investment laws - capital market 17 march 2010
TRANSCRIPT
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INVESTMENT LAWS - CAPITAL MARKET
17th March 2010
LAW
1. Securities Contract (Regulation) Act 1956
2. Securities Contract (Regulation) Rules 1957
3. Securities Exchange Board of India Act 1992
4. Depositories Act 1996
5. SEBI Regulations
6. Companies Act 1956
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CAPITAL MARKET
SEBI Regulations
Intermediaries
Unfair Practices
ISDR- Issue of Securities and Disclosure Requirements –IPO – FIPO – Rights – Bonus – Sweat – Preferential Allotment (QIP) – ESOP
Buy Back
Insider Trading
FII
Take Over
SRO’s
Venture Capital
Mutual Funds
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CAPITAL MARKET
COMPANIES ACT 1956
Prospectus –
Sec 55A - Powers of SEBI
Issue and Transfer of Securities
2. Buy Back of Shares
Sec 77A – Power of Company to purchase its own securities
Sec 77B – Prohibition of Buy Back
3. Audit Committee – Sec 292A
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CAPITAL MARKET
Resource mobilization through the primary market
(Rs crore)
Calendar Year
Mode 2006 2007 2008 2009(P)
1. Debt 389 594 0 3,500
2. Equity 32,672 58,722 49,485 23,098
of which, IPOs 24,779 33,912 18,393 19,296
Number of IPOs 75 100 37 20
Mean IPO size 330 339 497 965
3. Private Placement 1,17,407 1,84,855 1,55,743 2,38,226
4. Euro Issues 11,301 33,136 6,271 15,266
(ADR/GDR)
Total (1 to 4) 1,61,769 2,77,307 2,11,499 2,80,090
Source : SEBI and RBI (for Euro Issues)
P Provisional
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CAPITAL MARKETEquity returns, volatility, market capitalization & P/E ratio
Index Calendar Year
2006 2007 2008 2009
NNifty :
Returns (per cent) 39.83 54.77 -51.79 75.76
End-year Market Capitalization
(Rs cr.)
19,75,603 35,22,527 18,32,610 33,14,447
Daily volatility * 1.64 1.60 2.81 2.14
End-year P/E 21.26 27.62 12.97 23.17
Nifty Junior :
Returns (per cent) 28.24 75.73 -63.52 127.91
End-year Market Capitalization
(Rs cr.)
3,33,693 6,43,625 2,95,471 6,55,899
Daily volatility * 1.96 1.71 3.15 2.23
End-year P/E 21.78
26.48 8.99 16.28
BSE Sensex :
Returns (per cent) 46.7
47.2 -52.48 76.35
End-year Market Capitalization
(Rs cr.)
17,58,865
28,61,341 14,63,165 26,49,482
Daily Volatility * 1.6
1.5 2.85 2.19
End-year P/E 22.8
27. 7 12.36 22.36
BSE 500 :
Returns (per cent)
38.9 63.0 -58.74 85.34
End-year Market Capitalization
(Rs cr.)
33,36,509 64,70,881 29,40,741 56,87,505
Daily Volatility *
1.6 1.5 2.75 2.05
End-year P/E
20.2 29.1 12.4 21.9
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CAPITAL MARKET
Secondary Market
Market turnover (Rs Crore)
Market Calendar
year
2006
2007 2008 2009
NSE Spot
19,16,227 30,93,982 31,88,509 38,12,031
BSE Spot
9,61,653 14,14,727 13,24,053 12,74,065
NSE Derivatives
70,46,665 1,19,40,877 1,16,54,375 1,55,65,763
BSE Derivatives
18,071 2,19,824 75,178 36
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CAPITAL MARKET
INSTITUTIONS Regulating Authority SEBI
1. SROs
i. Stock Exchanges
a. Regional Stock Exchange
b. Over the Counter Exchange of India(OTC)
c. National Stock Exchange
d. Inter connected Stock Exchange
ii. Association of Mutual Funds
iii. Association of Merchant Bankers
2. Rating Institutions
3. Depository
4. Venture Capital
5. Custodian
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CAPITAL MARKET
Regulation – Listing Agreement
1. Price Sensitive Information
2. Interim Financial Statements
3. Corporate Governance
4. Accounting Standards
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INVESTORS
1. Financial Institutions
2. Foreign Institutional Investors/Sub-accounts
3. Mutual Funds
4. Retail Investors
5. Private Equity Funds
(A) Shareholdings of promoter and promoter group
1. Indian
a. Individuals or HUF
b. Central Government or State Government
c. Bodies corporate
d. Financial Institutions or Banks
e. Any others
CAPITAL MARKET
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CAPITAL MARKET
2. Foreign
a. Individuals (non resident individuals or foreign individuals)
b. Bodies corporate
c. Institutions
d. Any others
(B) Public Shareholding
1. Institutions
a. Mutual Funds or UTI
b. Financial institutions or banks
c. Central Government or State Government
d. Venture Capital Funds
e. Insurance Companies
f. Foreign Institutional Investors
g. Foreign Venture Capital Investors
h. Any others
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CAPITAL MARKET
B2 Non Institutions
a. Bodies Corporate
b. Individual
i. Individuals – I – individual shareholders holding nominal share capital upto Rs 1 lakh
ii. Individual shareholders holding nominal share capital in excess of Rs 1 lakh
c. Any other
(c- i) Non resident indians
(c-ii) Trusts
(c-iii) Foreign Nationals
(c-iv) Clearing Members
(c-v) Overseas corporate bodies
C Shares held by Custodians and against which depository receipts have been issued.
Information on shares pledged by promoters should be given
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CAPITAL MARKET
INSTRUMENTS
1. Equity
2. Preference Shares
3. Debenture(Non-convertible/Convertible)
4. Warrants
5. Securitisation
6. Derivatives
7. Futures/Option
8. Exchange Traded Funds
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CAPITAL MARKET
Instruments
Securities : As per Sec 2(h),the term “securities” include -
i. Shares, scrips, stocks, bonds, debentures, debenture
stock or other marketable securities of a like nature in or
of any incorporated company or other body corporate,
ii. Derivative,
iii. Units or any other instruments issued by any collective
investment scheme to the investors in such schemes
iv. Security receipts as defined in clause (zg) of Section 2
of the securitisation and reconstruction of Financial
Assets and Enforcement of Security Interest Act 2002
(SARFAESI)
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CAPITAL MARKET
v. Units or any other such instrument issued to the
investors under any mutual fund scheme
vi. Any certificate or instrument issued to an investor by
any issuer being a special purpose distinct entity which
possesses any debt or receivable, including mortgage
debt, assigned to such entity, and acknowledging
beneficial interest of such investor in such debt or
receivable, including mortgage debt, as the case may be
vii. Government Securities
viii. Such other instrument as may be declared by Central
Government to be securities and
ix. Rights or interest in securities
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CAPITAL MARKET
Derivatives: as per Sec 2 (aa), “Derivative” include –
a) A security derived from a debt instrument, share, loan
whether secured or unsecured, risk instrument or
contract for differences or any other form of security
b) A contract derives its value from the prices, or index of
prices of underlying securities
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INTERMEDIARIES
1. Stock Broker – Sub-broker
2. Share transfer agents
3. Banker to an issue
4. Trustee of a Debenture Trust
5. Registrar to an issue
6. Merchant Banker
7. Underwriter
8. Portfolio manager
9. Investment Advisor
10. Any other – associated with Security market
CAPITAL MARKET
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INDEXES
1. BSE, Sensex(2-1-1986 : 30 shares)
2. Nifty(NSE : 50 shares) S & PCNX 50
3. Crisil 500
4. OTCEI - Composite Index
5. Indices introduced by
o Financial Newspaper(E.g. Business Line-250 Index)
o Other players
o DSP’s GDR Valuation Index
o 22 Bankers(India GDR Index)
CAPITAL MARKET
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INITIAL PUBLIC OFFERINGS
1. SEBI Issue of Securities and Disclosure Requirements
Regulations 2009
All Types of Securities issued to public and Bonus shares
Book Building – Fixed Price - Auction
Offer Documents
Role of merchant Banker – Due Diligence
INVESTORS ASSOCIATIONS/PROTECTION
FUND/GRIEVANCE COMMITTEE
1. ROLE OF Stock Exchange
2. Role of SEBI
3. Listing Agreement – Corporate Governance by Cos.
CAPITAL MARKET
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INVESTMENT ADVICE ETC., BY INTERMEDIARIES
AMENDMENT REGULATION-NOT TO BE GIVEN
1. Bankers to issue
2. Credit Rating
3. Custodian of securities
4. Debenture trustee
5. Foreign Institutional Investor
6. Merchant Bankers
7. Mutual Funds
8. Portfolio Manager
9. Registrars to an issue
10. Stock Brokers
11. Underwriters
CAPITAL MARKET
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INVIGILATOR
(S-11: Functions of SEBI Board)
1. Regulation & Audit of all intermediaries / institutions /
SROs/VCs
2. Registration
3. Fraudulent and unfair trade practices
4. Insider trading
5. Substantial acquisition
6. Research
CAPITAL MARKET
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INFORMATION
Thro Cos. Act
“ Listing of Agreement
“ Accounting Standard
“ Other Legislation
Banking Cos. Act
Mutual fund Regulation
“ Stock Exchange
CAPITAL MARKET
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Inter-Exchange market surveillance
Code of Ethics for Directors and functionaries of stock
exchanges (to be part of Exchange byelaws)
Information Technology
Computerization – Net working
CAPITAL MARKET
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Capital Market Reforms – Share Related Regulations
IPO
ADR/GDR
Sweat Equity
Buy Back
Bonus Shares
Mergers/Demergers
Take Over(Substantial
Acquisition)
ESOP – SEBI Guidelines
Rights – S81 of Companies Act
Shares issued to
others(Preferential Allotment)
Mutual Funds(Collective
Investments)
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SHARE HOLDING
a) 90% Total Control
b) 75% Power to Pass Special Resolution
c) 50%+ Effective Control
d) 50% No Effective Control
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SHARE HOLDING
e) 25%+ Can block a special resolution
f) 25% Right to appoint director-go to court for oppression
g) 10% Virtually no rights
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SEBI (substantial acquisition of shares and
Takeovers) regulations 1997
OBJECTIVES
Equity of treatment and opportunity to Shareholders
Minority Protection
Acquirer to give full information
Information not to a chosen group of Share holders
Sufficient time in offer
Offer to be made with responsibility
Offer documents to be prepared with circumspection (all
parties)
Acquirer to recognize limits on freedom
False market no to be created
Target company cannot frustrate process (Except with
Shareholders consent)
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Motives of Acquiring Corporation(What is the buyer
looking for?)
Generally the acquirer seeks one or more of the following advantages(Bokum, 1968)
a) To obtain greater rate of growth
b) To eliminate a competitor by buying it out
c) To integrate better-horizontally and vertically
d) To diversify with minimum cost and immediate gain
e) To improve dividend yield, earnings or book value
f) To offset obsolescence
g) To enjoy the prospect of turning around a sick company
h) To improve the effectiveness of the marketing effort
i) To support increased product development
j) To obtain cost reductions through elimination of duplicate facilities, more effective product distribution from multiple plant locations, and spreading of administrative expenses over a large volume of business
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Some of the reasons are (Kharbanda and Stallworthy, 1988 p.39):
a) Declining Sales or earnings.
b) An uncertain future.
c) Owner wants to slow down or retire with no successor in
sight.
d) Desire to maximize growth under the umbrella of a larger
company.
e) To raise cash for a more promising line of business
f) A lack of adequate financial and management skills.
g) To concentrate time and effort on what it can do best.
Motives of the Acquired Corporations(Why are
companies available of sale?)
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Definitions
1. “Acquirer”- Precise- Wider coverage acquisition, voting rights-Control
2. “Persons acting is concert” – expanded – bright line test
Now defined:
3. Offer Period
4. Promoter
5. Public Shareholding
6. Target Company
Not Defined:
7. Takeover
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Exemptions (to report to SEs and SEBI)
1. Preferential allotment is public issues/others (full disclosure)
2. Rights
3. Inter Se Transfers
1. Group Companies
2. Promoters
3. Foreign Collaboration
4. Relatives
5. Government Companies
6. State Level Fis’
7. Private Co-promoters in joint sector
8. By financial institutions
9. Residual Cases – refer to a panel of SEBI
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Not applicable
1. If a person holds 50% or plus
Consolidation
1. 15% to 75% - in a period of 12 months (gross) acquire upto 2%
Exemptions (to report to SEs and SEBI)
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Operational
1. Takeover needs no definition
2. No distinction between negotiated or open market
3. Treshold Limit remains – Signal
4. Change is Control - Signal
5. Merchant Banker (category I) to be appointed
6. Timing
7. Not later than 4 days of agreements / voting rights change
8. One National English daily / one vernacular paper of the listed
area, now a Hindi paper
9. Inform SE’s / Company
10. Inform SEBI 2 days in advance of advertisement
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11. Public announcement is public offer
12. Contents of announcement
13. Highest average price paid (12 months period)
14. Financial arrangement
15. Persons holding Unregistered Shares can participate
16. Minimum level of acceptance
17. Should accept minimum of 200% whatever be the level
18. Offer Document – wait for 21 days for comment
19. Specified date
20. 30th day from date of announcement
Operational
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Minimum offer Price / Payment
Present;
Higher of weekly highs and lows – 26 weeks
In exchange for shares
SEBI approves price (if infrequently traded)
Proposed:
1. Eliminate SEBI approval for price
2. Frequent trading defined
3. Highest price paid for acquisition to be paid
4. Preferential allotment price to be considered
Can Offer for 100%
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Disclosure:
1. Of Shares and Control
2. 50% - 100%
3. To the Company
4. Company in turn to SE
Time Frame
1. Offer document with SEBI – 14 days of announcement
2. Mailing letter of offer – 45 days of announcement
3. Offer to open with – 60 days of announcement
4. Offer to close – 105 days of announcement
5. Consideration to be paid – within 30 days of disclosure
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Escrow
Deposits 100% in cash or security or Bank Guarantee
Bank Deposit
Consideration amount to be held in separate account
Cooling Period
Obligation of Target Company
Cannot induct acquirer on the Board during offer period.
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Proposition 1 High strategic uncertainty, requiring strategic flexibility, favors alliances
over acquisitions
Proposition 2 Environments characterized by dispersed knowledge, i.e. knowledge
asymmetries between companies, and converging technologies, favor
alliances (particularly a web of alliances) over acquisitions
Proposition 3 The need for high transaction – specific investments favors acquisition
over alliances
Proposition 3.1 Strong permanent specific interdependencies between the relational
partner and its institutional context (e.g. its present owner) favor
alliances over acquisitions despite high transaction – specific investment
Proposition 3.2 A high degree of diversification of the target company complicates an
acquisition or merger, and thus can favor alliance ………..despite high
transaction-specific investments
Proposition 4 High behavioral uncertainty, e.g. danger of opportunism and “moral
hazards”. Favors acquisition over alliances
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Proposition 4.1 High levels of inter-organizational trust, reducing behavioral uncertainty,
eliminates the disadvantages of alliances
Proposition 4.2 High compatibility of strategic intentions, reducing behavioral uncertainty,
eliminates the disadvantages of alliances
Proposition 5 High expected persistence of synergies favors acquisitions over alliances
Proposition 6 Weak appropriability regimes, ie.difficulties protecting the core capabilities and
distinctive resources of a company, favor acquisitions over alliances
Proposition 7 High resource endowment (especially financial strength) favors acquisition over
alliances
Proposition 8 High absorptive capacity, e.g.the ability to learn and adapt, reduces the danger of
losing “learning races,” and therefore favors alliances over acquisitions.
Proposition 9 Companies with high social capital have possibilities and are more attractive for
inter-organizational relationships, but do not favor any specific external growth
strategy
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Context-dependent characteristics
Environmental
characteristics
Transactional (relational)
characteristics
Company characteristics
Relative favorability of
acquisitions and alliances
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BUT SO ARE NEW DEFENCES….
The freedom to make open offers makes it possible to make a counter-
bid for the predator’s shares
Provisions for competitive bidding enable the target company to turn
to a white knight for protection.
Dual-class capitalization will allow shares without voting rights to be
issued, making takeovers difficult.
Swallowing a poison pill, in the form of large debt, will make the
target unattractive.
Company Law permits the management of the target to refuse an offer
on different grounds.
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NEW WEAPONS ARE EMERGING
Open offers are possible even without the consent of the management
of the target company.
Conditional bids allow exit routes to the bidder, providing more
flexibility in mounting an attack.
Secret accumulation of stock, without triggering the Takeover Code,
can put the defender under pressure.
Two-tiered bids, the first at a high price and the second at a lower one,
enable cheap acquisitions.
The assets of the target company can be purchased without invoiking
the conditions of the Takeover Code.
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Defences against takeovers
a) INTERNAL DEFENCES
Pre-bid defensive strategies against hostile takeovers
Action Result
Improve operational efficiency and reduce
costs
Improved EPS, higher share prices and
firm value.
Improve strategic focus by restructuring,
divestment, etc.
Improved EPS and higher firm value.
Asset stripping by bidder difficult
Change ownership structure, e.g. dual class
shares, high gearing, share buyback, poison
pill
Control by bidder difficult. Scope for
LBO limited.
Change management structure or incentive,
e.g. staggered board, golden parachute
Predator control delayed and bid cost
increased
Cultivate organisational constituencies,
e.g.unions and workforce
Useful alliance against bidder; share
support from pension funds/ESOPs
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b) EXTERNAL DEFENCES
Defences against takeovers
Pre-bid defensive strategies against hostile takeovers
Action Result
Cultivate shareholders and investors, e.g. use
investor relations advisers to inform about
company’s performance, prospects and
policies
Ensure loyalty and support during bid of key
shareholders
Inform analysts about company strategy,
financing policies and investment programmes
Share undervaluation risk reduced and bid
cost raised.
Accept social responsibility to improve social
image.
Public hostility to predator roused.
Make strategic defence investment, e.g. joint
venture/mutual shareholding in fellow targets.
Predator control blocked
Monitor the share register for unusual share
purchases; force disclosure of identity of
buyers
Early warning signal about possible
predators.
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Defences against takeovers
Post-offer defences against hostile takeover bids
Defence Description and purpose
First response and pre-emption letter
Defence document
Profit report / forecast
Promise higher future dividends
Asset revaluation
Attack bid logic and price: advise target
shareholders not to accept,
Praise own performance and prospects;
deride bid price and logic, form of finance
and predator’s track record.
Report or forecast improved profits for past /
current year to make offer look cheap.
Increase returns to shareholders; weaken
predator’s promise of superior returns.
Revalue properties, intangibles and brands;
show bid undervalues target.
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Qualified Institutional Placement (QIP)
introduced in mid 2006
GMR infrastructure 3865 crore at 240 per share
Suzlon Energy 2183 crore by selling shares
IDFC Rs 2100 Crore ( Across Asia, Europe and US)
UTI Bank
Kotak Mahindra Bank
India Inc – raised net 23400 cr
through QIPs in 2007
through 41 QIPs
in 2006 – 3935 crore
Preferred instrument for entities to raise funds
Lesser Disclosures
Does not require a pre-issue filing with SEBI
Fastest Mechanism to raise funds
No Lock in - Liquid