Types of issue of shares in Indian capital market

Under the Securities and Exchange Board of India (SEBI) Guidelines, the securities can be offered for sale in the primary market in different ways. Each method of issue has got its procedure and mechanism. The methods of issues of securities are :

1. Public Issue through Prospectus:

This method is the most common and popular method of issue of securities. The securities are offered to the investors through a detailed statement of terms and conditions known as prospectus. The prospectus is also known as the offer document. The contents of a prospectus are as per the requirements given in the Chapter VI of the SEBI Guidelines, 2000. These requirements are in respect of Name of the Company; Board of Directors; Existing and Proposed activities of the issuer; Authorised, Issued and Paid-up Capital; Names of the Merchant Bankers, Lead Manager, Advisors, Registrar, Bankers, Underwriters; Minimum Subscription; Different Disclaimer Clauses; Terms of the Present Issue: Utilisation of Issue Proceeds; Analysis of Financial Conditions and Result of Operations; Financial Information of Group Companies; Issues Price and basis for that; Risk Factors; Other general and financial information. The issue by prospectus method is adopted when the company wants to issue fixed number of securities at a fixed price (which may be equal to, less than or more than the face value). The application forms together with the copy of prospectus are distributed among the public investors who offer to the company to buy a specific number of securities. In case of over-subscription, the securities are allotted to the investors, in consultation with the stock exchange where the securities are proposed to be listed.… Read the rest

Capital market reforms by the SEBI

Securities and Exchange Board of India (SEBI) has a primary responsibility of regulating and supervising the capital market. It has introduced a number of reforms for the control and supervision of capital market and investors protection.

Primary Market Reforms by the SEBI:

The Securities and Exchange Board of India (SEBI) has introduced various guidelines and regulatory measures for capital issues for healthy and efficient functioning of capital market in India. The issuing companies are required to make material disclosure about the risk factors, in their offer documents and also to get their debt instruments rated. Steps have been taken to ensure that continuous disclosures are made by firms so as to enable to investors to make a comparison between promises and performance. The merchant bankers now have greater degree of accountability in the offer document and the issue process. The due diligence certificate by the lead manager regarding disclosure made in the offer document, has been made a part of the offer document itself for better accountability and transparency on the part of the lead managers.

New reforms by SEBI, in the primary market, include improved disclosure standards. introduction of prudential norms and simplifications of issue procedures. Companies are now required to disclose all material facts and specific risk factors associated with their projects while making public issues. SEBI has also introduced a code for advertisement for public issues for ensuring fair and true picture. In order to reduce the cost of issue, the underwriting of issues has been made optional subject to the conditions that if the subscription is less than 90% f the amount offered, the entire amount collected would be refunded to the investors.… Read the rest

Securities and Exchange Board of India (SEBI)

Securities and Exchange Board of India (SEBI) is the nodal agency to regulate the capital market and other related issues in India. It was established in 1988 as an administrative body and was given statutory recognition in January 1992 under the SEBI Act 1992 which came into force on January 30, 1992. Before that, the Capital Issues(Control) Act, 1947 was repealed. SEBI has been constituted on the lines of Securities and Exchange Commission of  USA. SEBI is consisting of the Chairman and 8 Members (one member representing the Reserve Bank of India, two members from the officials of Central Government and five other public representatives to be appointed by the Central Government from different fields). SEBI has been playing an active role in the Indian Capital Market to achieve the objectives enshrined in the SEBI Act, 1992.

The major objective of the SEBI may be summarised as follows:

  • To provide a degree of protection to the investors and safeguard their rights and to ensure that there is a steady flow of funds in the market.
  • To promote fair dealings by the issuer of securities and ensure a market where they can raise funds at a relatively low cost.
  • To regulate and develop a code of conduct for the financial intermediaries and to make them competitive and professional.
  • To provide for the matters connecting with or incidental to the above.

Section 11 of the SEBI Act deals with the powers and functions of the SEBI as follows :

  • It shall be the duty of Board to protect the interests of the investors in securities and to promote the development of and to regulate the securities market by measures as deemed frt.
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About secondary markets

Secondary market refers to the network/system for the subsequent sale and purchase of securities. An investor can apply and get allotted a specified number of securities by the issuing company in the primary market. However, once allotted the securities can thereafter be sold and purchased in the secondary market only. An investor who wants to purchase the securities can buy these securities in the secondary market. The secondary market is market for subsequent sale/purchase and trading in the securities. A security emerges or  takes birth in the primary market but its subsequent movements take place in secondary market. The secondary market consists of that portion of the capital market where the previously issued securities are transacted. The firms do not obtain any new financing from secondary market. The secondary market provides the life-blood to any financial system in general, and to the capital market in particular.

The secondary market is represented by the stock exchanges in any capital market. The stock exchanges provide an organised market place for the investors to trade in the securities. This may be the most important function of stock exchanges. The stock exchange, theoretically speaking, is a perfectly competitive market, as a large number of sellers and buyers participate in it and the information regarding the securities is publicly available to all the investors. A stock exchange permits the security prices to be determined by the competitive forces. They are not set by negotiations off the floor, where one party might have a bargaining advantage.… Read the rest

About primary market or new issue market

Companies issue securities from time to time to raise funds in order to meet their financial requirements for modernisation, expansions and diversification programmes. These securities are issued directly to the investors (both individuals as well as institutional) through the mechanism called primary market or new issue market. The primary market refers to the set-up which helps the industry to raise the funds by issuing different types of securities. This set-up consists of the type of securities available, financial institutions and the regulatory framework. The primary market discharges the important function of transfer of savings especially of the individuals to the companies, the mutual funds, and the public sector undertakings. Individuals or other investors with surplus money invest their savings in exchange for shares, debentures and other securities. In the primary market the new issue of securities are presented in the form of public issues, right issues or private placement.

Firms that seek financing, exchange their financial liabilities, such as shares and debentures, in return for the money provided by the financial intermediaries or the investors directly. These firms then convert these funds into real capital such as plant and machinery etc. The structure of the capital market where the firms exchange their financial liabilities for long-term financing is called the primary market. The primary market has two distinguishing features :

  • It is the segment of the capital market where capital formation occurs; and
  • In order to obtain required financing, new issues of shares, debentures securities are sold in the primary market.
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Mintzberg’s Model of Organizational Structure

Management expert Henry Mintzberg  proposed that traditionally organizations (profit making or not for profit) can be divided into five components. In practice organizational structure may differ from proposed model. Factors influencing organizational structure are industry norms,  size, experience, culture, external forces (competition, inflation, minimum wage legislation etc). Components identified by Mintzberg is useful for understanding the workflow of organizations.

The structure of an organization can be defined simply as the sum total of the ways in which it divides its labor into distinct tasks and then achieves coordination among them” – The Structuring of Organizations, Henry Mintzberg.

1. Strategic Apex

Strategic  apex is the most senior level in the organization. Management working at this level is referred as board of Directors (chairman, CEO, executes and non executive directors). They set the objectives (increase sales by 10% in one year) and strategic direction (new product and markets developments) of the organization. They take major investing (takeovers) and financing (Shares issue) decisions. They are not involved in day to day operations of the business. They do not deal with customers and suppliers except in exceptional cases (dealing with complaints). They represent the organizational face to external stakeholders (person have interest in the organization like government). Integrity of organization can be judged by integrity of its board of directors.

2. Middle Line

Middle line managers interprets objectives and strategies of the strategic level management into feasible plans and standards to get the work done through operational managers. They set budget, receives reports from management accountants, monitors performances and take corrective actions where necessary.… Read the rest