Security Market: Definition, Structure, and Functioning - PDF

Okay, I will convert the document into a structured markdown format. ## UNIT -II ## SECURITY MARKET ### INTRODUCTION The securities market is a component of the wider financial market where securities can be bought and sold between entities of the economy, on the basis of demand and supply. Secur...

Okay, I will convert the document into a structured markdown format. ## UNIT -II ## SECURITY MARKET ### INTRODUCTION The securities market is a component of the wider financial market where securities can be bought and sold between entities of the economy, on the basis of demand and supply. Securities markets encompass stock markets, bond markets, and derivatives markets where prices can be determined and participants, be they professional or non-professional, can meet. Securities markets can be split into two levels: * **Primary markets:** Where new securities are issued. * **Secondary markets:** Where existing securities can be bought and sold. Secondary markets can further be split into organized exchanges, like stock exchanges, and over-the-counter markets, where individual parties come together and buy or sell securities directly. For securities holders, knowing that a secondary market exists in which their securities may be sold and converted into cash increases the willingness of people to hold stocks and bonds, thus increasing the ability of firms to issue securities. There are a number of professional participants in a securities market, including brokerages, broker-dealers, market makers, investment managers, and speculators, as well as those providing the infrastructure, such as clearing houses and securities depositories. A securities market is used in an economy to attract new capital, transfer real assets into financial assets, determine prices that will balance demand and supply, and provide a means to invest money in both the short and long term. ### Security Markets The securities market is an economic institution where sale and purchase transactions of securities between entities of the economy take place according to demand and supply. These can be broken down into different types based on what is being traded. They are also differentiated by structure. * **Primary market:** The part of the capital markets that deals with the issue of new securities. * **Secondary market:** Also known as the aftermarket, is the financial market where previously issued securities and financial instruments such as stocks, bonds, options, and futures are bought and sold. After the initial issuance, investors can purchase from other investors in the secondary market. ## STRUCTURE OF SECURITIES MARKET IN INDIA ### Industrial Securities Market: The Industrial Securities Market refers to the market for shares and bonds of existing companies as well as those of new companies. This market is further divided into the New Issue Market (NIM) and Old Issue Market. * **New Issue Market:** Also called Primary Market. * **Old Issue Market:** Also called Secondary Market or Stock Exchange. **Table 40.1. The Structure of Securities Market** | Securities Market | | | :-------------------------------------- | :---------------------------- | | Industrial Securities Market | Government Securities Market | | ↓ | | | New Issue Market Secondary Market | Over-the-Counter Market | | | | | Organised Stock Exchange | Over-the-Counter Market | New Issue Market | Secondary Market | | :- | :- | :- | :- | | Bonds Equities Preference Shares | | | | However, it is important to emphasize that the New Issue Market and Stock Exchange are inter-linked and work in conjunction with each other. Although they differ from each other in the sense that the New Issue Market deals with 'new securities' issued for the first time to the public and Stock Exchange deals with those securities which have already been issued once to the public. **(i) Primary Market:** The primary market is concerned with the floatation of new issues of shares or bonds. The firms floating new issues to raise funds may be new companies or existing companies planning expansions. The Merchant Banking Division of a commercial bank is asked by the company to advise on the viability of floatation of an issue before an issue is actually floated in the market. The stock issuing company also approaches the institutional underwriters like LIC, UTI, ICICI, and IDBI to ensure the marketability of an issue. The underwriters like LIC and UTI purchase securities from the New Issue Market to hold these in their own asset portfolio. **(ii) Secondary Market:** The Secondary Market deals in existing securities. This market provides both liquidity and marketability to such securities. It implies that it is a market where a security can be bought or sold at a small transaction cost. Although the Secondary Market deals with the purchase and sale of old securities, the firms issuing new securities get themselves registered on a Stock Exchange by applying for listing of shares. Listing offers the investor a 'market' for the sale of his stock. ### PRIMARY MARKET The primary market is the part of the capital market that deals with the issuance and sale of equity-backed securities to investors directly by the issuer. Investors buy securities that were never traded before. Primary markets create long-term instruments through which corporate entities raise funds from the capital market. It is also known as the New Issue Market. A primary market issues new securities on an exchange for companies, governments, and other groups to obtain financing through debt-based or equity-based securities. Primary markets are facilitated by underwriting groups consisting of investment banks that set a beginning price range for a given security and oversee its sale to investors. Once the initial sale is complete, further trading is conducted on the secondary market, where the bulk of exchange trading occurs each day. ### Concept In a primary market, companies, governments, or public sector institutions can raise funds through bond issues, and corporations can raise capital through the sale of new stock through an initial public offering (IPO). This is often done through an investment bank or finance syndicate of securities dealers. The process of selling new shares to investors is called underwriting. Dealers earn a commission that is built into the price of the security offering, though it can be found in the prospectus. Instead of going through underwriters, corporations can make a primary issue or right issue of its debt or stock, which involves the issue by a corporation of its own debt or new stock directly to institutional investors or the public, or it can seek additional capital from existing shareholders. Since the securities are issued directly by the company to its investors, the company receives the money and issues new security certificates to the investors. The primary market plays the crucial function of facilitating the capital formation within the economy. The securities issued at the primary market can be issued at face value, premium value, and at par value. Once issued, the securities typically trade on a secondary market such as a stock exchange, bond market, or derivatives exchange. ### EQUITY CAPITAL MARKET The equity capital market (ECM) it is where financial institutions help companies raise equity capital and where stocks are traded. It consists of: * The primary market (for private placements, initial publiv offerings (IPOs) and warrants) * The secondary market (where existing shares are sold, and future options and swaps are traded. The equity capital market is a subset of the broader capital market, where financial institutions and companies interact to trade financial instruments and raise equity capital for companies. Equity capital markets are riskier than debt markets and thus also provide potentially higher returns. An Equity Capital Market (ECM) is a market between "companies and financial institutions" that is aimed at earning money for the company. \[1] Examples of financial institutions involved include Goldman Sachs and Citigroup. The company gives information about their finances to the institution, and the institution helps the company increase their profits through "market transactions." Institutions providing ECM services may be involved in initial public offerings (IPO), convertible bonds, and other services involving equity. They may also raise money for a company merger or acquisition of another company. There was a peak in the amount of profits generated through ECM in 2006-2007, but profits took a dive following those years. It has been reported that ECM profits are beginning to normalize. ### INSTRUMENTS TRADED IN THE EQUITY CAPITAL MARKET Equity capital is raised by selling a part of a claim/right to a company's assets in exchange for money. Thus, the value of the company's current assets and business defines the value of its equity capital. The following instruments are traded on the equity capital market: * **Common shares:** Common stock shares represent ownership capital, and holders of common shares/stock are paid dividends out of the company's profits. Common shareholders have a residual claim to the company's income and assets. They are entitled to a claim in the company's profits only after the preferred shareholders and bondholders have been paid. * **Preferred shares:** Preferred shares are a hybrid security because they combine some features of debentures and common equity stock. They are like debentures because they have a fixed/stated rate of dividend, have a claim to the company's income and assets before equity, do not have a claim in the company's residual income/assets, and do not confer voting rights to shareholders. However, just like common equity dividend, preferred dividends are not tax-deductible. The various types of preferred shares are irredeemable preferred shares, redeemable preferred shares, cumulative preferred shares, non-cumulative preferred shares, participating preferred shares, convertible preferred shares, and stepped preferred shares. ### Private Equity Equity investments made through private placements are known as private equity. Private equity is raised by private limited enterprises and partnerships as they cannot trade their shares publicly. Typically, start-up and/or small/medium-sized companies raise capital through this route from institutional investors and/or wealthy individuals because: * They have limited access to bank capital due to the unwillingness of banks to lend to an enterprise with no proven track record; or, * They have limited access to public equity on account of not having a large and active shareholder base. Venture capital funds, leveraged buyouts and private equity funds represent the most important sources of private equity. ### American Depository Receipts (ADR) An ADR is a certificate of ownership issued in the name of a foreign company, by an American bank, against the foreign shares deposited in the bank by the said foreign company. The certificates are tradable and represent ownership of shares in the foreign company. This promotes the trading of foreign shares in America by admitting the shares of foreign companies into a well-developed stocked market. ADRs often represent a combination of many foreign shares (for instance, lots of 100 shares). ADRs and their associated dividend are denominated in US dollars. ### Global Depository Receipts (GDRS) GDRs are negotiable receipts which are issued against the shares of foreign companies by financial institutions situated in developed countries. ### Futures A futures contract is a forward contract traded on an organized exchange. They are entered into and executed through clearing houses. Thus, clearing houses act as intermediaries between the buyer and seller of the futures contract. The clearinghouse also guarantees that both parties adhere to the contract. ### Options A one-sided contract, an option provides one party with the right but not the obligation to sell or buy the underlying asset on or before a pre-determined date. To acquire this right, a premium is paid. An option to buy is known as a call option while an option which confers the right to sell is known as a put option. ### Swaps A swap is a transaction under which one stream of cash flow is exchanged for another between two parties. ### FUNCTIONS OF AN EQUITY CAPITAL MARKET The equity capital market acts as a platform for the following functions: * marketing of issues, * distribution of issues, * allocating new issues, * initial public offerings (IPOs), * private placements, * trading derivatives, * accelerated book building. ### PARTICIPANTS IN THE EQUITY CAPITAL MARKET Large cap, mid cap, and small cap companies can be listed on the equity capital market. Investment bankers, retail investors, venture capitalists, angel investors, and securities firms are the dominant traders on the ECM. ### STRUCTURE OF THE EQUITY CAPITAL MARKET **The equity capital market can be divided into two parts:** * **Primary Equity Market** * **Secondary Equity Market** The primary equity market consists of the private placement market and primary public market, and the secondary equity market consists of the stock exchange and over-the-counter (OTC) markets. ### Primary equity market Allows companies to raise capital from the market for the first time. It is further divided into two parts: 1. **Private Placement Market**: The private placement market allows companies to raise private equity through unquoted shares. It provides a platform where companies can sell their securities to investors directly. In this market, companies do not need to register securities with the Securities Exchange Commission (SEC), as they are not subject to the same regulatory requirements as listed securities. Typically, the private placement market is illiquid and risky. As a result, investors in this market demand a premium as compensation for their risk-taking and the lack of liquidity in the market. 2. **Primary Public Market**: The primary public market deals with two activities: * *Initial Public Offerings (IPO)*: An IPO refers to the process by which a company issues equity publicly for the first time and becomes listed on the stock exchange. * *Seasoned Equity Offering (SEO)/Secondary Public Offering (SPO)*: An SEO/SPO is the process by which a company which is already listed on the stock exchange issues new/additional equity. When a firm issues stock on the stock exchange, it may do so without creating new shares, i.e., it may exchange unquoted stock for quoted stock. In such a case, the initial investor receives the proceeds earned by selling the newly quoted shares. However, if the company creates new shares for the issue, the proceeds from the sale of those shares are credited with the company. Furthermore, investment banks are major players in the primary public market because both IPOs and SEOs/SPOs require their underwriting services. ### Secondary Equity Market The secondary equity market provides a platform for the sale and purchase of existing shares. No new capital is created on the secondary equity market. The holder of the security, and not the issuer of the traded security, receives proceeds from the sale of the security in question. The secondary equity market can be further divided into two parts: 1. **Stock Exchanges**: A stock exchange is a central trading location where the shares of companies listed on the stock exchange are traded. Each stock exchange has its own criteria for listing a company on its exchange. The most commonly used criteria are: * Minimum earnings * Market capitalization * Net Tangible Assets * Number of shares held publicly 2. **Over-The-Counter (OTC) Markets**: The OTC market is a network of dealers who facilitate the trading of stocks bilaterally between two parties without a stock exchange acting as an intermediary. The OTC markets are not centralized and organized. Thus, they are easier to manipulate than stock exchanges. ### DEBT CAPITAL MARKETS The team within Debt Capital Markets (DCM) is responsible for providing advice on raising debt for acquisitions, refinancing of existing debt, or restructuring of existing debt. A Debt Capital Markets Group will work with a client to organize borrowing and to help provide access to a global pool of investors who are looking for opportunities. Debt is often used as it is usually cheaper than financing through equity and can add diversity to funding. A Debt Capital Market (DCM) is a market in which companies and governments raise funds through the trade of debt securities, including corporate bonds, government bonds, Credit Default Swaps, etc. ### DEBT MARKET VS. EQUITY MARKET: AN OVERVIEW Debt market and equity market are broad terms for two categories of investment that are bought and sold. The debt market, or bond market, is the arena in which investment in loans are bought and sold. There is no single physical exchange for bonds. Transactions are mostly made between brokers or large institutions, or by individual investors. Investments in debt securities typically involve less risk than equity investments and offer a lower potential return on investment. Debt investments by nature fluctuate less in price than stocks. Even if a company is liquidated, bondholders are the first to be paid. Bonds are the most common form of debt investment. These are issued by corporations or by the government to raise capital for their operations and generally carry a fixed interest rate. Most are unsecured but are issued with a rating by one of several agencies such as Moody's to indicate the likely integrity of the issuer. ### DERIVATIVE A derivative is a financial security with a value that is reliant upon or derived from an underlying asset or a group of assets a benchmark. The derivative itself is a contract between two or more parties, and the derivative derives its price from fluctuations in the underlying asset. The most common underlying assets for derivatives are stocks, bonds, commodities, currencies, interest rates, and market indexes. These assets are commonly purchased through brokerages. The derivative of a function of a real variable measures the sensitivity to change of the function value (output value) with respect to a change in its argument (input value). Derivatives are a fundamental tool of calculus. For example, the derivative of the position of a moving object with respect to time is the object's velocity: this measures how quickly the position of the object changes when time advances. The derivative of a function of a single variable at a chosen input value, when it exists, is the slope of the tangent line to the graph of the function at that point. The tangent line is the best linear approximation of the function near that input value. For this reason, the derivative is often described as the "instantaneous rate of change", the ratio of the instantaneous change in the dependent variable to that of the independent variable. Derivatives may be generalized to functions of several real variables. In this generalization, the derivative is reinterpreted as a linear transformation whose graph is (after an appropriate translation) the best linear approximation to the graph of the original function. The Jacobian matrix is the matrix that represents this linear transformation with respect to the basis given by the choice of independent and dependent variables. It can be calculated in terms of the partial derivatives with respect to the independent variables. The process of finding a derivative is called differentiation. The reverse process is called antiderivation. The fundamental theorem of calculus relates antiderivation with integration. Differentiation and integration constitute the two fundamental operations in single-variable calculus. ### DERIVATIVES MARKET The derivatives market is the financial market for derivatives, financial instruments like futures contracts or options, which are derived from other forms of assets. The market can be divided into two, that for exchange-traded derivatives and that for over-the-counter derivatives. The legal nature of these products is very different, as well as the way they are traded, though many market participants are active in both. The derivatives market in Europe has a notional amount of €660 trillion. ### Who are the market players in Derivatives market? On the basis of their trading rationale, participants in the Derivatives Market can be classified into 3 categories. These are as follows: * **Arbitrageurs**: In this category, the price difference between two different markets is exploited. A trader simultaneously buys an asset at a cheaper rate from one market and sells it at a higher price in another market, making it a low risk trade. However, it should be noted that such opportunities are very brief in the derivatives market. Since an arbitrageur rushes to grab this opportunity, it eventually narrows down the price gap. * **Hedgers**: In simple terms, hedging means buying insurance in order to minimize the risk. An investor/trader who wants to protect himself from unfavorable price movements is called a Hedger. The main objective of a hedger is to limit his exposure risk, and they do so by creating an exact opposite position in the derivatives market. * **Speculator:** Speculators are risk-takers who are willing to take high risk in the anticipation of making higher gains in a short span of time. They tend to buy stocks with the expectation that the price will rise and hope to eventually sell stocks at a higher level. While this category opens up the possibility of making large profits, it also exposes a trader to losing the principal amount. ### STOCK MARKET INTERMEDIATORS Financial intermediaries and financial markets can in many cases act as substitute sources of financial services. Lenders/savers, in particular, have a choice between the risk, return, and liquidity offered by both segments of the financial system. Each segment is able to offer a different range of investments and offers services to firms that are not complete substitutes. Broadly speaking, financial markets provide lower cost arms-length debt or equity finance to a smaller group of firms able to obtain such finance, while financial intermediaries offer finance with a higher cost reflecting the expense of uncovering information and ongoing monitoring. Financial intermediaries and markets may also provide complementary financial services to many firms. We identify the challenges confronted in the intermediaries-driven market regime, especially in preventing intermediaries' conflicts of interests vis-à-vis investors and issuer companies. Moreover, in the paper we attempt to ascertain if the existing regulatory framework is cognisant of such challenges and if it encompasses measures to fix intermediaries' accountability and liability in-conflict of interests situations. Currently, a rule-based avoidance regime of conflicts of interest is predominant in India, in contrast to the principle-based compliance seen in more mature capital markets. Given that regulations and rules alone cannot remedy such situations of conflict, the rules need to be supplemented with enduring principles and an ethical business culture. Creating robust internal control systems and self-regulation would be the two primary and predominant mechanisms to establish this culture. We conclude that conflicts of interest of intermediaries are inevitable, and we make recommendations to combat the conflict of interest crisis and mitigate risks while scrutinizing India's regulatory approach towards this menace from a practical standpoint. The establishment of SEBI-registered Self-Regulatory Organizations for market intermediaries is expected to bring the Indian market at par with international markets. ### Primary market intermediaries * **Merchant bankers** Merchant bankers play an important role in issue management process. Lead managers (category I merchant bankers) have to ensure correctness of the information furnished in the offer document. They have to ensure compliance with SEBI rules and regulations as also Guidelines for Disclosures and Investor Protection. To this effect, they are required to submit to SEBI a due diligence certificate confirming that the disclosures made in the draft prospectus or letter of offer are true, fair, and adequate to enable the prospective investors to make a well-informed investment decision. The role of merchant bankers in performing their due diligence functions has become even more important with the strengthening of disclosure requirements and with SEBI giving up the vetting of prospectuses. SEBI's various operational guidelines issued during the year to merchant bankers primarily addressed the need to enhance the standard disclosures. It was felt that a further strengthening of the criteria for registration of merchant bankers was necessary, primarily through an increase in the net worth requirements, so that their capital would be commensurate with the level of activities undertaken by them. With this in view, the net worth requirement for category I merchant bankers was raised in 1995-96 to Rs. 5 crore. In 1996-97, the SEBI (Merchant Bankers) Regulations, 1992 were amended to require the payment of fees for each letter of offer or draft prospectus that is filed with SEBI. Part III gives further details of the registration of merchant bankers during 1996-97. * **Underwriters** Underwriters are required to register with SEBI in terms of the SEBI Underwriters Rules and Regulations, 1993. In addition to underwriters registered with SEBI in terms of these regulations, all registered merchant bankers in categories 1, II, and 1II and stockbrokers and mutual funds registered with SEBI can function as underwriters. Part 1II gives further details of registration of underwriters. In 1996-97, The SEBI (Underwriters) Regulations, 1993 were amended mainly pertaining to some procedural matters. * **Bankers to an Issue** Scheduled banks acting as bankers to an issue are required to be registered with SEBI in terms of the SEBI Bankers to the Issue) Rules and Regulations, 1994. These regulations lay down eligibility criteria for bankers to an issue and require registrants to meet periodic reporting requirements. Part III gives further details of registration of bankers to an issue. * **Portfolio managers** Portfolio managers are required to register with SEBI in terms of the SEBI (Portfolio Managers) Rules and Regulations, 1993. The registered port folio managers exclusively carry on portfolio management activities. In addition, all merchant bankers in categories I and II can act as portfolio managers with prior permission from SEBI. Part 111 gives further details of the registration of portfolio managers. * **Debenture trustees** Debenture trustees are registered with SEBI in terms of the SEBI (Debenture Trustees) Rules and Regulations, 1993. Since 1995-96, SEBI has been monitoring the working of debenture trustees by calling for details regarding compliance by issuers of the terms of the debenture trust deed, creation of security, payment of interest, redemption of debentures, and redressal of complaints of debenture holders regarding non-receipt of interest/ redemption proceeds on due dates. Part III gives further details of the registration of debenture trustees. * **Registrars to an Issue and Share Transfer Agents** Registrars to an issue (RTI) and share transfer agents (STA) are registered with SEBI in terms of the SEBI (Registrar to the Issue and Share Transfer Agent) Rules and Regulations, 1993. Under these regulations, registration commenced in 1993-94 and is granted under two categories: category I- to act as both registrar to the issue and share transfer agent and category 11 to act as either registrar to an issue or share transfer agent. With the setting up of the depository and the expansion of the network of depositories, the traditional work of registrars is likely to undergo a change. ### Secondary Market Intermediaries: * **Stock brokers** All stock brokers dealing in securities registered with SEBI in terms of SEBI (Stock Brokers and Sub Brokers) Regulation 1992. During 1996-97, 391 additional brokers were registered with SEBI, making the total registered membership to 8,867 as on March 31, 1997. * **Sub brokers** In many cases, individual investors transact in securities through sub brokers. It is therefore absolutely imperative to regulate this class of intermediary. As on March 31, 1997 only 1,798 sub brokers were registered with SEBI. The main reason for the limited success in registering large number of sub brokers is that brokers are reluctant to take responsibility of the acts of the sub-brokers. Measures initiated by SEBI for bringing sub- brokers more fully under the ambit of regulatory oversight have been described earlier in this Report. ### ROLE OF SECURITIES MARKET INTERMEDIARIES The primary need for market intermediaries in the securities market is to match its demand and supply forces. In other words, intermediaries facilitate economies in confronting the critical challenge of the allocation of savings to investment opportunities, as below: [//]: # (Diagram Description: Diagram showing a circular flow; savings are directed to the intermediaries. From there they follow through to business opportunities, leading back to the intermediaries.) Economies that are able to match their available resources/savings to appropriate investment opportunities are successful in the creation of novel business avenues and the generation of more wealth and progress. Thus, to say that intermediaries are capable making or breaking economies would not be an statement. Further, investors and issuers are no longer homogenous; issuers and investors today are diverse and depict heterogeneous characteristics. To connect and manage such diverse groups, a mature market with sophisticated middlemen is essential. Additionally, in contemporary securities markets, investors, and issuers rely heavily on intermediaries to operate on well-informed decisions. Investors, especially retail investors, do not have adequate information, knowledge, or expertise, and issuers do not have adequate resources to reach out to individual investors spread across the country and the globe. Therefore intermediaries have a very crucial and sensitive role to play making market matrix, especially anonymous order driven trading platforms work smoothly. ### INDIAN LAWS GOVERNING SECURITIES MARKET INTERMEDIARIES The SEBI crafted a comprehensive regulatory framework, encompassing all intermediary categories the Intermediary Regulations. However, most the provisions are yet to be notified, except those dealing with enforcement orders and procedures. Today, intermediaries continue to be governed by the specific regulations governing each category of intermediaries, which include: * The SEBI (Stock Brokers and Sub- brokers) Regulations, 1992; * The SEBI (Depositories and Participants) Regulations, 1996; * The SEBI (Bankers to an Issue) Regulations 1994; The SEBI (Merchant Bankers) Regulations, 1992; * The SEBI (Portfolio Managers) Regulations, 1993; * The SEBI (Registrar to an Issue and Share Transfer Agents) Regulations, 1993; * The SEBI (Underwriters) Regulations, 1993. ### ROLE OF MERCHENT BANKERS IN THE ISSUE MANAGEMENT OF IPO AND FPO #### Issue management The management of issues for raising funds, though various types of instruments by companies is known as Issue management. Issue management can be defined as managing the issues of corporate securities, like equity shares, preference shares, and debentures/bonds. Also, marketing of capital issues, of existing companies, including rights issues and dilution of shares by a letter of offer, are included in it. The function of capital issues management in India carries out by merchant bankers, who have the requisite professional sill and competence. One of their functions, in fact issue management. Factors such as the tremendous growth in the number and size of public-listed companies, and the complexity arising, due to the ever-increasing SEBI requirements have all attributed to increasingly significant role players. The management of securities of the corporate sector offered to the public on a regular basis, and existing shareholders on a rights basis is known as public issue management. Issue management is an important function if merchant bankers and lead managers. The definition of merchant baker are contained in SEBI (Merchant Banker) rules and regulations. 992 clearly brings out the significance of Issue Management as follows: any person who is engaged in the business of Issue Management, either by making arrangement regarding selling, buying or subscribing to securities as manager, consultant advisor or rendering corporate advisory services in elation to such issue Management. A fast growing economy like India offers tremendous scope for issue management and , the merchant bankers provide their skills and expertise to companies in the management of capital issues. This essentially aims at channeling household savings in to the corporate sector through the issue of corporate securities. Companies raise fonds for the purposes of financing new projects, expansion/modernization/diversification of existing units and Augmenting long turn resources for working capital purposes. ### What is the role of a merchant banker Merchant bankers play an important role in public issue process. While acting as banker to an issue, a merchant banker has disclosed full details to the securities Exchange Board of India (SEBI). Fundamentally, merchant banks are financial institutions. They engage in business loans, as well as underwriting. They mostly cater to Large enterprises and individuals of high net worth. They perform a combination of consultancy and banking services. They provide consultancy matters pertaining the finances marketing management in law. 5uch consultancy services .Starting of assist businesses raise finance modernize expand or restructure business, revival of sick units as well as provide assistance to Companies in registering, buying and selling shares. They do not perform, the functions of depositories or retailer institutions. They are instead. intermediates. They assisted international transaction that involve multinational corporations. 1. **Furnishing Information**: * Number of issues for which the merchant banker is engaged as banker to issue. * Number of applications received *Details of application money received * Date 5 an which applications from investors were forwarded to issuing company. * Details of amount as refund to investors. 2. **Books to be Maintained**: * Books of accounts for a minimum period of 3 years * Records regarding the company * Documents such as company applications, names of investors, etc. 3. Agreement with issuing company Agreement with the merchant banker should contain * Number of collection centers * Application money received. * The daily statement by each branch which is a collecting center 4. Action by RBI any action merchant banker of the should be informed to SEB1 the Merchant Banker concerned. 5. Code of Contact Having high integration dealing with Clemts * Disclosure of detail orities concerned. Avoiding making exaggerated statements * Disclosing of the facts to customers * Not disclosing any confidential matter if the clients to third parties. * facilitate for primary advice * Merchant bankers are in charge the issue process. betweet the also marketine * Consults que diligence issues a certificate * Cnderwrite .dhares * the as intermedia the preparing the * Price brand. 7. .marketing for the companyINITIAL PUBLIC OFFERING Initial public offering or stock market launch type public offering which Shares of a company are soldinstitutional investors retail and or are IPO is underwritten by more investment banks arrange for the to listed exchanges Through processed known floaling or 761 public privately held company & transformed it public ### INITIAL PUBLIC OFFERING Initial public offering (IPO) or stock market launch is a type of public offering in which shares of a company are sold to institutional investors and usually also retail (individual) investors. An IPO is underwritten by one or more investment banks, who also arrange for the shares to be listed on one or more stock exchanges. Through this process, colloquially known as floating, or going public, a privately held company is transformed into a public company. Initial public offerings can be used to raise new equity capital for companies, to monetize the investments of private shareholders such as company founders or private equity investors, and to enable easy trading of existing holdings or future capital raising by becoming publicly traded. After the IPO, shares are traded freely in the open market at what is known as the free float. Stock exchanges stipulate a minimum free float both in absolute terms and as a proportion of the total share capital. Although IPO offers many benefits, there are also significant costs involved; chiefly those associated with the process such as banking and legal fees, and the ongoing requirement to disclose important and sometimes sensitive information. Details of the proposes offering are disclosed to potential purchases in the form of lengthy document known prospectus Most companies Undertakes in IPO with the assistance ofan The investment banking from acting in the capacity underwriter. Underwriters, provide severa including help correctly the of shares ( Share price and establishing a public market such at the Auction also and Several IPOs ### FOLLOW ON PUBLIC OFFER (FPO) A follow-on public offering (FPO) is the issuance of shares to investors by a company listed on stock exchange. A follow an offering is an issuance of additional shares made by the company after an initial public offering (IPO). However, follow-on offerings are different than Secondary offerings A follow-on public offering (FPO) different secondary offering an includes the of (2 prospectus similar public (IPO) A offering Securities the company Public Companies advantage (2 FPO document. should with IPO 3 initial equity publicare additional made an companies established an exchange * A fellow - on Public ffer anther of Shares Public IPO Companies usnally announce FPOs to or reduce debt. Public and The types af FPOs and dilutive Meaning and share added non dilative meaning privare Shares sold publicly An 2t- market offering ATM is &type (at type by company can offer. secondary public Shares. an given. depending the privalling to raise Capital ### Types of FPO There are basically two types of FPO, which are: * **Dilutive Offering:** Here, the ownership percentage of the board of directors of the company is diluted. The shares are purchased from the owners of the company. In order to issue more shares, the boards of directors raise the share float. Floating of the shares is essentially the total number of outstanding shares that are issued to the public for sale or investment. * **Non-Dilutive Offering:** In this type of FPO, the directors of the company agree to sell their privately held shares. It is non-dilutive because no additional shares are being sold in the market. ### DIFFERENCE BETWEEN FPO AND IPO Most of the people tend to consider the FPO and IPO as same but there is a big difference between the two terms. The prominent points of differences are listed below: * **Definition:** If any company decides to go public by selling its stocks for the first time, then it is known as the Initial Public Offering (IPO). On the other hand, FPO means issuing shares by a public company which is already established in the market and listed on the stock exchange. * **Type of Public Issue of Shares:** It is the first public issue of the shares by the company, whereas, FPO can be second, third or fourth public issue of shares. * **Listing Status:** An IPO is issued by the company before it is listed in the stock exchange. On the other hand, FPO is issued by a listed company. ### MODEL QUESTIONS 1. What is the primary market? 2. Define the secondary market. 3. Write a note on the stock market. 4. What is the equity capital market? 5. Define the debt market. 6. Write a note on the industrial security market. 7. What is derivatives? 8. Explain the role of security market intermediaries. 9. Discuss the structure of the security market in India. 10. Examine the role of merchant banking in issue management.