reading material equity i

8/3/2019 Reading Material Equity I

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Investments Introduction

Investment is the sacrifice of certain present values for the uncertain future reward. It involvesnumerous decision such as type, mix, amount, timing, grade etc, of investment.Investment may be defined as an activity that commits funds in any financial/physical form in the

present with an expectation of receiving additional return in the future. The expectation bringswith it a probability that the quantum of return may vary from a minimum to a maximum.This possibility of variation in the actual return is known as investment risk. Thus everyinvestment involves a return and risk. Investment has many meaning and facets. However,investment can be interpreted broadly from three angles -- economic,- layman,- financial.

Economic investment includes the commitment of the fund for netaddition to the capital stock of the economy. The net additions to the capitalstock means an increase in building equipments or inventories over the amount

of equivalent goods that existed, say, one year ago at the same time.The layman uses of the term investment as any commitment of funds fora future benefit not necessarily in terms of return. For example a commitment ofmoney to buy a new car is certainly an investment from an individual point ofview.Financial investment is the commitment of funds for a future return,thus investment may be understood as an activity that commits funds in any financial or physicalform in the presence of an expectation of receivingadditional return in future. In the present context, theinvestment is considered to be financial investment, which imply employmentof funds with the objective of realizing additional income or growth in value ofinvestment at a future date.

Financial investments are commitments of funds to derive income in form of interest, dividendpremium, pension benefits or appreciation in the value of initial investment. Hence the purchaseof shares, debentures post office savings certificates and insurancepolicies all are financial investments. Such investment generates financial assets.These activities are undertaken by anyone who desires a return, and is willing toaccept the risk from the financial instruments.

Why Invest? (Elaborate on these points) Meet Future Needs & Specific Goals To beat Inflation Contingencies

Tax Saving Cover for Risk Opportunity Cost

Characteristics of Investment

The characteristics of investment can be understood in terms of as


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Return: All investments are characterized by the expectation of a return. In fact,investments are made with the primary objective of deriving return. Theexpectation of a return may be from income (yield) as well as through capitalappreciation. Capital appreciation is the difference between the sale price andthe purchase price. The expectation of return from an investment depends uponthe nature of investment, maturity period, market demand and so on.

Risk: Risk is inherent in any investment. Risk may relate to loss of capital,delay in repayment of capital, nonpayment of return or variability of returns.The risk of an investment is determined by the investments, maturity period,repayment capacity, nature of return commitment and so on.Risk and expected return of an investment are related. Theoretically, thehigher the risk, higher is the expected returned. The higher return is acompensation expected by investors for their willingness to bear the higher risk.Safety: The safety of investment is identified with the certainty of return ofcapital without loss of time or money. Safety is another feature that an investordesires from investments. Every investor expects to get back the initial capitalon maturity without loss and without delay.Liquidity: An investment that is easily saleable without loss of money or time is

said to be liquid. A well developed secondary market for security increase theliquidity of the investment. An investor tends to prefer maximization ofexpected return, minimization of risk, safety of funds and liquidity ofinvestment.Marketability: Some investments like shares, bonds etc are easily marketable whereasinvestments like FDs, PPF, Life Insurance etc are non marketable. Marketability as a feature isgenerally preferred by investors as it allows them to liquidate their investments as and whenrequired.Tax shelter: Some investments can help investor postpone or avoid payment of tax on theamount invested. For eg, life insurance premium, investment in tax saving bonds, investment inPPF, etc attracts a relief from paying tax on the amount. Moreover returns from differentinvestment also have different tax treatments. For e.g, Interest on PPF is tax free whereas

interest on FDs is taxed as per an individuals tax bracket. Taxes can have a substantial impacton the real rate of return to an investor. Hence an investor should look into this feature beforetaking a decision on investments.

What are the various types of financial markets?

The financial markets can broadly be divided into money and capital market.

Money Market: Money market is a market for debt securities that pay off in the short termusually less than one year, for example the market for 90-days treasury bills. This market

encompasses the trading and issuance of short term non equity debt instruments includingtreasury bills, commercial papers, bankers acceptance, certificates of deposits, etc.

Capital Market: Capital market is a market for long-term debt and equity shares. In thismarket, the capital funds comprising of both equity and debt are issued and traded. Thisalso includes private placement sources of debt and equity as well as organized marketslike stock exchanges. Capital market can be further divided into primary and secondarymarkets.


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What is the difference between the Primary Market and the Secondary Market?

In the primary market, securities are offered to public for subscription for the purpose of raising

capital or fund. Secondary market is an equity trading venue in which already existing/pre-

issued securities are traded among investors.

Features of primary markets are:

This is the market for new long term equity capital. The primary market is the market where the

securities are sold for the first time. Therefore it is also called the new issue market (NIM).In a

primary issue, the securities are issued by the company directly to investors.The company

receives the money and issues new security certificates to the investors.Primary issues are

used by companies for the purpose of setting up new business or for expanding or modernizing

the existing business.The primary market performs the crucial function of facilitating capital

formation in the economy.The new issue market does not include certain other sources of newlong term external finance, such as loans from financial institutions. Borrowers in the new issue

market may be raising capital for converting private capital into public capital; this is known as

"going public".The financial assets sold can only be redeemed by the original holder

Secondary market

The secondary market, also called aftermarket, is the financial market where previously

issued securities and financial instruments such as stock, bonds, options, and futures are

bought and sold. With primary issuances of securities or financial instruments, or the primary

market, investors purchase these securities directly from issuers such as

corporations issuing shares in an IPO orprivate placement. After the initial issuance, investors

can purchase from other investors in the secondary market.

.A market is primary if the proceeds of sales go to the issuer of the securities sold.

This is a part of the financial market where enterprises issue their new shares and bonds.It is characterised by being the only moment when the enterprise receives money inexchange for selling its financial securities.

SECONDARY MARKET

The market where securities are traded after they are initially offered in the primarymarket is called secondary market. Most trading is done in the secondary market.
http://en.wikipedia.org/wiki/Financial_marketshttp://en.wikipedia.org/wiki/Securitieshttp://en.wikipedia.org/wiki/Financial_instrumentshttp://en.wikipedia.org/wiki/Stockhttp://en.wikipedia.org/wiki/Bondshttp://en.wikipedia.org/wiki/Option_(finance)http://en.wikipedia.org/wiki/Futures_contracthttp://en.wikipedia.org/wiki/Primary_markethttp://en.wikipedia.org/wiki/Primary_markethttp://en.wikipedia.org/wiki/Issuershttp://en.wikipedia.org/wiki/Corporationshttp://en.wikipedia.org/wiki/Shareshttp://en.wikipedia.org/wiki/IPOhttp://en.wikipedia.org/wiki/Private_placementhttp://en.wikipedia.org/wiki/Financial_marketshttp://en.wikipedia.org/wiki/Securitieshttp://en.wikipedia.org/wiki/Financial_instrumentshttp://en.wikipedia.org/wiki/Stockhttp://en.wikipedia.org/wiki/Bondshttp://en.wikipedia.org/wiki/Option_(finance)http://en.wikipedia.org/wiki/Futures_contracthttp://en.wikipedia.org/wiki/Primary_markethttp://en.wikipedia.org/wiki/Primary_markethttp://en.wikipedia.org/wiki/Issuershttp://en.wikipedia.org/wiki/Corporationshttp://en.wikipedia.org/wiki/Shareshttp://en.wikipedia.org/wiki/IPOhttp://en.wikipedia.org/wiki/Private_placement


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Types of shares :

Shares in the company may be similar i.e they may carry the same rights and liabilities andconfer on their holders the same rights, liabilities and duties. There are two types of sharesunder Indian Company Law :-

1.Equity shares means that part of the share capital of the company which are not preferenceshares.

Equity shares will get dividend and repayment of capital after meeting the claims of preference

shareholders. There will be no fixed rate of dividend to be paid to the equity shareholders and

this rate may vary from year to year. This rate of dividend is determined by directors and in case

of larger profits, it may even be more than the rate attached to preference shares. Such

shareholders may go without any dividend if no profit is made.

2.Preference Shares means shares which fulfill the following 2 conditions. Therefore, a sharewhich is does not fulfill both these conditions is an equity share.

a. It carries Preferential rights in respect of Dividend at fixed amount or at fixed rate i.e.dividend payable is payable on fixed figure or percent and this dividend must paid beforethe holders of the equity shares can be paid dividend.

b. It also carries preferential right in regard to payment of capital on winding up orotherwise. It means the amount paid on preference share must be paid back topreference shareholders before anything in paid to the equity shareholders. In otherwords, preference share capital has priority both in repayment of dividend as well ascapital.

Types of Preference Shares1.Cumulative or Non-cumulative : A non-cumulative or simple preference shares gives right tofixed percentage dividend of profit of each year. In case no dividend thereon is declared in anyyear because of absence of profit, the holders of preference shares get nothing nor can theyclaim unpaid dividend in the subsequent year or years in respect of that year. Cumulativepreference shares however give the right to the preference shareholders to demand the unpaiddividend in any year during the subsequent year or years when the profits are available fordistribution . In this case dividends which are not paid in any year are accumulated and are paidout when the profits are available.

2.Redeemable and Non- Redeemable : Redeemable Preference shares are preference shareswhich have to be repaid by the company after the term of which for which the preference shareshave been issued. Irredeemable Preference shares means preference shares need not repaidby the company except on winding up of the company. However, under the Indian CompaniesAct, a company cannot issue irredeemable preference shares. In fact, a company limited byshares cannot issue preference shares which are redeemable after more than 10 years from thedate of issue. In other words the maximum tenure of preference shares is 10 years. If acompany is unable to redeem any preference shares within the specified period, it may, withconsent of the Company Law Board, issue further redeemable preference shares equal toredeem the old preference shares including dividend thereon. A company can issue the


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preference shares which from the very beginning are redeemable on a fixed date or after certainperiod of time not exceeding 10 years provided it comprises of following conditions :-

1. It must be authorised by the articles of association to make such an issue.2. The shares will be only redeemable if they are fully paid up.3. The shares may be redeemed out of profits of the company which otherwise would be

available for dividends or out of proceeds of new issue of shares made for the purposeof redeem shares.

4. If there is premium payable on redemption it must have provided out of profits or out ofshares premium account before the shares are redeemed.

5. When shares are redeemed out of profits a sum equal to nominal amount of sharesredeemed is to be transferred out of profits to the capital redemption reserve account.This amount should then be utilised for the purpose of redemption of redeemablepreference shares. This reserve can be used to issue of fully paid bonus shares to themembers of the company.

3.Participating Preference Share or non-participating preference shares : ParticipatingPreference shares are entitled to a preferential dividend at a fixed rate with the right to

participate further in the profits either along with or after payment of certain rate of dividend onequity shares. A non-participating share is one which does not such right to participate in theprofits of the company after the dividend and capital have been paid to the preferenceshareholders.

Convertible & Non convertible preference shares: Preferred stock that includes an option for

the holder to convert the preferred shares into a fixed number of common shares, usually

anytime after a predetermined date are called convertible preference shares.Preference shares

which do not have the option of converting the same into equity after a predetermined period

are called non convertible preference shares.

Classification of Equity shares(investor terminology)

Equity Shares-: By investing in shares, investors basically buy the ownershipright to that company. When the company makes profits, shareholders receivetheir share of the profits in the form of dividends. In addition, when a companyperforms well and the future expectation from the company is very high, theprice of the companys shares goes up in the market. This allows shareholders tosell shares at profit, leading to capital gains. Investors can invest in shares eitherthrough primary market offerings or in the secondary market. Equity shares canbe classified in different ways but we will be using the terminology of Investors.

It should be noted that the line of demarcation between the classes are not clearand such classification are not mutually exclusive.

Blue Chips (also called Stalwarts) : These are stocks of high quality,financially strong companies which are usually the leaders in their industry.They are stable and matured companies. They pay good dividends regularly andthe market price of the shares does not fluctuate widely. Examples are stocks ofColgate, Hindustan Lever, SBI, Infosys etc.


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Growth Stocks: Growth stocks are companies whose earnings per share isgrows faster than the economy and at a rate higher than that of an average firmin the same industry. Often, the earnings are ploughed back with a view to usethem for financing growth. They invest in research and development anddiversify with an aggressive marketing policy. They are evidenced by high andstrong EPS. The high growth stocks are often called GLAMOUR STOCK or HIGH FLYERS.

Income Stocks: A company that pays a large dividend relative to the marketprice is called an income stock. They are also called defensive stocks. Drug,food and public utility industry shares are regarded as income stocks. Prices ofincome stocks are not as volatile as growth stocks.

Cyclical Stocks: Cyclical stocks are companies whose earnings fluctuate withthe business cycle. Cyclical stocks generally belong to infrastructure or capitalgoods industries such as general engineering, auto, cement, paper, constructionetc. Their share prices also rise and fall in tandem with the trade cycles.

Discount Stocks: Discount stocks are those that are quoted or valued below

their face values. These are the shares of sick units.

Under Valued Stock: Under valued shares are those, which have all thepotential to become growth stocks, have very good fundamentals and goodfuture, but somehow the market is yet to price the shares correctly.

Turn Around Stocks: Turn around stocks are those that are not really doingwell in the sense that the market price is well below the intrinsic value mainlybecause the company is going through a bad patch but is on the way to recoverywith signs of turning around the corner in the neat future.

Players in the market

The Bulls

A bull market is when everything in the economy is great, people are finding jobs, gross

domestic product (GDP) is growing, and stocks are rising. Things are just plain rosy! Picking

stocks during a bull market is easier because everything is going up. Bull markets cannot last

forever though, and sometimes they can lead to dangerous situations if stocks become

overvalued. If a person is optimistic and believes that stocks will go up, he or she is called a

"bull" and is said to have a "bullish outlook".

The Bears

A bear market is when the economy is bad, recession is looming and stock prices are falling.

Bear markets make it tough for investors to pick profitable stocks. One solution to this is tomake money when stocks are falling using a technique called short selling. Another strategy is

to wait on the sidelines until you feel that the bear market is nearing its end, only starting to buy

in anticipation of a bull market. If a person is pessimistic, believing that stocks are going to drop,

he or she is called a "bear" and said to have a "bearish outlook".

The Other Animals on the Farm - Chickens and Pigs
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Chickens are afraid to lose anything. Their fear overrides their need to make profits and so they

turn only to money-market securities or get out of the markets entirely. While it's true that you

should never invest in something over which you lose sleep, you are also guaranteed never to

see any return if you avoid the market completely and never take any risk,

Pigs are high-risk investors looking for the one big score in a short period of time. Pigs buy onhot tips and invest in companies without doing their due diligence. They get impatient, greedy,

and emotional about their investments, and they are drawn to high-risk securities without putting

in the proper time or money to learn about these investment vehicles. Professional traders love

the pigs, as it's often from their losses that the bulls and bears reap their profits

Stag:A stag is an investor or speculator who subscribes to a new issue with the intention ofselling them soon after allotment to realise a quick profit.

History & Development of capital market in India

The Indian market has 22 stock exchanges. The larger companies are enlisted with BSE andNSE. The smaller and medium companies are listed with OTCEI (Over The counter Exchangeof India). The functions of the Equity Market in India are supervised by SEBI (SecuritiesExchange Board of India).

History of Indian Equity Market The history of the Indian equity market goes back to the 18thcentury when securities of the East India Company were traded. Till the end of the 19th century,the trading of securities was unorganized and the main trading centers were Calcutta (now

Kolkata) and Bombay (now Mumbai).

Trade activities prospered with an increase in share price in India with Bombay becoming themain source of cotton supply during the American Civil War (1860-61). In 1865, there was dropin share prices. The stockbroker association established the Native Shares and Stock BrokersAssociation in 1875 to organize their activities. In 1927, the BSE recognized this association,under the Bombay Securities Contracts Control Act, 1925.

The Indian Equity Market was not well organized or developed before independence. Afterindependence, new issues were supervised. The timing, floatation costs, pricing, interest rateswere strictly controlled by the Controller of Capital Issue (CII). For four and half decades,companies were demoralized and not motivated from going public due to the rigid rules of the

Government.

In the 1950s, there was uncontrollable speculation and the market was known as 'SattaBazaar'The Securities Contracts (Regulation) Act, 1956 was enacted by the Government ofIndia. Financial institutions and state financial corporation were developed through anestablished network.

In the 60s, the market was bearish due to massive wars and drought. Forward tradingtransactions and 'Contracts for Clearing' or 'badla' were banned by the Government. With


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financial institutions such as LIC, GIC, some revival in the markets could be seen. Then in 1964,UTI, the first mutual fund of India was formed.

In the 70's, the trading of 'badla' resumed in a different form of 'hand delivery contract'. But theGovernment of India passed the Dividend Restriction Ordinance on 6th July, 1974.

This resulted in a drop by 20% in market capitalization at BSE (Bombay Stock Exchange)overnight. The stock market was closed for nearly a fortnight. Numerous multinationalcompanies were pulled out of India as they had to dissolve their majority stocks in Indiaventures for the Indian public under FERA, 1973.

The 80's saw a growth in the Indian Equity Market. With liberalized policies of the government, itbecame lucrative for investors. The market saw an increase of stock exchanges, there was asurge in market capitalization rate and the paid up capital of the listed companies.

The 90s was the most crucial in the stock market's history. Indians became aware of'liberalization' and 'globalization'. In May 1992, the Capital Issues (Control) Act, 1947 wasabolished. SEBI which was the Indian Capital Market's regulator was given the power and

overlook new trading policies, entry of private sector mutual funds and private sector banks, freeprices, new stock exchanges, foreign institutional investors, and market boom and bust. It hadto take drastic measures to plug many loopholes that were exploited by certain market forces toadvance their vested interests. After this initial phase of struggle SEBI has grown in strength asthe regulator of Indiass capital markets and as one of the countrys most important institutions.

In 1990, there was a major capital market scam where bankers and brokers were involved. Withthis, many investors left the market. Later there was a securities scam in 1991-92 whichrevealed the inefficiencies and inadequacies of the Indian financial system and called forreforms in the Indian Equity Market.

Two new stock exchanges, NSE (National Stock Exchange of India) established in 1994 and

OTCEI (Over the Counter Exchange of India) established in 1992 gave BSE a nationwidecompetition. In 1995-96, an amendment was made to the Securities Contracts (Regulation) Act,1956 for introducing options trading. In April 1995, the National Securities Clearing Corporation(NSCC) and in November 1996, the National Securities Depository Limited (NSDL) were set upfor demutualised trading, clearing and settlement. Information Technology scrips were the majorplayers in the late 90s with companies like Wipro, Satyam, and Infosys.

In the 21st century, there was the Ketan Parekh Scam. From 1st July 2001, 'Badla' wasdiscontinued and there was introduction of rolling settlement in all scrips. In February 2000,permission was given for internet trading and from June, 2000, futures trading started.


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PRIMARY MARKETINTRODUCTION

Primary market provides opportunity to issuers of securities, Government aswell as corporates, to raise resources to me et their requirements ofinvestment and/or discharge some obligation. The issuers create and issuefresh securities in exchange of funds through public issues and/or as private

placement. They may issue the securities at face value, or at adiscount/premium and these securities may take a variety of forms such asequity, debt or some hybrid instrument. They may issue the securities indomestic market and/or international market through ADR/GDR/ECB route.MARKET DESIGNThe market design for primary market is provided in the provision of theCompanies Act, 1956, which deals with issues, listing and allotment ofsecurities. In addition, DIP guidelines of SEBI prescribe a series of disclosuresnorms to be complied by issuer, promoter, management, project, risk factorsand eligibility norms for accessing the market. In this section, the marketdesign as provided in securities laws has been discussed.

Issue of SharesWhy do companies need to issue shares to the public?Most companies are usually started privately by their promoter(s). However,the promoters capital and the borrowings from banks and financialinstitutions may not be sufficient for setting up or running the business overa long term. So companies invite the public to contribute towards the equityand issue shares to individual investors. The way to invite share capital fromthe public is through a Public Issue. Simply stated, a public issue is an offerto the public to subscribe to the share capital of a company. Once this isdone, the company allots shares to the applicants as per the prescribedrules and regulations laid down by SEBI.What are the different kinds of issues?

Primarily, issues can be classified as a Public, Rights or Preferential issues(also known as private placements). While public and rights issues involve adetailed procedure, private placements or preferential issues are relativelysimpler. The classification of issues is illustrated below:


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Initial Public Offering (IPO) is when an unlisted company makes either afresh issue of securities or an offer for sale of its existing securities or bothfor the first time to the public. This paves way for listing and trading of theissuers securities.A follow on public offering (Further Issue) is when an already listedcompany makes either a fresh issue of securities to the public or an offer forsale to the public, through an offer document.Rights Issue is when a listed company which proposes to issue freshsecurities to its existing shareholders as on a record date. The rights arenormally offered in a particular ratio to the number of securities held prior tothe issue. This route is best suited for companies who would like to raisecapital without diluting stake of its existing shareholders.

Bonus issue: When an issuer makes an issue of securities to its existing shareholders as ona record date, without any consideration from them, it is called a bonus issue. The sharesare issued out of the Companys free reserve or share premium account in a particularratio to the number of securities held on a record date.Private placement: When an issuer makes an issue of securities to a select group of

persons not exceeding 49, and which is neither a rights issue nor a public issue, it is calleda private placement. Private placement of shares or convertible securities by listed issuercan be of two types:(i) Preferential allotment: When a listed issuer issues shares or convertible securities, toa select group of persons in terms of provisions of Chapter XIII of SEBI (DIP)guidelines, it is called a preferential allotment. The issuer is required to comply withvarious provisions which interalia include pricing, disclosures in the notice, lockin

etc, in addition to the requirements specified in the Companies Act.(ii) Qualified institutions placement (QIP): When a listed issuer issues equity shares orsecurities convertible in to equity shares to Qualified Institutions Buyers only in termsof provisions of Chapter XIIIA of SEBI (DIP) guidelines, it is called a QIP.

What is meant by Issue price?The price at which a company's shares are offered initially in the primarymarket is called as the Issue price. When they begin to be traded, themarket price may be above or below the issue price.


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What is meant by Market Capitalisation?The market value of a quoted company, which is calculated by multiplyingits current share price (market price) by the number of shares in issue iscalled as market capitalization. E.g. Company A has 120 million shares inissue. The current market price is Rs. 100. The market capitalisation ofcompany A is Rs. 12000 million.

What is the difference between public issue and privateplacement?When an issue is not made to only a select set of people but is open to thegeneral public and any other investor at large, it is a public issue. But if theissue is made to a select set of people, it is called private placement. As perCompanies Act, 1956, an issue becomes public if it results in allotment to 50persons or more. This means an issue can be privately placed where anallotment is made to less than 50 persons.

Who decides the price of an issue?Indian primary market ushered in an era of free pricing in 1992. Following

this, the guidelines have provided that the issuer in consultation withMerchant Banker shall decide the price. There is no price formula stipulatedby SEBI. SEBI does not play any role in price fixation. The company andmerchant banker are however required to give full disclosures of theparameters which they had considered while deciding the issue price. Thereare two types of issues, one where company and Lead Merchant Banker fix aprice (called fixed price) and other, where the company and the LeadManager (LM) stipulate a floor price or a price band and leave it to marketforces to determine the final price (price discovery through book buildingprocess).

Eligibilty norms for launching IPO

DIP Guidelines, 2000The issues of capital to public by Indian companies are governed by theDisclosure and Investor Protection (DIP) Guidelines of SEBI, 2000. Theguidelines provide norms relating to eligibility for companies issuingsecurities, pricing of issues, listing requirements, disclosure norms, lock-inperiod for promoters contribution, contents of offer documents, pre-and postissueobligations, etc. The guidelines apply to all public issues, offers for saleand rights issues by listed and unlisted companies.Eligibility NormsAny company issuing securities through the offer document has to satisfy thefollowing conditions: A company making a public issue of securities has to file a draft

prospectus with SEBI, through an eligible merchant banker, at least 30days prior to the filing of prospectus with the Registrar of Companies(RoCs). The filing of offer document is mandatory for a listed companyissuing security through a rights issue where the aggregate value ofsecurities, including premium, if any, exceeds Rs.50 lakh. A company cannot make a publicissue unless it has made an application for listingof those securities with stock exchange(s). The company must alsohave entered into an agreement with the depository fordematerialisation of its securities and also the company should have


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given an option to subscribers/shareholders/investors to receive thesecurity certificates or securities in dematerialised form with thedepository. A company cannot make an issue if the company has beenprohibited from accessing the capital market under any order ordiscretion passed by SEBI. An unlisted company can make an Initial Public Offering (IPO) of

equity shares or any other security which may be converted into orexchanged with equity shares at a later date, only if it meets all thefollowing conditions:(a) The company has net tangible assets of at least Rs.3 crore ineach of the preceding 3 full years (12 months each).(b) The company has a track record of distributable profits in termsof section 205 of the Companies Act, 1956, for at least three(3) out of immediately preceding five (5) years(c) The company has a net worth of atleast Rs.1 crore in each ofthe preceding 3 full years (of 12 months each).(d) In case the company has changed its name within the last oneyear, at least 50% of the revenue for the preceding 1 full year

is earned by the company from the activity suggested by thenew name.(e) The aggregate of the proposed issue and all previous issuesmade in the same financial year in terms of the size(i.e offerthrough offer document+firm allotment_promoters contributionthrough the offer document),does not exceed five (5) times itspre-issue net worth as per the audited balance sheet of the lastfinancial year.An unlisted company not complying with any of the conditionsspecified above may make an initial public offering (IPO) of equityshares or any other security which may be converted into orexchanged with equity shares at a later date, only if it meets the two

conditions given below.(a) The issue is made through the book-building process, withatleast 50 % of the net offer to public being allotted to theQualified Institutional Buyers (QIBs) failing which the full subscription monies shall be refundedOR the project has atleast 15 % participation by Financial Institutions/ScheduledCommercial Banks of which at least 10% comes from theappraiser(s). In addition to this, at least 10% of the issue sizeshall be allotted to QIBs, failing which the full subscriptionmonies shall be refunded.(b) The minimum post-issue face value capital of the company shallbe Rs.10 crores OR there shall be a compulsory market making

for at least 2 years from the date of listing of the shares,

FPO A listed company shall be eligible to make a public issue of equityshares or any other security which may be converted into orexchanged with equity shares at a later date; provided that theaggregate of the proposed issue and all previous issues made in thesame financial year in terms of size (i.e offer through offerdocument+firm allotment+promoters contribution through the offer


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document) issue size does not exceed 5 times its pre issue net worthas per the audited balance sheet of the last financial year. Further, ifthere is a change in the name of the issuer company within the last 1year (reckoned from the date of filing of the offer document), therevenue accounted for by the activity suggested by the new name isnot less than 50 % of its total revenue in the preceding 1 full year

period. Infrastructure companies are exempt from the requirement ofeligibility norms if their project has been appraised by a public financialinstitution or infrastructure development finance corporation orinfrastructure leasing and financing services and not less than 5% ofthe project cost is financed by any of the institutions, jointly orseverally, by way of loan and/or subscription to equity or acombination of both. Banks and rights issues of listed companies arealso exempt from the eligibility norms.

Contribution of Promoters and lock-inThe promoters contribution in case of public issues by unlisted companies

and promoters shareholding in case of offers for sale should not be less than20% of the post issue capital. In case of public issues by listed companies,promoters should contribute to the extent of 20% of the proposed issue orshould ensure post-issue holding to the extent of 20% of the post-issuecapital. For composite issues, the promoters contribution should either be20% of the proposed public issue or 20% of the post-issue capital. Thepromoters should bring in the full amount of the promoters contributionincluding premium at least one day prior to the issue opening date.The requirement of promoters contribution is notapplicable in case of (i) public issue of securities which has been listed on astock exchange for at least 3 years and has a track record of dividendpayment for at least 3 immediate preceding years, (ii) companies where no

identifiable promoter or promoter group exists, and (iii) rights issues.For any issue of capital to the public, the minimum promoters contribution islocked in for a period of 3 years. If the promoters contribution exceeds therequired minimum contribution, such excess is locked in for a period of oneyear. Securities allotted in firm allotment basis are also locked in for a periodof one year. The locked-in securities held by promoters may be pledged onlywith banks or FIs as collateral security for loans granted by such banks or FIs,provided the pledge of shares is one of the terms of sanction of loan.

IPO Grading: IPO grading is the grade assigned by a Credit Rating Agencyregistered withSEBI, to the initial public offering (IPO) of equity shares or other convertible

securities. Thegrade represents a relative assessment of the fundamentals of the IPO inrelation to theother listed equity securities. Disclosure of IPO Grades, so obtained ismandatory forcompanies coming out with an IPO. For more details on IPO Grading please referto thesubsection on IPO Grading.


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What is Cut-Off Price?In a Book building issue, the issuer is required to indicate either the priceband or a floor price in the prospectus. The actual discovered issue price can

be any price in the price band or any price above the floor price. This issue

price is called Cut-Off Price. The issuer and lead manager decides this afterconsidering the book and the investors appetite for the stock.

What is a Prospectus?A large number of new companies float public issues. While a large number

of these companies are genuine, quite a few may want to exploit theinvestors. Therefore, it is very important that an investor before applying for

any issue identifies future potential of a company. A part of the guidelinesissued by SEBI (Securities and Exchange Board of India) is the disclosure of

information to the public. This disclosure includes information like the reason

for raising the money, the way money is proposed to be spent, the return expected on themoney etc. This information is in the form of Prospectus

which also includes information regarding the size of the issue, the currentstatus of the company, its equity capital, its current and past performance,the promoters, the project, cost of the project, means of financing, product

and capacity etc. It also contains lot of mandatory information regardingunderwriting and statutory compliances. This helps investors to evaluate

short term and long term prospects of the company.

What is the difference between an offer document, Red Herring Prospectus, a

prospectus and an abridged prospectus? What does it mean when someone saysdraft offer doc?

Offer document means Prospectus in case of a public issue or offer for sale and Letter ofOffer in case of a rights issue, which is filed Registrar of Companies (ROC) and Stock

Exchanges. An offer document covers all the relevant information to help an investor tomake his/her investment decision. Draft Offer document means the offer document in

draft stage. The draft offer documents are filed with SEBI, atleast 21 days prior to the filingof the Offer Document with ROC/ SEs. SEBI may specifies changes, if any, in the draft Offer

Document and the issuer or the Lead Merchant banker shall carry out such changes in thedraft offer document before filing the Offer Document with ROC/ SEs. The Draft Offer

document is available on the SEBI website for public comments for a period of 21 days fromthe filing of the Draft Offer Document with SEBI.

Offer Document is called Prospectus in case of a public issue or offer for sale andLetter of Offer in case of a rights issue.

What is a Red Herring Prospectus?

Red Herring Prospectus is a prospectus, which does not have details of either price ornumber of shares being offered, or the amount of issue. This means that in case price is notdisclosed, the number of shares and the upper and lower price bands are disclosed. On the

other hand, an issuer can state the issue size and the number of shares are determinedlater. An RHP for and FPO can be filed with the RoC without the price band and the issuer, in

such a case will notify the floor price or a price band by way of an advertisement one dayprior to the opening of the issue. In the case of book-built issues, it is a process of price

discovery and the price cannot be determined until the bidding process is completed. Hence,such details are not shown in the Red Herring prospectus filed with ROC in terms of the


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provisions of the Companies Act. Only on completion of the bidding process, the details ofthe final price are included in the offer document. The offer document filed thereafter with

ROC is called a prospectus.

What is an Abridged Prospectus?Abridged Prospectus means the memorandum as prescribed in Form 2A under sub-section

(3) of section 56 of the Companies Act, 1956. It contains all the salient features of a

prospectus. It accompanies the application form of public issues.

Who prepares the Prospectus/Offer Documents?Generally, the public issues of companies are handled by Merchant Bankerswho are responsible for getting the project appraised, finalizing the cost of

the project, profitability estimates and for preparing of Prospectus. TheProspectus is submitted to SEBI for its approval.

Pricing of an issue

Who decides the price of an issue?Indian primary market ushered in an era of free pricing in 1992. Followingthis, the guidelines have provided that the issuer in consultation withMerchant Banker shall decide the price. There is no price formula stipulatedby SEBI. SEBI does not play any role in price fixation. The company andmerchant banker are however required to give full disclosures of theparameters which they had considered while deciding the issue price. Thereare two types of issues, one where company and Lead Merchant Banker fix aprice (called fixed price) and other, where the company and the LeadManager (LM) stipulate a floor price or a price band and leave it to marketforces to determine the final price (price discovery through book buildingprocess).

What is the difference between Fixed price issue and Book Builtissue?On the basis of Pricing, an issue can be further classified into Fixed Price issue orBook Builtissue.Fixed Price Issue: When the issuer at the outset decides the issue price andmentions it inthe Offer Document, it is commonly known as Fixed price issue.Book built Issue: When the price of an issue is discovered on the basis of

demand receivedfrom the prospective investors at various price levels, it is called Book Built

issue.

Understanding Book Building:(a) What is book Building?


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Book building is a process of price discovery. The issuer discloses a price bandin the RedHerring Prospectus. On the basis of the demands received at various price levelswithinthe price band specified by the issuer, Book Running Lead Manager (BRLM) incloseconsultation with the issuer arrives at a price at which the security offered bythe issuer,can be issued.

(b)What is a Price Band in a book built IPO?The prospectus may contain either the floor price for the securities or a priceband within which the investors can bid. The spread between the floor and

the cap of the price band shall not be more than 20%. In other words, it

means that the cap should not be more than 120% of the floor price. Theprice band can have a revision and such a revision in the price band shall be

widely disseminated by informing the stock exchanges, by issuing a pressrelease and also indicating the change on the relevant website and the

terminals of the trading members participating in the book building process.In case the price band is revised, the bidding period shall be extended for a

further period of three days, subject to the total bidding period not

Other requirements for book building include: bids remain open for at least 3days, only electronic bidding is permitted; bids are submitted through

syndicate members; bids can be revised; bidding demand is displayed at theend of every day; allotments are made not later than 15 days from the

closure of the issue failing which interest at the rate of 15% shall be paid toinvestors. The 100% book building has made the primary issuance process

comparatively faster and cost effective.

(c) How does Book Building work?Book building is a process of price discovery. The Red Herring prospectuscontains eitherthe floor price of the securities offered through it or a price range within whichthe bidscan move [Price Band]. The applicants bid for the shares quoting the price andthequantity that they would like to bid at.After the bidding process is complete, the cutoff price is arrived at based on

thedemand of securities. The basis of Allotment is then finalized andallotment/refund isundertaken. The final prospectus with all the details including the final issueprice and theissue size is filed with ROC, thus completing the issue process. Only the retailinvestorshave the option of bidding at cutoff.


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(d) How does cutoff option works for investors?Cutoff option is available for only retail individual investors i.e investors whoareapplying for securities worth up to Rs 2,00,000/ only. Such investors arerequired to tickthe cutoff option which indicates their willingness to subscribe to shares at anypricediscovered within the price band. Unlike price bids (where a specific price isindicated)which can be invalid, if price indicated by applicant is lower than the pricediscovered, thecutoff bids always remain valid for the purpose of allotment

Investor Categories in Public offerInvestors are broadly classified under following categories:(i) Retail individual Investor (RIIs): Individual investors who apply under thiscategory can subscribe for amount not exceeding Rs 2 lakh.

(ii) NonInstitutional Investors (NIIs)(iii) Qualified Institutional Buyers (QIBs)

What is QIB?

QIB (Qualified Institutional Buyers) means those buyers who are recommended by SEBI and who are

already having huge funds. These buyers buy the shares on a large scale. These include scheduled

commercial bank, registered insured companies with IRDA, mutual fund house, FII, etc. These all are

legally recommended by SEBI.

They are institutional investors who are generally perceived to possess expertise and the financial muscle to evaluateand invest in the capital markets. In terms of clause 2.2.2B (v) of DIP Guidelines, a Qualified Institutional Buyer shallmean:

Public financial institution Scheduled commercial banks;

Mutual funds;

Foreign institutional investor registered with SEBI;

Venture capital funds registered with SEBI..

h. State Industrial Development Corporations.

Insurance Companies registered with the Insurance Regulatoryand Development Authority (IRDA).

j. Provident Funds with minimum corpus of Rs.25 crores

k. Pension Funds with minimum corpus of Rs. 25 crores)

These entities are not required to be registered with SEBI as QIBs. Any entities falling under the categories specifiedabove are considered as QIBs for the purpose of participating in primary issuance process.

Private PlacementThe private placement involves issue of securities, debt or equity, to a limitednumber of subscribers, such as banks, FIs, MFs and high net worth

individuals. It is arranged through a merchant/investment banker, who actsas an agent of the issuer and brings together the issuer and the investor(s).

On the presumption that these are allotted to a few sophisticated andexperienced investors and the public at large does not have much stake in it,

the securities offered in a private placement are exempt from the publicdisclosure regulations and registration requirements of the regulatory body.


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What distinguishes private placement from public issues is while the latterinvite application from as many subscribers, the subscriptions in the private

placement are normally restricted to a limited number. In terms of theCompanies Act, 1956, offer of securities to more than 50 persons is deemed

to be public issue.

Guidelines for Allotment to different categoriesIn case of Book Built issue1. In case an issuer company makes an issue of 100% of the net offer to publicthrough100% book building process(a) Not less than 35% of the net offer to the public shall be available forallocation toretail individual investors;(b) Not less than 15% of the net offer to the public shall be available forallocation tononinstitutional investors i.e. investors other than retail individual investors and

Qualified Institutional Buyers;(c) Not more than 50% of the net offer to the public shall be available forallocationto Qualified Institutional Buyers:2. In case of compulsory BookBuilt Issues at least 50% of net offer to publicbeingallotted to the Qualified Institutional Buyers (QIBs), failing which the fullsubscription monies shall be refunded.3. In case the book built issues are made pursuant to the requirement ofmandatoryallocation of 60% to QIBs in terms of Rule 19(2)(b) of Securities Contract(Regulation) Rules, 1957, the respective figures are 30% for RIIs and 10% for

NIIs.In case of fixed price issueThe proportionate allotment of securities to the different investor categories inan fixedprice issue is as described below:1. A minimum 50% of the net offer of securities to the public shall initially bemadeavailable for allotment to retail individual investors, as the case may be.2. The balance net offer of securities to the public shall be made available forallotment to:a. Individual applicants other than retail individual investors, and

b. Other investors including corporate bodies/ institutions irrespective of thenumber of securities applied for.

What is the role of the Primary Market?The primary market provides the channel for sale of new securities. Primary

market provides opportunity to issuers of securities; Government as well as

corporates, to raise resources to meet their requirements of investment


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and/or discharge some obligation.They may issue the securities at face value, or at a discount/premium and

these securities may take a variety of forms such as equity, debt etc. Theymay issue the securities in domestic market and/or international market.

What is SEBIs Role in an Issue?

Any company making a public issue or a listed company making a rightsissue of value of more than Rs 50 lakh is required to file a draft offer

document with SEBI for its observations. The company can proceed furtheron the issue only after getting observations from SEBI. The validity period of

SEBIs observation letter is three months only i.e. the company has to openits issue within twelve months period.

Which are the intermediaries involved in an issue?Intermediaries which are registered with SEBI are Merchant Bankers to the issue(knownas Book Running Lead Managers (BRLM) in case of book built public issues),Registrars to

the issue, Bankers to the issue & Underwriters to the issue who are associatedwith theissue for different activities. Their addresses, telephone/fax numbers,registration number,and contact person and email addresses are disclosed in the offer documents.(i) Merchant Banker: Merchant banker does the due diligence to prepare theofferdocument which contains all the details about the company. They are alsoresponsible for ensuring compliance with the legal formalities in the entire issueprocess and for marketing of the issue.(ii) Registrars to the Issue:They are involved in finalizing the basis of

allotment in anissue and for sending refunds, allotment etc.(iii) Bankers to the Issue:The Bankers to the Issue enable the movement offunds in theissue process and therefore enable the registrars to finalize the basis ofallotmentby making clear funds status available to the Registrars.(iv) Underwriters: Underwriters are intermediaries who undertake to subscribeto thesecurities offered by the company in case these are not fully subscribed by thepublic, in case of an underwritten issue.

Merchant Banking(read from book what is merchant banking pg 76, for

functions/scope pg 84,85,86)The merchant banking activity in India is governed by SEBI (MerchantBankers) Regulations, 1992. All merchant bankers have to be registered with

SEBI. The person applying for certificate of registration as merchant bankerhas to be a body corporate other than a non-banking financial company, has


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necessary infrastructure, and has at least two persons in his employment with experience toconduct the business of the merchant banker. The applicant has

to fulfill the capital adequacy requirements, with prescribed minimum networth.

Merchant Banking is an organization that underwrites corporate securities and advisesclients on issues like corporate mergers, etc. involved in the ownership of commercial

ventures.

Intermediaries in a public offer (detailed)

Book Running Lead Managers (same as merchant

bankers)

The lead merchant banker plays an important role in the pre-issue obligationsof the company. He exercises due diligence and satisfies himself about all

aspects of offering, veracity and adequacy of disclosures in the offer

document. Each company issuing securities has to enter into a Memorandum

of Understanding with the lead merchant banker, which specifies their mutualrights, liabilities and obligations relating to the issue. In case of undersubscriptionof an issue, the lead merchant banker responsible for

underwriting arrangements has to invoke underwriting obligations and ensure

that the underwriters pay the amount of devolvement. It should ensure theminimum number of collection centres. It should also ensure that the issuer

company has entered into an agreement with all the depositories fordematerialization of securities. All the other formalities related to post-issue

obligations like, allotment, refund and despatch of certificates are also takencare by the lead merchant banker.

The Post Issue activities include management of escrow accounts (The bank

accounts where the money from all share applicants will get deposited), decidingthe final share issue price, share allotment to applicants, ensuring proper refund to

unsuccessful applicants, allotment letters and ensuring that each agency is carrying

out their requisite functions properly and by abiding by the laws laid down by SEBI

for an IPO process.

REGISTRAR:

Finalizes the list of eligible allotted after deleting the invalid applications

Corporate action for crediting of shares to the demat accounts of the applicants

Dispatch of refund orders to those applicable


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Receive the share application from various collection centers

Recommend the basis of allotment in consultation with the Regional Stock

Exchange for approval

Arrange for the dispatching of the share certificates

BANKERS TO THE ISSUE :

Bankers to the issue, as the name suggests are the people who carry out all

banking activities like accepting the money from the applicants, transfer of funds to

the promoters and transfer of refunds to unsuccessful applicants.

Books of Account / Record / Documents: A banker to an issue is required to maintain books of account/records/

documents for a minimum period of three years in respect of, inter alia, the number of application received, the

names of the investors, the times within which the applications received were forwarded to the issuing company/

registrar to the issue, and dates and amounts of refund money to investors.

Agreement with Issuing Companies: Every banker to an issue enters into an agreement with the issuing company.

The agreement provides for the number of collection centers at which applications/application money received is

forwarded to the registrar, for instance and submission of daily statement by the designated controlling branch of the

banker, stating the number of applications and the amount of money received from the investors.

UNDERWRITERS: Underwriting means they will subscribe to the balance shares if all the shares

offered at the IPO are not picked up

Could be a banker, broker, merchant banker or financial institution

Insurance against the possibility of inadequate subscription

Done for a commission

The aspects considered before appointing are

(a) Experience in the primary market

(b) Past underwriting performance and default

(c) Outstanding underwriting commitment

(d) The network of investor clientele of the underwriter and


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(e) His overall reputation

For ADR, GDR, IDR refer project report (important topics concept,

importance, features, benefits & disadvantages of all 3)

Secondary Market

Introduction

The secondary market is the market for the sale and purchase of previously issued orsecond hand security.

It is not directly issued by the company. It is issued by the existing investors to otherinvestors in the secondary market with the help of intermediary called broker.

In secondary market companies get no additional capital as securities are bought and sold

between investors only so directly there is no capital formation but secondary marketindirectly contributes in capital formation by providing liquidity to securities of the

company.

It is a market where securities are traded after being initially offered to the public in theprimary market and/or listed on the Stock Exchange. Majority of the trading is done in

the secondary market.

Importance of secondary market

Secondary market plays a vital role for effective movement of shares and debenture from

one investor to another investor. If any investor is not interested to keep any financial

product as long term investment, he just come to secondary market and sell his security to

other investor. Other investor either can keep or sell to another investor. Thus secondary

market is more liquidating market and very useful for all investors.

Secondary market connects investors' favouritism for liquidity with the capital users' wish

of using their capital for a longer period. Issuers of securities need capital for long terms

but investors might not wish to lock in their money for equally long period. Hence

investors might not actively invest in securities for lack of liquidity. But secondary

markets remove this obstacle by offering a platform for buying and selling of securities.

Hence investors who might want to liquidate their investments before their maturity get

an easy exit route.

STOCK EXCHANGES

The Securities Contract(Regulation) Act, 1956, has defined Stock

Exchange as an association, organization or body of individuals,

whether incorporated or not, established for the purpose of

assisting, regulating and controlling business of buying, selling


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and dealing in Securities. . The price at which each buying and

selling transaction takes is determined by the market forces (i.e.

demand and supply for a particular stock).

In earlier times, buyers and sellers used to assemble at stockexchanges to make a transaction but now with the dawn of IT,

most of the operations are done electronically and the stock

markets have become almost paperless.

Now investors dont have to gather at the Exchanges, and can

trade freely from their home or office over the phone or through

Internet.

At present, there are twenty one recognized stock exchanges in

INDIA which does not include the Over The Counter Exchange of

INDIA Limited (OTCEI) and the National Stock Exchange of INDIA

Limited (NSEIL).

Powers of Stock Exchanges In INDIA

The opening and closing of markets and the regulation of the

hours of trade

Regulation or prohibition of blank transfers

Regulation or prohibition of badlas or carry-over facilities

Fixing, altering or postponing of days for settlement

Determination and declaration of market rates, including

opening, closing, highest and lowest rates for securities.

Terms, conditions and incidents of contracts, including the

prescription margin requirement, if any, and conditions

relating thereto and forms of contract in writing.


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The method and procedure for the settlement of claims or

disputes.

The levy and recovery of fees, fines and penalties.

Separation of function of jobbers and brokers.

Importance or Functions of Stock Exchange:

We discuss about major functions of stock exchange under these headings:-

1. Providing a ready market: The organization of stock exchange provides a ready market tospeculators and investors in industrial enterprises. It thus, enables the public to buy and sell

securities already in issue.

2. Providing a quoting market price: It makes possible the determination of supply and

demand on price. The very sensitive pricing mechanism and the constant quoting of market price

allows investors to always be aware of values. This enables the production of various indexeswhich indicate trends etc.

3. Providing facilities for working: It provides opportunities to Jobbers and other members to

perform their activities with all their resources in the stock exchange.

4. Safeguarding activities for investors: The stock exchange renders safeguarding activities for

investors which enables them to make a fair judgment of a securities. Therefore directors have to

disclose all material facts to their respective shareholders. Thus innocent investors may besafeguard from the clever brokers.

5. Operating a compensation fund: It also operate a compensation fund which is always

available to investors suffering loss due due the speculating dealings in the stock exchange.

6. Creating the discipline: Its members controlled under rigid set of rules designed to protectthe general public and its members. Thus this tendency creates the discipline among its members

in social life also.

7. Checking functions: New securities checked before being approved and admitted to listing.

Thus stock exchange exercises rigid control over the activities of its members.

8. Adjustment of equilibrium: The investors in the stock exchange promote the adjustment of

equilibrium of demand and supply of a particular stock and thus prevent the tendency of

fluctuation in the prices of shares.

9. Maintenance of liquidity: The bank and insurance companies purchase large number of

securities from the stock exchange. These securities are marketable and can be turned into cash


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at any time. Therefore banks prefer to keep securities instead of cash in their reserve. This it

facilities the banking system to maintain liquidity by procuring the marketable securities.

10. Promotion of the habit of saving: Stock exchange provide a place for saving to general

public. Thus it creates the habit of thrift and investment among the public. This habit leads to

investment of funds incorporate or government securities. The funds placed at the disposal ofcompanies are used by them for productive purposes.

11. Refining and advancing the industry: Stock exchange advances the trade, commerce andindustry in the country. it provides opportunity to capital to flow into the most productive

channels. Thus the flow of capital from unproductive field to productive field helps to refine the

large scale enterprises.

12. Promotion of capital formation: It plays an important part in capital formation in the

country. its publicity regarding various industrial securities makes even disinterested people feel

interested in investment.

13. Increasing Govt. Funds: The govt. can undertake projects of national importance and social

value by raising funds through sale of its securities on stock exchange.

Brokers and Sub-brokers (obligations & responsibilities in book pg no 134)

A broker is a member of recognized stock exchange, who is permitted to do trades on

the screen-based trading system of different stock exchanges. He is enrolled as a member

with the concerned exchange and is registered with SEBI. A broker's registration number

begins with the letters INB

A sub-broker is a person who is registered with SEBI as such and is affiliated to a

member of recognized stock exchange. A sub broker registration number begins with the

letters INS.

Important SEs in India

OTCEIOTCEI was incorporated in 1990 as a Section 25 company

under the Companies Act 1956 and is recognized as a stock

exchange under Section 4 of the Securities Contracts

Regulation Act, 1956. The Exchange was set up to aid


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enterprising promoters in raising finance for new projects in

a cost effective manner and to provide investors with a

transparent & efficient mode of trading. Modeled along the

lines of the NASDAQ market of USA, OTCEI introduced many

novel concepts to the INDIAn capital markets such as screen-based nationwide trading, sponsorship of companies, market

making and scrip less trading.

FEATURES OF OTCEI

Nationwide listing: The OTCEI network is spread all over

INDIA through member, dealer and representative officecounters. Hence by listing on just one stock exchange, thecompany and its products get nationwide exposure andinvestors all over INDIA can start trading in that scrip.

Sponsorship- The companies that seek listing on the OTCEIexchange have to approach one of the members appointed

by the OTCEI for acting as the sponsor to the issue. Thesponsor appraises the project. By entering into sponsorshipagreement, the sponsor is committed to making market inthat scrip by giving a buy/sell quote for a minimum period of1Vz years. Investors are benefited by this as it enhances theliquidity of the scripts listed on the OTCEI exchange.

Listing of small and medium sized companies- In the past

many small and medium sized companies were not able toenter the capital market, as the listing requirement of thesecurities contract act 1956 specifies that a minimum issuedequity capital of 3000 crore. The OTCEI exchange providesan ideal opportunity to these companies to enter the capitalmarket. In fact any company with a paid up capital of more


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than 30 lakhs and less than 25 crore can raise finance fromthe capital market through the OTCEI exchange.

Eligibility criteria for listing on OTCEI

The issued equity capital of the company should be between rs30 lakhs and rs 25 crores. The company should make a minimumpublic offer of 25 % of its capital or rs 20 lakhs in face value,whichever is higher. The company should not be listed on anyother stock exchange of INDIA.

Benefits:

The OTCEI has set up a national, automated screen basedand ringless stock market. It helps companies raise financefrom the capital market in a cost effective manner andprovides a convenient and effective avenue of capitalmarket investment for investors at large.

While the other recognised stock exchanges require that inorder to have its securities listed the company should havean issued capital of not less than Rs. 3 crores out of whichnormally 25% is to be offered to the public, the minimumissued equity share capital of a company for eligibility forlisting on the OTCEI is Rs 30 lacs.

Listing on OTCEI is advantageous to companies because ofthe high liquidity of these securities, which is a result of

compulsory market making, improved access and speed oftransactions resulting from the extensive network ofelectronically interlinked counters.arial

Companies can obtain a fair price of their securities bynegotiating the same with the sponsors (who are membersof the OTCEI) and save unnecessary issue expeNSEs byplacing their securities with the sponsors who will in turn off


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load the securities to the public. This mechanism is nowpopularly known as a bought out deal.

OTCEI's wide computerized net work will be spread all overINDIA and will make investment easier. All deals will be

entered into through remote terminals which will beconnected to the mainframe computer of the OTCEI. Theexchange will enable transactions to be completed quicklyand investors can settle the deals across the counter withina few days. The exchange will also provide liquidity toinvestors as every scrip listed on the OTCEI will have at leasttwo makers who will continuously give two way quotes.

Objectives of OTCEI

To promote organized trading in Unlisted Securities To broad base the existing informal market in order to make

it more liquid To provide a source of valuation for securities To act as a launch pad to an IPO

NATIONAL STOCK EXCHANGE OFINDIA

National stock exchange was established in 1994 as a financial institution by IDBI as a nodal

agency. The NSE was conceived as a model exchange with a nationwide electronic based

scripless a and floorless trading system in securities both which is efficient and transparent

and offer equal and nationwide access to investors. NSE operates on The National Exchange

for Automated Trading (NEAT), a fully automated screen based trading system which adopts

the principal of order driven market. The NSE's key index is the S&P CNX Nifty, known as the

NSE NIFTY (National Stock Exchange Fifty), an index of fifty major stocks weighted by market

capitalization. . NSE is the third largest Stock Exchange in the world in terms of the number of

trades in equities. It is the second fastest growing stock exchange in the world with a recorded

growth of 16.6%.
http://en.wikipedia.org/wiki/S%26P_CNX_Niftyhttp://en.wikipedia.org/wiki/Stock_exchangehttp://en.wikipedia.org/wiki/S%26P_CNX_Niftyhttp://en.wikipedia.org/wiki/Stock_exchange


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OBJECTIVES

To establish trading facility systems for equities,debts and hybrids.

To facilitate equal access to investors across the country.

To provide fairness,efficiency and transparency to securities trading.

To enable shorter settlement cycles.

To meet international securities market standard.

FEATURES OF NSE

NSE operates in two segments i.e Whole sale debt market and Capital

market.

The trading in the capital market segment are linked through satellite link

up while those in whole sale debt market it is linked through dedicated speed lines.

There is no trading floor.

When a trade takes place, a trade confirmation slip is printed at the trading

members workstation.

The identity of the trading member is not revealed to others when he place

the order.Therefore, large orders are placed without influencing the market sentiment.

The automated trading system secures the best price available in the market.

Currently, NSE has the following major segments of the capital market:

Equity

Futures and Options

Retail Debt Market


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Wholesale Debt Market

Currency futures

MUTUAL FUND

STOCKS LENDING & BORROWING

BSE

HistoryThe Bombay Stock Exchange (BSE), The Stock Exchange, Bombay) is a stock

exchange located onDalal Street, Mumbai and is the oldest stock exchange in Asia. The

equity market capitalization of the companies listed on the BSE was US$1.63 trillion as of

December 2010, making it the 4th largest stock exchange in Asia and the 8th largest in the

world. The BSE has the largest number of listed companies in the world.

As of June 2011, there are over 5,085 listed Indian companies and over 8,196 scrips on the

stock exchange , the Bombay Stock Exchange has a significant trading volume. The BSE

SENSEX, also called "BSE 30", is a widely used market index in India and Asia. Though many

other exchanges exist, BSE and the National Stock Exchange of India account for the majority

of the equity trading in India. While both have similar total market capitalization (about USD 1.6

trillion), share volume in NSE is typically two times that of BSE.

Evolution of BSE

The Bombay Stock Exchange is the oldest exchange in Asia.

It traces its history to the 1850s, when four Gujarati and one

Parsi stockbroker would gather under banyan trees in front

of Mumbai's Town Hall.
http://en.wikipedia.org/wiki/Stock_exchangehttp://en.wikipedia.org/wiki/Stock_exchangehttp://en.wikipedia.org/wiki/Dalal_Streethttp://en.wikipedia.org/wiki/Mumbaihttp://en.wikipedia.org/wiki/Asiahttp://en.wikipedia.org/wiki/Market_capitalizationhttp://en.wikipedia.org/wiki/1000000000000_(number)http://en.wikipedia.org/wiki/List_of_stock_exchangeshttp://en.wikipedia.org/wiki/List_of_stock_exchangeshttp://en.wikipedia.org/wiki/Scripshttp://en.wikipedia.org/wiki/BSE_SENSEXhttp://en.wikipedia.org/wiki/BSE_SENSEXhttp://en.wikipedia.org/wiki/Asiahttp://en.wikipedia.org/wiki/National_Stock_Exchange_of_Indiahttp://en.wikipedia.org/wiki/Equity_tradinghttp://en.wikipedia.org/wiki/Stock_exchangehttp://en.wikipedia.org/wiki/Stock_exchangehttp://en.wikipedia.org/wiki/Dalal_Streethttp://en.wikipedia.org/wiki/Mumbaihttp://en.wikipedia.org/wiki/Asiahttp://en.wikipedia.org/wiki/Market_capitalizationhttp://en.wikipedia.org/wiki/1000000000000_(number)http://en.wikipedia.org/wiki/List_of_stock_exchangeshttp://en.wikipedia.org/wiki/List_of_stock_exchangeshttp://en.wikipedia.org/wiki/Scripshttp://en.wikipedia.org/wiki/BSE_SENSEXhttp://en.wikipedia.org/wiki/BSE_SENSEXhttp://en.wikipedia.org/wiki/Asiahttp://en.wikipedia.org/wiki/National_Stock_Exchange_of_Indiahttp://en.wikipedia.org/wiki/Equity_trading


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As the number of brokers increased, they had to shift from

place to place, but they always overflowed to the streets.

The group eventually moved to Dalal Street in 1874, the

brokers found a permanent place, and one that they could,

quite literally, call their own. The new place was, aptly,

called Dalal Street (Brokers' Street).

In 1875 became an official organization known as 'The

Native Share & Stock Brokers Association'.

In 1956, the BSE became the first stock exchange to be

recognized by the INDIAn Government under the Securities

Contracts Regulation Act.

The Bombay Stock Exchange developed the BSE SENSEX in1986, giving the BSE a means to measure overall

performance of the exchange.

The Bombay Stock Exchange switched to an electronic

trading system in 1995.

This automated, screen-based trading platform called BSE

On-line trading (BOLT) currently has a capacity of 8 million

orders per day.

In 2000 the BSE used this index to open its derivatives

market, trading SENSEX futures contracts.

The development of SENSEX options along with equity

derivatives followed in 2001 and 2002, expanding the BSE's

trading platform.


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Trading and settlement on Stock Exchange:

INTRODUCTION

There are three types of instruments that are traded on Major Stock Exchanges(NSE,BSE)

namely equities, derivatives and debt instruments.

The transactions in secondary market pass through three distinct phases, viz., trading,

clearing and settlement.

While the stock exchanges provide the platform for trading other entities, like the clearing

corporation, clearing members, custodians, clearing banks, depositories are involved in the

process of clearing.

The Stock Exchanges provide the platform for trading

Presently in India, stock exchanges follow T+2 days settlement cycle. Under this system,

trading happens on every business day, excluding Saturday, Sunday and exchange

notified holidays.

The trading schedule is between 9:00 a.m. in the morning to 3:30 p.m. in the evening.

During this period, shares of the companies listed on a particular stock exchange can be

bought and sold.

The SEBI has made it mandatory that only brokers and sub-brokers registered with it can buyand sell shares in the stock exchange. A person desirous of buying or selling shares on the

stock market needs to get himself registered with one of these brokers / sub-brokers.


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After client gets registered with broker he can trade by many ways

Online Trading (Through terminal)

Phone Trading

Mobile Trading

Apart from the purchase price of security, a client is also supposed to pay

brokerage, stamp duty and securities transaction tax.

CLEARING CORPORATION

The clearing corporation is responsible for post-trade activities such as risk

management and clearing and settlement of trades executed on a stock exchange.

The first clearing corporation to be established in the country and also the first

clearing corporation in the country to introduce settlement guarantee is the NationalSecurities Clearing Corporation Ltd. (NSCCL), a wholly owned subsidiary of NSE.

TRADING and SETTLEMENT PROCESS (also available in the book at pg 137)

1. Investor places order (TT, Mobile).

2. Broker house validates the orders and routes them to the exchange.

3. Order matching at the exchange.

4. Trade confirmation to the investors through the brokers.

5. Trade details are send to Clearing Corporation from the Exchange.

6. Clearing Corporation notifies the trade details to clearing

members/custodian who confirm back. Based on the confirmation, Clearing

Corporation determines obligations.

7. Clearing Corporation gives instructions to clearing Banks to make funds

available in pay in time.

8. Clearing Corporations gives instructions to depositories to make securities

available in pay in time.

Pay in of securities: Clearing Corporation advices depository to debit pool account of

custodian/clearing houses and credit its (clearing corporations) account and depository

does the same.

Pay in of funds: Clearing Corporation advises banks to debit account of

custodians/clearing houses and credit its account and banks do the same.

Pay out of Securities: Clearing Corporation advices depository to credit account of

custodians/clearing house and debit its account and depository does the same.

Pay out of Funds: Clearing Corporation advices the banks to credit account ofcustodians/clearing houses and debit its account and depository does the same.


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NOTE: clearing members of buy order and sell order are different and clearing corporation

just act as a link.

Depository informs Clearing members/Custodian members through Depository Participants

about pay in and pay out of securities.

Clearing banks inform Custodian/Clearing banks about pay in and pay out of funds.

AUCTION

Auctions are initiated by the Exchange on behalf of trading members for settlementrelated reasons. The main reasons are shortages, bad deliveries and objections.

Pay in day is the day in which trading members are required to provide securities and

money to exchange.

On pay out exchange will transfer fund and securities to trading members .

As the buying trading member has paid fund for securities, exchange will make

arrangement of securities from auction market.

The auction for the undelivered quantities is conducted on T+2 day between 2:00 p.m.

and 2.45 p.m. for all the scrips under Compulsory Rolling Settlements except those in

"Z" group and scrips on "trade to trade" basis which are directly closed-out.

During this time exchange purchases share from the market.

The participants who have securities give their bids.

Out of all bids exchange selects the best bid.

Participants have to deliver shares at T+3. Pay-out of auction shares and funds is also

done on the same day, i.e., T+3

Then exchange will then give these shares to trading member.

PROFIT/LOSS

Mostly sellers of security faces lose in an auction process.

But sometimes sellers can earn profit out of it.

If market on a day is down than share will be bid at lower price and difference will be

credited to sellers a/c.

However to avoid such practices some broker do not give credit to seller (if profit made

in auction).

Close-out is effected for cases when no offer for a particular scrip is received in an

auction or when Members who offer the scrips in auction, fail to deliver the same orshortages pertaining to those groups of securities for which auctions are not conducted


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The close-out rate is higher of the following rates :

a) The highest rate of the scrip from the trading day to the day on which the auction is

conducted for the respective settlement.

b) 20% above the closing rate as on the day of auction/close out of the respective

settlement.

STOCK MARKET INDICES (READ FROM BOOK- pg 198 onwards intro, sensexcalculation method, using free float method, advantages, definition, determining free float,

and pg 212-214. Prepare for why Sensex is called barometer of Indian economy)

WHY ARE INDICES IMPORTANT?

Stock market indexes are useful for a variety of reasons, Some are:

They provide a historical comparison of returns on money invested in the stockmarket against other forms of investments such as gold or debt.

They can be used as a standard against which to compare the performance of anequity fund.

It is a lead indicator of the performance of the overall economy or a sector of theeconomy.

Stock indexes reflect highly up to date information.

Modern financial applications such as Index Funds, Index Futures, Index Optionsplay an important role in financial investments and risk management.

IMPORTANCE OF EQUITY MARKETS IN DEVELOPING NATIONS

LIKE INDIA (can also refer to the book & notes, if u have made any

while I explained in the class)

Equity markets in Developingcountries

Overview of the world scenario

World stock markets are booming and stock markets in developing countries

account for a disproportionately large share of this boom.

Investors are venturing into the worlds newest markets and some are seeing

handsome returns.


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Economists have traditionally concentrated on the role of financial development to

the economic growth of countries.

Some analysts view stock markets in developing countries as casinos that have

little positive impact on economic growth.

The focus on stock markets as an engine of economic growth is a new opening in

financial literature.

Its benefits had been largely ignored in the past.

In recent times there has been some concern in the positive effects brought about

by stock markets.

Conditions prevailing in a developing country

A developing country is a nation which concentrates on its growth dominantly rather

than the development.

Its ultimate aim is to grow industries and encourage industrialization.

Many sectors in a developing country are underdeveloped or developing.

A developing country thrives in making the full utilization of these sectors i.e. the

emerging sectors.

The Liquidity factor in the secondary market.

Stock market liquidity plays a key role in economic growth.

Without a liquid stock market, many profitable longterm investments would not be

undertaken because savers would be reluctant to tie up their investments for long

periods of time.

A liquid equity market allows savers to sell their shares easily, thereby permitting firms

to raise equity capital on favorable terms.

By facilitating longerterm, more profitable investments, a liquid market improves

the allocation of capital and enhances prospects for longterm economic growth.

A more developed equity market may also provide liquidity that lowers the cost of the

foreign capital that is essential for development.

Liquidity has also been argued to increase investor incentive to acquire information on

firms and improve corporate governance , thereby facilitating growth.


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Advantages of secondary markets

Foreign Exchange inflows.

Self-employment

Employment opportunities

Index and stock prices reflect the internal as well as external conditions.

The functions ultimately result in :

a more efficient allocation of resources. (More efficiently mobilized savings cause

capital accumulation, which firms tap to finance large projects via equity issues)

a more rapid accumulation of human and physical capital.

..which in turn feed economic growth

Disadvantages of Secondary markets

Unawareness

Tips Based trading

Global scenario

Impact of foreign investments.

Only 2% of public invest in shares

Miscellaneous topics

MF Types According to Maturity Period: MFs can be broadly classified asopen-ended fundor closed-ended funds.

An open-ended fundgives the investors an option to redeem and buy unitsat any time from the fund. These schemes do not ha