Stock Market Introduction:
Stock Market is called as barometer of the health of the country's economy. All the major economic indicators determine stock market movements to a large extent. Stock Market movements are largely influenced by broad money supply, inflation, fiscal deficit, political stability, corporate performance, industrial growth etc.
Securities market is a wider term embracing a number of markets in which securities are bought and sold," securities with maturities of one year or less normally trade in the "Money" Market'', those with maturities more than one year are bought and sold in the "Capital Market". Indian Capital Market can be broadly classified as below:
Primary Market:
Market from where mobilization of resources is undertaken. In which the companies or other entities sell new issues of stock, bond and other securities.
Secondary Market:
Where the outstanding issues are permitted to trade e.g. Stock Exchanges. It is the place, which provides liquidity to the scrip issued in primary market. Secondary Market is the main driver, which motivates investors to invest and help the companies in raising money through primary market.
The scenario in the Indian Capital Market has changed very fast over the past decade, Some major changes are Computerization of stock exchanges $ expansion of trading terminals all over the India, introduction of depository (Dematerialized trading), introduction of derivatives, Securities lending scheme, Buy-back of shares, Introduction of Settlement -Guarantee Fund, Publication of results, Amendment of takeover regulation. Introduction of Rolling-Settlement, Book-Building etc.
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Stock Lending Scheme
In stock lending, the legal title of a security is temporarily transferred from a lender to a borrower. The lender retains all the benefits of ownership, other than the voting right. The borrower is entitled to utilize the securities as required but is liable to lender for all benefits associated with security. Borrower has to deposit the collateral securities with the lender, which can be liquidated in case of borrower is declared defaulter.
When a trader sells a security, he has to provide delivery of such security to 'buyer through stock exchange's clearinghouse. Sometimes (knowingly or unknowingly) it happens that trader sell the security without possessing delivery. He requires to deliver the security for settlement otherwise his transaction will be auctioned or it may cause failure of settlement. Hence, this scheme began as a means to cover short sales. Through this scheme, such trader may borrow temporarily, the security from a person who already possesses that security to avoid auction or settlement failure.
The lenders to maximize yields on their portfolio use a security-lending programme. This scheme is particularly attractive for large institutional holders of securities as it is an easy way of generating additional income.
Book-Building:
A common practice in most developed countries. It is a process used for marketing a public offer of securities. Indian corporate first interaction with this system was at the time while exploring the international money market. In domestic market, in 1996, ICICI Ltd. made the first issue through the book building process. The basic philosophy of this concept is based on the fact that the price of any scrip mainly depends upon the perception of the investors. It is also called as price discovery process. The book-building facility shall be available as an alternative In case the book-building option is availed of, underwriting shall be mandatory to the extent of the net offer to the public.
It involves collection of bids from investors, which is based on an indicative price range. The issue price is derived and constituted out of these bids. The issuers with the help of a few intermediaries normally carry out this exercise.
The bid should be open for at least 3 working days and not more than 7 working days. Investors should have right to revise their bids. While inviting a bid, either the floor price the securities offered through it or a price band along with the range within which the price can move is fixed. The cap of the price band should not be more than 20% of the floor of the band. The price band can be revised during the bidding period in which case the maximum revision on either side shall not exceed 20% i.e. floor of price band can move up or down to the extent of 20% of floor of the price band and the cap of the revised price band will be fixed accordingly. Any revision in the price band shall be widely disseminated by informing the stock exchanges, by issuing press release and also indicating the change on the relevant website and the terminals of the syndicate members. In case the price band is revised, the bidding period shall be extended for a further period of three days, subject to the total bidding period not exceeding 10 working days. The issue price is normally weighted average at which the majority of investors make bid.
In India, 25% of the issue has to be offered to the retail investors. Unlike international markets, India has a large number of retail investors who actively participate in IPO's. Internationally, the most active investors are the mutual funds; hence entire issue is book-built. Indian corporate has given two options:
1. 75% of the net offer to the public through the book-building process and 25% at the fixed price determined through book building to retail investors.
In this case, in the book built portion, not less than 25% of the net offer to the public, shall be available for allocation to Non- QIB and not more than 50% of the net offer to the public shall be available for allocation to QIB.
The balance 25% of the net offer to the public, offered at a price determined through book building, shall open within 15 days from the date of closure of bidding; It shall be available only to retail" individual investors who have either not participated or have not received any allocation, in the book built portion.
2. 100% of the net offer to public through book building process. In this case at least 35% of the issue size should be available for allocation to retail investors, at least 15% to non-institutional investors and not more than 50% to QIBs.
Retail bidders are individual bidders (including HUFs) who have bid for equity shares for a cumulative amount payable on application and on a call (as the case may be, based on the payment method selected) of not more than Rs. 100000/-. Retail bidders are allowed to bid at Cut-Off' price.
Out of the portion available for allocation to qualified institutional buyers under 5% shall be allocated proportionately to mutual' funds. Mutual fund applicants shall also be eligible for proportionate allocation under the balance available for Qualified Institutional Buyers.
Allotment to retail individual investors, non-institutional investors and qualified institutional buyers shall be made proportionately.
Allotment shall be made not later than 15 days from the closure of the issue failing which interest at the rate of 15% shall be paid to the investors.
In case of under subscription in any category, the under subscribed portion may be allocated to the bidders in the other categories.
Benefits of Book-Building
- Time and costs associated with public issue much reduced.
- Allows for price and demand discovery.
- As the issue is pre-sold, there would be no uncertainty relating to the fate of the issue.
Process of Book-Building in India:
- Issuing company appoints one of the lead merchant bankers as the book runner.
- Book runner prepares a draft prospectus containing full details except the price of the securities, and submits with SEBI.
- The book runner forms a syndicate of brokers, Merchant bankers & Fls. This syndicate invites bid from their clients for book runner. The institutional clients may submit their bid directly to book runner.
- Once the sufficient bids for the securities offered are received, the order book is closed.
- Finally, the book-runner and the issuing company on the basis of bids determine the issue price. Once the price is determined, the syndicate members are required to procure the subscription amount by a particular date and net offer to public is also opened on the same date and at the same price as determined above.
- Insider Trading:
Dealing in a company's securities on the basis of confidential price sensitive information relating to company, which is not published and not known to the public. The main motive of such trading is to make profit or avoid loss. Governing laws because it involves taking a secret, unfair advantage strictly prohibits the misuse of insider information.
Rolling Settlement:
One of the major reforms in the recent times is the introduction of rolling settlement. A new system of trading in which each trading day is taken as if it is a settlement. When an investor buys shares he will have to' pay for them and when he sells them he will have to give delivery if the transaction has not been squared-off before the closing of market. This settlement is very helpful in avoiding the risk of failure, keeps speculation within the affordable limits. Traders are bound to keep their exposures within the affordable limits
Share Buy-Back
The Companies (Amendment) Act 1999 gives the power ot the corporate to purchase its securities by virtue of section 77A & 77B. Now profitable and cash rich companies can utilize their earnings and reserves to reduce the outstanding equity shares.
Introduction of buy back of shares was welcomed by all segments of market. It can improve ne shareholder value by resulting higher EPS. It is used as a defensive mechanism in an environment where the threat of corporate takeovers has become real. It helps in restructuring of capital base. SEBI has prescribed 3 methods of buy-back viz. Tender Method, Open Market Purchase through book exchanges & Open market purchase through book building (Dutch Auction Method).
Safety Net:
When a company undertakes to buy shares issued and allotted in a new issue from the allot tees at a stipulated price. This is an agreement in relation to an issue of equity shares. The idea is to provide the equity investors safety of their investments from fall of the share price below the issue price.
Bought out Deal:
A process of investment by a sponsor or a syndicate of investors/sponsors in a company. It is a type of wholesale of equities by a company. A company allots shares in full or in lots to sponsors at a price negotiated between the company and the sponsor/so After a particular period of agreed upon, the shares are issued to the public by the sponsors with a premium. The company may either reimburse the holding cost or the sponsor may absorb the profit in part or full as per agreement, arising out d the public offering at a premium. In case of BOD Company instantly gets funds. BOD is an innovative method of financing for such companies, which are not having sufficient exposure in the public.
Sponsor also gains handsomely from a BOD. The major risk associated with BOD is a fear of loss of management control, undue influence of sponsor in policy decisions.
Introduction of Derivatives:
In November 1996, SEBI appointed L.C.Gupta committee to develop appropriate regulator, framework for derivatives trading in India, equity derivatives in particular. This committee recommended introduction of equity derivatives in Indian stock market from ,the point of, view c· market development as it lacks hedging facility against market risk to which all equity holders are exposed. Government of India lifted ban on forward trading in securities on March 1, 2000. Today trading in equity derivatives (both in Option & Future) is allowed in both index as well as individual stock.
GREEN SHOE OPTION
In case an issuer company is making an initial public offer of equity shares through the book building mechanism, the company can avail of the Green Shoe option (GSO) for stabilizing the post listing price of its shares. It is an option that allows underwriting of an IPO to sell additional shares to the public if the demand is high. The name comes from the fact that Green Shoe Company was the first to issue this type of option. It is also called as over allotment provision.
A company desirous of availing the option shall in the resolution of the general meeting authorizing the public issue, seek authorization also for the possibility of allotment of further shares to the 'stabilizing agent' (SA) at the end of the stabilization period in terms.
The company shall appo1ffi one of the Lead book runners, amongst the issue management team, as the "stabilizing agent" (SA), who will be responsible for the price stabilization process, if required. The SA shall enter into an agreement with the Issuer Company, prior to filing of offer 'document with SEBI, clearly stating all the terms and conditions relating to this option including fees charged r expenses to
be incurred by SA for this purpose.
The SA shall also enter into an agreement with the promoter(s) who will lend their shares for the purpose, specifying the maximum number of shares that may be borrowed from the promoters, which shall not be in excess of 15% of the total issue size.
The Lead Book Runner, in consultation with the SA, shall determine the amount of shares to be over allotted with the public issue. The SA shall borrow shares from the promoters of the company to the extent of the proposed over-allotment. These shares shall be in dematerialized form only. The allocation of these shares shall be pro-rata to all the applicants.
The stabilization mechanism shall be available' for the period disclosed by the company' in the prospectus, which shall not exceed 30 days from the date when trading permission was given by the exchange(s).
The SA shall open a special account with a bank to be called the "Special Account for GSO proceeds of Company" (GSO Bank account) and a special account for securities with a Depository participant to be called the "Special Account for GSO shares of company" (GSO Demat Account).
The money received .from the applicants against the over allotment in the green shoe option shall be kept in the GSO Bank Account, distinct from the issue account and-shall be used for the purpose of buying shares from the market, during the stabilization period. The shares bought from the market by the SA, if any during the stabilization period, shall be credited to the GSO Demat Account. The shares bought from the market and lying in the GSO Demat Account shall be returned to the promoters immediately, in any case not later than 2 working days after the close of the stabilization period.
The prime responsibility of the SA shall be to stabilize post-listing price of the shares. To this end, the SA shall determine the timing of buying the shares, the quantity to be bought, the price at which the shares are to be bought etc.
On expiry of the stabilization period, in case the SA does not buy shares to the extent of shares over- allotted by the company from the market, the issuer company shall allot shares to the extent of the shortfall in dematerialized form to the GSO Demat Account, within five days of the closure of the stabilization period. The SA in lieu of the shares borrowed from them shall return these shares to the promoters and the GSO Demat Account shall be closed thereafter.
The SA shall remit an amount equal to (further shares allotted by the issuer company to the GSO Demat Account) * (issue price) to the issuer company from the GSO Bank Account. As per SEBl's guidelines the amount left in this account, if any, after this remittance and deduction of expenses incurred by the SA for the stabilization mechanism, shall be transferred to the investor protection fund(s) of the stock exchange(s) where the shares of Issuer Company are listed, in equal parts if the shares are listed in more than one exchanges. The GSO Bank Account shall be closed soon thereafter. The SA shall submit a report to the stock exchange(s) on a daily basis during the stabilization period. The SA shall also submit a final report to SEBI accompanied with a depository statement for the "GSO Demat Account" for the stabilization period.
Red Herring Prospectus
Same as preliminary prospectus. Its 'name comes from the warning, printed in red, that the concerned regulator is still reviewing information in the document and is subject to change. It is a preliminary registration statement that must be filed with the concerned regulator. It describes the issue (IPO) and the prospects of the company. There is no price or issue size stated in the Red Herring. Red Herrings are sometimes updated several times before being called the final prospectus.
Offer for Sale:
Means offer of securities by existing shareholder(s) of a company to the public for subscription, through an offer document.
Differential Pricing
Any unlisted company or a listed company making a public issue' of equity shares or securities convertible at a later d-ate into equity shares" may issue such securities to applicants in the firm allotment category, at a price different from the price at which the net offer to the publ1c is made, provided that the price at which the security is being offered to the applicants in firm allotment category is higher than the price at which securities are offered to public. A listed company making a composite issue of capital may issue securities at differential prices in its public and rights issue. Justification for the price difference shill be given in the offer document.