Professional Documents
Culture Documents
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Objectives
Capital Market Instruments Primary Market Operations The Instruments Role of SEBI and Merchant Bankers Stock exchanges in India National Stock Exchange Stock Holding Corporation of India E- trading Index and future trading Stock market operations Book building
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Debt Mar Private ket Corporate Debt, PSU Bond Primar Second market, y ary Prof Govt. Rashmi
Derivati ves - Exchange Market Traded Futures and Options Inde Stoc x k
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A strong legal and regulatory environment Stable money Sound public finances and public debt management A central bank
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A financial system is a vertical arrangement of a well-integrated chain of financial markets and institutions that provide financial intermediation.
Classification of Financial Structure and Level of Development of Select Economies
Extent of Development Bank- based Market-based
Developed
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Underdeveloped
Japan, Germany, US, UK, France , Italy Singapore, Malaysia, Korea Argentina, Brazil, Mexico, Pakistan, Sri Philippines, Prof Rashmi 1111 Lanka, Turkey
Nature and Role of Financial Institutions (Intermediaries) and Financial Markets Financial Institutions provide three transformation services: Liability, asset and size transformation by mobilization of funds and their allocation
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Financial Markets
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Mobilise long-term savings to finance long-term investments Provide risk capital in the form of equity to entrepreneurs Encourage broader ownership of productive assets Provide liquidity to investor to sell financial assets
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Capital Markets
Capital markets deal in long term sources of funds with a maturity period of more than one year. Types of Capital Markets: Primary Markets Secondary Markets
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Primary Markets
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Primary market helps companies in raising funds through issue of securities like shares and debentures. Capital issues were controlled by Capital Issue Control Act, 1947.
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Nature of Fund Raising:Domestic: Equity issues by - Corporates (primary issues) - Financial intermediaries (secondary issues) Government (primary issues) - Corporates (primary issues) - Financial intermediaries (secondary issues)
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Debt instruments by
External: Equity issues through issue of: Debt instruments through Other External Borrowings: Foreign Direct Investment (FDI) Foreign Institutional Investments Non- Resident Indian 4/15/12 deposits (NRI) - in Equity and Debt form - in the form of portfolio investments - in the form of short-term and medium Prof term deposits Rashmi 1818
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Eliminates the risk of bad deliveries and fake or forged shares. This was introduced by SEBI with effect from Jan 15, 1998. SEBI has also set up a working group comprising National Securities Depositories Ltd. and various market participants like custodians, brokers, stock exchanges, etc.
Dematerialisation of Shares
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Dematerialisation of Shares
Conversion of physical certificates into dematerialised holdings at the request of investor is called dematerialisation Only shares registered in the name of account holder are accepted for dematerialisation at NSDL
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Dematerialisation
Dematerialisation is the process by which an investor can get physical certificate converted into electronic balances maintained in its account with the participant in the NSDL system. Depository Participant (DP) is the agent of the depository and is the interface between the depository and the investor.
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INVESTOR
Depositories
Depository system provides for Dematerialization of securities, custody and trading in electronic form The Depositories Act, 1996 introduced a legal frame work for the establishment of multi depositories to hold securities in scrip less form
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Depository means a company formed and registered under the Cos Act, 1956 and which has been granted a certificate of registration u/s-s (1A) of Sec 12 of the SEBI Act, 1992 Depositories must be registered with the SEBI
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Depositories in India
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First depository in the country. Sponsored by UTI, NSE, SBI, HDFC Bank and Citibank. It is a public ltd. co managed by the Board of Directors Governed by its bye-laws and business operations are regulated by its business rules
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Functions of NSDL
NSDL effects settlement of securities traded on the exchanges It carries out settlement of trades not done on the stock exchange (off- market trades) NSDL facilitates pledging/ hypothecation of dematerialised securities
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It offers a host of services to the investors through the network of Depository Participants (DP) Maintenance of beneficial holdings through DPs The NSDL maintains accounts of investor holdings through its DPs The DPs provide a statement of holding of each of their clients which is similar to such documents provided by a commercial bank
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Clearing Corporation
Stock Exchange
Trading Member
Investo r
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Rematerialisation
The conversion of dematerialised securities back into physical certificates is called Rematerialisation Rematerialisation is optional on the part of the investor and can be done on the request of investor, any time after the same have been dematerialised
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Rematerialisation
DEPOSITOR Y (NSDL) DEPOSITOR Y PARTICIPAN T
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Rolling Settlement
Major reform introduced by SEBI, which has terminated the badla system or the carry over trading system w.e.f. July 2,2001. Badla is a speculative system which allows an investor to carry over his transaction of a particular stock to the next settlement cycle without cash settlement in the current cycle.
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Major reforms in the recent times is the introduction of Rolling Settlement It is a system of settling transactions in a fixed number of days after the trade is agreed Badla system, also known as carry over trading system or forward trading system was allowed only on the BSE in India
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All transactions in all groups of securities in the equity segment and fixed income securities listed on BSE are required to be settled on T +2 basis (w.e.f April 1, 2003) A T+ 2 settlement cycle means that the final settlement of transactions done on T (i.e. trade day) by exchange of monies and securities between the buyers and sellers respectively takes place on second business day (excluding Sat, Sun and exchange traded holidays) after the trade day T+2 : By 11 am Pay in of securities and funds By 1.30 pm Pay out of securities 4/15/12 Prof Rashmi 3737 and funds
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The basic advantage of rolling system over the badla system is its simplicity The badla system was non-transparent and unregulated and the investors exposure to risk and fraud was very high. The investor had to keep track of different stocks as they had different settlement systems With rolling settlement, the investor has to merely keep track of the day of purchase/ sale of scrips as all the scrips are settled in the same format on all trading screens It improves the price discovery process as the settlement process is standardised and the participants can focus more on market outcomes
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Following the inefficient functioning of the capital market system, an alternative method called bookbuilding method is slowly becoming popular in India The essence of the tender/ book building method is that the pricing of the issues is left to the investors by which the demand for the proposed issue is elicited and built-up
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Difference between shares offered through book building and offer of shares through normal public issues Features
Pricing
Demand
Demand for the securities offered is known after the closure of the issue
Payment
Payment is made at the Payment only after time of subscription allocation wherein refund is given after allocation
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On Line IPOs
The on-line issue of shares is carried out via the electronic network of the stock exchanges The guidelines for online issue of shares are incorporated in a SEBI Disclosure and Investor Protection Guidelines, 2000 The guidelines clearly state that public issue can be made either through the online system or through the existing banking channels The company has to comply with sections 55-68A of the Companies Act, 1956 and Disclosure and Investor Protection 4/15/12 4848 guidelines Prof Rashmi
IPO is an offering of either a fresh issue of securities or an offer for sale of existing securities, or both by an unlisted company for the first time to the public IPO enables listing and trading of the issuers securities To enable the investors to take informed decisions and to protect their interests, SEBI has laid down stringent entry norms
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Eligibility norms laid down by SEBI for entities raising funds through an IPO Entry Norm I Entry Norm II Entry Norm III
For companies Issue shall be Project is desiring to tap through a book appraised and the primary building route participated to market- net with at least 50% the extent of 15% tangible assets of of the issue to be by FIs / at least Rs 3 crs mandatorily scheduled for 3 full years allotted to QIB commercial failing which the banks of which at money shall be least 10% comes refunded from the appraiser Distributable The minimum Minimum postprofits in at least post issue face issue capital shall 3 out of value capital be Rs 10 crores
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Are IPOs creators of wealth? always profitable. Subscribing to new issues is not
Some of the IPOs have, in fact, robbed the investors of their wealth Out of 107 issues in 2007-08 only 86 companies reported positive returns, while the remaining companies reported negative returns for their investors Stocks like global Broadcast News Ltd gained above 88% returns Some other stocks listed below their offer price and incurred losses- e.g. Orbit corporation reported a loss of nearly 19% From the period June to Sept 2009, Indian companies raised Rs 13,000 crores through the IPO route, including the IPOs of Adani Power, Oil India and NHPC Source: Portfolio organizer, investing has become a riskier proposition for IPO Dec 2009, pp 11 4/15/12 Prof Rashmi 5252 retail investors in the recent years
Company Total Name issue size (Rs cr) Reliance Power Edelweiss
Compan Total No. of y Name issue times size retail (Rs subscrip cr) tion Pipavav 512.00 2.89 Shipyard 1.70 3.10 3.09 5353
Oil India 2,777. 00 Mundra 1771.00 13.00 NHPC 6,048. Port Source: Data compiled from 00 Business India Aries Agro 58.50 Prof 6.42 Jindal 84.37 4/15/12 Rashmi
Primary Issues
Primary Issues
Public Issue IPO first time offer of sale Right s Issue Private Placement
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Rights Issue
Rights issue is a offer of new securities by a listed company to its existing shareholders on a prorata basis Rights issues shall be kept open for at least 30 days and not more than 60 days
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Private placement refers tot the direct sale of newly issued securities by the issuer to a small number of investors through merchant bankers These investors are selected clients such as financial institutions, Corporates, banks and high net-worth individuals
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Issue Mechanism
Public Issue Rights issue Bonus Issue Private Placement Market Bought out deals -( Reliance Capital and Finance Trust acquired one lakh shares of Neilcon Ltd. at Rs 20 premium)
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Company places its Equity shares to a sponsor/ merchant banker who offloads the shares at an appropriate time. The sponsor is also an intermediate investor. Bought out deals are known as Angels in UK. Entered the Indian corporate world with the Co-nick Alloys (India) offer for sale at a premium sponsored by ICICI.
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PUBLIC ISSUE
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Investors can be benefited by a compulsory requirement to have merchant bankers rated by authorized rating agencies. These rating agencies evolve their own norms, including post-listing appreciation/ depreciation in prices of securities handled by the merchant bankers.
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Computerization of Stock Exchanges (introduction of OTCEI and NSE and subsequently to BSE). Expansion of trading terminals of stock exchanges. Dematerialised trading paperless trading by setting up National Securities Depository Ltd. Securities lending scheme improves the efficiency of the settlement system.
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Merchant Bankers
Merchant banker means any person who is engaged in the business of issue management by making selling, buying arrangements or acting as manager, consultant, adviser or rendering corporate advisory service. All issues should be managed by at least one lead merchant banker .
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Merchant Bankers
The lead manager shall continue to be associated with the issue till the subscribers have received the share or debenture certificates or refund of excess application money. A merchant banker shall disclose to the Board his responsibilities with regard to the management of the issue. Also, he has to give all information relating to his activities as a manager, underwriter, consultant or adviser to an issue.
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Government Securities
Central Government securities State Government securities Securities guaranteed by Central Government for All India Financial Institutions like IDBI, ICICI, IFCI, etc Securities guaranteed by State Government for state institutions like state electricity boards and housing boards Treasury bills issued by RBI
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Treasury Bills National Defense/National Savings/National Deposit Certificates Deposit Certificates Annuity Certificates Annuity Deposit Certificates Zamindari Abolition Compensation Bonds and Rehabilitation Grant Bonds Social Security Certificates Capital Investment Certificates.
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Commercial banks Financial institutions (FIs) Large corporate bodies Reserve Bank of India Foreign Institutional Investors
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Stock Exchanges
Two leading stock Exchanges in IndiaBSE & NSE. Function of stock exchange is raising of capital through floating of issues. BSE was recognized by the Government of India on Aug 31, 1957 under the Securities Contracts (Regulations) Act, 1956. Companies which seek listing on BSE have to have a minimum issued capital of Rs 3 crores. Also, such companies should have a 4/15/12 Prof Rashmi profitability record of at least 3 years. 6969
BSE computerized its trading system by introducing BOLT (Bombay on line trading) on 14/03/95. BOLT provides a quote driven automatic trading facility. This system allows retention and matching of orders against one another where no quotes exists in the system for a particular scrip. It improves the price competitive character of the market. Securities on the BSE have been divided into five categories: Group A, Group B (B1 and B2) Group C, Group F and Group Z. B1 are well traded scrips in the B group while B2 are not well traded.
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Price Indices
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BSE Sensitivity Index (Sensex) and the BSE National Index (Natex). The BSE Sensex was introduced on 1/1/86 with the base year of 1978-79. The BSE Sensex consists of only 30scrips which are highly sensitive to market fluctuations. BSE National Index was set up in the year 198889 with the base year of 1983-84. Natex covers 100 actively traded scrips of major stock exchanges. The BSE introduced two new indices, i,e, the BSE National Index- 200 and Dollax with the base year of 1989-90. Dollax presents the current as well as the base year values in dollar terms.
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The Pherwani Committee recommended the setting up of a model National Stock Exchange at New Bombay. The NSE was recognized by the Government of India as a public limited company owned by IDBI and other financial institutions like ICICI, IFCI, GIC , LIC, SBI, Stock Holding Corporation of India. It was set up to establish a nation-wide trading for equities and debt instruments.
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The NSE set up two segments- the Wholesale Debt Market (WDM) segment which commenced trading on June 30, 1994 and the Capital Market segment (CM) which started on Nov 3, 1994. The WDM segment deals with pure debt instruments such as Government securities, treasury bills, public sector bonds, corporate debentures, commercial paper, bank bonds, etc.
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National Stock Exchange for Automated trading. This is a fully automated screen based trading system. It operates on a price-time priority, is order driven and hides the identity of the trading parties.
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This is reflected through the NSE- 50 index popularly called Nifty. It comprises 50 scientifically selected scrips having market capitalization of Rs 5 billion each. It was introduced on April 22, 1996 with the base year of Nov 3, 1995 to reflect market movement more accurately. The Nifty Junior Index (Mid cap Index) and the Dollar denominated Nifty (Defty) was introduced. The Mid Cap Index was introduced with the explicit objective of measuring the performance of stocks in the mid-cap range on Jan 1, 1997.
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Stock Exchanges
Auction market in shares and other securities. Persons at Stock Exchanges: Bull - buyer (Optimistic view) Bear seller (Pessimistic view) Transactions commence with placement of order.
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Types of Orders
Limit Orders Best Rate Order Immediate or Cancel Order Limited Discretionary Order Stop Loss Order Open Order
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Depository is an entity which holds securities in the form of electronic accounts in the same way as a bank holds money. This eliminates the need to deliver physical certificates on sale and transfer. All exchange and transfer takes place in the electronic form. All settlement activity takes place through a depository. The investor has to open an account with the depository through a Depository participant. They issue debit instructions for delivery of securities to their accounts. For receipt of delivery of securities to their accounts they issue a credit instruction.
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Advantages of a Depository
It is speedier and delay in transfer of securities is eliminated. It avoids a lot of paper work. The buyer gets exemption from stamp duty on transfer of securities. The company can save substantial amount on printing certificates, postage expenses and legal compliances.
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Depository receipts issued by a company in the USA is known as ADRs. Such receipts have to be issued in accordance with the provisions stipulated by the Securities and Exchange Commission of USA, which are very stringent. An ADR is generally created by the deposit of the securities of a non- United States company with a custodian bank in the country of incorporation of the issuing company. ADRs are United States dollar denominated and are traded in the same way as are the securities of United States company.
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Markets of GDRs
GDRs are sold primarily to institutional investors. Demand is dominated by emerging market funds. Switching by foreign institutional investors from ordinary shares into GDRs is likely. Major demand is also in UK, USA (Qualified Institutional Buyers), South East Asia (Hong Kong, Singapore), and to some extent continental Europe (principally France and Switzerland).
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The Government of India has formulated a scheme for allowing Indian companies to issue equity shares or convertible bonds in the International markets after Government approval. Companies must have good financial track record at lest for a period of three years, market price stability and good industry prospects. Euro issues offer tremendous advantages to Indian issuers. Investors are aiming to diversify their portfolios internationally. The merchant banker plays an important role in organizing a Euro issue.
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American Depository Receipts: Dollar denominated negotiable certificate and represents publicly traded Equities of Non-US companies. 4/15/12 Prof Rashmi 8787
Participants
Borrowers/Issuers(Corporates, Financial Institutions, banks and Govt. Bodies) q Lenders and Investors (Banks chief lenders of Euro Loans; Institutional Investors subscribers of ADRs and GDRs) q Intermediaries: a) Lead Managers b) Underwriters c) Custodians
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Forex Markets
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Exchange rate:- Rate at which one currency can be converted into another currency. Quoted in two ways: * Direct Quote * Indirect Quote
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Authorized Dealers
Banks Certain Financial Institutions State and Urban Co-op Banks Scheduled Commercial Banks
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Deal in foreign currency subject to certain restrictions. Two categories: 1) Full-fledged Money changers 2) Restricted Money changers.
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Derivatives Market
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A financial derivative is a product derived from the market of an underlying asset. Derivative refers to a variable which has been derived from another variable. They are designed to manage risks.
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Types of Derivatives
Futures Agreement to buy or sell a specific amount or a commodity or financial instrument at a particular price on a stipulated date in the future. q Options Right (not an obligation) to buy/ sell an underlying asset at a stated date at a stated price.
Participants
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Financial Institutions
Industrial Development Bank of India Industrial Finance Corporation of India Industrial Investment Bank of India Export and Import Bank of India State Financial Corporations State Industrial Development Corporations
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Investment Institutions
Life Insurance Corporation of India General Insurance Corporation Unit Trust of India Mutual Funds
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Banks
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Liberalization
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NBFCs
Investment Trusts or Investment Companies Nidhis or Mutual Benefit Funds Merchant Banks Hire-purchase Finance Companies Lease Finance Companies Housing Finance Institutions Venture Capital Funds, and Factors or Factoring Companies
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