Blackbook Project- Indian Capital Market

INDIAN CAPITAL MARKET|2014-15

CHAPTER 1: INTRODUCTION TO CAPITAL MARKETS

Generally, the personal savings of an entrepreneur along with contributions from friends and relatives are the source of fund to start new or to expand existing business. This may not be feasible in case of large projects as the required contribution from the entrepreneur (promoter) would be very large even after availing term loan; the promoter may not be able to bring his / her share (equity capital). Thus availability of capital can be a major constraint in setting up or expanding business on a large scale. However, instead of depending upon a limited pool of savings of a small circle of friends and relatives, the promoter has the option of raising money from the public across the country by selling (issuing) shares of the company. For this purpose, the promoter can invite investment to his or her venture by issuing offer document which gives full details about track record, the company, the nature of the project, the business model, the expected profitability etc. If you are comfortable with this proposed venture, you may invest and thus become a shareholder of the company. Through aggregation, even small amounts available with a very large number of individuals translate into usable capital for corporates. Your small savings of, say, even ` 5,000 can contribute in setting up, say, a ` 5,000 crore Cement or Steel plant. This mechanism by which corporates raise money from public is called the primary markets. TYBFM Mithibai

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Importantly, when you, as a shareholder, need your money back, you can sell these shares to other or new investors. Such trades do not reduce or alter the company’s capital. Stock exchanges bring such sellers and buyers together and facilitate trading. Therefore, companies raising money from public are required to list their shares on the stock exchange. This mechanism of buying and selling shares through stock exchange is known as the secondary markets. As a shareholder, you are part owner of the company and entitled to all the benefits of ownership, including dividend (company’s profit distributed to owners). Over the years if the company performs well, other investors would like to become owners of this performing company by buying its shares. This increase in demand for shares leads to increase in its price. You then have the option of selling your shares at a higher price than at which you purchased it. You can thus increase your wealth, provided you make the right choice. The reverse is also true! Apart from shares, there are many other financial instruments (securities) used for raising capital. Debentures or bonds are debt instruments that pay interest over their lifetime and are used by corporates to raise medium or long-term debt capital. If you prefer fixed income, you may invest in these instruments, which may give you higher rate of interest than bank fixed deposit, because of the higher risk. Besides, equity and debt, a combination of these instruments, like convertible debentures, preference shares are also issued to raise capital. If you have constraints like time, wherewithal, small amount etc. to invest in the market directly, Mutual Funds (MFs), which are regulated entities, provide an alternative avenue. They collect money from many investors and invest the aggregate amount in the markets in a professional and transparent manner. The returns from these investments net of management fees are available to you as a MF unit holder. MFs offer various schemes, like those investing only in equity or debt, index funds, gold funds, etc. to cater to risk appetite of various investors. Even with very small amounts, you can invest in MF schemes through monthly systematic investment plans (SIP). The institutions, players and mechanism that bring suppliers and users of capital together, is known as capital market. It allows people to do more with their savings by providing variety of assets thereby enhancing the wealth of investors who make the right choice. Simultaneously, it enables entrepreneurs to do more with their ideas and talent, facilitating capital formation. TYBFM Mithibai

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Thus capital market mobilizes savings and channelizes it, through securities, into preferred entrepreneurs. It is not that the providers of funds meet the user of and exchange funds for securities. It is because the securities offered by the users may not match the preference of the providers of funds. There are a large variety of intermediaries who bring the providers and user of funds together to facilitate the transactions. The market is supervised by SEBI. It ensures supply of quality securities and nonmanipulated demand for them. It develops best market practices and takes enforcement actions against the miscreants. It essentially maintains discipline in the market so that the participants can undertake transaction safely. 1.1 Definition of Capital Market Capital markets are financial markets for the buying and selling of long-term debt or equity-backed securities. These markets channel the wealth of savers to those who can put it to long-term productive use, such as companies or governments making long-term investments. 1.1.A. Major Objectives of Indian Capital Market » To mobilize resources for investments. » To facilitate buying and selling of securities. » To facilitate the process of efficient price discovery. » To facilitate settlement of transactions in accordance with the predetermined time schedules. 1.1.B. Reforms in Capital Market of India The major reform undertaken in capital market of India includes: »Establishment of SEBI: The Securities and Exchange Board of India (SEBI) was established in 1988. It got a legal status in 1992. SEBI was primarily set up to regulate the activities of the merchant banks, to control the operations of mutual funds, to work as a promoter of the stock exchange activities and to act as a regulatory authority of new issue activities of companies.

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»Establishment of Creditors Rating Agencies: Three creditors rating agencies viz. The Credit Rating Information Services of India Limited (CRISIL - 1988), the Investment Information and Credit Rating Agency of India Limited (ICRA - 1991) and Credit Analysis and Research Limited (CARE) were set up in order to assess the financial health of different financial institutions and agencies related to the stock market activities. It is a guide for the investors also in evaluating the risk of their investments. »Increasing of Merchant Banking Activities: Many Indian and foreign commercial banks have set up their merchant banking divisions in the last few years. These divisions provide financial services such as underwriting facilities, issue organizing, consultancy services, etc. » Rising Electronic Transactions: Due to technological development in the last few years, the physical transaction with more paper work is reduced. It saves money, time and energy of investors. Thus it has made investing safer and hassle free encouraging more people to join the capital market. » Growing Mutual Fund Industry: The growing of mutual funds in India has certainly helped the capital market to grow. Public sector banks, foreign banks, financial institutions and joint mutual funds between the Indian and foreign firms have launched many new funds. A big diversification in terms of schemes, maturity, etc. has taken place in mutual funds in India. It has given a wide choice for the common investors to enter the capital market. » Growing Stock Exchanges: The numbers of various Stock Exchanges in India are increasing. Initially the BSE was the main exchange, but now after the setting up of the NSE and the OTCEI, stock exchanges have spread across the country. Recently a new Inter-connected Stock Exchange of India has joined the existing stock exchanges. » Investor's Protection: Under the purview of the SEBI the Central Government of India has set up the Investors Education and Protection Fund (IEPF) in 2001. It works in educating and guiding

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investors. It tries to protect the interest of the small investors from frauds and malpractices in the capital market. » Growth of Derivative Transactions: Since June 2000, the NSE has introduced the derivatives trading in the equities. In November 2001 it also introduced the future and options transactions. These innovative products have given variety for the investment leading to the expansion of the capital market. » Commodity Trading: Along with the trading of ordinary securities, the trading in commodities is also recently encouraged. The Multi Commodity Exchange (MCX) is set up. The volume of such transactions is growing at a splendid rate. These reforms have resulted into the tremendous growth of Indian capital market. 1.1.C. Factors Affecting Capital Market in India A range of factors affects the capital market. Some of the factors that influence capital market are as follows: » Performance of domestic Companies: The performance of the companies’ or rather corporate earnings is one of the factors that have direct impact or effect on capital market in a country. Weak corporate earnings indicate that the demand for goods and services in the economy is less due to slow growth in per capita income of people. Because of slow growth in demand there is slow growth in employment that means slow growth in demand in the near future. Thus weak corporate earnings indicate average or not so good prospects for the economy as a whole in the near term. In such a scenario the investors (both domestic as well as foreign) would be wary to invest in the capital market and thus there is bear market like situation. The opposite case of it would be robust corporate earnings and its positive impact on the capital market. » Environmental Factors: Environmental Factor in India’s context primarily means- Monsoon. In India around 60 % of agricultural production is dependent on monsoon. Thus there is heavy dependence on monsoon. The major chunk of agricultural production comes from the states of Punjab, Haryana & Uttar Pradesh. Thus deficient or delayed monsoon in this part of the country TYBFM Mithibai

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would directly affect the agricultural output in the country. Apart from monsoon other natural calamities like Floods, tsunami, drought, earthquake, etc. also have an impact on the capital market of a country. »Macro Economic Numbers: The macroeconomic numbers also influence the capital market. It includes Index of Industrial Production (IIP) which is released every month, annual Inflation number indicated by Wholesale Price Index (WPI) which is released every week, Export – Import numbers which are declared every month, Core Industries growth rate (It includes Six Core infrastructure industries – Coal, Crude oil, refining, power, cement and finished steel) which comes out every month, etc. This macro –economic indicators indicate the state of the economy and the direction in which the economy is headed and therefore impacts the capital market in India. » Global Cues: In this world of globalization various economies are interdependent and interconnected. An event in one part of the world is bound to affect other parts of the world; however the magnitude and intensity of impact would vary. Thus capital market in India is also affected by developments in other parts of the world i.e. U.S., Europe, Japan, etc. Global cues includes corporate earnings of MNC’s, consumer confidence index in developed countries, jobless claims in developed countries, global growth outlook given by various agencies like IMF, economic growth of major economies, price of crude –oil, credit rating of various economies given by Moody’s, S & P, etc. » Political stability and government policies: For any economy to achieve and sustain growth it has to have political stability and pro- growth government policies. This is because when there is political stability there is stability and consistency in government’s attitude that is communicated through various government policies. The vice- versa is the case when there is no political stability .So capital market also reacts to the nature of government, attitude of government, and various policies of the government. » Growth prospectus of an economy: When the national income of the country increases and per capita income of people increases it is said that the economy is growing. Higher income also means higher TYBFM Mithibai

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expenditure and higher savings. This augurs well for the economy as higher expenditure means higher demand and higher savings means higher investment. Thus when an economy is growing at a good pace capital market of the country attracts more money from investors, both from within and outside the country and vice -versa. So we can say that growth prospects of an economy do have an impact on capital markets. » Investor Sentiment and risk appetite:Another factor, which influences capital market, is investor sentiment and their risk appetite. Even if the investors have the money to invest but if they are not confident about the returns from their investment, they may stay away from investment for some time. At the same time if the investors have low risk appetite, which they were having in global and Indian capital market some four to five months back due to global financial meltdown and recessionary situation in U.S. & some parts of Europe, they may stay away from investment and wait for the right time to come.

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CHAPTER 2: CLASSIFICATION OF CAPITAL MARKET

2.1Primary Market Companies issue securities from time to time to raise funds in order to meet their financial requirements for modernization, expansions and diversification programs. These securities are issued directly to the investors (both individuals as well as institutional) through the mechanism called primary market or new issue market. The primary market refers to the set-up, which helps the industry to raise the funds by issuing different types of securities. This set-up consists of the type of

securities

available,

institutions

and

framework.

The

the primary

financial regulatory market

discharges the important function of transfer of savings especially of the individuals to the companies, the mutual funds, and the public sector undertakings. Individuals

or

other

investors

with

surplus money invest their savings in exchange for shares, debentures and other securities. In the primary market the new issue of securities are presented in the form of public issues, right issues or private placement. Firms that seek financing, exchange their financial liabilities, such as shares and debentures, in return for the money provided by the financial intermediaries or the investors directly. These firms then convert these funds into real capital such as plant and machinery etc. The structure of the capital market where the firms exchange their financial liabilities for long-term financing is called the primary market. The primary market has two distinguishing features:

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» It is the segment of the capital market where capital formation occurs; and » In order to obtain required financing, new issues of shares, debentures securities are sold in the primary market. Subsequent trading in these securities occurs in other segment of the capital market, known as secondary market. The securities that are often resorted for raising funds are equity shares, preference shares, bonds, debentures, warrants, cumulative convertible preference shares, zero interest convertible debentures, etc. Public issues of securities may be made through: » Prospectus, » Offer for sale, » Book building process and » Private placement The investors directly subscribe the securities offered to public through a prospectus. The company through different media generally makes wide publicity about the public offer. 2.1.A. Activities in the Primary Market » Appointment of merchant bankers » Collection of money » Pricing of securities being issued » Minimum subscription » Communication/ Marketing of the issue » Listing on the stock exchange(s) » Information on credit risk » Allotment of securities in demat/ physical mode » Making public issues » Record keeping 2.1.B. Function of Primary Market » Organization: Deals with the origin of the new issue. The proposal is analyzed in terms of the nature of the security, the size of the issued timings of the issue and flotation method of the issue.

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» Underwriting: Underwriting is a kind of guarantee undertaken by an institution or firm of brokers ensuring the marketability of an issue. it is a method whereby the guarantor makes a promise to the stock issuing company that he would purchase a certain specific number of shares in the event of their not being invested by the public. » Distribution: The third function is that of distribution of shares. Distribution means the function of sale of shares and debentures to the investors. This is performed by brokers and agents. They maintain regular lists of clients and directly contact them for purchase and sale of securities. 2.1.C. Role of Primary Market » Capital formation - It provides attractive issue to the potential investors and with this company can raise capital at lower costs. » Liquidity - As the securities issued in primary market can be immediately sold in secondary market the rate of liquidity is higher. » Diversification - Many financial intermediaries invest in primary market; therefore there is less risk if there is failure in investment as the company does not depend on a single investor. The diversification of investment reduces the overall risk. » Reduction in cost - Prospectus containing all details about the securities are given to the investors hence reducing the cost is searching and assessing the individual securities. 2.1.D. Features of Primary Market » It is the new issue market for the new long-term capital. » Here company issues the securities directly to the investors and not through any intermediaries. » On receiving the money from the new issues, the company will issue the security certificates to the investors. » The amount obtained by the company after the new issues are utilized for expansion of the present business or for setting up new ventures. » External finance for longer term such as loans from financial institutions is not included in primary market. There is an option called ‘going public’ in which the TYBFM Mithibai

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borrowers in new issue market raise capital for converting private capital into public capital. 2.1.E. Types of issues Primary market Issues can be classified into four types. » Initial Public Offer (IPO): When an unlisted company makes either a fresh issue of securities or an offer for sale of its existing securities or both, for the first time to the public, the issue is called as an Initial Public Offer. » Follow On Public Offer (FPO): When an already listed company makes either a fresh issue of securities to the public or an offer for sale of existing shares to the public, through an offer document, it is referred to as Follow on Offer (FPO). » Rights Issue: When a listed company proposes to issue fresh securities to its existing shareholders, as on a record date, it is called as a rights issue. The rights are normally offered in a particular ratio to the number of securities held prior to the issue. This route is best suited for companies who would like to raise capital without diluting stake of its existing shareholders. » A Preferential issue: A Preferential Issue is an issue of shares or of convertible securities by listed companies to a select group of persons under Section 81 of the Companies Act, 1956, that is neither a rights issue nor a public issue. This is a faster way for a company to raise equity capital. The issuer company has to comply with the Companies Act and the requirements contained in the chapter, pertaining to preferential allotment in SEBI guidelines, which interalia include pricing, disclosures in notice etc.

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2.2 SECONDARY MARKET Secondary market refers to the network/system for the subsequent sale and purchase of securities. An investor can apply and get allotted a specified number of securities by the issuing company in the primary market. However, once allotted the securities can thereafter be sold and purchased in the secondary market only. An investor who wants to purchase the securities can buy these securities in the secondary market. The secondary market is market for subsequent sale/purchase and trading in the securities. A security emerges or takes birth in the primary market but its subsequent movements take place in secondary market. The secondary market consists of that portion of the capital market where the previously issued securities are transacted. The firms do not obtain any new financing from secondary market. The secondary market provides the life-blood to any financial system in general, and to the capital market in particular. The secondary market is represented by the stock exchanges in any capital market. The stock exchanges provide an organized market place for the investors to trade in the securities. This may be the most important function of stock exchanges. The stock exchange, theoretically speaking, is a perfectly competitive market, as a large number of sellers and buyers participate in it and the information regarding the securities is publicly available to all the investors. A stock exchange permits the security prices to be determined by the competitive forces. They are not set by negotiations off the floor, where one party might have a bargaining advantage. The bidding process flows from the demand and supply underlying each security. This means that the specific price of a security is determined, more or less, in the manner of an auction. The stock exchanges provide market in which the members of the stock exchanges (the share brokers) and the investors participate to ensure liquidity to the latter. In India, the secondary market, represented by the stock exchanges network, is more than 100 years old when in 1875, the first stock exchange started operations in Mumbai. Gradually, stock exchanges at other places have also been established and at present, there are 23 stock exchanges operating in India. The secondary market in India got a boost when the Over the Counter Exchange of India (OTCEI) and the National Stock Exchange (NSE) were established. Out of the 23 stock exchanges, 20 stock exchanges are operating at Mumbai (BSE), Kolkata, Chennai, Ahmadabad, Delhi, and Indore. Bangalore, Hyderabad, TYBFM Mithibai

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Cochin, Kanpur, Pune, Ludhiana, Guwahati, Mangalore, Patna, Jaipur, Bhubaneswar, Rajkot, Vadodara and Coimbatore. Besides, there is one ICSE established by 14 Regional Stock Exchanges. It may be noted that out of 23 stock exchanges, only 2, i.e., the NSE and the Over the Counter Exchange of India (OTCEI) have been established by the All India Financial Institutions while other stock exchanges are operating as associations or limited companies. In order to protect and safeguard the interest of the investors, the operations, functioning and working of the stock exchanges and their members (i.e., share brokers) are supervised and regulated by the Securities Contracts (Regulations) Act, 1956 and the SEBI Act, 1992. 2.2.A. Activities in the Secondary Market » Trading of securities » Risk management » Clearing and settlement of trades » Delivery of securities and funds 2.2.B. Importance of Secondary Market: » Providing liquidity and marketability to existing securities » Pricing of securities » Safety of transaction » Contribution to economic growth » Providing scope for speculation 2.2.C. Role of Secondary Market For the general investor, the secondary market provides an efficient platform for trading of his securities. For the management of the company, Secondary equity markets serve as a monitoring and control conduit—by facilitating value-enhancing control activities, enabling implementation of incentive-based management contracts, and aggregating information (via price discovery) that guides management decisions. 2.2.D. Products in secondary markets » Equity Shares TYBFM Mithibai

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» Rights Issue/ Rights Shares » Bonus Shares » Preferred Stock/ Preference shares » Cumulative Preference Shares » Cumulative Convertible Preference Shares » Participating Preference Share » Bond » Zero Coupon Bond » Convertible Bond » Debentures » Commercial Paper » Coupons » Treasury Bills 2.2.E. The OTC Market Sometimes you'll hear a dealer market referred to as an over-the-counter (OTC) market. The term originally meant a relatively unorganized system where trading did not occur at a physical place, as we described above, but rather through dealer networks. The term was most likely derived from the off-Wall Street trading that boomed during the great bull market of the 1920s, in which shares were sold "over-the-counter" in stock shops. In other words, the stocks were not listed on a stock exchange - they were "unlisted". 2.2.F. Third and Fourth Markets You might also hear the terms "third" and "fourth markets". These don't concern individual investors because they involve significant volumes of shares to be transacted per trade. These markets deal with transactions between broker-dealers and large institutions through over-the-counter electronic networks. The third market comprises OTC transactions between broker-dealers and large institutions. The fourth market is made up of transactions that take place between large institutions. The main reason these third and fourth market transactions occur is to avoid placing these orders through the main exchange, which could greatly affect the price of the security. Because access to the third and fourth markets is limited, their activities have little effect on the average investor.

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CHAPTER 3: PARTICIPANTS OF INDIAN CAPITAL MARKET

There are several major players in the primary market. These include the merchant bankers, mutual funds, financial institutions, foreign institutional investors (FIIs) and individual investors. In the secondary market, there are the stock exchanges, stock brokers (who are members of the stock exchanges), the mutual funds, financial institutions, foreign institutional investors (FIIs), and individual investors. Registrars and Transfer Agents, Custodians and Depositories are capital market intermediaries that provide important infrastructure services for both primary and secondary markets. I. Custodians In the earliest phase of capital market reforms, to get over the problems associated with paper-based securities, large holding by institutions and banks were sought to be immobilized. Immobilization of securities is done by storing or lodging the physical security certificates with an organization that acts as a custodian - a securities depository. All subsequent transactions in such immobilized securities take place through book entries. The actual owners have the right to withdraw the physical securities from the custodial agent whenever required by them. In the case of IPO, a jumbo certificate is issued in the name of the beneficiary owners based on which the depository gives credit to the account of beneficiary owners. The Stock Holding Corporation of India Limited was set up to act as a custodian for securities of a large number of banks and institutions who were mainly in the public sector. Some of the banks and financial institutions also started providing "Custodial" services to smaller investors for a fee. With the introduction of dematerialisation of securities there has been a shift in the role and business operations of Custodians. But they

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still remain an important intermediary providing services to the investors who still hold securities in physical form. II. Depositories The depositories are important intermediaries in the securities market that is scripless or moving towards such a state. In India, the Depositories Act defines a depository to mean "a company formed and registered under the Companies Act, 1956 and which has been granted a certificate of registration under sub-section (IA) of section 12 of the Securities and Exchange Board of India Act, 1992." The principal function of a depository is to

dematerialise

securities

and

enable

their

transactions

in

book-entry

form.

Dematerialisation of securities occurs when securities issued in physical form is destroyed and an equivalent number of securities are credited into the beneficiary owner's account. In a depository system, the investors stand to gain by way of lower costs and lower risks of theft or forgery, etc. They also benefit in terms of efficiency of the process. But the implementation of the system has to be secure and well governed. All the players have to be conversant with the rules and regulations as well as with the technology for processing. The intermediaries in this system have to play strictly by the rules. A depository established under the Depositories Act can provide any service connected with recording of allotment of securities or transfer of ownership of securities in the record of a depository. A depository cannot directly open accounts and provide services to clients. Any person willing to avail of the services of the depository can do so by entering into an agreement with the depository through any of its Depository Participants. The services, functions, rights and obligations of depositories, with special reference to NSDL are provided in the second section of this Workbook. III. Depository Participants A Depository Participant (DP) is described as an agent of the depository. They are the intermediaries between the depository and the investors. The relationship between the DPs and the depository is governed by an agreement made between the two under the depositories Act, 1996. In a strictly legal sense, a DP is an entity who is registered as such with SEBI under the provisions of the SEBI Act. As per the provisions of this Act, a DP can offer depository related services only after obtaining a certificate of registration from SEBI. SEBI (D&P) Regulations, 1996 prescribe a minimum net worth of Rs. 50 lakh for the TYBFM Mithibai

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applicants who are stockbrokers or non-banking finance companies (NBFCs), for granting a certificate of registration to act as a DP. For R & T Agents a minimum net worth of Rs. 10 crore is prescribed in addition to a grant of certificate of registration by SEBI. If a stockbroker seeks to act as a DP in more than one depository, he should comply with the specified net worth criterion separately for each such depository. If an NBFC seeks to act as a DP on behalf of any other person, it needs to have a networth of Rs. 50 cr. in addition to the networth specified by any other authority. No minimum net worth criterion has been prescribed for other categories of DPs. However, depositories can fix a higher net worth criterion for their DPs. NSDL stipulates a minimum net worth of Rs. 300 Lakh to be eligible to become a DP as against Rs. 50 lakh prescribed by SEBI (D&P) Regulations, except for R & T agents and NBFCs, as mentioned above. IV. Merchant Bankers Among the important financial intermediaries are the merchant bankers. The services of merchant bankers have been identified in India with just issue management. It is quite common to come across reference to merchant banking and financial services as though they are distinct categories. The services provided by merchant banks depend on their inclination and resources - technical and financial. Merchant bankers (Category I) are mandated by SEBI to manage public issues (as lead managers) and open offers in take-overs. These two activities have major implications for the integrity of the market. They affect investors' interest and, therefore, transparency has to be ensured. These are also areas where compliance can be monitored and enforced. Merchant banks are rendering diverse services and functions. These include organising and extending finance for investment in projects, assistance in financial management, raising Eurodollar loans and issue of foreign currency bonds. Different merchant bankers specialise in different services. However, since they are one of the major intermediaries between the issuers and the investors, their activities are regulated by: » SEBI (Merchant Bankers) Regulations, 1992. » Guidelines of SEBI and Ministry of Finance. » Companies Act, 1956. » Securities Contracts (Regulation) Act, 1956.

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Merchant banking activities, especially those covering issue and underwriting of shares and debentures, are regulated by the Merchant Bankers Regulations of Securities and Exchange Board of India (SEBI). SEBI has made the quality of manpower as one of the criteria for renewal of merchant banking registration. These skills should not be concentrated in issue management and underwriting alone. The criteria for authorisation takes into account several parameters. These include: » Professional qualification in finance, law or business management, » Infrastructure like adequate office space, equipment and manpower, » Employment of two persons who have the experience to conduct the business of merchant bankers, » Capital adequacy and » Past track record, experience, general reputation and fairness in all their transactions. SEBI authorises merchant bankers (Category I) for an initial period of three years, if they have a minimum net worth of Rs. 5 crore. An initial authorisation fee, an annual fee and renewal fee is collected by SEBI. According to SEBI, all issues should be managed by at least one authorised merchant banker functioning as the sole manager or lead manager. The lead manager should not agree to manage any issue unless his responsibilities relating to the issue, mainly disclosures, allotment and refund, are clearly defined. A statement specifying such responsibilities has to be furnished to SEBI. SEBI prescribes the process of due diligence that a merchant banker has to complete before a prospectus is cleared. It also insists on submission of all the documents disclosing the details of account and the clearances obtained from the ROC and other government agencies for tapping peoples' savings. The responsibilities of lead manager, underwriting obligations, capital adequacy, due diligence certification, etc., are laid down in detail by SEBI. The objective is to facilitate the investors to take an informed decision regarding their investments and not expose them to unknown risks. V. Registrar The Registrar finalizes the list of eligible allottees after deleting the invalid applications and ensures that the corporate action for crediting of shares to the demat accounts of the applicants is done and the dispatch of refund orders to those applicable are TYBFM Mithibai

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sent. The Lead manager coordinates with the Registrar to ensure follow up so that that the flow of applications from collecting bank branches, processing of the applications and other matters till the basis of allotment is finalized, dispatch security certificates and refund orders completed and securities listed. VI. Bankers to the issue Bankers to the issue, as the name suggests, carries out all the activities of ensuring that the funds are collected and transferred to the Escrow accounts. The Lead Merchant Banker shall ensure that Bankers to the Issue are appointed in all the mandatory collection centers as specified in DIP Guidelines. The LM also ensures follow-up with bankers to the issue to get quick estimates of collection and advising the issuer about closure of the issue, based on the correct figures. VII. Underwriters Underwriting is an agreement, entered into by a company with a financial agency, in order to ensure that the public will subscribe for the entire issue of shares or debentures made by the company. The financial agency is known as the underwriter and it agrees to buy that part of the company issues which are not subscribed to by the public in consideration of a specified underwriting commission. The underwriting agreement, among others, must provide for the period during which the agreement is in force, the amount of underwriting obligations, the period within which the underwriter has to subscribe to the issue after being intimated by the issuer, the amount of commission and details of arrangements, if any, made by the underwriter for fulfilling the underwriting obligations. The underwriting commission may not exceed 5 percent on shares and 2.5 percent in case of debentures. Underwriters get their commission irrespective of whether they have to buy a single security or not. Types of underwriting » Syndicate Underwriting: - is one in which, two or more agencies or underwriters jointly underwrite an issue of securities. Such an arrangement is entered into when the total issue is beyond the resources of one underwriter or when he does not want to block up large amount of funds in one issue. » Sub-Underwriting:- is one in which an underwriter gets a part of the issue further underwritten by another agency. This is done to diffuse the risk involved in underwriting. TYBFM Mithibai

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The name of every under-writer is mentioned in the prospectus along with the amount of securities underwritten by him. » Firm Underwriting: - is one in which the underwriters apply for a block of securities. Under it, the underwriters agree to take up and pay for this block of securities as ordinary subscribers in addition to their commitment as underwriters. The underwriter need not take up the whole of the securities underwritten by him. For example, if the underwriter has underwritten the entire issue of 5 lakh shares offered by a company and has in addition applied for 1 lakh shares for firm allotment. If the public subscribes to the entire issue, the underwriter would be allotted 1 lakh shares even though he is not required to take up any of the shares. Types of underwriters Underwriting of capital issues has become very popular due to the development of the capital market and special financial institutions. The lead taken by public financial institutions has encouraged banks, insurance companies and stock brokers to underwrite on a regular basis. The various types of underwriters differ in their approach and attitude towards underwriting:» Development banks like IFCI, ICICI and IDBI: - they follow an entirely objective approach. They stress upon the long-term viability of the enterprise rather than immediate profitability of the capital issue. They attempt to encourage public response to new issues of securities. » Institutional investors like LIC and AXIS: - their underwriting policy is governed by their investment policy. » Financial and development corporations: - they also follow an objective policy while underwriting capital issues. » Investment and insurance companies and stock-brokers: - they put primary emphasis on the short term prospects of the issuing company as they cannot afford to block large amount of money for long periods of time. To act as an underwriter, a certificate of registration must be obtained from Securities and Exchange Board of India (SEBI). The certificate is granted by SEBI under the Securities and Exchanges Board of India (Underwriters) Regulations, 1993. These regulations deal primarily with issues such as registration, capital adequacy, obligation and TYBFM Mithibai

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responsibilities of the underwriters. Under it, an underwriter is required to enter into a valid agreement with the issuer entity and the said agreement among other things should define the allocation of duties and responsibilities between him and the issuer entity. These regulations have been further amended by the Securities and Exchange Board of India (Underwriters) (Amendment) Regulations, 2006. VIII.Credit Rating Agencies The 1990s saw the emergence of a number of rating agencies in the Indian market. These agencies appraise the performance of issuers of debt instruments like bonds or fixed deposits. The rating of an instrument depends on parameters like business risk, market position, operating efficiency, adequacy of cash flows, financial risk, financial flexibility, and management and industry environment. The objective and utility of this exercise is two-fold. From the point of view of the issuer, by assigning a particular grade to an instrument, the rating agencies enable the issuer to get the best price. Since all financial markets are based on the principle of risk/reward, the less risky the profile of the issuer of a debt security, the lower the price at which it can be issued. Thus, for the issuer, a favorable rating can reduce the cost of borrowed capital. From the viewpoint of the investor, the grade assigned by the rating agencies depends on the capacity of the issuer to service the debt. It is based on the past performance as well as an analysis of the expected cash flows of a company, when viewed on the industry parameters and performance of the company. Hence, the investor can judge for himself whether he wants to place his savings in a "safe" instrument and get a lower return or he wants to take a risk and get a higher return. The 1990s saw an increase in activity in the primary debt market. Under the SEBI guidelines all issuers of debt have to get the instruments rated. They also have to prominently display the ratings in all that marketing literature and advertisements. The rating agencies have thus become an important part of the institutional framework of the Indian securities market.

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IX. Collective Investment Schemes Collective Investment Scheme is a scheme in whatever form, including an openended investment company, in pursuance of which members of the public are invited or permitted to invest money or other assets in a portfolio, and in terms of which: » Two or more investors contribute money or other assets to and hold a participatory interest; » The investors share the risk and benefit of investment in proportion to their participatory interest in a portfolio of a scheme or on any other basis determined in the deed. X. Unit Trust A Unit Trust Scheme is a Fund into which small sums of monies from individual investors are collected to form a “pool” for the purpose of investing in stocks, shares and money market instrument by professional fund managers on behalf of the contributors called unit holders [subscribers]. By investing in a unit trust scheme, the unit holders enjoy the benefits of diversification and professional management of their fund at low cost. The total fund of a unit trust scheme is divided into units of exactly equal monetary value e.g. If one unit is N1.00, any person investing N100 will get 100 units. Unit Trust Funds are invested in highly-rated securities on behalf of the unit holders by the management company. There are two types of Unit Trust Schemes, viz; » Open-Ended This is a Fund that continuously creates issues and redeems units after the initial public offering. The price is based on the Net Asset Value (NAV), which is total asset of the fund minus liabilities as at date of purchase or redemption. » Closed-Ended In a Closed–Ended Fund, there is no additional issue of new units or redemption of units. The Fund is usually listed and traded on the Stock Exchange and its price will be determined by the market forces of supply and demand. A unit holder who wants to redeem his unit will therefore have to go through his Stockbroker.

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XI. Venture Capital Funds It is early stage financing of new and young companies seeking to grow rapidly. It is defined as a profit seeking venture by an entrepreneur, whose primary objective is to provide fund not otherwise available to new and growing business venture for the purpose of making profit in the long term. For a Venture Capital Fund to exist there must be the presence of the following:» Risk-Takers, who are prepared to invest in Venture Capital Fund and wait for long term gains rather than short term profits (Venture Capitalist). » There must be a Venture Capital Company to collect the money from the risk-takers and offer them shares in return with a promise of high return in future. » There must be a viable business venture whether new or young into which the Venture Capital Company could invest part of its equity. » There must be an entrepreneur with a good business under taking yearning for expansion capital. The process for a Venture Capital activity involves: » Fund raising » Real flow/investment » Monitoring/value enhancement » Exit stage. XII. Foreign direct investment Foreign direct investment pertains to international investment in which the investor obtains a lasting interest in an enterprise in another country. Mostly it takes the form of buying or constructing a factory in a foreign country or adding improvements to such a facility in form of property, plants or equipments and thus is generally long term in nature. XIII.Private equity investment Private equity investment is one made by foreign investors in Indian Venture Capital Undertakings (VCU) and Venture Capital Funds (VCF).

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XIV. Foreign portfolio investment It is a short-term to medium- term investment mostly in the financial markets and is commonly made through foreign Institutional Investors (FIIs), non resident Indian (NRI) and persons of Indian origin (PIO). XV. Foreign Institutional Investors The term FII‘s used to denote an investor, mostly in the form of an institution or entity which invests money in the financial markets of a country different from the one where in the institution or the entity is originally incorporated. According to Securities and Exchange Board of India (SEBI) it is ―an institution that is a legal entity established or incorporated outside India proposing to make investments in India only in securities‖. These can invest their own funds or invest funds on behalf of their overseas clients registered with SEBI. The client accounts are known as sub - accounts‘. A domestic portfolio manager can also register as FII to manage the funds of the sub-accounts. From the early 1990s, India has developed a framework through which foreign investors participate in the Indian capital market. A foreign investor can either come into India as a FII or as a sub-account. As on March 31, 2011, there were 1,722 FIIs registered with SEBI and 5,686 sub-accounts registered with SEBI as on March 31, 2011 Basically FIIs have a huge financial strength and invest for the purpose of income and capital appreciation. They are no interested in taking control of a company. Some of the big American mutual funds are fidelity, vanguard, Merrill lynch, capital research etc. They are permitted to trade in securities in primary as well as secondary markets and can trade also in dated government securities, listed equity shares, listed non convertible debentures/bonds issued by Indian company and schemes of mutual funds but the sale should be only through recognized stock exchange. These also include domestic asset management companies or domestic portfolio managers who manage funds raised or collected or bought from outside India for the purpose of making investment in India on behalf of foreign corporate or foreign individuals. In the Indian context, foreign institutional investors (FIIs) and their sub-accounts mostly use these instruments for facilitating the participation of their overseas clients, who are not interested in participating directly in the Indian stock market.

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FIIs contribute to the foreign exchange inflow as the funds from multilateral finance institutions and FDI are insufficient. » It lowers cost of capital, access to cheap global credit. » It supplements domestic savings and investments. » It leads to higher asset prices in the Indian market. » And has also led to considerable amount of reforms in capital market and financial sector. XVI. R&T Agents - Registrars to Issue R&T Agents form an important link between the investors and issuers in the securities market. A company, whose securities are issued and traded in the market, is known as the Issuer. The R&T Agent is appointed by the Issuer to act on its behalf to service the investors in respect of all corporate actions like sending out notices and other communications to the investors as well as despatch of dividends and other non-cash benefits. R&T Agents perform an equally important role in the depository system as well. These are described in detail in the second section of this Workbook. XVII. Stock Brokers Stockbrokers are the intermediaries who are allowed to trade in securities on the exchange of which they are members. They buy and sell on their own behalf as well as on behalf of their clients. Traditionally in India, partnership firms with unlimited liabilities and individually owned firms provided brokerage services. There were, therefore, restrictions on the amount of funds they could raise by way of debt. With increasing volumes in trading as well as in the number of small investors, lack of adequate capitalisation of these firms exposed investors to the risks of these firms going bust and the investors would have no recourse to recovering their dues. With the legal changes being effected in the membership rules of stock exchanges as well as in the capital gains structure for stock-broking firms, a number of brokerage firms have converted themselves into corporate entities. In fact, NSE encouraged the setting up of corporate broking members and has today only 10% of its members who are not corporate entities.

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XVIII. Mutual Funds Mutual funds are financial intermediaries, which collect the savings of small investors and invest them in a diversified portfolio of securities to minimise risk and maximise returns for their participants. Mutual funds have given a major fillip to the capital market - both primary as well as secondary. The units of mutual funds, in turn, are also tradable securities. Their price is determined by their net asset value (NAV) which is declared periodically. The operations of the private mutual funds are regulated by SEBI with regard to their registration, operations, administration and issue as well as trading. There are various types of mutual funds, depending on whether they are open ended or close ended and what their end use of funds is. An open-ended fund provides for easy liquidity and is a perennial fund, as its very name suggests. A closed-ended fund has a stipulated maturity period, generally five years. A growth fund has a higher percentage of its corpus invested in equity than in fixed income securities, hence the chances of capital appreciation (growth) are higher. In growth funds, the dividend accrued, if any, is reinvested in the fund for the capital appreciation of investments made by the investor. An Income fund on the other hand invests a larger portion of its corpus in fixed income securities in order to pay out a portion of its earnings to the investor at regular intervals. A balanced fund invests equally in fixed income and equity in order to earn a minimum return to the investors. Some mutual funds are limited to a particular industry; others invest exclusively in certain kinds of short-term instruments like money market or government securities. These are called money market funds or liquid funds. To prevent processes like dividend stripping or to ensure that the funds are available to the managers for a minimum period so that they can be deployed to at least cover the administrative costs of the asset management company, mutual funds prescribe an entry load or an exit load for the investors. If investors want to withdraw their investments earlier than the stipulated period, an exit load is chargeable. To prevent profligacy, SEBI has prescribed the maximum that can be charged to the investors by the fund managers. XIX. The Stock Exchanges A stock exchange is the marketplace where companies are listed and where the trading happens. They provide a transparent and safe (risk-free) forum of a market for investors to transact and invest their funds. There are 23 Stock Exchanges registered with TYBFM Mithibai

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SEBI and under its regulation. National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE) are the pre-dominant ones. XX. Insurance Companies Insurance companies receive premium in exchange for insurance policies and use these funds to purchase a variety of securities. Thus, they invest the proceeds received from insurance in stocks and bonds. XXI. Pension funds Many companies, corporations and government organizations and agencies offer pension plans to their employers their employers or both periodically contribute funds to such plans. The funds contributed are invested in securities until they are withdrawn by the employees upon their retirement. XXII. Commercial Banks Commercial banks are those companies which are engage in accepting deposits from savers and lending it back to deficit groups who are demanding loans and advances in order to invest business. Commercial banks are a major source of deposits collectors among the all other kinds of financial institutions. They mobilize their depository funds in many forms for example, lending to individuals and corporations, invest in stock market and participate other forms of investment. XXIII. Saving Banks Like commercial banks, savings banks also accumulate the scattered savings of the country and then create investment friendly funds and lastly channelize these funds into productive investments. Most savings banks are mutual in nature. XXIV. Credit Unions Credit union differs from commercial savings banks in that they are not profit oriented company and restrict their business to the main members only. They use most of their funds to provide loans to their internal members.

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XXV. Finance Companies Most finance companies obtain funds by issuing securities and then lend the funds to individuals and small businesses. XXVI. Developmental Financial Institutions DFIs play the significant role as the source of long-term funds mainly for the corporate firms. They supply fixed capital to the investors for investment in fixed capital expenditures. They also perform the underwriting functions relating to shares and debentures of the corporate firms.

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CHAPTER 4: INSTRUMENTS IN INDIAN CAPITAL MARKET

I. Secured Premium Notes SPN is a secured debenture redeemable at premium issued along with a detachable warrant, redeemable after a notice period, say four to seven years. The warrants attached to SPN gives the holder the right to apply and get allotted equity shares; provided the SPN is fully paid. There is a lock-in period for SPN during which no interest will be paid for an invested amount. II. Deep Discount Bonds A bond that sells at a significant discount from par value and has no coupon rate or lower coupon rate than the prevailing rates of fixed-income securities with a similar risk profile. They are designed to meet the long term funds requirements of the issuer and investors who are not looking for immediate return and can be sold with a long maturity of 25-30 years at adept discount on the face value of debentures. TYBFM Mithibai

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III. Equity Shares With Detachable Warrants A warrant is a security issued by company entitling the holder to buy a given number of shares of stock at a stipulated price during a specified period. These warrants are separately registered with the stock exchanges and traded separately. Warrants are frequently attached to bonds or preferred stock as a sweetener, allowing the issuer to pay lower interest rates or dividends. IV. Fully Convertible Debentures With Interest This is a debt instrument that is fully converted over a specified period into equity shares. The conversion can be in one or several phases. When the instrument is a pure debt instrument, interest is paid to the investor. After conversion, interest payments cease on the portion that is converted. If project finance is raised through an FCD issue, the investor can earn interest even when the project is under implementation. Once the project is operational, the investor can participate in the profits through share price appreciation and dividend payments. V. Disaster Bonds Also known as Catastrophe or CAT Bonds, Disaster Bond is a high-yield debt instrument that is usually insurance linked and meant to raise money in case of a catastrophe. VI. Mortgage Backed Securities(MBS) MBS is a type of asset-backed security, basically a debt obligation that represents a claim on the cash flows from mortgage loans, most commonly on residential property. Kinds of Mortgage Backed Securities: » Commercial mortgage backed securities: backed by mortgages on commercial property » Collateralized mortgage obligation: a more complex MBS in which the mortgages are ordered into tranches by some quality (such as repayment time), with each tranche sold as a separate security. » Stripped mortgage backed securities: Each mortgage payment is partly used to pay down the loan’s principal and partly used to pay the interest on it

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» Residential mortgage backed securities: backed by mortgages on residential property VII.Indian Depository Receipts As per the definition given in the Companies (Issue of Indian Depository Receipts) Rules, 2004, IDR is an instrument in the form of a Depository Receipt created by the Indian depository in India against the underlying equity shares of the issuing company. In an IDR, foreign companies would issue shares, to an Indian Depository (say National Security Depository Limited – NSDL), which would in turn issue depository receipts to investors in India. The actual shares underlying the IDRs would be held by an Overseas Custodian, which shall authorize the Indian Depository to

issue

the

IDRs.

The

IDRs

would

have

following

features:

Overseas Custodian: It is a foreign bank having branches in India and requires approval from Finance Ministry for acting as custodian and Indian depository has to be registered

with

SEBI.

Approvals for issue of IDRs: IDR issue will require approval from SEBI and application can be made for this purpose 90 days before the issue opening date. Listing: These IDRs would be listed on stock exchanges in India and would be freely transferable. Eligibility

conditions

for

overseas

companies

to

issue

IDRs:

Capital: The overseas company intending to issue IDRs should have paid up capital and free

reserve

of

at

least

$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 during this period. Debt equity ratio: The pre-issue debt equity ratio of such company should not be more than

2:1.

Extent of issue: The issue during a particular year should not exceed 15% of the paid up capital

plus

free

reserves.

Redemption: IDRs would not be redeemable into underlying equity shares before one year

from

date

of

issue.

Denomination: IDRs would be denominated in Indian rupees, irrespective of the denomination TYBFM Mithibai

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underlying

shares. 31


Benefits: In addition to other avenues, IDR is an additional investment opportunity for Indian investors for overseas investment. VIII. FOREIGN CURRENCY CONVERTIBLE BONDS (FCCBs) A convertible bond is a mix between a debt and equity instrument. It is a bond having regular coupon and principal payments, but these bonds also give the bondholder the option to convert the bond into stock. FCCB is issued in a currency different than the issuer's domestic currency. The investors receive the safety of guaranteed payments on the bond and are also able to take advantage of any large price appreciation in the company's stock. Due to the equity side of the bond, which adds value, the coupon payments on the bond are lower for the company, thereby reducing its debt-financing costs. IX. Derivatives A derivative is a financial instrument whose characteristics and value depend upon the characteristics and value of some underlying asset typically commodity, bond, equity, currency, index, event etc. Advanced investors sometimes purchase or sell derivatives to manage the risk associated with the underlying security, to protect against fluctuations in value, or to profit from periods of inactivity or decline. Derivatives are often leveraged, such that a small movement in the underlying value can cause a large difference in the value of the derivative. X. Exchange Traded Funds An exchange-traded fund (or ETF) is an investment vehicle traded on stock exchanges, much like stocks. An ETF holds assets such as stocks or bonds and trades at approximately the same price as the net asset value of its underlying assets over the course of the trading day. Most ETFs track an index, such as the S&P 500 or Sensex. ETFs may be attractive as investments because of their low costs, tax efficiency, and stock-like features, and single security can track the performance of a growing number of different index funds (currently the NSE Nifty)

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XI. Gold ETF A Gold Exchange Traded Fund (ETF) is a financial instrument like a mutual fund whose value depends on the price of gold. In most cases, the price of one unit of gold ETF approximately reflects the price of 1 gram of gold. As the price of gold rises, the price of the ETF is also expected to rise by the same amount. Gold exchange-traded funds are traded on the major stock exchanges including Zurich, Mumbai, London, Paris and New York There are also closed-end funds (CEF's) and exchange-traded notes (ETN's) that aim to track the gold price.

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CHAPTER 5: TYPES OF CAPITAL MARKET

5. INTRODUCTION Any government or corporation requires capital (funds) to finance its operations and to engage in its own long-term investments. To do this, a company raises money through the sale of securities - stocks and bonds in the company's name. These are bought and sold in the capital markets. Thus there are two types of capital market as follows: » Debt or Bond Market » Stock or Equity Market

5.1.A. Debt or Bond Market The bond market (also known as the debt, credit, or fixed income market) is a financial market where participants buy and sell debt securities, usually in the form of bonds. References to the "bond market" usually refer to the government bond market, because of its size, liquidity, lack of credit risk and, therefore, sensitivity to interest rates.

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Because of the inverse relationship between bond valuation and interest rates, the bond market is often used to indicate changes in interest rates or the shape of the yield curve. Besides other causes, the decentralized market structure of the corporate and municipal bond markets, as distinguished from the stock market structure, results in higher transaction costs and less liquidity. Bond markets in most countries remain decentralized and lack common exchanges like stock, future and commodity markets. This has occurred, in part, because no two bond issues are exactly alike, and the variety of bond securities outstanding greatly exceeds that of stocks. With a large section of population underprivileged, the welfare commitments of the Indian state have to be supported by a large government borrowing program. The outstanding marketable government debt has grown from 4.3 trillion in 2000–01 to 29.9 trillion in 2012–13. The size of the annual borrowing of the central government through dated securities has grown from 1.0 trillion to 5.6 trillion during this period. It is no mean achievement to manage such large issuances in a non-disruptive manner in the post Fiscal Responsibility & Budget Management (FRBM) regime and declining SLR. The liquidity in the secondary market has also increased significantly from a daily average trading volume of 9 billion in February 2002 to 344 billion in March, 2013. The development of the debt and the derivatives market in India needs to be seen from the perspective of a central bank and a financial sector regulator which has a mandate to facilitate development of debt markets of the country. In many countries, debt market (both sovereign and corporate) is larger than equity markets. In fact, in matured economies, the debt market is three times the size of the equity market. However, in India like in emerging economies, the equity market has been more active, developed and has been the centre of attention be it in media or otherwise. Nevertheless, the Indian debt market has transformed itself into a much more vibrant trading field for debt instruments from the elementary market about a decade ago. Further, the corporate debt market in developed economies like US is almost 20% of their total debt market. In contrast, the corporate bond market (i.e. private corporate sector raising debt through public issuance in capital market), is only an insignificant part of the Indian debt market. Amongst the most important reforms is the development and deepening of the nonpublic debt capital market (DCM), where growth has been lack lustre in contrast to a soaring equity market. TYBFM Mithibai

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The stock of listed non-public-sector debt in India is currently estimated at about USD 21 billion, or about 2% of GDP, just a fraction of the public-sector debt outstanding (around 35% of GDP), or the equity market capitalisation (now close to 100% of GDP). To strengthen the Indian financial systems it is now pertinent to develop the environment for corporate debt market in India. The limitations of public finances as well as the systemic risk awareness of the banking systems in developing countries have led to a growing interest in developing bond markets. It is believed that well run and liquid corporate bond markets can play a critical role in supporting economic development in developing countries, both at the macroeconomic and microeconomic levels. Though the corporate debt market in India has been in existence since the Independence in 1947; it was only after 198586, following some debt market reforms that the state owned public enterprises (PSUs) began issuing PSU bonds. However, in the absence of a well functioning secondary market, such debt instruments remained highly illiquid and unpopular among the investing population at large. 5.1.B. Types of Bond Market in India » Corporate Bond Market » Municipal Bond Market » Government and Agency Bond Market » Funding Bond Market » Mortgage Backed and Collateral Debt Obligation Bond Market 5.1.C. Types of Debt Instruments There are various types of debt instruments available that one can find in Indian debt market. » Government Securities: It is the Reserve Bank of India that issues Government Securities or G-Secs on behalf of the Government of India. These securities have a maturity period of 1 to 30 years. G-Secs offer fixed interest rate, where interests are payable semi-annually.

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» Corporate Bonds: These bonds come from PSUs and private corporations and are offered for an extensive range of tenures up to 15 years. Comparing to G-Secs, corporate bonds carry higher risks, which depend upon the corporation, the industry where the corporation is currently operating, the current market conditions, and the rating of the corporation. However, these bonds also give higher returns than the G-Secs. » Certificate of Deposit: These are negotiable money market instruments. Certificate of Deposits (CDs), which usually offer higher returns than Bank term deposits, are issued in Demat form and also as a Usance Promissory Notes. There are several institutions that can issue CDs. Banks can offer CDs which have maturity between 7 days and 1 year. CDs from financial institutions have maturity between 1 and 3 years. There are some agencies like ICRA, FITCH, CARE, CRISIL etc. that offer ratings of CDs. CDs are available in the denominations of ` 1 Lac and in multiple of that. » Commercial Papers: There are short term securities with maturity of 7 to 365 days. CPs is issued by corporate entities at a discount to face value. » Zero Coupon bonds (ZCBs): ZCBs are available at a discount to their face value. There is no interest paid on these instruments but on maturity the face value is redeemed from the RBI. A bond of face value 100 will be available at a discount say at Rs 80 and the date of maturity is after two years. This implies an interest rate on the instrument. When the bonds are redeemed Rs 100 will be paid. The securities do not carry any coupon or interest rate i.e. unlike dated securities no interest is paid out every year. When the bond matures the face value is returned. The difference between the issue price (discounted price) and face value is the return on this security. 5.1.D. Recent developments in the corporate debt market in India In the recent past, the corporate debt market has seen a high growth of innovative asset-backed securities. The servicing of debt and related obligations for such instruments is backed by some sort of financial assets and/or credit support from a third party. Over the TYBFM Mithibai

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years greater innovation has been witnessed in the corporate bond issuances, like floating rate instruments, zero coupon bonds, convertible bonds, callable (put-able) bonds and stepredemption bonds. These innovative issues have provided a gamut of securities that caters to a wider segment of investors in terms of maintaining a desirable risk-return balance. Over the last five years, corporate issuers have shown a distinct preference for private placements over public issues. This has further cramped the liquidity in the market. The dominance of private placement in total issuances is attributable to a number of factors. » Lengthy issuance procedure for public issues, in particular, the information disclosure requirements » Costs of a public issue are considerably higher than those for a private placement » The quantum of money raised through private placements is typically larger than those that can be garnered through a public issue. Also, a corporate can expect to raise debt from the market at finer rates than the prime-lending rate of banks and financial institutions only with an AAA rated paper. This limits the number of entities that would find it profitable to enter the market directly. 5.1.E. Advantages of debt market The biggest advantage of investing in Indian debt market is its assured returns. The returns that the market offer is almost risk-free (though there is always certain amount of risks, however the trend says that return is almost assured). Safer are the government securities. On the other hand, there are certain amounts of risks in the corporate, FI and PSU debt instruments. However, investors can take help from the credit rating agencies which rate those debt instruments. Another advantage of investing in India debt market is its high liquidity. Banks offer easy loans to the investors against government securities. 5.1.G. Disadvantages of debt market As the returns here are risk free, those are not as high as the equities market at the same time. So, at one hand we are getting assured returns, but on the other hand, we are getting less return at the same time. Retail participation is also very less here, though increased recently. TYBFM Mithibai

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5.1.F. Different types of risks with regard to debt securities » Default Risk: This can be defined as the risk that an issuer of a bond may be unable to make timely payment of interest or principal on a debt security or to otherwise comply with the provisions of a bond indenture and is also referred to as credit risk. » Interest Rate Risk: It can be defined as the risk emerging from an adverse change in the interest rate prevalent in the market so as to affect the yield on the existing instruments. A good case would be an upswing in the prevailing interest rate scenario leading to a situation where the investors’ money is locked at lower rates whereas if he had waited and invested in the changed interest rate scenario, he would have earned more. » Reinvestment Rate Risk: It can be defined as the probability of a fall in the interest rate resulting in a lack of options to invest the interest received at regular intervals at higher rates at comparable rates in the market. » Counter Party Risk: It is the normal risk associated with any transaction and refers to the failure or inability of the opposite party to the contract to deliver either the promised security or the sale value at the time of settlement. » Price Risk: Refers to the possibility of not being able to receive the expected price on any order due to an adverse movement in the prices. 5.1.H. Bond market participants Bond market participants are similar to participants in most financial markets and are essentially either buyers (debt issuer) of funds or sellers (institution) of funds and often both. Participants include: » Institutional investors » Governments TYBFM Mithibai

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» Traders » Individuals Because of the specificity of individual bond issues, and the lack of liquidity in many smaller issues, the majority of outstanding bonds are held by institutions like pension funds, banks and mutual funds. In the India, approximately 10% of the market is currently held by private individuals. Mortgage-backed bonds accounted for around a quarter of outstanding bonds in the US in 2009 or some $9.2 trillion. The sub-prime portion of this market is variously estimated at between $500bn and $1.4 trillion. Treasury bonds and corporate bonds each accounted for a fifth of US domestic bonds. The outstanding value of international bonds increased by 13% in 2009 to $27 trillion. 5.1.I. Bond market size Amounts outstanding on the global bond market increased 10% in 2009 to a record $91 trillion. Domestic bonds accounted for 70% of the total and international bonds for the remainder. The US was the largest market with 39% of the total followed by Japan (18%). 5.1.J. Bond market volatility For market participants who own a bond, collect the coupon and hold it to maturity, market volatility is irrelevant; principal and interest are received according to a predetermined schedule. But participants who buy and sell bonds before maturity are exposed to many risks, most importantly changes in interest rates. When interest rates increase, the value of existing bonds falls, since new issues pay a higher yield. Likewise, when interest rates decrease, the value of existing bonds rise, since new issues pay a lower yield. This is the fundamental concept of bond market volatility: changes in bond prices are inverse to changes in interest rates. Fluctuating interest rates are part of a country's monetary policy and bond market volatility is a response to expected monetary policy and economic changes. 5.1.K. Bond investments Investment companies allow individual investors the ability to participate in the bond markets through bond funds, closed-end funds and unit-investment trusts. Exchange traded funds (ETFs) are another alternative to trading or investing directly in a bond issue. TYBFM Mithibai

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These securities allow individual investors the ability to overcome large initial and incremental trading sizes. 5.2.A. Equity or Stock Market A stock market or equity market is a public market (a loose network of economic transactions, not a physical facility or discrete entity) for the trading of company stock and derivatives at an agreed price; these are securities listed on a stock exchange as well as those only traded privately. The size of the world stock market was estimated at about 36.6 trillion USD at the beginning of October 2012. The total world derivatives market has been estimated at about $791 trillion face or nominal value, 11 times the size of the entire world economy. The value of the derivatives market, because it is stated in terms of notional values, cannot be directly compared to a stock or a fixed income security, which traditionally refers to an actual value. Moreover, the vast majority of derivatives 'cancel' each other out (i.e., a derivative 'bet' on an event occurring is offset by a comparable derivative 'bet' on the event not occurring). Many such relatively illiquid securities are valued as marked to model, rather than an actual market price. The stocks are listed and traded on stock exchanges which are entities of a corporation or mutual organization specialized in the business of bringing buyers and sellers of the organizations to a listing of stocks and securities together. The largest stock market in the United States, by market cap is the New York Stock Exchange, NYSE, while in Canada, it is the Toronto Stock Exchange. Major European examples of stock exchanges include the London Stock Exchange, Paris Bourse, and the Deutsche Börse. Asian examples include the Tokyo Stock Exchange, the Hong Kong Stock Exchange, the Shanghai Stock Exchange, and the Bombay Stock Exchange. In Latin America, there are such exchanges as the BM&F Bovespa. 5.2.B. Trading Participants in the stock market range from small individual stock investors to large hedge fund traders, who can be based anywhere. Their orders usually end up with a professional at a stock exchange, who executes the order.

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Some exchanges are physical locations where transactions are carried out on a trading floor, by a method known as open outcry. This type of auction is used in stock exchanges and commodity exchanges where traders may enter "verbal" bids and offers simultaneously. The other type of stock exchange is a virtual kind, composed of a network of computers where trades are made electronically via traders. Actual trades are based on an auction market model where a potential buyer bids a specific price for a stock and a potential seller asks a specific price for the stock. (Buying or selling at market means you will accept any ask price or bid price for the stock, respectively.) When the bid and ask prices match, a sale takes place, on a first-come-firstserved basis if there are multiple bidders or askers at a given price. The purpose of a stock exchange is to facilitate the exchange of securities between buyers and sellers, thus providing a marketplace (virtual or real). The exchanges provide real-time trading information on the listed securities, facilitating price discovery. 5.2.C. Market participants A few decades ago, worldwide, buyers and sellers were individual investors, such as wealthy businessmen, with long family histories (and emotional ties) to particular corporations. Over time, markets have become more "institutionalized"; buyers and sellers are largely institutions (e.g., pension funds, insurance companies, mutual funds, index funds, exchange-traded funds, hedge funds, investor groups, banks and various other financial institutions). The rise of the

institutional investor has brought with it some

improvements in market operations. Thus, the government was responsible for "fixed" (and exorbitant) fees being markedly reduced for the 'small' investor, but only after the large institutions had managed to break the brokers' solid front on fees. (They then went to 'negotiated' fees, but only for large institutions. However, corporate governance (at least in the West) has been very much adversely affected by the rise of (largely 'absentee') institutional 'owners'.

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5.3.D. Importance or Functions of Stock Exchange : We discuss about major functions of stock exchange under these headings:» Providing a ready market The organization of stock exchange provides a ready market to speculators and investors in industrial enterprises. It thus, enables the public to buy and sell securities already in issue. » Providing a quoting market prices It makes possible the determination of supply and demand on price. The very sensitive pricing mechanism and the constant quoting of market price allows investors to always be aware of values. This enables the production of various indexes which indicate trends etc. » Providing facilities for working It provides opportunities to Jobbers and other members to perform their activities with all their resources in the stock exchange. » Safeguarding activities for investors The stock exchange renders safeguarding activities for investors which enables them to make a fair judgment of a securities. Therefore directors have to disclose all material facts to their respective shareholders. Thus innocent investors may be safeguard from the clever brokers. » Operating a compensation fund It also operate a compensation fund which is always available to investors suffering loss due the speculating dealings in the stock exchange. » Creating the discipline Its members controlled under rigid set of rules designed to protect the general public and its members. Thus this tendency creates the discipline among its members in social life also. » Checking functions New securities checked before being approved and admitted to listing. Thus stock exchange exercises rigid control over the activities of its members. TYBFM Mithibai

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» Adjustment of equilibrium The investors in the stock exchange promote the adjustment of equilibrium of demand and supply of a particular stock and thus prevent the tendency of fluctuation in the prices of shares. » Maintenance of liquidity The bank and insurance companies purchase large number of securities from the stock exchange. These securities are marketable and can be turned into cash at any time. Therefore banks prefer to keep securities instead of cash in their reserve .This it facilities the banking system to maintain liquidity by procuring the marketable securities. » Promotion of the habit of saving Stock exchange provide a place for saving to general public. Thus it creates the habit of thrift and investment among the public. This habit leads to investment of funds incorporate or government securities. The funds placed at the disposal of companies are used by them for productive purposes. » Refining and advancing the industry Stock exchange advances the trade , commerce and industry in the country. It provides opportunity to capital to flow into the most productive channels. Thus the flow of capital from unproductive field to productive field helps to refine the large scale enterprises. » Promotion of capital formation It plays an important part in capital formation in the country. Its publicity regarding various industrial securities makes even disinterested people feel interested in investment. » Increasing Govt. Funds The govt. can undertake projects of national importance and social value by raising funds through sale of its securities on stock exchange.

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CHAPTER 6: EQUITY MARKET IN INDIA

The Indian Equity Market is more popularly known as the Indian Stock Market. The Indian equity market has become the third biggest after China and Hong Kong in the Asian region. The Indian financial markets have also grown considerably. The market capitalization of the equity market (National Stock Exchange) has grown from approximately 6.5 trillion in2000–01 to approximately 60 trillion in 2009–10 and further to approximately 61 trillion in 2011–12.The market was slow since early 2007 and continued till the first quarter of 2009. 6.1.A. Importance of Equity Market in India »Raising Capital For Businesses: The Stock Exchange provide companies with the facility to raise capital for expansion through selling shares to the investing public. »Facilitating Company Growth: A takeover bid or a merger agreement through the stock market is one of the simplest and most common ways for a company to grow by acquisition or fusion. »Creating Investment Opportunities For Small Investors: As opposed to other businesses that require huge capital outlay, investing in shares is open to both the large and small stock investors because a person buys the number of shares they can afford. Therefore the Stock Exchange provides the opportunity for small investors to own shares of the same companies as large investors. »Barometer of the Economy: At the stock exchange, share prices rise and fall depending, largely, on market forces. Share prices tend to rise or remain stable when companies and the economy in general show signs of stability and growth. An economic recession, depression, or financial crisis could eventually lead to a stock market crash. Therefore the movement of share prices and in general of the stock indexes can be an indicator of the general trend in the economy.

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» Speculation: The stock exchanges are also fashionable places for speculation. In a financial context, the terms "speculation" and "investment" are actually quite specific. For instance, although the word "investment" is typically used, in a general sense, to mean any act of placing money in a financial vehicle with the intent of producing returns over a period of time, most ventured money—including funds placed in the world's stock markets—is actually not investment but speculation. 6.2. Major Stock Exhanges of India 6.2.A. Bombay Stock Exchange (BSE) : BSE is the oldest stock exchange in Asia. The extensiveness of the indigenous equity broking industry in India led to the formation of the Native Share Brokers Association in 1875,

which

Bombay

later

Stock

became Exchange

Limited (BSE). BSE is widely recognized due to its pivotal and preeminent role in the development of the Indian capital market. In

1995,

the

trading

system transformed from open outcry system to an online screen-based order-driven trading system. The exchange opened up for foreign ownership (foreign institutional investment). » Allowed Indian companies to raise capital from abroad through ADRs and GDRs. » Expanded the product range (equities/derivatives/debt). » Introduced the book building process and brought in transparency in IPO issuance. » Depositories for share custody (dematerialization of shares). » Internet trading (e-broking).

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BSE has a nation-wide reach with a presence in more than 450 cities and towns of India. BSE has always been at par with the international standards. It is the first exchange in India and the second in the world to obtain an ISO 9001:2000 certifications. The equity market capitalization of the companies listed on the BSE was US$1.63 trillion as of December 2011, making it the 4th largest stock exchange in Asia and the 8th largest in the world. The BSE has the largest number of listed companies in the world. As of December 2011, there are over 5,085 listed Indian companies and over 8,196 scrips on the stock exchange, the Bombay Stock Exchange has a significant trading volume. Though many other exchanges exist, BSE and the National Stock Exchange of India account for the majority of the equity trading in India. 6.2.B. National Stock Exchange (NSE) : With the liberalization of the Indian economy, it was found inevitable to lift the Indian stock market trading system

on

par

with

the

international standards. On the basis of the recommendations of high

poweredPherwani

Committee, the National Stock Exchange was incorporated in 1992 by Industrial Development Bank of India (IDBI), Industrial Credit and Investment Corporation of India(ICICI), Industrial Finance Corporation of India (IFCI), all Insurance Corporations, selected commercial banks and others. Trading at NSE takes place through a fully automated screen-based trading mechanism which adopts the principle of an order-driven market. Trading members can stay at their offices and execute the trading, since they are linked through a communication network. The prices at which the buyer and seller are willing to transact will appear on the screen. When the prices match the transaction will be completed and a confirmation slip will be printed at the office of the trading member. NSE has several advantages over the traditional trading exchanges. TYBFM Mithibai

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They are as follows: » NSE brings an integrated stock market trading network across the nation. » Investors can trade at the same price from anywhere in the country since inter-market operations are streamlined coupled with the countrywide access to the securities. » Delays in communication, late payments and the malpractice’s prevailing in the traditional trading mechanism can be done away with greater operational efficiency and informational transparency in the stock market operations, with the support of total computerized network. 6.2.C. Over The Counter Exchange of India (OTCEI) : The

traditional

trading

mechanism prevailed in the Indian stock markets gave way to many functional absence

inefficiencies, of

liquidity,

such

as,

lack

of

transparency, unduly long settlement periods

and

benami

transactions,

which affected the small investors to a great extent. To provide improved services to investors, the country's first ring less, scrip less, electronic stock exchange -OTCEI - was created in 1992 by country's premier financial institutions - Unit Trust of India (UTI), Industrial Credit and Investment Corporation of India (ICICI), Industrial Development Bank of India (IDBI), SBI Capital Markets, Industrial Finance Corporation of India (IFCI), General Insurance Corporation and its subsidiaries and CanBank Financial Services. Compared to the traditional Exchanges, OTC Exchange network has the following advantages : » OTCEI has widely dispersed trading mechanism across the country which provides greater liquidity and lesser risk of intermediary charges. » Greater transparency and accuracy of prices is obtained due to the screen-based scrip less trading. » Since the exact price of the transaction is shown on the computer screen, the investor gets to know the exact price at which she/he is trading. » Faster settlement and transfer process compared to other exchanges. TYBFM Mithibai

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CHAPTER 7: DERIVATIVE MARKETS IN INDIA

The emergence of the market for derivative products such as futures and forwards can be traced back to the willingness of risk-averse economic agents to guard themselves against uncertainties arising out of price fluctuations in various asset classes. This instrument is used by all sections of businesses, such as corporate, SMEs, banks, financial institutions, retail investors, etc. 7.1.A. Participants Of Derivative Markets » Hedgers face risk associated with the price of an asset. They belong to the business community dealing with the underlying asset to a future instrument on a regular basis. They use futures or options markets to reduce or eliminate this risk. » Speculators have a particular mindset with regard to an asset and bet on future movements in the asset’s price. Futures and options contracts can give them an extra leverage due to margining system. » Arbitragers are in business to take advantage of a discrepancy between prices in two different markets. For example, when they see the futures price of an asset getting out of line with the cash price, they will take offsetting positions in the two markets to lock in a profit. 7.1.B. Major types of derivatives: I. Forwards: A forward contract is an agreement to buy or sell an asset on a specified date for a specified price. One of the parties to the contract assumes a long position and agrees to buy the underlying asset on a certain specified future date for a certain specified price. The other party assumes a short position and agrees to sell the asset on the same date forthe same price, other contract details like delivery date, price and quantity are negotiatedbilaterally by the parties to the contract. The forward contracts are normally traded outside the exchange. The salient features of forward contracts are:

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» They are bilateral contracts and hence exposed to counter-party risk. »Each contract is custom designed, and hence is unique in terms of contract size, expiration date and the asset type and quality. »The contract price is generally not available in public domain. »On the expiration date, the contract has to be settled by delivery of the asset, or net settlement. II. Futures: Futures contract is a standardized transaction taking place on the futures exchange. Futures market was designed to solve the problems that exist in forward market. A futures contract is an agreement between two parties, to buy or sell an asset at a certain time in the future at a certain price, but unlike forward contracts, the futures contracts are standardized and exchange traded To facilitate liquidity in the futures contracts, the exchange specifies certain standard quantity and quality of the underlying instrument that can be delivered, and a standard time for such a settlement. Futures’ exchange has a division or subsidiary called a clearing house that performs the specific responsibilities of paying and collecting daily gains and losses as well as guaranteeing performance of one party to other. A futures' contract can be offset prior to maturity by entering into an equal and opposite transaction. More than 99% of futures transactions are offset this way. Yet another feature is that in a futures contract gains and losses on each party’s position is credited or charged on a daily basis, this process is called daily settlement or marking to market. Any person entering into a futures contract assumes a long or short position, by a small amount to the clearing house called the margin money The standardized items in a futures contract are: » Quantity of the underlying » Quality of the underlying » The date and month of delivery » The units of price quotation and minimum price change » Location of settlement Futures Terminology » Spot Price: The price at which an asset trades in the spot market. TYBFM Mithibai

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» Futures Price: The price at which the futures contract trades in the futures market. » Contract Cycle: The period over which a contract trades. The index futures contracts on the NSE have one month, two months and three months expiry cycles that expires on the last Thursday of the month. Thus a contract which is to expire in January will expire on the last Thursday of January. » Expiry Date: It is the date specified in the futures contract. This is the last day on which the contract will be traded, at the end of which it will cease to exist. » Contract Size: It is the quantity of asset that has to be delivered under one contract. For instance, the contract size on NSE’s futures market is 200 Nifties. » Basis: In the context of financial futures, basis can be defined as the futures price minus the spot price. There will be different basis for each delivery month, for each contract. In a normal market, basis will be positive; this reflects that the futures price exceeds the spot prices. » Cost Of Carry: The relationship between futures price and spot price can be summarized in terms of what is known as the cost of carry. This measures the storage cost plus the interest paid to finance the asset less the income earned on the asset. » Initial Margin: The amount that must be deposited in the margin account at the time when a futures contract is first entered into is known as initial margin. » Mark To Market: In the futures market, at the end of each trading day, the margin account is adjusted to reflect the investor’s gain or loss depending upon the futures closing price. This is called Marking-to-market. TYBFM Mithibai

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» Maintenance Margin: This is somewhat lower than the initial margin. This is set to ensure that the balance in the margin account never becomes negative. If the balance in the margin account falls below the maintenance margin, the investor receives a margin call and is expected to top up the margin account to the initial margin level before trading commences on the next day. Advantages Of Stock Futures Trading: » Investing in futures is less costly as there is only initial margin money to be deposited. » A large array of strategies can be used to hedge and speculate; with smaller cash outlay there is greater liquidity. III. Options: An option is a contract, or a provision of a contract, that gives one party (the option holder) the right, but not the obligation, to perform a specified transaction with another party (the option issuer or option writer) according to the specified terms. The owner of a property might sell another party an option to purchase the property any time during the next three months at a specified price. For every buyer of an option there must be a seller. The seller is often referred to as the writer. As with futures, options are brought into existence by being traded, if none is traded, none exists; conversely, there is no limit to the number of option contracts that can be in existence at any time. As with futures, the process of closing out options positions will cause contracts to cease to exist, diminishing the total number. Thus an option is the right to buy or sell a specified amount of a financial instrument at a pre-arranged price on or before a particular date. There are two options which can be exercised: » Call option, the right to buy is referred to as a call option. » Put option, the right to sell is referred as a put option.

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CHAPTER 8: COMMODITY DERIVATIVES IN INDIA Commodity derivatives in India were established by the Cotton Trade Association in 1875, since then the market has suffered from liquidity problems and several regulatory dogmas. However in the recent times the commodity trade has grown significantly and today there are 25 derivatives exchanges in India which include four national commodity exchanges; National Commodity and Derivatives Exchange (NCDEX), National MultiCommodity Exchange of India (NCME), National Board of Trade (NBOT) and Multi Commodity Exchange (MCX) 8.1. Major Commodity Derivative exchanges in India 8.1.A. NCDEX It is the largest commodity derivatives exchange in India and is the only commodity exchange promoted by national level institutions. NCDEX was incorporated in 2003 Under the Companies Act, 1956 and is regulated by the Forward Market Commission in respect of the futures trading in commodities. NCDEX is located in Mumbai. NCDEX is a closely held private company which is promoted by national level institutions and has an independent Board of Directors and professionals not having vested interest in commodity markets. 8.1.B. MCX MCX is recognised by the government of India and is amongst the world’s top three bullion exchanges and top four energy exchanges. MCX’s headquarter is in Mumbai and facilitates online trading, clearing and settlement operations for the commodities futures market in the country. » MCX is India's No. 1 commodity exchange with 83% market share in 2009 » The exchange's main competitor is National Commodity & Derivatives Exchange Ltd. » The highest traded item is gold. » As of early 2010, the normal daily turnover of MCX was about US$ 6 to 8 billion. » MCX now reaches out to about 800 cities and towns in India with the help of about 126,000 trading terminals. » MCX COMDEX is India's first and only composite commodity futures price index. TYBFM Mithibai

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CHAPTER 9: SECURITIES EXCHANGE BOARD OF INDIA

9.1.A. History Initially SEBI was a non statutory body without any statutory power. However in 1995, the SEBI was given additional statutory power by the Government of India through an amendment to the securities and Exchange Board of India Act 1992. In April, 1998 the SEBI was constituted as the regulator of capital market in India under a resolution of the Government of India. 9.1.B. Introduction Securities and Exchange Board of India (SEBI) has been established with the prime mandate to protect the interest of investors in securities. The Securities and Exchange Board of India (SEBI) is the regulatory authority established under the SEBI Act 1992, in order to protect the interests of the investors in securities as well as promote the development of the capital market. It involves regulating the business in stock exchanges; supervising the working of stock brokers, share transfer agents, merchant bankers, underwriters, etc; as well as prohibiting unfair trade practices in the securities market. An investor enjoys investing, if » He knows how to invest; » He has full knowledge of the market; » The market is safe and there are no miscreants; and » There are arrangements for redressal in case of grievances.

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9.1.C. The Basic Objectives of the Board » To protect the interests of investors in securities; » To promote the development of Securities Market; » To regulate the securities market and » For matters connected therewith or incidental thereto. 9.1.D. Responsibilities SEBI has to be responsive to the needs of three groups, which constitute the market: » The issuers of securities » The investors » The market intermediaries. 9.1.E. Role/ Functions of SEBI The role or functions of SEBI are discussed below: » To protect the interests of investors through proper education and guidance as regards their investment in securities. For this, SEBI has made rules and regulation to be followed by the financial intermediaries such as brokers, etc. SEBI looks after the complaints received from investors for fair settlement. It also issues booklets for the guidance and protection of small investors. » To regulate and control the business on stock exchanges and other security markets. For this, SEBI keeps supervision on brokers. Registration of brokers and sub-brokers is made compulsory and they are expected to follow certain rules and regulations. Effective control is also maintained by SEBI on the working of stock exchanges. » To provide suitable training to intermediaries. » To register and regulate the working of mutual funds including UTI (Unit Trust of India). SEBI has made rules and regulations to be followed by mutual funds. The purpose is to maintain effective supervision on their operations & avoid their unfair and anti-investor activities. » To promote self-regulatory organization of intermediaries. SEBI is given wide statutory powers. However, self regulation is better than external regulation. Here,

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the function of SEBI is to encourage intermediaries to form their professional associations and control undesirable activities of their members. » To regulate and control the fraudulent & unfair practices which may harm the investors and healthy growth of capital market. » To issue guidelines to companies regarding capital issues. Separate guidelines are prepared for first public issue of new companies, for public issue by existing listed companies and for first public issue by existing private companies. SEBI is expected to conduct research and publish information useful to all market players (i.e. all buyers and sellers). » To conduct inspection, inquiries & audits of stock exchanges, intermediaries and selfregulating organizations and to take suitable remedial measures wherever necessary. This function is undertaken for orderly working of stock exchanges & intermediaries. » To restrict insider trading activity through suitable measures. This function is useful for avoiding undesirable activities of brokers and securities scams.

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CHAPTER 10: RESEARCH METHODLOGY To be able to estimate the reliability of a report, the methods which it is based upon have to be considered. Hence, this chapter, methodology, will give the reader an insight into my research process, selection and data collection.

10.1 OBJECTIVE OF THE STUDY. The main objective of research is to identify the awareness utilisation patterns of the people. About what they think about Capital Markets and are they aware or not about its benefits. The objective of present study can be accomplished by conducting a systematic research. The following are the objectives of the study:

» To understand the position of capital markets in India. » To understand the different types of Capital Markets. » To find out the future of Capital Markets in India. » To study the need of Capital Market. » To check the awareness among people regarding Capital Markets. » To study about benefits provided by Capital Market. » To find out conclusion and give Suggestions.

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10.2 SCOPE OF STUDY. Is mostly to identify weather the customers are aware of Capital Market or not and how much they are willing to save to invest in the markets and what are the different perceptions having towards Capital Markets.

Significance Of The Study. This dissertation presents review of capital market situation in India - the opportunities it provides, the challenges it faces and the concerns it raises. A discussion of the Capital Market for senior citizens and for low-income people is also done. The paper covers following areas:

» Capital Market scenario in India » Capital Market for the low-income people. » Types of Capital Market in India. » Need of Capital Market. » Role of Regulators in Capital Market. » Capital Market products available in India. 10.3 DATA COLLECTION Market research requires two kinds of data that is primary data and secondary data. Primary Sources: Primary data is collected using a well structured questionnaire, surveys etc. Survey is carried out in 2 steps 1) First visit 2) Appointment or personal interview Secondary Sources: Secondary Data is data collected by someone other than the user.Common sources of secondary data includes organizational records and qualitative methodologies or qualitative research. The data for study has been collected through various sources:

» Books » Internet sources

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CHAPTER 11: ANALYSIS OF PRIMARY DATA QUESTIONNAIRE Name

:

Occupation

:

1. What is your age?  BELOW 20  21-40  41-50  Above 50 2. Products offered through primary and secondary markets? »

Mutual Fund

Yes

No

»

Bonds

Yes

No

»

Insurance

Yes

No

»

Equity Shares

Yes

No

»

Fixed Deposits

Yes

No

»

Commodity markets

Yes

No

»

Gold & Silver

Yes

No

»

Real Estate

Yes

No

»

Private equity

Yes

No

3. How do you get information regarding these capital markets?  Advertisement  Company Sales force  Friends / Relatives  Magazines /Newspaper If any other please specify……………………………… 4. Who is the controller of capital markets in India?  SEBI  IRDA  AMFI  RBI

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5. What are the factors which you consider while investing in capital markets?  Return

(capital

appreciation)

 Liquidity  Convenience Risk

 Tax Saving 6. You like investing in financial products through?  Primary market  Secondary market 7. How will you invest your money in any secondary market?  Through any stock broking company.  Through Banks 8. What is your annual income?  1lac to 3 lacs  3lacs to 5lacs  5 lacs to 10lacs  more than 10 lacs 9. How long you prefer to keep your money when invested through secondary market?  Less than 6 months  6 months to 1 year  1 year to 3 years  More than 3 years 10. How much return you expect from secondary market investment?  10% to 20%  20% to 30%  30% to 50%  More than 50%

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INDIAN CAPITAL MARKET|2014-15 PRIMARY DATA ANALYSIS-QUESTIONNAIRE FINDINGS Sample size-30 1. What is your age?  BELOW 20

 41-50

 21-40

 Above 50

AGE GROUP 12 10 8 6

AGE GROUP

4 2 0 BELOW 20

21-40

41-50

ABOVE 50

2. Products offered through primary and secondary markets? »

Mutual Fund

Yes

No

»

Bonds

Yes

No

»

Insurance

Yes

No

»

Equity Shares

Yes

No

»

Fixed Deposits

Yes

No

»

Commodity markets

Yes

No

»

Gold & Silver

Yes

No

»

Real Estate

Yes

No

»

Private equity

Yes

No

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30 25 20 15 10

Yes

5

No

0

3. How do you get information regarding these capital markets?  Advertisement

 Friends / Relatives

 Company Sales force

 Magazines /Newspaper

If any other please specify………………………………

Information 9 8 7 6 5 4 3 2 1 0

Information

4. Who is the controller of capital markets in India?  SEBI  IRDA  AMFI  RBI TYBFM Mithibai

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Controller 25 20 15 Controller

10 5 0 SEBI

IRDA

AMFI

RBI

5. What are the factors which you consider while investing in capital markets?  Return

 Liquidity

(capital

 Convenience Risk

appreciation)  Tax Saving

20 18 16 14 12 10 8 6 4 2 0 Returns

Tax Saving

Liquidity

Convinience

Risk

6. You like investing in financial products through?  Primary market  Secondary market

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Prefrence 20 18 16 14 12 10 8 6 4 2 0

Prefrence

Primary Market

Secondary Market

7. How will you invest your money in any secondary market?  Through any stock broking company.  Through Banks

How do you invest 25 20 15 How do you invest

10 5 0 Stock Broking Company

Through Banks

8. What is your annual income?  1lac to 3 lacs  3lacs to 5lacs  5 lacs to 10lacs  more than 10 lacs

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Series 1 14 12 10 8 6

Series 1

4 2 0 1lac to 3 lacs

3lacs to 5 lacs

5lacs to 10 lacs

more than 10 lacs

9. How long you prefer to keep your money when invested through secondary market?  Less than 6 months

 1 year to 3 years

 6 months to 1 year

 More than 3 years

Investment Horizon 12 10 8 6 Investment Horizon 4 2 0 Less than 6 6 months to 1 year to 3 more than 3 months 1 year years years

10. How much return you expect from secondary market investment?  10% to 20%

 More than 50%

 20% to 30%  30% to 50% TYBFM Mithibai

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Returns 12 10 8 6

Returns

4 2 0 10%to 20%

20% to 30%

30% to 50% more than 50%

From the above questionnaire and survey, we can conclude by saying that each age category has their own investment, risk, time horizon and liquidity perspectives. When considered about the products offered through different markets majority of the sample population is aware of general instruments like mutual funds ,bonds , insurance , equity shares and fixed deposits. A general awareness about other products like commodity markets, forex investment should be encouraged. People gathering information through advertisements, company sales force , Friends and relatives, magazines and others include brokers and most of the people like investing via registered brokers established in the market. The general consensus of people covered in the survey likes to invest via secondary market. The returns expected from the market varies according to the time horizon and risk preference of individuals. People expecting 10 -20% and 20-30% of returns forms the major part of people participating in the market .

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INDIAN CAPITAL MARKET|2014-15 CONCLUSION

Reforms in the securities market, particularly establishment and empowerment of SEBI, allocation of resources by market, screen based nation-wide trading, dematerialization and electronic transfer of securities, availability of derivatives of securities, etc. have greatly improved the regulatory framework and efficiency and safety of issue, trading clearing and settlement of securities. However, efforts are on to improve working of the securities market further. The main change which has witnessed the Indian securities market is that earlier trading in both primary market and secondary market was done physically and is now replaced by electronic systems available for trading. With an strengthening of the regulatory system and introduction of various Acts has empowered the Indian securities market and therefore has become a better option for investing the resources, we can also see that no of people investing in securities be it Mutual Funds, Derivatives, in Equity Market, in Debt Market is on increase and will also further increase with more sophistication of technology and not to forget legislation authorities protecting rights of investors. Security exchange board of India SEBI have been playing an important role in regulating the business in stock exchanges and any other securities markets and to protect the interests of investors. The emergence of the securities market resulted as a major source of finance for trade and industry across India. A growing number of companies are accessing the securities market rather than depending on loans from FIs/banks. Moreover the Indian securities market is contributing to Indian GDP growth immensely. The capital mobilizations in both primary market and secondary market have been witnessing phenomenal growth over the years. Indian securities market is getting increasingly integrated with the rest of the world. Indian companies have been permitted to raise resources from abroad through issue of ADRs, GDRs, FCCBs and ECBs. ADRs/GDRs have two-way fungibility. Indian companies are permitted to list their securities on foreign stock exchanges by sponsoring ADR/GDR issues against block shareholding. TYBFM Mithibai

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INDIAN CAPITAL MARKET|2014-15 BIBLIOGRAPHY

» www.sbimf.com » www.moneycontrol.com » www.amfiindia.com » www.onlineresearchonline.com » www.mutualfundsindia.com » www.sebi.gov.in » www.rbi.gov.in » Beginners guide to capital Markets » Capital market and securities laws (module ii paper 6) » www.investopedia.com » Capital Markets and NSDL-Overview National - Handbook for NSDL Depository Operations Module

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Blackbook Project- Indian Capital Market

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