Stock Market Stock Market is a market where the trading of company stock, both listed securities and unlisted takes place. It is different from stock exchange because it includes all the national stock exchanges of the country. For example, we use the term, “the stock market was up today” or “the stock market bubble. ” Stock Exchanges In India ? Bombay Stock Exchange ? National Stock Exchange ? Regional Stock Exchanges ? Ahmedabad Stock Exchange ? Bangalore Stock Exchange ? Bhubaneshwar Stock Exchange ? Calcutta Stock Exchange ? Cochin Stock Exchange ? Coimbatore Stock Exchange ? Delhi Stock Exchange ? Guwahati Stock Exchange Hyderabad Stock Exchange ? Jaipur Stock Exchange ? Ludhiana Stock Exchange ? Madhya Pradesh Stock Exchange ? Madras Stock Exchange ? Magadh Stock Exchange ? Mangalore Stock Exchange ? Meerut Stock Exchange ? OTC Exchange Of India ? Pune Stock Exchange ? Saurashtra Kutch Stock Exchange ? Uttar Pradesh Stock Exchange ? Vadodara Stock Exchange Stock Exchanges are an organised marketplace, either corporation or mutual organisation, where members of the organisation gather to trade company stocks and other securities.
The members may act either as agents for their customers, or as principals for their own accounts.
Stock exchanges also facilitates for the issue and redemption of securities and other financial instruments including the payment of income and dividends. The record keeping is central but trade is linked to such physical place because modern markets are computerised. The trade on an exchange is only by members and stock broker do have a seat on the exchange. History of Indian Stock Market: Indian stock market marks to be one of the oldest stock market in Asia. It dates back to the close of 18th century when the East India Company used to transact loan securities.
In the 1830s, trading on corporate stocks and shares in Bank and Cotton presses took place in Bombay. Though the trading was broad but the brokers were hardly half dozen during 1840 and 1850. In 1860, the exchange flourished with 60 brokers. In fact the ‘Share Mania’ in India began with the American Civil War broke and the cotton supply from the US to Europe stopped. Further the brokers increased to 250. At the end of the war in 1874, the market found a place in a street (now called Dalal Street). In 1887, “Native Share and Stock Brokers’ Association” was established.
In 1895, the exchange acquired a premise in the street which was inaugurated in 1899. Indian Stock Markets 200 years ago in front of Trinity church in East Manhattan in U. S oldest stock exchange called New York stock exchange emerged, when there were no paper money changing hands and there was not even the idea of stock, people trade silver for papers saying they owned shares in cargo . The trade flourished. During American Revolution, the colonial government needed money to fund its wartime operations. By selling bonds they did this. Bonds are pieces of paper a person buys for a set price, knowing that after a certain eriod of time; they can exchange their bonds for a profit. Along with bonds, the first of the nation’s bank started to sell parts or shares of their own company to people in order to raise money. Thus they sell the part of the company to whoever wanted to buy it. This led to the emergence of the modern day stock market. The concept of stock markets came to India in 1875, when Bombay Stock Exchange (BSE) was established as ‘The Native Share and Stockbrokers Association’, a voluntary non-profit making association. BSE is the oldest in Asia. Presently India has about 10,000 listed companies, the largest number of listed companies in the world.
Stock exchanges in India can be categorized as: 1) Voluntary Associations such as Bombay, Indore and Ahmedabad, 2) Public limited companies such as Calcutta and Delhi, and 3) Guarantee companies such as Hyderabad, Madras and Bangalore. Besides BSE, India’s other major stock exchange is National Stock Exchange (NSE) that was promoted by leading financial institutions and was established in April 1993. Today, these global stock exchanges have become premier institutions and are highly efficient, computerized organizations that have fostered the growth of an open, global securities market. Indian Stock Market |Indian Stock |No. of |No. of Stock |Capital of |Market value of|Capital per |Market Value of |Appreciated value | |Growth |Market Growth X|Listed Co. s|Issues of |Listed Cos. |Capital of |Listed Cos. |Capital per Listed |of Capital per | | | | |Listed Cos. |(Cr. Rs. ) |Listed Cos. |(4/2) (Lakh |Cos. (Lakh Rs. ) (5/2)|Listed Cos. (Lak | | | | | | | | | |Rs. | |1946 |7 |1125 |1506 |270 753 1812 | 971 1292 2675|24 |86 | 358 | |1961 |7 |1203 |2111 |2614 3973 9723|3273 6750 25302|63 |107 |170 | |1971 |8 |1599 |2838 |32041 59583 |110279 478121 |113 |167 |148 | |1975 |8 |1552 |3230 | |168 |211 |126 | |1980 |9 |2265 |3697 | | |175 |298 |170 | |1985 |14 |4344 |6174 | | |224 |582 |260 | |1991 |20 |6229 |8967 | | |514 |1770 5564 |344 | |1995 |22 |8593 |11784 | | |693 | |803 | | | |INDIAN Capital Market : AN OVERVIEW | 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 meagre and obscure. The 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 was consolidated. 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 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.
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 Exchnage 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 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 at next page 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 | | |December | |Quarter – 4 |Heavy selling pressure continued. | | |Threat of inflation. | |(Jan’05 to Mar’05) |Hike in interest rate. | | |Dollar was strong. | |Slowdown in foreign fund flow. | | |High international crude oil price. | | |Q-3 results of corporates. | | |Good buy in cement, auto, bank and IT segment. | | |Quota system was introduced in Textile industry. | | |IPO size of over Rs. 4500 crore hit the primary market. | | |Increase in FDI capital in telecom industry – 74% | | |US Poll results – IT in favour. | | |Govt. lears autonomy package for PSU banks. | | |Govt. allows 100% FDI in construction sector. | | |Mergers like: Dabur-Balsara, Mahindra-Renault etc. , | |Quarter – 1 |Implementation of VAT. | | |Special Economic Zone Bill 2005. | |(April’05 to June’05) |Huge investment by FII’s – because in expectation of interest rate cut in US. | | |Announcement of banking reforms on – acquisition, revision of SLR and CRR & rising of dividend ceiling. | |FY-05 NP increased for most of premium companies. | | |Mid cap companies too showed a high positive results in their previous FY. | | |During month May’05 the Sensex raised upto 468 points. | |Quarter – 1 |Sensex sets new record at 7178 in the beginning of June’05. | | |Ambani brothers settlement. | |(April’05 to June’05) |Stronger money flow started. | | |FII’s restarts pumping investment in to Indian stock market. | | |Mutual Funds did a good business. | |IT export growth expected @ 30% | | |Monsoon sets in India. | | |PSU banks and Private banks performed well. | |July 2005 |Corporate governance issue of Reliance Company. | | |Strong FII’s inflows. | | |RBI released the BOP data for 2004-05. | | |Banking stocks were in the limelight. | | |YES bank listed its share on July 12th. | |India and US agrees to 8 major initiatives. | | |Tax Protocol comes into effect on August 1st so that Indian companies can access Singapore technology at | | |lower cost. | | |China finds Indian cotton yarn attractive. Textile companies finds a good time. | | |ICICI bank enters and exits NTPC. | | |Profit making PSU’s to get more financial autonomy. | Conclusion “Speed of the stock market index is the speed of the economy” a new saying, the author have coined.
Within 7 months time the sensex has crossed the benchmark – all time high more than 7500 points. This shows the potential of Indian Capital Market to react positively to the market news, which are genuine and which also fetches good returns even to naive investors. Let us all hope that the Sexy Sensex should cross sooner 8000 mark. The author and his team positively believes in this. Understanding Free-float Methodology Concept: Free-float Methodology refers to an index construction methodology that takes into consideration only the free-float market capitalization of a company for the purpose of index calculation and assigning weight to stocks in Index.
Free-float market capitalization is defined as that proportion of total shares issued by the company that are readily available for trading in the market. It generally excludes promoters’ holding, government holding, strategic holding and other locked-in shares that will not come to the market for trading in the normal course. In other words, the market capitalization of each company in a Free-float index is reduced to the extent of its readily available shares in the market. Major advantages of Free-float Methodology: ? A Free-float index reflects the market trends more rationally as it takes into consideration only those shares that are available for trading in the market. ? Free-float Methodology makes the index more broad-based by reducing the concentration of top few companies in Index. A Free-float index aids both active and passive investing styles. It aids active managers by enabling them to benchmark their fund returns vis-a-vis an investable index. This enables an apple-to-apple comparison thereby facilitating better evaluation of performance of active managers. Being a perfectly replicable portfolio of stocks, a Free-float adjusted index is best suited for the passive managers as it enables them to track the index with the least tracking error. ? Free-float Methodology improves index flexibility in terms of including any stock from the universe of listed stocks. This improves market coverage and sector coverage of the index. .
Determining Free-float factors of companies: BSE has designed a Free-float format, which is filled and submitted by all index companies on a quarterly basis with the Exchange. The Exchange determines the Free-float factor for each company based on the detailed information submitted by the companies in the prescribed format. Free-float factor is a multiple with which the total market capitalization of a company is adjusted to arrive at the Free-float market capitalization. Once the Free-float of a company is determined, it is rounded-off to the higher multiple of 5 and each company is categorized into one of the 20 bands given below. A Free-float factor of say 0. 5 means that only 55% of the market capitalization of the company will be considered for index calculation Maintenance of SENSEX One of the important aspects of maintaining continuity with the past is to update the base year average. The base year value adjustment ensures that replacement of stocks in Index, additional issue of capital and other corporate announcements like ‘rights issue’ etc. do not destroy the historical value of the index. The beauty of maintenance lies in the fact that adjustments for corporate actions in the Index should not per se affect the index values. The Index Cell of the exchange does the day-to-day maintenance of the index within the broad index policy framework set by the Index Committee.
The Index Cell ensures that SENSEX and all the other BSE indices maintain their benchmark properties by striking a delicate balance between frequent replacements in index and maintaining its historical continuity. The Index Committee of the Exchange comprises of experts on capital markets from all major market segments. They include Academicians, Fund-managers from leading Mutual Funds, Finance-Journalists, Market Participants, Independent Governing Board members, and Exchange administration. On-Line Computation of the Index: During market hours, prices of the index scrips, at which trades are executed, are automatically used by the trading computer to calculate the SENSEX every 15 seconds and continuously updated on all trading workstations connected to the BSE trading computer in real time. Adjustment for Bonus, Rights and Newly issued Capital:
The arithmetic calculation involved in calculating SENSEX is simple, but problem arises when one of the component stocks pays a bonus or issues rights shares. If no adjustments were made, a discontinuity would arise between the current value of the index and its previous value despite the non-occurrence of any economic activity of substance. At the Index Cell of the Exchange, the base value is adjusted, which is used to alter market capitalization of the component stocks to arrive at the SENSEX value. The Index Cell of the Exchange keeps a close watch on the events that might affect the index on a regular basis and carries out daily maintenance of all the 14 Indices Adjustments for Rights Issues:
When a company, included in the compilation of the index, issues right shares, the free-float market capitalisation of that company is increased by the number of additional shares issued based on the theoretical (ex-right) price. An offsetting or proportionate adjustment is then made to the Base Market Capitalisation (see ‘Base Market Capitalisation Adjustment’ below). Adjustments for Bonus Issue: When a company, included in the compilation of the index, issues bonus shares, the market capitalisation of that company does not undergo any change. Therefore, there is no change in the Base Market Capitalisation, only the ‘number of shares’ in the formula is updated.
Other Issues: Base Market Capitalisation Adjustment is required when new shares are issued by way of conversion of debentures, mergers, spin-offs etc. or when equity is reduced by way of buy-back of shares, corporate restructuring etc. Base Market Capitalisation Adjustment: The formula for adjusting the Base Market Capitalisation is as follows: New Market Capitalisation New Base Market Capitalisation = Old Base Market Capitalisation x ————————————— Old Market Capitalisation To illustrate, suppose a company issues right shares which increases the market capitalisation of the shares of that company by say, Rs. 100 crores.
The existing Base Market Capitalization (Old Base Market Capitalisation), say, is Rs. 2450 crores and the aggregate market capitalisation of all the shares included in the index before the right issue is made is, say Rs. 4781 crores. The “New Base Market Capitalisation ” will then be: 2450 x (4781+100) ————————– = Rs. 2501. 24 crores 4781 Criteria for Selection and Review of SENSEX Constituent The scrip selection and review policy for BSE Indices is based on the objective of: ? Improvement ? Transparency ? Simplicity Qualification Criteria: The general guidelines for selection of constituent scrips in SENSEX are as follows: A. Quantitative Criteria:
Final Rank:The scrip should figure in the top 100 companies listed by Final Rank. The final rank is arrived at by assigning 75% weightage to the rank on the basis of six-month average full market capitalisation and 25% weightage to the liquidity rank based on six-month average daily turnover & six-month average impact cost. Trading Frequency:The scrip should have been traded on each and every trading day for the last six months. Exceptions can be made for extreme reasons like scrip suspension etc. Market Capitalization Weightage :The weight of each scrip in SENSEX based on six-month average Free-Float market capitalisation should be at least 0. 5% of the Index.
Industry Representation: Scrip selection would take into account a balanced representation of the listed companies in the universe of BSE. The index companies should be leaders in their industry group. Listed History: The scrip should have a listing history of at least 3 months on BSE. However, the Committee may relax the criteria under exceptional circumstances. B. Qualitative Criteria: ? Track Record: ? In the opinion of the Committee, the company should have an acceptable track record. Index Review Frequency: The Index Committee meets every quarter to review all BSE indices. However, every review meeting need not necessarily result in a change in the index constituents.
In case of a revision in the Index constituents, the announcement of the incoming and outgoing scrips is made six weeks in advance of the actual implementation of the revision of the Index. NATIONAL STOCK EXCHANGE(NSE) The National Stock Exchange (NSE) is India’s leading stock exchange covering various cities and towns across the country. NSE was set up by leading institutions to provide a modern, fully automated screen-based trading system with national reach. The Exchange has brought about unparalleled transparency, speed & efficiency, safety and market integrity. It has set up facilities that serve as a model for the securities industry in terms of systems, practices and procedures. NSE has played a catalytic role in reforming the Indian securities market in terms of microstructure, market practices and trading volumes.
The market today uses state-of-art information technology to provide an efficient and transparent trading, clearing and settlement mechanism, and has witnessed several innovations in products & services viz. demutualisation of stock exchange governance, screen based trading, compression of settlement cycles, dematerialisation and electronic transfer of securities, securities lending and borrowing, professionalisation of trading members, fine-tuned risk management systems, emergence of clearing corporations to assume counterparty risks, market of debt and derivative instruments and intensive use of information technology Indices An Index is used to give information about the price movements of products in the financial, commodities or any other markets.
Financial indexes are constructed to measure price movements of stocks, bonds, T-bills and other forms of investments. Stock market indexes are meant to capture the overall behaviour of equity markets. A stock market index is created by selecting a group of stocks that are representative of the whole market or a specified sector or segment of the market. An Index is calculated with reference to a base period and a base index value. Stock market indexes are useful for a variety of reasons. Some of them are : They provide a historical comparison of returns on money invested in the stock market against other forms of investments such as gold or debt. They an be used as a standard against which to compare the performance of an equity fund. It is a lead indicator of the performance of the overall economy or a sector of the economy Stock indexes reflect highly up to date information Modern financial applications such as Index Funds, Index Futures, Index Options play an important role in financial investments and risk management Initial Public Offerings (IPO) A corporate may raise capital in the primary market by way of an initial public offer, rights issue or private placement. An Initial Public Offer (IPO) is the selling of securities to the public in the primary market. It is the largest source of funds with long or indefinite maturity for the company. What is Book Building?
SEBI guidelines defines Book Building as “a process undertaken by which a demand for the securities proposed to be issued by a body corporate is elicited and built-up and the price for such securities is assessed for the determination of the quantum of such securities to be issued by means of a notice, circular, advertisement, document or information memoranda or offer document”. Book Building is basically a process used in Initial Public Offer (IPO) for efficient price discovery. It is a mechanism where, during the period for which the IPO is open, bids are collected from investors at various prices, which are above or equal to the floor price. The offer price is determined after the bid closing date. As per SEBI guidelines, an issuer company can issue securities to the public though prospectus in the following manner: 1. 00% of the net offer to the public through book building process 2. 75% of the net offer to the public through book building process and 25% at the price determined through book building. The Fixed Price portion is conducted like a normal public issue after the Book Built portion, during which the issue price is determined. The concept of Book Building is relatively new in India. However it is a common practice in most developed countries. Book Building at NSE The NSE has set up nation-wide network for trading whereby members can trade remotely from their offices located all over the country. The NSE trading network spans various cities and towns across India.
NSE decided to offer this infrastructure for conducting online IPOs through the Book Building process. NSE operates a fully automated screen based bidding system called NEAT IPO that enables trading members to enter bids directly from their offices through a sophisticated telecommunication network. Book Building through the NSE system offers several advantages: ? The NSE system offers a nation wide bidding facility in securities ? It provide a fair, efficient & transparent method for collecting bids using latest electronic trading systems ? Costs involved in the issue are far less than those in a normal IPO ? The IPO market timings are from 10. 00 a. m. to 3. 00 p. m.
On the last day of the IPO, the session timings can be further extended on specific request by the Book Running Lead Manager. Issuers desirous of using NSE’s online IPO system are required to comply with the following procedures: ? Submit a written request as per prescribed format for usage of electronic facilities and software of NSE ? Give details regarding Book Running Lead Manager, Co Book Running Lead Managers and Syndicate Members. ? Pay the requisite charges to NSE. Trading Members The Book Running Lead Manager will give the list of trading members who are eligible to participate in the Book Building process to the Exchange. Members have to submit a one time undertaking to the Exchange.
Eligible trading members have to give in the prescribed format details of the user IDs that they would like to use. Subscribers Subscribers can approach any of the approved trading members for submitting bids in the NEAT IPO system. On line transaction registration slip are generated automatically after entering the bids in to the system which acts as proof of the registration of each Bid option. Reverse Book Building at NSE Delisting of shares under SEBI (delisting of Securities) guidelines 2003 Securities and Exchange Board of India has issued the SEBI (Delisting of Securities) Guidelines 2003’ for delisting of shares from stock exchanges. The guidelines inter alia provide the overall framework for voluntary delisting by a promoter.
In accordance with the guidelines for the first time in India by any Exchange, National Stock Exchange now provides online reverse book building for promoter/acquirer through its trading network which spans various cities and towns across India. NSE operates a fully automated screen based bidding system that enables trading members to enter offers directly from their offices through a sophisticated telecommunication network. What is Reverse Book Building (Delisting of shares)? The Reverse Book Building is a mechanism provided for capturing the sell orders on online basis from the share holders through respective Book Running Lead Managers (BRLMs) which can be used by companies intending to elist its shares through buy back process. In the Reverse Book Building scenario, the Acquirer/Company offers to buy back shares from the share holders. The Reverse Book Building is basically a process used for efficient price discovery. It is a mechanism where, during the period for which the Reverse Book Building is open, offers are collected from the share holders at various prices, which are above or equal to the floor price. The buy back price is determined after the offer closing date. Business process for delisting through book building is as follows: ? The acquirer shall appoint designated Book Running Lead Manager (BRLM) for accepting offers from the share holders. The company/acquirer intending to delist its shares through Book Building process is identified by way of a symbol assigned to it by BRLM. ? Orders for the offer shall be placed by the share holders only through the designated trading members, duly approved by the Exchange ? The designated trading members shall ensure that the security / share holders deposit the securities offered with the trading members prior to placement of an order. ? The offer shall be open for ‘n’ number of days. ? SEBI guidelines shall be applicable to delisting of securities of companies and specifically apply to: ? Voluntary delisting being sought by the promoters of a company. Any acquisition of shares of the company (either by a promoter or by any other person) or scheme or arrangement, by whatever name referred to, consequent to which the public shareholding falls below the minimum limit specified in the listing conditions or listing agreement that may result in delisting of securities. ? Promoters of the companies who voluntarily seek to delist their securities from all or some of the stock exchanges. ? Cases where a person in control of the management is seeking to consolidate his holding in a company, in a manner which would result in the public shareholding or in the listing agreement that may have the effect of company being delisted.
NSE uses the reverse book building system; a fully automated screen based bidding system that allows offers to run in several issues concurrently. The system has the facility of defining a hierarchy amongst the users of the system. The Book Running Lead Manager can define who will be the Syndicate member and who will be the other members participating in the issue. The Syndicate Member and other Members also have a facility of defining a hierarchy among the users of the system as Corporate Manager, Branch Manager and Dealer. Trading Members The Book Running Lead Manager will give the list of trading members who are eligible to participate in the Book Building process to the Exchange. Members have to submit a one-time undertaking to the Exchange.
Eligible trading members have to give in the prescribed format details of the user IDs that they would like to use. List of Approved Trading Members: ? ICICI Brokerage Services Limited. ? Karvy Stock Broking Limited. ? Master Capital Services Limited. Subscribers Subscribers can approach any of the approved trading members for submitting offers in the NEAT IPO system. On line transaction registration slip are generated automatically after entering the offers in to the system, which acts as proof of the registration of each offer. Reverse Book Building through the NSE system offers several advantages: ? The NSE system offers a nation wide bidding facility in securities. It provides a fair, efficient & transparent method for collecting offers using latest electronic trading systems. ? User Hierarchy | Order Book | Bidding Workstation | Reports | Current Issue factors affecting Indian stock mkt. The economy of India is the fourth-largest in the world as measured by purchasing power parity (PPP), with a GDP of US $3. 36 trillion. When measured in USD exchange-rate terms, it is the tenth largest in the world, with a GDP of US $691. 87 billion (2004). India was the second fastest growing major economy in the world, with a GDP growth rate of 8. 1% at the end of the first quarter of 2005–2006. However, India’s huge population results in a relatively low per capita income of $3,100 at PPP.
The country’s economy is diverse and encompasses agriculture, handicrafts, industries and a multitude of services. Services are the major source of economic growth in India today, though two-thirds of the Indian workforce earn their livelihood directly or indirectly through agriculture. In recent times, India has also capitalised on its large number of highly educated people who are fluent in the English language to become a major exporter of software services, financial services and software engineers. India has adhered to a socialist-inspired approach for most of its independent history, with strict government control over private sector participation, foreign trade, and foreign direct investment.
Since the early 1990s, India has gradually opened up its markets through economic reforms by reducing government controls on foreign trade and investment. Privatisation of public-owned industries and opening up of certain sectors to private and foreign players has proceeded slowly amid political debate. The socio-economic problems India faces are a burgeoning population and lack of infrastructure, as well as growing inequality and unemployment. Poverty also remains a problem although it has seen a decrease of 10% since the 1980s. Post-independence Growth rate of India’s real GDP per capita (Constant Prices: Chain series) (1950-2000). Data Source: Penn World tables.
Indian economic policy after independence, influenced by the colonial experience (which was seen by Indian leaders as exploitative in nature), and by their exposure to Fabian socialism, became protectionist in nature, implementing a policy of import substitution, industrialisation, state intervention in labour and financial markets, a large public sector, overt regulation of business, and central planning. Jawaharlal Nehru, the first prime minister of India, along with the statistician Prasanta Chandra Mahalanobis, formulated and oversaw the economic policy of independent India. They expected favourable outcomes from this strategy since it involved both the public and private sectors and was based on direct and indirect state intervention instead of a Soviet-style central command system.
The policy of concentrating simultaneously on capital and technology intensive heavy industry and subsidising hand based and low-skilled cottage industries was criticised by economist Milton Friedman, who thought it would not only waste both capital and labour, but also retard the development of smaller manufacturers. DETERIMINANTS Demographics Performance of Indian states in providing basic social services like education, healthcare, etcIndia, with a population of 1. 027 billion people, is the second most populous country in the world, accounting for nearly 17% of the world’s population. Growth rate of population has shown signs of decrease, coming down from a compound annual growth rate of 2. 15 (1951–1981) to 1. 93 (1991–2001); despite the decrease in the death rates owing to improvements in healthcare.
The large population puts further pressure on infrastructure, social services like education and has magnified socio-economic problems like unemployment, illiteracy, etc. A positive factor has been the large working age population, which forms 58. 2% of the total population, which is expected to substantially increase, because of the decrease in dependency ratio. Increased literacy, better healthcare and self-sufficiency in food production since independence, have ensured that a large population has not caused any serious problems. Geography and natural resources India’s geography ranges from mountain ranges to deserts, plains, hills and plateaus, while its climate varies from tropical in the south to a more temperate climate in the north.
India’s inland water resources comprising rivers, canals, ponds and lakes and marine resources comprising the east and west coasts of the Indian ocean and other gulfs and bays provide employment to nearly 6 million people in the fisheries sector. India is the sixth largest producer of fish in the world and second largest in inland fish production. India’s major mineral resources include Coal (fourth-largest reserves in the world), Iron ore, Manganese, Mica, Bauxite, Titanium ore, Chromite, Natural gas, Diamonds, Petroleum, Limestone and Thorium (world’s largest along Kerala’s shores). India’s oil reserves, found in Bombay High off the coast of Maharashtra, Gujarat, and in eastern Assam meet 25% of the country’s demand. Physical infrastructure
Cheap and environment friendly public transport is seen as a necessity for India’s crowded and polluted metros. Pictured here, is the New Delhi Metro, operational since 2002 and seen as a model for other metros. Since independence, India has allocated nearly half of the total outlay of the five-year plans for infrastructural development. Much of the total outlay was spent on large projects in the area of irrigation, energy, transport, communications and social overheads. Development of infrastructure was completely in the hands of the public sector and was plagued by corruption, inefficiencies, urban-bias and an inability to scale investment.
India’s low spending on power, construction, transportation, telecommunications and real estate, at $31 billion or 6% of GDP, compared to China’s spending of $260 billion or 20% of its GDP in 2002 has prevented India from sustaining a growth rate of around 8%. This has prompted the government to open up infrastructure to the private sector and allowing foreign investment. Politics India, a federal republic, has had stable democratic governments since independence. Politics is dominated by the centre-left Indian National Congress (INC), the right-wing Bharatiya Janata Party (BJP), the left-wing Communist Party of India (CPI) and CPI (Marxist) and various regional parties, which are either centre-right or centre-left.
Despite the varied political spectrums they occupy, the necessity of forming coalitions for government formation, the growing middle class that generally favours liberalisation and tightening fiscal deficits, especially at the state levels, has meant that all political parties adopt a moderate view towards economic reforms. Financial institutions The Bombay Stock Exchange is one of the two largest stock markets in India. Its index is used to gauge the strength of the Indian economy. At the time of Independence, India inherited several institutions like the civil services, central bank, railways, etc. , from her British rulers. Mumbai serves as the nation’s commercial capital, with the Reserve Bank of India (RBI), Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE) located here.
The headquarters of many financial institutions are also located within the city. Poverty Percentage of population in 1999–2000 living below poverty line, by states. (Primary data: NSSO, 1999-2000. ) States with lighter shades have more people living below the poverty line. The National sample survey organisation (NSSO) estimated that 26. 1% of the population was living below the poverty line in 1999–2000, down from 51. 3% in 1977–1978. The criterion used was monthly consumption of goods below Rs. 211. 30 for rural areas and Rs. 454. 11 for urban areas. 75% of the poor are in rural areas (27. 1% of the total rural population) with most of them comprising daily wagers, self-employed households and landless labourers.
The major causes for poverty are unemployment or under-employment, low ownership of assets (especially productive assets like land and farm equipment) and illiteracy. Corruption Extent of corruption in Indian states, as measured in a 2005 study by Transparency International India. (Darker regions are more corrupt)Corruption has been one of the pervasive problems affecting India, along with many developing countries, which has taken the form of bribes, evasion of tax and exchange controls, embezzlement, etc. The economic reforms of 1991 reduced the red tape, bureaucracy and the Licence Raj that had strangled private enterprise and was blamed for the corruption and inefficiencies.
Yet, a 2005 study by Transparency International (TI) India found that more than half of those surveyed had firsthand experience of paying bribe or peddling influence to get a job done in a public office. The chief economic consequences of corruption are the loss to the exchequer, an unhealthy climate for investment and an increase in the cost of government-subsidised services. The TI India study estimates the monetary value of petty corruption in 11 basic services provided by the government, like education, healthcare, judiciary, police, etc. , to be around Rs. 21,068 crores. India still ranks in the bottom quartile of developing nations in terms of the ease of doing business, and compared to China, the average time taken to secure the clearances for a startup or to invoke bankruptcy is much greater.
The Right to Information Act (2005) and equivalent acts in the states, that require government officials to furnish information requested by citizens or face punitive action, computerisation of services and various central and state government acts that established vigilance commissions have considerably reduced corruption or at least have opened up avenues to redress grievances.  Occupations and unemployment 57% of the workforce is in agriculture, which contributes to 25% of the GDP. Agricultural and allied sectors accounted for about 57% of the total workforce in 1999-2000, down from 60% in 1993-94. While agriculture has faced stagnation in growth, services have seen a steady growth. Of the total workforce, 8% is in the organised sector, two-thirds of which are in the public sector. The NSSO survey estimated that in 1999-2000, 106 million, nearly 10% of the population were unemployed and the overall unemployment rate was 7. 32%, with rural areas doing marginally better (7. 21%) than urban areas (7. 65%).
Unemployment in India, like most other developing countries, is characterised by chronic underemployment or disguised unemployment. Government schemes that target eradication of both poverty and unemployment, attempt to solve the problem, by providing financial assistance for setting up businesses, skill honing, setting up public sector enterprises, reservations in governments, etc. The decreased role of the public sector after liberalisation has further undermined the need for focusing on better education and has also put political pressure on further reforms. Regional imbalance Per capita net state domestic product (NSDP) of Indian states in 1997-1998.
One of the critical problems facing India’s economy is the sharp and growing regional variations among India’s different states and territories in terms of per capita income, poverty, availability of infrastructure and socio-economic development. The five-year plans have attempted to reduce regional disparities by sanctioning industrial development in the interior regions, but industries still tend to concentrate around urban areas and port cities. Even the industrial townships in the interiors, Bhilai for instance, resulted in very little development in the surrounding areas. After liberalisation, the disparities have grown despite the efforts of the union government in reducing them.
Part of the reason being, manufacturing and services and not agriculture are the engines of growth, in which the forward states are better placed, with infrastructure like well developed ports, urbanisation and an educated and skilled workforce which attract manufacturing and service sectors. The union and state governments of backward regions are trying to reduce the disparities by offering tax holidays, cheap land, etc. , and focusing more on sectors like tourism, which although being geographically and historically determined, can become a source of growth and is faster to develop than other sectors. Global trade relations Until the liberalisation of 1991, India was largely and intentionally isolated from the world markets in order to protect its fledging economy and achieve self-reliance.
Foreign trade was subject to import tariffs, export taxes and quantitative restrictions, while foreign direct investment was restricted by upper limit equity participation, requirements on technology transfer, export obligations and government approvals, which were needed for nearly 60% of new FDI in the industrial sector. These restrictions ensured that FDI averaged only around $200 million annually between 1985-1991 and a large percentage of the capital flows consisted of foreign aid, commercial borrowing and deposits of non-resident Indians. India’s exports were stagnant for the first 15 years, due to the predominance of tea, jute and cotton manufactures, whose demand were generally inelastic.
Imports in the same period consisted predominantly of machinery, equipment and raw materials due to the nascent industrialisation. Post-liberalisation, the value of India’s international trade has become more broad based and gone up to Rs. 63,080,109 crores in 2003-04 from Rs. 1,250 crores in 1950-51. India’s major trading partners are China, United States, UAE, UK, Japan and the European Union. India is a founder-member of General Agreement on Tariffs and Trade (GATT) since 1947 and its successor, the World Trade Organization since its inception. While participating actively in its general council meetings, India has been crucial in voicing the concerns of the developing world.
For instance, India has continued its opposition to the inclusion of such matters as labour and environment issues and other non-tariff barriers into the WTO policies. Balance of payments India is a net importer, with its imports totalling $89. 33 billion and exports totalling $69. 18 billion. Since independence, India’s balance of payments on current account has been negative for most of the years, owing to a larger share of imports vis-a-vis exports. Since liberalisation, incidentally precipitated by a balance of payment crisis, India’s exports have been consistently rising, covering 80. 3% of India’s imports in 2002-03, up from 66. 2% in 1990-91.
Although India is still a net importer, since 1996-1997, India’s overall balance of payments (current account balance + capital account balance) has been positive, largely on account of increased foreign direct investment and deposits from non-resident Indians, which until then, was occasionally positive on account of external assistance and commercial borrowings. As a result, India’s foreign currency reserves stood 141 billion USD as on 2005-2006. REFORMS IN INDIAN STOCK MARKET Recent reforms Till the middle of the 1990s, the stock market in India was fragmented with several regional exchanges. The Bombay Stock Exchange, more than a century old, has been serving as a central exchange for the country. The need for multiple exchanges was felt at that time due to the poor telecommunication facilities. Many new exchanges were opened and were all doing well in terms of volume.
With the development of telecommunication facilities over the years the basic constraint of having a single stock exchange for the whole country was removed. Ideally, the Government could have allowed the BSE to emerge as the national exchange and facilitate the regional exchanges to integrate with it. The securities scam of the early Nineties and the involvement of a few members of stock exchanges gave a tainted picture of members controlling stock exchanges and the Government made a hasty and costly move in the process of reforming the stock market. It sponsored the establishment of the National Stock Exchange through state controlled financial institutions and banks and allowed it to enter the equity segment in a big way though the original objective of NSE was to develop the debt market.
Simultaneously, the Government started strengthening its monitoring and supervision of the regional exchanges through the Securities and Exchange Board of India. During this period, the relationship between the regulator and the stock exchanges became strained several times. Financial And Banking Sector Reforms The last decade witnessed the maturity of India’s financial markets. Since 1991, every governments of India took major steps in reforming the financial sector of the country. The important achievements in the following fields is discussed under serparate heads: Financial Markets In the last decade, Private Sector Institutions played an important role.
They grew rapidly in commercial banking and asset management business. With the openings in the insurance sector for these institutions, they started making debt in the market. Competition among financial intermediaries gradually helped the interest rates to decline. Deregulation added to it. The real interest rate was maintained. The borrowers did not pay high price while depositors had incentives to save. It was something between the nominal rate of interest and the expected rate of inflation. Regulators The Finance Ministry continuously formulated major policies in the field of financial sector of the country. The Government accepted the important role of regulators.
The Reserve Bank of India (RBI) has become more independant. Securities and Exchange Board of India (SEBI) and the Insurance Regulatory and Development Authority (IRDA) became important institutions. Opinions are also there that there should be a super-regulator for the financial services sector instead of multiplicity of regulators. The banking system Almost 80% of the business are still controlled by Public Sector Banks (PSBs). PSBs are still dominating the commercial banking system. Shares of the leading PSBs are already listed on the stock exchanges. The RBI has given licences to new private sector banks as part of the liberalisation process.
The RBI has also been granting licences to industrial houses. Many banks are successfully running in the retail and consumer segments but are yet to deliver services to industrial finance, retail trade, small business and agricultural finance. The PSBs will play an important role in the industry due to its number of branches and foreign banks facing the constrait of limited number of branches. Hence, in order to achieve an efficient banking system, the onus is on the Government to encourage the PSBs to be run on professional lines. Development finance institutions FIs’s access to SLR funds reduced. Now they have to approach the capital market for debt and equity funds.
Convertibility clause no longer obligatory for assistance to corporates sanctioned by term-lending institutions. Capital adequacy norms extended to financial institutions. DFIs such as IDBI and ICICI have entered other segments of financial services such as commercial banking, asset management and insurance through separate ventures. The move to universal banking has started. Non-banking finance companies In the case of new NBFCs seeking registration with the RBI, the requirement of minimum net owned funds, has been raised to Rs. 2 crores. Until recently, the money market in India was narrow and circumscribed by tight regulations over interest rates and participants. The secondary market was underdeveloped and lacked liquidity.
Several measures have been initiated and include new money market instruments, strengthening of existing instruments and setting up of the Discount and Finance House of India (DFHI). The RBI conducts its sales of dated securities and treasury bills through its open market operations (OMO) window. Primary dealers bid for these securities and also trade in them. The DFHI is the principal agency for developing a secondary market for money market instruments and Government of India treasury bills. The RBI has introduced a liquidity adjustment facility (LAF) in which liquidity is injected through reverse repo auctions and liquidity is sucked out through repo auctions. On account of the substantial issue of government debt, the gilt- edged market occupies an important position in the financial set- up.
The Securities Trading Corporation of India (STCI), which started operations in June 1994 has a mandate to develop the secondary market in government securities. Long-term debt market: The development of a long-term debt market is crucial to the financing of infrastructure. After bringing some order to the equity market, the SEBI has now decided to concentrate on the development of the debt market. Stamp duty is being withdrawn at the time of dematerialisation of debt instruments in order to encourage paperless trading. The capital market The number of shareholders in India is estimated at 25 million. However, only an estimated two lakh persons actively trade in stocks. There has been a dramatic improvement in the country’s stock market trading infrastructure during the last few years.
Expectations are that India will be an attractive emerging market with tremendous potential. Unfortunately, during recent times the stock markets have been constrained by some unsavoury developments, which has led to retail investors deserting the stock markets. Mutual funds The mutual funds industry is now regulated under the SEBI (Mutual Funds) Regulations, 1996 and amendments thereto. With the issuance of SEBI guidelines, the industry had a framework for the establishment of many more players, both Indian and foreign players. The Unit Trust of India remains easily the biggest mutual fund controlling a corpus of nearly Rs. 70,000 crores, but its share is going down.
The biggest shock to the mutual fund industry during recent times was the insecurity generated in the minds of investors regarding the US 64 scheme. With the growth in the securities markets and tax advantages granted for investment in mutual fund units, mutual funds started becoming popular. The foreign owned AMCs are the ones which are now setting the pace for the industry. They are introducing new products, setting new standards of customer service, improving disclosure standards and experimenting with new types of distribution. The insurance industry is the latest to be thrown open to competition from the private sector including foreign players.
Foreign companies can only enter joint ventures with Indian companies, with participation restricted to 26 per cent of equity. It is too early to conclude whether the erstwhile public sector monopolies will successfully be able to face up to the competition posed by the new players, but it can be expected that the customer will gain from improved service. The new players will need to bring in innovative products as well as fresh ideas on marketing and distribution, in order to improve the low per capita insurance coverage. Good regulation will, of course, be essential. Overall approach to reforms The last ten years have seen major improvements in the working of various financial market participants.
The government and the regulatory authorities have followed a step-by-step approach, not a big bang one. The entry of foreign players has assisted in the introduction of international practices and systems. Technology developments have improved customer service. Some gaps however remain (for example: lack of an inter-bank interest rate benchmark, an active corporate debt market and a developed derivatives market). On the whole, the cumulative effect of the developments since 1991 has been quite encouraging. An indication of the strength of the reformed Indian financial system can be seen from the way India was not affected by the Southeast Asian crisis.
However, financial liberalisation alone will not ensure stable economic growth. Some tough decisions still need to be taken. Without fiscal control, financial stability cannot be ensured. The fate of the Fiscal Responsibility Bill remains unknown and high fiscal deficits continue. In the case of financial institutions, the political and legal structures hve to ensure that borrowers repay on time the loans they have taken. The phenomenon of rich industrialists and bankrupt companies continues. Further, frauds cannot be totally prevented, even with the best of regulation. However, punishment has to follow crime, which is often not the case in India. Deregulation of banking system
Prudential norms were introduced for income recognition, asset classification, provisioning for delinquent loans and for capital adequacy. In order to reach the stipulated capital adequacy norms, substantial capital were provided by the Government to PSBs. Government pre-emption of banks’ resources through statutory liquidity ratio (SLR) and cash reserve ratio (CRR) brought down in steps. Interest rates on the deposits and lending sides almost entirely were deregulated. New private sector banks allowed to promote and encourage competition. PSBs were encouraged to approach the public for raising resources. Recovery of debts due to banks and the Financial Institutions Act, 1993 was passed, and special recovery tribunals set up to facilitate quicker recovery of loan arrears.
Bank lending norms liberalised and a loan system to ensure better control over credit introduced. Banks asked to set up asset liability management (ALM) systems. RBI guidelines issued for risk management systems in banks encompassing credit, market and operational risks. A credit information bureau being established to identify bad risks. Derivative products such as forward rate agreements (FRAs) and interest rate swaps (IRSs) introduced. Capital market developments The Capital Issues (Control) Act, 1947, repealed, office of the Controller of Capital Issues were abolished and the initial share pricing were decontrolled. SEBI, the capital market regulator was established in 1992.
Foreign institutional investors (FIIs) were allowed to invest in Indian capital markets after registration with the SEBI. Indian companies were permitted to access international capital markets through euro issues. The National Stock Exchange (NSE), with nationwide stock trading and electronic display, clearing and settlement facilities was established. Several local stock exchanges changed over from floor based trading to screen based trading. Private mutual funds permitted The Depositories Act had given a legal framework for the establishment of depositories to record ownership deals in book entry form. Dematerialisation of stocks encouraged paperless trading.
Companies were required to disclose all material facts and specific risk factors associated with their projects while making public issues. To reduce the cost of issue, underwriting by the issuer were made optional, subject to conditions. The practice of making preferential allotment of shares at prices unrelated to the prevailing market prices stopped and fresh guidelines were issued by SEBI. SEBI reconstituted governing boards of the stock exchanges, introduced capital adequacy norms for brokers, and made rules for making client or broker relationship more transparent which included separation of client and broker accounts. Buy back of shares allowed
The SEBI started insisting on greater corporate disclosures. Steps were taken to improve corporate governance based on the report of a committee. SEBI issued detailed employee stock option scheme and employee stock purchase scheme for listed companies. Standard denomination for equity shares of Rs. 10 and Rs. 100 were abolished. Companies given the freedom to issue dematerialised shares in any denomination. Derivatives trading starts with index options and futures. A system of rolling settlements introduced. SEBI empowered to register and regulate venture capital funds. The SEBI (Credit Rating Agencies) Regulations, 1999 issued for regulating ew credit rating agencies as well as introducing a code of conduct for all credit rating agencies operating in India. Consolidation imperative Another aspect of the financial sector reforms in India is the consolidation of existing institutions which is especially applicable to the commercial banks. In India the banks are in huge quantity. First, there is no need for 27 PSBs with branches all over India. A number of them can be merged. The merger of Punjab National Bank and New Bank of India was a difficult one, but the situation is different now. No one expected so many employees to take voluntary retirement from PSBs, which at one time were much sought after jobs.
Private sector banks will be self consolidated while co-operative and rural banks will be encouraged for consolidation, and anyway play only a niche role. |About NSDL | | | |Although India had a vibrant capital market which is more than a century old, the paper-based settlement of trades caused substantial problems like | |bad delivery and delayed transfer of title till recently. The enactment of Depositories Act in August 1996 paved the way for establishment of NSDL, | |the first depository in India.
This depository promoted by institutions of national stature responsible for economic development of the country has | |since established a national infrastructure of international standard that handles most of the settlement of securities in dematerialised form in | |Indian capital market. | | | |Using innovative and flexible technology systems, NSDL works to support the investors and brokers in the capital market of the country. NSDL aims at | |ensuring the safety and soundness of Indian marketplaces by developing settlement solutions that increase efficiency, minimise risk and reduce costs. |At NSDL, we play a quiet but central role in developing products and services that will continue to nurture the growing needs of the financial | |services industry. | | | |In the depository system, securities are held in depository accounts, which is more or less similar to holding funds in bank accounts. Transfer of | |ownership of securities is done through simple account transfers. This method does away with all the risks and hassles normally associated with | |paperwork. Consequently, the cost of transacting in a depository environment is considerably lower as compared to transacting in certificates. | DEMATERIALISATION OF SHARES:
Trading in the shares of the Company is compulsory in dematerialized form for all investors. The Company has, therefore, enlisted its shares with both the depositories, viz, NSDL and CDSL. This means that you have now have the option to hold and trade in the shares of the Company in electronic form. While most of you may be familiar with how a Depository functions, given below is a brief outline, in question and answer format, which we hope will be useful to you. Dematerialisation Dematerialisation (“Demat” in short form) signifies conversion of a share certificate from its physical form to electronic form for the same number of holding which is credited to your demat account which you open with a Depository Participant (DP).
Dematerialisation is a process by which the physical share certificates of an investor are taken back by the Company and an equivalent number of securities are credited in electronic form at the request of the investor. An investor will have to first open an account with a Depository Participant and then request for the dematerialisation of his share certificates through the Depository Participant so that the dematerialised holdings can be credited into that account. This is very similar to opening a Bank Account. Dematerialisation of shares is optional and an investor can still hold shares in physical form. However, he / she has to demat the shares if he / she wishes to sell the same through the Stock Exchanges.
Similarly, if an investor purchases shares, he / she will get delivery of the shares in demat form. Depository A Depository (NSDL & CDSL) is an organisation like a Central Bank where the securities of a shareholder are held in the electronic form at the request of the shareholder through the medium of a Depository Participant. If an investor wants to utilise the services offered by a Depository, the investor has to open an account with the Depository through a Depository Participant. So is a depository just another form of a custodial service, the only difference being that the securities are held in an electronic form? No, the two are different. The Depository can legally transfer beneficial ownership which a custodian cannot.
The main objective of a Depository is to minimize the paper work involved with the ownership, trading and transfer of securities. Depository Participant Similar to the brokers who trade on your behalf in and outside the Stock Exchange; a Depository Participant (DP) is your representative (agent) in the depository system providing the link between the Company and you through the Depository. Your Depository Participant will maintain your securities account balances and intimate to you the status of your holding from time to time. According to SEBI guidelines, Financial Institutions like banks, custodians, stockbrokers etc. can become participants in the depository. A DP is one with whom you need to open an account to deal in electronic form.
While the Depository can be compared to a Bank, DP is like a branch of your bank with whom you can have an account. Functions Of Depository System operate The Depository System functions very much like the banking system. A bank holds funds in accounts whereas a Depository holds securities in accounts for its clients. A Bank transfers funds between accounts whereas a Depository transfers securities between accounts. In both systems, the transfer of funds or securities happens without the actual handling of funds or securities. Both the Banks and the Depository are accountable for the safe keeping of funds and securities respectively. Benefits of having a demat account ? Trading in the shares of the Company is now under the compulsory demat segment.
With SEBI making demat mandatory on most of the traded scrips, electronic transaction will be the only way everyone will trade. ? No stamp duty for transfer of securities in the electronic form. In case of transfer of physical shares, stamp duty of 0. 5 percent is payable on the market value of shares being transferred. ? All risks associated with physical certificates such as delays, loss, in transit, theft, mutilation, bad deliveries, etc. eliminated. Your shares can be kept in the “Frozen Mode” by your Depository Participant under your specific instructions. ? The concept of an “odd lot” in respect of dematerialized shares stands abolished, i. e. in the demat mode, market lot becomes one share. Dematerialised securities are most preferred by banks and other financiers for providing credit facility against securities. Generally, demat securities attract lower margin and lower rates of interest compared to physical securities. ? Even in the electronic mode of trading, the payment mechanism (usually through a broker) between the buyer and seller continues to be as before. Also the usual brokerage charges would have to be incurred. However, after the settlement, pay in and pay out are on the same day for scripless trading which means you get your securities as well as cash immediately. ? Shares bought or sold are transferred in your name on the very next day of pay out.
In case of physical shares, transfer of ownership takes 30 days or sometimes even more. ? No courier / postal charges for sending share certificates / transfer deeds. ? Facility for freezing / locking of investor accounts, which enables you to make your account non-operational, for instance if you are abroad. ? Facility to pledge and hypothecate your securities available. ? As the Depository System becomes popular, brokers will be increasingly reluctant to deal with physical shares. ? Investors prefer to buy shares which are already in dematerialised form. Process of dematerialisation The process of opening an account with a Depository Participant is similar to the opening of a bank account.
First, you will have to open an account with a Depository Participant (DP) of your choice by filling up an Account Opening Form and signing a “Participant-Client Agreement”. You will be then given a unique client ID number, which must be quoted in all correspondence with the DP. Thereafter, you will have to fill up and submit a Dematerialisation Request Form (DRF) provided by the DP duly signed by all the holders and surrender the physical shares intended to be dematted to the DP. The DP upon receipt of the shares and the DRF, will issue you an acknowledgement and will send an electronic request to the Company/ Registrars and Transfer Agents of the Company through the Depository for confirmation of demat.
The DP will simultaneously surrender the DRF and the shares to the Company / Registrars and Transfer Agents of the Company with a covering letter requesting the Company to confirm demat. The Registrars and Transfer Agents of the Company, after necessary verification of the documents received from the DP, will cancel the physical shares and confirm demat to the Depository. This confirmation will be passed on by the Depository to the DP which holds your account. After receiving this confirmation from the Depository, the DP will credit your account with the number of shares dematerialized. The DP will hold the shares in the dematerialized form thereafter on your behalf. And you will become the beneficial owner of these dematerialized shares.
DO NOT SEND THE SHARE CERTIFICATES / DOCUMENTS FOR DEMATERIALISATION TO THE COMPANY OR ITS REGISTRARS AND TRANSFER AGENTS. When you submit the shares for dematerialisation, your DP will deface the share certificates with the stamp “SURRENDERED FOR DEMATERIALISATION”. This ensures that your shares are not lost in transit or misused till credit is received by you in your demat account. Demutualisation The process of changing a mutual or cooperative association into a public company by converting the interests of members into shareholdings, which can then be traded through a stock exchange. Examples of mutuals in Australia are building societies, credit unions and some large insurance institutions.
Their structure limits their activities to servicing their members and inhibits their ability to pursue profits and diversification as freely as companies. Demutualisation of stock exchanges The Government through an ordinance has amended the Securities and Contract (Regulations) Act to makecorporatisation and demutualisation of stock exchanges mandatory. In this context, two authors give their viewson the implications of the move for the future of the near dormant regional stock exchanges. RECENTLY, THE Securities Contract (Regulations) Act (SCRA) was amended through the promulgation of an ordinance to make corporatisation and demutualisation of stock exchanges mandatory.
The amendment not only requires separation of ownership and trading rights, it also requires that the majority ownership rests with the public and those without any trading rights. Also through these conditions, the Government has signalled a major shift in its earlier stand that stock exchanges should be self-regulating agencies of their members. It now desires that they should be externally regulated. Though the social desirability of such external regulation and supervision in a liberalised environment is debatable, it may be assumed that there is a genuine reason for the Government to believe that such a move is socially desirable. However, there are several difficulties and practical issues when the exchanges are forced to comply with the provisions of the ordinance.
A review of the developments in the last one and half decades relating to stock exchanges will serve as a background to understand such difficulties and thereby also enable the current move to have the right perspective. Special features of regulation in the Indian context It is important that regulatory practices be derived from more general principles, since then they can more easily adapt to financial innovations. Regulatory practices also need to be attuned to country specific features, but not at the expense of deviations from general principles. For example in European jurisdictions disclosure of price sensitive information is mandated as a general principle, not as a response to specific events as was the case in US.
The Sarbanes-Oxley Act passed after the wave of corporate and securities scandals, has changed the US in this respect (Spaventa, 2003). The scandals revealed regulatory gaps such as insufficient enforcement of disclosure requirements, excessive reliance on peer review for auditors, and inability to keep brokerage and investment banking activities separate. Brokerage firms took fees for offering a preferred list of firms. For example, Morgan Stanley had failed to inform investors of the compensation it received for selling certain funds3. Under diffuse shareholding and independent managers, as prevail in the US, the information asymmetries between the principal and their agent become acute and require active regulatory intervention.
Under concentrated European shareholding, additional measures are required to protect minority shareholders, such as rights to appoint directors, and checks on preferential allotment and promoter holdings. We turn next to the Indian regulatory structure and context4. Miller (1986) points out that tax laws have often functioned as the bit of sand in the oyster producing the pearl of financial innovation. There were a series of scandals involving America’s mutual-fund industry. As a result the SEC has proposed reforms forcing the disclosure of fees, expenses and any conflicts of interest to investors. It also wants financial intermediaries to place trading orders before the stock market closes, more independent fund boards and clearer statements of funds’ policies on other disputed trading practices.
The sections below drawn upon Sebi annual reports, NSE capital markets reviews, Sebi press releases available at press reports, and conversations with participants. Shah and Thomas (1997) survey the early phase of Indian capital market reforms. SECURITIES AND EXCHANGE BOARD OF INDIA(SEBI) History, objectives, powers Late comers have the advantage that they can adopt best practices, but this is easiest done when a new institution is created, since changing old well established institutions is difficult. The Capital Issues (Control) Act 1947, administered by the Controller of Capital Issues (CCI), governed capital issues in India. As part of liberalizing reforms CCI was abolished, and Sebi set up in1988, was made a statutory body in 1992.
Its objectives are to protect the interests of investors, ensure the fairness, integrity and transparency of the securities market, and reach best international regulatory practices5. But flexibility was required to respond to market arbitrage, and to emerging requirements in the Indian context. There has been a constant attempt to improve regulatory practices and contribute to the ongoing capital market reforms. Once the policy decision had been taken to open out and reach and exceed international standards and practices, the direction of change was clear and Sebi contributed to progress along it in a major way. Sebi’s tasks and powers, expanded over time, were to regulate stock and other securities markets, register and regulate all intermediaries associated with securities markets.
Under the Sebi (Amendment) Bill 2002 its powers were expanded to cover all transactions associated with the securities market. In 2003 it was empowered to impose enhanced monetary penalties. But the regulatory and market microstructure reforms were unable to revive the stock markets over this extended period. Among the reasons were the periodic financial scams that deepened the lack of confidence in the effectiveness of the regulator’s monitoring, surveillance and implementation of the new world class rules, the industrial slowdown that persisted over 1997-2000, and shallow markets with a relative neglect of the retail investor. “Sebi’s vision statement put up on its website is for “Sebi to be the most dynamic and respected regulator globally”.
It is a member of IOSCO, International Organisation of Securities Commissions, and committed to reaching compliance standards for different markets, disclosure norms and capital adequacy. FOREIGN INSTITUTIONAL INVESTMENT Liberalization implied welcoming foreign institutional investors (FIIs) to the Indian capital market, with constant procedural simplification to facilitate entry and exit. FII Investment is allowed in any instrument, including commercial paper, subject to 70 percent of their portfolio being in securities, with a limit of 5 percent in the equity of any one company. The registration fee was reduced to $5000 and $1000 for a sub-account in 1995.
Investments on behalf of other parties through sub-accounts are allowed provided the name of the investor is disclosed to the board, and the entity is regulated somewhere. In 2002 FIIs were allowed to hedge their entire exposure in Indian equities compared to the earlier level of 15%. They could trade in derivatives subject to the prescribed position limit. By 2003 the number of FIIs exceeded 500, with over 1500 sub-accounts. Because of FII interest the Rs 100 billion ONGC IPO in March 2004 was oversubscribed in 10 minutes. In the sections to follow we classify and analyze the major measures undertaken by Sebi under the conceptual heads identified for regulation in capital markets. Information
Disclosure: Strict norms regarding disclosure of price sensitive information, and conflicts of interest, contribute to reducing asymmetries of information and aid the markets in price discovery. Companies issuing capital in the primary market are required to disclose the facts and specific risk factors associated with their projects; they should also give information on the procedure for the calculation of premium, but they can fix the premium. Sebi permitted companies to determine the par value of shares issued by them, and allowed issues of Initial Public Offers (IPOs) to go for “Book-Building”, that is get bids within an announced band to help discover market demands and price. Measures continue to be taken to improve transparency in markets.
In 2003 the National Stock Exchange (NSE) prohibited any cash transaction. In 2004 Sebi asked brokers to reveal details of transactions involving more than 0. 5 percent of the listed shares of a company, and banned them from trading with each other on the same exchange. Technology and Transactions costs India has reached and sometimes exceeded international benchmarks in disclosure norms, trading volume, settlement cycle, and low transaction costs. In the order driven system, each investor can access the same market and order book, at the same price and cost, irrespective of location. Dematerialization of securities had been introduced to reduce bad paper risk.
Settlement of trades in the depository is compulsory except for sales by small investors. Political economy: The rapid dominance of the Indian for-profit, fully automated NSE promoted by leading banks and financial institutions (mainly public sector), over the powerful traditional Bombay Stock Exchange (BSE), which was also forced to automate, and the collapse of all other small stock exchanges through the country, demonstrates the tipping equilibria discussed in section 3. The government ability to sponsor a new technology had a powerful effect in an industry with network effects. Moreover, technology affects the governance structure chosen. NSE is a company incorporated under the Companies Act (1956), and makes a profit.
Unlike the other broker run exchanges the management is independent of the broker members. The official view is that this allows a fair, equitable and efficient market to develop, free of the conflict of interest experienced in broker run exchanges (NSE, 2003), but our analysis suggests that governance structure follows from technology. Insider groups generate rents as well an incentive to trade. There were arguments made against anonymity, that it was important to know the counterparty among heterogeneous participants. But these arguments lost force as technology made a tight system of deposits and margins feasible, and a clearing corporation, NSCCL, was created to absorb counterparty risk and guarantee trades. Volatility
Price bands, complex value at risk (VaR) margining systems, circuit filters, exposure limits and suspension are all used to curb volatility. These allow adjustment for risk. The dominant view is that NSE took Indian capital markets kicking and screaming into the modern age. But it was technology, and the policy decision to adopt the most modern technology, that did so. After the initial protests markets realised its advantages quite rapidly. Moreover, margins reduce deposit requirements and therefore lower costs of trade. A daily mark-to-market margin system prevents large risks from building up, and lowers the possibility of a payments crisis.
Margin requirements were adjusted in response to episodes of volatility, implementation of the VaR based systems, and of rolling settlement. An index based market wide circuit breaker system can be applied at 3 stages of the index movement either way at 10%, 15%, 20%, to bring about a co-coordinated trading halt to nationwide equity and equity derivative markets. These are required since VaR cannot cover systemic shocks; such a shock can force margin sales that instensify index movements. Technology allows instant registration of price sensitive information and of financial results. Exchanges quickly check market rumours with company compliance officers. Market surveillance system and risk containment measures were set up in 1997-98.
There is an electronic stock watch system functional in most exchanges. In times of excess volatility, surveillance systems are put on high alert. Other measures are possible like shifting stocks to trade-for-trade category. Margin trading and stock lending and borrowing system will be introduced, as part of continuous market development, to make possible the physical settlement of derivative trades. Flexibility A principles-based stance gives flexibility to adjust to emerging trends. An example is Sebi tightening the norms for private placement in 2003. With the stock markets in the doldrums, many firms turned to these. But the absence of disclosure increased risk.
Apart from the stick Sebi also offered the carrot of reduction in the cost of open offers. In 2004 all listed companies were required to have a minimum 25 percent non-promoter holding but since earlier companies had been allowed to list with less, they were given time toadjust. Other examples of flexibility in action are: Exemptions: In 1998, Sebi exempted infrastructure firms from certain norms while floating public issue, since infrastructure is a public good. The minimum application size and the proportion of each issue allowed for assured allotment to institutions were raised when IPOs were doing poorly. Margin requirements were decreased before major PSU disinvestments in order to release funds for investment.
Allocation to FIIs and high net worth individuals (HNIs) were decreased when it was feared that they were hammering down prices before the IPOs . Participatory Notes: In end January 2004 the Sensex fell by nearly 500 points in three trading sessions after Sebi started seeking details of parties that had been investing, through participatory notes (PNs) on the FII account. Under this route brokers buy and sell on behalf of a foreign client, often hedge funds, but instead of giving the shares issue PNs. In August 2003 FIIs had been asked to file fortnightly information on PNs, following the general principle of increasing transparency. Markets stabilized after Sebi clarified in end January that only “regulated entities” could be issued PNs.
Hedge funds were allowed as long as they were regulated abroad, and the identity of the actual investor revealed to the regulator in a know-your-client mapping process. If hedge funds came in through sub-accounts of FIIs they could be under Sebi’s regulations. SEC had released proposed rules for hedge funds in September 2003, after the recent corporate and financial scandals. Hedge funds, which account for about 35 percent of global flows, make money by moving quickly to benefit from arbitrage opportunities across markets. They hedge against market risk by going long on undervalued stocks and short on overvalued, and then use leverage to pick individual stocks and raise returns.
Sebi wanted to ensure that investment by NRIs and Overseas Corporate Bodies (OCBs) were not being used by Indian operators to manipulate the market After the technology and principle related successes of regulation we turn to areas where performance could have been better and improvements are still required. Retail investors India capital markets are different in that the retail investor has an independent role. In most countries the small investors come in only through mutual funds. In the late 1970s a large retail investor base was created in India when multinationals had to issue shares to Indian investors as part of the FERA dilution of share holdings. But small investors incurred losses due to fluctuations and scams in stock markets.
Household investor surveys show that the retail investor base has been shrinking since 1997. Thus eventhe 2003 boom in stock markets was largely driven by FIIs and many domestic investors used the opportunity to liquidate their holdings and exit the stock markets. But in India, because of the huge potential numbers, low margin-high volume is always a viable business model. Moreover, retail investors tend to follow a buy and hold strategy, which lends stability to the markets. The success of the Maruti IPO in June 2003 showed that the retail investor was still interested in good companies. The issue was oversubscribed 13 times and 3 lakh retail investors responded to it even though the share price was decided by bidding.
All three stakeholders gained from the process and by January the share price had appreciated to Rs 380 compared to the issue price later fixed at Rs 125. Sale in 70 cities, with help form Maruti dealers in the sales of shares, contributed to the success of the issue. Sebi had hiked the small investor quota from 25 percent to 35 percent. The definition of the small investor was changed from those applying for upto Rs 50,000 worth of shares compared to the earlier one of 1,000 shares. Exchanges were allowed to lower the number of shares in the market lot for derivative trade in order to bring the contract size down to Rs 2 lakh. Price appreciation had raised the value of the minimum contract far Monitoring and Surveillance
Surveillance technology and regulatory standards are at international levels, but implementation is perceived to be imperfect10. Primary responsibility for this lies with the exchanges, with oversight by SEBI. Retail investors are still concerned about management frauds and lack of transparency, price manipulation and volatility (NSE, 2003), although Sebi’s reforms in 2001 have improved matters. Insider dominance and market manipulation becomes less feasible as the number of constituents and their geographical dispersion increases, and structural improvements can reduce the power of remaining groups. A survey response from 367 investors on potential measures to improve confidence in Indian primary markets gave the highest weight to improvements in regulation .
Corporate Governance: Corporate governance (CG) is being tightened, and extended to all companies in a phased manner, in order to prevent management frauds. In 2000 Sebi specified principles of CG and introduced a new clause in the listing agreement of the stock exchanges. Statutory requirements now call for one-third of directors to be independent. They have to periodically review legal compliance reports and steps taken for any correction, and to reveal any non fee-based pecuniary connection with the company, although the latter does not as yet automatically disqualify them as independent directors. CG practices protect minority shareholder rights. In 2003 the Bombay High Court ruled that majority shareholders cannot ease out minority shareholders by paying them the value of their shares.
Controlling shareholders are a threat to minority shareholders when ownership is concentrated. Divestment and higher floating stock will improve their position. But full disclosure and reserving seats on boards and audit committees for directors representing minority shareholders also protect their interest. These issues are particularly important because of the closely held PSUs, IT and family-based business houses in India. Conflicts of Interest: Sebi is planning new model bye-laws for governance of stock exchanges (April 2003). The surveillance and investigation functions of the stock exchanges will be managed by a separate entity or else would be outsourced. The agency will be responsible for any misuse of the system.
Stock exchanges will be empowered to impose penalties for failure to comply with any of the provisions of the listing agreement, subject to a limit of Rs 5 lakh for a specific violation and an overall limit of Rs 50 lakh in a financial year. These steps would improve self-enforcement of stock exchanges, define responsibility more clearly, remove conflicts of interest in policing members, and imply clearer contracts, without deliberate or sloppy ambiguity. Implementation of regulations: ] Good implementation is essential for effective regulation. Actions Sebi takes are largely under Regulation 11, Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Markets, and Regulation 13 (4) Procedure for Holding Enquiry and Imposing Penalties.
An enquiry officer is appointed after investigations, adjudication proceedings are initiated against those against whom he finds evidence, then a show cause notice is issued and order passed, which can be appealed at the Securities Appellate Tribunal (SAT), set up in 1997. It has taken upto two years to settle a case, and the conviction rate is poor; some of Sebi’s orders have been struck down or diluted by SAT. The award of the Tribunal can be challenged in higher courts under section 15Z of the Sebi Act if rights of the parties are affected and the Supreme Court only if matters of law are involved. Investor Activism: Investor awareness and activism can be effective to ensure regulatory effort and uprightness. The Securities Investor Association of Singapore (SIAS) set up in 1999 actively pushes for market improvements.
In India the Investor Education and Protection Fund was set up in October 2001, but funds available are not actively utilized. There is scope for learning from other countries. Innovations and other Improvements Depth of markets, width of instruments and participation rates should improve as growth firms up and capital markets revive. But space has to be actively made for the small investor in order to help bring household savings back to the securities markets allocation of market funds to small firms has to improve for more effective intermediation of savings. Measures such as encouraging analyst research on small firms, venture capital for initial financing and enabling its exit through an over the counter exchanges (OTCEI) are required.
The OTCEI which is not automated offers more customized products and works through market makers, is yet to take off in a big way. Most innovations have been technology based and have been initiated by the government. Although there is a beginning in private innovations, considering the depth of human capital available in this sector in India, much more should be done. Business method patents, in cases where products are not inputs in other products, may help. A continuing problem is the unclear demarcation of responsibility between regulators. Although all publicly traded market instruments come under Sebi’s jurisdiction, the Department of Company Affairs is also responsible for debentures after the Companies (Amendment) Act instituted a number of tighter provisions.
Implementation suffers because of poor co-ordination among regulators. In order to prevent regulatory arbitrage, and facilitate ease of movement of capital it is important that Asian countries learn from each other. SEBI had signed an MOU on 14Mutual funds have begun to innovate and offer customized products. Private banks have formed Productive partnerships with self-help groups in Andhra to deliver effective rural credit; securitization of NGOs’ microfinance loans has begun. Conclusion As growth revives and markets become more active, the tight norms Sebi has established and the deep steady capital market reforms to which it has contributed, will payoff. The paper has enumerated the pluses and minuses of
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