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Unit 1: Introduction to Capital Market

4. If a merchant banker does not make proper analysis of the company, it may face a lot of Notes
problems with the BOD. Unless it evaluates all the risks associated with the project, there
is every chance that the sponsor may burn its fingers.

Limitations

The book-building system has various limitations, some of which are summarised as follows:
1. Book-building is appropriate for mega issues only. In the case of small issues, the companies
can adjust the attributes of the offer according to the preferences of the potential investors.
It may not be possible in big issues, since the risk-return preference of the investors cannot
be estimated easily.

2. The issuer company should be fundamentally strong and well-known to the investors.
3. The book-building system works very efficiently in matured market conditions. In such
circumstances, the investors are aware of various parameters affecting the market price of
the securities. But such conditions are not commonly found in practice.
4. There is a possibility of price rigging on listing as promoters may try to bail out syndicate
members.

1.3 Stock Exchanges

A stock exchange is a corporation or mutual organization which provides "trading" facilities for
stock brokers and traders, to trade stocks and other securities. Stock exchanges also provide
facilities for the issue and redemption of securities as well as other financial instruments and
capital events including the payment of income and dividends. The securities traded on a stock
exchange include: shares issued by companies, unit trusts, derivatives, pooled investment products
and bonds. To be able to trade a security on a certain stock exchange, it has to be listed there.
Trade on an exchange is by members only. The initial offering of stocks and bonds to investors
is by definition done in the primary market and subsequent trading is done in the secondary
market. A stock exchange is often the most important component of a stock market.

1.3.1 Stock Market in India

From scattered and small beginnings in the 19th Century, India's stock market has risen to great
heights. In 1990, we had 19 stock exchanges in the country. There were around 6,000 listed
companies and the invested population stood around 15 million. You might be interested in
knowing more about the growth stock market in India. What functions does it perform? What is
the form of organization of stock exchanges in India? How are these administered? What is the
trading system followed on these exchanges? We shall adding to these and other questions in
the following sub-section.
Organizations and institutions, whether they are economic, social or political, are products of
history events and exigencies. The continually replace and/or reform the existing organizations,
so as to make them relevant and operational in contemporary situations. It is, therefore, useful
to briefly acquaint ourselves origin and growth of the stock market in India.
1800-1865: The East India Company and few commercial banks floated shares sporadically,
through a recognized brokers. The year 1850 marked a watershed. A wave of company flotations
took over the market the number of brokers spurted to 60. The backbone of industrial growth
and the resulting boom in share marked the general personality of the financial world,
(Premchand Rouchand).

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