SECURITY ANALYSIS AND PORTFOLIO MANAGEMENT

Security shares, debentures, and bonds Security stands for an investment instrument issued by a government or a company indicating the evidence of ownership ( shares ) or creditor ship ( bonds, debentures). Security can be traded , ownership can be transferred form one party to another

 Securities market securities are bought and sold. It implies the entire infrastructure required for transacting in securities, including the set of regulatory bodies to ensure that the transactions carried out in a fair and transparent manner Securities market cannot be identified with a physical location , it can be logically be divided into : - capital market ( market for long term FIS of O (s) and C(b/d) -money market ( market for short term FIS maturity of less than 1 year )

 Investors tend to invest in a group of securities. Such a group of securities is called a Portfolio Creation of a portfolio helps to reduce risk without sacrificing returns Portfolio Management deals with the analysis of individual securities as well as with the theory and practice of optimally combining securities into portfolios An investor understands principles + analytical aspects of PM has a better chance of success

SECURITIES AND EXCHANGE BOARD OF INDIA (SEBI) : SEBI is the national regulatory body for the securities market- the Big Daddy It was set up under the SEBI Act 1992 to protect the interests of investors in securities and to promote the development of, and to regulate the securities market and for matters connected herewith or incidental to SEBI has its head office in mumbai and regional offices in K,C and D. SEBI investor education program and a grievance redressal cell

What is Portfolio Management ?

Portfolio management comprises all the processes involved in the creation and maintenance of an investment portfolio PM aims at optimizing the investment of ones fund PM makes use of analytical techniques of analysis and conceptual theories regarding rational allocation of funds PM as the economic & financial environment changes , the risk-return characteristics of individual securities as well as portfolios also change. This calls for periodic review and revision of investment portfolios of investors

PHASES OF PORTFOLIO MANAGEMENT :

4&5 PORTFOLIO REVISION & PORTFOLIO EVALUATION

1 SECURITY ANALYSIS

3 PORTFOLIO SELECTION

2 PORTFOLIO ANALYSIS

EVOLUTION OF PORTFOLIO MANAGEMENT

1900 The anatomy of a railroad report was published by Thomas woodlock- FSA became more popular in investment field 1906 The art of wall street investing published by John moody strongly supported financial statement & ratios for investment 1911 The principles of Bond investment was published by Lawrence chamberlain 1900-02 charles Dow , the founder of Dow jones Co investment strategy consisted in studying the stock price movement with the help of price charts. This method came to be known as technical analysis

1938 Ralph.N.Elliot published a book entitled as The Wave principle after analysing 75 years of share price data he concluded that the market movement was quiet orderly and followed a pattern of waves. His theory came to be known as Elliot wave theory. J.C.Francis the development of investments management can be traced chronologically through three distinct phases: Speculative phase price manipulation was resorted to by the investors- stock exchange crash in USA in 1929. Speculative venture of investors were made illegal in the US by the Securities Act of 1934 Phase of Professionalism 1930 US regulations governing investment trading were passed 1933-34.Investment markets became safer. Benjamin grahm and David dodd publised a book titled Security analysis in 1934.They are considered as pioneers of security analysis as a discipline

 Third phase scientific phase

Harry Markowitz , publication of a paper on Portfolio selection in the journal of finance in 1952- foundation for modern portfolio theory.1959 published a book titled Portfolio selection :efficient diversification of investments. He attempted to quantify risks.He provided analytical tools for the analysis and selection of the optimal portfolio.This pioneering portfolio approach to investment management won him the nobel prize for economics in 1990. William sharpe shared the nobel prize with markowitz for his contribution to the development of CAPM ( capital asset pricing model ) The developments in the field of PM are continuing apace. Infact the last two phases in the development of PM practice namely professionalism and scientific analysis are currently advancing simultaneously.

INVESTMENT MANAGEMENT

Capital formation--Savings and investment is a necessary precondition for economic development of a country. Capital markets play an important role in the capital formation process Indian capital market mobilizing & channel zing private capital for the economic development of the country. In the process the functioning of the capital markets have become transparent and efficient INVESTMENTS may be defined as postponed consumption e.g A farmer buying a piece of agricultural land for 4 lakhs An officer buying 100 shares of ABC Ltd for Rs 100 each

 Investment is the net addition made to the nations capital stock that consists of goods/services that are used in the production process economic sense real assets Investment means conversion of cash or money into monetary assets or a claim on a future money for a return financial sense financial assets Income: spent current consumption savings future consumption Investment involves employment of funds with the aim of achieving additional income or growth in values

CHARACTERISTICS OF INVESTMENT

Legality Tax implication Capital growth Stability of purchasing power Stable income Liquidity Longer life expectancy High rate of interest Investment channel Income Workforce (men+women) Safety of principal

Financial Markets a market for creation and exchange of financial

assets. If you buy or sell financial assets, you n

Functions of Financial markets :

Financial markets facilitate price discovery. If you want to know the value of a financial asset , simply look at the price in the financial market
Financial markets provide liquidity to financial assets. Investors can readily sell their financial assets through the mechanism of financial markets. Financial markets considerably reduce the cost of transacting. The two major costs associated with transacting are search costs and information costs. Search cost includes advertising, effort & time one has to put in to locate a customer. Information costs refer to costs incurred in evaluating the merits of financial assets

CLASSIFICATION OF FINANCIAL MARKETS :

Nature of claim Debt market and Equity market Maturity of Claim Money market and Capital market Seasoning of Claim Primary market and Secondary market Timing of Delivery Cash or spot market and Forwards / Futures market Organizational structure exchange traded market and over the counter market

Factors Favouring investments :

Legal protection

Well organized monetary system

Role of financial institutions Forms of business organizations

INVESTMENT OBJECTIVES

Rate of Return : ROR= Annual income + ( ending price beginning price) -------------------------------------------------------------Beginning price Risk Safety Liquidity Hedge against inflation Tax shelter initial tax benefit, continuing tax benefit, terminal tax benefit Convenience

INVESTMENT Vs SPECULATION ( investor Vs speculator

Planning horizon - longer duration short duration Risk disposition moderate risk high risk Return expectation moderate rate of return high ROR Basis for decisions fundamental analysis technical analysis Leverage uses his own funds borrowing of funds

Gambling :
Compared to I and S , the result of gambling is known more quickly ( turn of a card or roll of a dice ) Rational people gamble for fun not for income Gambling does not involve a bet on an economic activity. It is based on risk that is created artificially. Gambling creates risk without providing any commensurate economic return

Approaches to investment decision making

Fundamental approach : There is an intrinsic value of a security depends upon fundamental factors relating to the company, industry and economy. Market price will differ from the intrinsic value, Sooner or later the market price will fall line with the intrinsic value Superior returns can be earned by buying under valued securities ( whose IV > market price) and selling over-valued securities ( whose IV < MP )

Psychological Approach :
Stock prices are guided by emotion( psychological mood ) rather than reason. When greed and euphoria sweep the market , prices rise to dizzy heights. When fear and despair envelop the market prices fall to abysmally low levels This approach uses technical analysis where patterns of price movements can be discerned by analyzing market data. Technical analysts use a variety of tools like bar chart, point and figure chart, moving average analysis and so on

Academic approach :
Stock markets are reasonably efficient in reacting quickly and rationally to the flow of information. Stock prices reflect intrinsic value fairly well ( Market price = Intrinsic value ) Stock price behavior corresponds to a random walk past price behavior cannot be used to predict future price behavior

The expected return from a security is linearly related to its systematic risk ( market risk ) there is a positive relationship between risk and return.

Eclectic approach :
Fundamental analysis is helpful in establishing basic standards and benchmarks. Exclusive reliance on FAs should be avoided. Do FAs to establish certain value. Technical analysis is useful in gauging the prevailing mood of investors and the relative strengths of supply and demand forces. Do TAs to assess the state of the market psychology. Combine FAs and TAs to determine which securities are worth buying, worth holding and worth disposing off. Respect market price an do not show excessive zeal in beating the market Accept the fact the search for a higher level of return often necessitates the assumption of a higher level of risk.

COMMON ERRORS IN INVESTMENT MANAGEMENT :

Inadequate comprehension of return and risk Vaguely formulated investment policy Nave extrapolation of the past Cursory decision making Untimely entries and exit High costs Over diversification and under diversification Wrong attitude toward losses and profits

Qualities for Successful investing : Contrary Thinking Patience Composure Flexibility and Openness Decisiveness

TIME VALUE OF MONEY

Money has time value. i.e, the value of money changes over a period of time The value of a rupee received today is different from the value of a rupee to be received after a year. A rupee today has value than a rupee after a year.
Factors contributing to the Time Value of Money individuals generally prefer current consumption to future consumption an investor can profitably employ a rupee received today to give him a higher value to be received tomorrow or after a certain period. In an inflationary economy the money received today has more purchasing power than money to be received in future

people consider a rupee today worth more than a rupee in the future, say, after a year. This is because of the uncertainty connected with the future.

Money received today is more valuable of the same amount received after 7 or 12 years. In reality sooner the money receives is better Mr X receives Rs 20000 ( 2 options available ) - receive it immediately - receive it after one year ( reward or interest ) Reasons for time preference for money : uncertainty and loss to satisfy present needs investment opportunities

PARTICULARS Initial investment

PROJECT A 1500000

PROJECT B 1500000

Expected cash-inflows 1 year 2 year 3 year

: 300000 300000 900000 -----------1500000 600000 600000 300000 ------------1500000

Both cash-inflows = project cost. But actually project B generate more cah inflows than project A. B is preferable in terms of time value of money.

TECHNIQUES OF TIME VALUE OF MONEY : Compounding technique or Future value Discounting technique or Present value

a. Compounding technique : under this method the interest received is actually reinvested. Interest earned on the principal amount becomes a part of the principal at the end of the compounding period. This method is used to determine the Future value of money.

Techniques : Lump sum method Formula method Table value method Multiple compounding periods

PRESENT VALUE OR Discounting technique

Direct opposite of FV technique PV discounting technique for taking financial decisions The process of determining PV of a future payment or receipt is called discounting Normally the PV of money received in future period will be less because of applying discount factor to find the future value. Under PV technique value today of a sum of money to be received at a future point of time

COMPUTATION OF PV

Lump sum method PV of a series of payment ( using table method) or formula method PV of annunity

RISK AND RETURN Two sides of the investment coin Return reward for undertaking investment
historical returns are often used as an important input in estimating future or prospective returns The return of an investment consist of two components : current return and capital return.

Current return is measured as the periodic income ( cash flow dividend, interest) in relation to the beginning price of the investment
Capital return - simply refers to price appreciation or depreciation divided by the beginning price of the asset Total return of the security = Current return + Capital return

RISK Risk is the potential for variability in returns An investment whose returns are fairly stable is considered to be low-risk investment An investment whose returns fluctuate significantly is considered to be a high-risk investment Example: Equity shares risky investments Government securities low risk Total risk systematic risk + unsystematic risk

 Systematic risk : impact of economic, political, and social changes is system wide and that portion of total variability in security returns caused by system wide factors is referred to as systematic risk
Interest rate risk Market risk Purchasing power risk

Unsystematic risk or unique risk. The returns from a security may sometimes vary because of certain factors affecting only the company issuing security. E.g raw material scarcity, labour strike, management inefficiency When variability of returns occurs because of such firms specific factors it is known as unsystematic risk The two types of unsystematic risk are referred to as : business risk financial risk -

GOVERNMENT SECURITIES
Debt securities issued by the central government, state government, and quasi government agencies are refereed to as government securities or Gilt-edged securities Government securities have maturities ranging from 3-20 years and carry interest rates that usually vary between 7 to 10 % These securities are typically held by banks, financial institutions, insurance companies, and provident funds mainly because of cartain statutory compulsions. The public debt office pays interest to the holders registered with it on the specified date of payment

RBI SAVINGS BONDS

Individuals , and NRIs can invest in these bonds The minimum amount of investment is Rs 1000. There is no maximum limit. The maturity period is 5 years from the date of issue Interest is 8 % per annum, payable half-yearly Interest earned is taxable. The bonds are exempt from wealth tax without any limit The bonds are transferable Nomination facility is available

 The bonds can be offered as security to banks for availing loans

Bonds are issued in the form of bond ledger account or in the form of promissory notes. The promissory notes are transferable by endorsement and delivery. Bonds in the form of promissory notes are issued only at RBI offices.
Bond ledger account can be opened in the name of the investors at the receiving offices ( designated offices of banks ) and at the Public debt offices of RBI.

PUBLIC SECTOR UNDERTAKING BONDS

PSUs issue debentures that are referred to as PSU bonds. 2 varieties of PSU bonds taxable bonds and tax free bonds PSU s are free to set the interest rate for taxable bonds, they cannot offer more than a certain interest rate on tax free bonds which is fixed by the ministry of finance PSU can issue bonds only with prior approval of the Ministry of Finance There is no deduction of tax at source on the interest paid on these bonds They are transferable by mere endorsement and delivery they are traded on the stock exchanges Some institutions are ready to buy and sell with a small price difference

PRIVATE SECTOR DEBENTURES

Debentures are instrument used for raising long term debt The obligations of a company towards debenture holders to pay interest and principal at specified times When a debenture issue is sold to the investing public a trustee is appointed. The trustee is usually a bank or a financial institution Debentures are secured by a charge on the immovable properties All debenture issues with a maturity period of more than 18 months must be necessarily credit-rated

 For debenture issues, a DRR ( Debenture redemption reserve ) has to be created. The company should create a DRR equivalent to at least 50 % of the amount of issue before redemption commences

Previously the coupon rate ( or interest rate ) on debentures was subjected to ceiling fixed by the ministry of finance. No such ceiling applies now. A company is free to choose the coupon rate. The rate may be fixed or floating. The floating rate case may be periodically determined in relation to some benchmark rate.
Earlier the average redemption period for non-convertible debentures was supposed to be about 7 years. Now there is no restriction. A company has freedom to choose the redemption ( maturity ) period.

 Debentures may have a convertible clause which gives the debenture holder the option to convert the debentures into equity shares on certain terms and conditions that are pre-specified. Debentures sometimes carry a Call feature which provides the issuing company with an option to redeem the debentures at a certain price before the maturity date. Sometimes the debentures may have a Put feature which gives the holder the right to seek redemption at specified times at predetermined prices.

Preference shares
Preference shares represent a hybrid security that partakes some characteristics of equity shares and some attributes of debentures. Preference shares carry a fixed rate of dividend Preference dividend is payable out of distributable profits. Hence when there is inadequacy of distributable profits, the question of paying preference dividend does not arise Dividend on preference shares is cumulative. Dividend skipped in one year has to be paid subsequently before equity dividend can be paid Preference shares are redeemable, the redemption period is usually 7 to 12 years Current preference dividend is tax exempt

EQUITY SHARES Equity capital represents ownership capital. Equity shareholders collectively own the company The amount of capital that a company can issue as per its MOA represents the Authorized capital The amount offered by the company to the investors is called the Issued capital That part of the issued capital that has been subscribed to by the investors is called the Subscribed capital The actual amount paid is called the paid up capital Typically the issued, subscribed and paid up capital are the same

 The par value is stated in the memorandum and written on the share scrip. The par value of equity shares is generally Rs 10 or Re 1. Infrequently , one come across par values like Rs 5, Rs 50, and Rs 1000. There is a proposal to make the par value uniformly at Rs 1. The issue price is the price at which the equity share is issued. When the issue price exceeds the par value the difference is known as the share premium Note that the issue price cannot be , as per law, lower than the par value. The book value of an equity share are as follows:
Book value of ES= Paid up capital + Reserves & Surpluses ------------------------------------------------------Number of outstanding equity shares

 The book value of an equity share tends to increase as the ratio of reserves and surpluses to the paid-up capital increases. The market value of an equity share is the price at which it is traded in the market As owners of the company , equity shareholders enjoy the following rights : - ESs have a residual claim to the income of the firm (PAT- PD) - Equity dividends are presently tax exempt - The company paying dividend is required to pay dividend distribution tax - Dividends provide current income to to ESs and RE tend to increase the intrinsic value of the equity shares - ESs elect the BODs and have the right to vote on every resolution placed before the company - ESs enjoy the pre-emptive right which enables them to maintain their proportional ownership by purchasing additional equity shares issued by the firm

 Example : If you own 1000 equity shares in a company that has 10,00,000 outstanding shares, you are entitled to subscribe to 200 shares, if the company proposes to issue 200000 additional shares. The equity shareholders of the company may however forfeit this right partially or totally to enable the company to make a public issue The law requires companies to give existing shareholders the first opportunity to purchase on a pro rata basis As in the case of income, equity shareholders have a residual claim over the assets of the company in the event of liquidation. Claim of creditors are prior to the claim of equity shgareholders

STOCK MARKET CLASSIFICATION Blue-chip shares : shares of large, well established and financially strong companies with an impressive record of earnings and dividends Growth shares : shares of companies that have a fairly entrenched position in a growing market and which enjoy an above average rate of growth as well as profitability Income shares : shares of companies that have fairly stable operations, relatively limited growth opportunities and high dividend payout ratios Cyclical shares : shares of companies that have a pronounced cyclicality in their operations Defensive shares : shares of companies that are relatively unaffected by the up s and downs in general business conditions Speculative shares : shares that tend to fluctuate widely because there is a lot of speculative trading in them

NEW ISSUE MARKET primary market When a company is floated, its shares are issued to the public in the primary market as an IPO SELLING OF SECURITIES to the public for the first time When a company decides to include debt in its capital structure by issuing bonds or debentures, these may be floated in the primary market When a company decides to expand its activities using either equity finance or bond finance, the additional shares or bonds may be floated in the primary market Capital formation takes place in the primary market Primary market investors : seekers of capital

 The primary market does not have a physical structure or form. All the agencies which provide the facilities and participate in the process of selling new issues to the investors constitute the NIM Functions of NIM : - Origination - Underwriting - Distribution

ORIGINATION It is the preliminary work in connection with the flotation of anew issue by a company It deals with assessing the feasibility of the project, technical, economic and financial, as also making arrangements for the actual flotation of the issue. The origination function in the NIM is now being carried out by the merchant bankers. These are separate institutions registered with the SEBI. As part of the origination work , decisions have to be taken on the following issues : - timing of floating the issue - type of issue - price of issue

 Time of floating the issue the flotation of the issue should coincide with the buoyant mood in the investment market to ensure proper support and subscription to the issue Type of issue equity, preference or debenture has to be properly analyzed at the time of origination work Price of issue price of the security is determined by the issuer and not by the market. New issues are made either at par or at a premium. Public support to a new issue will depend on the price of the issue to a large extent.

UNDERWRITING It is the guarantee to the issuer to ensure successful marketing of the issue. An underwriter is an individual or institution which gives an undertaking to the stock issuing company to purchase a specified number of shares of the company in the event of a shortfall in subscription to the new issue The stock issuing company can thus ensure full subscription to the new issue through under writing agreements with underwriters, even if there is no proper response to the new issue from the investors. Underwriting activity in the NIM is performed by large financial institutions such as LIC, UTI, IDBI, IFCI, general insurance companies, commercial banks and also by brokers. The underwriters earn commission from the issuing company for this activity

DISTRIBUTION The distribution function is carried out by brokers, sub-brokers and agents New issues have to be publicized by using different mass media such as newspapers, magazines, television ,radio, Internet etc New issues are also issued by mass mailing. It has become a general practice to distribute prospectus, application form, and other literature regarding new issues among the investing public

METHODS OF FLOATING NEW ISSUES 1. Public issue sale of securities of the public. The issuing company makes an offer for sale to the public directly of a fixed number of shares at a specific price. The offer is made though a legal document called a prospectus. Public issues are mostly underwritten by strong financial institutions. The company has to incur expenses on various activities such as advertisements, printing of prospectus, banks commissions, underwriting commissions, agents fees, legal charges etc This is the most popular method for floating securities in the NIM, but it involves an elaborate process and consequently it is an expensive process.

RIGHTS ISSUE The rights issue involves selling of securities to the existing shareholders in proportion to their current holding Sec 81 of the indian companies act 1956, when a company issues additional equity capital it has to be offered first to the existing shareholders. The shareholders may forfeit this special right by passing a special resolution and thereby enable the company to issue additional capital to the public through a public issue. RI is an inexpensive method of flotation of shares as the offer is made through a formal letter to te existing shareholders

PRIVATE PLACEMENT It is a sale of securities privately by a company to a selected group of investors The securities are normally placed with institutional investors, mutual funds or financial institutions. The terms of the issue are negotiated between the company and the investors A formal prospectus or underwriting arrangement is not necessary This method is useful to small companies for issue of new securities, because such companies are unlikely to get good response from public through public issues.

PRINCIPAL STEPS IN FLOATING A PUBLIC ISSUE PRE-ISSUE TASKS :

Drafting and finalization of prospectus :

inviting offers from the public for the subscription of any shares of a body of a corporate. The prospectus contains detailed information about the company, its activities, promoters, directors, capital structure, terms of the present issue, underwriting. The draft prospectus has to be approved by the BODs and to be filed with SEBI and the registrar of companies.

The final prospectus has to be prepared as per SEBI guidelines and filed with SEBI and the registrar of the companies

Services of intermediaries and entering into agreements with them

1. Merchant banker : who has the expertise to understand a particular transaction, has to arrange necessary capital and ensure that the transaction would ultimately produce profits.
Registration with SEBI is mandatory The applicant should be a body corporate The applicant should have a minimum net worth of Rs 5 crores The applicant must have at least 2 employees with prior experience in merchant banking The applicant should not have been involved in any securities scam Merchant banking services :

Merchant banker

Advisory services

Market operations

Issue management & finacial services

2. Registrar to an issue

Collecting applications form investors Keeping a record of applications and monies received form investors Assisting the stock issuing company in determining the basis of allotment of securities in consultation with the stock exchange Finalizing the list of persons entitled to allotment of securities Processing and dispatching allotment letters, refund of orders, certificates and other related documents

3.REGULATORY BODIES

SEBI RBI DCAs DEAs

These regulators monitor and help in the smooth and uninterrupted flow of activities in the capital market. SEBI has been empowered with more powers and is directly linked to the regulation of stock market, it also works with other regulators to govern the capital market.

 4. Share transfer agent is a person or institution which maintains the records of holders of securities of a company on behalf of that company. The share transfer agent is authorized to effect the transfer of securities as well as the redemption of securities wherever applicable 5. Banker to an issue banker to an issue is a schedule bank entrusted with the following activities in connection with the public issue :
Acceptance of application and application monies Acceptance of allotment or call monies Refund of application monies Payment of dividend

Opening and closing of the issue An initial listing application has to be filed with the stock exchange where the issue is proposed to be listed. An abridged version of the prospectus along with the issue opening and closing dates has to be published in newspapers The public issue is open for subscription by the public on the preannounced opening date Application form + monies banker forward it to Registrar to the issue Two closing date are given for the closing of the public issue. The First closing date not be less than 3 days from the opening date. Second closing date shall not exceed 10 days from the opening date

POST ISSUE TASKS

All the application forms received have to be scrutinized, processed and tabulated When the issue is not fully subscribed, the liability of each underwriter has to be determined When the issue is oversubscribed , the basis of allotment has to be decided in consultation with the stock exchange. Allotment letters and share certificates have to be dispatched to the allottees. Refund orders have to be dispatched to the applicants whose applications are rejected Shares have to be listed in the stock exchange for trading. The issuing company has to enter into a listing agreement with the stock exchange

BOOK BUILDING

The usual procedure of a public issue is through the fixed price method, where securities are offered for subscription to the public at a fixed price.
An alternative method is now available which is known as book building process, the issue price is not fixed in advance. It is determined by the offer of potential investors about the price which they are willing to pay for the issue.

The price of the security is determined as the weighted average at which the majority of investors are willing to buy the security. The issue price of a security is determined by the demand and supply forces in the capital market
A public issue of securities may be made through the book building route / fixed price / combination of both

SEBI guidelines issuing company chooses to issue securities through book building route 100 % of the offer to the public through the book building process 75 % of the offer to the public through the book building process and 25 % through the fixed price method at the price method at the price determined through book building 95 % of the offer to the public through the book building process and 10 % through the fixed price method

STEPS INVOLVED IN BOOK BUILDING PROCESS

The issuer appoints a merchant banker as the lead manager and book runner to the issue The book runner forms a syndicate of underwriters. The syndicate consists of book runner, lead manager, advisors, co-managers & underwriting members A draft prospectus is submitted to SEBI without a price or price band The draft prospectus is circulated to eligibile investors with a price band arrived at by the book runner in consultation with the issuer. Such a prospectus is known as Red Herring prospectus The book runner conducts road shows, conferences, awareness campaigns, and advertising Investors place their orders with syndicate members. These members collect orders from their clients on the amount of securities required by them as well as the price they are willing to pay

 The book runner builds up a record known as Book after receiving orders from members of the syndicate. He maintains detailed records in this regard. When the book runner receives substantial number of orders he announces closure of the book. A book should remain open for a minimum of 3 working days. Maximum period for which the bidding process may be allowed is 7 working days On the basis of offer received the book runner and the issuer company then determines the price at which the securities shall be sold The book runner finalizes the allocation to syndicate members Final prospectus along with the procurement agreements is then field with the registrar of companies within 2 days of determination of the offer price The book runner collects from the institutional buyers & underwriters the application forms along with the application monies to the extent of the securities proposed to be allotted to them/ subscribed by them

 Book building is a process wherein the issuer of securities asks investors to bid for their securities at different prices These bids should be within an indicative price band decided by the issuer Here investors bid for different quantity of shares at different prices Considering these bids, issuer determines the price at which the securities are to be allotted. Thus the issuer gets the best possible price for his securities as perceived by the market or investors.

 FIXED PRICE IPO :

Public issue of 10,000,000 equity shares of Rs 10 par value at a price of Rs 24 ( premium of Rs 14 ) each aggregating Rs 2400 million

BOOK BUILDING IPO :

Public issue of 72,243,300 equity shares of Rs 10 par value at a price of Rs ( *) each aggregating Rs ( * ) million A company may provide a price band indicating the minimum and maximum price E.g order book : bid price ( per share ) No of shares bid cummulative shares 501 200 200 400 2000 2200 : : 125 45,486,400 81,467,000
125 cut-ff price for the IPO

REGULATION OF PRIMARY MARKET Up to 1992, the primary market was controlled by the Controller of capital issues ( CCI ) appointed under the capital issues control act 1947. During this period the pricing of capital issues was regulated by CCI. The SEBI was formed under the SEBI act 1992, with the prime objective of protecting the interests of investors in securities as well as promoting and regulating the securities market. All public issues since Jan 1992 are governed by the rules, regulations, and guidelines issued by SEBI. SEBI constantly reviews its guidelines to make them more market friendly & investor friendly SEBI regulates every stage of a public issue & regulates the intermediaries in the market

Secondary market - Stock exchange SM is the market in which securities already issued by companies are subsequently traded among investors. SM A centralized market for buying and selling stocks where the price is determined through supply-demand mechanism SM Auction process are being replaced with electronic exchanges where buyers and sellers are connected only by computers over telecommunications network. Auction trading is giving way to screen based trading , where bid prices and offer prices are displayed on the computer screen
Bid price : refers to the price at which an investor is willing to buy the security Offer price ( ask price ) : refers to the price at which the investor is willing to sell the security

FUNCTIOS OF STOCK EXCHANGES SEs provides a market place for purchase and sale of securities such as shares, bonds, debentures etc. SEs provide the facility for continuous trading in securities

SEs provide liquidity to the investments in securities, it gives the investors a place to liquidate their holdings
SEs help in the valuation of securities by providing the market quotations of the prices of securities. Market quotation represent the collective judgement on the value of securities arrived at simultaneously by many sellers and buyers in the market SEs play the role of a barometer, an indicator of the state of health of the nations economy as a whole. The trend of price movements in the market is indicated by calculating stock marketindexes , which represent the weighted average of prices of selected shares representing all the important industries

STOCK MARKET IN INDIA There are currently 23 recognized stock exchanges in india. Out of which 4 are national and 19 are regional exchanges.

The four national level exchanges are BSE , NSE , OTCEI and ISE
North zone: kanpur, ludhiana, newdelhi, jaipur, meerut East zone : bhubaneswar,Kolkata, Guwahati West zone : ahmedabad, vadoadara, indore, pune, rajkot Southzone : bangalore, chennai, kochi, coimbatore, hyderabad, mangalore

OTCEI OTCEI was incorporated in oct 1990 under the companies act, it was promoted by UTI, ICICI, IDBI, IFCI, LIC, SBI Capital markets, GIC, Canbank financial services. Companies listed on OTCEI cannot be listed on any other stock exchange in india. This exchange is primarily meant for small size companies and small investors. OTCEI lists scrips even with 20 % of the capital offered for public trading. It introduced screen based trading for the first time in the indian stock market. An investor must buy INVESTOTC card for buying and selling shares on OTCEI by making an application at any of the counters of OTCEI. F &O transactions have been allowed to traded on OTCEI. SEBI has now allowed trading of equity shares of all unlisted companies on the OTCEI to boost its business volume

BSE : The bombay ( mumbai ) stock exchange BSE was recognized on a permanent basis in1957. This stock exchange is the oldest stock exchange in asia In 1995 BSE introduced screen based trading called BOLT ( BSE online trading ) BSE has an active investors grievance cell ( to settle disputes among trade members and investors ) BSE has tied up with NIICL to provide insurance cover for the exchange, members and the clearing house BSE has created the trade guarantee fund in 1997 for bonafide transactions & the corpus of the fund amounts to Rs 600 million BSE is governed by a board, chaired by a non executive chairman. The executive director is in charge of the administration of the exchange and is supported by elected directors, SEBI nominees & public representatives Securities traded in BSE are classified into A, B1 and B group

THE INTER CONNECTED STOCK EXCHANGE OF INDIA ISE has been set up in mumbai in 1997 ISE is an association of the 14 regional stock exchanges ISE was decided to evolve an inter connected market system by pooling the resources of the 14 regional stock exchanges The trading settlement and funds transfer operations of the ISE are completely automated. ISE provides trading, clearing, settlement, risk management and surveillance support to the inter connected market system SGF guarantees settlement of all trades validly executed in the ISE system.

NSE : the national stock exchange NSE became operational on 3, NOV 1994 in mumbai Promoters of NSE IDBI, ICICI, IFCI, LIC, GIC, SBI, BOB, CB, IB,OBC,UBI,PNB,SBI capital market & SHCIL NSE trading system NEAT ( national exchange for automated trading ) is a state of the art client server based application. It also uses satellite based communication technology ( 365 cities 2897 VSATs ) for trading. NSE has shifted its trading platform from the trading hall of the exchange to the computer terminals at the premises of the trading members located at different locations in the country. NSE has been instrumental in bringing about changes in the trading system such as reduction of settlement cycle, dematerialization and electronic transfer of securities, establishment of clearing corporations, professionalisation of trading members. Operations in the derivatives market commenced in june 2000

ORGANIZATIONAL STRUCTURE OF NSE :

CLEARING HOUSE NSCCL

INDEX SERVICES IISL

NSE

TECHNICAL SUPPORT NSEIT/DotEx

DEPOSITORY NSDL

LISTING OF SECURITIES

For the securities of the company to be traded on a stock exchange they have to be listed in that stock exchange. Listing is the process of including the securities of a company in the official list of the stock exchange for the purpose of trading Minimum listing requirements for IPOS : big company paid up capital minimum shall be Rs 3 cr and minimum issue size is 10 cr, small company paid up capital shall be Rs 3 cr and minimum issue size is Rs 3cr To get listed the company has to apply to the stock exchange. Its AOA should be approved. The draft prospectus also should be approved by the SEBI and concerned stock exchange The company would be required to execute a listing agreement with the stock exchange. The listing agreement contains the obligations & restrictions imposed on the company as a result of listing

Listing fees : Initial listing fees Annual listing fees : - Rs 20000

Companies with paid up capital up to Rs 5 crores 10000 Above Rs 5 crores and up to 10 crores _ 15000 Above Rs 10 crores and up to 20 crores _ 30000 Companies which have a listed capital of more than 20 crores will pay additional fees of Rs 750 for very increase of Rs 1 crore Incase of debenture capital of companies the fees will be charged @ 25 % of the fees payable as per the above mentioned scales

LISTED SECURITIES ARE CATEGORISED INTO GROUPS : e.g BSE

The equity shares listed in the exchange have been grouped under three groups namely : A, B1 and B2 based on certain qualitative & quantitative parameters that include number of trades, value of traded etc The F group represents the fixed income securities The G group includes government securities for retail investors

The Z group includes companies which have failed to comply with the listing requirements of the exchange or have failed to resolve investor complaints

SECURITY MARKET INDEXES A stock market index is created by selecting a group of stocks that are capable of representing the whole market or a specified sector or segment of the market. The change in the prices of this basket of securities is measured with reference to a base period A stock market index acts as the indicator of the performance of the overall economy or sector of the economy Index = ( total market capitalization of constituent scrips/ base value) * base index All stock exchanges constitute an index committee to identify the representative shares for the index. The index committee meets frequently to review the indexes Methods for computing stock indexes : market value weighted method, price weighted method and equal weight method BSE BSE sensex with 30 scrips & NSE S & P Nifty index

BSE indicies ( JAN 2004)

NSE indicies ( JAN 2004 )

SENSEX 30 stocks BSE-100 BSE-200 BSE-500 BSE-IT BSE-FMCG BSE-TECK BSE-PSU BSE-BANKEX
www.bseindia.com

S & P CNX Nifty 50 STOCKS CNX Nifty Junior 100 liquid securities S & P CNX 500 CNX Midcap 200 CNX IT Sector Index
www.nse-india.com

SEBI SECURITIES EXCHANGE BOARD OF INDIA SEBI was established in 1988 to regulate and develop the growth of the indian capital market SEBI regulates the working of stock exchanges & intermediaries SEBI Act 1992, states that the duty of the board is to protect the interests of investors in securities and to promote the development of and to regulate the securities market SEBI has a primary market department, secondary market department, mutual funds department, and a derivative cell to carry out regulatory services

organizational structure of SEBI Board of members constitute the top structure of governance, board is headed by a chairman and has 5 members representing the central government and RBI

POWERS & FUNCTIONS OF SEBI

Regulating the business in stock exchanges and other securities market Registering and regulating the working of stock brokers, sub brokers, share transfer agents, bankers to an issue, registrars to an issue, merchant bankers, underwriters, portfolio mangers, investment advisors & other intermediaries associated with the securities market Regulating substantial acquisition of shares and takeovers of companies Promoting and regulating self-regulatory organizations Prohibiting fraudulent & unfair trade practices in the securities market Protecting investors and promoting investor education and training of intermediaries in the securities market Prohibiting insider trading in securities Calling for information from, undertaking inspection, conducting enquiry, and audits of stock exchanges, intermediaries & self-regulatory organizations in the securities market

SECURITY MARKET INDEXES A stock market index is created by selecting a group of stocks that are capable of representing the whole market or a specified sector or segment of the market. The change in the prices of this basket of securities is measured with reference to a base period A stock market index acts as the indicator of the performance of the overall economy or sector of the economy Index = ( total market capitalization of constituent scrips/ base value) * base index All stock exchanges constitute an index committee to identify the representative shares for the index. The index committee meets frequently to review the indexes Methods for computing stock indexes : market value weighted method, price weighted method and equal weight method BSE BSE sensex with 30 scrips & NSE Nifty with 50 scrips

BSE indicies ( JAN 2004)

NSE indicies ( JAN 2004 )

SENSEX 30 stocks BSE-100 BSE-200 BSE-500 BSE-IT BSE-FMCG BSE-TECK BSE-PSU BSE-BANKEX
www.bseindia.com

S & P CNX Nifty 50 STOCKS CNX Nifty Junior 100 liquid securities S & P CNX 500 CNX Midcap 200 CNX IT Sector Index
www.nse-india.com

 Sensex and Nifty are calculated using market capitalization weighted method Index is calculated by comparing the previous days value Index value = index on previous day X Total MC for current day/ TMC of pre.d Example: If on the previous day , the total market capitalization was Rs 25310 billion and the index was 10635, the total market capitalization of all companies in the index adds up to Rs 26,175 billion , the index for the next day is calculated as follows = 10635 X26175 / 25310 = 10998 Segment of sensex in the Economic times :
Company name, days close, previous close, % change, free float market capitalization, days weight, % change in weights and P/E

SEBI SECURITIES EXCHANGE BOARD OF INDIA SEBI was established in 1988 to regulate and develop the growth of the indian capital market SEBI regulates the working of stock exchanges & intermediaries SEBI Act 1992, states that the duty of the board is to protect the interests of investors in securities and to promote the development of and to regulate the securities market SEBI has a primary market department, secondary market department, mutual funds department, and a derivative cell to carry out regulatory services

organizational structure of SEBI Board of members constitute the top structure of governance, board is headed by a chairman and has 5 members representing the central government and RBI

POWERS & FUNCTIONS OF SEBI

Regulating the business in stock exchanges and other securities market Registering and regulating the working of stock brokers, sub brokers, share transfer agents, bankers to an issue, registrars to an issue, merchant bankers, underwriters, portfolio mangers, investment advisors & other intermediaries associated with the securities market Regulating substantial acquisition of shares and takeovers of companies Promoting and regulating self-regulatory organizations Prohibiting fraudulent & unfair trade practices in the securities market Protecting investors and promoting investor education and training of intermediaries in the securities market Prohibiting insider trading in securities Calling for information from, undertaking inspection, conducting enquiry, and audits of stock exchanges, intermediaries & self-regulatory organizations in the securities market

TRADING SYSTEM IN STOCK EXCHANGE In the new electronic stock exchanges screen based trading The screen based trading systems are of two types : quote driven system and order driven system QDS : the market maker, who is the dealer in a particular security, inputs 2 way quotes into the system , that his bid price ( buying price ) and offer price ( selling price ). The market participants then place their quotes based on the bid-offer quotes. These are then automatically matched by the system ODS : clients place their buy and sell orders with the brokers. These are then fed into the system. The buy and sell orders are automatically matched by the system according to predetermined rules

TYPES OF ORDERS
An investor can have his buy or sell orders executed either at the best price prevailing on the exchange or at a price that he determines. Nett rate orders nett rate is purchase or sale rate minus brokerage. buy 100 HUL at Rs 245 Nett would mean that the client is willing to buy 100 HUL for no more than Rs 245 per share including brokerage payable to the broker. Market rate orders the broker is instructed by the investor to buy/sell shares at the best price in the market. Buy order the best price is the lowest price. Sell order the best price is the highest price obtainable. When placing a market order, the investor can be fairly certain that the order will b executed, but he will be uncertain of the price until after the order is executed. Market rate is Nett rate plus brokerage for purchase and minus brokerage for sale e.g BUY 100 HUL at Rs 245 market means that the client is willing to pay Rs 245 plus brokerage for each share of HUL.

Limit orders or Limited discretionary order

The investor specifies in advance the limit price at which he wants the transaction to be carried out In the case of a limit order to buy, the investor specifies the maximum price that he will pay for the share, the order has to be executed only at the limit price or a lower price In the case of a limit order to sell shares, the investor specifies the minimum price he will accept for the share and hence the order has to be executed only at the limit price or a price higher to it. In the case of a limit order to buy, the limit price would be below the prevailing price and in the case of a limit order to sell, the limit price would be above the prevailing market price The investor placing limit orders believes that his limit price will be reached and the order executed within a reasonable period of time. But the limit order may remain unexecuted. E.g BUY HUL 100 shares around Rs 245

STOP ORDERS A stop order may be used by an investor to protect a profit or limit a loss. For a stop order the investor must specify what is known as stop price If it is a sell order, the stop price must be below the market price prevailing at the time the order is placed. If it is a buy order, the stop price must be above the market price prevailing at the time of placing the order. Stop order conditional market order when the market price reaches or passes the stop price Stop order executed market price reaches or passes the stop price E.g investor has 100 shares of a company which were purchased at Rs 35 per share. CMP of the share is Rs 75. The investor thus has earned a profit of Rs 40 per share. To protect his profit a stop sell order at a price below CMP ( Rs 75 ) say Rs 70. Now if the price falls below Rs 70 the stop sell order will be executed. If the CMP of the share moves upward the stop cell order will not be executed, the investor retains the opportunity of earning higher profits.

STOP LIMIT ORDER The stop limit order gives the investor the opportunity of specifying a limit price for executing the stop orders : the maximum price for a stop buy order and the minimum price for a stop sell order. With a stop limit order, the investor specifies two prices , a stop price and a limit price When the market price reaches or passes the stop price, the stop limit order becomes a limit order to be executed within the limit price.

E.g a share is currently selling at Rs 60. An investor who holds the share may place a stop limit order to sell, with stop price of Rs 55 and limit price of Rs 52. If the market price declines to Rs 55 or lower , a limit order to sell the share at the limit price of Rs 52 or higher would be activated.

 Day orders : a day order is an order that is valid only for the trading day on which the order is placed. Week orders : orders that are valid till the end of the week during which the orders are placed. They expire at the close of the trading session on Friday of the week, unless they are executed by then Month orders : month orders expire at the close of the trading session on the last working day of the month. Open orders : orders that remain valid till they are executed by brokers or specifically cancelled by the investor. They are also known as good till cancelled orders (GTC) Fill or kill orders : these orders are meant to be executed immediately. If not executed, they are to be treated as cancelled.

MARGIN TRADING Investors may purchase securities in the stock exchanges either using their own funds or funds borrowed from banks, brokers etc Investors may use borrowed funds for buying securities when there is a good opportunity to buy some securities but ready cash may not be available Borrowing money from the bank or the broker for purchasing securities is known as margin trading The cash paid by the investor is known as margin If an investor places buy orders for purchase of securities worth Rs 50000 and pays as cash Rs 30000 to the broker, the investors margin is 60 % of the value of the securities. The balance amount is supplied by the broker In margin trading the investor has to pay interest on the money borrowed to finance the securities transaction. Margin trading is thus a risky venture

The Effect of Margin trading on security returns without margin with margin of (100% equity ) 80% 65% 50% ***************************************************************************** number of Rs 50 shares purchased 100 100 100 100 Cost of investment (Rs) 5000 5000 5000 5000 Less : borrowed money 0 1000 1750 2500 --------------------------------------------Rs 5000 4000 3250 2500 A. investor position if price rises by Rs30 to Rs 80 per share Value of stock (Rs) Less :cost of investment 8000 8000 8000 8000 5000 5000 5000 5000 ------------------------------------------3000 3000 3000 3000

Capital gain (Rs) Return on investors equity : (capital gain/equity in investment) 60%

75%

92.5%

120%

B. investor position if price falls by Rs 30 to Rs 20 per share Value of stock (Rs) Less :cost of investment 2000 2000 2000 2000 5000 5000 5000 5000 ------------------------------------------(3000) (3000) (3000) (3000) (75%) (92.5%) (120%)

Capital loss (Rs) Return on investors equity : (capital gain/equity in investment) (60%)

The lower the amount of the investors equity in the position, the greater the rate of return the investor will enjoy when the price of the security rises.
The risk of loss is also magnified ( by the same rate ) when the price of the security losses.

SPECULATION & TYPES OF SPECULATORS

A person may be interested in making a quick short-term profit from the fluctuations in the prices of securities in the stock market. Such a person is known as a speculator. Speculators believe that mis-pricing of securities occurs periodically in the market, where securities may be overpriced ( that is their price may be higher than their intrinsic value ) and at other times some securities may be under priced. Spectators attempt to exploit such mispricing of securities, because it is presumed that the mispricing would be corrected by the market eventually If a spectator feels that a security is underpriced, he would like to buy the security for the purpose of selling it at a higher price -> long position. speculative activity is known as -> long buy If a spectator feels that a security is overpriced, he would like to sell the security for the purpose of buying it at a lower price -> short position. speculative activity is known as -> short sale

TYPES OF SPECULATORS Bull a trader who expects a rise in price of securities is known as a bull. He takes a long position with respect to securities. The bulls will be able to make profit only if the prices rise as anticipated otherwise they will suffer losses. When the prices of securities are generally rising in the market, resulting in buoyancy and optimism in the market, the market is said to be in a bullish phase. Bear a bear is a pessimist who expects a decline in the prices of securities. He therefore takes a short position on securities by engaging in short sales .He attempts to cover up his short position by buying the securities at lower prices, when prices decline. The bear will suffer a loss if the prices of securities rise after he takes a short position on securities. When there is a general decline in prices of securities in the stock market, the market is said to be bearish.

 Lame duck a lame duck is a bear who has made a short sale but is unable to meet his commitment to deliver the securities sold by him on account of rise in prices of securities subsequent to the short sale. He is said to be struggling lime a lame duck. Stag A stag is a trader who applies for shares in the new issue market just like a genuine investor. A stag is an optimist like the bull and expects a rise in the prices of securities that he has applied for. He anticipates that when the new shares are listed in the stock exchange for trading, they would be quoted at premium, that is above the issue price. As soon as the stag receives the allotment of shares, he would sell them at the stock exchange at the higher prices and make a profit. A stag is said to be a premium hunter. The stag will suffer a loss if prices of the new shares do not rise as anticipated when they are listed for trading

SETTLEMENT
The process of transfer of security and cash is known as settlement of the trade. The settlement process involving delivery of securities and payment of cash is carried through a separate agency known as the Clearing house, which functions in each stock exchange. The clearing house acts as the counter party for each trade. Member-brokers who sell securities have to deliver the securities to the clearing house and will receive cash from the clearing house. Member-brokers who buy securities will have to pay cash to the clearing house and receive the securities from the clearing house The stock exchanges now follow a settlement procedure known as CRS ( compulsory rolling settlement ) as mandated by SEBI. Under CRS, the trades executed on a particular day are settled after a specified number of business days or working days

 BSE & NSE is currently based on T+2 rolling settlement cycle Since 2001, both BSE & NSE have uniform settlement cycle. Settlement cycle is completed on the third day after the execution of the trade E.g trades completed on Monday are settled on Wednesday, Tuesdays trades are settled on Thursday and so on The pay-in and pay-out of funds and securities are marked through the clearing house On T+1 , the exchange generates delivery & receive orders for transactions done by member-brokers. These provide the relevant information regarding the securities to be delivered & received by the member-brokers through the clearing house. A money statement showing the details of payment/receipt by the member-brokers is prepared by the exchange. The delivery/receive orders and the money statement can be downloaded by the member-brokers

 On T+2, the member brokers are required to submit the pay-in instructions to the depositories for transfer of securities to the clearing house in the case of demat securities. For pay-in of funds by member-brokers, the bank accounts of member-brokers maintained with the authorized clearing banks are directly debited through the computerized system. For pay-out of funds by the stock exchange, the bank accounts of member-brokers with the authorized clearing banks are credited by the clearing house In the CRSS, pay-in and pay-out of both funds and securities are completed on the same day

T +2 SETTLEMENT TRANSACTION Transactions Sale value Purchase Settlement on monday value on Wednesday Pay-in
Sold 40 shares of X Ltd at Rs 235.75 per share Bought 75 shares of X Ltd at Rs 231 per share

Settlement on Wednesday Pay-out

Rs 9430

Rs 17325

Gross basis

40 shares of X Ltd and Rs7895

75 shares of X Ltd
35 shares of X Ltd

Net basis

Rs 7895

DEPOSITORIES The physical form of securities is giving way to electronic form of securities wherein a security is represented by an entry in a depository account opened by the investor for the purpose The transfer of securities on sale of a security is effected through a debit entry in the depository account of the seller and a credit entry in the depository account of the buyer The securities are issued, held, and transferred in dematerialized form or demat mode. For the demat mode of shareholding, depositories play the most important role A depository can be compared to a bank. A depository holds securities for investors in electronic form and provides services related to transactions of securities. A depository interacts with clients through depository participants ( DP s ) Which are organizations affiliated to a depository.

 An investor has to open a demat account with a depository participant to avail depository services of holding securities and transferring securities There are two types of depositories in india namely : 1. NSDL -> national securities depository ltd 2.CDSL -> central depositories services ( of india ) ltd NSDL was first depository which started on NOV 6,96 CDSL was inaugurated on july15,99 The functioning of these depositories is supervised and regulated by SEBI Each depository has several depository participants affiliated to it. Clients/individual investors interact with the NSDL & CDSL through the DPs who are trading members of the stock exchange and also members of NSDL & CDSL

COSTS ASSOCIATED WITH TRADING OF PHYSICAL VS DEMAT OF SHARES

PARTICULA PHYSICAL SHARES RS DP account opening DP services charges Time taken to complete a trade Brokerage fee Stamp duty on transfer Transfer deeds
Bad delivery Loss of share certificate in transit

DEMAT SHARES
yes yes In days

No No In months

yes
yes

Yes, but les than physical shares no

yes Yes yes

no No no

FINANCIAL MARKETS

Copyright Macmillan Publishers India Ltd.

FINANCIAL SYSTEM
The Financial System of an economy comprises of financial markets, financial institutions, financial instruments and financial services. Apex bodies like RBI & SEBI regulate it.

INDIAN FINANCIAL SYSTEM

Money Market
Capital Market

Regulatory Institutions
Banking Institutions Non Banking Finance Companies Development Financial Institutions Mutual Funds

Long-term Instruments
Medium-term Instruments

Lease Financing
Hire Purchase Installment Payment System Merchant Banking Factoring Service Forfeiting

Short-term Instruments

FINANCIAL MARKETS
Financial market is the market for money and monetary claims; money market and capital market are two prominent financial markets.

Money market: It is the market in which liquid funds (cash) as well highly liquid securities are traded in for a very shorter duration.

The central bank of the country Reserve Bank of India (RBI) uses this market to exercise monetary control in the economy and credit control in the country.

MAIN INSTRUMENTS IN MONEY MARKET

Call Money Market Government Securities/Gilt-edged Securities Market Commercial Papers Market for Bills of Exchange

CALL MONEY MARKET

Call money market is the market in which surplus cash of banks and corporate houses is traded in for a very short maturity period, generally not exceeding one fortnight. The main participants in this market are:
Banks financial institution mutual funds corporate houses, and other organizations as allowed by the RBI

FEATURES OF CALL MONEY MARKET

Transactions done mainly between banks High value transactions Transactions over the telephone Transactions for a maximum of one fortnight Banks allowed to participate as provider and user of the funds Other participants can participate as provider of the funds

GILT-EDGED SECURITIES MARKET

The market for government securities is known as gilt-edged securities market. Government securities are either issued by the central government/state government or any of the agencies of these governments.

Gilt-Edged Security Market Features

Safety Marketability Liquidity RBI as underwriter and market maker Regulated by RBI High volume transactions Transactions through authorized dealers Banks and FIs are the main participants

TYPES OF GILT EDGED SECURITIES

DATED SECURITIES OF GOVERNMENT Either issued by government or guaranteed by the government; these securities have a maturity period of more than one year and carry a coupon rate.

TREASURY BILLS Have a maturity period not exceeding 364 days. These bills do not carry any interest rate; instead, these are issued at a discount to face value, and redeemed at par on the maturity date. RBI issues these on the behalf of the Central Government.

Regular T- bills

Ad-hoc T- bills

DIFFERENCE BETWEEN DATED SECURITIES AND T-BILLS BASIS DATED SECURITIES T-BILLS

MATURITY More than One Year COUPON RATE

Never Exceeds One Year The interest is paid to T-bills do not carry the holders in any coupon rate; accordance to this instead these are rate on half-yearly issued at a discount routine. to face value.

ISSUER

Can be issued by the central, state government, and agencies of these

Issued by the RBI on behalf of the central

TYPES OF SECONDARY MARKET TRANSACTION Spot transaction Forward transaction REPO deals Double ready forward deals/reverse REPO

VARIANTS OF SECONDARY MARKET TRANSACTION IN DATED SECURITIES OF GOVERNMENT

Voucher trading: Voucher trading in dated securities of government is done around the interest due date to have the benefit of TDS certificate. Switch deals: Switch deals are the deals in which two parties exchange the securities without exchanging the monetary consideration. Objectives:
to improve the maturity of portfolio to improve the yield of the portfolio

COMMERCIAL PAPERS (CPs)

Commercial papers are unsecured shortterm promissory note, issued by companies to raise the finance. CPs do not carry any interest rate; instead these are issued at discount to face value and redeemed at par on maturity.

It is a money market instrument and issued by a large number of companies and commercial banks to raise funds for short-term. According to RBI rules, only those corporate houses that obtain an investment grade rating can issue CPs.

POINTS RELEVANT TO CPs ISSUED IN INDIA

Companies, banks and financial institutions can issue commercial papers Minimum tangible net worth of issuing organization shall be Rs 4 crore The issuing organization must obtain a minimum investment grade rating from a rating agency in India Minimum maturity period is of 15 days and maximum of 365 days To be issued in the denomination of Rs 5 lakh or its multiple

POINTS RELEVANT TO CPs ISSUED IN INDIA

These can be issued to individuals, as well as to companies and banks CPs do not carry any interest rate Commercial papers are issued at a discount to face value and redeemed at par on maturity CPs are negotiable instrument At present, CPs can be issued only in demat form

BILLS OF EXCHANGE
A bill of exchange is an unconditional order by the writer (drawer) of the bill to the acceptor (drawee) for making a particular payment on a future date upon the presentation of the bill. Steps involved in creating a bill of Exchange: Trade transaction takes place between two parties Buyer of the goods/services does not make the payment; instead wants a credit facility.

Seller agrees to write a bill for the credit period

BILLS OF EXCHANGE
Seller writes a draft. Upon acceptance, this draft becomes a bill of exchange (commercial bill) For a drawer, it is the bills receivable and for the drawee, it is bills payable

The drawer, also known as holder of the bill, has three ways to dispose off the bill Hold the bill till maturity Endorse it in the favor of another party

BILL DISCOUNTING
Bill discounting means taking an amount advance from the bank by assigning (giving) bill to the bank before the maturity period. Sequence of activities that take place discounting of the bill: The holder of the bills receivable presents it to bank for discounting of the for the

Bank deducts interest charges for the remaining maturity of the bill and makes payment of the bill On the due date (maturity date), the bank presents the bill to the drawee (acceptor)

BILL DISCOUNTING
If the acceptor makes the payment, then the claim of the bank gets settled If the acceptor fails to make the payment, it is termed as dishonor of the bill In case of dishonor of the bill, the bank claims full amount of the bill from the holder of the bill in whose favor the bill was discounted Subsequently, the holder of the bill has the right to claim the payment from the acceptor/endorser

CAPITAL MARKETS

PRIMARY MARKET
Equity Shares Preferences Shares Debentures/Bonds

STOCK/SECONDARY MARKET Market in which outstanding securities of corporate houses as well as the government are traded under a regulated environment. Stock exchange is a regulated market place, in which listed securities are bought and sold through the intervention of members (brokers) of stock exchange, by following an open system of two-way quotation.

FUND RAISING MECHANISM

Public Issue Rights Issue Private Placement Public Issue through Book Building Buy-out Details

LISTING REQUIREMENTS
Listing of shares/debentures means including these in the list of securities to be traded on the stock exchange. Company must have minimum issued and paid up capital of Rs 3 crore. Out of the issued capital minimum, public offer should be 25 per cent for the general public. Company is to deposit 1 per cent of the issue amount with the regional stock exchange as security deposit. Initial listing fee and annual listing fee is to be paid by the company as laid down by the stock exchange. Allotment of shares is to be finalized within 30 days from the closure of the issue

RESERVE BANK OF INDIA

The Reserve Bank of India (RBI) is an apex bank, which regulates banking business in India. RBI functions according to the powers bestowed by the RBI Act 1934. Objectives of RBI: Issue of currency notes Credit control Banker of central government Banker of banks Issue of government securities Open-market operations and controlling the flow of money in the economy Regulation of banks and other financial

BANKING INSTITUIONS
FUNCTIONS

TRADITIONAL/CORE BANKING Accepting deposits Lending money for productive purposes Transfer of money through D.D./M.T

MODERN BANKING Lending support for nonproductive purposes consumer finance, house finance, etc. ATM services Credit/debit cards Portfolio consultancy Banka-assurance Mutual fund activities

NON-BANKING FINANCE COMPANY

A financial institution which is a company A non banking institution which is a company and which has as its principal business the receiving of deposits, under any scheme or arrangement or in any other manner, or lending in any matter Such other non-banking institution or class of such institutions, as the bank may, with the previous approval of the Central Government and by notification in the Official Gazette, specify. Clause (b) of section 45-I of Chapter III B of

TYPES OF NON-BANKING FINANCE COMPANIES Hire purchase finance company Investment company Loan company Mutual benefit finance company/Nidhi Equipment leasing company Chit fund company/miscellaneous nonbanking finance company Residuary non-banking finance company

DEVELOPMENT FINANCIAL INSTITUITIONS

Development financial institutions are the institutions established to carry out the special task of providing financial assistance for development infrastructure development, development of rural area, reconstruction of business, providing risk capital, etc.

IRBI, IFCI, IDBI, ICICI (now merged with ICICI bank), NHB, HDFC are some of the development financial institutions working in India.

FINANCIAL SERVICES PROVIDED BY BANKS AND NBFC

Lease Financing
Hire Purchase Installment Payment System Merchant Banking Factoring Services

Forfaiting

LEASE FINANCING
Leasing arrangement provides enterprises with use and control over assets without receiving title to them. It is a contractual arrangement, it originates from a contract between the leaser and the lessee and is regulated by the terms, conditions and covenants BENEFITS LEASE OFFER of such a contract.
LESSER
Flexibility in making lease payment Better utilization of own funds by the lessee 100 per cent financing Use of high value assets is possible without owning these No risk of obsolescence No loss due to decrease in the value of asset

LESSOR A manufacturer cum lessor finds it easy to sell the assets Lease rentals boost up the revenue as compared to the outright sale Idle assets can generate revenues

DIAGRAMATIC REPRESENGTATION OF LEASE TRANSACTION

ASSET
LESSOR LESSER

RENT

Return of the asset after end of lease

TYPES OF LEASE
FINANCIAL LEASE
OPERATING LEASE

SALE AND LEASE BACK

CROSS BORDER LEASE

DRY VERSUS WET LEASE

BIG TICKET LEASE

LEVERAGED LEASE

Hire Purchase It is the transaction to buy an asset, in which the purchaser, referred as hire purchaser, purchases the asset from the seller, referred as hire vendor, with a provision to make the payment in several installments over a period of time. Installment payment system It means buying an asset, in which the purchaser pays for the asset bought in several

MERCHANT BANKING
Merchant banking is a basket of financial services provided by the merchant banker. A merchant banker is an organization registered with SEBI. Services provided by a Merchant Banker: Issue management Underwriting Book building for issue Broker to the issue Project management Project consultancy Loan syndication Portfolio management Portfolio consultancy

FACTORING SERVICES
Factoring is like outsourcing of follow-up and collection of debts; also includes outsourcing of accounting activity of debts. Types of Factoring Services: Recourse factoring Non-recourse factoring Advance factoring Maturity factoring Full factoring Bank participating factoring

FIGURE

SELLER

SALE OFRECEIVABLE TO A FACTOR

FACTOR

SETTLEMENT OF ACCOUNTS

BUYER

FORFAITING
Forfaiting service ensures the recovery of payment as well as arrangement of finance in export business.

Forfaiting is always used in export business, where an exporter, who has goods for a credit period from medium to long time period, uses this facility.