Introduction to Capital Markets, Sources of raising funds

Company would choose from among various sources of finance depending on the
amount of capital required and the term for which it is needed. Finance sources can be
divided into three categories, namely traditional sources, ownership capital and non-
ownership capital.

Traditional Sources of Finance

Internal resources have traditionally been the chief source of finance for a company.
Internal resources could be a company’s assets, personal savings and profits that have not
been reinvested or distributed among shareholders. Working capital is a short term source
of finance and is the money used for a company’s day-to-day activities, including
salaries, rent, payments for raw materials and electricity bills.

Sources of Finance: Ownership Capital

Ownership capital is the capital owned by the shareholders of a company. A company can
raise substantial funds through an IPO (initial public offering). These funds are usually
used for large expenses, such as new product development, expansion into a new market
and setting up a new plant. The various types of shares are:

• Ordinary shares: These are also known as equity shares and give the owner the
right to share the company’s profits and vote at the firm’s general meetings.
• Preference shares: The owners of these shares may be entitled to a fixed dividend,
but usually do not have the right to vote.

Companies that are already listed on a stock exchange can opt for a rights issue, which
seeks an additional investment from existing shareholders. They could also opt for
deferred ordinary shares, wherein the issuing company is not required to pay dividends
until a specified date or before the profits reach a certain level.

Unquoted companies (those not listed on stock exchanges) can also issue and trade their
shares in over-the-counter (OTC) markets.

Sources of Finance: Non-Ownership Capital

Non-ownership capital includes funds raised from lenders, such as banks and creditors.
Companies typically borrow a fixed amount from a bank, at a predetermined interest rate
and with a fixed repayment schedule. Certain bank accounts offer overdraft facilities.
This is used by companies to meet their short-term fund requirements, as they usually
come at a very high interest rate.

Factoring enables a company to raise funds using its outstanding invoices. The company
typically receives about 85% of the value of the invoice from the factor. This method is
more appropriate for overcoming short-term cash-flow issues.
Hire purchase allows a company to use an asset without immediately paying the complete
purchasing price. Trade credit enables a company to obtain products and services from
another firm and pay the bill later.

Sources of Finance: Venture Capital

Firms in the early stages of development can opt for venture capital. This option gives the
financing company some ownership as well as influence over the direction of the
enterprise.

Sources of Finance: Duration

Depending on the date of maturity, sources of finance can be clubbed into the following:

Long-term sources of finance: Long-term financing can be raised from the following
sources:

• Share capital or equity share

• Preference shares
• Retained earnings
• Debentures/Bonds of different types
• Loans from financial institutions
• Loan from state financial corporation
• Loans from commercial banks
• Venture capital funding
• Asset securitization
• International

Medium-term sources of finance: Medium-term financing can be raised from the

following sources:

• Preference shares
• Debentures/bonds
• Public deposits/fixed deposits for duration of three years
• Commercial banks
• Financial institutions
• State financial corporations
• Lease financing / hire purchase financing
• External commercial borrowings
• Euro-issues
• Foreign currency bonds

Short term sources of finance: Short-term financing can be raised from the following
sources:

• Trade credit
 • Commercial banks
• Fixed deposits for a period of 1 year or less
• Advances received from customers
• Various short-term provisions

The Long-Term Finance may be Raised by the Companies from the following
Sources :-

Capital Market

Capital market denotes an arrangement whereby transactions involving the procurement

and supply of long-term funds take place among individuals and various organizations. In
the capital market, the companies raise funds by issuing shares and debentures of
different types. When long-term capital is initially raised by new companies or by
existing companies by issuing additional shares or debentures, the transactions are said to
take place in the market for new capital called, as 'New Issue Market'. But, buying and
selling of shares and debentures already issued by companies takes place in another type
of market called as 'Stock market'.

Individuals and institutions which contribute to the share capital of the company become
its shareholders. They are also known as members of the company. Before shares are
issued, the directors of the company have to decide on the following matters:-

 The amount of capital which is to be raised by issue of shares.

 The types of shares which will be issued.
 The time of issuing shares.

When a company decides to issue additional shares at any time after its formation or after
one year of the first allotment of shares, it is required under law that such shares must be
first offered to the existing shareholders of the company. If the offer is declined by the
existing shareholders, only then shares can be issued to the public. Such an issue is called
'rights issue' and these shares are known as 'right shares'. The Government controls the
issue of shares and debentures under the Capital Issues (Control) Act, 1947.

Special Financial Institutions

A large number of financial institutions have been established in India for providing long-
term financial assistance to industrial enterprises. There are many all-India institutions
like Industrial Finance Corporation of India (IFCI); Industrial Credit and Investment
Corporation of India (ICICI); Industrial Development Bank of India(IDBI) , etc. At the
State level, there are State Financial Corporations (SFCs) and State Industrial
Development Corporations (SIDCs). These national and state level institutions are known
as 'Development Banks'. Besides the development banks, there are several other
institutions called as 'Investment Companies' or 'Investment Trusts' which subscribe to
the shares and debentures offered to the public by companies. These include the Life
Insurance Corporation of India (LIC); General Insurance Corporation of India
(GIC); Unit Trust of India (UTI), etc.

Leasing Companies

Manufacturing companies can secure long-term funds from leasing companies. For this
purpose a lease agreement is made whereby plant, machinery and fixed assets may be
purchased by the leasing company and allowed to be used by the manufacturing concern
for a specified period on payment of an annual rental. At the end of the period the
manufacturing company may have the option of purchasing the asset at a reduced price.
The lease rent includes an element of interest besides expenses and profits of the leasing
company.

Foreign Sources

Funds can also be collected from foreign sources which usually consists of :-

 Foreign Collaborators: - If approved by the Government of India, the Indian

companies may secure capital from abroad through the subscription of foreign
collaborator to their share capital or by way of supply of technical knowledge,
patents, drawings and designs of plants or supply of machinery.
 International Financial Institutions: - like World Bank and International
Finance Corporation (IFC) provide long-term funds for the industrial
development all over the world. The World Bank grants loans only to the
Governments of member countries or private enterprises with guarantee of the
concerned Government. IFC was set up to assist the private undertakings without
the guarantee of the member countries. It also provides them risk capital.
 Non-Resident Indians: - persons of Indian origin and nationality living abroad
are also permitted to subscribe to the shares and debentures issued by the
companies in India.

Retained Profits or Reinvestment of Profits

An important source of long-term finance for ongoing profitable companies is the amount
of profit which is accumulated as general reserve from year to year. To the extent, profits
are not distributed as dividend to the shareholders; the retained amount can be reinvested
for expansion or diversification of business activities. Retained profit is an internal source
of finance. Hence it does not involve any cost of floatation which has to be incurred to
raise finance from external sources.
Short-Term Finance may be Raised by the Companies from the following Sources:-

Trade Credit

It is the credit which the firms get from its suppliers. It does not make available the funds
in cash, but it facilitates the purchase of supplies without immediate payment. No interest
is payable on the trade credits. The period of trade credit depends upon the nature of
product, location of the customer, degree of competition in the market, financial
resources of the suppliers and the eagerness of suppliers to sell his stocks.

Installment Credit

Firms may get credit from equipment suppliers. The supplier may allow the purchase of
equipment with payments extended over a period of 12 months or more. Some portion of
the cost price of the asset is paid at the time of delivery and the balance is paid in a
number of installments. The supplier charges interest on the installment credit which is
included in the amount of installment. The ownership of the equipment remains with the
supplier until all the installments have been paid by the buyer.

Accounts Receivable Financing

Under it, the accounts receivable of a business concern are purchased by a financing
company or money is advanced on security of accounts receivable. The finance
companies usually make advances up to 60 per cent of the value of the accounts
receivable pledged. The debtors of the business concern make payment to it which in turn
forwards to the finance company.

Customer Advance

Manufacturers of goods may insist the customers to make a part of the payment in
advance, particularly in cases of special order or big orders. The customer advance
represents a part of the price of the products that have been ordered by the customer and
which will be delivered at a later date.

Bank Credit

Commercial Banks play an important role in financing the short-term requirements of

business concerns. They provide finance in the following ways :-

 Loans: - When a bank makes an advance in lump sum, the whole of which is
withdrawn to cash immediately by the borrower who undertakes to repay it in one
single installment, it is called a loan. The borrower is required to pay the interest
on the whole amount.
 Cash credit: - It is the most popular method of financing by commercial banks.
When a borrower is allowed to borrow up to a certain limit against the security of
tangible assets or guarantees, it is known as secured credit but if the cash credit is
 not backed by any security, it is known as clean cash credit. In case of clean cash
credit the borrower gives a promissory note which is signed by two or more
sureties. The borrower has to pay interest only on the amount actually utilized.
 Overdrafts: - Under this, the commercial bank allows its customer to overdraw
his current account so that it shows the debit balance. The customer is charged
interest on the account actually overdrawn and not on the limit sanctioned.
 Discounting of bills: - Commercial banks finance the business concern by
discounting their credit instruments like bills of exchange, promissory notes and
hundies. These documents are discounted by the bank at a price lower than their
face value.

Sources of long term finance

The main sources of long term finance are as follows:
1. Shares:
These are issued to the general public. These may be of two types:
(i) Equity
(ii) Preference.
The holders of shares are the owners of the business.
2. Debentures:
These are also issued to the general public. The holders of debentures are the creditors of
the company.
3. Public Deposits:
General public also like to deposit their savings with a popular and well established
company which can pay interest periodically and pay-back the deposit when due.
4. Retained earnings:
The company may not distribute the whole of its profits among its shareholders. It may
retain a part of the profits and utilize it as capital.
5. Term loans from banks:
Many industrial development banks, cooperative banks and commercial banks grant
medium term loans for a period of three to five years.
6. Loan from financial institutions:
There are many specialized financial institutions established by the Central and State
governments which give long term loans at reasonable rate of interest. Some of these
institutions are:
Industrial Finance Corporation of India (IFCI), Industrial
Development Bank of India (IDBI), Industrial Credit and Investment
Corporation of India (ICICI), Unit Trust of India (UTI), State
Finance Corporations etc.
SEBI Guidelines for IPOs:-
1. IPOs of small companies:
Public issue of less than five crores has to be through OTCEI and separate guidelines
apply for floating and listing of these issues. (Public Offer by Small Unlisted
Companies)

2. Size of the Public Issue:

Issue of shares to general public cannot be less than 25% of the total issue, in case of
information technology, media and telecommunication sectors this stipulation is reduced
subject to the conditions that:

• Offer to the public is not less than 10% of the securities issued.
• A minimum number of 20 lakhs securities is offered to the public and
• Size of the net offer to the public is not less than Rs. 30 crores.

3. Promoter Contribution

• Promoters should bring in their contribution including premium fully before the
issue
• Minimum Promoters contribution is 20-25% of the public issue.
• Minimum Lock in period for promoters contribution is five years
• Minimum lock in period for firm allotments is three years.

4. Collection centers for receiving applications

• There should be at least 30 mandatory collection centers, which should include

invariably the places where stock exchanges have been established.
• For issues not exceeding Rs.10 crores (including premium, if any), the collection
centres shall be situated at:-

- the four metropolitan centres viz. Bombay, Delhi, Calcutta, Madras; and
- at all such centres where stock exchanges are located in the region in which the
registered office of the company is situated.

5. Regarding allotment of shares

• Net Offer to the General Public has to be at least 25% of the Total Issue Size for
listing on a Stock exchange.
• It is mandatory for a company to get its shares listed at the regional stock
exchange where the registered office of the issuer is located.
• In an Issue of more than Rs. 25 crores the issuer is allowed to place the whole
issue by book-building
• Minimum of 50% of the Net offer to the Public has to be reserved for Investors
applying for less than 1000 shares.
• There should be at least 5 investors for every 1 lakh of equity offered (not
applicable to infrastructure companies).
 • Quoting of Permanent Account Number or GIR No. in application for allotment
of securities is compulsory where monetary value of Investment is Rs.50,000/- or
above.
• Indian development financial institutions and Mutual Fund can be allotted
securities up to 75% of the Issue Amount.
• A Venture Capital Fund shall not be entitled to get its securities listed on any
stock exchange till the expiry of 3 years from the date of issuance of securities.
• Allotment to categories of FIIs and NRIs/OCBs is up to a maximum of 24%,
which can be further extended to 30% by an application to the RBI - supported by
a resolution passed in the General Meeting.

6. Timeframes for the Issue and Post- Issue formalities

• The minimum period for which a public issue has to be kept open is 3 working
days and the maximum for which it can be kept open is 10 working days. The
minimum period for a rights issue is 15 working days and the maximum is 60
working days.
• A public issue is affected if the issue is able to procure 90% of the Total issue size
within 60 days from the date of earliest closure of the Public Issue. In case of
over-subscription the company may have the right to retain the excess application
money and allot shares more than the proposed issue, which is referred to as the
‘green-shoe’ option.
• A rights issue has to procure 90% subscription in 60 days of the opening of the
issue.
• Allotment has to be made within 30 days of the closure of the Public Issue and 42
days in case of a Rights issue.
• All the listing formalities for a public Issue has to be completed within 70 days
from the date of closure of the subscription list.

7. Despatch of Refund Orders

• Refund orders have to be dispatched within 30 days of the closure of the Public
Issue.
• Refunds of excess application money i.e. for un-allotted shares have to be made
within 30 days of the closure of the Public Issue.

8. Other regulations pertaining to IPO

• Underwriting is not mandatory but 90% subscription is mandatory for each issue
of capital to public unless it is disinvestment in which case it is not applicable.
• If the issue is undersubscribed then the collected amount should be returned back
(not valid for disinvestment issues).
• If the issue size is more than Rs. 500 crores voluntary disclosures should be made
regarding the deployment of the funds and an adequate monitoring mechanism to
be put in place to ensure compliance.
 • There should not be any outstanding warrants or financial instruments of any
other nature, at the time of initial public offer.
• In the event of the initial public offer being at a premium, and if the rights under
warrants or other instruments have been exercised within the twelve months prior
to such offer, the resultant shares will not be taken into account for reckoning the
minimum promoter's contribution and further, the same will also be subject to
lock-in.
• Code of advertisement specified by SEBI should be adhered to.
• Draft prospectus submitted to SEBI should also be submitted simultaneously to
all stock exchanges where it is proposed to be listed.

9. Restrictions on other allotments

• Firm allotments to mutual funds, FIIs and employees not subject to any lock-in
period.
• Within twelve months of the public/rights issue no bonus issue should be made.
• Maximum percentage of shares, which can be distributed to employees cannot be
more than 5% and maximum shares to be allotted to each employee cannot be
more than 200.

10. Relaxations to public issues by infrastructure companies.

These relaxations would be applicable to Infrastructure Companies as defined under
Section 10(23G) of the Income Tax Act, 1961, provided their projects are appraised by
any Developmental Financial Institution (DFI) or IDFC or IL&FS. The projects must also
have a participation of at least 5% of the project cost (in debt and/or equity) by the
appraising institution.

• The infrastructure companies will be exempted from the requirement of making a

minimum public offer of 25 per cent of its securities.
• The requirement of 5 shareholders per Rs. 1 lakh of offer is also waived in case of
offerings by infrastructure companies.
• For public issues by infrastructure companies, minimum subscription of 90%
would no longer be mandatory provided disclosure is made about the alternate
source of funding which the company has considered, in the event of under
subscription in the public issue.
• Infrastructure companies are permitted to freely price the offerings in the
domestic market provided that the promoter companies along with Equipment
Suppliers and other strategic investors subscribe to 50% of the equity at the same
or a higher price than what is being offered to the public. Adequate disclosures
about the justification for the pricing will be required to be made in the offer
documents.
• The Infrastructure Companies would be allowed to keep their issues open for 21
days. The relaxation would give infrastructure companies sufficient time to
mobilise funds for their issues.
 • Infrastructure Companies would not be required to create and maintain a
Debenture Redemption Reserve (DRR) in case of Debenture Issues.

Qualifications for Listing initial public offerings (IPOs)

1) Paid up Capital:

• The Paid up equity capital of the applicant shall not be less than Rs. 10 crores*
and
• The capitalisation of the applicant’s equity shall not be less than Rs. 25 crores**

* For this purpose, post issue paid up equity capital for which listing is sought
shall be taken into account.
** For this purpose, capitalisation will be the product of issue price & post issue
number of equity shares.

2) Atleast three years track record of either:

• the applicant seeking listing; or

• the promoting company, incorporated in or outside India

For this purpose, the applicant or the promoting company shall submit audited balance
sheet of three preceding financial years of the company to the NSE.

General criteria

1) Conditions Precedent to Listing: The Issuer shall have adhered to conditions

precedent to listing as emerging inter-alia from Securities Contracts (Regulations) Act
1956, Companies Act 1956, Securities and Exchange Board of India Act 1992, any rules
and/or regulations framed under foregoing statutes, as also any circular, clarifications,
guidelines issued by the appropriate authority under foregoing statutes.

2) The Project/ Activity plan of the applicant must have been appraised by a financial
institution u/s 4A of the Companies Act, 1956 or a state finance corporation or a
scheduled commercial bank with a paid up capital exceeding Rs.50 crores or a category I
Merchant Banker with a net worth of atleast Rs.10 crores or a venture capital fund with a
net worth of atleast Rs. 50 crores. or
In the case of an existing company the applicant should have been listed on any other
recognised stock exchange for atleast last three years
This clause shall however not be applicable to listing of securities issued by Government
Companies, Public Sector Undertakings, Financial Institutions, Nationalised Banks,
Statutory Corporations Banking Companies and subsidiaries of scheduled commercial
bank who are otherwise bound to adhere to all the relevant statutes, guidelines, circulars,
clarifications etc. that may be issued by various regulatory authorities from time to time
and in case of an Offer for Sale.

3) The applicant desirous of listing its securities should satisfy the exchange on the
following:

• No Disciplinary action has been taken by other stock exchanges and regulatory
authorities in the past three years: The promoting company (if any) has not been
in default in payment of listing fees to any stock exchange in the last three years
or has not been delisted or suspended in the past and has not been proceeded
against by SEBI or other regulatory authorities in connection with investor related
issues or otherwise.
• Redressal mechanism of Investor grievance: The points of consideration are:
promoting company’s (if any) track record in redressal of investor grievances
promoting company’s arrangements envisaged are in place for servicing its
investor promoting company’s general approach and philosophy to the issue of
investor service and protection
• Distribution of shareholding: The promoting company’s (if any) shareholding
pattern on March 31 of preceding three years separately showing promoters and
other groups’ shareholding pattern should be as per the regulatory requirements
• Details of Litigation: The promoting company’s (if any) litigation record, the
nature of litigation, status of litigation during the preceding three years need to be
clarified to the exchange.

Qualifications for Listing Securities of Existing Companies

1) Paid up Capital & Market Capitalisation:

• The paid-up equity capital of the applicant shall not be less than Rs. 10 crores *
and the market capitalisation of the applicant’s equity shall not be less than Rs. 25
crores* or
• The paid-up equity capital of the applicant shall not be less than Rs. 25 crores * or
• The market capitalisation of the applicant’s equity shall not be less than Rs. 50
crores. **

* For this purpose the existing Paid up equity capital as well as the Paid up equity
capital after the proposed
issue for which listing is sought shall be taken into account.
** The average of the weekly high and low of the closing prices of the shares as quoted
on the National
Stock Exchange during the last twelve months preceding the date of submission of
application by the
company and if the shares are not traded on the National Stock Exchange such average
price on any of
the recognised Stock Exchanges where those shares are frequently traded should be taken
into account
while determining market capitalisation after making necessary adjustments for Rights /
Bonus Issues.

• Unless the market capitalisation is more than Rs. 25 crores the securities of the
company should be traded for at least 25% of the trading days during the last
twelve months preceding the date of submission of application by the company on
atleast one of the Stock Exchanges where it is traded.

The requirement of Rs. 25 crores market capitalisation mentioned above is not applicable
to listing of securities issued by Government Companies, Public Sector Undertakings,
Financial Institutions, Nationalised Banks, Statutory Corporations and Banking
Companies who are otherwise bound to adhere to all the relevant statutes, guidelines,
circulars, clarifications etc. that may be issued by various regulatory authorities from
time to time.

2) Atleast three years track record of either:

• the applicant seeking listing; or

• the promoting company, incorporated in or outside India

For this purpose, the applicant or the promoting company shall submit audited balance
sheet of three preceding financial years of the company to NSE and also provide a
certificate to the Exchange in respect of the following:

• The company has not been referred to the Board for Industrial and Financial
Reconstruction (BIFR).
• The net worth of the company has not been wiped out by the accumulated losses
resulting in a negative net worth.
• The company has not received any winding up petition accepted by a court.

3) The applicant has paid dividend in at least two out of the last three financial
years immediately

• Preceding the year in which listing application has been made OR

• The net worth of the applicant is at least Rs. 50 crores***

*** Net worth means:

o Paid up equity capital
o Reserves excluding revaluation reserve
o Miscellaneous Expenses not written off
o Negative balance in profit and loss account to the extent not set off

The above Clauses are not applicable to listing of securities issued by Government
Companies, Public Sector Undertakings, Financial Institutions, Nationalised Banks,
Statutory Corporations, Banking Companies and subsidiaries of scheduled commercial
bank who are otherwise bound to adhere to all the relevant statutes, guidelines, circulars,
clarifications etc. that may be issued by various regulatory authorities from time to time
and in case of an Offer for Sale.

Listing fees for National Stock Exchange

S.NO PARTICULARS AMOUNT (Rs.)
1. Initial Listing Fees 7,500
2 Annual Listing Fees
a) Companies with paid up Share and /or debenture capital of Rs.
4,200
1 crore
b) Above Rs. 1 crore and upto Rs.5 crores 8,400
c) Above Rs. 5 crore and upto Rs.10 crores 14,000
d) Above Rs. 10 crore and upto Rs.20 crores 28,000
e) Above Rs. 20 crore and upto Rs.50 crores 42,000
f) Above Rs. 50 crores 70,000

Companies having a paid up capital of more than Rs. 50 crores would pay additional
listing fees of Rs. 1400 for every increase of Rs. 5 crores or part there of in the paid-up
share/debenture capital. In case, of annual listing fee, they will be reduced by 50% for
the companies, which are non–regional for the exchange.

The payment can be done through Cheques/ Demand Drafts favouring National Stock
Exchange of India Limited on Mumbai.

Green Shoe Option

Green Shoe option means an option of allocating shares in excess of the shares included
in the public issue. Its main purpose is to stabilize post listing price of the newly issued
shares. It is being introduced in the Indian Capital Market in the initial public offerings
using book building method. It is expected to arrest the speculative forces.

• The basic purpose of ‘green shoe option’ is not to make available additional share
capital to company, but to act as stabilizing force, if issue is over subscribed. The
shares held by promoters are lent to Stabilising Agent (SA) and returned by SA to
them after the purpose is over. Promoters do not get any profit in this transaction.
• The green shoe option is available only in case of IPO and not for subsequent
issues.
• "Green Shoe option" means an option of allocating shares in excess of the shares
included in the public issue and operating a post-listing price stabilizing
mechanism, which is granted to a company to be exercised through a Stabilising
Agent [clause 1.2.1(xiii-a)].
• A company desirous of availing the option granted by this Chapter, 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 of clause 8A.15. [clause 8A.1]
• The company shall appoint one of the Lead book runners 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 [clause
8A.2]
• The SA shall also enter into an agreement with the promoters who will lend their
shares Maximum number of shares that may be borrowed from the promoters
shall not be in excess of 15% of the total issue size. [clause 8A.3].
• The details of the agreements mentioned in clause 8A.2 (between Company and
SA) and 8A.3 (between SA and promoters) shall be disclosed in the draft Red
Herring prospectus, Red Herring prospectus and the final prospectus.
• 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
[Clause 8A.7]. The allocation of these shares shall be pro-rata to all the applicants
[clause 8A.8].
• 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 exchanges [clause 8A.9].
• 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. [clause
8A.14].
• The idea is that due to excess supply of shares (permitted up to 15%), market
price will not shoot up at abnormally high level. However, if price of shares goes
below issue price, SA will buy share from the market, so that price rises. If despite
excess supply of shares, price continues to be higher than the issue price, there is
no question of buying the shares from market, as that will further aggravate the
market price.
• 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.
[clause 8A.15].
• The SA shall remit an amount equal to (further shares allotted by the issuer
company) * (issue price) to the issuer company from the GSO Bank Account. 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). [clause 8A.17] - - Thus,
promoters/company do not benefit from this transaction.

What is an ADR / GDR? : ADR stands for American Depository Receipt. Similarly,
GDR stands for Global Depository Receipt. Let’s understand these better.

Every publicly traded company issues shares – and these shares are listed and traded on
various stock exchanges. Thus, companies in India issue shares which are traded on
Indian stock exchanges like BSE (The Stock Exchange, Mumbai), NSE (National Stock
Exchange), etc.

These shares are sometimes also listed and traded on foreign stock exchanges like NYSE
(New York Stock Exchange) or NASDAQ (National Association of Securities Dealers
Automated Quotation). But to list on a foreign stock exchange, the company has to
comply with the policies of those stock exchanges. Many times, the policies of these
exchanges in US or Europe are much more stringent than the policies of the exchanges in
India. This deters these companies from listing on foreign stock exchanges directly. But
many good companies get listed on these stock exchanges indirectly – using ADRs and
GDRs.

This is what happens: The company deposits a large number of its shares with a bank
located in the country where it wants to list indirectly. The bank issues receipts against
these shares, each receipt having a fixed number of shares as an underlying (Usually 2 or
4).

These receipts are then sold to the people of this foreign country (and anyone who is
allowed to buy shares in that country). These receipts are listed on the stock exchanges.
They behave exactly like regular stocks – their prices fluctuate depending on their
demand and supply, and depending on the fundamentals of the underlying company.

These receipts, which are traded like ordinary stocks, are called Depository Receipts.
Each receipt amounts to a claim on the predefined number of shares of that company. The
issuing bank acts as a depository for these shares – that is, it stores the shares on behalf of
the receipt holders.

What is the difference between ADR and GDR? :Both ADR and GDR are depository
receipts, and represent a claim on the underlying shares. The only difference is the
location where they are traded.
 If the depository receipt is traded in the United States of America (USA), it is called an
American Depository Receipt, or an ADR. If the depository receipt is traded in a country
other than USA, it is called a Global Depository Receipt, or a GDR.

How can you use an ADR / GDR? :ADRs and GDRs are not for investors in India –
they can invest directly in the shares of various Indian companies.

But the ADRs and GDRs are an excellent means of investment for NRIs and foreign
nationals wanting to invest in India. By buying these, they can invest directly in Indian
companies without going through the hassle of understanding the rules and working of
the Indian financial market – since ADRs and GDRs are traded like any other stock, NRIs
and foreigners can buy these using their regular equity trading accounts!

Which Indian companies have ADRs and / or GDRs? :Some of the best Indian
companies have issued ADRs and / or GDRs. Below is a partial list.

Company ADR GDR

Bajaj Auto No Yes
Dr. Reddys Yes Yes
HDFC Bank Yes Yes
Hindalco No Yes
ICICI Bank Yes Yes
Infosys Technologies Yes Yes
ITC No Yes
L&T No Yes
MTNL Yes Yes
Patni Computers Yes No
Ranbaxy Laboratories No Yes
Tata Motors Yes No
State Bank of India No Yes
VSNL Yes Yes
WIPRO Yes Yes
Meaning and Structure of Securitisation Transaction
2.1 Meaning
One of the most prominent developments in international finance in recent decades and
the
one that is likely to assume even greater importance in future, is securitisation.
Securitisation
is the process of pooling and repackaging of homogenous illiquid financial assets into
marketable securities that can be sold to investors. The process leads to the creation of
financial instruments that represent ownership interest in, or are secured by a segregated
income producing asset or pool of assets. The pool of assets collateralises securities.
These
assets are generally secured by personal or real property (e.g. automobiles, real estate, or
equipment loans), but in some cases are unsecured (e.g. credit card debt, consumer
loans).
There are four steps in a securitisation: (i) SPV is created to hold title to assets underlying
securities; (ii) the originator or holder of assets sells the assets (existing or future) to the
SPV;
(iii) the SPV, with the help of an investment banker, issues securities which are
distributed to
investors; and (iv) the SPV pays the originator for the assets with the proceeds from the
sale
of securities. The touchstones of securitisation are:
• Legal true sale of assets to an SPV with narrowly defined purposes and activities
• Issuance of securities by the SPV to the investors collateralised by the underlying
assets
• Reliance by the investors on the performance of the assets for repayment - rather than
the credit of their Originator (the seller) or the issuer (the SPV)
• Consequent to the above, “Bankruptcy Remoteness” from the Originator
Apart from the above, the following additional characteristics are generally noticed:
• administration of the assets, including continuation of relationships with obligors
• support for timely interest and principal repayments in the form of suitable credit
enhancements
• ancillary facilities to cover interest rate / forex risks, guarantee, etc.
• formal rating from one or more rating agencies
A securitisation transaction generally involves some or all of the following parties: (i) the
initial owner of the asset (the originator or sponsor) who has a loan agreement with the
borrowers (obligors); (ii) the issuer of debt instruments who also is the SPV. The structure
keeps the SPV away from bankruptcy of the originator, technically called ‘bankruptcy
remote’; (iii) the investment bankers who assist in structuring the transaction and who
underwrite or place the securities for a fee; (iv) the rating agencies, who assess credit
quality
of certain types of instruments and assign a credit rating; (v) the credit enhancer, possibly
a
bank, surety company, or insurer, who provides credit support through a letter of credit,
guarantee, or other assurance; (vi) the servicer, usually the originator, who collects
payments
due on the underlying assets and, after retaining a servicing fee, pays them over to the
security holders; (vii) the trustee, who deals with issuer, credit enhancer and servicer on
behalf of the security holders; (viii) the legal counsel, who participates in the structuring
of
the transaction1; and (ix) the swap counterparty who provides interest rate / currency
swap, if
needed.
2.2 Parties to a Securitisation Transaction
There are primarily three parties to a securitisation deal, namely -
a. The Originator: This is the entity on whose books the assets to be
securitised exist. It is the prime mover of the deal i.e. it sets up the necessary
structures to execute the deal. It sells the assets on its books and receives the
funds generated from such sale. In a true sale, the Originator transfers both the
legal and the beneficial interest in the assets to the SPV.
b. The SPV: The issuer also known as the SPV is the entity, which would
typically buy the assets (to be securitised) from the Originator. The SPV is
typically a low-capitalised entity with narrowly defined purposes and
activities, and usually has independent trustees/directors. As one of the main
objectives of securitisation is to remove the assets from the balance sheet of
the Originator, the SPV plays a very important role inas much as it holds the
assets in its books and makes the upfront payment for them to the Originator.
c. The Investors: The investors may be in the form of individuals or
institutional investors like FIs, mutual funds, provident funds, pension funds,
insurance companies, etc. They buy a participating interest in the total pool of
receivables and receive their payment in the form of interest and principal as
per agreed pattern.
Besides these three primary parties, the other parties involved in a securitisation deal are
given below:
a) The Obligor(s): The Obligor is the Originator's debtor (borrower of the original loan).
The amount outstanding from the Obligor is the asset that is transferred to the SPV. The
credit standing of the Obligor(s) is of paramount importance in a securitisation
transaction.
b) The Rating Agency: Since the investors take on the risk of the asset pool rather than
the Originator, an external credit rating plays an important role. The rating process would
assess the strength of the cash flow and the mechanism designed to ensure full and timely
payment by the process of selection of loans of appropriate credit quality, the extent of
credit and liquidity support provided and the strength of the legal framework.
c) Administrator or Servicer: It collects the payment due from the Obligor/s and passes it
to the SPV, follows up with delinquent borrowers and pursues legal remedies available
against the defaulting borrowers. Since it receives the instalments and pays it to the SPV,
it is also called the Receiving and Paying Agent.
d) Agent and Trustee: It accepts the responsibility for overseeing that all the parties to
the securitisation deal perform in accordance with the securitisation trust agreement.
Basically, it is appointed to look after the interest of the investors.
e) Structurer: Normally, an investment banker is responsible as structurer for bringing
together the Originator, credit enhancer/s, the investors and other partners to a
securitisation deal. It also works with the Originator and helps in structuring deals.
The different parties to a securitisation deal have very different roles to play. In fact,
firms
specialise in those areas in which they enjoy competitive advantage. The entire process is
broken up into separate parts with different parties specialising in origination of loans,
raising
funds from the capital markets, servicing of loans etc. It is this kind of segmentation of
market roles that introduces several efficiencies securitisation is so often credited with.