SAIM

UNIT 1

Definition of 'Capital Markets'

Markets for buying and selling equity and debt instruments. Capital markets
channel savings and investment between suppliers of capital such as retail
investors and institutional investors, and users of capital like businesses,
government and individuals. Capital markets are vital to the functioning of an
economy, since capital is a critical component for generating economic
output. Capital markets include primary markets, where new stock and bond
issues are sold to investors, and secondary markets, which trade existing
securities.

Securities market is a component of the wider financial market where securities can be bought
and sold between subjects of the economy, on the basis of demand and supply. Securities
markets encompases equity markets, bond markets and derivatives markets where prices can be
determined and participants both professional and non professionals can meet.
A security is a tradable financial asset of any kind.
[1]
Securities are broadly categorized into:
debt securities, (e.g., banknotes, bonds and debentures)
equity securities, (e.g., common stocks)
derivative securities, (e.g., forwards, futures, options and swaps).

A stock exchange is a form of exchange which provides services for stock
brokers and traders to buy or sell stocks, bonds, and other securities. Stock exchanges also
provide facilities for issue and redemption of securities and other financial instruments, and
capital events including the payment of income and dividends. Securities traded on a stock
exchange include stock issued by listed companies, unit trusts, derivatives, pooled investment
products and bonds. Stock exchanges often function as "continuous auction" markets, with
buyers and sellers consummating transactions at a central location, such as the floor of the
exchange.

Securities Markets - New Issue Market
New issues are offered in the primary market and sold to the public for the
first time as initial public offerings, or IPOs. New issues are usually handled
for a corporation by an underwriting syndicate comprised of investment
banks and selling groups. An underwriter will advise the issuing corporation
on the best price at which to offer shares of the new security to the public.
Factors considered in arriving at a price include prevailing market conditions,
indications of interest from the underwriter's book of business, prices of
similar companies and the company's general finances.


New issue market and Stock exchange
MEANING:
The industrial securities market in India consists of new issue market and stock exchange.
The new issue market deals with the new securities which were not previously available to
the investing public, i.e., the securities that are offered to the investing public for the first
time. The market, therefore, makes available a new block of securities for public
subscription. In other words, new issue market deals with raising of fresh capital by
companies either for cash or for consideration other than cash.
The new issue market encompasses all institutions dealing in fresh claim. These claims may
be in the form of equity shares, preference shares, debentures, right issues, deposits etc. All
financial institutions which contribute, underwrite and directly subscribe to the securities are
part of new issue market.
STOCK EXCHANGE:
The stock exchange is a market for old securities, i.e., those which have been already issued
and listed on a stock exchange. These securities are purchased and sold continuously among
investors without the involvement of the companies. Stock exchange provides not only free
transferability of shares but also makes continuous evaluation of securities traded in the
market.
RELATIONSHIP BETWEEN NEW ISSUE MARKET AND STOCK
EXCHANGE:
Despite the above mentioned differences, the new issue market and stock exchange are
inseparably connected and work in conjunction with each other.
The new issues first placed in the new issue market can be disposed off subsequently in the
stock exchange. The stock exchange provides the mechanism for regular and continuous
purchase and sale of securities. This facility is of immense utility to potential investors who
are assured that they will be able to dispose off the allotment of shares at any time. Thus the
two markets are complementary in nature.
Both the markets are connected to each other even at the time of new issue. The companies
which make new issue apply for listing of shares on a recognised stock exchange. Listing of
shares adds prestige to the firm and widens the market for investors. The companies which
want stock exchange listing have to comply with statutory rules and regulations of the stock
exchange to ensure fair dealing in them. The stock exchanges, thus, exercise considerable
control over the organisation of new issues.
The new issue market and the stock market are economically an integral part of a single
market, i.e., industrial securities market. Both are susceptible to the common influence of the
environmental conditions such as political stability, economic conditions, monetary policy of
the central bank and the fiscal policy of the government. The two markets act and react upon
each other in the same direction. When the stock prices go up in the market, the new issues
increase and when the stock prices show a downward trend the new issues decline. The new
issue market also depends on the stock exchange to find out price movements and general
economic outlook and to forecast the climate for the success of new issues.
FEATURES OF PRIMARY MARKET:
1. This is the market for new long term capital. The primary market is the market where the
securities are sold for the first time. Therefore it is also called New Issue Market (NIM).
2. In a primary issue, the securities are issued by the company directly to investors.
3. The company receives the money and issue new security certificates to the investors.
4. Primary issues are used by companies for the purpose of setting up new business or for
expanding or modernizing the existing business.
5. The primary market performs the crucial function of facilitating capital formation in the
economy
6. The new issue market does not include certain other sources of new long term external
finance, such as loans from financial institutions. Borrowers in the new issue market may be
raising capital for converting private capital into public capital; this is known as going
public.
FUNCTIONS:
The main function of a new issue market is to facilitate transfer of resources from savers to
the users. The savers are individuals, commercial banks, insurance companies etc. The users
are public limited companies and the government. The new issue market plays an important
role of mobilizing the funds from the savers and transfers them to borrowers for production
purposes, an important requisite of economic growth. It is not only a platform for raising
finance to establish new enterprises but also for expansion/diversification/modernizations of
existing units. In this basis the new issue market can be classified as follows:
1. Market where firms go to the public for the first time through Initial Public Offering (IPO).
2. Markets where firms which are already trading raise additional capital through Seasoned
Equity Offering (SEO).
The main function of a new issue market can be divided into a triple services function:
1. Origination
2. Underwriting
3. Distribution
Origination
It refers to the work of investigation, analysis and processing of new project proposals.
Origination starts before an issue is actually floated in the market. There are two aspects in
this function:
1. A careful study of the technical, economical and financial viability to ensure soundness of the
project. This is a preliminary investigation undertaken by the sponsors of the issue.
2. Advisory services which improve the quality of capital issues and ensure its success.
The function of origination is done by merchant bankers who may be commercial banks,
all India financial institutions or private firms. The success of the issue depends, to a large
extent, on the efficiency of the market. The origination itself does not guarantee the success
of the issue. Underwriting, the special service is required in this regard.
Underwriting
It is an agreement whereby the underwriter promises to subscribe to a specified number of
shares or debentures or a specified amount of stock in the event of public not subscribing to
the issue. If the issue is fully subscribed, then there is no liability for the underwriter. If a part
of the share issues remain unsold, the underwriter will buy the shares. Thus, underwriting is a
guarantee for the marketability of shares.
Method of underwriting
An underwriting agreement may take any of the following three forms:
i. Standing behind the issue: Under this method, the underwriter guarantees the sale of a
specified number of shares within a specified period. If the public do not subscribe to the
specified amount of issue, the underwriter buys the balance in the issue.
ii. Outright Purchase: The underwriter, in this method, makes outright purchase of shares
and resells them to the investors.
iii. Consortium Method: Underwriting is jointly done by a group of underwriters in this
method. The underwriters form a syndicate for this purpose. This method is adopted for large
issues.
Distribution
It is the function of sale of securities to ultimate investors. This service is performed by
brokers and agents who maintain a regular and direct control with ultimate investors.

INSTRUMENTS OF ISSUES
Traditionally, equity shares preference share are issued by companies as ownership capital
and debentures and bonds as debt capital. Recently, new instruments to meet the varied needs
of investors in terms of security, rate of return, marketability and appreciation in value are
being issued by the companies.
The important new instruments and their characteristic are explained below
i. Secured premium notes with detachable warrants (SPN)
Secured premium notes are issued along with detachable warrant. The warrants attached to it
ensure the holder the right to apply and get equity shares after a notified the SPN is fully paid
up.The SPN is issued at nominal value and does not carry any interest.
The SPN is redeemed by repayment in several installments at a premium amount is
distributed equally over the period of maturity of the instrument. There is a lock in period for
SPN during which no interest will be paid for the invested amount. The instrument is secured
by mortgage of all immovable properties of the company.The investor can disclose off the
SPN on allotment at a premium if the shares of the issuing company commands a high
premium in the market.
The conversion of detachable warrant into equity shares will have to be done within the time
limits given by the company
ii. Equity Shares with Detachable Warrants
In this instrument along with fully paid up equity shares, detachable warrants are issued
which entitle the warrant holder to apply for a specified number of shares at a determined
price. Detachable warrants are registered separately with the stock exchange and traded
separately.
iii. Preference Shares with Warrants
This instrument shall carry certain number of warrants entitling the holder to apply for equity
shares at premium at any time in one or more stages between the third and fifth year from
date of allotment. From the date of allotment, the preference shares with warrant should be
transferred or sold for a period of three years.
iv. Non Convertible Debentures with Detachable Equity Warrants
The holder of instrument is given an option to buy a specified number of shares from the
company at a pre determined price with a definite time frame. There is a specific lock in
period after which the holder can exercise his option to apply for equity shares.
v. Fully Convertible Cumulative Preference Shares
This instrument has two parts A and B. part A is convertible into equity shares on the date of
allotment without application by the allottee. Part B will be redeemed at par /converted space
into equity after lock in period, at the option of investors.
vi. Zero Interest Fully Convertible Debentures(FCDs)
No interest will be paid to the holders of this instrument till the lock in period. After a
notified period this debenture will be automatically and compulsorily converted into shares.
Before the conversion of FCDs into equity, if the company issues rights, it would be available
to the holders in the proportion decided by the company.
7. FULLY CONVERTIBLE DEBENTURES (FCDs) WITH INTEREST
This instrument carries no interest for a specified period. After this period, option is
given to apply for equities at premium for which no additional amount is payable. However,
interest in FCDs is payable at a determined rate from the date of first conversion to second /
final conversion and equity will be issued in lieu of it interest amount.
8. ZERO INTEREST PARTLY CONVERTIBLE DEBENTURES (PCDs) WITH
DETACHABLE AND SEPARATLY TRADABLE WARRANTS
This partly convertible debenture has two parts- A and B. part A is convertible into
equity shares at a fixed amount on the date of allotment. Part B is non convertible and
redeemed at par at the end of a specific period. Part B will also carry a detachable and
separately tradable warrant. It also gives an option to the holder to receive equity share for
every warrant.
9. ZERO INTEREST BONDS
Zero interest bonds are sold at a discount from their eventual maturity value and bear
no interest. In India, zero interest convertible is bonds are issued by companies. These bonds
do not carry any interest till the date of conversion and are converted into equity shares at par
or premium on the expiry of a fixed period.
10. DEEP DISCOUNT BONDS
These bonds are sold at a large discount to their nominal value. There are no interest
payments on these bonds and the investors get return as accretion to the par value of the
instrument over its life.
The Industrial Development Bank of India issued in February 1996 deep discount bonds.
Each bond having a face value of Rs. 200000 was issued at a discounted price of Rs. 53000
with a maturity period of 25 years. The Industrial Finance of India issued Deep Discount
Bonds of Rs. 2500 and promised Rs. 100000 after 25 years. The Small Industrial Bank
of Indiaalso issued similar type of bonds.
11. OPTION BONDS
Option Bonds may be cumulative or non-cumulative as per the option of the holder of
the bonds. In case of cumulative bonds, interest is accumulated and is payable on maturity
only. In case of non-cumulative bonds, the interest is paid periodically. The option is to be
exercised by the investor at the time of investment. The Industrial Development Bank
ofIndia issued option bonds in January 1992.
12. BONDS WITH WARRANTS
A warrant allows the holder to buy a number of equity shares at a pre-specified price
in future. The warrants are usually attached to debentures or preference shares issued by
companies as sweetners to make issues more attractive. Essar Gujarat, Ranbaxy and Reliance
have issues bonds with equity warrants.
Besides the above, the Abid Hussain Committee has recommended the issue of the following
instruments:
a) Floating Rate Notes
b) Clip and Strip Bonds
c) Dual Convertible Bonds
d) Index Rate Notes
e) Stepped Coupon Bonds
f) Dual Option Warrants
g) Extendable Notes
h) Level Pay Floating Rate Notes
i) Commodity Bonds
j) Industrial Revenue Bonds.
The Pherwani Study Group has recommended the following new instruments:
1. Participating Preference Share
2. Participating Debenture
3. Convertible Debenture with Options
4. Third Party Convertible Debenture
5. Convertible Debentures Redeemable at Premium
6. Debt for Equity Swap.
PLAYERS/INTERMEDIARIES IN THE NEW ISSUE MARKET
There are many players in the new issue market. The important of them are the following:
1. Merchant bankers:
They are the issue managers, lead managers, co-managers and are responsible to the company
and SEBI. Their functions and working are described in a separate chapter.
2. Registrars to the issue:
Registrars are an important category of intermediaries who undertake all activities connected
new issue management. They are appointed by the company in consultation with the
merchant bankers to the issue. Registrars have a major role, next to merchant bankers, in
respect of servicing of investors.
The roles of registrar in the pre-issue, during the currency of issue, pre-allotment and post-
allotment are described below:
Role of registrar in pre-issue
1. Suggest draft application form to the merchant bankers.
2. Help in identifying the collection centres. The choice of collection centre and of collecting
banker is critical to the issue.
3. Assist in opening collection accounts with banks and lay down procedure for operation of these
accounts.
4. Send instructions to collecting branches, for collection of application along with cheques,
drafts, stock invest separately and remittance of funds.
5. Workout modalities to receive the collection figures on a regular basis until the subscription
list are closed.
During the currency of issue
1. Receive the collection figures every day.
2. Tabulate and classify the collection data on the basis of the standard proforma of slabs of
shares applied for.
3. Keep the merchant bankers and the company informed of the progress of total subscriptions.
4. Inform the stock exchange about the closure of issue.
Pre- allotment work
1. Get all application forms from the collecting bankers and sort out valid and invalid application
forms.
2. The valid applications are to be categorized and grouped as cash, draft and stock invest
applications.
3. Reclassify the valid applications eligible for allotment.
4. Prepare the list with inverted numbers and then approach the regional stock exchange for
finalizing the basis of allotment, in the event of over subscription.
5. Finalize the allotments as per the basis approved by the stock exchange.
6. Tally the final list approved for allotment and rejections with the inhouse control numbers and
correct mistakes, if any.
Allotment work
The most important work of a registrar is allotment of shares. The system of proportional
allotment was adopted for new issues in 1993. A new quota system was approved by SEBI in
April, 1995. According to the new system 50% of quota is for small investors and another
50% for other categories. The small investors include all applicants upto 1,000 shares. It has
also been revised recently.
Post allotment work
1. Get the letters of allotment and refund orders printed ready for dispatch. They have to be
mailed on or before 70 days from the closing date of subscription. For any delay, get the
permission of the Registrar of Companies and the relevant stock exchange.
2. Submit all statements to the company for their final approval.
3. Arrange to pay the brokerage and underwriting commission and submit their relevant
statements.
4. Assist the company in getting the allotted shares listed on the stock exchange.
Qualifications for Registrars to the issue
To be appointed as Registrar to the issue, registration with SEBI is essential. The criteria
adopted by SEBI for registration are the competency and expertise, quality of manpower,
their track record, adequacy of infrastructure such as computers, storage space etc. and capital
adequacy. A net worth of Rs.6 lakhs is essential for Registrars. SEBI has laid down a code of
conduct for their observance. They have to maintain proper books of accounts and registers
for a period of three years.
Collecting bankers collect the subscriptions in cash, cheques, stock invest etc.
Co-ordinating bankers collect information on subscriptions and co-ordinate the collection
work. They monitor the work and inform it to the registrars and merchant bankers.
Collecting banker and co-ordinating banker may be the same bank or different banks.
4. Underwriters and brokers:
Underwriting is an agreement whereby the underwriter promises to subscribe to a specified
number of shares or debentures or a specified amount of stock in the event of public not
subscribing to the issue.
Brokers along with the network of sub brokers market the new issues. They send their own
circulars and applications to the clients and do follow up work to market the securities.


Trading Securities

Definition: Trading securities is a category of securities that includes both debt and equity
securities, and which an entity intends to sell in the short term for a profit that it expects to
generate from increases in the price of the securities. Trading is usually done through an organized
stock exchange, which acts as the intermediary between a buyer and seller, though it is also
possible to directly engage in purchase and sale transactions with counterparties.
Trading securities are recorded in the balance sheet of the investor at their fair value as of the
balance sheet date. This type of marketable security is always positioned in the balance sheet as a
current asset.
If there is a change in the fair value of such an asset from period to period, this change is
recognized in the income statement as a gain or loss.
Other types of marketable securities are classified as available-for-sale and held-to-maturity.

Sep 03,
2009
SEBI (Employee Stock Option Scheme and Employee Stock Purchase Scheme)
Guidelines, 1999 (As updated upto 3rd September 2009)

Aug 20,
2009
SEBI (DIP) Guidelines updated upto August 20, 2009
Aug 11,
2009
SEBI (Aid for Legal Proceedings) Guidelines, 2009
Jul 31,
2009
SEBI (DIP) Guidelines updated upto July 31, 2009
Jul 09,
2009
SEBI (DIP) Guidelines updated upto July 9, 2009
Apr 20,
2009
SEBI (DIP) Guidelines updated upto April 20, 2009
Feb 24,
2009
(Disclosure and Investor Protection) Guidelines 2000 [updated upto Feb 24, 2009
]

Dec 08,
2008
SEBI (DIP) Guidelines, 2000 updated upto December 8, 2008
Nov 05,
2008
Framework for recognition and supervision of stock exchanges / platforms of
stock exchanges for small and medium enterprises

Aug 28,
2008
SEBI (Disclosure and Investor Protection Guidelines) 2000 (Amended upto
August 28, 2008)

Aug 04, SEBI (Employee Stock Option Scheme and Employee Stock Purchase Scheme)
2008 Guidelines, 1999 -(Amended up to August 04, 2008)
Jan 18,
2006
Guidelines for Anti-money laundering measures
Jan 21,
2004
Amendment to the SEBI (Informal Guidance ) Scheme 2003
Jun 24,
2003
SEBI (Informal Guidance) Scheme 2003
Feb 17,
2003
SEBI (Delisting of Securities) Guidelines, 2003 - as amended upto January 31,
2006

Jul 10,
1999
Guidelines for opening of Trading Terminals Abroad



The Securities and Exchange Board of India (frequently abbreviated SEBI) is the regulator for
the securities market in India. It was established in the year 1988 and given statutory powers on
12 April 1992 through the SEBI Act, 1992.

Functions and responsibilities[edit]
The Preamble of the Securities and Exchange Board of India describes the basic functions of the
Securities and Exchange Board of India as "...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".
SEBI has to be responsive to the needs of three groups, which constitute the market:
the issuers of securities
the investors
the market intermediaries.
SEBI has three functions rolled into one body: quasi-legislative, quasi-judicial and quasi-
executive. It drafts regulations in its legislative capacity, it conducts investigation and
enforcement action in its executive function and it passes rulings and orders in its judicial
capacity. Though this makes it very powerful, there is an appeal process to create accountability.
There is a Securities Appellate Tribunal which is a three-member tribunal and is presently
headed by Mr. Justice J P Devadhar, a former judge of the Bombay High Court.
[6]
A second
appeal lies directly to the Supreme Court. SEBI has taken a very proactive role in streamlining
disclosure requirements to international standards.
[7]


Powers[edit]
For the discharge of its functions efficiently, SEBI has been vested with the following powers:
1. to approve bylaws of stock exchanges.sebi
2. to require the stock exchange to amend their bylaws.
3. inspect the books of accounts and call for periodical returns from recognized stock
exchanges.
4. inspect the books of accounts of a financial intermediaries.
5. compel certain companies to list their shares in one or more stock exchanges.
6. registration brokers.
there are two types of brokers.
1.circuit broker 2.merchant broker
SEBI Committees
1. Technical Advisory Committee
2. Committee for review of structure of market infrastructure institutions
3. Members of the Advisory Committee for the SEBI Investor Protection and Education
Fund
4. Takeover Regulations Advisory Committee
5. Primary Market Advisory Committee (PMAC)
6. Secondary Market Advisory Committee (SMAC)
7. Mutual Fund Advisory Committee
8. Corporate Bonds & Securitization Advisory Committee


Saving is income not spent, or deferred consumption. Methods of saving include putting money
aside in, for example, a deposit account, apension account, an investment fund, or
as cash.
[1]
Saving also involves reducing expenditures, such as recurring costs. In terms
of personal finance, saving generally specifies low-risk preservation of money, as in a deposit
account, versus investment, wherein risk is higher; ineconomics more broadly, it refers to any
income not used for immediate consumption.

In finance, investment is putting money into an asset with the expectation of
capital appreciation, dividends, and/or interest earnings. This may or may not be backed by
research and analysis. Most or all forms of investment involve some form of risk, such as
investment in equities, property, and even fixed interest securities which are subject, among
other things, to inflation risk.

Types of investment[edit]
Types of investments include:
Alternative investments
Traditional investments
Speculation is the practice of engaging in risky financial transactions in an attempt to profit from
fluctuations in the market value of a tradable good such as a financial instrument, rather than
attempting to profit from the underlying financial attributes embodied in the instrument such as
capital gains, interest, or dividends. Many speculators pay little attention to the fundamental
value of a security and instead focus purely on price movements. Speculation can in principle
involve any tradable good or financial instrument. Speculators are particularly common in the
markets for stocks, bonds, commodity futures, currencies, fine art, collectibles, real estate,
andderivatives.

Types of investors[edit]
The following classes of investors are not mutually exclusive:
Retail investor
Individuals gambling in games of chance.
Individual investors (including trusts on behalf of individuals, and umbrella companies formed
by two or more to pool investment funds)
Collectors of art, antiques, and other things of value
Angel investors (individuals and groups)
Sweat equity investor
Institutional investor
Venture capital funds, which serve as investment collectives on behalf of individuals,
companies, pension plans, insurance reserves, or other funds.
Businesses that make investments, either directly or via a captive fund
Investment trusts, including real estate investment trusts
Mutual funds, hedge funds, and other funds, ownership of which may or may not be publicly
traded (these funds typically pool money raised from their owner-subscribers to invest in
securities)
Sovereign wealth funds
Investors might also be classified according to their styles. In this respect, an important
distinctive investor psychology trait is risk attitude.
Investor protection
The term investor protection defines the entity of efforts and activities to observe, safeguard
and enforce the rights and claims of a person in his role as an investor. This includes advice and
legal action. The assumption of a need of protection is based on the experience that financial
investors are usually structurally inferior to providers of financial services and products due to
lack of professional knowledge, information or experience. Countries with stronger investor
protections tend to grow faster than those with poor investor protections. Investor protection
includes accurate financial reporting by public companies so the investors can make an informed
decision. Investor protection also includes fairness of the market which means all participants in
the market have access to the same information.
Through government
Investor protection through government is regulations and enforcements by government
agencies to ensure that market is fair and fraudulent activities are eliminated. An example of
government agency that provides protection to investors is SEC.
Through individual
Investor protection through individual is the strategy that one utilizes to minimize loss. An
investor can protect him/herself by purchasing only shares of businesses that s/he understands
or remain calm through market volatility.

Security analysis

Security analysis refers to the analysis of trading securities from the point
of their prices, returns and risks. All investments are risky and
the expected return is related to the quantum of risk. All investors try to
earn more return with low level of risk or without risk. For this purpose
they are considering some objectives. These are:

Objectives

Regular income the income from the investment should be regular
and consistent one. The high fluctuation is income stream is not suitable
for the long-term growth.

Capital appreciation the investment must yield regular income as well
as growth in value i.e., capital appreciation. It is the difference between
the selling price and purchase price.

Safety of capital the capital invested in assets requires the safety.
Safety is the important element which protects the loss of capital and
return from the investments.

Liquidity liquidity is the ease of convertibility or marketability of
assets.

Hedge against Inflation the inflation is the biggest problem we are
facing today, hence the rate of return from the investment requires high
yield to beat inflation rate.

UNIT 2

The concept of risk
1. an unwanted event which may or may not occur.
2. the cause of an unwanted event which may or may not occur.
3. the probability of an unwanted event which may or may not occur.
4. the statistical expectation value of unwanted events which may or may not
occur.
5. the fact that a decision is made under conditions of known
probabilities (decision under risk)

Risk Components are:
The event that could occur the risk,
The probability that the event will occur the likelihood,
The impact or consequence of the event if it occurs the penalty (the price you pay)