UNIT - 2 SECURITIES Securities Contracts Regulation Act (SCRA), 1956, define securities as “an instruments such as shares, bonds, scrips, stocks or other marketable securities of similar nature in or of any incorporate company or body corporate, government securities, derivatives of securities, units of collective investment scheme, interest and rights in securities, security receipt or any other instruments so declared by the Central Government”.

Regulators of Securities market The responsibility for regulating the securities market is shared by Department of Economic Affairs (DEA), Department of Company Affairs (DCA), Reserve Bank of India (RBI) and Securities and Exchange Board of India (SEBI).

Participants in financial market The issuers of securities, Investors in securities and the Intermediaries, such as merchant bankers, brokers etc. Sources of investment information International affairs National affairs Industry information Company information Stock market information

Components of securities market Securities – Shares, Debentures, Bonds, mutual funds Intermediaries – brokers, sub-brokers, custodians, share transfer agents, merchant bankers Issues of securities – companies, corporate bodies, government Investors - individual s, Companies, Mutual fund institutions, FII.

The securities market has two interdependent segments: The primary (new issues) market and The secondary market. The primary market provides the channel for sale of new securities Primary market provides opportunity to issuers of securities; Government as well as corporates, to raise resources to meet their requirements of investment and/or discharge some obligation. Issue the securities at face value, or at a discount/premium and these securities may take a variety of forms such as equity, debt etc. Issue the securities in domestic market and/or international market.

Parties involved in the new issue market Managers to the issue Registrars to the issue Underwriters Bankers to the issue Advertising agents The financial institutions – ICICI, LIC, IDBI etc. Secondary market 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.

Secondary market deals in securities previously issued Secondary market deals in securities previously issued. 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. 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.

Private placement (unlisted companies) Further public offering Issues Public Issues Right Issues Private placement (unlisted companies) IPO Further public offering

Initial Public Offering (IPO) is when an unlisted company makes either a fresh issue of securities or an offer for sale of its existing securities or both for the first time to the public. This paves way for listing and trading of the issuer’s securities. A Further public offering (FPO) is when an already listed company makes either a fresh issue of securities to the public or an offer for sale to the public, through an offer document. Rights Issue (RI) is when a listed company which proposes to issue fresh securities to its existing shareholders as on a record date. Private placement: when an issue is made to a select set of people is called a private placement. i.e. allotment is made to less than 50 persons.

Security Exchange Board of India (1992) The Securities and Exchange Board of India (frequently abbreviated SEBI) is the regulator for the securities market in India. It was formed officially by the Government of India in 1992 with SEBI Act 1992 being passed by the Indian Parliament. SEBI is headquartered in the business district of Bandra Kurla Complex in Mumbai, and has Northern, Eastern, Southern and Western regional offices in New Delhi, Kolkata, Chennai and Ahmedabad. Objectives of SEBI To protect the interests of the investors in securities To promote the development of securities market To regulate the securities market.

Functions of SEBI Regulating the business in stock exchanges Registering and regulating the working of stock brokers, bankers to the issues, registrars to an issue, merchant bankers, portfolio managers, investment advisors etc. Registering and regulating the working of collective investment schemes like mutual funds. Prohibiting fraudulent and unfair trade practices in the securities market. Promoting investors education and training of intermediaries in securities market Prohibiting insiders trading in securities. Calling for information, undertaking inspection, conducting enquiries and audits of the stock exchanges, intermediaries and self-regulatory organizations in the securities market.

Depository Participants: DP is the agents between Depository and Investors, No. of Depository in the country Currently there are two depositories operational in the country. NSDL CDSL National Securities Depository Ltd. - NSDL - Having 95 Cr. Demat A/c as on 31-03-2010 - 300 DPs in India. The first depository in India. NSDL is promoted by Industrial Development Bank of India (IDBI) - the largest development bank of India, Unit Trust of India (UTI) - the largest mutual fund in India and National Stock exchange of India Ltd (NSE) - the largest stock exchange in India

Central Depository Services Ltd Central Depository Services Ltd. - CDSL - Having 65 laks Demat A/c as on 31-03-2010 - 500 DPs in India. Central Depository Limited (CDSL), is the first Indian central securities depository based in Mumbai. Its main function is the holding securities either in certificated or uncertificated (dematerialized) form, to enable book entry transfer of securities. CDSL is promoted by Bombay Stock Exchange Limited (BSE) jointly with State Bank of India, Bank of India, Bank of Baroda, HDFC Bank, Standard Chartered Bank, Union Bank of India and Centurion Bank.[5]

Bank Depository Hold funds in an account Hold securities in an account Transfers funds between accounts on the instruction of the account holder Transfers securities between accounts on the instruction of the account holder. Facilitates safe keeping of money Safe keeping of shares

Benefits of participation in a depository are Immediate transfer of securities No stamp duty on transfer of securities Elimination of risks associated with physical certificate such as bad delivery, fake securities etc. Reduction in paper work involved in transfer of securities Reduction in transaction cost.

SEBI’S ROLE IN THE PRIMARY MARKET Entry norms – dividend payments for a period of 3 years Promoter’s contribution – Promoter’s contribution should be 20% of the issued capital irrespective of the size – should be locked for 5 years Promoter’s contribution should be received before the public issue. If issue size exceeds Rs.100 crores - 50% promoter’s contribution. Disclosure The draft prospectus filed with SEBI is made as Public document to enhance transparency. Should provide all the information The present position of the company The future prospect etc

4. Book building – 100% book building is permitted by SEBI 4. Book building – 100% book building is permitted by SEBI. book building refers to the collection of bids from investors, based on a floor price, which is indicated before the opening of the bidding process. the issue price is fixed after the bid closing date 5. Allocation of shares To bring the small investors to the primary market, the minimum application of shares has been reduced from 500 to 200. 50% reservation of shares are made to the small investors. (who have applied for 1000 shares) The company are required to complete the allotment of securities within 30 days. If refund of application are not made within specified period should pay 15% rate of interest

Market intermediaries: Licensing of merchant bankers by SEBI was the first step to regulate the intermediaries. Licensing of merchant bankers is based on the capital adequacy as well as the track record of the capital market related activities.

Secondary market and SEBI Governing body Infrastructure - (VSAT ) NSE establish the screen based trading. Settlement and clearing – weekly settlement. SEBI advised all the stock exchanges to set up clearing houses for the process of dematerialization of securities and settlement transaction in the depository mode. 4. Debt market segment: Wholesale debt market segment in the NSE enables the traders to trade in debt instrument.. SEBI has allowed the listing of debt instrument on the stock exchange even if the company’s equity was not listed earlier. FII’s were allowed to invest 100% of the funds in debt instruments.