Professional Documents
Culture Documents
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What are Financial Markets ?
Market
Financial Market
Low
transaction
cost
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Primary and Secondary Market
Primary Market
Sale of new debt or equity securities which have come to life for the first time
(IPO, FPO, Rights, Private Placements)
Primary investors buy share directly from the company
Underwriter (usually the investment banker) provides facility of (in IPO, FPO):
• Origination
• Book Building
• Risk bearing
Private Placements
• Sale directly to the investors with help of an investment bank
• Lower issuance cost for the firm
• Lower issue price since there is no active secondary market for
such privately allotted securities
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Primary and Secondary Market
Secondary Market
Trading of securities previously issued are now exchanging hands.
Investors who have already invested during IPO can make an exit by selling their stake to other investors.
Issuer pays the exchange for Initial listing fee and Annual listing fees
Type of Claim/Security
Long-term markets consisting of securities having maturities greater than one year.
Include Bonds, Common Stock, Preferred Stock, and Convertible Securities, forex instruments,
derivatives.
Mortgage banks.
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Capital Markets and Money Markets
Money Markets
Characteristics :
• Liquid & short maturities, low expected return, low degree of risk.
• Homogeneous instruments.
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Flow of funds in financial markets ?
• Greater flow of funds increases the accommodation of individual’s preference for spending &
saving.
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Financial Intermediaries
Different forms of
intermediaries/Participants
Depository Institution
Arbitrageurs
Clearing House and Custodians – Quasi – regulatory in nature, reduce a lot of risk in the
investment process.
Private Placement
Right issue
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Sources and Uses of Funds
Three general sources of corporate funds
• Internally generated Cash
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Announcement of New Equity & the Value of the Firm
The market value of existing equity generally drops on the announcement of a new issue of common
stock
Reasons include
Managerial Information
• Since the managers are the insiders, perhaps they are selling new stock because they think it is
overpriced
Debt Capacity
• If the market infers that the managers are issuing new equity to reduce their debt-to-equity ratio
due to the specter of financial distress the stock price will fall
Falling Earnings
Contents
1. About Financial Market
Financial systems & structures
Role of financial & securities markets
Classification of financial market
Flow of funds in financial markets?
Financial Intermediaries
Methods of issuing capital in primary market
Sources and uses of funds
Announce of new equity & the value of the firm
2. All about IPO
Criteria & guidelines by SEBI for IPO
Factors determining price of IPO
Intermediary structure
IPO process & timeline
3. Source of Capital
Fund Sourcing
Capital Structure
Venture Capital investing
Crowdfunding
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IPO Process
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Criteria & guidelines by SEBI for IPO.
Listing with just 10 % holding with the public provided the minimum offer Rs 100 crore,
Offer should not exceed five times net worth as per latest audited accounts.
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Criteria & guidelines by SEBI for IPO.
Minimum promotors contribution (i.e. 20% of post issue capital) is locked in for 3years
Pre issue capital held by other than promotors must be locked in for 1 year.
Issuer may announce a price band 2 working days before bid opening.
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Factors determining price of IPO.
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Intermediary structure
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IPO timeline
Activity 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23
Preparation phase
2 weeks
Due diligence
4-5 weeks
SEBI Observation
4-8 weeks
Issue Period
3 days
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IPO timeline
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Contents
1. About Financial Market
Financial systems & structures
Role of financial & securities markets
Classification of financial market
Flow of funds in financial markets?
Financial Intermediaries
Methods of issuing capital in primary market
Sources and uses of funds
Announce of new equity & the value of the firm
2. All about IPO
Criteria & guidelines by SEBI for IPO
Factors determining price of IPO
Intermediary structure
IPO process & timeline
3. Source of Capital
Fund Sourcing
Capital Structure
Venture Capital investing
Crowdfunding
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Where do business get money from ?
Sources of capital
Entrepreneur
Angel investors
Venture capital
Friends & family
Commercial banks
Quasi Government agencies
Public capital markets
operations
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Capital Structure
Capital structure decision affects financial risk and, hence, value of the company.
The capital structure theory helps us understand the factors most important in the
relationship between capital structure and the value of the company.
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What is Venture capital ?
Financing that investors provide to start-up companies and small businesses
Venture capital generally comes from well-off investors, investment banks and any other
financial institutions.
Investors usually get equity in the company, and thus a say in company decisions.
venture capital focus on emerging companies seeking substantial funds for the first time
Private equity tends to fund larger, established companies seeking an equity infusion or
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Venture capital Process
Angel investors
1. Business Plan
Venture capital Firm
Company, products
2. Firm do the due diligence of
Business model, management
Pledge’s Capital
3. . Company Firm
Equity
5. Exits at 4- 6years
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Venture capital investment satges
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Venture Capital
Stages of Financing
Seed-Money Stage:
Start-Up:
• Funds are likely to pay for marketing and product refinement
First-Round Financing:
• Additional money to begin sales and manufacturing
• Second-Round Financing:
• For a firm that is currently selling its product but still losing money
• Funds earmarked for working capital
• Third-Round Financing:
• For firm that is at least breaking even and contemplating expansion
• Fourth-Round Financing:
• For a firm that is likely to go public within six months; a.k.a. bridge financing
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Crowd funding
Meaning: raising many small amounts of money from a large number of people.
Crowdsourcing refers to the practice of soliciting services, ideas or content from a large
group of people online.
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Reward based crowd funding Equity based crowd funding
Provides with working capital in exchange for
Set funding
goals a piece of your company
Take in your
Pros:
money and get Devise a reward
ready to deliver strategy • It is smart money
Cons:
the rewards • There are potentially
• Increased
larger sums of
transparency
How it works? fundraising
• Expensive
• Easier investor
Post your fundraising
relations
campaign to a
Get social
crowdfunding
platform
Pros: Cons:
• Access to cheap • The pressure is on
money • Lot of work,
• Pre-funding your potentially little
next product payoff
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