Year: 2020

Management Notes

Definitions & function of stock exchanges

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Stock Exchange (also called Stock Market or Share Market) is one important constituent of capital market. Stock Exchange is an organized market for the purchase and sale of industrial and financial security. It is convenient place where trading in securities is conducted in systematic manner i.e. as per certain rules and regulations.

It performs various functions and offers useful services to investors and borrowing companies. It is an investment intermediary and facilitates economic and industrial development of a country.

Stock exchange is an organized market for buying and selling corporate and other securities. Here, securities are purchased and sold out as per certain well-defined rules and regulations. It provides a convenient and secured mechanism or platform for transactions in different securities. Such securities include shares and debentures issued by public companies which are duly listed at the stock exchange, and bonds and debentures issued by government, public corporations and municipal and port trust bodies.

Stock exchanges are indispensable for the smooth and orderly functioning of corporate sector in a free market economy. A stock exchange need not be treated as a place for speculation or a gambling den. It should act as a place for safe and profitable investment, for this, effective control on the working of stock exchange is necessary. This will avoid misuse of this platform for excessive speculation, scams and other undesirable and anti-social activities.

London stock exchange (LSE) is the oldest stock exchange in the world. While Bombay stock exchange (BSE) is the oldest in India. Similar Stock exchanges exist and operate in large majority of countries of the world.

Characteristics or features of stock exchange are:

  1. Market for securities: Stock exchange is a market, where securities of corporate bodies, government and semi-government bodies are bought and sold.
  2. Deals in second hand securities: It deals with shares, debentures bonds and such securities already issued by the companies. In short it deals with existing or second hand securities and hence it is called secondary market.
  3. Regulates trade in securities: Stock exchange does not buy or sell any securities on its own account. It merely provides the necessary infrastructure and facilities for trade in securities to its members and brokers who trade in securities. It regulates the trade activities so as to ensure free and fair trade
  4. Allows dealings only in listed securities: In fact, stock exchanges maintain an official list of securities that could be purchased and sold on its floor. Securities which do not figure in the official list of stock exchange are called unlisted securities. Such unlisted securities cannot be traded in the stock exchange.
  5. Transactions effected only through members: All the transactions in securities at the stock exchange are affected only through its authorised brokers and members. Outsiders or direct investors are not allowed to enter in the trading circles of the stock exchange. Investors have to buy or sell the securities at the stock exchange through the authorised brokers only.
  6. Association of persons: A stock exchange is an association of persons or body of individuals which may be registered or unregistered.
  7. Recognition from Central Government: Stock exchange is an organised market. It requires recognition from the Central Government.
  8. Working as per rules: Buying and selling transactions in securities at the stock exchange are governed by the rules and regulations of stock exchange as well as SEBI Guidelines. No deviation from the rules and guidelines is allowed in any case.
  9. Specific location: Stock exchange is a particular market place where authorised brokers come together daily (i.e. on working days) on the floor of market called trading circles and conduct trading activities. The prices of different securities traded are shown on electronic boards. After the working hours market is closed. All the working of stock exchanges is conducted and controlled through computers and electronic system.
  10. Financial Barometers: Stock exchanges are the financial barometers and development indicators of national economy of the country. Industrial growth and stability is reflected in the index of stock exchange.
Management Notes

ESOP, Features, Benefits, Considerations, Types, Challenges

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An Employee Stock Ownership Plan (ESOP) is a unique and powerful employee benefit plan that provides workers with an ownership stake in the company they work for. Through ESOPs, employees become beneficial owners of shares in the company, aligning their interests with those of shareholders and fostering a sense of commitment and engagement. Employee Stock Ownership Plans (ESOPs) are powerful tools that promote a culture of ownership, engagement, and long-term success within organizations. By providing employees with a direct stake in the company’s performance, ESOPs contribute to a positive workplace environment, increased productivity, and enhanced employee satisfaction. However, the successful implementation and management of ESOPs require careful planning, effective communication, and compliance with regulatory standards. Companies considering the adoption of an ESOP should work closely with legal, financial, and valuation experts to design a plan that aligns with their specific goals and circumstances. Additionally, ongoing communication and education are vital to ensure that employees fully understand the benefits and responsibilities associated with their ownership stakes. When executed thoughtfully, ESOPs have the potential to drive not only individual financial well-being but also the overall success and sustainability of the organization.

Features of ESOPs:

  • Ownership Structure:

ESOPs create a trust that holds shares on behalf of employees. As employees accumulate tenure or meet other criteria, they become entitled to an allocation of shares.

  • Contributions:

Companies contribute to the ESOP either by directly contributing shares or by contributing cash to the trust, which is then used to purchase shares. Contributions are typically tied to company profits.

  • Vesting:

Employees gain ownership rights (vesting) over their allocated shares over a specified period. Vesting schedules can be time-based or performance-based.

  • Distribution:

Upon retirement, termination, disability, or other triggering events, employees receive the value of their vested ESOP shares. Distribution can be in the form of company stock or cash.

  • Borrowing Capacity:

ESOPs have the ability to borrow funds to acquire shares, allowing companies to use the plan as a mechanism for business succession or financing.

  • Employee Participation:

All eligible employees are generally allowed to participate in the ESOP, creating a broad-based ownership structure. However, eligibility criteria can vary.

Benefits of ESOPs:

  1. Ownership Culture:

ESOPs create a culture of ownership, where employees view themselves as partners in the company’s success. This can lead to increased commitment, productivity, and a focus on long-term goals.

  1. Employee Engagement:

With a direct financial stake in the company’s performance, employees are motivated to contribute to its success. This sense of engagement can positively impact innovation, collaboration, and overall workplace satisfaction.

  1. Retirement Benefits:

ESOPs serve as a retirement benefit, providing employees with a source of income when they retire. The value of their ESOP shares at retirement can significantly contribute to their financial well-being.

  1. Tax Advantages:

Contributions made by the company to the ESOP are tax-deductible, providing a financial incentive for companies to establish and maintain ESOPs.

  1. Succession Planning:

ESOPs offer a mechanism for business owners to transition ownership to employees, ensuring continuity and providing an exit strategy for founders looking to retire or sell their business.

  1. Improved Performance:

Studies have shown that ESOP companies tend to outperform non-ESOP companies in terms of sales, employment growth, and overall financial performance.

Considerations in Implementing ESOPs:

  • Plan Design:

Companies should carefully design their ESOPs, considering factors such as eligibility, vesting schedules, contribution levels, and distribution options. A well-designed plan aligns with the company’s goals and values.

  • Communication:

Clear communication is essential to ensure that employees understand the benefits and mechanics of the ESOP. Regular communication helps build trust and ensures that employees are well-informed about their ownership stakes.

  • Valuation Method:

The valuation of company stock is a critical aspect of ESOPs. Companies often engage independent appraisers to determine the fair market value of the shares, especially in the case of closely held or private companies.

  • Regulatory Compliance:

ESOPs are subject to various regulatory requirements, including those outlined in the Employee Retirement Income Security Act (ERISA), which sets standards for plan fiduciaries, participant disclosures, and other protections.

  • Leverage and Risk:

If the ESOP borrows funds to acquire shares, the company takes on debt. Managing leverage and associated risks is crucial to the long-term success of the ESOP.

  • Diversification:

As employees’ retirement benefits are tied to the performance of the company’s stock, it’s important to provide mechanisms for employees to diversify their investment portfolios, especially as they approach retirement.

Types of ESOPs:

  1. Leveraged ESOP:

The ESOP borrows funds to acquire shares, and the company makes tax-deductible contributions to the ESOP to repay the debt.

  1. Non–Leveraged ESOP:

The company contributes shares directly to the ESOP without the need for borrowing. Contributions are typically based on profits.

  1. Combined ESOP:

A combination of leveraged and non-leveraged elements, allowing companies to balance debt levels and cash flow considerations.

  1. S Corporation ESOP:

An ESOP can own shares in an S Corporation, with certain tax advantages for both the company and participants.

Regulatory and Legal Considerations:

  1. ERISA Compliance:

ESOPs are subject to ERISA regulations, which outline fiduciary responsibilities, participant disclosure requirements, and standards for plan management.

  1. Valuation Standards:

Companies must adhere to valuation standards set forth by ERISA and other regulatory bodies to ensure the fair market value of ESOP shares.

  1. Anti–Abuse Rules:

To prevent abuse or misuse of ESOPs, there are rules in place to ensure that transactions are conducted at arm’s length, and participants are treated fairly.

  1. Prohibited Transactions:

ERISA prohibits certain transactions between the ESOP and “disqualified persons” to protect the interests of plan participants.

  1. Fiduciary Responsibilities:

Fiduciaries responsible for managing the ESOP must act prudently, diversify plan assets, and follow established fiduciary duties outlined in ERISA.

Challenges and Criticisms:

  1. Lack of Diversification:

As employees’ retirement benefits are tied to the company’s stock, there is a lack of diversification, which may expose employees to undue risk.

  1. Valuation Complexity:

Determining the fair market value of closely held or private company stock can be complex and may require external expertise.

  1. Leverage Risks:

Leveraged ESOPs carry debt, and if the company’s performance declines, repaying the debt becomes challenging, posing financial risks.

  1. Communication Challenges:

Ensuring that employees understand the mechanics of the ESOP, including valuation, vesting, and distribution, can be a communication challenge for some companies.

Management Notes

Evolution & Growth of stock exchanges

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The earliest stock exchange was set up in Amsterdam in 1602 and it was involved in buying and selling of shares for Dutch East India Company. Prior to this, brokers existed in France dealing with government securities. It must be noted that the first real stock exchange started in Philadelphia in the United States during the late 18th century. Later, the New York Stock Exchange became popular and Wall Street became the hotspot of brokerage activities. Earlier stockbrokers were largely unorganised, but later most of them joined hands to form institutions and organisations.

Security Trading in India goes back to the 18th century when East India Company began trading in loan securities.

Derivatives market have been functioning in India in some form or the other for a long time. Corporate shares with the stock of Bank and Cotton presses started being traded in the 1830s in Mumbai with Bombay Cotton Trade Association being the first to start future trading in 1875 in the arena of commodities trading and by the early 1900s, India had one of the world’s largest futures industry. Going back to 1850s the roots of stock exchanges in India sprouting when 22 stockbrokers began trading opposite the Town Hall of Bombay under a banyan tree. The tree is still present in the area and is known as Horniman Circle.

This trading continued till a shift to banyan trees at the Meadows Street Junction, which is now known as Mahatma Gandhi Road, a decade later. The shift was an ongoing one and number of brokers gradually increased finally settling in 1874 at what is known as Dalal Street. The group of 318 people came together to form “Native Shares and Stock Brokers Association” and the membership fee was Re 1. This association is now known as Bombay Stock Exchange (BSE) and in 1965 it was given permanent recognition by the Government of India under the Securities Contracts (Regulation) Act (SCRA), 1956. BSE is also the oldest stock exchange in Asia and it is been 144 years since it has been formed. Following its formation, Ahmedabad stock exchange came into operation in 1894 trading in shares of textile mills. Another development in the history of stock exchanges began with the Calcutta stock exchange opening up in 1908 and began trading shares of plantations and jute mills. It was followed by Madras Stock Exchange starting in 1920.

Post-independence Era and Reforms in the market

There were a series of reforms in the stock market between 1993 and 1996 which further lead to the development of exchange-traded equity derivatives markets in India.

There was a certain element of the trading system called “Badla” involving some elements of forwards trading which had been in existence for decades. This practice led to the growth of undesirable market practices and to check this development it was prohibited off and on till it was banned in 2001. In the 1980s stockbroking services were restricted only to the wealthy class who could afford them. With the spread of the Internet, stockbroking became accessible.

In the 1990s stock market witnessed a steady increase in stock market crises. An aspect of these crises was market manipulation on the secondary market. Following are the incidents which prompted the development of the stock market:

  1. 1992: Harshad Mehta: The first “stock market scam” was one which involved both the GOI bond and equity markets in India. Thereafter, manipulation was based on inefficiencies in the settlement system in GOI bond market transactions. Inflation came about in the equity markets and the market index went up by 143% between September 1991 and April 1992 and the amount involved in the crises was Rs 54 billion.
  2. 1994: MS Shoes: Here the dominant shareholder of the firm, took large leveraged positions through brokers at both Delhi and Bombay stock exchanges, to manipulate share prices prior to the rights issue. After the share prices crashed, broker defaulted and BSE shut down for three days in a consequence.
  3. 1995: Sesa Goa: Another episode of market crises for the BSE, was the case of price manipulation of the shares of Sesa Goa. This was perpetrated by two brokers, who later failed on their margin payments on leveraged positions in the shares and the exposure was around 4.5 million.
  4. 1995: Bad deliveries of physical certificates: When anonymous trading and the nationwide settlement became the norm by the end of 1995, there was an increased incidence of fraudulent shares being delivered into the market. It has been the expected cost of encountering fake certificates in equity settlement in India at the time was as high as 1%.
  5. 1997: CRB. C.R. Bhansali created a group of companies, called the CRB group, which was a conglomerate of finance and non-finance companies. Market manipulation was an important focus of group activities. The non-finance companies routed funds to finance companies for price manipulations. The non-finance companies were tasked with sourcing funds from external sources, using manipulated performance numbers. The CRB episode was particularly important in the way it exposed extreme failures of supervision on part of RBI and SEBI. The amount involved in the episode was Rs 7 billion.
  6. 1998: BPL, Videocon and Sterlite: This is an episode of market manipulation involving the broker that engineered the stock market bubble of 1992, Harshad Mehta. He seems to have worked on manipulating the share prices of these three companies, in collusion.
  7. 2001: Ketan Parekh. This was triggered by a fall in the prices of IT stocks globally. Ketan Parekh was seen to be a leader of the episode, with leveraged positions onset of stocks called the “K10 stocks”. There are allegations of fraud in this crisis with respect to an illegal “Badla” market at the Calcutta Stock Exchange and banking fraud.

The above instances have had a disruptive effect on the market that is(i) pricing efficiency (ii) intermediation between households investing in shares and firms financing projects by issuing shares which were resolved by reform measures by the government.

In the post-independence era, the BSE dominated the volume of trading. However, the low level of transparency and undependable clearing and settlement systems, apart from other macro factors, increased the need for a financial market regulator, and the SEBI was born in 1988 as a non-statutory body. Later it was made a statutory body in 1992.

Thereafter, in 1952 cash settlement and options trading were prohibited by the government and derivatives trading shifted to informal forwards market. At present, the government allows for markets based pricing mechanism and shows less scepticism towards derivatives trading. The prohibition on futures trading of many commodities was lifted starting in the early 2000s and national electronic exchanges were created. In the 1980s stockbroking services were used only by a wealthy class who could afford them. With the rise of the Internet, stockbroking services became accessible to even the common man. Major organisations became involved in stockbroking activities. 

Although in the wake of Harshad Mehta scam in 1992, there was a pressing need for another stock exchange large enough to compete with BSE and bring transparency to the stock market. It leads to the development of the National Stock Exchange (NSE). It was incorporated in 1992, became recognised as a stock exchange in 1993, and trading began on it in 1994. It was the first stock exchange on which trading was conducted electronically. In response to this competition, BSE also introduced an electronic trading system known as BSE Online Trading (BOLT) in 1995.

Thereafter, BSE launched its own sensitivity index, the Sensex, known at present as the S&P BSE Sensex, in 1986 with 1978-79 as the base year. This is an index of 30 companies and is a benchmark stock index, measuring the overall performance of the exchange. Equity derivatives were introduced by the exchange in 2000. Index options launched in June 2001, stock options in July 2001, and stock futures in November 2001. India’s first free-float index, BSE Teck, was launched in July 2001.

Its competitor, NSE launched its benchmark exchange, the CNX Nifty, now known as Nifty 50, in 1996. It comprises of 50 stocks and functions as a performance measure of the exchange. In terms of electronic screen-based trading and derivatives, it has left behind its competitor BSE by introducing first of its kind products and services.

Stock exchanges at present

After incorporation of BSE and NSE, 23 stock exchanges were added not including the BSE. At present, there are 23 approved stock exchanges in India out of which 6 are functional:-

  1. BSE Ltd
  2. Calcutta Stock Exchange
  3. India International Exchange (India INX)
  4. Metropolitan Stock Exchange
  5. NSE 
  6. NSE IFSC Ltd

Thus, from the times when buyers and sellers had to assemble at stock exchanges for trading till the present times when the dawn of IT has made the operations at stock exchanges electronic hence making stock markets paperless. Trading facilities can be accessed from home or office on phone or Internet. Therefore, with new products and services, rampant growth in stock trading can be foreseen.

Management Notes

Initial public offering (IPO) Method followed

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Initial public offering is the process by which a private company can go public by sale of its stocks to general public. It could be a new, young company or an old company which decides to be listed on an exchange and hence goes public.

Companies can raise equity capital with the help of an IPO by issuing new shares to the public or the existing shareholders can sell their shares to the public without raising any fresh capital.

A company offering its shares to the public is not obliged to repay the capital to public investors.

The company which offers its shares, known as an ‘issuer’, does so with the help of investment banks. After IPO, the company’s shares are traded in an open market. Those shares can be further sold by investors through secondary market trading.

An IPO (initial public offering) is referred to a flotation, which an issuer or a company proposes to the public in the form of ordinary stock or shares. It is defined as the first sale of stock by a private company to the public. They are generally offered by new and medium-sized firms that are looking for funds to grow and expand their business.

 It is also referred to as “public offering”

 Basics of private and public:

  • Private
  • Public

A privately held company has fewer shareholders and its owners don’t have to disclose much information about the company. Most small businesses are privately held, with no exceptions that large companies can be private too, like Domino’s Pizza and Hallmark Cards being privately held. Shares of private companies can be reached through the owners only and that also at their discretion. On the other hand, public companies have sold at least a portion of their business to the public and thereby trade on a stock exchange. This is why doing an IPO is referred to going public.

The main reason for going public is to raise the good amount of cash through the various financial avenues that are offered. Besides, the other factors include:

  • Public companies usually get better rates when they issue debt due to increased scrutiny.
  • As long as there is market demand, a public company can always issue more stock.
  • Trading in the open markets means liquidity.
  • Being Public makes it possible to implement things like employee stock ownership plans, which help to attract top talent of the industry.

Factors to be considered before applying for an IPO:

There are certain factors which need to be taken into consideration before applying for Initial Public Offerings in India:

  • The historical record of the firm providing the Initial Public Offerings
  • Promoters, their reliability, and past records
  • Products offered by the firm and their potential going forward
  • Whether the firm has entered into a collaboration with the technological firm
  • Project value and various techniques of sponsoring the plan
  • Productivity estimates of the project
  • Risk aspects engaged in the execution of the plan

General Terms involved in IPO:

Primary market: It is the market in which investors have the first opportunity to buy a newly issued security as in an IPO.

Prospectus: A formal legal document describing the details of the company is created for a proposed IPO, also making the investors aware of the risks of an investment. It is also known as the offer document.

Book building: It is the process by which an attempt is made to determine the price at which the securities are to be offered based on the demand from investors.

Over-Subscription: A situation in which the demand for shares offered in an IPO exceeds the number of shares issued.

Green shoe option: It is referred to as an over-allotment option. It is a provision contained in an underwriting agreement whereby the underwriter gets the right to sell investors more shares than originally planned by the issuer in case the demand for a security issue proves higher than expected.

Price band: Price band refers to the band within which the investors can bid. The spread between the floor and the cap of the price band is not more than 20% i.e. the cap should not be more than 120% of the floor price. This is decided by the company and its merchant bankers. There is no cap or regulatory approval needed for determining the price of an IPO.

Listing: Shares offered in IPOs are required to be listed on stock exchanges for the purpose of trading. Listing means that the shares have been listed on the stock exchange and are available for trading in the secondary market.

Flipping: Flipping is reselling a hot IPO stock in the first few days to earn a quick profit. The reason behind this is that companies want long-term investors who hold their stock, not traders.

Management Notes

NSE, BSE OTCEI & overseas stock exchanges

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Most of the trading in the Indian stock market takes place on its two stock exchanges: the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE). The BSE has been in existence since 1875. The NSE, on the other hand, was founded in 1992 and started trading in 1994. However, both exchanges follow the same trading mechanism, trading hours, settlement process, etc. At the last count, the BSE had about 4,700 listed firms, whereas the rival NSE had about 1,200. Out of all the listed firms on the BSE, only about 500 firms constitute more than 90% of its market capitalization; the rest of the crowd consists of highly illiquid shares.

Almost all the significant firms of India are listed on both the exchanges. NSE enjoys a dominant share in spot trading, with about 70% of the market share, as of 2009, and almost a complete monopoly in derivatives trading, with about a 98% share in this market, also as of 2009. Both exchanges compete for the order flow that leads to reduced costs, market efficiency and innovation. The presence of arbitrageurs keeps the prices on the two stock exchanges within a very tight range.

OTCEI

Over the counter exchange of India or OTCEI which is commonly known as an electronic stock exchange in India. Also, it consists of small and medium-sized companies that aim to get access to capital markets. So, this is similar to electronic exchanges in the USA in the form of Nasdaq. Also, there is no central place for exchange. While the entire trading occurs through electronic networks.

OTCEI concept is a great innovation in the Indian Stock market. It is a recognized stock exchange under the Securities Contract (Regulations) Act, 1965 as well as the Indian Companies Act. OTCEI is a computer based screen system exhibiting the quotations of the scrips of the companies of different industries of the nation. It has a national network and there is no geographical barrier for listing. Dealers and Investors can take decisions on the spot more quickly than on the regular stock exchanges. It is a great boom to the small and marginal investors who are greatly neglected till today.

OTCEI was incorporated in October 1990. This company was promoted by a consortium of premier financial institutions, namely, UTI, ICICI, IDBI, SBI Capital Markets Ltd., IFCI, QIC and its subsidiaries and Canbank Financial Services Ltd. OTC Exchange is recognized by the Government of India as a “recognized stock exchange” under section 4 of the Securities Contract Regulations Act, 1965.

Companies listed on the OTCEI will enjoy the same listing status as available to other companies listed on any other stock exchange in the country except that a company listed on OTCEI cannot be listed /traded on any other stock exchange in India. The corporate office is situated in Bombay. It started functioning in 1992.

OTCEI has been linked to 42 centers all over India through computers. OTCEI operates with the use of INET the country’s first public switched data network and Telex – the first nationwide information dissemination network and RABMN  Remote Area Business Message Network.

Any counter in any of the four hundred cities in India can receive the scrip prices, which are generated by OTCEI’s central computer in Bombay. Any person or Indian citizen can apply for dealership or membership of the OTC provided he adheres to the prescribed conditions.

The aspirants would also have to pass a computer -based written test. Preference would be given to professionals and people having experience in the field with sound network. Those having proper infrastructural facilities like telephone, computers, telex, fax, office space and other networks would also be given due weightage and preference.

Features of OTCEI:

Following are the features of OTCEI:

  1. Ringless Trading:

For greater accessibility to the investor, the OTC Exchange has eliminated the trading ring. Trading will take place through a network of computers of OTC dealers located at several places within the same city and even across cities. The exchange allows dealers to quote, query and transact through a central OTC computer using telecommunication links.

  1. National Reach:

Unlike other stock exchanges, the OTC Exchange has a nationwide reach. This enables widely dispersed trading across cities, resulting in greater liquidity. Companies thus, have the unique benefit of nationwide listing and trading of their scrips by listing at just one exchange, the OTC exchange.

  1. Computerized:

All the activities of the OTC trading process are computerized. This facilitates a more transparent, quick and disciplined market. The trading mechanism brings out these features of the system.

  1. Exclusive List of Companies:

The OTC Exchange will not list and trade in companies listed on any other exchange. It will list an entirely new set of companies, sponsored by members of the OTC Exchange.

  1. Closeness:

Initially counters were opened at Bombay and were followed by counters at other centers. OTCEI will give public notice as to the availability of counters where trading take place. Facility for trading will be available after the offer at the counters of the sponsor and the additional Market Maker addresses will be given in the new issue application attached to offer for sale document (OSD) and with all the dealers of OTCEI.

  1. Authorized Dealers:

All members and dealers are authorized and approved by the OTCEI

  1. Liquidity through Market Making:

The sponsor-member requires day quotes (buy and sell) for the 12 months from the date of commencement of trading. Besides compulsory market maker, there are additional market maker and voluntary market maker who give two way quotes for the scrip.

  1. Efficient Market Pricing:

Competition among market makers produces efficient pricing. This reduces spreads between buy and sell quotations. It also increases the capacity to absorb larger volumes, to the benefit of investors. The market makers continually analyze companies and provide information about them to their investors, thus helping investors to make an informed investment decision.

  1. Transfer of Securities:

Investors will be required to submit transfer deeds to any of the OTCEI counters for transferring the shares in their names. Shares will be automatically transferred in the name of the investors, if the consolidated holding of the shares does not exceed 0.5% of the issued capital of the company.

  1. Investor Registration:

For buying and selling shares on the OTCEI and investor needs “INVESTOTC Card”. Application for “INVESTOTC Card” can be made at any of the counters of OTCEI and also at the time of applying for new issues on the OTCEI. The share application form includes the necessary details to be filled in for obtaining INVESTOTC Card.

  1. Transparency of Transactions:

At the OTC Exchange, the investor can see the available quotations on the computer screen at the dealer’s office before placing the order. The confirmation slip/trading document generated through the computer gives the exact price of the transaction and the brokerage charge. So the investor’s interest is totally safeguarded. This system also ensures that transactions are done at the best prevailing quotation in the market.

  1. Faster Delivery and Payment:

On the OTC Exchange, the transaction is settled within a period of 7 days. Further, the investor actually gets the delivery of the scrip or the payment for the scrip sold within 7 days.

  1. Sponsorship:

The companies that seek listing on the OTC Exchange have to approach one of the members appointed by the OTC for acting as a sponsor to the issue. The sponsor makes thorough appraisal of the project, resulting in investors getting a choice of quality companies. Through the sponsor-ship agreement, the sponsor is committed to making market in that scrip by giving a buy / sell quote for a minimum period of 1 year from the date of listing. Investors are benefited by this as it enhances the liquidity of the scrips listed on the OTC Exchange.

  1. Listing of Small and Medium Sized Companies:

In the past, many small and medium sized companies were not able to enter the capital market, due to the listing requirement of the Securities Contract (Regulation) Act, 1956. The Act specified that a minimum issued equity capital of Rs. 3 crores and maximum 25 crores for issuing.

The OTC Exchange provides an ideal opportunity to these companies to enter the Capital market. In fact, any company with an issued capital of more than Rs. 30 lakhs and less than Rs. 25 crores can raise finance from the capital market through the OTC Exchange.

  1. Bought-Out Deals:

Through the concept of bought-out deals, OTCEI allows companies to place their equity meant to be offered to the public with the sponsor -member at a mutually agreed price. This ensures swifter availability of funds to companies for timely completion of projects and a listed status at a later date.

Participants of OTCEI:

  1. Companies which list their shares on OTCEI.
  2. Members, dealers who operate OTCEI counters.
  3. Registrars who transfer and keep share certificates.
  4. Investors.
  5. Settlement bank
  6. SEBI and government.
Management Notes

Sweat Equity Shares, Nature, Issue

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Sweat equity Shares are equity shares issued by a company to its employees or directors in recognition of their hard work, expertise, or contributions that significantly benefit the company. These shares are typically issued at a discounted price or without any monetary consideration, often in lieu of cash compensation or as part of an incentive plan. Sweat equity shares serve to motivate and retain talent within the organization, aligning the interests of employees with those of shareholders by giving them a stake in the company’s success and growth.

Nature of Sweat Equity Shares:

  1. Non-Cash Compensation:

Sweat equity shares are often issued as a form of non-cash compensation. Instead of receiving monetary payment for their contributions, employees or directors receive equity in the company. This helps retain talent while conserving cash flow, particularly in startups or growing companies.

  1. Issued to Employees and Directors:

Typically, sweat equity shares are granted to employees, directors, or key personnel who significantly contribute to the company’s growth or development. This can include contributions such as technical expertise, management skills, or innovative ideas that enhance the company’s value.

  1. Discounted or No Consideration:

Sweat equity shares are usually issued at a discounted price or at no monetary consideration. This means that the recipients may not have to pay the full market price for the shares, making it an attractive incentive for employees and directors.

  1. Alignment of Interests:

By granting equity ownership, sweat equity shares align the interests of employees with those of shareholders. As employees become shareholders, they are more likely to work towards enhancing the company’s value and overall performance, as they directly benefit from its success.

  1. Regulatory Compliance:

The issuance of sweat equity shares is subject to regulatory guidelines in various jurisdictions. For instance, in India, the Companies Act, 2013, outlines specific provisions regarding the issuance of sweat equity shares, including the maximum limit of shares that can be issued and the required disclosures.

  1. Vesting Period:

Companies often establish a vesting period for sweat equity shares. This means that employees may have to remain with the company for a specified duration before the shares are fully owned by them. This encourages employee retention and commitment to the organization.

  1. Impact on Shareholding Structure:

Issuing sweat equity shares can dilute the ownership percentage of existing shareholders since new shares are introduced into the market. Companies need to carefully consider the impact of dilution on existing shareholders and communicate the rationale behind the issuance.

Issue of Sweat Equity Shares:

Issue of sweat equity shares in India is governed by the provisions outlined in the Companies Act, 2013, and the rules framed thereunder. Sweat equity shares are issued to employees or directors as a form of compensation for their contributions, and the process involves several regulatory requirements.

  1. Definition and Purpose:

Sweat equity shares are defined under Section 2(88) of the Companies Act, 2013, as shares issued to employees or directors at a discount or for consideration other than cash. The primary purpose of issuing sweat equity shares is to reward employees for their contributions, motivate them, and align their interests with those of the shareholders.

  1. Eligibility:

Sweat equity shares can be issued to:

  • Employees or directors of the company.
  • Employees of the company’s subsidiary or holding company.
  • Individuals who provide intellectual property rights or know-how to the company.
  1. Limitations:

According to Section 54 of the Companies Act, 2013, companies are subject to certain limitations when issuing sweat equity shares:

  • Sweat equity shares cannot exceed 15% of the total paid-up equity share capital of the company in a year.
  • The total sweat equity shares issued cannot exceed 25% of the total paid-up equity share capital of the company at any time.

  1. Board Approval:

The issuance of sweat equity shares requires the approval of the board of directors. The board must pass a resolution detailing the number of shares to be issued, the price at which they will be issued, and the recipients of the shares.

  1. Shareholder Approval:

In addition to board approval, shareholder approval is also necessary. This is typically done through a special resolution passed at a general meeting of the shareholders, as the issuance of sweat equity shares involves altering the share capital structure.

  1. Valuation:

A registered valuer must determine the fair price of sweat equity shares, particularly if they are issued at a discount or for non-cash consideration. This valuation ensures that the shares are issued fairly and that the interests of existing shareholders are protected.

  1. Compliance with Regulations:

The issuance of sweat equity shares must comply with the provisions of the Companies (Share Capital and Debentures) Rules, 2014, and other applicable regulations. This includes disclosures in the board report and maintaining records of the issuance.

  1. Vesting Period:

Companies often establish a vesting period for sweat equity shares, during which employees must remain with the company before they fully own the shares. This encourages retention and commitment among employees.

  1. Disclosure Requirements:

The company must disclose details regarding the issuance of sweat equity shares in its annual return and financial statements. This includes the number of shares issued, the class of shares, and the rationale for the issuance.

Management Notes

Recent development in Stock exchanges

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1. Growth in Financial Intermediation:

The Indian capital market has grown due to innovation of the mechanism of indirect financing.

This innovation has enhanced the efficiency of flow of funds from ultimate savers to ultimate users through newly established financial intermediaries like UTI, LIC and GIC. The LIC has been mobilising the savings of households to build a ‘life fund’.

It has been deploying a part of ‘life fund’ to purchase the shares and debentures of the companies. Until 1991 UTI was amongst the top ten shareholders in one out of every three companies listed in the Stock Exchange in which it had a shareholding. Likewise, UTI has been mobilising savings of households through the sale of ‘units’ to invest in securities of ‘blue-chip’ companies.

In short, financial intermediaries like LIC, UTI and GIC have activated the growth process of Indian capital market. It is evident from the rising intermediation ratio. The intermediation ratio is a ratio of the volume of financial instruments issued by the financial institutions, i.e., secondary securities to the volume of primary securities issued by non-financial corporate firms rose from 0.27 during 1951-56 to 0.37 during 1979-80 to 1981-82.

2. Growth in Underwriting of Securities:

The New Issue Market as a segment of capital market can be activated through institutional arrangements for the underwriting of new issues of securities. During the pre-independence period, the volume of securities underwritten was quite minimal due to lack of an adequate institutional arrangement for the provision of underwriting. Stock brokers and banks used to perform this function.

In recent years, the volume and amount of securities underwritten have tremendously increased owing to increasing participation of specialized financial institutions like LIC and UTI and the developed banks like 1FC1,1CICI and IDBI in underwriting activities. It is evident from the fact that the amount of securities underwritten was only 55 per cent in 1960-61, whereas at present it is about 99 per cent.

3. Growth in Response to the Offer of Public Issues of Shares and Bonds:

Traditionally investors in India being risk-investors had been reluctant to invest in shares of public limited companies. Hence, industrial securities as a form of investment were not popular in India before 1951. However, since 1991 public response to corporate securities has been improving. But equity-cult has yet to be developed in rural areas.

It is important to point out that the public response to new issues of shares and bonds depends upon number of factors such as rates of return on industrial securities relative to rates of return on non-marketable financial assets and real assets, government’s monetary policy and fiscal policy and above all legal protection to investors in recent years.

All the above mentioned factors have contributed to the growth of public response to new issue of corporate securities. In short, growing response to public issues has strengthened the Indian capital market. It is evident from the fact that the number of shareholders rose from 60 lakh in 1985 to 160 lakh in 1994.

4. Growth of Merchant Banking:

The role of merchant banking in India’s capital market can be traced back to 1969 when Grind lays Bank established a special cell called the ‘Merchant Banking’. Since then all the commercial banks have set up the ‘Merchant Banking Division’ to play an important role in the capital market.

The merchant banking division of commercial banks advises the companies about economic viability, financial viability and technical feasibility of the project. They conduct the initial ‘spade work’ to find out the investment climate to advise the company whether the public issue floated would be fully subscribed or under-subscribed.

The merchant banks in India act as the underwriter as well as the manager of new issues of securities. The Securities and Exchange Board of India (SEBI) regulates all merchant banks as far as their operations relating to issue activity are concerned. To sum up, the emergence of merchant banking has strengthened the institutional base of Indian capital market.

5. Growth of Credit Rating Agencies:

Of late, credit rating agencies have emerged in the financial sectors. This is an important development for the growth of Indian capital market. Investment Information and Credit Rating Agency of India (ICRA) rates bonds, debentures, preference shares, CDs (Corporate Debentures) and CPs (Commercial Papers).

As Credit Rating Information Services of India Ltd. (CRISIL) is a pioneer in credit rating, it rates debt instruments of banks, financial institutions and corporate firms. The credit assessment of companies issuing securities helps in the growth of New Issue Market segment of the capital market.

6. Growth of Mutual Funds:

Mutual funds companies are investment trust companies. Mutual funds schemes are designed to mobilise funds from individuals and institutional investors, who in exchange get units which Can be redeemed after a certain lock-in period, at their Net Asset Value (NAV). The mutual fund schemes provide tax benefits and buy back facility.

The Unit Trust of India (UTI) can be regarded as pioneer in the setting up of mutual funds in India. Of late, commercial banks have also launched in India mutual funds schemes. Can-stock scheme of the Canara bank and LIC’s scheme, such as Dhanashree, Dhanaraksha and Dhanariddhi are mutual funds schemes.

Since mutual funds schemes help to mobilise small savings of the relatively smaller savers to invest in industrial securities, so these schemes contribute to the growth of capital market. The total assets of mutual funds companies increased from Rs. 66,272 crore in 1993-94 to Rs. 99,248 crore in 2005 and to Rs. 4,13,365 crore in 2008. The investment of mutual funds in the secondary market influences the share prices in the stock exchange.

7. Stock Exchange Regulation Act:

The growth of capital market would not have been possible had the Government of India not legislated suitable laws to protect the investors and regulate the Stock Exchanges. Under this Act, only recognized stock exchanges are allowed to function. This Act has empowered the Government of India to enquire into the affairs of a Stock Exchange and regulate it’s working.

The Government of India established the Securities and Exchange Board of India (SEBI) on April 12, 1988 through an extra ordinary notification in the Gazette of India. In April 1992, SEBI was granted statutory recognition by passing an Act. Since 1991, SEBI has been evolving and implementing various measures and practices to infuse greater transparency in the capital market in the interest of investing public and orderly development of the securities market.

8. Liberalisation Measures:

Foreign Institutional Investors (FII) have been allowed access to Indian capital market. Investment norms for NRIs have been liberalized, so that NRIs and Overseas Corporate Bodies can buy shares and debentures, without prior permission of RBI. This was expected to internationalize Indian capital market.

To sum up, the Indian capital market has registered an impressive growth since 1951. However, it is only since the mid-1980s that new institutions, new financial instruments and new regularity measures have led to speedy growth of the capital market. The liberalisation measures under New Economic Policy (NEP) gave a further boost to the growth of Indian capital market.

Management Notes

Red herring prospectus, Components, Process, Importance

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Red Herring Prospectus (RHP) is a preliminary document issued by a company that is planning to offer its securities (such as shares or bonds) to the public in an initial public offering (IPO) or other securities offering. The document provides important information about the company, including financial details, business operations, and risks, but it does not include the offer price or the number of securities being issued, which are typically finalized later.

The term “red herring” refers to the red ink used on the cover page of the document to highlight that the document is not the final prospectus and that certain details are yet to be finalized.

Purpose of Red Herring Prospectus:

The primary purpose of a Red Herring Prospectus is to inform potential investors about a company’s offerings, business, and financial situation while the company seeks to finalize the terms of its public offering. The document serves as a tool for initial evaluation by investors and is often used to generate interest in the offering.

Components of a Red Herring Prospectus

A Red Herring Prospectus typically includes several key sections, which help investors assess the offering, even though the final terms are still pending.

  • Company Overview:

RHP provides a comprehensive overview of the company’s history, management, structure, and business model. It outlines the products or services the company offers, its competitive landscape, and its strategic plans for growth.

  • Financial Information:

It includes key financial statements, such as the balance sheet, income statement, and cash flow statement, as well as financial ratios and performance metrics. This section helps investors gauge the company’s financial health, profitability, and potential risks.

  • Risk Factors:

One of the most important sections, the risk factors section, outlines potential risks that investors should be aware of before purchasing securities. These risks could include industry-specific risks, regulatory risks, market competition, and financial uncertainties.

  • Use of Proceeds:

This section explains how the company plans to utilize the funds raised from the offering. The funds might be used for purposes such as expansion, debt repayment, research and development, or working capital.

  • Management and Governance:

RHP contains details about the company’s directors, senior executives, and their experience and qualifications. Information about corporate governance practices, including board composition and committees, is also provided.

  • Offer Details (Preliminary):

RHP includes preliminary details of the offering, such as the size of the issue and the type of securities being offered, but does not specify the final offer price or the exact number of securities. These details will be determined closer to the offering date.

  • Legal and Regulatory Disclosures:

Information about the company’s legal standing, compliance with regulations, and any pending lawsuits or regulatory investigations will be disclosed in the RHP. This is crucial for investors to understand any potential legal or regulatory risks.

  • Underwriting Arrangements:

The underwriting section describes the institutions or banks that will manage the offering process and whether they are acting as lead underwriters. It provides details on underwriting fees, their responsibilities, and the process of distributing the shares to the public.

Red Herring Prospectus vs. Final Prospectus

Red Herring Prospectus is not the final document that investors receive. It is part of the IPO process and is used to generate interest in the offering before all details are finalized. The final prospectus, often referred to as the Prospectus, includes all the necessary details about the offering, including the offer price and the number of securities being issued. The final prospectus is issued once the company has completed its regulatory filing and the offer details are confirmed.

Process of Issuing a Red Herring Prospectus:

  • Preparation and Filing:

The company prepares a Red Herring Prospectus and files it with the regulatory authority (such as the Securities and Exchange Board of India (SEBI) in India or the U.S. Securities and Exchange Commission (SEC) in the United States). This document is made available to the public and investors before the offering.

  • Review by Regulatory Authorities:

The regulatory authorities review the RHP to ensure that all required disclosures are made and that it complies with securities laws. The company may need to make revisions based on feedback from the regulators.

  • Roadshow and Marketing:

After the regulatory approval, the company may conduct a “roadshow,” where the company’s management meets with potential institutional investors to generate interest in the offering. The RHP is typically used during these meetings to provide detailed information about the company.

  • Pricing and Final Prospectus:

After the roadshow, the company finalizes the offer price, the number of securities being issued, and other final terms. A final Prospectus is issued, which includes these finalized details, and the securities are offered to the public.

Importance of Red Herring Prospectus:

  • Transparency:

RHP helps ensure transparency in the process of raising funds through public offerings. By providing crucial financial data, business details, and risk factors, it allows potential investors to make informed decisions.

  • Regulatory Compliance:

The Red Herring Prospectus ensures that the company is in compliance with legal and regulatory requirements. It helps authorities assess whether the offering meets the necessary standards.

  • Investor Confidence:

By making the company’s plans, risks, and financial health publicly available, the RHP fosters investor confidence. Potential investors can assess the viability of the investment and decide whether they wish to participate in the offering.

  • Market Reception:

RHP allows the company to gauge the market’s interest in its securities offering, which can help in determining the final price range and quantity of the securities to be issued.

Management Notes

Right Issues of Shares, Types, Procedure, Advantages and Disadvantages

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Rights issues refer to the method by which a company offers additional shares to its existing shareholders in proportion to their current holdings. This process allows shareholders to maintain their ownership percentage and avoid dilution of their shares. Rights issues are typically offered at a discounted price to encourage participation and raise capital for the company. Shareholders have the option to purchase the new shares within a specified timeframe, and if they choose not to exercise their rights, they can sell them in the market.

Types of Rights Issue of Shares:

  1. Renounceable Rights Issue:

In a renounceable rights issue, existing shareholders have the option to sell their rights to purchase additional shares to another party. This means that if a shareholder does not wish to buy the new shares, they can transfer their rights to another investor. This type of issue provides flexibility and liquidity to shareholders.

  1. Non-Renounceable Rights Issue:

In a non-renounceable rights issue, shareholders cannot sell their rights to others. They must either exercise their rights to purchase the new shares or let them lapse. This type of issue is more straightforward, as it does not allow for the transfer of rights, and typically ensures that the company raises the required capital from its existing shareholders.

  1. Fully Underwritten Rights Issue:

In a fully underwritten rights issue, an underwriter agrees to purchase any shares not taken up by existing shareholders. This ensures that the company raises the full amount of capital it seeks, even if some shareholders choose not to participate. Underwriting provides security for the company, reducing the risk associated with the rights issue.

  1. Partially Underwritten Rights Issue:

In a partially underwritten rights issue, only a portion of the shares offered in the rights issue is underwritten by an underwriter. This means that the company takes on some risk, as it may not raise the total desired capital if shareholders do not fully subscribe to the offer.

  1. Bonus Rights Issue:

Bonus rights issue combines the features of a bonus issue and a rights issue. In this case, shareholders receive the option to purchase additional shares at a discount, and the company may also distribute bonus shares simultaneously. This approach is used to reward existing shareholders while raising capital.

  1. Preemptive Rights Issue:

In a preemptive rights issue, existing shareholders are given the first opportunity to purchase additional shares before the company offers them to new investors. This helps maintain the shareholders’ proportionate ownership in the company and protects them from dilution.

Procedure for Rights Issue of Shares:

  1. Board Approval:

The first step involves obtaining approval from the Board of Directors. The board must discuss and approve the proposal for a rights issue, including the number of shares to be issued, the issue price, and the ratio of rights shares to existing shares.

  1. Preparation of Offer Document:

A detailed offer document or prospectus must be prepared, outlining the terms of the rights issue, the rationale for the issue, the pricing, and the implications for shareholders. This document should also include financial statements and disclosures as required by law.

  1. Shareholder Approval:

In most cases, a rights issue requires the approval of shareholders through a special resolution at a general meeting. The company must provide adequate notice to shareholders, including details of the proposed rights issue and the agenda for the meeting.

  1. Regulatory Filings:

The company must file the necessary documents with the regulatory authorities, such as the Securities and Exchange Board of India (SEBI) and the Registrar of Companies (ROC). This includes submitting the prospectus and obtaining approval for the rights issue.

  1. Announcement of the Rights Issue:

Once all approvals are obtained, the company announces the rights issue to the public and shareholders. This announcement typically includes the record date (the date on which shareholders must be on the company’s books to be eligible for the rights issue) and the details of the offer.

  1. Rights Entitlement:

Existing shareholders receive rights entitlement letters detailing their entitlement to subscribe to additional shares based on their current holdings. The letter specifies the number of shares they are entitled to purchase, the issue price, and the subscription period.

  1. Subscription Period:

Company sets a subscription period during which shareholders can exercise their rights. This period typically lasts a few weeks, during which shareholders can choose to subscribe to the additional shares.

  1. Receiving Applications and Payment:

Shareholders who wish to participate in the rights issue must submit their applications along with the requisite payment for the shares they wish to purchase. The company may offer multiple payment methods, such as bank transfers or cheques.

  1. Allotment of Shares:

After the subscription period closes, the company processes the applications and allocates shares to shareholders based on their subscriptions. The company must ensure that the allotment is done on a pro-rata basis, in line with the entitlements outlined in the rights entitlement letters.

  1. Credit of Shares:

Once shares are allotted, they are credited to the demat accounts of the shareholders. For shareholders who have not opted for dematerialization, physical share certificates may be issued.

  1. Post-Issue Compliance:

After the rights issue, the company must comply with ongoing reporting and disclosure requirements, including updating its share capital structure and informing regulatory authorities about the successful completion of the rights issue.

Advantages of the Rights Issue of Shares:

  1. Capital Raising Without Debt:

One of the primary advantages of a rights issue is that it allows companies to raise capital without incurring additional debt. This helps maintain a healthy balance sheet and reduces the burden of interest payments, enabling the company to invest in growth opportunities or enhance its financial stability.

  1. Maintaining Shareholder Control:

Rights issue provides existing shareholders the opportunity to maintain their proportional ownership in the company. By offering new shares at a discounted price, shareholders can avoid dilution of their voting rights and ownership percentage, ensuring that they retain control over the company’s future direction.

  1. Flexibility for Shareholders:

Rights issues offer flexibility to shareholders. They can choose to exercise their rights and purchase additional shares at a favorable price, sell their rights to other investors, or let the rights expire. This flexibility allows shareholders to make decisions that best suit their financial situations and investment strategies.

  1. Attracting New Investors:

The discounted price offered in a rights issue can attract new investors, which can enhance the company’s shareholder base. By encouraging existing shareholders to invite others to purchase shares, a rights issue can help the company broaden its appeal in the market.

  1. Positive Market Signal:

Rights issue can be perceived as a positive signal about the company’s future growth prospects. It demonstrates that the company is proactive in raising funds for expansion or strategic initiatives. This can bolster investor confidence and potentially improve the company’s stock price.

  1. Cost-Effective Capital Raising:

Compared to other methods of capital raising, such as public offerings or private placements, rights issues can be more cost-effective. The administrative and regulatory costs associated with rights issues are generally lower, allowing the company to allocate resources more efficiently.

  1. Improving Financial Ratios:

Issuing shares through a rights issue can improve various financial ratios, such as the debt-to-equity ratio. By raising capital through equity rather than debt, companies can strengthen their financial position, making them more attractive to potential investors and creditors.

Disadvantages of the Rights Issue of Shares:

  1. Dilution of Share Value:

If existing shareholders choose not to participate in the rights issue, their ownership percentage will decrease, leading to dilution of their share value. This can negatively impact their voting power and overall influence within the company.

  1. Potential Market Reaction:

The announcement of a rights issue can sometimes lead to a negative market reaction. Investors may perceive it as a sign that the company is in financial trouble or lacks sufficient internal funds, which can lead to a decline in the share price and investor confidence.

  1. Increased Administrative Burden:

Conducting a rights issue involves significant administrative tasks, including preparing prospectuses, legal compliance, and communication with shareholders. This can divert management’s attention and resources from other critical business operations.

  1. Limited Access to New Investors:

Rights issues primarily target existing shareholders, which may limit the opportunity for the company to attract new investors. This focus on current shareholders can restrict the potential for a broader market appeal and new capital influx.

  1. Uncertainty of Subscription:

There is no guarantee that all existing shareholders will exercise their rights to purchase additional shares. If the subscription rate is low, the company may not raise the intended capital, putting financial plans at risk.

  1. Short Timeframe for Decision-Making:

Rights issues typically have a limited subscription period, which can pressure shareholders to make quick decisions. Some shareholders may feel rushed, leading to suboptimal choices regarding their investment strategy, such as selling their rights without thoroughly evaluating the company’s prospects.

  1. Possible Negative Impact on Financial Ratios:

While a rights issue can improve certain financial ratios, it may also adversely affect others. For example, if the company issues a large number of shares without corresponding growth in profits, it may lead to a decrease in earnings per share (EPS), which can be viewed negatively by the market.

Management Notes

Role of merchant bankers in fixing the price

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Merchant bankers play an important role in public issue process. While acting as a banker to an issue, a merchant banker has to disclose full details to the Securities Exchange Board of India (SEBI). The details submitted by merchant banker about the public issue should contain the following.

  1. Furnishing Information:

  • Number of issues for which the merchant banker is engaged as banker to issue.
  • Number of applications received and details of application money received
  • Dates on which applications from investors were forwarded to issuing company.
  • Details of amount as refund to investors.

  1. 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.

  1. Agreement with issuing company

Agreement with the issuing company by the merchant banker should contain

  • Number of collection centres
  • Application money received
  • Daily statement by each branch which is a collecting centre.
  1. Action by RBI: Any action by RBI on merchant banker should be informed to SEBI by the merchant banker concerned.

  2. Code of Conduct

  • Having high integration in dealing with clients.
  • Disclosure of all details to the authorities concerned. Avoiding making exaggerated statements.
  • Disclosing all the facts to its customers.
  • Not disclosing any confidential matter of the clients to third parties.

A rights issue is the offer of shares of a company to the existing shareholders. A merchant banker has the following responsibilities in Rights issue.

Responsibilities of Merchant Bankers in Rights Issue

  1. The merchant banker will ensure that when Rights issues are taken up by a company, the merchant banker who is responsible for the Rights issue, shall see that an advertisement regarding the same is published in an English national daily, in an Hindi national daily and in a regional daily.

These newspapers should be in circulation in the city / town where the registered office of the company is located.

  1. It is the duty of the merchant banker to ensure that the application forms for Rights issue should be made available to the shareholders and if they are not available, a duplicate composite application form is made available to them within a reasonable time.
  2. If the shareholders are not able to obtain neither the original nor the duplicate application for Rights shares, they can apply on a plain paper through the merchant banker.
  3. The details that should be furnished in the plain paper, while applying for Rights shares should be provided by the merchant hanker.
  4. The merchant banker should mention in the advertisement, the company official to whom the shareholders should apply for Rights shares.
  5. The merchant banker should also inform that no individual can apply twice, in standard form as well as in plain paper.
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