UNIT 2
Types of financial markets
The financial markets can be divided into different subtypes:
- Capital markets which consist of:
- Stock markets, which provide financing through the issuance of shares or common stock, and enable the subsequent trading thereof.
- Bond markets, which provide financing through the issuance of bonds, and enable the subsequent trading thereof.
- Commodity markets, which facilitate the trading of commodities.
- Money markets, which provide short term debt financing and investment.
- Derivatives markets, which provide instruments for the management of financial risk.
- Futures markets, which provide standardized forward contracts for trading products at some future date; see also forward market.
- Insurance markets, which facilitate the redistribution of various risks.
- Foreign exchange markets, which facilitate the trading of foreign exchange.
What is meant by a Stock Exchange?
The Securities Contract (Regulation) Act, 1956 [SCRA] defines ‘Stock Exchange’ as any body of individuals, whether incorporated or not, constituted for the purpose of assisting, regulating or controlling the business of buying, selling or dealing in securities
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Stock exchange could be a regional stock exchange whose area of operation/jurisdiction is specified at the time of its recognition or national exchanges, which are permitted to have nationwide trading since inception. NSE was incorporated as a national stock exchange.
What is an ‘Equity’ Share?
Total equity capital of a company is divided into equal units of small denominations, each called a share. For example, in a company the total equity capital of Rs 2,00,00,000 is divided into 20,00,000 units of Rs 10 each. Each such unit of Rs 10 is called a Share. Thus, the company then is said to have 20,00,000 equity shares of Rs 10 each. The holders of such shares are members of the company and have voting rights.
What is a ‘Debt Instrument’?
Debt instrument represents a contract whereby one party lends money to another on pre-determined terms with regards to rate and periodicity of interest, repayment of principal amount by the borrower to the lender. In the Indian securities markets, the term ‘bond’ is used for debt instruments issued by the Central and State governments and public sector organizations and the term ‘debenture’ is used for instruments issued by private corporate sector.
What is a Derivative?
Derivative is a product whose value is derived from the value of one or more basic variables, called underlying. The underlying asset can be equity, index, foreign exchange (forex), commodity or any other asset. Derivative products initially emerged as hedging devices against fluctuations in commodity prices and commodity-linked derivatives remained the sole form of such products for almost three hundred years.
The financial derivatives came into spotlight in post-1970 period due to growing instability in the financial markets. However, since their emergence, these products have become very popular and by 1990s, they accounted for about two- thirds of total transactions in derivative products.
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 index movement, whether upwards or downwards.
What is a Depository?
A depository is like a bank wherein the deposits are securities (viz. shares, debentures, bonds, government securities, units etc.) in electronic form.
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).
The capital markets consist of primary markets and secondary markets.
Newly formed (issued) securities are bought or sold in primary markets.
Secondary markets allow investors to sell securities that they hold or buy existing securities.
PRIMARY MARKET:
IPO PROCEDURE:
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 submit 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
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Post IPO
15. Collection of Forms
16. Oversubscription or under subscription
17. Allotment Of shares
a. Pro data allotement
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
SEBI REGULATION REGARDING IPO:
SEBI has come up with Investor Protection and Disclosure Norms for raising funds through IPO. These rules are amended from time to time to meet with the requirement of changing market conditions.
1. Disclosure Norms.
• Risk Factor-The Company/Merchant Banker must specify the major risk factor in the front page of the offer document.
• General Risk.-Attention of the investor must be drawn on these risk factors.
• Issuers Responsibility-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.
• Listing Arrangement- It must clearly state that once the issue is subscribed where the shares will be listed for trading.
• Disclosure Clause- It is compulsory to mention this clause to distinctly inform the investors that though the prospectus is submitted and approved by SEBI it is not responsible for the financial soundness of the IPO.
• Merchant Bankers Responsibility-Disclaimer Clause the Lead Manager has to certify that disclosures made in the prospectus are generally adequate and are in conformity with the SEBI Guidelines.
• Capital Structure- The company must give complete information about the Authorised capital, Subscribed Capital with top ten shareholders holding pattern, Promoters interest and their subscription pattern etc. Also about the reservation in the present issue for Promoters, FII`s, Collaborators, NRI`s etc. Then the net public offer must be stated very clearly.
• Auditors Report- The Auditors have to clearly mention about the past performances, Cost of Project, Means of Finance, Receipt of Funds and its usage prior to the IPO. Auditor must also give the tax-benefit note for the company and investors.
2. INVESTOR PROTECTION NORMS.
• Pricing of Issue-The pricing of all the allocations for the present issue must follow the bid system. The reservation must be disclosed for different categories of investors and their pricing must be specified clearly.
• 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.
• Basis of Allotment- In case of full subscription of the issue, the allotment must be made with the full consultation of the concerned stock exchange and the company must be impartial in allotting the shares.
• Allotment/Refund- Once the allotment is finalized, the refund of the excess money must be made within the specified time limits otherwise the company must pay interest on delayed refund orders.
• Dematerialisation of Shares-As per the provisions of the Depositories Act, 1996, And SEBI Rules, now all IPO will be in Demat form only.
• Listing of Shares- It is mandatory on the part of the promoters that once the IPO is fully subscribed, and then the underlying shares must be listed on the stock exchange. This provides market and exit routes to the investors.
The above are the major Guidelines for the Investor Protection and Disclosure Norms. SEBI GUIDELINES
3.IPO OF SMALL COMPANIES:
Public issue of less than five crores has to be through OTCEI (Over the Counter Exchange of India) and separate guidelines apply for floating and listing of these issues.
Public Offer of Small Unlisted Companies (Post-Issue Paid-Up Capital upto Rs.5 crores) Public issues of small ventures which are in operation for not more than two years and whose paid up capital after the issue is greater than 3 crores but less than 5 crores the following guidelines apply.
1. Securities can be listed where listing of securities is screen based.
2. If the paid up capital is less than 3 crores then they can be listed on the Over The Counter Exchange of India (OTCEI)
3. Appointment of market makers mandatory on all the stock exchanges where securities are proposed to be listed.
4.SIZE OF THE PUBLIC ISSUE
Issue of shares to general public cannot be less than 25%of the total issue. Incase 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.
5.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.
6.COLLECTION CENTERS FOR RECEIVING APPLICATIONS
1. There should be at least 30 mandatory collection centers, which should include invariably the places where stock exchanges have been established.
2. For issues not exceeding Rs.10 crores the collection centers shall be situated at:-
• The 4 metropolitan centres viz. Mumbai Delhi Calcutta Chennai
• All such centres where stock exchanges are located in the region in which the registered office of the company is situated.
7.REGARDING ALLOTMENTS OF SHARES:
1. Net Offer the general public has to be at least 25% of the total issue size for listing on a stock exchange
2. 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.
3. In an issue of more than 25 crores the issuer is allowed to place the whole issue by book-building.
4. Minimum of 50% of the Net Offer to the public has to be reserved for the investors applying for less than 1000 shares.
5. There should be at least 5 investors for every 1 lakh equity offered.
6. 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.
7. Indian development financial institutions and Mutual Fund can be allotted securities upto 75% of the issue amount.
8. A venture capital fund shall not be entitled to get its securities listed on any stock exchange till the expiry of 3 years from the date of issuance of securities.
9. 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.
RESTRICTIONS ON ALLOTMENTS:
1. Firm allotments to mutual funds, FII and employees are not subject to any lock-in period.
2. Within 12 months of the public issue no bonus issue should be made.
3. Maximum percentage of shares, which can be distributes to employees cannot be more than 5% and maximum shares to be allotted to each employee cannot be more than 200
8.TIMEFRAMES FOR ISSUE AND POST-ISSUE FORMALITIES:
1. The minimum period for which the public issue is to be kept open is 3 working days and the maximum for which it can be kept open is 10 working days. The minimum period for right issue is 15 working days and the maximum is 60 working days.
2. A public issue is effected if the issue is able to procure 90% of the total issue size within 60 days from the date of the earliest closure of the public issue.
3. In case of oversubscription the company may have he right to retain the excess application money and allot shares more than the proposed issue, which is referred to as “green-shoe” option
4. Allotment has to be made within 30 days of the closure of the Public issue and 42 days in case of Rights issue
5. All the listing formalities of a Public Issue have to be completed within 70 days from the date of closure of the subscription list.
9.DISPATCH OF REFUND ORDERS.
1. Refund orders have to be dispatched within 30 days of the closure of the issue.
2. Refunds of excess application money i.e. non-allotted shares have to be made within 30 days of the closure of the issue.
10.OTHER REGULATIONS:
1. Underwriting is not mandatory but 90% subscription is mandatory for each issue of capital to public unless it is disinvestment where it is not applicable.
2. If the issue is undersubscribed then the collected amount should be returned back
3. If the issue size is more than Rs500 crores, voluntary disclosures should be made regarding the deployment of funds and an adequate monitoring mechanism put in place to ensure compliance.
4. There should not be any outstanding warrants for financial instruments of any other nature, at the time of the IPO.
5. In the event of the initial public offer being at a premium and if the rights under warrants or other instruments have been exercised within 12 months prior to such offer, the resultant shares will be not taken into account for reckoning the minimum promoters contribution further, the same will also be subject to lock-in.
6. Code of advertisement as specified by SEBI should be adhered to
7. Draft prospectus submitted to SEBI should also be submitted simultaneously to all stock exchanges where it is proposed to be listed.
HISTORY OF STOCK EXCHANGES IN INDIA
•Indian stock exchanges originated in the later half of 19th century.
•The brokers organized an informal association in Mumbai named “The Native Stock and Share Brokers Association” in 1875.
•Later different centers like Chennai, Delhi, Nagpur, Kanpur, Hyderabad and Bangalore established.
.At present there are 23 Stock Exchanges in India:
•AtAhmedabad
•BSE
•Bangalore
•Bhubaneswar
•Kolkatta
•Cochin
•Coimbatore
•Delhi
•Gauhati
•Hyderabad
•ICSE
•jaipur
•Ludhiana
•Madhya Pradesh
•Chennai
•Magadh
•Mangalore
•NSE
•OTCEI
•Pune
•Saurashtra Kutch
•UPSE
•Vadodra
SEBI AND STOCK MARKET:
•Foremost authority presiding over the capital markets
•With mission to promote and maintain Fair, efficient , secure and transparent market and to facilitate the orderly development of the stock exchange
Role and Functions of a stock exchange
1.Established for the purpose of assisting, regulating and controlling business of buying, selling and dealing in securities
2.Provides a market for the trading of securities to individuals and organizations seeking to invest their saving or excess funds through the purchase of securities
3.Provides a physical location for buying and selling securities that have been listed for trading on that exchange
4.Establishes rules for fair trading practices and regulates the trading activities of its members according to those
5.The exchange itself does not buy or sell the securities, nor does it set prices for them
6.The exchange assures that no investor will have an undue advantage over other market participants
7.Investor make informed and intelligent decision about the particular stock based on information Listed companies must disclose information in timely, complete and accurate manner to the Exchange and the public on a regular basis
8.Required information include stock price, corporate conditions and developments dividend, mergers and joint ventures, and management changes etc
BOMBAY STOCK EXCHANGE (BSE)
•Location -Mumbai, Dalal Street
•Owner -Bombay Stock Exchange Limited
•Established -1875
•Key people -Rajnikant Patel (CEO)
•No. of listings -4700
•Indexes -BSE Sensex
•Website -
•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.
•It has a nation-wide reach with a presence in more than 450 cities and towns of India
•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).
National Stock Exchange:
•National Stock Exchange Limited or S&P CNX NIFTY
•Location -Mumbai
•Owner -National Stock Exchange of India Limited
•Established -1993
•Keypeople- Mr. Ravi NarainMD
•No.oflistings -1587
•Indexes- S&P CNX Nifty ,CNX Nifty Junior ,S&P CNX 500
•Website
•In April 1993, it 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
JOURNEY OF BSE SENSEX…
Sensex / Month / Day / Year1000 / July / 25 / 1990
2000 / January / 15 / 1992
3000 / February / 29 / 1992
4000 / March / 30 / 1992
5000 / October / 8 / 1999
6000 / February / 11 / 2000
7000 / June / 20 / 2005
8000 / September / 8 / 2005
9000 / November / 28 / 2005
10000 / February / 6 / 2006
11000 / March / 21 / 2006
12000 / April / 20 / 2006
13000 / October / 30 / 2006
14000 / December / 5 / 2006
15000 / July / 6 / 2007
16000 / September / 19 / 2007
17000 / September / 26 / 2007
18000 / October / 9 / 2007
19000 / October / 15 / 2007
20000 / October / 29 / 2007
21000 / January / 8 / 2008
15200 / June / 13 / 2008
14220 / June / 25 / 2008
11801 / October / 6 / 2008
10527 / October / 10 / 2008
7697 / October / 27 / 2008
8813 / January / 22 / 2009
AT present 2010 Sep 20050 POINTS