unit 2.pintroduction to capital marketsptx

8/14/2019 Unit 2.pintroduction to capital marketsptx

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UNIT 2Introduction to Capital Markets


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INTRODUCTION

Over the last few years, there has been a rapidchange in the Indian securities market,especially in the secondary market. Advanced

technology and online-based transactions havemodernized the stock exchanges.

There are 22 stock exchanges in India, the firstbeing the Bombay Stock Exchange (BSE),which began formal trading in 1875, making itone of the oldest in Asia.


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Advanced technology and online-based transactionshave modernized the stock exchanges.

In terms of the number of companies listed and totalmarket capitalization, the Indian equity market isconsidered large relative to the countrys stage of

economic development.

There are six authorized primary dealers. Currently,there are 31 mutual funds, out of which 21 are in the

private sector. Mutual funds were opened to the privatesector in 1992. Earlier, in 1987, banks were allowed toenter this business, breaking the monopoly of the UnitTrust of India (UTI), which maintains a dominantposition


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Before 1992, many factors obstructed the

expansion of equity trading. Fresh capital

issues were controlled through the CapitalIssues Control Act. Trading practices were not

transparent, and there was a large amount of

insider trading.

Recognizing the importance of increasing

investor protection, several measures wereenacted to improve the fairness of the capital

market.


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The Securities and Exchange Board of India(SEBI) was established in 1988.

There have been significant reforms in theregulation of the securities market since 1992

in conjunction with overall economic andfinancial reforms.

In 1992, the SEBI Act was enacted givingSEBI statutory status as an apex regulatorybody.


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And a series of reforms was introduced to

improve investor protection, automation of

stock trading, integration of national markets,and efficiency of market operations.

India has seen a tremendous change in the

secondary market for equity. Its equity market

will most likely be comparable with theworldsmost advanced secondary markets.


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Before 1995, markets in India used open

outcry, a trading process in which traders

shouted and hand signalled from within a pit.One major policy initiated by SEBI from 1993

involved the shift of all exchanges to screen-

based trading, motivated primarily by the needfor greater transparency.


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The first exchange to be based on an openelectronic limit order book was the National

Stock Exchange (NSE), which started tradingdebt instruments in June 1994 and equity inNovember 1994.

NSE has established satellite communicationswhich give all trading members of NSE equalaccess to the market. Similarly, BSE and the

Delhi Stock Exchange are both expanding thenumber of trading terminals located all overthe country.


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Tough Challenges

The Indian capital market still faces many

challenges if it is to promote more efficient

allocation and mobilization of capital in the

economy. First, market infrastructure has to beimproved as it hinders the efficient flow of

information and effective corporate

governance.


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Accounting standards will have to adapt to

internationally accepted accounting practices.

The court system and legal mechanism shouldbe enhanced to better protect small

shareholders rights and their capacity to

monitor corporate activities. Second, thetrading system has to be made more

transparent

Market information is a crucial public good

that should be disclosed or made available to

all participants to achieve market efficiency


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SEBI should also monitor more closely cases ofinsider trading. Third, India may need further

integration of the national capital market throughconsolidation of stock exchanges.

Fourth, the payment system has to be improved tobetter link the banking and securities industries.

The capital market cannot thrive alone; it has to

be integrated with the other segments of thefinancial system. The global trend is for theelimination of the traditional wall between banksand the securities market.


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CONCLUSION

Securities market development has to be

supported by overall macroeconomic and

financial sector environments. Further

liberalization of interest rates, reduced fiscaldeficits, fully market-based issuance of

Government securities, and a more competitive

banking sector will help in the development ofa sounder and a more efficient capital market

in India.


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CAPITAL MARKET REFORMS &

DEVELOPMENTS

Over the last few years, SEBI has announcedseveral far-reaching reforms to promote thecapital market and protect investor interests.

Reforms in the secondary market have focusedon three main areas: structure and functioning

of stock exchanges, automation of trading andpost trade systems, and the introduction ofsurveillance and monitoring systems


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Until the early 1990s, the trading and

settlement infrastructure of the Indian capital

market was poor. Trading on all stockexchanges was through open outcry, settlement

systems were paper-based, and market

intermediaries were largely unregulated.

The regulatory structure was fragmented and

there was neither comprehensive registrationnor an apex body of regulation of the securities

market.


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Stock exchanges were run as brokers clubs

as their management was largely composed of

brokers. There was no prohibition on insider

trading, or fraudulent and unfair trade

practices.

The Indian capital market has experienced a

process of structural transformation with

operations conducted to standards equivalentto those in the developed markets.


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It was opened up for investment by foreign

institutional investors (FIIs) in 1992 and Indian

companies were allowed to raise resourcesabroad through Global Depository Receipts

(GDRs) and Foreign Currency Convertible

Bonds (FCCBs).


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The primary and secondary segments of the

capital market expanded rapidly, with greaterinstitutionalization and wider participation of

individual investors accompanying this

growth. However, many problems, including

lack of confidence in stock investments,

institutional overlaps, and other governance

issues, remain as obstacles to the improvement

of Indian capital market efficiency.


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STOCK MARKETPrimary Market

Since 1991/92, the primary market has grownfast as a result of the removal of investmentrestrictions in the overall economy and a

repeal of the restrictions imposed by theCapital Issues Control Act.

1991/92, Rs62.15 billion was raised in theprimary market. This figure rose to Rs276.21billion in 1994/95.


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Total market capitalization as of 1997/98 was

Rs5,898 billion (Table 2), equivalent to about

half of Indias annual gross domestic product(GDP) for the same fiscal year. India compares

favourably with other emerging markets in this

respect.


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RISK MAMAGEMENT SYSTEM

SEBI has taken several measures to improve theintegrity of the secondary market. Legislative andregulatory changes have facilitated thecorporatization of stockbrokers.

Capital adequacy norms have been prescribed andare being enforced. A mark-to-market margin andintraday trading limit have also been imposed.

Further, the stock exchanges have put in placecircuit breakers, which are applied in times ofexcessive volatility


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The disclosure of short sales and long

purchases is now required at the end of the day

to reduce price volatility and further enhance

the integrity of the secondary market.


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Institutional Investors

MUTUAL FUNDS

Indian investors have been able to invest

through mutual funds since 1964, when UTI

was established. Indian mutual funds have

been organized through the Indian Trust Acts,

under which they have enjoyed certain tax

benefits


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Since 1993, private sector mutual funds have

been allowed, which brought competition to

the mutual fund industry. This has resulted in

the introduction of new products and

improvement of services.

The notification of the SEBI (Mutual Fund)

Regulations of 1993, brought about a

restructuring of the mutual fund industry


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The regulations prescribed disclosure and

advertisement norms for mutual funds, and, for

the first time, permitted the entry of private

sector mutual funds. FIIs registered with SEBI

may invest in domestic mutual funds, whether

listed or unlisted.


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FOREIGN INSTITUTIONAL

INVESTORS FIIs have been allowed to invest in the Indian securities

market since September 1992 when the Guidelines forForeign Institutional Investment were issued by theGovernment.

The SEBI (Foreign Institutional Investors) Regulationswere enforced in November 1995, largely based onthese Guidelines. The regulations require FIIs toregister with SEBI and to obtain approval from the

Reserve Bank of India (RBI) under the ForeignExchange Regulation Act to buy and sell securities,open foreign currency and rupee bank accounts, and toremit and repatriate funds


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Once SEBI registration has been obtained, an FIIdoes not require any further permission to buy or

sell securities or to transfer funds in and out of thecountry, subject to payment of applicable tax.

Foreign investors, whether registered as FIIs or

not, may also invest in Indian securities outsidethe FII process. Such investment requires case-by-case approval from the Foreign InvestmentPromotion Board (FIPB) in the Ministry of

Industry and RBI, or only from RBI depending onthe size of investment and the industry in whichthe investment is to be made.


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FIIs seem to have a strong impact on equity

price movements in India.


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Regulatory Framework

Participants in the Indian capital market arerequired to register with SEBI to carry out theirbusinesses. These include:

stockbrokers, sub brokers, share transfer agents,bankers to an issue, trustees of a trust deed,registrars to an issue, merchant bankers,

underwriters, portfolio managers, investmentadvisers, and other such intermediaries who maybe associated with the securities market in anymanner


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depositories, participants, custodians of

securities, FIIs, credit rating agencies, and

other such intermediaries who may beassociated with the securities market in any

manner; and venture capital funds and

collective investment schemes, includingmutual funds.


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Stock Brokers & Sub Brokers

The Indian law defines a stockbroker simply as

a member of a recognized stock exchange.

Therefore, a registered stockbroker is a

member of at least one of the recognizedIndian stock exchanges.

Stockbrokers are not allowed to buy, sell, or

deal in securities, unless they hold a certificate

granted by SEBI.


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Each stockbroker is subject to capital adequacy

requirements consisting of two components:

basic minimum capital and additional or

optional capital related to volume of business.

The basic minimum capital requirement varies

from one exchange to another. A SEBI

regulation requires stockbrokers of BSE or

NSE to maintain a minimum of Rs500,000(about $14,000), which is the largest

requirement among the stock exchanges.


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Sub Brokers

Most stockbrokers in India are still relatively

small. They cannot afford to directly cover

every retail investor in a geographically vast

country and in such a complex society. Thus,they are permitted to transact with sub brokers

as the latter play an indispensable role in

intermediating between investors and the stockmarket.


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An applicant for a sub broker certificate must beaffiliated with a stockbroker of a recognized stockexchange. A sub broker application may take theform of sole proprietorship, partnership, orcorporation.

No sub broker is supposed to buy, sell, or deal insecurities, without a certificate granted by SEBI.

The Indian law defines a sub broker as any

person, not being a member of a stock exchange,who acts on behalf of a stockbroker as an agent,or otherwise, to assist the investors in buying,selling, or dealing securities through such astockbroker.


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NYSE

The New York Stock Exchange, commonly

referred to as NYSE is a stock exchange

located at 11 Wall Street, Lower Manhattan,

New York City, New York, United States.

It is by far the world's largest stock exchange

by market capitalization of its listed companies

at US$13.39 trillion as of Dec 2010.

Average daily trading value was approximately

US$153 billion in 2008.


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The NYSE is operated by NYSE Euronext

(NYSE: NYX), which was formed by the

NYSE's 2007 merger with the fully electronicstock exchange Euronext.

The NYSE trading floor is located at 11 Wall

Street and is composed of four rooms used for

the facilitation of trading.


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The New York Stock Exchange (sometimes

referred to as "the Big Board") provides a

means for buyers and sellers to trade shares ofstock in companies registered for public

trading. The NYSE is open for trading Monday

through Friday from 9:30 am 4:00 pm ET,with the exception of holidays declared by the

Exchange in advance.


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On the trading floor, the NYSE trades in a

continuous auction format, where traders can

execute stock transactions on behalf ofinvestors. They will gather around the

appropriate post where a specialist broker, who

is employed by an NYSE member firm (that is,he/she is not an employee of the New York

Stock Exchange), acts as an auctioneer in an

open outcry auction market environment tobring buyers and sellers together and to

manage the actual auction.


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LONDON STOCK EXCHANGE

The London Stock Exchange is a stock exchangelocated in the City of London in the United Kingdom.

As of June 2011, the Exchange had a marketcapitalisation of US$3.7495 trillion (short scale),

making it the fourth-largest stock exchange in the worldby this measurement (and the largest in Europe).

The Exchange was founded in 1801 and its currentpremises are situated in Paternoster Square close to St

Paul's Cathedral in the City of London.

The Exchange is part of the London Stock ExchangeGroup.


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The London Stock Exchange runs several

markets for listing, giving an opportunity for

different sized companies to list. Internationalcompanies can list a number of products in

London including shares, depositary receipts

and debt, offering different and cost-effectiveways to raise capital. In 2004 the Exchange

opened a Hong Kong Office and has attracted

more than 200 companies from the Asia-

Pacific region.


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For the biggest companies exists the Premium

Listed Main Market. This operates a Super

Equivalence method where conditions of boththe UK Listing Authority as well as London

Stock Exchangesown criteria have to be met.

The largest IPO (Initial Public Offering) on theExchange was completed in May 2011 by

Glencore International plc. The company

raised $10bn at admission, making it one of

the largest IPO ever.

P f i l S iti M k t Thi k t f ilit t


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Professional Securities MarketThis market facilitatesthe raising of capital through the issue of specialist debtsecurities or depositary receipts (DRs) to professionalinvestors. The market operates under the status as a

Recognised Investment Exchange, and by July 2011 ithad 32 DRs, 108 Eurobonds and over 350 MediumTerm Notes.

Specialist Fund Market Is the London StockExchange dedicated market, designed to accept moresophisticated fund vehicles, governance models andsecurity. It is suitable only for institutional, professionaland highly knowledgeable investors. The Specialist

Fund Market is an EU Regulated Market and thussecurities admitted to the market are eligible for mostinvestor mandates providing a pool of liquidity forissuers admitted to the market

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