SECURITY MARKETS: Features of capital markets. Functioning - capital markets. New issues market, IPO’s, valuation of issues fundamental and technical considerations Role of SEBI. STOCK EXCHANGES: role and importance, Trading procedures in securities, brokers and Jobbers, Impact of certain economic indicators on the stock market. UNIT – IV
THE NECESSITY FOR AN IPO • EXPANSION ACTIVITIES • ACQUISITIONS / MERGERS • ENTRY INTO NEW BUSINESS AVENUES • WORKING CAPITAL REQUIREMENTS • TO PROVIDE LIQUIDITY TO THE EXISTING SHAREHOLDERS • LISTING OF EXISISTING SHARES
MODES OF RAISING MONEY • INITIAL PUBLIC OFFER • RIGHTS ISSUE • PRIVATE PLACEMENT • PREFERENTIAL ALLOTMENT • ADR/GDR/FCCB ISSUES
THE METHODS OF RAISING MONEY • FIXED PRICE METHOD • BOOK BUILDING
FIXED PRICE METHOD • THIS IS THE NORMAL WAY OF RAISING FUNDS THROUGH PUBLIC ISSUE • THE SHARES OF THE COMPANY ARE EVALUATED MUCH BEFORE THE IPO AND THE SHARES ARE OFFERRED AT THE PRE-FIXED PRICE • TIME TAKEN IS LONGER THAN THE BOOK BUILDING PROCESS
WHAT IS BOOK BUILDING? • IT IS A PROCESS WHEREIN THE INVESTORS DETERMINE THE PRICE OF THE SHARES • OPTION IS GIVEN TO INVESTORS TO SUBSCRIBE AT THE FLOOR PRICE OR ABOVE AT THEIR DISCRETION • IT IS A PROCESS USED FOR MARKETING A PUBLIC OFFER OF EQUITY SHARES OF A COMPANY.
FEATURES OF BOOK BUILDING • THE ISSUER COMES OUT WITH AN ISSUE WITHOUT FINALISING THE ISSUE PRICE • THE FLOOR PRICE AND THE CAP PRICE ARE ANNOUNCED JUST BEFORE THE OPENING OF THE ISSUE • THE ISSUER HAS THE LIBERTY TO REVISE THE OFFER PRICE UPWARD OR DOWNWARD
FEATURES OF BOOK BUILDING • THE ALLOTMENT IS NORMALLY ON PROPORTIONATE BASIS TO THE RETAIL INVESTORS • ABOUT 15% TO RETAIL INVESTORS • 15% TO NON-INSTITUTIONAL BIDDERS and., • 50% TO QUALIFIED INSTITUTIONAL BIDDERS
FEATURES OF BOOK BUILDING • RETAIL INDIVIDUAL BIDDERS COULD BID AT CUT OFF PRICE IF THE TOTAL VALUE OF SECURITIES APPLIED IS LESS THAN Rs.1,00,000/- • RETAIL BIDDERS TO PAY THE BID MONEY ALONG WITH APPLICATION • TO REGISTER THE BID THROUGH AN ONLINE TERMINAL OF NSE OR BSE AT AN AUTHRISED BID CENTER
PRICE DISCOVERY • IT IS LARGELY BASED ON THE TOTAL SUBSCRIPTIONS RECEIVED • THE PRICE AT WHICH THE ISSUE GETS SUBSCRIBED ATLEAST ONE TIME • THE BOOK RUNNING LEAD MANAGERS IN CONSULTATION WITH THE ISSUER WOULD DETERMINE THE PRICING OF THE SHARES
THE PROCESS OF BIDDING • THE ISSUER TO APPOINT A BOOK RUNNER (NORMALLY A MERCHANT BANKER) • THE ISSUER ANNOUNCES THE PRICE BAND AND BID SHARES • THE ISSUER APPOINTS SYNDICATE MEMBERS WITH WHOM THE INVESTORS COULD REGISTER THEIR BIDS
THE PROCESS OF BIDDING • INVESTORS’ BIDS ARE ENTERED INTO THE ELECTRONIC BOOK – THE PROCESS IS CALLED BIDDING (IT IS SIMILAR TO OPEN AUCTION) • BIDS LESS THAN FLOOR PRICE NOT ACCEPTED • BIDS COULD BE REVISED FOR ANY NUMBER OF TIME BEFORE THE ISSUE CLOSES
IPO PROCESSING AND ALLOTMENT • AS PER SEBI REGULATIONS AND OTHER GOVERNING CORPORATE LAWS • RECONCILIATIONS OF AMOUNTS AND NO. OF SHARES APPLIED • ONLY VALID APPLICATIONS • INVERSE WRITING OF THE APPLN. No.
IPO PROCESSING AND ALLOTMENT • PREPARATION OF BASIS OF ALLOTMENT • DRAWAL OF LOTS IN THE PRESENCE OF PUBLIC REPRESENTATIVE APPOINTED BY STOCK EXCHANGE • ALLOTMENT OF SHARES AND NECESSARY CERTIFICATION BY MERCHANT BANKER/BOOK RUNNER
REJECTIONS • APPLICATION BY UNAUTHORISED PERSONS • APPLICATIONS WITH OUT DP ID/CLIENT ID • UNSIGNED APPLICATIONS • INCOMPLETE APPLICATIONS • APPLICATIONS FOR SHARES AT LESS THAN THE FINAL PRICING DETERMINED
KEY FACTORS Escrow Account Red Herring Prospectus Book Building Process Categories of Investors Price Band & Cut-off Price
Minimum Lot size Bidding Period & Bidding Centers Book Building Process Margin Amount Revision of Bids Basis of Allotment
Key Players The Investors The Issuer Book Running Lead Managers Syndicate Members Bidding Centers Escrow Bankers Registrars With the support of The stock exchanges The Depositories The Postal System
Escrow Account In a book building process, since the margin amount collected is not the application money, the same will be deposited in an escrow account. After the discovery of the price, the money lying in the escrow account is transferred on the designated date either in full or to the extent of the shares proposed to be issued to the public issue account before allotment / allocation of shares by the Board of Directors of the issuer
Red Herring Prospectus In a book building process, the issue price and on some occasions even the quantum of shares proposed to be issued is / are not known. Hence the document prepared to invite / solicit subscription is referred to as Red Herring Prospectus
Categories of Investors Qualified Institutional Investors Non Institutional Investors Retail Individual Investors Employees of promoter companies Existing shareholders of the issuer
The lower end of the price band is the floor price and the upper end of the price band is the cap price. The cap price is the price band should not be more than 20% of the floor price. The investors can opt to bid at any of the prices (including the floor price and ceiling price) in multiples of Rs.1 within the price band. The issuer in consultation with the BRLMs can revise the price band (upward or downward) during the period the bid is open subject to keeping the bidding period open for a minimum of 3 days after the revision. Price Band
Cut-off Price Retail individual bidders can bid at “cut off” price. In which case, they need not indicate the price as the specific number and yet become eligible to be considered for allotment irrespective of the issue price finally decided through the price discovery process. They must pay the margin amount calculated at the ceiling price. The other categories of investors (QIBs and non-institutional bidders) are forbidden from applying at cut off price
Minimum Lot Size The minimum lot size of the shares that can be bid shall be determined in such a manner that the amount payable at the floor price and cap price shall be in the range of Rs. 5000 to 7000. Bids should be for the minimum lot size or multiples there of.
Bidding Period The bid shall be open for a period of 5 – 10 days (recently revised to 3 to 7 working days). However, if there is a revision in price band the period shall be extended by three days from the date of revision subject to ensuring that the total period does not exceed 13 days (10 days if the recent guidelines are applicable)
Bidding Centers Bidding centers are essentially broking outfits associated with the Book Running Lead Managers / Syndicate Members. They have on-line connectivity to either or both BSE and NSE. Investors desirous of participating in the bidding process should submit their bid cum application forms to any of the designated bidding centers
Revision of Bids • Book building process provides for revision of the “options” • Revision is possible both in respect of the quantum of shares and / or the bid price • Revision is possible for any number of times before the closure of the issue. • Bidders are required to go to the same bidding center where the original bid earlier revision was registered along with the transaction registration slip issued by the bidding center.
Margin Amount The money collected along with the application is referred to as margin amount and need not necessarily be the total amount payable for the option exercised. The syndicate members are generally vested with powers to decide on the quantum / percentage of margin payable along with the bid-cum-application. However, the current practice is to stipulate 100% margin to retain ad non-institutional investors ad no margin for QIBs.
Basis of Allotment The allotment shall be made on proportionate basis to the investors. The number of shares allotted shall not be less than minimum lot prescribed and thereafter in multiples of one share. Where the shares available for allotment to any category is less than the minimum lot prescribed, on the basis of drawal lots the successful investors in that category shall be identified.
Role of the Bidding Centers • Accept bid-cum-application forms from investors along with cheque/ demand draft • Register bids (for all options) through on-line / off-line terminals • Generate transaction registration slips for each of the options • Lodge bid-cum-applications with an escrow banker and obtain acknowledgement on a daily basis
Illustration of Book Building and Price Discovery Process • Bidders can bid at any price within the price band • For instance, assume a price band of Rs.20 to Rs. 24 per share, issue size of 3,000 equity shares and receipt of five bids from bidders, details of which are shown in the table below
Bid Quantity Bid Price (Rs.) Cumulative Quantity Subscription 500 24 500 16.67% 1,000 23 1,500 50.00% 1,500 22 3,000 100.00% 2,000 21 5,000 166.67% 2,500 20 7,500 250.00% The illustrative book as shown below shows the demand for the shares of the company at various prices and is collated from bids from various investors
Illustration of Book Building and Price Discovery Process • The price discovery is a function of demand at various prices. The highest price at which the issuer is able to issue the desired number of shares is the price at which the book cuts off, i.e., Rs. 22 in the above example. • The issuer, in consultation with the book running lead managers, will finalise the issue price at or below such cut off price, i.e., at or below Rs. 22. • All bids at or above this issue price and cut-off bids are valid bids and are considered for allocation in the respective categories.
Stock Exchanges • Secondary market is a market for secondary sale of securities. • In other words, securities, which have already passed through the new issue market, are traded in this market. • Generally such securities are quoted in the stock exchange and it provided a continuous and regular market for buying and selling of securities.
origin • The origin of the stock market in India goes back to the end of the 18th century when long-term negotiable securities were first issued. • But the real beginning occurred in the middle of the 19th century after enactment of the companies act in 1850, which introduced the feature of the limited liabilities and generated investor interest in the corporate securities. • NATIVE SHARE AND STOCK BROKERS ASSOCIATIONS at BOMBAY in 1875, which is at present called BOMBAY STOCK EXCHANGE was formed.
STOCK EXCHANGES IN INDIA • There are 20 Recognized stock exchanges under the securities contracts (regulation) act,1956. • And 1 OTCEI • And 1 NSE Currently under the supervision of SEBI • This market consists of all stock exchanges recognized by the government of India. • The stock exchanges in India are regulated under the securities contracts (Regulations) Act, 1956. • The Bombay stock exchange is the principal stock exchange in India, which sets the tone of the other stock markets.
Key stock exchanges • AHAMADABAD STOCK EXCHANGE 1894 • CULCUTTA STOCK EXCHANGE 1908 • MADRAS STOCK EXCHANGE 1937 • BANGALORE STOCK EXCHANGE
Bombay Stock Exchange Limited (BSE) • Bombay Stock Exchange Limited (BSE) which was founded in 1875 with six brokers has now grown into a giant institution with over 874 registered Broker-Members spread over 380 cities across the country. • Today, BSE's Wide Area Network (WAN) connecting over 8000 BSE Online Trading (BOLT) System Trader Work Stations (TWS) is one of the largest of its kind in the country.
NameCurrentPrevious Close% ChangeBank Nifty8694.958960.45-2.96CNX 1004941.855022.25-1.60S&P CNX 5004264.804354.20-2.05S&P CNX Defty4433.604497.65-1.42CNX IT3972.353846.253.28CNX Midcap7068.357282.05-2.93NIFTY (S&P CNX)5067.005133.25-1.29CNX Nifty Junior9622.109968.15-3.47 List of India indices current value, Previous value and % change. On 7-feb08
NATIONAL STOCK EXCHANGE • The National Stock Exchange of India Limited has genesis in the report of the High Powered Study Group on Establishment of New Stock Exchanges, which recommended promotion of a National Stock Exchange by financial institutions (FIs) to provide access to investors from all across the country on an equal footing. • Based on the recommendations, NSE was promoted by leading Financial Institutions at the behest of the Government of India and was incorporated in November 1992 as a tax-paying company unlike other stock exchanges in the country. • On its recognition as a stock exchange under the Securities Contracts (Regulation) Act, 1956 in April 1993, NSE commenced operations in the Wholesale Debt Market (WDM) segment in June 1994. The Capital Market (Equities) segment commenced operations in November 1994 and operations in Derivatives segment commenced in June 2000.
INTERNATIONAL STOCK MARKETS • In United Kingdom, dealings in stocks and share began with the merchant ventures in the 17th century. • Gradually informed market developed around the coffee houses in the city of LONDON. • In 1773 new Jonathans coffee houses became the stock exchange though it was not formally constituted until 1802, with some 550 subscribers and 100 clerks. • Earlier to this also there were share dealings on the AMSTERDAN STOCK EXCHANGE as early as 1602. • In the 19th century global co-operation has shown its inevitable influence on the securities trade with the establishment of international federation of stock exchanges.
Asian Stock Exchanges • Sydney Futures Exchange, Australia • Australian Stock Exchanges, Australia • Shenzhen Stock Exchange, China • Stock Exchange of Hong Kong,Hong Kong • Hong Kong Futures Exchange,Hong Kong • National Stock Exchange of India,India • Bombay Stock Exchange, India • Jakarta Stock Exchange, Indonesia • Indonesia NET Exchange,Indonesia • Nagoya Stock Exchange,Japan • Osaka Securities Exchange, Japan • Tokyo Grain Exchange, Japan • Tokyo International Financial Futures Exchange (TIFFE), Japan • Tokyo Stock Exchange, Japan • Korea Stock Exchange, Korea • Kuala Lumpur Stock Exchange, Malaysia
European Stock Exchanges • Vienna Stock Exchange, Austria • EASDAQ, Belgium • Zagreb Stock Exchange, Croatia • Prague Stock Exchange, Czech Republic • Copenhagen Stock Exchange, Denmark • Helsinki Stock Exchange, Finland • Paris Stock Exchange, France • LesEchos:30-minute delayed prices, France • NouveauMarche, France • MATIF, France • Frankfurt Stock Exchange, Germany • Athens Stock Exchange, Greece • Budapest Stock Exchange, Hungary