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Equity Capital Markets – Types of Capital & Issue Mechanisms : Part 7

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Equity Capital Markets – Part 2: Types of Capital & Issue Mechanisms

Introduction:
Understanding equity capital requires diving deeper into the structure of capital and the mechanisms through which shares are issued to investors. This part of the blog covers types of capital, kinds of public and private issues, and important concepts like IPOs and rights issues.

1. Types of Capital

  • Authorised Capital: Maximum share capital a company is allowed to issue as per its charter.
  • Issued Capital: Portion of authorised capital offered to investors.
  • Subscribed Capital: Part of issued capital subscribed by investors.
  • Called-up Capital: Capital which shareholders are required to pay upon company’s request.
  • Paid-up Capital: Actual amount paid by shareholders out of the called-up capital.

2. Kinds of Share Issues

  • Public Issue: Shares offered to general public via IPO or FPO.
  • Private Placement: Offered to select investors. Includes:
    • Preferential Allotment
    • Qualified Institutional Placement (QIP)
    • Institutional Placement Programme (IPP)
  • Rights Issue: Existing shareholders get the right to buy additional shares at a discount.
  • Bonus Issue: Free shares issued from company reserves.
  • Sweat Equity: Shares issued to employees/directors for their contribution.

3. Public Issue Process – IPOs and FPOs

  • IPO (Initial Public Offering): First time a company offers shares to public.
  • FPO (Follow-on Public Offering): Additional shares issued by a listed company.

Important IPO Terms:

  • Red Herring Prospectus (RHP): Preliminary offer document with company info and financials.
  • Roadshow: Company presentations to investors and analysts before the IPO.
  • Green Shoe Option: Over-allotment option allowing extra shares to be issued in case of excess demand.

4. Diluted vs Non-Diluted Shareholding

  • Non-Diluted Shareholding: Current ownership without considering future issuances.
  • Diluted Shareholding: Ownership percentage assuming conversion of all potential shares (e.g., ESOPs, convertible debt).

5. Pricing of Issue

  • Fixed Price: Company decides the offer price.
  • Book Building: Price discovered based on investor bids within a price band.

6. Functions of Stock Exchanges

  • Provides platform for buying/selling listed securities
  • Ensures liquidity, transparency, and price discovery
  • Regulated by SEBI (in India)

7. Exchange vs OTC Market

  • Exchange Market: Centralized, regulated platform (e.g., NSE, BSE)
  • Over-the-Counter (OTC): Decentralized market without a formal exchange (e.g., bonds, derivatives)

8. Trading & Settlement Mechanism

  • Trading: Happens electronically via terminals or brokers.
  • Settlement: Process of transferring securities and funds.
  • T+1 or T+2: Transactions settled 1 or 2 business days after trade date.

9. Cash Market vs Equity Derivatives

  • Cash Market: Physical buying and selling of stocks for immediate delivery.
  • Equity Derivatives: Futures and options based on equity securities.

10. Demat Account

  • Holds securities in electronic form.
  • Mandatory for trading in listed shares.
  • Opened with a Depository Participant (DP).

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