Assignment Code: MFP-1/TMA/JAN/2023

Course Code: MFP-1

Assignment Name: Equity Markets

Year: 2023

Verification Status: Verified by Professor

1. What do you understand by ‘Book Building Process’ of issuing shares? Discuss the procedure adopted for this purpose and the advantage to the Issuing Company and the Investors.

Ans) The book building process is a mechanism used by companies to determine the demand for their shares before the shares are listed on a stock exchange. It is a process of price discovery that involves generating and recording investor demand for shares during an initial public offering (IPO). The book building process is used to determine the price at which the shares will be issued and also the quantity of shares to be issued.

The procedure for book building involves the following steps:

1. Selection of the Investment Banker: The company that wants to issue shares appoints an investment banker who helps to facilitate the IPO process. The investment banker provides advice to the company on the timing, size, and pricing of the issue.

2. Creation of the Prospectus: The company prepares a prospectus that contains detailed information about the company, its financial performance, and the terms and conditions of the IPO. The prospectus is circulated to potential investors.

3. Appointment of Book Runners: The investment banker appoints book runners who are responsible for collecting and recording investor demand for the shares. The book runners are also responsible for determining the final price at which the shares will be issued.

4. Determination of Price Range: The investment banker and the book runners determine a price range for the shares. The price range is based on the company's financial performance, market conditions, and other factors. The price range is announced to the market, and potential investors are invited to bid for the shares.

5. Collection of Bids: Investors are invited to bid for shares within the price range. Investors can bid for shares at any price within the range. The bids are collected by the book runners.

6. Allocation of Shares: After the bids are collected, the book runners determine the final price at which the shares will be issued. The shares are allocated to investors based on their bids. The investors who bid at the highest price are allocated shares first, followed by those who bid at lower prices.

7. Listing of Shares: After the shares are allocated, they are listed on a stock exchange.

The book building process has several advantages for both the issuing company and investors:

Advantages to the Issuing Company

1. Price Discovery: The book building process helps the company to determine the demand for its shares and the price at which the shares should be issued.

2. Efficient Allocation of Shares: The process ensures that shares are allocated efficiently to investors who are willing to pay the highest price.

3. Reduced Cost: The process reduces the cost of issuing shares as it eliminates the need for underwriters.

Advantages to Investors

1. Transparency: The process is transparent as investors can see the demand for the shares and the prices at which other investors are bidding.

2. Fair Allocation of Shares: The process ensures that shares are allocated fairly to investors who are willing to pay the highest price.

3. Efficient Pricing: The process ensures that the shares are priced efficiently based on market demand and investor sentiment.

In conclusion, the book building process is an important mechanism for determining the demand for shares and the price at which they should be issued. The process benefits both the issuing company and investors by ensuring fair allocation of shares and efficient pricing.

2. Explain the role of Securities and Exchange Board of India (SEBI) in regulating the securities markets in India. Discuss the major achievements of SEBI since its inception.

Ans) The Securities and Exchange Board of India (SEBI) is the regulatory body that oversees the securities markets in India. Its primary role is to protect the interests of investors and promote the development of the securities market. SEBI was established in 1988 and was given statutory powers in 1992 with the passing of the SEBI Act. SEBI has several functions, including regulating stock exchanges, registering and regulating stockbrokers and other intermediaries, registering and regulating mutual funds and other investment funds, regulating takeovers and mergers, and investigating and penalizing market manipulations and insider trading.

Some of the Major Achievements of SEBI Since its Inception

1. Transparency and Disclosure: SEBI has implemented regulations to increase transparency and disclosure in the securities markets. This has led to increased investor confidence in the markets and has helped to prevent fraud and manipulation.

2. Investor Protection: SEBI has taken steps to protect the interests of investors by implementing regulations to prevent fraudulent and unfair trade practices. This has led to increased investor protection and confidence in the securities markets.

3. Development of the Securities Market: SEBI has promoted the development of the securities market by introducing new products such as exchange-traded funds (ETFs) and derivatives. This has led to increased investor participation in the markets and has helped to deepen the market.

4. Strengthening of Corporate Governance: SEBI has introduced regulations to strengthen corporate governance in listed companies. This has led to improved transparency and accountability, which has increased investor confidence in these companies.

5. Regulation of Foreign Investments: SEBI has played a crucial role in regulating foreign investments in the securities markets. It has introduced regulations to prevent money laundering and other illegal activities.

Overall, SEBI has been instrumental in promoting the development of the securities market in India while protecting the interests of investors. Its efforts have helped to increase investor confidence and participation in the markets and have led to the growth of the Indian economy.

3. What do you understand by pledging of shares? How is it different from hypothecation of shares? Explain the procedure adopted for pledging of shares.

Ans) Pledging of shares refers to the process of using shares held by a shareholder as collateral for obtaining a loan. In this process, the shareholder pledges the shares to the lender as security, and the lender retains ownership of the shares until the loan is fully repaid. If the borrower fails to repay the loan, the lender can sell the shares to recover the loan amount. Hypothecation of shares, on the other hand, is a process where the borrower retains the ownership of the shares while pledging them as collateral for a loan. The lender has a right to sell the shares in case of default by the borrower.

The Procedure for Pledging of Shares

1. The shareholder approaches a lender, such as a bank or a financial institution, for a loan.

2. The lender evaluates the shares held by the shareholder and decides on the loan amount that can be offered based on the market value of the shares.

3. The shareholder signs a pledge agreement with the lender, which specifies the terms and conditions of the loan and the pledge of shares.

4. The shareholder then transfers the shares to the lender's account and informs the company whose shares are pledged about the pledge.

5. The company then puts a lock-in on the shares and updates its records to show that the shares are pledged.

6. The lender retains the shares as collateral until the loan is fully repaid. Once the loan is repaid, the shares are released back to the shareholder.

It is important to note that pledging of shares can be risky as it exposes the shareholder to the risk of losing ownership of the shares in case of default. It is advisable to carefully evaluate the terms and conditions of the loan and the pledge agreement before pledging shares as collateral.

4. Explain ‘Qualified Institutional Placement’ and the process involved in it. Discuss the regulatory framework that has evolved for this purpose in India.

Ans) Qualified Institutional Placement (QIP) is a process through which a listed company can raise funds by issuing equity shares or other securities to qualified institutional buyers (QIBs), such as mutual funds, banks, insurance companies, and foreign portfolio investors. QIP is a faster and more cost-effective way for companies to raise capital compared to other methods such as public offerings.

The Process Involved in a QIP

1. The company appoints merchant bankers as lead managers to manage the QIP process.

2. The company announces its intention to raise capital through a QIP and discloses the necessary details such as the size of the issue, the issue price, and the use of proceeds.

3. The company obtains approval from its board of directors and shareholders for the QIP.

4. The lead managers prepare a placement document, which includes information about the company, the securities being offered, and the risks associated with the investment.

5. The lead managers approach potential investors, who are QIBs, and invite them to subscribe to the securities being offered.

6. Once the investors have expressed their interest, the lead managers finalize the issue price and the number of shares to be allotted to each investor.

7. The shares are then allotted to the investors, and the company receives the funds raised through the QIP.

In India, the regulatory framework for QIP is provided by the Securities and Exchange Board of India (SEBI) through its SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018. These regulations provide guidelines for companies that want to raise funds through QIP and specify the eligibility criteria for QIBs.

Some of the Key Regulatory Requirements for QIP in India

1. The minimum issue size for a QIP is Rs. 100 crore.

2. The maximum discount on the issue price is 5% of the market price.

3. The minimum subscription size for a QIB is Rs. 10 crore.

4. The securities being offered through a QIP must be listed on a recognized stock exchange.

5. The QIP must be completed within 12 months of the approval from the board of directors.

Overall, QIP is an efficient way for listed companies to raise capital, and the regulatory framework in India provides adequate safeguards for investors and companies.

5. Explain the steps involved in the process of portfolio management. Discuss the fiduciary responsibilities of a Portfolio Manager?

Ans) The process of portfolio management involves a series of steps that are aimed at achieving the investment objectives of a client while minimizing risk.

The steps involved in the process are as follows:

1. Establishing Investment Objectives: The first step is to understand the investment objectives of the client. The portfolio manager needs to understand the client's financial situation, investment goals, risk tolerance, and other relevant factors.

2. Asset Allocation: The portfolio manager then determines the appropriate mix of asset classes (such as equities, bonds, real estate, commodities, etc.) based on the client's investment objectives and risk tolerance.

3. Security Selection: The portfolio manager selects specific securities within each asset class based on factors such as market conditions, financial performance, and risk characteristics.

4. Portfolio Optimization: The portfolio manager uses sophisticated analytical tools to optimize the portfolio based on factors such as diversification, risk management, and return expectations.

5. Monitoring and Rebalancing: The portfolio manager continually monitors the portfolio's performance and adjusts the asset allocation and security selection as needed to ensure that the portfolio remains aligned with the client's investment objectives.

The fiduciary responsibilities of a portfolio manager are as follows:

1. Duty of Loyalty: The portfolio manager has a duty to act in the best interests of the client and must always prioritize the client's interests over their own.

2. Duty of Care: The portfolio manager has a duty to exercise care, skill, and diligence in managing the portfolio and making investment decisions.

3. Duty to Disclose: The portfolio manager must disclose all material information to the client and must be transparent in all their dealings.

4. Duty to Manage Risk: The portfolio manager has a duty to manage risk prudently and must ensure that the portfolio is diversified and aligned with the client's risk tolerance.

5. Duty to Avoid Conflicts of Interest: The portfolio manager must avoid conflicts of interest and must disclose any potential conflicts to the client.

Overall, the process of portfolio management is complex, and the fiduciary responsibilities of a portfolio manager require a high level of professionalism, expertise, and integrity.