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BB0022: Capital and Money Market Assignment Set I Note: Each question carries 10 Marks.

. Answer all the questions. Q.1. What are the methods of raising capital using the new issues market ? Within private placement what are the new methods like QIBs etc.

Methods used for raising capital i) Public Issue by Prospectus: Companies Act defines prospectus as 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. The prospectus is the basis on which the prospective investors form their opinion and take decisions as to the worth and prospects of the company. Legally no public limited company can raise capital from the public without issuing prospectus. ii) Offer for Sale: Under this method, a third party having taken over a large block of companys securities, offers these publicly at a fixed price. Under this method, the company does not receive any new amount nor is any new capital asset created. Any premium charged to the public goes to the offerers than to the company. iii) Private Placing: When capital is provided by the finance companies, not in the form of an ordinary loan but by the purchase of an issue of debentures or shares can be called as private placing. iv) Rights Issue: Under this method new shares are offered to the existing shareholders. The rights issue is an offer with a pre-emption right to the existing shareholders of the company to further contribute to its share capital. New shares are offered to the existing shareholders in certain proportion to their existing share ownership. However the rights themselves are transferable and saleable in the market. Under the companies Act, where a company increases its subscribed capital by the issue of new shares either after two years of its formation or after one year of the first issue of shares, whichever is earlier, these have to be first offered to the existing shareholders with a right to reserve them in favour of a nominee.

v) Book Building: Book building helps the private placement of big premium issues by
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Q.2. What are the reasons for buyback of shares? Which companies have done buy back recently. BUY BACK OF SHARES Buy back of shares means re-purchases by a company of its own shares. The company may do so either for reducing share capital or for treasury operations. The reduction in share capital implies extinguishing of shares, which have been brought back by the company. Under the treasury operations, the acquired stock can be issued at a later date or for employees option.

Reasons for buyback of shares i) To return surplus cash to the investors: Eventhough the share repurchases and dividends are close substitutes in many respects, this share repurchases are not expected to be replaced on a regular basis. The share buy backs have a clear advantage for the company over cash dividends. Cash dividend attracts dividend tax, while the investment escape a tax liability. Thus the companies prefer buy back in order to minimise their tax out go. ii) To increase the share value: The process of buying back and extinguishing the shares by a company brings about a decrease in equity and consequently, leads to an increase in the earnings per share (EPS) of the company. It is presumed that the market price of the scrip will rise proportionately to maintain the price to the earning (P/E) ratio at the pre-buy back level. A share buy back may also be announced to support share price during periods of temporary weakness. iii) To achieve or maintain a target capital structure: The buy backs provide flexibility to corporate entities to alter their capital structure and financial position. Buy-backs aid a company in achieving an optimum debt equity ratio, especially when its equity is proportionately large. iv) To prevent hostile take over bids: The buy back will lead to a decline in liquidity and increase in share prices, which will make a take over operation difficult. The impact of buyback in eliminating surplus cash makes companies less succeptible to hostile take overs. A company is allowed to buy back subject to following conditions. For completed assignment visit Q.3. Select a company and identify the reasons for price fluctuations in the past one year. CAUSES OF PRICE FLUCTUATIONS

The prices of variable yield securities, say equity shares, in the stock exchange fluctuate frequently and sometimes widely. No direct explanation can be given for the rise and fall in the prices of securities. Many factors combine together to cause such changes, but quite a few are only remotely related to the process of the valuation of shares. In general, the fluctuations in the prices of scrips may be ascribed to the following factors: i) Demand and Supply: The law of demand and supply operates rigidly in the stock exchange. The demand and supply depends on a variety of factors, all of which are related either to the actual yield from them or the general expectation about the yield. If the actual yield is below the general expectations, there may be more sellers than buyers of the shares as such the market value of the shares will fall. On the other hand the market value of the shares may rise when actual yield is better than general expectations. ii) Bank Rate: The bank rate is the rate percent at which the central bank of a country discounts approved bills of exchange. This rate governs the rate of interest charged by commercial banks from their clients on loans and overdrafts procured by them. When the bank rate is low, the commercial banks provide credit at lower rate of interest, which in turn induces people to borrow money from banks to speculate in securities. Because the possible gains due to price changes are greater than interest paid to the bank. With more money, more people buy more stocks and shares, the price of securities will tend to rise. Similarly a rise in the bank rate discourages people from borrowing. Less demand for securities leads to fall in the prices. iii) Speculative Pressure: The activities of bulls and bears are both the cause and result of fluctuations in security prices. The bull run results in upward movement of prices and the bear pressure will lower the security prices. When the bulls liquidate or unload their holdings, they lower the prices. Large scale buying by the bears to meet their short sales will force the security prices upwards. iv) Actions of underwriters and other Financial Institutions: Large scale buying of a

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