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INVESTMENT LAWS - CAPITAL MARKET

17th March 2010

LAW

1. Securities Contract (Regulation) Act 1956

2. Securities Contract (Regulation) Rules 1957

3. Securities Exchange Board of India Act 1992

4. Depositories Act 1996

5. SEBI Regulations

6. Companies Act 1956

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CAPITAL MARKET

SEBI Regulations

Intermediaries

Unfair Practices

ISDR- Issue of Securities and Disclosure Requirements –IPO – FIPO – Rights – Bonus – Sweat – Preferential Allotment (QIP) – ESOP

Buy Back

Insider Trading

FII

Take Over

SRO’s

Venture Capital

Mutual Funds

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CAPITAL MARKET

COMPANIES ACT 1956

Prospectus –

Sec 55A - Powers of SEBI

Issue and Transfer of Securities

2. Buy Back of Shares

Sec 77A – Power of Company to purchase its own securities

Sec 77B – Prohibition of Buy Back

3. Audit Committee – Sec 292A

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CAPITAL MARKET

Resource mobilization through the primary market

(Rs crore)

Calendar Year

Mode 2006 2007 2008 2009(P)

1. Debt 389 594 0 3,500

2. Equity 32,672 58,722 49,485 23,098

of which, IPOs 24,779 33,912 18,393 19,296

Number of IPOs 75 100 37 20

Mean IPO size 330 339 497 965

3. Private Placement 1,17,407 1,84,855 1,55,743 2,38,226

4. Euro Issues 11,301 33,136 6,271 15,266

(ADR/GDR)

Total (1 to 4) 1,61,769 2,77,307 2,11,499 2,80,090

Source : SEBI and RBI (for Euro Issues)

P Provisional

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CAPITAL MARKETEquity returns, volatility, market capitalization & P/E ratio

Index Calendar Year

2006 2007 2008 2009

NNifty :

Returns (per cent) 39.83 54.77 -51.79 75.76

End-year Market Capitalization

(Rs cr.)

19,75,603 35,22,527 18,32,610 33,14,447

Daily volatility * 1.64 1.60 2.81 2.14

End-year P/E 21.26 27.62 12.97 23.17

Nifty Junior :

Returns (per cent) 28.24 75.73 -63.52 127.91


(Rs cr.)

3,33,693 6,43,625 2,95,471 6,55,899

Daily volatility * 1.96 1.71 3.15 2.23

End-year P/E 21.78

26.48 8.99 16.28

BSE Sensex :

Returns (per cent) 46.7

47.2 -52.48 76.35


(Rs cr.)

17,58,865

28,61,341 14,63,165 26,49,482

Daily Volatility * 1.6

1.5 2.85 2.19

End-year P/E 22.8

27. 7 12.36 22.36

BSE 500 :

Returns (per cent)

38.9 63.0 -58.74 85.34


(Rs cr.)

33,36,509 64,70,881 29,40,741 56,87,505

Daily Volatility *

1.6 1.5 2.75 2.05

End-year P/E

20.2 29.1 12.4 21.9

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CAPITAL MARKET

Secondary Market

Market turnover (Rs Crore)

Market Calendar

year

2006

2007 2008 2009

NSE Spot

19,16,227 30,93,982 31,88,509 38,12,031

BSE Spot

9,61,653 14,14,727 13,24,053 12,74,065

NSE Derivatives

70,46,665 1,19,40,877 1,16,54,375 1,55,65,763

BSE Derivatives

18,071 2,19,824 75,178 36

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CAPITAL MARKET

INSTITUTIONS Regulating Authority SEBI

1. SROs

i. Stock Exchanges

a. Regional Stock Exchange

b. Over the Counter Exchange of India(OTC)

c. National Stock Exchange

d. Inter connected Stock Exchange

ii. Association of Mutual Funds

iii. Association of Merchant Bankers

2. Rating Institutions

3. Depository

4. Venture Capital

5. Custodian

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CAPITAL MARKET

Regulation – Listing Agreement

1. Price Sensitive Information

2. Interim Financial Statements

3. Corporate Governance

4. Accounting Standards

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INVESTORS

1. Financial Institutions

2. Foreign Institutional Investors/Sub-accounts

3. Mutual Funds

4. Retail Investors

5. Private Equity Funds

(A) Shareholdings of promoter and promoter group

1. Indian

a. Individuals or HUF

b. Central Government or State Government

c. Bodies corporate

d. Financial Institutions or Banks

e. Any others

CAPITAL MARKET

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CAPITAL MARKET

2. Foreign

a. Individuals (non resident individuals or foreign individuals)

b. Bodies corporate

c. Institutions

d. Any others

(B) Public Shareholding

1. Institutions

a. Mutual Funds or UTI

b. Financial institutions or banks

c. Central Government or State Government

d. Venture Capital Funds

e. Insurance Companies

f. Foreign Institutional Investors

g. Foreign Venture Capital Investors

h. Any others

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CAPITAL MARKET

B2 Non Institutions

a. Bodies Corporate

b. Individual

i. Individuals – I – individual shareholders holding nominal share capital upto Rs 1 lakh

ii. Individual shareholders holding nominal share capital in excess of Rs 1 lakh

c. Any other

(c- i) Non resident indians

(c-ii) Trusts

(c-iii) Foreign Nationals

(c-iv) Clearing Members

(c-v) Overseas corporate bodies

C Shares held by Custodians and against which depository receipts have been issued.

Information on shares pledged by promoters should be given

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CAPITAL MARKET

INSTRUMENTS

1. Equity

2. Preference Shares

3. Debenture(Non-convertible/Convertible)

4. Warrants

5. Securitisation

6. Derivatives

7. Futures/Option

8. Exchange Traded Funds

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CAPITAL MARKET

Instruments

Securities : As per Sec 2(h),the term “securities” include -

i. Shares, scrips, stocks, bonds, debentures, debenture

stock or other marketable securities of a like nature in or

of any incorporated company or other body corporate,

ii. Derivative,

iii. Units or any other instruments issued by any collective

investment scheme to the investors in such schemes

iv. Security receipts as defined in clause (zg) of Section 2

of the securitisation and reconstruction of Financial

Assets and Enforcement of Security Interest Act 2002

(SARFAESI)

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CAPITAL MARKET

v. Units or any other such instrument issued to the

investors under any mutual fund scheme

vi. Any certificate or instrument issued to an investor by

any issuer being a special purpose distinct entity which

possesses any debt or receivable, including mortgage

debt, assigned to such entity, and acknowledging

beneficial interest of such investor in such debt or

receivable, including mortgage debt, as the case may be

vii. Government Securities

viii. Such other instrument as may be declared by Central

Government to be securities and

ix. Rights or interest in securities

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CAPITAL MARKET

Derivatives: as per Sec 2 (aa), “Derivative” include –

a) A security derived from a debt instrument, share, loan

whether secured or unsecured, risk instrument or

contract for differences or any other form of security

b) A contract derives its value from the prices, or index of

prices of underlying securities

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INTERMEDIARIES

1. Stock Broker – Sub-broker

2. Share transfer agents

3. Banker to an issue

4. Trustee of a Debenture Trust

5. Registrar to an issue

6. Merchant Banker

7. Underwriter

8. Portfolio manager

9. Investment Advisor

10. Any other – associated with Security market

CAPITAL MARKET

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INDEXES

1. BSE, Sensex(2-1-1986 : 30 shares)

2. Nifty(NSE : 50 shares) S & PCNX 50

3. Crisil 500

4. OTCEI - Composite Index

5. Indices introduced by

o Financial Newspaper(E.g. Business Line-250 Index)

o Other players

o DSP’s GDR Valuation Index

o 22 Bankers(India GDR Index)

CAPITAL MARKET

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INITIAL PUBLIC OFFERINGS

1. SEBI Issue of Securities and Disclosure Requirements

Regulations 2009

All Types of Securities issued to public and Bonus shares

Book Building – Fixed Price - Auction

Offer Documents

Role of merchant Banker – Due Diligence

INVESTORS ASSOCIATIONS/PROTECTION

FUND/GRIEVANCE COMMITTEE

1. ROLE OF Stock Exchange

2. Role of SEBI

3. Listing Agreement – Corporate Governance by Cos.

CAPITAL MARKET

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INVESTMENT ADVICE ETC., BY INTERMEDIARIES

AMENDMENT REGULATION-NOT TO BE GIVEN

1. Bankers to issue

2. Credit Rating

3. Custodian of securities

4. Debenture trustee

5. Foreign Institutional Investor

6. Merchant Bankers

7. Mutual Funds

8. Portfolio Manager

9. Registrars to an issue

10. Stock Brokers

11. Underwriters

CAPITAL MARKET

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INVIGILATOR

(S-11: Functions of SEBI Board)

1. Regulation & Audit of all intermediaries / institutions /

SROs/VCs

2. Registration

3. Fraudulent and unfair trade practices

4. Insider trading

5. Substantial acquisition

6. Research

CAPITAL MARKET

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INFORMATION

Thro Cos. Act

“ Listing of Agreement

“ Accounting Standard

“ Other Legislation

Banking Cos. Act

Mutual fund Regulation

“ Stock Exchange

CAPITAL MARKET

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Inter-Exchange market surveillance

Code of Ethics for Directors and functionaries of stock

exchanges (to be part of Exchange byelaws)

Information Technology

Computerization – Net working

CAPITAL MARKET

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Capital Market Reforms – Share Related Regulations

IPO

ADR/GDR

Sweat Equity

Buy Back

Bonus Shares

Mergers/Demergers

Take Over(Substantial

Acquisition)

ESOP – SEBI Guidelines

Rights – S81 of Companies Act

Shares issued to

others(Preferential Allotment)

Mutual Funds(Collective

Investments)

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SHARE HOLDING

a) 90% Total Control

b) 75% Power to Pass Special Resolution

c) 50%+ Effective Control

d) 50% No Effective Control

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SHARE HOLDING

e) 25%+ Can block a special resolution

f) 25% Right to appoint director-go to court for oppression

g) 10% Virtually no rights

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SEBI (substantial acquisition of shares and

Takeovers) regulations 1997

OBJECTIVES

Equity of treatment and opportunity to Shareholders

Minority Protection

Acquirer to give full information

Information not to a chosen group of Share holders

Sufficient time in offer

Offer to be made with responsibility

Offer documents to be prepared with circumspection (all

parties)

Acquirer to recognize limits on freedom

False market no to be created

Target company cannot frustrate process (Except with

Shareholders consent)

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Motives of Acquiring Corporation(What is the buyer

looking for?)

Generally the acquirer seeks one or more of the following advantages(Bokum, 1968)

a) To obtain greater rate of growth

b) To eliminate a competitor by buying it out

c) To integrate better-horizontally and vertically

d) To diversify with minimum cost and immediate gain

e) To improve dividend yield, earnings or book value

f) To offset obsolescence

g) To enjoy the prospect of turning around a sick company

h) To improve the effectiveness of the marketing effort

i) To support increased product development

j) To obtain cost reductions through elimination of duplicate facilities, more effective product distribution from multiple plant locations, and spreading of administrative expenses over a large volume of business

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Some of the reasons are (Kharbanda and Stallworthy, 1988 p.39):

a) Declining Sales or earnings.

b) An uncertain future.

c) Owner wants to slow down or retire with no successor in

sight.

d) Desire to maximize growth under the umbrella of a larger

company.

e) To raise cash for a more promising line of business

f) A lack of adequate financial and management skills.

g) To concentrate time and effort on what it can do best.

Motives of the Acquired Corporations(Why are

companies available of sale?)

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Definitions

1. “Acquirer”- Precise- Wider coverage acquisition, voting rights-Control

2. “Persons acting is concert” – expanded – bright line test

Now defined:

3. Offer Period

4. Promoter

5. Public Shareholding

6. Target Company

Not Defined:

7. Takeover

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Exemptions (to report to SEs and SEBI)

1. Preferential allotment is public issues/others (full disclosure)

2. Rights

3. Inter Se Transfers

1. Group Companies

2. Promoters

3. Foreign Collaboration

4. Relatives

5. Government Companies

6. State Level Fis’

7. Private Co-promoters in joint sector

8. By financial institutions

9. Residual Cases – refer to a panel of SEBI

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Not applicable

1. If a person holds 50% or plus

Consolidation

1. 15% to 75% - in a period of 12 months (gross) acquire upto 2%

Exemptions (to report to SEs and SEBI)

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Operational

1. Takeover needs no definition

2. No distinction between negotiated or open market

3. Treshold Limit remains – Signal

4. Change is Control - Signal

5. Merchant Banker (category I) to be appointed

6. Timing

7. Not later than 4 days of agreements / voting rights change

8. One National English daily / one vernacular paper of the listed

area, now a Hindi paper

9. Inform SE’s / Company

10. Inform SEBI 2 days in advance of advertisement

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11. Public announcement is public offer

12. Contents of announcement

13. Highest average price paid (12 months period)

14. Financial arrangement

15. Persons holding Unregistered Shares can participate

16. Minimum level of acceptance

17. Should accept minimum of 200% whatever be the level

18. Offer Document – wait for 21 days for comment

19. Specified date

20. 30th day from date of announcement

Operational

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Minimum offer Price / Payment

Present;

Higher of weekly highs and lows – 26 weeks

In exchange for shares

SEBI approves price (if infrequently traded)

Proposed:

1. Eliminate SEBI approval for price

2. Frequent trading defined

3. Highest price paid for acquisition to be paid

4. Preferential allotment price to be considered

Can Offer for 100%

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Disclosure:

1. Of Shares and Control

2. 50% - 100%

3. To the Company

4. Company in turn to SE

Time Frame

1. Offer document with SEBI – 14 days of announcement

2. Mailing letter of offer – 45 days of announcement

3. Offer to open with – 60 days of announcement

4. Offer to close – 105 days of announcement

5. Consideration to be paid – within 30 days of disclosure

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Escrow

Deposits 100% in cash or security or Bank Guarantee

Bank Deposit

Consideration amount to be held in separate account

Cooling Period

Obligation of Target Company

Cannot induct acquirer on the Board during offer period.

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Proposition 1 High strategic uncertainty, requiring strategic flexibility, favors alliances

over acquisitions

Proposition 2 Environments characterized by dispersed knowledge, i.e. knowledge

asymmetries between companies, and converging technologies, favor

alliances (particularly a web of alliances) over acquisitions

Proposition 3 The need for high transaction – specific investments favors acquisition

over alliances

Proposition 3.1 Strong permanent specific interdependencies between the relational

partner and its institutional context (e.g. its present owner) favor

alliances over acquisitions despite high transaction – specific investment

Proposition 3.2 A high degree of diversification of the target company complicates an

acquisition or merger, and thus can favor alliance ………..despite high

transaction-specific investments

Proposition 4 High behavioral uncertainty, e.g. danger of opportunism and “moral

hazards”. Favors acquisition over alliances

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Proposition 4.1 High levels of inter-organizational trust, reducing behavioral uncertainty,

eliminates the disadvantages of alliances

Proposition 4.2 High compatibility of strategic intentions, reducing behavioral uncertainty,

eliminates the disadvantages of alliances

Proposition 5 High expected persistence of synergies favors acquisitions over alliances

Proposition 6 Weak appropriability regimes, ie.difficulties protecting the core capabilities and

distinctive resources of a company, favor acquisitions over alliances

Proposition 7 High resource endowment (especially financial strength) favors acquisition over

alliances

Proposition 8 High absorptive capacity, e.g.the ability to learn and adapt, reduces the danger of

losing “learning races,” and therefore favors alliances over acquisitions.

Proposition 9 Companies with high social capital have possibilities and are more attractive for

inter-organizational relationships, but do not favor any specific external growth

strategy

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Context-dependent characteristics

Environmental

characteristics

Transactional (relational)

characteristics

Company characteristics

Relative favorability of

acquisitions and alliances

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BUT SO ARE NEW DEFENCES….

The freedom to make open offers makes it possible to make a counter-

bid for the predator’s shares

Provisions for competitive bidding enable the target company to turn

to a white knight for protection.

Dual-class capitalization will allow shares without voting rights to be

issued, making takeovers difficult.

Swallowing a poison pill, in the form of large debt, will make the

target unattractive.

Company Law permits the management of the target to refuse an offer

on different grounds.

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NEW WEAPONS ARE EMERGING

Open offers are possible even without the consent of the management

of the target company.

Conditional bids allow exit routes to the bidder, providing more

flexibility in mounting an attack.

Secret accumulation of stock, without triggering the Takeover Code,

can put the defender under pressure.

Two-tiered bids, the first at a high price and the second at a lower one,

enable cheap acquisitions.

The assets of the target company can be purchased without invoiking

the conditions of the Takeover Code.

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Defences against takeovers

a) INTERNAL DEFENCES

Pre-bid defensive strategies against hostile takeovers

Action Result

Improve operational efficiency and reduce

costs

Improved EPS, higher share prices and

firm value.

Improve strategic focus by restructuring,

divestment, etc.

Improved EPS and higher firm value.

Asset stripping by bidder difficult

Change ownership structure, e.g. dual class

shares, high gearing, share buyback, poison

pill

Control by bidder difficult. Scope for

LBO limited.

Change management structure or incentive,

e.g. staggered board, golden parachute

Predator control delayed and bid cost

increased

Cultivate organisational constituencies,

e.g.unions and workforce

Useful alliance against bidder; share

support from pension funds/ESOPs

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b) EXTERNAL DEFENCES


Pre-bid defensive strategies against hostile takeovers

Action Result

Cultivate shareholders and investors, e.g. use

investor relations advisers to inform about

company’s performance, prospects and

policies

Ensure loyalty and support during bid of key

shareholders

Inform analysts about company strategy,

financing policies and investment programmes

Share undervaluation risk reduced and bid

cost raised.

Accept social responsibility to improve social

image.

Public hostility to predator roused.

Make strategic defence investment, e.g. joint

venture/mutual shareholding in fellow targets.

Predator control blocked

Monitor the share register for unusual share

purchases; force disclosure of identity of

buyers

Early warning signal about possible

predators.

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Post-offer defences against hostile takeover bids

Defence Description and purpose

First response and pre-emption letter

Defence document

Profit report / forecast

Promise higher future dividends

Asset revaluation

Attack bid logic and price: advise target

shareholders not to accept,

Praise own performance and prospects;

deride bid price and logic, form of finance

and predator’s track record.

Report or forecast improved profits for past /

current year to make offer look cheap.

Increase returns to shareholders; weaken

predator’s promise of superior returns.

Revalue properties, intangibles and brands;

show bid undervalues target.

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Qualified Institutional Placement (QIP)

introduced in mid 2006

GMR infrastructure 3865 crore at 240 per share

Suzlon Energy 2183 crore by selling shares

IDFC Rs 2100 Crore ( Across Asia, Europe and US)

UTI Bank

Kotak Mahindra Bank

India Inc – raised net 23400 cr

through QIPs in 2007

through 41 QIPs

in 2006 – 3935 crore

Preferred instrument for entities to raise funds

Lesser Disclosures

Does not require a pre-issue filing with SEBI

Fastest Mechanism to raise funds

No Lock in - Liquid