Primary Market & Secondary Market PDF

MODULE 2 PRIMARY MARKET & SECONDARY MARKET PRIMARY MARKET Primary market or new issue market is the market where the companies issue their shares for the first time and public can subscribe to it. It is not a specific place but extends to all places where the shares or debentu...

MODULE 2 PRIMARY MARKET & SECONDARY MARKET PRIMARY MARKET Primary market or new issue market is the market where the companies issue their shares for the first time and public can subscribe to it. It is not a specific place but extends to all places where the shares or debentures or other securities of a company can be subscribed for the first time. This market is one major segment of capital market and includes all institutions dealing in the new issues. Thus, the underwriters, merchant banks, brokers, investors etc, are part of the new issue market. Functions of new issue market New issue market mainly facilitates transfer of resources from savers to the users. Individuals, companies, banks etc. have surplus fund with them. Companies and government need funds for setting up new projects, modernization, diversification etc. The new issue market mobilises the funds from the savers and transfers them to borrowers for productive purposes. A new issue market performs this function through three main services, viz., origination, underwriting and distribution. 1) Origination:-This is a preliminary investigation undertaken by the sponsors of the issue of new shares. This relates to a careful analysis and processing of proposed new projects of the company. Usually merchant bankers take up this work. They also advise the company on the type of securities to be issued, the number of shares to be issued, right time of issue, the method of issue, pricing of shares etc. These are part of origination function. 2) Underwriting:-Underwriting is an agreement whereby the underwriter agrees subscribe to a specified number of securities, if the public do not subscribe to it. If the public fully subscribes to the issue, then the underwriter will have no liability. Thus, underwriting is a guarantee that the shares of company will be marketed and the proposed project will be financed. An underwriting agreement may take any of the following forms: a. Standing behind the Issue- underwriter guarantees the sale of specified number of shares within a specified period. If the public de not subscribe to the specified amount of issue, the underwriter will buy the balance. It is also called full underwriting. b. Outright purchase- underwriters purchases the entire issues at an agreed price and sells them to investors. c. Consortium Method: In mega issues several underwriters join together to underwrite. They form a consortium/syndicate for this purpose. It is also called syndicate underwriting. d. Firm underwriting- the underwriter undertakes to buy or subscribe a certain number of shares irrespective of the subscription from the public. Underwriter will be liable for shares underwritten as well as that part of issue unsubscribed by the public. 1 LIC, UTI, ICICI, IDBI are some of the institutional underwriters. Brokers are non institutional underwriters 3) Distribution:- Sale of securities to the investors is the distribution function. Merchant banks, brokers, agents and other intermediaries perform this function for the company. A new share can be distributed to the investors through public issue, offer for sale, placement, right issue or bonus issue. Features of New Issue Market The key function of the primary market is to facilitate capital growth by enabling individuals to convert savings into investments. The major features of new issue market are as follows; a. This market is related to new issues (of shares and other financial instruments) for raising capital. b. It has no particular place, mainly focusing on the activity of bringing in new issues. c. It offers new issues through different methods like public issues, private placement, rights issues, etc. d. The financial instruments for raising capital are directly issued to investors. e. Primary market is regulated by SEBI. Methods of Floating New Issues Basically, issues made by an Indian company can be classified as follows; i. Public Issue a) Initial Public Offer (IPO) b) Further Public Offer (FPO) ii. Private Placement a) Preferential Issue b) Qualified Institutional Placement c) Institutional Placement Programme (IPP) iii. Rights Issue iv. Bonus Issue v. Employee Stock Option Plan (ESOP) 2 1. PUBLIC ISSUE:- A public issue is an issue where anybody and everybody can subscribe to the securities. When an issue or offer of securities is made to nev investors for becoming part of shareholders' family of the issuer, it is calle a public issue. Public issue can be further classified into (a) Initial Public Offer (IPO) and (b) Further Public Offer (FPO). Both IPO and FPO can be either a fresh issue or an offer for sale. a) Initial Public Offer (IPO):- IPO means an offer of securities by an unlisted issuer to the public for subscription (including an offer for sale of its existing securities) for the first time. It is the first sale of shares by a company to the public. The Initial Public Offering can be made through the fixed price method or book building method. IPO enables listing and trading of the issuers securities in the securities market. The IPO of Life Insurance Corporation of India (LIC) is considered as the biggest IPO (for₹21,000 Cr.) ever seen in the corporate India's history. An IPO cannot be made, if there are outstanding convertible securities entitling any person to receive equity shares after the IPO. Every issuer must get IPO grading from at least one SEBI registered credit rating agency e-IPO:- SEBI now allows Indian companies to make public offering (IPO) through the online system of stock exchanges. It is called e-IPO or Online IPO. This will provide for online submission of bids by investors from terminals of stock brokers. b) Further Public Offer (FPO): When a listed company makes either a fresh issue of securities to the public or an offer for sale to the public, it is called an FPO. It is also called Follow on Public Offer. It is the subsequent public offer of securities of a listed company. FPO is also known as Seasoned or Subsequent Public offer. Methods of Public Issue The methods of offering a public issue (IPO/FPO) can be of two types: Offer through Prospectus (Fresh Issue) (ii) Offer for Sale. 1) Offer through Prospectus Public issue through prospectus is the most popular method of distribution of shares of a company. Prospectus is an offer document containing the details of the company. The name of the company, address, location of the industry, authorized, paid up and subscribed capital, date of opening and closing of subscription list, names of lead merchant banker, brokers and underwriters, name of the board of directors, activities of the company and other important data must be included in the prospectus. After going through these details, the public can decide either to subscribe or not to subscribe to the shares. The draft of the prospectus must be approved by the board of directors, financial institutions, designated stock exchange etc. An abridged prospectus is being annexed to every share application form. Pricing of Issues The issuer can determine the price of shares. The justification for the same should be given in the offer document. There are two methods of pricing an issue viz., Fixed Price Issue and Book Built Issue.  In fixed price issue, the issuing company, in consultation with the lead merchant banker, decides the price of the issue and discloses the same in the prospectus. The issue will be subscribed by the public on the basis of the issue price fixed, and shares are allotted accordingly.  In book built issue, the issuer stipulates only a price band in the prospectus (namely Red Herring Prospectus) consisting of a floor price and a cap price, and the final price will be 3  decided on the basis of demand for the issue. On the basis of final price decided by market demand the bids are evaluated and successful bidders get allotment. The final prospectus with all the details including the final issue price and issue size should be filed with RoC (Registrar of Companies). FORMS OF OFFER DOCUMENT Offer document means Prospectus in case of a public issue or offer for sale and Letter of Offer in case of a rights issue. It contains all the relevant information about the company and is used for inviting subscription to the issue being made by the issuer. The different forms of offer document are explained below.  Prospectus is an offer document in case of a public issue, which has all relevant details including price and number of shares being offered  Abridged Prospectus contains all the salient features of a prospectus It accompanies the application form of public issues.  Red Herring Prospectus (RHP) is a prospectus, which does not have details of either price or number of shares being offered, or the amount of issue. In case price is not disclosed, the number of shares and the upper and lower price bands are disclosed. On the other hand, an issuer can state the issue size, and the numbers of shares are determined later RHP is used normally in case of a book built public issue.  Statement-in-lieu of Prospectus: Sec. 70 of the Companies Act 1956 provides that a company, having a share capital, which does not issue a prospectus, is required to submit to the Registrar of Companies a statement in lieu of prospectus.  Letter of offer means the offer document prepared by company for rights issue.  Placement Document means document prepared by Merchant Banker for the purpose of Qualified Institutions Placement (QIP)  Shelf prospectus is a prospectus which enables an issuer to make a series of issues within a period of 1 year without the need of filing a fresh prospectus every time. Advantages of issue through prospectus  Large number of investors could be contacted through prospectus.  Services of intermediaries are not necessary for this.  Concentration of shares in few hands is avoided as the shares are dispersed over a number of people. Demerits  It is suitable only for large issues.  The company has to incur additional expenses on advertisement, bank's commission, underwriting commission, listing fee, legal charges etc. 2) Offer for Sale (OFS) Offer for sale is an indirect offer of securities to the public through a sponsoring intermediary. This is outright sale of shares through intermediaries like issue houses, merchant bankers, brokers etc. Shares are not offered to the public directly. The intermediaries, after buying the entire shares, resell them to the investing public. In this case the issue houses (or other intermediaries) act as agents of the company. The OFS mechanism facilitates the promoters of an already listed company to sell or 4 dilute their existing shareholdings. Investors can buy shares in OFS by bidding through their brokers. The advantage of this method is that the company need not be bothered about the printing and advertisement of prospectus, allotment of shares etc. Foreign companies who want to participate in the share market and Indian investors and promoters who want to sell their shares usually adopt this method. Categories of Investors There are three categories of investors who can participate in the public issue: 1) Retail Individual Investors 2) Qualified Institutional Buyers (QIBs) 3) Non-Institutional Investors As far as an IPO (initial public offer) is concerned, the total shares issued to the public are divided into three major parts for 3 different categories of investors 1. Retail Individual Investor (RII): Means an investor (individuals & HUFs) who applies or bids for public issue of securities for a value of not more than 2 Lakhs. Any investor who applies or bids in excess of this will be considered in the Non-Institutional Investor (NII) category. 2. Qualified Institutional Buyer (QIB): They are institutional investors in the securities market. Financial institutions such as banks, mutual funds, insurance companies, foreign portfolio investors, provident funds, scheduled commercial banks, pension funds etc. come under this category Anchor investor: An anchor investor is a QIB who make an application value of 10 crore or more in a public issue 3. Non Institutional Investor (NII) means an investor other than a retail individual investor and qualified institutional buyer. In other words, resident Indians, HUFs, companies, NRIs, societies and trusts whose application size exceeds 2 Lakhs are included under this category They are also called High Net worth Investors (HNIs) Application Supported By Blocked Amount (ASBA) This is a new mode of payment for applying for a public issue. ASBA is an application containing an authorization to block the application money in the bank account, for subscribing to an issue. If an investor is applying through ASBA, his application money shall be debited from the bank account only if his/her application is selected for allotment after the basis of allotment is finalized. Under ASBA facility, investors can apply in any public issues by using their bank account. Investor submits the ASBA form to their banking branch by giving an instruction to block the amount in their account. Self-Certified Syndicate Bank (SCSB) is a Banker to an Issue registered under SEBI (Bankers to an Issue) Regulations, 1994 which offers the service of ASBA. 5 Green Shoe Option (GSO) Green Shoe Option is a post-listing price stabilizing mechanism. The term is coined from the name of the company which first used this option in U.S., Green Shoe Manufacturing Co. This option allows companies offering IPO to intervene in the market to ensure that the shares price on the stock exchanges does not fall below the issue price during the 30-day stabilisation period immediately after listing. This clause will be contained in the underwriting agreement of an IPO. This clause allows the underwriters/merchants bankers (acting as underwriters) to buy additional 15% shares of the company at offering price. It is also referred to as overallotment option, because, in addition to public offer, additional shares are allotted for underwriters. To keep the share price under control, the underwriter oversells or shorts up to 15% more shares than initially offered by the company. Exercising green shoe option involves purchase or selling of equity shares from the market by the underwriter/merchant banker in case the share price fall below issue price or goes significantly above the issue price 2. PRIVATE PLACEMENT Shares can be distributed through out right sale by companies to selected group of persons. This is known as placement or private placement. In other words, when an issuer makes an issue of securities to a select group of persons not exceeding 50, it is called a private placement. In this case, the issue houses or brokers can buy the securities from the company and sell them to his own clients. In private placement the promoters may sell a portion of issue to the friends and well-wishers Financial institutions, mutual funds, investment bank etc. subscribe to placement orders. Types of private placement Private placement of securities by listed issuer can be of three types: (a) Preferential Issue/allotment: Preferential Issue means an issue of specified securities by a listed issuer to any select person or group of SF persons on a private placement basis. An issuer can make preferential issue of securities only if, a special resolution by the shareholders has been passed. The price of issue should be the price higher of the average of the weekly high and low of the closing price of the related shares quoted of the stock exchange during the (a) 6 months and (b) 2 weeks preceding the relevant date. (b) Qualified Institutions Placement (QIP): When a listed issuer issues allots securities to Qualified Institutional Buyers (QIBs) on private placement basis, it is called a QIP. Conditions of QIP  An issuer can make a QIP only if a special resolution approving the qualified institutions placement has been passed by its shareholders.  The QIP should be managed by a merchant banker. The qualified institutions placement shall be made on the basis of a placement document which shall contain all material information. 6  The QIP should be made at a price not less than the average of the weekly high and low of the closing prices (of the equity shares of the same class) during the two weeks preceding the relevant dates (c) Institutional Placement Programme (IPP):- When a listed company makes a further public offer (or offer for sale) of equity shares, in which the allocation and allotment is made only to qualified institutional buyers, it is called an IPP. This route is available only for companies which are currently not in compliance with the minimum public shareholding requirements prescribed by SEBI. Placement method is useful, when the market is depressed. The issue cost is very low. Small companies may also find it useful as they cannot spend huge money on prospectus and advertisement. The disadvantage of this method is that the shares may be concentrated in few hands who may take control of the company. 3. RIGHTS ISSUE Shares offered to the existing share holders of a company are called rights issues. The right of shareholders to receive right shares is called 'Pre-emptive right'. The object is, to ensure equitable distribution of shares and the proportion of voting rights is not affected by issue of fresh shares. The shares are offered in a particular proportion to the existing share ownership. The rights issue is made to the shareholders existing on the Register of Members as on a particular date, called record date. The proportion may be decided on the basis of capital requirement of the company. Such shares are marketable in the market by the allottes. Successful companies adopt this method for fund raising. The prospectus prepared by the company for rights issue is called letter of offer. The issue price of rights shares can be decided by the company. Right shares are usually offered at a rate lower than the prevailing market price Advantages Rights issue is advantageous to the company as the cost of issue is minimum. Underwriting, advertising and brokerage expenses could be avoided in this case. The control of the company is undisturbed as the shareholders get shares according to the proportion of existing number of shares held. 4. BONUS ISSUE Bonus issue is issue of shares to the existing share holders out of the free reserves of the company. The existing share holders get this as a bonus without payment of any money, based upon the number of shares he/she owns. As the free reserves are capitalised there will be an increase of equity capital. Shares issued as bonus are called bonus shares. Bonus issue should be made out of free reserves built out of genuine profits/securities premium collected in cash only. Reserves created by revaluation of fixed assets are not to be used. 7 The declaration of bonus issue, in lieu of dividend, is not to be made. The bonus issue should be implemented within 15 days from the date of its approval by the Board of Directors (BoD) of the issuer. 5. Employee Stock Option Plans (ESOPs) An Employee Stock Option Plan (ESOP) means a plan under which the company offers an option to their employees to own the share of the company they are working. There are different ways in which employees can receive stocks and shares of their company. Employees can receive them as a bonus, buy them directly from the company, or receive them through an ESOP. The main purpose of an ESOP is to retain, reward and motivate employees. Employee Stock Option is an option given to the whole time directors officer or employees of a company to purchase the securities offered by the company at a pre-determined price, at a future date. The option granted to an employee should not be transferable to any person, the option can only be exercised by the employee to whom the option is granted. Shares can be issued under employee stock option only with the approval of shareholders by way of special resolution The price payable by the employee for exercising the option granted to him is called exercise price. TYPES OF ESOPS 1. Employee Stock Option Scheme (ESOS):- It is a scheme in which the company grants an option to its employees to acquire shares at a predetermined price at a future date. Option is given at price called exercise price, which is normally lower than the current market price of the shares. 2. Employee Stock Purchase Scheme (ESPP):- It is a plan in which the company gives right to its employees to acquire shares directly from the company as part of public issue. Here the employees of a company are given right to acquire shares immediately, not at a future date as in ESOS, at a price lower than the current market price. 3. Share Appreciation Rights (SARS):- Under this scheme, no shares are issued; employees get the appreciation in the share price from the date of the grant to the date of the exercise, as an incentive for performance. SARs are also called Phantom Shares. However, in India, SEBI Guidelines 1999 provides for two types of schemes only viz. ESOS and ESPP Methods of Pricing an Issue On the basis of methods of determining price of an issue, the issue can be; i. Fixed Price Issue:- When the issuer decides the price in consultation with the merchant banker and mentions it in the prospectus, it is known as fixed price issue. ii. Book Building:- Book building is a pricing mechanism whereby new securities are priced on the basis of assessment of market demand. In simple terms, it is a mechanism by which the issue price is discovered on the basis of bids received from investors through syndicate 8  members or brokers. The syndicate members or brokers collect the feedback from prospective investors. On the basis of this information the company fixes the issue price of shares. This is considered as the most practical mechanism for quick and efficient management of mega issues. Book Built Issue Vs Fixed Price Issue Basis Fixed Price Issue Book Building Price The price at which the shares are Price at which securities offered is not known in offered to public is known in Advance in case of offer of shares through book advance to investor. building. Price The price of the issue is The price of the issue be determined by the Determination determined by the issuing Market forces of demand and supply method Company in advance i.e. fixed price. Market demand In case of fixed price issue the In case of Book Building the demand can be demand for the issue is known only known everyday on the basis bids from investors. at the close of the issue. Price There will be 'Fixed price' for There the is price band (containing the floor securities offered. Price & cap price) for discovering the price. Book Building: The concept SEBI (Disclosure And Investor Protection) Guidelines 2000 defines the term 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 determination of the quantum of such securities to be issued by means of a notice, circular, advertisement, document or information, memorandum or offer document." Thus, book building can be understood as an international practice that refers to collecting orders from Qualified Institutional Buyers (QIBs), Non-Institutional Investors and Retail Investors, based on an indicative price range or price band. The price band consists of a floor price and a cap price. Floor price is the minimum price and Cap price is the maximum price in which bid can be made. This mechanism provides the issuer and lead merchant banker with the flexibility of price and demand discovery. The system is more suited for existing companies as past financial data are available for analysis. Book Runners Book Runners or Book Running Lead Managers (BRLMs) and Syndicate Members are the two important intermediaries in the Book building process. The lead merchant bankers appointed by the Issuer Company are referred to as the Book Running Lead Managers or Book Runners. They assist the company in the book building process. The Book Runners appoint the Syndicate Members, who enter the bids of investors in the book building system and also act as underwriters. In Book building the Book Runner (Book Running Lead Manager) builds up the book based on bid offers from the syndicate members. 9 Book Building - The Process The book building process can be summarized as follows: 1) The Issuer, who is planning an offer, appoints a lead merchant banker(s) as 'Book runner' or 'Book Running Lead Manager'. 2) Book runner prepares the draft red herring prospectus (RIP) and other documents to be filed with SEBI and ROC 3) The Issuer specifies the number of securities/issue size to be issued the price band for the bids and the minimum bid size in the RIIP 4) The book runner circulates the draft prospectus filed with SEBI to different categories of investors. 5) The Issuer also appoints syndicate members, stock brokers & SCBs for the purpose of accepting bids, applications and placing orders with the issuer. 6) The book built issue normally remains open for a period of 3 to 7 working days. 7) During the period, when the issue is open to the public for bidding, the applicants may approach the stock brokers of the stock exchange, through which the securities are offered under on-line system or Self Certified Syndicate Banks, as the case may be, to place an order for bidding for the securities. 8) The syndicate members/brokers/Self Certified Syndicate Banks (SCSBs) input the orders into an 'electronic book'. This process is called 'bidding'. 9) The syndicate members/brokers intimate the book runner about the orders received by them. On receipt of an offer the book runner enters the name and number of shares ordered by investors and the price at which they are willing to subscribe. In fact, he builds up a book of orders from the members of syndicate. 10) On the close of the book building period, the book runners evaluate the bids on the basis of the demand at various price levels. 11) The book runners and the Issuer decide the final price at which the securities shall be issued. 12) Final prospectus, stating the price and the number of securities proposed to be issued, is filed with the Registrar of Companies (RoC). 13) Allocation of securities is made to the successful bidders. All bids below the cut-off price will be rejected. 14) The securities will be listed within the stipulated period with designated stock exchanges. To conclude, the companies can raise capital through public issues (IPO or FPO) by following the steps mentioned above. While the investors (having trading account and demat account, i.e., client of any registered stock broking firm) apply for the shares in a public offer (either through the broker or online), the required amount for purchase of numbers of shares applied will be blocked in his bank account (ASBA-Application Supported by Blocked Amount) and when the shares are allotted the amount equivalent to the shares allotted will be transferred to the company's bank account (from investors bank account), forming part of its share capital. This is how company's raise capital through pubic offers (IPO/FPO). Intermediaries in the New issue market The important players in the new issue market are 10  1) Merchant Bankers (Managers to the Issue) 2) Underwriters to the Issue 3) Registrar and Share Transfer (R&T) Agents (Registrars to the Issue) 4) Brokers to the Issue 5) Banker to the Issue 6) Syndicate Members 7) Depositories These intermediaries are appointed by the issuing company for facilitating the issue process in the primary market. Their roles are explained below; 1. Merchant Bankers (Managers to the Issue) Merchant banker means any person/institution who is engaged in the business of issue management either by making arrangements for selling, buying or subscribing to securities as manager, consultant, advisor or rendering corporate advisory services in relation to such issue management. This is the most important intermediary in primary market. Management of public issues is the most important function of a merchant banker. SEBI Regulations 1992 prescribe that all public issues should be managed by at least one merchant banker functioning as Lead manager et Managers to the Issue. If the issue is through book building process the lead merchant banker appointed by the issuing company is referred as the Book Running Lead Manager (BRLM) or Book Runner Depending on the size of the issue there can be more than one manager to the issue. If the size exceeds 400 crores there can be five or more managers as agreed by SEBI. The Managers to the issue assist the promoters in designing the capital structure, drafting the prospectus and application forms, listing of shares, appointment of registrars and other operators in the new issue, arrangement of long term loans, marketing of public issues etc. The lead manager prepares Draft Red Herring Prospectus (RHP) and is responsible for any irregularities in the same. The company should enter into a memorandum of understanding with the managers to the issue in the form prescribed by SEBI Issue Management Functions of Merchant Banker I. Pre-Issue management activities - 1) Co-ordinate the activities relating to issue with different Govt, and public bodies, professionals and private agencies. 2) Ensure that the information required by Companies Act & SEBI is furnished in the prospectus. Arrangements for dematerialization of shares. 3) Compliance of formalities for listing in stock exchanges and other approvals. 4) Appointment of various intermediaries like Bankers to issue, underwriters, Registrars to issue etc. 5) Finalise arrangements relating to date of opening and closing issue, registration of prospectus, launching publicity campaigns & fixing date of Board meeting, approve and sign prospectus and pass the necessary resolutions. 6) Help the company in finalizing the price band. 11 II. Post-Issue Management Activities Registrar to the issue performs major role here. 1) Supervising the collection of filled in application forms, statement of accounts from bankers. 2) Screening applications, deciding allotment procedure, mailing of allotment/regret letters, re- fund orders etc. 3) Finalising the issue price. 4) Submitting the basis of allotment and other compliance certificates to SEBI, Registrar of Companies and the stock exchange. 5) Management of escrow/ASBA accounts 6) Listing of the shares in the stock exchange. 7) Ensuring the proper functioning of other intermediaries appointed. Merchant bankers assist the issuing company right from the preparation of prospectus till the listing of the securities at stock exchange. As of now, there are 191 merchant bankers registered with SEBI. DSP Merril Lynch Ltd., ICICI Securities, SBI Capital Markets Ltd., JP Morgan India Pvt. Ltd. etc., are few known names. 2. Underwriters to the Issue A public issue is said to be a success only if it has achieved the minimum subscription of 90%. In the event of non-receipt of minimum subscription (called under subscription) the issuing company has to terminate the public issue process and refund the application money. The services of underwriters are used by issuing companies to overcome the risk of under subscription. Underwriters are financial institutions who make a firm commitment that they will take up the shares up to a certain amount if the public does not subscribe to it. This is an agreement with one or more institutions and a guarantee of the marketability of shares. Underwriters are appointed by the company in consultation with the managers to the issue. Financial institutions, bankers, members of stock exchanges, investment companies, trusts etc. can act as under writers. Underwriters charge a commission for their service which is known as underwriting commission. The underwriters must be registered with SEBI. E.g., Citicorp Capital Markets Ltd., State Bank of India etc. 3. Brokers to the Issue Brokers are persons authorised to market the issues. Companies can engage any number of brokers to market the new issue. The brokers may engage sub-brokers and they send their own circulars and applications to the clients and follow up the work for canvassing the subscription. Brokers to the issue are not compulsory for public issues, but their expertise and contacts with investors could be used for marketing the issue. Remuneration to the broker and terms and conditions of brokerage is fixed by SEBI. Geojith BNP Paribas Financial Services Ltd., JRG Securities Ltd., Karvy Stock Broking Ltd., UTI Securities Ltd., UAE Exchange & Finance Ltd., Sharekhan Ltd. etc. are names of few brokers. 12 4. Registrars to the Issue (Registrar and Share Transfer (R&T) Agents) R&T agent plays a significant role in a public issue along with the lead managers. Registrars are persons appointed in consultation with lead managers to assist the issue management functions. Their work relates to pre-issue management, management during the currency of issue, pre- allotment work, allotment work and post allotment work. It is their duty to collect the application forms from bankers to the issue, process them for allotment and issue certificate of allotment. Functions of Registrars 1) Designing and drafting the format of application form for the merchant banker or lead manager 2) Identifying collection centres of application forms. 3) Opening collection accounts with banks. 4) Collecting application forms from banks. 5) Scrutinizing application forms. 6) Informing the merchant bankers and the company of the total subscription. 7) Preparing allotment register. 8) Finalizing the allotment as per the basis approved by the stock exchange. 9) Ensuring that the corporate action for crediting of shares to the demat accounts of the applicants is done 10) Printing refund orders and letters of allotment. 11) Submitting all statements to the company for their final approval. 12) Printing Register of members. 13) Helping the company in getting the shares listed. The Lead manager co-ordinates with the Registrar to ensure follow up so that the flow of applications from collecting bank branches, processing of the applications and other matters till the basis of allotment is finalized, dispatch security certificates and refund orders completed, and securities listed, with in the stipulated time. 66 SEBI registered R&T agents are now functioning. E.g., Karvy Computershare Pvt. Ltd., Ankit Consultancy Pvt. Ltd., CANBANK Computer Services Ltd., Deutsche Investor Services Pvt. Ltd. etc. 5. Bankers to the Issue Bankers to the issue collect the application forms and the money in cash, cheque or ASBA. Depending on the size of the issue there may be many collection centers and many bankers. They are appointed in consultation with lead manager. Infrastructure facilities available, manpower, past experience, location of branches, efficiency and cost effectiveness etc are parameters for selection of bankers to the issue. The Lead Merchant Banker shall ensure that Bankers to the Issue are appointed in all the mandatory collection centers. The Lead manager also ensures follow-up with bankers to the issue to get quick estimates of collection and advising the issuer about closure of the issue, based on the actual figures. The banker to the issue will transfer all the applications received to the registrar to the issue on the closure of issue subscription. They also help the issuer in marketing the issue by distributing the application forms and publication materials. 13 6. Syndicate Members Syndicate Members are commercial or investment banks registered with SEBI who also carry on the activity of underwriting in IPO (in case of book built issue). This intermediary plays important role in a book built issue along with book running lead manager. The Book Running Lead Managers to the issue appoint the Syndicate Members, who enter the bids of investors in the book building system. Syndicate members work as intermediaries for issuer, and the buyers of the IPO stocks. Investors submit their bids for IPO shares through Syndicate Members appointed by the issuer. They are also known as the Members of the Syndicate. The Members of the Syndicate circulate copies of the Red Herring Prospectus along with the bid cum application form to potential investors. 8. Depositories A depository is an organisation which holds securities (like shares, debentures, bonds, government securities, mutual fund units etc.) of investors in electronic form at the request of the investors through a registered Depository Participant. It also provides services related to transactions in securities. Since the securities are issued in demat form, the issuing company will have to appoint a depository and the applicants of shares have to quote their demat account number in the share application form. Innovative Financial Instruments Financial engineering and resulted financial innovation led to the introduction of many new financial instruments in the capital market. 1. Non-Voting Shares (NVS) Non-Voting Shares (NVS) do not carry voting rights. But the holder of NVS is eligible for higher dividend for sacrificing the voting rights. 2. Shares with Differential Voting Rights (SWDVR) Shares with differential voting rights are shares which 'carry' more votes than ordinary shares do. Section 86 of the Companies Act permits the issue of equity shares with DVRs, subject to conditions prescribed under the Companies (Issue of Share Capital with Differential Voting Rights) Rules, 2001. 'Differential Voting Rights' (DVRs) include rights as to dividend or voting. Tata Motors Ltd. (November 2008) became the first company to issue equity shares with differential voting rights in India. 3. Floating Rate Bonds The interest rates of these bonds are not fixed, but related to market rate. The first floating rate bond was issued by State Bank of India providing rate for minimum interest payable at 12% p.a. and call option, to the bank after 8 years to redeem the bonds (maturity period 10 years). IDBI, ICICI, Arvind Mills, ITC and Katak Mahindra have raised funds through floating rate bonds. The strength 14 of these bonds is the provision to reduce interest risk and assure minimum interest on the investment. 4. Secured Premium Notes (with detachable warrants) SPN is a secured debenture redeemable at premium issued along with a detachable warrant, redeemable after a notice period, say four to seven years. The warrants attached to SPN gives the holder the right to apply and get allotted equity shares; provided the SPN is fully paid. There is a lock-in period for SPN during which no interest will be paid for an invested amount. In case the SPN holder holds it further, the holder will be repaid the principal amount along with the interest/ premium on redemption. E.g., TISCO issued warrants for the first time in India in the year 1992. 5. Depository Receipts A depository receipt is a negotiable financial instrument (in the form of a certificate) issued by a depository against underlying stocks or shares of a foreign company. The shares are deposited by the issuer with depository (usually an international bank) and the depository in turn gives depository receipts to the investors. It can be traded on local stock exchanges like any other security. The depository receipt represents particular bunch of equity shares on which the receipt holder has the right to receive dividend and other corporate benefits from time to time. However depository receipts do not carry voting rights. Following two types of depository receipts can be used by Indian companies to raise capital from foreign markets. They are, (a) American Depository Receipts (ADRs) ADRs are the fore-runners of Global depository receipts. It is a negotiable instrument denominated in US dollars and issued by a depository bank representing ownership in non-US securities representing the underlying ordinary shares. These are the instruments in the nature of depository receipts or certificates. These instruments are negotiable and represent publicly traded local currency equity shares issued by non- American Company. ADR enables an American investor to subscribe for the shares of foreign company offered in his country or through the international market in the form of depository receipts. Some of the Indian Companies who have gone for ADR are Infosys Technology, ICICI Bank etc. (b) Global Depository Receipts (GDRs) The GDR is a dollar denominated instrument tradable on stock exchange in Europe or the US or both. The GDR represents a certain number of equity shares. The shares are issued by the issuing companies to the intermediaries called "Depository". The physical possession of the equity shares is with another intermediary called the "custodian". It is a bank certificate issued in more than one country for shares in a foreign company. 15 Indian Depository Receipts (IDRs) A foreign company can access Indian securities market for raising funds through issue of Indian Depository Receipts (IDRs). An IDR is an instrument denominated in Indian Rupees in the form of a depository receipt created by a domestic depository (custodian of securities, registered with the SEBI) against the underlying equity of issuing (foreign) company An overseas custodian bank, a domestic depository and a merchant banker are the mandatory intermediaries insisted by SEBI for IDR issue. The issuing company (foreign company) deliver the underlying equity shares to an Overseas Custodian Bank (OCB, a foreign bank having a place of business in India). OCB authorises the domestic depository to issue IDRs. The size of an IDR issue shall not be less than Rs. 50 crores. The issuing company (foreign company) should be listed in its home country and should have a good track record of distributable profits, and compliance with security market regulations in its home country. Standard Chartered PLC is the first company to come out with an IDR. The IDR is an opportunity for Indian investors to invest in a globally diversified banking and financial services conglomerate at a reasonable price. IDRs facilitates the integration of Indian capital market with foreign markets. 6. Foreign Currency Convertible Bonds (FCCBs) FCCBs are special category of bonds used by companies to raise money in foreign currencies. They are issued in currencies other than the issuing company's domestic currency. FCCBs are equity linked debt instruments that can be converted into equity shares or depository receipts after a specified period. 7. Yankee Bonds Yankee bonds are dollar denominated bonds issued in the U.S. bond market by a non-American company. Yankee bonds help issuers take advantage of relatively favourable regulatory and lending conditions within the U.S., as well as the US.'s very large bond market. Yankee bond issuance has dominated the foreign bonds issued by Indian companies Eg. Reliance Industries issued Yankee Bonds (50 years maturity) for raising $100m Se 1996. 8. Hybrid Instruments Hybrid instruments have both the features of equity and debentures. Examples are convertible debenture/bonds, warrants, preference shares etc. 9. Infrastructure bonds Infrastructure bonds are debt instruments issued by infrastructure development and finance companies to fund their infrastructure development bonds. The funds raised through the issue will be utilised towards infrastructure lending. Infrastructure bonds are additional tax saving options available to tax payers nowadays. IDFC and L&T ha launched the first series of tax-free infrastructure bonds. 16 10. Perpetual Bonds Perpetual bonds are introduced in 2005. These are issued by schedule commercial banks for tenure of 15 years with a roll on forever at the option of the bank. Insurance companies are usually the investors. Perpetual bond enable the banks to meet Basel norms regarding capital adequacy ratio 11. Derivative Instruments Derivative instruments are contracts (or a category of financial instruments) whose value is derived from the value of one or more underlying assets (like commodities, currency, bonds, stocks, stock indices etc.). They are widely used for hedging risk. Derivatives includes futures forwards, swaps, options and variations of these such as currency derivatives, interest rate derivatives, credit default swaps, interest rate swaps, currency swaps, equity derivatives (index/stock options or futures) etc. 12. Securitised Debt Instruments Securitised debt instruments are the result of securitisation process. Securitisation is a process by which banks and financial institutions pools and repack illiquid financial assets (mortgages, car loans etc) into marketable securities that can be sold to investors.. Such bonds or debt instruments can offer various advantages over more conventional financial instruments. Asset Backed Securities (securities backed by non-mortgage Le loans), Mortgage Backed Securities (securities backed by mortgage loans), CDO (collateralised debt obligations, a type of asset backed security) and CMO (Collateralised mortgage obligations, a type of mortgage backed security) are two new variants of securitised instruments. SECONDARY MARKET Secondary market is the market where the existing securities of companies are traded. It is the stock market where the shares and bond and other securities bought and sold. The secondary market assists the operations associated with primary market. It provides liquidity and marketability to the securities which are issued in the primary market. Secondary market consists of stock exchanges, depositories and participants in the market like brokers, etc. For the general investor, the secondary market provides an efficient platform for trading of his securities. For the management of the company, secondary equity markets serve as a monitoring and control conduit, by facilitating value-enhancing control activities, enabling implementation of incentive-based management contracts, and aggregating information (via price discovery) that guides management decisions. Primary Market vs. Secondary Market Primary Market Secondary Market It is a market where new securities are issuedIt to is a market where already issued the public (existing) securities are traded. It is also called New Issue Market. It is called Old Issues Market or Stock Exchange. There is no geographical location for Secondary market covers stock exchanges and other primary market places where trading facilities are available. 17  Securities are issued by listed or Securities of listed companies are only traded unlisted companies. here Securities are issued by the company to Listed securities are traded by investors. investors. This market is used by issuers for raising Investors trade for liquidity and for making capital. profit. Stock Exchanges Stock exchange refers to an organised market in which listed shares and debentures of companies can be purchased and sold. In addition to the second hand shares (already issued) and debentures of public companies, stock exchange also deals with government securities and bonds and debentures issued by municipal bodies, port trusts etc. The Concept The Securities Contract (Regulation) Act 1956 defines a stock exchange as "any body of individuals, whether incorporated or not constituted for the purpose of assisting, regulating or controlling business of buying, selling or dealing in securities". Guthmann Dougall defines it as market places, open only to members, most of whom are brokers, acting for buyers and sellers of the stocks and bonds permitted in the market. The above definitions make it clear that stock exchanges are the institutions organised for providing necessary facilities to carry on trading in securities. It constitutes, maintains and provides market place and facilities for bringing together purchasers and sellers of securities. Role and Functions of Stock Exchanges Stock exchanges have become an indispensable organisation in the economic development of the country, especially, in the event of liberalisation. Capital formation for economic growth depends much on a well developed stock exchange. They have an important position in the financial system of the country. They perform invaluable services to the investors, companies and to the economy as a whole. The various economic functions of a stock exchange can be listed as follows. 1. Ready and continuous market for securities: Anybody can buy or sell securities in a stock exchange during business hours. By providing ready market for stocks and shares it enables investors to realise cash quickly. In a stock exchange, cash can be converted into shares at any time and vice versa. This liquidity provided by stock exchange increases the value of securities and facilitates their use as collateral security for loan. Easy marketability attracts investors to invest in these type of investments. 2. Wider distribution of securities: When securities are quoted in all stock exchanges, it attracts investors from different parts of the country Shares listed in stock exchanges are more acceptable to investors. 18 3. Mobility and channelization of capital: Stock exchange directs the flow of savings into the most productive and profitable channels. The market quotation for different securities is given wide publicity. This will help the investors to invest in profitable companies. Such companies can raise additional capital by fresh issues. Unsuccessful companies cannot raise additional capital in this way. Thus stock exchanges act as an agency for capital formation. Capital flows automatically to profitable ventures. 4. Safety of capital and protection of investors: The stock exchange transactions are made publicly under well defined rules and regulations. This factor ensures safety and fair dealings to the investors. Over- trading and illegitimate speculation are strictly prohibited by rules. Control of SEBI and Government is an added safety to investors. 5. Evaluation of securities: Free interplay of demand and supply forces is possible in a stock exchange. This will bring forth the correct valuation of securities. The evaluation is made on the present and future income yielding prospects of the enterprise. The valuations are widely published by newspapers and trade journals. This will enable the investor to ascertain the value of his shareholding 6. Regulation of company management: The companies which want to get their securities listed in stock exchange will have to fulfil certain conditions, like furnishing various returns and financial statements. This factor safeguards the interest of the investing public and also regulates company management. This is a motivation for companies for improved performance. 7. Barometer of business progress: Booms and depressions are reflected by index prices of various securities maintained by the stock exchange. By analysing the ups and downs of the market quotations, the causes for changes in the business climate can be ascertained. 8. Help to Bank: The stock exchange helps the banks to maintain liquidity by increasing the value of easily marketable securities. It can thus broaden the basis for social credit. 9. Facilities for speculation: Stock exchanges encourage healthy speculation and provide opportunities to shrewd businessmen to speculate and reap profit. 10. Agency for capital formation: Stock exchange provides opportunity for creating the habit of saving, investing and risk bearing amongst the investing public. This mobilisation of funds to corporate securities will definitely foster industrial growth. 11. Supply of long term funds: Whenever an investor needs money he can sell his shares in the market. There will always be a buyer to buy them. Thus the company is assured of a long-term fund as the shares are not redeemed. 12. It acts as a clearing house of business information: Because of the important economic functions performed by stock exchange it has been referred to as the market where business of business is carried on (Cream of business). Stock Exchanges in India A Stock Exchange is an organised market for purchase and sale of listed financial instruments. In India, the first stock exchange was started in 1875 in Bombay, under the name 'Native Share and Stock Brokers Association of Bombay’. Later this came to be known as Bombay Exchange (BSE) Presently there are 7 recognised stock exchanges (including derivative exchanges in India'. Section 2(f) of the Securities Contract Regulation Act defines recognise stock exchange as a stock 19 exchange, which is, for the time being, recognized by the Central Government under Section 4. SEBI is empowered under Section 4 to grant recognition to Stock Exchanges derivative The two major stock exchanges in India are NSE and BSE. NATIONAL STOCK EXCHANGE (NSE) NSE was incorporated in 1992 in Bombay as a move to professionalize Indian capital market. It got recognition in 1993 and started functioning in 1994. In 1995 it became the largest stock exchange in the country. It provides nationwide trading facility with access to investors all over the country. It has an automated screen based trading system, using computers and modern technologies to make the operations more transparent. In 2000 NSE commenced internet trading and derivatives trading. The Objective The main objective of NSE is to ensure comprehensive nationwide securities trading facilities to investors. It accomplishes this through automated screen based trading and automatic post trade clearing and settlement facilities. The Management IDBI, ICICI, IFCI, GIC, LIC, SBI etc. are the promoters of NSE. IDBI is the lead promoter. Key- policy decisions are taken by the Board of directors. Operational decisions are taken by the executive committee. The functioning The NSE market is a fully automated screen based trading system. Quotations come on the screen. Anybody can sit in any city and can be logged in to the system and can trade. There is only one exchange and all other centers (broker offices) are electronically connected to the main exchange. Operation of NSE Operations of NSE are divided mainly into two segments, viz. Wholesale Debt Market (WDM) segment and Capital Market segment WDM segment provides trading facilities for a variety of debt instruments like Government Securities, Treasury bills, Bonds of PSUs, units of MF's, Certificates of Deposits, Commercial paper etc. Trading can be done only by members, recognised by the NSE. For obtaining recognition they must satisfy a comprehensive selection criterion. They should possess at least two years' experience in banking or other financial services sector and a minimum net worth of ₹ 2 crores. The applicant should engage only in securities business. These institutions are the "trading members" of the NSE. In WDM segment, membership is open only to body corporates, subsidiaries of banks, and financial institutions.Capital Market segment covers trading in equities and convertible debentures. The players in the market include individuals, registered firms, corporates and institutions 20 In addition to this, NSE has Derivatives - F&O (Futures & Options) and Currency Derivatives trading segment. The important subsidiaries of NSE include: 1) National Securities Clearing Corporation Ltd. (NSCCL) Estd. 1995 2) National Securities Depository Ltd. (NSDL) -Estd. 1996. 3) India Index Services & Products Ltd. (IISL) Estd. 1998. 4) NSE.IT Ltd. Estd in 1999. The NSE series of indices includes Nifty, Nifty Junior, CNX Midcap CNX 100 etc. BOMBAY STOCK EXCHANGE (BSE) The first stock exchange in India was started in 1875 in Bombay, under the name 'Native Share and Stock Brokers Association of Bombay. Later this came to be known as Bombay Stock Exchange (BSE). It is also known as Dalal Street. Bombay Stock Exchange is the oldest stock exchange in Asia. It is the first stock exchange in India to obtain permanent recognition from the Government. Management BSE is managed by a Board of Directors, consisting of professionals, representatives of the public, market intermediaries and SEBI. In addition to this there is a management team consisting of 9 executive directors as the head of various departments and divisions. Besides there is also a Derivatives-Governing and Clearing council for managing the derivatives segment of the market. Importance Over the past 135 years, BSE has facilitated the growth of the Indian corporate sector by providing it with an efficient capital raising platform. Today, BSE is the world's number-1 Exchange in the world in terms of the number of listed companies (over 4900). It is the world's 5th most active in terms of number of transactions handled through its electronic trading system. And it is in the top ten of global exchanges in terms of the market capitalization of its listed companies. As of now, more than 7,700 scrips are traded in BSE. The worlds most tracked and country's first index, SENSEX is launched by BSE in 1986. To facilitate smooth transactions, BSE had replaced its open outcry system with the BSE On-line Trading (BOLT) facility in 1995. BSE has also introduced the world's first centralized exchange based Internet trading system, bsewebx.co.in. The initiative enables investors anywhere in the world to trade on the BSE platform BSE on Sept 2010 Launched mobile-based trading, using its proprietary Fastrade mobile application and a wireless access protocol browser-based mobile trade portal. Operations BSE has Equity, Debt and Derivatives segments. The trading of BSE is based on BOLT (BSES Online Trading) System. In this system the members' brokers enter orders for buying/selling of 21 securities, from trader- work stations installed in their offices, instead of assembling in the trading ring. Trading is done from Monday to Friday. The scrips traded in BSE are classified into Group A, B, S, TS, Z etc on the basis of qualitative and quantitative parameters like volume of trade, market capitalization etc. For the purpose of listing on BSE, Companies have been classified as large cap companies and small cap companies. A large cap company is a company with a minimum issue size of 10 Cr. and market capitalization of not less than 25 Cr. A small cap company is a company with a minimum issue size of ₹ 3 Cr. and minimum market capitalization of ₹ 5 Cr. SENSEX, BSE 100, BSE Dollex, BSE 200, BSE IPO Index etc., are the important BSE series of indices. Though many other exchanges exist, BSE and the NSE account for most of the trading in shares in India. Metropolitan Stock Exchange of India Limited (MSEIL) MSEIL (founded in 2008) is a government owned stock exchange recognized by Securities and Exchange Board of India (SEBI). MSEI offers an electronic, transparent and hi-tech platform for trading in Capital Market, Futures & Options, Currency Derivatives, Debt Market and SME segments. It has a live trading platform in all segments except SME. SX40 is the market index of MSEL. The exchange's shareholders are some of India’s top public sector banks, private sector banks, and domestic financial institutions. MSEIL has two subsidiaries: Metropolitan Clearing Corporation of The India Limited (MCCIL) and MCX SX KYC Registration Agency Limited (MRAL). Listing of Securities Securities of a company are said to be listed when they have been included in the official list of the stock exchange for trading. Listing is compulsory for those companies which go for public issue. The objective of listing is to provide marketability and liquidity to the securities and also to ensure investor protection. Listing of securities means permission to quote shares and debentures officially on the trading floor of the stock exchange. Every security issued by companies cannot be traded at a stock exchange. The stock exchanges fix certain standards which the company must fulfill, before getting the securities listed. A company may list its securities in more than one stock exchange. But it is mandatory to list on the regional stock exchange nearest to the registered office of the company. The stock exchanges levy annual listing fees from listed companies. Requirements for listing :- A company, desirous of listing its securities on the Exchange, shall be required to file an application in the prescribed form, with the Exchange before the issue of Prospectus with registrar of companies. 22 Every issuer has to obtain, in-principle, approval from recognised stock exchanges (RSEs) before a public issue. The company shall be responsible to follow all the requirements specified in the Companies Act, the listing norms issued by SEBI from time to time and regulations to make the security eligible to be listed and for continuous listing on the Exchange. The basic norms for listing of securities are uniform for all exchanges. They will be the mentioned in the listing agreement entered into between the company and the concerned stock exchange. Under the Listing Agreement, a company undertakes, amongst other things, (i) to provide facilities for prompt transfer, registration, sub division an consolidation of securities; (ii) to give proper notice of closure of transfer books and record dates, (iii) to forward 6 copies of unabridged Annual Reports, Balance Sheets and Profit and Loss Accounts to the stock exchange, (iv) to file shareholding patterns and financial results on a quarterly basis; (v) to intimate promptly to the Exchange the happenings which are likely to materially affect the financial performance of the Company and its stock prices, (vi) to comply with the conditions of Corporate Governance, etc. The compliance of this is monitored by the stock exchanges. Companies making public/rights issues are required to deposit 1% of the issue amount with the Designated Stock Exchange before the issue opens. This amount is liable to be forfeited in the event of the company not resolving the complaints of investors regarding delay in sending refund orders/share certificates, non-payment of commission to underwriters, brokers, etc. As per the listing agreement a company is required to complete the allotment of securities within 15 days from the date of closure of the issue and approach the designated stock exchange for approval of the basis of allotment. The following information must be filed with the exchange for getting a security listed": (i) Memorandum and Articles of Association of the company. (ii) Copies of all prospectus or statements in lieu of prospectus. (iii) Copies of Balance sheets, audited accounts, agreements promoters, underwriters, brokers, etc. (iv) Details of shares and debentures issued and shares forfeited. (v) Details of issues of bonuses and dividends declared. (vi) History of the company in brief. (vii) An undertaking regarding compliance with the provisions of the Companies Act, 1956 and Securities Contracts (Registration) Act 1956 as well as rules made therein. (viii) A list of the highest ten holders of each class or kind of securities of the company. As per SEBI guidelines, an issuer company should complete the formalities within 7 days of the finalization of the basis of allotment. In addition to all these rules, regulation and compliance, every stock exchange has a set of guidelines of its own for the companies to be listed on them. For example they may provide for the minimum issue size and market capitalization of the issuing company. 23  After listing, the issuing company has to make disclosures on a quarterly basis relating to financials and other material information. It is mandatory for listed companies to publish their half yearly results. The stock exchanges are empowered to withdraw or suspend the admission granted for trading following any breach of conditions. NOTE -For the purpose of listing on BSE, Companies have been classified as large cap companies and small cap companies. A large cap company is a company with a minimum issue size of 10 Cr. and market capitalization of not less than 25 Cr. A small cap company is a company with a minimum issue size of 3 Cr. and minimum market capitalization of 5 Cr. Advantages of listing 1. Liquidity: It provides liquidity to the shares of the company. Securities can be easily converted into cash and vice versa. 2. Image: Improves public image of the company. Listed companies are very often mentioned in the stock market reports, T.V., newspaper etc 3. Wider market for shares: The publicity coverage attracts investors from different parts of the country. 4. Easy finance: Financial institutions are ready to extend finance to companies whose shares are listed. 5. Collateral Securities: Listed securities are treated as collateral securities by financial institutions for lending money. They are rated high and easily marketable in the market. 6. Protection of investors: The listed companies have to fulfill many obligations as prescribed by SEBI and other agencies. This ensures that such companies comply with rules and regulations of SEBI and other agencies. This is a guarantee for the safety of the money of the investors. 7. Disclosure of vital information is beneficial to the investors. They can know about the worth of the securities also. Disadvantages 1. Companies are subjected to strict rules and regulations. 2. Companies may have to disclose vital information to competitors such as the declaration of bonus, dividend etc. 3. The information received by stock exchanges and related persons may lead to speculation. This may be detrimental to the interest of the company. 4. The company may have to incur heavy expenditure in public issue with listing procedures. Delisting of Securities Delisting of securities means permanent removal of securities of a listed company from the stock exchange where it was registered. As a result of this, the shares of the company would no longer be traded at that stock exchange. It can be classified under two head: 1. Compulsory delisting refers to permanent removal of securities of listed company from a stock exchange as a penalizing measure at the behest of the stock exchange for not making 24 submissions/comply with various requirements set out in the listing agreement within the time frames prescribed. 2. In voluntary delisting, a listed company decides on its own to permanently remove its securities from a stock exchange. This happens mainly due to merger or amalgamation of one company with the other or due to the non-performance of the shares on the particular exchange in the market. Members of Stock Exchanges The members of stock exchanges are called stock brokers or share brokers. They are classified into groups depending on the nature of their activities in the stock exchange. Only members can do business at the floor of the stock exchange. A person can become a member of stock exchange only if:  he is a citizen of India  he is 21 years of age  he is not adjudged bankrupt or insolvent  he is not a declared defaulter by any other stock exchange.  he has obtained a certificate of registration from SEBI.  he has atleast 2 years experience in the field.  has the minimum networth and working capital as fixed by the stock exchange. The following are the various categories of members of stock exchange. 1. Commission brokers -A commission broker is a member of stock exchange who transacts business in securities on commission for non-member or clients. He acts as agent on behalf of his clients or outside people. Commission brokers buy and sell securities on behalf of the investing public. They are paid a commission, which is usually a fixed percentage of the total price. A commission broker has to register himself with SEBI. Individuals, have prescribed can become a qualifications which SEBI specifies. 2. Jobbers:- A Jobber is an independent broker who deals in securities for himself. He is not an agent of any non-member. He buys and sells securities in his own name and earns profit. Generally, he is a specialist in certain type of securities. These types of brokers are common in London stock exchange. He can deal either with a broker or with another jobber. A broker first approaches a jobber for purchase or sale of securities. 3. Floor brokers (Sub-Brokers):- Brokers, who do business in the stock exchange for principal brokers, are called floor brokers. They are sub-brokers. When a particular broker has large number of clients he may entrust part of his work to sub-brokers. Such brokers are called floor brokers. The commission broker will give part of his commission to the floor broker. They can affiliate to only one broker and need to register with Stock exchanges and SEBI. 4. Tarawaniwalas :- In India a Tarawaniwala is a person who is a dealer in his own name. They are similar to the Jobbers of London exchange. But since the brokers are not officially classified in India, the Tarawanivalas can change their role and act as commission brokers. Basically he is Jobber in the Bombay stock exchange 5. Arbitrageurs:- He is a broker who tries to make profit by exploiting the price differences in two different exchanges. Through the help of electronic media they can buy shares from a low 25  priced place and sell it at higher price at another place. They make simultaneous or closely related purchase and sale of same or equivalent securities in the same or different markets. 6. Securities dealers:- The brokers who deal only with the securities of central government and state government are known as security dealers. By the of primary dealers, the significance of securities dealers is reduced. 7. Oddlot dealers:- A broker who specialises in odd lot dealings only is an oddlot dealer. Oddlot is anything less than the standard units of trading (market lot). Most of the companies have fixed market lot as 50 or 100 (in physical form). Anything less than this is an odd lot. For dematerialized scrips the market lot is 1. Usually oddlot arise form the issue of bonus or rights shares. Non-members acting for members a) Remisier:- He is a person who acts as agent for a member. He obtains business for his principal and gets remuneration in the form of commission for the business secured by him. In other words he is a sub-broker. They can also enter into the stock exchange. b) Authorised clerks:- They are employees of members in the stock exchange who transact business on behalf of their employers on the floor of the exchange. They are paid a salary plus a commission on the business done by them. They have authorization to transact business on behalf of their employers. A member can appoint a specified number of authorised clerks. They are also called member assistants. The brokers are personally liable for all the dealings carried out by the authorised clerks. Investors and Speculators An investor is a person who buys securities with the intention to earn income. Investors generally retain their security for a long period and earn income through dividends. They are much interested in the safety of their investment and regularity of income. They will sell their holdings only investment when they are assured of a profit The speculator is a person who buys securities with a view to sell them in future at a profit. He is always interested in the appreciation of his capital and quick profit. Speculators do not intend to retain their holdings for long. Generally they do not give or take delivery of scrips but make profit through price differentials. In reality there are no hundred percent investor or speculator Each investor is a speculator and each speculator is an investor to a certain extent. Types of Speculators The speculators of stock exchange are given different names depending upon the nature of their speculative activity. The names are taken from the animal kingdom probably on the basis of its resemblance with the behaviour of the animals. These speculators can forecast price movements of certain shares because of their experience in the field and their analytical ability. 1. Bull:- Bull is a person who buys shares expecting a rise in their prices. His intention of buying is to sell them at a profit at a future date. Hence, even though he is a buyer he is a potential 26  seller. He is an optimist as he always believes that the price will rise. The share market is said to be bullish when it is dominated by an expectation of a rise in prices. In a bullish market the general atmosphere is one of optimism A bull in the share market often tries to raise the price of the security as the animal bull generally throws its victim upwards. Sometimes the bulls in the share market may try for an artificial rise in the prices through a Bull Campaign. They will spread stories - true, half true, and untrue which may favourably affect their position. This is called rigging market. In technical terms a bull is said to be on the long side of the market or buy long. In the Indian stock exchange a bull is also known as Tejiwala. 2. Bear:- A bear is a person who sells the shares with the expectation of buy them in future at a reduced price. Hence, even though he is a seller he is a potential buyer. He is a pessimist as he always expects a fall in the price. As the animal bear presses its victim down to the ground the bear speculator also tries to bring down the price of the share in the market. The joint action of the bears for bringing down the prices is called bear raid. The share market is said to be bearish when it is dominated by an expectation of fall in price. Pessimism prevails in such market. In Bombay stock exchange a bear is also known as Mandiwala. 3. Stag:- A stag is one type of bull speculator. He is a person who applies for shares in the new issue market with the intention of selling them at a profit when allotment is due. He has no intention to become the actual holder of shares. His only intention is to bag quick profit when the issue goes to premium. In other words, he is a premium hunter. The difference between the application money paid by him and the price at which he sells the allotment is his profit. Since they act fast, they are referred to as stags the fast runner. The stags create fictitious demand at the time of issue of shares. The demand for shares will be enormously higher than the supply at the time of issue but there will be a steady decline afterwards. This anomaly is caused by selling of stags. New companies will be in great difficulties because of the functioning of the stags as these companies may not be able to collect the expected money from the market. 4. Lame Duck:- A lame duck is one type of bear speculator. He is a speculator who finds it difficult to meet his commitment. For example, a bear who enters into selling contract should sell the contracted securities at the stipulated time. But if the security is not available in the market on the fixed date he cannot fulfill his commitment. If the other party is not willing to postpone the settlement the speculator will be in difficulty. Such a speculator is known as lame duck. This situation arises in short selling. Short selling is a contract of selling by the bear where he does not actually possess the shares. Speculative Transactions The various types of transactions which facilitate speculative dealings can be classified into the following: 1. Option Dealings 2. Margin Trading 3. Arbitrage 4. Wash Sales 5. Blank Transfers 27  6. Carry over or Badla Transactions 7. Cornering 8. Rigging the Market etc. The structural and technological changes along with stringent disclosure/regulatory requirements and constant market surveillance made several types of speculative transactions (like blank transfer, carry forwards, cornering etc) irrelevant or unprofitable. 1. Option Dealings The term option means a right. Option dealing is an arrangement of right to buy or sell a certain number of specified securities at a predetermined price within a prescribed time limit. Share dealing is a highly risky transaction in securities whose price fluctuates violently. To avoid the risk of loss, the speculators enter into option dealings. In option dealing, the speculator enters into a contract with another person and acquires the right either to buy or sell certain securities at a specified price on a specified date. If he is a bull speculator, he shall enter into purchase options and if the speculator is a bear, he will contract for sale options. The speculator should also pay a certain sum of money as consideration for acquiring the right. It is known as option money. However, the speculator has no actual intention to take or to give delivery of the securities. By acquiring the right to buy or not to buy, or to sell or not to sell, he guards against price fluctuation. Thus, option dealings have the element of insurance against price fluctuation. Kinds of Option Dealings Option Dealings can be classified into three categories, viz., a) Call Option: It is an option to buy certain securities at fixed price on a future date. The bull speculators generally enter into call option dealings. It means that he has the right either to buy or not to buy. It is also known as "Teji Sauda" in the Bombay stock exchange. b) Put Option: In this case the speculator acquires the right to sell or not to sell. It is a transaction generally made by the bear speculators. It is also known as "Mandi Sauda". c) Call and Put Option: A call and put option is a combination of two. It is a right either to buy or sell the securities given for a specified sum. It is also called as "Teji Mandi" or "Agali Sauda" in our country. 2. Margin Trading Margin Trading is a system of purchasing securities with funds borrowed from brokers. Under margin trading, the client opens an account with the broker by depositing a certain amount in cash or securities. He also agrees to maintain the margin at a certain level. The broker will debit the client's account with the amount of purchases and various charges like brokerage, commission etc., and credit the account with the cash deposited and the sale proceeds. If the prices are favourable the client may instruct the broker to sell the securities. When securities are sold may instruct be credited and will have higher margin for purchases his account will difference is credited or debited as the case may be. 28 Most of the speculative purchases are made on the basis of margin trading. This system protects the interests of the brokers and prevents over-trading by their clients since the client should maintain the margin. 3. Arbitrage Arbitrage is a highly specialised and skilled speculative activity. It is undertaken to make profit out of the differences in prices of a security in two different markets. It refers to the purchase and sale of the same security simultaneously in two different markets with a view to earning a profit out of the price differentials. The speculator buys the security from one market where its price is cheaper, and sells it in another market where its price is high. If the two markets are situated in the same country, the arbitrage transaction shall be called domestic arbitrage. When the two markets are located in different countries, it is called foreign arbitrage. The speculator has to act very quickly since the prices are very sensitive and they may get equalised in short period. The act is also known as traffic in securities. This helps to bring about a levelling of price in two markets. 4. Wash Sales Wash Sales are fictitious transactions. Under this method, the speculator sells his securities and then repurchases the same through the broker at a higher price. Actually, no transaction takes place in the wash sales. But these types of transactions are carried on to create confusion in the minds of the speculators about the actual movement of the price of a particular security. By this process, an artificial demand can be created which will ultimately, lead to an artificial rise in price. The speculator will then the securities at the increased price and make the profit. Since wash sales are considered an objectionable and practice, the rules of every stock exchange prohibit this activity and provide for severe penalty for such sales. 5. Blank Transfer It is a method of transfer without mentioning the name of the transferee in the transfer deed. By this process the shares can be transferred in any number of times and finally any transferee who wants to get the share registered in his name can submit the blank transfer form along with security and get them transferred in his name. This saves stamp duty and other fees on every transfer. Blank transfers became irrelevant due to dematerialization of shares which are transferred electronically. 6. Cornering A corner is the condition of the market in which almost the entire supply of a particular security is held by an individual or a group of supply of individuals. The speculators will enter into purchasing contracts with the bears in certain securities. Thereafter, by purchasing substantially the whole of the available securities and getting their actual delivery, the speculator will not resell them and will create a scarcity. In such an event, he will insist the bear speculators to make actual delivery of the securities, on the fixed date. The bears will find it difficult to effect actual delivery since such securities have already disappeared from the market. At this stage, the bull speculator will be able to 29 dictate the terms, and bears in the market are said to be "Squeezed". The bear will now be a lame duck. This is also an undesirable activity. This practice will create an artificial scarcity and affect the normal supply of the securities. Ultimately, the interests of the genuine investors will be badly hit. 7. Rigging the Market Rigging means artificially pushing up the market price of a particular security. This activity is generally carried on by the bull speculators. Due to strong bull movement the price of certain securities will go up and demand shall be created. When the price rises they will sell the securities and make profit. Kerb Market/Trading Kerb market is the market where share transactions take place outside the stock exchange or after the official trading time. Such unofficial trading take place outside carried outside the stock exchange premises is known as Kerb trading. Grey Market Grey markets are unofficial markets where trading on applied shares (applications invited not yet allotted) are done. There may be persons who would like to be investors but could not apply for the same. They are prospective buyers in a grey market. The sellers are those persons who applied for shares but allotment is not made yet. They sell this unallotted share in the grey market to the prospective buyers. Insider Trading Insider trading is the trading of securities of a company by individuals who are in some way connected with the company (insiders) and has access to non-public price sensitive information about the company. According to Section 195 of Companies Act 2013, insider trading means "an act of subscribing, buying, selling, dealing or agreeing to subscribe, buy, sell or deal in any securities, by any director or key managerial personnel or any other officer of a company, if such director or key managerial personnel or any other officer of the company is reasonably expected to have access to any non-public price sensitive information in respect of securities of company; or an act of counseling about procuring or communicating directly or indirectly any non-public price- sensitive information to any person." Insider means any person who is (i) a connected person or (ii) in possession of or having access to unpublished price sensitive information. Connected person means every person associated with the company and in possession of unpublished price sensitive information and deemed insiders (like relatives). Unpublished price sensitive information includes information relating to financial results, dividends, change in capital structure, mergers, acquisitions, changes in key personnel etc. 30 Insider trading and is highly prohibited under the provisions of SEBI regulations and Companies Act, 2013. According to SEBI (Prohibition of Insider Trading) Regulations, 2015, no insider shall communicate, provide, or allow access to any unpublished price sensitive information, relating to a company or securities listed or proposed to be listed, to any person. Each and every company should formulate an insider trading policy and appoint a compliance officer to ensure that SEBIs regulation regarding insider trading is followed. The insiders should disclose their respective holding of the company's securities on a continual basis to the compliance officer. As per the Companies Act 2013, if any insider is found guilty of insider trading he shall be punishable with imprisonment for a term which may extend to five years or with fine which shall not be less than five lakh rupees but which may extend to twenty-five crore rupees or three times the amount of profits made out of insider trading, whichever is higher, or with both. Methods of Trading in Stock Exchanges Stock exchanges provide trading facility on various listed securities to the stock brokers and traders. The stock brokers used to sell and buy shares using the open outcry method by assembling in the trading floor of stock exchanges. This traditional method continued till the introduction of policy for screen based trading by SEBI in 1993. In 1995, BSE completely shifted to a fully computerised mode of trading known as BOLT (BSE Online Trading) system. In this system members (brokers) enter orders for purchase of or sale of securities from workstations in their offices, instead of assembling in the trading ring. Later on in 2000 internet trading was introduced which facilitates the buying and selling of shares online through internet by sitting in home or office without even going to broking firms. BSE in Sept 2010 launched mobile-based trading, using its proprietary Fastrade mobile application and a wireless access protocol browser-based mobile trade portal. Screen Based Trading The open outcry system has been replaced by online screen based electronic system. Screen based trading is made through a network of computers connecting stock exchanges and brokers across the country. Trading has been shifted from trading floors of stock exchanges to the brokers’ office where the trades are executed through a computer terminal. The BSE (BOLT), NSE (NEAT) and all other stock exchanges facilitate trading through computers. In a screen based trading system, a member/ broker feeds in to the computer the number of securities and the prices at which he would like to transact and as soon as a match is found in the system, the transaction would be executed. Broker use different software like ODIN or software provided by stock exchanges like MULTEX, NEAT etc for electronically connecting to the stock exchanges. Screen based trading is also called offline trading. In NSE, the members' computers are connected to the central computer at NSE through VSATs. Even the primary issue, public offers, private placements etc are done through this. This reduces the cost of issue, the work load on bank and reaches more members in less time. 31 BSE and other stock exchanges display the information regarding shares, bids, offers, transaction, prices etc. in the trading ring and offices of members. The current status of issue through book building is available on the trading screens of all brokers. Reporting of daily transactions, settlement, corrections etc. are carried out directly from the offices. Online Trading This method facilitates buying and selling of securities online through internet. This development has shifted trading from broker's office to home or office of the investor. Investors can trade in securities through websites without any intervention from the broker. Stock exchanges like BSE (Webx) and stock broking firms (Xtrade of UAE Exchange Financial Services) provide websites/online trading portal and technical support for internet based trading. Online trading is also known as internet trading. For doing online trading an investor needs a bank account, a demat account and a trading account with any stock broker or stock exchange. A unique user ID and password will be given to the client. Quotes can be put by the client using the ID and password and then as soon as the order is confirmed and finalized, cash or securities are debited or credited from the respective accounts. Benefits of online trading  Anywhere availability: Traders/investor can place order or sell securities anywhere and from any device like computers and mobile phones having an internet connection during the trading hours.  Own Trading: The investor/client can perform the trading without the assistance of a broker by himself. The investor is in control of online trading and he can take spot decision and executes trades.  Quick decision and actions: While trading online the investors can react quickly and take advantages of favourable market movements on a real time basis. This will improve the value of investments.  Low transaction cost: The fees charged by broking firms for offering online trading facility is comparatively low. In India, stock trading on the Internet was introduced in February 2000. NSE launched the world's first internet trading platform, Dotex, which allow brokers to avail themselves of a common internet trading platform. Online trading reduces the transaction costs and increases liquidity. As of now, 10% of the total traded volume on NSE and BSE accounts to online trading. Process of Trading in Stock Exchange The following steps are involved in the buying and selling of securities in a stock exchange; 1. Selection of a Broker 2. Placing an Order 3. Making the Contact 4. Preparing Contract Note 32  5. Settlement of Transaction 1. Selection of a broker & Opening a Trading Account The purchase or sale of shares has to be made only through a broker. Therefore, the first thing to be done by a client to operate in the market is to select a broker. The intending investor or seller may approach his or any other stock broker for this purpose. The banks have their own brokers at exchanges. On a recommendation from the bank the client's account is opened by the broker. The bank assures about the financial condition of the client. Credit worthy clients can contact the brokers directly also. The client has to sign a "Member-Client agreement" / "Sub broker- Client agreement" for the purpose of engaging a broker. The agreement contains clauses defining the rights and responsibilities of client vis-a-vis broker / sub broker. The client has to furnish details and documents like ID proof, Address proof, PAN No., details of bank account, passport photo etc. After accepting the application the broker will issue a unique client Code, user id and password to the client. The broker assist the clients in opening the DEMAT account also. 2. Placing an order After opening trading account and demat account the client can place order through the broker either in online mode or in offline mode. In online mode, the client himself by using the client id, user name and password provided, access the trading platform using the broker's website and do trade. The broker also guides the client about the type of securities to be purchased and the proper time for it. If a client is to sell the securities then the broker tells him about the favourable time for sale. In offline trading the client instructs the broker to perform trade on behalf of him. In purchasing the broker is told to purchase shares, their number and price to be paid. Sometimes a definite price is given on which the purchase is to be made. In certain cases minimum price to be paid is told. The broker will try to make purchases as far as possible to the nearest price offered by the client. The order will be placed in the computerized software system of the exchange for matching bids. The orders can be of different types: a) At best order: This is an order which doesn't specify any price. The order must be executed immediately at the best possible price. Example: Buy 100 Tatas at best. b) Limit order: This is an order for purchase and sale at a fixed price specified by the client. Ex: Sell 1000 Reliance @ 450. c) Stop loss order: This is an order to sell as soon as the price falls up to a certain level or buy when the prices are up to a specified level Example: Buy 100 SBI at 125 stop. d) Immediate or cancel order: This order has to be executed immediately and if not the order is to be cancelled. Example: Buy 100 Tatas immediately/cancel. e) Discretionary order: In this type of order the client gives complete discretion to the broker to do business on his behalf. It means that he has full faith in the broker. f) Day order: valid only for the day on which it is entered. The order will be cancelled automatically at the end of the day. 33 g) Good Till Cancelled: GTC order remains in the system until it is cancelled by the party or get a match. h) Good Till Dates: GTD allows the party to specify the day or days up to which the order should stay in the system. 3. Making the Contract/Execution of Order When matching bid is identified the clients order gets executed automatically. If no immediate match is found, the order will be kept in the system on a price cum time priority basis. Price priority means that if two orders are entered in to the system, the order having the best price gets the highest priority. Price priority means if two orders having same price are entered, the order entered first get the highest priority for execution. 4. Preparing the Contract Note Contract note is a confirmation slip of trade done on a particular day on behalf of a particular client. Brokers issue the contract note to the client in the prescribed format showing details. The details of securities traded are given in this note mentioning their number, price etc. Being documentary evidence the contract note should contain the name of the company, date of purchase, date of delivery, brokerage etc. A duplicate copy of the same will be kept by the broker. 5. Settlement Settlement of trade means payment/delivery of securities to the clients. With effect from April 1, 2003 all stock exchanges are following T+2 rolling settlement cycles. If the settlement is done by giving actual delivery of securities on receiving the price, it is called liquidation in full. The purchaser will make funds available with his broker and the seller will make the securities available in his demat account on T+2 basis. In another method the dealings are squared by adjusting price differences only. Square-off means to settle the position. If you square-off a trade, it means you have no position at the end of the day-only profit or loss. Clearing and Settlement All actively traded scrips are held, traded and settled in demat form. The obligations of members are communicated to custodians by the clearing agency. They make available the required securities in their pool accounts with the depository partici