BE

Dr. Vibhuti Tripathi

 All Over Again
Capital Market -- The market for relatively long-term
(greater than one year original maturity) financial
instruments.

Primary Market -- A market where new securities are

bought and sold for the first time (a “new issues”
market).

Secondary Market -- A market for existing (used)

securities rather than new issues.
• Market for long-term capital. Demand comes from
the industrial, service sector and government

• Supply comes from individuals, corporates, banks,

financial institutions, etc.

• Can be classified into:

– Gilt-edged market
– Industrial securities market (new issues and stock
market)
 Need for Development of Capital Market

• Increase in Industrial Units due to ..

– Technological Development
– Increase in Demand
– Competition

• Situation ..
– Capital at the disposal of one individual or a few individuals is
not sufficient.

– Paucity of funds arises .

 Gilt Edged
• Securities of government and semi-government
organisations are marketed.
• Securities are backed by RBI.
• Investors are predominantly institutions, which
are compelled by law to invest a certain portion
of their funds in Government securities.

• Thus called a captive market for Government

securities.
 Industrial Securities Market
• Refers to the market for shares and debentures of
old and new companies

• New Issues Market- also known as the primary

market- refers to raising of new capital in the form of
shares and debentures

• Stock Market- also known as the secondary market.

Deals with securities already issued by companies
 Development Financial Institutions

After industrial revolution in India Existing Financial

Institutions were inadequate in number to provide
funds to large scale industries.

Government of India Established DFIs

These institutions subscribe to shares and debentures of

new and old companies and also give them loans.
– Industrial Finance Corporation of India (IFCI)

– State Finance Corporations (SFCs)

– Industrial Development Finance Corporation (IDFC)

– Industrial Credit and Investment Corporation of India (ICICI)

– Industrial Development Bank of India (IDBI)

– Small Industries Development Bank of India (SIDBI)

 Non-Banking Finance Companies
• Those who are not approaching DFIs due to not matching the
requirements.

• NBFCs provide credit to them.

• No minimum liquidity ratio is mandatory

• Also give loans to self-employed individuals.

• Subject to extreme insecurities;

– Loans are not protected.
– No exchange of communication between companies.
 Financial Intermediaries
Merchant Banks: are issue houses rendering various services to
industrial projects and new companies.

Reasons to establish :
– To encourage small and medium industrialists who
require specialist services.
– Complexity in rules and procedures of government
norms.

Merchant banking is brought under the regulatory framework of SEBI

 Activities of Merchant Banker
• Issue Management :
– Structuring of instrument
– Preparation of offer document- (prospectus, need for
money, expenditure, nature of instrument, information
about management, future plans etc. )
– Obtaining statutory and other clearances
– Assistance in selection of brokers, registrars, printers,
ad agency and other intermediaries.
– Post Issue activities- Collecting application forms,
money, dispatch of share certificate.
• Corporate advisory services:
– Valuation
– Advise on mergers / Acquisitions
– Restructuring of business and finance
– Selling of assets

Underwriting: contractual obligation whereby the

underwriter agrees to subscribe to a certain number
of shares if they are not subscribed by the company.
 Venture Capital Financing
• Development of any entrepreneurship would
require combination of three vital factors :

– Innovative ideas
– Competency in project preparation &
implementation
– Project financing

Many ideas are profitable but risky; solution ----

VENTURE CAPITALISTS
• Venture Capital firms take up such risky projects.

• ICICI, IDBI, IFCI have venture capital divisions.

• Private banks too have such divisions.

 Mutual Funds
• Promote savings and mobilise funds which are invested in the
stock market and bond market

• Pool funds of savers and invest in the stock market/bond market

• Their instruments at saver’s end are called units

• Offer many types of schemes: growth fund, income fund,

balanced fund

• Regulated by SEBI
 Types of Shares
• Equity shares: These shares are also known as ordinary
shares.

• They are the shares which do not enjoy any preference

regarding payment of dividend and repayment of capital.

• They are given dividend at a fluctuating rate.

• The dividend on equity shares depends on the profits made by

a company.
• Preference shares: These shares are those shares which are given
preference as regards to payment of dividend and repayment of capital.

• Preference shareholders have some preference over the equity

shareholders, as in the case of winding up of the company, they are paid
their capital first.

• Deferred shares: These shares are those shares which are held by the
founders or pioneer or beginners of the company.

• They are also called as Founder shares or Management shares.

• The right to share profits of the company is deferred, i.e.
postponed till all the other shareholders receive their
normal dividends.

• IPOs : Initial Public offer , floated by new companies or

for first time to raise funds.

• FPOs: Follow on Public Offer, already listed company

issues more equity shares.
 Debentures
• Is a document that either creates a debt or
acknowledges it.

• Used for a medium- to long-term debt instrument used

by large companies to borrow money.

• Debenture holders have no voting rights.

 Stock Exchange
• Place where trading of shares is done in terms of sale and
purchase.

• At present, there are twenty one recognized stock exchanges in

India.

• Bombay Stock Exchange is the largest, with over 6,000 stocks listed.

• The BSE accounts for over two thirds of the total trading volume in
the country.
 Working of Stock exchanges
• Placing an order with a broker –
– Only members are allowed to trade.
– Outsiders trade through members.
– Opening of an account with the broker
– Order placed with the broker
• Execution of the order-
– Broker or his clerk approaches the SE
– Quotations are asked or quoting his own price
– Negotiation on word of mouth and noted for, quantity, description, name of
party
– Transaction appears in SE’s daily official list – including no. of shares and
price.
• Reporting the deal to the client –
– Contract note is prepared – security bought or sold, price,
broker’s commission, date of settlement.

• Settlement of transaction –
1. Ready delivery (Spot Delivery) – cash settlement made
immediately on transfer of securities or within 1-7 days through
clearing houses.

2. Forward Delivery – settlement within a fixed duration,

normally 15 days.

3. Carry forward transactions- postponing the transaction to next

settlement period by paying carry forward charge.
• Clearing Houses: agencies given the
responsibility of settling the amounts payable
between counter parties.

• It is separate arm; for BSE – Bank of India

• Clearing the transactions on commission.

 Flaws in Stock Exchanges
• Lack of integration – leading to variation in
prices.

• Settlement system varies.

• No nation wide platform.

 National Stock Exchange (NSE)
• Established in 1994 in Mumbai.
• There was a need for a nation wide trading
• Equal access to investors across the country.
• Meet international securities market
standard.
 Working of NSE
• Fully automated screen based trading system.
• Trader can put various conditions in terms of
type, price and quantity
• Orders received are stacked in price and time
priority.
• Computer searches for compatibility
• In case of no-match the order is kept pending
• When the deal is stuck a confirmation slip is printed to
give details of price and quantity.

• Identity of the trader is not revealed.

• Done through registered brokers.

• NSE to Start Mobile Trading from Early October (Read

the hand out distributed)
 SPECULATION :
• Definition : it involves the buying, holding, selling, short-
term selling of stocks, bonds, commodities, currencies,
collectibles or any valuable financial instrument to ..

• Profit from fluctuations in its price as opposed to buying

it for use or for income via method like dividends or
interest.
 Kinds of speculation
• Bull Market (Tejiwala): purchasing the shares at
current prices to sell at a higher price in the near future
and make a profit.

Only if expectations come true. Also called a long

buyer.

• Bear Market (Mandiwala) : Selling security in the hope

that he will be able to buy them back at lesser price.
Also called “short selling”.
• Stag : Applying for a large number of a shares in a new
issue with the intention of selling them at a premium.
Insider trading

• The trading of a corporation's stock or other securities

(e.g. bonds or stock options) by individuals with
potential access to non-public information about the
company.
 Why do we need a regulatory body ?

 India is an ` informationally ' weak market.

 Investors are less aware.

 Boosting capital market demands; restoring the

confidence of investors who have been beaten down
by repeated scams.
 FEW SCAMS, Which shook the Investors’
confidence.
• During 1992 : ‘Big Bull’, Harshad Mehta’s Securities Scam.
Many Banks were involved.

• 1993 : Preferential Allotment Scam, issuing of equity

allotments to their respective controlling groups at steep
discounts. To the tune of Rs. 5000 crores lost.

• 1993 – 94 : Disappearance of companies; Stock market shot

up 120%; 3,911 companies raised over Rs. 25,000 crores and
vanished / did not set up their projects.
• 1995-97 : Plantation Companies’ Scam, NBFCs promised
high returns; collected Rs. 50,000 crores

• 1999 – 2000 UTI Scam Rs. 32 crores.

• IT Scam; firms changed their names to include infotech;

IT sector was booming.

• Satyam Fiasco : Inflated (non-existent) cash and bank

balances. Insider Trading; corporate-mis-governance.
 Mission of SEBI
• Securities & Exchange Board of India (SEBI) formed
under the SEBI Act, 1992 with the prime objective of
– Protecting the interests of investors in securities,
– Promoting the development of, and
– Regulating, the securities market and for matters
connected therewith or incidental thereto.’

Focus being the greater investor protection, SEBI has

become a vigilant watchdog
 FUNCTIONS OF SEBI
1. A review of the market operations, organizational structure and
administrative control of the exchange

2. Registration And Regulation Of The Working Of

Intermediaries

Primary Market Secondary Market

Merchant Bankers Stock brokers

Underwriters Sub- Brokers

Portfolio Managers
3. Registration And Regulation Of Mutual Funds, Venture
Capital Funds & Collective Investment Schemes

Promoting and protecting the interest of mutual funds and

their unit-holders, increasing public awareness of mutual
funds, and serving the investors' interest by defining and
maintaining high ethical and professional standards in the
mutual funds industry'.

Every mutual fund must be registered with SEBI and

registration is granted only where SEBI is satisfied with the
background of the fund.

SEBI has the authority to inspect the books of accounts,

records and documents of a mutual fund and its trustees.
• SEBI (Mutual Funds) Regulations, 1996 lays down the provisions for the
appointment of the trustees and their obligations

• Every new scheme launched by a mutual fund needs to be filed with SEBI and
SEBI reviews the document in regard to the disclosures contained in such
documents.

• Regulations have been laid down regarding listing of funds, refund procedures,
transfer procedures, disclosures, guaranteeing returns etc

• SEBI has also laid down advertisement code to be followed by a mutual fund in
making any publicity regarding a scheme and its performance

• SEBI has prescribed norms / restrictions for investment management with a

view to minimize / reduce undue investment risks.

• SEBI also has the authority to initiate penal actions against an erring MF.

• In case of a change in the controlling interest of an asset management company,

investors should be given at least 30 days time to exercise their exit option.
4. Prohibiting Fraudulent And Unfair Trade Practices In The
Securities Market

– SEBI is vested with powers to take action against these practices

relating to securities market manipulation and misleading statements to
induce sale/purchase of securities.

5. Prohibition Of Insider Trading

an investor who has in excess of 5 per cent of the stake in a company has to disclose
any transaction that has the effect of altering his ownership stake by more than 2
per cent.

It has to do so within four working days following the day when its trade resulted in
crossing the 2 per cent threshold.
6. Investor Education And The Training Of Intermediaries
– SEBI distributed the booklet titled “A Quick Reference Guide for
Investors” to the investors
– SEBI also issues a series of advertisement /public notices in national
as well as regional newspapers to educate and caution the investors
about the risks associated with the investments in collective investment
schemes
– SEBI has also issues messages in the interest of investors on National
Channel and Regional Stations on Doordarshan.

7. Inspection And Inquiries

8. Regulating Substantial Acquisition Of Shares

And Take-overs