SECURITIES MARKET SEGMENTS

SECURITIES MARKET SEGMENTS (Part 1)

• Definition: The primary market refers to the market where equity or debt funds are raised by companies from ‘outside’ investors through an offer of securities.
• Key Characteristics:
  • Investors purchase the security directly from the issuer.
  • It is also called the “new issue market” since these securities are issued for the first time by the company.
  • The process of expanding the ability of an issuer to raise capital from public investors is also known as “going public.”

Key Functions of the Primary Market

• Access to Wider Markets and Investors: Enables participation of a wider group of investors and allows companies to raise funds at competitive terms.
• Transparent Pricing Mechanism: Securities are issued for public subscription at a price determined by demand and supply conditions in the market.
• Ownership Diversification: New subscribers of equity capital lead to a reduction in the stakes of existing shareholders, making the ownership of the business more broad-based and diversified.
• Better Disclosures: Businesses seeking to raise capital from new investors must meet higher standards of disclosure and transparency.
• Evaluation by Investors: Issuers are evaluated by a large number of prospective investors, providing an additional layer of scrutiny.
• Exit for Early Investors: Primary markets provide an exit option for promoters, private, and other investors who subscribed to the initial capital.
• Liquidity for Securities: Enables distribution of securities to a large number of investors, making them liquid.
• Regulatory Supervision: The issue process is subject to comprehensive regulatory supervision to protect the interest of investors.

Types of Issues in the Primary Market

• Public Issue: Securities are issued to the members of the public, and anyone eligible to invest can participate.
• Private Placement: Securities are issued to a select set of investors who can bid and purchase the securities on offer.
• Preferential Issue: An issue of specified securities by a listed issuer to any select person or group of persons on a private placement basis.
• Qualified Institutions Placement: Issue of eligible securities by a listed issuer to qualified institutional buyers on a private placement basis.
• Rights and Bonus Issues: Securities are issued to existing investors, enabling them to buy more securities at a specific price or get an allotment of additional shares without consideration.

Types of Issuers in the Primary Market

• Central, State, and Local Governments: Raise funds through government securities (G-Sec), which are short-term or long-term.
• Public Sector Units: Companies registered under the Companies Act, in which the government is the majority shareholder, may make an issue of shares or bonds.
• Private Sector Companies: Raise funds from the markets by issuing equity or debt securities, including ordinary equity shares, preference shares, and convertible instruments.
• Banks, Financial Institutions, and Non-Banking Finance Companies: Raise funds by issuing equity shares, preference shares, bonds, convertible bonds, commercial paper, certificates of deposits, and securitized paper.

SECURITIES MARKET SEGMENTS (Part 2)

• Definition: Companies raise term capital through the issue of securities, accessing both domestic and international markets.
• Details: Various entities, such as Mutual Funds, Real Estate Investment Trusts (REITs), Infrastructure Investment Trusts (InvITs), and Alternative Investment Funds, raise funds through public offers or private placements.

Key Investors

• Types of Investors: Both retail and institutional investors participate in primary market issues, including:
  • Resident individuals
  • Hindu Undivided Family (HUF)
  • Minors through guardians
  • Registered societies and clubs
  • Non-resident Indians (NRI)
  • Persons of Indian Origin (PIO)
  • Banks
  • Financial institutions
  • Association of persons
  • Companies
  • Partnership firms
  • Trusts
  • Foreign portfolio investors (FPIs)
  • Limited Liability Partnerships (LLP)

Public Issue of Equity Shares

• Initial Public Offer (IPO): The first public offer of shares made by a company, which can be a fresh issue of shares or an offer for sale by existing shareholders.
• Further Public Offer: An issue made by a company that has already made an IPO, to raise additional capital.
• Pricing: The price of a public issue can be determined through a fixed price issue or a book-built issue, where investors bid for shares within a specified price band.

Regulatory Norms

• SEBI Regulations: Primary market offerings are subject to regulatory requirements laid down by the Securities and Exchange Board of India (SEBI) in the SEBI Issue of Capital and Disclosure Requirements (ICDR) Regulations, 2018.
• Companies Act: Public issues are also subject to the provisions of the Companies Act, 2013/1956, as applicable.
• RBI Regulations: Issues to non-resident investors and receipt of money from abroad are subject to RBI regulations.

Applying to a Public Issue

• Application Process: Investors must apply through the ASBA (Application Supported by Blocked Amount) facility, which blocks the application money in the bank account and releases funds only on allotment.
• UPI Payment Mechanism: SEBI has introduced the use of Unified Payment Interface (UPI) with ASBA facility for retail investor applications.
• Bidding Process: In a book-built offer, investors must place bids for the minimum bid lot specified by the issuer, with a minimum application value adhering to the SEBI prescribed range of Rs.10,000 to Rs. 15,000.

SECURITIES MARKET SEGMENTS (Part 3)

• Public Issue of Securities: Investors who bid at the cut-off price or higher are successful bidders and receive allotment at the cut-off price. Investors who bid lower than the cut-off price will receive a refund of their application amount.
• Over-subscription: If the issue is over-subscribed, shares will be allotted to investors on a proportionate basis, with refunds made for the extent that shares allotted are lower than shares applied for.
• Public Issue of Debt Securities: A company can make a public issue of debt securities, such as debentures, by making an offer through a prospectus. The issue of debt securities is regulated by the provisions of the Companies Act, 2013 and SEBI rules and regulations.
• Rights Offer: A rights offer is an offer for shares made to the existing shareholders of the company, with a specific ratio in which the shares are offered to the investor. The Renounceable Entitlement (RE) has a separate International Securities Identification Number (ISIN) and can be traded on stock exchanges.

Key Concepts in Secondary Markets

• Secondary Market: The secondary market is where securities once issued are bought and sold between investors, providing liquidity, price discovery, information signalling, and indicating economic activity.
• Functions of Secondary Markets:
  • Liquidity: Enables investors to buy or sell securities at a low cost and in a short span of time.
  • Price Discovery: Enables price discovery of traded securities, reflecting the individual assessment of investors about the fundamental worth of the security.
  • Information Signalling: Market prices provide instant information about issuing companies to all market participants, forcing issuers to improve profitability and performance.
  • Indicating Economic Activity: Secondary market trading data is used to generate benchmark indices that are widely tracked in the country, indicating the overall market direction and economic performance.
  • Medium for Corporate Control: Stock markets function as markets for efficient governance by facilitating changes in corporate control.

Market Structure and Participants

• Market Infrastructure Institutions: Stock exchanges, clearing corporations, and depositories.
• Investors: Individuals, institutions, and foreign portfolio investors (FPIs) that buy and sell securities.
• Issuers: Companies that issue securities.
• Financial Intermediaries: Firms that facilitate secondary market activity.
• Regulator: Authority that oversees activities of all participants in the market.

Market Information

• Market Capitalisation: The number of shares outstanding multiplied by the market price per share, measuring the market value of a company's share capital.
• Market Turnover: Indicates how much trading activity took place in a stock on a given business day, with higher turnover indicating better liquidity.
• Market Indices: Tracks the market movement by using the prices of a small number of shares chosen as a representative sample, with the most widely tracked indices in India being the S&P BSE Sensex and NSE's Nifty 50.

SECURITIES MARKET SEGMENTS (Part 4)

• Market Index: A representative index serves as a performance benchmark, and its value is a leading indicator of overall economic or sector performance, effectively capturing the state of financial markets at a point in time.
• Risk Management Systems: Stock exchanges have risk management systems to mitigate the risk of members defaulting on payment or delivery obligations, ensuring high liquidity in trade execution and guaranteed settlement of executed trades.

Key Concepts

• Capital Adequacy Norms: Trading and clearing members must meet minimum paid-up capital and net worth norms, consisting of Base Minimum Capital (BMC) and Additional/Optional Capital related to the volume of business.
• Margins: A margin is the amount of funds deposited with the clearing corporation to cover the risk of non-payment of dues or non-delivery of securities, collected from clients by brokers when an order is placed.
• Circuit Breakers and Price Bands: Exchanges can suspend trading if there is an abnormal price movement in an index, and impose price bands on individual securities to limit volatility in prices.
• Settlement Guarantee Mechanism: The clearing house/corporation is the counterparty to all trades, eliminating counterparty risk through novation, and guaranteed settlement is ensured through the Core Settlement Guarantee Fund (Core SGF).
• On-line Monitoring: The positions and transactions of trading members/clearing members are monitored on a real-time basis, with alerts for abnormal sale or purchase positions or inadequate margins.
• Price Monitoring and Action: Stock exchanges can take actions to minimize volatility, such as imposing special margins, reducing circuit filter limits, or shifting a scrip to the trade-to-trade segment.
• Inspection of Books: The stock exchange conducts an inspection of the books of trading members at least once a year to check compliance with applicable rules and regulations.

Corporate Actions

• Rights Issue: A company offers shares to existing shareholders in a proportion approved by the board, to prevent dilution of holdings, and must follow SEBI's regulations on issue of shares.
• Bonus Issue: A company issues shares to existing shareholders without consideration, out of its free reserves built from genuine profits, and requires approval from the board of directors and shareholders.
• Dividend: A company declares dividends out of its profit and loss account and profits of the year, and listed companies must declare dividends on a per share basis.
• Stock Split: A company reduces the face value of existing shares in a defined ratio, resulting in an increase in the number of shares and a decrease in face value.

Securities Market Segments (Part 5)

• Share Split: A company can increase the number of shares held by an investor by reducing the face value of each share. This does not change the company's share capital, as the increase in shares is offset by a decrease in face value.
• Effect on Investor's Holding: The value of the investor's holding remains the same after a share split. For example, if the shares were trading at Rs.1,000 per share before the split, the price may decrease to Rs.200 per share after the split, but the investor's total holding value remains the same (e.g., Rs.100,000).
• Purpose of Share Split: Companies consider a share split to increase liquidity in the market when the share price is very high, making it difficult for investors to participate.

Share Buyback

• Definition: A company buys back its shares from investors using its reserves and surplus, leading to a reduction in its share capital.
• Purpose: Share buyback is used to increase Earning Per Share (EPS) and support the share price in the market. It also helps companies restructure their capital by using surplus cash.
• Eligibility: To be eligible for a share buyback, a company must not have defaulted on payments such as interest or principal on debentures, fixed deposits, or dividends.

Delisting of Shares

• Definition: Delisting refers to the permanent removal of a company's shares from a stock exchange.
• Types: Delisting can be compulsory (due to non-compliance with regulations) or voluntary (when a company chooses to delist by buying back shares through a reverse book building process).

Mergers and Acquisitions

• Definition: A substantial acquisition of shares and voting rights by an acquirer, which can change the shareholding pattern of a listed company.
• SEBI Regulations: Provide an opportunity for public shareholders to exit the company if they choose to do so.

Offer for Sale

• Definition: An offer by existing investors to sell their shares to the public, without issuing new shares.
• Purpose: This route is adopted by companies to give existing anchor investors an option to exit partially or fully, with the sale proceeds going to the investor, not the company.