Professional Documents
Culture Documents
FINAL Cap MRKT
FINAL Cap MRKT
PRESENTED BY:
1830's Business on corporate stocks and shares in Bank and Cotton presses started in
Bombay. Trading list by the end of 1839 got broader
1840's Recognition from banks and merchants to about half a dozen brokers
1860-61 The American Civil War broke out which caused a stoppage of cotton supply from
United States of America; marking the beginning of the "Share Mania" in India
A disastrous slump began at the end of the American Civil War (as an example,
Bank of Bombay Share which had touched Rs. 2850 could only be sold at Rs. 87)
1874 With the rapidly developing share trading business, brokers used to gather at
a street (now well known as "Dalal Street") for the purpose of transacting
business.
1875 "The Native Share and Stock Brokers' Association" (also known as "The
Bombay Stock Exchange") was established in Bombay
1880 - Sharp increase in share prices of jute industries in 1870's was followed by a
90's boom in tea stocks and coal
1920 Madras witnessed boom and business at "The Madras Stock Exchange" was
transacted with 100 brokers.
1923 When recession followed, number of brokers came down to 3 and the
Exchange was closed down
1936 Merger of the Lahore Stock Exchange with the Punjab Stock Exchange
1937 Re-organization and set up of the Madras Stock Exchange Limited (Pvt.)
Limited led by improvement in stock market activities in South India with
establishment of new textile mills and plantation companies
1940 Uttar Pradesh Stock Exchange Limited and Nagpur Stock Exchange Limited
was established
1947 "Delhi Stock and Share Brokers' Association Limited" and "The Delhi Stocks
and Shares Exchange Limited" were established and later on merged into
"The Delhi Stock Exchange Association Limited". And also government
POST - INDEPENDENCE
1970 The only biggest names available in the market were TATA, Birlas, Bombay Dyeing,
ONGC, ACC, etc.
1980’s RIL entered the market and slowly and gradually companies developed.
Trading Cycle
In 1980’s there were no computers therefore the trading use to take place In “Ring System”.
BSE
Broker M Market
This process use to take long time as it required physical transfer of shares.
1990’s In 1992 SEBI (Security Exchange Board Of India) was formed. In 1994 SEBI
came into power and in the same year NSE National Stock Exchange of India
was formed.
1) STOCK EXCHANGE
A stock exchange is a corporation or mutual organization which provides "trading"
facilities for stock brokers and traders, to trade stocks and other securities. Stock exchanges also
provide facilities for the issue and redemption of securities as well as other financial instruments
and capital events including the payment of income and dividends. The securities traded on a stock
exchange include: shares issued by companies, unit trusts, derivatives, pooled investment products
and bonds. To be able to trade a security on a certain stock exchange, it has to be listed there.
Usually there is a central location at least for recordkeeping, but trade is less and less linked to such
a physical place, as modern markets are electronic networks, which gives them advantages of speed
and cost of transactions. Trade on an exchange is by members only. The initial offering of stocks
and bonds to investors is by definition done in the primary market and subsequent trading is done in
the secondary market. A stock exchange is often the most important component of a stock market.
4) WHAT IS A DERIVATIVE?
Derivative is a product whose value is derived from the value of one or more basic
variables, called underlying. The underlying asset can be equity, index, foreign exchange (forex),
commodity or any other asset.
Derivative products initially emerged as hedging devices against fluctuations in commodity
prices and commodity-linked derivatives remained the sole form of such products for almost three
hundred years. The financial derivatives came into spotlight in post-1970 period due to growing
6) WHAT IS AN INDEX?
An Index shows how a specified portfolio of share prices is moving in order to give an
indication of market trends. It is a basket of securities and the average price movement of the basket
of securities indicates the index movement, whether upwards or downwards.
7) WHAT IS A DEPOSITORY?
A depository is like a bank wherein the deposits are securities (viz. shares, debentures,
bonds, government securities, units etc.) in electronic form.
8) WHAT IS DEMATERIALIZATION?
Dematerialization is the process by which physical certificates of an investor are converted
to an equivalent number of securities in electronic form and credited to the investor’s account with
his Depository Participant (DP).
1) 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 corporate, to raise resources to
meet their requirements of investment 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. They may issue the securities in domestic
market and/or international market.
The primary market issuance is done either through public issues 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 the Companies Act, 1956, an issue becomes public if it results in
allotment to more than 50 persons. This means an issue resulting in allotment to less than 50
persons is private placement. There are two major types of issuers who issue securities. The
corporate entities issue mainly debt and equity instruments (shares, debentures, etc.), while the
governments (central and state governments) issue debt securities (dated securities, treasury bills).
The price signals, which subsume all information about the issuer and his business including
associated risk, generated in the secondary market, help the primary market in allocation of funds.
A follow on public offering (FPO) is when an already listed company makes either a fresh
issue of securities to the public or an offer for sale to the public, through an offer document.
An offer for sale in such scenario is allowed only if it is made to satisfy listing or continuous
listing obligations.
Rights Issue whenever, an existing company wants to issue new series of equity shares to
finance its additional activities, it is required to offer these shares to the existing shareholders
at a specified price during a particular period.
It is called a 'right' or Pre-emptive right'. It may simply be defined as an option to buy a
security at a specified price, generally at par or at premium but much below the market price.
The shares offered are called Right Shares and financing the projects of a company by the
issue of such right shares is 'right financing'.
TERMINOLOGIES USED:
Book Building is basically a capital issuance process used in Initial Public Offer (IPO)
which aids price and demand discovery. It is a process used for marketing a public offer of
equity shares of a company. It is a mechanism where, during the period for which the book
for the IPO is open, bids are collected from investors at various prices, which are above or
equal to the floor price. The process aims at tapping both wholesale and retail investors. The
offer/issue price is then determined after the bid closing date based on certain evaluation
criteria.
Book Running Lead Manager is a Lead Merchant Banker who has been appointed by the
Issuer Company as the Book Runner Lead Manager. The name of the Book Runner Lead
Manager is mentioned in the offer document of the Issuer Company.
Floor Price is the minimum offer price below which bids cannot be entered. The Issuer
Company in consultation with the Book Running Lead Manager fixes the floor price.
Merchant Banker is an entity registered under the Securities and Exchange Board of India
(Merchant Bankers) Regulations, 1999.
Syndicate Members are the intermediaries registered with the Board and permitted to carry
on activity as underwriters. The Book Running Lead Managers to the issue appoints the
Syndicate Members.
Order Book is an 'electronic book' that shows the demand for the shares of the company at
various prices.
Offer document means Prospectus in case of a public issue or offer for sale and Letter of
Offer 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 to
make his/her investment decision. Draft Offer document means the offer document in draft
stage. The draft offer documents are filed with SEBI, at least 21 days prior to the filing of
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 the
draft 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
from the filing of the Draft Offer Document with SEBI.
Red Herring Prospectus (RHP) is a prospectus, which does not have details of either price
or number of shares being offered, or the amount of issue. This means that incase price is
not disclosed, 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 determined
later. 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 day
prior 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
Abridged Prospectus contains all the salient features of a prospectus. It accompanies the
application form of public issues.
Lock-in indicates a freeze on the shares. SEBI (DIP) Guidelines have stipulated lock-in
requirements on shares of promoters mainly to ensure that the promoters or main persons,
who are controlling the company, shall continue to hold some minimum percentage in the
company after the public issue.
The promoter has been defined as a person or persons who are in over-all control of the
company, who are instrumental in the formulation of a plan or program pursuant to which
the securities are offered to the public and those named in the prospectus as promoters(s). It
may be noted that a director / officer of the issuer company or person, if they are acting as
such merely in their professional capacity are not be included in the definition of a
promoter.
'Promoter Group' includes the promoter, an immediate relative of the promoter (i.e. any
spouse of that person, or any parent, brother, sister or child of the person or of the spouse).
In case promoter is a company, a subsidiary or holding company of that company; any
company in which the promoter holds 10% or more of the equity capital or which holds
10% or more of the equity capital of the Promoter
Issue Price is the price at which a company's shares are offered initially in the primary
market. When they begin to be traded, the market price may be above or below the issue
price. Indian primary market ushered in an era of free pricing in 1992. Following this, the
guidelines have provided that the issuer in consultation with Merchant Banker shall decide
the price. There is no price formula stipulated by SEBI. SEBI does not play any role in price
fixation. The company and merchant banker are however required to give full disclosures of
the parameters which they had considered while deciding the issue price. There are two
types of issues one where company and LM fix a price (called fixed price) and other, where
the company and LM stipulate a floor price or a price band and leave it to market forces to
determine the final price (price discovery through book building process).
Price Band: The red herring prospectus may contain either the floor price for the securities
or a price band 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. The price band can have a revision and such a
revision in the price band shall be widely disseminated by informing the stock exchanges,
by issuing press release and also indicating the change on the relevant website and the
‘Retail individual investor’ (RII) means an investor who applies or bids for securities of or
for a value of not more than Rs.1, 00,000. Any bid made in excess of this will be considered
in the High Net worth Individuals (HNI) category.
Qualified Institutional Buyers (QIBs) are those institutional investors who are generally
perceived to possess expertise and the financial muscle to evaluate and invest in the capital
markets.
Allotment: In a book built issue allocation to Retail Individual Investors (RIIs), Non
Institutional Investors (NIIs) and Qualified Institutional Buyers (QIBs) is in the ratio of 35:
15: 50 respectively. In case the book built issues are made pursuant to the requirement of
mandatory allocation of 60% to QIBs in terms of Rule 19(2) (b) of SCRR, the respective
figures are 30% for RIIs and 10% for NIIs. This is a transitory provision pending
harmonization of the QIB allocation in terms of the aforesaid Rule with that specified in the
guidelines.
Green Shoe option means an option of allocating shares in excess of the shares included in
the public issue and operating a post-listing price stabilizing mechanism for a period not
exceeding 30 days in accordance with the provisions of Chapter VIIIA of DIP Guidelines,
which is granted to a company to be exercised through a Stabilizing Agent. This is an
arrangement wherein the issue would be over allotted to the extent of a maximum of 15% of
the issue size. From an investor’s perspective, an issue with green shoe option provides
more probability of getting shares and also that post listing price may show relatively more
stability as compared to market.
Cut off price: In Book building issue, the issuer is required to indicate either the price band
or a floor price in the red herring 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 PROCESS:
1. The Issuer who is planning an IPO nominates a lead merchant banker as a 'book runner'.
2. The Issuer specifies the number of securities to be issued and the price band for orders.
EXAMPLES:
1) INDIABULLS POWER IPO
Objects of the Issue:
The objects of the Issue are to achieve the benefits of listing on the Stock Exchanges & to
raise capital:
1. To part finance the construction and development of the 1,320 MW Amravati Power
Project Phase – I
2. Funding equity contribution in the Company’s wholly owned subsidiary, IRL, to part
finance the construction and development of the 1,335 MW Nashik Power Project
3. General corporate purposes.
Issue Detail:
1. Issue Open: Oct 12, 2009 - Oct 15, 2009
2. Issue Type: 100% Book Built Issue IPO
3. Issue Size: 339,800,000 Equity Shares of Rs. 10
4. Issue Size: Rs. 1,529.10 Crore
5. Face Value: Rs. 10 Per Equity Share
6. Issue Price: Rs. 40 - Rs. 45 Per Equity Share
7. Market Lot: 150 Shares
Issue Detail:
1) Issue Open: Jul 28, 2009 - Jul 31, 2009
2) Issue Type: 100% Book Built Issue IPO
3) Issue Size: 301,652,031 Equity Shares of Rs. 10
4) Issue Size: Rs. 3,016.52 Crore
5) Face Value: Rs. 10 Per Equity Share
6) Issue Price: Rs. 90 - Rs. 100 Per Equity Share
7) Market Lot: 65 Shares
8) Minimum Order Quantity: 65 Shares
9) Listing At: BSE, NSE
The procedure of right issue as given in the Companies Act may be followed as follows:
First, the offer must be made by giving a notice to the existing shareholders, mentioning
therein the number of shares offered and the time within which the offer must be accepted. Such
period shall not be less than 15 days from the date of offer, however it may be more than 15 days
keeping in mind that shareholders must have sufficient time to make up their mind judiciously. The
notice must also indicate that if the offer is not accepted within the specified period, it shall be
deemed to have been declined. Again the notice must also state that they have the right to renounce
all or any of the shares offered to them in favour of their nominee(s).
Example:
Tata comes out with Rs10,000 cr rights issue to repay Corus debt. The issue will include
12.18 crore shares of Rs. 300 each to be issued on rights basis in the ratio 1:5 and CCPS of Rs100
to be converted into equity on 1 September, 2009.
Tata group company Tata Steel is coming out with a mega rights issue of about Rs10,000
crore to repay the ‘bridge loans’ raised for funding acquisition of British steel behemoth Corus.
The proceeds will be used to repay bridge loans taken for acquisition of Corus. Tata Steel
UK has raised 3.15 million pounds of debt for financing the acquisition.
The issue, opening on 22 November, will include 12.18 crore shares of Rs300 each to be
issued on rights basis in the ratio 1:5 and Cumulative Compulsory Preference Shares (CCPS) of
Rs100 to be converted into equity on 1 September, 2009, he said.
According to the Draft Letter of Offer filed with the Securities Exchange Board of India
(Sebi), the rights issue will fetch Rs3,654 crore while CCPS will bring in Rs6,000 crore.
The company’s overall borrowings during 2006-07 increased by over 600% from Rs3,377
crore to Rs24,926 crore “principally in connection with its acquisition of Corus and expenditure in
connection with other acquisitions and expansions,” said the document.
Tata’s decision to raise funds from rights issue will result in enlargement of its equity by
20% after the rights issue and 35% after conversion of CCPS into equity.The enlargement of equity
base may impair Tata Steel’s ability to maintain a high rate of dividend to its shareholders.
The past decade in many ways has been remarkable for securities market in
India. It has grown exponentially as measured in terms of amount raised from the market, number
of stock exchanges and other intermediaries, the number of listed stocks, market capitalization,
2.3. 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. Secondary market could be either auction or dealer
market. While stock exchange is the part of an auction market, Over-the-Counter (OTC) is a part of
the dealer market.
SENSEX
SENSEX is the short term for the words "Sensitive Index" and is associated with the
Bombay (Mumbai) Stock Exchage (BSE).
The SENSEX was first formed on 1-1-1986 and used the market capitalization of the 30
most traded stocks of BSE. The base was 1979 and taken as 100. The 30 scrips of 1986 and no
more the same - some have been removed while some have been added. At irregular intervals, the
Bombay Stock Exchange (BSE) authorities review and modify its composition to make sure it
reflects current market conditions.
Today the Sensex constitutes of the following companies:
SBTS electronically matches orders on a strict price/time priority and hence cuts down on
time, cost and risk of error, as well as on fraud resulting in improved operational efficiency. It
allows faster incorporation of price sensitive information into prevailing prices, thus increasing the
informational efficiency of markets. It enables market participants, irrespective of their
geographical locations, to trade with one another simultaneously, improving the depth and liquidity
of the market. It provides full anonymity by accepting orders, big or small, from members without
DEMAT ACCOUNT:
Demat account allows you to buy, sell and transact shares without the endless paperwork
and delays. It is also safe, secure and convenient.
Why demat?
The Benefits
A safe and convenient way to hold securities;
Elimination of risks associated with physical certificates such as bad delivery, fake
securities, delays, thefts etc.;
Change in address recorded with DP gets registered with all companies in which investor
holds securities electronically eliminating the need to correspond with each of them
separately;
Required Documents
The extent of documentation required to open a demat account may vary according to your
relationship with the institution. If you plan to open a demat account with a bank, a savings, current
and, or other account for which the holder have been issued a check book, such holder has an edge
over the non-account holder. In fact, banks usually offer additional incentives to customers who
open a demat account with them. Along with the application form, your photographs (with co-
applicants) and proof of identity/residence/date of birth have to be submitted. The DPs also ask for
a DP-client agreement to be executed on non-judicial stamp paper. Here is a broad list:
Proof of Identification
Proof of Address
For proof of identification and, or address self-attested facsimile copies of PAN card, Voter’s
ID, Passport, Ration card, Driver’s license, Photo credit card, Employee ID card, Bank attestation,
latest IT returns and, or latest Electricity/Landline phone bill are sufficient. While they only ask for
photocopies of the documents, they will need the originals for verification
Statement of Account:
A periodical statement of holdings and transactions is provided by DP. This can also be asked for
from the DP.
1) NSDL
NSDL is promoted by Industrial Development Bank of India Limited (IDBI) - the largest
development bank of India, Unit Trust of India (UTI) - the largest mutual fund in India and
National Stock Exchange of India Limited (NSE) - the largest stock exchange in India... NSDL
aims at ensuring the safety and soundness of Indian marketplaces by developing settlement
solutions that increase efficiency, minimise risk and reduce costs.
2) CDSL
CDSL was set up with the objective of providing convenient, dependable and secure
depository services at affordable cost to all market participants .CDSL was promoted by Bombay
Stock Exchange Limited (BSE) jointly with leading banks such as State Bank of India, Bank of
India, Bank of Baroda, HDFC Bank, Standard Chartered Bank, Union Bank of India and Centurion
Bank.
TRADING ACCOUNT
The Securities and Exchange Board of India (SEBI) mandates a demat account for equity
share trading even One equity share. A Trading account can also be opened with most banks and
financial institutions, after filling up the required forms and providing identity and address proofs.
The actual trading can be done by phone, internet or using transaction slips that are provided at the
time of opening the account.
There is a brokerage charge that is incurred for both buying and selling of shares. This
charge varies across different trading houses. Also, government levies like the Securities
Transaction Tax (STT) will be incurred on such transactions.
1. PLACING ORDER
An order is to be placed by an investor with the broker either to buy or sale of certain
number of securities at a certain specified price. An order can be placed by telegram, telephone,
telex/ fax, and letter or in person. There are different types of orders. When in the order the client
places a limit on the price of the security it is called limit order. Where the order is to be executed
by the broker at the best price, such an order is called 'Best Rate Order'. When the client does not
fix any price limit or time limit on the execution of the order and relies on the judgement of the
broker is called 'Open Order'.
2. TRADE EXECUTION
The broker has to execute the order placed by his client during the trading hours. The order
is executed as per requirements of the client. The broker may negotiate with other parties in order to
execute the orders.
3. CONTRACT NOTE
When the order is executed, the broker prepares a contract note. It is the basis of the
transaction. Particulars such as price, quantity of securities, date of transaction, names of the parties,
brokerage etc. are entered in the contract note.
5. SETTLEMENT
The procedure adopted for the settlement of transactions varies depending upon the kind of
securities. On the date of settlement cheques/ drafts and securities are exchanged as per the delivery
order. The clearinghouse makes the payment and delivers the security certificates to the members
on the payout day. Each broker settles the account with every client by taking delivery or giving
delivery of securities certificates and receipts or payment of cheques.
VARIOUS SECTORS
The companies listed in BSE and NSE are divided into various sectors depending upon
company’s profile
The various sectors are as follows:
MID CAP:
The National Stock Exchange manages an index called CNX Midcap 200. The objective of
such an index is to capture the movement in the mid-cap shares segment. According to the NSE,
CNX Midcap 200 represents about 77% of the total market capitalization of the mid-cap universe
and 75% of the total traded value. This index provides investors a broad-based benchmark for
comparing portfolio returns in the mid-cap segment.
e.g.: Midcap companies like Jain Irrigation Systems, Bajaj Hindustan, IVRCL
Infrastructures and Nagarjuna Construction have recorded impressive performances with a sharp
growth in their sales and earnings.
There is no classical definition of mid-cap shares. The name ‘mid-cap’ originates from the
term medium capitalized. It is based on the market capitalization of the stock. Market capitalization
is calculated by multiplying the current stock price with the number of shares outstanding or issued
by the company. The definition of mid-cap shares can vary from market to market and from country
to country.
In case of India, the National Stock Exchange (NSE) defines the mid-cap universe as stocks
whose average six months’ market capitalization is between Rs 75 crore and Rs 750 crore. In the
US, mid-cap shares are those stocks that have a market capitalization ranging from Rs 9,000 crore
to Rs 45,000 crore. In India, these shares would be classified as large-cap shares.
SMALL CAP:
Small cap are generally small companies that have just incorporated. They have a market
capitalization of less than $1 or $2 billion. These companies do well early in an economic recovery,
when interest rates are low and they have easy access to funds to invest into their growth. However,
they are the riskiest stocks because smaller companies are more likely to fail.
Small-cap stocks are stocks with a relatively small market capitalization. Classifications
such as 'large cap' or 'small cap' are only approximations that change over time. In fact, the
definition of 'small cap' can vary among brokerages, but generally it involves a company with a
market capitalization of between $300 million and $2 billion.
Below this, companies having a market capitalization between $50 million and $300 million
are called 'micro cap' stocks. Even these aren't the smallest breeds. Nano-cap stocks are even
smaller, and involve small public companies having a market capitalization of below $50 million.
LARGE CAP:
Large cap refers to companies that have a market capitalization of over $5 billion or even
$10 billion. These are large, relatively stable companies whose stock prices may not grow as fast as
a smaller company. That is because it is difficult to grow quickly when you are already the market
leader, which most of these companies are. However, their large size makes them less likely to go
out of business, so they are a safer investment than small cap companies.
OTHER IMPORTANT CONCEPTS
BONUS SHARES
Bonus share is a free share of stock given to current shareholders in a company, based upon
the number of shares that the shareholder already owns. While the issue of bonus shares increases
the total number of shares issued and owned, it does not increase the value of the company.
Although the total number of issued shares increases, the ratio of number of shares held by each
shareholder remains constant. An issue of bonus shares is referred to as a bonus issue. Depending
upon the constitutional documents of the company, only certain classes of shares may be entitled to
bonus issues, or may be entitled to bonus issues in preference to other classes.Generally, for the
bonus only equity shareholders are entitled & the preference shareholders only if they are
participating.
Bonus shares are issued by cashing in on the free reserves of the company. The assets of a
company also consist of cash reserves. A company builds up its reserves by retaining part of its
profit over the years (the part that is not paid out as dividend). After a while, these free reserves
increase, and the company wanting to issue bonus shares converts part of the reserves into capital.
There are two ways of giving bonus to shareholders:
1) By making partly paid shares as fully paid
2) By issuing fully paid bonus shares.
If you hold 100 shares of Rs. 10 each of a company, partly paid at Rs. 6 per share & the co.
issues bonus by making the shares fully paid. Thus, you are not required to pay the balance of Rs. 4
per share. Without any cost to you, the partly paid shares are converted into fully paid shares by the
company.
If you hold 100 fully paid shares of a company and a 2:1 bonus offer is declared, you get 200
shares free. That means your total holding of shares in that company will now be 300 instead of 100
at no cost to you.
A bonus issue is a signal that the company is in a position to service its larger equity. What
it means is that the management would not have given these shares if it was not confident of being
able to increase its profits and distribute dividends on all these shares in the future.
When a company declares bonus issues, there has to be a cut-off date for such benefits to be
transferred to the shareholders. This date is termed as "Book Closure" date or "Record Date". It is
BUYBACK OF SHARES
A Share buyback occurs when a company repurchases some of its own stock either through
purchasing shares on the open market or by buying shares directly from shareholders through a
tender offer at a premium to current market price.
The rationale behind buyback is to boost demand by reducing supply of shares, which
should shoot up the price. The repurchase of shares reduces the number of shareholders, which in
turn enhances the Earning Per Share (EPS) ratio. EPS is Net Profit after payment of tax & pref.
dividend divided by the total no. of equity shares.The share buyback may increase the share price of
a company by reducing the supply of shares available for purchase.
Unused Cash: If they have huge cash reserves with not many new profitable projects to
invest in and if the company thinks the market price of its share is undervalued. Eg. Bajaj
Auto went on a massive buy back in 2000 and Reliance's recent buyback.
Exit option If a company wants to exit a particular country or wants to close the company.
Escape monitoring of accounts and legal controls If a company wants to avoid the
regulations of the market regulator by delisting. They avoid any public scrutiny of its books
of accounts.
Show better financial ratios Companies try to use buyback method to show better financial
ratios. For e.g. when a company uses its cash to buy stock, it reduces outstanding shares and
also the assets on the balance sheet (because cash is an asset). Thus, return on assets (ROA)
actually increases with reduction in assets, and return on equity (ROE) increases as there is
less outstanding equity. If the company earnings are identical before and after the buyback
earnings per share (EPS) and the P/E ratio would look better even though earnings did not
improve. Since investors carefully scrutinize only EPS and P/E figures, an improvement
could jump-start the stock
Increase promoter's stake A company may also buy its shares back to increase the stake of
promoters and to help fend off hostile takeover bids. By reducing the number of shares
available and driving up the share price, the company using a buyback strategy makes it
more difficult for an investor to gain a controlling stake in the company.
In Feb 09, the Anil Ambani promoted Reliance Infrastructure (R-Infra) announced buy back
of shares worth Rs 700 crore. In Oct 09, the country’s biggest real estate developer, DLF
Ltd, began Rs 1,100 Cr stock buy-back program.
STOCK SPLIT
An increase in the number of outstanding shares of a company's stock, such that
proportionate equity of each shareholder remains the same. This requires approval from the board
of directors and shareholders. A corporation whose stock is performing well may choose to split its
shares, distributing additional shares to existing shareholders. The most common stock split is two-
for-one, in which each share becomes two shares. The price per share immediately adjusts to reflect
the stock split, since buyers and sellers of the stock all know about the stock split (in this example,
the share price would be cut in half). Some companies decide to split their stock if the price of the
stock rises significantly and is perceived to be too expensive for small investors to afford also
called split.
DIVIDENDS
Dividends are payments made by a corporation to its shareholder members. It is the portion
of corporate profits paid out to stockholders. When a corporation earns a profit or surplus, that
money can be put to two uses: it can either be re-invested in the business (called retained earnings),
or it can be paid to the shareholders as a dividend. Many corporations retain a portion of their
earnings and pay the remainder as a dividend.
For a joint stock company, a dividend is allocated as a fixed amount per share. Therefore, a
shareholder receives a dividend in proportion to their shareholding. For the joint stock company,
AUCTION
On account of non-delivery of securities by the trading member on the pay-in day, the
securities are put up for auction by the Exchange. This ensures that the buying trading member
receives the securities. The Exchange purchases the requisite quantity in auction market and gives
them to the buying trading member.
Auctions are initiated by the Exchange on behalf of trading members for settlement related
reasons. The main reasons are Shortages, Bad Deliveries and Objections. In the Auction market,
auctions are initiated by the Exchange on behalf of trading members for settlement related reasons.
For e.g. If you are a buyer in XYZ Company for say 3000 shares @ Rs. 140 each. The
delivery of the same shares would be available to you in your Demat Account at T+2days. If there
is an availability shortage, the shares are then auctioned by the exchange.
There are three types of participants in the auction market.
Initiator: The party who initiates the auction process is called an initiator.
Competitor: The party who enters on the same side as of the initiator is called a competitor.
Solicitor: The party who enters on the opposite side as of the initiator is called a solicitor.
The trading members can participate in the Exchange initiated auctions by entering orders as a
solicitor. E.g. If the Exchange conducts a Buy-In auction, the trading members entering sell orders
are called solicitors. When the auction starts, the competitor period for that auction also starts.
Competitor period is the period during which competitor order entries are allowed. Competitor
orders are the orders which compete with the initiator’s order i.e. if the initiator’s order is a buy
order, then all the buy orders for that auction other than the initiator’s order are competitor orders.
And if the initiator order is a sell order then all the sell orders for that auction other than the
initiators order are competitor orders.
After the competitor period ends, the solicitor period for that auction starts. Solicitor period
is the period during which solicitor order entries are allowed. Solicitor orders are the orders which
are opposite to the initiator order i.e. if the initiator order is a buy order, then all the sell orders for
that auction are solicitor orders and if the initiator order is a sell order, then all the buy orders for
that auction are solicitor orders.
REGULATORS
Why does Securities Market need Regulators?
The absence of conditions of perfect competition in the securities market makes the role of
the Regulator extremely important. The regulator ensures that the market participants behave in a
desired manner so that securities market continues to be a major source of finance for corporate and
government and the interest of investors are protected.
PRICE BANDS
Daily price bands are applicable on securities as below:
Daily price bands of 5% (either way) on securities as specified by the Exchange.
Daily price bands of 10% (either way) on securities as specified by the Exchange.
Price bands of 20% (either way) on all remaining scrips (including debentures, warrants,
preference shares etc).
No price bands are applicable on: scrips on which derivative products are available or scrips
included in indices on which derivative products are available. In order to prevent members
from entering orders at non-genuine prices in such securities, the Exchange has fixed
operating range of 20% for such securities.
The price bands for the securities in the Limited Physical Market are the same as those applicable
for the securities in the Normal Market. For auction market the price bands of 20% are applicable.
There are no price bands for those securities which are available for trading in the Futures and
Options segment and securities which form part of the indices on which trading is available in the
Futures and Options segment.
Historically, FIIs have been the major movers and shakers of the BSE Sensex. In most cases, the
domestic Mutual Funds have taken the opposite approach, SELL when FIIs Buy and vice-versa.
However, due to smaller participation by domestic funds [1/3rd of FIIs], FIIs tend to be the
momentum movers. An efficient market is one which responds to news rapidly. Prices that adjust
are of essence to the efficient functioning of a market economy. The job of financial markets is to
hold a mirror up to the real economy. So therefore volatility in Indian stock market is not bad.
SOME ARE THE REASONS FOR THE VOLATILITY IN THE INDIAN STOCK
MARKET:
Inflation rate
FII’s
Policy Changes
Results of Companies
International Markets
Global Atmosphere
Government Change
Climatic Factors, etc.
Following is the detail analysis of the Indian stock market volatility from 15k to 21k:
On July 23, 2007, the Sensex touched a new high of 15,733 points. On July 27, 2007 the Sensex
witnessed a huge correction because of selling by Foreign Institutional Investors and global cues to
come back to 15,160 points by noon. Following global cues and heavy selling in the international
markets, the BSE Sensex fell by 615 points in a single day on August 1, 2007.
• 16,000, September 19, 2007- The Sensex on September 19, 2007 crossed the 16,000 mark
and reached a historic peak of 16322 while closing. The bull hits because of the rate cut of
50 bit/s in the discount rate by the Fed chief Ben Bernanke in US.
• 18,000, October 9, 2007- The Sensex crossed the 18k mark for the first time on October 9,
2007. The journey from 17k to 18k took just 8 trading sessions which is the third fastest
1000 point rise in the history of the sensex. The sensex closed at 18,280 at the end of day.
This 788 point gain on October 9 was the second biggest single day absolute gains.
• 19,000, October 15, 2007- The Sensex crossed the 19k mark for the first time on October
15, 2007. It took just 4 days to reach from 18k to 19k. This is the fastest 1000 points rally
ever and also the 640 point rally was the second highest single day rally in absolute terms.
This made it a record 3000 point rally in 17 trading sessions overall.
Participatory Notes :
On October 16, 2007, SEBI (Securities & Exchange Board of India) proposed curbs on
participatory notes which accounted for roughly 50% of FII investment in 2007. SEBI was not
happy with P-notes because it was not possible to know who owned the underlying securities, and
hedge funds acting through P-notes might therefore cause volatility in the Indian markets.
However the proposals of SEBI were not clear and this led to a knee-jerk crash when the markets
opened on the following day (October 17, 2007). Within a minute of opening trade, the Sensex
crashed by 1744 points or about 9% of its value - the biggest intra-day fall in Indian stock markets
in absolute terms till then. This led to automatic suspension of trade for 1 hour. Finance Minister P.
Chidambaram issued clarifications, in the meantime, that the government was not against FIIs and
was not immediately banning PNs. After the market opened at 10:55 AM, the index staged a
comeback and ended the day at 18715.82, down 336.04 from the last day's close.
This was, however not the end of the volatility. The next day (October 18, 2007), the Sensex
tumbled by 717.43 points — 3.83 per cent — to 17998.39. The slide continued the next day when
the Sensex fell 438.41 points to settle at 17559.98 at the end of the week, after touching the lowest
level of that week at 17226.18 during the day.
After detailed clarifications from the SEBI chief M. Damodaran regarding the new rules, the market
made a 879-point gain on October 23, thus signalling the end of the PN crisis.
Table showing the movements and reasons in Indian stock market from 15k to 21k:
Following is the detail analysis of the Indian stock market volatility In year 2008:
Jan 22, 2008 - It was a Terrible Tuesday for the bourses. The Sensex saw its biggest intra-
day fall when it hit a low of 15332, down 2273 points. However, it recovered losses to some
extent and closed at a loss of 875 points at 16730. Trading was suspended for one hour at
the Bombay Stock Exchange.
Mar 25, 2008 - The Sensex opened with a positive gap of 324 points at 15613 on the back
of firm trend in the global markets. Aggressive buying in financial, realty and technology