMENT STUDIES

Subject Title: FINANCIAL SERVICES Subject Code: SBAX1010

Course: B.COM Level Term IIIYear II.Semester III..

UNTI-II

2.1MEANING OF MERCHANT BANK:

Merchant banker is one who underwriters corporate securities and advises clients on issues
like corporate mergers. The merchant banker may be in the form of a bank, a company, a firm or
even a proprietary concern.
It is basically services banking which provides non financial services such as arranging for
funds rather than providing them. The merchant banker understands the requirements of the business
concern and arranges finance with the help of financial institutions banks, stock exchanges and,
money market.
2.2DEFINITIONS:
According to Charless.Kindleberges, Merchant banking is the development of banking
from commerce which frequently encountered a prolonged intermediate stage known in England
originally as merchant banking.
,,According to the Securities and Exchange Board of India (SEBI) (Merchant Bankers) rules,
1992. A merchant bankers has been defined as any person who is engaged in the business of issue
management either by making arrangements regarding selling, buying or subscribing to securities or
acting as managers consultant, adviser or rendering corporate advisory services in relation to such
issue management.
2.3MERCHANT BANKING ORGANISATION IN INDIA:-
It comes under four categories:-

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 Merchant banking division of commercial banks-both Indian and foreign. Example:-SBI Capital
Market, Grind lays Banks, Citi Bank, etc.
Sub division of commercial banks. Examples: -can bank.
Merchant banking activities of financial institutions. Example:-ICICI and IFCI.
merchant banking by financial services firms-stock brokers or other independent companies.
Example: kotak Mahindra, Fair Growth financial Company, CRB Capital Market.
2.4FUNCTIONS:-
Corporate Counseling:-
Corporate Counseling refers to a set of activities under taken to ensure efficient running of a
corporate enterprise at its maximum potential through effective management of finance. It aims at
rejuvenating old-line companies and ailing units, and guiding the existing units in locating areas/
activities of growth and diversification.
Providing guidance in areas of diversification based on the governments economic
and licensing policies.
Arranging for the approval of the financial institutions banks for the schemes of
rehabilitation in involving financial relief, etc.
Providing assistance in getting soft loans from financial institutions for capital
expenditure, and the requisite credit facilities from the bank.
Project Counseling:-
Project counseling is a part of corporate counseling, and relates to project financing.
It broadly covers the study of the project.
It offers advisory assistance on the viability and procedural steps for its
implementation.
Undertaking the general review of the project ideas projects profile.
Providing advice on procedural aspects of project implementation.
Conducting review of technical feasibility of the project on the basis of the report
prepared by own experts or by outside consultants.
Arranging and negotiating foreign collaborations, amalgamations mergers, and take
overs.
Advising and assisting clients in preparing applications for financial assistance to
various national financial institutions, state level institutions, banks,etc.

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 Pre investment Studies:-
Activities that are connected with making a detailed feasibility exploration to evaluate
alternative avenues of capital investmentin terms of growth and profit prospectus are
called Pre-investment Studies.
Carrying out an in-depth investigation of environment and regulatory factory,
location of raw material suppliers demandsprojections, and financial requirements in
order to assess the financial and economic viability of a project.
Conducting each studies as many be required for foreign companies wishing to
participate in joint ventures in India.
Capital Restructuring Services:-
Activities that are carried out to assist projects in achieving their maximum potential
through effective capital structuring and to suggest various strategies to widen and restructure the
capital base, diversify operations and implement schemes for amalgamations, merger or change in
business states are collectively known as Capital Restructuring Services
Examining the capital structure of the client company to determine the extent of
capitalization required
Preparing a memorandum covering valuation of shares and justifying the level of
premium applied for.
Capital restructuring may cover mergers, take overs and amalgamations, involving
modernization or diversification of the existing production systems and the units.

Credit Syndication:-
Activities connected with joint credit procurement and project financing, aimed at
raising Indian and foreign currency loans from banks and financial institutions, are collectively
known as credit syndication Estimating the total cost of the project to be undertaken.
Issue Management and underwriting:-
Issue management and underwriting are the activities connected the management of
the public issues of corporate securities, viz, equity shares, preference shares, and debentures or
bonds, and are aimed at mobilization of money from the capital market.
Preparation of an action plan

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 Preparation of budget for the total expenses for the issue
Drafting of prospectus
Selection of issue houses and advertizing agencies for undertaking pre and post- issue
publicity.
Co-ordination with the underwriters, brokers and bankers the issue and the stock
exchange.
Portfolio Management:-
Undertaking investment in securities
Undertaking review of provident fund investment, trust investment,etc.
Providing advice on selection of investment
It involves making the right choice of investment, aimed at obtaining an optimum
investment mix, taking into account factors such as the objectives of the investment,
tax bracket of the investor, need for maximizing yield and capital appreciation, etc.
Working Capital Finances:-
The finance required for meeting the day -to -day expenses of an enterprise is known
as Working Capital Finance
Assessment of working capital requirements
Preparing the necessary application to negotiations for the sanction of appropriate
credit facilities.
Advising on the issue of debentures for argument long term requirements of working
capital.
Acceptance Credit and Bill Discounting:-
Activities relating to the acceptance and the discounting of bills of exchange, besides
the advancement of loans to business concerns on the strength of such instruments, are collectively
known as Acceptance Credit and Bill Discounting. It is the integral part of a developed money
market.
Merger and Acquisition:-
This is a specialized services provided by the merchant banker who arranges for
negotiating acquisitions and mergers by offering expert valuation regarding the quantum and the
nature of consideration, and other related matters.

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 Examining the pros and cons of proposals and formulating schemes for financial
reconstruction, merger, and acquisition.
Obtaining approvals from shareholders, depositors, creditors, government and other
authorities.
Monitoring the implementation of merger and amalgamation schemes.
Identifying organizations with matching characteristics.
Venture Financing:-
A specially designed capital, as a form of equity financing for funding high risk and
high rewards projects, is known as Venture capital.
In India, venture capital companies have largely contributed to the technological and
industrial revolution.
A large number of Indian and international companies are engaged in venture capital
funding for high-risk projects. A number of leading national developments financial institutions such
as IFCI, IDBI and ICICI are engaged in venture capital financing , and have developed a number of
special schemes for this purpose.
Lease Financing:-
A merchant banking activity whereby financial facilities are provided to companies
that undertake leasing, is known as Lease financing. Leasing involves letting out assets on lease for
a particular times period for use by the lessee.
Providing advice on the viability of leasing as an alternative source for financing
capital investment projects.
Providing advice on the choice of a favorable rental structure.
Providing assistance in establishing lines of lease for acquiring capital equipment,
including preparation of proposals, documentations etc.
Foreign currency Financing:-
The finance provided to fund foreign trade transactions is called Foreign Currency
Finance. The provision of foreign currency finance takes the form of export import trade
finance,curo currency loans, Indian joint ventures abroad, and foreign collaborations.
Providing assistance in opening and operating bank accounts abroad.
Arranging foreign currency loans under buyers credit scheme for importing goods.
Brokering Fixed Deposits:-

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 Computation of the amount that could beraised by a company in the form of deposits
from the public and loans from shareholders.
Drafting of advertisement for inviting deposits.
Filling a copy of advertisement with the resistor of company for registration
Arranging for the issue of advertisement in newspapers, as required by the company
act.
Drafting and printing of application forms.
Making arrangements for the collection of deposits at the banks branches.
Submission of periodical statements to companies concerned.
Making arrangements for payment of interest amounts
Helping the company to observe all the rules and regulation in this connection.
Assisting in maintenance of records and registers for the purpose.
Mutual Fund:-
Institutions and agencies that are engaged in the mobilization of the savings of
innumerable small investors for the purpose of channeling them into productive investment of a wide
variety of corporate and other securities, are called mutual funds. Some of the services rendered by
mutual funds are as follows:-
Mopping up public savings
Investing the funds in a diversified portfolio of shares and debentures belonging to
well- managed and growing companies.
Making investment in any commercial paper floated by the central government, RBI,
any local authority, any foreign Government, foreign bank or any other authority
outside India and approved by RBI.
Relief To Sick Industries:-
Rejuvenating old- lives and ailing units by appraising their technology and process,
assessing their requirements, and restructuring their capital base.
Evolving rehabilitation packages which are acceptable to financial institutions and
banks.
Monitoring the implementation of rehabilitation schemed, mergers and or
amalgamations.
Project Appraisal:-

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 The evaluation of industrial projects in terms of alternative variants in technology,
raw materials, production capacity, and location of plant is known as Project Appraisal.
The various components of project appraisal are financial appraisal, technical
appraisal and economic appraisal.

Financial Markets
It deals about the raising of finance by various institutions through the issue of
various securities. Every business concern requires two types of finance. They are short-term or
working capital requirements and long term or fixed capital requirements. The short-term or
working capital requirements are raised or borrowed in the money market through the issue of
different securities such as bills, promissory notes etc.

2.5NEED FOR OR IMPORTANCE OF CAPITAL MARKET:-

It is only with the help of capital market, long-term funds are raised by the business
community.
It provides opportunity for the public to invest their savings in attractive securities
which provide a higher return.
A well developed capital market is capable of attracting funds even from foreign
country. Thus, foreign capital flows into the country through foreign investments
capital market provides and opportunity for the investing public to know the trend of
different securities and the conditions prevailing in the economy.
It enables the country to achieve economic growth as capital formation is promoted
through the capital market.
Existing companies, because of their performance will be able expand their industries
and also go in for diversification of their activities due to the capital market.
Capital market is the barouceter of the economy by which you are able to study the
economic conditions of the country and it enables the government to take suitable
action.
Through the press and different media, the public are informed about the prices of
different securities that enable them to take necessary investment divisions.

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 Capital market provides opportunities for different institutions such as commercial
banks, mutual funds, investment trust, etc to earn a good return on the investing
funds.
2.6CAPITAL MARKET IN INDIA:-
It is divided into
a) Gilt-edged market
b) Industrial security market

2.7CLASSIFICATION OF CAPITAL MARKET:-

Capital Market

Gilt-edge market Industrial Security Market

Primary market Secondary Market

a. Gilt-edge Market:- The gilt-edge market refers to government securities. They are called
gilt-edged because the documents will have yellow border on the sides, so that they can be
distinguished as government securities. These are preferred as they are guaranteed by the
government, both for the principal and interest. It is called sovereign guarantee.
b. Industrial Security Market:-This refers to the securities of the companies consisting of
shares and debentures of old and new companies. The industrial security market is divided
into new issue market and old capital market.
(1) Primary market and (2) secondary market. A primary market is one in which new
securities are offered to the investing public for the first time. Hence it is also called new
issue market.

2.8PRIMARY MARKET (NEW ISSUE MARKET )

A primary market is one in which new securities are offered to the investing public for the first time.
Hence, it is also called new issue Market.

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Advantages of the primary market or the New issue market
1) It provides opportunity for new investors to start new enterprises. Persons with technical
know how may resort to promote new ventures which are profit oriented. The new issue
market gives them an opportunity to materialize their ideas.
2) Existing companies will be in apposition to expand their activies; when the existing
companies find their products obsolete, they would like to venture into new areas of
production for which they require additional capital. The issue market helps them raise the
required funds.
3) Promotion of partnership firm into Public Limited companies or merger of companies or
facilitates buy back of shares: When new ventures are started, a management may wish to
have a control on the owner ship and for this purpose, they would like to enter into a buy
back arrangement. By this arrangement, the shares will be issued to a group of persons
(NRIs)for a specific period after which they will be bought back from out of the profits. This
ensures the retention of ownership and prevents any changes in management.

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 2.9Securities dealt in the new issue market or primary market are classified as
Primary Market

Equity Shares Preference Shares Debentures

Equity shares
These are shares issued by companies for raising capital. The owners of these shares are
shareholders. Normally, the face value of the shares may be Rs. 10 or Rs. 100/-. A group of
fully paid shares are called stock and these can be transferred. The shareholders are entitled
for profit, which are distributed to them in the formof dividend. The share capital will be
refunded to them only during the winding up of the company, provided the company has
sufficient assets.
Preference shares
Preference shares are similar to equity shares but are given on a preference basis to
certain share holders like promoters, auditors, etc., There are cumulative, non cumulative,
participating redeemable, irredeemable, convertible and non convertible preference shares.
The preference shareholders will get the first preference in the distribution of dividend over
equity shareholders. The same condition applies in the repayment of capital at the time of
winding up.

Debentures
It is a loan obtained by the company from the public for a fixed interest rate for a fixed
period. Those investors who do not want to take any risks will prefer debentures as they have less
risk on the repayment compared to shares. There are debentures which have mortgage charge on the
assets of the company and these debentures holders are assured of the repayment.
2.11Functions of New Issue Market:
Functions of New Market

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 Origination Underwriting Distribution
The main function of the new issue market involves (a) Origination, (b) Underwriting and (c)
Distribution.
Origination:
Under this study, the company takes up (i) investigation, (ii) analysis; and (iii) processing of
new proposals.
(i) Investigation involves a study of technical, economic, financial and legal aspects of
the issuing company. Based on this, (Issue House will back the company for issue of
shares it may be merchant banking company also.)
(ii) Analysis : Here quality of capital is analyzed. This includes determination of the class
of security , price of the issue on the basis of market condition
(iii) Processing of new proposals involves the study of timing and magnitude (volume) of
issue method of flotation and technique of selling. Here the new issue market plays a
major role.

2.11Distribution
Distribution functions of new issue market

Prospectus offer for sale private rights issue bonus book

Placement Shares building

Prospectus:- This is method by which a company directly sells its share to the public. Through the
media the company advertises and interested persons are given the prospectus which carry full
details about the company. Based on this, the public apply to the company and shares of the new
company are allotted at the face value. The old companies may issue shares at the market value with
the due permission of authorities concerned, (SEBI). The issue of shares is guaranteed by an
underwriter who ensures certain minimum quantity of sales of shares.
Offer of Sale:- Here the company resorts to the sale of shares through intermediaries who are stock
brokers or issue houses. By this method the company is able to promote the sale of shares and the

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sale is also guaranteed with the help of underwriters. Intermediaries will take more interest in the
sale of shares as they are offered to them at a lesser price and they in turn will sell them at a higher
price to the public. The difference in the price will be the profit earned by the intermediaries. The
drawback of this system is that the company will not be benefited when the shares are sold at a
higher price by the intermediaries.
Private Placement:- The shares of the companies are given to the investing public with the help of
issue houses. This method is adopted by certain companies as it prevents the presence of
underwriters. The issue houses are responsible for the sale of the shares and no prospectus is
required under this system. It also involves minimum expenditure.
Rights issue:- When a company wishes to expand its capital base, it prefers to issue shares to the
existing shareholders which are called rights shares. But before the issuing of the rights shares, the
company should get permission of the government (SEBI) and a resolution has to be passed by the
board of directors. The rights issue will be based on a proportion of existing shares held by the
shareholders. A company can issue rights shares only after two years of its formation or after one
years of its first issue of shares, whichever is earlier. There is no need for issue of prospectus or
advertisements and this can be adopted only by and existing company and not a new company. The
price of rights shares may be fixed at apremium also, subject to the permission of the Government
(SEBI)
Bonus shares :
When a company decides to capitalize its profit, it will issue bonus shares which will be
available only to the existing share holders. Bonus shares can be issued only by companies which
earned profit, which is a commercial profit arising out of their business operations, if a company
earns profit by the sale of assets. It will not be construed as profit. For the issue of bonus shares, the
company must fulfill statutory obligations of providing various reserves and declaring dividend to
the existing shareholders. After meeting the statutory regulations, if the remaining profit is more than
40 % then the company with the prior permission of Government (SEBI), can go in for the issue of
bonus shares. It will be issued on a proportion to existing shares held by the shareholders.
Book Building
When a company, instead of offering shares directly to the public, invites bids from the
merchant bankers for the sale of shares, it is called book building. The merchant bankers will take
the full responsibility for the issue of the shares. The entire procedure of allotment of listing of

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shares will be undertaken by the merchant bankers. The share price depends on the demand for the
shares in the market. The book runner or the merchant banker will select any stock exchange and
register the shares for the issue. If the stock exchange is having an on line computer facility, then
the merchant banker will make available the shares through the on line system. The closing date
for the sale of shares will be fixed by the merchant banker after consulting with the stock exchange
concerned. Depending upon the offers received after the date of closure, the price will be fixed. On
finalisation of the share price, the shares will be allotted.
2.12Investment Decision by the investor in New Issue Market
In the new issue market, an investors decision is based on three factors
1) Companys ability for a good performance.
2) The underwriter behind the issue.
3) The method of distribution of shares
1) Companys ability for a good performance
The investor will analyse the ability of the company from the point of view of (a)
financial capacity, (b) economic independence, (c) technical competence, (d) efficient
management ; and (e ) market prospects.
2) The underwriter behind the issue
The reputation of the underwriter behind the issue also counts for the purchase of new
shares. The confidence of the investor goes up when he finds a familiar underwriter,
underwriting the shares of a new company. From the point of view of the company the
underwriter not only guarantees the sale of certain percentage of issue of shares but also
takes those shares in case of short falls.
3) The method of distribution of shares
As per the law, a certain percentages of the shares newly issued should be offered to
the public. Normally, the stock broker undertakes the sale of shares. Depending upon the
reliability of the brokers, the sale of shares will take place. It is true that the newly promoted
companies find it difficult to sell the shares through reputed share brokers and underwriters.
So, there is a need for a special institution for the promotion of the new issue of shares
belonging to newly promoted small companies.
2.13Role of New Issue market in industrial financing

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1.Many of the FMCG ( fast moving consumer goods such as cosmetics ) manufacturing
companies could raise funds through new issue market.
2.Agro based companies ( such as sugar factories ) could raise their funds through the new
issue market with the support of professional underwriters.
3.Merchant bankers are also responsible for the development of new issue market.
4.Some of the foreign financial institutions such as Morgan Stanley, Merry lynch are also
instrumental for strengthening the new issue market
5.Development banks showed a keen interest in promoting more new companies which had
technically sound projects.
6.Different types of debt instruments of new companies are subscribed by investing companies in
the public and private sectors which also strengthened new issue market.
7.The creation of some new Apex financial institutions such as NABARAD, Exim Bank, SIDBI
is another development in this regards, as they are lending a good support to new issue
market.
2.14Reasons for poor performance of New Issue Market
1.In the Bombay Stock Exchange, out of the 5000 odd listed companies, only 800 company
shares are actively traded. This works out to roughly 16 % of the listed companies only, It
means that the capital invested in remaining 84 % companies are either blocked or lost due to
inefficient management of companies.
2.The effect of stock scam of 1992 has sent wrong signals about the poor conditions of capital
market in India.
3.In the absence of credit rating and ineffective control of SEBI, the new issue market lost its
vigour.
4.The delay in the governments policy of disinvestment also affected the new issue market.
5.UTI fiasco has also affected the new issue market. Here, many of the investments made by UTI
has either failed or the market value of such instruments has declined below the par value.

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2.`5DIFFERENT BETWEEN NEW ISSUE MARKET AND SECONDARY MARKET
S.no Feature New Issue Market Secondary Market

1 Issue of New Issue Market deals with Deals in existing securities.

securities new or fresh issue of securities.
2 Locations No fixed geographical location Need a fixed place to house the
needed secondary market activity viz.,
trading
3 Transfer of Securities are created and Securities are transferred from one
Securities transferred from corporate to investor to another through the
investors for the first time stock exchange mechanism.
4 Entry All companies can enter new For these securities to enter the
issue market and make fresh portals of stock exchange for the
issue of securities purpose of trading ,listing is
maudatory
5 Administration Has no tangible form of Has a definite administration set-
administrative set-up up that facility trading securities.
6 Regulation Subject to regulations mostly Subject to regulation both from
from outside the company- within and outside the stock
SEBI, stock exchange, exchange framework.
companies act
7 Price movement Stock price movement in Both macro and micro facts
secondary market influences influence the stock price
pricing of new issues movement.

2.16SEBI (Securities Exchange Board of India)

Even though we have 23 stock exchange in India, a major part of the transactions is
controlled by Bombay Stock Exchange. This has led to enormous speculation, rigging and cornering

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of shares by a few speculators. To prevent these malpractices by companies, brokers and merchant
bankers, the government constituted Securities Exchange Board of India in April 1982 for regulating
and promoting the stock market in the country. SEBI came into existence by the Act of Parliament
on 1st April 1982.
2.17Main objects of SEBI
1. To deal with development and regulation of stock market in India.
2. To promote fair dealings by the issue of securities and ensure a market place where they can
raise funds.
3. To provide protection to the investors.
4. Regulate and develop a code of conduct for brokers, merchant bankers, etc.
5. To have check on preferential allotment to promoters at a very low price.
6. To prevent deviation and violations of rules prescribed by stock exchanges
7. To verify listing requirements, listing procedures, and ensure compliance of the same by the
companies, so that only financially sound companies are listed.
8. To prescribe required standards for merchant bankers.
9. The promote healthy growth of security market for the development of capital market in the
country.
2.18Main features of SEBI
SEBI is body corporate with head office at Bombay. The Chairman and the board members
are appointed by the Central government. SEBI has two major functions. They are:
1. Regulatory; and
2. Developmental
1. Regulatory
(a) Registering the brokers and sub-brokers
(b) Registration of mutual funds
Regulation of stock exchanges
(d) Prohibition of fraudulent and unfair trade practice
(e) Controlling insider- trading, take- over bids and imposing penalties
2. Developmental
(a) Educating investors
(b) Training intermediaries in stock transactions

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(c) Promoting fair transactions
(d) Undertaking research and publishing useful information to all
Powers of SEBI
As per the Act , SEBI has powers
(a) To file complaints in court
(b) To regulate companies in the issue and transfer of shares including bonus and rights shares.
It can levy penalties on companies and on brokers for violating transactions.
(d) Power to summon any broker or intermediaries and call for documents.
(e) It can issue directions to all brokers for protecting the interests of investors.
In addition to the above powers,
(a) It can call for periodical returns from stock exchange
(b) Seek any information from stock exchange
It can enquire into the functioning of stock exchange
(d) It can grant permission for the change of bye-laws of any stock exchange
(e) It can compel listing of securities of public company
(f) It can control and regulate stock exchanges
(g) Granting registration to market intermediaries, prohibit insider-trading and prohibit
Fraudulent unfair trade practices.
(h) Promoting investor education, and trading of intermediaries in capital market.
(i) Regulating purchase of shares and take-over of companies.
2.19SEBI Guidelines for issue of fresh share capital
1. All applications should be submitted to SEBI in the prescribed form
2. Applications should be accompanied by true copies of industrial licence
3. Cost of the project should be furnished with scheme of finance
4. Company should have the shares issued to the public and listed in one or more recognized
stock exchanges.
5. Where the issue of equity share capital involves offer for subscription by the public for the
first time, the value of equity capital, subscribed capital privately held by promoters, and
their friends shall be not less than 15% of the total issued equity capital
6. An equity preference ratio of 3:1 is allowed

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 7. Capital cost of the projects should be as per the standard set with a reasonable debt-equity
ratio
8. New company cannot issue shares at a premium. The dividend on preference shares should
be within the prescribed list.
9. All the details of the underwriting agreement
10. An allotment of shares to NRIs is not allowed without the approval of RBI.
11. Details of any firm allotments in favour of any financial institutions.
12. Declaration by secretary or director of the company.
2.20SEBI Guidelines for first issue by new companies (Primary market)
1. A new company which has not completed 12 months of commercial operations will not be
allowed to issue shares at a premium.
2. If an existing company with a 5-years track record of consistent profitability, is promoting a
new company, then it is allowed to price its issue.
3. A draft of the prospectus has to be given to the SEBI before public issue.
4. The shares of the new companies have to be listed either with OTCEI or any other stock
exchange
2.21SEBI guidelines for Secondary market
1. All the companies entering the capital market should give a statement regarding fund
utilization of previous issue
2. Brokers are to satisfy capital adequacy norms so that the members firms maintain adequate
capital in relation to outstanding positions
3. The stock exchanges authorities have to alter their bye-laws with regard to capital adequacy
norms
4. All the brokers should submit with SEBI their audited accounts
5. The brokers must also disclose clearly the transactions price of securities and the commission
earned by them. This will bring transparency and accountability for the brokers
6. The brokers should issue within 24 hours of the transaction contract notes to the clients.
7. The brokers must clearly mention their accounts details of funds belonging to clients and that
of their own.
8. Margin money on certain securities has to be paid by claims so that speculative investments
are prevented

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 9. Market makers are introduced for certain scrips by which brokers become responsible for the
supply and demand of the securities and the price of the securities is maintained.
10. A broker cannot underwrite more than 5% of the public issue
11. All transactions in the market must be reported within 24 hours to SEBI.
12. The brokers of Bombay and Calcutta must have a capital adequacy of Rs.5 lakhs and for
Delhi and Ahmadabad it is Rs.2 lakhs.
13. Members who are brokers have to pay securities deposit and this is fixed by SEBI.

2.22STOCK EXCHANGE:-
Meaning:- A specialized marketplace that facilitates the exchanges of securities that already
exist, is known as a stock exchange or the stock market. It is also called a secondary market for
securities.
Definition:-
According to section2 (3) of the securities contract regulation act 1956.The stock exchange
has been defined as anybody of individuals whether incorporated or not, constituted for the purpose
of assisting, regulating or controlling the business of buying , selling or dealing in securities.
2.23FUNCTIONS/SERVICES/FEATURES/ROLE:-
Common, trading platform:-A stock exchange provides an ideal and convenient meeting place
and a common platform for sellers and buyers of securities.
Mobilization of savings:-Stock exchange help in the mobilization of savings and surplus funds
of individuals, firms and other institutions.
Safety to Investors:-One of the fundamental functions of a stock exchange is to provide
adequate safety to the genuine investors and save them for fraud and manipulation caused due to
activities of speculator.
Distribution of new securities:-Stock exchanges also help in distribution of new securities.
Existing companies, which wish to raise additional capital, my sell securities through stock
exchange.
Ready Market:-An important function of a stock exchange is provide a continuous, ready, open
and a broad-based market for securities.

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Liquidity:-It is an important indicator for judging the efficiency of an exchange as it concerns
with sale and purchase of securities quickly,easily and at reasonable prices, which is near to the
previous one.
Capital formation:-As an essential adjunct of joint stock enterprise, stock exchanges allow for
quick capital formation to take place. This in turn contributes to the development and promotion
of the economy through accelerated industrial development.
Speculative trading:-An efficient functioning of stock market motivates investors to save more
and invest in high yielding securities, and thus, promotes those industrial units that show best
productive and financial performance. Speculation also plays a dominant role in mobilization of
saving in a economy.
Efficient Channeling Of Savings:-The stock exchange mechanism enables judicious use of
national savings by allowing the flow of savings into the profitable and desirable areas of
investments. It allows corporate to mobilize capital in a free and equitable manner.
Optical Resource Allocation:-Stock exchange serves as an ideal tool of allocating the national
savings to promising issue and thereby, ensures most effective and optimum allocation and
utilization of scarce financial resources in industry and commerce for maximum social
advantage.
Platform For Public Debt:-Stock exchange act as platform for mopping up public debt to
execute the schemes of planned projects. It works as an over-the-counter market, consisting of
dealers of dealers and brokers in government securities. Banks, LIC, provident fund and pension
fund institutions are the chief buyers of government securities.
Clearing House Of Business Information:-Stock exchange to serve as a clearing house of
business information. Besides, the formation provided by the corporate by way of financial
statements annual reports and other reports etc, helps ensure maximum publicity of corporate
operations and working.
Sound Price Setting:-Stock exchanges help in determining current market prices of various
securities. The prices at which transactions take place are recorded and made public in the form
of market quotations, which help the investors to know the current market prices.
Economic Barometer:-Stock exchanges serve as a barometer of the economy. The price
movement of securities on a stock exchange indicates the state of health not only of industrial
companies but also of the economy of the nation as a whole.

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 Dissemination Of Market Data:-Stock exchange serve as information hub of trade and industry
of an economy. They dissemination information about share prices, volume of trade, industry-
wise, scrip-wise etc.
Perfect Market Conditions:-Perfect market conditions prevail in the stock exchange .They are
well regulated by institutions of government. They facilitate a free and limitless competition
among the dealers and the brokers of securities.
Seasoning of securities:-Stock market players such as underwriter dealers, brokers and
speculators temporarily hold securities issued by anew companies. This is called Seasoning of
Securities.
Evaluation Of Securities:-Another important function of the stock exchange is to allow for an
opportunity to determine a reasonable and fair price of various scrip traded on its floor through
the market forces of demand and supply.
True Market Mechanism:- A stock exchange assists in determining the stock prices near to
their true and fair market worth and prevents form violent and erratic fluctuations in such
prices. A stock exchange, thus facilities free market mechanism providing for marketability,
stability and continuity in prices.
Investor Education:-Stock exchanges play a significant role in educating the mass through
various communication media by providing information relating to principles and advantages of
investing in shares, debentures, bonds and other avenues. They also educate the people in
selecting the securities and designing their own portfolio.
Fair Price Determination:-The prices in the stock market are determined by the interplay of
the forces of supply and demand. The two-way auction trading taking place in the stock
exchange facilitates a fair price determination.
Industrial financing:-Stock exchange provides for an ideal ground for the corporate
enterprise to mobilize the capital required for undertaking industrial activities.
Company Regulation:-The requirements of listing on a stock exchange make it possible
for the stock exchange to rein in on the corporate enterprise.

2.24Stock exchange traders

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Only the registered members are permitted to carry out trading on the floor of a stock exchange.
However, for reasons of convenience some other persons are also permitted to enter the premises
and transact business on behalf of the members. They are:
Remisiers
The sub-brokers employed by a member (share-broker) to secure business are calledRemisiers. As
the share brokers are prohibited to get business by advertisement, the role of remisiers assumes
importance. Remisiers are not permitted to enter the trading floor for exchange dealings. Remisiers
are engaged by the full-fledged member of the BSE in order to secure business for them. They act as
agents of the members. The members pay them commission on the business procured by them and
for this reason remisiers are best known as half commission men. The remisiers are practically
under the same restrictions as their principals.
Authorized clerks
Authorized clerks are the people who assist a member in transacting business, especially at time
where the volume is heavy. The employees of a member of a stock exchange are called authorized
clerks. These clerks or assistants are authorized to transact business on behalf of their member-
employer, but they cannot make any bargain in their own name. Such persons can signs on behalf of
their employers where they are provided with the power of attorney. They also assist the member in
conducting the exchange transactions. Besides, they are authorized to enter the trading floors of the
stock exchange for carrying out buying and selling of scrips on behalf of their employers. They
cannot buy or sell on their own account. The number of authorized clerks permitted for each
member varies between exchanges. For instance, in the Bombay Stock Exchange, five authorized
clerks are permitted per member; the Calcutta Exchange allows eight authorized clerks or member
assistants per member, and the Madras Exchange provides three authorized clerks for a members.
Brokers and Jobbers
In a stock exchange, the actions of brokers and jobbers are interrelated. Both the broker and the
jobber perform important functions. A broker acts as an expert agent of the ordinary investors who is
hardly competent to deal with skilled jobbers directly. A jobber renders a useful service by executing
orders without delay. The immediate execution of orders helps make the price fluctuations smooth.
He uses his experience and specialized knowledge to name the price at which a security should pass
form one investor to another. Although there is a clear-cut distinction between brokers and jobbers in
the London Stock Exchange, no such difference exists between them in India. For instance, brokers

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are commission agents who transact business in securities on behalf of nonmembers; they work on
commission basis. A brokers commission on his business is fixed.
A broker serves as link between the general public and the jobber. Since a broker acts for a
larger number of his non-member clients, he deals in a wide variety of securities. Brokers are
competent to enter into transactions in an exchange. Brokerage charges are collected for the services
rendered by them. Brokers place orders on behalf of their client- shareholders, collect the share
certificate from the seller-broker and deliver the same to the buyer-broker. It is the brokers through
whom transactions are dealt in by a stock exchange. Brokers trade in their own account, besides
placing orders on behalf of their clients. The actions of brokers infuse liquidity in stock exchanges
all over the world. Stock broking business in India is a traditional family business. With the initiation
of economic reforms, international investors and foreign brokerage houses entered the Indian capital
market. A great deal of change has since taken place in the profile of the market participants.
Corporate broking houses are now common, which is an international norm.
Tarawaniwalas
Tarawaniwalas are dealers in securities in the BSE who transact business in their own name and on
their own behalf as well. Such dealers usually specialize in one or two securities only. They
resemble the jobbers of the London Exchange in as far as the method of transacting business is
concerned. A typical dealer like the tarawaniwala is not prohibited from acting as a broker although
it might prove objectionable form the point of view of the public as it gives him a chance to purchase
securities form clients at lower prices or sell his own securities to them at higher prices.
Dealers
Dealers are market-makers. They are important intermediaries in the stock exchange. Dealers buy
and sell inventory of stocks. Through this process, they absorb excessive buying or selling pressures,
thereby providing liquidity and immediacy in the exchange. Such intermediaries are not very
common in the Indian capital market.
2.25WEAKNESSES
Although rapid strides have been made in the Indian stock markets, there are many irritants that
continue to afflict the functioning of the stock exchanges. Following are the principle weakness of
the Indian stock exchanges:
1. Raging speculation
2. Insider trading menace

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 3. Neglect of small investors
4. Restrictions on forward trading
5. Bad trading practice
6. Lack of integration
7. Lack of interface
8. Ineffective banking system
9. Inadequacy of investor service
10. Inadequate infrastructure

2.27SECURITIES CONTRACTS (REGULATION)ACT,1956

The Securities contracts (Regulation)act was passed in 1956 by parliament and it came into
force in February 1957. The main objects of this act are-
Defining the term Securities for transacting
Procedure for transacting securities in the stock exchange
Laying down procedure for listing securities of companies
Regulating the operations of brokers with regard to purchase and sale of securities
Protecting the interest of investors.

2.28Definitions:-
Sections 2 of the securities contracts (Regulation) act has recognized the following as
securities-
a. Shares, stocks, bonds ,debentures,scrips, or any other marketable securities of incorporated
companies
b. Derivatives
c. Any other instrument issued by any collective investment scheme
d. Government securities
e. Rights share, bonus share,etc.
2.29 POWER OF CENTRAL GOVERNENMENT (SEBI) OVER STOCK EXCHANGE
(SECTION 6)

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 1. All recognized stock exchanges have to submit periodical returns with regard to its activities
to SEBI.
2. Books of accounts, for a period of 5 years have to be preserved by members as well as stock
exchanges.
3. The books of accounts can be inspected by SEBI at any time.
4. SEBI can call for additional information or explanation from any stock exchange or any
member with regard to any matter.
5. SEBI can appoint one or more persons for making enquiries regarding the affairs of the
governing body of stock exchange or any member of the stock exchange and submit a report
within the specified time.
6. During such enquiry, every individual in the stock exchange will have to submit documents
pertaining to the stock exchange and furnish whatever information called for.
7. Stock exchanges should furnish a copy of its annual report to SEBI
8. Restriction of voting rights: Any restrictions imposed on the voting rights of the members or
any regulation in the voting rights or any restriction in the rights of any member by the stock
exchange will be valid only when it is approved by SEBI
9. SEBI can direct all or any particular stock exchange to make rules or amend rules after an
inquiry being conducted on the affairs of the stock exchange.
10. When a stock exchange fails to comply with the orders of SEBI, then the government may
stipulate time for complying with the conditions.
2.30Powers of the stock Exchange
A recognized stock exchange will have the following powers with the approval of SEBI-
1. Prescribing hours of trade
2. Procedure for clearing house for settlement of transactions, delivery and payment for
securities
3. Submission of report by the clearing house periodically to SEBI with regard to details of
various classes of securities
4. Rules pertaining to prohibition of blank transfer. When securities are traded, the buyer must
receive the security and send it for transfer in his name after signing the transfer document.
However, if the buyer, keeps the transfer document blank and further sells it to other buyer,
then it is a blank transfer

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 5. Different classes of contract and the payment to the clearing house.
6. Fixing, altering or postponing settlement dates.
7. Fixing of prices such as opening, closing, high and low
8. Prescribing margin requirements for different contracts
9. Regulating termination of contracts between members
10. In case of default or insolvency of seller or buyer, procedure for dealing with such contracts
11. Procedure for listing securities in stock exchange
12. Settlement of disputes
13. Fixing of fees, fined and penalties
14. Fixing broker commission
15. In case of syndicate transaction or cornering or pool which is illegal, fixing of prices on
securities
16. Separating the functions of jobbers and brokers
17. Limiting the volume of trade by individual members
18. Obligation on the part of members to furnish information as required by the governing body.

2.31LISTING OF SECURITIES
Introduction
For trading in the stock market, a company has to list its securities in the stock exchange. It
means that the name of the company is registered in the stock exchange. The company has the fulfill
certain conditions according to companies act. The company has to offer its shares of debentures to
the public for subscription according to section 73 of the companies act. Only then, the company will
be allowed to list its security in the stock exchange. For listing shares in the stock exchange, a
company must have minimum of Rs.5 crores as its equity capital and 60% of this i.e., Rs.3 crores is
offered to the public.
2.31Conditions for listing
Before listing securities, a company has to fulfill the following conditions:
1. Shares of the company must be offered to the public through a prospectus and 25% of each
class of securities must be offered.
2. The prospectus should clearly mention opening of subscription, receipt of application, etc.

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3. The capital structure of the company should be broad-based and there should be public
interest in securities.
4. The minimum issued capital must be Rs.3crores of which Rs.1.80crores must be offered to
the public.
5. There must be at least five public shareholders for every Rs.1lakhs of fresh issue of capital
and 10 shareholders for every Rs.1lakh of offer for sale of existing capital. On the excess
application money, the company will have top pay interest from 4% to 15%, if there is delay
in refund and delay should not be more than 10 weeks from the date of closure of
subscription list.
6. A Company with paid up capital of more than Rs.5 crores should get itself listed in more
than one stock exchange, it includes the compulsory listing on regional stock exchange.
7. The auditor or secretary of the company applying for listing should declare that the share
certificates have been stamped so that shares belonging to the promoters quots cannot be
sold or hypothecated or transferred for a period of 5 years.
8. Articles of Association of the company must have the following provisions:-
A common form of transfer shall be used
Full paid shares be used
No lien on fully paid shares
Calls paid in advance will not carry a right to dividend and will not be forfeited
before the claim becomes time-barred
Option to call off shares shall be given only after sanction by the general meeting.
9. Letter of allotment, letter of regret and letter of rights shall be issued simultaneously.
10. Receipts of all the securities deposited, whether for registration or split and no charges will
be made for the services.
11. The company will issue consolidation and renewal certificates for split certificate, letter of
allotment, letter of rights and transfer, etc. when required.
12. The stock exchange should be notified by the company regarding the date of board meeting,
change in the composition of board of directors, and any new issue of securities, in place of
reissue of forfeited shares.
13. Closing the transfer books for the purpose of declaration of dividend, rights issue or bonus
issue. And for this purpose, due notice should be given to stock exchange.

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 14. Annual return of the company to be filed soon after the annual general body meeting
15. The company will have to comply with conditions imposed by the stock exchange now and
then for listing of security.
2.32TYPES OF LISTING:-
1. Initial listing:- Here, the shares of the company are listed for the first time on a stock
exchange.
2. Listing for public issue:- When a company which has listed its shares on a stock exchange
comes out with a public issue.
3. Listing for rights issue:- When the company which has already listed its shares in the stock
exchange issue securities to the existing share holders on rights basis.
4. Listing of bonus shares:- When a listed company in a stock exchange is capitalizing its
profit by issuing bonus shares to the existing shareholders.
5. Listing for merger or amalgamation:- When the amalgamated company issues new shares
to the shareholders of amalgamated company, such shares are listed.

2.33BENEFITS OF LISTING:-
By listing its security in a stock exchange, a company is able to raise its required
capital easily.
Listed securities enjoy wider market.
Listing helps the company to diversify its shareholdings especially on a geographical
distribution.
Banks will prefer listed securities as collateral securities for loans.
A wide publicity is given to the companies as securities prices are quoted in
newspapers, television and other magazines.
The interest of investors is now protected as the stock exchange regulates and
controls the company.
Listed securities provide liquidity to the stock holder as he can convert them easily
into cash.
The correct value of the securities is given in the press which enables the prospective
investor to take a right division for investment.

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2.34DEFECTS OF LISTING:-
It is only an indication of financial soundness.
It does not guarantee for the securities of the company.
Listing May encourages speculation in the market.
Due to speculation, genuine investors may not enter the market.
Directors and promoters may take advantage of listing and may go in for personal
gain.
The management of the company may change as substantial shareholdings are
controlled by a few interested groups.

2.35PROCEDURE FOR LISTING REQUIREMENTS:-

For listing the shares in the stock exchange, the public limited company will have to submit
supporting documents. They are:
1. Certified copies of memorandum, articles of association, prospectus and agreements with
underwriters.
2. All particulars regarding capital structure.
3. Copied of advertisements offering securities for sale during the last 5 years.
4. Copies of balance sheet, audited accounts and auditors report for the last 5 years.
5. Specimen copies of shares and debenture, certificate letter of allotment, and letter of regret.
6. A brief history of the company since incorporation with any changes in capital structure,
borrowings,etc.
7. Details of shares and debentures issued for consideration other than cash.
8. Statement showing distribution of shares and particular of commission, brokerage, discounts
or special terms towards the issue of shares.
9. Any agreement with financial institutions.
10. Particulars of shares forfeited.
11. Details of shares of debentures of which permission to deal with is applied for.
12. Certified copy of consent form SEBI.
2.36PROCEDURE AT THE STOCK EXCHANGE

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 After the application is made the Listing Committee of the stock exchange will scrutinize the
application form of the company. Here, the stock exchange will ensure the following-
a. The financial position of the company is sound
b. Solvency and liquidity positions are good
c. The issue is large and broad based to generate public interest.
If the application for listing is accepted, the listed company will be called to execute listing
agreement with the stock exchange. The company must follow certain obligations which are.
a. The company will treat all the applications with equal fairness.
b. In case of over subscription, the allotment will be decided in consultation with stock
exchange; and
c. The company will notify to the stock exchange any change in its management, business, and
capital structure or bonus or rights issue of shares.
2.37TERMS USED IN THE STOCK EXCHANGE
Broker:- A broker is a commission agent who buys and sells securities on behalf of clients.
He is given commission as a percentage of the value of securities transacted.
Jobber:- He is a person who buys and sells securities in his own name. Any profits made in
the transaction are solely enjoyed by the jobber. The difference in the selling price is his
profit.
Authorized Dealers:- They are appointed by the members to assist them but they cannot do
business on their own.
Remisiers or sub- brokers:- They are appointed by the brokers for securing business. Each
broker is allowed to have five sub-brokers.
Bull:- A bull is a speculator who buys the share at a lower price with a view to sell on a
future day at a higher price. Hence earns profit when the share price goes up to a higher
level. The market is said to be bullish when the prices of shares are going up.
Bear:- A bear is quite opposite to bull where he sells the share at a higher price and
purchases at a lowers price. A market is said to be bearish a when there is more sale of shares
due which the price falls.
A bull purchases a share with an expectation that the price will go up so that he can
sell. A bear sells the share so that he can avoid any further fall in the price and
prevent any loss.

30
 Stage:- When a person purchases shares of a new company with the view to sell them at a
higher price.
Lame duck:- When a bear is unable to buy a share at a lower price or is unable to fulfill his
commitment due to changing price in the market.
Cover:- It is deposit of cash or securities left with the broker by the client.
Cornering:- When a bear is unable to meet selling obligations on the date of delivery.
Kerb trading:- When transactions are taking place outside the market and outside the
trading hours, it is kerb trading. It is illegal. They will not be reported in the stock market. It
is a parallel market.
Arbitrage:- It is difference between the price prevailing in two different markets. It may be
buying in one market at a lower price and selling the same at a higher price in a different
market.

2.38Underwriting Meaning:-
Underwriting is an act of guarantee by an organisal for the sale of certain minimum amount
of shares an debentures issued by public limited company. According to the companies act, when a
person agrees to take up shares specified in the underwriting agreement when the public or other
failed to subscribe for them, it is called underwriting agreement.
2.39Definitions:-
According to Gerstuberg, underwriting is an agreement entered into before the shares are
brought by the public that in the event of the public not taking up the whole of them the underwriter
will take an allotment of such part of the shares the public has not applied for.
2.40DIFFERENT FORMS OF UNDERWRITERS:-
Underwriters in India are in different forms. There are
Development banks such as IDBI, IFCI, and SFC etc.
Investment institutions such as LIC, UTI, etc
Commercial banks such as SBI, Canara Bank, etc
Stock brokers who also undertake underwriting.
2.41MERITS OF UNDERWRITING:-
It ensures the success of the proposed issue of share it provides and insurance against
the risk

31
 It enables the company to get the minimum subscribed required as even if the public
fails to subscribe, the underwriting will fulfill their commitment
The reputation of the underwriters acts as a confidence investors. The underwriters
who are called the load managed provide financial soundness to the company, whose
shares are issued to the public.

2.42SEBIs Guidelines:-
According to SEBI, the number of underwritersshould be decided well in advance by the
issuer and he must obtain prior permission from SEBI. Permission will be granted by SEBI only
after finding out the net worth of the underwriters and their outstanding commitments. The stock
exchange, where the security is to be listed must also be informed about the arrangements made
with the underwriters.
25% of each class of securities must be offered to the public and in the remaining 75% ,the
following method of firm allotment could be adopted.
2.43FIRM ALLOTMENT
After issuing certain percentage of shares to the public, the remaining shares are allotted to
different categories of investors, such an allotment is known as firm allotment.
Firm allotment are allotments made as per SEBI regulations to different categories of
investors. Given below is the percentage of shares that can be allotted to different categories of
investors.
1. Foreign financial institutional investors(30%)
2. Development financial institutions(20%)
3. Indian mutual funds(20%)
4. Permanent regular employees(10%)
5. 5% for lead bankers
6. 10% for employees of the promoting companies. The balance can be taken by the promoters.
All these above regulations were made by SEBI through a circular dated 11.10.1993.

2.44 TYPES OF UNDERWRITERS

Types of Underwriters

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 Institutional Underwriters Non-Institutional Underwriters

IDBI ICICI UTI SBI Capital Market Any NBFC

2.45RESPONSIBLILITIES OF UNDERWRITERS
1. An underwriter, not only has to underwrite the securities but has to subscribe within 45 days
that part of shares which remain unsubscribed by the public.
2. His underwriting obligations should not exceed, at any time, 20 times of his new worth.
3. The underwriter cannot derive any other benefit except the underwriting commission which
1
is 5% for shares and 2 2% for debentures.

Question bank
Part A
1. Meaning of merchant bank
2. What do you mean by Rights issue
3. Underwriting - Meaning
4. Give definition for stock exchange
5. what are the terms used in the stock exchange
6. Meaning of capital market

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 7. Gilt-edge market -meaning
8. Give benefits of listing
9. Definition of stock exchange
10. Meaning of new issue market

Part B
1. Describe the functions of merchant banking function in India
2. Briefly explain the functions of new issue market in India
3. Different between new issue market and capital market
4. What are the SEBI s guidelines for secondary market
5. What are the types of underwriting
6. Briefly describe procedure for listing
7. Describe the functions of stock exchange
8. What are the powers of stock exchange India
9. What are the SEBI s guidelines for fresh capital
10. Briefly give the securities dealt in primary market

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