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Indian Financial System
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Objectives
Capital Market Instruments Primary Market Operations The Instruments Role of SEBI and Merchant Bankers Stock exchanges in India National Stock Exchange Stock Holding Corporation of India
E- trading Index and future trading Stock market operations Book building
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Lenders & Borrowers
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Functions of Financial
SystemThe Savings Function
Liquidity Function
Payment Function
Risk FunctionPolicy Function
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Indian Financial System
Formal(Organised)
Informal(Unorganised)
Regulat
orsSEBI,RBI,IRDA
Moneylenders,Local bankers,
Traders,
Landlords,Pawn brokers
Financial
Institutions(Intermediaries)
BankingInstituti
ons
Non
Banking
Institutions
Mutual
Funds
Insurance and
HousingFinancecos.
ScheduledCommercial
Banks
ScheduledCooperative
Banks
Non-Banking
Financecos.
DevelopmentFinanceInstituti
ons
All India FinancialInstitutions: IFCI, IDBI, SIDBI,
IDFC, NABARD, Exim Bank
State levelInstitutions: SFCs,
SIDCs
OtherInstitutions-ECGC, DICGC 55Prof Rashmi
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Indian Financial System
Formal(Organised)
Informal(Unorgan
ised
FinancialServices
Depositories
Custodial Credit,Factoring,Forfaitin
g,MerchantBanking,
Leasing,HP,
FinancialInstruments
Term:Short,Medi
umLong
Prima
rySecurities
SecondarySecuritiesEquity,
Preferen
ce, Debt&variouscombina
tions
TimeDeposi
ts, MFunits,Insurancepolicie
s 66Prof Rashmi
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Indian Financial System
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Formal(Organised
Informal(Unorga
nised
CapitalMarket
MoneyMarket
TreasuryBills,
Call moneymarket,Commercial Bills, CP,CD, Term
money
Primary
Segme
SecondarySegme
Equity
Market
DebtMar
ketPrivateCorporateDebt, PSUBondmarket,Govt.
Primar
y
Second
ary
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Indian Financial System
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EquityMarket
Primary
Market
-Publicissues- Private
placement
Dome
sticMarket
Internati
onalmarket
Secondary
Market-NSE-BSE-OTCEI-ISE-Regionalstock
exchanges
Derivatives
Market- ExchangeTradedFutures andOptions
Index
Stock
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Notes to the flow charts:
IDBI : Industrial Development Bank of India
IFCI : Industrial Finance Corporation of India
SIDBI : Small Industries Development Bank ofIndia
IDFC: Infrastructure Development Finance Co.
Ltd. IIBI : Industrial Investment Bank of India
NABARD : National Bank for Agriculture andRural Development
EXIM Bank: Export- Import Bank of India SFC: State Financial Corporation
SIDC: State Industrial DevelopmentCorporation
ECGC: Export Credit Guarantee Corporation ofIndia Prof Rashmi 99
B i l t f ll
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Basic elements of a well-functioning financial
systemA strong legal and regulatoryenvironment
Stable money Sound public finances and
public debt management
A central bank
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Financial System Designs
A financial system is a verticalarrangement of a well-integrated chain offinancial markets and institutions thatprovide financial intermediation.
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Classification of Financial Structure and Level ofDevelopment of Select Economies
Extent ofDevelopment
Bank- based Market-based
Developed Japan, Germany,France , Italy
US, UK,Singapore,Malaysia, Korea
Under-
developed
Argentina,
Pakistan, SriLanka
Brazil, Mexico,
Philippines,Turke
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Nature and Role of FinancialInstitutions (Intermediaries) and
Financial Markets
Financial Institutions providethree transformation services:-
Liability, asset and size
transformation by mobilizationof funds and their allocation
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Session 2:
Introduction to CapitalMarkets
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Financial Markets
Money Market
Capital Market
Government Securities
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Functions of a CapitalMarket
Mobilise long-term savings tofinance long-term investments
Provide risk capital in the form of
equity to entrepreneurs Encourage broader ownership of
productive assets
Provide liquidity to investor to sell
financial assets
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Capital Markets
Capital markets deal in long termsources of funds with a maturity period of
more than one year.
Types ofCapital Markets:
Primary Markets
Secondary Markets
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Primary Markets
v Primary market helps companies inraising funds through issue of securities
like shares and debentures.v Capital issues were controlled by Capital
Issue Control Act, 1947.
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Nature of Fund Raising:-Domestic:
Equity issues by - Corporates (primary issues)- Financial intermediaries (secondaryissues)
Debt instruments by -Government (primary issues)- Corporates (primary issues)- Financial intermediaries (secondary
issues)External:
Equity issues through issueof:
-Global Depository Receipts (GDR)- American Depository Receipts (ADR)
Debt instruments through - External Commercial Borrowings (ECB)
Other External Borrowings:
Foreign Direct Investment(FDI)
- in Equity and Debt form
Foreign InstitutionalInvestments
- in the form of portfolio investments
Non- Resident Indiandeposits (NRI) - in the form of short-term and mediumterm depositsProf Rashmi 1818
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Dematerialisation ofShares
Eliminates the risk of bad deliveriesand fake or forged shares.
This was introduced by SEBI witheffect from Jan 15, 1998.
SEBI has also set up a working groupcomprising National SecuritiesDepositories Ltd. and various marketparticipants like custodians, brokers,
stock exchanges, etc.
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Dematerialisation of Shares
Conversion of physical certificatesinto dematerialised holdings at therequest of investor is called
dematerialisation Only shares registered in the name
of account holder are accepted fordematerialisation at NSDL
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Dematerialisation
Dematerialisation is the process by whichan investor can get physical certificateconverted into electronic balancesmaintained in its account with the
participant in the NSDL system. Depository Participant (DP) is the
agent of the depository and is theinterface between the depository and the
investor.
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Diagrammatic
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Diagrammaticpresentation of Demating
of Securities
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INVESTOR
DEPOSITORYPARTICIPANT
DEPOSITORY
REGISTRAR
1. Dep.Req.Formandcertificates 2.Demat
req.
3.Demat
Req.
4. DRF &
Cert.
5.
Confirmation andupdation
6.Updati
on andBal
7.Intimation
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Depositories
Depository system provides forDematerialization of securities,custody and trading in electronic
form The Depositories Act, 1996
introduced a legal frame work for theestablishment of multi depositories
to hold securities in scrip less form
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Depositories Act, 1996(adopted on 20/09/95)
Depository means a companyformed and registered under
the Cos Act, 1956 and whichhas been granted a certificateof registration u/s-s (1A) ofSec 12 of the SEBI Act, 1992
Depositories must beregistered with the SEBI
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Depositories in India
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National SecuritiesDepositories Ltd. (NSDL)
First depository in the country.Sponsored by UTI, NSE, SBI, HDFCBank and Citibank.
It is a public ltd. co managed by theBoard of Directors
Governed by its bye-laws andbusiness operations are regulated
by its business rules
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Functions of NSDL
NSDL effects settlement ofsecurities traded on theexchanges
It carries out settlement oftrades not done on the stockexchange (off- market trades)
NSDL facilitates pledging/hypothecation of dematerialisedsecurities
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Services offered by NSDL
It offers a host of services to the investorsthrough the network of DepositoryParticipants (DP)
Maintenance of beneficial holdings through
DPs The NSDL maintains accounts of investor
holdings through its DPs
The DPs provide a statement of holding of
each of their clients which is similar to suchdocuments provided by a commercial bank
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Structure/ Design ofNSDL
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NSDL Issuer/ R & Tagent
ClearingCorporation
ClearingMember
Depository
Participant
StockExchange
TradingMember
Investor
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contractnote.htm
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Rematerialisation
The conversion of dematerialisedsecurities back into physical certificatesis called Rematerialisation
Rematerialisation is optional on the partof the investor and can be done on therequest of investor, any time after thesame have been dematerialised
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Rematerialisation
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DEPOSITORY (NSDL)
DEPOSITORYPARTICIPANT
REGISTRAR AND
TRANSFERAGENT
BENEFICIAL
OWNER(INVESTOR)
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Rolling Settlement
Major reform introduced bySEBI, which has terminated thebadla system or the carry overtrading system w.e.f. July
2,2001. Badla is a speculative system
which allows an investor tocarry over his transaction of aparticular stock to the nextsettlement cycle without cashsettlement in the current cycle.
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Rolling Settlement andBadla
Major reforms in the recent times isthe introduction of RollingSettlement
It is a system of settling transactionsin a fixed number of days after thetrade is agreed
Badla system, also known as carryover trading system or forwardtrading system was allowed only onthe BSE in India
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Introduction of the RollingSettlement
Rolling settlement system replaced thebadla system from 2, July 2001. By 2 Jan2002, all scrips were brought under the
compulsory rolling mode In the cash market there is now a
compulsory rolling settlement, which will bedone on a daily basis i.e. each trading daywill be taken as if it is a settlement
When an investor buys shares he will haveto pay for them and when he sells them hewill have to give delivery
With this new system all the settlement
days of all exchanges will become the sameProf Rashmi 3636
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Compulsory RollingSettlement
All transactions in all groups of securities inthe equity segment and fixed incomesecurities listed on BSE are required to besettled on T +2 basis (w.e.f April 1, 2003)
A T+ 2 settlement cycle means that the
final settlement of transactions done on T(i.e. trade day) by exchange of monies andsecurities between the buyers and sellersrespectively takes place on second business
day (excluding Sat, Sun and exchangetraded holidays) after the trade day
T+2 : By 11 am Pay in of securities andfunds
By 1.30 pm Pay out of securitiesand funds Prof Rashmi 3737
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Advantages of Rolling Settlement The basic advantage of rolling system over
the badla system is its simplicity The badla system was non-transparent and
unregulated and the investors exposure torisk and fraud was very high. The investorhad to keep track of different stocks as theyhad different settlement systems
With rolling settlement, the investor has tomerely keep track of the day of purchase/sale of scrips as all the scrips are settled in
the same format on all trading screens It improves the price discovery process as
the settlement process is standardised andthe participants can focus more on market
outcomes Prof Rashmi 3838
Book building A new issue
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Book building A new issuemechanism in India (Primary
market)
Following the inefficient functioningof the capital market system, analternative method called book-building method is slowly becomingpopular in India
The essence of the tender/ book
building method is that the pricing ofthe issues is left to the investors bywhich the demand for the proposedissue is elicited and built-up
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The Book Building process
During the process on both the NSE andBSE, investors can watch the book beingbuilt. This helps the investor to know themarket price
It offers investors the opportunity to bidcollectively and it then uses the bids toarrive at a consensus price
The issuer company first of all appoints a
book runner, i.e. a merchant banker The book runner prepares and submits the
draft documents to SEBI and obtains anacknowledgement card
The issuer and the book runner decide tooffer shares at a rice within a s ecifiedProf Rashmi 4040
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The Book Building process
Offers regarding the demand for securitiesat different price levels are invited fromsyndicate members brokers, merchantbankers, underwriters, financial
institutions, mutual funds and others The advertisement should mention the
opening and closing dates for the bids. Abid is usually open for a minimum of five
working days Based on the bids received, the issuer
arrives at a final cut-off rate and the finalallocation in consultation with the book-runner and the lead manager
The final prospectus is filed with the ROCProf Rashmi 4141
Difference between shares offered through
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gbook building and offer of shares through
normal public issues
Features Fixed price process Book building process
Pricing Price at which securitiesare offered /allotted isknown in advance to theinvestor
Price at which securitieswill be offered/ allotted isnot known in advance tothe investor. Only anindicative price range isknown
Demand Demand for thesecurities offered isknown after the closureof the issue
Demand for the securitiesoffered can be knowneveryday as the book isbuilt
Payment Payment is made at thetime of subscriptionwherein refund is givenafter allocation
Payment only afterallocation
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Book Building Guidelines The concept of book building assumed
significance in India as the SEBI approved,w.e.f. Nov 1, 1995; the use of the process inpricing new issues
The SEBI issued guidelines under which theoption of 100 percent book building wasavailable to those issuer companies whichare to make an issue of capital of and aboveRs 25 crore
Bharti Televentures was the first 100 per
cent book building issue. It raised Rs 834crore through 100 percent book-building in2001-02.
ICICI was the first to price its debt issue
through book-building. Other companiessuch as IPCL Hindalco and HUDCO usedProf Rashmi 4343
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Moving Price Band concept
SEBI reintroduced the moving price bandconcept in book built IPOs
Price band includes the floor price and thecap price
PNB issues price band was Rs 350-390. Rs350 is the floor price and Rs 390 is the capprice
The spread between the floor and the cap ofthe price band should not be more than 20%
The cap should not be more than 120% ofthe floor price
This price band denotes the range ofbidding
Investors can bid at an rice between RsProf Rashmi 4444
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Guidelines for Book building
A book built issue shall offer not less that n 50%to the qualified institutional buyers (QIBs) andnot less than 25% to the retail investors
The rest may be allotted to the non-institutionalbuyers or high net worth individuals
Note: QIB public financial institution,scheduled commercial banks, mutual funds,foreign institutional investors, etc
A retail individual investor is one who applies orbids for securities of or for a value of not morethan Rs 1,00,000 (higher than this he is ahigher net worth individual)
The registrar then ensures that the dematcredit or refund as applicable is completed
within 15 days of the closure of the issue.Listin on stock exchan e is done within 7 da sProf Rashmi 4545
C it l M k t R f (
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Capital Market Reforms (aconclusion)
Stock markets moved to the T+2 systemfrom April 1, 2003
The SEBI intends to move to T+1
The move towards T+1 is part of the capitalmarket reforms initiated by the SEBI,especially after the stock market scams
The rolling settlement system of sharetransactions prevents speculations inbetween the settlement periods
Movement to the T+1 system, requires realtime gross settlement in bankingtransactions. This would ensure that thebanking transactions are settled within a
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Capital markets & itsoperAtions
SESSION 3
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On Line IPOs
The on-line issue of shares is carried out viathe electronic network of the stockexchanges
The guidelines for online issue of shares are
incorporated in a SEBI Disclosure andInvestor Protection Guidelines, 2000
The guidelines clearly state that publicissue can be made either through the on-
line system or through the existing bankingchannels
The company has to comply with sections55-68A of the Companies Act, 1956 andDisclosure and Investor Protectionguidelines Prof Rashmi 4848
Disclosure and Investor
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Disclosure and InvestorProtection Guidelines
Under online system, a company has to complywith sections
55-68A of the Cos Act, 1956 (Prospectus andallotment and other matters relating to issue ofshares and debentures)
This system reduces the time taken for theissue process and securities get listed within 15days from the closure of the issue
Allotment of securities should be made not laterthan 15 days from the closure of the issue,failing which interest @ 15% should be paid toinvestors
Corporates planning an IPO can reduce theirstationery, printing and other expenses
The investor also benefits as the systemProf Rashmi 4949
I iti l P bli Off i
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Initial Public Offering(IPOs)
IPO is an offering of either a fresh issue ofsecurities or an offer for sale of existingsecurities, or both by an unlisted company for thefirst time to the public
IPO enables listing and trading of the issuerssecurities
To enable the investors to take informeddecisions and to protect their interests, SEBI has
laid down stringent entry norms
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g y norms a own yf i i i i f d h h
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g y yfor entities raising funds through
an IPOEntry Norm I Entry Norm II Entry Norm III
For companiesdesiring to tapthe primarymarket- nettangible assets ofat least Rs 3 crsfor 3 full years
Issue shall bethrough a bookbuilding routewith at least 50%of the issue to bemandatorilyallotted to QIBfailing which themoney shall be
refunded
Project isappraised andparticipated tothe extent of 15%by FIs /scheduledcommercialbanks of which atleast 10% comes
from theappraiser
Distributableprofits in at least
3 out of
The minimumpost issue face
value capital
Minimum post-issue capital shall
be Rs 10 croresProf Rashmi 5151
Are IPOs creators of
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Are IPO s creators ofwealth?
Subscribing to new issues is not always profitable.
Some of the IPOs have, in fact, robbed theinvestors of their wealth
Out of 107 issues in 2007-08 only 86 companiesreported positive returns, while the remainingcompanies reported negative returns for their
investors Stocks like global Broadcast News Ltd gained above
88% returns
Some other stocks listed below their offer price andincurred losses- e.g. Orbit corporation reported a
loss of nearly 19% From the period June to Sept 2009, Indian
companies raised Rs 13,000 crores through the IPOroute, including the IPOs of Adani Power, Oil Indiaand NHPC
IPO investing has become a riskier proposition forretail investors in the recent yearsProf Rashmi 5252
Source: Portfolioorganizer, Dec 2009,
pp 11
Retail In estor response to
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Retail Investor response toIPOs
2007 2009
CompanyName
Totalissuesize(Rs cr)
No. oftimesretailsubscrip
tion
Company Name
Totalissuesize(Rs
cr)
No. oftimesretailsubscrip
tionReliancePower
10,260.00
9.02 PipavavShipyard
512.00 2.89
Edelweiss 691.84 20.00 Oil India 2,777.00
1.70
MundraPort
1771.00 13.00 NHPC 6,048.00
3.10
Aries Agro 58.50 6.42 Jindal 84.37 3.09Prof Rashmi 5353
Source: Data compiled from
Business India
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Primary Issues
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Primary Issues
PublicIssue
Rights
Issue
PrivatePlacement
IPO firsttimeoffer
ofsale
Follow onpublic
offering
Anofferof sale
ofexistingsecurit
ies
PrivatePlace
ment
Preferentialissue
QIP(forlist
edCos)
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Rights Issue
Rights issue is a offer of newsecurities by a listed company toits existing shareholders on a pro-
rata basis Rights issues shall be kept open for
at least 30 days and not more than
60 days
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Private Placement Market
Private placement refers tot thedirect sale of newly issuedsecurities by the issuer to a
small number of investorsthrough merchant bankers
These investors are selectedclients such as financialinstitutions, Corporates, banksand high net-worth individuals
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Share of Public sector and Private
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Share of Public sector and Privatesector in Private Placement
market
Year Share of Private sector(in %)
Share of Publicsector (in %)
2000-01 36 64
2001-02 44 562002-03 37 63
2003-04 42 58
2004-05 42 58
2005-06 44 56
2006-07 58 42
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Issue Mechanism
Public Issue
Rights issue
Bonus Issue
Private Placement Market Bought out deals
-( Reliance Capital and Finance Trust
acquired one lakh shares of Neilcon Ltd. atRs 20 premium)
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Private Placement Market
Direct sale by a public/private co. ofshares/ debentures to UTI, LIC, GIC,State Finance Corporations, Pensionand Insurance Funds.
Intermediaries are Credit ratingagencies and trustees like ICICI andMerchant Bankers.
Maximum time frame for privateplacement is 2/3 months.
Private placement can be made ofpromoters quota but not with
unrelated investors. 5959Prof Rashmi
Bought out deals
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Bought - out -deals
Company places its Equity shares toa sponsor/ merchant banker whooffloads the shares at anappropriate time.
The sponsor is also an intermediateinvestor.
Bought out deals are known asAngels in UK.
Entered the Indian corporate worldwith the Co-nick Alloys (India) offerfor sale at a premium sponsored byICICI.
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Methods of Offer of Bo ght
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Methods of Offer of Bought-out deals
COMPANY
SPONSOR
MERCHANTBANKER
PUBLIC ISSUE
OTCEI STOCK
EXCHANGE
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Role of Merchant
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Role of MerchantBankers
Investors can be benefited by acompulsory requirement to havemerchant bankers rated by authorizedrating agencies.
These rating agencies evolve their ownnorms, including post-listing appreciation/depreciation in prices of securities
handled by the merchant bankers.
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Measures taken by SEBI
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Measures taken by SEBIare:
Computerization of Stock Exchanges(introduction of OTCEI and NSE andsubsequently to BSE).
Expansion of trading terminals of
stock exchanges. Dematerialised trading paperless
trading by setting up NationalSecurities Depository Ltd.
Securities lending scheme improvesthe efficiency of the settlementsystem.
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Merchant Bankers
Merchant banker means anyperson who is engaged in thebusiness of issue managementby making selling, buyingarrangements or acting asmanager, consultant, adviser orrendering corporate advisoryservice.
All issues should be managedby at least one lead merchantbanker .
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Merchant Bankers
The lead manager shall continue to beassociated with the issue till thesubscribers have received the share ordebenture certificates or refund of excess
application money. A merchant banker shall disclose to the
Board his responsibilities with regard tothe management of the issue.
Also, he has to give all informationrelating to his activities as a manager,underwriter, consultant or adviser to anissue.
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Government Securities
Central Government securities State Government securities
Securities guaranteed by Central
Government for All India FinancialInstitutions like IDBI, ICICI, IFCI, etc
Securities guaranteed by StateGovernment for state institutions like
state electricity boards and housingboards
Treasury bills issued by RBI
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Government Securities -
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Government Securities -Form
Stock Certificates Promissory Notes Bearer Bonds Other Forms
Treasury Bills National Defense/National Savings/National DepositCertificates
Deposit Certificates Annuity Certificates Annuity Deposit Certificates
Zamindari Abolition Compensation Bonds andRehabilitation Grant Bonds Social Security Certificates Capital Investment Certificates.
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Government Securities -
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Government Securities -Investors
Commercial banks
Financial institutions (FIs)
Large corporate bodies
Reserve Bank of India
Foreign Institutional Investors
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Stock Exchanges
Two leading stock Exchanges in India-BSE & NSE.
Function of stock exchange is raising ofcapital through floating of issues.
BSE was recognized by the Governmentof India on Aug 31, 1957 under theSecurities Contracts (Regulations) Act,1956.
Companies which seek listing on BSEhave to have a minimum issued capital ofRs 3 crores.
Also, such companies should have a
profitability record of at least 3 years. 6969Prof Rashmi
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Trading system on BSE
BSE computerized its trading system byintroducing BOLT (Bombay on line trading) on14/03/95.
BOLT provides a quote driven automatic tradingfacility.
This system allows retention and matching oforders against one another where no quotesexists in the system for a particular scrip.
It improves the price competitive character of themarket.
Securities on the BSE have been divided into fivecategories: Group A, Group B (B1 and B2) GroupC, Group F and Group Z.
B1 are well traded scrips in the B group while B2are not well traded.
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Price Indices
BSE Sensitivity Index (Sensex) and the BSENational Index (Natex).
The BSE Sensex was introduced on 1/1/86 withthe base year of 1978-79.
The BSE Sensex consists of only 30scrips which
are highly sensitive to market fluctuations. BSE National Index was set up in the year 1988-
89 with the base year of 1983-84. Natex covers 100 actively traded scrips of major
stock exchanges. The BSE introduced two new indices, i,e, the
BSE National Index- 200 and Dollax with thebase year of 1989-90.
Dollax presents the current as well as the baseyear values in dollar terms.
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National Stock Exchange
The Pherwani Committee recommendedthe setting up of a model National StockExchange at New Bombay.
The NSE was recognized by theGovernment of India as a public limitedcompany owned by IDBI and otherfinancial institutions like ICICI, IFCI, GIC ,
LIC, SBI, Stock Holding Corporation ofIndia.
It was set up to establish a nation-widetrading for equities and debt instruments.
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Trading Segments of NSE
The NSE set up two segments- theWholesale Debt Market (WDM)segment which commenced tradingon June 30, 1994 and the Capital
Market segment (CM) which startedon Nov 3, 1994.
The WDM segment deals with puredebt instruments such as
Government securities, treasurybills, public sector bonds, corporatedebentures, commercial paper, bankbonds, etc.
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Trading system of NSE
National Stock Exchange for Automatedtrading.
This is a fully automated screen basedtrading system.
It operates on a price-time priority, isorder driven and hides the identity of thetrading parties.
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Price Index of NSE
This is reflected through the NSE- 50 indexpopularly called Nifty.
It comprises 50 scientifically selected scripshaving market capitalization of Rs 5 billion each.
It was introduced on April 22, 1996 with the baseyear of Nov 3, 1995 to reflect market movementmore accurately.
The Nifty Junior Index (Mid cap Index) and theDollar denominated Nifty (Defty) was introduced.
The Mid Cap Index was introduced with theexplicit objective of measuring the performanceof stocks in the mid-cap range on Jan 1, 1997.
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S k E h
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Stock Exchanges
Auction market in shares and othersecurities.
Persons at Stock Exchanges:a) Bull - buyer (Optimistic view)
b) Bear seller (Pessimistic view)
q) Transactions commence with placementof order.
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T f O d
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Types of Orders
Limit Orders
Best Rate Order
Immediate or Cancel Order
Limited Discretionary Order
Stop Loss Order
Open Order
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Delivery of Share
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Delivery of Share
Certificates Spot Delivery
Hand Delivery
Specified Delivery
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D it t i I di
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Depository system in India
Depository is an entity which holds securities in theform of electronic accounts in the same way as a bankholds money.
This eliminates the need to deliver physicalcertificates on sale and transfer.
All exchange and transfer takes place in the electronicform.
All settlement activity takes place through adepository.
The investor has to open an account with the
depository through a Depository participant. They issue debit instructions for delivery of securities
to their accounts. For receipt of delivery of securities to their accounts
they issue a credit instruction.7979Prof Rashmi
Advantages of a
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Advantages of aDepository
It is speedier and delay in transfer ofsecurities is eliminated.
It avoids a lot of paper work.
The buyer gets exemption from stampduty on transfer of securities.
The company can save substantialamount on printing certificates, postage
expenses and legal compliances.
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International Capital
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International CapitalMarkets
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International Capital
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International CapitalMarkets
Factors for development of such markets:
1) Avoidance of taxes by investors in their
own countries2) To ensure protection against
depreciating home currencies.
3) Emergence of new technologies in the
area of financial services.4) Development and deregulation of
financial markets.
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A i D it R i t
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American Depository Receipts
Depository receipts issued by a company in theUSA is known as ADRs.
Such receipts have to be issued in accordancewith the provisions stipulated by the Securities
and Exchange Commission of USA, which arevery stringent.
An ADR is generally created by the deposit of thesecurities of a non- United States company with acustodian bank in the country of incorporation ofthe issuing company.
ADRs are United States dollar denominated andare traded in the same way as are the securitiesof United States company.
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Gl b l D it R i t
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Global Depository Receipts
Depository receipts may trade freely in theoverseas markets, either on a foreign stockexchange or over-the-counter market, or amonga restricted group such as Qualified Institutional
Buyers (QIBs). Through the issue of depository receipts,
companies in India have been able to tap globalequity market to raise foreign currency funds byway of equity.
A GDR issue has been able to fetch higher pricesfrom international investors.
As a result of introduction of GDRs aconsiderable foreign investment has flown into
India. 8484Prof Rashmi
M k t f GDR
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Markets of GDRs
GDRs are sold primarily to institutionalinvestors.
Demand is dominated by emergingmarket funds.
Switching by foreign institutionalinvestors from ordinary shares into GDRsis likely.
Major demand is also in UK, USA
(Qualified Institutional Buyers), SouthEast Asia (Hong Kong, Singapore), and tosome extent continental Europe(principally France and Switzerland).
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Stock Market operations on
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Stock Market operations onInternational Level
The Government of India has formulated ascheme for allowing Indian companies to issueequity shares or convertible bonds in theInternational markets after Government approval.
Companies must have good financial track recordat lest for a period of three years, market pricestability and good industry prospects.
Euro issues offer tremendous advantages toIndian issuers.
Investors are aiming to diversify their portfoliosinternationally. The merchant banker plays an important role in
organizing a Euro issue.
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International Equity
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International EquityInstruments
Global Depository Receipts:
Instrument in the form of depository
receipt/ certificate created by OverseasDepository Bank outside India and issued toNRIs.
American Depository Receipts:
Dollar denominated negotiable certificateand represents publicly traded Equities of
Non-US companies. 8787Prof Rashmi
Participants
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Participants
Borrowers/Issuers-
(Corporates, Financial Institutions, banksand Govt. Bodies)
q Lenders and Investors(Banks chief lenders of Euro Loans;
Institutional Investors subscribers ofADRs and GDRs)
q Intermediaries:a) Lead Managers
b) Underwriters
c) Custodians8888Prof Rashmi
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Forex Markets
v Exchange rate:- Rate at which one currencycan be converted into another currency.
v Quoted in two ways:
* Direct Quote
* Indirect Quote
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Participants in Forex
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Participants in ForexMarkets
Exporters
Importers
Commercial Banks
Central Banks.
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Authorized Dealers
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Authorized Dealers
Banks
Certain Financial Institutions
State and Urban Co-op Banks
Scheduled Commercial Banks
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Authorized Money
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Authorized MoneyChangers
v Deal in foreign currency subject to certainrestrictions.
v Two categories:
1) Full-fledged Money changers
2) Restricted Money changers.
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Derivatives Market
v A financial derivative is a product derivedfrom the market of an underlying asset.
v Derivative refers to a variable which hasbeen derived from another variable.
v They are designed to manage risks.
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Types of Derivatives
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Types of Derivatives
Futures Agreement to buy or sell a specific
amount or a commodity or financialinstrument at a particular price on astipulated date in the future.
q Options
Right (not an obligation) to buy/ sell an
underlying asset at a stated date at a statedprice.
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Participants
Hedgers
Speculators
Arbitrageurs
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Financial Institutions
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Financial Institutions
Industrial Development Bank of India
Industrial Finance Corporation of India
Industrial Investment Bank of India Export and Import Bank of India
State Financial Corporations
State Industrial DevelopmentCorporations
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Investment Institutions
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Investment Institutions
Life Insurance Corporation of India
General Insurance Corporation
Unit Trust of India
Mutual Funds
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Banks
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Banks
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Liberalization
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Liberalization
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NBFCs
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NBFCs
Investment Trusts or InvestmentCompanies
Nidhis or Mutual Benefit Funds
Merchant Banks Hire-purchase Finance Companies
Lease Finance Companies
Housing Finance Institutions
Venture Capital Funds, and
Factors or Factoring Companies