5ccf6b2c04dc277ce680f3d5d023da1d

INDIAN FIANCIAL
SYSTEM
(MODULE-A)
PRINCIPLE & PRACTICES OF BANKING-JAIIB

CHAPTER 5 ROLE & FUNCTIONS OF CAPITAL MARKET & SEBI
CAPITAL MARKET
The capital market is a highly specialized and
organized financial market and indeed
essential agent of economic growth because
of its ability to facilitate and mobilize saving
and investment. To a great extent, the positive
relationship between capital accumulation real
economic growths has long affirmed in
economic theories.
Success in capital accumulation and

mobilization for development varies among
nations, but it is largely dependent on
ROLE & FUNCTIONS OF

domestic savings and inflows of foreign
capital. Therefore, to arrest the menace of the
current economic downturn, effort must be
CAPITAL MAKETS &

geared towards effective resources
mobilization. It is in realization of this that
consideration is given to measure for the
SEBI
development of capital market as an
institution for the mobilization of finance from
the surplus sectors to the deficit sectors.
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CONTENTS
1. CAPITAL MARKETS
2. PRICING OF THE ISSUE
3. APPLICATIONS SUPPORTED BY BLOCKED AMOUNT (ASBA)
4. QUALIFIED INSTITUTIONAL PLACEMENT QIP
5. SECURITIES AND EXCHANGE BOARD OF INDIA (SEBI)
6. REGISTRATION CERTIFICATE
7. QUALIFIED INSTITUTIONAL BUYERS
CAPITAL MARKETS
A very important area of the financial services industry is the capital markets. The capital markets are
fundamental to the economy of the country. It promotes economic growth by providing corporations and
governments access to capital which enables these organizations to invest in businesses, create jobs,
and build infrastructure. SEBI has prescribed certain rules and regulations and by complying with the
same, the promoters can raise their financial requirement in a market known as the capital market.
Capital markets are markets for buying and selling equity and debt instruments. Capital markets channel
savings and investment between suppliers of capital such as retail investors and institutional investors,
and users of capital like businesses, government and individuals. Capital markets include primary
markets, where new stock and bond issues are sold to investors, and secondary markets, which trade
existing securities. Capital market can be further divided into two Part.
PRIMARY MARKET
The primary market is the part of the capital market that deals with issuing of new securities. Primary
markets create long term instruments through which corporate entities raise funds from the capital
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market. The issue of securities, shares or bonds in the primary market is subject to the fulfillment of a
number of pre-issue guidelines by SEBI and compliance to various provisions of the company act. The
primary market is classified into public issue market and private placement market. There are number of
intermediaries in the primary market such as merchant banker, issue manager, etc.
Banks participate in the capital market as bankers to the issue, arrangers, underwriters etc.
SECONDARY MARKET
The market in which securities are traded after they are initially offered in the primary market. Most
trading occurs in the secondary market. In the secondary market, securities are sold by and transferred
from one investor or speculator to another.
Equity shares, bonds, preference shares, treasury bills, debentures, etc. are some of the key products
available in a secondary market. SEBI is the regulator of the same. Secondary market could be either an
auction or a dealer market. While stock exchange is the part of an auction, over the counter (OTC)
market is a part of the dealer market.
For the general investors, the secondary market provides an efficient platform for the trading of securities
and price discovery. For the managers of the company, secondary market serve as a monitoring and
control conduit- by facilitating value enhancing control activities, enabling implementation of incentive
based management contracts and aggregating information that guides management decisions. Banks
also extend credit against securities; they may also act as clearing house banks.
STOCK EXCHANGE IN INDIA

Stock Exchange (also called Stock Market or Share Market) is one important constituent of capital
market. Stock Exchange is an organized market for the purchase and sale of industrial and financial
5 security. It is convenient place where trading in securities is conducted in systematic manner i.e. as per
certain rules and regulations. There are 22 recognized stock exchanges in India.
In terms of legal structure, the stock exchange in India could be segregated into broad groups-19 stock
exchanges which were set up as companies either limited by guarantees or by shares and the 3 stock
exchanges which were associations of persons (AOPs), viz. Bombay stock exchange (BSE), Ahmedabad
stock exchange (ASE) and Madhya Pradesh stock exchange (MPSE).
To improve the efficiency of the exchanges, it is necessary to corporatize them. Corporatization is the
process of converting the organizational structure of the stock exchange from a non-corporate to a
corporate structure. Traditionally, some of the stock exchanges in India were established as AOPs, e.g.
BSE, ASE and MPSE. Corporatization of such exchanges is the process of converting them into
incorporated companies.
DEMUTUALIZATION OF STOCK EXCHANGES

Demutualization is the process by which a customer-owned mutual organization (mutual) or co- operative
changes legal structure to form a joint stock company.
In a mutual exchange, the three functions of ownership, management and trading are intertwined into a
single group. A demutualized exchange has all these three functions clearly segregated, i.e. the
ownership, management and trading are in separate hands.
The BSE, NSE and OCTCEI are not only corporatized but also demutualized with the segregation of
ownership and trading rights of members.
The NSE was started in 1992 by banks and financial institutions including Industrial financial corporation
of India (IFCI), IL &FS, Industrial credit and investment corporation of India (ICICI), Punjab national banks
(PNB) and general insurance corporations already has an enabling provision allowing a foreign
6 institutional investment (FII) up to 26 % and a foreign direct investment (FDI) limit of 23% of its paid-up
capital. The paid-up capital of NSE is at present Rs 45 crore as on 31st March 2014.
STOCK BROKERS
A broker is a member of a recognized stock exchange, who permitted to do trading on the screen-based
trading system of different stock exchanges. He is enrolled as a member with the concerned exchange
and is registered with SEBI.
A sub-broker is affiliated to a member of a recognized stock exchange and is a person who is registered
with SEBI.
FINANCIAL PRODUCTS/ INSTRUMENTS DEALT WITH IN THE SECONDARY MARKET
1. EQUITY Equity Shares
The ownership interest in a company of holders of its common Right Issues/Rights

Shares
and preferred stock. The various kinds of equity shares are:
Equity Bonus Shares
a. EQUITY SHARES
Preferred
Financial Product in secondary

Security Receipts
Stock/Preference shares
An equity share commonly referred to as ordinary
Government securities Cumulative Preference
share also represents the form of fractional ownership (G-Secs) Shares
market
in which a shareholder, as a fractional owner, Debentures
Zero Coupon Bond

undertakes the maximum entrepreneurial risk associated
Bond
with a business venture. The holders of such shares are Convertible Bond
Commercial Paper
members of the company and have voting rights.
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Treasury Bills
b. RIGHT ISSUES/RIGHTS SHARES

The issue of new securities to existing shareholders at a ratio to those already held.
c. BONUS SHARES
Shares issued by the companies to their shareholders free of cost by capitalization of accumulated
reserves from the profits earned in the earlier years.
d. PREFERRED STOCK/PREFERENCE SHARES

Owners of these kinds of shares are entitled to a fixed dividend or dividend calculated at a fixed rate to
be paid regularly before dividend can be paid in respect of equity share. They also enjoy priority over the
equity shareholders in payment of surplus. But in the event of liquidation, their claim rank below the
claims of the companys creditors, bond holders/debenture holders.
e. CUMULATIVE PREFERENCE SHARES

A type of preference shares on which dividend accumulates if remains unpaid. All arrears of preference
dividend have to be paid out before paying dividend on equity shares.
f. CUMULATIVE CONVERTIBLE PREFERENCE SHARES

A type of preference shares where the dividend payable on the same accumulates, if not paid. After a
specified date, these shares will be converted into equity capital of the company.
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g. PARTICIPATING PREFERENCE SHARES

The right of certain preference shareholders to participate in profits after a specified fixed dividend
contracted far is paid. Participation right is linked with the quantum of dividend paid on the equity shares
over and above a particular specified level.
2. SECURITY RECEIPTS
Security receipt means a receipt or other security, issued by a securitization company or reconstruction
company to any qualified institutional buyer pursuant to a scheme, evidencing the purchase or acquisition
by the holder thereof, of an undivided right, title or interest in the financial asset involved in securitization.
3. GOVERNMENT SECURITIES (G-SECS)

These are sovereign (credit risk-free) coupon bearing instruments which are issued by the Reserve Bank
of India on behalf of Government of India, in lieu of the Central Governments market borrowing
programme. These securities have a fixed coupon that is paid on specific dates on half-yearly basis.
These securities are available in wide range of maturity dates, from short dated (less than one year) to
long date (up to twenty years).
4. DEBENTURES
Bonds issued by a company bearing a fixed rate of interest usually payable half yearly on specific dates
and principal amount repayable on particular date on redemption of the debentures. Debentures are
normally secured / charged against the asset of the company in favour of debenture holder.
5. BOND
A negotiable certificate evidencing indebtedness, it is normally unsecured. A debt security is generally
issued by a company, municipality or government agency. A bond investor lends money to the issuer and
in exchange, the issuer promises to repay the loan amount on a specified maturity date. The issuer
usually pays the bond holder periodic interest payments over the life of the loan.
The various types of Bonds are as follows:
a. ZERO COUPON BOND

Bond issued at a discount and repaid at a face value. No periodic interest is paid. The difference between
the issue price and redemption price represents the return to the holder. The buyer of these bonds
receives only one payment, at the maturity of the bond.
b. CONVERTIBLE BOND
A bond giving the investor the option to convert the bond into equity at a fixed conversion price.
6. COMMERCIAL PAPER
A short term promise to repay a fixed amount that is placed on the market either directly or through a
specialized intermediary. It is usually issued by companies with a high credit standing in the form of a
promissory note redeemable at par to the holder on maturity and therefore, doesnt require any
guarantee. Commercial paper is a money market instrument issued normally for tenure of 90 days.
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7. TREASURY BILLS
Short-term (up to 91 days) bearer discount security issued by the Government as a means of financing
its cash requirements.
REGULATORY REQUIREMENTS SPECIFIED BY SEBI FOR CORPORATE DEBT

SECURITIES
The term Corporate Bonds referred here includes all debt securities issued by institutions such as Banks,
Public Sector Undertakings, Municipal Corporations, bodies corporate and companies having a tenure of
more than 365 days. Such an issue of bonds, if offered to the public shall be required to comply with the
SEBI (Disclosure and Investor Protection Guidelines), 2000. Also, a private placement of corporate
bonds made by a listed company shall be required to comply with provisions contained in SEBI Circulars
in this regard.
All the issuers making public issues of debt securities or seeking listing of debt securities issued on
private placement basis shall comply with the conditions of listing specified in the respective listing
agreement for debt securities. Every rating obtained by an issuer shall be periodically reviewed by the
registered credit rating agency with SEBI. The debt securities shall be issued and traded in the demat
form.
COMMONLY USED TERMS IN THE CAPITAL MARKET
1. AUCTION
On account of non-delivery of securities by the trading member on the pay-in day, securities are put up
for auction by the exchange. This ensures that buying trading member receives the securities. The
11 Exchange purchases the requisite quantity in auction market and gives them to the buying trading
member.
2. PAY IN/PAY OUT

Pay in day is the day when the brokers shall make payment or delivery of securities to the exchange. Pay
out day is the day when the exchange makes payment or delivery of securities to the broker. Settlement
cycle is on T+2 rolling settlement basis w .e. f. April 01, 2003. The exchanges have to ensure that the
pay out of funds and securities to the clients is done by the broker within 24 hours of the payout. The
Exchanges will have to issue press release immediately after pay out.
3. ROLLING SETTLEMENT
In a Rolling Settlement, trades executed during the day are settled based on the net obligations for the
day. Presently the trades pertaining to the rolling settlement are settled on a T+2 day basis where T
stands for the trade day. Hence, trades executed on a Monday are typically settled on the following
Wednesday (considering 2 working days from the trade day). The funds and securities pay-in and pay-
out are carried out on T+2 day.
4. SECURITIES LENDING SCHEME

A scheme formed in 1997 for lending of securities through an approved intermediary to a borrower under
an agreement for a specified period with the condition that the borrower will return equivalent securities of
the same type or class at the end of the specified period along with the corporate benefits accruing on
the securities borrowed. Securities Transaction Tax (STT)-It is a tax payable in India on the value of
securities (excluding commodities and currency) transacted through a recognized stock exchange. As of
2016, it is 0.1% for delivery based equity trading. STT was originally introduced in 2004 by the then
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Finance Minister and came into effect from October 1, 2004. The government reduced this tax in the
2013 budget after a lot of protests for years by the brokers and the trading community.
TYPES OF CAPITAL ISSUES IN THE PRIMARY MARKET
Capital issues
in the primary
market
Qualified
Private institutional Preferential
Public issue Rights issue
placement placement issue
(qip)
Follow-on
Initial public
public offer
offer (ipo)
(FPO)
1. PUBLIC ISSUE
Securities are issued to the all the members of the public who are eligible to participate in the issue.
Public issue is classified into two parts:
A. Initial public offer (IPO)

When a (unlisted) company makes a public issue for the first time and gets its shares listed on stock
exchange, the public issue is called as initial public offer.
B. Follow-on public offer (FPO)

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When a listed company makes another public issue to raise capital, it is called follow-on offer.
2. RIGHTS ISSUE
Rights issue is when the listed company issues new securities and provides special rights to its existing
shareholders for buying the securities before issuing it to public. The rights are issued on particular ratio
based on the number of securities currently held by the shareholder.
3. PRIVATE PLACEMENT
The sale of securities to a relatively small number of select investors as a way of raising capital. This is a
wholesale issue of securities to institutional investors by an unlisted company to a select group of
persons under section 81 of the Companies Act, 1956, which is neither aright issue nor a public issue.
4. QUALIFIED INSTITUTIONAL PLACEMENT (QIP)

A private placement of securities by a listed company to a set of institutional investors termed as qualified
institutional buyers is a QIP.
5. PREFERENTIAL ISSUE
A private placement of securities by a listed company. Securities are issued to an identified set of
investors which may include promoters, strategic investors, employees and such groups.
ELIGIBILITY NORMS FOR MAKING CAPITAL ISSUES

SEBI has laid down eligibility norms for entities accessing the primary market through public issues.
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There are no eligibility norms for a listed company that is making a rights issue as it is an offer made to
the existing shareholders who are expected to know their company. There are also no eligibility norms for
a listed company making a preferential issue. However for a QIP, only those companies whose shares
are listed in NSE or BSE and those who are having a minimum public float as required in terms of the
listing agreement, are eligible.
Any company making a public issue or a listed company making a rights issue of a value of more than
Rs. 50 lakh is required to file a draft offer document with SEBI for its observations. The validity period of
SEBFs observation letter is only three months, i.e. the company has to open its issue within a period of
three months. There is no requirement of filing any offer document/notice to SEBI in the case of
preferential allotment and QIP. In QIP, the merchant banker handling the issue has to file a copy of the
placement document with SEBI post-allotment, for record purposes.
The merchant banks are the specialized intermediaries who are required to display due diligence and
ensure that all the requirements of DIP are complied with, while submitting the draft offer document to
SEBI. Any non-compliance on their part attracts penal action from SEBI, in terms of SEBI (Merchant
Bankers) Regulations. The draft offer document filed by the merchant banker is also placed on the
website for public comments. Officials of SEBI, at various levels, examine the compliance with DIP
guidelines and ensure that all necessary material information is disclosed in the draft offer documents.
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 which are filed with Registrar of Companies (ROC) and stock exchanges. An offer
document covers all the relevant information to help an investor to make his/her investment decision. A
15 Draft Offer Document means the offer document in a draft stage. The draft offer documents are filed with
SEBI, at least twenty-one days prior to the filing of the offer document with ROC/SEs. SEBI may specify
changes, if any, in the draft offer document and the issuer or the lead merchant banker (LM) shall carry
out such changes in the draft offer document before filing the offer document with ROC/ SEs. The draft
offer document will be available on the SEBI website for public comments for a period of twenty-one days
from the filing of the draft offer document with SEBI.
Red Herring Prospectus (RHP)

Red Herring Prospectus (RHP) is a prospectus which does not have details of either price of number of
shares being offered or the amount of issue. This means that in case the 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 number of shares is determined later. An RHP for an FPO can be filed with
the ROC without the price band. In such a case, the floor price or the price band will be notified by way of
an advertisement one day prior to the opening of the issue.
In the case of book-built issues, it is a process of price discovery and the price cannot be determined until
the bidding process is completed. Such details are thus not shown in the RHP filed with ROC in terms of
the provisions of the Companies Act. Only on completion of the bidding process, the details of the final
price are included in the offer document. The offer document filed thereafter with ROC is called a
prospectus.
Pricing Of the Issue

Indian primary market ushered in an era of free pricing in 1992. Following this, the guidelines have
provided that the issuer, in consultation with the merchant banker shall decide the price. There is no price
formula stipulated by SEBI. SEBI does not play any role in the price fixation. The company and merchant
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banker are however required to give full disclosures of the parameters which they had considered while
deciding the issue price. There are two types of issues, one where company and LM fix a price (called
fixed price) and other, where the company and LM stipulate a floor price or a price band and leave it to
market forces to determine the final price (price discovery through book building process).
An issuer company is allowed to freely price the issue. The basis of issue price is disclosed in the offer
document where the issuer discloses in detail about the qualitative and quantitative factors justifying the
issue price. The issuer company can mention a price band of 20 per cent (cap in the price band should
not be more than 20 per cent of the floor price) in the draft offer documents filed with SEBI and actual
price can be determined at a later date before filing of the final offer document with SEBI/ROCs.
Book Building
Book Building means a process undertaken, by which a demand for the securities proposed to be issued
by a corporate body is elicited and built-up and the price for the securities is assessed on the basis of the
bids obtained for the quantum of securities offered for subscription by the issuer. This method provides
an opportunity to the market to discover the price for securities. In a book built issue allocation, Retail
Individual Investors (RIIs), Non-Institutional Investors (Nils) and QIBs are in the ratio of 35:15:50
respectively. In case the book built issues are made pursuant to the requirement of mandatory allocation
of 60 per cent to QIBs in terms of Rule 19(2)(b) of SCRR, the respective figures are 30 per cent for RIIs
and 10 per cent for Nils. Retail Individual Investor means an investor who apples or bids for securities of
or for a value not more than Rs. 1, 00,000.
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INTERMEDIARIES IN AN ISSUE IN THE PRIMARY MARKET
1. MERCHANT BANKERS
Merchant bankers play an important role in issue management process. Merchant bankers to the issue or
Book Running Lead Managers (BRLM), syndicate members, registrars to the issue, bankers to the issue,
auditors of the company, underwriters to the issue, solicitors, etc. are the intermediaries to an issue in the
primary market.
2. BOOK RUNNING LEAD MANAGERS (BRLM)

The book runner is the main underwriter or lead manager in the issuance of new equity, debt or securities
instruments, and in investment banking, the book runner is the underwriting firm that runs, or who is in
charge of, the books. A merchant banker possessing a valid SEBI registration in accordance with the
SEBI regulations, 1992 is eligible to act as a BRLM to an issue.
3. SAFETY NET
Any safety net scheme or buy-back arrangements of the shares proposed in any public issue shall be
finalized by an issuer company with the lead merchant banker in advance and disclosed in the
prospectus. Such a buy-back or safety net arrangement shall be made available only to original resident
individual allottee limited to a maximum of 1000 share per allottee and the offer is kept open for a period
of six months from the last date of dispatch of securities.
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4. CUT- OFF PRICE

In Book building issue, the issuer is required to indicate either the price band or a floor price in the red
herring prospectus. The actual discovered issue price can be any price in the price band or any price
above the floor price. This issue price is called "Cut off price". This is decided by the issuer and LM after
considering the book and investors' appetite for the stock. SEBI (DIP) guidelines permit only retail
individual investors to have an option of applying at cut off price.
APPLICATIONS SUPPORTED BY BLOCKED AMOUNT (ASBA)

ASBA is a process developed by the India's Stock Market Regulator SEBI for applying to Initial Public
Offers (IPO). 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, or the issue is withdrawn/failed.
ASBA process facilitates retail individual investors bidding at a cut-off, with a single option, to apply
through Self Certified Syndicate Banks (SCSBs), in which the investors have bank accounts. SCSBs are
those banks which satisfy the conditions laid by SEBI. Investor submits the ASBA form after filling the
details like name of the applicant, PAN number; demat account number, bid quantity, bid price and other
relevant details to their banking branch by giving an instruction to block the amount in their account. In
turn, the bank will upload the details of the application in the bidding platform.
ASBA is stipulated by SEBI and available from most of the banks operating in India. In public issues from
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1st May, 2010 all the investors could apply through ASBA. All shareholders of the company as on record
date are permitted to use ASBA for making applications in rights issue provided him /her /it:
Is holding shares in dematerialized form and has applied for entitlements or additional shares in the
issue in dematerialized form;
Has not renounced its entitlements in full or in part;
Is not a renounce to the Issue
Applies through a bank account maintained with SCSBs
ADVANTAGES OF APPLYING THROUGH ASBA

Applying through ASBA process has the following advantages:
1. The investor need not pay the application money by cheque rather the investor submits ASBA
which accompanies an authorization to block the bank account to the extent of the application
money.
2. The investor does not have to bother about refunds, as in ASBA only that much money which is
required for allotment of securities, is taken from the bank account only when his application is
selected for allotment after the basis of allotment is finalized.
3. The investor continues to earn interest on the application money as the same remains in the bank
account.
4. The application form is simpler.
5. The investor deals with the known intermediary i.e. its own bank.
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QUALIFIED INSTITUTIONAL PLACEMENT QIP

Qualified institutional placement (QIP) is a capital-raising tool, primarily used in India and other parts of
southern Asia, whereby a listed company can issue equity shares, fully and partly convertible
debentures, or any securities other than warrants which are convertible to equity shares to a qualified
institutional buyer (QIB).
Apart from preferential allotment, this is the only other speedy method of private placement whereby a
listed company can issue shares or convertible securities to a select group of persons. QIP scores over
other methods because the issuing firm does not have to undergo elaborate procedural requirements to
raise this capital.
SEBI introduced the QIP method of raising money in 2006 at a time when Indian companies were looking
at investments help to make Indian markets more competitive and efficient. They have been around since
about 2006; before that, Indian companies often tapped foreign markets via American depository receipts
(ADRs) for capital. QIPs help Indian companies raise capital in India and associated with raising capital in
the domestic markets had led many companies to look at tapping overseas market via foreign currency
convertible bonds(FCCB) and global depository receipts (GDR). This has also helped issuing companies
price their issues closer to the prevailing market price. The specified securities can be issued only to
QIBs, who shall not be promoters or related to promoters of the issuer. The issue is managed by a SEBI-
registered merchant banker. There is no pre-issue filing of the placement document with SEBI.
SECURITIES AND EXCHANGE BOARD OF INDIA (SEBI)

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The Securities and Exchange Board of India (SEBI) is the regulator for the securities market in India. It
was established in the year 1988 and given statutory powers on 30 January 1992 through the SEBI Act
1992. It became an autonomous body by The Government of India on 12 April 1992 and given statutory
powers in 1992 with SEBI Act 1992 being passed by the Indian Parliament.
1. FUNCTIONS OF BOARD
We can classify the functions of SEBI in three categories:-
1. Protective functions
2. Developmental functions
3. Regulatory functions.
2. PROTECTIVE FUNCTIONS
As the name suggests, the main focus of this function of SEBI is to protect the interest of investor and
security of their investment. As protective functions SEBI performs following functions:
i. SEBI checks Price Rigging

Price Rigging means some people manipulate the prices of securities for inflation or depressing
the market price of securities. SEBI prohibits such practice to avoid fraud and cheating which
can happen to any investor.
ii. SEBI prohibits Insider trading
Any person who is connected with company such as directors, promoters, workers etc are
22
called Insider. Due to working in the company they have sensitive information which affects the
prices of the securities. Such information is not available to people at large but Insider get this
key full knowledge by working in such company. Insider can use this information for their
personal benefits or make profit from it, such process is known as Insider Trading.
For Example - Managers or Directors of a company may know that company will issue Bonus shares to
its shareholders at particular time and they purchase shares from market to make profit with bonus issue.
iii. SEBI always restricts these types of practices when Insider are buying securities of the
company and take strict action to avoid this in future.
iv. SEBI prohibits fraudulent and Unfair Trade Practices
SEBI always restricts the companies which make misleading statements which are likely to
induce the sale or purchase of securities by any other person.
v. SEBI sometimes educate the investors so that become able to evaluate the securities and
always invest in profitable securities.
vi. SEBI issues guidelines to protect the interest of debenture holders.
vii. SEBI is empowered to investigate cases of insider trading and has provision for stiff fine and
imprisonment.
viii. SEBI has stopped the practice of allotment of preferential shares unrelated to market prices.
ix. SEBI has stopped the practice of making preferential allotment of shares unrelated to market
prices.
23 3. DEVELOPMENTAL FUNCTIONS
Under developmental categories following functions are performed by SEBI:
I. SEBI promotes training of intermediaries of the securities market.

II. SEBI tries to promote activities of stock exchange by adopting flexible and adoptable approach in
following way:
SEBI has permitted internet trading through registered stock brokers.
SEBI has made underwriting optional to reduce the cost of issue.
Even initial public offer of primary market is permitted through stock exchange.
4. REGULATORY FUNCTIONS
These functions are performed by SEBI to regulate the business in stock exchange. To regulate the
activities of stock exchange following functions are performed:
I. SEBI has framed rules and regulations and a code of conduct to regulate the intermediaries such
as merchant bankers, brokers, underwriters, etc.
II. These intermediaries have been brought under the regulatory purview and private placement has
been made more restrictive.
III. SEBI registers and regulates the working of stock brokers, sub-brokers, share transfer agents,
trustees, merchant bankers and all those who are associated with stock exchange in any manner.
IV. SEBI registers and regulates the working of mutual funds etc.
V. SEBI regulates takeover of the companies
24 VI. SEBI conducts inquiries and audit of stock exchanges.
VII.
OTHER FUNCTIONS
I. Registering and regulating working of stock brokers, sub - brokers, share transfer agents, bankers
to issue, trustees of trust deed, registrars to an issue, merchant bankers, underwriters, portfolio
managers, investment adviser and such other intermediaries who may be associated with
securities markets in any manner.
II. SEBI also performs the function of registering and regulating working of depositories, custodians of
securities. Foreign Institutional Investors, credit rating agencies etc.
III. Registering and regulating working of Venture Capital Funds and collective investments schemes
including mutual funds.
IV. Promoting and regulating self - regulatory organizations.
V. Calling for information form, undertaking inspection, conducting inquiries and audits of stock
exchange, mutual funds and intermediaries and self - regulatory organizations in the securities
market.
VI. Calling for information and record from any bank or any other authority or boars or corporation
established or constituted by or under any Central, State or Provincial Act in respect of any
transaction in securities which are under investigation or inquiry by the Board.
VII. Conduct research for any matter described if any.
VIII. Calling information from any agency, institution, banks etc.
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CEASE AND DESIST PROCEEDINGS
If the SEBI finds, after causing an inquiry to be made, that any person has violated, or is likely to violate,
any provisions of this Act, or any rules or regulations made there under, it may pass an order requiring
such person to cease and desist from committing or causing such violation.
REGISTRATION CERTIFICATE
Registration of stock brokers, sub-brokers, share transfer agents, etc.
1. No stock-broker, sub- broker, share transfer agent, banker to an issue, trustee of trust deed,
registrar to an issue, merchant banker, underwriter, portfolio manager, investment adviser and such
other intermediary who may be associated with securities market shall buy, sell or deal in securities
except under, and in accordance with, the conditions of a certificate of registration obtained from
the Board in accordance with the [regulations] made under this Act:
2. No depository [participant,] custodian of securities, foreign institutional investor, credit rating agency
or any other intermediary associated with the securities market as the Board may by notification in
this behalf specify, shall buy or sell or deal in securities except under and in accordance with the
conditions of a certificate of registration obtained from the Board in accordance with the regulations
made under this Act.
3. No person shall sponsor or cause to be sponsored or carry on or cause to be carried on any
venture capital funds or collective investment schemes including mutual funds, unless he obtains a
26 certificate of registration from the Board in accordance with the regulations:
4. Every application for registration shall be in such manner and on payment of such fees as may be
determined by regulations.
5. The Board may, by order, suspend or cancel a certificate of registration in such manner as may be
determined by regulations.
Provided that no order under this sub-section shall be made, unless the person concerned has been
given a reasonable opportunity of being heard.
QUALIFIED INSTITUTIONAL BUYERS

Qualified Institutional Buyers are those institutional investors who are generally perceived to possess
expertise and the financial muscle to evaluate and invest in the capital markets. In terms of clause 2.2.2B
(v) of DIP Guidelines, a 'Qualified Institutional Buyer' shall mean:
a. Public financial institution as defined in section 4A of the Companies Act, 1956;
b. Scheduled commercial banks;
c. Mutual funds;
d. Foreign institutional investor registered with SEBI;
e. Multilateral and bilateral development financial institutions;
f. Venture capital funds registered with SEBI.
g. Foreign Venture capital investors registered with SEBI.
h. State Industrial Development Corporations.
i. Insurance Companies registered with the Insurance Regulatory and Development Authority (IRDA).
27
j. Provident Funds with minimum corpus of Rs.25 crores
k. Pension Funds with minimum corpus of Rs. 25 crores)
These entities are not required to be registered with SEBI as QIBs. Any entities falling under the
categories specified above are considered as QIBs for the purpose of participating in primary issuance
process.
28

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INDIAN FIANCIAL

PRINCIPLE & PRACTICES OF BANKING-JAIIB

Success in capital accumulation and

ROLE & FUNCTIONS OF

CAPITAL MAKETS &

STOCK EXCHANGE IN INDIA

DEMUTUALIZATION OF STOCK EXCHANGES

FINANCIAL PRODUCTS/ INSTRUMENTS DEALT WITH IN THE SECONDARY MARKET

1. EQUITY Equity Shares

The ownership interest in a company of holders of its common Right Issues/Rights

Financial Product in secondary

Zero Coupon Bond

b. RIGHT ISSUES/RIGHTS SHARES

d. PREFERRED STOCK/PREFERENCE SHARES

e. CUMULATIVE PREFERENCE SHARES

f. CUMULATIVE CONVERTIBLE PREFERENCE SHARES

g. PARTICIPATING PREFERENCE SHARES

3. GOVERNMENT SECURITIES (G-SECS)

a. ZERO COUPON BOND

REGULATORY REQUIREMENTS SPECIFIED BY SEBI FOR CORPORATE DEBT

COMMONLY USED TERMS IN THE CAPITAL MARKET

2. PAY IN/PAY OUT

4. SECURITIES LENDING SCHEME

TYPES OF CAPITAL ISSUES IN THE PRIMARY MARKET

A. Initial public offer (IPO)

B. Follow-on public offer (FPO)

4. QUALIFIED INSTITUTIONAL PLACEMENT (QIP)

ELIGIBILITY NORMS FOR MAKING CAPITAL ISSUES

Red Herring Prospectus (RHP)

Pricing Of the Issue

INTERMEDIARIES IN AN ISSUE IN THE PRIMARY MARKET

2. BOOK RUNNING LEAD MANAGERS (BRLM)

4. CUT- OFF PRICE

APPLICATIONS SUPPORTED BY BLOCKED AMOUNT (ASBA)

ADVANTAGES OF APPLYING THROUGH ASBA

QUALIFIED INSTITUTIONAL PLACEMENT QIP

SECURITIES AND EXCHANGE BOARD OF INDIA (SEBI)

i. SEBI checks Price Rigging

I. SEBI promotes training of intermediaries of the securities market.

QUALIFIED INSTITUTIONAL BUYERS

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