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Financial Markets

Primary and Secondary Market

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Financial Markets

  1. 1. INSTITUTIONS FINANCIAL MARKETS AND
  2. 2. Module1: Financial Markets Primary Market - Meaning – Features - Players of Primary Market – Instruments in Primary Market (Names) – Procedure for issuing Equity shares and Debentures - SEBI guidelines towards the issue of Equity Shares and Debentures - Merits and Demerits of Primary Markets. Secondary Market – Meaning – Structure – Functions – Trading and Settlement System of Stock Exchange Transactions - Players in the Stock Market – Merits and Demerits of Stock Markets – Reforms in Stock Market – OTCEI and NSE – Origin – Function – Merits – Demerits. FINANCIAL MARKETS AND INSTITUTIONS Module 2: Non-Banking Financial Intermediaries Investment & Finance Companies - Merchant Banks - Hire Purchase Finance - Lease Finance - Housing Finance - Venture Capital Funds and Factoring. Module 3: Mutual Funds Concept of Mutual Funds - Growth of Mutual Funds in India - Mutual Fund Schemes – Money Market Mutual Funds – Private Sector Mutual Funds – Evaluation of the performance of Mutual Funds – Functioning of Mutual Funds in India. Module 4: Recent Trends In Financial Services Personalized Banking – ATM – Tele-banking & E-banking - Credit & Debit Card - Customization of Investment Portfolio - Financial Advisors. Module 5: International Financial Markets FII- Regulations governing FII in India – FDI: Meaning- advantages and disadvantages – GDR and ADR, Meaning and Evaluation – Issue structure of GDR/ADR.
  3. 3. Course Instructor Mohammed Umair | M.Com, PGDBA, NET Mohammed Umair is a faculty member Department of Commerce, St. Joseph’s College, Bangalore. He specializes & teaches Finance and Taxation Courses for Undergraduate and Post graduate programmes. He also teaches management students at St. Joseph’s evening college and Students of MBA Executive programme offered by St. Joseph’s Institutions. Prior to his academic career, he has worked for several MNCs, to name a few HSBC, ICICI, IBM, Cognizant and Honeywell in different domains like recruitment, operations, training and finance. His passion towards teaching drove him to education sector and in short span of 8 years he is recognized as a distinguished and committed teacher by the students and colleagues. Mohammed Umair is also an enthusiast researcher and has presented & published research papers in various international conferences and research journals. In addition to teaching and research he is also authored several text books on subjects like Marketing, Financial Management, Income tax and International Business. Mohammed Umair is also known for his quizzing skills and has conducted more than hundred quiz shows for various college fests. During his student life he was a recipient of ‘Student of the Year’ award in graduation. He has also won many accolades as an employee in ICICI and cognizant which includes ‘Performer of the Year’ award. Feedback & Questions|mdumair@sjc.ac.in
  4. 4. Unit 1 FINANCIAL MARKET
  5. 5. Primary Market Part A Unit 1
  6. 6. Business organizations • Business organizations require capital for commencing new business, expanding business and sustaining business. Governments • Governments require funds to finance infrastructure projects, provide important public services and of course for national security. Individuals • Individuals frequently want funds to fulfill various needs such as shelter, hunger, clothing and education. Where can they get this money? Fortunately, there are some individuals and firms with incomes greater than their expenditures.
  7. 7. What is finance? AIMS OF FINANCE FUNCTION Finance function refers to action performed by a finance department that involves acquiring and utilizing funds of a business. What is finance Function? Estimating fund requirements Identifying Sources of Funds Evaluating various sources Deciding capital structure Procuring funds Procuring adequate funds Mobilization of funds Acceleration of profits Maximize firm value Accounting and Analysis Financial reporting Key tasks performed by finance department in an organization. Finance is the science and art of managing money and other assets.
  8. 8. AIMS OF FINANCE FUNCTION Name of Firm Nature of Business Funds Procured Issue price Current Price Avenue Supermarts The supermarket chain of DMart stores is owned and operated by Avenue Supermarts Ltd. Rs 1,870 Crore Rs. 299 Rs. 1,106 Coffee Day Enterprises Café Coffee Day is an Indian café chain owned by Coffee Day Global Limited, a subsidiary of Coffee Day Enterprises Limited. Rs. 1,150 crore Rs. 328 Rs. 220 Dixon Technologies Dixon is leading manufacturer of lighting products of CFL, LED bulbs, LED TVs and semi-automatic washing machines in India. Rs. 600 crore Rs. 1760 Rs. 2,683 Matrimony.com Matrimony.com is engaged in providing online matchmaking and marriage services. They offers their services through Internet and mobile platforms. Rs. 130 crore Rs. 985 Rs. 856 Maximize firm Value Key tasks performed by finance department in an organization.
  9. 9. Factors influencing capital requirements AIMS OF FINANCE FUNCTION Nature of Business Size of a Firm The capital structure of a company is a particular combination of debt, equity and other sources of finance that it uses to fund its long-term asset. Stability in Earnings Growth stage Asset structure Control factor Risk apatite of management Corporate taxes Degree of competition Cost of capital Growth stage Government policies Floatation cost Economic condition
  10. 10. Putting things in Perspective What is a Market? A market is a location where buyers and sellers come into contact to exchange goods or services. Markets can exist in various forms depending on various factors. Market is an avenue whether physical or virtual where the sellers of a specific good or service can interact with the buyers of that goods and service where there is a possibility for a transaction to take place. Existence of an area Buyers and sellers Commodity Competition Price consideration
  11. 11. A financial market is a market in which people and entities can trade financial securities, commodities, and other fungible items of value at low transaction costs and at prices that reflect supply and demand. What is a Financial Market? Financial Markets→Business →Government →Individuals Borrowers →Business →Government →Individuals Lenders Financial institutions, Banks, NBFCs, Stock markets, Financial Intermediary Investment Savings The funds are exchanged by issue of financial assets or instruments. Financial market is a mechanism that allows buyers and sellers participate in the trade of financial assets such as equities, bonds, currencies and derivatives. Financial markets facilitate exchange of funds between borrowers and lenders by issue of financial instruments.
  12. 12. CLASSIFICATION OF FINANCIAL MARKETFinancialMarket Organized Market Capital Market Industrial Securities Market Primary Market Secondary Market Government Securities Market Long Term Loan Market Term Loan Market Market for Mortgage Market for financial Guarantees Money Market Call money market Commercial bill market Treasury bill market Short term loan market Unorganized Market Money lenders and indigenous bankers
  13. 13. CLASSIFICATION OF FINANCIAL MARKET The financial transactions which takes place outside a well established exchange constitutes an unorganized capital market. The unorganized sector of the capital market consists of: Unorganized Market  INDIGENOUS BANKERS Any individual or private firm receiving deposits and dealing in hundies or lending money"  In Chennai, these bankers are called Chettys;  In Northern India Sahukars, Mahajans and Khatnes;  In Mumbai, Shroffs and Marwaris; and  In Bengal, Seths and Banias. 1. As remittance instruments (to transfer funds from one place to another), 2. As credit instruments (to borrow money [IOUs]), 3. For trade transactions (as bills of exchange). Hundis refer to financial instruments Normal banker before organized banking institution
  14. 14. CONCEPT OF CAPITAL MARKETS  The term capital in business and accounting means Money invested in a business to generate income.  On the other hand market means a medium that allows buyers and sellers of a specific good or service to interact in order to facilitate an exchange. Capital market is market for financial assets which have a long or indefinite maturity. It includes securities with long term maturity (i.e. above one year). Classification of capital Market Industrial Securities Market Government Securities Market Long term Loan Market A Industrial Securities Market The industrial securities market is an ideal market for corporates to rise long term funds by issuing debt and equity instruments. Primary Market New issue market Secondary Market Also called stock market
  15. 15. CONCEPT OF CAPITAL MARKETS The primary market is the part of the capital market that deals with issuing of new securities. PRIMARY MARKET FEATURES OF PRIMARY MARKET It is related with New Issues This is the market for new long term capital Securities are issued by the company directly to investors Capital is raised for inception and operations It has No Particular Place WAYS OF BORROWING FUNDS IN CAPITAL MARKETS or Instruments in Primary Market WAYS OF BORROWING FUNDS IN CAPITAL MARKETS Issue of Shares Issue of Debt Securities Instruments in Primary Market Or
  16. 16. DEBENTURES A debenture is a capital market securities which is used to raise long term funds from public. It acknowledges a loan to the company and is executed under the common seal of the company.MERITS • No dilution of control • Low issue cost • Long-term funds • Lower interest • Tax-deductible expense DEMERITS • Increased financial risk • Rigid obligation • Protective measures TYPES OF DEBENTURES Fully Convertible & Non-convertible Debentures Redeemable and Irredeemable Debentures Registered & Unregistered Debentures Secured and Unsecured Debentures Pricing of Debentures Debentures can, be issued in three ways. 1. At par : it is equal to the nominal value 2. At Discount : less than the nominal value 3. At Premium : more than its nominal value
  17. 17. PROCEDURE TO ISSUE DEBENTURES UNDER THE COMPANIES ACT, 2013 • Call and hold Board meeting and decide which types of the debenture will be issued. Conduct Meeting • Draft debenture trust deed • To act as debenture trustee, the entity should either be a scheduled bank carrying on commercial activity, a public financial institution, an insurance company, or a body corporate. • The entity should be registered with SEBI to act as a debenture trustee. Appointment of Debenture Trustee Prepare offer letter • Secured debentures will be permitted for public subscription. Issue of Debentures The power to issue debentures can be exercised on behalf of the Company as a meeting of the Board under the provisions of Section 179 (3) of the Companies Act, 2013.
  18. 18. SEBI Guidelines for Issue of Debentures Who can issue? • Public company |Public sector undertaking |NBFCs Purposes of Issue • For starting new undertakings • Expansion or diversification • For modernization • Merger/amalgamation which has been approved by financial institutions • Restructuring of capital • For acquiring assets • For increasing resources of long-term finance Quantum of issue • Issue of debentures should not exceed more than 20% of gross current assets and also loans and advances. (in the case of working capital requirements) Debt-equity ratio • Debt-equity ratio in issue of debentures should not exceed 2:1 Key values • Interest rate: Shall not exceed 15 per cent per annum. • Listed on the stock exchange
  19. 19. Credit Rating Symbols Rating Definition Remarks CRISIL AAA Highest Safety Timely servicing of financial obligations-lowest credit risk. CRISIL AA High Safety Timely servicing of financial obligations very- low credit risk. CRISIL A Adequate safety Adequate degree of safety- low credit risk. CRISIL BBB Moderate Safety Carry moderate credit risk. CRISIL BB Moderate Risk Risk of default -financial obligations CRISIL B High Risk CRISIL C Very High Risk CRISIL D Default An estimate of the ability of a person or organization to fulfil their financial commitments, based on previous dealings.
  20. 20. Issue of Debentures Company Debenture Type Issue Size Remarks Tata Power Unsecured, non-cumulative, redeemable Rs. 1,500 Crore Private placement Maturity is 7 years Reliance Industries Unsecured, Non-convertible & Listed Rs. 5,000 Crore Private placement Mahindra Finance Non-convertible debentures Rs. 2,000 crore Public offer Muthoot Finance Secured Redeemable Non- Convertible Debentures Rs. 200 crore Public offer HDFC Masala bonds Rs. 1,300 Will be listed on the London Stock Exchange Sundram Fasteners Non-convertible debentures Rs. 500 crore Private Placement Axis Bank Unsecured Redeemable Non-Convertible Rs. 5,000 crore To meet to Basel-III norms Face value of ₹10 lakh each Piramal Enterprises Secured non-convertible debentures Rs. 500 crore Private placement
  21. 21. 10 companies default on interest payments Companies Issue size (Crore) Amtek Auto 600 Bhushan Steel 305 Castex Technologies 200 Educomp Solutions 35 Essar Power 200 Gitanjali Gems 125 Jindal Steel & Power 1750 Metorpolitan Infrahousing 100 Spentex Industries 50 Transmission Corp of AP 200 Reliance Communications
  22. 22. METHODS OF FLOATING NEW ISSUE Public Issue 1 1. Initial Public Offer 2. Follow on Public 3. Rights Issue 4. Bonus Issue 5. Fast Track Issue 6. Indian Depository Receipts 7. Offer For Sale Private Placement 2 1. Preferential Allotment 2. Qualified institutional placement (QIP) 3. ESOP
  23. 23. METHODS OF FLOATING NEW ISSUE Public issue implies to borrowing funds from public by issue of shares to public rather than being privately funded by the companies own promoter(s), which may not be enough capital for the business to start up, produce, or continue running. SIGNIFICANT FACTORS AFFECTING IPO VALUATIONS 1 Initial Public Offer: IPO  The first sale of stock by a company to the public for raising fund is called an IPO.  When a company reaches a certain stage in its growth, it may decide to issue shares, or go public, with an initial public offering (IPO). A strong demand Timing of IPO Issue Industry Comparable Future Growth Marketing Strategy of Business Key Executives & Consultants Pending Legal Cases New & Innovative Products & Services
  24. 24. METHODS OF FLOATING NEW ISSUE Public issue implies to borrowing funds from public by issue of shares to public. WONDERLA’S ACCESS TO CAPITAL MARKET The first sale of stock by a company to the public for raising fund is called an IPO.  Currently, Wonderla Holidays own and operate two amusement parks under the brand name 'Wonderla', situated at Kochi and Bangalore and are in the process of setting up their third amusement park in Hyderabad. They also own and operate a resort beside the amusement park in Bangalore under the brand name 'Wonderla Resort' which has been operational since March 2012.  In April 2014, Wonderla decided to borrow funds from capital market to fuel its expansion, the summary of its borrowing is as follows: Incorporated in 2002, Wonderla Holidays Ltd is one of the largest operators of amusement parks in India. The Offer  1.45 Crore shares (new). Takes total share capital to 5.65 cr. shares.  Price band of Rs. 115 to Rs. 125 per share.  Applications in multiples of 100 shares.  Retail investors (upto Rs. 200,000) got 35% reservation. What will they use the money for?  They need the money to build a theme park in Hyderabad. They’ll use Rs. 173 cr. to build it, and it’ll cost around 220 cr. to build. About 50 cr. of the money needed will be borrowed at around 12.5%. They have around 50 acres of land in Hyderabad.
  25. 25. METHODS OF FLOATING NEW ISSUE IPOS WITHDRAWN DUE TO POOR RESPONSE The first sale of stock by a company to the public for raising fund is called an IPO.  Incorporated in 1998, Plastene India Limited is Gujrat based plastics packaging manufacturer.  Plastene exports to around 30 countries and derives close to 49% sales from international customers. Plastene India Limited CONCERNS – Reasons for failure 1. Low Profit Margins - Plastene faces stiff competition from other packaging companies. This is reflected in the PAT margins which have typically ranged from 2 to 4%. Raw material and currency movements add to margin volatility. 2. Clients facing economic slowdown -The companies' key clients are in the fertilizer and cement industries. These are vulnerable to a slowdown in government spending and an economic slowdown. 3. Listed peers trading at a cheaper valuation - Plastene's peers in the packaging industry are trading at P/E below 5 while Plastene will be listed at a ratio of over 8 times earnings 4. Labour intensive business - The firm employed over 1,800 people and remains vulnerable to rising wage inflation
  26. 26. METHODS OF FLOATING NEW ISSUE IPOS WITHDRAWN DUE TO POOR RESPONSE  Incorporated in 1998, Plastene India Limited is Gujrat based plastics packaging manufacturer. Plastene India Limited Number of Times Subscribed (BSE + NSE) May 2012 QIB NII RII Employee Total Shares Offered / Reserved 46,00,000 13,80,000 32,20,000 55,290 92,55,290 Day 1 0.0000 0.1100 0.0000 0.0000 0.0200 Day 2 0.0000 1.6000 0.0000 0.3900 0.2400 Day 3 0.0000 1.6500 0.0300 0.7000 0.2600 Day 4 0.0000 1.7600 0.0500 0.7500 0.2800 Day 5 0.0000 1.7600 0.0500 0.7500 0.2900 Avoid subscribing to the IPO of Plastene India as the underlying business of the company is volatile and the stock has been valued above its listed peers.  Plastene India public issue subscribed 0.2900 times on its final day of subscription.  NII quota of the IPO subscribed most with bids received for 176% shares.  The response in QIB and Retail Individual (RII) was worst. IPO didn't receive a single bid in QIB quota.
  27. 27. METHODS OF FLOATING NEW ISSUE 2 Follow on Public Offer: FPO  When a company that is already listed on stock exchange further issues of shares to the public it is called follow-on public offer. A company opts for the FPO route when it wishes to raise additional capital from the shareholders and new investors. FPOs CAN BE OF TWO TYPES Dilutive FPO In a dilutive FPO, the board of directors of a company agrees to increase the shares by selling more equity. Non-dilutive FPO A non-dilutive FPO means selling privately held shares of the directors or insiders of a company. Point of Difference IPO FPO  Concept First public issue Subsequent public issue  Issuer Unlisted Company Listed Company  Stage of issue Transitory growth Further growth  Risk High Comparatively low CRITERIA: As per the new norms, firms in which public shareholders own stocks worth Rs 1,000 crore will able to access this route through a follow-on public offer (FPO). Also called as Offer For Sale
  28. 28. METHODS OF FLOATING NEW ISSUE MAINLINE IPO'S IN YEAR 2017 - IPO REPORT & ANALYSIS Calendar Year: 2017 | Total Issue Succeeded: 35 | Total Issue Failed: 0 | Total Money Raised: 67,505.14 Issuer Company Issue Type Issue Size (Crore Rs.) Issue Price (Rs.) Listing Day Close Price (Rs.) BSE Limited IPO BB 1,243.43 806 1069.2 Music Broadcast Ltd IPO BB 488.53 333 372.9 Avenue Supermarts Limited IPO BB 1,870.00 299 641.6 CL Educate Ltd IPO BB 238.95 502 422.1 Shankara Building Products Ltd IPO BB 345 460 632.45 S Chand and Company Ltd IPO BB 728.56 670 676 IRB InvIT Fund IPO BB 5,921.10 102 101.8 Housing and Urban Development Corporation Ltd IPO BB 1,224.35 60 72.55 PSP Projects Ltd IPO BB 211.68 210 199.5 IndiGrid InvIT Fund IPO BB 2,250.00 100 98.64 Tejas Networks Limited IPO BB 0 257 263.5 Eris Lifesciences Limited IPO BB 0 603 601.5 Central Depository Services (India) Limited IPO BB 523.99 149 261.6 GTPL Hathway Limited IPO BB 0 170 171.65
  29. 29. Au Financiers (India) Limited IPO BB 1,912.51 358 541.65 Salasar Techno Engineering Ltd IPO FP 35.87 108 262.5 Security and Intelligence Services (India) Ltd IPO BB 0 815 757.05 Cochin Shipyard Ltd IPO BB 0 432 528.15 Apex Frozen Foods Ltd IPO BB 152.25 175 212.1 Bharat Road Network Limited IPO BB 600.65 205 208.45 Dixon Technologies (India) Limited IPO BB 600 1,766.00 2891.55 Matrimony.com Limited IPO BB 0 985 904.65 Capacit'e Infraprojects Limited IPO BB 400 250 342.55 ICICI Lombard General Insurance Company Ltd IPO BB 5,700.94 661 681.2 SBI Life Insurance Company Ltd IPO BB 8,400.00 700 707.55 Prataap Snacks Limited IPO BB 0 938 1180.65 Godrej Agrovet Limited IPO BB 1,157.31 460 595.65 MAS Financial Services Ltd IPO BB 460.04 459 654.4 Indian Energy Exchange Ltd IPO BB 1,000.73 1,650.00 1629.15 General Insurance Corporation of India IPO BB 11,372.64 912 874.3 Reliance Nippon Life Asset Management Ltd IPO BB 1,542.24 252 284.4 Mahindra Logistics Limited IPO BB 829.36 429 429.5 The New India Assurance Company Limited IPO BB 9,600.00 800 727.1 Khadim India Limited IPO BB 0 750 688.85 HDFC Standard Life Insurance Company Ltd IPO BB 8,695.01 290 344.6 MAINLINE IPO'S IN YEAR 2017 - IPO REPORT & ANALYSIS
  30. 30. Year No. of IPOs Amount Raised (in Rs. Crore) Issue Succeeded Issue Failed 2007 108 33,946.22 104 4 2008 39 18,339.92 36 3 2009 22 19,306.58 21 1 2010 66 36,362.18 64 2 2011 40 6,043.57 37 3 2012 13 6,770.17 11 2 2013 5 1,283.95 3 2 2014 7 1,200.94 5 2 2015 21 11,362.30 21 0 2016 27 26,372.48 26 1 *2017 35 70,714.41 35 0 METHODS OF FLOATING NEW ISSUE IPO's - Year Wise (IPO's in India Share Market)
  31. 31. METHODS OF FLOATING NEW ISSUE When a company raises funds from its existing shareholders by selling (issuing) them new shares / debentures, it is called as rights issue. Convene a Board Meeting Pass resolution for approving “Letter of offer” Dispatch Letter of offer to all existing shareholders Receive & document response from shareholders Convene a Board Meeting for approving allotment and issue of shares. File with Registrar a return of allotment  After the rights announcement but before the record date, the shares are known as cum-rights.  Even if you do not currently own the shares but if you buy them at that time, you will get the rights issue.  On the record date, they become ex-rights.  If you buy them after this day, you do not get the rights issue. 3 Rights Issue
  32. 32. METHODS OF FLOATING NEW ISSUE When a company raises funds from its existingshareholdersby selling (issuing)them new shares/ debentures, it is called as rights issue. 3 Rights Issue Company Announcement date Record Date Ratio Issue Price Market Price Amount In Crore Lakshmi Vilas Bank 27/09/2017 06/12/2017 1:3 122 179.95 800 Canara Bank 9/02/2016 20/2/2016 1:10 207 300 150  The price of the shares was moving between Rs 80 to Rs 90 when the rights issue was first announced in February.  The price of each share in this rights issue was only Rs 54.  However, after the announcement of the rights issue, the share price fluctuated widely between Rs 75 and Rs 100. Generally, the price will go up because investors now want to buy the shares so that they can avail of the rights issue. Rights share are usually at a discount to the current market rate. Let's take the example of the Bata India stock. CRITERIA: The minimum public holding requirement for a rights offer is Rs 250 crore.
  33. 33. METHODS OF FLOATING NEW ISSUE Under the 'fast-track' route, a listed company would not be required to file any draft offer document for its FPO or rights issue and they can proceed with fund-raising programme without necessarily getting 'observations' from SEBI. 4 Fastrack IssueSEBI has decided on 24th August 2007 to introduce Fast Track Issuance of Securities (FTIs). Listed on BSE or NSE, for at least three years Excellent track record in redressing Shareholders / Investor Grievances Average free float market capitalization of at least Rs.10,000 crore or more during last one year Promoter group shares are necessarily held in dematerialized form Annualized Trading Turnover of shares constitute at least 2% of total listed shares during the previous one year No prosecution proceedings or show cause notice issued by SEBI is pending against the company / its promoters / whole time directors. FAST TRACK ISSUANCES- ELIGIBILITY CRITERIA
  34. 34. METHODS OF FLOATING NEW ISSUE An IDR is a way for a foreign company to raise money in India. Standard Chartered PLC became the first global company to file for an issue of Indian depository receipts in India. 5 Indian Depository Receipts Conditions The overseas company intending to issue IDRs should have paid up capital and free reserve of atleast $ 100 million. Sales turnover: It should have an average turnover of $ 500 million during the last three years. Profits/dividend Such company should also have earned profits in the last 5 years and should have declared dividend of at least 10% each year. Debt equity ratio: The preissue debt equity ratio of such company should not be more than 2:1 Minimum issue size: $500 million ELIGIBILITY CONDITIONS FOR OVERSEAS COMPANIES TO ISSUE IDR
  35. 35. METHODS OF FLOATING NEW ISSUE Public Issue 1 1. Initial Public Offer 2. Follow on Public 3. Rights Issue 4. Bonus Issue 5. Fast Track Issue 6. Indian Depository Receipts 7. Offer For Sale Private Placement 2 1. Preferential Allotment 2. Qualified institutional placement (QIP) 3. ESOP
  36. 36. METHODS OF FLOATING NEW ISSUE  Private placement is the opposite of a public issue.  In this method a company issues financial securities to a particular group of investors not more than 49 in number. 1 Private Placement Private placement can be of two types: Preferential Allotment  Preferential Allotment is the process by which allotment of securities/shares is done on a preferential basis to a select group of investors.  For instance, venture capitalists, existing shareholders like promoters. Qualified institutional placement (QIP)  Here shares are issued to qualified institutional buyer (QIB)  Public financial institution ǀ Scheduled commercial banks ǀ Mutual funds  Foreign institutional investor ǀ Venture capitalist ǀ Provident Funds  Pension Funds ǀ Insurance Companies
  37. 37. METHODS OF FLOATING NEW ISSUE  Popular Preferential allotment in the form of strategic stakes Preferential Allotment  KTM is Austrian motorcycle and sports car manufacturer.  Largest motorcycle manufacturer in Europe.  By 2013, Bajaj Auto held a 47.97% stake in the company.  Jet Airways is a major Indian international full-service airline.  It operates over 300 flights daily to 68 destinations  The second-largest airline in India after IndiGo with 17.8% passenger market share.  In 2013, 24% stake in the airline to Etihad for US$379 million. 3 Employee Stock Ownership Plan (ESOP) ESOP is a type of employee benefit plan which is intended to encourage employees to acquire stocks or ownership in the company.
  38. 38. MERITS & DEMERITS OF PUBLIC & PRIVATE ISSUE PUBLIC VS. PRIVATE PLACEMENT Acquisition of capital Optimizes cost of capital Public offerings refer to the issuance of securities to unspecified investors publicly, while private placements refer to the issuance of specific investors privately. Increased Goodwill Wealth Maximization Employee ownership Pricing and Valuations Liquidity Loss of confidentiality Regulatory Pressure Accountability via reporting Loss of control Increased cost Advantages of Going Public or (Importance/Advantages of Primary Markets) Disadvantages of Going Public or Primary Markets Advantages of Private Placement Less Expensive Quick process Structure effectiveness Limited Investors Low pricing Short Selling Disadvantages of Going Public
  39. 39. ISSUE MECHANISM STEPS or PROCEDURE FOR ISSUE OF SECURITIES Appointment of Merchant Bankers 1 Checking Compliance with Entry Norms of SEBI 2 Preparing and Filing Prospectus 3 Appointment of Underwriters4 Appointment of Bankers 5 Appointment of Brokers to the issue 6 Appointing Registrar to Issue 7 Filing of Documents 8 Price Discovery 9 Allotment of shares 10 Listing of shares 11
  40. 40. ISSUE MECHANISM APPOINTMENT OF MERCHANT BANKERS 1 They are also called lead managers and are in charge of the issue process. Lead managers are independent financial institutions appointed by the company going public to manage the IPO. Pre-issue Due diligence Preparation of the Budget Suggest on timing of issue Prepare & design offer documents Advice on appointment of registrar, underwriters, brokers, bankers & advertising agency. Compliance (Stock Exchange, RoC, SEBI) Post-issue Management of Escrow Account Allotment of shares and refund Finalization of trading Dispatch and de-materialization Redressal of investor grievances FunctionsofMerchantBankersinissueprocess
  41. 41. ISSUE MECHANISM
  42. 42. ISSUE MECHANISM SEBI REQUIREMENTS FOR ISSUING SHARES TO PUBLIC2 An unlisted company has to satisfy the following criteria to be eligible to make a public issue (IPO). Net Tangible Assets of at least Rs. 3 crores in each of the preceding three full years of which not more than 50% are held in monetary assets. However, the limit of fifty percent on monetary assets shall not be applicable in case the public offer is made entirely through offer for sale. 1 What are Net Tangible Assets? Net Tangible Assets = Total assets — Intangible assets — Liabilities (ExcludingEquity). 2 Minimum of Rs. 15 crores as average pre-tax operating profit in at least three of the immediately preceding five years. What is operating profit? The profit earned from a firm's normal core business operations. Operating profit= Sales — Variable Cost — Fixed Cost Also known as "earnings before interest and tax" (EBIT) or "operating income". If the company has changed its name within the last one year, at least 50% revenue for the preceding1 year should be from the activity suggested by the new name.
  43. 43. ISSUE MECHANISM SEBI REQUIREMENTS FOR ISSUING SHARES TO PUBLIC 3 Net worth of at least Rs. 1 crore in each of the preceding three full years. What is Net Worth? Net worth can be a useful tool to measure your financial progress from year to year. Net worth = Equity Capital + Reserves & Surplus + Any other shareholders fund 4 The aggregate of the proposed issue and all previous issues made in the same financial year in terms of issue size does not exceed five times its pre-issue net worth as per the audited balance sheet of the preceding financial year Proposed Issue < 5 times pre-issue networth Issue Size Networth 5 times Netwoth Max Money can be borrowed 20,000 shares × Rs .100 per share 20,00,000 2 Lakhs 5×2L=10L 10 No 10,000 shares × Rs .100 per share 10,00,000 5 Lakhs 5×5L=25L 25 Yes 5 The promoters of the issuer shall contribute in the public issue not less than twenty per cent of the post issue capital.
  44. 44. ISSUE MECHANISM SEBI REQUIREMENTS FOR ISSUING SHARES TO PUBLIC2 An unlisted company has to satisfy the following criteria to be eligible to make a public issue (IPO). Norms 1. Net Tangible Assets 2. Average pre-tax operating profit 3. Net worth 4. Issue size limit 5. Minimum promoters’ contribution 1. In case an unlisted company does not satisfy any of the above criterion, it can come out with a public issue only through the Book-Building process. 2. In the Book Building process the company has to compulsorily allot at least sixty percent (60%) of the issue size to the Qualified Institutional Buyers (QIBs), failing which the full subscription monies shall be refunded. What if a company fails to meet any of the prescribed Norms?
  45. 45. ISSUE MECHANISM Preparing and Filing Prospectus 3What is a Prospectus? Any document in the form of a notice, circular, advertisement inviting the public for the subscription or purchase of any shares in, or debentures of, a body corporate;  Any company making a public issue or a rights issue of securities of value more than Rs. 50 lakh is required to file a draft offer document with SEBI for its observations.  There is no requirement of filing any offer document / notice to SEBI in case of preferential allotment and Qualified Institution Placement (QIP).  In QIP, Merchant Banker handling the issue has to file the placement document with Stock Exchanges for making the same available on their websites. Is it necessary to issue prospectus What SEBI does with prospectus? 1. After scrutinising the prospectus, SEBI issues an observation letter. 2. The validity period of SEBI’s observation letter is twelve months only 3. Submission of offer document to SEBI should not in any way be deemed or construed that the same has been cleared or approved by SEBI. 4. The investors should make an informed decision purely by themselves based on the contents disclosed in the offer documents. SEBI
  46. 46. ISSUE MECHANISM Preparing and Filing Prospectus3 TYPES OF PROSPECTUS Prospectus means any document inviting the public for the subscription of financial instruments. Draft Offer document • Offer document in draft stage. • The Draft Offer document is available on the SEBI website for public comments for a period of 21 days from the filing of the Draft Offer Document with SEBI. • SEBI may specifies changes, if any, in the draft Offer Document and the issuer or the Lead Merchant banker shall carry out such changes in the draft offer document Offer document • Once draft offer document is approved it becomes Offer document • It is filed with Registrar of Companies (ROC) and Stock Exchanges. • An offer document covers all the relevant information to help an investor to make his/her investment decision. Draft Red Herring Prospectus (DRHP) • Prospectus which does not have details of either price or number of shares being offered or the amount of issue. • In such a case will notify the floor price or a price band by way of an advertisement one day prior to the opening of the issue. • Only on completion of the bidding process, the details of the final price are included in the offer document. The offer document filed thereafter with ROC is called a prospectus.
  47. 47. SEBI puts Barbeque Nation’s IPO on hold  The restaurant chain was founded in 2006 and had 81 outlets across the country as on March 31, 2017.  The proceeds of the IPO towards the expansion of Barbeque Nation restaurants in the country and repayment of loans.  Barbeque Nation restaurants, comprises a fresh issue of shares worth up to Rs 200 crore, besides an offer for sale of up to 61.79 lakh. ISSUE MECHANISM Preparing and Filing Prospectus3 Liability for Mis-statements Criminal Liability Section 34 any statement which is untrue or misleading in form or context in which it is included or where any inclusion or omission of any matter is likely to mislead, every person who authorizes the issue of such prospectus shall be liable. Imprisonment term: 6 months to 10 years. Fine: not be less than the amount involved in the fraud, but which may extend to three times the amount involved in the fraud “pending regulatory action for past violations”
  48. 48. ISSUE MECHANISM Preparing and Filing Prospectus3 Contents of Prospectus 1. RISK FACTORS  Internal risk factors  External risk factors  Litigation 2. SUMMARY OF INDUSTRY  Macroeconomic Overview  Market Segmentation  Structure of Industry  Growth drivers 3. THE COMPANY PROFILE  Overview  Strengths  Distribution network  Business model  Profitability  Future plans  Promoters  Market overview 5. FINANCIAL INFORMATION  Balance sheet  Income statement  Earnings per share  Cash flows statement  Capital Structure 4. THE OFFER  Basis for offer price  Monitoring utilization of funds  Variation in objects  Objects of the fresh issue  Deployment of net proceeds  Statement of tax benefits 4. GENERAL INFORMATION  Registered and Corporate Office  Registrar of Companies  Board of Directors  Cash flows statement  Company Secretary  Compliance Officer  Chief Financial Officer  Investor Grievances  BRLM  Indian Legal Counsel  Auditors to our Company  Registrar to the Offer  Bankers to the Issue  Bankers to Company  Registered Brokers  Underwriting Agreement
  49. 49. ISSUE MECHANISM Price Discovery 4 How to fix the price of the shares?  Price discovery is the process of determining the price of share in the marketplace through the analysis of merchant bankers.  Companies are allowed to freely price their issues.  SEBI does not play any role in deciding the price for issues. METHODS OF PRICING Fixed Price Issues  When the issuer at the outset decides the issue price and mentions it in the offer document, it is in the offer document, it is commonly known as “Fixed price issue”.  The order document justifies the price with qualitative and quantitative factors. Differential pricing  Where one category of investors is offered shares at a price different from the other category, it is called differential pricing. 1. Retail investors: An issuer can allot the shares to retail individual investors at a discount of maximum 10% to the price at which the shares are offered to other categories of public. 2. Employees: An issuer company can offer the shares to employees at a discount of maximum 10 % of the floor price at which the shares are offered to other categories of public.
  50. 50. METHODS OF PRICING Book Building Offer  Book building is actually a price discovery method in which company doesn't fix up a particular price for the shares, but instead gives a price range investors have to decide at which price they would like to bid for the shares. Based on the demand and supply of the shares, the final price is fixed. ISSUE MECHANISM Appointment of book runner- BRLM Selection of price Band Applicants then bid for the shares. Syndicate members are hired to obtain bids from the investors. Normally the issue is kept open for 3 days. In case price band revision, the issue can be extended up to 10 days. The final price is then discovered based on these bids. Describe a price range in a Book Building issue. PRICE BAND Lowest price is referred to as the ‘floor price’ FLOOR PRICE The highest, the ‘cap price’ CAP PRICE Lot size is the quantity multiple of the issue. LOT SIZE The price multiple within a specified price band. TICK SIZE Issue price after book building is called "cut off price". TICK SIZE
  51. 51. DIFFERENCES BETWEEN FIXED PRICE AND BOOK BUILDING ISSUE MECHANISM Factor Fixed Pricing Book Building Knowledge of Price Know to investor in Advance Only an indicative price range is given Demand Demand for the issue is know only after the closure of the issue Demand for shares is known everyday as the book is built Payment Payment is made at the time of subscription. Refund is given after allocation. Payment is made only after allocation. Reservations 50 % of the shares offered are reserved for applications below Rs. 1 lakh and the balance for higher amount applications. 50 % of shares offered are reserved for QIBS, 35 % for small investors and the balance for all other investors.
  52. 52. ISSUE MECHANISM Withdrawal of IPO  Emaar’s issue, was subscribed by 83%.  The timing of the IPO appeared to be wrong.  High valuation was one of the causes.  6.44% by QIB & 51.92 by RII  Initial price band Rs. 280 to Rs.310 & revised price band was Rs.225 to Rs.260. Extended by two days.  Credit rating agency Crisil had accorded grade 4 to the IPO but still the issue failed.
  53. 53. ISSUE MECHANISM Appointment of Underwriters5 What if the shares are not Subscribed? Underwriting is guarantee given by underwriters to take up whole or part of the issue of securities not subscribed by the public. Underwriting of shares is optional. IS UNDERWRITING COMPULSORY ?  Under law, the company has to refund investors their money if 90% of the issue is not subscribed.  The company will, accordingly, refund investors in 15 days.  Hard underwriting is when an underwriter agrees to buy his commitment before the issue opens.  Soft underwriting is when an underwriter agrees to buy the shares at a stage after the issue is closed. PROPORTION OF UNDERWRITING  Min: In respect to every underwritten issue, the lead merchant banker(s) shall undertake a minimum underwriting obligation of 5% of the total underwriting commitment or Rs 25 lacs, whichever is less.  Max: Underwriting commitments of a merchant banker shall not exceed 20 times its net worth at any point of time.  In the case of under subscription of an issue lead merchant bank responsible for underwriting arrangement shall invoke underwriting obligations and within 60 days from the date of closure of the issue. Underwriter
  54. 54. ISSUE MECHANISM # Rates of Underwriting Commission On amount devolving On underwriters On amount subscribed by Public 1 Shares 2.5% 2.5% 2 Preference Shares and on non Convertible debentures (a) For amount upto 5 lakhs 2.5% 1.5% (b) For amount in excess of 5 lakhs 2.0% 1.0%  These rates of commission are the maximum ceiling rates, within which any company will be free to negotiate with the underwriters.  Underwriting commission will not be payable on amounts of shares subscribed by promoters group, employees, directors, their relatives and friends and to business associates. Firm Underwriting Sub-Underwriting Syndicate Underwriting Agree to buy, securities not to be taken up by the public. Main enter UW enters into a the contract wit other underwriters to share the risk Agreement between the issuing company and 2-3 or more firms of underwriters to underwriters a large issue. Types of Underwriting Underwriting is guarantee given by underwriters to take up whole or part of the issue of securities not subscribed by the public.  Honor commitments within 60 days of closure of issue  If an issue is not subscribed to 100%, the underwriters are obligated to take-up the unsubscribed portion
  55. 55. ISSUE MECHANISM Underwriting is guarantee given by underwriters to take up whole or part of the issue of securities not subscribed by the public. Green-shoe Option also referred to as over-allotment option  Green Shoe option means an option of allocating shares in excess of the shares included in the public issue.  This is an arrangement wherein the issue would be over allotted to the extent of a maximum of 15% of the issue size.  IPO through the book-building mechanism can avail the green shoe option for stabilizing the post-listing price of the shares.  This involves purchase of equity shares from the market by the underwriting syndicate in case the share price fall below issue price or goes significantly above the issue price. Advantages of underwriting: 1. Relieved from the tension of marketing of securities and of uncertainties in the market. 2. Fulfilling the statutory regulation of minimum subscription. 3. Guarantee to adequacy of CapitaLand help companies in raising capital. 4. Quick sale of securities Disadvantages of underwriting: 1. Very costly method 2. Provide secret information 3. Secure control on the company Leading IPO Underwriters 1. Goldman Sachs 2. Morgan Stanley 3. Merrill Lynch
  56. 56. ISSUE MECHANISM Bankers to Issue The bankers to an issue collect money on behalf of the company from the applicants and transfers to Escrow account. Escrow Account: In other words, the bankers to the issue keep the funds in the escrow account on behalf of the bidders. A registrar is the institution, often a bank or trust company, responsible for keeping records of bondholders and shareholders when an issuer sells securities to the public. They play an administrative role in conducting a public issue. 1. Application management 2. Determine basis of allotment 3. Finalize allotment of securities 4. Processing refunds 5. They advise the company regarding the closure or extension of closing date of the issue. Registrar to an Issue
  57. 57. ISSUE MECHANISM Basis of allotment in a public issue Aggregation under different categories Calculation of over subscription ratios in each category The over subscription ratio is then applied to the number of shares applied The number of successful allottees is determined. This process is followed in case of proportionate allotment. In case of allotment for QIBs, it is subject to the discretion of the post issue lead manager. Firm Allotment • In this shares are allotted as per the quantity applied by the investors. This method is used when there is an under or full subscription Proportional Allotment • If the shares are oversubscribed then proportion of the number of specified shares applied for in respect of a particular reserved category to the number of specified securities reserved for that category. Lottery Allotment • After making proportional allotment if shares are left, then allotment is then on lottery basis. Allotment of shares 10
  58. 58. ISSUE MECHANISM Basis of allotment in a public issue No of shares issued No of applications received Over subscription ratio Lot size 1000 3000 3 times 30 & multiples thereof Person Lot Applied Calculation How much he will get? Mr. X 30+30 (60)=2 Lots No.of share applied (in Lot) ÷No. of time of oversubscription in particular category --60/3=20 Lottery Method Mr. Y 30+30+30+30(120)=4 Lots 120/3=40 30 shares PROPORTONATE ALLOTMENT Allotment of shares 10
  59. 59. ISSUE MECHANISM Listing of shares 11  Listing refers to the admission of security of a public limited company on a recognized stock exchange for trading.  Listing of securities offered to public becomes compulsory. Entry to stock Exchange  How listing price is decided? [Why there is difference between issue & listing price?] Answer: Through Call Auction in Pre Open session for IPOs (New listing) Scrips? SESSION TIME ACTION EXCHANGE STATUS Exchange Call auction in Pre Open session for IPOs (New listing) 9:00am - 9:44/45am (approx.) Orders for new listings (IPO) can be placed /modified /cancelled in the Call auction in Pre Open session. Open Exchange Call auction Pre Open session for IPOs (New listing) Order Matching & Confirmation Period. 9:45am - 9:55am Order placement /modification /cancellation in the call auction in Pre Open session will be stopped. Opening price determination, order matching & trade confirmation starts at Exchange. Open Buffer Period. 9:55am - 10:00am To facilitate transition between call auction in pre open and continuous trading session. Open Continuous Trading for IPOs (New listing) 10:00am - 3:30pm Exchange would move all unmatched market orders to the continuous session at the opening price. Open It is basically a mechanism to determine the Opening Price based on aggregated supply and demand for the underlying on the first day of trading/ re-commencement of trading. The price at which the maximum quantity is traded is fixed as the equilibrium or opening price.
  60. 60. Secondary Market Part B Unit 1  Rule No.1: Never lose money.  Rule No.2: Never forget rule No.1. —Warren Buffett
  61. 61. What is a Stock Exchange? An association , organization , or an individual which is established for the purpose of assisting, regulating, and controlling business in buying, selling and dealing in securities.” Features of Stock Exchanges Organized securities market Constituent of capital market Membership is not open to everybody Only the members can trade Operates under accepted code of conduct Features of NSE & BSE
  62. 62. What is a Stock Exchange? An association , organization , or an individual which is established for the purpose of assisting, regulating, and controlling business in buying, selling and dealing in securities.” Features of Stock Exchanges Market for Securities Deals in existing securities Regulates trade in securities Allows dealings only in listed securities Transactions effected only through members Organized Management Recognition from Central Government Working as per rules Specific location Financial Barometers Features of NSE & BSE
  63. 63. Structure of Stock Market/Exchange Most of the stock exchanges in the country are incorporated as ‘Association of Persons’ of Section 25 companies under the Companies Act. Organization structure of Stock Exchange in India Ownership & Management Regulatory Framework Governing Body Membership 1. Ownership & Management Structure In India stock exchanges ownership is corporatized. “Corporatization” means stock exchange should be organized as a company. The idea is to separate ownership, management and trading rights from each other. In India stock exchanges management is Demutualized. “Demutualization" means the segregation of ownership and management from the trading rights of the members of a recognized stock exchange in accordance with a scheme approved by the Securities and Exchange Board of India.
  64. 64. Structure of Stock Market/Exchange Most of the stock exchanges in the country are incorporated as ‘Association of Persons’ of Section 25 companies under the Companies Act. 2. Regulatory framework The five main legislations governing the securities market are: The Securities Contracts (Regulation) Act, 1956 Provides for regulation of transactions in securities through control over stock exchanges. The Companies Act, 2013 A uniform law relating to companies throughout India. Sets out the code of conduct for the corporate sector in relation to issue, allotment and transfer of securities disclosures to be made to the public issues. The SEBI Act, 1992 For the protection of interests of investors and for promoting development of and regulating the securities market. The Depositories Act, 1996 Provides for electronic maintenance and transfer of ownership of dematerialized securities The Prevention of Money Laundering Act, 2002 To prevents money laundering and provides for confiscation of property derived from or involved in money laundering. 1 2 3 4 5 ReformsinStockMarket
  65. 65. Structure of Stock Market/Exchange Most of the stock exchanges in the country are incorporated as ‘Association of Persons’ of Section 25 companies under the Companies Act. 3. Governing Body of Stock Exchange  Governing body is a group of people who formulate the policy and direct the affairs of a stock exchange.  The Governing Board has the responsibility to maintain an orderly and well regulated market.  The members of the governing body elect the President and Vice –president. Governing Body Elected Directors Government Nominee Public Representative Governing Body Consits13 members  SEBI nominates persons not exceeding 3  6 elected by the members of the stock exchange.  The board nominates 3 public representatives  The stock exchange appoints one Executive Director.
  66. 66. Structure of Stock Market/Exchange Most of the stock exchanges in the country are incorporated as ‘Association of Persons’ of Section 25 companies under the Companies Act. 4. Membership in a Stock Exchange  To be a member a person has to conform certain rules and regulations specified under the Securities Exchange Board of India. 1. The person must be an Indian Citizen 2. The minimum are prescribed for the members is 12 years 3. The person must neither be a bankrupt nor compounded with the creditors 4. Must not be convicted for fraud or dishonesty 5. Should not be engaged in any other business connected with a company 6. Must not be a defaulter of any other stock exchange 7. The minimum educational qualification required is 12th pass.
  67. 67. Functions Stock Market/Exchange? Role, Function, Merits and Importance of Stock Exchanges [NSE, BSE] or Stock Markets or Secondary Markets Effective Mobilization of savings Promoting Capital formation Wider Avenues of investment Liquidity of investment Wide Marketability to Securities Financial resources for public and private sectors Indicator of Industrial Development Barometer of National Economy
  68. 68. Players in the Stock Market 1 Commission Broker  A broker on the floor of an exchange who acts as agent for a particular brokerage house and buys and sells stocks for the brokerage house on a commission basis. He acts as an agent for his customer and earns a commission for the service performed. 2 Jobbers  Jobbers are those security merchants that deal in shares, debentures at an independent level. Their job is to purchase and sell securities at their own level and get the maximum profit. Jobbers cannot deal on the behalf of public and are barred from taking commissions. 3 Floor Broker  The floor broker buys and sells shares for other brokers on the floor of the exchange. He is an individual member owns his own seat and receives commissions on the orders the executes. 4 Taraniwalla  The Tarawaniwalas act both as jobbers and brokers. A tarawaniwala makes transactions on his behalf like a jobber but he may also act as a broker on behalf of the public. 5 Odd Lot Dealer  A broker who combines odd lots of securities from multiple buy or sell orders into round lots and executes transactions in those round lots.
  69. 69. Players in the Stock Market 6 Budliwalla  He is the financier in the stock market who provides credit facilities to the market in return for a fee. He gives the loan for a short period time ranging from two to three weeks. 7 Arbitrageur  He deals in securities in different stock markets and specializes in making a profit from the price differences in different stock markets. 8 Primary Dealers  These brokers deal only in government securities. Types of Speculators Speculation is an act of trading in an asset, or conducting a financial transaction, that has a significant risk of losing most or all of the initial outlay, in expectation of a substantial gain. Types of Speculators Bulls Bears StagsLame Duck Wolves
  70. 70. Players in the Stock Market 1 Bull (A bull is also called a ‘tejiwala’)  A bull is a speculator who expects a price increase. Buy securities at current prices with the aim of selling them at a later time, if prices rise. 2 Bear (A bull is also called a ‘tejiwala’)  A bull is a speculator who expects a price increase. Buy securities at current prices with the aim of selling them at a later time, if prices rise. 3 Lame Duck  A speculator who makes poor trades and ends up with heavy losses over time is considered a "lame duck." When bear fails to meet his obligations he struggles to meet finance like the Lame Duck. 4 Stag  Stag is a speculator applies for shares in new companies and expects to sell them at a premium if he gets an allotment. He is not willing to become an actual shareholder of the company. 5 Wolves  These are brokers who are fast speculators, they are very quick to perceive changes in the trends of the market and trade fast to make quick bucks. They are generally not caught in the wrong foot.
  71. 71. Stock Exchanges in India Major Stock Exchanges in India BSE NSE OTCEI Regional Stock Exchnages
  72. 72. Bombay Stock Exchange a. Bombay Stock Exchange (BSE), is a stock exchange located on Dalal Street, Mumbai India. It is the 11th largest stock exchange in the world by market capitalization. b. Bombay Stock Exchange Ltd. is the India's oldest Stock Exchange, one of Asia's oldest stock exchange and one of India’s leading exchange groups. c. BSE is a corporatized and demutualized entity, with a broad shareholder-base which includes two leading global exchanges, Deutsche Bourse, Fuse and Singapore Exchange as strategic partners. d. BSE provides an efficient and transparent market for trading in equity, debt instruments, derivatives, mutual funds. e. BSE also provides a host of other services to capital market participants including risk management, clearing, settlement, market data services and education. f. BSE also provides depository services through its Central Depository Services Limited (CDSL) arm. g. The BSE has computerized its trading system by introducing BOLT (Bombay Online Trading) since March 1995. h. BSE’s popular equity index- SENSEX is India's most widely tracked stock market benchmark index. Sensex is a basket of 30 constituent stocks representing a sample of large, liquid and representative companies.
  73. 73. National Stock Exchange Formation of National Stock Exchange of India Limited (NSE) in 1992 is one important development in the Indian capital market. The need was felt by the industry and investing community since 1991. a. The National Stock Exchange of India Ltd. (NSE) is the India’s leading stock exchange located in the financial capital of Mumbai India. b. National Stock Exchange (NSE) was established in the mid-1990s as a demutualized electronic exchange. c. NSE provides a modern, fully automated screen-based trading system, its trading system, called National Exchange for Automated Trading (NEAT). d. NSE was started by a clutch of leading Indian financial institutions like Life Insurance Corporation of India, GIC, State Bank of India and Infrastructure Development Finance Company (IDFC) etc. e. NSE offers trading, clearing and settlement services in equity, debt and equity derivatives and it is India's largest exchange, globally in cash market trades, in currency trading and index options. f. NSE was also instrumental in creating the National Securities Depository Limited (NSDL) which allowed investors to securely hold and transfer their shares and bonds electronically.
  74. 74. OTCEI The Over The Counter Exchange of India was incorporated in October, 1990 as a Company under the Companies Act 1956. It became fully operational in 1992 with opening of a counter at Mumbai. It is recognized by the Government of India as a recognized stock exchange under the Securities Control and Regulation Act 1956. It was promoted jointly by the financial institutions like UTI, ICICI, IDBI, LIC, GIC, SBI, IFCI, etc. a. OTCEI is a floorless exchange where all the activities are fully computerized. b. Its promoters have been designated as sponsor members and they alone are entitled to sponsor a company for listing there. c. Trading on the OTCEI takes place through a network of computers or OTC dealers located at different places within the same city and even across the cities. These computers allow dealers to quote, query & transact through a central OTC computer using the telecommunication links. d. A Company which is listed on any other recognized stock exchange in India is not permitted simultaneously for listing on OTCEI. e. OTCEI deals in equity shares, preference shares, bonds, debentures and warrants.
  75. 75. Concept of Trading • To “trade” means to buy and sell in the jargon of the financial markets. The members carrying on business are known as ‘brokers’ and can trade only on listed securities. Locating a Broker Selecting method of trading Placement & Execution of Order Selecting patterns of trade Preparation of Contract Notes Settlement of Transactions
  76. 76. 1. Locating a Broker • The selection of a broker depends largely on the kind of services rendered by a particular broker as well as upon the kind of transaction that a person wishes to undertake.  Provide information: A broker to be selected should be able to give information about the available investments. These may be in the form of  capital structure of companies’  earnings,  dividend policies and  prospects. These could also take the form of advice about  taxes,  portfolio planning and  investment management.  Availability of Investment Literature: Secondly, a broker should be able to supply financial periodicals, prospectuses and reports. He should also prepare and analyses valuable advisory literature to educate the investor.  Appoint Competent Representatives: Brokers should have registered competent representatives who can assist customers with most of their problems.
  77. 77. Popular Stock Brokers & Their fee Fixed Price Broker Percentage Basis Brokers • When you buy 100 share of RIL at Rs 1000 per share, the brokerage charged by Fixed Price Broker will still be Rs 20; • while Percentage Basis Brokers will charge Rs 500 • at the rate of 0.50% of 100,000 • (Rs. 1000 x 100 shares). Fee types Fixed Price Broker Percentage Basis Brokers The above example clearly show that the brokerage charged in flat fee share dealing is significantly low and simple and this make a huge difference in the year end when you see your P&L account
  78. 78. Requirements of Trading in Stocks Broker A broker is a member of a recognized stock exchange, who is permitted to do trades on the screen-based trading system of different stock exchanges. He is enrolled as a member with the concerned exchange and is registered with SEBI. Application Name Date of birth Photograph Address Education Occupation  Residential status Bank account If you are registered with any other broker, then the name of broker and concerned Stock exchange and Client Code Number. Opening of account In India, shares and securities are held electronically in a Dematerialized (or "Demat") account, instead of the investor taking physical possession of certificates. Why should you have a Demat Account? As per SEBI guidelines shares cannot be bought and sold in any form except in dematerialised form. Therefore, if you want to buy and sell shares through the stock exchange, you necessarily have to have a demat account.
  79. 79. 2.Selecting Method of Trading Online Stock Trading Offline Stock Trading • Doing stock trading with help of computer, internet connection and with trading/demat account is called Online Stock Trading. • If you would like to do online stock trading then you should have a computer, internet connection and online trading account (DEMAT Account). • Access to the Dematerialized account requires an internet password and a transaction password. • Transfers or purchases of securities can then be initiated. • Purchases and sales of securities on the Dematerialized account are automatically made once transactions are confirmed and completed. • Doing stock trading with the help of broker or through phone is called Offline trading. • In other words trading will be done by another person on your behalf based on the instructions given by you, and then the other person can be a broker. • The broker will do buying and selling of stocks on your behalf depending on the instructions given by you. • If you want to do offline stock trading then you need to open the demat account.
  80. 80. 3.Placement & Execution of order • Market Order: When you put buy or sell price at market rate then the price get executes at the current rate of market.  The market order get immediately executed at the current available price. In market order there is no need to mention the price; the stocks will get executed at the best current available price. If you wish to buy or sell stocks at any specific price then market order is not suitable for you then you have to go for limit order. Market order is for those who want to buy or sell immediately at the current available price.
  81. 81.  Limit Order: An order placed with a broker to buy or sell a set number of shares at a specified price or better. Because the limit order is not a market order, it may not be executed if the price set by the investor cannot be met during the period of time in which the order is left open. Limit orders also allow an investor to limit the length of time an order can be outstanding before being canceled. In day trading its risk because you have to close all your transactions before 3:30 PM. Example of a limit order: Orders are limited by a fixed price. ‘Buy Reliance Petroleum at Rs. 50. Here, the order has clearly indicated the price at which it has to be bought and the investor is not willing to give more than Rs. 50.
  82. 82. How is a share price calculated at any given time? • The calculation of prices is completely automated, software driven, and anonymous at both BSE and NSE, and the price is calculated by electronically matching bids and offers for a particular share recorded an electronic limit order book (ELOB). Buy (bids) Sell (asks) S.No. Quantity Price Quantity Price S.No. 1 1,000 3.5 2,000 4 5 2 1,000 3.4 1,000 4.05 6 3 2,000 3.4 500 4.2 7 4 1,000 3.3 100 4.25 8  If you look at the above table, the left side are the bids and the right side are the asks. As it stands – there can’t be any transaction because the highest price that the buyers are willing to pay is lower than the lowest price at which the sellers are willing to sell.  However, if you come in and put up a market order to buy 3,000 shares – your order will be executed and you will get 2,000 shares at Rs. 4.00 and the remaining 1,000 shares at Rs. 4.05.  Similarly if you wanted to sell 2,000 shares – the first 1,000 will be sold at Rs. 3.50 and the second thousand will be sold at Rs. 3.40.
  83. 83.  Stop loss order: • The orders are given to limit the loss due to unfavorable price movements in the market. • A particular limit is given for waiting. If the price falls below the limit, the broker is authorized to sell the shares to prevent further loss. • Ex. Sell BRC Ltd at Rs. 25, stop loss at Rs. 22.  Order Execution • Matching of Orders Once the order has been fed into the computer, the computer searches and finds out the suitable matching order subject to the conditions placed by the investor or the trader. • The conditions are related to the price, volume and time of the trade. • While matching the order, priority is given on the basis of price and time. • If the matching order is found, the deal is struck, otherwise as per the instructions the order would be kept pending or cancelled.
  84. 84. 4. Selecting pattern of trade • Day Trading: (Also called as Intra-day trading) • It is a type of stock trading where both buying and selling of a financial instrument is done on the same day and all the trading’s are closed before the market close for the day. • In other words whatever you buy today you have to sell it today OR whatever you sell today you have to buy it today and very importantly during market hours that is 9.55 am to 3.30 pm (Indian time). • Traders who participate in day trading are called active traders or day traders. • Day trading demands fast decision and fast action. This type of stock trading is not advisable for a beginner.
  85. 85. Some of the methods of day trading are 1. Scalping: It is a technique of trading and profiting in stock market. It is a day trading strategy and focuses on taking very small profits from hundreds of trades. It involves taking quick and small profits, using the ask and bid differences. 2. Pattern trading: As the stock prices move up and down, they tend to form recognizable recurring designs or figurative diagrams, called chart patterns. Trading these patterns gives us more consistent profitable trades. 3. Momentum Day Trading: It is a method of stock trading, where in a trade is made, when the stock is making a trending movement and the trade is closed at the end of the day.
  86. 86. 4. Selecting pattern of trade • Inter day Trading: (Also Called as Delivery Trading) • Delivery based trading involves buying shares on a market day and selling them only after receiving the delivery of those shares in demat account. • In other words, In Delivery Trading, as the name say, you have to take the delivery of shares and after getting these shares in your demat account you can sell them at any time or you can hold them till you want, there is no restriction.
  87. 87. Some of the methods of Inter day Trading are 1. Short Term Trading: A trade period of more than one day to a few weeks is considered as short term trade. A stock is bought and held in position from one day to a few weeks. 2. Medium Term Trading: A trade period from a few weeks to a few months is considered as medium term trade. 3. Long Term Trading: In this type of stock trading, stock is held for many months to many years. Profit from growth of the company, dividends and bonuses attracts this type of stock trading.
  88. 88. 5.Preparation of contract notes • After a broker has executed your deal, his system will automatically generate and post a contract note. This will show: • Name of the company • Date of the trade • Number of shares traded • Whether you have bought or sold • Price • Brokerage charged • Stamp duty (if any) • Panel of Takeovers and Mergers Levy (a flat charge on large trades only) • Name of the account in which shares are held. • Broker is supposed to send you the contract note within 24 hours. Thus a contract note is an important document for investors transacting in shares and other listed securities on a recognized stock exchange. What is a contractnote? A contract note is a legal record of trade transactioncarried on a stock exchange through a broker.
  89. 89. 6. Settlement of Transactions (Settlement Procedure-NSE and BSE) • This means actual transfer of securities. This is the last stage in the trading of securities done by the broker on behalf of their clients. • The National Securities Clearing Corporation Ltd. (NSCCL) carries out clearing and settlement functions as per the settlement cycles provided in the settlement schedule. • Rolling Settlement Cycle: RSC means when you will get your stocks in your Demat account or in physical form. In a rolling settlement, each trading day(T) is considered as a trading period and trades executed during the trading day(T) are settled on a T+2 basis i.e. trading day plus two working days. Settlement Process Day Timings Job performed T(Trade Day) Market Timing (9.55am to 3.30pm) Buy/sell securities T+1 By 11.00 am Confirmation of all trades By 1.30 pm Processing and downloading of files to brokers T+2 By 11.00 am Pay-in of securities and funds By 1.30 pm Pay-out of securities and funds
  90. 90. Feedback & Questions|mdumair@sjc.ac.in

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