UNIT-2
TWO MARK QUSTIONS:
1. Define the term financial market?
A Financial market can be defined as the market in which financial assets are created or transferred. Financial market classified in to Money market and Capital market. The capital market can be defined as a market for Long term money and financial assets.
Capital market is classified in to two types
a. Primary Market
b. Secondary Market
2. What is primary market?
Primary market or new issue market deals with new securities which are issued for the first time for public subscription. Main functions of new issue market are
1. Origination----refers to the work of investigation, analysis and processing of new project proposal.
2. Underwriting
3. Distribution.
3. What is secondary market?
The secondary market provides a place for purchase and sale of already issued or existing securities.
4. What are the methods of floating of new issues?
1. Pure Prospects method 2.Offer for sale method 3.Private Placement method 4.Initial Public offers method 5.Right issue method 6.Bonous issues method 7.Book building method 8.Stock option method 9.Bought –out deals method.
5. Define the term’ Book Building’?
It is a capital issuance process which results towards a price discovery and also to assess demand analysis of the security.
Book building Process:
Step: 1 The issuer nominates a merchant banker as book runner
2. Specifies issue size and floor price
3. Appoints syndicate members
4. Investors place orders into the electronic book, termed as the process of bidding
5. Bids are entered, at or above the floor price
6. Retail investors can bid at a cut-off price
7. The price opted by majority of bidders shall be decided as the subscription price.
8. What is underwriting of shares?
Underwriting is an agreement whereby the underwriter promises to subscribe to a specified number of shares or specified amount of stock in the event of public issue.
If the issues are fully subscribed then there is no liability for the underwriter. If part of share issues remains unsold, the underwriter will buy the shares. Thus underwriting is a guarantee for the marketability of shares.
9. What is Green shoe option?
It denotes an option of allocating shares in excess of the shares included in the public issue.
10. What do you mean by Follow on Public Offering (FBO)?
When an existing listed company either makes a fresh issue of securities to the public or makes an offer for sale of securities to the public for the first time, through an offer document such issues are called as Follow on Public Offering.
11. What do you mean by Private placement or Subscription?
Shares are sold to individuals or institutions directly by making a private appeal to them.
12. Define the term Stock Exchange?
The Securities Contract (Regulation) Act, 1956 [SCRA] defines ‘Stock Exchange’ as anybody of individuals, whether incorporated or not, constituted for the purpose of assisting, regulating or controlling the business of buying, selling or dealing in securities.List out the various Functions of Stock Exchange.
1. Maintains active trading
2. Fixation of prices
3. Ensure safe and fair dealing
4. Helps in financing the industry
5. Providing Information
6. Performance inducer
13. What is demutualization of stock exchanges?
The process of demutualization is to convert the traditional ‘not for profit’ stock exchanges into a ‘for profit’ company and this process is to transform the legal structure from a mutual form to a business corporation form.
The board of a stock exchange should consist of 75% public interest /shareholder directors and only 25%broker directors..These are generally for –profit and taxpaying entities. It would bring in the transparency and prevent conflict of interest in the functioning of stock exchanges.
14. What is an Index?
An Index shows how a specified portfolio of share prices is moving in order to give an indication of market trends. It is a basket of securities and the average price movement of the basket of securities indicates the indexmovement, whether upwards or downwards.
15. What is Dematerialization?
Dematerialization is the process by which physical certificates of an investor are converted to an equivalent number of securities in electronic form and credited to the investor’s account with his Depository Participant (DP).
16. List out the features of Bombay Stock Exchange (BSE)?
•BSE is the oldest stock exchange in Asia(1875) and in 1995 it introduced screen based trading called BOLT.
•The 30 stock sensitive index or BSE Sensex was first compiled in 1986.
• The greatest number of listed companies in the world, with 4700 listed as of August 2007.
•Apart from the SENSEX, BSE offers 21 indices, including 12 sectoral indices.
•BSE is the first exchange in India and the second in the world to obtain an ISO 9001:2000 certifications.
• It is also the first exchange in the country and second in the world to receive Information Security Management System Standard BS 7799-2-2002 certification for its BSE On-line Trading System (BOLT).
17. Mention the features of National Stock Exchange (NSE)?
•In April 1993, NSE was recognized as astock exchangeunder theSecurities Contracts (Regulation) Act, 1956.
•NSE commenced operations in the WholesaleDebt Market(WDM) segment in June 1994.
•TheCapital Market(Equities) segment of the NSE commenced operations in November 1994, while operations in the Derivativessegment commenced in June 2000.
•The software in the NSE trading system is known as National Exchange for Automated Trading (NEAT)
18. What is SENSEX? How it is computed?
SENSEX means SensitivityIndex
SENSEX= free float market capitalization of 30 company/ Index Divisor
free float market capitalization=price of the share *no. Of shares issued by the company * free float factor.
Main factors:
1. Listed history
2. Trading frequency
3. Top 100 companies by find rank
4. Market capitalization weight age- based on three month
5. Balanced industry Representation
6. Company should have good track record.
19. What is NIFTY INDEX?
S&P CNX Nifty (Nifty), is a scientifically developed, 50 stock index, reflecting accurately the market movement of the Indian markets. It comprises of some of the largest and most liquid stocks traded on the NSE.
20. What is OTCEI? Expand the term QIB &FII?
OTCEI refers to over the counter exchange of India. It is a wingless stock exchange in India.where the trading of securities of small and medium sized companies takes place. it is a company incorporated in 1990 under the companies act, 1956 and established on lines of NASDAQ- the OTC exchange in USA.
QIB: Qualified Institutional Buyer
FII: Foreign Institutional Buyer
21. What do you mean by NSDL?
NSDL: National Securities Depository Limited
NSDL provides electronic depository facilities for securities traded in the stock market. NSDL keeps investor securities in the electronic form. NSDL, was registered by SEBI on june7th 1996 .It was promoted by IDBI, UTI, NSE.
NSDL operation on 3 tire structure.
Tire1: NSDL MAINTANIS accounts of its depository participant (DP)
Tire2: DP maintains accounts of the clients or investor.
Tire3: individual investor.
Advantages of NSDL?
1. Less paper work
2. Quick action
3. Free from the wrong of loss of shares certificates and other procedures
4. Free from worry of loss of share certificate and other procedure
22.Narrate the steps in trading Mechanism in stock market?
Step 1: choose a broker
2: agreement with broker
3: Opening a DEMAT account with broker
4: Place the order
5: Executing the choice of orders and broker lived it brokerage chargers
6: Giving margin money to broker
7: Preparing contract note
8: Settlement of contract
9: Rolling settlement .it was introduced by SEBI
23. Explain the current settlement system in NSE?
Since April 2003, all stock exchange follows T+2 rolling settlement system previously it was T+5
Activity / DayTrading / Rolling settlement Trading / T
Clearing / Custodial confirmation / T+1 Working days
Delivery Generation / T+1 working days
Settlement / Securities and Funds Pay in / T+2 working days
Securities and Funds Pay out / T+2 working days
24. What do you mean by arbitrage Process in stock exchange?
It refers to the purchase and sale of the same security simultaneously in two different markets with a view to earn profit out of the Price differentials.ie NSE &BSE.
25. Define the term Option and Hedging?
The term option means a right. It is an agreement of right to buy or sell a certain number of specified securities as a pre determined price within a prescribed time limit.
1. Call option—Right to buy 2.Put option---- Right to sell
It is a risk reducing tool, it focus on the role of transferring the risk of price changes to others holders in the future market.
26. Show the comparison between share and stock?
S.No / SHARE / STOCK1 / It has a nominal value / It has no nominal value
2 / It may not be fully paid i.e. it may also be partly paid up / It is always fully paid up
3 / It cannot be transferred in small fraction. It is always transferred as a whole / It can be transferred in any fraction.
4 / It can be issued directly to the public / It cannot be issued directly to the public .Only the fully paid shares may be converted in to stock
5 / All shares are of equal denomination / The stock may be of unequal amount.
6 / All the shares bear distinct numbers / The stock discloses the consolidated value of share capital.Thus,the fraction of stock do not bear any number
27. Whatis Deferred shares?
It has other name called Founder shares or management shares. It is issued to promoters. They can share the profit after satisfying the preference and equity dividend. Deferred shares cannot be issued in following companies.
1. Public limited companies
2. Subsidiaries of public limited companies
3. Private companies deemed to be public limited companies
28. List out the various participant in stock market?
1. Hedgers – to eliminate the price risk
2. Speculators –willing to take the risk
3. Arbitrages –make the profit by making difference between two stock market.
4.Scalpers –make the profit within quick time
5. Spreaders -
6. Day traders
7. Position traders
16 Mark Questions:
1. Elaborately discuss various processes under new issue market or Initial Public offer (IPO) in detail?
IPO Procedure majorly classified in three broad heading:
1. Pre IPO Process2.At the time of IPO3.Post IPO Process
Appointment Procedure or Pre IPO:
1. Meeting of Board of Directors
2. Appointing of Merchant Bankers- Specialized financial Consultancy who looks after Initial Public Offering
3. Appointing of Registrar and transfer agent done by Merchant Bankers
4. Banks- Appointed by Merchant Bankers
5. Appointing of Lawyer
Real Procedure
6. Book issued by Merchant bankers and submits it to SEBI which includes Reason of Issuing, no of Shares, Financial Condition of the company, current Business, Management, Growth in Sectors and Risk factor
7. Prospectus- Issued to stock Market and registrars
8. Printing of Forms
9. Appointment of Brokers
10. Marketing & Advertising
11. Brokers Meeting in a Company
12. Road Shows or meetings
13. IPO starts 3-7 days opened
14. IPO closed
Post IPO
15. Collection of Forms
16. Oversubscription or under subscription
17. Allotment Of shares
a. Pro data allotment
b. lottery system
18. Issue of share certificate
a. Letter of allotment
b. regret Letter
19. Refund cheque
20. Listing Of shares in NSE or BSE.
2. Discuss SEBI regulation regarding Initial Public offer (IPO) or new issues market in detail?
1. Entry Norm I:
-Net tangible assets of company is at least Rs 3 crores for 3 full years
-Distributable Profit in at least 3 years.
-Net worth of minimum Rs 1 crore in last 3 years
-The issue size does not exceed 5 times the pre-issue net worth.
2. Entry Norm II:
-The minimum post-issue face value capital shall be Rs 10 crores (or) there shall be a compulsory market making for at least 2 years.
-Issue shall be through Book Building route with at least 50% to be mandatorily allotted to the Qualified Institutional Buyers (QIB)
3. The company shall also satisfy the criteria of having at least 1000prospective allotters in its issue.
4. Minimum Subscription:
If the company does not receive minimum subscription of 90% of subscription in each category of offer and if the issue is not underwritten or the underwriters are unable to meet their obligation, then fund so collected must be refunded back to all applicants.
5. Size of the Public issue:
Issue of shares to general public cannot be less than 25%of the total issue. In case of IT, Media and Telecommunication sectors, this stipulation is reduced subject to the conditions that
1. Offer to the public is not less than 10% of the securities issued.
2. A minimum number of 20 lakh securities is offered to the public
3. Size of the net offer to the public is not less than Rs.30 crores
6.Promoters Contribution:
1. Promoters should bring in their contribution including premium fully before the issue
2. Minimum promoter’s contribution is 20-25% of the public issue.
3. Minimum lock in period for promoter’s contribution is five years.
4. Minimum lock in period for firm allotment is three years.
7. Promoters Contribution
-Minimum Promoters contribution Is 20-25 % of the Public issue
-Minimum lock in period for Promoters contribution is 5 years.
8. Dematerialization of Shares-As per the provisions of the Depositories Act, 1996, And SEBI Rules, now all IPO will be in Demat form only.
9. Disclosure Norms.
• Risk Factor-The Company/Merchant Banker must specify the major risk factor in the front page of the offer document. Attention of the investor must be drawn on general risk factors also. It is the absolute responsibility of the issuer company about the true and correct information in the prospectus. Merchant Banker is also responsible for giving true and correct information regarding all the documents such as material contracts, capital structure, appointment of intermediaries and other matters.
10.IPO OF SMALL COMPANIES:
Public issue of less than 5 crores has to be through OTCEI (Over the Counter Exchange of India) and separate guidelines apply for floating and listing of these issues.
11. Regarding allotment of shares:
a. Net Offer the general public has to be at least 25% of the total issue size for listing on a stock exchange
b. It is mandatory for a company to get its shares listed at the regional stock exchange where the registered office of the issuer is located.
c. In an issue of more than 25 crores the issuer is allowed to place the whole issue by book-building.
d. Minimum of 50% of the Net Offer to the public has to be reserved for the investors applying for less than 1000 shares.
e. There should be at least 5 investors for every 1 lakh equity offered.
f. Quoting of PAN or GIR No. in application for the allotment of securities is compulsory where monetary value of investment is Rs.50000/- or above.
g. Indian development financial institutions and Mutual Fund can be allotted securities upto 75% of the issue amount.
8. Allotment to categories of FIIs and NRIs/OCBs is upto maximum of 24%, which can be further extended to 30% by an application to the RBI-supported by a resolution passed in the General Meeting.
12. Time limit for IPO:
-Public issue should open for minimum 3 working day to max 10 working day.
-Incase of right issue minimum 15 days to max 60 working days.
-Allotment has to be made within 30days of the closure of public issues.
-All the listing formalities done within 70days the closure of public issues.
-Within 12 months of the public issue, No bonus issue should be made.
3. Who are the key players or participant involved in the new issue market?
1. Merchant Bank-Roles and Functions of merchant Bank.
2. Syndicate members-Brokers registered with SEBI work as Syndicate members for an IPO
3. Underwriters---Market the securities.
4. Registrars to an issues and Share Transfer Agent (STA)
5. Credit Rating Agency (CRISIL, CARE, ICRA)---Grading the IPO.
6. Investment Bankers---lead company through IPO
7. Depositary Participant (DP) ---Demat/Custodian of securities.
4. Elaborately discuss various methods of new issue market in detail?
1. Pure Prospects method
-It is the most popular method,
-It is mainly based on underwriting
Main drawback:1. High issue costs 2.Time consuming
2. Offer for sale method
-Where the marketing of securities take place through intermediaries such as stock brokers, issue house is called as ‘offer for sale method’.
-It involves two stages 1.company to Brokers 2.Brokers to Investors.
3. Private Placement method
In this method issuer makes the offer of sale to individuals and institutions privately without issue of prospects.
4. Initial Public offers method
Under this method of marketing securities are issued to successful applicants on the basis of the orders placed by them, through their brokers. It involves order, share allocation, etc.
5. Right issue method
6. Bonous issues method
7. Book building method
8. Stock option method– Employees is encouraged to take up shares and subscribed it.
9. Bought –out deals method.
Under this method the promoters of an unlisted company make an outright sale of a chunk of equity shares to a single sponsor or the lead sponsor.
5.Explain the structure and major reforms in the Indian capital market?
Important Mile stones in Indian stock market.
- Market Segments –Primary and secondary market
- Establishment of the native share and stock brokers association ie Bombay stock Exchange 1887
- Capital issues control Act was passed in the year 1947
- The companies Act Passed -1956
- SEBI-Stock Exchange Board of India was established - 1988
- SERA-Security Exchange Regulation Act was passed -1992
- The capital issues control Act was passed-1992
- NSE established -1992
- OTCEI was established-1992
- Screen Based Trading was started-1992
- Depositories Act 1996
- ISE established 1998
- SCRA was amended to include derivatives in the Definition of securities-1999
- Derivatives trading began in India-2000
- Corporation and Demutualization of stock exchanges was completed.2007
- Participants
- -issuers, Intermediaries, Investors
CAPITAL MARKET REFORMS:
1. SEBI ACT, 1992
-Protect -Promote –Regulate
2. Disclosure and Investor Protection Guidelines (DIP)
-Free Pricing
3 Book Building Process
4. Screen Based Trading
-Internet Trading (BOLT-Bombay stock exchange Online Trading)
-Mobile trading
5. Trading Cycle reducing from (T+5,T+3,T+2,T+1)
6. Derivatives Trading (June 2000)
7. Demutualization and Corporation (-ownership-Management-Trading Membership)
8. Depositories NSDL&CDSL
9. Risk Management
-Capital Adequacy, Margin, Monitoring, Trade /settlement Guarantee Fund
10. Dematerialization of securities
11. Derivatives Trading
12. Buy back of Securities
13. Employee stock option scheme