Capital market

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INTRODUCTION TO CAPITAL INTRODUCTION TO CAPITAL MARKET, MARKET,

CONCEPT & TERMINOLOGYCONCEPT & TERMINOLOGY

ByByD.K. GuptaD.K. Gupta

Head – TrainingHead – TrainingInter-connected Stock Exchange of Inter-connected Stock Exchange of

India Ltd.India Ltd.

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Inter-connected Stock Exchange of India Ltd.

(ISE) • promoted by 13 regional stock exchanges to provide

cost-effective linkage/ connectivity to their members • over 750 trading members across 131 cities in 26

states. • regional officers at Delhi, Kolkata, Coimbatore,

Nagpur• Bhubaneshwar, Patna, Guwahati, Ahemadabad &

Hyderabad• is a national level stock exchange and provides • -- provides trading, clearing & settlement• -- listing of securities• -- depository participant (DP) demat services• -- training & research• -- investor’s grievances and redressal

Importance of Financial Markets

• Secor-wise share in GDP• Agriculture 17.2%• Industry 26.4%• Services 56.4%

• Financial markets are grouped in Services.

Financial Markets

• Financial markets comprises of

• Money Market (short term Market of less than one year)

• Capital Market (long term market of more than one year)

Why capital market are long term

• Because business houses raises their resources for a long term perspective (infinitive)

• They can raise their resources either by raising own sources (equity) or by borrowing or by both.

• Proprietary - partnership -company

Capital Market

• Reliance Industries Ltd. were pioneers for development of retail investors in stock market.

• Capital appreciation from 10,000 to over 400 crores – Guess the company.

Growth in number of shares• 1981 Bonus 1:1 200 shares

• 1985 Bonus 1:1 400 shares• 1986 Share split to Rs.10 4000 shares• 1987 Bonus 1:1 8000 shares• 1989 Bonus 1:1 16000 shares• 1992 Bonus 1:1 32000 shares• 1995 Bonus 1:1 64000 shares• 1997 Bonus 1:2 192000 shares• 1999 Share split to Rs.2 960000 shares• 2004 Bonus 1:2 2880000 shares• 2005 Bonus 1:1 5760000 shares• 2010 Bonus 2:3 9600000 shares

Capital appreciation

• Company’s performance, good profits earnings, dividend declaration, bonus, rights, stock splits, buy-back.

• Investors are willing to pay more for good companies shares.

• Other reasons for price rise or decline are govt. policies, import export policies, foreign treaties budget proposals etc.

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STOCK MARKET STOCK MARKET WHY SHOULD WE WHY SHOULD WE

HAVE ?HAVE ?• Stock Market facilitates transfer Stock Market facilitates transfer

of resources from savers/investors of resources from savers/investors to borrowersto borrowers

• Deregulated economy requires an efficient stock market system for capital formation

Instruments – Shares, equity, stock, preferential shares, / debentures, bonds, etc. Instruments – Shares, equity, stock, preferential shares, / debentures, bonds, etc. Instruments – Shares, equity, stock, preferential shares, / debentures, bonds, etc.

PARTICIPANTSPARTICIPANTS

• Issuers ( corporate Private / Issuers ( corporate Private / Public, Govt., )Public, Govt., )

• Investors ( individuals, you, me, Investors ( individuals, you, me, housewives, firms, companies, housewives, firms, companies, govt. etcgovt. etc

• Intermediaries ( stock exchangesIntermediaries ( stock exchanges

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How companies raise How companies raise capitalcapital

– EquityEquity• Venture Capital / Private EquityVenture Capital / Private Equity• Initial Public Issue (IPO)Initial Public Issue (IPO)• Further Public Offers / Rights IssuesFurther Public Offers / Rights Issues• Qualified Institutional Placements / Private Qualified Institutional Placements / Private

PlacementsPlacements• GDR / ADR / FCCB IssuesGDR / ADR / FCCB Issues

– DebtDebt• Financial InstitutionsFinancial Institutions• BanksBanks• External BorrowingsExternal Borrowings• Mutual FundsMutual Funds• NBFCsNBFCs• Unorganized / Private MarketsUnorganized / Private Markets

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CAPITAL MARKET CAPITAL MARKET INSTRUMENTSINSTRUMENTS

• Equity Share or ordinary SharesEquity Share or ordinary Shares• Preference Shares Preference Shares - Cumulative Preference Share- Cumulative Preference Share - Non Cumulative Preference Share- Non Cumulative Preference Share• DebenturesDebentures - Convertible debenture- Convertible debenture - Non convertible debenture- Non convertible debenture• BondsBonds - - Income bondsIncome bonds - Tax-free bonds- Tax-free bonds - Capital gains bonds- Capital gains bonds - Deep discount bonds- Deep discount bonds - Infrastructure bonds- Infrastructure bonds

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Share Share A share represents fractional A share represents fractional ownership in a company.ownership in a company.

If a company issues 1 lac shares of If a company issues 1 lac shares of Rs.10.00 each shareholder will Rs.10.00 each shareholder will represent ownership in the company represent ownership in the company in proportion of his holdings.in proportion of his holdings.

Shareholders are entitled to respective Shareholders are entitled to respective portions of the companies profit or portions of the companies profit or loss to the extent of his holdings. He loss to the extent of his holdings. He can increase or decrease his holding.can increase or decrease his holding.

Company keeps its shareholders Company keeps its shareholders informed through convening Annual informed through convening Annual General Body meeting and Annual General Body meeting and Annual reports. reports.

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Savings and Investments

• Investment

• Motives of Investment

- return on ideal resources

- to generate specified amount for a specific purpose

- provision for uncertain futures.

- inflation impact

• Time for investment

-- Invest early

-- Invest regularly

-- investment for long term and not short term

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Different options for investment

-- physical assets – real estate –house, shops, plot, land, gold, silver / commodities – Copper, oil, crude etc.

-- financial assets – fixed deposits in banks / post office deposits / insurance / provident funds / pension funds, etc.

-- Securities like shares / bonds & Debentures

Short term investments – which are for less than 1 year

-- SB accounts, Money market, short term fixed deposit

Long term investments – which are more than 1 year

-- Post Office deposits, PPF, Company Fixed Deposits,

Bonds and Mutual Funds investment, shares

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Principles of InvestmentPrinciples of Investment

• Is the investment safe ?Is the investment safe ?• Is the investment liquid ?Is the investment liquid ?• Will it yield income and if so, Will it yield income and if so,

how much will it yield ?how much will it yield ?• Will its value appreciate ?Will its value appreciate ?

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Why one should invest in Why one should invest in Shares ?Shares ?

• Profits or GrowthProfits or Growth• Minimal OutlayMinimal Outlay• LiquidityLiquidity• Decisions can be changedDecisions can be changed• Hedge against inflationHedge against inflation• SafetySafety• Wide optionsWide options• Tax advantageTax advantage• Collateral facilityCollateral facility• Ownership of a large companyOwnership of a large company• The gameThe game

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Safety – Risk involve in Safety – Risk involve in stock marketstock market

• Your expectations of income and / or growth may not materialised

• Realisation of the values of the investments of an equity holder is only in the share market. Thus the investment may not be liquid.

• Disinvestment may also result in capital losses.

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Why should we know Why should we know Capital MarketCapital Market

– Common man is dam afraid of investing Common man is dam afraid of investing in Stock Market. in Stock Market.

– While few of the middle class persons While few of the middle class persons have made money in stock market, most have made money in stock market, most of them have suffered losses in this of them have suffered losses in this market mainly because of lack of market mainly because of lack of knowledge.knowledge.

– They have burnt their fingers in 1992 They have burnt their fingers in 1992 and again in 2008.and again in 2008.

ContinueContinue• For middle class and common man, it is for For middle class and common man, it is for

long term investment say for 10 to 15 years long term investment say for 10 to 15 years horizon which are quite safe in stock markethorizon which are quite safe in stock market

• The share market index say Nifty has grown The share market index say Nifty has grown by 12% over the last 14.5 years climbing by 12% over the last 14.5 years climbing from 1000 to 5000 or so currently.from 1000 to 5000 or so currently.

• Long term inflation is about 8% during the Long term inflation is about 8% during the same period.same period.

• In fact, we are earning less than Post Tax In fact, we are earning less than Post Tax returns by investing in Banks & post offices.returns by investing in Banks & post offices.

• A majority of us thus have chosen to remain A majority of us thus have chosen to remain middle class or poor by investing where middle class or poor by investing where money grows at a lower rate.money grows at a lower rate.04/15/23 21

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ContinueContinue

• Equity Market takes care of inflation– Equity Market takes care of inflation–

• Foreign Institutional Investors (FIIs) Foreign Institutional Investors (FIIs) are investing in India their pension are investing in India their pension funds seeing the trend in stock market funds seeing the trend in stock market while Indian Pension funds do not invest while Indian Pension funds do not invest in Stock Market although they are in Stock Market although they are permitted by Government & SEBI permitted by Government & SEBI considering that they are risky.considering that they are risky.

• Not taking risk is safe but not taking Not taking risk is safe but not taking risk is also a biggest risk.risk is also a biggest risk.

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continuecontinue

• Outsiders (Foreign Investors) have made Outsiders (Foreign Investors) have made money in India. Even Govt. is making money in India. Even Govt. is making money in this market by selling PSUs money in this market by selling PSUs shares. Even Banks and Insurance shares. Even Banks and Insurance companies are making money. companies are making money.

• Then why not small investors also make Then why not small investors also make money here for which it is necessary money here for which it is necessary that he learns stock market and its that he learns stock market and its concepts.concepts.

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• Lot of money came in this market Lot of money came in this market when sensex rose from 17,000 t0 when sensex rose from 17,000 t0 21,000 and maximum money went 21,000 and maximum money went out when it hovered around 8,000. out when it hovered around 8,000. One can not become rich in this One can not become rich in this heard mentality. heard mentality.

• Similar thing happened in 1992 Similar thing happened in 1992 during Harshad Mehta’ time.during Harshad Mehta’ time.

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continuecontinue

• In the name of learning, some agencies In the name of learning, some agencies tell you about short term trading or “DAY tell you about short term trading or “DAY TRADING” where money moves fast. But TRADING” where money moves fast. But the experience says that in this type of the experience says that in this type of trade most of the investors lost their trade most of the investors lost their money and only brokers and speculators money and only brokers and speculators make money.make money.

• As such one must learn systematically in As such one must learn systematically in an out of the market. He should try to an out of the market. He should try to make wealth than money.make wealth than money.

Some GuidanceSome Guidance

• Investments in shares (stock) is high risk Investments in shares (stock) is high risk with high gain businesswith high gain business

• One should expertise in judging the One should expertise in judging the performance of companies and the marketperformance of companies and the market

• Investment differs from speculationInvestment differs from speculation• Never put all the money in one Never put all the money in one

investments investments • Keep invested for a long term to make Keep invested for a long term to make

good returns.good returns.

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STOCK EXCHANGESTOCK EXCHANGE • Centralised marketplace where Centralised marketplace where

issuers raise capital and investors issuers raise capital and investors buy and sell securitiesbuy and sell securities

• Offers Offers – Real/virtual market for buyers and sellers Real/virtual market for buyers and sellers – Getting best prevailing price for tradesGetting best prevailing price for trades– Settlement of Trades as per settlement Settlement of Trades as per settlement

cycle.cycle.– Receiving shares or money out of trade Receiving shares or money out of trade

as the case may be. as the case may be. – Protection against counter-party riskProtection against counter-party risk– Efficient dissemination of pre-trade, Efficient dissemination of pre-trade,

trading and post-trade informationtrading and post-trade information– Reasonable enforcement of rules against Reasonable enforcement of rules against

unscrupulous market activities – unscrupulous market activities – resolution of disputes.resolution of disputes.

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Functions of a Stock Functions of a Stock ExchangeExchange

• Listing of securities (equities, Listing of securities (equities, debentures, bonds, derivatives and debt)debentures, bonds, derivatives and debt)

• Providing a trading platform for listed Providing a trading platform for listed and permitted securitiesand permitted securities

• Settlement of securities, directly or Settlement of securities, directly or through Clearing Corporationthrough Clearing Corporation

• Monitoring of compliance by companies Monitoring of compliance by companies with respect to listing regulations with respect to listing regulations

• Regulation of marketRegulation of market• Redressal of investor grievances and Redressal of investor grievances and

provision of arbitration mechanismprovision of arbitration mechanism• Education and training of investorsEducation and training of investors

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GROWTH OF CAPITAL GROWTH OF CAPITAL MARKETMARKET

Capital Mobilised through Public & Right IssuesCapital Mobilised through Public & Right Issues

1999-001999-00 93 issues 93 issues Rs. 7817 crore Rs. 7817 crore

2003-042003-04 57 issues 57 issues Rs. 23,272 crore Rs. 23,272 crore

2007-082007-08 124 issues124 issues Rs. 87,029 crore Rs. 87,029 crore



2010-11 2010-11 91 issues 91 issues Rs. 67,608 crore Rs. 67,608 crore

2011-122011-12 71 issues Rs. 48,480 crore 71 issues Rs. 48,480 crore

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MARKET MARKET CAPITALISATIONCAPITALISATION

Year – endYear – endBSEBSENSENSE

March 2004March 2004 12,01,206 crore12,01,206 crore 11,20,976 crore11,20,976 crore


March 2009March 2009 30,86,075 crore30,86,075 crore 28,96194 crore28,96194 crore

March 2010March 2010 61,65,619 crore 60,09,173 crore61,65,619 crore 60,09,173 crore



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TURNOVERTURNOVERCASH SEGNENT1999-001999-00 15,25,480 Crore15,25,480 Crore2007-082007-08 51,29,895 Crore51,29,895 Crore2008-092008-09 38,52,097 Crore38,52,097 Crore2009-102009-10 55,16,832 crore55,16,832 crore2010-112010-11 46,82,437 crore46,82,437 crore

DERIVATIVESDERIVATIVES2000-012000-01 4038 Crore 4038 Crore2005-062005-06 48,24,256 Crore48,24,256 Crore2007-082007-08 1,33,32,787 Crore 1,33,32,787 Crore2008-092008-09 1,10,22,557 Crore 1,10,22,557 Crore2009-102009-10 1,76,63,899 Crore 1,76,63,899 Crore2010-112010-11 2,92,48,375 Crore 2,92,48,375 Crore

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Trend in FIIsTrend in FIIs

YearYear Net Inv. Net Inv. Net Inv. Net Inv.CummulativeCummulative Rs. CroreRs. Crore In US mn $ In US In US mn $ In US

mn $ mn $ 2004-052004-05 45,88145,881 10,17210,172 35,92635,9262005-062005-06 41,46741,467 9,332 9,332 45,26045,2602007-082007-08 66,17966,179 16,04016,040 68,00768,0072008-09 - 45,811 -11,3502008-09 - 45,811 -11,350 59,08159,0812009-10 1,42,6582009-10 1,42,658 30,252 30,252 89,33389,3332010-11 1,46,438 32,226 2010-11 1,46,438 32,226

121,559121,559

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Mutual Funds InvestmentsMutual Funds Investments

YearYear Equity Equity Debt Total Asset underDebt Total Asset under

ManagementManagement

(Rs. In Crore)(Rs. In Crore)

2004-052004-05 448 448 16,987 17,435 1,49,600 16,987 17,435 1,49,600

2005-06 14,3032005-06 14,303 36,801 51,104 36,801 51,104 2,31,8622,31,862

2007-08 16,306 73,790 61,6052007-08 16,306 73,790 61,605 3,26,2923,26,292

2008-092008-09 6,985 81,803 88,787 4,17,2996,985 81,803 88,787 4,17,299

2009-10 -10,512 180,588 170,076 6,13,9792009-10 -10,512 180,588 170,076 6,13,979

2010-11 -19,802 249,154 229,352 5,92,2502010-11 -19,802 249,154 229,352 5,92,250

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MARKET SEGMENTSMARKET SEGMENTS

Primary MarketPrimary Market– Channel for sale of new securitiesChannel for sale of new securities

Secondary MarketSecondary Market– Platform for buying and selling of Platform for buying and selling of

securities already issuedsecurities already issued

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TYPES OF ISSUESTYPES OF ISSUES

• Public IssuesPublic Issues– Any person can subscribe for the securitiesAny person can subscribe for the securities– Allotment to at least 50 persons (Indian Cos. Allotment to at least 50 persons (Indian Cos.

Act)Act)

• Private PlacementPrivate Placement– Issue made to select personsIssue made to select persons– Allotment to less than 50 personsAllotment to less than 50 persons

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TYPES OF ISSUERSTYPES OF ISSUERS

• CorporateCorporate– Domestic issuesDomestic issues

• Equities, Debentures, BondsEquities, Debentures, Bonds

– Overseas issuesOverseas issues• ADRs, GDRs, External Commercial ADRs, GDRs, External Commercial

BorrowingsBorrowings

• GovernmentGovernment– Central GovernmentCentral Government– State GovernmentsState Governments

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Market Market IntermediariesIntermediariesMarket Intermediaries (SEBI) March

1999 April 2012

Stock Exchanges (Cash Market) 23 19 Stock Exchanges (Derivatives Market) NA 2 Stock Exchanges (Currency Derivatives) NA 4 Brokers (Cash Segment) 9,069 10264 Sub-brokers (Cash Segment) 4,589 76566 Brokers (Derivatives) NA 2339 Brokers (Currency Derivatives) NA 2179 Foreign Institutional Investors 450 1765 Depositories 2 2 Depository Participants 96 856 Merchant Bankers 415 201 Bankers to an Issue 66 57 Underwriters 17 3 Credit Rating Agencies NA 6 Venture Capital Funds NA 215 Foreign Venture Capital Investors NA 177 Registrars to an Issue & Share Transfer Agents

251 74

Portfolio Managers 18 249 Mutual Funds 41 49

Source: SEBI

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A person intend to invest in A person intend to invest in stock market, is required to take stock market, is required to take

the following stepsthe following steps

He has to earmark a certain amount to invest in He has to earmark a certain amount to invest in shares.shares.

He has to obtain (1) a PAN card, (2) open a Demat He has to obtain (1) a PAN card, (2) open a Demat account with a Depository Participant and (3) Bank account with a Depository Participant and (3) Bank Account (savings or current) with a BankAccount (savings or current) with a Bank

He can acquire shares from 2 sources – Primary He can acquire shares from 2 sources – Primary Market or Secondary MarketMarket or Secondary Market

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In primary market shares are issued by In primary market shares are issued by the company directly to the investors. the company directly to the investors. He can apply when the Initial Public He can apply when the Initial Public Offer is made by the Company.Offer is made by the Company.

In secondary market, an investor can In secondary market, an investor can purchase shares from other investors purchase shares from other investors through a broker or sub-broker who is a through a broker or sub-broker who is a member of a recognized Stock member of a recognized Stock Exchange.Exchange.

For buying shares directly from market For buying shares directly from market an investor has to approach a Broker or an investor has to approach a Broker or Sub-broker who should be registered Sub-broker who should be registered with SEBI.with SEBI.

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Once broker or sub-broker is Once broker or sub-broker is selected, an investor is required to selected, an investor is required to registered himself with that broker registered himself with that broker or sub-broker through “Know Your or sub-broker through “Know Your Client” (KYC) registration Form. He Client” (KYC) registration Form. He can be registered with more than can be registered with more than one broker or sub-brokerone broker or sub-broker

Once these formalities are Once these formalities are completed, an investor can purchase completed, an investor can purchase or sell shares in stock market by or sell shares in stock market by placing an order with the broker.placing an order with the broker.

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Orders are placed on “Online Trading System” Orders are placed on “Online Trading System” of a broker or sub-broker of the recognized of a broker or sub-broker of the recognized Exchange. Orders are placed for a specific Exchange. Orders are placed for a specific quantity of shares of a particular company at quantity of shares of a particular company at specific price for either to buy or sell. Orders specific price for either to buy or sell. Orders are generally matched in 2 seconds and are are generally matched in 2 seconds and are confirmed by the broker or sub-broker. There confirmed by the broker or sub-broker. There are many features of online trading screen, are many features of online trading screen, most important are stop loss order, change in most important are stop loss order, change in orders, current price, last traded price, total orders, current price, last traded price, total buy orders at different price levels as well as buy orders at different price levels as well as total sell orders at different price levels total sell orders at different price levels depicting the demand or supply of the shares depicting the demand or supply of the shares in the market at a given point of time in the market at a given point of time

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Trades are done on T+2 trading system. In Trades are done on T+2 trading system. In other words, a trade for buy or sell done on other words, a trade for buy or sell done on Monday will be settled at Broker level on Monday will be settled at Broker level on Wednesday and at client level on Thursday. Wednesday and at client level on Thursday. Immediately on purchase of shares, cheque Immediately on purchase of shares, cheque of the required amount is to be paid to the of the required amount is to be paid to the Broker or shares are to be delivered to the Broker or shares are to be delivered to the Broker’s Demat account from the Broker’s Demat account from the investor’s Demat account, in case of sale.investor’s Demat account, in case of sale.

Selection of a Company for investment – Selection of a Company for investment – Knowledge about balance sheet Knowledge about balance sheet interpretation, different financial ratios, interpretation, different financial ratios, Company Analysis , Industry Analysis.Company Analysis , Industry Analysis.

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Regulatory PyramidRegulatory Pyramid

• Apex RegulatorsApex Regulators– SEBI, DEA, DCA, RBISEBI, DEA, DCA, RBI– Activities coordinated by a High Level Activities coordinated by a High Level

Committee on Capital MarketsCommittee on Capital Markets

• Self Regulatory OrganisationsSelf Regulatory Organisations– Stock Exchanges, Depositories, AMFI, etc.Stock Exchanges, Depositories, AMFI, etc.

• RegulateesRegulatees– Stock Brokers, Sub-brokers, DPs, Stock Brokers, Sub-brokers, DPs,

Merchant Bankers, FIIs, VC Investors, Merchant Bankers, FIIs, VC Investors, Mutual Funds, Portfolio Managers, RTIs & Mutual Funds, Portfolio Managers, RTIs & STAs, Underwriters, etc.STAs, Underwriters, etc.

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Regulatory FrameworkRegulatory Framework

•SEBI Act, 1992SEBI Act, 1992•Securities Contracts Securities Contracts

(Regulation) Act, 1956(Regulation) Act, 1956•Depositories Act, 1996Depositories Act, 1996

•Companies Act, 1956Companies Act, 1956

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SEBI Act, 1992SEBI Act, 1992

• Empowers SEBI with statutory powers forEmpowers SEBI with statutory powers for– Protecting the interests of investors in securitiesProtecting the interests of investors in securities– Promoting the development of the securities marketPromoting the development of the securities market– Regulating the securities marketRegulating the securities market

• Provides regulatory jurisdiction over corporate Provides regulatory jurisdiction over corporate issuing capital and all intermediaries & issuing capital and all intermediaries & persons associated with the securities marketpersons associated with the securities market

• Empowers SEBI to conduct enquiries, audits Empowers SEBI to conduct enquiries, audits and inspections of all market participants, and inspections of all market participants, adjudicate offences and impose penalties in adjudicate offences and impose penalties in case of offencescase of offences

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SCRA, 1956SCRA, 1956

• Provides for direct and indirect control Provides for direct and indirect control over all aspects of securities tradingover all aspects of securities trading

• Gives regulatory jurisdiction to Gives regulatory jurisdiction to Central Govt. / SEBI overCentral Govt. / SEBI over– Stock exchanges (recognition and Stock exchanges (recognition and

continued supervision)continued supervision)– Contracts in securitiesContracts in securities– Listing of securities on stock exchangesListing of securities on stock exchanges

• Specifies the minimum listing criteria Specifies the minimum listing criteria on the basis of which stock exchanges on the basis of which stock exchanges can frame listing regulations can frame listing regulations

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Depositories Act, 1996Depositories Act, 1996

• Provides for establishment of Provides for establishment of depositories for securitiesdepositories for securities

• Provisions deal withProvisions deal with– Making securities of public limited Making securities of public limited

companies freely transferablecompanies freely transferable– Dematerializing securities in the Dematerializing securities in the

depository modedepository mode– Maintenance of ownership records Maintenance of ownership records

in book entry formin book entry form

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Companies Act, 1956Companies Act, 1956• Deals with issue, allotment and Deals with issue, allotment and

transfer of securities and aspects transfer of securities and aspects related to company managementrelated to company management

• Lays down standards for disclosure in Lays down standards for disclosure in public issues and all information public issues and all information related theretorelated thereto

• Prescribes regulations for Prescribes regulations for underwriting, use of premium and underwriting, use of premium and discounts in public/rights/bonus issues, discounts in public/rights/bonus issues, payment of interest and dividends payment of interest and dividends

• Lays down norms for disclosure of Lays down norms for disclosure of quarterly results and annual quarterly results and annual performance, as well as other related performance, as well as other related informationinformation

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Stock Market ReformsStock Market Reforms• Enactment of Enactment of SEBI ActSEBI Act kick-starts reforms (1992) kick-starts reforms (1992)• Screen-based tradingScreen-based trading ushers transparency, efficiency ushers transparency, efficiency

and speed (1994-96)and speed (1994-96)• Demat settlementDemat settlement through the depositories eliminates through the depositories eliminates

paper-based risks (1996)paper-based risks (1996)• Shrinkage ofShrinkage of settlement cycle settlement cycle enhances liquidity (1995- enhances liquidity (1995-

2000)2000)• DIP GuidelinesDIP Guidelines raises the bar for public issues (2000) raises the bar for public issues (2000)• Introduction of Introduction of derivatives tradingderivatives trading broadens the market broadens the market

and offers scope for hedging (2000)and offers scope for hedging (2000)• Implementation of Implementation of advanced risk managementadvanced risk management practices practices

have reduced systemic and operational risks (since have reduced systemic and operational risks (since 1995)1995)

• Establishment of Establishment of Investor Grievance CellsInvestor Grievance Cells by stock by stock exchanges (1994) and exchanges (1994) and Investor Education and Protection Investor Education and Protection FundFund by Central Govt. (2001) provide greater safety to by Central Govt. (2001) provide greater safety to investorsinvestors

• Demutualization of stock exchangesDemutualization of stock exchanges aims to prevent aims to prevent conflict of interest among owners, users and managers conflict of interest among owners, users and managers of stock exchanges (2005)of stock exchanges (2005)

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REFORMS IN TRADINGREFORMS IN TRADING• Transition from open outcry to Transition from open outcry to

screen-based systemscreen-based system– 1994 to 19961994 to 1996

• Transformation from person-Transformation from person-dependent to anonymous systemdependent to anonymous system

• Single city to nation-wide operationSingle city to nation-wide operation– Trading from over 900 citiesTrading from over 900 cities

• Evolution of share shops – sub-Evolution of share shops – sub-brokers and franchiseesbrokers and franchisees

• Expansion of trading capacityExpansion of trading capacity– 1 lakh to 80 lakh trades 1 lakh to 80 lakh trades – volume from 150 cr. per day to 1,00,000 volume from 150 cr. per day to 1,00,000

cr. cr. Use of internet technology for tradingUse of internet technology for trading– 16% of total volume16% of total volume

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Reforms In Clearing and Reforms In Clearing and

SettlementSettlement• Establishment of depositories and Establishment of depositories and depository participantsdepository participants– NSDL in 1996 and CDSL in 1997NSDL in 1996 and CDSL in 1997

• Changeover from physical to demat Changeover from physical to demat settlementsettlement– Elimination of paper-based risksElimination of paper-based risks

• Clearing corporations/clearing houses as Clearing corporations/clearing houses as counter parties to tradescounter parties to trades– Novation eliminates settlement riskNovation eliminates settlement risk

• Shrinkage in post-trade cycleShrinkage in post-trade cycle– A30 to A15 to A7 to T+5 to T+3 to T+2A30 to A15 to A7 to T+5 to T+3 to T+2

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Demat advantagesDemat advantages• Reduction in the settlement cycle.Reduction in the settlement cycle.• Reduction in share transfer time to the buyer.Reduction in share transfer time to the buyer.

Immediate transfer and registration of SecuritiesImmediate transfer and registration of Securities• No stamp duty on transfer of securities.No stamp duty on transfer of securities.• Instant disbursement of non-cash benefits like Instant disbursement of non-cash benefits like

bonus and rights into client’s account. bonus and rights into client’s account. • No odd lot problem. No odd lot problem. • Handling and safekeeping of huge paper share is Handling and safekeeping of huge paper share is

reduced.reduced.• Elimination of risks associated with physical Elimination of risks associated with physical

certificates such as bad delivery, fake securities, certificates such as bad delivery, fake securities, etc.etc.

• Nomination facility.Nomination facility.

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SETTLEMENT TYPESSETTLEMENT TYPES

• Account periodAccount period– Monthly, Fortnightly, Weekly, 3-Monthly, Fortnightly, Weekly, 3-

dayday

• Rolling- Rolling- End day position results End day position results in payment/delivery after n days.in payment/delivery after n days.– T+5, T+3, T+2, T+1T+5, T+3, T+2, T+1

• Trade for tradeTrade for trade– Each trade settled individually Each trade settled individually

Limited Physical MarketLimited Physical Market

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Rolling SettlementRolling Settlement

• In a rolling settlement, each trading day is In a rolling settlement, each trading day is considered as a trading period and trades considered as a trading period and trades executed during the day are settled based executed during the day are settled based on the net obligations for the day. on the net obligations for the day.

• Currently, trades in rolling settlement are Currently, trades in rolling settlement are settled on a T+2 basis i.e. on the 2nd settled on a T+2 basis i.e. on the 2nd working day. Typically trades taking place working day. Typically trades taking place on Monday are settled on Wednesday, on Monday are settled on Wednesday, Tuesday's tradesTuesday's trades settled on Thursday and settled on Thursday and so on. so on.

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Types of TradesTypes of Trades

SpeculationSpeculation – An approach to investing that – An approach to investing that relies more on chance and therefore entails relies more on chance and therefore entails a greater risk. Speculation is driven by an a greater risk. Speculation is driven by an expectation of a high rate of return over a expectation of a high rate of return over a very short time very short time

HedgingHedging – Hedgeing is a mechanism to – Hedgeing is a mechanism to reduce investment risk using derivative reduce investment risk using derivative instruments like futures & options. A hedge instruments like futures & options. A hedge can help lock in existing profit. Its purpose can help lock in existing profit. Its purpose is to reduce the volatility of a portfolio, by is to reduce the volatility of a portfolio, by reducing the risk of loss.reducing the risk of loss.

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HedgingHedging• Crude Oil Futures (Example) - Case: Crude Oil Futures (Example) - Case: • In January 11, Oil Co. has negotiated a In January 11, Oil Co. has negotiated a

sales contract to sell 1 lac Ltrs of oil. The sales contract to sell 1 lac Ltrs of oil. The price Oil Co. will receive is the spot price price Oil Co. will receive is the spot price of oil on June 30, 2011.of oil on June 30, 2011.– Spot price of crude oil in January = Rs. 50.00 Spot price of crude oil in January = Rs. 50.00

per Ltr.per Ltr.– June Oil futures price = Rs. 51.50 per Ltr.June Oil futures price = Rs. 51.50 per Ltr.– Futures contract is for delivery of 1 lac Ltrs.Futures contract is for delivery of 1 lac Ltrs.

• Hedging strategyHedging strategy– January 11: Sell 1 lac Ltrs. June Oil futures January 11: Sell 1 lac Ltrs. June Oil futures

contractscontracts– June 30: Close out futures positionJune 30: Close out futures position

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Hedging Contd.Hedging Contd.• In JuneIn June : Spot price of oil is Rs. 53.00 per Ltr. : Spot price of oil is Rs. 53.00 per Ltr.

– Company receives Rs. 53.00 per Ltr. under the sales Company receives Rs. 53.00 per Ltr. under the sales contract.contract.

– Company has a short futures position at Rs. 51.50 per Ltr.Company has a short futures position at Rs. 51.50 per Ltr.– Company Lose Rs. 1.50 per Ltr. from the futures Company Lose Rs. 1.50 per Ltr. from the futures

contract.contract.– Net price received is Rs. 51.50 (Rs.53.00 – 1.50 loss)Net price received is Rs. 51.50 (Rs.53.00 – 1.50 loss)

• In June In June : Spot price of oil is 49.00 per Ltr. : Spot price of oil is 49.00 per Ltr.– Company receives Rs. 49.00 per Ltr. from the sales Company receives Rs. 49.00 per Ltr. from the sales

contract.contract.– Company has a short futures position at Rs. 51.50 Company has a short futures position at Rs. 51.50 – Company gains Rs.2.50 per Ltr. on the short futures Company gains Rs.2.50 per Ltr. on the short futures

position.position.– Net price received is Rs. 51.50 (Rs.49.00 + 2.50 gain)Net price received is Rs. 51.50 (Rs.49.00 + 2.50 gain)

• In either caseIn either case, the company receives Rs. 51.50 per , the company receives Rs. 51.50 per Ltr.Ltr.

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Hedging Contd.Hedging Contd.

• Gold Futures Case(Example)Gold Futures Case(Example)• Oct 2011 - A manufacturer needs Gold in Oct 2011 - A manufacturer needs Gold in

December 2011 to make cutting tool. Current December 2011 to make cutting tool. Current price of Gold Rs. 26000 per 10 gms. (one unit) price of Gold Rs. 26000 per 10 gms. (one unit)

• Fears price of Gold will rise to a level of Rs. Fears price of Gold will rise to a level of Rs. 27,000 in Dec. 2011.27,000 in Dec. 2011.

• Buys December 2011 Gold Futures @ Rs. Buys December 2011 Gold Futures @ Rs. 2700027000

Hedging contd.Hedging contd.• Dec. 11: Gold spot market price is Rs. 28,000Dec. 11: Gold spot market price is Rs. 28,000• Manufacturer makes a profit of Rs. 1,000 per unit Manufacturer makes a profit of Rs. 1,000 per unit

in Gold Futures contractin Gold Futures contract• Now spends Rs. 27,000 of his own money & Now spends Rs. 27,000 of his own money &

Rs.1000/- profit from futuresRs.1000/- profit from futures• Dec. 11: Gold spot market price is Rs. 25,500Dec. 11: Gold spot market price is Rs. 25,500• Manufacturer suffers a loss of Rs. 1,500 per unit in Manufacturer suffers a loss of Rs. 1,500 per unit in

Gold FuturesGold Futures• Now pays Rs.1,500 as loss in futures and buys Now pays Rs.1,500 as loss in futures and buys

gold at Rs. 25,500 the total cost to him being gold at Rs. 25,500 the total cost to him being 25500 cost of gold + 1500 loss in futures. 25500 cost of gold + 1500 loss in futures.

• In either case he pays Rs.27,000/- per unit .In either case he pays Rs.27,000/- per unit .

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Hedging Contd.Hedging Contd.• Currency Futures (Example)Currency Futures (Example)• Case : October 07 - An exporter will Case : October 07 - An exporter will

receive US $ 1 million in Jan 08. receive US $ 1 million in Jan 08. (presently, US $ 1 = Rs. 31)(presently, US $ 1 = Rs. 31)

• Fears US $ will fall in valueFears US $ will fall in value• Sells Currency Futures : USDINR $ 1 mill. Sells Currency Futures : USDINR $ 1 mill.

Futures @ Rs. 31 Futures @ Rs. 31 • Jan ‘08 RBI reference rate US $ 1 = Rs. Jan ‘08 RBI reference rate US $ 1 = Rs.

2828• Jan 08 : Exporter receives US $ 1 mill. Jan 08 : Exporter receives US $ 1 mill.

which is now valued at Rs. 28 mill.which is now valued at Rs. 28 mill.• USDINR futures will be settled at Rs. 28USDINR futures will be settled at Rs. 28

– Short position @ Rs. 31Short position @ Rs. 31

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• Gain from Futures= Rs. 3 million Gain from Futures= Rs. 3 million – Short position US $ 1 mill.Short position US $ 1 mill.

• `̀• Exporter earns Rs. 31 mill. Exporter earns Rs. 31 mill.

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Type of Trade Contd:Type of Trade Contd:

• Arbitrage –Arbitrage – Simultaneous purchase and sale Simultaneous purchase and sale transactions in a share undertaken in 2 different transactions in a share undertaken in 2 different markets to profit from price difference.markets to profit from price difference.

• Cash MarketCash Market - Shares are purchased or sold - Shares are purchased or sold against cash or shares – delivery based transactions - against cash or shares – delivery based transactions - T+2 systemT+2 system

• Day TradingDay Trading – Taking a position ( Buy or Sell) with – Taking a position ( Buy or Sell) with the object to off set the same by opposite transaction the object to off set the same by opposite transaction before end of the day. A day trader may enter into one before end of the day. A day trader may enter into one or more transactions during the trading period but all or more transactions during the trading period but all his o/s transactions are to be closed out by end of the his o/s transactions are to be closed out by end of the day.day.

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MarginsMargins• Margins are collected to safeguard against Margins are collected to safeguard against

any adverse price movement. Margins are any adverse price movement. Margins are quoted as a percentage of the value of the quoted as a percentage of the value of the transaction.transaction.

Margins for Cash SegmentMargins for Cash Segment

• Value at Risk (VaR) marginValue at Risk (VaR) margin9999thth percentile estimate that computed margin would percentile estimate that computed margin would

be adequate to meet T+1 price riskbe adequate to meet T+1 price risk• Extreme Loss MarginExtreme Loss Margin - - To cover the losses outside the coverage of VaR To cover the losses outside the coverage of VaR

marginmargin• Mark-to-Market (MTM) marginMark-to-Market (MTM) margin

– Represents actual or notional loss suffered by Represents actual or notional loss suffered by broker at client-level end of day; payable by T+1broker at client-level end of day; payable by T+1

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• Margins on Futures & OptionsMargins on Futures & Options• Initial Margin - Initial Margin - SPAN Software used – SPAN Software used –

depending mainly upon Value of Future & Option, depending mainly upon Value of Future & Option, price and volatility of security in cash market.price and volatility of security in cash market.

• Exposure Margin – Exposure Margin – Index futures, Stock Index futures, Stock futures and sell positions of Index and stock Options futures and sell positions of Index and stock Options are collected.are collected.

• On OptionsOn Options• Premium Margin – Premium Margin – In addition to initial In addition to initial

margins, premium margin is charged from buyers of margins, premium margin is charged from buyers of options.options.

• Assignment Margin – Assignment Margin – Collected from sellersCollected from sellers

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Order TypesOrder Types

•Limit OrderLimit Order– Order for execution at specified Order for execution at specified

price or betterprice or better

•Market Order Market Order – Order for execution at the best Order for execution at the best

prevailing priceprevailing price

•Stop Loss Order Stop Loss Order – Order taken up for execution when Order taken up for execution when

trigger prices is reachedtrigger prices is reached

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Market Market SessionsSessions•Pre-openingPre-opening

– 0955 to 1000 hrs. 0955 to 1000 hrs. •OpeningOpening

– 1000 hrs.1000 hrs.•ContinuousContinuous

– 1000 to 1530 hrs. 1000 to 1530 hrs. •Post-closingPost-closing

– 1530 to 1535 hrs.1530 to 1535 hrs.

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Bulls, Bears and Bulls, Bears and StagsStags•Bull Bull

– Operator who buys a security at a Operator who buys a security at a certain level, anticipating a price certain level, anticipating a price rise, so that he can square-up rise, so that he can square-up (sell) at a profit(sell) at a profit

•Bear Bear – Operator who sells a security at a Operator who sells a security at a

certain level, anticipating a price certain level, anticipating a price fall, so that he can cover-up (buy) fall, so that he can cover-up (buy) at a profitat a profit

•StagStag– Person who subscribes to a new Person who subscribes to a new

issue with the primary objective issue with the primary objective of selling at a profit on allotment of selling at a profit on allotment of the securitiesof the securities

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SafetySafety ProvisionsProvisions

• Settlement Guarantee FundSettlement Guarantee Fund– Protection against counterparty defaultProtection against counterparty default– Corpus created out of initial contribution from Corpus created out of initial contribution from

the stock exchange and its members, base the stock exchange and its members, base capital deposits of trading members and capital deposits of trading members and ongoing accruals from transaction chargesongoing accruals from transaction charges

• Investor Protection FundInvestor Protection Fund– Protection to investors against default of Protection to investors against default of

membersmembers– Corpus created out of initial contributions from Corpus created out of initial contributions from

the stock exchange and ongoing accruals from the stock exchange and ongoing accruals from transaction chargestransaction charges

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CORPORATISATION & CORPORATISATION & DEMUTUALISATIONDEMUTUALISATION

• Demutualisation segregates Demutualisation segregates ownership, trading and management ownership, trading and management rights on stock exchangerights on stock exchange

• Uniform model of corporatisation and Uniform model of corporatisation and demutualisation for all exchangesdemutualisation for all exchanges– Conversion to companies limited by sharesConversion to companies limited by shares– Change from not-for-profit companies to Change from not-for-profit companies to

for-profit companiesfor-profit companies

• Exchange could prescribe ceiling on Exchange could prescribe ceiling on voting rights of different shareholder voting rights of different shareholder groupsgroups

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PUBLIC ORIENTATIONPUBLIC ORIENTATION

• Wider media coverage – print and Wider media coverage – print and electronicelectronic

• On-line, round-the-clock coverage of stock On-line, round-the-clock coverage of stock marketsmarkets

• Evolution of equity researchers, company Evolution of equity researchers, company analysts, etc.analysts, etc.

• Capital market now included in the Capital market now included in the curriculum of colleges/institutescurriculum of colleges/institutes

• Establishment of investor forums Establishment of investor forums

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Corporate benefitsCorporate benefits• Dividend – is a percentage of the face

value of a share that a company returns to its shareholders from its annual profits

• Dividend yield - Dividend yield gives the relationship between the current price of a stock and the dividend paid by its’ issuing company during the last 12 months. It is calculated by aggregating past year's dividend and dividing it by the current stock price.

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• Bonus issue – A bonus issue is the issue of shares to the existing shareholders by the company in proportion to the number of shares held, by capitalizing reserves.

• Right issue – A right issue of shares to the existing shareholders by the company in proportion to the number of shares held at a certain price.

• One to One – This means that if bonus shares are One to One – This means that if bonus shares are declared than one bonus share will be issued to declared than one bonus share will be issued to every one share held.every one share held.

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Stock Split -

A stock split is a corporate action which splits the existing shares of a particular face value into smaller denominations so that the number of shares increase, however, the market capitalization or the value of shares held by the investors post split remains the same as that before the split. It is done to increase the liquidity of the stock whose price has gone very high.

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• Buyback of SharesBuyback of Shares A buyback can be seen A buyback can be seen as a method for company to invest in itself by as a method for company to invest in itself by buying shares from other investors in the buying shares from other investors in the market. Buybacks reduce the number of shares market. Buybacks reduce the number of shares outstanding in the market. Buy back is done by outstanding in the market. Buy back is done by the company with the purpose to improve the the company with the purpose to improve the liquidity in its shares and enhance the liquidity in its shares and enhance the shareholders’ wealth. Under the SEBI (Buy Back shareholders’ wealth. Under the SEBI (Buy Back of Securities) Regulation, 1998, a company is of Securities) Regulation, 1998, a company is permitted to buy back its share from:permitted to buy back its share from:

a) Existing shareholders on a proportionate a) Existing shareholders on a proportionate basis through the offer document.basis through the offer document.b) Open market through stock exchanges using b) Open market through stock exchanges using book building process.book building process.c) Shareholders holding odd lot shares.c) Shareholders holding odd lot shares.

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THANK YOUTHANK YOU- D.K. Gupta

Head, ISE TRC

Economy & Finance

Capital market