Overview of capital markets
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This document provides an overview of capital markets and the finance function. It discusses the aims of the finance function such as procuring adequate funds, mobilizing funds, accelerating profits, and maximizing firm value. It also defines what the finance function is and provides examples of how recent funds were mobilized by different companies. Additionally, it discusses key aspects of the capital market such as the primary and secondary markets and how companies can raise funds through the primary market via methods like IPOs, rights issues, private placements etc.
Overview of capital markets
- 1. An Overview of CAPITAL MARKETS
- 2. Aims of Finance Function Procuri ng adequa te funds Aims of Finance functio ns Mobiliz ation of funds Acceler ation of profits Maximi ze firm value Financi al reporti ng Accoun ting and Analysi s What is finance Function? Finance function refers to action performed by a finance department that involves acquiring and utilizing funds of a business.
- 3. Name of Firm Nature of Business Funds Procured recently How the funds were mobilized? Bharthi Infratel Telecom tower infrastructure providers which deploys, owns and manages telecom towers and communication structures for all wireless operators Rs 4,500 Crore 1. Installation of 4,813 new towers; 2. Up gradation and replacement on existing towers; 3. Green initiatives at tower sites; 4. General corporate purposes; and Just Dial Local Search Engine: providing local search services over the Phone, Web, Mobile and SMS. Rs. 327 crore The funds will be used for expansion and to upgrade technology. PC Jeweller Ltd Operations include the manufacture, retail and wholesale of jewellery. Rs. 609.30 Crore 1. Finance establishment of new showrooms; 2. General corporate purposes. Finance Function in action The basic corporate finance functions are described as those functions related raising capital to support company operations and investments. The finance function ensures that resources are efficiently and effectively acquired, maintained
- 4. Putting things in Perspective What is a Market? A market is a location where buyers and sellers come into contact to exchange goods or services. Markets can exist in various forms depending on various factors. Existence of an area Buyers and sellers Commodity Competition Price consideration KEY CHARACTERISTICS OF A MARKET Market is an avenue whether physical or virtual where the sellers of a specific good or service can interact with the buyers of that goods and service where there is a possibility for a transaction to take place.
- 5. A financial market is a market in which people and entities can trade financial securities, commodities, and other fungible items of value at low transaction costs and at prices that reflect supply and demand. Broad term describing any marketplace where buyers and sellers participate in the trade of assets such as equities, bonds, Financial Market Organized Market Capital Market Industrial Securities Market Primary Market Secondary Market Government Securities Market Long Term Loan Market Term Loan Market Market for MMaorrktegta gfoer financial Guarantees Money Market Call money market Commercial bill market Treasury bill market Short term loan market Unorganized Market Money lenders and indigenous bankers
- 6. What is a Capital Market? It is a market for financial assets which have a long or indefinite maturity. It includes securities with long term maturity (i.e. above one year). How do I decide the Capital Required ? Nature of Business Size of a Firm Stability in Earnings Growth stage Asset structure Control factor Risk apatite of management Corporate Taxes Degree of Competition Cost of capital Investors requirements
- 7. Nature of Business & Capital Investments 407.31 199.59 175.05 38.42 34.54 Inventories 68.75 73.7 32.91 37.89 19.17 Sundry Debtors 56.33 18.29 52.83 32.2 24.18 Cash and Bank Balance 1.39 10.76 1.16 0.81 0.47 Total Current Assets 126.47 102.75 86.9 70.9 43.82 in Rs. Cr. 12 mths 12 mths 15 mths 12 mths 12 mths Fixed Assets 10.87 13.85 13.94 13.77 29.39 Less: Accum. Depreciation 2.19 3.64 2.89 2.13 15.68 Total Fixed assets 8.68 10.21 11.05 11.64 13.71 Balance sheet extract of Pantaloons industries Balance sheet extract of Kingfisher Airlines Investments 0.03 0.05 0.05 0.05 0 Inventories 204.79 187.65 164.88 147.25 48.64 Sundry Debtors 187.59 440.53 322.49 229.84 27.16 Cash and Bank Balance 182.27 88.18 50.91 49.41 5.84 Total Current Assets 574.65 716.36 538.28 426.5 81.64 in Rs. Cr. 12 mths 12 mths 15 mths 12 mths 12 mths Fixed assets 2,238.72 2,254.26 2,048.14 1,891.80 322.33 Less: Accum. Depreciation 795.69 682.37 493.62 316.29 43.55 Total Fixed Assets 1,443.03 1,571.89 1,554.52 1,575.51 278.78
- 8. Stability of Earnings Stable earning of ONGC Limited: Stable earning of ONGC Limited: ------------------- in ------------ Mar '12 Mar '11 Mar '10 Mar '09 Mar '08 Sales Turnover 76,887.06 66,487.1 60,470.1 64,342.2 60,466.4 Net Sales 76,515.09 66,164.3 60,251.7 64,003.9 60,065.1 Other Income 7,593.53 5,028.07 3,615.96 4,085.59 4,228.63 Total Income 84,199.96 71,205.3 63,985.7 68,170.6 64,407.8 Share holding pattern and control factor Share Holdi g Patter n in (%) Tata Power Wipro MAR' 13 DEC' 12 JUN' 12 MAR' 12 Promo oter 32.4 31.7 31.7 31.8 FII 24.5 24.9 22.9 21.8 DII 23.7 23.9 25.6 26.5 Other s 19.2 19.3 19.6 19.7 Total 100 100 100 100 Share Holdi ng Patter n in (%) MAR' 13 DEC' 12 SEP' 12 JUN' 12 Prom oter 78.2 78.2 78.3 78.3 FII 7.3 7.02 6.54 6.59 DII 3.32 3.06 3.5 3.47 Other s 11.1 11.6 11.6 11.5 Total 100 100 100 100
- 9. Concept of Capital Market Capital market is market for financial assets which have a long or indefinite maturity. It includes securities with long term maturity (i.e. above one year). A Industrial Securities Market The industrial securities market is an ideal market for corporates to rise long term funds by issuing debt and equity Primariny struments. MaNrkeewt issue market Secondary Market Also called aftermar ket Classificatio n of capital Market Industrial Securities Market Governm ent Securities MLaornkge t term Loan Classification of CO; Market Capital Authorized Capital Issued Capital Subscribed Capital Called up Capital Paid up capital
- 10. The primary market is the part of the capital market that Cdoemalsp awniitehs ,is gsouvinegrn omf ennetws oser cpuurbitliiecs s. ector institutions can obtain funds tPhrriomuagrhy t he sale of a Debt & Equity securities. Market How to raise funds from primary Market? IPO FPO Right Issue Features of Primary Market Private Placement ESOP Fast-track Issue Offer for Sale Methods of Floating new issues
- 11. Process for IPO- Issue mechanism Price Discovery Application to SEBI Drafting of prospectus Appointment of : Underwrit ers Registrar Brokers Allotment Listing of shares Review
- 12. Drafting of prospectus Section 2(36) in The Companies Act, 1956 Any document described or issued as a prospectus and includes any notice, circular, advertisement or other document inviting deposits from the public or inviting offers from the public for the subscription or purchase of any shares in, or debentures of, a body corporate;
- 13. Prospectus means any document inviting the public for the subscription of financial instruments. Type What it means? Process Contents Remarks Offer docu ment Prospectus in case of a public issue or offer for sale and Letter of Offer in case of a rights issue. filed Registrar of Companies (ROC) and Stock Exchanges. Document covers all the relevant information to help an investor to make his/her investment decision. Draft Offer docu ment Offer document in draft stage. filed with SEBI, at least 21 days prior to the filing of the Offer Document with ROC/ SEs. SEBI may specifies changes, if any, in the draft Offer Document Document covers all the relevant information to help an investor to make his/her investment decision. But it is not finalized. The Draft Offer document is available on the SEBI website for public comments for a period of 21 days from the filing of the Draft Offer Document with SEBI. Red Herrin Prospectus which does not have details of either price or This means that in case price is not disclosed, An RHP for and FPO can be filed with the RoC without the price band and the issuer, in such a case Only on completion of the bidding process, the details of the final price are included in the Types of Prospectus
- 14. Price Discovery How to fix the price of the Price discovery is the sprhocaesrs eofs d?etermining the price of an asset in the Fixed Pricedm Issaureketplace through the interactions of buyers and sellers. •The issuing company determines a fixed price for the issue. Book Building Issue •The issuing company ‘discovers’ its price using the book building process Note •There is no fixed price per share. Instead, the company issuing the shares arrives at a price band. Step 1 •Appointment of book runner- BRLM Step 2 •Selection of price Band Step 3 •Applicants then bid for the shares. Step 4 •The final price is then discovered based on these bids. Price Band Describe a price range in a Book Building issue Floor price Lowest price is referred to as the ‘floor price’ Cap price The highest, the ‘cap price’ Cut off Price Issue price after book building is called "cut off price". Lot size Lot size is the quantity multiple of the issue.
- 15. Price Discovery Factors Influencing IPO Pricing QUALITATIVE Past Records Experience of Promoters Unique Selling Proposition Industry Scenario Credit Rating Current Market Price & High Low of last 3 Years P/E Multiple compared to Industry Growth Rate in PAT & EPS Industry Scenario QUANTITIVE Book Value of Shares RONW & ROCE
- 16. Types of Bidders RII HNI or NIIs QIBs "Retail individual investor" means an investor who applies or bids for securities for a value of not more than Rs. 2,00,000 If retail investor applies more then Rs. 2,00,000 /- of shares in an IPO, they are considered as HNI. Financial Institutions, Banks, FII's and Mutual Funds who are registered with SEBI are called QIB's. They usually apply in very high quantities. What are the different types of investor categories? Reservati ons Retail Investors 35% : Non Institutional Investors 15%: Qualified Institutional Investors 50%
- 17. Differential Factor Fixed Pricing Book Building Knowledge of Price Know to investor in Advance Only an indicative price range is given Demand Demand for the issue is know only after the closure of the issue Demand for shares is known everyday as the book is built Payment Payment is made at the time of subscription. Refund is given after allocation. Payment is made only after allocation. Reservations 50 % of the shares offered are reserved for applications below Rs. 1 lakh and the balance for 50 % of shares offered are reserved for QIBS, 35 % for small investors and the Difference between Fixed price and Book Building
- 18. Description No. of Shares Price per share Share Capital Maximum amount of capital which a company is allowed 1,000 Shares Rs. 10 Rs. 10,000 Offered by the company 300 Shares Rs. 10 Rs. 3,000 Accepted by the public 200 Shares Rs. 10 Rs. 2,000 Amount company asks to pay 100 Shares Rs. 10 Rs. 1,000 Actually paid by the shareholders. 90 Shares Rs. 10 Rs. 900 Check you Progress Termed Authorized capital Issued capital Subscribed capital Called-up capital Paid-up capital
- 19. UnderwritinG What if the shares are not Underwriting is guSaurabntsece rgiibveend b?y underwriters to take up whole or part of the issue of securities not subscribed by the public. An underwriter is an investment firm that acts as an intermediary between a company selling securities and the investing public The underwriter is the principal player in the IPO Typically, the underwriter buys the securities for less
- 20. Types of Underwriting The underwriting commission may not exceed 5 percent on shares and 2.5 percent in case of debentures. Advantages of underwriting: 1. Relieved from the tension of marketing of securities and of uncertainties in the market. 2. Fulfilling the statutory regulation of minimum subscription. 3. Guarantee to adequacy of CapitaLand help companies in raising capital. Disadvantages of underwriting: 1. 4. Very Quick costly sale method of securities 2. Provide secret information 3. Secure control on the company Firm Underwriting Sub- Underwriting Syndicate Underwriting agree to buy, securities not to be taken up by the public. Main enter UW enters into a the contract wit other underwriters to share the risk Agreement between the issuing company and 2-3 or more firms of underwriters to underwriters a large issue. Leading IPO U1n.deGrowldrimtearns Sachs 2. Morgan Stanley 3. Merrill Lynch Underwriting is guarantee given by underwriters to take up whole or part of the issue of securities not subscribed by the public.
- 21. Role of underwriters Honor commitments within 60 days of Underwriter Greenshoe Option Underwriting is guarantee given by underwriters to take up whole or part of the issue of securities not subscribed by the public. closure of issue If an issue is not subscribed to 100%, the underwriters are obligated to take-up the unsubscribed portion An IPO's Best Friend A green shoe option can create greater profits for both the issuer and the underwriting company if demand is greater than expected. It also facilitates price stability. Stride Rite Corporation also referred to as over-allotment option A provision contained in an underwriting agreement that gives the underwriter the right to sell investors more shares than originally planned by the issuer.
- 22. Lead ManagTehreys are also called merchant bankers and are in charge of the issue process. Lead managers are independent financial institutions appointed by the company going public to manage the IPO. They are the main body responsible for most of the IPO processing. Due diligence issue 2. Preparation of the Budget 3. Suggest on timing of issue 4. Prepare & design offer documents 5. Advice on appointment of registrar, underwriters, brokers, bankers & advertising agency. 6. Compliance (Stock Exchange, RoC, SEBI) Role, Duties or Functions of Lead Pre-1. Post-issue 1. Management of Escrow Account 2. Allotment of shares and refund 3. Finalization of trading 4. Dispatch and de-materialization 5. Redressal of investor grievances
- 23. Bankers to Issue Carries out all the activities of ensuring that the funds are The bankers to an issue collect money on behalf of the company from the applicants. collected and transferred to the Escrow accounts. Escrow Account: In other words, the bankers to the issue keep the funds in the escrow account on behalf of the bidders. 1. Application management 2. Determine basis of allotment 3. Finalize allotment of securities Registrars 4. Processing to an Issue refunds and Share Transfer Agents Role, Duties or Functions of Registrar
- 24. Basis of allotment in a public issue a fair and proper manner Concept of Allotment Retail Investors 35% : Non Institutional Investors 15%: Qualified Institutional Investors 50% FIRM ALLOTMENT |PROPORTONATE ALLOTMENT |LOTTERY ALLOTMENT 1. The over subscription ratios are then calculated for each of the categories 2. In each of these categories, the bids are then segregated into different buckets based on the number of shares applied for. 3. The over subscription ratio is then applied to the number of shares applied for and the number of shares to be allotted for applicants in each of the buckets is determined. 4. The number of successful allottees is determined.
- 25. Retail Investors 35% : Non Institutional Investors 15%: No of shares issued Qualified Institutional Investors 50% No of applications received Over subscription ratio Lot size 1000 3000 3 times 30 & multiples thereof Perso n Lot Applied Calculation How much he will get? Mr. X 30+30 (60)=2 Lots No.of share applied (in Lot) ÷No. of time of oversubscription in particular category --60/3=20 Lottery Method Mr. Y 30+30+30+30(120) =4 Lots 120/3=4 40 shares Concept of Allotment a fair and proper manner
- 26. Listing refers to the admission of security of a public limited company on a recognized stock exchange for trading. Listing of Shares Entry to stock Exchange Listing of securities offered to public becomes compulsory. Objectives Liquidity Mobilize savings Protect interest of investors by ensuring full disclosures Industry Scenario Credit Rating Requirements of Listing in Stock Market (Conditions) 1 The minimum post-issue paid-up capital of the applicant shall be Rs. 10 crore for IPOs & Rs.3 crore for FPOs; 2 The minimum issue size shall be Rs. 10 crore 3 The minimum market capitalization of the Company shall be Rs. 25 crore (market capitalization shall be calculated by multiplying the post-issue paid-up number of equity shares with the issue price). 4 To deposit 1% of the issue amount with the Designated Stock Exchange before the issue opens.
- 27. Entry Norms of SEBI criteria to be eligible SEBI requirements for issuing shares to An unlisted company has to satisfy the following critpeuriba ltioc be 1e.liNgiebtleT taon mgiabklee aA pssuebtlsic oisfsuaet (IlPeOas).t Rs. 3 crores in each of the preceding three full years of which not more than 50% are held in monetary assets. However, the limit of fifty percent on monetary assets shall not be applicable in case the public offer is made entirely through offer for sale. 2. Minimum of Rs. 15 crores as average pre-tax operating profit in at least three of the immediately preceding five years. 3. Net worth of at least Rs. 1 crore in each of the preceding three full years. 4. If the company has changed its name within the last one year, at least 50% revenue for the preceding 1 year should be from the activity suggested by the new name. 5. The aggregate of the proposed issue and all previous issues made in the same financial year in terms of issue size does not exceed five times its pre-issue net worth as per the audited balance sheet of the preceding financial year In case an unlisted company does not satisfy any of the above criterion, it can come out with a public issue only through the Book-Building process. In
- 28. What is Tangible Net Worth? Calculated as the total assets of a company, minus any intangible assets such as goodwill, patents and trademarks, less all liabilities and the par value of preferred stock. Net Tangible Assets (NTA) = Total assets — Intangible assets — Total liabilities What is operating profit? The profit earned from a firm's normal core business operations. Particulars Amount Sales Less: Variable Cost Contribution Less: Fixed Cost Operating profit Also known as "earnings before interest and tax" (EBIT) or "operating income".
- 29. What is Tangible Net Worth? Net worth can be a useful tool to measure your financial progress from year to year. 1) Share capital reserve + Surplus When, Net worth 2) Asset —Liability inc1.reAa csoemsp oanry Dcaen cinrceraeassee sit?s net worth by paying down liabilities or increasing assets. 2. If a company has positive earnings on its income statement at the end of the year, this will increase its net worth in the form of retained earnings. 3. On the other hand, negative earnings (losses) will decrease net worth. Proposed Issue < 5 times pre-issue networth Issue Size Networth 5 times 4. Paying out dividends can also decrease a company's net worth. Netwoth 10,000 shares × Rs .100 per share 10,00,00 2 Lakhs 5×2L=10L 10,000 shares × Rs .100 per share 10,00,00 5 Lakhs 5×5L=25L
- 30. Entry Norms of SEBI criteria to be eligible SEBI requirements for issuing shares to public 1. If the company has changed its name within the last one year, at least 50% revenue for the preceding 1 year should be from the activity suggested by the new name. 2. The aggregate of the proposed issue and all previous issues made in the same financial year in terms of issue size does not exceed five times its pre-issue net worth as per the audited balance sheet of the preceding financial year Any listed company not fulfilling these conditions shall be eligible to make a public issue (i.e. FPO) by complying with QIB Route as specified for IPOs i.e. issue shall be through book building route, with at least 75% to be mandatory allotted to the Qualified Institutional An listed company has to satisfy the following criteria to be eligible
- 31. Buy Back of Shares “Buy-Back is a corporate action in which a company buys back its shares from the existing shareholders usually at a price higher than market price”. Reasons for Buy Back To change capital structure To utilize huge Cash balance Increase promoter's stake Reduces takeover chances Enhances shareholders value Better valuation of shares Tax Implication
- 32. Capital Structure Amoun Concept of Capital Capitalisation Refers to the total amount of securities issued by the company Equity capital 50,00,000 Preference capital 25,00,000 Debentures 15,00,000 Long term bonds 20,00,000 Equity capital 50,00,000 Focus is on and equity. Over capitalization is situation when the company raises more capital than required for its level of business activity and Capitalisation 1,60,00,000 Financial structure Represents entire liability side of balance sheet Equity capital 50,00,000 Preference capital 25,00,000 Debentures 15,00,000 Long term bonds 20,00,000 Reserves & surplus 20,00,000 Retained earnings 5,00,000 Current liabilities 15,00,000 1,50,00,000 t Focus is on quality, measured by comparing Mix of various long term sources of funds Equity capital Equit y proportion of debt 70.07 % 50,00,000 Preference capital 25,00,000 Reserves & surplus 20,00,000 Retained earnings 5,00,000 Debentures Debt 29.93 % 15,00,000 Long term bonds 20,00,000 quantity of funds employed using various long term securities and Loans. Signifies the way in which the firm's assets are financed. Liabilities Rs. (lakhs) Assets Rs. (lakhs) Equity capital 75 Land and Building 85 Debentures 100 Plant and Machinery 50 Long term loans 25 Furniture and fixtures 20 Reserves and Surplus 80 Investments 65 Current liabilities 10 Cash and Bank balance 70 290 290 Balance Sheet of: Ex-why-zee Limited In fact most of the long terms funds are being invested in current assets. company also has excessive reserves and surplus. company has an excessive amount of cash or liquid assets. Overcapitalized company must: • Repay its debt or • Make a tender offer for shares in order to reduce its capital. requirements.
- 33. Methods of Buy bac“kBusy-Back is a corporate action in which a company buys back its shares from the existing shareholders usually at a price higher than market price”. Through the Tender offer Methods of buyback of shares From Open Market Through stock exchange Book Building process From Odd- Lot holders
- 34. A special resolution shall be passed in general meeting of the company authorizing buy-back. The company shall appoint a merchant banker and make a public announcement A company opting for buy back through the public offer or tender offer shall open an escrow Account. The offer for buy back shall remain open to the shareholders for a period not less than fifteen days and not exceeding thirty days. The merchant banker and the company shall determine the buy-back price based on the acceptances received. The final buy-back price, which shall be the highest price accepted shall be paid to all holders whose shares have been accepted for buy-back. Extinguishments of Certificate The Company shall extinguish and physically destroy the security certificates so bought back in the presence of a Registrar or the Merchant Banker, and the Statutory Auditor within seven days from the date of acceptance of the securities. Process or Procedure of Buy Back of shares
- 35. Mobilization of Savings Capital Formation Provision of Investment Avenue Speed up Economic Growth and Developme nt Continuous Availability of Funds Service Provision Function, Objectives and Importance of Primary, Capital and Financial Markets
- 36. UK Financial Conduct Authority U.S. Securities and Exchange Commission Hong Kong Securities and Futures Commission Germany Federal Financial Supervisory Authority China China Securities Regulatory Commission Canada Canadian securities regulation India Securities and Exchange Board of India Australia Australian Securities and Investments Commission