Stock Market of India

HISTORY
Stock markets refer to a market place where investors can buy and sell stocks. The price at which each
buying and selling transaction takes is determined by the market forces (i.e. demand and supply for a
particular stock).

Let us take an example for a better understanding of how market forces determine stock prices. ABC Co.
Ltd. enjoys high investor confidence and there is an anticipation of an upward movement in its stock price.
More and more people would want to buy this stock (i.e. high demand) and very few people will want to sell
this stock at current market price (i.e. less supply). Therefore, buyers will have to bid a higher price for this
stock to match the ask price from the seller which will increase the stock price of ABC Co. Ltd. On the
contrary, if there are more sellers than buyers (i.e. high supply and low demand) for the stock of ABC Co.
Ltd. in the market, its price will fall down.

In earlier times, buyers and sellers used to assemble at stock exchanges to make a transaction but now with
the dawn of IT, most of the operations are done electronically and the stock markets have become almost
paperless. Now investors dont have to gather at the Exchanges, and can trade freely from their home or
office over the phone or through Internet.

History of the Indian Stock Market - The Origin

One of the oldest stock markets in Asia, the Indian Stock Markets have a 200 years old history.

18th Century East India Company was the dominant institution and by end of the century, busuness in its loan securities gain
full momentum

1830's Business on corporate stocks and shares in Bank and Cotton presses started in Bombay. Trading list by the en
1839 got broader

1840's Recognition from banks and merchants to about half a dozen brokers

1850's Rapid development of commercial enterprise saw brokerage business attracting more people into the business

1860's The number of brokers increased to 60

1860-61 The American Civil War broke out which caused a stoppage of cotton supply from United States of America;
marking the beginning of the "Share Mania" in India

1862-63 The number of brokers increased to about 200 to 250

1865 A disastrous slump began at the end of the American Civil War (as an example, Bank of Bombay Share which
touched Rs. 2850 could only be sold at Rs. 87)

Pre-Independance Scenario - Establishment of Different Stock Exchanges

1874 With the rapidly developing share trading business, brokers used to gather at a street (now well known as "Dala
Street") for the purpose of transacting business.
1875 "The Native Share and Stock Brokers' Association" (also known as "The Bombay Stock Exchange") was establ
in Bombay

1880's Development of cotton mills industry and set up of many others

1894 Establishment of "The Ahmedabad Share and Stock Brokers' Association"

1880 - 90's Sharp increase in share prices of jute industries in 1870's was followed by a boom in tea stocks and coal

1908 "The Calcutta Stock Exchange Association" was formed

1920 Madras witnessed boom and business at "The Madras Stock Exchange" was transacted with 100 brokers.

1923 When recession followed, number of brokers came down to 3 and the Exchange was closed down

1934 Establishment of the Lahore Stock Exchange

1936 Merger of the Lahoe Stock Exchange with the Punjab Stock Exchange

1937 Re-organisation and set up of the Madras Stock Exchange Limited (Pvt.) Limited led by improvement in stock
market activities in South India with establishment of new textile mills and plantation companies

1940 Uttar Pradesh Stock Exchange Limited and Nagpur Stock Exchange Limited was established

1944 Establishment of "The Hyderabad Stock Exchange Limited"

1947 "Delhi Stock and Share Brokers' Association Limited" and "The Delhi Stocks and Shares Exchange Limited" we
established and later on merged into "The Delhi Stock Exchange Association Limited"

Post Independance Scenario

The depression witnessed after the Independance led to closure of a lot of exchanges in the country. Lahore
Estock Exchange was closed down after the partition of India, and later on merged with the Delhi Stock
Exchange. Bnagalore Stock Exchange Limited was registered in 1957 and got recognition only by 1963.
Most of the other Exchanges were in a miserable state till 1957 when they applied for recognition under
Securities Contracts (Regulations) Act, 1956. The Exchanges that were recognized under the Act were:

1. Bombay
2. Calcutta
3. Madras
4. Ahmedabad
5. Delhi
6. Hyderabad
7. Bangalore
8. Indore

Many more stock exchanges were established during 1980's, namely:

1. Cochin Stock Exchange (1980)

2. Uttar Pradesh Stock Exchange Association Limited (at Kanpur, 1982)
3. Pune Stock Exchange Limited (1982)
4. Ludhiana Stock Exchange Association Limited (1983)
 5. Gauhati Stock Exchange Limited (1984)
6. Kanara Stock Exchange Limited (at Mangalore, 1985)
7. Magadh Stock Exchange Association (at Patna, 1986)
8. Jaipur Stock Exchange Limited (1989)
9. Bhubaneswar Stock Exchange Association Limited (1989)
10. Saurashtra Kutch Stock Exchange Limited (at Rajkot, 1989)
11. Vadodara Stock Exchange Limited (at Baroda, 1990)
12. Coimbatore Stock Exchange
13. Meerut Stock Exchange

At present, there are twenty one recognized stock exchanges in India which does not include the Over The
Counter Exchange of India Limited (OTCEI) and the National Stock Exchange of India Limited (NSEIL).

Government policies during 1980's also played a vital role in the development of the Indian Stock Markets.
There was a sharp increase in number of Exchanges, listed companies as well as their capital, which is
visible from the following table:

S. No. As on 31st December 1946 1961 1971 1975 1980 1985 1991 19

1 No. of Stock Exchanges 7 7 8 8 9 14 20

2 No. of Listed Cos. 1125 1203 1599 1552 2265 4344 6229

3 No. of Stock Issues of Listed Cos. 1506 2111 2838 3230 3697 6174 8967 1

4 Capital of Listed Cos. (Cr. Rs.) 270 753 1812 2614 3973 9723 32041 5

5 Market value of Capital of Listed Cos. (Cr. Rs.) 971 1292 2675 3273 6750 25302 110279 47

6 Capital per Listed Cos. (4/2)(Lakh Rs.) 24 63 113 168 175 224 514

7 Market Value of Capital per Listed Cos. (Lakh Rs.) (5/2) 86 107 167 211 298 582 1770

8 Appreciated value of Capital per Listed Cos. (Lak Rs.) 358 170 148 126 170 260 344

Trading Pattern of the Indian Stock Market

Indian Stock Exchanges allow trading of securities of only those public limited companies that are listed on
the Exchange(s). They are divided into two categories:
Types of Transactions
The flowchart below describes the types of transactions that can be carried out on the Indian stock
exchanges:

Indian stock exchange allows a member broker to perform following activities:

 1. Act as an agent,
2. Buy and sell securities for his clients and charge commission for the same,
3. Act as a trader or dealer as a principal,
4. Buy and sell securities on his own account and risk.

Over The Counter Exchange of India (OTCEI)

Traditionally, trading in Stock Exchanges in India followed a conventional style where people used to gather
at the Exchange and bids and offers were made by open outcry.

This age-old trading mechanism in the Indian stock markets used to create many functional inefficiencies.
Lack of liquidity and transparency, long settlement periods and benami transactions are a few examples that
adversely affected investors. In order to overcome these inefficiencies, OTCEI was incorporated in 1990
under the Companies Act 1956. OTCEI is the first screen based nationwide stock exchange in India created
by Unit Trust of India, Industrial Credit and Investment Corporation of India, Industrial Development Bank of
India, SBI Capital Markets, Industrial Finance Corporation of India, General Insurance Corporation and its
subsidiaries and CanBank Financial Services.

Advantages of OTCEI

1. Greater liquidity and lesser risk of intermediary charges due to widely spread trading mechanism
across India
2. The screen-based scripless trading ensures transparency and accuracy of prices
3. Faster settlement and transfer process as compared to other exchanges
4. Shorter allotment procedure (in case of a new issue) than other exchanges

National Stock Exchange

In order to lift the Indian stock market trading system on par with the international standards. On the basis of
the recommendations of high powered Pherwani Committee, the National Stock Exchange was incorporated
in 1992 by Industrial Development Bank of India, Industrial Credit and Investment Corporation of India,
Industrial Finance Corporation of India, all Insurance Corporations, selected commercial banks and others.

NSE provides exposure to investors in two types of markets, namely:

1. Wholesale debt market

2. Capital market

Wholesale Debt Market - Similar to money market operations, debt market operations involve institutional
investors and corporate bodies entering into transactions of high value in financial instrumets like treasury
bills, government securities, commercial papers etc.

Trading at NSE

1. Fully automated screen-based trading mechanism

2. Strictly follows the principle of an order-driven market
3. Trading members are linked through a communication network
4. This network allows them to execute trade from their offices
5. The prices at which the buyer and seller are willing to transact will appear on the screen
6. When the prices match the transaction will be completed
7. A confirmation slip will be printed at the office of the trading member

Advantages of trading at NSE

1. Integrated network for trading in stock market of India

2. Fully automated screen based system that provides higher degree of transparency
3. Investors can transact from any part of the country at uniform prices
4. Greater functional efficiency supported by totally computerized network

INTRODUCTION TO STOCK MARKET

The Indian Equity Market is more popularly known as the Indian Stock Market. The Indian equity market has
become the third biggest after China and Hong Kong in the Asian region. According to the latest report by
ADB, it has a market capitalization of nearly $600 billion. As of March 2009, the market capitalization was
around $598.3 billion (Rs 30.13 lakh crore) which is one-tenth of the combined valuation of the Asia region.
The market was slow since early 2007 and continued till the first quarter of 2009.

A stock exchange has been defined by the Securities Contract (Regulation) Act, 1956 as an organization,
association or body of individuals established for regulating, and controlling of securities.

The Indian equity market depends on three factors -

• Funding into equity from all over the world

• Corporate houses performance
• Monsoons
The stock market in India does business with two types of fund namely private equity fund and venture
capital fund. It also deals in transactions which are based on the two major indices - Bombay Stock
Exchange (BSE) and National Stock Exchange of India Ltd. (NSE).

The market also includes the debt market which is controlled by wholesale dealers, primary dealers and
banks. The equity indexes are allied to countries beyond the border as common calamities affect markets.
E.g. Indian and Bangladesh stock markets are affected by monsoons.

The equity market is also affected through trade integration policy. The country has advanced both in foreign
institutional investment (FII) and trade integration since 1995. This is a very attractive field for making profit
for medium and long term investors, short-term swing and position traders and very intra day traders.

The Indian market has 22 stock exchanges. The larger companies are enlisted with BSE and NSE. The
smaller and medium companies are listed with OTCEI (Over The counter Exchange of India). The functions
of the Equity Market in India are supervised by SEBI (Securities Exchange Board of India).

History of Indian Equity Market The history of the Indian equity market goes back to the 18th century when
securities of the East India Company were traded. Till the end of the 19th century, the trading of securities
was unorganized and the main trading centers were Calcutta (now Kolkata) and Bombay (now Mumbai).

Trade activities prospered with an increase in share price in India with Bombay becoming the main source of
cotton supply during the American Civil War (1860-61). In 1865, there was drop in share prices. The
stockbroker association established the Native Shares and Stock Brokers Association in 1875 to organize
their activities. In 1927, the BSE recognized this association, under the Bombay Securities Contracts Control
Act, 1925.

The Indian Equity Market was not well organized or developed before independence. After independence,
new issues were supervised. The timing, floatation costs, pricing, interest rates were strictly controlled by the
Controller of Capital Issue (CII). For four and half decades, companies were demoralized and not motivated
from going public due to the rigid rules of the Government.

In the 1950s, there was uncontrollable speculation and the market was known as 'Satta Bazaar'.
Speculators aimed at companies like Tata Steel, Kohinoor Mills, Century Textiles, Bombay Dyeing and
National Rayon. The Securities Contracts (Regulation) Act, 1956 was enacted by the Government of India.
Financial institutions and state financial corporation were developed through an established network.

In the 60s, the market was bearish due to massive wars and drought. Forward trading transactions and
'Contracts for Clearing' or 'badla' were banned by the Government. With financial institutions such as LIC,
GIC, some revival in the markets could be seen. Then in 1964, UTI, the first mutual fund of India was
formed.

In the 70's, the trading of 'badla' resumed in a different form of 'hand delivery contract'. But the Government
of India passed the Dividend Restriction Ordinance on 6th July, 1974. According to the ordinance, the
dividend was fixed to 12% of Face Value or 1/3 rd of the profit under Section 369 of The Companies Act,
1956 whichever is lower.

This resulted in a drop by 20% in market capitalization at BSE (Bombay Stock Exchange) overnight. The
stock market was closed for nearly a fortnight. Numerous multinational companies were pulled out of India
as they had to dissolve their majority stocks in India ventures for the Indian public under FERA, 1973.

The 80's saw a growth in the Indian Equity Market. With liberalized policies of the government, it became
lucrative for investors. The market saw an increase of stock exchanges, there was a surge in market
capitalization rate and the paid up capital of the listed companies.

The 90s was the most crucial in the stock market's history. Indians became aware of 'liberalization' and
'globalization'. In May 1992, the Capital Issues (Control) Act, 1947 was abolished. SEBI which was the
Indian Capital Market's regulator was given the power and overlook new trading policies, entry of private
sector mutual funds and private sector banks, free prices, new stock exchanges, foreign institutional
investors, and market boom and bust.

In 1990, there was a major capital market scam where bankers and brokers were involved. With this, many
investors left the market. Later there was a securities scam in 1991-92 which revealed the inefficiencies and
inadequacies of the Indian financial system and called for reforms in the Indian Equity Market.

Two new stock exchanges, NSE (National Stock Exchange of India) established in 1994 and OTCEI (Over
the Counter Exchange of India) established in 1992 gave BSE a nationwide competition. In 1995-96, an
amendment was made to the Securities Contracts (Regulation) Act, 1956 for introducing options trading. In
April 1995, the National Securities Clearing Corporation (NSCC) and in November 1996, the National
Securities Depository Limited (NSDL) were set up for demutualised trading, clearing and settlement.
Information Technology scrips were the major players in the late 90s with companies like Wipro, Satyam,
and Infosys.

In the 21st century, there was the Ketan Parekh Scam. From 1st July 2001, 'Badla' was discontinued and
there was introduction of rolling settlement in all scrips. In February 2000, permission was given for internet
trading and from June, 2000, futures trading started.

Types of Stock Markets in India

India's economy, although still considered developing, is becoming one of the biggest in the
world. This is due largely to the country's technical prowess and attractiveness to overseas
countries looking to outsource. The country has a number of stock exchanges on which
investors who wish to capitalize on India's growth story can invest their money.

Bombay Stock Exchange

o The Bombay/Mumbai Stock Exchange is India's oldest. Commonly called the
BSE, it was established in 1875 and includes more than 6,000 stocks. The
BSE is the largest stock exchange in South Asia and is rapidly becoming one
of the biggest in the world due to India's economic growth. The most
commonly watched BSE index is called the sensitive index, or Sensex, of 30
large stocks.

National Stock Exchange

o The National Stock Exchange, also located in Bombay/Mumbai, is India's
other dominant stock market along with the BSE. The rapidly growing
exchange was founded in 1992. The NSE and BSE are responsible for the
vast majority of trading volume in India. The NSE's best-known index is the
S&P CNX Nifty, which comprises the stocks of 50 large companies.

Other Stock Exchanges

o Although the NSE and BSE are the two largest stock markets in India, there
are a total of 22 stock exchanges in the country. They are located in other
large Indian cities including Ahmedabad, Bangalore, Calcutta, Chennai and
Delhi. There is also an over-the-counter stock exchange in India that is used
to invest in smaller companies.

Foreign Investing in India

o Foreign investments in India used to be harder to come by, but the country
has recently opened things up. India, along with China, is believed to have
ample economic growth potential. As a result, a number of U.S.-based
mutual funds and exchange traded funds have now been created that allow
investors to participate in India's stock market.
Regulatory Body
o Funds that invest in India must register with the Securities and Exchange
Board of India (SEBI), which is India's answer to the U.S. Securities and
Exchange Commission. The SEBI is located in Bombay, the site of the
country's major stock exchanges. It was founded in 1992 with a mission to
"protect the interests of investors in securities and to promote the
development of, and to regulate the securities market and for matters
connected therewith or incidental thereto."

SHARE MARKET
Share market is an area which fascinates each and every individual who is
craving for more money. Some common phrases are “If we want to earn just
try with share markets; my friend has made lot of money in that “.
As beginners we should understand one thing. If we are planning to invest in
share market, first we have to categorize our self.
Are we a long term investor?
Are we a short term investor? (Daily trading).
Note:
In share market we are 95% secured if we are ready to wait (provided
company fundamentals are good. Exclude cases like enron, worldcom.etc)
.The problem comes when we have invested in a bank we can withdraw same
amount with interests till date for any of our emergency.
Assume our money is in form of stocks we got an emergency by today
evening 7 pm of 1 lakh. We have seen our stock’s worth in today’s closing
was our investment 1 lakh+ whatever market price added to it. We think we
have more than required and sell it tomorrow. But tomorrow fate decided the
other way market falls our stock value becomes 90 thousand. If we sell that’s
where the problem comes.
It may even go upto 1.25 laks next week /next month. Can we wait? That’s
the million dollar question.
Case1 – short term investor (Risky)
Remember its here we play not invest.
1. Make investment break ups: If we have “x” Rs in our hand don’t get
carried away to buy shares for all “x” Rs. Always we should have fifty
percent in our hand.
2. Reinvest only when profits: Make the profits what we earn on the
first trade if daily trader (if so happens) to buy extra shares. Suppose
if 0ur stock didn’t go up after first investment wait till (may be
months) till our holding goes up.
3. Capital maintain: Always ensure that our capital is maintained with
till date interest rate of banks. Though depository participants
 suggests us its always better we should have basic ideas of the
company. We have lot of information sources (net, softwares).
4. In case of IPO: Buy and sell within max 1 week of IPOS. Invest in
established stocks. If we feel trend of IPO is good come back and
invest.
5. Sell well ahead of your expected need: Suppose we have a
marriage and we wanted money for that. If we feel that today our
investment + return (m-cap) is good may be 30 days ahead of
marraige.sell it today. We are secured.
The very simple formula will be if we crave for more we have more chances
to lose more.
Case 2 – Long term investor
It’s here we invest. We are most secured in this case because we don’t
consider money invested to be used for emergency. Any company will one
day have a growth curve. Even a sick company value can be raised by
psychological factors of investors.
TYPES OF SHARES
here are different types of shares. I have mentioned about the most popular shares
which are as follows:-
Equity shares: These shares are also known as ordinary shares. They are the
shares which do not enjoy any preference regarding payment ofdividend and
repayment of capital. They are given dividend at a fluctuating rate. The
dividend on equity shares depends on the profitsmade by a company. Higher
the profits, higher will be the dividend, where as lower the profits, lower will
be the dividend.

Preference shares: These shares are those shares which are given preference
as regards to payment of dividend and repayment of capital. They do not enjoy
normal voting rights. Preference shareholders have some preference over the
equity shareholders, as in the case of winding up of the company, they are
paid their capital first. They can vote only on the matters affecting their own
interest. These shares are best suited to investors who want to have security
of fixed rate of dividend and refund of capital in case of winding up of the
company.

Deferred shares: These shares are those shares which are held by the founders
or pioneer or beginners of the company. They are also called as Founder
shares or Management shares.
In deferred shares, the right to share profits of the company is deferred, i.e.
postponed till all the other shareholders receive their normal dividends. Being
the last claimants of the profits, they have a considerable element of
speculation or uncertainty and they have to bear the greatest risk of loss.
The market price of such shares shows a very wide fluctuation on account of
wide dividend fluctuations. Deferred shares have disproportionate voting
rights. These shares have a small denomination or face value.

Deferred shares are not transferable if issued by a private company. Deferred

shareholders do not enjoy the right of priority to have shares offered in case of
the issue of shares by the company. If the company goes into liquidation the
deferred shareholders can get refund of capital and participate in the surplus
capital, if any, after the rights of preference and equity shareholders have
been satisfied.

Bonus shares: The word bonus means a gift given free of charge. Bonus shares
are those shares which are issued by the company free of charge as bonus to
the shareholders. They are issued to the existing shareholders in proportion to
their existing share holdings. It is a kind of gift to the shareholders from the
company. It is bonus in the form of shares instead of cash. It is given out of
accumulated profits and reserves. These shares have all types of preferences
which are available to the existing shares. For example. two bonus shares for
five equity shares. The issue of bonus shares is also termed as capitalization of
undistributed profits.
Bonus shares is a type of windfall gain to the equity shareholders. They are
advantageous to the equity shareholders as they get additional shares free of
cost and also they earn dividend on them in future.

Conditions for issue of bonus shares:

(i) Sufficient amount of undistributed profits: There must be sufficient amount

of undistributed profits for the issue of bonus shares.

(ii) Provision in the articles: There must be a provision in the articles of

association regarding the issue of bonus shares. If there is a provision in the
articles regarding the issue of bonus shares the company can issue bonus
shares if there is no provision, the company cannot issue the bonus shares.
 (iii) Suitable Resolution: The Board of Directors must pass a suitable resolution
in the Board meeting for the issue of bonus shares.

(iv) Shareholders approval: The shareholders must give formal approval for
the issue of bonus shares in the Annual General Meeting.

(v) When a company can issue: A company can issue bonus shares only twice
in a period of five years.

(vi) Fully paid up shares: Bonus shares can be issued only when the existing
shares are fully paid up.

Types of Equity
There are a number of types of equity, each with different charactenstics.

Common stock or ordinary shares

Common stock, as it is known in the United States, or ordinary shares, according to

British terminology, is the most important form of equity investment. An owner of
common stock is part owner of the enterprise and is entitled to vote on certain important
matters, including the selection of directors. Common stock holders benefit most from
improvement in the firm's business prospects. But they have a claim on the firm's income
and assets only after all creditors and all preferred stock holders receive payment. Some
firms have more than one class of common stock, in which case the stock of one class
may be entitled to greater voting rights, or to larger dividends, than stock of another class.
This is often the case with family owned firms which sell stock to the public in a way that
enables the family to maintain control through its ownership of stock with superior voting
rights.

Preferred stock

Also called preference shares, preferred stock is more akin to bonds than to common
stock. Like bonds, preferred stock offers specified payments on specified dates. Preferred
stock appeals to issuers because the dividend remains constant for as long as the stock is
outstanding, which may be in perpetuity. Some investors favour preferred stock over
bonds because the periodic payments are formally considered dividends rather than
interest payments, and may therefore offer tax advantages. The issuer is obliged to pay
dividends to preferred stock holders before paying dividends to common shareholders. if
the preferred stock is cumulative, unpaid dividends may accrue until preferred stock
holders have received full payment. In the case of non cumulative preferred stock,
preferred stock holders may be able to impose significant restrictions on the firm in the
event of a missed dividend.

Convertible preferred stock

This may be converted into common stock under certain conditions, usually at a
predetermined price or within a predetermined time period. Conversion is always at the
owner's option and cannot be required by the issuer. Convertible preferred stock is
similar to convertible bonds.

Warrants

Warrants offer the holder the opportunity to purchase a firm's common stock during a
specified time period in future, at a predetermined price, known as the exercise price or
strike price. The tangible value of a warrant is the market price of the stock less the strike
price. If the tangible value when the warrants are exercisable is zero or less the warrants
have no value, as the stock can be acquired more cheaply in the open market. A firm may
sell warrants directly, but more often they are incorporated into other securities, such as
preferred stock or bonds. Warrants are created and sold by the firm that issues the
underlying stock. In a rights offering, warrants are allotted to existing stock holders in
proportion to their current holdings. If all shareholders subscribe to the offering the firm's
total capital will increase, but each stock holder's proportionate ownership will not
change. The stock holder is free not to subscribe to the offering or to pass the rights to
others. In the UK a stock holder chooses not to subscribe by filing a letter of renunciation
with the issuer.

Issuing shares

Few businesses begin with freely traded shares. Most are initially owned by an
individual, a small group of investors (such as partners or venture capitalists) or an
established firm which has created a new subsidiary. In most countries, a firm may not
sell shares to the public until it has been in operation for a specified period. Some
countries bar firms from selling shares until their business is profitable, a requirement
that can make it difficult for young firms to raise capital.

Flotation

Flotation, also known as an initial public offering (ipo), is the process by which a firm
sells its shares to the public. This may occur for a number of reasons. The firm may
require additional capital to take advantage of new opportunities. Some of the firm's
original investors may want it to buy them out so they can put their money to work
elsewhere. The firm may also wish to use shares to compensate employees, and a public
share listing makes this easier as the value of the shares is freely established in the market
place. The flotation need not involve all or even the majority of the firm's shares. Table
7.3 shows that the annual value of Ipos in the United States grew sevenfold during the
199os before collapsing in 2ool. The value of Ipos in the UK, although much smaller, has
been less volatile.

Some of the biggest flotations in recent years have involved the privatisation of
government owned enterprises, such as Deutsche Telekom in Germany and YPF, a
petroleum company, in Argentina. Such large firms are often floated in a series of share
issues rather than all at once, because of uncertainty about demand for the shares.
According to the OECD, privatisations raised nearly $6oo billion between 1996 and
2000, much of which was financed by issuance of shares. Another source of large
flotations is the spin off of parts of existing firms. In such a case, the parent firm bundles
certain assets, debt obligations and businesses into the new entity, which initially has the
same shareholders as the parent. Among the largest spin offs in recent years have been
Lucent Technologies, formerly part Of AT&T, and Delphi, the component manufacturing
unit of General Motors Corp. A third source of large flotations has been decisions by the
managers of established companies with privately traded shares to allow limited public
ownership, as in the case of ups, an American package delivery company.

Private offering

Rather than selling its shares to the public, a firm may raise equity through a private
offering. only sophisticated investors, such as moneymanagement firms and wealthy
individuals, are normally allowed to purchase shares in a private offering, as disclosures
about the risks involved are fewer than in a public offering. Shares purchased in a private
offering are common equity and are therefore entitled to vote on corporate matters and to
receive a dividend, but they usually cannot be resold in the public markets for a specified
period of time.

Secondary offering

A secondary offering occurs when a firm whose shares are already traded publicly sells
additional shares to the public called a follow on offering in the UK or when one or more
investors holding a large proportion of a firm's shares offers those shares for sale to the
public. Firms that already have publicly traded shares may float additional shares to
increase their total capital. If this leaves existing shareholders owning smaller proportions
of the firm than they owned previously, it is said to dilute their holdings. if the secondary
offering involves shares owned by investors, the proceeds of a secondary offering go to
the investors whose shares are sold, not to the issuer. Table 7.4 provides data on the
extent of secondary offerings in US markets.

The flotation process

Before issuing shares to the public, a firm must engage accountants to prepare several
years of financial statements according to the Generally Accepted Accounting Principles,
Or GAAP, of the country where it wishes to issue. In many countries, the offering must
be registered with the securities regulator before it can be marketed to the public. The
regulator does not judge whether the shares represent a sound investment, but only
whether the firm has complied with the legal requirements for securities issuance. The
firm incorporates the mandatory financial reports into a document known as the listing
particulars or prospectus, which is intended to provide prospective investors with detailed
information about the firm's past performance and future prospects. in the United States,
a prospectus circulated before completion of the registration period is called a red
herring, as its front page bears a red border to highlight the fact that the regulator has not
yet approved the issuance of the shares.