OVERVIEW OF CAPITAL MARKETS

UNIT 1

By Priya Kansal Assistant Professor Jaipuria Institute of Management

NEW ISSUE MARKET

Where the securities never been issued are offered Specialized agencies, intermediaries & financial institutions are there to support the NIM and is functioning Availability of financial resources for corporate enterprises, to a great extent depends upon the status of NIM

Functions of NIM
Origination; involves
study of technical, economic & financial viability of project advisory services to improves the quality of issue

Underwriting; through
Standing behind the issue/ outright purchase Consortium Method

Distribution

Investors Protection in Primary Market

(A) Principal Ingredients are (a) provision of all relevant information (b) provision of accurate information (c) transparent allotment procedures without any bias

(B) Measures for Investor Protection

Project Appraisal Underwriting Disclosure of prospects Clearance of Stock Exchange Signing By Board of Directors SEBIs Role Redressal of Investors Grievance

SECONDARY MARKET
Organized and regulated market for various securities issued by corporate sector and other institution
Enable free purchase and resale of securities

Characteristics of Secondary Market:

Place where securities are purchased and sold Association of persons whether incorporated or not Trading is regulated by strict rules and regulations Trading is done by both genuine investors and speculators Dealing of any kind of security is allowed

Functions of Secondary Market

Ensure liquidity of capital Continuous market for securities Evaluation of securities Mobilizing surplus savings Helpful in raising new capital Safety in dealing Listing of securities

LIMITATIONS/ WEAKNESS OF INDIAN STOCK MARKET

Rampant Speculation Insider Trading Oligopolistic Outdated Share Trading System Lack of Single Market Problem of Interface in Primary & Secondary Market Inadequacy of Investor Service

TRADING OF SECURITIES Primary Market

Forms of Issues: (a) Initial Public Offers (b) Seasoned New Issue/ Followed Public Offer IPOs & Seasoned New Issues can be issued through : (a) Public issue (b) Private Placement (c) Right Issue (d) Preferential Allotment

Parties Involved in New Issue/ Intermediaties

Managers to the Issue/ Lead Manager Registrar to the Issue Underwriters Bankers to the Issue Advertising agents Financial Institutions

Process of IPO & Seasoned Issue

Approval of B. O. D

Approval of shareholders

Appointment of Lead Manager

Process Cont..
Due Diligence by Lead Manager

Appointment of other Intermediaries

Preparation of Draft Prospectus

Process Cont
Filling of Draft Prospectus By SEBI

Application For Listing in Stock Exchange

Filling of the prospectus with the registrar of Company

Process Cont.

Promotion of Issue

Printing and Distribution of Application

Process Cont..
Collection of Applications

Determination of Liabilities of Underwriting

Finalization of Allotment

Process Cont..

Giving DEMAT Credit (or dispatch of share certificates) & Refund Order

Trading of Securities: Secondary Market

Steps

Placement of Order Locating a broker Limit Order Execution of Order

Market Order

MEMBERS OF STOCK EXCHANGE

Commission Broker Floor Broker Tataniwala Dealers in non- cleared secuities Odd-lot Dealers Budiwalas Security Dealer

THE SECURITIES AND EXCHANGE BOARD OF INDIA (SEBI)

SECURITIS AND EXCHANGE BOARD OF INDIA

Got a statutory status in 1992 Objectives: -to protect the interest of investors in security market -to promote the development of securities markets -to regulate the securities

Objectives of SEBI
To protect the interest of the investors in securities To promote the development of securities market To regulate the securities market

Functions of SEBI
Regulating the business in stock exchange and any other securities market Registering and regulating the workings of intermediaries associated with securities market Registering and regulating the working of collective investment schemes including mutual funds Promoting and regulating self-regulatory organizations Prohibiting fraudulent and unfair trade practices in the securities market Promoting investors education and training of intermediaries in securities market
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Functions Cont..
Prohibiting insiders trading in securities Regulating substantial acquisition of shares and takeover of companies Calling for information, undertaking inspection, conducting enquiries and audits of the stock exchanges, intermediaries and self-regulatory organizations in the securities market

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ORGANIZATION OF SEBI
Primary Department
Redressal of grievances & guidance

Registering regulating & Issue Management & monitoring of the intermediaries & security Intermediary of order document Department

Organization cont

Secondary Policy matter related to stock Market Department exchange

Institutional Mutual funds, FIIs, investment mergers and Department acquisition

SEBI Regulates.
SEBI regulates

Primary Market

Secondary Market

Mutual Funds

Foreign Institutional Investment

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SEBI & Primary Market

Measures undertaken by SEBI Entry norms Promoters contribution Disclosure Book building Allocation of shares Market intermediaries

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Conti..

1. Entry norms
a) Track record of dividend payment for minimum 3 yrs preceding the issue. b) Post-issue networth becomes more than 5 times the pre-issue networth c) For Manufacturing company not having such track record appraise project by a public financial institution or a scheduled commercial bank. d) 5 public shareholders for every Rs.1 lakh of the net capital offer made to the public e) Banks 2 yrs of profitability for issues above par.
SAPM

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Conti..
2. Promoters contribution
Should not be less than 20% of the issued capital. 50 % Receiving of promoters contribution. Lock in period as per SEBI (3 yrs & 5yrs )

3. Disclosure
draft prospectus Un audited financial results
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Conti.. 4. Book building

SEBI recommends two-tier under writing system One of the mode of public issue Cap price should not be more than 20 % of floor price. 5. Allocation of shares Minimum application of shares (200 shares) 50% Reservation for small investors Allotment of securities
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Conti..
6. Market intermediaries Licensing of merchant bankers Licensing of underwriters, registrars, transfer agents, etc., Merchant bankers net worth Rs.5 crores

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SEBI & Secondary Market

Reforms in the secondary market:1. Governing board 2. Infrastructure 3. Settlement & clearing 4. Debt market 5. Price stabilization 6. Delisting 7. Brokers 8. Insider Trading
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Conti..
1. Governing board Brokers and non-brokers representation made 50:50 60% of brokers in arbitration, disciplinary & default committees For trading members 40% representation 2. Infrastructure On-line screen based trading terminals
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Conti..
3. Settlement & clearing Weekly settlements Auctions for non-delivered shares within 80 days of settlement date Advice to set up clearing houses, clearing corporation or settlement guarantee fund Warehousing facilities permitted by SEBI.
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Conti..
4. Debt market segment Regulates through SEBI (depository & participants) regulation Act 1996. Listing of debt instruments Investment Range for FIIs is 100 % Dual rating for above Rs.500 million

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Conti..
5. Price stabilization Division to monitor the unusual movements in prices. Monitor prices of newly listed scrip from the first day of trading. Imposing of special margins of 25% on purchase in addition to regular margin. Price filters Price bands
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Conti.. 6. Delisting On voluntary de-listing from regional stock exchanges buy offer to all share holders Promoters to buy or arrange buyers for the securities 3 yrs listing fees from companies and be kept in Escrow A/c with the stock exchange.
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Evaluation Of SEBI s Performance

Enhancing disclosures
In most case only the minimum information required under the Companies Act is made available The manner in which the swap ratio is fixed and what the management thinks of the same is largely taken for granted.
Valuation reports are made available for inspection, but access is not easy for all investors.

Inability To Utilize The Existing Powers Effectively

SEBI could initiate prosecution proceedings on insider trading only in one case and seven cases on fraudulent and unfair practices. Only in seven of the 181 cases, SEBI resorted to cancellation of registration during the last four years. Though SEBI has the power to impose a penalty of Rs 1.50 lakhs every time a person fails to furnish the requisite information,

but rarely has this power has been exercised by it .

The provision for mandatory punishment of imprisonment in addition to award for penalty has scarcely has been used.

Quality Of Decisions
What is worrying is the poor rate of conviction in major cases. Virtually every SEBI decision involving major cases such as Sterlite, BPL, Videocon, Anand Rathi and Associates and Hindustan Lever has been overturned by the appeals process (or the Securities Appellate Tribunal).

Accounting, audit quality

The plethora of inter-corporate investments, intracompany and intra-group transactions, guarantees and contingent liabilities are areas where there is room for considerable concern.

Price Manipulation No Dent

Price manipulation, informed trading and insider trading

with key operators/investors is now routine. This is an area that is difficult to tackle for any regulator. But over the last ten years, SEBI has taken action on such price manipulation in just two cases (Bayer ABS and Amara Raja Batteries). Here, too, the penal action has hardly been stringent

Enticing ads and investor risk

Advertisement sans indication of performance by mutual
funds has continued regardless of the SEBI guidelines on this. The Securities and Exchange Board of India (Sebi) is being blamed for lack of alertness and poor riskmanagement measures with regard to the automated lending and borrowing mechanism.