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Malpractices in securities market

Manipulation of share pricesPrice riggingInsider tradingDelay in settlements & listiing

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Deficiencies of Securities market (Post II world war period)

1. Lack of variety in financial instruments2. Misleading & deceptive information of

issue of securities

3. Speculative trading (0nly a small portion of trading was genuine)

4. Poor liquidity ( high volatality / low liquidity)

5. Lack of control over brokers

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•Set up on April 12, 1988 as a non statutory body

•In 1992 – through SEBI Act –powers to control capital markets were conferred

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Objectives of SEBI•Primary objectives : to promote healthy & orderly growth of securities market & protect investors

•To maintain steady flow of savings into capital markets

•To regulate securities market & ensure fair practice by issuers to help them raise resources at minimum cost

•To promote efficient services by brokers, merchant bankers and other intermediaries to make them professional and competitive

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Functions of SEBI I. Regulatory function:1. Regulation of stock exchanges & other

organisations2. Registration & regulation of stock

brokers, sub brokers, merchant bankers, underwriters and other intermediaries

3. Registration & regulation of working of collective investment schemes like mutual funds

4. Prohibition of unfair trade practices , insider trading, substantial acquisition of of shares by companuies

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Functions of SEBI

II. Development function :

1. Promote investors education2. Training of intermediaries3. Conduct research & provide information

to market participants4. Promoting self regulatory organisations

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•Chapter II of SEBI Act deals with incorporation, administration & management ,….

•The Statutory Board consists of six members

•The chairman & 2 members are to be appointed by the central govt

•One member by RBI•Another two with experience of securities

market - to be appointed by central govt

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Organisation - 4 operational departments

1. Primary market department : all policy matters & regulatory issues relating to primary market, market intermediaries, investors grievances, matters relating to Self Regulatory Organisations (SROs)

2. Issue Management & Intermediaries Department : registration, regulation & monitoring issue related information

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Operational departments – contd

3. Secondary Market Department : policy & regulatory issues, administration of major stock exchanges,…

4. Institutional Investment Department: framing policy of foreign Institutional investors, mutual funds, membership in international organisations,….

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Powers of SEBI1. To call periodical returns from

recognised stock exchanges2. To ask explanation from recognised

stock exchanges / their members3. To direct enquiries on any stock

exchange4. To make / amend by laws of

recognised stock exchanges5. To compel listing of securities by

public companies6. To control * regulate stock


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Powers - contd

7. To levy fees or charges for carrying out the purpose of regulations

8. To declare applicability of Sec 17 of Securities contract (Regulation) Act to grant licenses to dealers of securities.

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SEBI & central Govt•Central govt can supersede SEBI board•It has the powers to direct SEBI & to call

for reports and returns from SEBI

•SEBI General Fund : used to meet the expenses of SEBI board, pay salaries,… consists of :

1. Grants given by the Central govt2. Fees & charges collected from stock


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Public Issue

•Corporates may raise capital in the primary market by way of an initial public offer, rights issue or private placement.

•This Initial Public Offering can be made through the fixed price method, book building method or a combination of both. 

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Fixed price vs Book building method

•Offer Price at which the securities are offered and would be allotted is made known in advance to the investors

•Demand for the securities offered is known only after the closure of the issue

•A 20 % price band is offered by the issuer within which investors are allowed to bid and the final price is determined only after closure of the bidding.

•Demand for the securities offered , and at various prices, is available on a real time basis on the BSE website during the bidding period.

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Contd •100 % advance

payment is required to be made by the investors at the time of application.

•50 % of the shares offered are reserved for applications below Rs. 1 lakh and the balance for higher amount applications.

• 10 % advance payment is required to be made by the QIBs along with the application, while other categories of investors have to pay 100 % advance

• 50 % of shares offered are reserved for QIBS, 35 % for small investors and the balance for all other investors.

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Book Building •The process by which an underwriter attempts to determine at what price to offer an IPO based on demand from institutional investors.

•An underwriter "builds a book" by accepting orders from fund managers indicating the number of shares they desire and the price they are willing to pay.

•Book-building is the most practical mechanism for the quick and efficient management of mega issues (including offers of sale).

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Book building• Book-building is a mechanism by which the issue price is discovered on the basis of bids received from syndicate members/brokers and not by the issuers/merchant bankers.

•However, it is felt that this system will be more suited for companies that are in existence for some time as past financial data are available for analysis and there will be awareness of the company, etc. and for Follow on Public Offers (FPO)

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In India

•The introduction of book-building in India in 1995 followed the recommendation of an expert committee appointed by SEBI under Y. H. Malegam

•The committee recommended and SEBI accepted the book building route in Nov 1995

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BSE – book building• BSE offers a book building platform through the

Book Building software that runs on the BSE Private network.

• This system is one of the largest electronic book building networks in the world, spanning over 350 Indian cities through over 7000 Trader Work Stations via leased lines, VSATs and Campus LANS.

• The software is operated by book-runners of the issue and by the syndicate members , for electronically placing the bids on line real-time for the entire bidding period.

• In order to provide transparency, the system provides visual graphs displaying price v/s quantity on the BSE website as well as all BSE terminals.

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Process of book building1. The Issuer who is planning an offer

nominates lead merchant banker(s) as 'book runners'.

2. The Issuer specifies the number of securities to be issued and the price band for the bids.

3. The Issuer also appoints syndicate members with whom orders are to be placed by the investors.

4. The syndicate members input the orders into an 'electronic book'. This process is called 'bidding' and is similar to open auction.

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Process contd

5. The book normally remains open for a period of 5 days.

6. Bids have to be entered within the specified price band.

7. Bids can be revised by the bidders before the book closes.

8. On the close of the book building period, the book runners evaluate the bids on the basis of the demand at various price levels.

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Process contd

9. The book runners and the Issuer decide the final price at which the securities shall be issued.

10.Generally, the number of shares are fixed, the issue size gets frozen based on the final price per share.

11.Allocation of securities is made to the successful bidders. The rest get refund orders.

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red herring prospectus

• A prospectus that does not have complete particulars on the price of securities offered and the quantum of securities offered.

•The Concise Oxford Dictionary gives the meaning of `red herring' as a misleading clue or distraction, so named from the practice of using the scent of red herring (a silvery fish) in training hounds.

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Qualified Institutional Buyer (QIB)

•A legal designation assigned to a purchaser of securities who meets a certain minimum level of sophistication, size and market savvy with respect to complicated or risky securities.

•Issuers and their banks may elect to market private placement, stock or bond offerings only to QIB clients as a means to save time and transaction costs

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"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” --- SEBI

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Who are QIBs? Public financial institution as

defined in section 4A of the Companies Act, 1956

Scheduled commercial banks; Mutual funds Foreign institutional investor

registered with SEBI Multilateral and bilateral

development financial institutions Venture capital funds registered

with SEBI.


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contd Foreign Venture capital investors registered with SEBI.

State Industrial Development Corporations

Insurance Companies registered with the (IRDA)

Provident Funds with minimum corpus of Rs.25 crores

Pension Funds with minimum corpus of Rs. 25 crores

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QIBs• Some of the important terms and conditions were:• (a) The option should be available only to issues

exceeding Rs. 100 crores;• (b) The issuer companies could either reserve the

securities for firm allotment or avail themselves of the book-building process'

• (c) Draft prospectus to be submitted to SEBI could exclude information about the offer price;

• (d) A book runner to be nominated from among the lead market bankers charged with specific responsibilities and the name submitted to SEB;I and

• (e) The requirement of 25 per cent of the securities to be offered to the public will be applicable.

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Some common terms• greenshoe  - legally called an "over-allotment option" (the only way it can be referred to in a prospectus),

•gives underwriters the right to sell additional shares in a registered securities offering at the offering price,

•if demand for the securities exceeds the original amount offered.

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Greenshoe contd

•The green shoe can vary in size up to 15% of the original number of shares offered.

•it is the only SEC -permitted means for an underwriter to stabilize the price of a new issue post-pricing.

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Broke issue

•When a public offering trades below its offering price, the offering is said to have "broke issue" or "broke syndicate bid".

• This creates the perception of an unstable or undesirable offering, which can lead to further selling and hesitant buying of the shares.