CAPITAL MARKETS

Introduction
• The capital market is a vital of the financial
system.
• The wave of economic reforms initiated by the
government has influenced the functioning
and governance of the capital market.
• The capital market is a place where people buy
and sell securities.
• Securities in this sense is simply a bundle of
rights sold to the public by companies,
authorities or institutions on which people then
trade in the capital market.
• There are different types of securities or
bundles of rights. These include shares,
debentures, bonds, etc.
 Definitions
• “The capital market is a complex of institutions investment
and practices with established links between the demand
for and supply of different types of capital gains”.
• F. Livingston defined the capital market as “In a developing
economy, it is the business of the capital market to facilitate
the main stream of command over capital to the point of
the highest yield. By doing so it enables control over
resources to pass into hands of those who can employ them
most effectively thereby increasing productive capacity and
spelling the national dividend”.
 Capital Market redefined
• As per definitions, meaning of capital market as follows:
• 1. The capital market is the market for securities, where companies and
governments can raise long-terms funds.
• 2. The capital market is market for long-term debt equity shares. In this
market, the capital funds comprising of both equity and debt are issued
and traded.
• 4. The market in which long-term securities such as stocks and bonds are
bought and sold.
• 5. The capital market comprises of financial securities, government
securities and semi-government securities.
• 6. The capital market concerns two broad types of securities traded,
debts and equity. Buying stock allows investors to gain an equity interest
in the company and become owner.
 History of Indian Capital Market
• Indian Stock Markets are one of the oldest in
Asia.
• Its history dates back to nearly 200 years ago.
• The earliest records of security dealings in
India are meager and obscure.
• The East India Company was the dominant
institution in those days and business in its
loan securities used to be transacted towards
the close of the eighteenth century.
• The history of the Indian capital markets can be traced
back to 1861 when the American Civil War began.
• The opening of the Suez Canal during the 1860s led to
a tremendous increase in Exports to the United
Kingdom and United States, Several companies were
formed during this period and many banks came
forward to handle the finances relating to these trades.
• With many of these registered under the British
Companies Act, the Stock Exchange, Mumbai, came
into existence in 1875.
Indian Capital Market before Independence

• The Indian capital market was not properly

developed before Independence.
• The growth of the industrial securities market
was very much hampered since there were very
few companies and the number of securities
traded in the stock exchanges was still smaller.
• Most of the British Enterprises in India looked to
the London capital market for funds than to the
Indian capital market.
Indian Capital Market after Independence
• Since Independence and particularly after 1951, the Indian
capital market has been broadening significantly and the volume
of saving and investment has shown steady improvement.
• All types of encouragement and tax relief exist in the country to
promote savings.
• Besides, many steps have been taken to protect the interests of
investors.
• A very important indicator of the growth of the capital market is
the growth of joint stock companies or corporate enterprises.
• In 1951 there were about 28,500 companies both public limited
and private limited companies with a paid-up capital of Rs. 775
crores.
• The Indian capital market is also undergoing structural
transformation since liberalisation.
• The chief aim of the reforms is to improve market
efficiency, make stock market transactions more
transparent, curb unfair trade practices and to bring
our financial markets up to international standards.
• Further, the consistent reforms in Indian capital
market, especially in the secondary market resulting in
modern technology and online trading have
revolutionized the stock exchange.
 EVOLUTION OF CAPITAL MARKETS IN INDIA :
A HISTORICAL REVIEW
• Inception Phase (upto 1919)
• The history of capital market in India dates back to almost 200 years.
• Indian stock markets are one of the oldest in Asia.
• In the early nineteenth century, there are some signs of existence of capital
market in India. Though the records are meager, there are some evidences of
presence of capital market during the first half of the nineteenth century.
• During those days, the East India Company was in a dominant position. The
business in its loan securities was transacted even at the close of eighteenth
century
• In 1830’s business on corporate stocks and shares in bank and cotton presses
took place in Mumbai (the then Bombay).
• There were only 6 brokers recognized by banks and merchants during 1840
and 1850. Even after trading list was broadened in 1839, there was no
corresponding growth in the turnover of the markets.1
• In the decade of 1850’s, there was a rapid
development of commercial enterprise and
brokerage business attracted many people in
to the field and by the year 1860, the number
of brokers increased to 60.
• In 1860-61 American civil war started. Therefore,
cotton supply from the US and Europe was stopped.
• Thus, the’ share mania’ began in India. The number
of brokers increased to almost 250.
• However, at the end of American civil war, a disaster
again took place in 1865. This disaster was so hard
that, a share of bank of Bombay which had touched
Rs.2850 could be sold at Rs.87. This was true almost
for all securities traded in the market.
• At the end of the American civil war, the brokers who had no place to
trade, found the place in the year 1874.
• This place was a street in Mumbai where the brokers used to come and
negotiate on a piece of paper which later took the form of share
certificate.
• The place where the brokers assembled and transacted business
regularly, was known as Dalal Street and the building which was popularly
reckoned as a premier stock exchange, was known as ‘Jijibhoy Towers’.
• In 1887, these brokers formally established the ‘Native Share and Stock
Exchange Association’. It was just an association of persons which was
purely informal.
• It was not given a separate status as a corporate or business entity.
However, in 1895, the stock exchange acquired a 10 premise in the same
street and it was formally inaugurated in 1899.
• Thus, the stock exchange of Mumbai (now called as BSE) came into
existence.
• Next to the city of Mumbai, Ahmadabad gained
more importance in this regard.
• The cotton business which was a prominent business
for both of these cities was a common feature.
• Especially after 1880, many textile mills started in
Ahmedabad, rapidly surged and expanded their
business.
• As the new mills were floated, the need for stock
exchange was realized and in 1894, the brokers
formed the ‘Ahmedabad Share and Stock Brokers
Association’.
• During the same time Calcutta was emerging as a centre for
jute industry.
• Apart from jute, tea and coal industries were the major
industries in and around Calcutta city.
• From the experiences of ‘share mania’ in Mumbai during 1861-
65, there was a boom in jute shares in 1870’s.
• This was further followed by a boom in tea shares in the last
two decades of the nineteenth century i.e. from 1880 to 1900.
• The similar boom was also experienced in coal business
between 1904 and 1908. The leading brokers of Calcutta then
in June 1908 formed the ‘Calcutta Stock Exchange Association.’
• In the nineteenth century, industrial revolution too,
was taking place in various parts of the world.
• India, under British Empire, was not an industrially
emerging country.
• But then, since Britishers had an industrial revolution
(especially in Europe), the raw material was mostly
supplied from the Indian sub continent and thus,
slowly India became a major supplier of raw materials
for the European market which was a developed
market.
• Due to this reason, indirectly, in the beginning of the twentieth century,
the industrial revolution was on the way in India.
• At the same time, ‘Swadeshi Movement’ in India also got the momentum.
• In 1907, the Tata Iron And Steel Company Limited was inaugurated (which
is now popularly called as (TISCO).
• This was an important development in industrial advancement of Indian
enterprises. Further, due to the First World War some of the Indian
industries prospered.
• These industries included cotton and jute textiles, steel, sugar, paper,
flour mills etc.
• At that time most of the Indian 11 industries which enjoyed prosperity,
were providing the raw material for the industrially developed European
market
 Post independence Growth
• During the World War II, there was a fear about its adverse effects
on the Indian industries.
• But in the post world war period there was a fear of depression
which proved to be true.
• Most of the stock exchanges suffered almost a sharp fall during the
post world war period.
• At the same time there was a development on political front that
India got independence.
• After partition, the Lahore stock exchange was shifted to Delhi and
later on it merged with Delhi Stock Exchange.
• In 1947, both of the stock exchanges in Delhi were amalgamated
into the ‘Delhi Stock Exchange Association Limited’
• In southern India, the Bangalore Stock Exchange was
registered in 1957 and it was recognized in 1963.
• By this time, only few stock exchanges were recognized
by the Central Government.
• The first act to regulate and recognize the exchanges
came into force in 1956 i.e. Securities Contracts
(Regulation) Act, 1956.
• The established stock exchanges of Mumbai,
Ahmedabad, Calcutta, Madras, Delhi, Hyderabad and
Indore were recognized under the act.
• For nearly twenty years thereafter, the
number remained unchanged.
• Again after that period, in 1980’s, many more
stock exchanges were established.
• The stock exchanges which were formed in
the 1980’s were:
• Cochin Stock Exchange (1980) Kochi ,Kerala
• Uttar Pradesh Stock Exchange Association Limited (1982),
Kanpur,U.P.
• Pune Stock Exchange Limited (1982) Pune, Maharashtra.
• Ludhiana Stock Exchange Association Limited (1983)- Ludhiana,
Punjab.
• Gauhati Stock Exchange Limited (1984), Guwadhati, Assam Kannara
Stock Exchange Limited (1985) , Manglalore, Karnataka Magadh
Stock Exchanges Association (1986), Patna, Bihar Jaipur Stock
Exchange Limited (1989) , Jaipur, Rajasthan Bhubaneshwar Stock
Exchange Asso. Limited (1989)- Bhubaneshwar, Orissa Saurashtra
Kutch Stock Exchange Limited (1989) , Rajkot, Gujarat Vadodara
Stock Exchange Limited, (1990), Baroda, Gujarat Coimbatore Stock
Exchange Limited (1990), Coimbatore , Tamilnadu Meerut Stock
Exchange Limited (1990), Meerut , U.P
• Thus there were 21 recognized stock exchanges
upto the year 1990.
• The stock exchanges during this period, not only
grew in number, but also the number of listed
companies and capital raised by these companies
grew considerably.
• Especially after 1985, there has been a remarkable
growth in the stock exchanges due to the favorable
government policies towards the securities markets.
Post Reform Phase (1991 Onwards)
• After independence, there was a steady growth in the
stock markets in India. After 1985, the number of stock
exchanges increased sharply.
• But after 1991, there was really a qualitative development
in the Indian market.
• The uses of technology, variety of products, investor
protection are the areas which emerged during the last
two decades.
• Event though there was quantitative increase in the Indian
capital market, there were some inherent limitations like
lack of liquidity, imperfections in the information, lack of
transparency, long settlement periods, etc.
• During this time benami transactions and
some frauds also took place in the Indian stock
markets. This affected the small investors to a
great extent. The last decade of the twentieth
century saw the emergence of two important
stock exchanges viz.
• Over The Counter Exchange of India (OTCEI)
and the National Stock Exchange (NSE).
 Overview of Regulation on the Capital
Market in India
• The first act which was enacted to regulate the Indian
companies was the Joint Stock Companies Act, 1850;
• British India during this period legalized formation of
joint stock companies with limited liability.
• Five Indian companies like East India Company got
registered during 1850’s under this act.
• These companies were the first companies of which
shares were traded for the first time in Indian capital
market.
• Then, the Government of Bombay introduced
of Bill No. XXVII of 1865 to deal with the
situation arising out of the ‘share mania’ of
1860-65. This attempt failed and
subsequently, the Bill was withdrawn in 1867.
The Bombay Securities Contract Control Act,
1925
• The Bombay Legislative Assembly passed a
special legislation for the first time to control
stock exchanges when the Bombay Securities
Contract Act was passed in October, 1925.
 Capital Issues (Control) Act 1947
• Capital Issues (Control) Act has now only historical
relevance as it has been replaced by Capital Issues
(Control) Repeal Act, 1992.
• But after independence, Capital Issues (Control) Act 1947
has played an important part in the functioning of the
Indian capital market for almost 45 years.
• The provisions of this erstwhile act, have now become the
powers of SEBI. The act was administered by Controller of
Capital Issues (CCI) in the Ministry of Finance, Department
of Economic Affairs, and Government of India
• Securities Contracts (Regulations) Act ,1956;
• The Companies Act , 1956: The financial as well as
non-financial aspects of the working of all the
companies in India are governed by the Companies
Act, 1956. It aimed at developing an integrated
relationship between promoters, investors and
company management. Right from the formation to
the liquidation of company, all the activities are
governed and regulated by the Companies Act, 1956
 SEBI Act, 1992
• Certain powers under certain sections of
Securities Contract (Regulation) Act and
Companies Act have now been delegated to
the SEBI. The SEBI has its head office in
Mumbai and the organization is under the
overall control of the Ministry of Finance,
Central Government. SEBI Act was enacted to
avoid the problem of multiple regulatory
bodies.
 Depositories Act, 1996
• With the advent of new technology and need
for faster settlement, there was a need to
regulate matters in the capital market which
arise due to technology adoption. The
Depositories Act provides for the
establishment of depositories in securities
with the objective of ensuring free
transferability of securities with speed,
accuracy and security.
 RBI ACT (Provisions for NBFCs)
• RBI Act, 1934 governs and regulates the entire
banking system in India. Though RBI Act does
not directly control or regulate capital markets
in India, some of the players which are
participants in the market, are governed by
the RBI Act. Non-banking Financial
Corporations in the 1990s had some unethical
elements. These NBFCs were using their
surplus and assets in the capital markets.
 Classification of Capital Market
• The capital markets are broadly classified into debt and equity
markets.
• Debt markets are characterized by large institutional involvement with
less presence of retail participation.
• Debt markets trade in government securities, treasury bills, corporate
bonds, other debt instruments while equity markets deal mainly in
equity shares and to a limited extent in preference shares and
company debentures.
• Recently, futures and options in indices and equity shares have also
become a part of the market. In the context of equity product, the
markets are classified into Primary market and Secondary market. Of
late, derivatives market has also become a part of the broader market.
• In the capital markets, there is large number of participants with variety
of products. The various components of capital market are as follows:-
• • Securities :- the term securities include shares, bonds, debentures,
futures, options, mutual funds units
• • Intermediaries – intermediaries include brokers, sub-brokers,
custodians, share transfer agents, merchant bankers, and depositories.
• • Issuers of securities – companies, body corporate, banks, government,
financial institutions, mutual funds • Investors – investors include
individuals, companies, mutual funds, financial institutions, foreign
institutional investors
• • Market regulators – The regulators in the capital markets are SEBI, RBI
(to some extent), Department of Company Affairs, and Department of
Economic Affairs of the Central government.
 Nature and Participants
• The nature of the capital market is wider.
• The capital market consists of a number of individuals and
institution.
• The government is also an important player in the capital
market.
• The players in the capital market canalize the supply and
demand for long-term capital.
• The constituents of exchange, commercial banks, co-
operative banks, savings banks, development banks,
insurance companies, investment trust and companies etc.
 Capital market participants
• The supply in this market comes from savings from
different sectors of the economy. These savings accrue
from the following sources:
• 1. Individuals.
• 2. Corporate.
• 3. Governments.
• 4. Foreign countries.
• 5. Banks.
• 6. Financial Institutions,
• etc.
 capital market instruments
• The various capital market instruments used by corporate
entities for raising resources are as follows:
• Preference shares
• Equity shares
• Debentures
• Bonds
• Mutual fund
• Derivatives
• Commodities
• Currency exchange, etc.
 Functions/ Role of Capital Market
• Capital market plays an extremely important role in
promoting and sustaining the growth of an economy
• It is an important and efficient conduit to channel and
mobilize funds to enterprises, and provide an effective
source of investment in the economy.
• It plays a critical role in mobilizing savings for investment in
productive assets, with a view to enhancing a country’s long-
term growth prospects.
• It thus acts as a major catalyst in transforming the economy
into a more efficient, innovative and competitive
marketplace within the global arena.
• Capital markets play a vital role in indian
economy, the growth of capital markets will be
helpful in raising the per-capita income of the
individuals, decrease the levels of un-
employment, and thus reducing the number of
people who lie below the poverty line.
• With the increasing awareness in the people they
start investing in capital markets with long-term
orientations, which would provide capital inflows
to the sectors requiring financial assistance.
 1. Capital arrangement
• The capital market promotes capital formation in
the country. Rate of capital formation depends
upon savings in the country. Though the banks
mobilize savings, they are not adequate to match
the requirements of the industrial sector. The
capital market mobilizes savings of households and
of the industrial concern. Such savings are then
invested for productive purposes. Thus savings and
investment leads to capital arrangement in country.
 2. Economic growth
• Capital market smoothens the progress of the
growth of the industrial sector as well as other
sectors of the economy. The main purpose of
the capital market is to transfer resources
from masses to the industrial sector. The
capital market makes it possible to lend funds
to various projects, both in the private as well
as public sector.
3. Development of backward areas
• The capital markets provide funds for the
projects in backward areas. This facilitates the
economic development of backward areas.
 4. Generates employment
• Capital market generates employment in the
country: i) Direct employment in the capital
markets such as stock markets, financial
institutions etc. ii) Indirect employment in all
sectors of the economy, because of the funds
provided for developmental projects
5. Long term capital to industrial sector

• The capital market provides a stable long-term

capital for the companies. Once, the funds are
collected through issues, the money remains
with the company. The company is left free
with the funds while investors exchange
securities among themselves.
 6. Generation of foreign capital
• The capital market makes possible to generate
foreign capital. Indian firms are able to
generate capital from overseas markets by
way of bonds and other securities. Such
foreign exchange funds are vital for the
economic development of the nation.
7. Developing role of financial institutions

• The various agencies of capital market such as

industrial financial corporation of India (IFCI), state
finance corporations (SFC), industrial development
bank of India (IDBI), industrial credit and investment
corporation of India (ICICI), unit trust of India (UTI),
life insurance corporation of India (LIC), etc. there
have been rendering useful services to the growth
of industries. They have been financing, promoting
and underwriting the functions of the capital
market.
 8. Investment opportunities
• Capital markets provide excellent investment
opportunities to the members of the public.
The public can have alternative source of
investment i.e. In bonds, shares and
debentures etc.
 Role revisited
• The capital market play very important role in Indian financial
system as follow:
• 1. To mobilize long-term savings to finance long term investments.
• 2. To improve the efficiency of capital allocation through a
competitive pricing mechanism.
• 3. To provide liquidity with mechanism enabling the investor to
see financial assets.
• 4. To make lower the costs of transactions and information. 5. To
make bridge between investors and companies.
• 6. To make quick valuation of financial instruments both equity
and debt.
 Types of capital market
• The Capital Market comprises the primary capital market
and secondary capital market;
• Primary Capital Market: The primary capital market is a
market for new or fresh issues.
• It deals to the long-term flow of fund from the surplus
sector to the government and corporate sector through
primary issues and to banks and non-bank financial
intermediary ;
• The Primary market for securities is the new issues market
which brings together the “supply and demand” or
“sources and uses” for new capital funds.
• The company will usually issue only primary
shares, but may also sell secondary shares.
Typically, a company will hire an investment
banker to underwrite the offering and a corporate
lawyer to assist in the drafting of the prospectus.
• A follow on public offering /Further Issue is when
an already listed company makes either a fresh
issue of securities to the public or an offer for sale
to the public, through an offer document.
 Secondary Capital Market
• The secondary market also called "aftermarket” is
the financial market for trading of securities that
have already been issued in Secondary market ;
• It is also called share market. Share market includes
exchange of those securities which are already sold
and listed in the Primary market. Any transaction in
the share market can be executed by the members of
the exchange keeping in mind the rules and
regulations of the SEBI. its initial private or public
offering.
• If any normal investor wants to buy or sell any
security then he or she will have to contact
with any broker of the exchange. Then the
broker shall buy or sell the contemplated
security on behalf of the investor and thus will
be entitled to a certain brokerage
• Unlike primary issues in the primary market which
result in capital formulation the secondary market
facilitates only liquidity and marketability of
outstanding debt and equity instruments.
• The secondary market also provides instant
valuation of securities made possible by changes in
the internal environment that is, companywide and
industry wide facilities the measurement of the cost
of capital and rate of return of economic entities at
the micro level.
Structure of Indian Capital Market
 Capital Market Instruments

• There are mainly two types of instruments which

are traded in the capital market, which are:
• Stocks:  Stocks are sold and bought over a stock
exchange, They represent ownership in the
company and the buyer of the share is referred as
the shareholder.
•  Bonds: The debt securities which are traded in
the capital market are known as the bonds.
Companies issue bonds for in order to raise capital
foe the expansion of the business and growth.
 Capital Market Intermediaries
• Financial Intermediaries are the organizations which help in the transfer or
channeling of funds from those who have surplus funds to those who are in
need of it.
• They act as a middleman in connecting the surplus parties to the deficit ones.
• A classic example can be a bank which accumulates bank deposits and uses
them to provide bank loans.
• The main Financial Intermediaries of India include:
• Stock Exchanges: These include the NSE (National Stock Exchange), BSE
(Bombay Stock Exchange), MCX (Multi Commodity Exchange), etc
• Banks
• Insurance Companies
• Pension Funds
• Mutual Funds
 Role of SEBI in Capital Market
• The Securities Exchange Board of India (SEBI) regulates the
functions of the Securities Market in India. It was set up in
1988 but didn’t have any legal status until May 1992, when
it was granted powers to legally enforce its control over
the financial market intermediaries.
• With the bloom of the scale of actions in the financial
markets, there were a lot of malpractices taking place.
Practices like a false issue, delay in delivery, violation of
rules and regulations of stock exchanges are on a rise. In
order to curb these malpractices, the Govt. of India
decided to set up a regulatory body known as the
Securities Exchange Board of India (SEBI).
• The roles and objectives of SEBI are elaborate
and have been described as below:
• Regulation of the activities of the stock market
• Protecting the rights of investors
• Ensuring the safety of the investments.
• To prevent malpractices and fraudulent activities.
• To develop a code of conduct for the
intermediaries such as brokers, mutual fund
sellers etc.
 Credit Rating Agencies
• A credit rating agency is a company that
assesses the financial strength of companies
and government entities, especially their
ability to meet principal and interest payments
on their debts. The rating assigned to a given
debt shows an agency’s level of confidence
that the borrower will honor its debt
obligations as agreed.
Role of Credit Rating Agencies in India (CRA)

• The history of Credit Rating in India is only a decade and half.

During this short span of time, the rating agencies have instilled
confidence in the minds of the Investors and Regulatory bodies.
The major rating agencies in India are attracting the Global
Rating Agencies, which have entered into alliances with them
for technical collaboration and equity participation.
• The Indian Rating Agencies are providing training and technical
assistance in setting up rating agencies in many other countries.
Moreover the Indian Rating Agencies are instrumental for the
incorporation of Association of Credit Rating Agencies of Asia
(ACRAA).
• Credit rating emerged in India with the birth of
Credit Rating Information Services of India
Limited (CRISIL). The Investment Information
and Credit Rating Agency (ICRA), Credit
Analysis and Research Limited (CARE), SMERA
(SME Rating Agency of India) provide various
services to the investing community in India.
 The New Issue Market
• While discussing The New Issue Market (NIM),
the distinction between NIM and stock
exchanges must be considered.
• They differ from each other organisationally as
well as on the basis of functions they perform;
• In the first place NIM deals with ‘ New
Securities’ i.e. securities which are not
previously available and are offered to the
public for investing for the first time.
• The market derives its name from the fact that
it makes available new stock of securities for
public subscription.
• The stock market on the other hand is a market
for ‘old’ securities i.e. those which have already
been issued and have been granted stock
exchange listing.
• They are sold and purchased continuously
among investors;
• A related aspect of the two is the nature of
their contribution to industrial financing.
• The NIM provides the issuing company with
additional funds for starting a new enterprise
or for either expansion or diversification of an
existing one and thus its contribution to
company financing is direct.
Structure of the New Issue Market
• While new issue market, as a channel for
private corporate investments, has grown over
the years, the pattern of growth of the NIM
varies through the various phases of its
growth, in terms of both financial instruments
and channels of marketing used by private
corporate firms.
Parties Involved in the New Issue Market

• In earlier times, the company and its recruits

managed the issue of securities. But, in the
recent days the rules and regulations are
rigorous. Capital market changes its picture
according to the circumstances. To make the
issue successful support of many agencies are
called for. The vital parties involved in the new
issue are.
 1. Managers to the issue
• To administer the activities relating to the
issue, the issuing company appoints the
administrators i.e., managers. The proficient
to act as managers to the issue are merchant
banking division, subsidiary of commercial
banks, foreign banks, private banks and
private agencies. The below said are the
duties performed in common.
• i.)Outlining of prospectus, ii) Planning
budgeted expenses related to the issue, iii)
Establishing the appropriate timing of the
issue and iv) Recommending the company on
the matters related to the appointment of
registrars, underwriters, brokers, bankers to
the issue, advertising agencies and the like.
 2.Registrar to the issue
• A conciliator who performs all the activities
related to the new issue management is none
other than a registrar. Habitually, the registrar
to the issue performs those function
connected with the allotment of securities.
They entertain share applications from various
collection centers. They reshuffle valid
applications for allotment of securities.
• Then they confirm the allotment of securities
on the basis of approval by the stock
exchange. The registrars assemble for the
send out of the share certificate. The registrars
make preparations to shell out the brokerage
and underwriting commission. They also
support the company in receiving the shares
listed on the stock exchange.
 3.Underwriters

• Underwriting is an indenture in which the

underwriter assures subscription to the issue.
They may be financial institutions, banks and
investment companies.
• While employing an underwriter, his financial
potency in the primary market, past
underwriting performance, outstanding
underwriting commitment, investor customers
and the like are considered by the issuing
company.
• After the finality of subscription, the company
endows the details of shares, which are not
subscribed to the underwriter. He would
receive the agreed portion of the shares. If he
fails to do so, the company may declare
damages from the underwriter for any loss
bear by it.
 4.Bankers
• The part of bankers in connection with issue is
very significant. They gather application
money along with application forms. They
charge commission in deliberation of the
services carried out for the issuing company. If
the issue is bulky, more than one banker may
be employed.
• The banker should have branches in those
collection centers specified by the Central
Government. Bankers may be synchronizing
bankers or collecting bankers. Collecting
bankers collect subscription, while
synchronizing bankers synchronize the
collection work. They also keep an eye on the
issue and inform to the registrars.
 5.Advertising Agencies
• Advertising plays an imperative role in prop up
the issue. Hence, selecting an advertising
agency, the fitness and the precedent
evidence of the agency are the features that
are well thought-out before its selection
moreover; As a final point, an appropriate
advertising agency is selected in discussion
with the lead managers to the issue.
• Advertising agencies accept to give extensive
exposure to the issue in the course of media
such as newspapers, magazines, billboards,
television, radio and the like.
 6.Financial Institutions
• Financial institutions too underwrite the issue
in Indian context. They also lengthen term
loans to the issuing company. The lead
managers send a copy of the prospectus and
the projected plan for public issue to the
financial institutions. On the might of those
documents, the financial institutions consent
to underwrite and bestow financial help.
7.Government and Statutory Agencies

• The below said are some significant

government and statutory agencies linked to
the new issue in the primary market. i)
Securities Exchange Board of India [SEBI] ii)
Registrar of Companies iii) Reserve Bank of
India iv) Stock Exchange v) Industrial Licensing
Authorities and vi) Pollution Control
Authorities, whose clearance is obtained for
the project, is to be stated in the prospectus.
 Methods of Floating New Issues

• The new issue market facilitates transfer of

funds from savers to the companies raising
fresh capital. There are four methods of
placing new issues in the market, namely:
 1.Public Issues
• Trade through a prospectus is a direct process
of floating shares. When a new company has
to raise gigantic funds, it goes in for public
issue. Under this method, the issuing company
offers to public, a fixed number of shares
through a lawful manuscript called
prospectus.
 Thus prospectuses form and contain the
following:
• i) Name of the issuing company ii) Address of the
registered office of the company iii) Existing and
proposed business activities iv) Location of the
industry v) List of directors of the company vi)
Minimum subscription vii) Dates of opening and
closing of subscription list viii) Names and addresses
of the institutional underwriters and the amounts
underwritten by them ix) A declaration that it will
apply to the stock exchange for listing and
quotation of its shares.
 2.Offer for Sale
• While trade through prospectus is a direct method,
the offer for sale is a roundabout method of hovering
new shares. Under this technique, securities are
opened to public through intermediaries such as
issue house and brokers. Two phases are concerned
in the sale of securities. Initially, the issuing company
issues securities to issuing houses and brokers at a
preset price. Subsequently, the intermediaries resell
the securities to the eventual investors at an
elevated price.
• The earnings charged by the issue house are
known as ‘turn’ or ‘spread’. This method is
beneficial to the issuing company as it is
reassured from the trouble of printing and
advertising prospectus.
 3.Placement
• Under this process, the issue is positioned with of financial
institutions, corporate bodies and remarkable folks. These
intermediaries acquire the shares and vend them to investors at later
date at a right price. Placement gives bountiful advantages. Primarily,
there is no necessity for underwriting preparations, as the placement
itself amounts to underwriting. Secondly, private placement securities
are traded at to financial institutions like UTI, Mutual Funds, Insurance
Companies, Merchant Banking subsidiaries of apparent commercial
banks. As these institutions are trendy among the investing public,
securities can effortlessly be sold to them. Finally, this process is
appropriate when the issuing company is tiny in size. However, this
method put up with one serious limitation. The securities are not far
and wide spread to a huge segment of the society.
 4.Right Issue
• Under the right issue, the shares are first
presented to the existing shareholders. These
shares are called right shares. The rights
themselves are manageable and marketable in
the market by the shareholders who are
permitted to purchase right shares.
 5.Book Building
• SEBI guidelines define book building as “a
process undertaken by which a demand for
the shares up and the price for the securities
is assessed on the basis obtained for the
quantity. The process provides an opportunity
to the discover price for the securities of
equity shares of a company. The process is
named so because it refers to collection of
bids after the closing date of the bid.
 Financial Instruments
• Indian economy strives to create opportunities to
its industries for mobilizing the required financial
resources by integrating the one with surplus
investible funds (investors) with another who
needs such funds (borrower-organisations). The
capital requirements for the industries could be
for infrastructural development, business
diversification, strategic requirements (such as
amalgamation, diversification,restructuring, etc).
• Such capital requirements could be for a short term
or long term, and the organisation seeking for capital
requirements might look for equity financing or debt
financing or both.
• Short term capital requirements are met by money
markets and the long term capital requirements by
the capital markets. Both money market and capital
market create diverse investment opportunities for
the diverse groups of investors offering a diverse
group of investment securities that meet their
investment objectives
• At the same time, money and capital markets
facilitate the industries/organisations to
mobilize the required capital resources based
on their objectives. The markets also enable
the fund-seeking organizations to have the
optimal capital structure which minimizes
their costs of capital and provide for necessary
leverage to their operations.
• The organizations intending to minimize the costs of
capital and retain the ownership in their hands would
look for more debt financing. On the other hand, the
organizations which intend to have their own internal
source of capital and estimate that they cannot generate
high volume sales and profits, and feel that it would not
possible for them to have interest cover would seek for
more equity financing. It all depends upon a number of
factors such as corporate objectives, ability to mobilize
the resources internally, market interest rate, required
funds, company's performance records, etc.
 Financial instruments/ Avenues available
for investment
• Equity or Common Stock refers to equity share capital
of the company. These are listed securities which the
investors can buy at the time of initial allotment (Initial
Public Offer, IPO) or in the secondary market where
they are traded. These instruments carry the ownership
right and provide for voting power to the holders. They
also provide the investors with the benefits of claiming
a share in the profit of the company (dividends) and
market linked returns (capital appreciation) which
depend upon the demand for such shares in the market
• Bonds are secured investments which carry a
fixed rate of interest and fixed maturity
period. They are securitized against the assets
of the issuer company or the promise of the
government (RBI) to honour the face value of
the bond on the date of maturity to the bearer
of the instruments.
• Government Securities are the instruments
issued by the government bodies. Individual
investors generally cannot participate in these
instruments except, as the issue prices of the
securities are normally very high.
• Insurance Policies are financial instruments which are
used by the investors today for the purpose of hedging
the risk of loss of interest in any asset/life. Another
driving force behind investors' decision to invest in
insurance policies is the tax benefits under Section 80 (C)
of Income Tax Act. These are also becoming attractive to
all sections of the investment community as they ensure a
bundle of benefits to the investors such as capital
appreciation, safety of principal amount, equity
linked/market linked performance, risk cover for the loss
of interest in asset/life assured under the policy, etc.
• Mutual Funds are the investments made in corpus created by a
fond management/mutual fond company for small units of
investments made by the small investors. These small investors
have very minimum or no knowledge about the technicalities of
the market. Hence, the investors transfer the task of managing
their fonds to a specialized fond manager who manages their
investment. These are attractive forms of investments in the
market. This is because of the reasons that they create
opportunities for all sections of the market to participate in money
market/capital markets. Further, they enable the investors to reap
the benefits of market linked performance with the help of well
managed portfolio which they cannot do individually.
• Realty or Real Estate refers to investments in
land, buildings, commercial infrastructures,
etc., and also cover investments made in
infrastructure bonds. These investments
normally require huge capital investments and
are normally made with the intention of
earning better returns on principal amount
invested (capital appreciation).
• Gold and other Metals such as silver, platinum, etc.,
always carry a high degree of capital appreciation.
When the Capital Markets/Money Markets are subject
to high degree of volatility, investors find these forms of
investments very lucrative. It is due to the fact that they
have ready market for liquidity and ensure an optimal
reward in terms of capital appreciation. They act as
attractive forms of investments especially for investors
who are looking for capital appreciation, capital safety
and better liquidity platforms in the market.
• Art provides an opportunity to investors to
invest in unique art and architectures (ancient
and unique paints, photographs, monuments,
etc) which are scarce. In this type of cases,
investments require huge amount of
investment and they normally carry high
capitalization. Because, some sections of
investors find these as very lucrative forms of
investments.
• Hybrid Investments refer to investment in
securities that combine two or more different
financial instruments. Hybrid securities generally
combine both debt and equity characteristics.
Convertible bond is an example to hybrid securities.
However, it is heavily influenced by the price
movements of the stock into which it is convertible.
New types of hybrid securities are being introduced
to meet the needs of sophisticated investors.
• Futures and Options: Here, analysis is made only to
equity derivative contracts. Equity Derivatives are
instruments with underlying assets based on equity
securities. An equity derivative's value fluctuates
with changes in the value of equity in the cash
segment. Investors use Equity Derivatives to hedge
the risk associated with taking position of stock in
the cash segment by setting limits to the losses that
might be incurred by price changes in the cash
market/spot market.
• The investor receives this insurance by paying
the cost of the derivative contract which is
termed as premium.
• Currencies refer to investment in foreign exchange and they
are normally referred to as Forex. A small section of investors
who are speculative in terms of future price movements in the
market for the foreign currencies and who feel that they could
capitalize on the opportunities provided by the market in
terms of inverse movement of prices than they anticipate
could provide them with high rewards take positions in the
currency market. Banks and Financial Institutions,
International Markets, Multinational Corporations (MNCs) and
Transnational Corporations (TNCs) and the business houses
involved in international trade are the major participants in
these markets
• Global Securities: Economic liberalization and free reign
economic system have extended the opportunities for the
organisations to look for mobilizing capital from
international markets by cross broader listing or listing the
equities in international stock exchanges. Investors also find
it attractive for investing as it provides them opportunities to
have international investment securities in their portfolio,
and diversify their risk of performance of their portfolio
linking them to diverse economies. Investment here refers to
investment in ADR/GDR (American Depository Receipts and
Global Depository Receipts)
• Bank Deposits, others like Post Office
Investment solutions, Public Provident Funds,
Indigenous Bank investments, Unorganized
investments such as Chit Funds, Unrecognized
Provident Funds, investment in co-operative
investment solutions offered by Co-operative
Societies or Banks