Introduction to Capital Markets- New

8/2/2019 Introduction to Capital Markets- New

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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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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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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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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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EquityMarket

Primary

Market

-Publicissues- Private

placement

Dome

sticMarket

Internati

onalmarket

Secondary

Market-NSE-BSE-OTCEI-ISE-Regionalstock

exchanges

Derivatives

Market- ExchangeTradedFutures andOptions

Index

Stock



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

6666Prof Rashmi

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.

7575Prof Rashmi

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.

7676Prof Rashmi

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

7777Prof Rashmi

Delivery of Share


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Delivery of Share

Certificates Spot Delivery

Hand Delivery

Specified Delivery

7878Prof Rashmi

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.

8080Prof Rashmi

International Capital


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International CapitalMarkets

8181Prof Rashmi

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.

8282Prof Rashmi

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.

8383Prof Rashmi

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).

8585Prof Rashmi

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.

8686Prof Rashmi

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

8989Prof Rashmi

Participants in Forex


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Participants in ForexMarkets

Exporters

Importers

Commercial Banks

Central Banks.

9090Prof Rashmi

Authorized Dealers


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Authorized Dealers

Banks

Certain Financial Institutions

State and Urban Co-op Banks

Scheduled Commercial Banks

9191Prof Rashmi

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.

9393Prof Rashmi

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.

9494Prof Rashmi


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Participants

Hedgers

Speculators

Arbitrageurs

9595Prof Rashmi

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

9696Prof Rashmi

Investment Institutions


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Investment Institutions

Life Insurance Corporation of India

General Insurance Corporation

Unit Trust of India

Mutual Funds

9797Prof Rashmi

Banks


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Banks

9898Prof Rashmi

Liberalization


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Liberalization

9999Prof Rashmi

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

Documents

Introduction to Capital Markets- New