CHAPTER 1.

INTRODUCTION TO SECURITY

1.1 MEANING

Meaning Of Security (In Financial Markets) A security means a document that gives its owner a specific claim of ownership of a particular financial asset. Financial markets provide facilities for buying and selling of financial claims and services. Thus, securities are the financial instruments which are bought and sold in the financial market for investment. The important financial instruments are shares, bonds, debentures, etc. Other financial instruments, also known as securities, are Treasury Bills, Mutual fund units, fixed deposits, etc. These securities are used by the investors for their investment. Some of these securities are transferrable while some of them are not transferrable. The definition of Securities as per the Securities Contracts Regulation Act (SCRA), 1956, includes instruments such as shares, bonds, scripts, stocks or other marketable securities of similar nature in or of any incorporate company or body corporate, government securities, derivatives of securities, units of collective investment scheme, interest and rights in securities, security receipt or any other instruments so declared by the Central Government.

A security is generally a fungible, negotiable financial instrument representing financial value.

Financial Markets For Different Securities A financial market is a market for creation and exchange of financial assets, i.e., different securities. If a person buys or sells any of the security or financial assets then he/she will participate in financial markets in some or other way. Functions of financial markets Financial markets play a pivotal role in allocating resources in an economy by performing three important functions: It facilitates price discovery. It provides liquidity to financial assets and securities. It considerably reduces the cost of transacting. Classification of Financial Markets There are different ways of classifying financial markets:

One way is to classify financial markets by the type of financial claim:

The debt market is the market for the fixed claims (debt instruments). The equity market is the market for residual claims (equity instruments).

Second way is to classify financial markets by the maturity of claims:

The money market is the market for short term debt instruments. The capital market is the market for long term debt and equity instruments.

Third

way to classify is based on whether the claims represent new issues or

outstanding issues (Seasoning of claim): Primary market is the market where the issuers sell new claims to raise capital. Secondary market is the market where the investors trade outstanding securities.

 Fourth way to classify is by the timing of delivery:

Cash or spot market is the market where where the delivery occurs immediately. Forwards and futures market is the one where the delivery occurs at a predetermined time in future.

Fifth way to classify is by the nature of its organizational structure:

An exchange traded market is a centralized organization with standardized procedures. An over the counter market is decentralized market with customized procedures.

Nature of Claim

Debt Market Equity market

Maturity of Claim

Money market Capital Market

Seasoning of Claim

Primary Market Secondary Market

Timing of Delivery

Cash or Spot Market Forwards & futures Market

Organizational Structure

Exchange Traded Market Over-the-Counter Market

1.2 Important Functions Of Securities Market

Securities markets provide channels for reallocation of savings to investments and entrepreneurship. Savings are linked to investments by a variety of intermediaries, through a range of financial products, called Securities.

It is a place where buyers and sellers of securities can enter into transactions to purchase and sell shares, bonds, debentures etc.

It performs an important role of enabling corporates, entrepreneurs to raise resources for their companies and business ventures through public issues.

It helps efficiently achieve transfer of resources from those having idle resources (investors) to others who have a need for them (corporates).

1.3 DIFFERENT TYPES OF SECURITIES

As an investor a person has a wide array of investment securities avenues available to him. Different avenues help meet the needs of different investors because all investors never have same investment objectives but different one like how much risk they can bear?, how much returns they expect?, for how much time they can invest?, for what reason they are investing?, etc. They are classified as under:

Real Estate Life Insurance

NonMarketable Financial Assets

Investmen t Avenues
Financial Derivative s Mutual Fund Schemes Equity Shares

Money Market Instrumen ts

Bonds Or Debenture s

Non-Marketable Financial Assets:

A good portion of the financial assets of individual investors is held in the form of non-marketable financial assets like bank deposits, post office deposits, company deposits and provident fund deposits. A distinguishing feature of these assets is that they represent personal transactions between the investor and the issuer. For example, when you open a savings bank account at a bank, you deal with the bank personally. In contrast, when you buy equity shares in the stock market you do not know who the seller is and you do not care.

The important non-marketable financial assets held by investors are given below: Bank Deposits Post Office Savings Account Post Office Time Deposits Monthly Income Scheme Of The Post Office Kisan Vikas Patra National Savings Certificate Company Deposits Employee Provident Fund Scheme Public Provident Fund Schemes

Money Market Instruments: Debt instruments, which have maturity less than one year at the time of issue, are called money market instruments. These instruments are highly liquid and have negligible risk. The money market is dominated by government, financial institutions, banks and corporates. Individual investors scarcely participate in the money market directly.

The major money market instruments are: Treasury Bills Certificates of Deposit Commercial Paper Repos

Bonds Or Debentures: Bonds or Debentures represent long-term debt instruments. The issuer of a bond promises to pay a stipulated stream of cash flows. This generally comprises of periodic interest payments over the life of the instruments and principal payment at the time of redemption. The bonds or debentures are of the following types: Government Securities Savings Bonds Private Sector Debentures Public Sector Undertaking Bonds Preference Shares

Equity Shares: Equity capital represents ownership capital. Equity shareholders collectively own the company. They bear the risk and enjoy the rewards of ownership. Of all the forms of securities, equity shares appear to be the most interesting. While fixed income investment avenues may be more important to most of the investors. The potential rewards and penalties associated with equity shares make them an interesting, exiting, proposition.

Mutual Fund Schemes: A Mutual Fund is a form of collective investment that pools money from many investors and invests the money in stocks, bonds, short-term money market instruments, and/or other securities. Mutual Fund is a trust that pools the savings of a number of investors who share a common financial goal. The money thus collected is invested by the fund manager in different types of

securities depending upon the objective of the scheme. Each Mutual Fund scheme has a defined investment objective and strategy. The flow chart below describes broadly the working of a mutual fund:

Mutual fund schemes invest in 3 broad categories of financial assets, viz. stocks, bonds and cash. Stocks refer to equity and equity related instruments. Bonds are debt instruments that have a maturity of more than one year. Cash represents bank deposits and debt instruments that have a maturity of less than one year. Depending on the asset mix, mutual fund schemes are classified into 3 broad types. Within each of these categories, there are several variants. They are as under:

Equity Schemes: invest the bulk of their corpus,85-95% or even more, in stocks and the balance in cash. Diversified equity schemes Index schemes Sectorial schemes Tax planning schemes

Hybrid (Balanced) Schemes: invest in a mix of stocks and debt instruments. Equity-oriented schemes Debt- oriented schemes Variable asset allocation schemes

Debt Schemes: invest in bonds and cash. Gilt schemes Mixed schemes Floating rate debt schemes Cash (Liquid) schemes

Financial Derivatives: A derivative is an instrument whose value depends on the value of some underlying asset. Hence, it may be viewed as a side bet on that asset. From the point of view of investors and portfolio managers, futures and options are the two most important financial derivatives. They are used for hedging and speculation. Derivatives are known as hedging instruments. Following are the different types of derivatives available in India: Forwards Futures Options Swaps

Life Insurance: The basic customer needs met by life insurance policies are protection and savings. Policies that provide protection benefits are designed to protect the policy holder (or his dependents) from the financial consequence of unwelcome events such as death or long-term sickness/disability. Policies that are designed as savings contracts allow the policy holder to build up funds to meet specific investment objectives such as income in retirement or repayment of a loan. In practice, many polices provide a mixture of savings and protection benefits. The common types of insurance policies are: Endowment Assurance Money Back Plan Whole Life Assurance Unit Linked Plan Term Assurance Immediate Annuity Deferred Annuity Riders

Real Assets: Unlike financial assets, real assets are tangible or physical in nature. The major types of real assets are as follows: Real Estate Residential House Commercial Property Urban and Semi-Urban Land Agricultural Farm Time share in a Holiday Resort

Precious Metals Gold Silver Precious Stones Diamonds Others Art Objects and Collectibles Paintings Sculpture Antiques Others

CHAPTER 2.OVERVIEW OF SECURITIES MARKET

2.1 INTRODUCTION

The securities markets in India have witnessed several policy initiatives,which has refined the market micro-structure, modernised operations and broadened investment choices forthe investors. The irregularities in the securities transactions in the last quarter of 200001,hastened the introduction and implementation of several reforms. While a Joint ParliamentaryCommittee was constituted to go into the irregularities and manipulations in all their ramifications in all transactions relating to securities, decisions were taken to complete theprocess of demutualisation and corporatisation of stock exchanges to separate ownership,management and trading rights on stock exchanges and to effect legislative changes forinvestor protection, and to enhance the effectiveness of SEBI as the capital market regulator. Rolling settlement on T+5 basis was introduced in respect of most active 251 securities from July 2, 2001 and in respect of balance securities from 31st December 2001. Rolling settlement on T+3 basis commenced for all listed securities from April 1, 2002 and subsequently on T+2 basis from April 1, 2003. The derivatives trading on the NSE commenced with the S&P CNX Nifty Index Futures on June 12, 2000. The trading in index options commenced on June 4, 2001 and trading in options on individual securities commenced on July 2, 2001. Single stock futures were launched onNovember 9, 2001. Due to rapid changes in volatility in the securities market from time to time, there was a need felt for a measure of market volatility in the form of an index that would help the market participants. NSE launched the India VIX, a volatility index based on the S&P CNX Nifty Index Option prices. Volatility Index is a measure of markets expectation of volatility over the near term. The Indian stock market regulator, Securities & Exchange Board of India (SEBI) allowed the direct market access (DMA) facility to investors in India on April 3, 2008. To begin with,DMA was extended to the institutional investors. In addition to the DMA facility, SEBI alsodecided to permit all classes of investors to short sell and the facility for securities lending and borrowing scheme was operationalised on April 21, 2008. The Debt markets in India have also witnessed a series of reforms, beginning in the year 2001-02 which was quite eventful for debt markets in India, with implementation of several important decisions like setting up of a clearing corporation for government securities,negotiated dealing system to facilitate transparent electronic bidding in auctions and secondary market transactions on a real time basis and dematerialisation of debt instruments. Further, there was adoption of modified Delivery-versus-Payment mode of settlement (DvP III in March2004).

T+1 cycle on May 11, 2005. To provide banks and other institutions with a more advanced and more efficient trading platform, an anonymous order matching trading platform(NDSOM)was introduced in August 2005. Short sale was permitted in G-secs in 2006 to provide an opportunity to market participants to manage their interest rate risk more effectively and to improve liquidity in the market. When issued (WI) trading in Central Government Securitieswas introduced in 2006. As a result of the gradual reform process undertaken over the years, the Indian G-Sec market has become increasingly broad-based and characterized by an efficient auction process, an active secondary market, electronic trading and settlement technology that ensures safe settlement with Straight through Processing (STP). This chapter, however, takes a review of the stock market developments since 1990. These developments in the securities market, which support corporate initiatives, finance the exploitation of new ideas and facilitate management of financial risks, hold out necessary impetus for growth, development and strength of the emerging market economy of India.

2.2 PRODUCTS, PARTICIPANTS & FUNCTIONS Transfer of resources from those with idle resources to others who have a productive need for them is perhaps most efficiently achieved through the securities markets. Stated formally, securities markets provide channels for reallocation of savings to investments and entrepreneurship and thereby decouple these two activities. As a result, the savers and investors are not constrained by their individual abilities, but by the economys abilities to invest an d save respectively, which inevitably enhances savings and investment in the economy. Savings are linked to investments by a variety of intermediaries through a range of complex financial products called securities which is defined in the Securities Contracts (Regulation) Act, 1956 to include: (1) shares, scrips, stocks, bonds, debentures, debenture stock or other marketable securities of a like nature in or of any incorporated company or body corporate;

(a) units of any other instrument issued by any collective investment scheme to theinvestors in such schemes; (b) security receipt as defined in clause (zg) of section 2 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002; (c) units or any other such instrument issued to the investors under any mutual fund scheme; (d) any certificate or instrument (by whatever name called), issued to an investor by any issuer being a special purpose distinct entity which possesses any debt or receivable, including mortagage debt, assigned to such entity, and acknowledging beneficial interest of such investor in such debt or receivable, including mortgage debt, as the case may be;

(2) government securities, such other instruments as may be declared by the Central Government to be Securities. rights or interest in securities. There are a set of economic units who demand securities in lieu of funds and others who supplysecurities for funds. These demand for and supply of securities and funds determine, under competitive market conditions in both goods and securities market, the prices of securities which reflect the present value of future prospects of the issuer, adjusted for risks and also prices of funds.

2.3 STOCK MARKET TERMS

A Guide to Common Stock Market terms The stock market can be a great investment tool, but many people find themselves unsure of whether or not to invest in the market because they are unfamiliar with some of the more common terms associated with market trading. If you are one of these people, dont despair; below youll find several of the more common terms associated with the stock market defined so as to help you make sense of the investment news that you hear. Stocks Stocks are obviously one of the most commonly traded items in the stock market they are the publicly sold and traded shares of companies. Each share of a stock is a portion of ownership in the company that issued the stock, and the stockholder is usually entitled to vote in stockholder meetings. Stockholders are also often given advance notice of upcoming splits, mergers, and the release of new stock shares. Bonds Bonds are similar to stocks, but are more often issued by governments than by individual companies. Bonds are issued with a specific date set at which they reach maturity, after which point they are cashed out and their current value is paid to the bond holder. The longer a bond holder owns a bond before maturity, the more money they have accrued in the bond and the more they get upon maturity. Dividends Dividends are additional payments that are made to stockholders after a particularly profitable quarter. Many people automatically reinvest their dividends, getting more shares of stock equal to the amount of the dividend that was paid. Futures Futures are traded along the same lines as stocks, but are purchased against the future cost of commodities. When the futures mature, money is made if the actual price of the commodities is higher than that which was paid for the futures and money is lost if the price is lower than that which was paid.

Index Trading Groups of stocks based upon commodities or sectors of the market can be purchased and traded as an index; common indices include the diamond market, the gold market, technology sectors, healthcare, and other such groupings.

Trading on Margin Trading on margin is similar to making stock trades with borrowed money you can purchase the stock shares for a portion of the actual price, with the remainder due at a later date or upon sale of the stock. The broker which places the order must have your margin portion of the cost before placing the order, which is typically 50% of the cost of the stock. Splits Splits are a way that companies reduce the value of their individual stocks without reducing the value of their stocks as a whole. The most common type of split is a two-for-one split, in which each share of stock is divided into two shares this doubles the total amount of shares, though the total amount invested remains the same and each individual share is worth one half of its previous value. Stockholders end up owning twice as many shares after a twofor-one split, though the total amount that they have invested remains the same. American Depositary Receipt (ADR) A stock representing a specified number of shares in a foreign corporation. ADRs are bought and sold in the American markets just like regular stocks. American-Style Options An option contract that may be exercised at any time between the date of purchase and the expiration date. Arbitrage The simultaneous purchase and sale of identical or equivalent financial instruments or futures in order to benefit from a discrepancy in their price relationship. Ask Also called an offer. Willingness to sell a contract at a given price. At-the-money When the price of the underlying security is equal to the strike price, an option is at-themoney. Bear One who expects the prices to decrease.

Bear Market A market in which prices are declining/falling.

Bid The price that the market participants are willing to pay. Blue Chip Stocks Stock in a well-established, financially-sound, and stable company that has demonstrated its ability to pay dividends in both good and bad times. Book Building The process of optimum price discovery in which the company decides the price of the security by asking various investors about how much and at what price would they invest in the companys equity. Bull One who expects prices to rise. Bull Market A market in which prices are rising. Buy On Close To buy at the end of a trading session at a price within the closing range. Buy On Opening To buy at the beginning of a trading session at a price within the opening range. Call A call option gives the buyer the right but not the obligation, to buy the underlying security at a specific price for a specified time. The seller/writer of a call option has the obligation to sell the underlying security should the buyer chose to exercise his option to buy.. Cash Settlement Payment for transaction on the due date

Close Position Getting out of a position in a particular stock or security. Cost of carry Cost of financing an asset

Day Order Any order to buy or sell a security that automatically expires if not executed on the day the it is placed. Day Trading Traders who take positions and liquidate them prior to the close of the same trading day. Derivatives A derivative instrument is an instrument which derives its value from the value of one or more underlying which can be commodities, precious metals, currency, bonds, stock, stock indices etc. Exercise Or Strike Price The price at which the holder of the option may buy or sell the underlying asset upon the exercise of an option. Expiration Date The last day on which an option may be exercised. Also, the last day of trading for a futures contract. Futures A Futures Contract is an agreement between a buyer and a seller to buy or sell on a future date a specified amount of the financial instrument or physical commodity at an agreed price. GAAP Generally Accepted Accounting Principles Green Shoe Option The green shoe option allows a company to retain the amount of oversubscription in case of a fresh public issue. GTC A GTC order remains in the system until it is cancelled by the user. GTD A GTD order allows the user to specify the number of days / date till which the order should stay in the system if not executed.

Hedging Taking positions in securities so that eachone offsets the other Holder of an Option One who purchases an option. Initial Margin The funds required when a position (or a short position) is opened. Insider Any person who has or has access to valuable nonpublic information about a corporation. Insider Trading Trading on information which is not really available to the general public Intial Public Offering (IPO) The first sale of stock by a private company to the public. Intrinsic Value The amount by which an option is in the money IPR Intellectual property rights Kerb Deals The sale/purchase of securities before and after the official trading hours of the stock exchange. Limit Order An order placed with a broker to buy or sell shares at a specified price or better than the specified price. Liquidity The ability of a security/stock to get converted into cash without loss of time/value. Margin Call A demand for additional funds because of adverse price movement.

Market Capitalization Market capitalization is the market value of the equity of a company/index. Market Maker A person who provides both buy and sell quotes for a security. Market Order An order for immediate execution to buy or sell as stock at the market price. Mark-To-Market The daily adjustment of margin accounts to reflect profits and losses. NASDAQ National Association of Securities Dealers Automatic Quotation System NSCCL National Securities Clearing Corporation Ltd. NSE National Stock Exhange Of India ltd. Odd Lot A lot of share that is less than the marketable lot is called an odd lot.Offer Also called ask. Indicates the willingness to sell at a given price. Offset Any transaction that offsets or closes out a long or short futures position. Open Order An order to buy or sell a security that remains in effect until it is either canceled by the customer or executed. Option A contract giving the holder the right, but not the obligation, hence, option, to buy or sell a futures contract in a given commodity at a specified price at any time between now and the expiration of the option contract. Over the Counter (OTC)

A security which is not traded on an exchange, usually due to an in ability to meet listing requirements. For such securities, brokers/dealers negotiate directly with one another over computer networks and by phone. Pay-in When securities and funds are given by brokers to the Clearing House. Pay-out The day when the Clearing House gives securities and funds to the brokers. Position An interest in the market, either long or short, in the form of open contracts. Price Discovery Process by which buyers and sellers interact and set the price Put A put option gives the buyer the right, but not the obligation, to sell an underlying security at a specific price for a specified time. The seller of a put option has the obligation to buy the underlying security should the buyer choose to exercise his option to sell. Rally An upward movement of prices following a decline; the opposite of a reaction. Range The high and low prices or high and low bids and offers, recorded during a specified time. RBI Reserve Bank of India Reaction A decline in prices following an advance. The opposite of rally. Rights Issue Issue of additional equity to existing shareholders of a company Scalping Scalping normally involves establishing and liquidating a position quickly, usually within the same day,hour or even just a few minutes.

SEBI Securities and Exchange Board of India Settlement Price Price that is used to calculate gains and losses in futures and options market accounts. Share A share is the smallest unit representing the ownership in a company. Short Selling The selling of a security that the seller does not own, or any sale that is completed by the delivery of a security borrowed by the seller. Spread Taking positions in two or more futures/options of the same type. Stag A person, who invests in the primary market, i.e. buys shares only in IPOs and sells on allotment. Stock Exchange An organised market for trading in listed securities. Stock Split The division of a companys existing stock into more shares. In a 2-for-1 split, each stockholder would receive an additional share for each share formerly held. Stop Loss Order An order placed with a broker to buy or sell when a certain price is reached. Tick Smallest increment of price movement possible Trend The general direction of the market.

CHAPTER 3.PRIMARY MARKET

3.1 INTRODUCTION

Primary market provides opportunity to issuers of securities, Government as well as corporates to raise resources to meet their requirements of investment and/or discharge some obligation.The issuers create and issue fresh securities in exchange of funds through public issues or private placement They may issue the securities at face value, or at a discount/premium and these securities may take a variety of forms such as equity, debt or some hybrid instrument. They may issue the securities in domestic market and/or international market through ADR/GDR/ECB route. The primary market is that part of the capital markets that deals with the issuance of new securities. Companies, governments or public sector institutions can obtain funding through the sale of a new stock or bond issue. This is typically done through a syndicate of securities dealers. The process of selling new issues to investors is called underwriting. In the case of a new stock issue, this sale is an initial public offering (IPO). Dealers earn a commission that is built into the price of the security offering, though it can be found in the prospectus. Primary markets create long term instruments through which corporate entities borrow from capital market. Features of primary markets are:

This is the market for new long term equity capital. The primary market is the market where the securities are sold for the first time. Therefore it is also called the new issue market (NIM). In a primary issue, the securities are issued by the company directly to investors. The company receives the money and issues new security certificates to the investors. Primary issues are used by companies for the purpose of setting up new business or for expanding or modernizing the existing business. The primary market performs the crucial function of facilitating capital formation in the economy. The new issue market does not include certain other sources of new long term external finance, such as loans from financial institutions. Borrowers in the new issue market may be raising capital for converting private capital into public capital; this is known as "going public." The financial assets sold can only be redeemed by the original holder.

3.2 MARKET STRUCTURE

The market design for primary market is provided in the provision of the Companies Act, 1956,which deals with issues, listing and allotment of securities. In addition, ICDR guidelines of SEBI prescribe a series of disclosures norms to be complied by issuer, promoter, management,project, risk factors and eligibility norms for accessing the market. In this section, the market design as provided in securities laws has been discussed.

3.2.1 SEBI Issue of Capital and Disclosure Requirements (ICDR) Regulations 2009 The issue of capital in India is governed by the SEBI (Issue of Capital and DisclosureRequirements) Regulation, 20093. ICDR regulations are applicable for public issue; rights issue 4, preferential issue; an issue of bonus shares by a listed issuer; qualified institutions placement by a listed issuer and issue of Indian Depository Receipts.

General conditions for public issues and rights issues

An issuer cannot make a public issue or rights issue of equity shares and convertible securities5 under the following conditions: a. If the issuer, any of its promoters, promoter group or directors or persons in control of the issuer are debarred from accessing the capital market by SEBI b. If any of the promoters, director or person in control of the issuer was or also is a promoter, director or person in control of any other company which is debarred from accessing the capital market under the order or directions made by SEBI. c. If the issuer of convertible debt instruments6 is in the list of willful defaulters published by the RBI or it is in default of payment of interest or repayment of principal amount in respect of debt instruments issued by it to the public, if any, for a period of more than 6 months. d. Unless an application is made to one or more recognised stock exchanges for listing of equity shares and convertible securities on such stock exchanges and has chosen one of them as a designated stock exchange. However, in case of an initial public offer, the issuer should make an application for listing of the equity shares and convertible securities in at least one recognised stock exchange having nationwide trading terminals.

e. Unless it has entered into an agreement with a depository for dematerialisation of equity shares and convertible securities already issued or proposed to be issued. f. Unless all existing partly paid-up equity shares of the issuer have either been fully paid up or forfeited.

Appointment of Merchant banker and other intermediaries

The issuer should appoint one or more merchant bankers, at least one of whom should be a lead merchant banker. The issuer should also appoint other intermediaries, in consultation with the lead merchant banker, to carry out the obligations relating to the issue. The issuer should in consultation with the lead merchant banker, appoint only those intermediaries which are registered with SEBI. Where the issue is managed by more than one merchant banker,the rights, obligations and responsibilities, relating inter alia to disclosures, allotment, refund and underwriting obligations, if any, of each merchant banker should be predetermined disclosed in the offer document.

Pricing in Public Issues The issuer determines the price of the equity shares and convertible securities in consultation with the lead merchant banker or through the book building process. In case of debt instruments, the issuer determines the coupon rate and conversion price of the convertible debt instruments in consultation with the lead merchant banker or through the book building process

Indian Depository Receipts A foreign company can access Indian securities market for raising funds through issue of Indian Depository Receipts (IDRs). An IDR is an instrument denominated in Indian Rupees in the form of a depository receipt created by a Domestic Depository (custodian of securities registered with the Securities and Exchange Board of India) against the underlying equity of issuing company to i) ii) Enable foreign companies to raise funds from the Indian securities markets. An issuing company making an issue of IDR is required to satisfy the following: (a) it should be listed in its home country18. (b) it should not be prohibited to issue securities by any regulatory body. (c) it should have a track record of compliance with securities market regulations in its home country.

MERCHANT BANKING The merchant banking activity in India is governed by SEBI (Merchant Bankers) Regulations,1992. All merchant bankers have to be registered with SEBI. The person applying forcertificate of registration as merchant banker has to be a body corporate other than a nonbankingfinancial company, has necessary infrastructure, and has at least two persons in hisemployment with experience to conduct the business of the merchant banker. The applicanthas to fulfill the capital adequacy requirements, with prescribed minimum net worth. The regulations specify the code of conduct to be followed by merchant bankers, responsibilitiesof lead managers, payments of fees and disclosures to SEBI. They are required to appoint a Compliance Officer, who monitors compliance requirements of the securities laws and is responsible for redressal of investor grievance CREDIT RATING AGENCY Credit rating is governed by the SEBI (Credit Rating Agencies) Regulations, 1999. The Regulations cover rating of securities only and not rating of fixed deposits, foreign exchange, country ratings, real estates etc. CRAs can be promoted by public financial institutions, scheduled commercial banks, foreign banks operating in India with the approval of RBI, foreign credit rating agencies recognised in the country of their incorporation, having at least five years experience in rating, or any company or a body corporate having continuous net worth of minimum Rs.100 crore for the previous five years. CRAs would be required to have a minimum net worth of Rs. 5 crore. No Chairman, Director or Employee of the promoters shall be Chairman, Director or Employee of CRA or its rating committee. A CRA can not rate (i) a security issued by its promoter, (ii) securities issued by any borrower, subsidiary, an associate promoter of CRA, if there are common Chairman, Directors and Employees between the CRA or its rating committee and these entities (iii) a security issued by its associate or subsidiary if the CRA or its rating committee has a Chairman, Director or Employee who is also a Chairman, Director or Employee of any such entity. For all public and rights issues of debt securities, an obligation has been cast on the issuer to disclose in the offer documents all the ratings it has got during the previous 3 years for any of its listed securities. CRAs would have to carry out periodic reviews of the ratings given during the lifetime of the rated instrument.

KINDS OF ISSUES

Initial Public Offering (IPO) is when an unlisted company makes either a fresh issue of securities or an offer for sale of its existing securities or both for the first time to the public. 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. Rights Issue is when a listed company which proposes to issue fresh securities to its existing shareholders as on a record date. The rights are normally offered in a particular ratio to the number of securities held prior to the issue. This route is best suited for companies who would like to raise capital without diluting stake of its existing shareholders. A Preferential issue is an issue of shares or of convertible securities by listed companies to a select group of persons under Section 81 of the Companies Act, 1956 which is neither a rights issue nor a public issue. This is a faster way for a company to raise equity capital. The issuer company has to comply with the Companies Act and the requirements contained in the Chapter pertaining to preferential allotment in SEBI guidelines which inter-alia include pricing, disclosures in notice etc.

Private placement
A private placement, also known as an initial private offering is the issuance and sale of stock of a company to an institutional investor, accredited and/or non-accredited investor to procure financing and raise capital. The Offering Memorandum shall outline the terms of the investment securities being offered non-publicly. The structure of the private placement somewhat resembles a business plan in both layout and detail, allowing a company the ability

to raise capital through the sale of equity or debt securities compliant with the SEC's Regulation D Offer for sale There are two main ways for a company to list new shares 1) By an offer for sale, which is a public invitation by a sponsoring intermediary such as an investment bank. 2) By an offer for subscription, or direct offer, which is a public invitation by the issuing company itself. The offer can be made at a price that is fixed in advance or it can be by tender where investors state the price they are prepared to pay. After all bids are received, a strike price is set which all investors must pay. Bonus Issue A bonus share is a free share of stock given to current shareholders in a company, based upon the number of shares that the shareholder already owns. While the issue of bonus shares increases the total number of shares issued and owned, it does not change the value of the company. Although the total number of issued shares increases, the ratio of number of shares held by each shareholder remains constant. Whenever a company announces a bonus issue, it also announces a book closure date which is a date on which the company will ideally temporarily close its books for fresh transfers of stock. An issue of bonus shares is referred to as a bonus issue. Depending upon the constitutional documents of the company, only certain classes of shares may be entitled to bonus issues, or may be entitled to bonus issues in preference to other classes. Bonus shares are distributed in a fixed ratio to the shareholders. Sometimes a company will change the number of shares in issue by capitalizing its reserve. In other words, it can convert the right of the shareholders because each individual will hold the same proportion of the outstanding shares as before. A bonus share issue is not a dividend. Although these shares are "distributed" from a company to its shareholders, this is almost never a "distribution" in the corporate law sense. That is because they represent no economic event no wealth changes hands. The current shareholders simply receive new shares, for free, and in proportion to their previous share in the company. Therefore, a bonus share issue is very similar to a stock split. The only practical difference is that a bonus issue creates a change in the structure of the company's shareholders' equity (in accounting). Another difference between a bonus issue and a stock split is that while a stock split usually also splits the company's authorized share capital, the distribution of bonus shares only changes its issued share capital (or even only its outstanding shares).

BOOK BUILDING PROCESS Book Building is basically a capital issuance process used in Initial Public Offer (IPO) which aids price and demand discovery. It is a process used for marketing a public offer of equity shares of a company. It is a mechanism where, during the period for which the book for the IPO is open, bids

are collected from investors at various prices, which are above or equal to the floor price. The process aims at tapping both wholesale and retail investors. The offer/issue price is then determined after the bid closing date based on certain evaluation criteria. Sebi guidelines defines book building as a process undertaken by which a demand for the securities proposed to be issued by a body corporate is elicited and built up and the price for the securities is assessed on the basis of the bids obtained for the quantum of securities offered for subscription by the issuer. This process provides an opportunity to the market to discover price for the securities on offer. In common words, book building is a method for public offer of equity shares of a company. The process is named so because it refers to collection of bids from investors, which is based on a price range. The issue price is fixed after the closing date of the bid. A company planning an IPO appoints a merchant bank as a book runner. Then the company issues a prospectus that does not mention the price, but provides other details related to the issue size, the companys operating area and business, the promoters and future plans among other disclosures. A particular time frame is also fixed as the bidding period. Then the book runner builds an order book that collates bids from various investors. Potential investors are allowed to revise their bids at any time during the bidding period. At the end of bidding period the order book is closed and consequently the quantum of shares ordered and the respective prices offered are known. The calculation of final price is based on demand at various prices and also involves negotiations between those involved in the issue. Limitations of Book- Building System In the case of the potential investors, the companies canadjust the attributes of the offer according to thepreferences of the potential investors. The issuer company should be fundamentally strong andwell known to the investors. The book-building system works very efficiently inmatured market conditions. In such circumstances, the investors are aware of thevarious parameters affecting the market price of thesecurities. There is a possibility of price rigging on listing aspromoters may try to bail out syndicate member