CBP Class Handouts #43

Securities Market in India

References:
Ramesh Singh, Mishra and Puri, NCERT
• 1. Gilt Edged Market
– Market in govt securities or securities guranteed by the govt.
– Gilt edged means “of the best quality”
– Can be new issues or secondary market.
– Many institutions statutorily invest in these and comprise the “captive market”.
– Mostly issued through auction because of the ability of same to reveal more information about price
determination and improve the allocation process.
• 2. Corporate Securities Market
– Can new issue (primary market) or the stock exchange (secondary market)
– Obtain assistance of underwriters to look after new issues.
– Method of new issues:
• Prospectus: Invite general public.
• Offer of sale: Initial shares taken by third party in bulk and then sold to public at premium by
same.
• Private Placing: Direct sale via private appeal , saves cost of raising capital.
• Right issues: From existing shareholders.
• Stock Exchange: or the secondary market is for purchase and sale of second hand quoted or listed
securities ie a security incorporated in the register of stock exchange.
• With abolition of Capital issues control wef from 1992, the corporate securities got tremendous boost.
Capital issues (control) Act was passed in 1947 to regulate investment in different enterprises, prevent
diversion of funds to non essential activities and to protect interest of investors.
– Capital issue consist of two parts: Shares and debentures
• Shares can be Equity shares (dividend depend on yearly profit) and preference shares (fixed rate
of dividend, preference in payment of dividend and capital in event of the company being
wound up)
• Debentures are mainly loans carrying fixed rate of interest.
• National Security Clearing Corporation: Guaranteed all trades on NSE hence eliminating all risk of
counterparty default.
• Dematerialisation: National Securities Depository Limited (NSDL) set up in 1996 followed by Central
Securities Depository Limited (CSDL). The depository maintains computer record of ownership of securities
and dispenses with physical share certificate.
• Some Points:
– Secondary Market provides liquidity to securities market.
– Underwriting business growth contributed significantly to development of capital market in India.
– Transaction date is date of transaction while Settlement date is date of change of ownership of
security.
• Security Market: Where long term capital is raised.
• Instruments: shares, securities, bonds, debentures, mutual funds
• Components: Regulator (SEBI in India), stock exchanges, share indices, brokers, jobbers etc
• Transactions: Different types like badla, reverse badla, future trading, insider trading (not allowed), private
placement.
• Primary Market: in which instruments are traded are traded directly between capital raiser and instrument
purchaser.
• Secondary Market: Market in which instruments of security market are resold. This needs institutional
floor for trading which is made available by the stock exchange.
– Stock Exchange publishes its “index” to project the mood of market.
– Trading in Stock Exchange takes place via mediators known as brokers, jobbers, market makers etc.
– Currently 26 stock exchanges operating in India, 7 at national level.
– National Stock Exchange (NSE): S&P CNX -50 (Nifty Fifty) is the 50 share index and S&P CNX-500 is
the 500 share index.
– Bombay Stock Exchange (BSE): Biggest in India, 5th largest in world, 75 % of total stocks traded in
India.
• Sensex: The sensitive index is a 30 stock index of BSE
• National Index: Index of 100 stocks
– Separate trading platform for SME’s: BSE has named it as BSESME and NSE has named it as Emerge.
– Players in Stock Exchanges:
• Broker: Registered member who buys or sells shares / securities on his clientes behalf and
charges a commission (commission brokers), additionally if broker offer investment advice,
portfolio planning and credit they are called full service brokers.
• Jobber: Broker’s broker or the one who specialises in specific securities catering to the need of
other brokers. He has no contact with the investing public. Called by name of Market Maker in
London and specialist in New York.
• Market Maker: Intermediary in market ready to buy and sell securities. He simultaneously
quotes two rates for buying and selling at the same time.
• Commodity Trading: ie trading in actual physical goods.
– Commodity futures serve a great purpose in hedging against price risk.
– Forward Market Commission is a statutory body providing regulatory oversight. It was merged with
SEBI in Sep 2015.
– Presently 113 commodities notified for future trading and there are 21 commodity exchanges in
India including 3 national level MCX (Multi Commodity Exchange of India) Mumbai, NCDEX (
National Commodities and Derivative Exchange ) Mumbai and NMCE (National Multi commodity
Exchange of India) Ahmedabad.
• Spot Exchange: Electronic traders platform facilitate purchase and sale of specified commodities by
providing spot delivery contracts
– Innovative Indian experiment distinct from common commodity exchanges which trade in futures
contracts.
– An electronic market where farmer or trader can discover the prices of commodity at national level
and can buy or sell goods immediately ie on spot to anyone across country.
– Traders are settled on guaranteed basis.
– Presently 4 spot exchanges on country:
• National Spot Exchange Ltd (NSEL) at national level promoted by NAFED (National Agricultural
Cooperatives Marketing Federation of India)
• NCDEX Spot Exchange estb by NSE
• Reliance Spot Exchange Ltd (R Next)
• Indian Bullion Spot Exchange Ltd (an online over the counter spot exchange)
– Spot exchange advantages: Efficient price determination with wider cross section of people across
country, unlike mandis where price discovery is through local markets, transparency and anonymity,
bring best practices etc.
Some Terms of Stock Market

• Rolling Settlement: All commitments of sale and purchase result into payment / delivery at the end of X
days later. X is mainly 5 for India.
• Badla: When buyers want postponement of the transaction – called Contango in west world.
• Undha Badla: When sellers want postponement of the transaction, also known as reverse badla or
backwardation.
• Spread: Difference between buying and selling prices of share. Higher the liquidity of a share lower is its
spread and vice versa. Also known as Jobber’s Turn or Margin or Hair cut.
• Kerb Dealings: Unofficial dealings after normal trading hours.
• Authorised Capital: The limits upto which shares can be issued by a company, also known as nominal or
registered capital.
• Paid Up Capital: Part of authorised capital paid by the shareholder, as all authorised share might not be
issued.
• Greenshoe Option: Company issuing shares for the first time is allowed to sell some additional shares to
public, usually 15 %, known as over allotment provision.
• Penny Stocks: Low priced stocks.
• ESOP: Employee Stock Ownership plan enables a foreign company to offer shares to employee overseas.
• Screen Based Trading: Trading based on the electronic medium.
• OFCD’s: Optionally fully convertible debentures are covertible into shares after a fixed lockin period.
• Derivatives: Product whose value is derived from the value of one or more basic variables called bases
(underlying asset, index etc) in a contractual manner.
• Indian Depository Receipts (IDR):
– A depository receipt created by an Indian depository in India against the underlying equity shares of
the issuing company.
– It allows investors in India to invest in listed foreign companies, in INR.
– What ADR’s / GDR’s are for investors abroad with respect to Indian companies, IDRs are for Indian
investors with respect to foreign companies.
– IDR subscription and holding is just like any equity share trading on Indian exchanges.
• Shares ‘at Par’ and ‘at Premium’
– Par value: Originally recorded in the balance sheet as ‘equity capital’ say for example Rs 10 per share
– If company issues share at subscription price of Rs 50 , then it is at premium of Rs 40. Existing
companies with track record of at least 5 years of consistent profits are allowed to issue shares at
premium (ie close to market value of its existing shares)
– No company is allowed to issue shares at a discount ie at price below par.
– In India no tax benefits for dividends even though they are paid out of earning left after taxes.
• Angel Investor: Entrepreneurs family and friends but they may be from outside also who provide one time
injection of seed money as equity or favourable loan.
• Venture Capitalist: Have profits as there intention not the person.
• Participatory Notes:
– P Note is a derivative instrument issued in foreign jurisidiction , by a SEBI registered FII , against
Indian securities.
– PN also known as Overseas Derivative Instruments, Equity Linked Notes, Capped Return Notes and
Participatory Return Notes.
– Investor in PN do not own the uderlying Indian security , which is held by the FII’s who issues the PN.
The value of PN is linked to value of underlying security.
 – Popular because restriction on foreign investments, lack of full capital account convertability, give
exposure to local shares without incurring the time and costs involved in investing directly.
– As per SEBI decision only Category III FIIs are not allowed to issue PNs (Category I is govt entities /
instituition investing on behalf of Central Bank. Category II is financial institutions duly regulated in
the country of their origin. Category III is that which belongs to neither I or II)
– Concern: PN obfuscate the real beneficial owner, are outside of India and hence outside the purview
of SEBI surveillance, and it is the FII which act as Mini exchange overseas, expost reporiting
requirement on FII on monthly basis effectively keeps the transaction in PN out of the real time
market surveillance mechanism and beyond the enforceability jurisdiction of SEBI
• Hedge Fund: Invetible free floating capital which moves swiftly across markets and sectors.
• Short Selling: Sale of share not owned , after borrowing from stock brokers on hope of future price fall.
• Bear: Speculates share prices to fall in future and so sells his share
• Bull: Opposite of bear
• Book Building: During IPO individual investors reserved and allotted shares by the company.
• IPO: Initial Public Offer, share / securities issued for the first time.
• Price Band: During public issue company gives price range and highest bidder gets the shares.
• ECB: External Commercial Borrowing under automatic route and approval route.
– Masala Bonds: INR denominated overseas bond, minimum maturity of 5 years, cannot be issued for
real sector and capital market sector, withholding tax of 5 % on interest income, no capital gains tax
in case of INR appreciation.
• Rajiv Gandhi Equity Saving Scheme (RGESS): 50 % deduction of the amount invested from taxable income
for that year to first time retail investors who invest up to Rs 50k and whose annual income is below Rs 10
lakhs.
• CDS: Credit Default Swap, A credit derivative instrument where one party (protection buyer) pays the
other party (protection seller) periodic payment for the specified life of the agreement. Protection seller
makes no payment unless a credit event relating to reference assets occurs. Hence CDS transfers credit risk
from investors exposed to risk (protection buyers) to the investor willing to take risk (protection seller).
• Securitisation: Process of issuing marketable securities backed by a pool of existing assets such a auto or
home loans. After an asset is converted into a marketable security , it is sold to an investor who receives
interest and principal out of the cash flow from debt servicing. For the sellers it gives them liquid cash out
of assets that otherwise be stuck on their balance sheets.
• Corporate Bond: Done in Investment Model exercise.
• Inflation Indexed Bonds: To reduce gold demand, these provide returns always in excess of inflation
ensuring that price rise do not erode value of savings. In 2013-14 RBI launched two such bonds:
– One linked to WPI
– Second linked to CPI:
• Called Inflation Indexed National Saving Securities – Cumulative (IINSS-C) with 10 years tenure.
• Internationally called linkers
• Interest rate linked to combined CPI (Base 2010). Interest rate comprise of fixed rate (1.5 %)
and inflation rate of CPI.
• WPI is less accurate gauge of inflation than CPI.
• CPSE ETF: Central Public Sector Enterprise ETF comprises shares of 10 blue chip PSUs was listed on BSE and
NSE on 2014
– ETF is a security that tracks an index, a commodity or a basket of assets such as an index fund , but
trades like a stock on an exchange.
– CPSE ETF tracks CPSE Index and invests raised corpus in index companies as per given weightage.
– BHARAT-22 Exchange Traded Fund (ETF): Launched in 2017, The strength of this ETF lies in the
specially created Index S&P BSE BHARAT-22 INDEX. This Index is a unique blend of shares of key
CPSEs,Public Sector Banks (PSBs) and also the Government owned shares in blue chip private
companies like Larsen & Tubro (L&T), Axis Bank and ITC.
• Pension Sector Reforms:
– New Pension Scheme for govt recruits after 2004.
– Swavalamban Scheme 2010: Unorganised sector version of NPS. Also known as NPS Lite.
– NPS Corporate Sector Model 2011: For ‘organised sector’.
– Atal Pension Yojana 2015-2016: Defined pension (Rs 1k, 2k, 3k, 4k, 5k per month) depending on the
contribution and its period.
– Open to all bank account holders and non income tax payer.
• Financial Stability Development Council: In line with G20 initiative for monitoring financial stability and
enhancing inter regulatory coordination.
• Financial Sector Assessment Programme (FSAP): IMF includes India in 25 systemically important
economies under the FSAP.
• Financial Action Task Force: Inter govt policy making body for combating money laundering and terrorist
financing.
• Real Estate Investment Trust (REITs): For enabling cash strapped real estate have easy access to funds
– Close ended scheme, returns derived mainly from rental income or capital gains from real estate, to
raise funds only through an initial offering and units of REITs have to be mandatorily listed on stock
exchange, initially only wealthy individuals and instituitions will be allowed to subscribe to REIT unit
offer.
• Infrastructure Investment Trusts (InvITs): Somewhat similar to REITs, however initial offer will not be
mandatory though listing mandatory for both publicly and privately placed InvITs
• Expert Committee 2017-18 to integrate spot and derivatives market in the agriculture sector for
commodities trading. eNAM will be integral part of the framework.