INVESTORS’ PERCEPTION ON CAPITAL FINANCIAL INSTRUMENTS IN AHMEDABAD

8/3/2019 INVESTORS PERCEPTION ON CAPITAL FINANCIAL INSTRUMENTS IN AHMEDABAD

1/139

SECONDARY

DATA

1


2/139

INTODUCTION

In today's financial marketplace, financial instruments can be classified generally as

equity based, representing ownership of the asset, or debt based, representing a loan madeby an investor to the owner of the asset. Foreign exchange instruments comprise a third,

unique type of instrument.

Financial instruments can be thought of as easily tradable packages of capital, each

having their own unique characteristics and structure. The wide array of financial

instruments in today's marketplace allows for the efficient flow of capital amongst the

world's investors.

Source: www.answers.com

INDIAN FINANCIAL SYSTEM

The economic development of a nation is reflected by the progress of the various

economic units, broadly classified into corporate sector, government and household

sector. While performing their activities these units will be placed in a

surplus/deficit/balanced budgetary situations.

2


3/139

There are areas or people with surplus funds and there are those with a deficit. A

financial system or financial sector functions as an intermediary and facilitates the flow

of funds from the areas of surplus to the areas of deficit. A Financial System is a

composition of various institutions, markets, regulations and laws, practices, money

manager, analysts, transactions and claims and liabilities.

Financial System;

The word "system", in the term "financial system", implies a set of complex and closely

connected or interlined institutions, agents, practices, markets, transactions, claims, and

liabilities in the economy. The financial system is concerned about money, credit and

finance-the three terms are intimately related yet are somewhat different from each other.Indian financial system consists of financial market, financial instruments and financial

intermediation. These are briefly discussed below;

Constituents of a Financial System

3


4/139

FINANCIAL MARKETS

A Financial Market can be defined as the market in which financial assets are created or

transferred. As against a real transaction that involves exchange of money for real goods

or services, a financial transaction involves creation or transfer of a financial asset.

Financial Assets or Financial Instruments represents a claim to the payment of a sum of

money sometime in the future and /or periodic payment in the form of interest or

dividend.

1. Money Market:

4

Capital MarketMoney Market Forex Market Credit Market

Financial Market


5/139

The money market ifs a wholesale debt market for low-risk, highly-liquid, short-term

instrument. Funds are available in this market for periods ranging from a single day up to

a year. This market is dominated mostly by government, banks and financial institutions.

2. Capital Market:

The capital market is designed to finance the long-term investments. The transactions

taking place in this market will be for periods over a year.

3. Forex Market:

The Forex market deals with the multicurrency requirements, which are met by the

exchange of currencies. Depending on the exchange rate that is applicable, the transfer of

funds takes place in this market. This is one of the most developed and integrated market

across the globe.

4. Credit Market:

Credit market is a place where banks, FIs and NBFCs purvey short, medium and long-

term loans to corporate and individuals.

FINANCIAL INTERMEDIATION

Having designed the instrument, the issuer should then ensure that these financial assetsreach the ultimate investor in order to garner the requisite amount. When the borrower of

funds approaches the financial market to raise funds, mere issue of securities will not

suffice. Adequate information of the issue, issuer and the security should be passed on to

take place. There should be a proper channel within the financial system to ensure such

transfer. To serve this purpose, Financial intermediaries came into existence. Financial

5


6/139

intermediation in the organized sector is conducted by a wide range of institutions

functioning under the overall surveillance of the Reserve Bank of India. In the initial

stages, the role of the intermediary was mostly related to ensure transfer of funds from

the lender to the borrower. This service was offered by banks, FIs, brokers, and dealers.

However, as the financial system widened along with the developments taking place in

the financial markets, the scope of its operations also widened. Some of the important

intermediaries operating ink the financial markets include; investment bankers,

underwriters, stock exchanges, registrars, depositories, custodians, portfolio managers,

mutual funds, financial advertisers financial consultants, primary dealers, satellite

dealers, self regulatory organizations, etc. Though the markets are different, there may be

a few intermediaries offering their services in move than one market e.g. underwriter.

However, the services offered by them vary from one market to another.

Intermediary Market Role

Stock Exchange Capital Market Secondary Market to securities

Investment Bankers Capital Market, Credit MarketCorporate advisory services,

Issue of securities

UnderwritersCapital Market, Money

Market

Subscribe to unsubscribed

portion of securities

Registrars, Depositories,

CustodiansCapital Market

Issue securities to the investors

on behalf of the company and

handle share transfer activity

6


7/139

Primary Dealers Satellite

DealersMoney Market

Market making in government

securities

Forex Dealers Forex MarketEnsure exchange ink

currencies

FINANCIAL INSTRUMENTS

A contract regarding any combination of capital assets is called a financial instrument,

and may serve as a

medium of exchange,

standard of deferred payment,

unit of account, or

store of value

Most indigenous forms of money (wampum, shells, tally sticks and such) and the modern

fiat money are only a "symbolic" storage of value and not a real storage of value like

commodity money.

7


8/139

Source: www.indianmba.com

MONEY MARKET INSTRUMENTS:

The money market can be defined as a market for short-term money and financial assets

that are near substitutes for money. The term short-term means generally a period up to

one year and near substitutes to money is used to denote any financial asset which can be

quickly converted into money with minimum transaction cost.

Some of the important money market instruments are briefly discussed below;

1. Call/Notice Money

2. Treasury Bills

3. Term Money

4. Certificate of Deposit

5. Commercial Papers

1. Call /Notice-Money Market

Call/Notice money is the money borrowed or lent on demand for a very short period.

When money is borrowed or lent for a day, it is known as Call (Overnight) Money.

Intervening holidays and/or Sunday are excluded for this purpose. Thus money, borrowedon a day and repaid on the next working day, (irrespective of the number of intervening

holidays) is "Call Money". When money is borrowed or lent for more than a day and up

to 14 days, it is "Notice Money". No collateral security is required to cover these

transactions.

8
http://www.stcionline.com/working-of-money-market.htmlhttp://www.stcionline.com/working-of-money-market.htmlhttp://www.stcionline.com/call-notice-money-inter-bank-term-money.htmlhttp://www.stcionline.com/deposit-market-inter-corporate-market.htmlhttp://www.stcionline.com/commercial-papers-market.htmlhttp://www.stcionline.com/commercial-papers-market.htmlhttp://www.stcionline.com/working-of-money-market.htmlhttp://www.stcionline.com/call-notice-money-inter-bank-term-money.htmlhttp://www.stcionline.com/deposit-market-inter-corporate-market.htmlhttp://www.stcionline.com/commercial-papers-market.htmlhttp://www.stcionline.com/working-of-money-market.html


9/139

2. Inter-Bank Term Money

Inter-bank market for deposits of maturity beyond 14 days is referred to as the term

money market. The entry restrictions are the same as those for Call/Notice Money except

that, as per existing regulations, the specified entities are not allowed to lend beyond 14

days.

3. Treasury Bills.

Treasury Bills are short term (up to one year) borrowing instruments of the union

government. It is an IOU of the Government. It is a promise by the Government to pay astated sum after expiry of the stated period from the date of issue (14/91/182/364 days i.e.

less than one year). They are issued at a discount to the face value, and on maturity the

face value is paid to the holder. The rate of discount and the corresponding issue price are

determined at each auction.

4. Certificate of Deposits

Certificates of Deposit (CDs) is a negotiable money market instrument nd issued in

dematerialized form or as a Usance Promissory Note, for funds deposited at a bank orother eligible financial institution for a specified time period. Guidelines for issue of CDs

are presently governed by various directives issued by the Reserve Bank of India, as

amended from time to time. CDs can be issued by (i) scheduled commercial banks

excluding Regional Rural Banks (RRBs) and Local Area Banks (LABs); and (ii) select

all-India Financial Institutions that have been permitted by RBI to raise short-term

resources within the umbrella limit fixed by RBI. Banks have the freedom to issue CDs

depending on their requirements. An FI may issue CDs within the overall umbrella limit

fixed by RBI, i.e., issue of CD together with other instruments viz., term money, term

deposits, commercial papers and interoperate deposits should not exceed 100 per cent of

its net owned funds, as per the latest audited balance sheet.

5. Commercial Paper

9


10/139

CP is a note in evidence of the debt obligation of the issuer. On issuing commercial paper

the debt obligation is transformed into an instrument. CP is thus an unsecured promissory

note privately placed with investors at a discount rate to face value determined by market

forces. CP is freely negotiable by endorsement and delivery. A company shall be eligible

to issue CP provided - (a) the tangible net worth of the company, as per the latest audited

balance sheet, is not less than Rs. 4 crore; (b) the working capital (fund-based) limit of

the company from the banking system is not less than Rs.4 crore and (c) the borrowal

account of the company is classified as a Standard Asset by the financing bank/s. The

minimum maturity period of CP is 7 days. The minimum credit rating shall be P-2 of

CRISIL or such equivalent rating by other agencies.

CAPITAL MARKET INSTRUMENTS:

The capital market generally consists of the following long term period i.e., more than

one year period, financial instruments; in the equity segment Equity shares, preference

shares, convertible preference shares, non-convertible preference shares etc and in the

debt segment debentures, zero coupon bonds, deep discount bonds etc The capital

market instruments are discussed afterwards in detail.

HYBRID INSTRUMENTS:

Hybrid instruments have both the features of equity and debenture. This kind of

instruments is called as hybrid instruments. Examples are convertible debentures,

warrants etc

Source: www.indianmba.com

INDIAN capital market: HISTORY

EVOLUTION

Indian Stock Markets are one of the oldest in Asia. Its history dates back to nearly 200

years ago. The earliest records of security dealings in India are meager and obscure. The

10


11/139

East India Company was the dominant institution in those days and business in its loan

securities used to be transacted towards the close of the eighteenth century.

By 1830's business on corporate stocks and shares in Bank and Cotton presses took place

in Bombay. Though the trading list was broader in 1839, there were only half a dozen

brokers recognized by banks and merchants during 1840 and 1850.

The 1850's witnessed a rapid development of commercial enterprise and brokerage

business attracted many men into the field and by 1860 the number of brokers increased

into 60.

In 1860-61 the American Civil War broke out and cotton supply from United States of

Europe was stopped; thus, the 'Share Mania' in India begun. The number of brokers

increased to about 200 to 250. However, at the end of the American Civil War, in 1865, a

disastrous slump began (for example, Bank of Bombay Share which had touched Rs 2850

could only be sold at Rs. 87).

At the end of the American Civil War, the brokers who thrived out of Civil War in 1874,

found a place in a street (now appropriately called as Dalal Street) where they would

conveniently assemble and transact business. In 1887, they formally established in

Bombay, the "Native Share and Stock Brokers' Association" (which is alternatively

known as "The Stock Exchange "). In 1895, the Stock Exchange acquired a premise in

the same street and it was inaugurated in 1899. Thus, the Stock Exchange at Bombay wasconsolidated.

OTHER LEADING CITIES IN STOCK MARKET OPERATIONS

Ahmedabad gained importance next to Bombay with respect to cotton textile industry.

After 1880, many mills originated from Ahmedabad and rapidly forged ahead. As new

mills were floated, the need for a Stock Exchange at Ahmedabad was realised and in

1894 the brokers formed "The Ahmedabad Share and Stock Brokers' Association".

What the cotton textile industry was to Bombay and Ahmedabad, the jute industry was to

Calcutta. Also tea and coal industries were the other major industrial groups in Calcutta.

After the Share Mania in 1861-65, in the 1870's there was a sharp boom in jute shares,

which was followed by a boom in tea shares in the 1880's and 1890's; and a coal boom

11


12/139

between 1904 and 1908. On June 1908, some leading brokers formed "The Calcutta

Stock Exchange Association".

In the beginning of the twentieth century, the industrial revolution was on the way in

India with the Swadeshi Movement; and with the inauguration of the Tata Iron and Steel

Company Limited in 1907, an important stage in industrial advancement under Indian

enterprise was reached.

Indian cotton and jute textiles, steel, sugar, paper and flour mills and all companies

generally enjoyed phenomenal prosperity, due to the First World War.

In 1920, the then demure city of Madras had the maiden thrill of a stock exchange

functioning in its midst, under the name and style of "The Madras Stock Exchange" with

100 members. However, when boom faded, the number of members stood reduced from

100 to 3, by 1923, and so it went out of existence.

In 1935, the stock market activity improved, especially in South India where there was a

rapid increase in the number of textile mills and many plantation companies were floated.

In 1937, a stock exchange was once again organized in Madras - Madras Stock Exchange

Association (Pvt) Limited. (In 1957 the name was changed to Madras Stock Exchange

Limited).

Lahore Stock Exchange was formed in 1934 and it had a brief life. It was merged with

the Punjab Stock Exchange Limited, which was incorporated in 1936.

INDIAN STOCK EXCHANGES - AN UMBRELLA GROWTH

The Second World War broke out in 1939. It gave a sharp boom which was followed by a

slump. But, in 1943, the situation changed radically, when India was fully mobilized as a

supply base.

On account of the restrictive controls on cotton, bullion, seeds and other commodities,

those dealing in them found in the stock market as the only outlet for their activities.

They were anxious to join the trade and their number was swelled by numerous others.

Many new associations were constituted for the purpose and Stock Exchanges in all parts

of the country were floated.

12


13/139

The Uttar Pradesh Stock Exchange Limited (1940), Nagpur Stock Exchange Limited

(1940) and Hyderabad Stock Exchange Limited (1944) were incorporated.

In Delhi two stock exchanges - Delhi Stock and Share Brokers' Association Limited and

the Delhi Stocks and Shares Exchange Limited - were floated and later in June 1947,

amalgamated into the Delhi Stock Exchange Association Limited.

POST-INDEPENDENCE SCENARIO

Most of the exchanges suffered almost a total eclipse during depression. Lahore

Exchange was closed during partition of the country and later migrated to Delhi and

merged with Delhi Stock Exchange.

Bangalore Stock Exchange Limited was registered in 1957 and recognized in 1963.Most of the other exchanges languished till 1957 when they applied to the Central

Government for recognition under the Securities Contracts (Regulation) Act, 1956. Only

Bombay, Calcutta, Madras, Ahmedabad, Delhi, Hyderabad and Indore, the well

established exchanges, were recognized under the Act. Some of the members of the other

Associations were required to be admitted by the recognized stock exchanges on a

concessional basis, but acting on the principle of unitary control, all these pseudo stock

exchanges were refused recognition by the Government of India and they thereupon

ceased to function.

Thus, during early sixties there were eight recognized stock exchanges in India

(mentioned above). The number virtually remained unchanged, for nearly two decades.

During eighties, however, many stock exchanges were established: Cochin Stock

Exchange (1980), Uttar Pradesh Stock Exchange Association Limited (at Kanpur, 1982),

and Pune Stock Exchange Limited (1982), Ludhiana Stock Exchange Association

Limited (1983), Gauhati Stock Exchange Limited (1984), Kanara Stock Exchange

Limited (at Mangalore, 1985), Magadh Stock Exchange Association (at Patna, 1986),Jaipur Stock Exchange Limited (1989), Bhubaneswar Stock Exchange Association

Limited (1989), Saurashtra Kutch Stock Exchange Limited (at Rajkot, 1989), Vadodara

Stock Exchange Limited (at Baroda, 1990) and recently established exchanges -

Coimbatore and Meerut. Thus, at present, there are totally twenty one recognized stock

13


14/139

exchanges in India excluding the Over The Counter Exchange of India Limited (OTCEI)

and the National Stock Exchange of India Limited (NSEIL).

The Table given below portrays the overall growth pattern of Indian stock markets since

independence. It is quite evident from the Table that Indian stock markets have not only

grown just in number of exchanges, but also in number of listed companies and in capital

of listed companies. The remarkable growth after 1985 can be clearly seen from the

Table, and this was due to the favouring government policies towards security market

industry.

Growth Pattern of the Indian Stock Market

Sl.No.

As on 31st 1946

1961

1971

1975

1980

1985 1991 1995

December

1

No. of 7 7 8 8 9 14 20 22StockExchanges

2No. of 112

51203

1599

1552

2265

4344 6229 8593

Listed Cos.

3

No. of Stock 1506

2111

2838

3230

3697

6174 8967 11784

Issues ofListed Cos.

4

Capital ofListed

270 753 1812

2614

3973

9723 32041 59583

Cos. (Cr. Rs.)

5

Market valueof

971 1292

2675

3273

6750

25302

110279

478121

Capital ofListedCos. (Cr. Rs.)

6

Capital per 24 63 113 168 175 224 514 693Listed Cos.

(4/2)(Lakh Rs.)7 Market Value

of86 107 167 211 298 582 1770 5564

Capital perListedCos. (LakhRs.)

14


15/139

(5/2)

8

Appreciatedvalue

358 170 148 126 170 260 344 803

of Capital perListed Cos.

(Lak Rs.)Source: Various issues of the Stock Exchange Official Directory, Vol.2 (9) (iii), Bombay

Stock Exchange, Bombay.

TRADING PATTERN OF THE INDIAN STOCK MARKET

Trading in Indian stock exchanges is limited to listed securities of public limited

companies. They are broadly divided into two categories, namely, specified securities

(forward list) and non-specified securities (cash list). Equity shares of dividend paying,growth-oriented companies with a paid-up capital of at least Rs.50 million and a market

capitalization of at least Rs.100 million and having more than 20,000 shareholders are,

normally, put in the specified group and the balance in non-specified group.

Two types of transactions can be carried out on the Indian stock exchanges: (a) spot

delivery transactions "for delivery and payment within the time or on the date stipulated

when entering into the contract which shall not be more than 14 days following the date

of the contract" : and (b) forward transactions "delivery and payment can be extended by

further period of 14 days each so that the overall period does not exceed 90 days from the

date of the contract". The latter is permitted only in the case of specified shares. The

brokers who carry over the outstanding pay carry over charges (cantango or

backwardation) which are usually determined by the rates of interest prevailing.

A member broker in an Indian stock exchange can act as an agent, buy and sell securities

for his clients on a commission basis and also can act as a trader or dealer as a principal,

buy and sell securities on his own account and risk, in contrast with the practice

prevailing on New York and London Stock Exchanges, where a member can act as ajobber or a broker only.

The nature of trading on Indian Stock Exchanges are that of age old conventional style of

face-to-face trading with bids and offers being made by open outcry. However, there is a

great amount of effort to modernize the Indian stock exchanges in the very recent times.

15


16/139

OVER THE COUNTER EXCHANGE OF INDIA (OTCEI)

The traditional trading mechanism prevailed in the Indian stock markets gave way to

many functional inefficiencies, such as, absence of liquidity, lack of transparency, unduly

long settlement periods and benami transactions, which affected the small investors to a

great extent. To provide improved services to investors, the country's first ring less, scrip

less, electronic stock exchange - OTCEI - was created in 1992 by country's premier

financial institutions - Unit Trust of India, Industrial Credit and Investment Corporation

of India, Industrial Development Bank of India, SBI Capital Markets, Industrial Finance

Corporation of India, General Insurance Corporation and its subsidiaries and CanBank

Financial Services.

Trading at OTCEI is done over the centers spread across the country. Securities traded on

the OTCEI are classified into:

Listed Securities - The shares and debentures of the companies listed on the OTC

can be bought or sold at any OTC counter all over the country and they should not

be listed anywhere else

Permitted Securities - Certain shares and debentures listed on other exchanges and

units of mutual funds are allowed to be traded

Initiated debentures - Any equity holding at least one lakh debentures of a

particular scrip can offer them for trading on the OTC.

OTC has a unique feature of trading compared to other traditional exchanges. That is,

certificates of listed securities and initiated debentures are not traded at OTC. The

original certificate will be safely with the custodian. But, a counter receipt is generated

out at the counter which substitutes the share certificate and is used for all transactions.

In the case of permitted securities, the system is similar to a traditional stock exchange.

The difference is that the delivery and payment procedure will be completed within 14

days.

16


17/139

Compared to the traditional Exchanges, OTC Exchange network has the following

advantages:

OTCEI has widely dispersed trading mechanism across the country which

provides greater liquidity and lesser risk of intermediary charges.

Greater transparency and accuracy of prices is obtained due to the screen-based

scrip less trading.

Since the exact price of the transaction is shown on the computer screen, the

investor gets to know the exact price at which s/he is trading.

Faster settlement and transfer process compared to other exchanges.

In the case of an OTC issue (new issue), the allotment procedure is completed in a

month and trading commences after a month of the issue closure, whereas it takesa longer period for the same with respect to other exchanges.

Thus, with the superior trading mechanism coupled with information transparency

investors are gradually becoming aware of the manifold advantages of the OTCEI.

NATIONAL STOCK EXCHANGE (NSE)

With the liberalization of the Indian economy, it was found inevitable to lift the Indian

stock market trading system on par with the international standards. On the basis of the

recommendations of high powered Pherwani Committee, the National Stock Exchange

was incorporated in 1992 by Industrial Development Bank of India, Industrial Credit and

Investment Corporation of India, Industrial Finance Corporation of India, all Insurance

Corporations, selected commercial banks and others.

Trading at NSE can be classified under two broad categories:

(a) Wholesale debt market and

(b) Capital market.

Wholesale debt market operations are similar to money market operations - institutions

and corporate bodies enter into high value transactions in financial instruments such as

government securities, treasury bills, public sector unit bonds, commercial paper,

certificate of deposit, etc.

17


18/139

There are two kinds of players in NSE:

(a) Trading members and (b) Participants.

Recognized members of NSE are called trading members who trade on behalf of

themselves and their clients. Participants include trading members and large players likebanks who take direct settlement responsibility.

Trading at NSE takes place through a fully automated screen-based trading mechanism

which adopts the principle of an order-driven market. Trading members can stay at their

offices and execute the trading, since they are linked through a communication network.

The prices at which the buyer and seller are willing to transact will appear on the screen.

When the prices match the transaction will be completed and a confirmation slip will be

printed at the office of the trading member.

NSE has several advantages over the traditional trading exchanges. They are as follows:

NSE brings an integrated stock market trading network across the nation.

Investors can trade at the same price from anywhere in the country since inter-

market operations are streamlined coupled with the countrywide access to the

securities.

Delays in communication, late payments and the malpractices prevailing in the

traditional trading mechanism can be done away with greater operationalefficiency and informational transparency in the stock market operations, with the

support of total computerized network.

Unless stock markets provide professionalized service, small investors and foreign

investors will not be interested in capital market operations. And capital market being one

of the major source of long-term finance for industrial projects, India cannot afford to

damage the capital market path. In this regard NSE gains vital importance in the Indian

capital market system.

Source: http://www.yeahindia.com/c-india1.htm

18


19/139

CAPITAL MARKET: AN OVERVIEW

Capital market is one of the most important segments of the Indian financial system. It is

the market available to the companies for meeting their requirements of the long-term

funds. It refers to all the facilities and the institutional arrangements for borrowing and

lending funds. In other words, it is concerned with the raising of money capital for

purposes of making long-term investments. The market consists of a number of

individuals and institutions (including the Government) that canalize the supply and

demand for long -term capital and claims on it. The demand for long term capital comes

predominantly from private sector manufacturing industries, agriculture sector, trade and

the Government agencies. While, the supply of funds for the capital market comes largely

from individual and corporate savings, banks, insurance companies, specialized financing

agencies and the surplus of Governments.

19


20/139

The Indian capital market is broadly divided into the gilt-edged market and the industrial

securities market.

The gilt-edged market refers to the market for Government and semi-government

securities, backed by the Reserve Bank of India (RBI). Government securities are

tradable debt instruments issued by the Government for meeting its financial

requirements. The term gilt-edged means 'of the best quality'. This is because the

Government securities do not suffer from risk of default and are highly liquid (as they

can be easily sold in the market at their current price). The open market operations of

the RBI are also conducted in such securities.

The industrial securities market refers to the market which deals in equities anddebentures of the corporate. It is further divided into primary market and secondary

market.

a. Primary market (new issue market):- deals with 'new securities', that is, securities

which were not previously available and are offered to the investing public for the

first time. It is the market for raising fresh capital in the form of shares and

debentures. It provides the issuing company with additional funds for starting a newenterprise or for either expansion or diversification of an existing one, and thus its

contribution to company financing is direct. The new offerings by the companies are

made either as an initial public offering (IPO) or rights issue.

b. Secondary market/ stock market (old issues market or stock exchange):- is the

market for buying and selling securities of the existing companies. Under this,

securities are traded after being initially offered to the public in the primary market

and/or listed on the stock exchange. The stock exchanges are the exclusive centers for

trading of securities. It is a sensitive barometer and reflects the trends in the economy

through fluctuations in the prices of various securities. It been defined as, "a body of

individuals, whether incorporated or not, constituted for the purpose of assisting,

20


21/139

regulating and controlling the business of buying, selling and dealing in securities".

Listing on stock exchanges enables the shareholders to monitor the movement of the

share prices in an effective manner. This assist them to take prudent decisions on

whether to retain their holdings or sell off or even accumulate further. However, to

list the securities on a stock exchange, the issuing company has to go through set

norms and procedures.

REGULATORY FRAMEWORK

In India, the capital market is regulated by the Capital Markets Division of the

Department of Economic Affairs, Ministry of Finance. The division is responsible for

formulating the policies related to the orderly growth and development of the securities

markets (i.e. share, debt and derivatives) as well as protecting the interest of the investors.

In particular, it is responsible for (i) institutional reforms in the securities markets, (ii)

building regulatory and market institutions, (iii) strengthening investor protection

mechanism, and (iv) providing efficient legislative framework for securities markets,

such as Securities and Exchange Board of India Act, 1992 (SEBI Act 1992); Securities

Contracts (Regulation) Act, 1956; and the Depositories Act, 1996. The division

administers these legislations and the rules framed there under.

The Securities and Exchange Board of India (SEBI) is the regulatory authorityestablished under the SEBI Act 1992, in order to protect the interests of the investors in

securities as well as promote the development of the capital market. It involves regulating

the business in stock exchanges; supervising the working of stock brokers, share transfer

agents, merchant bankers, underwriters, etc; as well as prohibiting unfair trade practices

in the securities market. The following departments of SEBI take care of the activities in

the secondary market:-

Market Intermediaries Registration and Supervision Department (MIRSD) -

concerned with the registration, supervision, compliance monitoring and inspections

of all market intermediaries in respect of all segments of the markets, such as equity,

equity derivatives, debt and debt related derivatives.

21


22/139

Market Regulation Department (MRD) - concerned with formulation of new policies

as well as supervising the functioning and operations (except relating to derivatives)

of securities exchanges, their subsidiaries, and market institutions such as Clearing

and settlement organizations and Depositories.

Derivatives and New Products Departments (DNPD) - concerned with supervising

trading at derivatives segments of stock exchanges, introducing new products to be

traded and consequent policy changes.

Policy Measures and Initiatives

A number of initiatives have been undertaken by the Government, from time to time, so

as to provide financial and regulatory reforms in the primary and secondary market

segments of the capital market. These measures broadly aim to sustain the confidence of

investors (both domestic and foreign) in the countrys capital market.

The policy initiatives that have been undertaken in the primary market during 2006-07

include:-

SEBI has notified the disclosures and other related requirements for companies

desirous of issuing Indian depository receipts in India. It has been mandated that:- (i)

the issuer must be listed in its home country; (ii) it must not have been barred by any

regulatory body; and (iii) it should have a good track record of compliance of

securities market regulations.

As a condition of continuous listing, listed companies have to maintain a minimum

level of public shareholding at 25 per cent of the total shares issued. The exemptions

include:- (i) companies which are required to maintain more than 10 per cent, but less

than 25 per cent in accordance with the Securities Contracts (Regulation) Rules,

1957; and (ii) companies that have two crore or more of listed shares and Rs. 1,000

crore or more of market capitalization.

SEBI has specified that shareholding pattern will be indicated by listed companies

under three categories, namely, 'shares held by promoter and promoter group'; 'shares

22


23/139

held by public' and 'shares held by custodians and against which depository receipts

have been issued'.

In accordance with the guidelines issued by SEBI, the issuers are required to state on

the cover page of the offer document whether they have opted for an IPO (InitialPublic Offering) grading from the rating agencies. In case the issuers opt for a

grading, they are required to disclose the grades including the unaccepted grades in

the prospectus.

SEBI has facilitated a quick and cost effective method of raising funds, termed as

'Qualified Institutional Placement (QIP)' from the Indian securities market by way of

private placement of securities or convertible bonds with the Qualified Institutional

Buyers.

SEBI has stipulated that the benefit of no lock-in on the pre-issue shares of an

unlisted company making an IPO, currently available to the shares held by Venture

Capital Funds (VCFs)/Foreign Venture Capital Investors (FVCIs), shall be limited

to:- (i) the shares held by VCFs or FVCIs registered with SEBI for a period of at least

one year as on the date of filing draft prospectus with SEBI; and (ii) the shares issued

to SEBI registered VCFs/FVCIs upon conversion of convertible instruments during

the period of one year prior to the date of filing draft prospectus with SEBI.

In order to regulate pre-issue publicity by companies which are planning to make an

issue of securities, SEBI has amended the 'Disclosure and Investor Protection

Guidelines' to introduce 'Restrictions on Pre-issue Publicity'. The restrictions, inter

alia, require an issuer company to ensure that its publicity is consistent with its past

practices, does not contain projections/ estimates/ any information extraneous to the

offer document filed with SEBI.

Similarly, the policy initiatives that have been undertaken in the secondary marketduring 2006-07 include:-

In continuation of the comprehensive risk management system put in place since May

2005 in T+2 rolling settlement scenario for the cash market, the stock exchanges have

been advised to update the applicable Value at Risk (VaR) margin at least 5 times in a

23


24/139

day by taking the closing price of the previous day at the start of trading and the

prices at 11:00 a.m., 12:30 p.m., 2:00 p.m. and at the end of the trading session. This

has been done to align the risk management framework across the cash and derivative

markets.

In order to strengthen the Know Your Client norms and to have sound audit trail of

the transactions in the securities market, 'Permanent Account Number (PAN)' has

been made mandatory with effect from January 1, 2007 for operating a beneficiary

owner account and for trading in the cash segment.

In order to implement the proposal on creation of a unified platform for trading of

corporate bonds, SEBI has stipulated that the BSE Limited would set up and maintain

the corporate bond reporting platform. The reporting shall be made for all trades in

listed debt securities issued by all institutions such as banks, public sector

undertakings, municipal corporations, corporate bodies and companies.

In line with the Government of Indias policy on foreign investments in infrastructure

companies in the Indian securities market, the limits for foreign investment in stock

exchanges, depositories and clearing corporations, have been specified as follows:- (i)

foreign investment up to 49 per cent will be allowed in these companies with a

separate Foreign Direct Investment (FDI) cap of 26 per cent and cap of 23 per cent on

Foreign institutional investment (FII); (ii) FDI will be allowed with specific prior

approval of Foreign Investment Promotion Board (FIPB); (iii) FII will be allowed

only through purchases in the secondary market; and (iv) FII shall not seek and will

not get representation on the board of directors.

The application process of FII investment has been simplified and new categories of

investment (insurance and reinsurance companies, foreign central banks, investment

managers, international organizations) have been included under FII.

Initial issue expenses and dividend distribution procedure for mutual funds have been

rationalized.

24


25/139

Mutual funds have been permitted to introduce Gold Exchange Traded Funds.

In the Government securities market, the RBI has ceased to participate in primary

issues of Central Government securities, in line with the provisions of Fiscal

Responsibility and Budget Management Act (FRBM Act).

Foreign institutional investors have been allowed to invest in security receipts.

Thus, the capital market plays a vital role in fostering economic growth of the country, as

it augments the quantities of real savings; increases the net capital inflow from abroad;

raises the productivity of investments by improving allocation of investible funds; and

reduces the cost of capital in the economy.

Source: http://business.gov.in/business_financing/capital_market.php

25


26/139

INDIAN CAPITAL MARKET

The capital market is the market for securities, where companies and governments can

raise long term funds. Selling stock and selling bonds are two ways to generate capital

and long term funds. Thus bond markets and stock markets are considered capital

markets. The capital markets consist of the primary market, where new issues are

distributed to investors, and the secondary market, where existing securities are traded.

The Indian Equity Markets and the Indian Debt markets together form the Indian Capital

markets

INDIAN CAPITAL- EQUITY MARKET

The Indian Equity Market depends mainly on monsoons, global funds flowing into

equities and the performance of various companies. The Indian Equity Market is almost

wholly dominated by two major stock exchanges -National Stock Exchange of India Ltd.

(NSE) and The Bombay Stock Exchange (BSE). The benchmark indices of the two

exchanges - Nifty of NSE and Sensex of BSE are closely followed. The two exchanges

also have an F&O (Futures and options) segment for trading in equity derivativesincluding the indices. The major players in the Indian Equity Market are Mutual Funds,

Financial Institutions and FIIs representing mainly Venture Capital Funds and Private

Equity Funds.

Indian Equity Market at present is a lucrative field for investors. Indian stocks are

profitable not only for long and medium-term investors but also the position traders,

short-term swing traders and also very short term intra-day traders. In India as on

December 30 2007, market capitalization (BSE 500) at US$ 1638 billion was 150 per

cent of GDP, matching well with other emerging economies and selected matured

markets.

The Indian Equity Market is also the other name for Indian share market or Indian stock

market. The forces of the market depend on monsoons, global funding flowing into

equities in the market and the performance of various companies. The Indian market of

26


27/139

equities is transacted on the basis of two major stock indices, National Stock Exchange of

India Ltd. (NSE) and The Bombay Stock Exchange (BSE), the trading being carried on in

a dematerialized form. The physical stocks are in liquid form and cannot be sold by the

investors in any market. Two types of funds are there in the Indian Equity Market;

Venture Capital Funds and Private Equity Funds.

The equity indexes are correlated beyond the boundaries of different countries with their

exposure to common calamities like monsoon which would affect both India and

Bangladesh or trade integration policies and close connection with the foreign investors.

From 1995 onwards, both in terms of trade integration and FIIs India has made an

advance. All these have established a close relationship between the stock market indexes

of India stock market and those of other countries. The Stock derivatives add up all

futures and options on all individual stocks. This stock index derivative was found to

have gone up from 12 % of NSE derivatives turnover in 2002 to 35 % in 2004. The

Indian Equity Market also comprise of the Debt Market, dominated by primary dealers,

banks and wholesale investors.

Indian Equity Market at present is a lucrative field for the investors and investing in

Indian stocks are profitable for not only the long and medium-term investors, but also the

position traders, short-term swing traders and also very short term intra-day traders. In

terms of market capitalization, there are over 2500 companies in the BSE chart list with

the Reliance Industries Limited at the top. The SENSEX today has rose from 1000 levels

to 8000 levels providing a profitable business to all those who had been investing in the

Indian Equity Market. There are about 22 stock exchanges in India which regulates the

market trends of different stocks. Generally the bigger companies are listed with the NSE

and the BSE, but there is the OTCEI or the Over the Counter Exchange of India, which

lists the medium and small sized companies. There is the SEBI or the Securities and

Exchange Board of India which supervises the functioning of the stock markets in India.

In the Indian market scenario, the large FMCG companies reached the top line with a

double-digit growth, with their shares being attractive for investing in the Indian stock

market. Such companies like the Tata Tea, Britannia, to name a few, have been providing

a bustling business for the Indian share market. Other leading houses offering equally

27


28/139

beneficial stocks for investing in Indian Equity Market, of the SENSEX chart are the

two-wheeler and three-wheeler maker Bajaj Auto and second largest software exporter

Infosys Technologies.

Other than some restricted industries, foreign investment in general enjoys a majorityshare in the Indian Equity Market. Foreign Institutional Investors (FII) need to register

themselves with the SEBI and the RBI for operating in Indian stock exchanges. In fact

from the Indian stock market analysis it is known that in some specific industries

foreigners can have even 100% shares. In the last few years with the facility of the Online

Stock Market Trading in India, it has been very convenient for the FIIs to trade in the

Indian stock market. From an analysis on the Indian Equity Market it can be said that the

increase in the foreign investments over the years no doubt have accentuated the

dynamism of the Indian market of equities. Foreign investors are allowed to buy Indian

equity for the purpose of converting the equity into ADR or GDR.

Thus, the growing financial capital markets of India being encouraged by domestic and

foreign investments is becoming a profitable business more with each day. If all the

economic parameters are unchanged Indian Equity Market will be conducive for the

growth of private equities and this will lead to an overall improvement in the Indian

economy.Source: http://business.mapsofindia.com/india-market/equity.html

EQUITY CAPITAL MARKET INSTRUMENTS:

A stock market, or equity market, is a private or public market for the trading of

company stock and derivatives at an agreed price; these are securities listed on a stock

exchange as well as those only traded privately.

28


29/139

What are shares and why are they issued?

Shares represent ownership of a company. When an individual buys shares in your

company, they become one of the owners of the company. Shareholders choose who runsa company and are involved in making key decisions, such as whether a business should

be sold.

While shares are most obviously associated with the stock market, the majority of small

businesses don't go near a stock market in their lifetime. They are more likely to issue

shares in their company in return for a lump sum investment. This may either be from

friends and family or, for businesses that are looking for capital to fund high growth,

through formal equity funding finance.

Formal equity finance is available through:

business angel investors

venture capital firms

stock markets

These investors are willing to put up capital for a share in a growth business. The

advantage of raising money in this way is that you don't have to pay the money back or

pay interest to the investors. Instead, shareholders are entitled to a share of thedistributable profits of the company, known as dividends.

Issuing shares in your company on a stock market can provide:

new finance

an exit for founding investors who want to realise their investment

a mechanism for investors to trade shares

a market valuation for the company

an incentive for staff using shares or share options

an acquisition currency in the form of shares

a way to raise your business' profile

29


30/139

Source: http://www.legalserviceindia.com/company%20law/com_2.htm

Types of shares

A company may have many different types of shares that come with different conditionsand rights.

There are four main types of shares:

A. Ordinary shares are standard shares with no special rights or restrictions. They

have the potential to give the highest financial gains, but also have the highest risk.

Ordinary shareholders are the last to be paid if the company is wound up.

B. Preference Shares means shares which fulfill the following 2 conditions.

Therefore, a share which is does not fulfill both these conditions is an equity share.

a. It carries Preferential rights in respect of Dividend at fixed amount or at fixed rate

i.e. dividend payable is payable on fixed figure or percent and this dividend must

paid before the holders of the equity shares can be paid dividend.

b. It also carries preferential right in regard to payment of capital on winding up or

otherwise. It means the amount paid on preference share must be paid back to

preference shareholders before anything in paid to the equity shareholders. In

other words, preference share capital has priority both in repayment of dividend

as well as capital.

Types of Preference Shares

I. Cumulative or Non-cumulative: A non-cumulative or simple preference shares

gives right to fixed percentage dividend of profit of each year. In case no dividend

thereon is declared in any year because of absence of profit, the holders of preference

shares get nothing nor can they claim unpaid dividend in the subsequent year or yearsin respect of that year. Cumulative preference shares however give the right to the

preference shareholders to demand the unpaid dividend in any year during the

subsequent year or years when the profits are available for distribution. In this case

dividends which are not paid in any year are accumulated and are paid out when the

profits are available.

30


31/139

II.Redeemable and Non- Redeemable: Redeemable Preference shares are preference

shares which have to be repaid by the company after the term of which for which the

preference shares have been issued. Irredeemable Preference shares means preference

shares need not repaid by the company except on winding up of the company.

However, under the Indian Companies Act, a company cannot issue irredeemable

preference shares. In fact, a company limited by shares cannot issue preference shares

which are redeemable after more than 10 years from the date of issue. In other words

the maximum tenure of preference shares is 10 years. If a company is unable to

redeem any preference shares within the specified period, it may, with consent of the

Company Law Board, issue further redeemable preference shares equal to redeem the

old preference shares including dividend thereon. A company can issue the preference

shares which from the very beginning are redeemable on a fixed date or after certain

period of time not exceeding 10 years provided it comprises of following

conditions :-

1. It must be authorized by the articles of association to make such an issue.

2. The shares will be only redeemable if they are fully paid up.

3. The shares may be redeemed out of profits of the company which otherwise

would be available for dividends or out of proceeds of new issue of shares made

for the purpose of redeem shares.4. If there is premium payable on redemption it must have provided out of profits or

out of shares premium account before the shares are redeemed.

5. When shares are redeemed out of profits a sum equal to nominal amount of shares

redeemed is to be transferred out of profits to the capital redemption reserve

account. This amount should then be utilized for the purpose of redemption of

redeemable preference shares. This reserve can be used to issue of fully paid

bonus shares to the members of the company.

I. Participating Preference Share or non-participating preference shares:

Participating Preference shares are entitled to a preferential dividend at a fixed rate

with the right to participate further in the profits either along with or after payment of

certain rate of dividend on equity shares. A non-participating share is one which does

31


32/139

not such right to participate in the profits of the company after the dividend and

capital has been paid to the preference shareholders.

Source: http://www.businesslink.gov.uk/bdotg/action/detail?type=RESOURCES&itemId=1074433335

DIFFERENCE BETWEEN EQUITY SHARES AND PREFERENCE SHARE

Broadly speaking, preference share is a part of the share capital of a company which

fulfils the following two conditions:

1. In case of payment of dividends, it carries preferential rights over equity shares for

payment of a fixed rate/amount of dividends.

2. In case of winding up or repayment of share capital of the company, a preferentialright over the Equity shares for repayment of paid-up amount of shares.

And for Equity shares comprising in the share capital of a Company, the law provides the

definition as "all share capital which is not preference share capital".

In India, Section 85 and 86 of the Companies Act 1956 deal with the share capital and the

kind of shares a company can issue.

Source: www.answers.com

32


33/139

INDIAN CAPITAL-DEBT MARKET

For a developing economy like India, debt markets are a crucial source of funds. The debt

market in India is amongst the largest in Asia. It includes government securities the

largest component - and bonds issued by public sector undertakings, other government

bodies, financial institutions, banks and companies. Debt markets are now considered an

alternative route to banking channels for finance.

Debt Instruments are obligations of issuer of such instruments as regards certain future

cash flows representing Interest & Principal, which the issuer would pay to the legal

owner of the Instruments. Generally debt instruments represent agreements to receive

certain cash flows as per the terms contained within the agreement. They can also be said

to be tradable form of loans.

For a developing economy like India, debt markets are crucial sources of capital funds.

The debt market in India is amongst the largest in Asia. It includes government securities,

public sector undertakings, other government bodies, financial institutions, banks and

companies.

How do the debt markets impact the economy?

1. Increased funds for implementation of government development plans. The

government can raise funds at lower costs by issuing government securities.2. Conducive to implementation of a monetary policy.3. Less risk compared to the equity markets, encouraging low-risk investments. This

leads to inflow of funds into the economy.4. Higher liquidity and control over credit.5. Opportunity for investors to diversify their investment portfolio.6. Better corporate governance.

33


34/139

7. Improved transparency because of stringent disclosure norms and auditing

requirements.

SBI DFHI Limited is trading in equities and equity derivatives after RBI allowed stand-

alone PDs to diversify their activities in 2006. It remains an active participant in theIndian debt market. Through SBI DFHI Invest Plus, investors can purchase investment

grade Corporate Bonds for their portfolio (details available on the website).

Source: http://www.sbidfhi.com/capital-market.htm

Types of capital-debt market instruments

A. Debentures:

A debenture is defined as a certificate of agreement of loans which is given under thecompany's stamp and carries an undertaking that the debenture holder will get a fixed

return (fixed on the basis of interest rates) and the principal amount whenever the

debenture matures.

The advantage of debentures to the issuer is they leave specific assets burden free, and

thereby leave them open for subsequent financing. Debentures are generally freely

transferable by the debenture holder. Debenture holders have no voting rights and the

interest given to them is a charge against profit.

Types of Debentures:

There are two types of debentures:

I. Convertible Debentures, which can be converted into equity shares of the issuing

company after a predetermined period of time.

II.Non-Convertible Debentures, which cannot be converted into equity shares of the

liable company. They usually carry higher interest rates than the convertible ones.

A. Bonds:

In finance, a bond is a debt security, in which the authorized issuer owes the holders a

debt and, depending on the terms of the bond, is obliged to pay interest (the coupon)

34


35/139

and/or to repay the principal at a later date, termed maturity. It is a formal contract to

repay borrowed money with interest at fixed intervals.

Thus a bond is like a loan: the issueris the borrower, the bond holderis the lender, and

the coupon is the interest. Bonds provide the borrower with external funds to finance

long-term investments, or, in the case of government bonds, to finance current

expenditure. Certificates of deposit (CDs) or commercial paper are considered to be

money market instruments and not bonds.

Bonds and stocks are both securities, but the major difference between the two is that

stock-holders are the owners of the company (i.e., they have an equity stake), whereas

bond holders are lenders to the issuers. Another difference is that bonds usually have a

defined term, or maturity, after which the bond is redeemed, whereas stocks may be

outstanding indefinitely. An exception is a consol bond, which is a perpetuity (i.e., bondwith no maturity).

Issuing bonds

Bonds are issued by public authorities, credit institutions, companies and supranational

institutions in the primary markets. The most common process of issuing bonds is

through underwriting. In underwriting, one or more securities firms or banks, forming a

syndicate, buy an entire issue of bonds from an issuer and re-sell them to investors. The

security firm takes the risk of being unable to sell on the issue to end investors. However

government bonds are instead typically auctioned.

Features of bonds

The most important features of a bond are:

Nominal, principal or face amount the amount on which the issuer pays interest,

and which has to be repaid at the end.

Issue price the price at which investors buy the bonds when they are first issued,

which will typically be approximately equal to the nominal amount. The net proceeds

that the issuer receives are thus the issue price, less issuance fees.

35


36/139

Maturity date the date on which the issuer has to repay the nominal amount. As

long as all payments have been made, the issuer has no more obligations to the bond

holders after the maturity date. The length of time until the maturity date is often

referred to as the term or tenor or maturity of a bond. The maturity can be any length

of time, although debt securities with a term of less than one year are generally

designated money market instruments rather than bonds. Most bonds have a term of

up to thirty years. Some bonds have been issued with maturities of up to one hundred

years, and some even do not mature at all. In early 2005, a market developed in Euros

for bonds with a maturity of fifty years. In the market for U.S. Treasury securities,

there are three groups of bond maturities:

short term (bills): maturities up to one year;

medium term (notes): maturities between one and ten years;

Long term (bonds): maturities greater than ten years.

Coupon the interest rate that the issuer pays to the bond holders. Usually this rate

is fixed throughout the life of the bond. It can also vary with a money market index,

such as LIBOR, or it can be even more exotic. The name coupon originates from the

fact that in the past, physical bonds were issued which had coupons attached to them.

On coupon dates the bond holder would give the coupon to a bank in exchange for the

interest payment.

36
http://en.wikipedia.org/wiki/File:Vereinigte_Ostindische_Compagnie_bond.jpg


37/139

Bond issued by the Dutch East India Company in 1623

The quality of the issue, which influences the probability that the bondholders will

receive the amounts promised, at the due dates. This will depend on a whole range of

factors.

Indentures and Covenants an indenture is a formal debt agreement that

establishes the terms of a bond issue, while covenants are the clauses of such an

agreement. Covenants specify the rights of bondholders and the duties of issuers,

such as actions that the issuer is obligated to perform or is prohibited from

performing. In the U.S., federal and state securities and commercial laws apply to

the enforcement of these agreements, which are construed by courts as contracts

between issuers and bondholders. The terms may be changed only with greatdifficulty while the bonds are outstanding, with amendments to the governing

document generally requiring approval by a majority (or super-majority) vote of

the bondholders.

High yield bonds are bonds that are rated below investment grade by the credit

rating agencies. As these bonds are more risky than investment grade bonds,

investors expect to earn a higher yield. These bonds are also called junk bonds.

Coupon dates the dates on which the issuer pays the coupon to the bond holders.In the U.S. and also in the U.K. and Europe, most bonds are semi-annual, which

means that they pay a coupon every six months.

Optionality: Occasionally a bond may contain an embedded option; that is, it grants

option-like features to the holder or the issuer:

Call ability Some bonds give the issuer the right to repay the bond before the

maturity date on the call dates; see call option. These bonds are referred to as

callable bonds. Most callable bonds allow the issuer to repay the bond at par.With some bonds, the issuer has to pay a premium, the so called call premium.

This is mainly the case for high-yield bonds. These have very strict covenants,

restricting the issuer in its operations. To be free from these covenants, the issuer

can repay the bonds early, but only at a high cost.

37


38/139

Put ability some bonds give the holder the right to force the issuer to repay the

bond before the maturity date on the put dates; see put option. (Note: "Putable"

denotes an embedded put option; "Puttable" denotes that it may be putted.)

Call dates and put datesthe dates on which callable and putable bonds can be

redeemed early. There are four main categories.

A Bermudan callable has several call dates, usually coinciding with coupon

dates.

A European callable has only one call date. This is a special case of a Bermudan

callable.

An American callable can be called at any time until the maturity date.

A death put is an optional redemption feature on a debt instrument allowing thebeneficiary of the estate of the deceased to put (sell) the bond (back to the

issuer) in the event of the beneficiary's death or legal incapacitation. Also

known as a "survivor's option".

Sinking fund provision of the corporate bond indenture requires a certain portion of

the issue to be retired periodically. The entire bond issue can be liquidated by the

maturity date. If that is not the case, then the remainder is called balloon maturity.Issuers may either pay to trustees, which in turn call randomly selected bonds in the

issue, or, alternatively, purchase bonds in open market, then return them to trustees.

Convertible bond lets a bondholder exchange a bond to a number of shares of the

issuer's common stock.

Exchangeable bond allows for exchange to shares of a corporation other than the

issuer.

Types of bonds

a. Fixed rate bonds have a coupon that remains constant throughout the life of the

bond.

38


39/139

b. Floating rate notes (FRNs) have a coupon that is linked to an index. Common

indices include: money market indices, such as LIBOR or Euribor, and CPI (the

Consumer Price Index). Coupon examples: three month USD LIBOR + 0.20%, or

twelve month CPI + 1.50%. FRN coupons reset periodically, typically every one or

three months. In theory, any Index could be used as the basis for the coupon of an

FRN, so long as the issuer and the buyer can agree to terms.

c. Zero coupon bonds don't pay any interest. They are issued at a substantial discount

to par value. The bond holder receives the full principal amount on the redemption

date. An example of zero coupon bonds is Series E savings bonds issued by the U.S.

government. Zero coupon bonds may be created from fixed rate bonds by a financial

institutions separating "stripping off" the coupons from the principal. In other words,

the separated coupons and the final principal payment of the bond are allowed totrade independently. See IO (Interest Only) and PO (Principal Only).

d. Inflation linked bonds, in which the principal amount and the interest payments are

indexed to inflation. The interest rate is normally lower than for fixed rate bonds with

a comparable maturity (this position briefly reversed itself for short-term UK bonds in

December 2008). However, as the principal amount grows, the payments increase

with inflation. The government of the United Kingdom was the first to issue inflation

linked Gilts in the 1980s. Treasury Inflation-Protected Securities (TIPS) and I-bonds

are examples of inflation linked bonds issued by the U.S. government.

e. Other indexed bonds, for example equity-linked notes and bonds indexed on a

business indicator (income, added value) or on a country's GDP.

f. Asset-backed securities are bonds whose interest and principal payments are backed

by underlying cash flows from other assets. Examples of asset-backed securities are

mortgage-backed securities (MBS's), collateralized mortgage obligations (CMOs) and

collateralized debt obligations (CDOs).

g. Subordinated bonds are those that have a lower priority than other bonds of the

issuer in case of liquidation. In case of bankruptcy, there is a hierarchy of creditors.

First the liquidator is paid, then government taxes, etc. The first bond holders in line

to be paid are those holding what is called senior bonds. After they have been paid,

the subordinated bond holders are paid. As a result, the risk is higher. Therefore,

39


40/139

subordinated bonds usually have a lower credit rating than senior bonds. The main

examples of subordinated bonds can be found in bonds issued by banks, and asset-

backed securities. The latter are often issued in tranches. The senior tranches get paid

back first, the subordinated tranches later.

h. Perpetual bonds are also often called perpetuities. They have no maturity date. The

most famous of these are the UK Consols, which are also known as Treasury

Annuities or Undated Treasuries. Some of these were issued back in 1888 and still

trade today, although the amounts are now insignificant. Some ultra long-term bonds

(sometimes a bond can last centuries: West Shore Railroad issued a bond which

matures in 2361 (i.e. 24th century)) are virtually perpetuities from a financial point of

view, with the current value of principal near zero.

i. Bearer bond is an official certificate issued without a named holder. In other words,the person who has the paper certificate can claim the value of the bond. Often they

are registered by a number to prevent counterfeiting, but may be traded like cash.

Bearer bonds are very risky because they can be lost or stolen. Especially after federal

income tax began in the United States, bearer bonds were seen as an opportunity to

conceal income or assets. U.S. corporations stopped issuing bearer bonds in the

1960s, the U.S. Treasury stopped in 1982, and state and local tax-exempt bearer

bonds were prohibited in 1983.

j. Registered bond is a bond whose ownership (and any subsequent purchaser) is

recorded by the issuer, or by a transfer agent. It is the alternative to a Bearer bond.

Interest payments, and the principal upon maturity, are sent to the registered owner.

k. Municipal bond is a bond issued by a state, U.S. Territory, city, local government, or

their agencies. Interest income received by holders of municipal bonds is often

exempt from the federal income tax and from the income tax of the state in which

they are issued, although municipal bonds issued for certain purposes may not be tax

exempt.

l. Book-entry bond is a bond that does not have a paper certificate. As physically

processing paper bonds and interest coupons became more expensive, issuers (and

banks that used to collect coupon interest for depositors) have tried to discourage

40


41/139

their use. Some book-entry bond issues do not offer the option of a paper certificate,

even to investors who prefer them.

m. Lottery bond is a bond issued by a state, usually a European state. Interest is paid

like a traditional fixed rate bond, but the issuer will redeem randomly selected

individual bonds within the issue according to a schedule. Some of these redemptions

will be for a higher value than the face value of the bond.

n. War bond is a bond issued by a country to fund a war.

o. Serial bond is a bond that matures in installments over a period of time. In effect, a

$100,000, 5-year serial bond would mature in a $20,000 annuity over a 5-year

interval.

p. Revenue bond is a special type of municipal bond distinguished by its guarantee of

repayment solely from revenues generated by a specified revenue-generating entity

associated with the purpose of the bonds. Revenue bonds are typically "non-

recourse," meaning that in the event of default, the bond holder has no recourse to

other governmental assets or revenues.

Source: http://en.wikipedia.org/wiki/Bond_(finance)

DIFFERENCE BETWEEN DEBENTURE AND BOND

Debentures and bonds are similar, but bonds are more secure than debentures. In the

case of both, the company pays you a guaranteed interest that does not change in

value irrespective of the fortunes of the company. However, bonds are more secure

than debentures, and carry a lower interest rate.

In the case of bonds, the company provides collateral for the loan.

In case of liquidation, bondholders will be paid off before debenture holders.

41


42/139

Another difference is bond holder has a greater claim on an issuer's income than a

shareholder in the case of financial distress (this is true for all creditors) but debenture

holders usually does have greater claim than shareholder.

Debentures are pays periodical interest on the principal amount. After maturity date

the principal paid back. In Bond the Interest cant pay in a regular manner. the bond

mature, paid back principal + Interest amount bond is actually a broad word and

debenture is a type of bond but it is not secured, While the interest and principle

payment procedure of both are same ,both are refer to as long term debt. In short

both are same debenture can be called as bond.

Source: www.allinterview.com, www.answers.com.

42


43/139

DIF FERENCE BETWEEN DEBENTURE- BOND AND SHARES

Bonds and Debentures are debt instruments. The borrower (may be a Company )

issues the Bond or Debenture as the case may giving details of the interest to be paid

and the period of the loan, and how the loan will be repaid. There are different types

of bonds & debentures. When u buys a bond or debenture u becomes a creditor to the

company.

Share is equity participation in the Company. When u buy a share, u become a

shareholder of the company. The company will pay u dividend on the shares held by

you (share of your profit in the company is called dividend).

Deposits are like any bank deposit. Interest is paid in various ways on the deposits.

To issue a share / bond / debenture, the company must be registered and must have

the necessary minimum capital. Prior approval from the existing share holders,

Company Law Board, SEBI, RBI etc is necessary...

Source:http://answers.yahoo.com

43


44/139

PERCEPTION

The process through which we organize and interpret the range of visual, aural, tactile

and chemical stimuli which impinge upon us.

(Thompson & McHugh 2002)

Perceived reality, not actual reality is the key to understanding behavior. How we

perceive others and ourselves is at the root of our actions and intentions. Understanding

the perceptual process and being aware of its complexities is essential for developing

insights into managing others. The words we use and the body language we display

communicates our view of the world. The power of the perceptual process in guiding ourbehavior needs to be unpacked and understood for effective relationships with others.

(Mullins, 2002: 434)

44


45/139

LITERATURE REVIEW

WHEN PERCEPTION CHANGES REALITY: AN EMPIRICAL STUDY OF

INVESTORS VIEWS OF THE FAIRNESS OF SECURITIES ARBITRATION*

Jill I. Gross& Barbara Black

Arbitration in securities industry-sponsored forums is the primary mechanism to resolve

disputes between investors and their brokerage firms. Because it is mandatory,

participants debate its fairness, and Congress has introduced legislation to ban pre-dispute

arbitration clauses in customer agreements. Missing from the debate has been empirical

research of perceptions of fairness by the participants, especially investors. To fill that

gap, we mailed 25,000 surveys to participants in recent securities arbitrations involving

customers to learn their views of the process. The article first details the surveys

background, explains the importance of surveying perceptions of fairness, and describes

our methodologies, procedures, and survey error structure. We then present our findings,

including our primary conclusions that (1) investors have a far more negative perception

of securities arbitration than all other participants, (2) investors have a strong negative

perception of the bias of arbitrators, and (3) investors lack knowledge of the securities

arbitration process. We also offer several explanations for these negative perceptions. We

conclude that customers negative perceptions transform the reality faced by policy-makers and mandate reform of the process, including the elimination of the industry

arbitrator requirement and further public deliberation on the value of the explained

award.

SURVEYING PERCEPTIONS

Background

In 2002 the State of California and the SROs were engaged in litigation over the states

attempt to impose its conflict disclosure standards on arbitrators in SRO securities

arbitrations. The SEC filed an amicus curiae brief in support of the SROs position that

federal regulation preempted state standards and also requested that Professor Michael A.

45


46/139

Perino assess the adequacy of the current SRO arbitrator disclosure requirements. In the

resulting report (the Perino Report), Professor Perino concluded that the disclosure

rules appeared to be adequate. He went on to observe that any lingering perceptions of

pro-industry bias relate to panel composition, not the presence of undisclosed arbitrator

conflicts. He further noted that, while empirical evidence was limited, past surveys

seemed to suggest that parties involved in SRO arbitrations find that arbitrators are fair

and impartial. However, because of lingering concerns about pro-industry bias and the

insufficient amount of empirical evidence addressing investors perceptions of the

securities arbitration process, Professor Perino recommended that the SROs sponsor

additional independent studies to further evaluate the impartiality of the SRO arbitration

process.

In response to this recommendation, NASD asked SICA to conduct a study of

participants perceptions of the fairness of securities arbitration. On October 5, 2003,

SICA disseminated a Request for Proposal seeking vendors interested in conducting the

recommended study. In 2004, we submitted a proposal to design a survey to investigate

the fairness of SRO arbitrations to the individual investor, focusing on an assessment of

(1) investors perceptions of fairness of the SRO arbitration process; (2) whether

arbitrators appear competent to resolve investors disputes with their broker-dealers; (3)

investors perceptions of fairness of SRO arbitration as compared to their perceptions offairness in securities litigation in similar disputes; and (4) whether the outcome of

arbitrations appears fair to the parties. SICA accepted this proposal and, on August 22,

2005, formally retained us to conduct the recommended study.

The Importance of Perceptions of Fairness.

Academic literature confirms the importance of surveying perceptions of fairness of a

dispute resolution forum. These perceptions are important because the substantive (or

distributive) fairness of a dispute resolution process can not readily be measured,

especially when the process is confidential and outcomes are not transparent (which is the

case in securities arbitration because awards do not typically contain an explanation or

reasons). Dispute resolution scholars recently have focused on procedural justice as a

46


47/139

more accessible predictor than substantive justice of parties assessment of the overall

fairness of a process. These scholars have found that perceptions of procedural fairness

strongly impact perceptions of substantive fairness, which results in a greater willingness

to comply with the outcome and greater trust in and respect for the decision-maker.

Summarizing prior research by social psychologists, a leading scholar of procedural

justice writes that people who believe that they have been treated in a procedurally fair

manner are more likely to conclude that the resulting outcome is substantively fair, even

if that outcome is unfavorable. She posits that four key elements reliably lead people to

conclude that a dispute resolution process is procedurally fair: (1) the process provides

an opportunity for disputants to voice their concerns to a third party; (2) the disputants

perceive that the third party actually considered these concerns; (3) the disputants

perceive that the third party treated them in an even-handed way; and (4) the disputants

feel that they were treated in a dignified and respectful manner.

Our survey asked participants about their most recent experience with the SRO

arbitration process, including their perceptions about the attentiveness, competence and

impartiality of the arbitrators, as well as their satisfaction with the outcome. We also

asked, more generally, about their opinion of the securities arbitration process. From the

survey, we gain valuable insights about procedural and substantive fairness in securities

arbitration cases as experienced by the survey participants.

Source: www.ssrn.com

47


48/139

OBJECTIVESAND

LIMITATIONSOFTHESTUDY

48


49/139

OBJECTIVE S OF THE STUDY

Main objective:

To study the investors perception on capital financial instruments

Sub objectives:

To know the impact of internal factors on investors perceptions such as

experience, income socio- economic factor, education and occupation.

To know the impact of different perception criteria such as risk, return, safety,

liquidity and time on investors.

To know the impact of external factors such as income, market trend, companys

reputation, inflation and political factors on investors perception.

To know the relationship between household average annual income and different

perception criteria on capital financial instruments.

To know the correlation between the external factors such as Income as an

economic factor, market trend, company reputation, inflation and political factors.

49


50/139

LIMITATIONS OF THE STUDY

We can only include the main capital financial instruments in our study i.e.

Equity, Preference shares, Debentures and Bonds because it may difficult to take

all the capital instruments.

We take sample size 270 only in Ahmedabad which is not sufficient to know the

accurate investors perception but due to time constraints we cant take more

sample size.

The respondent s may not give correct answers due to personal bias.

Due to time constraints we cant go for all analytical approach.

50


51/139

RESEARCH

METHODOLOGY

51

8/3/2019 INVESTORS PERCEPTION ON CAPITAL FINANCIAL INSTRUMENTS IN AHMEDABA

Documents

INVESTORS’ PERCEPTION ON CAPITAL FINANCIAL INSTRUMENTS IN AHMEDABAD