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Chapter 1 - Capital Market in India: Introduction
Chapter 1 - Capital Market in India: Introduction
Chapter 1 - Capital Market in India: Introduction
The capital market is the market for securities, where companies and governments
can raise long term funds. Selling stock and selling bonds are two ways to generate
capital and long term funds. Thus bond markets and stock markets are considered
capital markets. The capital markets consist of the primary market, where new issues
are distributed to investors, and the secondary market, where existing securities are
traded
.The Indian Equity Markets and the Indian Debt markets together form the Indian
Capital markets
Indian Equity Market at present is a lucrative field for investors. Indian stocks are
profitable not only for long and medium-term investors but also the position traders,
short-term swing traders and also very short term intra-day traders. In India as on
December 30 2007, market capitalisation (BSE 500) at US$ 1638 billion was 150 per
cent of GDP, matching well with other emerging economies and selected matured
markets.
For a developing economy like India, debt markets are crucial sources of capital
funds. The debt market in India is amongst the largest in Asia. It includes
government securities, public sector undertakings, other government bodies,
financial institutions, banks and companies.
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Capital Market
This is the market for new long term 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).
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 issuance is done either through public issue or private
placement . A public issue does not limit any entity in investing while in private
placement , the issuance is done to select people. In terms of Indian Companies Act
, 1956 as issue becomes public if it
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Capital Market
An IPO is the first sale of stock by a company to the public. In this market company
can raise money by issuing equity. If the company has never issued equity to the
public, it's known as an IPO. Mostly public companies go for IPO. But large privately-
owned companies may also go for an IPO to become publicly traded. In an IPO the
company offloads a certain percentage of its total shares to the public at a certain`
price In an IPO, the issuer obtains the assistance of an underwriting firm, which
helps it determine what type of security to issue (common or preferred), best offering
price and time to bring it to market.. Most IPO’S these days do not have a fixed offer
price. Instead they follow a method called BOOK BUILDIN PROCESS, where the
offer price is placed in a band or a range with the highest and the lowest value (refer
to the newspaper clipping on the page). The public can bid for the shares at any
price in the band specified. Once the bids come in, the company evaluates all the
bids and decides on an offer price in that range. After the offer price is fixed, the
company allots its shares to the people who had applied for its shares or returns
them their money in case of non allotment of shares.
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Capital Market
A public offering will allow a company to raise capital to use for various corporate
purposes such as working capital, acquisitions, research and development,
marketing, and expanding plant and equipment.
Liquidity
Once shares of a company are issue through an IPO & traded on a public exchange,
those shares have a market value and can be resold. This allows a company to
attract and retain employees by offering stock incentive packages to those
employees. Moreover, it also provides investors in the company the option to trade
their shares thus enhancing investor confidence.
Increased Prestige
Public companies often are better known and more visible than private companies,
this enables them to obtain a larger market for their goods or services. Public
companies are able to have access to larger pools of capital as well as different
types of capital.
Valuation
Public trading of a company's shares sets a value for the company that is set by the
public market and not through more subjective standards set by a private valuator.
This is helpful for a company that is looking for a merger or acquisition. It also allows
the shareholders to know the value of the shares.
Increased wealth
The founders of the company often have the sense of increased wealth as a result of
the IPO. Prior to the IPO these shares were illiquid and had a more subjective price.
These shares now have an ascertainable price and after any lockup period these
shares may be sold to the public, subject to limitations of law.
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Capital Market
Conducting an IPO is time consuming and expensive. A successful IPO can take up
to a year or more to complete and a company can expect to spend large amount of
money on attorneys, accountants, and printers. In addition, the underwriter's fees
can range from 3% to 10% of the value of the offering. Due to the time and expense
of preparation of the IPO, many companies simply cannot afford the time or spare
the expense of preparing the IPO.
Disclosure
Once a company goes public it comes under the purview of SEBI . It is supposed to
file quarterly results with SEBI and follow other regulations as per SEBI guidelines. .
Management's decisions may be affected by the market price of the shares and the
feeling that they must get market recognition for the company's stock. They may give
more consideration to market price of the share and as a consequence may take a
decision which is not prudent & sound .
Regulatory Review
The Company will be open to review by the SEBI to ensure that the company is
making the appropriate filings with all relevant disclosures.
If the shares of the company's stock fall, the company may lose market confidence,
decreased valuation of the company may affect lines of credits, secondary offering
pricing, the company's ability to maintain employees, and the personal wealth of
insiders and investors.
Vulnerability
If a large portion of the company's shares are sold to the public, the company may
become a target for a takeover, causing insiders to lose control. A takeover bid may
be the result of shareholders being upset with management or corporate raiders
looking for an opportunity. Defending a hostile bid can be both expensive and time
consuming.
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Promoters
Industry Outlook
The products or services of the company should have a good demand and
scope for profit.
Business Plans
Financials
Why does the company require the money? Is the company floating more
equity than required? What is the debt component? Keep a track on the profits,
growth and margins of the previous years. A steady growth rate is the quality of a
fundamentally sound company. Check the assumptions the promoters are making
and whether these assumptions or expectations sound feasible.
Risk Factors
The offer documents will list our specific risk factors such as the company’s
liabilities, court cases or other litigations. Examine how these factors will affect the
operations of the company.
Key Names
Every IPO will have lead managers and merchant bankers. You can figure out
the track record of the merchant banker through the SEBI website.
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Capital Market
Pricing
Compare the company’s PER with that of similar companies. With this you
can find out the P/E Growth ratio and examine whether its earning projections seem
viable.
Listing
You should have access to the brokers of the stock exchanges where the
company will be listing itself.
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Capital Market
Secondary market:-
Secondary market is the market for buying and selling securities of the existing
companies. Under this, securities are traded after being initially offered to the public
in the primary market and/or listed on the stock exchange. The stock exchanges are
the exclusive centres for trading of securities. It is a sensitive barometer and reflects
the trends in the economy through fluctuations in the prices of various securities. It
been defined as, "a body of individuals, whether incorporated or not, constituted for
the purpose of assisting, regulating and controlling the business of buying, selling
and dealing in securities". There are 23 stock exchanges in India. Listing on stock
exchanges enables the shareholders to monitor the movement of the share prices in
an effective manner. This assist them to take prudent decisions on whether to retain
their holdings or sell off or even accumulate further. However, to list the securities on
a stock exchange, the issuing company has to go through set norms and
procedures.
The stock exchanges are the exclusive centres for trading of securities. Though the
area of operation/jurisdiction of an exchange is specified at the time of its
recognition, they have been allowed recently to set up trading terminals anywhere in
the country. The three newly set up exchanges (OTCEI, NSE and ICSE) were
permitted since their inception to have nation wide trading. The trading
platforms of a few exchanges are now accessible from many locations.
Further, with extensive use of information technology, the trading platforms of a
few exchanges are also accessible from anywhere through the Internet and
mobile devices. This made a huge difference in a geographically vast country like
India.
Most of the stock exchanges in the country are organised as” Mutuals” which was
considered beneficial in terms of tax benefits and matters of compliance. The
trading members, who provide brokering services, also own,control and manage the
exchanges. This is not an effective model for self -regulatory organisations as the
regulatory and public interest of the exchange conflicts with private interests.
Efforts are on to demutualise the exchanges whereby ownership,
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Capital Market
management and trading membership would be segregated from one another. Two
exchanges viz. OTCEI and NSE are demutualised from inception, where
ownership, management and trading are in the hands of three different sets of
people. This model eliminates conflict of interest and helps the exchange to
pursue market efficiency and investor interest aggressively.
(c) Membership:
The trading platform of an exchange is accessible only to brokers. The broker enters
into trades in exchanges either on his own account or on behalf of clients. No
stock broker or sub-broker is allowed to buy, sell or deal in securities, unless he or
she holds a certificate of registration granted by SEBI. A broker/sub-broker complies
with the code of conduct prescribed by SEBI. Over time, a number of brokers -
proprietor firms and partnership firms - have converted themselves into corporates.
The standards for admission of members stress on factors, such as corporate
structure, capital adequacy, track record, education, experience, etc. and reflect a
conscious endeavour to ensure quality broking services.
(d) Listing:
A company seeking listing satisfies the exchange that at least 10% of the securities,
subject to a minimum of 20 lakh securities, were offered to public for subscription,
and the size of the net offer to the public (i.e. the offer price multiplied by
the number of securities offered to the public, excluding reservations, firm
allotment and promoters' contribution) was not less than Rs. 100 crore, and the
issue is made only through book building method with allocation of 60% of the
issue size to the qualified institutional buyers. In the alternative, it is required to
offer at least 25% of the securities to public.
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Capital Market
listing agreement entered into between the company and the concerned exchange.
The listing agreement prescribes a number of requirements to be continuously
complied with by the issuers for continued listing and such compliance is
monitored by the exchanges. It also stipulates the disclosures to be made by the
companies and the corporate governance practices to be followed by them. SEBI
has been issuing guidelines/circulars prescribing certain norms to be included in
the listing agreement and to be complied with by the companies.
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certain exceptions;
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Capital Market
the number of investor accounts was 4,605,588. All actively traded scrips are held,
traded and settled in demat form. Demat settlement accounts for over 99% of
turnover settled by delivery. This has almost eliminated the bad deliveries and
associated problems. To prevent physical certificates from sneaking into circulation, it
has been mandatory for all new IPOs to be compulsorily traded in
dematerialised form. The admission to a depository for dematerialisation of securities
has been made a prerequisite for making a public or rights issue or an offer for sale.
It has also been made compulsory for public listed companies making IPO of any
security for Rs. 10 crore or more to do the same only in dematerialised form.
(i) Charges:
Rolling settlement on T+3 basis gave way to T+2 from April 2003.
The market has moved close to spot/cash market.
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Capital Market
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Capital Market
For a developing economy like India, debt markets are crucial sources
of capital funds. The debt market in India is amongst the largest in Asia. It includes
government securities, public sector undertakings, other government bodies,
financial institutions, banks and companies. The debt markets in India is divided into
three segments, viz., Government Securities, Public Sector Units (PSU) bonds, and
corporate securities.
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Capital Market
1. Central Government:-
Reserve Bank Of India (RBI), the central bank of the country, acts as investment
banker to the government, raises funds for the government through bond and T-bill
issues, and also participates in the market through open- market operations, in the
course of conduct of monetary policy.
3. Primary dealers:-
Primary dealers are market intermediaries appointed by the Reserve Bank of India
who underwrite and make market in government securities
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Capital Market
Public Sector Units are large issuers of debt securities, for raising funds
to meet the long term and working capital needs.
6. Corporate treasuries:-
Corporate treasuries issue short and long term paper to meet the
financial requirements of the corporate sector.
7. Banks:-
Commercial banks are the largest investors in the debt markets, particularly the
treasury bill and G-sec markets. They have a statutory requirement to hold a certain
percentage of their deposits (currently the mandatory requirement is 24% of
deposits) in approved securities (all government bonds qualify) to satisfy the
statutory liquidity requirements.
8. Mutual funds :-
Mutual Funds have emerged as another important player in the debt markets, owing
primarily to the growing number of bond funds that have mobilised significant
amounts from the investors.
Provident funds are large investors in the bond markets, as the prudential regulations
governing the deployment of the funds they mobilise, mandate investments pre-
dominantly in treasury and PSU bonds.
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Capital Market
As in the case of equity primary market , this is the market in which debt
instruments – government securities, PSU Bonds & corporate bonds are issued for
the first time .
Government Securities:-
In this, successful bids are decided by In this, successful bids are filled up in
filling up the notified amount from the terms of prices that are bid by
lowest bid upwards. participants from the highest price
downward.
This auction creates a new security, This auction facilitates the re-issue of an
every time an auction is completed & existing security
the name of the security is the cut-off
yield
For example, the G-sec 10.3% 2010 For example, in March 2001, RBI
derives its name from the cut-off yield at auctioned the 11.43% 2015 security.
the auction, which in this case was This was a G-sec, which had been
10.3%, which also becomes the coupon earlier issued and trading in the market.
payable on the bond. The auction was for an additional issue
of this existing security. The coupon rate
and the dates of payment of coupons
and redemption are already known.
The two choices in treasury auctions, which are widely known and
used, are:
Discriminatory Price Auctions (French Auction)
In both these kinds of auctions, the winning bids are those that exhaust the amount
on offer, beginning at the highest quoted price (or lowest quoted yield). In the Indian
markets, discriminatory price auction as well as uniform price auction is used for all
bond issuances. Whether an auction will be Dutch or French is announced in the
notification of the auction.
If all the successful bidders have to pay the cut-off price of Rs. 111.2, the auction is
called a Dutch auction, or a uniform price auction. If the successful bidders have to
pay the prices they have actually bid, the auction fills up the notified amounts, in
various prices at which each of the successful bidders bid. This is called a French
auction, or a discriminatory price auction. Each successful bidder pays the actual
price bid by him.
BID TYPE
2. Non-Competitive Bid: Participants not having SGL a/c & current a/c
RBI announces the auction of G-sec through a press notification, and invites bids.
Front office takes a view about Bank's participation in the auction, taking into
consideration the market factors, Bank's
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of 56 and the existing portfolio.
Accordingly, proposal is placed before the Investment Committee
Capital Market
Y
Bids are submitted through NDS_OM platform giving details of the quantum and
expected price/yield of securities. Report is generated.
Result of the auction is declared by RBI on the same day evening on NDS.
If bid is accepted either partially or fully, the same is entered and authorized in bank
system.
To enable medium and small investors to participate in the auction process without
taking the price risk in auctions, the Reserve Bank of India has introduced a facility of
non-competitive bidding in dated government securities auctions for select set of
investors. Non-competitive bidding means that a person would be able to participate
in the auctions of dated government securities without having to quote the yield or
price in the bid. Thus, he will not have to worry about whether his bid will be on or off-
the-mark; as long as he bids in accordance with the scheme, he will be allotted
securities fully or partially.
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Capital Market
be open to those who do not have current account (CA) or Subsidiary General
Ledger (SGL) account with the Reserve Bank of India. As an exception, Regional
Rural Banks (RRBs) and Urban Cooperative Banks (UCBs) can also apply under this
Scheme in view of their statutory obligations.
Corporate Bonds :-
The corporate bond market has been in existence in India for a long time. However,
despite a long history, the size of the public issue segment of the corporate bond
market in India has remained quite insignificant.
Secondary Market :-
Like in the case of equity secondary market, the secondary debt market
involves buying and selling of debt instruments which are already issued in the
primary market or listed on the exchanges.
Government bonds are deemed to be listed as soon as they are issued. Markets for
government securities are pre-dominantly wholesale markets, with trades done on
telephonic negotiation. NSE WDM provides a trading platform for Government
bonds, and reports over 65% of all secondary market trades in government
securities.
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Capital Market
broker of a permitted stock exchange in which case settlement can be on T+2 basis.
In NDS, all trades between members of NDS have to be reported immediately. The
settlement is routed through CCIL for all NDS members.
The correlation between Indian 10 yr G-sec has held reasonably well in the recent
past. Although, the correlation might not hold on a day to day basis, but over a
slightly longer period, the direction of the movement of the Indian 10 yr bond is
quite similar to that of the US 10 yr bond.
The yields of the bonds have increased as the green shoots of recovery in the
global economy has led to an increase in risk taking behaviour among the
investors who are selling bonds to enter other asset classes which are relatively
more risky and offers higher yields. The S&P’s decision to lower ratings outlook
on US sovereign debt to negative from stable led to sell off in the US treasuries.
Similarly in India, the rally in equity markets since the election results on 18 th May
might have led to some sell off in the bond markets which have pushed the
Indian 10 yr bond yields to 6.70% levels from 6.22% in Mid May, in line with the
sharp rise in the US 10 yr bonds .
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Capital Market
The sense of political stability following election results has reduced the risk of
an outright sovereign rating downgrade by international credit rating agencies
in the near future . Although , the fiscal deficit concerns remain, the continuity
of the political regime will abate the risk of runaway fiscal deficits. The
reduced risk of sovereign rating downgrade due to a stable government and a
likely controllable fiscal deficit scenario will therefore provide support to the
bond market sentiments.
The bond interest rate is also affected by the RBI policy stance. If the RBI
goes for an expansionary monetary policy , then the bond coupon rate will
come down , as there will be ample liquidity in the system which easily would
meet the demand for the same. It is a reverse situation when the RBI goes for
a contractionary monetary policy. This is because then the money supply in
the economy would be less as compared to the demand for the same and the
consequence would be hardening of the bond coupon rate.
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Capital Market
National Stock Exchange (NSE) , top 50 companies are taken into consideration
to calculating nifty.
If the Sensex goes up, it means that the prices of the stocks of most of the
major companies on the BSE have gone up. If the Sensex goes down, this tells you
that the stock price of most of the major stocks on the BSE have
gone down.
Just like the Sensex represents the top stocks of the BSE, the Nifty
represents the top stocks of the NSE.
The sensex 30 includes the following companies (As on 24th July 2009)
3 L &T 18 NTPC
10 SBI 25 DLF
11 ONGC 26 Wipro
12 BHEL 27 Hindalco
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Capital Market
The 30 companies that make up the Sensex are selected and reviewed from time to
time by an “index committee”. This “index committee” is made up of academicians,
mutual fund managers, finance journalists, independent governing board members
and other participants in the financial markets.
3 L &T 28 Wipro
6 ITC 31 Unitech
11 BHEL 36 SAIL
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Depending on the value of the market cap, the company will either be a “mid-cap” or
“large-cap” or “small-cap” company
According the BSE, any shares that DO NOT fall under the following criteria, can be
considered to be open market shares:
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Capital Market
Locked-in shares and shares which would not be sold in the open market in normal
course.
A company has to submit a complete report about “who has how many of the
company’s shares” to the BSE. On the basis of this, the BSE will decide the “free-
float factor” of the company. The “free-float factor” is a very valuable number. If you
multiply the "free-float factor" with the “market cap” of that company, you will get the
“free-float market cap” ,which is the value of the shares of the company in the open
market
NSE respectively:-
(a) Market capitalization: -The company should have a market capitalization in the
Top 100 market capitalization’s of the BSE. Also the market capitalization of each
company should be more than 0.5% of the total market capitalization of the Index.
(b) Trading frequency: -The company to be included should have been traded on
each and every trading day for the last one year. Exceptions can be made for
extreme reasons like share suspension etc.
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Capital Market
(c) Number of trades: -The scrip should be among the top 150 companies listed
by average number of trades per day for the last one year.
(e) Listed history:- The companies should have a listing history of at least one year
on BSE.
(f) Track record:- In the opinion of the index committee, the company should have
an acceptable track record.
First: Find out the “free-float market cap” of all the 30 companies that make up the
Sensex.
Second: Add all the “free-float market cap’s” of all the 30 companies.
Third: Make all this relative to the Sensex base. The value you get is the Sensex
value. To understand the third step let us take an example .
Example:-Suppose, the free float market cap of all the 30 companies was Rs.
100,000,000 at the end of one trading day and the value of sensex is 12500. The
market cap at the end of next trading day becomes Rs.120,000,000, then the sensex
value at the end of that day is –
Thus the sensex value at the end of next trading day is 15000. Please note
that every time one of the 30 companies has a “stock split” or a "bonus" etc.
appropriate changes are made in the “market cap” calculations.
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8.
Price Earnings ratio = Market price per share
Earnings Per Share
Who are the participants in the capital market ?
ANS:- The following are the market participants in the capital market :-
(i)Financial Institutions
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Pension Fund
A pension fund is a pool of assets forming an independent legal entity that are
bought with the contributions to a pension plan for the exclusive purpose of financing
pension plan benefits.
Mutual fund
Financial Institution
A financial institution is an institution that provides financial services for its clients or
members. Probably the most important financial service provided by financial
institutions is acting as financial intermediaries. Most financial institutions are highly
regulated by government bodies. Broadly speaking, there are three major types of
financial institution :-
1) Deposit-taking institutions that accept and manage deposits and make loans
(this category includes banks, credit unions, trust
companies, and mortgage loan companies);
2) Insurance companies and pension funds; and
3) Brokers, underwriters and investment funds.
10. What is the difference between FDI and FII? Which Form of
Investment is good for the economy ?
ANS:- Foreign Direct Investment (FDI ) is the investment made by the foreign
companies / investors in a company with a strategic perspective. The investment is
not only made to gain return but also made to have a say in the management of the
affairs of the company.
On the other hand, Foreign Institutional Investments (FIIs) , also called as portfolio
investments are made by foreign investors primarily to get a healthy return on their
investment.
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FDI is preferred over FII investments since it is considered to be the most beneficial
form of foreign investment for the economy as a whole. Direct investment targets a
specific enterprise, with the aim of increasing its capacity/productivity or changing its
management control. Direct investment to create or augment capacity ensures that
the capital inflow translates into additional production. In the case of FII investment
that flows into the secondary market, the effect is to increase capital availability in
general, rather than availability of capital to a particular enterprise. Translating an FII
inflow into additional production depends on production decisions by someone other
than the foreign investor — some local investor has to draw upon the additional
capital made available via FII inflows to augment production. In the case of FDI that
flows in for the purpose of acquiring an existing asset, no addition to production
capacity takes place as a direct result of the FDI inflow. Just like in the case of FII
inflows, in this case too, addition to production capacity does not result from the
action of the foreign investor – the domestic seller has to invest the proceeds of the
sale in a manner that augments capacity or productivity for the foreign capital inflow
to boost domestic production.
There is a widespread notion that FII inflows are hot money — that it comes and
goes, creating volatility in the stock market and exchange rates. While this might be
true of individual funds, cumulatively, FII inflows have only provided net inflows of
capital.
FDI tends to be much more stable than FII inflows. Moreover, FDI brings not just
capital but also better management and governance practices and, often,
technology transfer. The know-how thus transferred along with FDI is often more
crucial than the capital per se. No such benefit accrues in the case of FII inflows,
although the search by FIIs for credible investment options has tended to improve
accounting and governance practices among listed Indian companies.
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The following graph shows the FDI & FII inflows in India during the last 5 years
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Capital Market
The capital market is the market for securities, where companies and governments
can raise long term funds. Selling stock and selling bonds are two ways to generate
capital and long term funds. It provides a new avenue to corporate and government
to raise funds for long term.
At present the central government has a large fiscal deficit of 6.8% of GDP, which
comes to around Rs. 4,00,000 cr. To finance this large deficit the government would
look to capital market . Corporates at the moment are also looking at raising funds
through capital market.
It is seen mostly in case of developing countries that they suffer from investment –
savings gap . This gap means that funds available fall far short of the amount
needed to stimulate economic development.Thus this gap hinders the economic
growth of a developing country like India.In such a situation capital market plays an
important role . Capital market expand the investment options available in the
country , which attracts portfolio investments from abroad. Domestic savings are also
facilitated by the availability of additional investment options. This enables to bridge
the gap between investment and savings and paves the way for economic
development .
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Capital Market
Capital market in any country provides the corporate and government to raise long
term finance at a low cost as compared to other modes of raising finance .Therefore
capital market is important, more so for India as it embarks on the path of becoming
a developed country.
Through open Market Operation (OMO), the Reserve Bank of India controls the cost
and availability of money supply in the Indian economy.Thus when RBI follows
expansionary monetary policy it purchases government securities from the Bond
market and when it intends to contract the money supply in the economy it sells the
securities from the secondary bond market . Because of these operation there is also
an impact on the interest rates , which in turn impacts the cost of the funds in the
economy. Thus capital market helps the RBI to check the cost and availability of
funds in the economy.
Capital market also indicate the state of the economy. It is said to be the face of the
economy. This is so because when capital market is stable , investments flow into
capital market from within as well as outside the country , which indicates that the
future prospects of the economy are good.
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The corporate earnings for the April – June quarter for the current fiscal has
been good. The companies like TCS, Infosys,Maruti Suzuki, Bharti Airtel, ACC, ITC,
Wipro,HDFC,Binani cement, IDEA, Marico Canara Bank, Piramal Health, India
cements , Ultra Tech, L&T, Coca- Cola, Yes Bank, Dr. Reddy’s Laboratories, Oriental
Bank of Commerce, Ranbaxy, Fortis, Shree Cement ,etc have registered growth in
net profit compared to the corresponding quarter a year ago. Thus we see
companies from Infrastructure sector, Financial Services, Pharmaceutical sector, IT
Sector, Automobile sector, etc. doing well . This across the sector growth indicates
that the Indian economy is on the path of recovery which has been positively
reflected in the stock market( rise in sensex & nifty) in the last two weeks. (July 13-
July 24).
b) Environmental Factors :-
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Capital Market
from monsoon other natural calamities like Floods, tsunami, drought, earthquake,
etc. also have an impact on the capital market of a country.
The Indian Met Department (IMD) on 24th June stated that India would receive only
93 % rainfall of Long Period Average (LPA). This piece of news directly had an
impact on Indian capital market with BSE Sensex falling by
0.5 % on the 25th June . The major losers were automakers and consumer goods
firms since the below normal monsoon forecast triggered concerns that demand in
the crucial rural heartland would take a hit. This is because a deficient monsoon
could seriously squeeze rural incomes, reduce the demand for everything from
motorbikes to soaps and worsen a slowing economy.
The macro economic numbers also influence the capital market. It includes Index of
Industrial Production (IIP) which is released every month, annual Inflation number
indicated by Wholesale Price Index (WPI) which is released every week, Export –
Import numbers which are declared every month, Core Industries growth rate ( It
includes Six Core infrastructure industries – Coal, Crude oil, refining, power, cement
and finished steel) which comes out every month, etc. This macro –economic
indicators indicate the state of the economy and the direction in which the economy
is headed and therefore impacts the capital market in India.
A case in the point was declaration of core industries growth figure. The six Core
Infrastructure Industries – Coal, Crude oil, refining, finished steel, power & cement –
grew 6.5% in June , the figure came on the 23 rd of July and had a positive impact on
the capital market with the sensex and nifty rising by 388 points & 125 points
respectively.
d) Global Cues :-
Thus capital market in India is also affected by developments in other parts of the
world i.e. U.S. , Europe, Japan , etc.
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major economies, price of crude –oil, credit rating of various economies given by
Moody’s, S & P, etc.
An obvious example at this point in time would be that of subprime crisis & recession
. Recession started in U.S. and some parts of the Europe in early 2008 .Since then it
has impacted all the countries of the world- developed, developing , less- developed
and even emerging economies.
For any economy to achieve and sustain growth it has to have political stability and
pro- growth government policies. This is because when there is political stability
there is stability and consistency in government’s attitude which is communicated
through various government policies. The vice- versa is the case when there is no
political stability .So capital market also reacts to the nature of government , attitude
of government, and various policies of the government.
The above statement can be substantiated by the fact the when the mandate came
in UPA government’s favour ( Without the baggage of left party) on May 16 2009, the
stock markets on Monday , 18th May had a bullish rally with sensex closing 800 point
higher over the previous day’s close. The reason was political stability. Also without
the baggage of left party government can go ahead with reforms.
When the national income of the country increases and per capita income of people
increases it is said that the economy is growing . Higher income also means higher
expenditure and higher savings.This augurs well for the economy as higher
expenditure means higher demand and higher savings means higher investment.
Thus when an economy is growing at a good pace capital market of the country
attracts more money from investors, both from within and outside the country and
vice
-versa. So we can say that growth prospects of an economy does have an impact on
capital markets.
Another factor which influences capital market is investor sentiment and their risk
appetite .Even if the investors have the money to invest but if they are not confident
about the returns from their investment , they may stay away from investment for
some time.At the same time if the investors have low risk appetite , which they were
having in global and Indian capital market some four to five months back due to
global financial meltdown and recessionary situation in U.S. & some parts of
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Europe , they may stay away from investment and wait for the right time to come.
If a particular investor buy’s the same securities as other people, he will have the
same results as other people. It is impossible to produce a superior performance
unless that investor does something different from the majority. To buy when others
are despondently selling and to sell when others are greedily buying requires the
greatest fortitude and pays the greatest reward. Bear markets have always been
temporary. And so have bull markets. Share prices usually turn upward from one to
twelve months before the bottom of the business cycle and vice versa. If a particular
industry or type of security becomes popular with investors, that popularity will
always prove temporary and, when lost, may not return for many years.
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FUNDAMENTAL ANALYSIS :-
The investor while buying stock has the primary purpose of gain. If he invests
for a short period of time it is speculative but when he holds it for a fairly long period
of time the anticipation is that he would receive some return on his investment.
Fundamental analysis is a method of finding out the future price of a stock, which an
investor wishes to buy. The method for forecasting the future behavior of investments
and the rate of return on them is clearly through an analysis of the broad economic
forces in which they operate. The kind of industry to which they belong and the
analysis of the company's internal working through statements like income
statement, balance sheet and statement of changes of income. The fundamental
analysis involves
(C) Economic
Company Economic
Analysis.
Analysis Analysis
Industrial
(a) Company Analysis:-
Analysis
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Company analysis is a study of the variables that influence the future of a firm
both qualitatively and quantitatively. It is a method of assessing the competitive
position of a firm earning and profitability, the efficiency with which it operates and its
financial position with respect to the earning to its shareholders. The fundamental
nature of this analysis is that each share of a company has an intrinsic value, which
is dependent on the company's financial performance, quality of management and
record of its earnings and dividend. They believe that the market price of share in a
period of time will move towards its intrinsic value. If the market price of a share is
lower than the intrinsic value, as evaluated by the fundamental analysis, then the
share is supposed to be undervalued and it should be purchased but if the current
market price shows that it is more than intrinsic value then according to the theory
the share should be sold. This basic approach is analyzed through the financial
statements of an organization. The basic financial statements, which are required as
tools of the fundamental analyst, are the income statement, the balance sheet, and
the statement of changes in financial position. These statements are useful for
investors, creditors as well as internal management of a firm and on the basis these
statements the future course of action may be taken by the investors of the firm.
While evaluating a company, its statement must be carefully judged to find out that
they are:
i) Correct,
ii) Complete,
iv) Comparable.
Engineering,
Textiles,
Cement,
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Retail,
Sugar,
Information Technology,
Telecommunications,
FMCG,
Miscellaneous.
Industry should also be evaluated or analyzed through its life cycle. Industry life
cycle may also be studied through the industrial life cycle state.
There are generally three stages of an industry. These stages are pioneering stage,
expansion stage and stagnation stage.
The industrial life cycle has a pioneering stage when the new inventions and
technological developments take place. During this time the investor will notice great
increase in the activity of the firm. Production will rise and in relation to production,
there will be a great demand for the product. At this stage, the profits are also very
high as the technology is new. Taking a look at the profit many new firms enter into
the same field till the market becomes competitive. The market competitive pressures
keep on increasing with the entry of new-firms and the prices keep on declining and
then ultimately profits fall. At this stage all firms compete with each other and only a
few efficient firms are left to run the business and most of the other firms are wiped
out in the pioneering stage itself.
The efficient firms, which have been in the market now, find that it is time to stabilize
them. Although competition is there, the, number of firms have gone down during
pioneering stage itself and there are a large number of firms left to run the business
in the industry. This is the time when each one has to show competitive strength
and superiority. The
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investor will find that this is the best time to make an investment. At the pioneering
stage it was difficult to find out which of the firm to invest in, but having waited for the
stability period there has been a dynamic selection process and a few of the large
number of firms are left in the industry. This is the period of security and safety and
this is also called period of maturity for the firm. This stage lasts from five years to
fifty years of a firm depending on the potential and productivity and also the
capability to meet the change in competition and rapid change in customer habit.
3. STAGNATION STAGE: -
During the stagnation stage the investor will find that although there is
increase in sales of an organization, this is not in relation to the profits earned by the
company. Profits are also there but the growth in the firm is lower than it was in the
expansion stage. The industry finds that it is at a loss of power and cannot expand.
During this stage most of the firms who have realized the competitive nature of the
industry , begin to change their course of action and start on a new venture . Investor
should make a continuous evaluation of their investments. In firms in which investors
have received profits for large number of years and have reached stagnation stage,
they should sell off their investment in those firms and find better avenues in those
firms where the expansion stage has set in, many be in another industry.
1. POPULATION: -
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3. CAPITAL FORMATION: -
The natural resources are to a large extent are responsible for a country's economic
development and overall improvement in the condition of corporate growth. In India,
technological discoveries recycling of materials, nuclear and solar energy and new
synthetics should give the investor an opportunity to invest in untapped or recently
tapped resources which would also produce higher investment opportunity.
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TECHNICAL ANALYSIS
Technical analysis is simply the study of prices as reflected on price charts. Technical
analysis assumes that current prices should represent all known information about
the markets. Prices not only reflect intrinsic facts, they also represent human emotion
and the pervasive mass psychology and mood of the moment. Prices are, in the end,
a function of supply and demand. However, on a moment to moment basis, human
emotions,fear, greed, panic, hysteria, elation, etc. also dramatically affect prices.
Markets may move based upon people’s expectations, not necessarily facts. A
market "technician" attempts to disregard the emotional component of trading by
making his decisions based upon chart formations, assuming that prices reflect both
facts and emotion. Analysts use their technical research to decide whether the
current market is a BULL MARKET or a BEAR MARKET.
A stock chart is a simple two-axis (X-Y) plotted graph of price and time. Each
individual equity, market and index listed on a public exchange has a chart that
illustrates this movement of price over time. Individual data plots for charts can be
made using the CLOSING price for each day. The plots are connected together in a
single line, creating the graph. Also, a combination of the OPENING, CLOSING,
HIGH and/or LOW prices for that market session can be used for the data plots. This
second type of data is called a PRICE BAR. Individual price bars are then overlaid
onto the graph, creating a dense visual display of stock movement. Stock charts can
be drawn in two different ways. An ARITHMETIC chart has equal vertical distances
between each unit of price. A LOGARITHMIC chart is a percentage growth chart.
2. TRENDS
The stock chart is used to identify the current trend. A trend reflects the average rate
of change in a stock's price over time. Trends exist in all time frames and all markets.
Trends can be classified in three ways: UP, DOWN or RANGEBOUND. In an uptrend,
a stock rallies often with intermediate periods of consolidation or movement against
the trend. In doing so, it draws a series of higher highs and higher lows on the stock
chart. In an uptrend, there will be a POSITIVE rate of price change over time. In a
downtrend, a stock declines often with intermediate periods of consolidation or
movement against the trend. In doing so, it draws a series of lower highs and lower
lows on the stock chart. In a downtrend,
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there will be a NEGATIVE rate of price change over time. Range bound price swings
back and forth for long periods between easily seen upper and lower limits. There is
no apparent direction to the price movement on the stock chart and there will be
LITTLE or NO rate of price change.
Trends tend to persist over time. A stock in an uptrend will continue to rise until some
change in value or a condition occurs. Declining stocks will continue to fall until some
change in value or conditions occur. Chart readers try to locate TOPS and
BOTTOMS, which are those points where a rally or a decline ends. Taking a position
near a top or a bottom can be very profitable. Trends can be measured using
TRENDLINES. Very often a straight line can be drawn UNDER three or more
pullbacks from rallies or OVER pullbacks from declines. When price bars return to
that trend line, they tend to find SUPPORT or RESISTANCE and bounce off the line
in the opposite direction.
3. VOLUME:-
Volume measures the participation of the crowd. Stock charts display volume through
individual HISTOGRAMS below the price pane. Often these will show green bars for
up days and red bars for down days. Investors and traders can measure buying and
selling interest by watching how many up or down days in a row occur and how their
volume compares with days in which price moves in the opposite direction. Stocks
that are bought with greater interest than sold are said to be under
ACCUMULATION. Stocks that are sold with great interest than bought are said to be
under DISTRIBUTION. Accumulation and distribution often LEAD to price
movement. In other words, stocks under accumulation often will rise some time after
the buying begins. Alternatively, stocks under distribution will often fall some time
after selling begins. It takes volume for a stock to rise but it can fall of its own weight.
Rallies require the enthusiastic participation of the crowd. When a rally runs out of
new participants, a stock can easily fall. Investors and traders use indicators such as
ON BALANCE VOLUME to see whether participation is lagging (behind) or leading
(ahead) the price action. Stocks trade daily with an average volume that determines
their LIQUIDITY. Liquid stocks are very easy for traders to buy and sell. Liquid stocks
require very high SPREADS (transaction costs) to buy or sell and often cannot be
eliminated quickly from a portfolio. Stock chart analysis does not work well on illiquid
stocks.
Charts allow investors and traders to look at past and present price action in order to
make reasonable predictions and wise choices. It is a highly visual medium. This one
fact separates it from the colder world of value-
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based analysis. The stock chart activates both left-brain and right-brain functions of
logic and creativity. So it's no surprise that over the last century two forms of analysis
have developed that focus along these lines of critical examination. The oldest form
of interpreting charts is PATTERN ANALYSIS. This method gained popularity through
both the writings of Charles Dow and Technical Analysis of Stock Trends, a classic
book written on the subject just after World War II. The newer form of interpretation is
INDICATOR ANALYSIS, a math-oriented examination in which the basic elements of
price and volume are run through a series of calculations in order to predict where
price will go next. Pattern analysis gains its power from the tendency of charts to
repeat the same bar formations over and over again. These patterns have been
categorized over the years as having a bullish or bearish bias. Some well-known
ones include HEAD and SHOULDERS, TRIANGLES, RECTANGLES, DOUBLE
TOPS, DOUBLE BOTTOMS
and FLAGS. Also, chart landscape features such as GAPS and TRENDLINES are
said to have great significance on the future course of price action. Indicator analysis
uses math calculations to measure the relationship of current price to past price
action. Almost all indicators can be categorized as TREND-FOLLOWING or
OSCILLATORS. Popular trend-following indicators include MOVING AVERAGES,
ON BALANCE VOLUME and MACD. Common
oscillators include STOCHASTICS, RSI and RATE OF CHANGE. Trend- following
indicators react much more slowly than oscillators. They look deeply into the rear
view mirror to locate the future. Oscillators react very quickly to short-term changes
in price, flipping back and forth between OVERBOUGHT and OVERSOLD levels.
Both patterns and indicators measure market psychology. The core of investors and
traders that make up the market each day tend to act with a herd mentality as price
rises and falls. This "crowd" tends to develop known characteristics that repeat
themselves over and over again. Chart interpretation using these two important
analysis tools uncovers growing stress within the crowd that should eventually
translate into price change.
5. MOVING AVERAGES
The most popular technical indicator for studying stock charts is the MOVING
AVERAGE. This versatile tool has many important uses for investors and traders.
Take the sum of any number of previous CLOSE prices and then divide it by that
same number. This creates an average price for that stock in that period of time. A
moving average can be displayed by re-computing this result daily and plotting it in
the same graphic pane as the price bars. In other words, if price starts to move
sharply upward or downward, it will take some time for the moving average to "catch
up". Plotting moving averages in stock charts reveals how well current price is
behaving as compared to the past. The power of
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the moving average line comes from its direct interaction with the price bars. Current
price will always be above or below any moving average computation. When it is
above, conditions are "bullish". When below, conditions are "bearish". Additionally,
moving averages will slope upward or downward over time. This adds another visual
dimension to a stock analysis. Moving averages define STOCK TRENDS. They can
be computed for any period of time. Investors and traders find them most helpful
when they provide input about the SHORT-TERM, INTERMEDIATE and LONG-TERM
trends. For this reason, using multiple moving averages that reflect these
characteristics assist important decision making. Commons moving average settings
for daily stock charts are 20 days for short term, 50 days for intermediate and 200
days for long-term. One of the most common buy or sell signals in all chart analysis
is the MOVING AVERAGE CROSSOVER. These occur when two moving averages
representing different trends. For example, when a short-term average crosses
BELOW a long-term one, a SELL signal is generated. Conversely, when a short-
term crosses ABOVE the long-term, a BUY signal is generated. Moving averages
can be "speeded up" through the application of further math calculations. Common
averages are known as SIMPLE or SMA. These tend to be very slow. By giving more
weight to the current changes in price rather than those many bars ago, a faster
EXPONENTIAL or EMA moving average can be created. Many technicians favor the
EMA over the SMA. Fortunately all common stock chart programs, online and offline
do the difficult moving average calculations but plot price perfectly.
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jumps in to buy or sell. When a level is penetrated but does not attract a crowd of
buyers or sellers, it often falls back below the old support or resistance. This failure is
known as a FALSE BREAKOUT. Support and resistance come in all varieties and
strengths. They most often manifest as horizontal price levels. But trend lines at
various angles represent support and resistance as well. The length of time that a
support or resistance level exists determines the strength or weakness of that level.
The strength or weakness determines how much buying or selling interest will be
required to break the level. Also, the greater volume traded at any level, the stronger
that level will be. Support and resistance exist in all time frames and all markets.
Levels in longer time frames are stronger than those in shorter time frames. The
ideas of Charles Dow, the first editor of the Wall Street Journal, form the basis of
technical analysis today. The behavior patterns that he observed apply to markets
throughout the world.
Before going to equity analysis let’s see some of the basic investment or rather
investing principles:-
Everything Changes
Search Worldwide
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3. Warrants:
A warrant is a security issued by a company granting the holder of the warrant the
right to purchase a specified number of, shares at a specified price any time prior to
an expiry date. Warrants may be issued with debentures or equity shares. The
specific rights are already set out in the warrant. An amount equivalent to at least
twenty five percent of the price fixed shall become payable for the warrant on the
date of their allotment.
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The Securities and Exchange Board of India (SEBI) introduced the QIP process in
2006, to prevent listed companies in India from developing an excessive
dependence on foreign capital. The complications associated with raising capital in
the domestic markets had led many companies to look at tapping the overseas
markets via Foreign Currency Convertible Bonds (FCCB) and Global Depository
Receipts (GDR) to fulfil their needs. To keep a check on this process and to give a
push to the domestic markets, QIPs were launched.
The QIP guidelines of the securities and Exchange Board of India (SEBI) cover any
issue of equity shares / fully convertible debentures (FCDs) / partly convertible
debentures (PCDs) ,(nonconvertible debentures (NCDs) with warrants or any
securities (other than warrants)), which are convertible into or exchangeable with
equity shares at a later date (hereinafter referred to as “specified securities”) made to
Qualified Institutional Buyers (QIBs) by a listed company.
Shareholders’ Resolution
Allotment of specified securities under the QIP route shall be completed within
twelve months from the date of passing of the resolution in terms of sub-section (1A)
of Section 81 of the Companies Act, 1956 or any other applicable provision.
The resolution passed at the meeting of shareholders shall specify that the allotment
is proposed to be made to QIBs through the QIP route and shall also specify the
relevant date on the basis of which price of the resultant shares shall be determined.
Investors in a QIP :-
Only QIBs shall be eligible for allotment of specified securities issued through
QIP.
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No allotment shall be made through the QIP route, either directly or indirectly,
to any QIB being a promoter or any person related to promoter/s.For the
purpose of QIP, QIB who has all or any of the following rights shall also be
deemed to be a person related to promoter/s:
(c) Right to appoint any nominee director on the board of the issuer.
Provided that a QIB who does not hold any shares in the issuer and who has
acquired the aforesaid rights in the capacity of a lender shall not be deemed
to be a person related to promoter/s.
Where the specified security is NCD with warrant, an investor can subscribe
to the combined offering of NCDs with warrants or to the individual
instruments, i.e., either NCDs or warrants.
Pricing of a QIP
An issue of specified securities made under this Chapter shall be made at a price
not less than the average of the weekly high and low of the closing prices of the
related shares quoted on the stock exchange during the two weeks preceding the
relevant date.
"Relevant date" for the purpose of this clause means the date of the meeting in
which the Board of the company or the Committee of Directors duly authorised by
the Board of the company decides to open the proposed issue.
"Stock exchange" for the purpose of this clause means any of the recognised stock
exchanges in which the equity shares of the issuer of the same class are listed and
in which the highest trading volume in such shares has been recorded during the
(two weeks) immediately preceding the relevant date.
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Apart from preferential allotment, this is the only other method of private placement.
However, it scores over other methods, as it does not involve many of the common
procedural requirements such as the submission of pre-issue filings to the market
5. Preferential Issue:-
The preferential issue of equity shares/ Fully Convertible Debentures (FCDs)/ Partly
Convertible Debentures (PCDs) or any other financial instruments which would be
converted into or exchanged with equity shares at a later date, by listed companies
whose equity share capital is listed on any stock exchange, to any select group of
persons under Section 81(1A) of the Companies Act 1956 on private placement
basis are governed by the Securities and Exchange Board of India (SEBI) ,
Disclosure and Investor protection (DIP) guidelines,2000
Where the equity shares of a company have been listed on a stock exchange for a
period of six months or more as on the relevant date, the issue of shares on
preferential basis ( other than an issue of shares on preferential basis to Qualified
Institutional Buyers not exceeding five in number) shall be made at a price not less
than higher of the following:-
I) The average of the weekly high and low of the closing prices of the related shares
quoted on the stock exchange during the six months preceding the relevant date;
OR
II) The average of the weekly high and low of the closing prices of the related
shares quoted on a stock exchange during the two weeks preceding the relevant
date.
Where the equity shares of a company have been listed on a stock exchange
for a period of less than six months as on the relevant date, the issue of shares on
preferential basis (other than an issue of shares on
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preferential basis to Qualified Institutional Buyers not exceeding five in number) can
be made at a price not less than the higher of the following:
a) The price at which shares were issued by the company in its IPO or the value per
share arrived at in a scheme of arrangement under sections 391 to 394 of the
Companies Act, 1956, pursuant to which the shares of the company were listed, as
the case may be. OR
b) The average of the weekly high and low of the closing prices of the related
shares quoted on the stock exchange during the period shares have been listed
preceding the relevant date. OR
c) The average of the weekly high and low of the closing prices of the related shares
quoted on a stock exchange during the two weeks preceding the relevant date.”
"Relevant date" above means the date thirty days prior to the date on which
the meeting of general body of shareholders is held, in terms of Section 81(1A) of
the Companies Act, 1956 to consider the proposed issue.
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Bibliography:-
The company deposits a large number of its shares with a bank located in
the country where it wants to list indirectly. The bank issues receipts against these
shares, each receipt having fixed number of shares as an underlining ( usually 2 or
4 ). These receipts are then sold to the people of this foreign country (these are
issued to everyone who is allowed to buy shares in that country).These receipts
are listed on the stock exchange. These receipts behave exactly like regular socks
–the prices fluctuate depending on their demand and supply, and depending on the
fundamentals of the underlying company. These receipts are traded like ordinary
stocks, and are called Depository receipts. The issuing bank acts as a depository
for these shares – that is, it stores the shares on behalf of the receipt holders.
Both ADR & GDR are depository receipts and represent a claim on the underlying
shares . The only difference is the location where they are traded. If the depository
receipt is traded in the United States Of America (USA), it is called an American
Depository Receipt or an ADR. If the depository receipt is traded in a country other
than USA, it is called as a Global Depository Receipt or a GDR .
Recently we had an ADR issue by Tata Steel & Suzlon and a GDR issue of
Tata Power.
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http://in.reuters.com
http://www.raagvamdatt.com
Abbreviations
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