Securities Markets

Security Analysis
Semester 3
 Securities Markets
• Markets and their functions
• Development of Stock Markets in India
• Equity Issues and Book Building
• Stock Market indicators
• Listing of securities
• Dematerialization and its significance
• Trading of securities
• Clearing and settlement procedure
• Regulation of financial markets
• Role of SEBI
Markets and Their Functions
• What is a market?
• Essential features of a market
– Existence of buyers and seller
– Intermediaries
– Price of asset being traded
– Allocation of resources
– Existence of regulator and regulatory
mechanism
Markets and Their Functions
• Salient features of an efficient
market
– Breadth
– Depth
– Information arbitrage efficiency
– Fundamental valuation efficiency
– Full insurance efficiency
– Operational efficiency
– Efficiency of allocation
Markets and Their Functions
• Functions of Markets
Savings function
Liquidity function
Risk function
Policy function
 Development of Securities
Markets in India
• Evolution
– Enactment of The Companies Act in
1850s
– The Native Share and Stock Brokers’
Association, 1887
– Ahmedabad Share and Stock Brokers’
Association, 1894
– Establishment of Calcutta Stock
Exchange in 1908
– Securities Contract Regulation Act, 1956
–
 Development of Securities
Markets in India
• Recent Developments
– Abolition of CCI and establishment of SEBI
as market regulator
– Introduction of private sector MFs
– Introduction of FIIs
– Institutionalization of intermediaries such
as Merchant Bankers, Bankers to the Issue,
Share Transfer Agents, Registrars to the
Issue, Underwriters, Brokers, sub-brokers
etc.
– Emergence of credit rating agencies such
as CRISIL, CARE, ICRA.
 Development of Securities
Markets in India
• Reforms introduced by SEBI
– Freedom of issue pricing
– Removal of restriction on Right and Bonus
issue
– RHDP
– Stock Invest
– Proportionate allotment in case of
oversubscription
– Categories of allocation of IPO
– Optional underwriting
– Private placement/bought out deals
– Code of advertisement
 Development of Securities
Markets in India
• Reforms introduced by SEBI
– Corporatization and demutualization of
SEs
– Compulsory issuance of contract note
– Introduction of rolling settlement
– Separate client and clearing accounts
for brokers
– Introduction of derivatives trading and
SLBS
– Introduction of exchange traded
 Equity Issues…
• Types of Issues – Public Issues(IPO
and FPO), Right Issue and Private
Placement
• Laws governing equity issues
– The Companies Act, 1956
– Securities Contract Regulation Act, 1956
– Securities Contract Regulation Rules,
1957
– SEBI Guidelines and Clarifications
 …and Book Building
• What is book building?
• Book building v/s Fixed price
• Process of book building
– Appointment of lead merchant banker/book
runner/syndicate members
– Announcement of issue size, price range, dates
etc
– Invitation of bids and revision of bids
– Evaluation of bids
– Determination of cut off price and proportion of
allocation
– Allocation of shares
 Reverse Book Building
• What is reverse book building?
• Floor price and cap price
• Determination of floor price
• Pros and cons
 Security Market Indicators
• Various stock market indices
• Purpose of an index
– Basic tool to help and analyze stock
price movements
– Barometer of economic health
– Tool to evaluate portfolio risk-return
– Tool for investing and hedging decisions
 Stock Market Indicators
• Formula for calculating indices
• Stock market indices – national and
international
• GDR Indices
– DSP’s GDR Valuation Index
– Skindia GDR Index
• Debt market indices
– CRISIL Bond index
– I-Sec Bond index
– J P Morgan India Treasury Bill index
 Stock Market Indicators
• Limitations of indices
– Prices of convertibles not captured
– Adjustment for convertibles
– Partial picture of economy
 Listing of Securities
• What is listing?
• Compulsory listing of securities
offered through Public Issues
• Types of Listing
– Initial listing
– Listing of Right/Bonus/ESOPs
– Listing of securities on account of M & A
 Listing of Securities
Advantages for Advantages for
Issuers Investors
• National and • Liquidity of investment
international • Tax advantage
recognition
• Increases and eases • Better valuation
debt raising • Better and regular
• Easy and quick fund financial disclosures
mobilization through • Additional protection
FPOs and right issue from stock exchanges.
• Wider distribution of
shareholding ensures
management control
and deterrent for take
over
 Dematerialization of
Securities
• What is dematerialization of
securities?
• Governing law – The Depositories
Act, 1996
• Participants
– Depositories – NSDL and CDSL
– Depository Participants
– Registrar and Share Transfer Agents
– Investors
 Dematerialization of
Securities
• Structure and Process
Depositories – NSDL/CDSL

Registrar &
Depository
Transfer
Participant Agent

Investor
 Dematerialization of
Securities
• Advantages
– Reduced paper work
– No bad deliveries
– Exemption of paying stamp duty on
transfer of shares
– Faster transfer of shares resulting into
shorter settlement periods
– No scope for forged/bogus shares
– Faster placement of shares as collateral
 Trading Procedure on Stock
Exchanges
• Trading systems – NEAT and BOLT
• Trading timings and trading days
• Types of Orders
– Time Condition – Day, GTC, GTD, IOC
– Price Condition – Limit order, Market
order, stop loss order
– Quantity Condition – Disclosed quantity,
Minimum Fill, All Or None.
 Clearing and Settlement
Procedure
• T + 2 settlement, pay-in and pay-out
• Rolling Settlement
• NSCCL and BoI Shareholding Ltd.
• Risk management
– Capital adequacy requirement for members
– Stringent margin requirement
– Online/real time monitoring of member
positions and margin deposits
– Automatic disablement and penalties for
margin shortfall.
 Regulation of Financial
Markets
• No development of healthy securities
markets without effective regulations
for disclosures, listing, trading,
liquidity, intermediation, settlements,
accountability etc.
• Focus on visible and effective
maintenance of market discipline
and professionalization of
intermediation and support services.
 Regulation of Financial
Markets
• Pre 1947
• The Capital Issues ( Control) Act,
1947
• Securities Contract Regulation Act,
1956
• Formation of SEBI in 1988
• Abolition of CCI in 1992 and
• The SEBI Act, 1992
 Regulation of Financial
Markets
• Objectives of SEBI
– To PROTECT the interest of the investors
in securities
– To PROMOTE the development of
securities market in India
– To REGULATE the securities market

DISCIPLINARY AND DEVELOPER

 Regulation of Financial
Markets
• The Organization of SEBI
1. Primary Markets
1. A Chairman 2. Secondary Markets
3. Venture Capital
2. Two 4. MF
Nominees 5. CIS
from MoF 6. Legal
and MoCA 7. Take Over
3. A Nominee 8. FII
9. Depositories
of RBI 10.Derivatives
4. Five other 11.Investigation,
nominees Enforcement and
from GoI Suveillance
 Regulation of Financial
Markets
• Functions of SEBI
– Regulating the securities market
– Recognition and regulation of stock
exchanges
– Registering and regulating
intermediaries
– Registering and regulating functioning
of depositories, DPs and custodians
– Registering FIIs
– Registering and regulating functioning
 Regulation of Financial
Markets
• Functions of SEBI
– Promotion and regulation of SROs
– Prohibiting fraudulent and unfair trade
practices
– Prohibiting insider trading
– Regulating M & A activities
– Promoting investor education and
training of intermediaries
– Conducting research related to
securities market
 Regulation of Financial
Markets
• Powers of SEBI
– Powers of Civil Court as per Code of Civil
Procedure, 1908
– Discovery and production of books of
accounts and other related documents
– Summoning, examining and enforcing
attendance of persons/representatives
– Inspections of books, registers and other
documents of intermediaries and listed
companies
 Regulation of Financial
Markets
• Powers of SEBI
– Suspend trading of a securities
– Restraining persons from
accessing/intermediating in securities
market
– Suspend/appoint office bearers of SEs
– Impend and retain the proceeds of any
security under investigation
– Attach bank accounts of intermediaries,
maximum for one month
 Regulation of Financial
Markets
• Powers of SEBI
– Direct any intermediary not to dispose
or alienate an asset forming part of any
transaction under investigation
– Regulating matters relating to issue of
capital, transfer of securities etc.
– Prohibit any company from issuing
prospectus, offer of securities or
advertisement soliciting money or
securities
 Regulation of Financial
Markets
• Other power of SEBI
– Levy penalties for various offences
– Levy fees and other charges
– Issue orders/directions in interest of
investors and healthy development of
securities market
– Hear appeal of companies against stock
exchange
– Suspend or cancel registration of
intermediaries
 Regulation of Financial
Markets
• SROs – Self Regulatory Organisation
– Definition
– Purpose behind emergence of SROs
– Examples of SROs – NSE, BSE, AMFI,
AMBI, RAIN, FIMMDA etc
– Code of conduct for members of SROs
 Regulation of Financial
Markets
• Other Regulatory Bodies
– High Level Committee on Secondary
Markets – Finance Secretary, Chairman
of SEBI and Governor of RBI
– RBI
– International Organization of Securities
Commissions
 Case Study: Derivative
Trading in India
1. What are the events that led to the
introduction of derivatives in Indian
securities market?
2. What are the basic structural
requirement to start derivatives
trading?
3. Which derivative instruments are
available for trading and what are
the underlying securities?
4. What has been the response of
 Case Study: Derivative
Trading in India
5. What are merits and demerits of
derivative?
6. Are the arguments against
derivative trading justified after
nearly 8 years of its introduction?
Explain in detail why not.
7. Which are foreign securities market
where derivatives based on Indian
securities are available for trading?
8. What is normal backwardation
 Case Study: Derivative
Trading in India
9. What is accounting treatment and
tax implication of derivative
transaction for investors?
10. What is the status of issues
(related to derivative trading)
unresolved as of June 2008?
11. What is the difference between
cash settlement and delivery
settlement of derivatives? Which
settlement method is followed in
 Case Study: Derivative
Trading in India
12. What is “market making”?
13. Differentiate the terms- hedging,
speculating and arbitraging.
THANK YOU

Mayank Patel