SAIM UNIT I

8/3/2019 SAIM UNIT I

1/107

vddf 1

OVERVIEW OF

CAPITAL MARKET


2/107

1-2

INVESTMENT

A sacrifice now to obtain a return later

Real investment: purchase of land,

machinery, etc.

Financial investment: purchase of "paper"

contract.


3/107

1-3

Why Do Individuals Invest ?

By saving money (instead ofspending it), individuals tradeoffpresent consumption for a largerfuture consumption.


4/107

1-4How Do We Measure The Rate of Returnon an Investment ?

The pure rate of interest is the exchange ratebetween future consumption (future rupees)and present consumption (current rupees).

Market forces determine this rate.

People willingness to pay the difference forborrowing today and their desire to receive a

surplus on their savings give rise to aninterest rate referred to as the pure timevalue of money.


5/107

1-5

Contd

If the future payment will be diminished invalue because of inflation, then the investorwill demand an interest rate higher than the

pure time value of money to also cover theexpected inflation expense.

If the future payment from the investment is

not certain, the investor will demand aninterest rate that exceeds the pure time valueof money plus the inflation rate to provide arisk premium to cover the investment risk.


6/107

1-6

Defining an Investment

a commitment of funds made in theexpectation of some positive rate of return

Investment is the current commitment

of amount in order to derive futurepayment that will compensate theinvestor for:

The time The expected rate of inflation

The uncertainty of future payments


7/107

1-7

Characteristics of Investment

RETU

RN: Expectation of return . Yield + capitalappreciation.

RISK: Risk is inherent in investment. Risk may beloss of capital , delay in repayment of capital, non-payment of interest, variability of returns.

SAFETY: certainty of return of capital without loss ofmoney or time. Safety feature is desired forinvestments.

LIQUIDITY: Saleable / marketable without loss of

money or time. TAX BENEFITS : Its not what you make, its what you

keep that is important. Tax Planning Involves:

The desired return after-taxes

Type of income received from investments


8/107

1-8

Types of Investments

Securities or Property Securities: stocks, bonds, options

Real Property: land, buildings

Tangible Personal Property: gold,silver, antiques

Direct orIndirect Direct: investor directly acquires a

claim

Indirect: investor owns an interest in aprofessionally managed collection of

securities or properties


9/107

1-9

Types of Investments (cont'd)

Debt, Equity orDerivative Securities Debt: investor lends funds in exchange for

interest income and repayment of loan infuture (bonds)

Equity: represents ongoing ownersh

ip in abusiness or property (common stocks)

Derivative Securities: neither debt norequity; derive value from an underlyingasset (options)

Low Risk or High Risk Risk: chance that actual investment returns

will differ from those expected


10/107

1-10

Types of Investments (cont'd)

Short-Term or Long-Term

Short-Term: mature within one year

Long-Term: maturities of longer than a

year

Domestic or Foreign

Domestic: U.S.-based companies

Foreign: foreign-based companies


11/107

1-11

Investment vs. Speculation

Risk: Possibility of incurring loss. Risk is relatedto Return. Higher return Higher risk. Investornormally opts for low risk whereas speculatorfor high risk to get high returns.

Capital Gain: Speculator interested in capitalgain .; Buying low and Selling high.

Time period: Investment is long term whereas

speculation is short term.

Both investment & speculation aim at goodreturns diff being motives & methods.


12/107

1-12

Investment vs Gambling

Gambling are horse races, card games, lotteriesetc. Gambling consists in taking high risk not onlyforhigh returns but also for thrill & excitement.

Gambling is unplanned & non scientific. It issurrounded by uncertainty and based on tips andrumours.

Investment - plan, evaluate and allocate funds tovarious investment which offer safety of principal

and moderate and continuous return over a longperiod of time.


13/107

1-13

Types of Investors

Individuals & Institutions

Individual large in number but investableresources are smaller. They lack skill toextensive evaluation and analysis . They donot have time and resources .

Institutions like Mutual funds, investmentcompanies, banking and non-banking ,insurance etc with large amounts of surplusfunds . Fewer in number but investableresources larger.


14/107

1-14Type of Investors: According to Personality

1. MeasuredInvestor

Your personality is loosing your money-not the market

Characteristics

The measured investor starts investing early, enjoysinvesting and is happy with his orher current financialsituation

Strengths

Regularly rebalances his orher portfolio Invests regularly

Avoids concentration in a single investment Is committed to an investing plan

Weakness

Holds losers too long Does not take profits


15/107


2. ReluctantInvestor

Characteristics

The reluctant investor doesnt enjoy investing and preferto spend as little time as possible on his or herinvestments. However, the reluctant investor is confidentthat he or she will have a comfortable retirement.

Strengths

Get rid of investment that are losing Doesnt chase hot investment Avoids concentration of a portfolio in a single investment

Weakness

Invests too little and too late Doesnt invest regularly, even they have money

Doesnt regularly rebalances his orher portfolio


16/107


3. CompetitiveInvestor

Characteristics

The competitive investor enjoys investing, but makes ahabit of trying to beat the market. This investor is happywith his or her current situation and is confident aboutthe future.

Strengths

Regularly rebalances his orher portfolio Invests regularly Puts as much money as possible into his or her

investments

Weakness

Holds losers too long and does not take profits Fails to adequately diversify his orher investments Is over-confident and chases hot investments


17/107


4. UnpreparedInvestor

Characteristics

The unprepared investor tends to put off investing. Thisinvestor is not happy with his or her current financialsituation and prospects for a secure retirement, andlacks confidence in his orher investment ability.

Strengths

Understands the importance of investing and is willing tolearneven though he or she can a slow starter

Weakness

Invests too little, too late and not regularly Holds losers too long Doesnt regularly rebalances his orher portfolio I

gnore taxes and expenses


18/107

1-18

Type of Investors: According to Personality

There are five types of investors that fit well withinthe investment club structure:

1. The "I'm not ready to go out on my own!"Investor:

Th

is investor is someone wh

o justdoes not yet have the expertise or knowledgerequired to be successful in any market. Byparticipating in an investment club, this

investor will learn from a pool of like-mindedpeople on how best to invest their money,make smart financial decisions, and managetheir money.


19/107

1-19Type of Investors: According to Personality(Contd.)

2. The "I am passionate about learningnew things!" Investor: This investor is aperson that loves to continually expand

their world with new things, new ideas,and new people. Investment clubs aredesigned to explore the wide world of

investing and educate members byhaving them participate first-hand.


20/107

1-20Type of Investors: According to Personality(Contd.)

3. The "I love to socialize AND makemoney!" Investor: Some people join

investment clubs simply because th

eyenjoy meeting new people, teamproblem-solving, team planning. Withonline investment clubs being all the

rage, people from anywhere in the worldare able to participate, pool theirresources, and have fun doing it.


21/107

1-21Type of Investors: According to Personality(Contd)

4. The "I want to make extra money forcollege/retirement/vacations" Investor: Thesedays, it seems that everyone is looking for

ways to supplement their income. It could beto pay for tuition or plan retirement or even toadd to a limited income due to retirement. Aninvesting club offers direction and education,

and that helps avoid the dangers of a trialand error approach.


22/107

1-22Type of Investors: According to Personality(Contd)

5. The "I want to invest but do not have a largeamount of funds to start with" Investor: Mostpeople don't have large sums of money

sitting around, but they do have an extraRs.200 a month to add to a pool of money tobe invested as a whole. Given that startingout alone with such a small initial outlay can

prove near impossible, pooling resourceswith an investment club is an ideal solution.


23/107

1-23

The Investment Process

A description of the process is:1. Set investment policy

Objectives

Amount Choice of assets / investible funds

2. Conduct security analysis

Conduct Market, Industry & Companyanalysis

Examine securities (identify those which

are mispriced?)


24/107

1-24

The Investment Process (contd)

3. Portfolio Construction Identify assets

Choose extent of diversification

4. Portfolio Evaluation

Assess the performance of portfolio

5. Portfolio Revision

Repeat previous three steps


25/107

vddf 25

INDIAN SECURITIES

MARKET


26/107

1-26

What and Why of Securities Market?

In every economic System, some units which maybe individual or Institution are surplus-generatingwhile others are deficit-generating.

Surplus-Generating Units are called Savers whileDeficit-generating units are called spenders.

Households are surplus-generating andCorporates and Government are deficitgenerators.

By placing the surplus funds in Financial claims orFinancial securities the Spending community getsfunds at a cost and saving community gets variousbenefits like interest, dividend, capital

appreciation, Bonus etc.


27/107

1-27

CONTD..

The Surplus generating units (Savers) areinvestors and Deficit generating units (spenders)are issuers.

These investors and issuers of financial securitiesconstitute two important elements of the securitiesmarkets.

The third critical element of markets is the

intermediaries who act as conduits between theinvestors and issuers.

Regulatory bodies, which regulate the functioningof the securities markets, constitute the last but

very significant element of securities markets.


28/107

1-28

Securities Market in India

Thus the four important elements ofsecurities markets are:

Investors

Issuers

Intermediaries

Regulators


29/107

1-29

Need of Securities Market

Securities market provides channelfor reallocation of savings toinvestments and entrepreneurship.

Savers and investors are notconstrained by individual abilities but

by economys abilities to invest andsave.


30/107

1-30

Types of Financial MarketsTypes of Financial MarketsTypesofFinancial MarketsTypes of Financial MarketsTypes of Financial Markets

CapitalMarket

MoneyMarket

ForexMarket

Equity

Debt

Retail

Corporate

BanksFI

FIIs

T-Bills

Call Money

Repos, CP,

CD

BanksCorporate

FI, FIIs

Spots

Forwards

Banks

Corporate

FI, FIIs

Agriculture

Produces,

Metals,

Financialfutureslike

Interestrate,

currency,

indicesetc

Banks, FIs

Corporate

DerivativesMarket


31/107

1-31

FinancialSystem

Suppliers of Funds

Individuals

Businesses

Governments

Demanders of Funds

Individuals

Businesses

Governments

Financial Markets

Money Market

Capital Market

Financial Institutions

Commercial Banks

Insurance Companies

Mutual Funds

Provident/Pension Funds

Non-banking Financial Companies

Private

Placement

Funds

Securities

Funds Securities

Funds Funds

Securities

Securities

FundsFunds

Deposits

SharesLoans


32/107

1-32

Functions of Financial Market

It provides facilities for interaction between theinvestors and the borrowers.

It provides pricing information resulting fromthe interaction between buyers and sellers in

the market when they trade the financialassets.

It provides security to dealings in financialassets.

It ensures liquidity by providing a mechanismfor an investor to sell the financial assets.

It ensures low cost of transactions and

information.


33/107

1-33

Types of Financial Market

A financial market consistsof two major segments:

Money MarketCapital Market


34/107

1-34

Money Market

The money market is a market for short-term funds, which deals in financialassets whose period of maturity is uptoone year.

It should be noted that money marketdoes not deal in cash or money as such

but simply provides a market for creditinstruments such as bills of exchange,promissory notes, commercial paper,treasury bills, etc.


35/107

1-35

Money Market Instruments

Following are some of the importantmoney market instruments or securities:

1. Call Money

Call money is mainly used by th

e banks tomeet their temporary requirement of cash.They borrow and lend money from each othernormally on a daily basis. It is repayable ondemand and its maturity period varies in

between one day to a fortnight. The rate ofinterest paid on call money loan is known ascall rate.


36/107

1-36

Money Market Instruments contd

2. Treasury Bill A treasury bill is a promissory note issued by the

RBI to meet the short-term requirement of funds.Treasury bills are highly liquid instruments, that

means, at any time the

holder of treasury bills cantransfer of or get it discounted from RBI.

These bills are normally issued at a price less thantheir face value; and redeemed at face value. Sothe difference between the issue price and the

face value of the treasury bill represents theinterest on the investment.

These bills are secured instruments and areissued for a period of not exceeding 364 days.


37/107

1-37


3. Commercial Paper Commercial paper(CP) is a popular instrument for

financing working capital requirements ofcompanies.

The CP is an unsecured instrument issued in theform of promissory note.

This instrument was introduced in 1990 to enablethe corporate borrowers to raise short-term funds.It can be issued for period ranging from 15 days toone year.

Commercial papers are transferable byendorsement and delivery. The highly reputedcompanies (Blue Chip companies) are the major

player of commercial paper market.


38/107

1-38


4. Certificate ofDeposit Certificate of Deposit (CDs) are short-term instruments

issued by Commercial Banks and Special FinancialInstitutions (SFIs), which are freely transferable from oneparty to another.

The maturity period of CDs ranges from 91 days to one year.These can be issued to individuals, co-operatives andcompanies.

5. Promissory Notes

A promissory note is an instrument in writing (not being abank note or a currency note) containing an unconditionalundertaking, signed by the maker, to pay a certain sum ofmoney only to or to the order of a certain person or to the

bearer of the instrument.


39/107

1-39

Capital Market

Capital Market may be defined as a marketdealing in medium and long-term funds. It isan institutional arrangement for borrowingmedium and long-term funds and which

provides facilities for marketing and tradingof securities.

So it constitutes all long-term borrowingsfrom banks and financial institutions,borrowings from foreign markets and raisingof capital by issue various securities such as

sh

ares debentures, bonds, etc.


40/107

1-40

Capital Market contd..

The market where securities are tradedknown as Securities market. It consists oftwo different segments namely primary andsecondary market.

The primary market deals with new or freshissue of securities and is, therefore, alsoknown as new issue market.

whereas the secondary market provides aplace for purchase and sale of existingsecurities and is often termed as stock

market or stock exchange.


41/107

1-41

Primary Market

The primary market provides the channelfor creation and sale of new securities.

In Primary Market, new issues may be

made in three ways viz: Public Issue: involves sale of securities to

members of public

Right Issue: involves sales of securities of

the existing shareholders/debentureholders

Private/Preferential Issue: involves sellingsecurities privately to a selected group of

investors.

1 42


42/107

1-42

Primary Market

1 43


43/107

1-43

Eligibility Norms for Public Issue

Entry Norm I (EN I): The company shall meetthe following requirements:

(a) Net Tangible Assets of at least Rs. 3crores for3 full years.

(b) Distributable profits in at least three years

(c) Net worth of at least Rs. 1 crore in threeyears

(d) If change in name, at least 50% revenuefor preceding 1 year should be from thenew activity.

(e) The issue size does not exceed 5 times

the pre- issue net worth

1 44


44/107

1-44

Pricing of Issues

Free Pricing

SEBI does not play any role in price fixation.

Fixed Price/Book Building

The company and merchant banker are howeverrequired to give full disclosures of the parameters

which they had considered while deciding the issueprice.

1 45


45/107

1-45

Book Building Process

The book-building system is part of InitialPublic Offer(IPO) ofIndian Capital Market.

It was introduced by SEBI onrecommendations of Mr. Y.H. Malegam inOctober 1995.

Book Building involves sale of securities to thepublic and the institutional bidders on the basisof predetermined price range.

It is an innovative method of marketing

securities involving price determination andquantum of securities on the basis of thedemand from the prospective shareholders.

1 46


46/107

1-46

Book Building Process

A process undertaken by which a demandfor the securities proposed to be issued bya body corporate is elicited and built upand the price for the securities isassessed on the basis of the bidsobtained for the quantum of securitiesoffered for subscription by the issuer.

This method provides an opportunity tothe market to discover price for securities.

1 47


47/107

1-47

Features FixedPriceProcess

BookBuildingProcess

Pricing Price at which thesecurities are

offered/allotted is known

in advance to the investor

Price at which securities

will be offered/allotted is

not known in advance to

the investor. Only anindicative price range is

known.

Demand Demand for the securitiesoffered is known only

after the closure of the

issue

Demand for the securities

offered can be known

everyday as the book is

built.

Payment Payment if made at thetime of subscription

wherein refund is given

after allocation.

Payment only after

allocation.

Difference between shares offered through book building andoffer of shares through normal public issue

1-48


48/107

1-48

Green Shoe Option

An option of allocating shares in excessof the shares included in the publicissue.

It is an option allowing the issuingcompany to issue additional shareswhen the demand is high for the shareswhen the floatation is on.

SEBI guidelines allow the issuingcompany to accept over subscription,subject to ceiling, say 15% of the offermade to public.

1-49


49/107

1 49

Promoter

The promoter has been defined as a person or personswho are in over-all control of the company

Promoters Contribution should not be less than 20% of post

issue of capital in case of offers for sale and public issuesby unlisted companies.

Exceptions

Public issue of securities listed on a stock exchangefor at least 3 years with a dividend payment record of3 immediate preceding years

No identifiable promoter or group exist

Rights Issue;

1-50


50/107

1 50

Credit Rating

SEBI Credit rating regulations ACT 1999

Promoted by PFI, SCB, Foreign Banks operating in India,Foreign credit rating agencies with 5 yrs of exp.

Minimum Net worth of5 crores.

A CRA cannot rate

A security issued by its promoter

Security issued by an associate , subsidiary ,anassociate promoter of CRA if they have a commonchairman, director and employees.

For all debt issue greater than or equal to 100 crores , has

to be rated by two different agencies.

1-51


51/107

1 51

ADR/GDR

Method of raising foreign currency resources

Foreign Convertible currency bonds

ADR/GDR

Depository Receipt negotiable instrument in the form of a

certificate denominated in US dollars

Certificates are issued by an overseas depository bank againstunderlying shares deposited by the issuing company with the bank

The DRs are issued by the bank to the investors

It is a non voting equity holding with all other benefits accrued.

Permits cross border trading and settlement , minimize transactioncosts and broaden the capital base forInstitutional Investors.

1-52


52/107

1 52

Contd

ADR GDR

Negotiable US certificaterepresenting ownership ofshares in a Non US corp..

Issued to public or private tomarkets inside or outside US

Quoted and traded in $ in USmarkets

Allows issuer to raise capital intwo or more marketssimultaneously

To facilitate the purchase,

holding and sale of non USSecurities byUS investors.

Underlying shares correspond to

GDR are fixed in ratio i.e. 1GDR = 10 shares

ADRs and GDRs are identical in legal, technical ,operational and

administrative point of view


53/107

vddf 53

STOCK MARKET

1-54


54/107

Introduction

It was in 1875 that the Indian Share Marketfirst started functioning.

The first share trading association in Indiawas known as the Native Share and Stock

Broker's Association, only to become theBombay Stock Exchange (BSE) later on in1894.

Main components ofIndia Share Market

Bombay Stock Exchange (BSE)

National Stock Exchange (NSE)

1-55


55/107

Secondary Market/Stock Market

The secondary market known as stock market or stockexchange plays an equally important role in mobilising long-term funds by providing the necessary liquidity to holdings inshares and debentures.

It is an organised market where shares, and debentures are

traded regularly with high degree of transparency andsecurity.

An active secondary market facilitates the growth of primarymarket as the investors in the primary market are assured of acontinuous market for liquidity of theirholdings.

The major players in the primary market are merchantbankers, mutual funds, financial institutions, and the individualinvestors; and in the secondary market you have all these andthe stockbrokers who are members of the stock exchangewho facilitate the trading.

1-56


56/107

Purpose of Stock Market

It helps in the capital formation of thecountry.

It maintains active trading.

It increases liquidity of assets.

It also helps in price recoveryprocess.

1-57


57/107

Distinction b/w Primary and Secondary Market

PointsofDifference Primary Market Secondary Market

Function To raise long-term fundsthrough fresh issue ofsecurities

To provide continuousand ready market forexisting long-termsecurities.

Participants Financial Institutions,

mutual funds,underwriters andindividual investors.

All of these and the

stockbrokers who aremembers of the stock

exchange

Listing

Requirement

Listing is not required fordealing in the primarymarket.

Only those securitiescan be dealt within thesecondary market, which

have been approved forthe purpose (listed)

Determinationof

Process

Prices are determinedby the management withdue compliance withSEBI requirement for

new issue of securities.

Prices are determinedby forces of demand andsupply and keep onfluctuating.

1-58


58/107

Stock Exchange The Securities Contract (Regulation) Act has defined

stock exchange as an association, organisation or bodyof individuals, whether incorporated or not, establishedfor the purpose of assisting, regulating and controllingbusiness of buying, selling and dealing in securities.

Stock exchange is the term commonly used for asecondary market, which provide a place where differenttypes of existing securities such as shares, debenturesand bonds, government securities can be bought andsold on a regular basis.

A stock exchange is generally organised as anassociation, a society or a company with a limitednumber of members.

It is open only to these members who act as brokers for

the buyers and sellers.

1-59


59/107

Characteristics of Stock Exchange

The main characteristics of a stock exchange are:

It is an organised market.

It provides a place where existing and approved

securities can be bought and sold easily.

In a stock exchange, transactions take placebetween its members or their authorised agents.

All transactions are regulated by rules and by lawsof the concerned stock exchange.

It makes complete information available to publicin regard to prices and volume of transactions

taking place every day.

1-60


60/107

Functions of a Stock Exchange

The functions of stock exchange can beenumerated as follows:

Provides ready and continuous market

Provides information about prices and sales

Provides safety to dealings and investment

Helps in mobilisation of savings and capitalformation

Barometer of economic and businessconditions

Better Allocation of funds

1-61


61/107

Advantages of Stock Exchange

1.

To theC

ompanies: The companies whose securities have been listed on a

stock exchange enjoy a better goodwill and credit-standing than other companies because they aresupposed to be financially sound.

The market for their securities is enlarged as theinvestors all over the world become aware of suchsecurities and have an opportunity to invest

As a result of enhanced goodwill and higher demand,

the value of their securities increases and theirbargaining power in collective ventures, mergers, etc.is enhanced.

The companies have the convenience to decide upon

the size, price and timing of the issue.

1-62


62/107

Advantages of Stock Exchange contd..

2.

To the Investors: The investors enjoy the ready availability of facility and

convenience of buying and selling the securities at willand at an opportune time.

Because of the assured safety in dealings at the stockexchange the investors are free from any anxiety aboutthe delivery and payment problems.

Availability of regular information on prices of securitiestraded at the stock exchanges helps them in deciding

on the timing of their purchase and sale. It becomes easier for them to raise loans from banks

against their holdings in securities traded at the stockexchange because banks prefer them as collateral on

account of their liquidity and convenient valuation.

1-63


63/107

Advantages of Stock Exchange contd..

3. To the Society: The availability of lucrative avenues of investment and the

liquidity thereof induces people to save and invest in long-termsecurities. This leads to increased capital formation in thecountry.

The facility for convenient purchase and sale of securities atthe stock exchange provides support to new issue market. Thishelps in promotion and expansion of industrial activity, which inturn contributes, to increase in the rate of industrial growth.

The Stock exchanges facilitate realisation of financialresources to more profitable and growing industrial units whereinvestors can easily increase their investment substantially.

The volume of activity at the stock exchanges and themovement of share prices reflect the changing economichealt

h.

1-64


64/107

Limitations of Stock Exchange

Scarcity of floating stocks: FIs, banks, andinsurance companies own 80% of the equitycapital in the private sector.

Rampant Speculation: Around 80% of thetransactions on the NSE and BSE arespeculative in nature.

Insider Trading: Obtaining market sensitive

information to make money in the markets.

Price rigging: Evident in relatively unknownand low quality scrips causes short time

fluctuations in the prices.

1-65


65/107

Why to invest in Share Market???

An investor does not require a lot ofmoney to start investing in India sharemarket unlike buying property .

Time of trading involved spans from smallto big. One can trade for a short period oftime or even a lengthy span.

It helps you to see 'fast' cash if the marketis in robust mood and helps in fastliquidation.

1-66


66/107

Bulls and Bears..

BU

LL Market : Economy is great,GDP is high & Stocks are rising

An optimistic person is called aBULL and is said to have a bullish

outlook.

BEAR Market : Economy isdeclining, GDP is low & Stocks arefalling

A pessimist is know as a BEARand is said to have a bearish

outlook.

1-67


67/107

Bombay Stock Exchange (BSE)

Bombay Stock Exchange(BSE) isknown as the oldest exchange in Asia.

In 1956, the BSE became the first stockexchange to be recognized by the

Indian Government under theSecurities Contracts Regulation Act.

The Bombay Stock Exchangedeveloped the BSE Sensex in 1986,

In 2000 the BSE used this index toopen its derivatives market,

1-68


68/107

National Stock Exchange (NSE)

The NSE, located in Bombay, isIndia's first debt market.

It was set up in 1993 to encouragestock exchange reform .

It opened for trading in mid-1994. Itwas recently accorded recognition asa stock exchange by the Department

of Company Affairs.The instruments traded are: treasury

bills government security and bondsissued by public sector companies.


69/107

REGULATORY MECHANISM:SECURITY EXCHANGE

BOARD OF INDIA

1-70

h i


70/107

What is SEBI?????????

SEBI is the regulator for the securityMarket in India.

In 1988 the Securities and Exchange

Board ofI

ndia (SE

BI

) was establish

edby the Government ofIndia through anexecutive resolution, and wassubsequently upgraded as a fullyautonomous body on April 12, 1992

the Securities and Exchange Board OfIndia was constituted. It wasconstituted in accordance with theprovisions of the Securities andExchange Board OfIndia Act

1-71


71/107

PREAMBLE

The Preamble of the Securities andExchange Board of India describesthe basic functions of the Securitiesand Exchange Board ofIndia as

..to protect the interests of

investors in securities and to

promote the development of, and to

regulate the securities market and formatters connected therewith or

incidental thereto.

1-72


72/107

Objectives of SEBI

To protect the interests of investors insecurities;

To promote t

he development ofSecurities Market;

To regulate the securities market.

It makes rules and regulations for themarket.

1-73


73/107

Functions of SEBI

Regulating the business in stock exchangeand any other securities market

Registering and regulating the workings ofintermediaries associated with securities

marketRegistering and regulating the working of

collective investment schemes includingmutual funds

Promoting and regulating self-regulatoryorganizations

Prohibiting fraudulent and unfair trade

practices in the securities market

1-74


74/107

7

4

Functions of SEBI contd..

Promoting investors education and trainingof intermediaries in securities market

Prohibiting insiders trading in securities

Regulating substantial acquisition of shares

and take-over of companies

Calling for information, undertakinginspection, conducting enquiries and audits

of th

e stock exch

anges, intermediaries andself-regulatory organizations in thesecurities market

1-75


75/107

Organization of SEBI

Th

e management ofSE

BI

vests in th

e board,which consists of the following members:

A Chairman

Two members from amongst the officials ofMinisters of the Central Government dealing withFinance of law

O

ne member from amongst th

e official of th

eReserve Bank ofIndia

Two other members, to be appointed by theCentral Government

1-76


76/107

Organization of SEBI

Departments

Primary Mkt. dept.

Issue Mgt. & Intermediaries Dept.

Secondary Mkt. dept.

Institutional Invt.Advisory

Committees

Policy matters related to primary

market, intermediaries and self regulatory organizations, redressal ofinvestors grievances and guidance

Mutual Funds, FIIs etc

Registration, regulation andmonitoring of theintermediaries and securityof offer document.

Policy matters related to major

stock exchanges, pricemonitoring, prevention of insidertrading and brokers registration.

1-77


77/107

7

7

SEBI Regulates.

SEBI

regulates

Primary

Market

Secondary

Market

Mutual

Funds

Foreign

Institutional

Investment

1-78

i k


78/107

7

8

SEBI & Primary Market

MeasuresundertakenbySEBI:-

Entry norms

Promoters contribution

Disclosure

Allocation of shares

Market intermediaries

1-79


79/107

Contd..

1.Entry normsa) Track record of dividend payment for minimum 3

yrs preceding the issue.b) Already listed companies - when post-issue

networth becomes more than 5 times the pre-

issue networthc) For Manufacturing company not having such

track record appraise project by a publicfinancial institution or a scheduled commercialbank.

d) For corporate body 5 public shareholders forevery Rs.1 lakh of the net capital offer made tothe public

e) Banks 2 yrs of profitability for issues above par.

1-80

C d


80/107

8

0

Contd.

2. Promoters contribution

Should not be less than 20% of the issuedcapital.

The entire promoters contribution shouldbe received before the public issue.

SEBI announced that not more than 20%of the entire contribution brought in bypromoters cumulatively in public andpreferential issue would be locked in for5years .

1-81

C td


81/107

8

1

Contd.

3. Disclosure

Draft prospectus should be provide all theneeded information to the investor

regarding: The present position of the company

The future prospect and;

The risk factor associated with the investment

of the company.

SEBI has advised all the listed companiesto publish unaudited financial results on aquarterly basis.

1-82

C td


82/107

8

2

4. Allocation of sharesTo bring back the small investors to the

primary market, the minimum application ofshares has been reduced from 500 to 200

Reservation of minimum 50% of net offers tothe small investors(


83/107

8

3

5. Market intermediaries

Licensing of merchant bankers

Licensing of underwriters, registrars, transferagents, etc.,

Merchant bankers net worth Rs.5 crores

From Dec 7, 1997 SEBI advised themerchant bankers to segregate the fundbased activities from the fee based activities.

Contd.

1-84

SEBI & S d M k t


84/107

8

4

SEBI & Secondary Market

Reformsinthesecondarymarket:-

1. Governing board

2. Infrastructure

3. Settlement & clearing

4. Debt market

5. Price stabilization

6. Delisting7. Brokers

8. InsiderTrading

1-85

C td


85/107

8

5

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 tradingterminals

Contd.

1-86

C td


86/107

8

6

3. Settlement & clearing

Weekly settlements

Auctions for non-delivered sh

ares with

in 8days of settlement

Advice to set up clearing houses, clearingcorporation or settlement guarantee fund

for expediting the process of dematerialization of securities.

Warehousing facilities permitted by SEBI.

Contd.

1-87

C td


87/107

8

7

4. Debt market segment

Regulates thru SEBI(depository &

participants) regulation Act 1996.

Listing of debt instruments on the stockexchange even if the companys equity

was not listed earlier.

Dual rating for above Rs.500 million

Contd.

1-88

Contd


88/107

8

8

5. Price stabilization Division to monitor the unusual movements in

prices.

Monitor prices of newly listed scrip from the first

day of trading. Circuit breaker system and other monitoring

restrictions could be applied

Imposing of special margins of25% on purchasein addition to regular margin.

Price filters: to prevent circular trading and pricerigging

Price bands: intra-day---10% and 25% weeklyprice cap.

Contd.

1-89

Contd


89/107

6. Delisting

On voluntary de-listing from regionalstock exchanges buy offer to all

share

holders

Promoters to buy or arrange buyersfor the securities

3 yrs listing fees from companies andbe kept in Escrow A/c with the stockexchange.8

9

Contd.

1-90

SEBI and the FIIs


90/107

SEBI and the FIIsUnion Govt. allowed

Foreign Institutional Investors (FIIs)

Non-Resident Indians (NRIs), and

Persons ofIndian Origin (PIOs)

to enter into both Primary & Secondary market in India throughthe portfolio investment scheme (PIS), under Liberalized policyregime. Under this scheme, FIIs/NRIs can acquireshares/debentures of Indian companies through the stockexchanges in India.

Implications

Affects the SENSEX movements

Determines the market indications, Guidelines announced in1992. In 1993, 12 FIIs got registered

At the end of 1996-97, 439 FIIs were registered

At the end of June 2010, 1713 FIIs were registered.

Can trade in securities of listed companies including OTCEI.

1-91

Th ili f ll i t t f FII


91/107

24% of the paid up capital of the Indian company

10% forNRIs/PIOs.

20% of the paid up capital in the case of publicsector banks, including the State Bank ofIndia.

Modifications in ceilings

The ceiling of24 % for FII investment can be raisedup to sectoral cap/statutory ceiling, subject to theapproval of the board and the general body of thecompany passing a special resolution to that effect.

The ceiling of 10 % forNRIs/PIOs can be raised to24% subject to the approval of the general body of

the company passing a resolution to t

hat effect.

The ceiling for overall investment for FIIs

1-92

Contd


92/107

The Reserve Bank ofIndia

monitors the ceilings on FII/NRI/PIOinvestments in Indian companies on adaily basis.

For effective monitoring of foreigninvestment ceiling limits, the Reserve

Bank has fixed cut-off points that aretwo percentage points lower than theactual ceilings.

Contd.

1-93

FIIs breakup in Indian Capital Market


93/107

FIIs breakup in Indian Capital Market

1-94

SEBI guidelines for FIIs


94/107

SEBI guidelines for FIIs

According to the 1995 regulations, FIIs should holdcertificate granted by SEBI to trade in Indian stockmarket.

To grant the certificate the applicant should :

1. Have track record, professional & competence record,financial soundness, general reputation of fairnessand integrity.

2. Regulated by an appropriate foreign regulatory

authority.3. Permission under the provisions of FER A Act

1973.(FEMA - 2006)

4. The certificate is valid for a period of5 years from the

date of its grant.

1-95

Custodians


95/107

Custodians FIIs have to appoint an agency as a custodian to deal

in the securities and reporting. Maintenance of accounts Submission of semi-annual reports (SEBI & RBI) Inspection of accounts

SEBI Guidelines

Foreign brokers can operate only on behalf ofregistered FIIs.

Execution of orders for sale and purchase ofsecurities are done by a member of an Indian stockexchange

Time stipulation for transaction b/w custodian &member ofISE is 48 hrs.

1-96

Preferential Allotment


96/107

Preferential Allotment

Regulation

Under mutual consent of the shareholders

As per the ceilings

Allotment on the highest price (26 weeks)Permitted up to 15% of the equity within the

ceiling

Holdings of a single FII

increased from5%

to 10% of theequity of a company

1-97

Recent developments in FIIs


97/107

Recent developments in FIIs

Exemption from attaching copy of RBIapproval with each market lots.

Allowed to invest in unlisted stocks of any

company.

Allowed to invest up to 100% in debtinstruments.

Mandatory to settle transactions thrudematerialized mode for FIIs havingsecurities more than Rs.10 cr.


98/107

vddf 98

THE RISE OFSENSEX

1-99

Bombay Stock Exchange SENSEX


99/107

Bombay Stock Exchange SENSEX

BSE Sensex or Bombay Stock ExchangeSensitivity Index is a value-weightedindex composed of30 stocks that started January1, 1986.

The Sensex is regarded as the pulse of the

domestic stock markets in India. It consists of the30 largest and most actively traded stocks,representative of various sectors, on the BombayStock Exchange.

These companies account for around fifty per centof the market capitalization of the BSE.

The base value of the SENSEX is 100 on April 1,1979, and the base year ofBSE-SENSEX is 1978-79.

1-100

The Rise of Sensex


100/107

The Rise of Sensex

1000, July 25, 1990: On July 25, 1990, the Sensex

touched the magical four-digit figure for the firsttime and closed at 1,001 in the wake of a goodmonsoon and excellent corporate results.

2000

, January15

,1992

:O

n January 15

, 1992

, th

eSensex crossed the 2,000-mark and closed at2,020 followed by the liberal economic policyinitiatives undertaken by the then finance ministerand current Prime MinisterDr Manmohan Singh.

3000, February 29, 1992: On February 29, 1992,the Sensex surged past the 3000 mark in the wakeof the market-friendly Budget announced by thethen Finance Minister, Dr Manmohan Singh.

1-101

The Rise of Sensex contd


101/107

The Rise of Sensex contd.

4000, March 30, 1992: On March 30, 1992, the

Sensex crossed the 4,000-mark and closed at4,091 on the expectations of a liberal export-importpolicy. It was then that the Harshad Mehta scam hitthe markets and Sensex witnessed unabated

selling.

5000, October 8, 1999: On October 8, 1999, theSensex crossed the 5,000-mark as the BJP-ledcoalition won the majority in the 13th Lok Sabha

election.

6000, February 11, 2000: On February 11, 2000,the infotech boom helped the Sensex to cross the6,000-mark and hit and all time high of6,006.

1-102



102/107


7000, June 20, 2005: On June 20, 2005, the news of thesettlement between the Ambani brothers boosted investorsentiments. This helped the Sensex crossed 7,000 pointsfor the first time.

8000, September 8, 2005: On September 8, 2005, theBombay Stock Exchange's benchmark 30-share index --the Sensex -- crossed the 8000 level following briskbuying by foreign and domestic funds in early trading.

9000, November28, 2005: The Sensex on November28,2005 crossed the magical figure of 9000 to touch 9000.32points during mid-session at the Bombay Stock Exchangeon the back of frantic buying spree by foreign institutionalinvestors and well supported by local operators as well asretail investors.

1-103



103/107


10,000

,F

ebruary6

,2006

:Th

eS

ensex on February6, 2006 touched 10,003 points during mid-session.The Sensex finally closed above the 10K-mark onFebruary 7, 2006.

11,000, March 21, 2006: The Sensex on March 21,2006 crossed the magical figure of 11,000 andtouched a life-time peak of 11,001 points during mid-session at the Bombay Stock Exchange for the firsttime. However, it was on March 27, 2006 that the

Sensex first closed at over 11,000 points.

12,000, April 20, 2006: The Sensex on April 20,2006 crossed the 12,000-mark and closed at a peak

of 12

,040

points for th

e first time.

1-104



104/107


13,000, October30, 2006: The Sensex on October30,2006 crossed the magical figure of 13,000 and closed at13,024.26 points, up 117.45 points or0.9%. It took 135days for the Sensex to move from 12,000 to 13,000 and123 days to move from 12,500 to 13,000.

14,000, December 5, 2006: The Sensex on December5, 2006 crossed the 14,000-mark to touch 14,028points. It took 36 days for the Sensex to move from13,000 to the 14,000 mark.

15,000, July 6, 2007: The Sensex on July 6, 2007crossed the magical figure of 15,000 to touch 15,005points in afternoon trade. It took seven months for theSensex to move from 14,000 to 15,000 points.

1-105



105/107


16,000, September19, 2007: The Sensex scaled yetanother milestone during early morning trade onSeptember 19, 2007. Within minutes after tradingbegan, the Sensex crossed 16,000, rising by 450points from the previous close. The 30-share Bombay

Stock Exchange's sensitive index took 53 days toreach 16,000 from 15,000.

17,000, September26, 2007: The Sensex scaled yetanother height during early morning trade on

September 26, 2007. Within minutes after tradingbegan, the Sensex crossed the 17,000-mark . Someprofit taking towards the end, saw the index slip intored to 16,887 - down 187 points from the day's high.Th

eS

ensex ended with

a gain of22

points at 16,9

21.

1-106



106/107


18,000, October 09, 2007: The BSE Sensex crossedthe 18,000-mark on October 09, 2007. It took just 8days to cross 18,000 points from the 17,000 mark.The index zoomed to a new all-time intra-day high of18,327. It finally gained 789 points to close at an all-

time high of 18,280.

19,000, October 15, 2007: The Sensex crossed the19,000-mark backed by revival of funds-based buying

in blue chip stocks in metal, capital goods andrefinery sectors. The index gained the last 1,000points in just four trading days and touched a freshall-time intra-day high of 19,096, and finally endedwith a smart gain of640 points at 19,059.

1-107



107/107


20,000, December 11, 2007: The Sensex actuallycrossed the 20,000-mark on October 29, 2007 duringintra-day trading but closed at 19,977.67 points.However, it was on December 11, 2007 that it finallyclosed at a figure above 20,000 points on the back of

aggressive buying by funds. The 30-share indexspurted 360.21 points to fly-past the crucial level andclosed at 20,290.89.

21,000, January 8, 2008: The Sensex crossed the

21,000-mark in intra-day trade on January 8, 2008,bringing cheer to the markets at the very beginning ofthe New Year. Scaling a new peak, the Sensex spurted264 88 points to touch 21 077 53 points in the first five

Documents

SAIM UNIT I