Bachelor of Business

Administration

A6.5A Investment Banking

Study Material

KCES’s Institute of Management and Research,

Jalgaon
Chapter 1: Stock Market History in World and in India

1.1Role & Importance of Stock Market in Economy

The stock market plays a crucial role in the economy. It is a platform where publicly traded
companies can raise capital by issuing shares to the public. These shares represent ownership
in the company and give shareholders the right to participate in the company's profits through
dividends and capital gains.

Here are some of the roles and importance of the stock market in the economy:

1 Capital Formation: The stock market is a vital source of capital for companies seeking to
expand their operations, finance new projects, or pay off debt. By issuing shares, companies
can raise large sums of money from a broad pool of investors.
2 Wealth Creation: The stock market provides an opportunity for investors to invest in stocks
and earn a return on their investment. When companies do well and their stock price rises,
shareholders benefit from capital appreciation, creating wealth and boosting consumer
confidence.
3 Economic Indicators: The stock market can serve as an economic indicator, reflecting
investor sentiment about the economy's health. When stock prices rise, it generally
indicates that investors are optimistic about the economy's future, while a decline in stock
prices may signal economic weakness.
4 Liquidity: The stock market provides liquidity to investors, allowing them to buy and sell
stocks quickly and easily. This liquidity helps ensure that the market remains efficient and
transparent.
5 Job Creation: The stock market also plays a crucial role in job creation. Companies that are
able to raise capital through the stock market can use that capital to expand their operations,
leading to job creation and economic growth.

In summary, the stock market is a vital component of the economy, providing a means for
companies to raise capital, creating wealth for investors, serving as an economic indicator,
providing liquidity, and contributing to job creation.
1.2Stock Markets in World and India

Stock Markets in world :

New York Stock Exchange (NYSE): Located in New York City, the NYSE is the largest stock
exchange in the world by market capitalization. It has been in operation since 1792 and is home
to many of the world's largest and most prestigious companies.

1. Nasdaq: The Nasdaq Stock Market is a global electronic marketplace for buying and
selling securities. It is known for its high-tech and biotech listings and is the second-
largest stock exchange in the world by market capitalization.
2. Tokyo Stock Exchange (TSE): The TSE is the largest stock exchange in Asia and the
third-largest in the world by market capitalization. It is located in Tokyo, Japan, and is
home to many of the country's largest and most well-known companies.
3. Shanghai Stock Exchange (SSE): The SSE is one of the two stock exchanges in China
and is the fourth-largest in the world by market capitalization. It is located in Shanghai
and has been in operation since 1990.
4. Hong Kong Stock Exchange (HKEX): The HKEX is the primary stock exchange in
Hong Kong and is the fifth-largest in the world by market capitalization. It is a major
gateway for foreign investment into China and is known for its strong listings in
financials and real estate.
5. London Stock Exchange (LSE): The LSE is the primary stock exchange in the United
Kingdom and is the sixth-largest in the world by market capitalization. It is located in
London and is known for its strong listings in oil and gas, mining, and financials.
6. Euronext: Euronext is a pan-European stock exchange that operates markets in
Amsterdam, Brussels, Dublin, Lisbon, Oslo, and Paris. It is the largest stock exchange
in Europe by market capitalization and is known for its listings in technology,
healthcare, and energy.

These stock exchanges are famous for their size, reputation, and the companies that are listed
on them. They play a critical role in the global economy by providing a platform for companies
to raise capital and for investors to trade securities.
Stock Markets in India :

The National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE) are the two major
stock exchanges in India. Both the exchanges are headquartered in Mumbai and play a
significant role in the Indian financial markets. Here is a more detailed note on NSE and BSE:

National Stock Exchange (NSE):

The NSE was established in 1992 and is the largest stock exchange in India in terms of market
capitalization. It is a fully automated electronic trading platform that offers trading in equity,
derivatives, currency, and debt instruments. The NSE has over 2,000 companies listed on it,
and it is considered to be one of the most transparent and efficient stock exchanges in the world.
Some of the popular indices of NSE are Nifty 50, Nifty Bank, Nifty IT, etc.

The NSE has several unique features, such as a 15-minute pre-open trading session that allows
traders to place orders before the market opens, and a trading mechanism called "price-time
priority," which ensures that the first order received at a particular price is executed first. The
NSE is also known for introducing new and innovative products, such as exchange-traded
funds (ETFs), index options, and futures.

Bombay Stock Exchange (BSE):

The BSE is the oldest stock exchange in Asia and the first one to be established in India. It was
founded in 1875 and is also located in Mumbai. The BSE offers trading in equities, derivatives,
and debt instruments. The BSE has over 5,000 companies listed on it, and it is the world's 10th
largest stock exchange by market capitalization.

The BSE has several unique features, such as a 15-minute pre-open trading session, a trading
mechanism called "BOLT" (BSE Online Trading System) which is used for the online trading
of equities and a unique index called the BSE Sensex, which is used to measure the
performance of the top 30 companies listed on the BSE.

One of the key differences between NSE and BSE is the way they operate. The NSE is a
completely electronic exchange, while the BSE has both electronic and floor trading systems.
In floor trading, traders physically enter the stock exchange and trade face-to-face, whereas in
electronic trading, all trading is done through computers and the internet.

In conclusion, both NSE and BSE are important stock exchanges in India and play a significant
role in the country's financial markets. They offer various trading options and innovative
products that cater to the needs of different investors. The NSE is known for its advanced
technology, while the BSE is known for its rich history and unique index, the BSE Sensex.

1.2.1 World Stock markets :

History:

The history of the stock market can be traced back to the 17th century, when the first stock
exchange was established in Amsterdam. This exchange, called the Amsterdam Stock
Exchange, was created to trade the shares of the Dutch East India Company. Over time, stock
exchanges were established in other parts of Europe and around the world, and today there are
thousands of exchanges worldwide.

The stock market has become an essential part of the global economy, enabling companies to
raise capital by selling shares to investors, and providing investors with opportunities to buy
and sell these shares. The stock market has also been a key indicator of economic growth and
stability, reflecting the performance of companies and the broader economy.

Here is a more detailed description of some of the world's leading stock exchanges:

New York Stock Exchange (NYSE):

The New York Stock Exchange (NYSE) is the world's largest stock exchange in terms of
market capitalization. It was founded in 1817 and is located in New York City. The NYSE is
known for its iconic trading floor, where traders used to shout and gesture to place orders, but
now it operates electronically. The NYSE lists around 2,800 companies, including many of the
world's largest corporations such as Apple, Coca-Cola, and Goldman Sachs.

The NYSE operates under a hybrid market model, which combines electronic trading with a
human presence on the trading floor. The electronic trading platform, known as NYSE Arca,
allows investors to buy and sell shares directly on the exchange. However, the NYSE also has
a designated market maker (DMM) system, which ensures that there is always a human
presence on the trading floor to provide liquidity and facilitate trading.

One of the key advantages of the NYSE is its reputation as a stable and reliable market. The
exchange has a long history of being at the forefront of innovation in the financial industry,
from the introduction of electronic trading to the development of new financial products such
as exchange-traded funds (ETFs).

NASDAQ:
The NASDAQ is the world's second-largest stock exchange by market capitalization. It was
founded in 1971 and is also located in New York City. The NASDAQ is known for being a
tech-heavy exchange, with many of the world's leading technology companies, such as
Amazon, Facebook, and Microsoft, listed on it. The NASDAQ is also known for its electronic
trading platform, which was one of the first electronic stock trading systems in the world.

The NASDAQ operates exclusively as an electronic market, which means that all trading is
done through its electronic trading platform. This has led to the exchange being known for its
fast and efficient trading system, which allows investors to buy and sell shares quickly and
easily.

One of the key advantages of the NASDAQ is its focus on technology and innovation. The
exchange has been at the forefront of developing new financial products and services, such as
the first electronic options market and the first internet-based trading platform.

London Stock Exchange (LSE):

The London Stock Exchange (LSE) is one of the world's oldest stock exchanges, having been
founded in 1801. It is located in London, England, and is the primary stock exchange in the
United Kingdom. The LSE lists around 3,000 companies, including many international
companies, and is known for its diverse range of financial products, such as shares, bonds, and
derivatives.

The LSE operates under a hybrid model, which combines electronic trading with human
oversight. The electronic trading platform, known as the London Stock Exchange Group's
trading platform (LSEG), allows investors to buy and sell shares directly on the exchange.
However, the LSE also has market makers who are responsible for providing liquidity and
ensuring that trades are executed smoothly.

One of the key advantages of the LSE is its global reach. The exchange has a strong reputation
for international listings, with many companies from around the world choosing to list on the
LSE. The exchange is also known for its diverse range of financial products, which allows
investors to access a wide range of investment opportunities.

Shanghai Stock Exchange (SSE):

The Shanghai Stock Exchange (SSE) is the largest stock exchange in mainland China, with a
total market capitalization of over $6 trillion as of 2021. It was founded in 1990 and is located
in Shanghai. The SSE is known for its focus on domestic companies, and many of China's
largest corporations, such as China Mobile and Industrial and Commercial Bank of China, are
listed on it.

The SSE operates under a hybrid model, which combines electronic trading with human
oversight. The electronic trading platform, known as the SSESTAR Market, allows investors
to buy and sell shares directly on the exchange. However, the SSE also has market makers who
are responsible for providing liquidity and ensuring that trades are executed smoothly.

One of the key advantages of the SSE is its strong ties to the Chinese government. The
exchange is heavily regulated by the government, which helps to ensure stability and
transparency in the market. The Chinese government also provides financial support to the
exchange, which allows it to invest in new technologies and products to stay competitive.

However, the SSE has also faced challenges, particularly in terms of transparency and
corporate governance. In recent years, there have been concerns about fraudulent activity by
some Chinese companies listed on the exchange. In response, the SSE has implemented stricter
listing requirements and increased oversight to improve transparency and prevent fraud.

Despite these challenges, the SSE remains an important player in the global stock market. Its
focus on domestic companies and ties to the Chinese government make it a unique and
influential market, and its continued growth is expected to play a major role in the future of the
global economy.

Hang Seng:

The Hang Seng is the primary stock exchange in Hong Kong, a major financial hub in Asia. It
was founded in 1891 and is located in Hong Kong. The Hang Seng is known for its focus on
Asian companies, particularly those from Hong Kong and China, and is home to many of Asia's
largest corporations.

The Hang Seng operates under a hybrid model, which combines electronic trading with human
oversight. The electronic trading platform, known as the Automatic Order Matching and
Execution System (AMS), allows investors to buy and sell shares directly on the exchange.
However, the Hang Seng also has market makers who are responsible for providing liquidity
and ensuring that trades are executed smoothly.
One of the key advantages of the Hang Seng is its focus on Asian companies. The exchange
has a strong reputation for listing companies from across Asia, particularly those from Hong
Kong and China. This has helped to make it a major player in the global stock market and a
hub for investment in the region.

The Hang Seng has also been at the forefront of innovation in the financial industry. It was one
of the first exchanges in the world to introduce electronic trading, and has continued to invest
in new technologies and products to stay competitive.

However, the Hang Seng has also faced challenges, particularly in recent years with political
unrest in Hong Kong and tensions between Hong Kong and mainland China. These challenges
have led to increased volatility in the market and raised concerns about the long-term stability
of the exchange.

Despite these challenges, the Hang Seng remains an important player in the global stock
market. Its focus on Asian companies and position as a major financial hub in Asia make it a
key market for investors looking to access the region's growing economies.
 Chapter 2: Investment Banking

2.1 Meaning of Investment Banking

Investment banking is a specialized division of banking that helps individuals, companies, and
governments raise capital by underwriting and selling securities. It involves various activities
such as initial public offerings (IPOs), mergers and acquisitions (M&A), and other corporate
finance services. Investment bankers act as intermediaries between companies that need to raise
capital and investors who are looking to invest their money in various financial instruments.

2.2 Role of Investment Banker.

The role of an investment banker can vary depending on the specific job responsibilities and
the needs of their clients. However, some common roles and responsibilities of investment
bankers include:

1 Advising clients: Investment bankers provide strategic and financial advice to companies,
governments, and other organizations. They help clients develop business plans, identify
potential acquisition targets, and evaluate investment opportunities.
2 Underwriting securities: Investment bankers help companies raise capital by underwriting
and selling securities such as stocks, bonds, and other financial instruments.
3 Facilitating mergers and acquisitions: Investment bankers play a critical role in facilitating
mergers and acquisitions by providing advice on structuring the deal, identifying potential
acquisition targets, and negotiating the terms of the transaction.
4 Research and analysis: Investment bankers conduct market research and financial analysis
to identify trends and opportunities in the market. They use this information to provide
insights to clients and make informed investment decisions.
5 Marketing and sales: Investment bankers help promote and sell securities to potential
investors. They use their knowledge of the market and their network of contacts to identify
potential buyers and facilitate the sale of securities.

Overall, the role of an investment banker is to help clients raise capital, manage risk, and make
informed investment decisions. They provide a range of services, including advisory services,
underwriting securities, facilitating mergers and acquisitions, conducting research and analysis,
and marketing and sales. Investment bankers play a critical role in the financial markets and
are essential to the functioning of the global economy.

2.3 Who can be Investment Banker?

To become an investment banker, one typically needs a strong academic background in finance,
accounting, economics, or a related field. While there is no specific degree requirement to
become an investment banker, most investment bankers hold at least a bachelor's degree, and
many have a master's degree in finance or business administration.

In addition to a strong academic background, investment bankers need to have excellent

analytical and quantitative skills, as well as strong communication and interpersonal skills.
They must be able to work well under pressure and meet tight deadlines.

While there are no formal licensing requirements to become an investment banker, some
investment bankers choose to obtain professional certifications such as the Chartered Financial
Analyst (CFA) designation. This can help demonstrate their expertise and credibility to clients
and employers.

Investment bankers typically work for investment banks or other financial institutions, but
some also work for consulting firms or in-house at large corporations. They may work in
various roles, including as analysts, associates, vice presidents, directors, and managing
directors, depending on their level of experience and expertise.

Overall, becoming an investment banker requires a combination of education, skills, and

experience. It is a highly competitive field, and candidates must be willing to work hard and
continuously develop their skills and expertise to succeed.

2.4 Merchant Banker: Meaning

A merchant banker is a financial institution or individual that provides various services such
as corporate finance, capital raising, underwriting, mergers and acquisitions, advisory services,
and fund management to corporations, governments, and high net worth individuals.

Merchant bankers are specialized financial intermediaries who play a key role in facilitating
the smooth functioning of the financial markets. They work closely with companies to help
them raise capital from the market, manage their finances, and grow their businesses.
Merchant bankers also help in identifying investment opportunities and provide strategic
advice to clients on various financial matters. They act as intermediaries between issuers of
securities and investors in the market, helping to price and distribute securities in the primary
and secondary markets. Overall, merchant bankers play a vital role in the efficient functioning
of the financial system.

2.5 Role of Lead Merchant Banker to the Issue

In India, lead merchant bankers play a crucial role in the process of issuing securities in the
primary market. Here are the key roles and responsibilities of lead merchant bankers:

1 Pre-issue Activities: The lead merchant banker (LMB) is responsible for conducting due
diligence and preparing the draft offer documents such as the prospectus, red herring
prospectus, and offer for sale document.
2 Appointment of intermediaries: The LMB appoints other intermediaries such as registrars,
legal advisors, auditors, and underwriters to assist in the issue process.
3 Coordination with SEBI: The LMB is responsible for ensuring that the issue complies with
the guidelines and regulations issued by the Securities and Exchange Board of India
(SEBI).
4 Marketing of the Issue: The LMB is responsible for marketing the issue to potential
investors and ensuring that the issue is fully subscribed.
5 Pricing of the Issue: The LMB plays a key role in determining the price of the securities
being issued. They also decide on the allocation of securities to investors.
6 Post-issue Activities: The LMB is responsible for ensuring that the securities are listed on
the stock exchange and that investors receive their allotted securities.

Overall, the lead merchant banker is the primary point of contact for the company issuing
securities and is responsible for ensuring a smooth and successful issue process.
 Chapter 3: Primary and Secondary Stock Market

3.1 Primary Markets: Meaning

Primary Markets Meaning

The primary market, also known as the new issue market, is a financial market where new securities,
such as stocks, bonds, and other financial instruments, are issued for the first time by companies,
governments or other entities to raise capital.

In the primary market, securities are sold directly to investors through an initial public offering (IPO),
a rights issue or a private placement. The companies or entities issuing the securities receive the funds
from the sale of the securities and use them to finance their operations, expand their business or make
investments.

Investors who participate in the primary market have an opportunity to buy securities at the initial
offering price. The price of the securities is determined by the issuer and the lead underwriter, based on
market demand and other factors such as the company's financial performance, market trends, and other
macroeconomic factors.

Once the securities are sold in the primary market, they can be traded in the secondary market, where
investors can buy and sell the securities among themselves. The primary market is important for
companies and entities to raise capital, while it also provides opportunities for investors to participate
in the growth of these entities.

3.2 Issues of Shares on Stock Markets

When a company decides to issue shares on a stock market, it typically follows a process that includes
the following steps:

Hiring an investment bank: The company hires an investment bank to manage the stock offering
process. The investment bank typically acts as an underwriter and helps the company determine the
appropriate size of the offering and the offering price.

Preparing the offering prospectus: The company prepares a prospectus that provides information about
the company, its business operations, financials, and the securities being offered. The prospectus is
reviewed by regulatory authorities to ensure that it complies with securities laws.

Pricing the offering: The investment bank and the company determine the price at which the shares will
be offered to the public. The offering price is typically based on market demand and other factors such
as the company's financial performance, market trends, and other macroeconomic factors.
Marketing the offering: The investment bank markets the offering to potential investors through
roadshows and other marketing efforts. This is done to generate interest in the offering and to attract
investors.

Going public: The company goes public by listing its shares on a stock exchange. This provides the
company with access to a large pool of potential investors who can buy and sell its shares on the
exchange.

Trading of shares: Once the shares are listed on the exchange, they can be traded among investors. The
price of the shares is determined by market demand and supply, and can fluctuate based on various
factors such as the company's financial performance, news about the industry, and other macroeconomic
factors.

Overall, issuing shares on a stock market is a complex process that requires careful planning,
preparation, and execution. It provides companies with access to capital and a public market for their
shares, while also providing investors with an opportunity to invest.

3.2.1 Initial Public Offer (IPO)

An Initial Public Offering (IPO) is the process through which a private company becomes a publicly-
traded company by selling shares of its stock to the public for the first time.

During an IPO, the company will work with an investment bank to set the initial price for its shares,
and then offer those shares to the public for purchase. The IPO process typically involves extensive
regulatory filings and disclosures, including a prospectus that outlines the company's financial
performance, management team, and other relevant information.

For the company, an IPO can provide a significant infusion of capital to fund growth and expansion.
For investors, an IPO can offer an opportunity to invest in a promising company and potentially profit
from its growth. However, IPOs also involve risks, including the possibility that the stock price will
decline after the initial offering.

Overall, an IPO is a significant event for a company and its investors, marking a major milestone in the
company's growth and development.

The process of an Initial Public Offering (IPO) in India typically involves the following steps:

1 Selecting investment bankers: The company looking to go public selects one or more investment
banks to underwrite the IPO. The investment bankers help determine the offering price for the
shares and facilitate the sale of those shares to the public.
2 Due diligence and disclosures: The company must provide extensive financial and business
information to the investment bankers, who conduct due diligence to assess the company's financial
performance, management team, and other relevant factors. The company must also file a draft red
herring prospectus (DRHP) with the Securities and Exchange Board of India (SEBI) and make the
necessary disclosures.
3 Roadshow and book building: The company and the investment bankers conduct a roadshow to
promote the IPO to potential investors. They also use the book building process to determine the
demand for the shares and to set the price of the shares.
4 Final prospectus and allotment: After the completion of the book building process, the company
files the final prospectus with SEBI and applies for the listing of its shares on the stock exchange.
The shares are then allotted to investors who have applied for the IPO.
5 Listing and trading: Once the shares are allotted, they are listed on the stock exchange, and trading
in the shares begins. The company becomes a publicly traded company, and investors can buy and
sell the shares on the stock exchange.

It is worth noting that the IPO process in India is highly regulated, and companies must comply with
various regulations and requirements set by SEBI and other regulatory bodies.

3.2.2 Follow on Public Offer / Further Public Offer (FPO)

A Follow-on Public Offering (FPO), also known as a Secondary Offering, is a process by which a
publicly-traded company raises additional capital by selling shares of its stock to the public after its
initial public offering (IPO).

Unlike an IPO, where a company goes public for the first time, an FPO involves the sale of additional
shares by a company that is already publicly traded. The proceeds from the sale of these shares are
typically used for various corporate purposes, such as financing acquisitions, funding research and
development, or reducing debt.

The process of an FPO is similar to an IPO in that the company works with an investment bank to
underwrite and sell the new shares to the public. However, an FPO typically requires less regulatory
scrutiny and disclosure than an IPO, as the company is already publicly traded and subject to ongoing
reporting requirements.

For investors, an FPO can offer an opportunity to purchase shares in a company that has already
established a track record as a publicly-traded entity. However, investors should carefully evaluate the
company's financial performance and prospects before investing, as an FPO can also be a signal of a
company's need for additional capital, which could indicate potential risks.
3.2.3 Offer for Sale

Offer for Sale (OFS) is a mechanism used in India for listed companies to sell their existing shares to
the public through the stock exchange platform.

Under the OFS mechanism, a listed company can sell its shares held by promoters, institutional
investors, or any other non-promoter entities to the public. The shares are offered at a price determined
through the bidding process, and the company receives the proceeds from the sale of shares.

The OFS mechanism is typically used by companies to comply with the minimum public shareholding
requirements set by the Securities and Exchange Board of India (SEBI). As per SEBI guidelines, listed
companies must have a minimum public shareholding of 25% of their total shares. The OFS mechanism
enables companies to meet this requirement by allowing them to sell their existing shares to the public.

Investors can participate in an OFS by placing bids through their brokers or online trading accounts.
The shares are allotted to investors based on the bidding price and other conditions specified by the
company.

The OFS mechanism offers several benefits to investors, including transparency, efficiency, and access
to shares of listed companies at a fair price. It also provides an opportunity for investors to participate
in the growth story of established companies and benefit from their long-term potential.

3.2.4 Private Placement

Private placement is a method of raising capital by offering securities, such as shares or bonds, to a
small group of private investors, rather than to the general public. Private placement is typically used
by companies that are not yet ready or do not want to go public through an IPO.

In a private placement, the issuer typically targets a small group of institutional or accredited investors,
such as high net worth individuals, mutual funds, or private equity firms. The issuer negotiates the terms
of the securities offering directly with the investors, including the price, quantity, and timing of the
securities.

Private placements are often used by companies to raise funds quickly and with minimal regulatory
requirements, as they are exempt from the rigorous registration and disclosure requirements that apply
to public offerings. However, private placements are subject to certain rules and regulations under
securities laws, and issuers must comply with the relevant regulations to avoid any legal and regulatory
issues.

Private placements are also used by companies to raise capital for specific projects or to fund growth
opportunities. The funds raised through a private placement can be used for various purposes, such as
expanding the business, developing new products, or acquiring other companies.
Private placements can be a good source of capital for companies that are not yet ready for an IPO or
do not want to go public. However, investors should carefully evaluate the issuer's financial
performance and prospects before investing in a private placement, as the securities may be less liquid
and subject to greater risks than publicly traded securities.

3.2.5 Preferential Allotment

Preferential allotment is a method used by companies to raise capital by issuing shares or convertible
securities to a select group of investors on a preferential basis. In this method, the shares are issued to
a specific group of investors, such as promoters, strategic investors, private equity firms, or other
investors, at a price that is determined by the company.

Preferential allotment is typically used by companies to raise capital quickly and efficiently, without
the need for a public offering. It is often used for strategic purposes, such as funding expansion plans,
acquiring new businesses, or strengthening the company's balance sheet.

Preferential allotment is subject to certain rules and regulations under securities laws, and the company
must comply with the relevant regulations to avoid any legal and regulatory issues. The Securities and
Exchange Board of India (SEBI) has set guidelines for preferential allotment, which require the
company to obtain approval from the shareholders and the stock exchanges before issuing the shares.

In a preferential allotment, the company must offer the shares to the existing shareholders of the
company first, on a pro-rata basis, before offering them to external investors. The price of the shares is
determined by the company's board of directors, based on the valuation of the company and other
factors.

Preferential allotment can be an efficient method for companies to raise capital quickly and on favorable
terms, while also maintaining control over the ownership and management of the company. However,
investors should carefully evaluate the company's financial performance and prospects before investing
in a preferential allotment, as the securities may be less liquid and subject to greater risks than publicly
traded securities.

3.2.6 Institutional Placement Procedures (IPP)

Institutional Placement Procedures (IPP) in India is a method used by listed companies to raise capital
by issuing shares or convertible securities to qualified institutional buyers (QIBs). In an IPP, the
company can issue shares to institutional investors such as banks, mutual funds, insurance companies,
and foreign institutional investors (FIIs).
The IPP method is an efficient way for companies to raise capital quickly and efficiently without going
through the process of a public offering. It is typically used for strategic purposes, such as funding
expansion plans, acquisitions, or other growth opportunities.

The IPP method is subject to certain rules and regulations under the Securities and Exchange Board of
India (SEBI). The SEBI has set guidelines for IPPs, which require the company to obtain approval from
the shareholders and the stock exchanges before issuing the shares. The price of the shares is determined
by the company's board of directors, based on the market price and other factors.

In an IPP, the company can offer shares to QIBs through a book-building process, in which investors
bid for the shares at a price that is determined through the bidding process. The company can also issue
shares to a specific group of investors, such as promoters, strategic investors, private equity firms, or
other investors, at a price that is negotiated by the company.

The IPP method can be an efficient method for companies to raise capital quickly and on favorable
terms, while also maintaining control over the ownership and management of the company. However,
investors should carefully evaluate the company's financial performance and prospects before investing
in an IPP, as the securities may be less liquid and subject to greater risks than publicly traded securities.

3.2.7 Qualified Institutional Placement (QIP): ( IPP and QIP is same)

Qualified Institutional Placement (QIP) in India is a capital-raising method used by listed companies to
issue equity shares or other securities to qualified institutional buyers (QIBs) such as mutual funds,
insurance companies, banks, and foreign institutional investors (FIIs). QIPs are regulated by the
Securities and Exchange Board of India (SEBI).

In a QIP, the issuer can issue equity shares or other securities to QIBs through a private placement,
without the need for a public offering. The price of the securities is determined by the issuer, based on
the prevailing market price, demand from investors, and other factors. The issuer can also choose to
issue securities with a discount to the market price, to attract more investors.

The SEBI has set guidelines for QIPs, which require the issuer to obtain approval from the shareholders
and the stock exchanges before issuing the securities. The issuer must also comply with the minimum
pricing formula and other rules and regulations set by the SEBI.

QIPs are often used by companies to raise capital quickly and on favorable terms, without diluting the
ownership or control of the existing shareholders. They are typically used for strategic purposes, such
as funding expansion plans, acquisitions, or other growth opportunities.

QIPs can be a good source of capital for companies that are looking to raise funds quickly and
efficiently, without going through the time-consuming and expensive process of a public offering.
However, investors should carefully evaluate the company's financial performance and prospects before
investing in a QIP, as the securities may be less liquid and subject to greater risks than publicly traded
securities.

3.2.8 Rights Issue

A Rights Issue is an offer of additional shares to existing shareholders of a company, in proportion to

their existing holdings. This means that shareholders have the right to buy additional shares at a
discounted price, in proportion to the number of shares they already own. The discounted price is called
the issue price, which is usually lower than the market price of the shares. The purpose of a rights issue
is to provide existing shareholders with the opportunity to purchase additional shares and raise capital
for the company.

In a rights issue, the company offers the new shares to existing shareholders for a specific period of
time, called the subscription period. Shareholders who choose not to subscribe for the new shares can
sell their rights on the stock market, usually through a renunciation letter, which allows other investors
to buy the rights to purchase the new shares. The proceeds from the rights issue are used to fund the
company's growth or to pay off existing debts.

Advantages of Rights Issue:

1 Raises Capital: A rights issue allows companies to raise capital quickly and efficiently by issuing
new shares to existing shareholders. This helps companies to fund their growth plans, pay off
existing debts, and take advantage of new business opportunities.
2 Lower Cost: A rights issue is generally less expensive than a public offering, as it requires fewer
regulatory and administrative procedures. This makes it an attractive option for companies that need
to raise capital quickly and efficiently.
3 Shareholder Participation: A rights issue gives existing shareholders the opportunity to participate
in the growth of the company by purchasing new shares at a discounted price. This helps to
strengthen the relationship between the company and its shareholders.
4 No Dilution of Control: A rights issue allows companies to raise capital without diluting the
ownership or control of the existing shareholders. This is because the new shares are offered only
to existing shareholders, in proportion to their existing holdings.

Disadvantages of Rights Issue:

1 Risk of Undersubscription: A rights issue may not be fully subscribed if existing shareholders do
not exercise their right to purchase the new shares. This can lead to a shortfall in the expected capital
raising, which can be a setback for the company's growth plans.
2 Negative Market Perception: A rights issue may be perceived negatively by the market if investors
interpret it as a sign of financial weakness or inability to raise capital through other means.
3 Dilution of Earnings per Share: A rights issue may dilute the earnings per share of the existing
shareholders, as the new shares increase the total number of outstanding shares. This can negatively
impact the company's stock price.
4 Complexity of Procedures: A rights issue requires complex procedures for issuance, which can be
time-consuming and costly. This can be a deterrent for companies that need to raise capital quickly
and efficiently.

3.2.9 Bonus Issue

A Bonus Issue, on the other hand, is an issue of additional shares to existing shareholders without any
additional cost. This means that the company issues new shares to shareholders in proportion to their
existing holdings, without requiring them to pay any additional money. For example, if a shareholder
owns 100 shares of a company and the company announces a bonus issue of 1:1, the shareholder will
receive an additional 100 shares for free.

The purpose of a bonus issue is to increase the liquidity of the company's shares and to reward
shareholders by increasing the number of shares they hold, without diluting the value of their holdings.
The company may also use a bonus issue to signal its financial strength and positive outlook to the
market, which can attract new investors.

Advantages of Bonus Issue:

1 Rewards Shareholders: A bonus issue rewards existing shareholders by increasing the number of
shares they hold without requiring them to pay any additional money. This increases the value of
their investments and provides an incentive for long-term holding of the company's shares.
2 Enhances Liquidity: A bonus issue can enhance the liquidity of the company's shares by increasing
the number of outstanding shares. This can make the shares more attractive to investors, which can
lead to an increase in the company's stock price.
3 Positive Market Perception: A bonus issue may be perceived positively by the market as a sign of
financial strength and a positive outlook for the company. This can attract new investors and
improve the company's image in the market.
4 No Dilution of Ownership: A bonus issue does not dilute the ownership of the existing shareholders,
as the new shares are offered only to existing shareholders in proportion to their existing holdings.

Disadvantages of Bonus Issue:

1 No Cash Inflow: A bonus issue does not provide any cash inflow to the company, as no additional
money is raised from the shareholders. This can limit the company's ability to fund its growth plans
or pay off existing debts.
2 Dilution of Earnings per Share: A bonus issue may dilute the earnings per share of the existing
shareholders, as the new shares increase the total number of outstanding shares. This can negatively
impact the company's stock price.
3 Increased Administrative Work: A bonus issue requires administrative work to issue new shares
and update the company's records. This can be time-consuming and costly.
4 Market Misinterpretation: A bonus issue may be misinterpreted by the market as a sign of financial
weakness or inability to raise capital through other means. This can negatively impact the
company's image and stock price.

3.3 Secondary Markets

3.3.1 Meaning of Secondary Market

Secondary markets, also known as aftermarket or stock market, refer to the financial markets where
securities that have already been issued are traded among investors. In these markets, existing securities
such as stocks, bonds, and other financial instruments are bought and sold by investors, rather than
being issued by the company or government.

The secondary market provides investors with an opportunity to buy or sell securities that they already
own at a fair market price. These securities are bought and sold through various exchanges, such as the
New York Stock Exchange (NYSE) and the Nasdaq Stock Market in the United States, and the National
Stock Exchange (NSE) and Bombay Stock Exchange (BSE) in India.

The secondary market provides liquidity to investors, as they can buy and sell securities without having
to wait for a new issue or the maturity of existing securities. It also helps in the efficient pricing of
securities, as the market forces of supply and demand determine the price of securities.

The secondary market is an essential component of the financial system, as it helps in the allocation of
capital and resources, and provides investors with an opportunity to diversify their investment portfolio.

3.3.2 Listing of Share

Listing of shares refers to the process by which a company's shares are made available for
trading on a stock exchange. Once a company goes public through an initial public offering
(IPO) or any other means, it can apply to list its shares on one or more stock exchanges, subject
to compliance with the exchange's listing requirements.

The listing process involves the submission of various documents, such as the company's
prospectus, financial statements, and other relevant information, to the stock exchange. The
exchange then reviews the application and assesses the company's compliance with its listing
rules and regulations.

Once the exchange approves the listing, the company's shares become available for trading on
the exchange, and investors can buy and sell the shares through brokers or online trading
platforms. The company's shares are assigned a unique stock ticker symbol, which is used to
identify the shares on the exchange and track their price movements.

Listing on a stock exchange provides several benefits to the company and its shareholders, such
as increased visibility, liquidity, and access to capital. It also helps in establishing the
company's credibility and reputation in the market.

However, listing on a stock exchange also involves significant costs and regulatory
requirements, such as compliance with disclosure and reporting requirements, which can be
time-consuming and expensive. Additionally, the company's management must be prepared to
deal with the increased scrutiny and accountability that comes with being a publicly-traded
company
 Chapter 4: Issue of shares : Important Concepts

4.1 Meaning of Prospectus, Contents of Prospectus

A prospectus is a legal document that companies must file with regulatory authorities, such as
the Securities and Exchange Commission (SEC) in the United States or the Securities and
Exchange Board of India (SEBI) in India, when offering securities to the public. It contains
detailed information about the company and the securities being offered, and is designed to
provide investors with all the information they need to make an informed investment decision.

The contents of a prospectus typically include:

1 Business Overview: A description of the company's business, history, products and

services, and key management personnel.
2 Use of Proceeds: A description of how the proceeds from the offering will be used by the
company, including any plans for expansion or investment.
3 Financial Information: Financial statements, including balance sheets, income statements,
and cash flow statements, for the past several years, as well as any other financial data
relevant to the offering.
4 Risk Factors: A discussion of the risks associated with investing in the company's
securities, including any material risks related to the company's business, operations,
financial condition, or regulatory environment.
5 Management Discussion and Analysis: A discussion of the company's financial
performance and future prospects, including any trends, opportunities, or challenges that
the company may face.
6 Shareholding Pattern: A detailed breakdown of the company's shareholding structure,
including the names of major shareholders and the percentage of shares held by each.
7 Offering Details: A description of the securities being offered, including the number of
shares, the offering price, and any restrictions or limitations on the offering.
8 Legal and Regulatory Information: A summary of any legal or regulatory matters that may
affect the company or the offering, including any pending or threatened litigation or
regulatory action.

Prospectus is an important document for investors to evaluate the risks and opportunities
associated with the investment in a company. It is also a regulatory requirement to disclose all
relevant information to the investors for their better understanding and decision making.
4.2 Types of Prospectus:

There are three types of prospectus used by companies when offering securities to the public:

Draft or Preliminary Red herring Prospectus: A draft red herring prospectus is a preliminary
version of the prospectus that is filed with regulatory authorities before the actual offering. This
document includes most of the information that will be included in the final prospectus, but
does not contain the final offering price or the number of shares being offered. The red herring
prospectus is used to generate interest from potential investors and to begin the marketing
process for the offering.

Final Red herringProspectus: The final Red Herring prospectus is the complete and final
version of the prospectus that is filed with regulatory authorities prior to the sale of securities.
It includes all the relevant details of the offering, such as the final offering price, the number
of shares being offered, and any other pertinent information related to the securities being
offered. The final prospectus must be delivered to investors before they can purchase the
securities.

Shelf Prospectus: A shelf prospectus is a type of prospectus that allows companies to register
a large amount of securities for sale over a period of time, typically up to three years. This type
of prospectus is useful for companies that plan to issue securities in multiple tranches, as it
streamlines the registration process and reduces the regulatory burden associated with each
offering. Under a shelf prospectus, companies can issue securities when market conditions are
favorable without having to go through the entire registration process each time.

Overall, the prospectus is an important document that provides investors with the information
they need to make an informed investment decision. Each type of prospectus serves a unique
purpose and is designed to meet the specific needs of the company and its investors.

4.3 Meaning of Offer and Offer for Sale

In an IPO (Initial Public Offering), an "offer" refers to the price at which the shares are being
sold to the public by the company going public. The offer price is typically determined by the
underwriters, who are investment banks hired by the company to help facilitate the IPO. The
offer price is based on a number of factors, including the company's financial performance,
growth prospects, industry trends, and market conditions.
An "offer for sale" in an IPO typically refers to the sale of shares by existing shareholders, such
as company founders, employees, or investors who are selling their stakes in the company. The
offer for sale allows these existing shareholders to cash out some or all of their investment in
the company. The proceeds of the offer for sale go to the selling shareholders, not to the
company.

Both the offer and the offer for sale are important components of an IPO, as they determine the
price and number of shares being sold to the public. The offer price and the number of shares
being sold can have a significant impact on the success of the IPO, as well as on the future
trading price of the company's stock.

4.4 Due Diligence Report

A due diligence report is a comprehensive investigation and analysis of a company, business

or investment opportunity. The report is typically prepared by a professional team of analysts
or experts, and it is used to evaluate the potential risks and benefits associated with a specific
transaction or investment.

The purpose of a due diligence report is to provide the investor or potential buyer with a
detailed understanding of the target company's operations, financial performance, legal status,
and any other relevant factors that may impact the investment decision. The report will
typically include a review of the company's financial statements, tax records, contracts, and
other legal documents. It may also involve interviews with management and employees, as
well as site visits to the company's facilities.

The due diligence process is critical for investors, as it helps them to identify potential risks
and issues that may not be apparent from the company's public disclosures or marketing
materials. By conducting a thorough due diligence review, investors can make informed
decisions about whether to move forward with the investment, negotiate better terms, or walk
away from the deal entirely.

The due diligence report can also be used to negotiate purchase price, warranties,
indemnifications, and other terms of the transaction or investment. The report can provide
valuable insights into the target company's strengths and weaknesses, which can help investors
to structure a deal that is favorable to their interests.
4.5 Underwriter and Underwriting obligations

In India, underwriters are financial institutions or banks that help companies to raise capital by
purchasing and reselling their securities. Underwriting is the process by which the underwriter
agrees to purchase a certain number of securities from the company and resell them to investors.
This helps the company to ensure that it will receive a certain amount of capital, even if the
securities do not sell on the open market.

Underwriters in India have certain obligations that they must fulfill under the Securities and
Exchange Board of India (SEBI) guidelines. These obligations include:

1 Due Diligence: Underwriters are responsible for conducting due diligence on the company
and the securities being offered. This involves reviewing financial statements, legal
documents, and other relevant information to ensure that the securities are a sound
investment.
2 Disclosures: Underwriters are required to disclose all material information about the
company and the securities being offered to potential investors. This includes risks
associated with the investment, financial information, and any other relevant information
that may impact the investment decision.
3 Underwriting Agreement: Underwriters must sign an underwriting agreement with the
company, which outlines the terms of the underwriting agreement, including the amount of
securities being purchased, the price, and the timeline for the sale.
4 Marketing: Underwriters are responsible for marketing the securities to potential investors.
This involves preparing marketing materials, such as a prospectus or offering
memorandum, and conducting roadshows or other marketing events.
5 Stabilization: Underwriters may engage in stabilization activities to support the market
price of the securities during the initial period after the offering. This may involve buying
securities on the open market to prevent a drop in price.

Overall, underwriters in India play an important role in helping companies to raise capital
through the issuance of securities. By fulfilling their obligations and responsibilities,
underwriters help to ensure that investors are informed and that the capital markets

4.6 Book-building

Book building is a process used by companies to raise capital through an initial public offering
(IPO). In this process, the company issuing the securities or shares sets a price range for the
shares, and potential investors indicate the number of shares they would like to purchase at
various price points within the range.

During the book building process, the company's underwriters will solicit bids from potential
investors and compile an order book that shows the number of shares that investors are willing
to buy at each price level. The order book helps the company to determine the optimal price at
which to sell the shares and the number of shares to issue. Once the book building process is
complete, the company will finalize the issue price based on the demand for the shares and
allocate shares to investors who bid successfully.

The book building process is designed to help companies raise capital more efficiently by
allowing them to gauge market demand for their shares and set a price that reflects the true
value of the shares. It is also intended to be a more transparent and equitable process for
investors, as it allows them to participate in the price discovery process and compete on a level
playing field.

In India, book building is regulated by the Securities and Exchange Board of India (SEBI) and
is commonly used for IPOs by companies seeking to list their shares on Indian stock exchanges.
The SEBI sets guidelines for book building, including the minimum size of the issue, the
maximum number of days allowed for the bidding process, and the disclosure requirements for
companies and underwriters.

4.7 Green-shoe Option

A green shoe option, also known as an over-allotment option, is a provision in an underwriting

agreement that allows the underwriter to sell additional shares of an initial public offering (IPO)
of securities to the public if there is strong demand. This option gives the underwriter the ability
to increase the size of the offering by up to 15% beyond the original size of the offering.

The term "green shoe" comes from the name of the company that first used this type of option
in 1960, Green Shoe Manufacturing Company (now called Stride Rite Corporation).

By using a green shoe option, the underwriter can reduce the risk of a failed offering, in which
the offering is undersubscribed and there are unsold shares remaining. This option can also
benefit the issuer, as it can increase the liquidity of the stock and potentially provide additional
funding.
Overall, a green shoe option provides flexibility for both the underwriter and the issuer during
the IPO process.

4.8 Listing Agreement

In India, a listing agreement is a contractual arrangement between a company and the stock
exchange where its securities are listed. This agreement lays out the terms and conditions under
which the company's securities will be listed and traded on the exchange. The listing agreement
in India is governed by the Securities and Exchange Board of India (SEBI) and it includes the
following key provisions:

1 Listing requirements: The agreement sets out the eligibility criteria for a company to be
listed on the exchange, including financial requirements such as minimum net worth,
profitability, and market capitalization.
2 Disclosure requirements: The agreement mandates the company to make timely and
accurate disclosures to the exchange and its shareholders. This includes financial
statements, shareholding patterns, and other relevant information.
3 Compliance requirements: The agreement sets out the obligations of the company to
comply with various rules and regulations, including those relating to corporate
governance, insider trading, and continuous disclosure.
4 Fees and charges: The agreement specifies the fees and charges payable by the company to
the exchange for listing and trading of its securities.
5 Listing period: The agreement sets the duration of the listing period and outlines the
procedures for renewal or termination of the listing agreement.

Overall, the listing agreement in India is an important document that helps ensure transparency
and accountability in the listing and trading of securities on the exchanges.
 Chapter 5: Capital Market Instruments

5.1 Equities & Preference Shares

Equity shares are the most common type of share issued by a company, which represents
ownership in the company. Holders of equity shares are entitled to vote at the company's annual
general meetings and receive dividends when the company distributes profits.

The main characteristics of equity shares are:

1 Ownership: Equity shareholders are the owners of the company and have voting rights to
elect the board of directors.
2 Risk: Equity shares represent the highest risk among all forms of investments in a company
since they have no fixed return and their value can fluctuate widely.
3 Dividends: Equity shareholders may receive dividends when the company makes a profit,
but the amount is not fixed and is subject to the discretion of the board of directors.
4 Residual claim: Equity shareholders are entitled to any residual value left over after all the
company's debts and obligations have been paid.

Preference shares are a type of share that has a fixed dividend and priority over equity shares
in the payment of dividends and liquidation proceeds. Preference shares do not generally carry
voting rights, but in some cases, they may have limited voting rights on certain matters.

The main characteristics of preference shares are:

1 Fixed dividend: Preference shareholders are entitled to a fixed dividend, which is paid
before any dividend is paid to equity shareholders.
2 Priority: Preference shareholders have priority over equity shareholders in the payment of
dividends and liquidation proceeds.
3 No voting rights: In most cases, preference shareholders do not have voting rights, or their
voting rights may be limited to specific matters.
4 Limited risk: Preference shares carry less risk than equity shares, as their dividends are
fixed and they have priority over equity shares in the event of a liquidation.

Overall, preference shares offer a lower risk investment with a fixed income stream, while
equity shares provide potential for higher returns and voting rights but also carry a higher risk.

Types of Preference Shares:

There are several types of preference shares, each with its own unique characteristics. Some of
the common types of preference shares include:

1 Cumulative preference shares: These shares accumulate dividends if they are not paid in a
given year. The accumulated dividends are then paid in the future, before any dividends are
paid to equity shareholders.
2 Non-cumulative preference shares: These shares do not accumulate dividends if they are
not paid in a given year. If the company does not pay a dividend in a particular year, the
preference shareholders lose their right to that dividend.
3 Redeemable preference shares: These shares can be redeemed by the company at a specific
date or after a specific period of time. The redemption price is usually fixed at the time of
issue.
4 Irredeemable preference shares: These shares cannot be redeemed by the company, except
in certain circumstances such as the winding up of the company.
5 Convertible preference shares: These shares can be converted into equity shares after a
specific period of time or at the option of the shareholder. This allows the preference
shareholder to participate in any future growth of the company.
6 Participating preference shares: These shares have a fixed dividend, but also participate in
the profits of the company after a certain level of profit has been reached. This allows the
preference shareholder to benefit from the company's growth.

Overall, preference shares provide companies with flexibility in raising capital and provide
investors with a lower risk investment with a fixed income stream. The type of preference share
issued will depend on the needs of the company and the preferences of the investors.

5.2 Shares with differential voting rights (DVR)

Shares with differential voting rights (DVRs) are a type of share that give their holders different
voting rights compared to other shares of the same company. Typically, DVRs have fewer
voting rights than ordinary shares, but they may also have more or different voting rights.

The purpose of DVRs is to allow companies to raise capital while still maintaining control by
a small group of shareholders, such as the founding members or management team. By issuing
DVRs with reduced voting rights, the company can raise capital from investors without diluting
the control of its existing shareholders.
DVRs are popular in emerging markets, where companies often require significant capital to
grow but want to avoid losing control to outside investors. However, they have been
controversial in some countries, with some investors and regulators arguing that they give too
much power to insiders and undermine the principle of one share, one vote.

Overall, DVRs can be an effective way for companies to raise capital while maintaining
control, but their use should be carefully considered and regulated to ensure that the interests
of all shareholders are protected.

5.3 Non Convertible Debentures (NCD), Partly-and Fully-Convertible

Debentures (PCD, FCD)

Debentures are a type of debt instrument that companies issue to raise funds from the public.
They represent a loan that the investor makes to the company and are generally secured by the
company's assets. Debentures typically offer a fixed rate of interest, and the company is
required to repay the principal amount at the end of the specified period.

Non-convertible debentures (NCDs)

A non-convertible debenture (NCD) is a type of debt instrument issued by companies to raise

long-term funds from the public. Unlike convertible debentures, NCDs cannot be converted
into equity shares of the issuing company at a later stage.

NCDs are typically issued by companies to finance their long-term investment requirements
such as expansion, capital expenditures, or debt refinancing. They are also used to diversify
the sources of funding and to lower the cost of borrowing compared to bank loans.

The features of NCDs are as follows:

1. Interest rate: NCDs typically offer a higher rate of interest compared to traditional fixed
deposits or other debt instruments. The interest rate on NCDs is determined by various
factors such as the credit rating of the issuing company, prevailing market conditions,
and the tenor of the instrument.
2. Tenor: NCDs are usually issued for a fixed tenor ranging from 1 to 10 years. They may
be secured or unsecured in nature, depending on the credit rating of the issuing
company.
3. Redemption: NCDs are redeemable on maturity or on a pre-determined date. They may
also be redeemed through buyback or call options exercised by the issuer.
 4. Credit rating: The credit rating of the issuer is an important factor in determining the
risk associated with investing in NCDs. A higher credit rating implies lower risk, and
hence, a lower interest rate. A lower credit rating implies higher risk, and hence, a
higher interest rate.
5. Trading: NCDs can be traded on stock exchanges or over-the-counter markets.
However, the liquidity of NCDs is lower compared to other debt instruments, and
hence, investors may find it difficult to sell their holdings before maturity.

In conclusion, non-convertible debentures are a popular debt instrument issued by companies

to raise long-term funds from the public. They offer a higher rate of return compared to
traditional fixed deposits or other debt instruments and provide investors with a relatively lower
risk compared to equity investments.

Fully convertible debentures (FCDs)

Fully Convertible Debentures (FCDs) are a type of debt instrument issued by companies that
can be converted into equity shares of the issuing company at a later stage. FCDs are a hybrid
instrument that combines the features of both debt and equity.

FCDs are typically issued by companies to raise long-term capital for financing their growth
or expansion plans. They offer several benefits to companies, such as a lower cost of borrowing
compared to other forms of financing, the ability to defer equity dilution, and the flexibility to
convert the instrument into equity shares at a later stage.

The features of FCDs are as follows:

1. Conversion: FCDs are fully convertible into equity shares of the issuing company at a
pre-determined ratio and price. The conversion ratio and price are specified at the time
of issuance and are based on various factors such as the market value of the shares, the
prevailing market conditions, and the credit rating of the issuing company.
2. Interest rate: FCDs usually offer a lower interest rate compared to traditional debentures
or bonds, as they offer the additional benefit of equity conversion.
3. Tenor: FCDs are issued for a fixed tenor, typically ranging from 3 to 10 years. The
conversion option may be exercised anytime during the tenor, subject to certain
conditions specified in the issuance documents.
4. Credit rating: The credit rating of the issuing company is an important factor in
determining the conversion ratio and price of FCDs. A higher credit rating implies a
 lower conversion ratio and price, while a lower credit rating implies a higher conversion
ratio and price.
5. Trading: FCDs can be traded on stock exchanges or over-the-counter markets.
However, their liquidity may be lower compared to other debt or equity instruments, as
the conversion option limits their appeal to some investors.

In conclusion, Fully Convertible Debentures (FCDs) are a popular hybrid instrument issued by
companies to raise long-term capital. They offer the benefits of both debt and equity and are a
useful tool for companies to finance their growth or expansion plans. However, investors must
carefully.

Partly convertible debentures (PCDs)

Partly Convertible Debentures (PCDs) are a type of hybrid financial instrument issued by
companies that have a mix of features of both debt and equity instruments. PCDs are similar to
FCDs in that they can be partially converted into equity shares of the issuing company, but the
conversion option is limited to only a portion of the debentures.

PCDs are typically issued by companies to raise long-term capital while balancing the need for
debt funding and the desire to retain control over the equity capital structure. The portion of
the PCDs that is not converted into equity shares continues to function as a regular debt
instrument with a fixed coupon rate and repayment schedule.

The features of PCDs are as follows:

1. Conversion: PCDs have a partial conversion option, where a portion of the debentures
can be converted into equity shares of the issuing company at a pre-determined ratio
and price. The remaining portion of the debentures continues to function as regular debt
with a fixed coupon rate and repayment schedule.
2. Interest rate: The coupon rate offered on PCDs is typically higher than that offered on
FCDs due to the limited conversion option.
3. Tenor: PCDs are issued for a fixed tenor, typically ranging from 3 to 10 years. The
conversion option may be exercised anytime during the tenor, subject to certain
conditions specified in the issuance documents.
4. Credit rating: The credit rating of the issuing company is an important factor in
determining the conversion ratio and price of PCDs. A higher credit rating implies a
 lower conversion ratio and price, while a lower credit rating implies a higher conversion
ratio and price.
5. Trading: PCDs can be traded on stock exchanges or over-the-counter markets.
However, their liquidity may be lower compared to other debt or equity instruments, as
the conversion option limits their appeal to some investors.

PCDs provide several benefits to investors, such as the potential to benefit from the
appreciation in the share price of the issuing company for the converted portion, a lower risk
compared to pure equity investments for the non-converted portion, and a fixed tenor that helps
in financial planning.

In conclusion, Partly Convertible Debentures (PCDs) are a hybrid financial instrument that
combines the features of debt and equity. They are useful for companies that want to balance
the need for debt funding and the desire to retain control over the equity capital structure.
However, investors must evaluate the creditworthiness and growth prospects of the issuing
company before investing in PCDs.

5.4 Indian Depository Receipts (IDR)

Indian Depository Receipts (IDRs) are a financial instrument that allows Indian companies to
raise capital from foreign investors by issuing securities that represent their shares. IDRs are
listed on Indian stock exchanges and can be bought and sold like regular shares. However,
IDRs are denominated in foreign currency, and the underlying shares are held in custody by a
domestic depository.

The process of issuing IDRs involves a company appointing a domestic depository, which
holds the underlying shares on behalf of the foreign investors. The domestic depository then
issues IDRs that represent a certain number of underlying shares. These IDRs can be traded on
Indian stock exchanges just like regular shares, and the foreign investors can buy and sell them
as they would any other security.

IDRs provide several benefits to Indian companies that want to raise capital from foreign
investors. Firstly, they allow companies to access a larger pool of capital than would be
available through domestic investors alone. Secondly, IDRs offer a way for companies to avoid
the costs and complexities of listing their shares on foreign stock exchanges. Finally, IDRs
provide foreign investors with an opportunity to invest in Indian companies without having to
deal with foreign exchange regulations and other legal and regulatory issues.
However, there are also some limitations to IDRs. For example, they are only available to
companies that are listed on Indian stock exchanges, and they can only be issued by companies
that have been in operation for at least three years. Additionally, IDRs may not be as popular
among foreign investors as other types of securities, such as American Depository Receipts
(ADRs), which are more widely recognized and accepted.

In summary, IDRs are a financial instrument that allows Indian companies to raise capital from
foreign investors by issuing securities that represent their shares. While IDRs offer several
benefits to companies, they also have some limitations that must be considered before deciding
whether to issue them.

5.5 Global Depository Receipts (GDR)

Global Depository Receipts (GDRs) are a financial instrument that allows foreign companies
to raise capital from international investors by issuing securities that represent their shares.
GDRs are listed on international stock exchanges and can be bought and sold like regular
shares. However, GDRs are denominated in a currency that is different from the currency of
the company's home country, and the underlying shares are held in custody by an international
depository.

The process of issuing GDRs involves a foreign company appointing an international

depository bank, which holds the underlying shares on behalf of the international investors.
The depository bank then issues GDRs that represent a certain number of underlying shares.
These GDRs can be traded on international stock exchanges just like regular shares, and
international investors can buy and sell them as they would any other security.

GDRs provide several benefits to foreign companies that want to raise capital from
international investors. Firstly, they allow companies to access a larger pool of capital than
would be available through domestic or foreign investors alone. Secondly, GDRs offer a way
for companies to avoid the costs and complexities of listing their shares on multiple
international stock exchanges. Finally, GDRs provide international investors with an
opportunity to invest in foreign companies without having to deal with foreign exchange
regulations and other legal and regulatory issues.

However, there are also some limitations to GDRs. For example, they are only available to
companies that meet certain regulatory requirements, such as having a minimum market
capitalization and a certain level of financial reporting. Additionally, GDRs may not be as
popular among international investors as other types of securities, such as ADRs or local
shares, which may be more widely recognized and accepted.

In summary, GDRs are a financial instrument that allows foreign companies to raise capital
from international investors by issuing securities that represent their shares. While GDRs offer
several benefits to companies, they also have some limitations that must be considered before
deciding whether to issue them.

5.6 American Depository Receipts (ADR)

American Depository Receipts (ADRs) are a financial instrument that allows foreign
companies to raise capital from US investors by issuing securities that represent their shares.
ADRs are listed on US stock exchanges and can be bought and sold like regular shares.
However, ADRs are denominated in US dollars, and the underlying shares are held in custody
by a domestic depository.

The process of issuing ADRs involves a foreign company appointing a depositary bank, which
holds the underlying shares on behalf of the US investors. The depositary bank then issues
ADRs that represent a certain number of underlying shares. These ADRs can be traded on US
stock exchanges just like regular shares, and the US investors can buy and sell them as they
would any other security.

ADRs provide several benefits to foreign companies that want to raise capital from US
investors. Firstly, they allow companies to access a larger pool of capital than would be
available through foreign investors alone. Secondly, ADRs offer a way for companies to avoid
the costs and complexities of listing their shares on US stock exchanges. Finally, ADRs provide
US investors with an opportunity to invest in foreign companies without having to deal with
foreign exchange regulations and other legal and regulatory issues.

However, there are also some limitations to ADRs. For example, they are only available to
companies that meet certain regulatory requirements, such as having a minimum market
capitalization and a certain level of financial reporting. Additionally, ADRs may not be as
popular among US investors as other types of securities, such as US-listed shares, which are
more widely recognized and accepted.

In summary, ADRs are a financial instrument that allows foreign companies to raise capital
from US investors by issuing securities that represent their shares. While ADRs offer several
benefits to companies, they also have some limitations that must be considered before deciding
whether to issue them.
Chapter 6 SEBI and Insider Trading and Corporate Governance

6.1 SEBI : Functions and Role

The Securities and Exchange Board of India (SEBI) is the regulator of the securities market in
India. It was established in 1988 as a non-statutory body and was later given statutory powers
through the SEBI Act, 1992. SEBI is headquartered in Mumbai and has regional offices in
major cities across India.

SEBI's primary objective is to protect the interests of investors in securities and promote the
development of the securities market in India. It does this by regulating the issuance and trading
of securities, ensuring transparency in the market, preventing fraudulent and unfair trade
practices, and educating investors about their rights and responsibilities.

Functions and Role of SEBI

SEBI has the following functions

1. Protective Function

2. Regulatory Function

3. Development Function

The following functions will be discussed in detail

Protective Function: The protective function implies the role that SEBI plays in protecting
the investor interest and also that of other financial participants. The protective function
includes the following activities.

a. Prohibits insider trading: Insider trading is the act of buying or selling of the securities by
the insiders of a company, which includes the directors, employees and promoters. To prevent
such trading SEBI has barred the companies to purchase their own shares from the secondary
market.

b. Check price rigging: Price rigging is the act of causing unnatural fluctuations in the price of
securities by either increasing or decreasing the market price of the stocks that leads to
unexpected losses for the investors. SEBI maintains strict watch in order to prevent such
malpractices.
c. Promoting fair practices: SEBI promotes fair trade practice and works towards prohibiting
fraudulent activities related to trading of securities.

d. Financial education provider: SEBI educates the investors by conducting online and offline
sessions that provide information related to market insights and also on money management.

Regulatory Function: Regulatory functions involve establishment of rules and regulations for
the financial intermediaries along with corporates that helps in efficient management of the
market.

The following are some of the regulatory functions.

a. SEBI has defined the rules and regulations and formed guidelines and code of conduct that
should be followed by the corporates as well as the financial intermediaries.

b. Regulating the process of taking over of a company.

c. Conducting inquiries and audit of stock exchanges.

d. Regulates the working of stock brokers, merchant brokers.

Developmental Function: Developmental function refers to the steps taken by SEBI in order
to provide the investors with a knowledge of the trading and market function. The following
activities are included as part of developmental function.

1. Training of intermediaries who are a part of the security market.

2. Introduction of trading through electronic means or through the internet by the help of
registered stock brokers.

3. By making the underwriting an optional system in order to reduce cost of issue.

6.2 Price Sensitive Information: Meaning

Price-sensitive information refers to any information related to a company's operations,

financial condition, or future prospects that could potentially affect its stock price or the
investment decisions of its shareholders.

This information can include financial results, earnings forecasts, merger and acquisition
activity, changes in management, new product launches, regulatory changes, or any other news
that could have a material impact on the company's performance or the market's perception of
the company.
Because this type of information can have a significant impact on a company's stock price, it
is important for companies to carefully manage the release of price-sensitive information to
ensure that it is disclosed to all investors in a fair and timely manner, and in accordance with
relevant regulations and guidelines. Companies typically have to make sure that they provide
this information publicly through official channels, such as regulatory filings, press releases,
or conference calls, in order to avoid selective disclosure or insider trading.

6.3 Insider Trading : Meaning and Consequences on stock market prices

Insider trading refers to the buying or selling of a company's securities, such as stocks or bonds,
by individuals who have access to non-public, material information about the company. Insider
trading is illegal and unethical because it gives an unfair advantage to those who possess such
information, while disadvantaging other investors who don't have access to it.

Insider trading can have significant consequences on stock prices, as well as on the overall
integrity and fairness of the securities markets. Here are some potential effects of insider
trading on stock prices:

1 Price manipulation: Insider trading can manipulate the price of a company's securities by
buying or selling large amounts of stock based on inside information, thereby creating a
false impression of the company's performance or prospects.
2 Unfair advantage: Insider trading gives an unfair advantage to those who possess inside
information, which can harm other investors who do not have access to such information.
3 Loss of confidence: Insider trading can damage investor confidence in the securities
markets and lead to a loss of trust in the fairness and transparency of the market.
4 Legal and reputational risk: Insider trading is illegal and can result in legal consequences,
such as fines or imprisonment, as well as reputational damage for the company and the
individuals involved.

Overall, insider trading undermines the integrity of the securities markets and can have
significant consequences on stock prices, as well as on the broader economy. It is important
for companies and regulators to take steps to prevent and punish insider trading in order to
protect the interests of all investors.
6.4 Provision in SEBI Act, 1992 for Punishment against Insider Trader

The SEBI Act, 1992 has provisions for punishment against insider trading. Section 15G of the
Act provides for penalties for insider trading. The penalties may include:

1 A penalty of up to INR 25 crores (approximately USD 3.4 million) or three times the
amount of profits made by the insider, whichever is higher.
2 Imprisonment of up to ten years.
3 Prohibition from accessing the securities market.
4 Disgorgement of profits made from insider trading.

In addition to these penalties, SEBI can also initiate proceedings to recover any profits made
from insider trading, as well as to impose fines or penalties on individuals or entities who have
aided or abetted in the commission of insider trading.

SEBI has also established a framework for monitoring and investigating instances of insider
trading, which includes surveillance of trading patterns, analysis of trading data, and
coordination with other regulatory bodies and law enforcement agencies.

Overall, the SEBI Act, 1992 provides a strong legal framework for preventing and punishing
insider trading, in order to protect the integrity and fairness of the securities markets and
promote investor confidence.

6.5 Corporate Governance: Meaning

Corporate governance refers to the set of processes, principles, and practices that guide how a
company is directed, managed, and controlled. It encompasses the relationships between a
company's management, board of directors, shareholders, and other stakeholders, as well as the
processes by which decisions are made and implemented within the company.

The purpose of corporate governance is to create a framework for responsible and ethical
decision-making that promotes the long-term success of the company while protecting the
interests of its various stakeholders.

Effective corporate governance typically involves a number of key components, including:

1 Board of directors: The board of directors is responsible for overseeing the management of
the company, setting its strategy and objectives, and ensuring that the company is managed
in a responsible and ethical manner.
2 Management: The management team is responsible for the day-to-day operations of the
company and for implementing the strategy and policies set by the board. Management
should be accountable to the board and have the necessary skills and experience to fulfill
its role.
3 Shareholders: Shareholders are the owners of the company and have the right to vote on
important decisions, such as the appointment of directors and the approval of major
transactions. Shareholders should be given access to relevant information and have the
ability to exercise their rights.
4 Transparency and disclosure: Companies should be transparent in their operations and
disclose relevant information to their stakeholders, including financial performance, risk
management, and ESG factors.
5 Ethics and culture: Companies should have a strong ethical culture that promotes integrity,
accountability, and responsibility. This includes having clear policies and procedures for
managing conflicts of interest, avoiding insider trading, and promoting diversity and
inclusion.

Overall, effective corporate governance is essential for building trust and confidence among
stakeholders and for ensuring the long-term sustainability and success of a company.

6.6 Importance & Need of Corporate Governance in Corporate

Corporate governance is important for several reasons, including:

1. Building trust and confidence: Good corporate governance practices can help build
trust and confidence among stakeholders, including shareholders, customers,
employees, and the broader society. This can enhance a company's reputation and
improve its access to capital.
2. Enhancing accountability: Corporate governance structures help to establish clear
lines of responsibility and accountability within a company, including for decision-
making, risk management, and financial reporting. This can help to prevent
misconduct and promote ethical behavior.
3. Promoting long-term sustainability: Effective corporate governance practices can help
to ensure that a company is managed in a sustainable and responsible manner, taking
into account environmental, social, and governance (ESG) factors as well as financial
performance. This can help to mitigate risks and improve long-term financial
performance.
 4. Attracting and retaining talent: Companies with strong corporate governance practices
are often more attractive to employees who value ethical behavior and responsible
management. This can help to attract and retain talented employees, which can in turn
benefit the company's performance.
5. Reducing legal and regulatory risks: Good corporate governance practices can help to
reduce the risk of legal and regulatory violations, which can result in costly fines and
damage to a company's reputation. By establishing clear policies and procedures for
compliance and risk management, companies can mitigate these risks.

The need for corporate governance arises from the fact that companies are complex entities
with multiple stakeholders, including shareholders, employees, customers, suppliers, and the
broader society. Effective corporate governance helps to balance the interests of these
stakeholders and ensure that a company is managed in a responsible and sustainable manner.
It also helps to prevent misconduct, reduce risks, and promote ethical behavior, which can
improve a company's reputation and financial performance over the long term.

Best Luck