MODULE III

REGULATION OF INDIAN CAPITAL MARKETS

Genesis

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• Spreading the investment risk and access to various source of capital by –– Investor and

– Issuer of capital

• Price determination – reduce the cost of capital

• Volatility

Factors

• Lack of adequate instruments

• Inadequate financial disclosure

• Lack of developed secondary market

• Insiders trading menace

• Price manipulation at new issue

• Abolition of CCI

• Unofficial trading

• Uncontrolled broking

• Lack of institutional support

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Regulatory framework

• CIC –Capital Issues Control – Inadequate t control capital market

– Changing industrial environment

– Companies Act requirement

• Need of a larger body

• Acting as unifying force

• Protecting investors and issuer of capital

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SEBI

• Securities and Exchange Board of India

• Set up on April 12, 1988• Non statutory body• To protect the interest of

investor, and• Promoting and development of

the regulation of securities market in India

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Functions of SEBI

• Regulating stock exchanges

• Registration and regulation of stock brokers

• Protecting the interest of investors

• Regulating the intermediaries

• Regulations of stock markets – both primary and secondary

• Regulation of other parties to the capital issue

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SEBI Regulations

• Insider trading regulation –– Disclosure of books of accounts

– Publishing of price sensitivity

• Regulating portfolio managers– Registration with SEBI

– Capital adequacy norms – 50 lakhs

• Disclosure and investor protection– Par issue – new company

– Draft prospectus – submitted to SEBI

– Free pricing – existing company

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Contd..,– FCDs – no conversion beyond 36 months– Credit rating – mandatory for Debt issue– Debenture issue – mandatory disclosure of

debt ratio, service charges etc– Reservation – not less than 20% to public– Compulsory subscription – 20% by

promoters

• Surveillance of stock exchanges• Clearing house –

– SE’s to set up clearing house– Provide trade guarantee– Transacting through depositories

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Regulations before SEBI

• Securities Exchanges Act 1934

• Bombay Securities Control Act 1926 (BSCC Act)

• Defence of India Rule 1943

• Capital Issue Control Act 1947 (CIC Act)

• Securities Contracts (Regulations) Rules 1957

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Companies Act 1956

• Part I – constitution of CLB• Part II – Articles and Memorandum• Part III – issues of capital activity i.e

capital markets– Sec 55 – 68 – prospectus and material

information– Sec 77 – buy back of shares

• Part IV – share capital & debenture• Part V – registration charges• Part VI – general provisions of company• Part VII – winding up of company

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Committee on Regulatory Framework

• The Malegam committee – 1995 – Disclosure in prospectus

– Transparent accounting procedure

– Madatory disclosure – tech, mkt etc

– Promoters group

– Disclosure of stock market data

– Justification for price

– Right issue

– Promoter issue

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NIM

• New issue market – primary market

• Secondary market

• Performance of secondary market & NIM

• Performance of NIM & secondary market

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Services of NIM

• The transfer – resources

• Investigative services –– Technical analysis

– Economic analysis

– Financial analysis

• Advisory services –

• The guarantee – underwriting

• Distribution – brokers and dealers

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NIM vs Secondary market

• Issue of securities

• Location

• Transfer of securities

• Entry of companies

• Administration

• Regulation within the company

• Price movement in SE

• Aim

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Methods of marketing new issue

• Pure Prospectus Method• Exclusive Subscription• Issue Price• Underwriting

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Methods of new issue

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General guidelines for New Issue

• New Company- At par

• Existing company- Issue price should be justified as per MalegamCommittee’s recommendations– EPS for last 3 years & comparison of pre-

issue price to earning ratio to the P/E of the industry

– Latest NAV

– Minimum return on increased net worth to maintain pre-issue EPS.

• SEBI does not play any role in price fixation

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Principal steps of a public issue

• Drafting, Printing of prospectus & application forms

• Salient features of prospectus

• Initiating allotment procedure

• Brokers to the issue

• Listing the issue

• Publication in news papers

• Allotment of shares

• Underwriters liability

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Private Placement• A private placement is a direct private

offering of securities to a limited number of sophisticated investors.

• It is the opposite of a public offering.

• Investors in privately placed securities include

– insurance companies,

– pension funds,

– mutual funds.

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• Securities issued as private placements include debt, equity, Preference shares.

• Advantages

– Cost effective

– Time Effective

– Flexible

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Principal steps of private placement

• Terms & conditions - Value of the instrument, Yield rate, Issue & redemption details

• Credit rating- Mandatory

• Confidential information memorandum

• Trustees to the issue ( Banks may be appointed as trustees to the issue)

• Pre-launching formality

• Pricing of the issue

• Post-issue steps

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Bought out deals (Offer for sale)

• Process by which promoter places shares with an investment bankers who in turn offers to the public at a later date

• Bought out dealer decides the price after analysing the viability, gestation period, Promoters background & future projections©

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Contd..,

• Advantages-– Quick money, – Less cost of raising funds, – Low risk for investors

• Disadvantage-– Difficult for the promoters to

project their image

• Steps In case of Offer for Sale– Agreement with the merchant

banker– Registration with stock exchange– Default – Arbitration commitee

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Rights issue

• A rights issue is basically when a company offers existing shareholders a right to purchase additional shares of the company at a given price, which is at a discount to the prevailing market price of the stock, to make the offer enticing for the shareholder and to ensure that the rights offer is fully subscribed to.

• Shareholder has the option of applying for additional shares also i.e. over and above what he is entitled to.

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• Conditions to rights issue– Must be offered to the existing

shareholders

– Notice must be issued to specify the number of shares issued

– Minimum of 15 days time must be gives to the investors to accept the rights.

• Advantages of a rights issue– It leads to increased liquidity and

affordability of the stock owing to reduced stock price and higher equity base.

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Bonus issue

• Issuing of securities to the existing share holders as bonus

• It may be issued as a mandatory or statutory requirement or as voluntary act of company

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Right issue vs. Bonus issue

• Payment

• Privilege issue

• Paid up shares

• Minimum subscription

• Separate account

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Book Building• Book Building is basically a capital

issuance process used in Initial Public Offer (IPO) which aids price and demand discovery.

• Its selling of the shares to the public atan acceptable price through merchantbankers

• A book building process may mention thefloor price of the offer. The merchantbanker then records the number ofoffers that have been received and theoffer prices along with the name of theinvestor who is making the offer

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Contd..,

• The process aims at tapping both wholesale and retail investors.

• The offer/issue price is then determined after the bid closing date based on certain evaluation criteria.

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Stock option or ESOPS

• It is a voluntary scheme of company to encourage its employees to participate in company

• It can also be offered as an incentive to the employees

• Useful to the company whose activity is dominantly based on the talent of the employees©

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SEBI guidelines

• Issue at discount – allowed• Approval of shareholders through

special resolution• Maximum limit – if more than 1% special

approval in AGM • Superintendence – compensation

committee of BOD• Eligibility – all permanent employees but

not promoters• Directors report

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