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Financial Environment

Financial Markets
earning Outcomes
To understand the Structure of the Financial
Markets in ndia
To understand the methods of raising capital
from a Business Perspective
To be familiar with the nstruments, mechanism
and Functions of Financial institutions
Financial Markets in ndia
Primary Market
Secondary Market
Money Market
Primary Market or New ssues
Market
Market for Fresh Capital or Additional Capital
Company
Raises Capital
Shares / Debentures
Public / nvestors
nvest Money
Secondary Market or Stock Market
Market where existing or already issued securities are
resold or traded
nvestor
Buys / SeIIs
Shares / Debentures
Stock Exchange
Money
infIow / outfIow
Affects
Company
Share prices
& Company Performance
Primary Market
Public
ssue
Bonus
ssue
Private
Placement
Rights
ssue
PO FPO
Preferential
Placement
Qualified
nstitutional
Placement
BEAS Co td, plans for an PO at Rs.10 per share with an objective
to raise capital to establish itself and has plans to raise Rs.
500,000 but managed to distribute only Rs. 300000 to the public
through banks, finance companies and brokers, out of the capital
limit of Rs. 10,00,000 as per the MOA. The response was
moderate and the total number of share applications received
was Rs. 1,00,000. n response to the first call of Rs 5 per share
the total funds received was Rs.40,000.
Questions: (1 mark each)
1. What is the price of one share?
2. What is the objective behind the PO? What does PO stand For?
3. What is the Value of the First call?
4. Whom did the company approach for the distribution of shares to
the public?
5. Calculate Authorized capital ?
6. Calculate ssued capital ?
7. Calculate subscribed capital ?
8. Calculate called up capital ?
9. Calculate paid up capital?
10. Calculate the number of shares issued by the company?
1. What is the price of one share? Rs.10 per share
2. What is the objective behind the PO? What does
PO stand For? nitial Public offering - with an
objective to raise capital to establish itself
3. What is the Value of the First call? Rs 5 per share
4. Whom did the company approach for the
distribution of shares to the public? banks, finance
companies& brokers
5. Calculate Authorized capital ? 10,00,000
6. Calculate ssued capital ? Rs. 300000
7. Calculate subscribed capital ? Rs. 1,00,000
8. Calculate called up capital ? Rs 50,000
9. Calculate paid up capital? Rs.40,000
10. Calculate the number of shares issued by the
company?
Rs. 300000 / 10 per share = 30,000
Price Determination
Fixed Price
Book Building
Book Building
Auction of Shares
ssuer & ead Manager
Fix Upper and ower
imit
nvestors give the Bid
Price and number of
shares
PO's and FPO's
Price range is known
Demand known on daily
basis during BB
Process
Payment made after
allocation
ixed Price
Merchant Banker Fixes
Price
Pricing Date, ssuing
date & Trading date
Time ag + Price
Fluctuation = High Cost
of Capital
Price is known in
advance
Demand known only
after the closure of
issue
Payment made during
subscription refund after
allocation
Parties in Book Building
Parties nvolved in the process of BB
Company (ssuer)
ead manager / Merchant Banker / Book
runner
SEB
Registrar of Companies (ROC)
Syndicate members
nvestors
Private Placement
Process of BB
Co appoints book runner
Submits draft doc's to SEB (Acknowledgement card)
Co & BR decide Price range
Appoints syndicate members
nvites public Bids and makes Ads
Final Cut off & allocation
Restrictions are made on Share Allocation to avoid threats
of future takeovers
Final Prospectus is filled with ROC
Final Allocation
Placement Portion opens a day before public portion if Under
subscribed( Pub issue size increased)
Public Portion over subscribed (Proportional allotment) and
under subscribed (allotted to Pvt Placement )
ame of the issue
Book Running
Lead Manager
Date of
ssue
No.
of
member
No. of
Bidding
centers
ssue
Size
Iakh
share
Price
Range
ssue
Price
(Rs.)
GOENKA
DAMOND &
JEWELS
LM%ED
SBI Capital
Markets
Limited
23/03/10
to
26/03/10
109 47 100
Rs. 135
to
Rs. 145
135
N%RASO%
%ECHNOLOG
ES LM%ED
Collins Stewart
Inga Private
Limited and
Anand Rathi
Advisors
Limited
23/03/10
to
26/03/10
96 33 37
Rs. 137
to
Rs. 145
145.00
PERSS%EN%
SYS%EMS
LM%ED
Enam Securities
Private
Limited,
J.P. Morgan India
Private
Limited
17/03/10
to
19/03/10
100 47 54.19
Rs.290
to
Rs. 310
310.00
ey Points
About Bids
Open for 5 days
Not less than Floor Price
Can be revised before issue closure
Must not exceed 13 days of the Price band is
revised
Bids are evaluated
Price Aggression
nvestor Quality
Earliness of Bids
About Book Display
Open Book - Electronic Book
Closed Book
About Type of nvestors
Qualified nstitutional Buyers 50%
Retail nvestors 25%
Non nstitutional Buyers or high net worth
individuals 25%
Types of Books
QB's
Financial nstitutions
Scheduled commercial Banks
MF's, PF's
F's & Venture Capital funds, foreign Venture
Capitalist with SEB
Development financial nstitutions
State ndustrial Development Corporations
Pension Funds and nsurance Companies
BB Options
100%
75%
75% is Book Built
25% Fixed Price method
100%
Not less than 25 crore fully uinderwritten
Allotted in Dmat form only
50% - QB
35% -Retail
15% - N
Focus on nation wide centres
75%
75% Placement + Public Portion
other 25% is Fixed compulsorily
Taken by Corporate
ssue size not less than 100 crores
Placement Portion Underwriters, MB's, F, HN
nvestors can alos buy through syndicate
Public Portion Retail nvestors
Focus is on 3 4 centres only
Reverse Book Building
Process where share holders are asked to
bid for the price at which they are ready to
offer their Shares
Similar to reverse auctions
Helps in discovering the exit price by
companies that want to DeIist or buy-
back their shares from shareholders
Reasons for Buyback
%o increase promoters hoIding
%o thwart takeover bid
%o pay surpIus cash not required by
business
Process
Company has to secure BOD & Share holders Permission.
Co appoints BR ead manager
BRM decides Date for nviting Bids & Floor Price
Only Dmat holders will be allowed to bid
The offer period will be for three days
Bidding will be done in Electronic form through stock exchange trading
mechanism
Trading members will be appointed and through whom the bids will be
placed
Bids can be made at or above the floor price
Revision of Bids is possible
15 days time is given to share holders to submit their share Docs if the bid
price is accepted by BRM
6 months time will be given to shareholders whose bid price is too high to
quote an acceptable price if they wish to give their shares
Public ssues
PO nitial Public Offering
Offering a fresh issue of
securities
Offer for sale of securities by
an unlisted company for the
first time to the public
FPO Follow on Public
Offering
Sale of Securities by a listed
company
Also known as subsequent or
seasoned public offering
To finance their growth plans
Name of the issue
Book Running
Lead Manager
Date of
ssue
No.
of
member
No. of
Bidding
centers
ssue
Size
Iakh
share
Price
Range
ssue
Price
(Rs.)
GOENKA
DAMOND &
JEWELS
LM%ED
SBI Capital
Markets
Limited
23/03/10
to
26/03/10
109 47 100
Rs. 135
to
Rs. 145
135
N%RASO%
%ECHNOLOG
ES LM%ED
Collins Stewart
Inga Private
Limited and
Anand Rathi
Advisors
Limited
23/03/10
to
26/03/10
96 33 37
Rs. 137
to
Rs. 145
145.00
PERSS%EN%
SYS%EMS
LM%ED
Enam Securities
Private
Limited,
J.P. Morgan India
Private
Limited
17/03/10
to
19/03/10
100 47 54.19
Rs.290
to
Rs. 310
310.00
Online PO's
Shares are issued through electronic network of stock
exchanges in more than one stock exchange
Co enters into agreement with stock exchanges for online offer
of securities
Appoints registrars with electronic connectivity
Stock exchange will appoint SEB registered brokers for
accepting applications and collecting money
Brokers send application and payments to the registrar
f client fails to pay money broker will have to pay the money
f the broker does n't pay money he will be a defaulter
The investors can also contact the stock exchange for
subscription
f public issue is more than 10 crores, centers for application
and collection had to be opened in metropolitan centers
A separate bank account called escrow account shall be opened
to keep the money.
Prospectus should list the names of the brokers, lead managers
and registrars
Follow-on Public Offering
Sale of Securities by a listed company
Used by Co's to raise finance for growth
plans
Cumbersome Procedure, High Cost and
Time
Rights issue
Pre-emptive rights
Proportionate number of fresh extra shares at predetermined price
Share are offered to expand / diversify operations or restructure capital
4 Options:
Buy new shares
sell a part of shares in open market or exercise right partly
Sell all the shares in the open market
Do nothing
ept open for at least 30 days and not more than 60 days
Rights issue are attractively priced / are low priced
To get full subscription
To reward shareholders
Some share are overpriced in the market and the promoters want to hide the
same
Private Placement
Direct sale of newly issued securities to a small set of
Private nvestors through the merchant banker (50
members)
Private nvestors can be F's, Corporate Banks and
High net worth ndividuals, MF's, PF's etc
Do not require detailed Compliance of Formalities,
Disclosure norms and rating
Banks do not trade on these securities
Takes ess time & Cost
Reasons for Preferring Pvt Placements:
No ock in period for Pvt Placements
imit on bank investment on debts is removed
Popular among corporate who use Pvt Placement Capital to
repay Bank loans and other debts
Short term debt is more popular and its attractively priced
Preferential ssue
Co's have to seek shareholders approval
Preferential Allotment of shares or
convertible shares to strategic groups
promoters
Foreign Partners
Technical collaborators
Reasons
Debt Restructuring or conversion of oans
For strategic investments by Foreign
investors
To issue shares by Employee stock option
plans
For take over of the company by
management group.
SEB Norms for preferential
issue for isted Companies
Total Preferential nvestment issue to promoters to be locked in
for 3 years
Amount details of funds utilized / unutilized and purpose to be
disclosed under an appropriate Head in B/s
Preferential allotment share price should not be less than the
higher of:
Weekly closing prices in stock exchange 6 months before
general meeting date
Weekly closing prices in stock exchange 2 weeks before
general meeting date
f equity shares are listed for a period less than 6 months
Consider the PO Price or Prices 2 weeks before Completing Six
months isted in the Stock exchange