Learning Objectives

Stock

Exchanges in India National Stock Exchange Stock Holding Corporation of India Book Building Introduction to Derivatives Scrip less Trading E-Trading-Index Share Lending Scheme Buy back of shares

 Secondary

market refers to a market where securities are traded after being initially offered to the public in the primary market and/or listed on the Stock Exchange. Majority of the trading is done in the secondary market. Secondary market comprises of equity markets and the debt markets.

 In

the primary market, securities are offered to public for subscription for the purpose of raising capital or fund. Secondary market is an equity trading avenue in which already existing/pre- issued securities are traded amongst investors. Secondary market could be either auction or dealer market. While stock exchange is the part of an auction market, Over-the-Counter (OTC) is a part of the dealer market.

 In

the fast growing Indian financial market, there are 23 stock exchanges trading securities. The National Stock Exchange of India (NSE) situated in Delhi - is the largest and most advanced exchange with 1016 companies listed and 726 trading members

 NSE

was promoted by IDBI,ICICI,IFCI,GIC,LIC,SBI,SHCILas a joint stock company under companys act on Nov 27 1992. Government of India has appointed IDBI as a lead promoter. To form the infrastructure of NSE,IDBI had appointed a Hongkong bound consulting firm i.e. International Securities Consulting Limited for helping in setting of the NSE. The main objective of NSE is to ensure comprehensive nationwide securities trading facilities to investors through automated screen based trading and automatic post trade clearing and settlement facilities..

 NSE

is promoted by financial institutions,mutual funds NSE is a company incorporated under companys act 1956,it is constituted by board of directors and managed by it.50% of managing board of the NSE should comprise of professionals from cross section of finance and industry. NSE gets full support from National Clearing and Settlement divisions, SHCIL.It is using modern computer technology for the clearance and settlement procedures.

 NSE

provides nationwide computerized debt and stock trading facility to investors.NSE operates in two segments i.e the debt market and capital market ,in the debt segment there are transactions in securities such as Government securities,Treasury bills,PSU bonds,commercial papers,certificates of bond(CD). Capital market segment covers trading in equities.

 The

NSE is owned by the group of leading financial institutions such as Indian Bank or Life Insurance Corporation of India. However, in the totally de-mutualised Exchange, the ownership as well as the management does not have a right to trade on the Exchange. Only qualified traders can be involved in the securities trading

 The

NSE is one of the few exchanges in the world trading all types of securities on a single platform, which is divided into three segments: Wholesale Debt Market (WDM), Capital Market (CM), and Futures & Options (F&O) Market. Each segment has experienced a significant growth throughout a few years of their launch. The National Stock Exchange of India has stringent requirements and criteria for the companies listed on the Exchange. Minimum capital requirements, project appraisal, and company's track record are just a few of the criteria. In addition, listed companies pay variable listing fees based on their corporate capital size

 The

National Stock Exchange of India Ltd. provides its clients with a single, fully electronic trading platform .Unlike most world exchanges, the NSE uses the satellite communication system that connects traders from 345 Indian cities. The advanced technologies enable up to 6 million trades to be operated daily on the NSE trading platform.

 Book

Building is essentially a process used by companies raising capital through Public Offerings-both Initial Public Offers (IPOs) or Follow-on Public Offers ( FPOs) to aid price and demand discovery. It is a mechanism where, during the period for which the book for the offer is open, the bids are collected from investors at various prices, which are within the price band specified by the issuer.

 The

process is directed towards both the institutional as well as the retail investors. The issue price is determined after the bid closure based on the demand generated in the process. The process by which an underwriter attempts to determine at what price to offer an IPO based on demand from institutional investors.

 Book-building is

a process of price discovery used in public offers. The issuer sets a base price and a band within which the investor is allowed to bid for shares. The investor had to bid for a quantity of shares he wished to subscribe to within this band. Every public offer through the book-building process has a book running lead manager (BRLM), a merchant banker, who manages the issue.

 Further,

an order book, in which the investors can state the quantity of the stock they are willing to buy, at a price within the band, is built. Thus the term 'book-building. Once the issue period is over and the book has been built, the BRLM along with the issuer arrives at a cut-off price. The cut-off price is the price discovered by the market. It is the price at which the shares are issued to the investors.

 Book

building refers to the collection of bids from investors ,which is based on an indicative price range and the quantum of securities to be purchased from the issuer. The principal parties involved in a book building process are as follows. The company A book running lead manager who is generally a merchant banker, who has to be registered with SEBI. Syndicate members who actually bid for the securities

 Book

building process involves following steps. Preparation of prospectus-A draft prospectus is prepared and filed with SEBI ,this prospectus contains all the information required by companies act. It contains the name of the book runner and the price band within which the securities are offered for subscription. Formation of Syndicate-The book runner circulates the prospectus to invite syndicate members ,these syndicate members then send the draft prospectus to their clients and obtain orders from them for securities.

of orders-The syndicate members maintain a record of orders received by them from their clients.They aggregate the orders received by them and intimate same to the book runner. Consolidation-A record of i)number of securities ii)price of the security iii) name of the eligible buyer(syndicate member) is documented by the book runner. Closure of order book-The book runner closes the order book in consultation with the issuer company. The number of securities to be issued is also determined jointly by book runner and issuing company.
Record

of price-The company organises road shows,places advertisements to determine the issue price.The book runner notes the offers by eligible members then in consultation with issuing company the ultimate price of the security is determined. Agreement-The issuer company enters into a agreement with syndicate members indicating the number of securities to be subscribed by them at the price determined by the company. Filing of prospectus-The company files the final prospectus with the registrar of the company along with the agreement.
Determination

of applications-The application forms and application money for the securities proposed to be allotted to the syndicate members as subscribed by them are collected by the book runner. Maintenance of records-A records of book building are maintained by the book runner and other intermediaries involved in the process. Such records may be inspected by SEBI.
Collection

 Stock

Holding Corporation of India Ltd. (SHCIL) is a company incorporated under the companies act with an authorized capital of Rs 25 crores and paid up capital of Rs 10.5 crores subscribed by seven ALL India Financial Institutions namely IDBI Bank Ltd., ICICI Bank Ltd.,UTI, IFCI Ltd., GIC, IRBI, UIC. SHCLs operations are computer aided and have offices at New Delhi,Kolakata and Chennai with headquarters at Mumbai.

 The

prime aim of it is to simplify and expedite the transactions eliminating most of the paper work and thus simplifying the job on the lines of Depository Trust Company(DTC) of USA or Canadian Depository for Securities Limited(CDT) who holds stock on behalf of investors in its name. Main objectives of SHCIL are To make easy for an investor to buy or sell securities. To keep active share and debenture certificates in safe custody. To computerize trading among active investors of institutions and mutual funds.

 To

create regional SHCIL as volume grows. To credit dividend and other payment directly to investors through central collection. To act as custodian for shares.
SHCIL

gives services like Clearing and settlement of issues Registration and transfer processing As NSE can not go to the length and breadth of the country,SHCIL helps in reaching to the each corner of the country

 The

transfer of shares would be fast and simple. The liquidity of shares and debentures would increase as certificates would no longer get locked up with companies. Direct transfer of dividends and interest payment into the accounts of investors result in faster realization of money facilitate in issue of single tax deduction statement for income from different companies. With paperless trading ,the investor find it easier to maintain multicompany portfolio.

 Buyback is

reverse of issue of shares by a company where it offers to take back its shares owned by the investors at a specified price; this offer can be binding or optional to the investors.

Cash: If they have huge cash reserves with not many new profitable projects to invest in and if the company thinks the market price of its share is undervalued then it can think of buying back shares E.g. Bajaj Auto went on a massive buy back in 2000 . However, companies in emerging markets like India have growth opportunities. Therefore applying this argument to these companies is not logical.
Unused

 This

argument is valid for MNCs, which already have adequate R&D budget and presence across markets. Since their incremental growth potential limited, they can buyback shares as a reward for their shareholders.

Tax

Gains Since dividends are taxed at higher rate than capital gains, companies prefer buyback to reward their investors instead of distributing cash dividends, as capital gains tax is generally lower.

perception By buying their shares at a price higher than prevailing market price company signals that its share valuation should be higher. Expecting further fall many companies like Citigroup, IBM have come out with buyback offers worth billions of dollars at prices higher than the prevailing rates thus stemming the fall. Recently the prices of RIL and REL have not fallen, as expected, despite the spat between the promoters. This is mainly attributed to the buyback offer made at higher prices
Market

option If a company wants to exit a particular country or wants to close the company. Escape monitoring of accounts and legal controls If a company wants to avoid the regulations of the market regulator by delisting. They avoid any public scrutiny of its books of accounts.
Exit

 Show

rosier financials Companies try to use buyback method to show better financial ratios. For eg. When a company uses its cash to buy stock, it reduces outstanding shares and also the assets on the balance sheet (because cash is an asset). Thus, return on assets (ROA) actually increases with reduction in assets, and return on equity (ROE) increases as there is less outstanding equity.

 If

the company earnings are identical before and after the buyback ,earnings per share (EPS) and the P/E ratio would look better even though earnings did not improve. Since investors carefully scrutinize only EPS and P/E figures, an improvement could jumpstart the stock. For this strategy to work in the long term, the stock should truly be undervalued

 Some

of the features in government regulation for buyback of shares are: 1. A special resolution has to be passed in general meeting of the shareholders 2. Buyback should not exceed 25% of the total paid-up capital and free reserves 3. A declaration of solvency has to be filed with SEBI and Registrar Of Companies

 The

ratio of debt owned by the company should not be more than twice the capital and its free reserves after such buy back. Every buy back shall be completed within 12 months from the date of passing the resolution. After obtaining approval of the shareholders, the company is required to file a draft letter of offer with the registrar of companies. When company buy back its shares ,it shall physically destroy the securities so bought back within 7 days of the last date of completion of buy back.

 When

a company completes buy back of its shares ,it will not issue same kind of shares within a period of six months. The company shall submit the particulars about the buy back to the SEBI within 30 days of completion of buy back of shares.

 Maximum

price at which shares shall be bought back shall be determined by shareholders through special resolution.A copy of this resolution should be filed with SEBI as well as stock exchange where the company is listed,within 7 days and 2 days from the date of passing the resolution. The buy back offer shall remain open for not less than 15 days and not more than 30 days.

 Company

shall ensure that it should not mislead the information through public announcement or any circular or brochure. The company has to pay the consideration in the form of cash only. The company can not withdraw the offer of buy back after the draft letter of offer is filed with SEBI No buy back should be performed during the period of amalgamation.

 The

company shall within 2 days of the completion of buy back ,issue a public advertisement in a national daily disclosing.. Number of shares bought Price at which they bought Total amount invested in buy back. Consequent changes in the capital structure after buy back.

 Some

companies who have less paid up capital can not get listed on stock exchanges so they do not get opportunity to raise funds from the public For such companies over the counter exchange was set up to deal with investors and small and medium sized companies. OTCE was promoted by ICICI,LIC,GIC,SBI,Canara bank.

 It

is registered with a authorized capital of 8 crores. Equity shares, preference shares, debentures all these securities are traded in OTCE. Nationwide Listing-OTC network is spread all over India through dealers and members. By listing on any one of the stock exchange ,the company gets nationwide exposure and investors all over India can start trading.

trading, sometimes called etrading, is a method of trading securities (such as stocks, and bonds), foreign currency, and exchange traded derivatives electronically. It uses information technology to bring together buyers and sellers through electronic media to create a virtual market place. Exchanges that facilitate electronic trading in the India are regulated by either the Securities and Exchange Board of India or the, and are generally called electronic communications networks or ECNs.
Electronic

 Reduced

cost of transactions - By automating as much of the process as possible, costs are brought down. The goal is to reduce the incremental cost of trades as close to zero as possible, so that increased trading volumes don't lead to significantly increased costs. This has translated to lower costs for investors.

liquidity - electronic systems make it easier to allow different parties to trade with one another, no matter where they are located. This leads to greater liquidity (i.e. there are more buyers and sellers) which increases the efficiency of the markets Greater competition - While etrading hasn't necessarily lowered the cost of entry to the financial services industry, it has removed barriers within the industry and had a globalization-style competition effect.
Greater

 Increased

transparency E-trading has meant that the markets are less opaque. It's easier to find out the price of securities when that information is flowing around the world electronically.

 Securities

Lending and Borrowing is a scheme which enables lending of idle securities by the investors to the clearing corporation and earning a return through the same. For securities borrowing and lending system, clearing corporations of the stock exchange would be the nodal agency and be registered as the Approved Intermediaries. The clearing corporation can borrow, on behalf of the members, securities for the purpose of meeting shortfalls.

 The

defaulter selling broker may make the delivery within the period specified by the clearing corporation. In the event of the defaulted selling broker failing to make the delivery within the specified period, the clearing corporation has to buy the securities from the open market and return the same to the lender within seven trading days. In case of an inability to purchase the securities from the market, the transaction shall be closed out.

 Security

lending scheme came into force on 6th Feb 1997

is a product whose value is derived from the value of one or more basic variables, called bases (underlying asset, index, or reference rate), in a contractual manner. The underlying asset can be equity, commodity or any other asset. For example, wheat farmers may wish to sell their harvest at a future date to eliminate the risk of a change in prices by that date. Such a transaction is an example of a derivative. The price of this derivative is driven by the spot price of wheat which is the "underlying".
Derivative

A forward contract is a customized contract between two entities, where an agreement made today between a buyer and seller to exchange the commodity or instrument for cash at a predetermined future date at a price agreed upon today. The agreed upon price is called forward price and transfer of ownership occurs on the spot but delivery of commodity does not occur until some future date. No money changes hands at the time the deal is signed.e.g a wheat farmer may wish to sell its harvest
Forwards:

At a future date to eliminate the risk of change in prices by that date, such transaction should take place through forward contract.
Futures:

A futures contract is an agreement between two parties to buy or sell an asset at a certain time in the future at a certain price agreed upon today. Futures contracts are special types of forward contracts in the sense that the future contracts are standardized exchange-traded contracts

 Options:

Options are of two types - calls and puts. Calls give the buyer the right but not the obligation to buy a given quantity of the underlying asset, at a given price on or before a given future date. Puts give the buyer the right, but not the obligation to sell a given quantity of the underlying asset at a given price on or before a given date.

 Take

a real life example. Imagine you want to purchase this piece of jewellery for Rs50,000 but you do not have the cash upfront. However, 6 months later, you will have enough cash to afford the jewellery. So you make a deal with the owner, giving you the option of purchasing this piece of jewellery for Rs50,000 in exactly 6 months from now. However, to give you the right or this "Option", the owner charges you Rs2500. From here, you stand to either gain from the transaction or lose from it.

A call gives the holder the right to acquire or buy an asset at a certain price within a specified period of time. Holders of Calls hope that their asset goes up in value substantially for them to make big profits. Put: A put gives the holder the right to dispose of or sell an asset at a certain price within a specified period of time. Holders of Puts hope that value of the asset goes down in value substantially for them to make big profits.
Call:

Options generally have lives of up to one year, the majority of options traded on options exchanges having a maximum maturity of nine months. Longer-dated options are called warrants. LEAPS: The acronym LEAPS means Long-Term Equity Anticipation Securities. These are options having a maturity of up to three years.
Warrants:

 Scrip

less trading is a method of securities trading in which the settlement of transactions take place via book entry instead of physical exchange and delivery of securities certificates. The transaction of securities is done through Central depository system. The major objective of introducing scrip less trading is to ensure the safety of securities certificates and to improve the liquidity position of stock markets both in primary and secondary market.

 This

concept is similar to banks where money moves from one account to another without actual changing hands.

advantages of scripless trading system are as follows Reduction in paper work of stock brokers and stock exchanges. Ensure safety of certificates from theft,fake certificates. Reduction in cumbersome share transfer procedures. Greater speed in delivery and exchange of security certificates. Investors receive dividend payments immediately.
Major