Gfm capital markets evolution

Capital Markets
©2010 BSE Training Institute Limited 1

What is Stock Exchange
• It is a platform where buyers and sellers meet
• It provides a place to buy and sell shares
• It acts as a bridge between demanders of fund
and suppliers of fund
• Channelize savings into investments

Participants
• Govt.
• Companies
• Institutions
• Retail Investors
• Mutual Funds

History of Stock Exchanges
• BSE first stock exchange started on 9th July
1875
• Known as “Native Shares and Stock Broking
Association”
• Membership fees was Rs. 1
• There were 318 members

Major reforms in capital Market
• 1992 FII were allowed in india
• 1993 Private Sector Mutual Funds were
launched
• 1996 First time SEBI came out with Guidelines
for MF industry

Reforms cont
• 1996 Depository act passed
• 2000 Derivatives markets gets going
• 2003 Commodities Market started
• 2008 Currency futures market launched

Current scenario
• Today 23 stock exchanges in India
• Major ones BSE (Bombay Stock Exchange )
and NSE (National Stock Exchange)
• NSE formed in 1994

Daily Turnover of stock markets
• BSE Cash segment Rs. 4000 crores
• NSE cash segment Rs. 15000 crores
• NSE FO Rs. 1,00,000 crores

Financial Markets
• Financial Markets are the capital markets that
is stock market
• Stock market is known as “Barometer of the
Economy”
• Let us understand this statement
• Companies listed on stock market represent
corporate india
• When there profit rises or falls

Stock market Barometer
• It is indication that net profit of companies
rises or falls
• This means that sales have either gone up or
down
• This indicates demand has increased or
decreased in economy
• It has direct impact on stock market
• Stock market ultimately reflects the sentiment
in the economy

Financial Markets Classification
• Capital Market is market for long term source
of funds
• Market having maturity of more than one year
• Instruments like
• Shares
• Preference shares
• Debentures
• Bonds

Capital market and Economic Growth
• US,UK,Japan have high economic growth due
to developed Capital markets
• Fund raising very easy activity

Money Markets
• It is a market for short term source of funds
• The maturity of these instruments is less than
one year
• Instruments like
• T- Bills
• Commercial Paper
• Inter-corporate Deposit
• Certificate of Deposit

Call Money Market
• Liquidity management main object
• 2007 Call money rate 0.25 %
• 2008 call money rate 21 %
• Currently call money rates 7.25 % to 7.5 %

What is IPO ?
• It refers to Initial Public Offering
• The company for the first time goes to public
to raise the money
• IPO market is also known as Primary market
• Ex:- Coal India raised the money for Rs.
15000 crore

Why companies raise money
through IPO ?
• Money raised through IPO is ownership
money
• It need not be returned to shareholder unless
company closes down
• No interest is to be paid on this amount
• No mortgage of property is required on this
amount

Process of IPO
• The company first goes to Merchant Banker
Category I who has licence from SEBI
• Merchant banker has the ability to raise the
money from the market
• Merchant banker are those who have networth
of Rs. 1 crore
• Eg:- karvy consultants, ENAM, SBI Cap

Process Cont
• The Merchant Banker will prepare project
report of the company
• They will do two types of analysis
• Quantitative
• Qualitative

Process cont.
• Based on both types of analysis the price
range is decided by the Merchant Banker
• For instance Coal India had price band of Rs.
225 to Rs. 245
• If promoters agree then the Prospectus is
submitted to SEBI

IPO process cont
• SEBI would give answer within 21 days
• If no comment comes from SEBI within 21
days then IPO is said to be approved
• If any comment comes then new prospectus is
to be filled again

IPO process
• Once the IPO gets SEBI approval the
Merchant Banker goes for marketing of the
issue
• At least 90 % of the issue should be
subscribed then only issue is considered as
successful
• If less than 90 % is collected then issue is
considered as Fail and money has to be
refunded

IPO process
• In order to avoid failure of IPO
• Companies also appoint Underwriter
• Underwriter is also a company who gives the
guarantee to buy the shares if the public does
not buy
• Eg:- Infosys IPO had failed but ENAM
consultants were the underwriter who
purchased the stocks and made the issues
successful

What is FPO ?
• It is Follow on Public Offer
• It refers to company is already listed and for
second time goes for raising money
• For ex:- Power Grid raised Rs. 7000 crore
from the market

Secondary Market
• It is known as the Stock Market
• Companies trade on the stock market
• On BSE 6500 companies are listed
• On NSE 2500 companies are listed

Regulation of Stock Market
• It is regulated by SEBI (Securities and
Exchange Board of India)
• All the stock exchanges of the country are
regulated by SEBI
• All the matters related to scams in the stock
market are looked after by this agency

Relationship between Primary
and Secondary market
• Both are inter related
• If there is bull run in secondary market more
IPO will come in Primary Market
• If there is bear run in the secondary market
then less IPO will come in Primary market

Years of IPO
• 2007 saw maximum IPO as the market was in
bull mode
• 2008 there were no IPO after Reliance Power
failure
• 2009 again saw many IPO as stock market
recovered

Classification of stocks
• Large Cap stocks which have market cap
greater than Rs. 9000 crore
• Mid cap stocks which have market cap
between Rs. 2500 to 9000 crore
• Small Cap stocks which have market cap
between Rs. 250 cr to 2500 Crores
• Micro cap less than Rs. 250 crores

Another classification
• A – Blue Chip stocks which are fundamentally
very sound
• B1 B2 which are sound but they are small in
size. Normally known as Mid cap
• T group refers to Trade to Trade and most
risky as only delivery base trade allowed.
These stocks have abnormal volatility

Another classification
• S group stocks are small companies which are
listed on Indonext exchange but traded on
BSE
• Z group stocks are those which are very risky
as they may get delisted or suspended
anytime by SEBI.

Global markets
• US
• Dowjones
• NASDAQ (National Association of securities Dealer
Automated Quotations)
• EUROPE
• FTSE (Financial Times Stock exchange) - London
• DAX (Deutscher Action Index) - Germany
• CAC (Cotation Assistee Qn Continu) - France

Cont..
• ASIAN MARKET
• Nikkie 225 – Tokyo (Japan)
• Strait Times – Singapore
• SGX Nifty - Singapore
• Hangsang – Hongkong
• Taiwan Index – Taiwan

Cont..
• Shanghai Composite – China
• KOSPI – Korea Composite Stock Price Index
• Sensex - India
• S&P CNX Nifty - India

What is neeed to Open trade in the equity
market ?
• 3 types of accounts required to trade in stock
market
• 1. Trading Account
• 2. Demat Account
• 3. Saving account in bank

How to open Demat Account ?
• Documents Required
• Pan card
• Address Proof (Voter id, passport, bank
statement, driving license)
• Bank Statement
• Photo pass port size
• Cancelled cheque (if required)

Use of Trading & Demat Account ?
• Trading account is used to actually put the buy
and sell transaction
• A code is generated and transactions are
punched into that code
• Demat accout is used to store the securities
which are purchased.
• Demat account is also a number which is
known as Client ID.

How Exactly does trading take place ?
• Once trading and demat accounts are opened.
• The client will call the broker or sub broker
• He will tell his trading code in which the
transaction has to be kept
• Once the transaction is done, the broker or
sub broker will give confirmation to client about
the trades done

How many types of trading are there ?
• Two types of trading
• Intraday trading
• Delivery base trading
• Intraday trading refers to doing buy and sell
transaction in one day itself
• In intraday, the profit or loss is settled by the
way of difference only

Delivery base trading
• Here the entire payment is made by the client
• The securities are then transferred to the
demat account of the client after the client
makes full payment.
• If client does not pay then securities are lying
in pool account of broker.

Settlement Process
• The payin and payout of funds and securities
takes place on T + 2 basis
• T is Monday so plus two working days means
on Wednesday the payin of funds and
securities will take place in the morning
• Also on Wednesday the payout of funds and
securities will take place in afternoon

Equity as Asset Class
• Equity fulfills “Wealth Creation” Objective
• Sensex has given 17.25 % CAGR return from
1979 to 2009.
• Rs. 9500 invested in Infosys in 1993 has
converted into Rs. 2 crore in 2007.

Stock Markets
• Primary
• Secondary

Stock Markets Regulatory Framework
• Self Regulatory Bodies
• SCRA 1956 & SCR Rules 1957
• Activities supervised by MoF
• Perception that rights & Interests of Investors
were ignored.

S E B I
• SEBI act passed in April 4,1992.
Functions
• To protect the interest of investors
• To promote the development of & regulate
the securities market.

Role of SEBI
• Regulate the Business in SE’s
• Register & Regulate intermediaries, collective
investment schemes (incl. MF’s)
• Promote & regulate SRO’s
• Prohibit unfair & fraudulent trade practices
• Promote investor education & Training
• Prohibit Insider trading

Role of SEBI……. contd
• Regulate substantial acquisition of shares &
take over of companies
• Inspection/Audit of intermediaries & SRO’s
• Any other function as provided under the
SCRA 1956, as delegated by the govt.

Measures initiated by SEBI
• Capital Adequacy norms for Brokers
• Intra day trading limits
• Gross Exposure limits
• Margins
• Surveillance systems at SE’s
• Circuit Filters
• Inspection of Stock Exchanges

…..contd
• Client Broker relationship
• KYC
• Registration of Sub brokers & brokers
• Increasing trading hours
• Introduction of Derivatives Trading
• Rolling Settlements
• Dematerialistaion

….contd
• Computerization of Exchanges
• Internet trading

Role of exchanges
• To promote develop & maintain a well regulated
market for dealing in securities
• To safe guard interest of members & investing public
having dealings on SE
• Promote industrial development through efficient
resource mobilization by way of investment in
corporate securities
• Establish & promote honourable & just practices in
securities transactions.

Instruments available
• Equity
• Debt
• Derivatives
• Mutual Funds
• Commodities

Equity
• Preference Shares
• Equity shares

Debt
• Debentures
• Bonds

Derivatives
• Futures- Index / Stock
• Options- Call / Put

Risk Return Profile
Risk Return
Equity High High
Debt Low Low
Derivatives Moderate High

Conclusion
• Need for market regulator
• SEBI regulates the markets to help them
modernize & grow
• Exchanges bring on best practices
• Various Investments products available
according to the risk appetite of investor.

Other Regulatory Bodies
• Indian Financial system governed by various
regulatory bodies
• RBI
• AMFI
• IRDA
• PFRDA
• FMC - Forward Markets Commission
• FSDC - Financial Stability and Development
Council

RBI
• Reserve Bank of India
• Apex body for regulation of Banking Sector
• GTL merged with OBC by RBI for protection of
depositors
• CAR of 9 % compulsory

AMFI
• AMFI – Association of Mutual Funds of India
• Advisory body for mutual funds
• Represents MF industry before the
Government

IRDA
• IRDA – Insurance Regulatory Development
Authority
• Controls the Insurance sector
• ULIP issue taken up by IRDA

FDSC
• FSDC – Financial Stability Development
Council
• Chairman is Finance Minister Himself
• It solves the Inter-Regulatory Tussle between
the various bodies
• Recently SEBI and IRDA had tussel

Japan and UK Model
• Japan has Financial Services Agency
• UK has FSA – Financial Service Authority
• Both have single regulatory model

Debt Market
• Debt Instruments are those who have fixed
rate of return
• They create financial obligation on the issuer
• The issuer has to repay the principal and the
interest amount

Debt Equity Ratio – The CRUX
• This ratio shows the DEBT component in the
capital structure of the company
• Higher Debt always creates problem
• SUB PRIME Crisis is the best example that
high debt has led to Recession in the world

SUB PRIME CRISIS
• In 2001, WTC attack
• USA was to face recession as no one wanted
to go to USA
• FEDRAL RESERVE reduces the interest rates
from 5 % to 1 %
• Banks gave $ 3.3 trillion in loans
• NINJA loans means No Income No Job No
Asset

SUB PRIME CRISIS Cont..
• In 2007, time of Repayment
• Huge defaults
• Large number of houses came for auction
• Reduced the prices of houses more than 70 %
• 108 banks filed for Bank Ruptcy
• FII went to sell off mode due to liquidity crisis

Debt Equity Ratio
• Most important ratio after Global Recession
• Sub Prime taught best lesson that debt should be
under control
• Ideal ratio not more than 2:1
• DLF, Unitech had ratio of 8:1
• Aban offshore had 16:1
• Wockhart also had same problem
• It should always be low

Types of Debt Instruments
• Fixed Deposits
• Bonds
• Debentures
• NSC
• KVP
• PPF

Risk in Debt Market
• Credit Risk
• Inflation Risk
• Interest Rate Risk

Credit Rating
• CRISIL 1987
• ICRA 1991
• CARE 1993
• IPO Grading has also been started
• R power issue classic case

Global Credit Rating Agencies
• Standard and Poor
• Fitch
• Moody

Forex Markets
• Currency Trading has now started in india
• Participants
• Banks
• MNCs
• NSE and MCX offer trading platforms

Exchange Rates
• Exchange Rate lot more than an mere number
• Currency appreciates and Depreciates
• Appreciation refers to strengthening of
currency that is economy is strong
• Depreciation refers to weakening of rupee that
is economy is weak
• Currency futures now traded on Stock market

Types of Exchange Rate
• 1. Demand Supply Method (Most transparent
method – India, US, Uk, Japan)
• 2. Fixed rate method (China)
• 3. Snake in the tunnel (European union)
• 4. Dirty Float Method (Central bank)
• 5. Hybrid method (Central bank along with
demand supply method)

Appreciation of Rupee
• 1 $ = 45 Rs
• 1$ = 40 Rs
• This is Appreciation of Rupee.
• Economy becomes strong
• FII buys so Rupee becomes strong
• IT, Textile and Exports get harm due to
appreciation of rupee

Depreciation of Rupee
• 1$ = 45 Rs.
• 1$ = 50 Rs.
• This is Depreciation of Rupee.
• Economy becomes weak.
• FII sells so Rupee becomes weak
• IT, Textile and Exports benefit due to
depreciation of rupee
• Oil we import 73 %

Example of Aviation industry
• Indian Aviation industry is worth $ 10 billion to
$ 12 billion
• Crude oil above $ 95 creates big problem for
the aviation industry
• It starts making losses in big way
• When rupee depreciates it creates further
problem as we import crude oil
• Industry debt equity is 5:1

SROs
• Association of Merchant Bankers of India
(AMBI)
AMBI was granted recognition to set up professional standards
for providing efficient services and establish standard practices in
merchant banking and financial services.
It was promoted for healthy business practice and to exercise
overall supervision over its members in the matters of compliance
with statutory rules and regulations pertaining to merchant
banking and other activities.
AMBI in consultation with SEBI is working towards improving
disclosures standards in the offer document as well as meeting
the statutory requirement in a systematic manner.

SROs
• Association of Mutual Funds of India
(AMFI)
• SEBI undertakes regular consultations with
members of AMFI on various issues affecting
mutual funds.
• In February 1997, SEBI held a meeting with
trustees of all mutual funds to discuss with them
their responsibilities for prudential oversight of
mutual funds in the light of SEBI (Mutual Funds)
Regulations, 1996.

SROs
• Association of Custodial Agencies of India
(ACAI)
• Following the notification of the SEBI (Custodians of Securities)
Regulations, 1997, custodians of securities registered an
association, ACAI.
• To streamline custodial practices and to ensure that custodians
do not function in isolation from the clearing and settlement
systems.
• ACAI has also highlighted to SEBI from time to time difficulties
encountered by custodians on behalf of their clients who are
mainly foreign institutional investors, domestic mutual funds,
financial institutions, corporates and high net worth individuals.

SROs
• Registrars Association of India
(RAIN)
• The Registrars Association of India (RAIN) is a
self regulatory organisation set up for
registrars to an issue and share transfer
agents

Merits of Single Regulatory model
• Given the spate of these changes in the financial services sector,
great value may be obtained by having a single financial sector
regulator that has the wide remit to cover prudential regulation,
conduct of business rules, market regulation and consumer
protection.
• The traditional regime of multiple regulators suffers the significant
drawback of duplication of functions, roles, responsibilities
leading to conflicting treatments for indistinguishable products
and services, regulatory gaps and black-holes and reduced
efficiency in regulating financial markets and their participants.
• Efficiency
• Single entity benefits
• Matching accountability with resources

Demerits of Single Regulatory Model
• Inadequate Legal and Regulatory Foundations to support it
• Merger-related difficulties
• Spread As Opposed to Depth – while multiple regulatory
model will have more focus the single regulatory model will
have broader objectives
• Diluted Regulatory Capacity
• Lack of Regulatory competition

Gfm capital markets evolution

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