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8/6/2019 Cm Module III
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MODULE III
REGULATION OF INDIAN
CAPITAL MARKETS
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Genesis
2
Pavan
KU
@B
angalore
Spreading the investment risk andaccess to various source of capital by Investor and
Issuer of capital
Price determination reduce the cost ofcapital
Volatility
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Factors
Lack of adequate instruments Inadequate financial disclosure
Lack of developed secondary market
Insiders trading menace Price manipulation at new issue
Abolition of CCI
Unofficial trading
Uncontrolled broking
Lack of institutional support
Pavan
KU
@B
angalore
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Regulatory framework
CIC Capital Issues Control Inadequate t control capital market
Changing industrial environment
Companies Act requirement
Need of a larger body
Acting as unifying force
Protecting investors and issuer ofcapital
Pavan
KU
@B
angalore
4
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SEBI
Securities and Exchange Boardof India
Set up on April 12, 1988 Non statutory body To protect the interest of
investor, and Promoting and development of
the regulation of securitiesmarket in India
Pavan
KU
@B
angalore
5
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Functions of SEBI
Regulating stock exchanges
Registration and regulation of stockbrokers
Protecting the interest of investors
Regulating the intermediaries
Regulations of stock markets bothprimary and secondary
Regulation of other parties to the
capital issue
Pavan
KU
@B
angalore
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SEBI Regulations
Insider trading regulation Disclosure of books of accounts
Publishing of price sensitivity
Regulating portfolio managers Registration with SEBI
Capital adequacy norms 50 lakhs
Disclosure and investor protection Par issue new company Draft prospectus submitted to SEBI
Free pricing existing company
Pavan
KU
@B
angalore
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Contd.., FCDs no conversion beyond 36 months
Credit rating mandatory for Debt issue Debenture issue mandatory disclosure of
debt ratio, service charges etc Reservation not less than 20% to public
Compulsory subscription 20% bypromoters
Surveillance of stock exchanges
Clearing house SEs to set up clearing house Provide trade guarantee Transacting through depositories
Pavan
KU
@B
angalore
8
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Regulations before SEBI
Securities Exchanges Act 1934
Bombay Securities Control Act 1926(BSCC Act)
Defence of India Rule 1943
Capital Issue Control Act 1947 (CIC Act)
Securities Contracts (Regulations) Rules1957
Pavan
KU
@B
angalore
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Companies Act 1956
Part I constitution of CLB Part II Articles and Memorandum Part III issues of capital activity i.e
capital markets Sec 55 68 prospectus and material
information Sec 77 buy back of shares
Part IV share capital & debenture Part V registration charges Part VI general provisions of company Part VII winding up of company
Pavan
KU
@B
angalore
10
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Committee on RegulatoryFramework
The Malegam committee 1995 Disclosure in prospectus
Transparent accounting procedure
Madatory disclosure tech, mkt etc Promoters group
Disclosure of stock market data
Justification for price Right issue
Promoter issue
Pavan
KU
@B
angalore
11
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NIM
New issue market primary market Secondary market
Performance of secondary market &
NIM Performance of NIM & secondary
market
Pavan
KU
@B
angalore
12
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Services of NIM
The transfer resources
Investigative services Technical analysis
Economic analysis
Financial analysis
Advisory services
The guarantee underwriting
Distribution brokers and dealers
Pavan
KU
@B
angalore
13
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NIM vs Secondary market
Issue of securities
Location
Transfer of securities Entry of companies
Administration
Regulation within the company Price movement in SE
Aim
Pavan
KU
@B
angalore
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Methods of marketing new issue
Pure Prospectus Method Exclusive Subscription Issue Price
Underwriting
Pavan
KU
@B
angalore
15
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Methods of
new issue
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17
General guidelines for New Issue
New Company- At par Existing company- Issue price should
be justified as per MalegamCommittees recommendations EPS for last 3 years & comparison of pre-
issue price to earning ratio to the P/E ofthe industry
Latest NAV
Minimum return on increased net worth tomaintain pre-issue EPS.
SEBI does not play any role in price
fixation
Pavan
KU
@B
angalore
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18
Principal steps of a public issue
Drafting, Printing of prospectus &application forms
Salient features of prospectus
Initiating allotment procedure
Brokers to the issue
Listing the issue
Publication in news papers
Allotment of shares
Underwriters liability
Pavan
KU
@B
angalore
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19
Private Placement
A private placement is a direct privateoffering of securities to a limitednumber of sophisticated investors.
It is the opposite of a public offering.
Investors in privately placed securitiesinclude
insurance companies,
pension funds, mutual funds.
Pavan
KU
@B
angalore
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20
Securities issued as privateplacements include debt, equity,Preference shares.
Advantages
Cost effective
Time Effective
Flexible
Contd..,
Pavan
KU
@B
angalore
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21
Principal steps of private placement
Terms & conditions - Value of theinstrument, Yield rate, Issue &redemption details
Credit rating- Mandatory Confidential information memorandum
Trustees to the issue ( Banks may beappointed as trustees to the issue)
Pre-launching formality
Pricing of the issue
Post-issue steps
Pavan
KU
@B
angalore
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22
Bought out deals (Offer for sale)
Process by which promoter placesshares with an investment bankers whoin turn offers to the public at a later
date Bought out dealer decides the price
after analysing the viability, gestation
period, Promoters background & futureprojections
Pavan
KU
@B
angalore
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Contd..,
Advantages-
Quick money, Less cost of raising funds, Low risk for investors
Disadvantage- Difficult for the promoters to
project their image
Steps In case of Offer for Sale Agreement with the merchant
banker Registration with stock exchange Default Arbitration commitee
Pavan
KU
@B
angalore
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24
Rights issue
A rights issue is basically when a companyoffers existing shareholders a right topurchase additional shares of the companyat a given price, which is at a discount tothe prevailing market price of the stock, tomake the offer enticing for theshareholder and to ensure that the rightsoffer is fully subscribed to.
Shareholder has the option of applying foradditional shares also i.e. over and abovewhat he is entitled to.
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Conditions to rights issue Must be offered to the existingshareholders
Notice must be issued to specify the
number of shares issued Minimum of 15 days time must be gives to
the investors to accept the rights.
Advantages of a rights issue It leads to increased liquidity and
affordability of the stock owing to reducedstock price and higher equity base.
Contd..,
Pavan
KU
@B
angalore
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Bonus issue
Issuing of securities to the existingshare holders as bonus
It may be issued as a mandatory orstatutory requirement or as voluntaryact of company
Pavan
KU
@B
angalore
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Right issue vs. Bonus issue
Payment
Privilege issue
Paid up shares
Minimum subscription
Separate account
Pavan
KU
@B
angalore
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Book Building Book Building is basically a capital
issuance process used in Initial PublicOffer (IPO) which aids price anddemand discovery.
Its selling of the shares to the public at
an acceptable price through merchantbankers A book building process may mention the
floor price of the offer. The merchant
banker then records the number ofoffers that have been received and theoffer prices along with the name of theinvestor who is making the offer
Pavan
KU
@B
angalore
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Contd..,
The process aims at tapping bothwholesale and retail investors.
The offer/issue price is then
determined after the bid closing datebased on certain evaluation criteria.
PavanKU
@B
angalore
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Stock option or ESOPS
It is a voluntary scheme of company toencourage its employees to participatein company
It can also be offered as an incentive tothe employees
Useful to the company whose activity is
dominantly based on the talent of theemployees
PavanKU
@B
angalore
30
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SEBI guidelines
Issue at discount allowed Approval of shareholders through
special resolution Maximum limit if more than 1% special
approval in AGM Superintendence compensation
committee of BOD Eligibility all permanent employees but
not promoters Directors report
PavanKU
@B
angalore
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PavanKU
@B
angalore