A capital market is a market for securities (debt or equity), where business enterprises
(companies) and governments can raise long-term funds. It is defined as a market in
which money is provided for periods longer than a year
The market where investment funds like bonds, equities and mortgages are
traded is known as the capital market. The primal role of the capital market is to
channelize investment from investors who have surplus funds to the ones who
are running a deficit.
The different types of financial instruments that are traded in the capital markets
are equity instruments, credit market instruments, insurance instruments,
foreign exchange instruments, hybrid instruments and derivative instruments
The capital market is an important constituent of the financial system. It is a
market for long-term funds, both equity and debt and funds raised within and
outside the country.
The capital market aids economic growth by mobilizing the savings of the
economic sectors and directing the same towards channel of productive uses.
Primary Capital Market and Secondary Capital Market
The capital market comprises of the primary capital market and the secondary
Primary Market: Primary Market comprises of the new securities which are
offered to the public by new companies. It is the mechanism through which the
resources of the community are mobilized and invested in various types of
industrial securities. Whenever a new company wants to enter the market it has
to first enter the primary market. Primary market refers to the long – term flow
`of the funds from the surplus sector to the government and the corporate sector
(through primary issues) and to banks and non- bank financial intermediaries
(through secondary issues). Primary issues of the corporate sector lead to the
capital formation, (creation of net fixed assets and incremental change in
The nature of the fund raising is as follows:
Equity Issues – Equity Issues -
Financial Intermediaries GDRS
Debt Instruments - External Commercial
Other External Borrowings:
Foreign Direct Investment (FDI) - in equity and debt form
Foreign Institutional Investors (FII) - in the form of the portfolio
Non- Resident Indian Deposits - in the form of short term and
medium term deposits.
The secondary market, also known as the aftermarket, is the financial
market where previously issued securities and financial instruments such
as stock, bonds, options, and futures are bought and sold.
Secondary market is a market for outstanding securities. An equity
instrument, being an eternal fund, provides an all- time market while a
debt instrument, with a defined maturity period, is traded at the
secondary market till maturity. Unlike the primary issues in the primary
market, which result in capital formation, the secondary market provides
only liquidity and the marketability of outstanding debt and equity
instruments. The secondary market contributes to economic growth by
channelizing funds into the most efficient channel through the process of
disinvestment to reinvestment. The secondary market also provides
instant valuation of securities (equity and debt) made possible by changes
in the internal environment, that is, through companywide and industry
Methods of Raising Capital
Debentures Preference Fresh Issue Public Public Loans From
Shares Bonds Deposits Banks & FIs
- Equity shares
Public Private Placements Rights Issue
Today, a company has various options through which it can raise capital for its
business purposes. These are debentures, preference shares, fresh issues, public
bonds,public deposits and loans from banks and financial institutuions.
What is Initial Public Offering?
An IPO stands for Initial Public offering. It is the initial share offering a company
makes to the pubic. This offering is normally made by the company in order to
raise public funds for its future projects. In return for the money the public
invests, it receives shares of the company. These shares entitle the investor to
part of the profits as returns, when the project becomes successful. A corporate
may raise capital in the primary market by way of an initial public offer, rights
issue or private placement. An Initial Public Offer (IPO) is the selling of securities
to the public in the primary market. It is the largest source of funds with long or
indefinite maturity for the company. IPO is the first sales of stock by a company
to the public through investment banking firms. IPOs often come from smaller,
younger companies seeking capital to expand their business. IPOs are the first
prices for shares of a company offered to the public.
Different Kind of Issues
Public issues can be further classified into Initial Public offerings and further
public offerings. In a public offering, the issuer makes an offer for new investors
to enter its shareholding family. The issuer company makes detailed disclosures
as per the DIP guidelines in its offer document and offers it for subscription. The
significant features are illustrated below:
Initial Public Offering (IPO) is 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. This paves way for listing and trading of the issuer’s
A Further public offering (FPO) is when an already listed company makes
either fresh issue of securities to the public or an offer for sale to the public,
through an offer document. An offer for sale in such scenario is allowed only if it
is made to satisfy listing or continuous listing obligations.
Rights Issue is when a listed company which proposes to issue fresh securities
to its existing shareholders as on a record date. 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 unless they do not intend to subscribe to their
A private placement is an issue of shares or of convertible securities by a
company to a select group of persons under Section 81 of the Companies Act,
1956 that is neither a rights issue nor a public issue. This is a faster way for a
company to raise equity capital. A private placement of shares or of convertible
securities by a listed company is generally known by name of preferential
A Qualified Institutions Placement is a private placement of equity shares or
securities convertible in to equity shares by a listed company to Qualified
Institutions Buyers only in terms of provisions of Chapter XIIIA of SEBI (DIP)
guidelines. The Chapter contains provisions relating to pricing, disclosures,
currency of instruments etc.
Qualified Institutional Buyer’ shall mean:
a. Public financial institution as defined in section 4A of the Companies
b. Scheduled commercial banks;
c. Mutual funds;
d. Foreign institutional investor registered with SEBI;
e. Multilateral and bilateral development financial institutions;
f. Venture capital funds registered with SEBI.
g. Foreign Venture capital investors registered with SEBI.
h. State Industrial Development Corporations.
i. Insurance Companies registered with the Insurance Regulatory and
Development Authority (IRDA).
j. Provident Funds with minimum corpus of Rs. 25 crores
k.Pension Funds with minimum corpus of Rs. 25 crores)
These entities are not required to be registered with SEBI as QIBs. Any entities
falling under the categories specified above are considered as QIBs for the
purpose of participating in primary issuance process.
Reasons For Going Public
Raising funds to finance programs like expansion, diversification, and
Financing of increased working capital requirements.
Financing acquisitions like a manufacturing unit, brand acquisitions.
Exit route for existing investors.
Advantages and Disadvantages of IPO
• Stock holder Diversification As a company grows and becomes more valuable,
its founders often have most of its wealth tied up in the company. By selling
some of their stock in a public offer, the founders can diversify their holdings
and thereby reduce somewhat the risk of their personal portfolios.
• Easier to raise new capital
If a privately held company wants to raise capital a sale of a new stock, it must
either go to its existing shareholders or shop around for other investors. This can
often be a difficult and sometimes impossible process. By going public it becomes
easier to find new investors for the business.
• Enhances liquidity
The sock of a closely held firm is not liquid. If one of the holders wants to sell
some of his shares, it is hard to find potential buyers-especially if the sum
involved is large. Even if a buyer is located there is no establishes price at which
to complete the transaction. These problems are easily overcome in a publicly
• Establishes value for the firm
This can be very useful in attracting key employees with stock options because
the underlying stock have a market value and a market for them to be traded
that allows for liquidity for them.
The reputation and visibility of the company increases. It helps to increase
company and personal prestige.
• Other advantages
Additional incentive for employees in the form of the companies stocks. This also
helps to attract potential employees
It commands better valuation of the company
Better situated for making acquisitions
• Cost of Reporting
A publicly owned company must file quarterly reports with the Securities
and exchange Board of India. These reports can be costly especially for small
Management may not like the idea or reporting operating data, because such
data will then be available to competitors.
• Self dealings
The owner’s managers of closely held companies have many opportunities
for self-transactions, although legal they may not want to disclose to the
• Inactive market low price
If a firm is very small and its and its shares are not traded frequently, then its
stock will not really be liquid and the market price may not be truly
representative of the stocks value.
• Loss of Control
Owning less than 50% of the shares could lead to a loss of control in the
• Other disadvantages
The profit earned by the company should be shared with its investors in the
form of dividend
An IPO is a costly affair. Around 15-20% of the amount realized is spent on
raising the same.
A substantial amount of time and effort has to be invest
Registrar & Share Transfer Agents
Bankers to the Issue
Stock Brokers & Sub-Brokers
“It is any document described or issued as a prospectus and includes any notice,
circular, advertisement or other document inviting deposits from the public or
inviting offers from the public for the subscription or purchase of any shares in,
or debentures of, a body corporate.”
Contents Of Prospectus:
-It consists of name , address, telephone no, fax no and email address.
-Credit rating (in case of debenture issue)
•Capital Structure of the company
-Authorized issue and subscribed no. of instruments.
-Size of present issue.
-Reservation for specified categories
-Net offer to public
•Terms of Present Issue
-Authority of the issue
-Terms of payment
-Procedure and time for allotment and issue of certificates/refund orders
•Particulars of the Issue
-Purpose of the Issue
-Means of financing
-Name of appraising agency if any
-Name of monitoring agency if any
•Company, Management and Project
-Promoters and their background
-Location of the project
-Nature of products and services
•Financial information of Group Companies
-Balance sheet data
-Profit and loss data
-Stock market quotation.
•Basis of Issue Price
-Weighted Average Return on Net Worth in the last 3 yrs.
-In case of a new issue, EPS pre issue, P/E pre-issue
-Comparison of all accounting ratios with the companies of comparable size.
•Outstanding Litigations or defaults
-Whether all payments / refunds debentures, deposits of banks, institutional
dues etc. have been paid up to date.
What Is Red Herring Prospectus?
A preliminary prospectus issued by stock-underwriting firms to measure
investor interest in a prospective stock offering. The document must
contain a warning, printed in red, that the document does not contain all
the information normally required by the stock exchange authority, and
that some parts may be changed before the final prospectus is issued to
It is understood that the document will be modified significantly before
the final prospectus is published.
It is a prospectus, which does not have details of either price or number of
shares being offered, or the amount of issue.
Therefore, in case the price is not disclosed, the numbers of shares and the
upper and lower price bands have to be disclosed.
On the other hand, an issuer can state the issue size and the number of
shares are determined later.
In the case of book-built issues it is a process of price discovery hence only
on completion of the bidding process, the details of the final price are
included in the offer document.
What is 'IPO Grading'?
All IPOs that come out in India need a mandatory IPO grading. This grading is
assigned by a credit agency and is in a scale of 1 to 5.
The number indicates the following:
1: Poor fundamentals
2: Below average fundamentals
3: Average fundamentals
4: Above average fundamentals
5: Strong fundamentals
IPO grading is a service aimed at facilitating the assessment of equity issues
offered to public.
The grade assigned to any individual issue represents an assessment of the
‘fundamentals’ of that issue in relation to the universe of other listed equity
securities in India.
IPO Grading considers the following five parameters:
Earnings per share
Is likely to help SEBI regulate the IPO market by helping it protect the
investors from cases of vanishing companies.
Retail investors, stand to benefit the most on account of the professional
perspective of the company's fundamentals.
Neutral agencies can be more objective in their evaluation of a public offer
compared to other market participants.
SEBI guidelines, 1995 defines book building as “a process undertaken by which a
demand for the securities proposed to be issued by a body corporate is elicited
and built up and the price for such securities is assessed for the determination of
the quantum of such securities to be issued by means of a notice, circular,
advertisement, document or information memoranda or offer document.” Book
building process is a common practice used in most developed countries for
marketing a public offer of equity shares of a company. However, book building
is a transparent and flexible price discovery method of initial public offerings
(IPOs) in which price of securities is fixed by the issuer company along with the
Book Running Lead Manager (BRLM) on the basis of feedback received from
investors as well as market intermediaries during a certain period.
. The steps which are usually followed in the book building process can be
1. The issuer company proposing an IPO appoints a lead merchant banker as
2. Initially, the issuer company consults with the BRLM in drawing up a
draft prospectus (i.e. offer document) which does not mention the price of
the issues, but includes other details about the size of the issue, past
history of the company, and a price band. The securities available to the
public are separately identified as “net offer to the public”.
3. The draft prospectus is filed with SEBI which gives it a legal standing.
4. A definite period is fixed as the bid period and BRLM conducts awareness
campaigns like advertisement, road shows etc.
5. The BRLM appoints a syndicate member, a SEBI registered intermediary
to underwrite the issues to the extent of “net offer to the public”.
6. The BRLM is entitled to remuneration for conducting the Book Building
7. The copy of the draft prospectus may be circulated by the BRLM to the
institutional investors as well as to the syndicate members.
8. The syndicate members create demand and ask each investor for the
number of shares and the offer price.
9. The BRLM receives the feedback about the investor’s bids through
10. The prospective investors may revise their bids at any time during the bid
11. The BRLM on receipts of the feedback from the syndicate members about
the bid price and the quantity of shares applied has to build up an order
book showing the demand for the shares of the company at various prices.
The syndicate members must also maintain a record book for orders
received from institutional investors for subscribing to the issue out of the
12. On receipts of the above information, the BRLM and the issuer company
determine the issue price. This is known as the market-clearing price.
13. The BRLM then closes the book in consultation with the issuer company
and determine the issue size of (a) placement portion and (b) public offer
14. Once the final price is determined, the allocation of securities should be
made by the BRLM based on prior commitment, investor’s quality, price
aggression, earliness of bids etc. The bid of an institutional bidder, even if
he has paid full amount may be rejected without being assigned any
reason as the Book Building portion of institutional investors is left
entirely at the discretion of the issuer company and the BRLM.
15. The Final prospectus is filed with the registrar of companies within 2 days
of determination of issue price and receipts of acknowledgement card
16. Two different accounts for collection of application money, one for the
private placement portion and the other for the public subscription should
be opened by the issuer company.
17. The placement portion is closed a day before the opening of the public
issue through fixed price method. The BRLM is required to have the
application forms along with the application money from the institutional
buyers and the underwriters to the private placement portion.
18. The allotment for the private placement portion shall be made on the 2nd
day from the closure of the issue and the private placement portion is
ready to be listed.
19. The allotment and listing of issues under the public portion (i.e. fixed
price portion) must be as per the existing statutory requirements.
20. Finally, the SEBI has the right to inspect such records and books that are
maintained by the BRLM and other intermediaries involved in the Book