cm module iii

8/6/2019 Cm Module III

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MODULE III

REGULATION OF INDIAN

CAPITAL MARKETS


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Genesis

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Spreading the investment risk andaccess to various source of capital by Investor and

Issuer of capital

Price determination reduce the cost ofcapital

Volatility


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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 ofcapital

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SEBI

Securities and Exchange Boardof India

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

investor, and Promoting and development of

the regulation of securitiesmarket in India

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Functions of SEBI

Regulating stock exchanges

Registration and regulation of stockbrokers

Protecting the interest of investors

Regulating the intermediaries

Regulations of stock markets bothprimary 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% bypromoters

Surveillance of stock exchanges

Clearing house SEs 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) Rules1957

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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 RegulatoryFramework

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 MalegamCommittees recommendations EPS for last 3 years & comparison of pre-

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

Latest NAV

Minimum return on increased net worth tomaintain 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 privateoffering of securities to a limitednumber of sophisticated investors.

It is the opposite of a public offering.

Investors in privately placed securitiesinclude

insurance companies,

pension funds, mutual funds.

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Securities issued as privateplacements include debt, equity,Preference shares.

Advantages

Cost effective

Time Effective

Flexible

Contd..,

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Principal steps of private placement

Terms & conditions - Value of theinstrument, Yield rate, Issue &redemption details

Credit rating- Mandatory Confidential information memorandum

Trustees to the issue ( Banks may beappointed 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 placesshares with an investment bankers whoin turn offers to the public at a later

date Bought out dealer decides the price

after analysing the viability, gestation

period, Promoters background & futureprojections

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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 companyoffers existing shareholders a right topurchase additional shares of the companyat a given price, which is at a discount tothe prevailing market price of the stock, tomake the offer enticing for theshareholder and to ensure that the rightsoffer is fully subscribed to.

Shareholder has the option of applying foradditional shares also i.e. over and abovewhat he is entitled to.


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Conditions to rights issue Must be offered to the existingshareholders

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 reducedstock price and higher equity base.

Contd..,

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Bonus issue

Issuing of securities to the existingshare holders as bonus

It may be issued as a mandatory orstatutory requirement or as voluntaryact 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 PublicOffer (IPO) which aids price anddemand discovery.

Its selling of the shares to the public at

an acceptable price through merchantbankers A book building process may mention the

floor price of the offer. The merchant

banker 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 bothwholesale and retail investors.

The offer/issue price is then

determined after the bid closing datebased on certain evaluation criteria.

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Stock option or ESOPS

It is a voluntary scheme of company toencourage its employees to participatein company

It can also be offered as an incentive tothe employees

Useful to the company whose activity is

dominantly based on the talent of theemployees

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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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cm module iii

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