Globalization of

companies – Module 2
and 3
Dr Deepika Prakash
Securities and Capital market
 A security is a financial instrument, typically any financial asset that can be traded
 The nature of what can and can’t be called a security generally depends on the
jurisdiction in which the assets are being traded.
 Def under SCRA, 1956 Sec 2 (h)
 As much as skills are required to earn money, it is required in equal measure in
spending it wisely
 Savings and Investing for a secured financial future
 Generally, the personal savings of an entrepreneur along with contributions from
friends and relatives are the source of fund to start new or to expand existing
business. This may not be feasible in ca se of large projects as the required
contribution from the entrepreneur (promoter) would be very large even after availing
term loan; the promoter may not be able to bring his / her share (equity capital).Thus
availability of capital can be a major constraint in setting up or expanding business on
a large scale
 Various securities are available in the market to raise capital or invest
Products available in the capital market

 Equity shares
instruments issued by companies to raise capital and it represents the title to the
ownership of a company. You become an owner of a company by subscribing to its
equity capital (whereby you will be allotted shares) or by buying its shares from its
existing owner(s)
 Debt ( loan instrument)
 Corporate debt
 Debentures are instrument issued by companies to raise debt capital. As an
investor, you lend you money to the company, in return for its promise to pay
you interest at a fixed rate (usually payable half yearly on specific dates) and to
repay the loan amount on a specified maturity date say after 5/7/10 years
(redemption).
 Types of debentures that are offered are as follows:
 Non convertible debentures (NCD) – Total amount is redeemed by the issuer

 Partially convertible debentures (PCD)– Part of it is redeemed and the remaining is converted to equity shares as per
the specified terms

 Fully convertible debentures (FCD)– Whole value is converted into equity at a specified price
 Bonds are broadly similar to debentures. They are issued by companies, financial institutions, municipalities or
government companies and are normally not secured by any assets of the company (unsecured).
 Government securities- pay interest at fixed rate on specific dates on half yearly basis. Free from risk of default. Get
them through RBI or security market
 Mutual funds- collect money from many investors and invest this corpus in equity, debt or a combination of both, in
a professional and transparent manner.
 In return for your investment, you receive units of mutual funds which entitle you to the benefit of the collective return
earned by the fund, after reduction of management fees.
 Mutual funds offer different schemes to cater to the needs of the investor are regulated by securities and Exchange
board of India (SEBI)

 Types of Mutual Funds - At the fundamental level, there are three types of mutual funds:

 Equity funds (stocks)

 Fixed-income funds (bonds)

 Money market funds

SEBI

 Securities market enable capital formation in the economy and enhances wealth of
investors who make the right choices
 The role of SEBI is that of a regulator, set up in 1992 by an Act of Parliament with a
mandate to:
1. Protect the interest of the investors
2. Promote the development of and
3. Regulate the securities market
 It also has enforcement mechanism- carrying out inspections of registered
intermediaries, investigations and while processing of documents filed with it, including
investors complaints. SEBI is vested with the power of civil court to call for information
and records, to issue summons, to inspect and to investigate entities associated with
securities markets. Apart from these civil proceedings, SEBI also launches criminal
proceedings against entities for breach of norms.
Important set up of the securities
market
1. Public offer and debt securities issue and listing
2. Intermediaries  and their roles- vital link between investor, issuer and regulator.
share brokers, Registrars and Share Transfer Agents, Custodians and Depositories are capital
market intermediaries that provide important infrastructure services for both primary and
secondary markets
SEBI (Intermediaries) Regulations, 2008
3. Disclosure standard
SEBI issued Disclosure and Investor Protection (DIP) guidelines.
The guidelines allow issuers, complying with the eligibility criteria, to issue securities the
securities at market determined rates.
Because of such move, the market moved from merit-based to disclosure-based regulation.
4. Takeover regulations
When an “Acquirer” takes over the control of the “Target Company”, it is termed as Takeover.
When an acquirer acquires “substantial quantity of shares or voting rights” of the Target
Company, it results in substantial acquisition of shares.
SEBI (Substantial Acquisitions of shares and Takeovers) Regulations, 2011.
5. Prohibition of insider trading and unfair trade practice
the SEBI (Insider Trading) Regulations
prohibits directors and key managerial personnel from purchasing call and put options of shares of the
company, its holding company and its subsidiary and associate companies as if such person is reasonably
expected to have access to price-sensitive information (being information which, if published, is likely to
affect the price of the company’s securities).
6. Delisting of securities
The Company has an option to delist any or all class of securities. 
Provided that the securities of the company have been listed for a minimum period of 3 years on any stock
exchange.
7. Corporate Governance
8. Grievance redressal mechanism
 Market regulator SEBI, which has got statutory mandate to regulate and promote the securities market,
passes various orders, penalties against the market players. These orders affect the players in many
ways. 
 Securities Appellate Tribunal is a statutory body established under the provisions of Section 15K of the
Securities and Exchange Board of India Act, 1992 to hear and dispose of appeals against orders passed
by the Securities and Exchange Board of India or by an adjudicating officer under the Act and to
exercise jurisdiction, powers and authority conferred on the Tribunal by or under this Act or any other
law for the time being in force. Moreover, though recent amendment, the jurisdiction of Tribunal has
been expanded and it now hears appeal not only against the decision of SEBI but also against other
functionaries. The appeal against the order of SAT directly lies before Supreme Court.
 Further, inter-se grievances of players are resolved through the various mechanism available in our
existing legal framework, however most differences are shorted out though ADR mechanism.
Derivatives and their regulation
 a type of financial contract whose value is dependent on an underlying asset, group of
assets, or benchmark. A derivative is set between two or more parties that can trade on
an exchange or over-the-counter  (OTC).
• Derivatives are usually leveraged instruments, which increases their potential risks and
rewards.
 The most common underlying assets for derivatives are stocks,
bonds, commodities , currencies , interest rates, and market indexes. Contract values
depend on changes in the prices of the underlying asset.
 Instead, the hedge is merely a way for each party to manage risk. Each party has its
profit or margin built into the price, and the hedge helps to protect those profits from
being eliminated by market moves in the price of the commodity
 Derivatives were originally used to ensure balanced exchange rates for internationally
traded goods. International traders needed a system to account for the differing values
of
Why do investors find lucrative in derivative contracts?

 There is more advantage of dealing in the derivative contracts apart from making the
profits.
• It gives an arbitrage advantage.
• It can be also used for speculation.
• It also provides protection against market volatility.
 PRO OF DERIVATIVES CON OF DERIVATIVES

1.Lock in prices 1. Hard to value

2.Hedge against risk 2. Subject to counterparty default (if
3.Can be leveraged OTC)
4.Diversify portfolio 3. Complex to understand
4. Sensitive to supply and demand
factors
Participants in Derivative Market

 Following all are the derivative market participants:

• Hedgers
• Margin Traders
• Speculators
• Arbitrageurs
Types of derivatives

 There are two classes of derivative products: "lock" and "option."

 Lock products (e.g., futures, forwards, or swaps) bind the respective parties from the
outset to the agreed-upon terms over the life of the contract.
 Option products (e.g., stock options), on the other hand, offer the holder the right,
but not the obligation, to buy or sell the underlying asset or security at a specific
price on or before the option's expiration date.
 The most common derivative types are futures, forwards, swaps, and options.
national currencies.
 . Options
• Options are the agreement between the buyer and the seller.
• In which the buyer gives the right but not the obligation to buy or sell a certain asset at a later date
on an agreed price.
 2. Futures
• These are standardized contracts and are traded on the stock exchange.
• This is an agreement between the two parties for a particular contract at a specified time and on an
agreed price beforehand.
 3. Forwards
• These are the customized contracts and are traded on the Over the Counter (OTC) Market.
• This is also an agreement between the parties for a certain contract at a specified time and on an
agreed price.
 4. Swaps
• Swaps are also a type of derivative contract where the parties exchanges the cash flows at a certain
interest rate.
• Interest rates swaps are mostly used instruments of the derivative market and swaps are traded on
the over-the-counter (OTC) Market.
SCRA, 1956

 Securities Contract Regulation Act 1956: Salient Features

 Recognition of Stock Exchange
 Regulation of Contracts and Options in Securities Listing of Securities
 Adjudication: Penalties and Procedure