FINANCIAL MARKETS

Arvind Gajakosh
B.E. MBA. NET.

Topics covered

Introduction of Financial Market Structure of Financial System Indian Financial System Regulatory authority structure Classification of Financial Markets
Capital Market Basics of Primary Market Basics of Secondary Market Money Market

INTRODUCTION

Financial markets are the one in which buying or selling of financial assets take place. A financial asset is one which is used for production or further creation of assets. There is no specific place/location to indicate a financial market Financial assets can be classified into two types 1) marketable assets-> shares, G-sec, Bonds, MF units 2) non-marketable assets-> Bank Depo, PO Certificates, PF.

STRUCTURE OF A FINANCIAL SYSTEM

FUNDS

DEPOSITS/SECURITIES

FINANCIAL INSTITUTIONS CBs, MFs, NBFCs, Insurance Cos. etc

FUNDS LOANS/SECURITIES

SUPPLIERS OF FUNDS Individuals, Companies, Govts

FUNDS

PRIVATE PLACEMENTS
SECURITIES

DEMANDERS OF FUNDS Individuals, Companies, Govts

SECURITIES FUNDS

FINANCIAL MARKETS SECURITIES Capital Market Money Market

FUNDS

Indian Financial System

Indian financial system

Fin. institutions

Fin. markets

Fin. instruments
Short term Medium term Long term

Fin. services

Banking institutions Cooperative banks

Non banking institutions DFIs Dev. Banks Inv. Banks Specialized institutions

Money market

Capital market

Asset based

Commercial banks NBFC Hire Purchase Leasing

Call money Treasury bills Commercial papers Commercial bills CDs

Primary market

Fee based

Secondary market

Public sector Private sector Foreign banks

Regulatory authority

GOI
MOF(Fiscal policy)

RBI(monetory)

SEBI(CMR)

IRDA (Insurance)

Regulatory

Supervisory

Classification of Financial Market

Organized market Capital market (LT- maturity period>1yr) Equity: Debt i) Primary Market ii) Secondary Market Money market (ST- maturity period<=1yr) Unorganized market Money lenders Indigenous bankers

BASICS OF PRIMARY MARKET

Primary market Issues can be classified into 4-types.

Initial Public Offer - When an unlisted company makes

either a fresh issue of securities or an offer for sale of its existing securities or both, for the first time to the public, the issue is called as an Initial Public Offer.

Follow on Offer - When an already listed company

makes either a fresh issue of securities to the public or an offer for sale of existing shares to the public, through an offer document, it is referred to as Follow on Offer (FPO).

BASICS OF PRIMARY MARKET

Rights Issue -When a listed company proposes to issue

fresh securities to its existing shareholders, as on a record date, it is called as a rights issue. The rights are normally offered in a particular ratio to the number of securities held prior to the issue. This route is best suited for companies who would like to raise capital without diluting stake of its existing shareholders.

Preferential Issue - A Preferential Issue is an issue of shares

or of convertible securities by listed companies to a select group of persons u/s 81 of the Companies Act, 1956, that is neither a rights issue nor a public issue. The issuer company has to comply with the Companies Act and the requirements of SEBI guidelines, which include pricing, disclosures in notice etc.

INITIAL PUBLIC OFFER

Various intermediaries in a public issue:

Lead managers / Book Running Lead Managers (BRLMs) Registrar to the issue

Underwriters to the issue

Bankers to the Issue

LEAD MANAGERS / BOOK RUNNING LEAD MANAGERS (BRLMS)

Lead managers also called merchant bankers and are in charge of the issue process.
They have to ensure the company is following the rules laid down for an IPO, that it has made available all the information a potential investor needs to know and that the facts in the prospectus are correct. They act as intermediaries between the company and the investors. They are also responsible for drawing up the prospectus and marketing the issue.

LEAD MANAGERS / BOOK RUNNING LEAD MANAGERS (BRLMS)

If it is a book building process, the lead manager also helps to determine the price band; in such cases, they are also called Book Running Lead Managers.

REGISTRAR TO THE ISSUE

This is a financial institution appointed to keep a record of the issue and ownership of company shares.

Drawing up the list of allottees, crediting the shares to their demat accounts and ensuring refunds (if one is not allotted the shares, his/her money is returned within a month) is done by the Registrar to the Issue.

UNDERWRITERS TO THE ISSUE

These could be a banker, broker, merchant banker or a financial institution.

They give a commitment to underwrite the issue. Underwriting means they will subscribe to the balance shares if all the shares offered at the IPO are not picked up.

INITIAL PUBLIC OFFER

SOME IMPORTANT CONCEPTS:

Face Value - The nominal or stated amount (in Rs.) assigned to a security by the issuer. Issue at premium - When a security is sold above its face value, it is said to be issued at a Premium.

Issue at Discount - When a security is sold at less than its face value, then it is said to be issued at Discount.

INITIAL PUBLIC OFFER

Book Building Process :- When the company and the BRLM fix a floor (Minimum) and cap price (maximum) for the issue. This range is called the price band. Investors are free to bid at any price in this range. The final price is determined by market forces according to the demand for the issuing companys shares.

As far as the IPO is concerned, there are three categories of investors: Qualified Institutional Bidders.(QIBs) Non-Institutional Investors. (NIIs) Retail Investors.

INITIAL PUBLIC OFFER

Qualified Institutional Bidders :- Under this head, financial institutions such as Banks, Mutual funds, Insurance companies, Foreign Institutional investors etc. are permitted to bid for the shares. A maximum of 50% of the issue can be kept reserved for investors falling under the QIB category. Out of the 50% shares, 5% are reserved for Mutual Funds.
Non-Institutional Investors:- Under this category, Resident Indian individuals, HUFs, Companies, corporate bodies, NRIs, societies and trusts whose application size in terms of value is more than Rs 1 lakh are allowed to bid. At least 15% of the total issue has to be reserved for NonInstitutional Investors.

INITIAL PUBLIC OFFER

Retail Investors :- Only Individuals, both Resident and NRIs along with HUFs are allowed to bid. At least 35% of the issue has to be reserved for such investors. The size in terms of value should not exceed Rs 1 lakh if one wants to apply under this category.
De-listing of securities:- means permanent removal of securities of a listed company from a stock exchange. As a consequence of de-listing, the securities of that company would no longer be traded at that stock exchange.

Role of SEBI in an IPO:

Any company making a public issue or a listed company making a rights issue of value of more than Rs 50 lakh is required to file a draft offer document with SEBI for its observations. SEBI does not recommend any issue nor does take any responsibility either for the financial soundness of any scheme or the project for which the issue is proposed to be made or for the correctness of the statements made or opinions expressed in the offer document. SEBI mainly scrutinizes the issue for seeing that adequate disclosures are made by the issuing company in the prospectus or offer document.

INITIAL PUBLIC OFFER

Prospectus of a company:- Gives information about the issue and the company.
Abridged Prospectus:- is a shorter version of the Prospectus and contains all the salient features of a Prospectus. It accompanies the application form of public issues. Offer document:- means Prospectus in case of a public issue or offer for sale and Letter of Offer in case of a rights issue which is filed with the Registrar of Companies (ROC) and Stock Exchanges (SEs).

INITIAL PUBLIC OFFER

As per SEBI guidelines: The issue should remain open for a minimum of 3 days.

The Basis of Allotment should be completed within 15 days from the issue close date. Within 2 working days after completion of the basis of allotment, the details of credit to demat account /allotment advice and dispatch of refund order needs to be completed. Listing of shares would take around 3 weeks after the closure of the issue.

INITIAL PUBLIC OFFER

As per SEBI guidelines:

The spread between the floor and the cap of the price band shall not be more than 20%.

In case the price band is revised, the bidding period shall be extended for a further period of 3 days, subject to the total bidding period not exceeding 10 days.

INITIAL PUBLIC OFFER

Some of the key benefits of investing in an IPO are:

Safer to invest as the scope for manipulation of price is smaller. The investor does not have to pay any kind of brokerage or transaction fees or any tax such as service tax, stamp duty. All investors will get the shares at the same price.

INITIAL PUBLIC OFFER

Some of the key drawbacks of investing in an IPO are:

In case of over subscription, the shares are allotted in proportionate basis. Thus, small investors hardly get any allotment in such a case. Money is locked for a long time and the shares are allotted after a few days where as in case of purchase from the secondary market the shares are credited within three working days.

BASICS OF SECONDARY MARKET

The secondary market is where we purchase securities from the seller as opposed to the issuer of securities.
The secondary market comprises of broad segments such as Equity, Debt and Derivatives. The secondary market consists of buyers, sellers and Intermediaries such as stockbrokers & others. SEBI circuit breakers. One on stock market in general and the other on individual applies two types

stocks.

MARKET CIRCUIT BREAKERS

Should a 10 percent rise/ fall in the Nifty/ Sensex occur Before 1 pm Between 1 pm to 2.30 pm Trading gets suspended for 1 hour 30 minutes

2.30 pm onwards
Should a 15 percent rise/ fall in the Nifty/ Sensex occur Before 1 pm

Trading continues
Trading gets suspended for 2 hours

Between 1 pm to 2 pm
2 pm onwards

1 hour
Trading is stopped

In case of a 20 percent movement of the index (at whatever time),

trading is halted for the rest of the day.

STOCK CIRCUIT BREAKERS

When applied to individual stocks, circuit filters / breakers are known as price bands or price filters. There are no circuits on the 30 stocks included in the Sensex or the 50 stocks included in the Nifty. Different circuit breakers of 2%,5%,10% or 20% as applicable to different stocks are specified by the

stock exchanges.

MONEY MARKET
Money market is a market for dealing with financial assets and securities which have a maturity of up to 1yr. Commercial banks are main financial intermediary for money market. The Money market is subdivided into four. They are i) Call money market ii) Commercial bills market iii) Treasury bills market iv) Short term loan market

Call money market

It is a market for extremely short period loans (1-14 days) Highly liquid in nature. Interest rate varies from day to day and even hr to hr. Very sensitive to changes in demand & supply of call loans.

Commercial bills market

It is a market for BoE (Bills of Exchange) arising out of trade transaction. In credit sale, the seller draw a bill of exchange on the buyer. The buyer accepts such a bill promising to pay at a later date specified in the bill. The seller need not wait until the due date of the bill. Instead, he can get immediate payment by discounting the bill from any bank or FI.

Treasury bills market

It is a promissory note issued by the government. Highly liquid in nature. Maturity period can be 91, or 182, or 364days Regular/ordinary TBs (issued to CBs or Public) Ad-hoc TBs (issued to RBI)

Short term loan market

It is a market where short term loans are given to corporate customers for meeting their working capital requirements. Commercial banks provide ST loans in the form of overdraft (business people) and cash credit (for industrialist). OD is purely a temporary accommodation and it is given in the current account itself. CC is given for a period of one year and it is sanctioned in a separate account.

Thank you.