Pros and Cons of Capital Market

Investors’ Awareness

Orderly growth of the capital market began with setting up of the Stock Exchange, Mumbai in July 1875 and Ahmedabad Stock exchange in 1894 and 22 other exchange in various cities over the years.

Open market reforms – Eliminated license quota & Golden Quadrilateral project, Indian Economy grew at a rapid pace.

As a result of these major reforms, today the economy

of India is the tenth-largest in the world by nominal GDP at $ 1.87 trillion and the third-largest by purchasing power parity (PPP) at $ 5.07 trillion.

Overview of Capital Markets in India

The FDI inflows had aggregated to $24.29 billion in 2013-14 as against $ 22.42 billion in 2012-13. Today India and China are considered as most attractive FDI destinations in the world.

Turnover - The total amount of equity issues mobilised in the Primary market stood at 15,474 crore in 2012-13 as against 12,857 crore in 2011-12.

While in Secondary market, In FY 2012-13 a total of 5211 companies were listed in BSE with a market capitalization of Rs. 63,87,887/- crore and 1666 companies were listed in NSE with a market capitalization of Rs. 62.39,035/- crore.

The trading in Secondary Market includes majority in Equity with 76%, Currency Derivative – 17%, Cash segment - 6% and Corporate Bonds – 1%.

Contd….

India would require around $1 trillion in the next five years to overhaul its infrastructure sector, including ports, airports and highways to boost growth.

During the budget, the fiscal deficit of India is estimated at 4.1% of GDP at Rs. 5,31,000/- crore in 2014-15.

High food Inflation, Land Acquisition issues, shortage of coal for power supply, weak monsoon significantly pose challenges before Indian economy.

In this scenario, government feels appropriate to use PPP model and invite FDI in various sectors to boost growth.

Challenges before Indian Economy

Investor Awareness is required because there are many number of investment schemes available in the market. Recently, many Ponzi and fake investment schemes have been witnessed in the markets which have resulted in erosion of funds of millions of gullible investors.

Why Investor Awareness

Ponzi Scheme:- Receiving money/deposit from one set of investors and paying back to another set of investors. Eventually, following may be witnessed in a Ponzi scheme:-

1. The promoter vanishes, taking all the remaining investment money;

2. The scheme collapses as the promoter starts having problems paying the promised returns .

Pyramid Scheme:- The organization promises its new members a share of the money taken from every additional member that they recruit. Such organizations seldom involve sales of products or services with real value.

Fake Investment Schemes

Investor Awareness is a term used in investor relations, by public companies and similar bodies, to describe how well their investors, and the investment market in general, know their business.

Concept of Investors’ Awareness

Areas of Investor Awareness include:-◦ Relating to Primary Market

◦ Relating to Secondary Market

◦ Relating to Mutual funds

◦ Relating to shares and debenture holders

◦ Relating to Corporate Restructuring

Overview of Investor Awareness

The Securities Transactions in India at present are mainly governed by three Acts:- 

The Securities Contracts (Regulation) Act, 1956: - Enacted to prevent undesirable transactions in securities and to regulate the working of stock exchanges in the country.

The Securities & Exchange Board of India Act, 1992: - Protects the interests of investors in securities.

The Depositories Act, 1996:-Enacted to pave the way for smooth and free transfer of securities in a dematerialized form.

Various Regulators:

Contd….

The other relevant laws which affect the capital market are:-1. The Foreign Exchange Management Act,

1999;2. Arbitration and Conciliation Act, 1996;3. Companies Act, 2013;4. Debt Recovery Act (Bank and Financial

Institutions Recovery of Dues Act, 1993);5. Banking Regulation Act; 19496. Benami Prohibition Act;7. Indian Penal Code; 1860. 8. Indian Evidence Act, 1872.

Abnormally high 'guaranteed' returns

High initial investment

Vague/complicated investment strategy

Unsustainable business model

Offers of exclusivity and paying back of losses

Fake Claims of Investment

FRAUD COMPANY

Sells cheap and low-quality

products

Entry cost high

Easy earnings, mostly depend

on the number of new recruits

Commissions come from new

recruits; negligible payout by

companies

No refund or exit policy

GENUINE COMPANY

Sells quality products

• Entry cost reasonable

Earnings are performance-

based

Remuneration comes from

the company

Members can exit as and

when they want.

  Differences between a Fraud company and Genuine company: -

Do’s and Don’ts:A. Do’s:-

Avail nomination for all your investments without fail

Convert your physical certificates in to demat form by opening demat a/c

Provide your PAN card details in case of transfer / transmission of shares in physical form

Keep track of your investments on regular basis

Shares and Debenture holders Awareness

Be alert to any public announcements on the shares of the companies that you have invested

Be aware that an intermediary or its staff making a recommendation, is required to disclose their interest/ position in that scrip

Read the Annual Report and enclosed explanatory statements, if any, before attending General Meetings

In case of any grievance, contact the compliance officer of the company /

Debenture Trustee (DT)

Contd….

Be aware that listed companies, Registrar and Share Transfer Agents (RTA) and DTs are required to have a dedicated Email ID for registering your complaints

Approach SEBI, if grievance is not redressed by the Company / DT

Be aware that investor complaints against listed companies are displayed on the website(s) of SE

Be aware that the details of disposal of arbitration proceedings are displayed on the website(s) of SE

Contd….

Do not invest with borrowed money

Do not expect unrealistic / guaranteed returns

Do not be influenced by advertisement / advices / rumours / unauthentic news promising unrealistic gains and windfall profits in mass media

Do not be guided by astrological predictions on share prices and market movements

B. Don’ts

Do not fall prey to market rumours / ‘hot tips’/ ‘opportunity knocks only once’ kind of advice

Do not be swayed by market sentiments

Do not invest on any explicit / implicit promises made by anyone

Do not indulge in impulse investing

Do not associate in any way with grey market

Contd…..

Rights as a Equity shareholder

Rights as a holder of debt Instrument

Common responsibilities

Rights and Responsibilities of Investors:

Chapter IV covering sections 43-72 states the provisions regarding shares and debentures which are as under:-

If a company with intent to defraud issues a duplicate certificate of shares, the company shall be punishable with fine which shall not be less than five times the face value of the shares involved in the issue of the duplicate certificate but which may extend to ten times the face value of such shares or rupees ten crores whichever is higher and every officer of the company who is in default shall be liable for action under section 447. (Section 46)

Relevant provisions of Companies Act, 2013

The conditions under which the preference shareholders can vote on every resolution placed before meeting of shareholders has been changed. Now preference shareholders can only exercise such voting rights when dividends payable in respect of a class of preference shares are in arrears for a period of 2 years or more. There is no distinction between cumulative and non cumulative preference shares. (Section 47)

If the variation of one class of shareholders affects the rights of any other class of shareholders the consent of ¾ of that class should also obtained.(Section 48)

Contd….

Such class of companies as may be prescribed cannot utilize securities premium for in writing off the preliminary expenses, for providing the premium payable on the redemption of preference shares or of any debentures of the company. (Section 52)

Company cannot issue shares at discount other than as sweat equity, no provision has been provided for any approval. (Section 54)

Alteration of Share Capital shall be made only after making application to the Tribunal and getting approval. (Section 61)

Contd…..

No reduction of capital shall be allowed if the company is in arrears for payment of deposits, accepted either before or after the commencement of this Act. Reduction of share capital to be made subject to confirmation by the Tribunal. The Tribunal on receiving an application for reduction of share capital, shall give notice to the Central Government, Registrar and to the SEBI and consider the representations received in this behalf (Section 66)

Contd….

A company can make buyback even if it had at any time defaulted in repayment of deposit or interest payable thereon, redemption of debentures or preference shares or payment of dividend to any shareholder or repayments of any term loan or interest payable thereon to any financial institution or bank, provided that default must have been remedied and a period of 3 years must have lapsed after such default ceased to subsist.(Section 66 (6))

When the company issues prospectus or make an offer or invitation to the public or to its members exceeding five hundred for the subscription of its debentures, it is required to appoint a debenture trustee. (Section 71)

Contd….

The same are governed under following sections:-

1. Amalgamation:-Specific provision for purchase of minority shares in case an acquirer or person acting in concert with the acquirer become holder of 90% or more of the issued capital of the company, either directly or by virtue of any amalgamation, share exchange, conversion of securities or any other reason to notify the company to buy the remaining equity shares. (Section 236)

Rights of Minority Shareholders’

2. Oppression and Mismanagement:-

In case of a company having share capital, not less than 100 members or not less than 10% of total members whichever is less or holding 10% of share capital and in case of a company not having a share capital, not less than 1/5th of total members of the company can make a complain of Oppression and Mismanagement of the company. The Tribunal may make such order as it thinks fit to bring the matter to end. (Sections 241 to 244) .

Contd….

3. Class Action (Section 245):-

Such number of members and depositors as may be prescribed may make a class action to the Tribunal for prevention of oppression and mismanagement in the company. The Tribunal shall pass an order which shall be binding on the company and all its members, depositors, and auditors including audit firm or expert or consultant or advisor or any other person associated with the company. Following penalty may be imposed if the company fails to comply with the order:- Company – Rs. 5 lakhs to Rs. 25 lakhs, Officer – Rs. 25000 to Rs. 10 lakhs, Imprisonment

3 years

Contd…..

Thank You.Presented by:-

Jignesh Mehta,B. Com, ACA and LCS.9699490918.