The Securities and Exchange Board of India (SEBI)

Understanding The Financial markets.

Can broadly be classified into:
I. Money Market:
This market encompasses the trading and issuance of short term (usually less than one year) non equity debt instruments for example the market for 90-days treasury bills. II. Capital Market:

This is a market for long-term debt and equity shares.

2

Capital market can be further divided into:

Primary Market :

Securities are initially offered to the public for subscription for the purpose of raising capital or fund. Secondary Market :
It is an equity trading avenue in which already existing/pre- issued securities are traded amongst investors. It could either be a Stock Exchange (Auction Market) or Over-The- Counter (Dealer Market).
3

The following are the financial products/instruments which the secondary market deals with:
Equity Shares

Rights Issue/ Rights Shares

Bonus Shares Preferred Stock/ Preference shares

Cumulative Preference Shares

Cumulative Convertible Preference Shares Participating Preference Share Bond Zero Coupon Bond Convertible Bond Debentures
4

SEBI and its Role in the Secondary Market

Established in the year 1988 by the Government of India through an executive resolution to monitor capital market activities & to promote healthy development of the market.

Upgraded as a fully autonomous body (a statutory Board) in the year 1992 with the passing of the SEBI Act on 30th January 1992. An outcome of the Securities Scam of 1990-91.
5

Harshad Mehta Scam

An Indian stockbroker alleged to have engineered the crash in the BSE stock exchange in the year 1992. Exploited several loopholes in the banking system, siphoned of funds from inter-bank transactions (in particular the inter-bank market in government securities) for financing operations in the stock market and bought shares heavily at a premium across many segments, a rise in the Sensex. In April 1992, press reports indicated that there was a shortfall in the Government Securities held by the State Bank of India. In almost a month, investigations uncovered the scam, involving misappropriation of funds to the tune of over Rs. 3500 crores. The scam engulfed top executives of large nationalized banks, foreign banks and financial institutions, brokers, bureaucrats and politicians. . Created a panic among investors and brokers led to a prolonged closure of the stock exchanges along with a precipitous drop in the price of shares.
6

ADMINISTRATION: (6 Members)
a) A Chairman
b) Two members from among the officials of the Ministries of the Central Government (CG) dealing with Finance and Law. c) One member from among the officials of the RBI d) Two other members.

a)& d) shall be appointed by the Central Government

b)& c) shall be nominated by Central Government & RBI respectively.
7

Objectives of the Board:

to protect the interests of investors in securities;

to promote the development of Securities Market; to regulate the securities market and for matters connected therewith or incidental thereto.

Powers & Functions:

1. 2. Regulating business conducted in stock exchange & any other security market. Registering & regulating working of stock brokers, bankers to an issue, trustee of trust deeds, merchant bankers, underwriters, portfolio managers, investment advisors & other intermediaries who may be associated with securities markets. Registering & regulating working of collective investment schemes including mutual funds Prohibiting fraudulent & unfair trade practices in securities markets.

3. 4.

Cont:5. 6. 7. 8. Promoting investors education & training of intermediaries in securities market. Prohibiting insider trading in securities. Regulating substantial acquisition of schemes & take over of companies. Obtaining information from, undertaking inspection & audit of stock exchanges & their intermediaries. Performing & exercising such powers under the provision of the Capital issues (Control) Act. 1947, & the Securities contracts. (Regulation ) Act. 1956, as may be delegated to it by Central govt.
10

9.

Cont:11. Levying fees or other charges for carrying out the functions of Section11 of the Act. 12. Conducting research for the above purposes. 13. Performing such other functions as may be prescribed by the government.

11

SEBIS GUIDELINES FOR DISCLOSURE AND INVESTOR PROTECTION

Grouped the companies coming with public issue under three categories: I. II. First issue of New Companies First issue of Existing Private/Closely held Companies

III. Public Issue by Existing Listed Companies

12

I. First Issue Of New Companies

1. New company, is one which has not completed 12 months of commercial operations, audited operative results are not available or no track record-permitted to issue capital at par.
New company set up by existing company with 5 years track record of consistent profits free to price its issue provided the promoting companys contribution is not less than 50% of the equity of a new company & issue price is uniform to all new investors including promoters. Prospectus shall contain justification for issue. Draft of prospectus is to be submitted to SEBI. Shares can be listed on Stock Exchange.
13

2.

3. 4. 5.

II. First issue of Existing Private/Closely held Companies

1. Such companies with a 3 year track record of consistent profitably shall be permitted to freely price the issue. Not less than 20% of the equity should be offered to the public. The draft prospectus shall be vetted by SEBI, Disclosure of last audited balance sheet.

2. 3. 4.

5.

Justification for price issued.

14

III. Public Issue by Existing Listed Co.

1. These companies are permitted to raise fresh capital by freely pricing their further issues.

2.
3.

The issue price will be determined by the issuer in consultation with the lead mangers to the issue.
Disclosure of prospectus to SEBI, which shall contain the net asset value of the company and a justification for the price of the issue. High & Low price of shares for the last 2 years. Promoters contribution shall be 20% or 25% as the case may be with a minimum of 1 lakh from each of the relatives, friends and associates.
15

4. 5.

Underwriting
1. 2. Underwriting agreements may be filled with the stock exchange. To reduce the cost of the issue, underwriting of issues has been made optional.

3.

Subject to the condition that if an issue is not underwritten, and is not able to collect 90% of the amount offered to the public,the entire amount collected would be refunded to the investors.

16

Guidelines for Issue Of Debentures:

Debenture is a written instrument acknowledging a debt as regards to the repayment of principal and the payment of interest at a fixed rate. Where fully convertible debentures (FCDs) are to be issued, the interest rate can be freely determined by the issuer. Companies are required to create a Debenture Redemption Reserve (DRR) equivalent to 50% of the amount of debenture issue before debenture redemption commences.

17

Promoters contribution
1. Lock in period-25% of total issue of equity capital up to Rs.100 crore & 20% above Rs.100 crore.

2.
3.

Not less than Rs. 1 lakh per person.

Lock in for 5 years from commencement of production.

4.
5.

Not transferable for 3 to 5 years.

Not transferable should be written on shares.

18

Guidelines on Bonus Shares

1. 2. 3. 4. 5. Issued to the existing shareholders on prorata basis without receiving any cash from them. No public issue should be made within 12 months of any public/rights issue. The bonus issue shall be made out of free reserves built out of genuine profits or share premium collected in cash only. Reserves created by revaluation of fixed assets should not be capitalized for the purpose of bonus issue. No bonus issue shall be made which will dilute the value or the right of the holders of debentures, convertibly full or partially.

19

Guidelines on Rights Issues

Rights shares are those shares which are offered to the existing shareholders by virtue of their legal rights, in proportion, as nearly as circumstances admit, to the capital paid up on those shares. Shall be made applicable to existing listed co.

Shall not apply to Rights issue of private companies/closely held or other unlisted co.
Letter of offer for Rights issue containing disclosure shall be vetted by SEBI. The quantum of issue shall not exceed the amount specified in the prospectus.

20

Amendment of SEBI Act 25 January,1995

1. To arm SEBI with additional powers for ensuring the orderly development of the capital market.
2. To enhance its ability to protect the interest of investors. 3. To enable SEBI to respond speedily to market conditions & to reinforce its autonomy. 4. To empower SEBI to file complaints in the courts without the prior approval of central govt. 5. To notify its regulations without the prior approval of the Central govt.
21

22