Key Concepts in Finance: Markets, Capital, and Regulatory Bodies

Posted on Nov 16, 2025 in Business Administration and Management (BAM)

The Green Shoe Option (Over-Allotment Provision)

The Green Shoe Option is a special provision in the underwriting agreement that allows the underwriter to sell more shares to investors than what has been planned by the issuer in the Initial Public Offering (IPO).

Green Shoe Manufacturing Company (now known as Stride Rite Corporation) was the first company to incorporate the green shoe clause in its underwriting agreement. Henceforth, all underwriting agreements that include an over-allotment option clause are said to have the Green Shoe Option.

This option permits the underwriters to buy up to an additional 15% of the shares at the offer price if public demand for the shares exceeds expectations and the share trades above its offering price. The Green Shoe Option is also known as an over-allotment provision.

This option is primarily used at the time of an IPO or listing of any stock to ensure a successful opening price.

Concept of Euro Issue

A Euro Issue refers to a method by which a company raises capital by issuing securities, usually bonds or Eurobonds, in a currency other than its domestic one—typically the Euro. This allows companies to access the broader European capital markets and attract international investors.

In a Euro Issue, debt securities are issued in Euros, enabling companies to tap into Europe’s deep and liquid financial markets. The process includes legal and regulatory compliance with European standards, and often involves collaboration with international banks and underwriters.

Euro Issues are commonly used to diversify funding sources, lower borrowing costs, finance expansion, or refinance debt. It is a strategic tool for multinational companies aiming to globalize their financial activities and broaden their investor base.

Venture Capital Financing

Venture Capital (VC) is a form of private equity financing provided by venture capital firms or funds to startups, early-stage, and emerging companies.

These companies are typically deemed to have high growth potential or have already demonstrated significant growth (in terms of number of employees, annual revenue, scale of operations, etc.).

Venture Capital serves as a financing tool for companies and an investment vehicle for wealthy individuals and institutional investors. Wealthy investors often invest their capital in startups with a long-term growth perspective. This capital is called venture capital, and the investors are called venture capitalists.

It is a way for companies to receive money in the short term and for investors to grow wealth in the long term. VC investments tend to focus on emerging companies. Such investments are risky and illiquid, but they also have the potential to provide impressive returns if invested in the right venture.

A venture capital firm can finance a company through:

Equity participation (seeking capital gains)
Participation in debentures
Extending conditional loans

Regional Stock Exchanges (RSEs)

Regional stock exchanges refer to stock markets that operate within specific geographical regions, serving as local financial hubs beyond the major national exchanges.

Unlike national exchanges such as the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE) in India, regional stock exchanges are confined to specific states or smaller territories.

RSEs play a vital role in providing local businesses, especially smaller and regional companies, with a platform to raise capital by issuing securities and enabling investors in those regions to participate in the equity markets.

While they may not have the same scale and visibility as national exchanges, regional stock exchanges contribute to regional economic development, promote local entrepreneurship, and offer a venue for trading securities of companies that may not meet the stringent listing criteria of larger exchanges.

Over time, changes in the regulatory landscape and the rise of electronic trading have led to the consolidation and reduced prominence of many regional exchanges.

Types of Non-Banking Financial Companies (NBFC) in India

NBFC-Account Aggregator (NBFC-AA): Facilitates data sharing between financial institutions with customer consent.
Mortgage Guarantee Companies (MGCs): Provides mortgage credit guarantees.
NBFC-Peer to Peer Lending Platform (NBFC-P2P): Online platforms that match lenders and borrowers.
Housing Finance Companies (HFCs): Regulated by the National Housing Bank; provides housing loans.
NBFC-Investment and Credit Company (NBFC-ICC): Includes loan companies, asset finance companies, and investment companies.
Infrastructure Finance Company (IFC): Focuses on infrastructure projects.
NBFC-Factors: Engaged in the factoring business.
NBFC-Micro Finance Institution (NBFC-MFI): Provides small loans to low-income individuals.

Primary Market vs. Secondary Market Comparison

Definition

Primary Market (P): The market where new securities are issued for the first time.
Secondary Market (S): The market where existing securities are traded among investors.

Also Known As

P: New Issue Market (NIM)
S: Aftermarket

Purpose

P: The main purpose is to raise capital for issuers, such as companies or the government.
S: The purpose is to provide liquidity and a platform for investors to trade securities.

Participants

P: Involves the issuer and investors.
S: Involves only investors (buyers and sellers).

Intermediaries

P: Includes investment banks and underwriters.
S: Includes brokers and dealers.

Price Determination

P: The price is fixed or determined through book building.
S: The price is market-driven, based on demand and supply.

Frequency of Sale

P: Securities can be sold only once.
S: Securities can be traded multiple times.

Key Functions of Stock Brokers in India

Trade Execution: Stock brokers execute buy and sell orders on behalf of their clients on the stock exchanges. They ensure that client orders are transmitted to the exchange and matched with counter orders to complete the trade.
Account Maintenance: Stock brokers maintain demat (dematerialized) and trading accounts for their clients. The demat account holds electronic securities, while the trading account is used for buying and selling securities.
Providing Trading Platforms: Stock brokers offer online trading platforms, mobile apps, or desktop applications that enable investors to place and manage their trades. These platforms provide real-time market data, charts, and other tools for analysis.
Initial Public Offerings (IPOs): Stock brokers assist clients in participating in IPOs by facilitating the application process. Investors can apply for shares during the IPO period through their broker.
Brokerage Charges: Stock brokers charge brokerage fees for their services, which may vary based on the type of broker and the services provided. These fees are a source of revenue for brokers.
Technology Integration: Brokers continually invest in technology to enhance the efficiency and reliability of their trading platforms. This includes adopting high-speed trading systems, advanced analytics, and providing real-time market data.
Settlement of Trades: Brokers ensure the smooth settlement of trades by coordinating the exchange of securities and funds between the buyer and the seller. This process is crucial for the timely and accurate completion of transactions.
Margin Calls: In margin trading, brokers issue margin calls to clients if their account equity falls below a specified level. This helps manage the risks associated with leveraged positions.
Facilitating Mutual Fund Investments: Some brokers offer the facility for clients to invest in mutual funds. They provide a platform for buying, selling, and managing mutual fund investments.
Customer Support: Brokers offer customer support services to address queries, resolve issues, and provide assistance to clients. Effective customer support is essential for maintaining a positive client-broker relationship.
Facilitating Corporate Actions: Stock brokers assist clients in navigating corporate actions such as dividends, bonus issues, stock splits, and rights issues.

Core Functions of the Reserve Bank of India (RBI)

Issue of Currency Notes: RBI has the sole authority to issue currency notes (except ₹1 notes and coins). These are legal tender and are issued against gold, securities, and government bonds.
Banker to Other Banks: RBI regulates and supervises all commercial banks. It maintains reserves of other banks and acts as the lender of last resort during emergencies.
Banker to the Government: RBI manages government accounts, collects taxes, makes payments, manages public debt, and provides temporary financial support to the government.
Exchange Rate Management: RBI formulates foreign exchange policies to stabilize the external value of the Rupee and balances the demand and supply of foreign currency (mainly USD).
Credit Control Function: To ensure economic stability, RBI controls the credit creation of commercial banks using tools like the repo rate, CRR, SLR, etc.
Supervisory Function: RBI supervises banks by issuing licenses, conducting audits, inspecting branches, and ensuring healthy banking practices.
Monetary Policy Implementation: RBI formulates and implements India’s monetary policy to control inflation, ensure liquidity, and support economic growth.
Maintaining Financial Stability: RBI works to maintain trust in the financial system and prevent banking or financial crises through proactive measures.
Developmental Role: RBI supports rural and agricultural banking, promotes financial inclusion, and strengthens financial institutions.
Custodian of Foreign Exchange Reserves: RBI manages the country’s foreign exchange reserves and ensures the smooth functioning of the forex market under FEMA.