After opening up of the Indian Economy and implementation of financial sector reforms from the year 1991, the financial markets in the country have undergone tectonic change and have been integrated with the global markets to a large extent. The segment of the Financial Market which has witnessed the most profound transformation is the Capital Market. The Capital Market consists of the equity market and the debt market. While shares are traded in Equity Market, bonds and other debt instruments are traded in the debt market. Equity market is further divided into Primary Market and Secondary Market. Both these segments have witnessed significant changes since mid-eighties.
Green Shoe Option:
Primary market refers to a system through which equity/debt instruments are offered to a wide spectrum of investors for subscription. The shares may be offered at a fixed price determined by the issuer or a price discovered through a process called Book Building. However, in case of over-subscription of an issue, the company may exercise the option of retaining additional subscription to a certain extent for which prior approval from SEBI would be required. This option contained in the prospectus of the issue is called a ‘Green Shoe Option’.
SEBI being the regulator of Equity Market has stipulated following norms for all those companies which are going public. Public issue by Listed Company is the issue size of that company should not exceed five times of its pre issue net worth. Otherwise, it will have to make public offer through Book building route where 60% of the issue size would be allotted to Qualified Institutional Buyers. Book Building is a process by which demand for the issuance of securities will be issued by a company and price of security will be assessed. The investor has to bid for a minimum floor price. However, he can revise the bid within given time frame. This process is advantageous to the issuer company because the final pricing is deciding at a date very close to the date of opening of the issue.
Lead Manager’s role is extremely important for finalizing a public offer:
Only Category I Merchant Banker duly registered with SEBI can become a Lead Manager. After the allotment is made, respective Depository Participants accounts are credited with the allotment of shares and refunds, if any, are dispatched to the non allottees and for part allotments. Underwriting of a public issue is not mandatory from 1.4.95. If a company wants to underwrite the issue then underwriting will be done by those underwriters which are registered with the SEBI. The objective of the secondary market is to ensure orderly trading and settlement processes in a transparent manner. Stock exchanges provide the required link between the savings and investments of the community. The stock exchanges thus act as a barometer of the state of health of Nations’ economy.
However, till 80s, the activities of stock exchanges were carried out in a traditional manner on net basis volumes since early 90’s and occurrence of security scams, several reforms have been carried out at the instance of SEBI to make stock trading a much more safe and transparent process. Till 1994-95 member brokers used to assemble in a ring for doing transactions in securities. Now computer based trading in these stock exchanges can be carried out from all over the country. From January 2000, SEBI has approved Internet Based Trading through order-trading systems. Country would be able to trade using the Internet as a medium through SEBI-registered brokers’ Internet trading systems, provided the broker has obtained permission from the respective stock exchanges.
Transfer from the shares were valid for one year only limiting the free tractability of the shares. To overcome these problems and to facilitate the smooth transfer of shares in tune with the shares in physical certificates of an investor are converted to an equivalent number of securities in electronic form and credited in to the investor’s account with his/her Depository Participant (DP).
A depository is an organization which holds securities of investor in electronic form at the request of the investor through a registered. National Securities Depository Limited (NSDL) and Central Depository Services (I) Limited (CDSL). There are also approximately 390 SEBI-registered Depository Participants. A depository participant (DP) is an agent of the depository through which it interfaces with the investor. A depository can be compared with a bank which holds securities in electronic form in the account of the investors while a depository participant is similar to the branch of the bank.
Under the traditional “Account Period settlement”, trades done during the entire week were settled on Fridays. This system led to heavy outstanding settlements, which could also be carried over under the then prevalent “Badla” system. The settlement risk created under this system was addressed by SEBI through rolling settlement introduced in 2001. The process was started on T+5 basis and has been gradually reduced to T+2 basis from April 1, 2003. The surveillance function of exchanges has assumed great importance to set up a separate surveillance department to keep close watch on price movement of scrips, market manipulations, monitor abnormal prices and volumes which are not consistent with normal trading pattern and monitor member brokers’ position to ensure that defaults do not occur.
As per guidelines issued by SEBI, the exchanges are required to apply daily circuit filter of 8% on scrips quoting above Rs. 20/-. As directed by SEBI, the circuit filter limit of 200 scrips, which are commonly traded and jointly identified by BSE and NSE and scrips which are under the Compulsory Rolling Settlement, has been relaxed to 16% with effect from July 3, 2000. Once circuit filter is hit in particular scrip, trading in that scrip is suspended. The imposition of circuit filters, therefore, ensures that the price of scrip cannot move upward or downward beyond the limit set for a day and a settlement.
The large variation in the prices as well as the volumes of the scrips is scrutinized by the exchanges and appropriate actions are taken. The scrips which reach a new high or new low and companies which have high turnover are watched. In case certain abnormalities are noticed, then circuit filters are reduced to make it difficult for the price manipulators to increase or push down the prices of a scrip within a short period of time. Where any scrip has been suspended sent to SEBI for further investigation/action, if any. This would provide cooling period to the market participants and assimilate and re-act on the market movements.
A derivative has no independent value of its own. Its value is derived from the value of underlying assets. Derivative products have been introduced in stock exchanges in India in a phased manner since June 2002. Futures and options are the derivative products offered by the BSE and NSE.
On expiry, futures can be settled by delivery of the underlying asset or cash. Futures contracts can be entered on the provision of a specified margin. Option contract gives the buyer the right but not the obligation to buy/sell the underlying asset at a specified price at the end of a specified period. The seller of the option provides this right for a consideration called the Premium. Derivatives contracts can be entered on stock indices such as SENSEX or NIFTY or on individual scrips allowed by stock exchanges.
- Strong Macroeconomic Fundamentals of the Indian Economy
- Basics of Capital Market and Money Market:3
- Basics of Capital Market and Money Market:2
- Basics of Capital Market and Money Market:1
- Merchant Banking
- Credit risks and market risks
- Financial risk management
- Financial risk management
- Basics of Capital Market and Money Market:4
- Reconciliation between the financial and Cost Accounts