Transcript Click to add title - Southern India Regional Council

Capital Market Analysis and Corporate Laws
Paper 11
Introduction To Stock Markets
Date/ Time / version
© South Indian Regional Council for ICWAI
CAPITAL MARKET
|
Securities
Primary
Issue
Issue
of Shares
Issue of Debts
Hybrid instruments
Secondary
Stock Exchange
Origination
Underwriting
Distribution
Compliance to ACT
Trading
Clearing & settlement
Compliance
Statutes
Companies
Intermediaries
• Merchant
Members
Brokers
Sub-brokers
•
Merchant Brokers
((contd..)
CAPITAL MARKET (contd..)
 PRIMARY MARKET is concerned with the issue of securities made to the public
by the companies to raise funds. Guidelines issued by SEBI. Compliance to rules
and regulations important issues involved in the functioning of Primary Markets
could be discussed under:

Issue of Securities

Compliance to rules and regulations prescribed by SEBI and the Companies
Act, 1956, relating to the issue of securities

Norms for Disclosure and Protection of Investors’ interest

Role of Intermediaries
(contd..)
CAPITAL MARKET (contd..)
 Issue of Securities – Depending upon the company and other aspects, an issue may
be classified as

Public Issue – New Issue or Further Issue

Rights Issue

Private Placement
 Issuing Companies may be of following types:

New companies that makes first issue

New Companies set up by existing companies

Existing / Private / Closely Held / Unlisted Companies that make first issue

Existing Listed companies making public issue
DISCLOSURES AND THE PROTECTION OF
INVESTORS’ INTERESTS
 Required to make all information relevant in the Prospectus or Statement in Lieu of
Prospectus at the interest of public and trade. Intend to make issues to the public
are required to have the shares listed in the recognized stock exchanges.
 LISTING
o
Listing means admission of securities of an issuer to trading privileges on a
stock exchange through a formal agreement. The prime objective of admission
to dealings on the Exchange is to provide liquidity and marketability to
securities, as also to provide a mechanism for effective management of trading.

Listing on NSE provides qualifying companies with the broadest access to
investors, the greatest market depth and liquidity, cost-effective access to
(contd..)
DISCLOSURES AND THE PROTECTION
OF INVESTORS’ INTERESTS (contd...)
capital, the highest visibility, the fairest pricing, and investor benefits.
Securities listed on the Exchange are required to fulfill the eligibility criteria
for listing.

Listing is a matter of great importance to companies and investors, since this
provides the liquidity to the securities in the market. In order to avail the
benefit of listing the company should apply as per conditions of listing
agreement entered into with stock exchange. It is open to companies to get
their securities listed in Regional stock Exchanges and one or more of the other
Stock Exchanges in the country.
Companies seeking listing with Stock
Exchanges in other countries shall have to follow the rules and regulations of
those exchanges.
(contd..)
DISCLOSURES AND THE PROTECTION OF
INVESTORS’ INTERESTS (contd...)

Only Public Companies are allowed to list their securities in the Stock
Exchange. Private Limited Companies shall first convert into Public Limited
Company and amend the Articles of Association as application to Public
Limited Company.
TYPES OF LISTING

Initial Listing – for the first time by a company

Listing for Public Issue – When a company whose shares are listed on a stock
exchange comes out with a public issue, it has to list such issue with the stock
exchange.

Listing for Right Issue – When companies whose securities are listed on the
stock exchange issue securities to existing shareholder on right basis, it has to
list such rights issues on the concerned stock exchange.

Listing of Bonus shares – Shares issued as a result of capitalization of profit
through bonus issue shall list such issues also on the concerned stock exchange.

Listing for merger or amalgamation – When new shares are issued by an
amalgamated company to the shareholders of the amalgamating company, such
shares are also required to be listed on the concerned stock exchange.
BENEFITS OF LISTING

Liquidity

Public image of company enhanced

Disclosure of important information to investors

Listed companies can get loans and investments form Banks and FIs
easily.
 MULTIPLE LISTING – Companies with a paid up capital of over Rs. 5 Crores
should list its securities or have its securities permitted for trading on atleast one
more stock exchange in addition to the stock exchange of the region in which it is
located. Multiple listing provides arbitrage opportunities to the investors, whereby
can make profit based on the difference in the prices.
PROCEDURES AT THE STOCK EXCHANGE
 After the application is received the Listing Committee of the stock exchange will
scrutinize the application form to ensure:

the financial position of the company is sound

solvency and liquidity position are good

the issue is large and broad based to generate public interest
 If the application for listing is accepted, the company will be called to execute the
listing agreement with the stock exchange.
STOCK BROKER
 It is a stock exchange member who is licensed to buy or sell securities on his own
or on behalf of his client’s order. Person or Corporate Body, holding membership
of a recognized stock exchange engaged in buying and selling securities for clients
against brokerage. Brokers are easily accessible people for the investors. The
investor can only route their orders only through a broker / brokerage firm.
The
brokers charge commission at specified rate from their customers for the business
transacted.
 SUB BROKER – Person affiliated and authorized by a Stock Broker being a
member of Stock Exchange entitled to and engaged in buying, selling and dealing
in securities.
THE TRANSACTION PROCESS
 It is the business of brokers to execute orders as per the instructions of the clients, in
the process of share transactions the following steps are necessary to complete a
transaction:

Oral or written communication of order

Acceptance of order through ‘Order Confirmation Note’ – Oral acceptance only if
the client is well known to the broker

Only shares of companies listed in the stock exchange will be transacted

Execution of order for the unlisted securities through contacts with the members
of stock exchanges where the securities are listed

Transactions on securities listed in the stock exchanges are subject to prescribed
hours in each working day of the stock exchange.
(contd..)
THE TRANSACTION PROCESS (contd..)

The broker transacts with the other broker who is having order to match the script and
rate.

Once the rate and number of shares are decided the transaction is completed

Completed transaction will be written on the ‘transaction book’ and the brokers will sign
on each other’s transaction book.

The broker has to submit the details, regarding his net position till date in each of the
cleared scrip, in the Consolidated Daily Position of the cleared securities conditionally
and for the non-cleared securities, if required by the stock exchange authorities.

The broker who has transacted business for this client, will intimate the client by sending
a ‘Contract Note’ in duplicate. The client will sign on the duplicate and return it to the
broker as a matter of confirming the contract.
NATIONAL STOCK EXCHANGE
 In order to counter the influence of Bombay Stock Exchange and to reduce the
influence of certain powerful intermediaries in the stock market, a new stock
market was promoted in which both securities of companies and debt instruments
are traded, named NSE. NSE takes into account screen based trading.
 NSE was promoted in November 1992, as a limited company by insurance
companies, commercial banks and other financial institutions. The International
Securities Consultancy (ISC) of Hong Kong has helped in setting up of the NSE.
 Salient Features of NSE

Wide Coverage

No Fixed Location
(contd..)
NATIONAL STOCK EXCHANGE (contd..)

Confidential Trading – the identity of members is withheld and transactions are
entered only trough code numbers.

Transparency – opening and closing prices are available for investors. Can
also able to see orders being executed.

Effective matching – matching of orders in done immediately with the help of
the system, ensures best prices, as the computer network helps the trader to find
a suitable match for its order and waits till the match is located.

Borrowings made easy – for the debt instruments, the system helps by
providing a suitable match with reasonable interest and period of repayment.

Settlement – Automated trade matching system ensures quick and efficient
settlement of transactions.
CLASSIFICATION OF SHARES
 Alpha shares – frequently traded share in the market
 Technical shares – shares belonging to technological companies
 Growth Oriented Shares – shares which determine the economic growth of the
country
 Cyclical shares – shares whose prices fluctuate due to trade cycle fluctuations
 Blue Chip Shares – Companies with long standing and very good performance and
whose shares are in demand
 Rolling Settlement – Trade outstanding with stock market at the end of the day has
to be settled at the end of the settlement period
(contd..)
CLASSIFICATION OF SHARES (contd..)
 Permitted Securities – These are securities listed in one exchange and permitted to
be traded in other exchanges also.
 T + 2 Rolling Settlement
 Liquidity Shares – Shares which can be quickly traded
 DEMATERIALISATION

Dematerialization is the process by which shares in the physical/paper form are
cancelled and credit in the form of electronic balance is maintained on highly
secure systems at the depository.
POINTS IN SHARE TRADING
 Types of Orders

Net Rate Order

Market Rate Order

Limited Discretionary Order

Best Rate Order

Stop Loss Order
 Separation of transaction from delivery
 The effect of book closure on delivery
 The effect of bonus, right, dividends, etc., after trading but before delivery
 Trading at marketable lot
 Cleared, Non-cleared and Permitted Securities
What do “Promoters’ quota shares” mean? What is
the rationale behind prescribing the loci-in period on
promoters’ quota shares?

“Promoters’
quota shares” means the shares kept reserved for allotment to
promoters in case of issue of shares by listed companies.
The SEBI
(Disclosures and Investor Protection) Guidelines 2000 stipulates the minimum
contribution and also the limit up to which the promoters shall participate in the
issue of securities.

The rationale behind prescribing the lock-in period on promoter’s quota shares
is to restrict the promoters from selling their stake in the company after
inducing the public to invest their money. Further to ensure that the promoters
take serious efforts to make the project successful for which public money is
raised by issue of shares.
TRADING
 Carry forward trading - Carry forward trading has evolved in response to local
needs in India and it refers to the trading in which the settlement is postponed to the
next account period on payment of contango charges (known as vyaj badla) in
which the buyer pays interest on borrowed funds or the backwardation charges
(known as undha badla) in which the short seller pays a charge for borrowing
securities.
 Good - bad delivery - A share certificate together with its transfer form shall meet
all the requirements of title transfer from seller to buyer is called good delivery in
the market. Delivery of a share certificate together with deed of transfer which
does meet requirements of title of transfer from seller to buyer is called bad
delivery in the market.
(contd..)
TRADING
(contd..)
 Insider trading - Trading in a company’s shares by a connected person having
non-public, price sensitive information, such as expansion plans, financial results,
take over bids, etc. by virtue of his association with that company, is called insider
trading.
 Jumbo certificate - A jumbo share certificate is a single composite share certificate
formed by consolidating/aggregating a large number of market lots.
 Market lot - Market lot is the minimum number of shares of a particular security
that must be transacted on the exchange. Multiples of the market lot may also be
transacted. In demat scrips the market lot is one share.
(contd..)
TRADING (contd..)
 No-delivery period - Whenever a book closure or record date is announced by a
company, the exchange sets a no delivery period for that security. During this
period, trading is permitted in that security. However, these trades are settled only
after the no-delivery period is over. This is done to ensure that investor’s
entitlement for corporate benefits is clearly determined
 Odd lot - A number of shares that are less than the market lot are known as oddlots. Under the scrip-based delivery system, these shares are normally traded at a
discount to the prevailing price for the marketable lot.
 Price band - The daily /weekly price limits within which price of a security is
allowed to rise or fall.
(contd..)
TRADING (contd..)
 TRANSFER DEED is a form that is used for effecting transfer of shares or
debentures and is valid for a specific period. It should be sent to a company along
with the share certificate for registering the transfer. The transfer deed must be duly
stamped and signed by or on behalf the transferor and transferee and complete in all
respects.
 Limited Physical Market – Pursuant to the directive of SEBI to provide an exit
route for small investors holding physical shares in securities mandated for
compulsory dematerialised settlement, the Exchange has provided a facility for
such trading in physical shares not exceeding 500 shares. This market segment is
referred to as 'Limited Physical Market' (small window). The Limited Physical
Market was introduced on June 7, 1999.
(contd..)
TRADING (contd..)
BOLT – BSE on-Line Trading – modern trading practice introduced by the Bombay
Stock Exchange. Under this arrangement, the member-brokers and their authorized
assistants from their workstations can carry out trading. It provides for a search
based trading mechanism whereby two-way quotes are accepted from jobbers and
Market Makers and from brokers on the basis of orders received from investors.
The system matches them according to the logic specified in BOLT.
(contd..)
TRADING
(contd..)
 Computer to Computer Link (CTCL) facility - NSE offers a facility to its trading
members by which members can use their own trading front-end software in order
to trade on the NSE trading system. This facility called Computer-to-Computer
Link (CTCL) facility is available only to trading members of NSE.
CIRCUIT BREAKERS
 A mechanism by which exchanges temporarily suspend the trading in a security
when its prices are volatile and tend to breach the price band.
 Circuit breakers or price limits have been imposed by BSE to control volatility in
the price movements vis-à-vis prescribed daily and weekly limit for every stock.
Daily price limit is checked against the stocks closing price in the previous trading
session. Weekly price limit of stock depends on its closing price on the last trading
day in the previous week. The BOLT system is so structured that it rejects buy or
sell orders of a stock at prices outside the price limits, though it does not stop
trading itself.
AUTOMATED LENDING AND BORROWING
MECHANISM (ALBM)
 Automated Lending and Borrowing Mechanism is a scheme introduced by the
National Stock Exchange (NSE) that acts as a facilitator for securities lending. It
also facilitates financing in addition to securities lending. ALBM is basically a
modified carry forward system. Lending of securities and funds is a way by which
individuals can take advantage and participate in the bull period. It allows one to
participate in the market without worrying about downside risks and incidental
problems. It involves lending securities to those who had sold without being in
possession of the instruments (Short-Sellers). It helps generate income for those
with idle securities. It also includes lending of funds on those buying shares
without funds.
MARKET MAKING
 MARKET MAKING is a process whereby tow way quotes are offered for the
purpose facilitating trading in respect of certain scrip. The primary advantage of
market making is that it provides much needed liquidity to the securities. Also
increases the supply of scrips in the market and also triggers demand for the scrips
in the market. Market making helps in reducing the bane of concentration and thus
eliminating the influence of the unbiased sensitive index.
NATIONAL EXCHANGE FOR AUTOMATED
TRADING (NEAT)
 The sophisticated screen based trading system operated by NSE, which is order
driven without trading intermediaries to quote buy or sell prices of stock as an
inducement. The system matches the orders received and executed on a price time
priority basis systematically. It is possible for a trading member to enter different
types of order combining time, price and quantity related conditions. NSE also
operates a circuit breaker for daily and weekly price limits to control and monitor
violent price variations.
 NSE operates on the 'National Exchange for Automated Trading' (NEAT) system, a
fully automated screen based trading system, which adopts the principle of an order
driven market. NSE consciously opted in favour of an order driven system as
opposed to a quote driven system. This has helped reduce jobbing spreads not only
on NSE but in other exchanges as well, thus reducing transaction costs.
TRADING AT BSE
 Till March 1995 had on open outcry trading system – member-brokers used to
assemble in a trading ring for doing transactions.
 From March 1995 switched over to fully automated computerized mode- BOLT
system.
 Members enter orders for purchase or sale from Trader Work Stations (TWSs)
installed in their offices instead of assembling in the trading ring. Initially Order
and Quote driven, is currently only order driven. The facility of placing of quotes
has been discontinued w.e.f. August 13, 2001 in view of lack of market interest and
to improve system-matching efficiency.
(contd..)
TRADING AT BSE (contd..)
 The system, which is now only order driven, facilitates more efficient in-putting,
processing, automatic matching and faster execution of orders in a transparent
manner.
 Trading is conducted in an anonymous environment and the counter-party identity
is not revealed.
 For guidance and benefit of investors classified the Scrips into
 Equity - ‘A’, ‘B1’, ‘B2’ - based on certain qualitative & quantitative parameters
 Fixed Income Securities - ‘F’
 Government Securities - ‘G’ - from January 16, 2003
(contd..)
TRADING AT BSE (contd..)
 ‘Z’ group – companies not complied with the listing requirements / not resolved investor
complaints / not made arrangement with Depositories, etc.
 ‘C’ group – odd lot securities and Rights renunciations in all groups
 Computation of Closing price of scrips in the Cash Segment – on the basis of
weighted average price of all trades executed during the last 15 minutes of the continues
trading session. If not traded on last 15 minutes, the last traded price.
 Compulsory Rolling Settlement (CRS) Segment – to bring efficiency in settlement and
reduce the risk, the Group of 30 (G-30) had recommended in 1989 that all the secondary
market across the globe should adopt a rolling settlement cycle on T+3 basis by 1992.
 SEBI from December 31, 2001 required T+5 basis settlement, from April 1, 2002 T+3.
From April 1, 2003 T+2. For some of the Securities T+1 settlement.