Gfm capital markets evolution

Capital Markets

©2010 BSE Training Institute Limited 1

What is Stock Exchange

• It is a platform where buyers and sellers meet

• It provides a place to buy and sell shares

• It acts as a bridge between demanders of fund

and suppliers of fund

• Channelize savings into investments


Participants

• Govt.

• Companies

• Institutions

• Retail Investors

• Mutual Funds


History of Stock Exchanges

• BSE first stock exchange started on 9th July

1875

• Known as “Native Shares and Stock Broking

Association”

• Membership fees was Rs. 1

• There were 318 members


Major reforms in capital Market

• 1992 FII were allowed in india

• 1993 Private Sector Mutual Funds were

launched

• 1996 First time SEBI came out with Guidelines

for MF industry


Reforms cont

• 1996 Depository act passed

• 2000 Derivatives markets gets going

• 2003 Commodities Market started

• 2008 Currency futures market launched


Current scenario

• Today 23 stock exchanges in India

• Major ones BSE (Bombay Stock Exchange )

and NSE (National Stock Exchange)

• NSE formed in 1994


Daily Turnover of stock markets

• BSE Cash segment Rs. 4000 crores

• NSE cash segment Rs. 15000 crores

• NSE FO Rs. 1,00,000 crores


Financial Markets

• Financial Markets are the capital markets that

is stock market

• Stock market is known as “Barometer of the

Economy”

• Let us understand this statement

• Companies listed on stock market represent

corporate india

• When there profit rises or falls


Stock market Barometer

• It is indication that net profit of companies rises or falls

• This means that sales have either gone up or down

• This indicates demand has increased or decreased in economy

• It has direct impact on stock market

• Stock market ultimately reflects the sentiment in the economy


Financial Markets Classification

• Capital Market is market for long term source of funds

• Market having maturity of more than one year

• Instruments like

• Shares

• Preference shares

• Debentures

• Bonds


Capital market and Economic Growth

• US,UK,Japan have high economic growth due

to developed Capital markets

• Fund raising very easy activity


Money Markets

• It is a market for short term source of funds

• The maturity of these instruments is less than one year

• Instruments like

• T- Bills

• Commercial Paper

• Inter-corporate Deposit

• Certificate of Deposit


Call Money Market

• Liquidity management main object

• 2007 Call money rate 0.25 %

• 2008 call money rate 21 %

• Currently call money rates 7.25 % to 7.5 %


What is IPO ?

• It refers to Initial Public Offering

• The company for the first time goes to public

to raise the money

• IPO market is also known as Primary market

• Ex:- Coal India raised the money for Rs.

15000 crore


Why companies raise money

through IPO ?

• Money raised through IPO is ownership

money

• It need not be returned to shareholder unless

company closes down

• No interest is to be paid on this amount

• No mortgage of property is required on this

amount


Process of IPO

• The company first goes to Merchant Banker

Category I who has licence from SEBI

• Merchant banker has the ability to raise the

money from the market

• Merchant banker are those who have networth

of Rs. 1 crore

• Eg:- karvy consultants, ENAM, SBI Cap


Process Cont

• The Merchant Banker will prepare project

report of the company

• They will do two types of analysis

• Quantitative

• Qualitative


Process cont.

• Based on both types of analysis the price

range is decided by the Merchant Banker

• For instance Coal India had price band of Rs.

225 to Rs. 245

• If promoters agree then the Prospectus is

submitted to SEBI


IPO process cont

• SEBI would give answer within 21 days

• If no comment comes from SEBI within 21

days then IPO is said to be approved

• If any comment comes then new prospectus is

to be filled again


IPO process

• Once the IPO gets SEBI approval the

Merchant Banker goes for marketing of the

issue

• At least 90 % of the issue should be

subscribed then only issue is considered as

successful

• If less than 90 % is collected then issue is

considered as Fail and money has to be

refunded


IPO process

• In order to avoid failure of IPO

• Companies also appoint Underwriter

• Underwriter is also a company who gives the guarantee to buy the shares if the public does not buy

• Eg:- Infosys IPO had failed but ENAM consultants were the underwriter who purchased the stocks and made the issues successful


What is FPO ?

• It is Follow on Public Offer

• It refers to company is already listed and for

second time goes for raising money

• For ex:- Power Grid raised Rs. 7000 crore

from the market


Secondary Market

• It is known as the Stock Market

• Companies trade on the stock market

• On BSE 6500 companies are listed

• On NSE 2500 companies are listed


Regulation of Stock Market

• It is regulated by SEBI (Securities and

Exchange Board of India)

• All the stock exchanges of the country are

regulated by SEBI

• All the matters related to scams in the stock

market are looked after by this agency


Relationship between Primary

and Secondary market

• Both are inter related

• If there is bull run in secondary market more

IPO will come in Primary Market

• If there is bear run in the secondary market

then less IPO will come in Primary market


Years of IPO

• 2007 saw maximum IPO as the market was in

bull mode

• 2008 there were no IPO after Reliance Power

failure

• 2009 again saw many IPO as stock market

recovered


Classification of stocks

• Large Cap stocks which have market cap

greater than Rs. 9000 crore

• Mid cap stocks which have market cap

between Rs. 2500 to 9000 crore

• Small Cap stocks which have market cap

between Rs. 250 cr to 2500 Crores

• Micro cap less than Rs. 250 crores


Another classification

• A – Blue Chip stocks which are fundamentally

very sound

• B1 B2 which are sound but they are small in

size. Normally known as Mid cap

• T group refers to Trade to Trade and most

risky as only delivery base trade allowed.

These stocks have abnormal volatility


Another classification

• S group stocks are small companies which are

listed on Indonext exchange but traded on

BSE

• Z group stocks are those which are very risky

as they may get delisted or suspended

anytime by SEBI.


Global markets

• US

• Dowjones

• NASDAQ (National Association of securities Dealer Automated Quotations)

• EUROPE

• FTSE (Financial Times Stock exchange) - London

• DAX (Deutscher Action Index) - Germany

• CAC (Cotation Assistee Qn Continu) - France


Cont..

• ASIAN MARKET

• Nikkie 225 – Tokyo (Japan)

• Strait Times – Singapore

• SGX Nifty - Singapore

• Hangsang – Hongkong

• Taiwan Index – Taiwan


Cont..

• Shanghai Composite – China

• KOSPI – Korea Composite Stock Price Index

• Sensex - India

• S&P CNX Nifty - India


What is neeed to Open trade in the equity

market ?

• 3 types of accounts required to trade in stock

market

• 1. Trading Account

• 2. Demat Account

• 3. Saving account in bank


How to open Demat Account ?

• Documents Required

• Pan card

• Address Proof (Voter id, passport, bank

statement, driving license)

• Bank Statement

• Photo pass port size

• Cancelled cheque (if required)


Use of Trading & Demat Account ?

• Trading account is used to actually put the buy

and sell transaction

• A code is generated and transactions are

punched into that code

• Demat accout is used to store the securities

which are purchased.

• Demat account is also a number which is

known as Client ID.


How Exactly does trading take place ?

• Once trading and demat accounts are opened.

• The client will call the broker or sub broker

• He will tell his trading code in which the transaction has to be kept

• Once the transaction is done, the broker or sub broker will give confirmation to client about the trades done


How many types of trading are there ?

• Two types of trading

• Intraday trading

• Delivery base trading

• Intraday trading refers to doing buy and sell

transaction in one day itself

• In intraday, the profit or loss is settled by the

way of difference only


Delivery base trading

• Here the entire payment is made by the client

• The securities are then transferred to the

demat account of the client after the client

makes full payment.

• If client does not pay then securities are lying

in pool account of broker.


Settlement Process

• The payin and payout of funds and securities

takes place on T + 2 basis

• T is Monday so plus two working days means

on Wednesday the payin of funds and

securities will take place in the morning

• Also on Wednesday the payout of funds and

securities will take place in afternoon


Equity as Asset Class

• Equity fulfills “Wealth Creation” Objective

• Sensex has given 17.25 % CAGR return from

1979 to 2009.

• Rs. 9500 invested in Infosys in 1993 has

converted into Rs. 2 crore in 2007.


Stock Markets

• Primary

• Secondary


Stock Markets Regulatory Framework

• Self Regulatory Bodies

• SCRA 1956 & SCR Rules 1957

• Activities supervised by MoF

• Perception that rights & Interests of Investors

were ignored.


S E B I

• SEBI act passed in April 4,1992.

Functions

• To protect the interest of investors

• To promote the development of & regulate

the securities market.


Role of SEBI

• Regulate the Business in SE’s

• Register & Regulate intermediaries, collective

investment schemes (incl. MF’s)

• Promote & regulate SRO’s

• Prohibit unfair & fraudulent trade practices

• Promote investor education & Training

• Prohibit Insider trading


Role of SEBI……. contd

• Regulate substantial acquisition of shares &

take over of companies

• Inspection/Audit of intermediaries & SRO’s

• Any other function as provided under the

SCRA 1956, as delegated by the govt.


Measures initiated by SEBI

• Capital Adequacy norms for Brokers

• Intra day trading limits

• Gross Exposure limits

• Margins

• Surveillance systems at SE’s

• Circuit Filters

• Inspection of Stock Exchanges


…..contd

• Client Broker relationship

• KYC

• Registration of Sub brokers & brokers

• Increasing trading hours

• Introduction of Derivatives Trading

• Rolling Settlements

• Dematerialistaion


….contd

• Computerization of Exchanges

• Internet trading


Role of exchanges

• To promote develop & maintain a well regulated market for dealing in securities

• To safe guard interest of members & investing public having dealings on SE

• Promote industrial development through efficient resource mobilization by way of investment in corporate securities

• Establish & promote honourable & just practices in securities transactions.


Instruments available

• Equity

• Debt

• Derivatives

• Mutual Funds

• Commodities


Equity

• Preference Shares

• Equity shares


Debt

• Debentures

• Bonds


Derivatives

• Futures- Index / Stock

• Options- Call / Put


Risk Return Profile

Risk Return

Equity High High

Debt Low Low

Derivatives Moderate High


Conclusion

• Need for market regulator

• SEBI regulates the markets to help them

modernize & grow

• Exchanges bring on best practices

• Various Investments products available

according to the risk appetite of investor.


Other Regulatory Bodies

• Indian Financial system governed by various

regulatory bodies

• RBI

• AMFI

• IRDA

• PFRDA

• FMC - Forward Markets Commission

• FSDC - Financial Stability and Development

Council


RBI

• Reserve Bank of India

• Apex body for regulation of Banking Sector

• GTL merged with OBC by RBI for protection of

depositors

• CAR of 9 % compulsory


AMFI

• AMFI – Association of Mutual Funds of India

• Advisory body for mutual funds

• Represents MF industry before the

Government


IRDA

• IRDA – Insurance Regulatory Development

Authority

• Controls the Insurance sector

• ULIP issue taken up by IRDA


FDSC

• FSDC – Financial Stability Development

Council

• Chairman is Finance Minister Himself

• It solves the Inter-Regulatory Tussle between

the various bodies

• Recently SEBI and IRDA had tussel


Japan and UK Model

• Japan has Financial Services Agency

• UK has FSA – Financial Service Authority

• Both have single regulatory model


Debt Market

• Debt Instruments are those who have fixed

rate of return

• They create financial obligation on the issuer

• The issuer has to repay the principal and the

interest amount


Debt Equity Ratio – The CRUX

• This ratio shows the DEBT component in the

capital structure of the company

• Higher Debt always creates problem

• SUB PRIME Crisis is the best example that

high debt has led to Recession in the world


SUB PRIME CRISIS

• In 2001, WTC attack

• USA was to face recession as no one wanted

to go to USA

• FEDRAL RESERVE reduces the interest rates

from 5 % to 1 %

• Banks gave $ 3.3 trillion in loans

• NINJA loans means No Income No Job No

Asset


SUB PRIME CRISIS Cont..

• In 2007, time of Repayment

• Huge defaults

• Large number of houses came for auction

• Reduced the prices of houses more than 70 %

• 108 banks filed for Bank Ruptcy

• FII went to sell off mode due to liquidity crisis


Debt Equity Ratio

• Most important ratio after Global Recession

• Sub Prime taught best lesson that debt should be

under control

• Ideal ratio not more than 2:1

• DLF, Unitech had ratio of 8:1

• Aban offshore had 16:1

• Wockhart also had same problem

• It should always be low


Types of Debt Instruments

• Fixed Deposits

• Bonds

• Debentures

• NSC

• KVP

• PPF


Risk in Debt Market

• Credit Risk

• Inflation Risk

• Interest Rate Risk


Credit Rating

• CRISIL 1987

• ICRA 1991

• CARE 1993

• IPO Grading has also been started

• R power issue classic case


Global Credit Rating Agencies

• Standard and Poor

• Fitch

• Moody


Forex Markets

• Currency Trading has now started in india

• Participants

• Banks

• MNCs

• NSE and MCX offer trading platforms


Exchange Rates

• Exchange Rate lot more than an mere number

• Currency appreciates and Depreciates

• Appreciation refers to strengthening of currency that is economy is strong

• Depreciation refers to weakening of rupee that is economy is weak

• Currency futures now traded on Stock market


Types of Exchange Rate

• 1. Demand Supply Method (Most transparent

method – India, US, Uk, Japan)

• 2. Fixed rate method (China)

• 3. Snake in the tunnel (European union)

• 4. Dirty Float Method (Central bank)

• 5. Hybrid method (Central bank along with

demand supply method)


Appreciation of Rupee

• 1 $ = 45 Rs

• 1$ = 40 Rs

• This is Appreciation of Rupee.

• Economy becomes strong

• FII buys so Rupee becomes strong

• IT, Textile and Exports get harm due to

appreciation of rupee


Depreciation of Rupee

• 1$ = 45 Rs.

• 1$ = 50 Rs.

• This is Depreciation of Rupee.

• Economy becomes weak.

• FII sells so Rupee becomes weak

• IT, Textile and Exports benefit due to

depreciation of rupee

• Oil we import 73 %


Example of Aviation industry

• Indian Aviation industry is worth $ 10 billion to

$ 12 billion

• Crude oil above $ 95 creates big problem for

the aviation industry

• It starts making losses in big way

• When rupee depreciates it creates further

problem as we import crude oil

• Industry debt equity is 5:1


SROs

• Association of Merchant Bankers of India

(AMBI)

AMBI was granted recognition to set up professional standards

for providing efficient services and establish standard practices in

merchant banking and financial services.

It was promoted for healthy business practice and to exercise

overall supervision over its members in the matters of compliance

with statutory rules and regulations pertaining to merchant

banking and other activities.

AMBI in consultation with SEBI is working towards improving

disclosures standards in the offer document as well as meeting

the statutory requirement in a systematic manner.


SROs

• Association of Mutual Funds of India

(AMFI)

• SEBI undertakes regular consultations with

members of AMFI on various issues affecting

mutual funds.

• In February 1997, SEBI held a meeting with

trustees of all mutual funds to discuss with them

their responsibilities for prudential oversight of

mutual funds in the light of SEBI (Mutual Funds)

Regulations, 1996.


SROs

• Association of Custodial Agencies of India

(ACAI) • Following the notification of the SEBI (Custodians of Securities)

Regulations, 1997, custodians of securities registered an

association, ACAI.

• To streamline custodial practices and to ensure that custodians

do not function in isolation from the clearing and settlement

systems.

• ACAI has also highlighted to SEBI from time to time difficulties

encountered by custodians on behalf of their clients who are

mainly foreign institutional investors, domestic mutual funds,

financial institutions, corporates and high net worth individuals.


SROs

• Registrars Association of India

(RAIN) • The Registrars Association of India (RAIN) is a

self regulatory organisation set up for

registrars to an issue and share transfer

agents


Merits of Single Regulatory model

• Given the spate of these changes in the financial services sector,

great value may be obtained by having a single financial sector

regulator that has the wide remit to cover prudential regulation,

conduct of business rules, market regulation and consumer

protection.

• The traditional regime of multiple regulators suffers the significant

drawback of duplication of functions, roles, responsibilities

leading to conflicting treatments for indistinguishable products

and services, regulatory gaps and black-holes and reduced

efficiency in regulating financial markets and their participants.

• Efficiency

• Single entity benefits

• Matching accountability with resources


Demerits of Single Regulatory Model

• Inadequate Legal and Regulatory Foundations to support it

• Merger-related difficulties

• Spread As Opposed to Depth – while multiple regulatory

model will have more focus the single regulatory model will

have broader objectives

• Diluted Regulatory Capacity

• Lack of Regulatory competition


Economy & Finance

Gfm capital markets evolution