ISSUING SECURITIES:

PROCEDURE AND

REGULATIONS

INTRODUCTION

• A financial instrument that represents: an ownership position in

a publicly-traded corporation (stock), a creditor relationship

with governmental body or a corporation (bond), or rights to

ownership as represented by an option.

TYPES OF SECURITY

DEBT SECURITY – E.g.. Banknotes, Bonds ,Debentures

EQUITY SECURITY – E.g.. Common Stocks

HYBRID SECURITY – E.g.. Preference shares

DERIVATIVES SECURITY – E.g. Forwards, Futures, Options

and Swaps

DEBT SECURITIES

Debt securities are any debt instrument that can be bought or sold

between two parties and has basic terms defined. The original

buyer of the debt security lends the issuer money in exchange for

the security. The holder of a debt security is typically entitled to

the payment of principal and interest, together with other

contractual rights under the terms of the issue.

TYPES OF DEBT SECURITIES

Government Securities

Corporate Bonds

DebenturesCertificate of

Deposits

EQUITY SECURITIES

An equity security is a share of equity interest in an entity

such as the capital stock of a company, trust or

partnership. The most common form of equity interest is

common stock, although preferred equity is also a form of

capital stock. The holder of an equity is a shareholder,

owning a share, or fractional part of the issuer

HYBRID SECURITIESHybrid securities combine some of the characteristics of both debt

and equity securities. E.g. Preference Shares

Preference shares form an intermediate class of security

between equities and debt.

If the issuer is liquidated, they carry the right to receive interest

and/or a return of capital in priority to ordinary shareholders.

From a legal perspective, they are capital stock and therefore may

entitle holders to some degree of control depending on whether

they contain voting rights.

Derivative security

“A security derived from a debt instrument, share, loan, risk instrument or any other form”.

“A contract which derives its value from price of underlying securities”.

WHAT IS THE USE OF DERIVATIVE ?

Hedging

Speculation & Arbitrage

TYPES OF DERIVATIVES & ITS

MEANING• OTC (Over the Counter)

- contracts that are privately negotiated and traded directly

between two parties, without going through an exchange or

other intermediary

• Exchange traded Derivative

- derivatives products that are traded via specialized

derivatives exchanges or other exchanges

• Derivative includes forward, future, options, etc.

• Future contract ?

• It is legally binding agreement to buy or sell the underlying

security at future date.

• Option contract ?

• It is contract for purchase or sale of securities in future

which includes put & call in securities.

• Option to buy is called as call option.

• Option to sell is called as put option.

SECURITIES MARKETS

• There are two types of security market Primary and

Secondary market.

• In the primary market, the money for the securities is received

by the issuer of the securities from investors, typically in an

Initial Public Offering (IPO)

• In the secondary market, the securities are simply assets held by

one investor selling them to another investor, with the money

going from one investor to the other.

Procedure for Issuing Securities

The basic steps for issuing securities are –

1. Approval from the Board of Directors.

2. The Firm must file a Registration Statement with the SEBI. This

statement contains financial information, financial history and plans for

future.

3. The SEBI studies the registration statement during a waiting period.

During this time the firm may distribute copies of a preliminary

prospectus of the potential investors. This is called Red Herring

because bold red letters are printed on the cover.

The company cannot sell the securities during the waiting period.

4. A registration statement will become effective on the 20th day

after its filing unless the SEBI sends a letter of comment

suggesting changes.

5. On the effective date of the registration ,a price is determined

and a full fledged selling effort starts.

6. A final prospectus must accompany the delivery of securities or

confirmation of sale whichever comes first.

REGULATORY FRAMEWORK

The SEBI has framed regulations under these acts for registration and

regulation of the market intermediaries and for prevention of unfair

trade practices.

The responsibility for regulating the securities market is shared jointly

by Department of Economic Affairs (DEA), Department of Company

Affairs (DCA), Reserve Bank of India (RBI) and SEBI.

The four main legislations governing the securities market are :

• (a) The SEBI Act, 1992 - The SEBI Act, 1992 was enacted to

empower SEBI with statutory powers for protecting the interests of

investors in securities, promoting the development of the securities

market, and regulating the securities market

(b) The Companies Act, 1956 - It deals with issue, allotment and transfer

of securities and various aspects relating to company management. It

provides for standards of disclosure in the public issues, particularly in the

fields of company management and projects, information about other listed

companies under the same management.

(c) The Securities Contracts (Regulation) Act, 1956 - It gives the Central

Government regulatory jurisdiction over (a) stock exchanges through a

process of rrecognition and continued supervision, contracts in securities,

and listing of securities on stock exchanges.

(d) The Depositories Act, 1996 – It provides for the establishment of

depositories for securities to ensure transferability of securities with speed,

accuracy and security. This it provides for electronic maintenance and

transfer of ownership of demat securities.

Present scenario of bonds & securities RBI (2011) observed that listed corporate debt forms are

only 2% of GDP.

Very low as compare to Malaysia, Korea and China.

Follows chart shows that corporate bonds are not highly appreciable: