UNIT II

Financial Markets
A financial market is a marketplace that provides an avenue for the sale and purchase of assets
such as bonds, stocks, foreign exchange, and derivatives. Often, they are called “Wall Street” and
“capital market,” Simply put, businesses and investors can go to financial markets to raise money
to grow their business and to make more money, respectively.

Four important functions of financial markets: 1. Puts savings into more productive use. 2.
Determines the price of securities. 3. Makes financial assets liquid- Buyers and sellers can use
financial markets to sell their securities or make investments as they desire. 4. Lowers the cost of
transactions -In financial markets, various types of information regarding securities can be acquired
without the need to spend.

Importance of Financial Markets There are many things that financial markets make possible,
including the following: • Financial markets provide a place where participants like investors and
debtors, regardless of their size, will receive fair and proper treatment. • They provide individuals,
companies, and government organizations with access to capital. • Financial markets help lower
the unemployment rate because of the many job opportunities it offers.

Equit
y Market: An equity market is a market in which shares of companies are issued and traded,
either through exchanges or over-the-counter markets. Also known as the stock market, it is one of
the most vital areas of a market economy. It gives companies access to capital to grow their
business, and investors a piece of ownership in a company with the potential to realize gains in
their investment based on the company's future performance. An equity market is a form
of equity financing, in which a company gives up a certain percentage of ownership in exchange
for capital. That capital is then used for a variety of business needs. The stock market trades shares
of ownership of public companies. Each share comes with a price, and investors make money with
the stocks when they perform well in the market. There are various indices that investors can use
to monitor how the stock market is doing. When stocks are bought at a cheaper price and are sold
at a higher price, the investor earns from the sale. Equity markets are the meeting point for buyers
and sellers of stocks. The securities traded in the equity market can either be public stocks, which
are those listed on the stock exchange, or privately traded stocks. Most equity markets are stock
exchanges that can be found around the world, such as the New York Stock Exchange and the
Tokyo Stock Exchange.

Debt Market (or Bond Market): The bond market broadly describes a marketplace where
investors buy debt securities that are brought to the market by either governmental entities or
corporations. National governments generally use the proceeds from bonds to finance
infrastructural improvements and pay down debts. Companies issue bonds to raise the capital
needed to maintain operations, grow their product lines, or open new locations. In a bond market,
investors buy bonds from a company, and the company returns the amount of the bonds within
an agreed period, plus interest. Bonds are either issued on the primary market, which rolls out
new debt, or traded on the secondary market, in which investors may purchase existing debt via
brokers or other third parties. Bonds tend to be less volatile and more conservative than stock
investments, but they also have lower expected returns. There are two types of bonds: Corporate
and Government. Companies issue corporate bonds to raise money for a sundry of reasons, such
as financing current operations, expanding product lines, or opening up new manufacturing
facilities. Corporate bonds usually describe longer-term debt instruments that provide a maturity
of at least one year. National-issued government bonds (or sovereign bonds) entice buyers by
paying out the face value listed on the bond certificate, on the agreed maturity date, while also
issuing periodic interest payments along the way.

MONEY MARKET: The money market is a market for financial assets that are close substitutes
for money. It is a market for overnight to short-term funds and instruments having a maturity
period of one or less than one year. It is not a physical location (like the stock market), but an
activity that is conducted over the telephone. The money market constitutes a very important
segment of the Indian financial system.
The characteristics of the money market are as follows:
• It is not a single market but a collection of markets for several instruments.
• It is a wholesale market of short-term debt instruments.
• Its principal feature is honour where the creditworthiness of the participants is important.
• The main players are: the Reserve Bank of India (RBI), the Discount and Finance House of India
(DFHI), mutual funds, insurance companies, banks, corporate investors, non-banking finance
companies (NBFCs), state governments, provident funds, primary dealers, the Securities Trading
Corporation of India (STCI), public sector undertakings (PSUs), and non-resident Indians.
• It is a need-based market wherein the demand and supply of money shape the market.
• Transactions in the money market can be both secured and unsecured, i.e., without collaterals.

The Reserve Bank of India is the most important constituent of the money market. The market
comes within the direct purview of the Reserve Bank regulations. The aims of the Reserve Bank’s
operations in the money market are • to ensure that liquidity and short-term interest rates are
maintained at levels consistent with the monetary policy objectives of maintaining price stability;
• to ensure an adequate flow of credit to the productive sectors of the economy; and • to bring
about order in the foreign exchange market.

The instruments traded in the Indian money market are: 1. Treasury Bills (T-bills); 2. Cash
Management Bills (CMBs); 3. Call/notice money market—Call (overnight) and short notice (up to
14 days); 4. Commercial Papers (CPs); 5. Certificates of Deposits (CDs); 6. Commercial Bills (CBs); 7.
Collateralized Borrowing and Lending Obligation (CBLO).
Functions of the Money Market: A money market is generally expected to perform three broad
functions. • Provide a balancing mechanism to even out the demand for and supply of short-term
funds. • Provide a focal point for central bank intervention for influencing liquidity and general
level of interest rates in the economy. • Provide reasonable access to suppliers and users of short-
term funds to fulfil their borrowings and investment requirements at an efficient market clearing
price. • Plays a central role in the monetary policy transmission mechanism as through it the
operations of monetary policy are transmitted to financial markets and ultimately to the real
economy.

Benefits of an Efficient Money Market: • Provides a stable source of funds to banks.

• Encourages development of nonbank entities. • Facilitates government market borrowing.
• Makes effective monetary policy actions. • Helps in pricing different floating interest products.

Forex Market: Foreign exchange is the process of changing one currency into another for
various reasons, usually for commerce, trading, or tourism. The foreign exchange (forex or FX)
market is a global marketplace for exchanging national currencies. Because of the worldwide
reach of trade, commerce, and finance, forex markets tend to be the world's largest and most
liquid asset markets. Its most unique aspect is that it lacks a central marketplace and trading is
conducted electronically over the counter (OTC). A foreign exchange transaction is a contract to
exchange funds in one currency for funds in another currency at an agreed rate and arranged basis.
Exchange rates thus denote the price or the ratio or the value at which one currency is exchanged
for another currency.
The foreign exchange market in India started when in 1978 the government allowed banks to trade
foreign exchange with one another. Foreign Exchange Market in India operates under the Central
Government of India and executes wide powers to control transactions in foreign exchange. The
Foreign Exchange Management Act, 1999 or FEMA regulates the whole Foreign Exchange Market in
India. The foreign exchange market in India consists of 3 segments or tires. The first consists of
transactions between the RBI and the authorized dealers (AD). The latter are mostly commercial
banks. The second segment is the interbank market in which the AD’s deal with each other. And the
third segment consists of transactions between AD’s and their corporate customers.
Participants in forex market include Commercial and Investment banks, Central banks, Investment
managers and hedge funds. Then there are companies which are involved in imports and exports
who also participate in currency markets as they have to conduct foreign transactions to pay or
receive foreign currencies for goods and services. A currency pair is the quotation of two different
currencies, with the value of one currency being quoted against the other. The first listed currency
of a currency pair is called the base currency, and the second currency is called the quote currency.
Currency pairs compare the value of one currency to another—the base currency (or the first one)
versus the second or the quote currency. It indicates how much of the quote currency is needed to
purchase one unit of the base currency.
Based on the types of instruments or settlement period the market can be categorized in the
following types-
• Spot market (current market): Spot market for foreign exchange is that market which handles
only spot transactions or current transactions. Spot rate of exchange prevails at the time when
transactions are incurred. it is of daily nature.
• Derivative market: It is meant for future delivery. It deals in following instruments: foreign
exchange forwards, currency futures, currency swaps, currency options.
o Forward markets deal in over-the-counter (OTC) forward contracts. Forward contracts are
agreements between parties to exchange a particular quantity of currency pair at a specific rate
and on a given date. They help in hedging currency risks i.e., the risk of changing values of currency
assets due to fluctuations in currency exchange rates. However, forward markets do not have a
central exchange for their operations. They are highly illiquid and usually do not require any
collateral and thus have counterparty risk i.e., risk of parties not following through with an
agreement.
o The futures markets are basically forward markets, but with centralised exchanges like the NSE.
Therefore, they have higher liquidity and lower counterparty risk than forward markets. Since all
transactions are publicly available and settled in cash, it is easier to trade, speculate and perform
arbitrage in the futures market.
o The Options market allows traders the right to buy/sell currency at a specified price on a
specified date through a central exchange such as the NSE. The currencies available are the same as
that of the NSE currency futures market.
o Currency swaps are agreements between two parties to exchange a principal and interest
amount in different currencies only to be re-exchanged at a specific later date. At least one of the
interest rates in the agreement is fixed.

IPO (Initial Public Offering)

Initial Public Offering is an offering of either a fresh issue of securities or an offer for sale of existing
securities, or both by an unlisted company for the first time to the public. IPO enables listing and
trading of the issuer’s securities. IPO is a method by which a private control company becomes a
publicly-traded company by giving its shares to the general public for the first time to raise the
fresh capital.

Reasons for issuing IPO-

 to raise capital for expansion, growth, debt repayment, and for the future.
 Exit for early investors- An IPO can be a Fresh issue, an Offer for sale (OFS), or a combination
of both. The existing investors or promoters can reduce their stake in the company by selling
their shares to the general public through an OFS. This makes it easier for the early
investors/promoters to exit the company and seek other opportunities.
 Business Expansion- A company needs capital to expand its business and fund other
projects. An IPO helps a company raise a lot of money to grow the business.
 Repayment of loans- The proceeds from the IPO can help a company reduce its debt
without having to worry about repaying the principal.
 Enhanced credibility- An IPO gives publicity to a company's profile through media coverage.
IPO enhances the company's brand image. A listed company is required to be transparent
about its business and operations. If the company's performance and prospects are good,
this increases the company's credibility and name recognition.

Advantages-

• An IPO helps a company raise a large amount of funds to finance its growth, expansion, capital
expenditures, repayment of loans, and more.
• IPO provides an exit route for the promoters and early investors.
• IPO is a cost-effective way to raise capital because companies do not have to pay interest on the
funds raised from the public, nor do they have to return the capital raised.
• IPO increases visibility and helps build a brand image for the company.
• IPO increases the prestige of employees and builds their confidence in the company . It helps to
retain employees and attract new staff.
• IPO enables the correct valuation of the company.
• IPO encourages discipline in the management as the company is answerable to its shareholders
for all their actions.
• By going public, a company gets to know the outsider's perspective . It helps them plan their
actions for better prospects.

Disadvantages-

• IPO is a time-consuming process as it requires a lot of management time and effort.

• Although the IPO is a low-cost method of raising capital, it can be expensive because of the costs
to the investment banker, the lead manager and the underwriters.
• The IPO may result in dilution of ownership among various shareholders that were previously
limited to a few promoters and investors.
• A company conducting an IPO is required to file regulatory documents on a regular basis with the
required disclosures. This increases administrative costs for the company, as it must hire a team to
oversee and complete these tasks.
• By going public, the company becomes accountable to its investors and therefore must maintain
relationships with investors and meet their expectations.

Entry Norms:
Entry Norm 1- It is commonly known as ‘Profitability Route.’ The company desiring to tap the
primary market shall meet the following requirements:
• Net tangible assets of at least `3 crores for three full years, of which not more than 50 per cent is
held in monetary assets.
• Distributable profits in at least three out of the preceding five years both on stand-alone as well
as on consolidated basis of the three most profitable years of `15 crore.
• Net worth of at least `1 crore in three years.
• If there is a change in the company’s name, at least 50 per cent revenue for preceding one year
should be earned from the new activity.
• The issue size should not exceed 5 times of the pre-issue net worth as per the audited balance
sheet of the last financial year.

Entry Norm 2- It is commonly known as ‘QIB Route.’

• Issue shall be through a book building route, with at least 50 per cent of the issue to be
mandatorily allotted to the qualified institutional buyers (QIBs), failing which the money shall be
refunded.
• The minimum post-issue face value capital shall be `10 crore or there shall be compulsory
market making for at least 2 years.

Entry Norm 3- It is commonly known as ‘Appraisal Route’.

• The ‘project’ is appraised and participated to the extent of 15 per cent by FIs/scheduled
commercial banks of which at least 10 per cent comes from the appraiser(s). In addition, at least 10
per cent of the issue size shall be allotted to QIBs, failing which the full subscription monies shall be
refunded.
• The minimum post-issue face value capital shall be `10 crore or there shall be a compulsory
market making for at least 2 years.

Intermediaries to an issue- IPO intermediaries are the parties (companies/individuals) that assist
an issuer in completing an IPO and a successful listing. Intermediaries such as Merchant Bankers,
Registrars, Bankers, Underwriters and Market Makers assist the company at various stages of an IPO.
IPO intermediaries provide services to help a company initiate and complete the IPO process and
get listed. IPO prospectus documents detail the involvement of all parties in the IPO. These
intermediaries act as a bridge between the company and investors and coordinate with other
intermediaries and parties to ensure a smooth IPO process. They are: -
1. Issuer Company- The issuer of an IPO is a private company that wishes to go public and issue new
shares or sell existing shares to the general public for the first time through an IPO. Generally, an
issuer is a company that offers securities to raise capital.
2. Stock Exchanges- A stock exchange is a company that provides a trading platform where investors
can buy and sell equity shares, bonds, ETFs and other listed securities.
3. SEBI- Securities and Exchange Board of India is a regulatory body for the capital market in India. It
is a government organization established by Government of India. Any company seeking to raise
more than Rs 50 lakhs through an IPO has to submit a draft offering document to SEBI for approval.
The company must submit its offer within a window of 12 months from the date of SEBI's approval.
4. Merchant Banker (Lead manager) Merchant bankers are independent financial institutions
registered with SEBI. They assist companies in their IPO from start to end. They are also called Lead
Managers or Bookrunning Lead Managers ( BRLM ). An IPO can have one or more lead managers. A
merchant banker assists a company throughout the IPO process, from due diligence and determining
if the company is eligible for an IPO, to applying for an IPO with the exchanges, to preparing a
prospectus, IPO advertising, road shows, marketing, and the post-listing process.
5. Self-Certified Syndicate Banks (SCSB) The issuer company appoints banks to perform all banking-
related tasks in an IPO. These are banks registered with SEBI to manage IPOs. They are called Self-
Certified Syndicate Banks (SCSB) or bankers. A company can appoint one or more banks to act as
bankers.
6. Registrar to the Issue (RTI) The IPO registrar is an entity that assists the issuer in the allotment of
IPO shares and maintains records of the company's shareholding. The IPO Registrar is responsible for
the final allotment of shares in consultation with the issuer company and the stock exchanges after
preparing a list of valid and invalid IPO applications.
7. IPO Underwriter- An IPO underwriter is an intermediary that undertakes the risk of purchasing
the shares in case of the IPO under subscription. IPO underwriting is a process wherein the
underwriter and the issuer company get into an agreement wherein the underwriter agrees to
purchase the unsold shares of an IPO in return for an underwriting commission.
8. Market Maker Market makers are licensed stockbrokers who buy or sell stocks in the stock
market at specific prices to improve liquidity and price discovery. They provide liquidity in thinly
traded stocks. They also monitor the trading in the script and report to the exchange when
irregularities occur.

BOOK BUILDING
Book building is a process by which demand for the proposed issue is elicited and built-up and the
price at which the securities will be issued is determined on the basis of the bids received. In the
book-building method of issuance, the IPO price is not fixed in advance. The issuing company
announces an IPO price range within which bids for the IPO are accepted. The IPO price is
determined at the end of the bidding period based on the demand for the shares at various price
levels. According to the regulations, the price range should be announced at least two business days
before the opening of the issue for the subscription. The issuer can revise the price range for the
offering during the life of the offering. A book-building issue must be kept open for 3-7 business
days, although the period may be extended by three days if the price range is revised. BSE and NSE
offer a fully automated online bidding system for book-building IPOs.
Advantages- • An efficient mechanism for price discovery. • The company can assess its credibility
based on the demand for the issue. • A realistic approach to pricing that is based on demand for the
shares and not set by management.
Limitations-
• In India, unlike in the developed markets, the book building process is still dependent on good
faith. The numbers of investors invited to apply are limited and it is the peer pressure and
reputation that ensures that there are no defaults.

• There is a lack of transparency at critical steps of the book building process and the absence of
strong regulation.

• Since the price fixed for the public portion as well as for the placement portion is the same,
issues may not succeed in inviting the desired public response.

• It has not proved to be a good price discovery mechanism.

• Issuers may have to sell cheap due to the collective bargaining power of institutions.

• High institutionalized holding may affect the stock’s liquidity and make it volatile as well in case
of bulk offloading.

• The role of retail investors in determining the pricing decreases. Moreover, retail investors may
not have the information to judge the issue and thus, may not be able to arrive at the correct
pricing.

• The limits fixed are fungible and can be altered depending upon market conditions.

Book Building Process Steps:

• The company (issuer) first of all appoints one or more merchant banker(s) as book runner(s).
The lead merchant banker shall act as the lead book runner and shall be primarily responsible for
the book building. There shall be only one lead book runner and if the issuer appoints more than
one, they shall either be co-book runners or syndicate members.

• The lead book runner and co-book runners shall compulsorily underwrite the issue and the
syndicate members shall sub-underwrite with the lead book runner/co-book runners. The details of
final underwriting arrangement indicating actual numbers of shares underwritten shall be disclosed
and printed in the prospectus before it is registered with the Registrar of Companies.

• The issuer shall enter into an agreement with one or more of the stock exchange(s) which have
the system of on-line offer of securities. The agreement shall specify inter-alia, the rights, duties,
responsibilities, and obligations of the issuer and recognized stock exchange(s) inter se.

• The book runner(s)/syndicate members shall appoint stock brokers who are members of the
recognized stock exchange and registered with the SEBI, for the purpose of accepting bids,
applications and placing orders with the issuer and ensure that the stock brokers so appointed are
financially capable of honouring their commitments arising out of defaults of their clients/
investors, if any.

• The lead merchant banker shall file with the SEBI a draft red herring prospectus containing all
the disclosures including total issue size, if applicable, except the price and the number of specified
securities to be offered.

• The basis for issue price, floor price, or price band, as the case may be, shall be disclosed and
justified by the issuer in consultation with the lead merchant banker.
• A public issue shall be kept open for at least three working days but not more than ten working
days, including the days for which the issue is kept open in case of revision in price band.

• The issuer shall, after registering the red herring prospectus (in case of a book-built issue) or
prospectus (in case of fixed price issue) with the Registrar of Companies, make a pre-issue
advertisement in one English national daily newspaper with wide circulation, Hindi national daily
newspaper with wide circulation, and one regional language newspaper with wide circulation at
the place where the registered office of the issuer is situated.

Bidding Process
1. Bidding process shall be only through an electronically linked transparent bidding facility
provided by recognized stock exchange(s).
2. The lead book runner shall ensure the availability of adequate infrastructure with syndicate
members for data entry of the bids in a timely manner.
3. The syndicate members shall be present at the bidding centres so that at least one electronically
linked computer terminal at all the bidding centres is available for the purpose of bidding.
4. During the period the issue is open to the public for bidding, the applicants may approach the
stock brokers of the stock exchange/s through which the securities are offered under on-line
system or Self Certified Syndicate Banks, as the case may be, to place an order for bidding for the
specified securities.
5. Every stock broker shall accept orders from all clients/investors who place orders through him
and every Self Certified Syndicate Bank shall accept Applications Supported by Blocked Amount from
ASBA investors.
6. Applicants who are Qualified Institutional Buyers (QIB) shall place their bids only through the
stock brokers who shall have the right to vet the bids.
7. The bidding terminals shall contain an online graphical display of demand and bid prices
updated at periodic intervals, not exceeding 30 minutes.
8. At the end of each day of the bidding period, the demand including allocation made to anchor
investors shall be shown graphically on the bidding terminals of syndicate members and websites of
recognized stock exchanges offering electronically linked transparent bidding facility, for
information of public.
9. The investors (except ASBA investors) may revise their bids.
10. The qualified institutional buyers shall not withdraw their bids after closure of bidding.
11. The identity of qualified institutional buyers making the bidding shall not be made public.
12. The stock exchanges shall continue to display on their website, the data pertaining to book
built issues in a uniform format, inter alia giving category-wise details of bids received, for a period
of at least three days after closure of bids. The margin collected from categories other than
qualified institutional buyers shall be uniform across the book runner(s)/syndicate members/Self-
certified Syndicate Banks for each such investor category.

Reverse Book Building

Reverse book building is a process wherein the shareholders are asked to bid for the price at which
they are willing to offer their shares. It is just similar to reverse auctions. This process helps in
discovering the exit price and is used by companies who want to buy-back shares from the
shareholders. Reverse book building is a price-discovery mechanism for companies who want to
buy-back shares from the shareholders.
The process for reverse book building is as follows:

• The acquiring company secures board and share-holders approval to delist the shares.

• The acquirer shall appoint a designated BRLM to execute the process.

• The BRLM decides the floor price and the dates for inviting bids from the shareholders.

• The acquiring company shall, upon receipt of in principle approval for delisting from the
recognized stock exchange, make a public announcement in at least one English national daily
with wide circulation, one Hindi national daily with wide circulation, and one regional language
newspaper of the region where the concerned recognized stock exchange is located.

• Before making the public announcement, the acquiring company shall open an escrow account
and deposit therein the total estimated amount of consideration calculated on the basis of floor
price and number of Equity shares outstanding with public shareholders.

Fixed price issue method

In a fixed price issue, the offer price is fixed (e.g., Rs 75 per share) that is decided in advance before
the IPO opens for the subscription. The SME companies prefer a fixed price issue over the book-
building method due to the smaller issue size.
Fixed price issue features- A fixed-price issue must apply the price set by the issuing company.
• The fixed-price IPO prospectus contains all the details about the IPO price and the basis for
setting it • The issuer must register the fixed-price IPO prospectus with the Registrar of Companies
before the issue is opened for subscription. • At least 50% of the net offering of securities should be
made available to retail investors. • A fixed-price offering should be held open for 3-10 business
days.
Fixed price IPO process- The fixed-price IPO method is comparatively simple compared to the book-
building method because there is no price discovery. The following are the steps for a fixed price
issue:
1. The lead manager is appointed by the issuer company. They jointly evaluate various factors such
as the company's financial position, growth prospects, assets and liabilities, and decide on the size of
the issue and the IPO price.
2. The bidding process takes place as soon as the IPO is opened for subscription.
3. Investors submit their bids at the set price.
4. The lead manager assesses the demand for the issue at the close of the bidding period and
accordingly works with the company's registrar (RoC) for the allotment.
5. The Registrar completes the allotment, credits the shares to the de-mat account and initiates
the refund, if any.
 IPO Process
A company must follow the IPO procedures set by the exchange(s) on which the company wishes to
list its shares after the IPO. The IPO procedure in India is as follows:

1. Merchant Banker (Lead Manager) Appointment- The company appoints a Merchant Banker
(Lead Manager) to assist the issuer throughout the IPO process, starting from due diligence
to post-listing support. They orchestrate the entire IPO process and coordinate with all
parties involved in the IPO from start to end. A merchant banker is a SEBI-registered
financial institution that assists companies with financial solutions, such as raising funds,
providing advisory services, acting as an underwriter, and more.
2. DRHP Approval from SEBI- The DRHP document is submitted to SEBI for review. This
process takes between 2 to 4 months. SEBI reviews the information in the DRHP and issues
the necessary approvals.
3. IPO Application to Exchanges- Merchant bankers then submit the IPO application and DRHP
document to the stock exchanges for approval. The exchange gives the company in
principle approval after verifying the IPO application.
4. Price determination- The issuer and the merchant bank determine the IPO pricing method:
fixed-price issue or book-building issue. In a fixed-price offering, the price at which shares
are sold and allotted in the fixed-price offering is announced to investors prior to the IPO. In
Book Building Issue, the issuer decides a price range (e.g., Rs 80 to 90) or a 20% price range
within which investors can bid for the shares. The final price is determined after the bidding
process is completed.
5. RHP Submission- A Red Herring Prospectus (RHP) is prepared and filed with the
Exchange(s). The RHP is an updated version of the DRHP document. It contains current
information about the company, i.e., the most recent financial data. It also contains
additional information such as the IPO timeline and pricing details to help investors make an
informed decision.
6. Road Show- Merchant bankers, along with the PR (agency), agency begin promoting the IPO
to the public. This process is called an IPO roadshow. They arrange investor meetings with
 the company's promoters in different cities. The meetings are also scheduled with
journalists, analysts and other media representatives.
7. IPO Open for Anchor Investor- The IPO will be open to anchor investors (if any). An anchor
investor is a qualified institutional buyer (QIB) who applies for an IPO under the anchor
investor section and submits a bid for an amount of at least Rs 10 crore. The company
allots the shares to the anchor investor one day before the issue opens to the public.
8. IPO Open for Public- The IPO is opened to the public to place bids for the shares offered in
the IPO. An offering may be open to the public for a minimum of three days and up to ten
days. While the offering is open, investors and retail investors place bids for the available
shares.
9. IPO Shares Allotment- Once the public offering is closed, the application data is forwarded
by the exchanges to the IPO registrar, which handles the allotment.
10. IPO Listing Date Announcement- The company submits the listing documents to the stock
exchange. The company then sends a credit confirmation from the depository, i.e., the
shares are transferred to the allottee's account, and the stock exchange issues a listing
circular to the market the next day.
11. IPO Shares Listing- Trading of IPO shares is set up on the stock exchanges in two steps: 1.
Pre-open Session The pre-opening session is a pricing mechanism for newly listed shares. It
is a special trading session for IPOs on the first day of their listing. 2. Commencement of
trading Normal trading begins at 10 a.m. on the day of listing. At this time, anyone can buy
or sell the shares of the IPO on the market.
12. Post-Listing Documents- After listing, the issuer must submit documents to the stock
exchange, including invitations to board meetings, annual reports, shareholding samples,
audit reports, corporate governance reports and audit reports.

Green-Shoe Option: The SEBI permitted the green-shoe option in book building issues
when it amended the guidelines in August 2003. Green-shoe option is an option of over-allotting
shares by an issuer to the underwriter in a public offering to provide post-listing price stability to
an initial public offering. This option is to the extent of 15 per cent of the issue size. It is also
referred to as an over-allotment option. The first-ever exercise of a green-shoe option in the course
of a public issue was carried out by the ICICI Bank.
Reasons for Overallotment / Green shoe-
Demand for the company’s shares- The underwriters of a company’s shares may exercise the green
shoe option to benefit from the demand for the shares of a company. This occurs mostly when a
well-known company issues an IPO because many more investors are likely to be interested in
investing in well-known companies, as opposed to lesser-known companies.

Price stabilization-Overallotment can also be used as a price-stabilization strategy when there is an

increasing or decreasing demand for a company’s shares.

Price exceeds the offer price-Increasing demand for a company’s shares can raise the share prices to
a price above the offer price. In such a scenario, the underwriters cannot buy back the shares at the
current market price since doing so would result in a loss. At this point, the underwriters can
exercise their green shoe option to buy additional shares at the original offer price without incurring
a loss. The difference between the offer price and the current market price helps to compensate for
any loss incurred when the shares were trading below the offer price.

Process of exercising Green Shoe Option

 Methods of Raising Funds

Venture Capital: Venture capital (VC) is a form of private equity and a type of financing that
investors provide to startup companies and small businesses that are believed to have long-term
growth potential. Venture capitalists can provide backing through capital financing, technological
expertise, and/or managerial experience.VC can be provided at different stages of their evolution,
although it often involves early and seed round funding. Venture Capital funds manage pooled
investments in high-growth opportunities in startups and other early-stage firms and are typically
only open to accredited investors. Venture capital can be broadly divided according to the growth
stage of the company receiving the investment. The stages of VC investment are:

 Pre-Seed: This is the earliest stage of business development when the founders try to turn
an idea into a concrete business plan. They may enrol in a business accelerator to secure
early funding and mentorship.
 Seed Funding: This is the point where a new business seeks to launch its first product. Since
there are no revenue streams yet, the company will need VCs to fund all of its operations.
 Early-Stage Funding: Once a business has developed a product, it will need additional
capital to ramp up production and sales before it can become self-funding. The business
will then need one or more funding rounds, typically denoted incrementally as Series A,
Series B, etc.

The first step for any business looking for venture capital is to submit a business plan, either to a
venture capital firm or to an angel investor. If interested in the proposal, the firm or the investor
must then perform due diligence, which includes a thorough investigation of the
company's business model, products, management, and operating history, among other things.
Once due diligence has been completed, the firm or the investor will pledge an investment of
capital in exchange for equity in the company. These funds may be provided all at once, but more
typically the capital is provided in rounds. The firm or investor then takes an active role in the
funded company, advising and monitoring its progress before releasing additional funds. The
investor exits the company after a period of time, typically four to six years after the initial
investment, by initiating a merger, acquisition, or initial public offering (IPO) .

Private Equity: Private equity (PE) is ownership or interest in an entity that is not publicly listed
or traded. A source of investment capital, private equity comes from high-net-worth individuals
(HNWI) and firms that purchase stakes in private companies or acquire control of public
companies with plans to take them private and delist them from stock exchanges. The private
equity industry is comprised of institutional investors such as pension funds, and large PE firms
funded by accredited investors. Most PE firms are open to accredited investors or those who are
deemed high-net-worth, and successful PE managers can earn over a million dollars a year.
Leveraged buyouts (LBOs) and venture capital (VC) investments are two key PE investment sub-
fields.

Public issues: Public Issues or Public Offering refers to the issue of shares or convertible securities
in the primary market by the promoters of a company to attract new investors for a subscription.
IPO- Initial Public Offering is an offering of either a fresh issue of securities or an offer for sale of
existing securities, or both by an unlisted company for the first time to the public. IPO enables
listing and trading of the issuer’s securities.
FPO- A follow-on public offering (FPO) is an offering of either a fresh issue of securities or an offer
for sale to the public by an already listed company through an offer document. Investors
participating in these offerings take informed decisions based on its track record and performance.
OFS: An OFS is different from IPO and FPO because Offer for Sale does not raise any fresh capital. In
this case, an existing shareholder dilutes their stakes through the primary market. An OFS solely
ends up in a transfer of ownership from one shareowner to a different one and doesn't increase
the share capital of the corporate. Some corporations mix their initial public offering (IPO) with OFS
to provide a partial exit to promoters and non-public equity (PE) investors.

Differences between the three:

1. Rules and Regulations - Before issuing a notice for OFS, promoters need to inform the stock
exchange platforms two days before announcing it. An Initial Public Offer (IPO) is valid for 3-
10 days to purchase shares. A Follow-on Public Offer (FPO) bidding goes for 3 - 5 days for all
the listed companies.

2. Procedurally different- Mostly small companies utilize the use of IPOs much more openly and
frequently as compared to well-renowned companies. FPO and OFS are utilized by companies
that are already listed on stock exchange platforms.
3. Cost- The cost incurred by the promoter and investor within the company throughout an OFS
resembles a token economy. The capitalist, during this case, incurs solely the regular dealings
charges. An Initial Public Offering (IPO) is preceded by a lot of promotional material activities to
induce the word out. The more obscure the corporate is, the larger tough it'll face and, hence,
are going to be needed to pay a great deal quite before at this stage. Whereas whenever a
company issues an FPO and sets a base price, the investors need to fulfil and meet this base
price to buy the shares which the company has issued an FPO for.
4. Allotments of the Shares- Before the commencement of the OFS, the promoters within a
company discuss a fair price for the shares that becomes the threshold mark (or the baseline)
mark that needs to be paid. This price or the baseline mark is always less than the market price.
 In an initial public offer (IPO), the value band (the base price) here is set by the investment bank
before the initial offering.
Conclusion To sum up everything, an IPO is a method through which a private company makes
its shares public to the investors through a stock exchange platform to raise fresh capital. An FPO
is used when an already listed company (that means a company that is listed on the stock
exchange platform) wants to expand its capital and diversify their shares. And lastly, an OFS is a
method through which a promoter wants to reduce their holding shares (that means this person
requires money, so he/she wants to reduce his stakes within the company).

Rights Issue: Rights issue is the issue of new shares in which existing shareholders are given pre-
emptive rights to subscribe to the new issue on a pro-rata basis. The right is given in the form of an
offer to existing shareholders to subscribe to a proportionate number of fresh, extra shares at a
pre-determined price. Companies offer shares on a rights basis either to expand, diversify,
restructure their balance sheet or raise the promoter stake. Promoters offer rights issues at
attractive price often at a discount to the market price due to a variety of reasons. Firstly, they want
to get their issues fully subscribed to. Secondly, to reward their shareholders. Thirdly, it is possible
that the market price does not reflect a stock’s true worth or that it is overpriced, prompting
promoters to keep the offer price low. Fourthly, to hike their stake in their companies, thus, avoiding
the preferential allotment route which is subject to lot of restrictions. Moreover, funds can be raised
by a company through this route without diluting the stakes of both its existing shareholders and
promoters.

Private Placement: Private placement refers to the direct sale of newly issued securities by the
issuer to a small number of investors through merchant bankers. The number of investors can go
only up to 49. The major issuers of privately placed securities are financial institutions, banks, and
central- and state-level undertakings. The subscribers are banks, provident funds, mutual funds,
and high net worth individuals. In India, privately placed securities are admitted for trading, but are
not listed. Banks do not trade these securities and hold them till maturity. Hence, there is no
secondary market for such securities.
Preferential Issue: Preferential issue is an issue of specified securities by a listed issuer to any select
person or group of persons on a private placement basis and does not include an offer of specified
securities made through a public issue, rights issue, bonus issue, employee stock option scheme,
employee stock purchase scheme or qualified institutions placement or an issue of sweat equity
shares or depository receipts issued in a country outside India or foreign securities.
Preference for Preferential Issues- • To enhance holding of promoters. • Can be pledged with
banks. • Easier Norms. • Low cost. • Management control to institutional investors.
Qualified Institutions Placement: Qualified Institutions Placement is a private placement of equity
shares or convertible securities by a listed company to Qualified Institutions Buyers. Through a QIP
issue, funds can be raised from foreign as well as domestic institutional investors without getting
listed on a foreign exchange, which is a lengthy and cumbersome affair. A QIP issue can be offered
to a wider set of investors including Indian mutual funds, banks and insurance companies, as well
as, foreign institutional investors. Securities which can be issued through QIP are equity shares, or
any securities other than warrants, which are convertible into or exchangeable with equity shares.

Disinvestment of PSUs

The disinvestment of public sector undertakings means the sale of public sector equity leading to a
dilution of the government’s stake. In India, the term ‘disinvestment’ is used rather than
‘privatization.’ Privatization implies a change in ownership resulting in a change of management
while disinvestment may or may not lead to a change of management. A well-designed
disinvestment programme helps in the long-term growth process through increased foreign
investment, technology transfer and the subsequent enhancements in productivity. The process of
disinvestment was initiated by the government of India during 1991–92 as part of a package of PSU
reform.
Objectives:
(a) Promote people’s ownership of Central Public Sector Enterprises (CPSEs) to share in their
prosperity through disinvestment.
(b) Enable efficient management of public investment in CPSEs for accelerating economic
development and augmenting Government’s resources for higher expenditure.
(c) Listing of CPSEs on stock exchanges to facilitate development and deepening of capital market
and spread of equity culture.
(d) Raising budgetary resources for the Government.
Sell-off Methods: The government adopted various methods to sell-off shares in PSUs which are:
• Bidding: When the government invites bids for a portion of its stake in a public sector
undertaking, it is essentially conducting an auction. The government sets a price below which it is
unwilling to sell its stake. This price is referred to as the reserve price. However, this strategy instead
of helping the government to divest shares in loss-making enterprises at reasonable prices, resulted
in disinvestment at very low prices. The practice of bundling shares was abandoned thereafter. The
government, in subsequent years, sold shares for each company separately.
• Sale of Shares in the Market: The sale of shares through public issue not only brings down the
government’s equity holding in the company but there is also the advantage that the money so
realized can be used for expansions. The offer of sale of shares in the primary market increases
public ownership in these PSUs through retail participation resulting in better price discovery,
increasing the floating stock of the company and deepening the capital market. The IPO route is
suitable during strong secondary market conditions. Moreover, retail investors get an opportunity to
subscribe to the offer and help develop capital markets. The wealth created by PSUs through public
resources can be shared equitably with the public at large.
• Global Depository Receipts (GDR) Route: The government decided to tap the overseas market
for disinvestment due to sluggish capital market conditions. However, the disinvestment through
offloading of minority shares through domestic, ADR, or GDR markets was not productive.
• Cross-holdings: After widely missing the targets on the PSU disinvestment front, the government
adopted an innovative route to meet the disinvestment target in 1998–99. Cash-rich oil companies
were asked to subscribe to each other’s shares. This swapping of shares within oil sector PSUs took
place just before the close of 1998–99. This cross-holding of Indian Oil Corporation (IOC) buying 10
per cent government stake in ONGC and 5 per cent stake in GAIL, ONGC buying 10 per cent in IOC
and 5 per cent in GAIL, and GAIL buying 2.5 per cent stake in ONGC helped the government gather
`4,867 crore at the end of the year.
• Strategic Sale: Strategic sale is sale of equity blocks of a PSU to a single buyer (private investor)
resulting in change of ownership and management. A strategic sale is indicative of the government’s
sincerity about disinvestment. It also enables a higher valuation since it takes into account intrinsic
valuation, not just the prevailing market price. Under strategic sale, the government transfers part of
its holding to a strategic partner who would control the operation and financial policy of the
enterprise. The transfer of ownership is subject to certain restrictions imposed through covenants.
However, strategic sale may inhibit competition and limit the ability of the government to realise the
full value of the assets.

Raising of funds from International Markets

ADR: ADRs are negotiable instruments, denominated in dollars, and issued by the US Depository
Bank. cover a wider market. ADRs are accessible to only good companies with high transparency
and good governance practices which also benefit the local investor; this gets reflected in a higher
P/E ratio. An ADR issue creates a currency for issue of dollar-denominated stock option to
employees, thereby enabling the company to hire and retain the best human resources.

GDR:

Euro Issues: https://theintactone.com/2022/11/23/gdrs-and-adrs-euro-issues/

FCCB: FCCBs are bonds issued by Indian companies and subscribed to by a non-resident in foreign
currency. They carry a fixed interest or coupon rate and are convertible into a certain number of
ordinary shares at a preferred price. They are convertible into ordinary shares of the issuing
company either in whole, or in part, on the basis of any equity-related warrants attached to the debt
instruments. These bonds are listed and traded abroad. The minimum maturity period for FCCBs is
five years but there is no restriction on the time period for converting the FCCBs into shares. The
interest rate in FCCBs is much lower than bond issuances or loan syndications. The equity
component in a FCCB is an attractive feature for investors. Higher the premium for conversion of
equity, higher will be the yield on the FCCB. FCCBs straddle both the worlds of equity and debt.
FCCBs are less dilutive than equity and are cheaper than debt.

Masala Bonds: Masala Bonds are rupee-denominated bonds. It is a debt instrument issued by an
Indian entity in foreign markets to raise money, in Indian currency, instead of dollars or local
denomination. major objectives of Masala Bonds are to fund infrastructure projects, ignite internal
growth (via borrowings) and internationalise the Indian rupee. the major characteristic features of
Masala Bond:
  Investors

o These bonds can only be issued to a resident of such a country which is a member
of the Financial Action Task Force (FATF)

o Also, the security market regulator of the country must be a member of the
International Organisation of Securities Commission

o These bonds can also be subscribed by regional and multilateral financial

institutions where India is a member country.

 Maturity Period

o The minimum original maturity period for bonds raised up to 50 million US Dollars
equivalent in INR per financial year should be 3 years

o The minimum original maturity period for bonds raised above 50 million US Dollars
equivalent in INR per financial year should be 5 years

 Eligibility

o Investors from outside of India who are interested to invest in Indian assets are
eligible to invest in Masala bonds

o HDFC, NTPC, India bulls Housing Finance, are a few Indian entities who have raised
funds using Masala Bonds

Benefits of Masala Bonds

 Masala bonds have opened up an investment route for global investors who have no access
to the domestic market through the Foreign Institutional Investor (FII) or Foreign Portfolio
Investment (FPI) route
 The documentation work is also less as the registration does not have to be made as FPI in
India
 For borrowers, it is beneficial as the cost of funds is cheaper and is issued below 7% interest
rate
 The companies issuing these bonds do not have to worry about the depreciation of rupee
 Since, the interest rates in the US dollar, pound sterling, euro, and yen, are at very low
levels, it benefits Indian companies to raise funds via issuing Masala Bonds
 It is an easy medium to internationalise Indian rupee by making it familiar to the
international investors
 It will also boost the development of domestic bond markets due to competition with
overseas market

Limitations of Masala Bond

 RBI has been making periodical rate cuts in Masala Bonds which has made it a bit less
appealing to the investors
 The money raised through these bonds cannot be used everywhere. There are fixed fields
where the money can be invested
 As per Moody’s, the sustainability of financing via Masala Bonds is a challenge as investors
are expected to be cautious in taking on currency risks from emerging markets