Capital Market

Capital Market

Chapter 1 - Capital Market in India Introduction:The capital market is the market for securities, where companies and governments can raise long term funds. Selling stock and selling bonds are two ways to generate capital and long term funds. Thus bond markets and stock markets are considered capital markets. The capital markets consist of the primary market, where new issues are distributed to investors, and the secondary market, where existing securities are traded .The Indian Equity Markets and the Indian Debt markets together form the Indian Capital markets Indian Equity Market at present is a lucrative field for investors. Indian stocks are profitable not only for long and medium-term investors but also the position traders, short-term swing traders and also very short term intra-day traders. In India as on December 30 2007, market capitalisation (BSE 500) at US$ 1638 billion was 150 per cent of GDP, matching well with other emerging economies and selected matured markets. For a developing economy like India, debt markets are crucial sources of capital funds. The debt market in India is amongst the largest in Asia. It includes government securities, public sector undertakings, other government bodies, financial institutions, banks and companies.

Indian Capital Market

Equity Market

Debt Market

Primary

Seconda

Primary

Seconda

Market

ry

Market

ry

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Capital Market

Equity market in India:Stock is the type of equity security with which most people are familiar. When investors (savers) buy stock, they become owners of a "share" of a company's assets and earnings. If a company is successful, the price that investors are willing to pay for its stock will often rise and shareholders who bought stock at a lower price then stand to make a capital profit. If a company does not do well, however, its stock may decrease in value and shareholders can lose money. Stock prices are also subject to both general economic and industry-specific market factors. The equity market is classified as :(a) Primary market (b) Secondary market

(a) Primary market:The primary market provides the channel for creation of new securities through the issuance of financial instruments by public companies as well as government companies , bodies and agencies. Features of primary markets are:  This is the market for new long term capital. The primary market is the market where the securities are sold for the first time. Therefore it is also called the New Issue Market (NIM).  In a primary issue, the securities are issued by the company directly to investors.  The company receives the money and issues new security certificates to the investors.  Primary issues are used by companies for the purpose of setting up new business or for expanding or modernizing the existing business.  The primary market performs the crucial function of facilitating capital formation in the economy. The primary market issuance is done either through public issue or private placement . A public issue does not limit any entity in investing while in private placement , the issuance is done to select people. In terms of Indian Companies Act , 1956 as issue becomes public if it Page 2 of 56

Capital Market results in allotment to more than 50 persons. This means an issue resulting in allotment to less than 50 persons is private placement . An IPO is the first sale of stock by a company to the public. In this market company can raise money by issuing equity. If the company has never issued equity to the public, it's known as an IPO. Mostly public companies go for IPO. But large privately-owned companies may also go for an IPO to become publicly traded. In an IPO the company offloads a certain percentage of its total shares to the public at a certain` price In an IPO, the issuer obtains the assistance of an underwriting firm, which helps it determine what type of security to issue (common or preferred), best offering price and time to bring it to market.. Most IPO’S these days do not have a fixed offer price. Instead they follow a method called BOOK BUILDIN PROCESS, where the offer price is placed in a band or a range with the highest and the lowest value (refer to the newspaper clipping on the page). The public can bid for the shares at any price in the band specified. Once the bids come in, the company evaluates all the bids and decides on an offer price in that range. After the offer price is fixed, the company allots its shares to the people who had applied for its shares or returns them their money in case of non allotment of shares.

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Capital Market

Advantages of going public Increased Capital A public offering will allow a company to raise capital to use for various corporate purposes such as working capital, acquisitions, research and development, marketing, and expanding plant and equipment. Liquidity Once shares of a company are issue through an IPO & traded on a public exchange, those shares have a market value and can be resold. This allows a company to attract and retain employees by offering stock incentive packages to those employees. Moreover, it also provides investors in the company the option to trade their shares thus enhancing investor confidence. Increased Prestige Public companies often are better known and more visible than private companies, this enables them to obtain a larger market for their goods or services. Public companies are able to have access to larger pools of capital as well as different types of capital. Valuation Public trading of a company's shares sets a value for the company that is set by the public market and not through more subjective standards set by a private valuator. This is helpful for a company that is looking for a merger or acquisition. It also allows the shareholders to know the value of the shares. Increased wealth The founders of the company often have the sense of increased wealth as a result of the IPO. Prior to the IPO these shares were illiquid and had a more subjective price. These shares now have an ascertainable price and after any lockup period these shares may be sold to the public, subject to limitations of law.

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Capital Market

Disadvantages of going Public Time and Expense Conducting an IPO is time consuming and expensive. A successful IPO can take up to a year or more to complete and a company can expect to spend large amount of money on attorneys, accountants, and printers. In addition, the underwriter's fees can range from 3% to 10% of the value of the offering. Due to the time and expense of preparation of the IPO, many companies simply cannot afford the time or spare the expense of preparing the IPO. Disclosure Once a company goes public it comes under the purview of SEBI . It is supposed to file quarterly results with SEBI and follow other regulations as per SEBI guidelines. . Decisions based upon Stock Price Management's decisions may be affected by the market price of the shares and the feeling that they must get market recognition for the company's stock. They may give more consideration to market price of the share and as a consequence may take a decision which is not prudent & sound . Regulatory Review The Company will be open to review by the SEBI to ensure that the company is making the appropriate filings with all relevant disclosures. Falling Stock Price If the shares of the company's stock fall, the company may lose market confidence, decreased valuation of the company may affect lines of credits, secondary offering pricing, the company's ability to maintain employees, and the personal wealth of insiders and investors. Vulnerability If a large portion of the company's shares are sold to the public, the company may become a target for a takeover, causing insiders to lose control. A takeover bid may be the result of shareholders being upset with management or corporate raiders looking for an opportunity. Defending a hostile bid can be both expensive and time consuming.

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Capital Market

Parameters to judge an IPO Good investing principles demand that you study the minutes of details prior to investing in an IPO. Here are some parameters you should evaluate:Promoters Is the company a family run business or is it professionally owned? Even with a family run business what are the credibility and professional qualifications of those managing the company? Do the top level managers have enough experience (of at least 5 years) in the specific type of business? Industry Outlook The products or services of the company should have a good demand and scope for profit. Business Plans Check the progress made in terms of land acquisition, clearances from various departments, purchase of machinery, letter of credits etc. A higher initial investment from the promoters will lead to a higher faith in the organization. Financials Why does the company require the money? Is the company floating more equity than required? What is the debt component? Keep a track on the profits, growth and margins of the previous years. A steady growth rate is the quality of a fundamentally sound company. Check the assumptions the promoters are making and whether these assumptions or expectations sound feasible. Risk Factors The offer documents will list our specific risk factors such as the company’s liabilities, court cases or other litigations. Examine how these factors will affect the operations of the company. Key Names Every IPO will have lead managers and merchant bankers. You can figure out the track record of the merchant banker through the SEBI website.

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Capital Market

Pricing Compare the company’s PER with that of similar companies. With this you can find out the P/E Growth ratio and examine whether its earning projections seem viable. Listing You should have access to the brokers of the stock exchanges where the company will be listing itself.

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Capital Market

Secondary market:Secondary market is the market for buying and selling securities of the existing companies. Under this, securities are traded after being initially offered to the public in the primary market and/or listed on the stock exchange. The stock exchanges are the exclusive centres for trading of securities. It is a sensitive barometer and reflects the trends in the economy through fluctuations in the prices of various securities. It been defined as, "a body of individuals, whether incorporated or not, constituted for the purpose of assisting, regulating and controlling the business of buying, selling and dealing in securities". There are 23 stock exchanges in India. Listing on stock exchanges enables the shareholders to monitor the movement of the share prices in an effective manner. This assist them to take prudent decisions on whether to retain their holdings or sell off or even accumulate further. However, to list the securities on a stock exchange, the issuing company has to go through set norms and procedures.

Various aspects of secondary/ stock market in India :(a) Corporate Securities: The stock exchanges are the exclusive centres for trading of securities. Though the area of operation/jurisdiction of an exchange is specified at the time of its recognition, they have been allowed recently to set up trading terminals anywhere in the country. The three newly set up exchanges (OTCEI, NSE and ICSE) were permitted since their inception to have nation wide trading. The trading platforms of a few exchanges are now accessible from many locations. Further, with extensive use of information technology, the trading platforms of a few exchanges are also accessible from anywhere through the Internet and mobile devices. This made a huge difference in a geographically vast country like India. (b) Exchange Management: Most of the stock exchanges in the country are organised as” Mutuals” which was considered beneficial in terms of tax benefits and matters of compliance. The trading members, who provide brokering services, also own,control and manage the exchanges. This is not an effective model for self -regulatory organisations as the regulatory and public interest of the exchange conflicts with private interests. Efforts are on to demutualise the exchanges whereby ownership, Page 8 of 56

Capital Market management and trading membership would be segregated from one another. Two exchanges viz. OTCEI and NSE are demutualised from inception, where ownership, management and trading are in the hands of three different sets of people. This model eliminates conflict of interest and helps the exchange to pursue market efficiency and investor interest aggressively. (c) Membership: The trading platform of an exchange is accessible only to brokers. The broker enters into trades in exchanges either on his own account or on behalf of clients. No stock broker or sub-broker is allowed to buy, sell or deal in securities, unless he or she holds a certificate of registration granted by SEBI. A broker/sub-broker complies with the code of conduct prescribed by SEBI. Over time, a number of brokers - proprietor firms and partnership firms - have converted themselves into corporates. The standards for admission of members stress on factors, such as corporate structure, capital adequacy, track record, education, experience, etc. and reflect a conscious endeavour to ensure quality broking services. (d) Listing: A company seeking listing satisfies the exchange that at least 10% of the securities, subject to a minimum of 20 lakh securities, were offered to public for subscription, and the size of the net offer to the public (i.e. the offer price multiplied by the number of securities offered to the public, excluding reservations, firm allotment and promoters' contribution) was not less than Rs. 100 crore, and the issue is made only through book building method with allocation of 60% of the issue size to the qualified institutional buyers. In the alternative, it is required to offer at least 25% of the securities to public. The company is also required to maintain the minimum level of non promoter holding on a continuous basis. In order to provide an opportunity to investors to invest/trade in the securities of local companies, it is mandatory for the companies, wishing to list their securities, to list on the regional stock exchange nearest to their registered office. If they so wish, they can seek listing on other exchanges as well. Monopoly of the exchanges within their allocated area, regional aspirations of the people and mandatory listing on the regional stock exchange resulted in multiplicity of exchanges. The basic norms for listing of securities on the stock exchanges are uniform for all the exchanges. These norms are specified in the Page 9 of 56

Capital Market listing agreement entered into between the company and the concerned exchange. The listing agreement prescribes a number of requirements to be continuously complied with by the issuers for continued listing and such compliance is monitored by the exchanges. It also stipulates the disclosures to be made by the companies and the corporate governance practices to be followed by them. SEBI has been issuing guidelines/circulars prescribing certain norms to be included in the listing agreement and to be complied with by the companies. A listed security is available for trading on the exchange. The stock exchanges levy listing fees - initial fees and annual fees - from the listed companies. It is a major source of income for many exchanges. A security listed on other exchanges is also permitted for trading. A listed company can voluntary delist its securities from non-regional stock exchanges after providing an exit opportunity to holders of securities in the region where the concerned exchange is located. An exchange can, however, delist the securities compulsorily following a very stringent procedure.

(e) Trading Mechanism: The exchanges provide an on-line fully-automated Screen Based Trading System (SBTS) where a member can punch into the computer quantities of securities and the prices at which he likes to transact and the transaction is executed as soon as it finds a matching order from a counter party. SBTS electronically matches orders on a strict price/time priority and hence cuts down on time, cost and risk of error, as well as on fraud resulting in improved operational efficiency. It allows faster incorporation of price sensitive information into prevailing prices, thus increasing the informational efficiency of markets. It enables market participants to see the full market on real-time, making the market transparent. It allows a large number of participants, irrespective of their geographical locations, to trade with one another simultaneously, improving the depth and liquidity of the market. It provides full anonymity by accepting orders, big or small, from members without revealing their identity, thus providing equal access to everybody. It also provides a perfect audit trail, which helps to resolve disputes by logging in the trade execution process in entirety. (f)

Trading Rules: Page 10 of 56

Capital Market Regulations have been framed to prevent insider trading as well as unfair trade practices. The acquisitions and takeovers are permitted in a welldefined and orderly manner. The companies are permitted to buy back their securities to improve liquidity and enhance the shareholders' wealth. (g) Price Bands: Stock market volatility is generally a cause of concern for both policy makers as well as investors. To curb excessive volatility, SEBI has prescribed a system of price bands. The price bands or circuit breakers bring about a coordinated trading halt in all equity and equity derivatives markets nation-wide. An index-based market-wide circuit breaker system at three stages of the index movement either way at 10%, 15% and 20% has been prescribed. The movement of either S&P CNX Nifty or Sensex, whichever is breached earlier, triggers the breakers. As an additional measure of safety, individual scrip-wise price bands of 20% either way have been imposed for all securities except those available for stock options. (h) Demat Trading: The Depositories Act, 1996 was passed to proved for the establishment of depositories in securities with the objective of ensuring free transferability of securities with speed, accuracy and security by :(i) making securities of public limited companies freely transferable subject to certain exceptions; (ii) dematerialising the securities in the depository mode; and (iii) providing for maintenance of ownership records in a book entry form. In order to streamline both the stages of settlement process, the Act envisages transfer of ownership of securities electronically by book entry without making the securities move from person to person. Two depositories, viz. NSDL and CDSL, have come up to provide instantaneous electronic transfer of securities. At the end of March 2002, 4,172 and 4,284 companies were connected to NSDL and CDSL respectively. The number of dematerialised securities increased to 56.5 billion at the end of March 2002. As on the same date, the value of dematerialsied securities was Rs. 4,669 billion and Page 11 of 56

Capital Market the number of investor accounts was 4,605,588. All actively traded scrips are held, traded and settled in demat form. Demat settlement accounts for over 99% of turnover settled by delivery. This has almost eliminated the bad deliveries and associated problems. To prevent physical certificates from sneaking into circulation, it has been mandatory for all new IPOs to be compulsorily traded in dematerialised form. The admission to a depository for dematerialisation of securities has been made a prerequisite for making a public or rights issue or an offer for sale. It has also been made compulsory for public listed companies making IPO of any security for Rs. 10 crore or more to do the same only in dematerialised form. (i)

Charges:

A stock broker is required to pay a registration fee of Rs.5, 000 every financial year, if his annual turnover does not exceed Rs. 1 crore. If the turnover exceeds Rs. 1 crore during any financial year, he has to pay Rs. 5,000 plus one-hundredth of 1% of the turnover in excess of Rs.1 crore. After the expiry of five years from the date of initial registration as a broker, he has to pay Rs. 5,000 for a block of five financial years. Besides, the exchanges collect transaction charges from its trading members. NSE levies Rs. 4 per lakh of turnover. The maximum brokerage a trading member can levy in respect of securities transactions is 2.5% of the contract price, exclusive of statutory levies like SEBI turnover fee, service tax and stamp duty. However, brokerage charges as low as 0.15% are also observed in the market. (j)

Trading Cycle:

Rolling settlement on T+3 basis gave way to T+2 from April 2003. The market has moved close to spot/cash market. (k) Risk

Management:

To pre-empt market failures and protect investors, the regulator/exchanges have developed a comprehensive risk management system, which is constantly monitored and upgraded. It encompasses capital adequacy of members, adequate margin requirements, limits on exposure and turnover, indemnity insurance, on-line position monitoring and automatic disablement, etc. They also administer an efficient market surveillance system to curb excessive volatility, detect and prevent price manipulations. A clearing corporation assures the counterparty risk of each member and guarantees financial settlement in respect of trades executed on NSE. Page 12 of 56

Capital Market

Thus in a nutshell the following diagram explains what all is discussed above –

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Capital Market

Debt Market in India:Page 14 of 56

Capital Market For a developing economy like India, debt markets are crucial sources of capital funds. The debt market in India is amongst the largest in Asia. It includes government securities, public sector undertakings, other government bodies, financial institutions, banks and companies. The debt markets in India is divided into three segments, viz., Government Securities, Public Sector Units (PSU) bonds, and corporate securities.

Debt – Market Segments

Government

PSU Bonds

Securities

Corporate Bonds

The market for Government Securities comprises the Centre, State and State-sponsored securities. Government securities (G-secs) or gilts are sovereign securities, which are issued by the Reserve Bank of India (RBI) on behalf of the Government of India (GOI). The GOI uses these funds to meet its expenditure commitments. The PSU bonds are generally treated as surrogates of sovereign paper, sometimes due to explicit guarantee and often due to the comfort of public ownership. Some of the PSU bonds are tax free, while most bonds including government securities are not taxfree. The RBI also issues tax-free bonds, called the 6.5% RBI relief bonds, which is a popular category of tax-free bonds in the market. Corporate bond markets comprise of commercial paper and bonds. These bonds typically are structured to suit the requirements of investors and the issuing corporate, and include a variety of tailor- made features with respect to interest payments and redemption.

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Capital Market

PARTICIPANTS IN THE DEBT MARKETS

1. Central Government:Central government raises money through bond issuances, to fund budgetary deficits and other short and long term funding requirements. 2. Reserve Bank of India:Reserve Bank Of India (RBI), the central bank of the country, acts as investment banker to the government, raises funds for the government through bond and T-bill issues, and also participates in the market through open- market operations, in the course of conduct of monetary policy. 3. Primary dealers:Primary dealers are market intermediaries appointed by the Reserve Bank of India who underwrite and make market in government securities

4. State Governments, municipalities and local bodies :Page 16 of 56

Capital Market State governments , municipalities and local bodies issue securities in the debt markets to fund their developmental projects, as well as to finance their budgetary deficits. 5. Public sector units (PSU):Public Sector Units are large issuers of debt securities, for raising funds to meet the long term and working capital needs. 6. Corporate treasuries:Corporate treasuries issue short and long term paper to meet the financial requirements of the corporate sector. 7. Banks:Commercial banks are the largest investors in the debt markets, particularly the treasury bill and G-sec markets. They have a statutory requirement to hold a certain percentage of their deposits (currently the mandatory requirement is 24% of deposits) in approved securities (all government bonds qualify) to satisfy the statutory liquidity requirements. 8. Mutual funds :Mutual Funds have emerged as another important player in the debt markets, owing primarily to the growing number of bond funds that have mobilised significant amounts from the investors. 9. Foreign Institutional Investors:Foreign Institutional Investors are permitted to invest in Dated Government Securities and Treasury Bills within certain specified limits. 10. Provident funds:Provident funds are large investors in the bond markets, as the prudential regulations governing the deployment of the funds they mobilise, mandate investments pre-dominantly in treasury and PSU bonds.

Primary market/ New Issue Market:-

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Capital Market As in the case of equity primary market , this is the market in which debt instruments – government securities, PSU Bonds & corporate bonds are issued for the first time . Government Securities:In case of government securities , it is the RBI which issues securities on behalf of the government (both state as well as central government). Thus RBI periodically conducts auction of GOI/SDL under Central/State borrowing Treasury program as per the auction calendar and also under MSS for GOI Securities.

The Primary issuance process involves:AUCTION TYPE:

Yield-based auction

Price-based auction.

In this, successful bids are decided In this, successful bids are filled up by filling up the notified amount in terms of prices that are bid by from the lowest bid upwards. participants from the highest price downward. This auction creates a new This auction facilitates the re-issue security, every time an auction is of an existing security completed & the name of the security is the cut-off yield

For example, the G-sec 10.3% 2010 derives its name from the cut-off yield at the auction, which in this case was 10.3%, which also becomes the coupon payable on the bond.

For example, in March 2001, RBI auctioned the 11.43% 2015 security. This was a G-sec, which had been earlier issued and trading in the market. The auction was for an additional issue of this existing security. The coupon rate and the dates of payment of coupons and redemption are already known.

The additional issue increases the gross Page 18 of 56 cash flows only on these dates.

Capital Market

The two choices in treasury auctions, which are widely known and used, are:  Discriminatory Price Auctions (French Auction)  Uniform Price Auctions (Dutch Auction) In both these kinds of auctions, the winning bids are those that exhaust the amount on offer, beginning at the highest quoted price (or lowest quoted yield). In the Indian markets, discriminatory price auction as well as uniform price auction is used for all bond issuances. Whether an auction will be Dutch or French is announced in the notification of the auction. If all the successful bidders have to pay the cut-off price of Rs. 111.2, the auction is called a Dutch auction, or a uniform price auction. If the successful bidders have to pay the prices they have actually bid, the auction fills up the notified amounts, in various prices at which each of the successful bidders bid. This is called a French auction, or a discriminatory price auction. Each successful bidder pays the actual price bid by him.

BID TYPE 1. Competitive Bid: Participants having SGL a/c & current a/c 2. Non-Competitive Bid: Participants not having SGL a/c & current a/c

COMPETITIVE BIDDING PROCESS: RBI announces the auction of G-sec through a press notification, and invites bids.

Front office takes a view about Bank's participation in the auction, taking into consideration the market factors, Bank's liquidity Page 19 of 56 and the existing portfolio. Accordingly, proposal is placed before the Investment Committee

Capital Market

Investment committee consists of GM, AGM of different departments & CMD. Proposal for investment is placed before the Investment Committee. Decision is taken. NO

End

Y Bids are submitted through NDS_OM platform giving details of the quantum and expected price/yield of securities. Report is generated.

Result of the auction is declared by RBI on the same day evening on NDS. If bid is accepted either partially or fully, the same is entered and authorized in bank system.

Back-Office Operation:Duly authorized Deal Slip is verified by the back office. On the day of allotment/settlement back office will settle the deal in the system & Non-Competitive Bidding in Government Securities categorising securities in HTM, AFS & HFT.

To enable medium and small investors to participate in the auction process without taking the price risk in auctions, the Reserve Bank of India has introduced a facility of non-competitive bidding in dated government securities auctions for select set of investors. Non-competitive bidding means that a person would be able to participate in the auctions of dated government securities without having to quote the yield or price in the bid. Thus, he will not have to worry about whether his bid will be on or offthe-mark; as long as he bids in accordance with the scheme, he will be allotted securities fully or partially.

Participants in the Scheme: Participation in the Scheme of non-competitive bidding is open to any person including firms, companies, corporate bodies, institutions, provident funds, trusts and any other entity as prescribed by RBI. As the focus is on the small investors lacking market expertise, the Scheme will Page 20 of 56

Capital Market be open to those who do not have current account (CA) or Subsidiary General Ledger (SGL) account with the Reserve Bank of India. As an exception, Regional Rural Banks (RRBs) and Urban Cooperative Banks (UCBs) can also apply under this Scheme in view of their statutory obligations.

Amount offered for non-competitive bidding: Non-competitive bids will be allowed up to 5 per cent of the notified amount in the specified auctions of dated securities, within the notified amount. That is, if the notified amount is Ra.1000 crore, the amount reserved for non-competitive bidders would be Rs.50 crore and the remaining Rs.950 crore will be put up for competitive auctions. The minimum amount for bidding will be Rs.10, 000 (face value) and in multiples in Rs.10,000.

Corporate Bonds :The corporate bond market has been in existence in India for a long time. However, despite a long history, the size of the public issue segment of the corporate bond market in India has remained quite insignificant.

Secondary Market :Like in the case of equity secondary market, the secondary debt market involves buying and selling of debt instruments which are already issued in the primary market or listed on the exchanges. Government bonds are deemed to be listed as soon as they are issued. Markets for government securities are pre-dominantly wholesale markets, with trades done on telephonic negotiation. NSE WDM provides a trading platform for Government bonds, and reports over 65% of all secondary market trades in government securities. Currently, transactions in government securities are required to be settled on the trade date or next working day unless the transaction is through a Page 21 of 56

Capital Market broker of a permitted stock exchange in which case settlement can be on T+2 basis. In NDS, all trades between members of NDS have to be reported immediately. The settlement is routed through CCIL for all NDS members. The lack of market infrastructure and comprehensive regulatory framework coupled with low issuance leading to low liquidity in the secondary market, narrow investor base, inadequate credit assessment skills, high cost of issuance and lack of transparency in trades are some of the major factors that hindered the growth of the private corporate debt market.

Factors affecting bond interest rates : The key variables having a bearing on interest rate outlook are: US 10 year government bond yields :

The correlation between Indian 10 yr G-sec has held reasonably well in the recent past. Although, the correlation might not hold on a day to day basis, but over a slightly longer period, the direction of the movement of the Indian 10 yr bond is quite similar to that of the US 10 yr bond. The yields of the bonds have increased as the green shoots of recovery in the global economy has led to an increase in risk taking behaviour among the investors who are selling bonds to enter other asset classes which are relatively more risky and offers higher yields. The S&P’s decision to lower ratings outlook on US sovereign debt to negative from stable led to sell off in the US treasuries. Similarly in India, the rally in equity markets since the election results on 18th May might have led to some sell off in the bond markets which have pushed the Indian 10 yr bond yields to 6.70% levels from 6.22% in Mid May, in line with the sharp rise in the US 10 yr bonds .

 Inflation / crude oil prices : Inflation arises as the purchasing power of people increases, the value of Rupee increases. To control the inflation and to suck excess liquidity from the system the bonds are issued t higher yield.

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Capital Market 

Political stability / sovereign rating outlook : The sense of political stability following election results has reduced the risk of an outright sovereign rating downgrade by international credit rating agencies in the near future . Although , the fiscal deficit concerns remain, the continuity of the political regime will abate the risk of runaway fiscal deficits. The reduced risk of sovereign rating downgrade due to a stable government and a likely controllable fiscal deficit scenario will therefore provide support to the bond market sentiments.

 RBI policy stance / liquidity outlook:The bond interest rate is also affected by the RBI policy stance. If the RBI goes for an expansionary monetary policy , then the bond coupon rate will come down , as there will be ample liquidity in the system which easily would meet the demand for the same. It is a reverse situation when the RBI goes for a contractionary monetary policy. This is because then the money supply in the economy would be less as compared to the demand for the same and the consequence would be hardening of the bond coupon rate.

Chapter 2- Frequently Asked Questions (FAQ’s)

1. What are the Sensex & the Nifty? ANS:-The Sensex is an "index". An index is basically an indicator. It gives you a general idea about whether most of the stocks have gone up or most of the stocks have gone down. The Sensex is an indicator of all the major companies of the BSE. The Nifty is an indicator of all the major companies of the NSE. The sensex is calculated taking into consideration the top 30 companies of Bombay Stock Exchange (BSE).In case of Page 23 of 56

Capital Market National Stock Exchange (NSE) , top 50 companies are taken into consideration to calculating nifty. If the Sensex goes up, it means that the prices of the stocks of most of the major companies on the BSE have gone up. If the Sensex goes down, this tells you that the stock price of most of the major stocks on the BSE have gone down. Just like the Sensex represents the top stocks of the BSE, the Nifty represents the top stocks of the NSE.

2. Which are the top 30 companies of BSE & top 50 companies of NSE, which are used to calculate sensex & nifty ? ANS:- The following is the list of top 30 companies of BSE :The sensex 30 includes the following companies (As on 24th July 2009) S. No.

Name of company

the S. No

Name of the company

1

Reliance Industies

16

Grasim Industries

2

Infosys Technologies

17

Maruti Suzuki

3

L &T

18

NTPC

4

ICICI Bank

19

Sterlite Industries

5

HDFC

20

6

ITC

21

Reliance Infrastructure

7

Reliance Communication

22

Mahindra & Mahindra

8

Bharti Airtel

23

Jai Prakash Associates

9

HDFC Bank

24

Hero Honda

10

SBI

25

DLF

11

ONGC

26

Wipro

12

BHEL

27

Hindalco

13

Hindustan Unilever

28

Tata Motors

Tata Power

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Capital Market 14

Tata Consultancy

29

Sun Pharma

15

Tata Steel

30

ACC

The 30 companies that make up the Sensex are selected and reviewed from time to time by an “index committee”. This “index committee” is made up of academicians, mutual fund managers, finance journalists, independent governing board members and other participants in the financial markets. The Nifty 50 Companies as on 24th July 2009 are as follows :S .No

Name of the company

S.

Name of the company

1

Reliance Industies

26

Hero Honda

2

Infosys Technologies

27

DLF

3

L &T

28

Wipro

4

ICICI Bank

29

Cipla

5

HDFC

30

Idea Celluar

6

ITC

31

Unitech

7

Bharti Airtel

32

Cairn

8

HDFC Bank

33

9

SBI

34

10

ONGC

35

Tata Motors

11

BHEL

36

SAIL

12

Hindustan Unilever

37

Punjab National Bank

13

Tata Consultancy

38

Sun Pharma

14

Tata Steel

39

ACC

15

Grasim Industries

40

Ambuja Cement

16

Reliance Communication

41

17

Jindal Steel

42

18

Axis Bank

43

No.

Hindalco Reliance capital

ABB Siemens Power Grid

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Capital Market 19

Maruti Suzuki

44

Reliance Power

20

NTPC

45

Suzlon Energy

21

Sterlite Industries

46

BPCL

47

HCL Technologies

22

Tata Power

23

Reliance Infrastructure

48

Ranbaxy Laboratories

24

Mahindra & Mahindra

49

Tata Communication

25

GAIL(I)

50

National Aluminium

3. What is market capitalisation ( Market cap ) ? ANS:- Market cap or market capitalization is simply the worth of a company in terms of it’s shares. To calculate the market cap of a particular company, simply multiply the “current share price” by the “number of shares issued by the company”. Thus,

Market Cap= by the company.

Current Share Price

X

no. of shares issued

Depending on the value of the market cap, the company will either be a “mid-cap” or “large-cap” or “small-cap” company

4.What do we mean by ‘Free Float Market Capitalisation ‘? ANS:- Many different types of investors hold the shares of a company. These include government, founders( promoters ) or directors of the company, FDI’s , retail investors, etc. Only the “open market” shares that are free for trading by anyone, are called the “free-float” shares.A particular company, may have certain shares in the open market and certain shares that are not available for trading in the open market. According the BSE, any shares that DO NOT fall under the following criteria, can be considered to be open market shares:  Holdings by founders/directors/ acquirers which has control element  Holdings by persons/ bodies with "controlling interest" Page 26 of 56

Capital Market  Government holding as promoter/acquirer  Holdings through the FDI Route  Strategic stakes by private corporate bodies/ individuals  Equity held by associate/group companies (cross-holdings)  Equity held by employee welfare trusts Locked-in shares and shares which would not be sold in the open market in normal course. A company has to submit a complete report about “who has how many of the company’s shares” to the BSE. On the basis of this, the BSE will decide the “free-float factor” of the company. The “free-float factor” is a very valuable number. If you multiply the "free-float factor" with the “market cap” of that company, you will get the “free-float market cap” ,which is the value of the shares of the company in the open market

5.What is the criteria for selecting top 30 and 50 stocks in case of BSE & NSE respectively ? ANS:- The following are Stocks for BSE &

the criteria for selecting

the top 30 and 50

NSE respectively:(a)Market capitalization: -The company should have a market capitalization in the Top 100 market capitalization’s of the BSE. Also the market capitalization of each company should be more than 0.5% of the total market capitalization of the Index. (b)Trading frequency: -The company to be included should have been traded on each and every trading day for the last one year. Exceptions can be made for extreme reasons like share suspension etc. Page 27 of 56

Capital Market (c) Number of trades: -The scrip should be among the top 150 companies listed by average number of trades per day for the last one year. (d)Industry representation: -The companies should be leaders in their industry group. (e)Listed history:- The companies should have a listing history of at least one year on BSE. (f)Track record:- In the opinion of the index committee, the company should have an acceptable track record.

6.How to calculate the value of sensex at a particular point ? ANS:- The following are the steps to calculate sensex at a particular point of time:First: Find out the “free-float market cap” of all the 30 companies that make up the Sensex. Second: Add all the “free-float market cap’s” of all the 30 companies. Third: Make all this relative to the Sensex base. The value you get is the Sensex value. To understand the third step let us take an example .

Example:-Suppose, the free float market cap of all the 30 companies was Rs. 100,000,000 at the end of one trading day and the value of sensex is 12500. The market cap at the end of next trading day becomes Rs.120,000,000, then the sensex value at the end of that day is – Sensex value =

120,000,000 x12500 100,000,000

=

15000

Thus the sensex value at the end of next trading day is 15000. Please note that every time one of the 30 companies has a “stock split” or a "bonus" etc. appropriate changes are made in the “market cap” calculations. Page 28 of 56

Capital Market

7. What is price – earnings ratio ( P/E ratio) ? ANS: - PE Ratio is a short form for Price to Earnings Ratio. This is the ratio of the market price of a stock and its EPS. It is used to judge the valuation of a company. This ratio shows how much the investors are willing to pay for a company for each rupee of profit.

As a rule of thumb, companies in mature industries / markets having stable growth have a low to moderate PE ratio. Companies in high-growth industries / markets having rapid growth have a moderate to high PE ratio.

Price Earnings ratio = Market price per share Earnings Per Share

8.

Who are the participants in the capital market ? ANS:- The following are the market participants in the capital market :(a) Foreign institutional Investors (b) Non- Resident Indians (c) Persons of Indian Origin (d) Retail investors (e) Venture capital funds (f) Mutual Funds (g) Private Equity (h) High Net worth Individuals (HNIs) (i)Financial Institutions (j)Insurance companies Page 29 of 56

Capital Market (k) Pension funds , etc.

9. What are Mutual Funds, Pension Funds and Financial Institutions ? ANS:- The meaning of above terms is as follows:Pension Fund A pension fund is a pool of assets forming an independent legal entity that are bought with the contributions to a pension plan for the exclusive purpose of financing pension plan benefits. Mutual fund A mutual fund is a professionally managed type of collective investment scheme that pools money from many investors and invests it in stocks, bonds, short-term money market instruments, and/or other securities. The mutual fund will have a fund manager that trades the pooled money on a regular basis. The net proceeds or losses are then typically distributed to the investors annually. Financial Institution A financial institution is an institution that provides financial services for its clients or members. Probably the most important financial service provided by financial institutions is acting as financial intermediaries. Most financial institutions are highly regulated by government bodies. Broadly speaking, there are three major types of financial institution :1) Deposit-taking institutions that accept and manage deposits and

make loans (this category includes banks, credit companies, and mortgage loan companies); 2) Insurance companies and pension funds; and 3) Brokers, underwriters and investment funds.

unions, trust

10. What is the difference between FDI and FII? Which Form of Investment is good for the economy ? ANS:- Foreign Direct Investment (FDI ) is the investment made by the foreign companies / investors in a company with a strategic perspective. The investment is not only made to gain return but also made to have a say in the management of the affairs of the company. On the other hand, Foreign Institutional Investments (FIIs) , also called as portfolio investments are made by foreign investors primarily to get a healthy return on their investment. Page 30 of 56

Capital Market FDI is preferred over FII investments since it is considered to be the most beneficial form of foreign investment for the economy as a whole. Direct investment targets a specific enterprise, with the aim of increasing its capacity/productivity or changing its management control. Direct investment to create or augment capacity ensures that the capital inflow translates into additional production. In the case of FII investment that flows into the secondary market, the effect is to increase capital availability in general, rather than availability of capital to a particular enterprise. Translating an FII inflow into additional production depends on production decisions by someone other than the foreign investor — some local investor has to draw upon the additional capital made available via FII inflows to augment production. In the case of FDI that flows in for the purpose of acquiring an existing asset, no addition to production capacity takes place as a direct result of the FDI inflow. Just like in the case of FII inflows, in this case too, addition to production capacity does not result from the action of the foreign investor – the domestic seller has to invest the proceeds of the sale in a manner that augments capacity or productivity for the foreign capital inflow to boost domestic production. There is a widespread notion that FII inflows are hot money — that it comes and goes, creating volatility in the stock market and exchange rates. While this might be true of individual funds, cumulatively, FII inflows have only provided net inflows of capital. FDI tends to be much more stable than FII inflows. Moreover, FDI brings not just capital but also better management and governance practices and, often, technology transfer. The know-how thus transferred along with FDI is often more crucial than the capital per se. No such benefit accrues in the case of FII inflows, although the search by FIIs for credible investment options has tended to improve accounting and governance practices among listed Indian companies.

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Capital Market The following graph shows the FDI & FII inflows in India during the last 5 years

Chapter 3-

Capital Market in India - Impact & Factors Page 32 of 56

Capital Market

Impact of capital market on Indian Economy:-

1. Long term finance for corporate and government :The capital market is the market for securities, where companies and governments can raise long term funds. Selling stock and selling bonds are two ways to generate capital and long term funds. It provides a new avenue to corporate and government to raise funds for long term. At present the central government has a large fiscal deficit of 6.8% of GDP, which comes to around Rs. 4,00,000 cr. To finance this large deficit the government would look to capital market . Corporates at the moment are also looking at raising funds through capital market.

2. Helps to bridge investment – savings gap:It is seen mostly in case of developing countries that they suffer from investment – savings gap . This gap means that funds available fall far short of the amount needed to stimulate economic development.Thus this gap hinders the economic growth of a developing country like India.In such a situation capital market plays an important role . Capital market expand the investment options available in the country , which attracts portfolio investments from abroad. Domestic savings are also facilitated by the availability of additional investment options. This enables to bridge the gap between investment and savings and paves the way for economic development . India’s improving macroeconomic fundamentals, a sizeable skilled labour force and greater integration with the world economy have increased India’s global competitiveness, placing the country on the radar screens of investors the world over. The global ratings agencies Moody’s and Fitch have awarded India investment grade ratings, indicating comparatively low sovereign risks. These positive dynamics have led to a sustained surge in India’s equity markets since 2003 ,attracting sizeable capital from foreign investors. The net cumulative portfolio flows from 2003-2006 ( bonds & equities) amounted to $35 billion. In current year (from Jan to July) the Foreign Institutional Investors have pumped in over $6 billion or around Rs . 29,940 cr.

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Capital Market 3. Cost – effective mode of raising finance :Capital market in any country provides the corporate and government to raise long term finance at a low cost as compared to other modes of raising finance .Therefore capital market is important, more so for India as it embarks on the path of becoming a developed country. 4. Provides an avenue for investors to park their surplus funds :Capital market provides the investors both domestic as well as foreign ,various instruments to invest their surplus funds. Not only it provides an avenue to park surplus funds but it also helps the investors to reap decent rewards on their investment. This realisation has resulted in increased investments in capital market both from domestic as well as foreign investors in Indian capital market. Also there is an opportunity for investors to diversify their investment portfolio, as wide range of instruments for investment are available in capital market. 5. Conducive to implementation of Monetary Policy:Through open Market Operation (OMO), the Reserve Bank of India controls the cost and availability of money supply in the Indian economy.Thus when RBI follows expansionary monetary policy it purchases government securities from the Bond market and when it intends to contract the money supply in the economy it sells the securities from the secondary bond market . Because of these operation there is also an impact on the interest rates , which in turn impacts the cost of the funds in the economy. Thus capital market helps the RBI to check the cost and availability of funds in the economy. 6.Indicates the state of the economy:Capital market also indicate the state of the economy. It is said to be the face of the economy. This is so because when capital market is stable , investments flow into capital market from within as well as outside the country , which indicates that the future prospects of the economy are good.

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Capital Market

Factors affecting capital market in India :The capital market is affected by a range of factors . Some of the factors which influence capital market are as follows:-

a)Performance of domestic companies:The performance of the companies or rather corporate earnings is one of the factors which has direct impact or effect on capital market in a country. Weak corporate earnings indicate that the demand for goods and services in the economy is less due to slow growth in per capita income of people . Because of slow growth in demand there is slow growth in employment which means slow growth in demand in the near future. Thus weak corporate earnings indicate average or not so good prospects for the economy as a whole in the near term. In such a scenario the investors ( both domestic as well as foreign ) would be wary to invest in the capital market and thus there is bear market like situation. The opposite case of it would be robust corporate earnings and it’s positive impact on the capital market. The corporate earnings for the April – June quarter for the current fiscal has been good. The companies like TCS, Infosys,Maruti Suzuki, Bharti Airtel, ACC, ITC, Wipro,HDFC,Binani cement, IDEA, Marico Canara Bank, Piramal Health, India cements , Ultra Tech, L&T, Coca- Cola, Yes Bank, Dr. Reddy’s Laboratories, Oriental Bank of Commerce, Ranbaxy, Fortis, Shree Cement ,etc have registered growth in net profit compared to the corresponding quarter a year ago. Thus we see companies from Infrastructure sector, Financial Services, Pharmaceutical sector, IT Sector, Automobile sector, etc. doing well . This across the sector growth indicates that the Indian economy is on the path of recovery which has been positively reflected in the stock market( rise in sensex & nifty) in the last two weeks. (July 13-July 24). b)Environmental Factors :Environmental Factor in India’s context primarily means- Monsoon . In India around 60 % of agricultural production is dependent on monsoon. Thus there is heavy dependence on monsoon. The major chunk of agricultural production comes from the states of Punjab , Haryana & Uttar Pradesh. Thus deficient or delayed monsoon in this part of the country would directly affect the agricultural output in the country. Apart Page 35 of 56

Capital Market from monsoon other natural calamities like Floods, tsunami, drought, earthquake, etc. also have an impact on the capital market of a country. The Indian Met Department (IMD) on 24th June stated that India would receive only 93 % rainfall of Long Period Average (LPA). This piece of news directly had an impact on Indian capital market with BSE Sensex falling by 0.5 % on the 25th June . The major losers were automakers and consumer goods firms since the below normal monsoon forecast triggered concerns that demand in the crucial rural heartland would take a hit. This is because a deficient monsoon could seriously squeeze rural incomes, reduce the demand for everything from motorbikes to soaps and worsen a slowing economy.

c)Macro Economic Numbers :The macro economic numbers also influence the capital market. It includes Index of Industrial Production (IIP) which is released every month, annual Inflation number indicated by Wholesale Price Index (WPI) which is released every week, Export – Import numbers which are declared every month, Core Industries growth rate ( It includes Six Core infrastructure industries – Coal, Crude oil, refining, power, cement and finished steel) which comes out every month, etc. This macro –economic indicators indicate the state of the economy and the direction in which the economy is headed and therefore impacts the capital market in India. A case in the point was declaration of core industries growth figure. The six Core Infrastructure Industries – Coal, Crude oil, refining, finished steel, power & cement –grew 6.5% in June , the figure came on the 23 rd of July and had a positive impact on the capital market with the sensex and nifty rising by 388 points & 125 points respectively. d)Global Cues :In this world of globalisation various economies are interdependent and interconnected. An event in one part of the world is bound to affect other parts of the world , however the magnitude and intensity of impact would vary. Thus capital market in India is also affected by developments in other parts of the world i.e. U.S. , Europe, Japan , etc. Global cues includes corporate earnings of MNC’s, consumer confidence index in developed countries, jobless claims in developed countries, global growth outlook given by various agencies like IMF, economic growth of Page 36 of 56

Capital Market major economies, price of crude –oil, credit rating of various economies given by Moody’s, S & P, etc. An obvious example at this point in time would be that of subprime crisis & recession . Recession started in U.S. and some parts of the Europe in early 2008 .Since then it has impacted all the countries of the worlddeveloped, developing , less- developed and even emerging economies. e)Political stability and government policies:For any economy to achieve and sustain growth it has to have political stability and pro- growth government policies. This is because when there is political stability there is stability and consistency in government’s attitude which is communicated through various government policies. The vice- versa is the case when there is no political stability .So capital market also reacts to the nature of government , attitude of government, and various policies of the government. The above statement can be substantiated by the fact the when the mandate came in UPA government’s favour ( Without the baggage of left party) on May 16 2009, the stock markets on Monday , 18th May had a bullish rally with sensex closing 800 point higher over the previous day’s close. The reason was political stability. Also without the baggage of left party government can go ahead with reforms. f)Growth prospectus of an economy:When the national income of the country increases and per capita income of people increases it is said that the economy is growing . Higher income also means higher expenditure and higher savings.This augurs well for the economy as higher expenditure means higher demand and higher savings means higher investment. Thus when an economy is growing at a good pace capital market of the country attracts more money from investors, both from within and outside the country and vice -versa. So we can say that growth prospects of an economy does have an impact on capital markets. g)Investor Sentiment and risk appetite :Another factor which influences capital market is investor sentiment and their risk appetite .Even if the investors have the money to invest but if they are not confident about the returns from their investment , they may stay away from investment for some time.At the same time if the investors have low risk appetite , which they were having in global and Indian capital market some four to five months back due to global financial meltdown and recessionary situation in U.S. & some parts of Page 37 of 56

Capital Market Europe , they may stay away from investment and wait for the right time to come.

Chapter 4 – Equity Reserarch

If a particular investor buy’s the same securities as other people, he will have the same results as other people. It is impossible to produce a superior performance unless that investor does something different from the majority. To buy when others are despondently selling and to sell when others are greedily buying requires the greatest fortitude and pays the greatest reward. Bear markets have always been temporary. And so have bull markets. Share prices usually turn upward from one to twelve months before the bottom of the business cycle and vice versa. If a particular industry or type of security becomes popular with investors, that popularity will always prove temporary and, when lost, may not return for many years.

Equity Research

The investor should bear in mind that while he makes investment decision, he should have idea of the company’s break-even point and company’s position in the stock exchange. For this EQUITY RESEARCH is done. Equity Research does the research of company’s income and growth. In the process, it uses the various sources of financial information available in the country and accordingly advises in which company an investor should invest. Thus Equity Research Involves:-

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Capital Market

FUNDAMENTAL ANALYSIS :The investor while buying stock has the primary purpose of gain. If he invests for a short period of time it is speculative but when he holds it for a fairly long period of time the anticipation is that he would receive some return on his investment. Fundamental analysis is a method of finding out the future price of a stock, which an investor wishes to buy. The method for forecasting the future behavior of investments and the rate of return on them is clearly through an analysis of the broad economic forces in which they operate. The kind of industry to which they belong and the analysis of the company's internal working through statements like income statement, balance sheet and statement of changes of income. The fundamental analysis involves

Fundamental

Technical (a) Analysis

Analysis

Company

Analysis

(b) Industry Analysis

Company

(C)

Economic Analysis

Analysis

(a)

Economic Analysis.

Industrial Analysis Page 39 of 56

Company Analysis:-

Capital Market Company analysis is a study of the variables that influence the future of a firm both qualitatively and quantitatively. It is a method of assessing the competitive position of a firm earning and profitability, the efficiency with which it operates and its financial position with respect to the earning to its shareholders. The fundamental nature of this analysis is that each share of a company has an intrinsic value, which is dependent on the company's financial performance, quality of management and record of its earnings and dividend. They believe that the market price of share in a period of time will move towards its intrinsic value. If the market price of a share is lower than the intrinsic value, as evaluated by the fundamental analysis, then the share is supposed to be undervalued and it should be purchased but if the current market price shows that it is more than intrinsic value then according to the theory the share should be sold. This basic approach is analyzed through the financial statements of an organization. The basic financial statements, which are required as tools of the fundamental analyst, are the income statement, the balance sheet, and the statement of changes in financial position. These statements are useful for investors, creditors as well as internal management of a firm and on the basis these statements the future course of action may be taken by the investors of the firm. While evaluating a company, its statement must be carefully judged to find out that they are: i) Correct, ii) Complete, iii) Consistent and iv) Comparable.

(b)Industry Analysis:The industry has been defined as homogeneous groups of people doing a similar kind of activity or similar work. In India, the broad classification of industry is made according to stock exchange list, which is published. This gives a distinct classification to industry to industry in different forms such as:  Engineering,  Banking and Insurance,  Textiles,  Cement, Page 40 of 56

Capital Market  Steel Mills and Alloys,  Chemicals and Pharmaceuticals,  Retail,  Sugar,  Information Technology,  Automobiles and Ancillary,  Telecommunications,  FMCG,  Miscellaneous. Industry should also be evaluated or analyzed through its life cycle. Industry life cycle may also be studied through the industrial life cycle state.

There are generally three stages of an industry. These stages are pioneering stage, expansion stage and stagnation stage. 1. THE PIONEERING STAGE: The industrial life cycle has a pioneering stage when the new inventions and technological developments take place. During this time the investor will notice great increase in the activity of the firm. Production will rise and in relation to production, there will be a great demand for the product. At this stage, the profits are also very high as the technology is new. Taking a look at the profit many new firms enter into the same field till the market becomes competitive. The market competitive pressures keep on increasing with the entry of new-firms and the prices keep on declining and then ultimately profits fall. At this stage all firms compete with each other and only a few efficient firms are left to run the business and most of the other firms are wiped out in the pioneering stage itself. 2. THE EXPANSION STAGE: The efficient firms, which have been in the market now, find that it is time to stabilize them. Although competition is there, the, number of firms have gone down during pioneering stage itself and there are a large number of firms left to run the business in the industry. This is the time when each one has to show competitive strength and superiority. The Page 41 of 56

Capital Market investor will find that this is the best time to make an investment. At the pioneering stage it was difficult to find out which of the firm to invest in, but having waited for the stability period there has been a dynamic selection process and a few of the large number of firms are left in the industry. This is the period of security and safety and this is also called period of maturity for the firm. This stage lasts from five years to fifty years of a firm depending on the potential and productivity and also the capability to meet the change in competition and rapid change in customer habit. 3. STAGNATION STAGE: During the stagnation stage the investor will find that although there is increase in sales of an organization, this is not in relation to the profits earned by the company. Profits are also there but the growth in the firm is lower than it was in the expansion stage. The industry finds that it is at a loss of power and cannot expand. During this stage most of the firms who have realized the competitive nature of the industry , begin to change their course of action and start on a new venture . Investor should make a continuous evaluation of their investments. In firms in which investors have received profits for large number of years and have reached stagnation stage, they should sell off their investment in those firms and find better avenues in those firms where the expansion stage has set in, many be in another industry.

(c) ECONOMIC ANALYSIS :Investors are concerned with those forces in the economy, which affect the performance of organizations in which they wish to participate, through purchase of stock. A study of the economic forces would give an idea about future corporate earnings and the payment of dividends and interest to investors. Some of the broad forces within which the factors of investment operate are: 1. POPULATION: Population gives an idea of the kind of labor force in a country. In some countries the population growth has slowed down whereas in India and some other third world countries there has been a population explosion. Population explosion will give demand for more industries like hotels, residences, service industries like health, consumer demand like refrigerators and cars. Likewise, investors should prefer to invest in industries, which have a large amount of labor force because in the future such industries will bring better rates of return. Page 42 of 56

Capital Market 2. RESEARCH AND TECHNOLOGICAL DEVELOPMENTS: The economic forces relating to investments would be depending on the amount of resources spent by the government on the particular technological development affecting the future. Broadly the investor should invest in those industries which are getting a large amount of share in the funds of the development of the country. For example, in India in the present context automobile industries and spaces technology are receiving a greater attention. These may be areas, which the investor may consider for investments. 3. CAPITAL FORMATION: Another consideration of the investor should be the kind of investment that a company makes in capital goods and the capital it invests in modernization and replacement of assets. A particular industry or a particular company which an investor would like to invest can also be viewed at with the help of the economic indicators such as the place, value and property position of the industry, group to which it belongs and the year-to-year returns through corporate profits. 4. NATURAL RESOURCES AND RAW MATERIALS: The natural resources are to a large extent are responsible for a country's economic development and overall improvement in the condition of corporate growth. In India, technological discoveries recycling of materials, nuclear and solar energy and new synthetics should give the investor an opportunity to invest in untapped or recently tapped resources which would also produce higher investment opportunity.

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Capital Market

TECHNICAL ANALYSIS Technical analysis is simply the study of prices as reflected on price charts. Technical analysis assumes that current prices should represent all known information about the markets. Prices not only reflect intrinsic facts, they also represent human emotion and the pervasive mass psychology and mood of the moment. Prices are, in the end, a function of supply and demand. However, on a moment to moment basis, human emotions,fear, greed, panic, hysteria, elation, etc. also dramatically affect prices. Markets may move based upon people’s expectations, not necessarily facts. A market "technician" attempts to disregard the emotional component of trading by making his decisions based upon chart formations, assuming that prices reflect both facts and emotion. Analysts use their technical research to decide whether the current market is a BULL MARKET or a BEAR MARKET.

Various aspects of Technical analysis 1. STOCK CHARTS A stock chart is a simple two-axis (X-Y) plotted graph of price and time. Each individual equity, market and index listed on a public exchange has a chart that illustrates this movement of price over time. Individual data plots for charts can be made using the CLOSING price for each day. The plots are connected together in a single line, creating the graph. Also, a combination of the OPENING, CLOSING, HIGH and/or LOW prices for that market session can be used for the data plots. This second type of data is called a PRICE BAR. Individual price bars are then overlaid onto the graph, creating a dense visual display of stock movement. Stock charts can be drawn in two different ways. An ARITHMETIC chart has equal vertical distances between each unit of price. A LOGARITHMIC chart is a percentage growth chart. 2. TRENDS The stock chart is used to identify the current trend. A trend reflects the average rate of change in a stock's price over time. Trends exist in all time frames and all markets. Trends can be classified in three ways: UP, DOWN or RANGEBOUND. In an uptrend, a stock rallies often with intermediate periods of consolidation or movement against the trend. In doing so, it draws a series of higher highs and higher lows on the stock chart. In an uptrend, there will be a POSITIVE rate of price change over time. In a downtrend, a stock declines often with intermediate periods of consolidation or movement against the trend. In doing so, it draws a series of lower highs and lower lows on the stock chart. In a downtrend, Page 44 of 56

Capital Market there will be a NEGATIVE rate of price change over time. Range bound price swings back and forth for long periods between easily seen upper and lower limits. There is no apparent direction to the price movement on the stock chart and there will be LITTLE or NO rate of price change. Trends tend to persist over time. A stock in an uptrend will continue to rise until some change in value or a condition occurs. Declining stocks will continue to fall until some change in value or conditions occur. Chart readers try to locate TOPS and BOTTOMS, which are those points where a rally or a decline ends. Taking a position near a top or a bottom can be very profitable. Trends can be measured using TRENDLINES. Very often a straight line can be drawn UNDER three or more pullbacks from rallies or OVER pullbacks from declines. When price bars return to that trend line, they tend to find SUPPORT or RESISTANCE and bounce off the line in the opposite direction. 3. VOLUME:Volume measures the participation of the crowd. Stock charts display volume through individual HISTOGRAMS below the price pane. Often these will show green bars for up days and red bars for down days. Investors and traders can measure buying and selling interest by watching how many up or down days in a row occur and how their volume compares with days in which price moves in the opposite direction. Stocks that are bought with greater interest than sold are said to be under ACCUMULATION. Stocks that are sold with great interest than bought are said to be under DISTRIBUTION. Accumulation and distribution often LEAD to price movement. In other words, stocks under accumulation often will rise some time after the buying begins. Alternatively, stocks under distribution will often fall some time after selling begins. It takes volume for a stock to rise but it can fall of its own weight. Rallies require the enthusiastic participation of the crowd. When a rally runs out of new participants, a stock can easily fall. Investors and traders use indicators such as ON BALANCE VOLUME to see whether participation is lagging (behind) or leading (ahead) the price action. Stocks trade daily with an average volume that determines their LIQUIDITY. Liquid stocks are very easy for traders to buy and sell. Liquid stocks require very high SPREADS (transaction costs) to buy or sell and often cannot be eliminated quickly from a portfolio. Stock chart analysis does not work well on illiquid stocks. 4.PATTERNS AND INDICATORS Charts allow investors and traders to look at past and present price action in order to make reasonable predictions and wise choices. It is a highly visual medium. This one fact separates it from the colder world of valuePage 45 of 56

Capital Market based analysis. The stock chart activates both left-brain and right-brain functions of logic and creativity. So it's no surprise that over the last century two forms of analysis have developed that focus along these lines of critical examination. The oldest form of interpreting charts is PATTERN ANALYSIS. This method gained popularity through both the writings of Charles Dow and Technical Analysis of Stock Trends, a classic book written on the subject just after World War II. The newer form of interpretation is INDICATOR ANALYSIS, a math-oriented examination in which the basic elements of price and volume are run through a series of calculations in order to predict where price will go next. Pattern analysis gains its power from the tendency of charts to repeat the same bar formations over and over again. These patterns have been categorized over the years as having a bullish or bearish bias. Some well-known ones include HEAD and SHOULDERS, TRIANGLES, RECTANGLES, DOUBLE TOPS, DOUBLE BOTTOMS and FLAGS. Also, chart landscape features such as GAPS and TRENDLINES are said to have great significance on the future course of price action. Indicator analysis uses math calculations to measure the relationship of current price to past price action. Almost all indicators can be categorized as TREND-FOLLOWING or OSCILLATORS. Popular trend-following indicators include MOVING AVERAGES, ON BALANCE VOLUME and MACD. Common oscillators include STOCHASTICS, RSI and RATE OF CHANGE. Trendfollowing indicators react much more slowly than oscillators. They look deeply into the rear view mirror to locate the future. Oscillators react very quickly to short-term changes in price, flipping back and forth between OVERBOUGHT and OVERSOLD levels. Both patterns and indicators measure market psychology. The core of investors and traders that make up the market each day tend to act with a herd mentality as price rises and falls. This "crowd" tends to develop known characteristics that repeat themselves over and over again. Chart interpretation using these two important analysis tools uncovers growing stress within the crowd that should eventually translate into price change. 5. MOVING AVERAGES The most popular technical indicator for studying stock charts is the MOVING AVERAGE. This versatile tool has many important uses for investors and traders. Take the sum of any number of previous CLOSE prices and then divide it by that same number. This creates an average price for that stock in that period of time. A moving average can be displayed by re-computing this result daily and plotting it in the same graphic pane as the price bars. In other words, if price starts to move sharply upward or downward, it will take some time for the moving average to "catch up". Plotting moving averages in stock charts reveals how well current price is behaving as compared to the past. The power of Page 46 of 56

Capital Market the moving average line comes from its direct interaction with the price bars. Current price will always be above or below any moving average computation. When it is above, conditions are "bullish". When below, conditions are "bearish". Additionally, moving averages will slope upward or downward over time. This adds another visual dimension to a stock analysis. Moving averages define STOCK TRENDS. They can be computed for any period of time. Investors and traders find them most helpful when they provide input about the SHORT-TERM, INTERMEDIATE and LONG-TERM trends. For this reason, using multiple moving averages that reflect these characteristics assist important decision making. Commons moving average settings for daily stock charts are 20 days for short term, 50 days for intermediate and 200 days for long-term. One of the most common buy or sell signals in all chart analysis is the MOVING AVERAGE CROSSOVER. These occur when two moving averages representing different trends. For example, when a short-term average crosses BELOW a long-term one, a SELL signal is generated. Conversely, when a shortterm crosses ABOVE the long-term, a BUY signal is generated. Moving averages can be "speeded up" through the application of further math calculations. Common averages are known as SIMPLE or SMA. These tend to be very slow. By giving more weight to the current changes in price rather than those many bars ago, a faster EXPONENTIAL or EMA moving average can be created. Many technicians favor the EMA over the SMA. Fortunately all common stock chart programs, online and offline do the difficult moving average calculations but plot price perfectly. 6. SUPPORT AND RESISTANCE The concept of SUPPORT AND RESISTANCE is essential to understanding and interpreting stock charts. Just as a ball bounces when it hits the floor or drops after being thrown to the ceiling, support and resistance defines natural boundaries for rising and falling prices. Buyers and sellers are constantly in battle mode. Support defines that level where buyers are strong enough to keep price from falling further. Resistance defines that level where sellers are too strong to allow price to rise further. Support and resistance play different roles in up-trends and down-trends. In an uptrend, support is where a pullback from a rally should end. In a downtrend, resistance is where a pullback from a decline should end. Support and resistance are created because price has memory. Those prices where significant buyers or sellers entered the market in the past will tend to generate a similar mix of participants when price again returns to that level. When price pushes above resistance, it becomes a new support level. When price falls below support, that level becomes resistance. When a level of support or resistance is penetrated, price tends to thrust forward sharply as the crowd notices the BREAKOUT and Page 47 of 56

Capital Market jumps in to buy or sell. When a level is penetrated but does not attract a crowd of buyers or sellers, it often falls back below the old support or resistance. This failure is known as a FALSE BREAKOUT. Support and resistance come in all varieties and strengths. They most often manifest as horizontal price levels. But trend lines at various angles represent support and resistance as well. The length of time that a support or resistance level exists determines the strength or weakness of that level. The strength or weakness determines how much buying or selling interest will be required to break the level. Also, the greater volume traded at any level, the stronger that level will be. Support and resistance exist in all time frames and all markets. Levels in longer time frames are stronger than those in shorter time frames. The ideas of Charles Dow, the first editor of the Wall Street Journal, form the basis of technical analysis today. The behavior patterns that he observed apply to markets throughout the world. Whatever analysis you do- technical or fundamental, it would not guarantee an investor assured returns. We therefore give the following principles which the investor should keep in mind before investing:Before going to equity analysis let’s see some of the basic investment or rather investing principles: Invest for Real Returns  Keep an Open Mind  Never Follow the Crowd  Everything Changes  Avoid the Popular  Learn from your Mistakes  Buy During Times of Pessimism  Hunt for Value and Bargains  Search Worldwide  No-one Knows Everything

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Chapter -5 Other modes of raising finance 1. Foreign Currency Convertible Bond (FCCB): A FCCB is a convertible bond which is a combination of debt and equity. Owing to the equity option attached to this bond the coupon payments on the bond are lower for the company, thereby reducing its debt-financing costs. In a FCCB one has to make regular coupon and principal payments however the bondholder also has the option to convert the bond into equity where in the coupon and principal payment is waived off. Thus though FCCB the investors not only receive guaranteed payments on the bond but they can also take advantage of any large price appreciation in the company’s stock as the Bonds are issued at a fixed price.

2. Fully convertible debentures: It is a debt security which is fully convertible into equity shares at the issuer’s notice. The conversion ratio is decided at the time of issuance itself by the issuer. Post the conversion of such debentures the investors enjoy the same status as ordinary shareholders of the company. The differentiating factor between the FCDs and other convertible debentures is that the issuer can compel conversion into equity, whereas in other types of convertible securities, the owner of the debenture may have that option.

3. Warrants: A warrant is a security issued by a company granting the holder of the warrant the right to purchase a specified number of, shares at a specified price any time prior to an expiry date. Warrants may be issued with debentures or equity shares. The specific rights are already set out in the warrant. An amount equivalent to at least twenty five percent of the price fixed shall become payable for the warrant on the date of their allotment.

4. Qualified Institutional Placement:Page 49 of 56

Capital Market The Securities and Exchange Board of India (SEBI) introduced the QIP process in 2006, to prevent listed companies in India from developing an excessive dependence on foreign capital. The complications associated with raising capital in the domestic markets had led many companies to look at tapping the overseas markets via Foreign Currency Convertible Bonds (FCCB) and Global Depository Receipts (GDR) to fulfil their needs. To keep a check on this process and to give a push to the domestic markets, QIPs were launched.

The QIP guidelines of the securities and Exchange Board of India (SEBI) cover any issue of equity shares / fully convertible debentures (FCDs) / partly convertible debentures (PCDs) ,(nonconvertible debentures (NCDs) with warrants or any securities (other than warrants)), which are convertible into or exchangeable with equity shares at a later date (hereinafter referred to as “specified securities”) made to Qualified Institutional Buyers (QIBs) by a listed company. Shareholders’ Resolution Allotment of specified securities under the QIP route shall be completed within twelve months from the date of passing of the resolution in terms of sub-section (1A) of Section 81 of the Companies Act, 1956 or any other applicable provision. The resolution passed at the meeting of shareholders shall specify that the allotment is proposed to be made to QIBs through the QIP route and shall also specify the relevant date on the basis of which price of the resultant shares shall be determined. The placements made pursuant to authority of the same shareholders’ resolution shall be separated by at least six months between each placement. Investors in a QIP : Only QIBs shall be eligible for allotment of specified securities issued

through QIP.  QIBs would include Mutual funds, Foreign Institutional Investors , banks, Venture capital funds, Provident funds, pension funds.  Minimum of 10 per cent of specified securities issued through shall

be allotted to mutual funds.

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Capital Market  If no mutual fund is agreeable to take up the minimum portion (i.e.

10 %) or any part thereof, such minimum portion or part thereof may be allotted to other QIBs.  No allotment shall be made through the QIP route, either directly or

indirectly, to any QIB being a promoter or any person related to promoter/s.For the purpose of QIP, QIB who has all or any of the following rights shall also be deemed to be a person related to promoter/s: (a) Rights under a shareholders’ agreement or voting agreement

entered into with promoters or persons related to the promoters; (b) Veto rights; or

(c) Right to appoint any nominee director on the board of the issuer. Provided that a QIB who does not hold any shares in the issuer and who has acquired the aforesaid rights in the capacity of a lender shall not be deemed to be a person related to promoter/s. Where the specified security is NCD with warrant, an investor can subscribe to the combined offering of NCDs with warrants or to the individual instruments, i.e., either NCDs or warrants.

Pricing of a QIP

An issue of specified securities made under this Chapter shall be made at a price not less than the average of the weekly high and low of the closing prices of the related shares quoted on the stock exchange during the two weeks preceding the relevant date. "Relevant date" for the purpose of this clause means the date of the meeting in which the Board of the company or the Committee of Directors duly authorised by the Board of the company decides to open the proposed issue. "Stock exchange" for the purpose of this clause means any of the recognised stock exchanges in which the equity shares of the issuer of the same class are listed and in which the highest trading volume in such shares has been recorded during the (two weeks) immediately preceding the relevant date. Page 51 of 56

Capital Market Apart from preferential allotment, this is the only other method of private placement. However, it scores over other methods, as it does not involve many of the common procedural requirements such as the submission of pre-issue filings to the market

5. Preferential Issue:The preferential issue of equity shares/ Fully Convertible Debentures (FCDs)/ Partly Convertible Debentures (PCDs) or any other financial instruments which would be converted into or exchanged with equity shares at a later date, by listed companies whose equity share capital is listed on any stock exchange, to any select group of persons under Section 81(1A) of the Companies Act 1956 on private placement basis are governed by the Securities and Exchange Board of India (SEBI) , Disclosure and Investor protection (DIP) guidelines,2000

Such preferential issues by listed companies by way of equity shares/ Fully Convertible Debentures (FCDs)/ Partly Convertible Debentures (PCDs) or any other financial instruments which would be converted into / exchanged with equity shares at a later date, shall be made in accordance with the pricing provisions mentioned below: Pricing of the issue :Where the equity shares of a company have been listed on a stock exchange for a period of six months or more as on the relevant date, the issue of shares on preferential basis ( other than an issue of shares on preferential basis to Qualified Institutional Buyers not exceeding five in number) shall be made at a price not less than higher of the following:I) The average of the weekly high and low of the closing prices of the related shares quoted on the stock exchange during the six months preceding the relevant date; OR II) The average of the weekly high and low of the closing prices of the related shares quoted on a stock exchange during the two weeks preceding the relevant date.

Where the equity shares of a company have been listed on a stock exchange for a period of less than six months as on the relevant date, the issue of shares on preferential basis (other than an issue of shares on Page 52 of 56

Capital Market preferential basis to Qualified Institutional Buyers not exceeding five in number) can be made at a price not less than the higher of the following: a) The price at which shares were issued by the company in its IPO or the value per share arrived at in a scheme of arrangement under sections 391 to 394 of the Companies Act, 1956, pursuant to which the shares of the company were listed, as the case may be. OR b) The average of the weekly high and low of the closing prices of the related shares quoted on the stock exchange during the period shares have been listed preceding the relevant date. OR c) The average of the weekly high and low of the closing prices of the related shares quoted on a stock exchange during the two weeks preceding the relevant date.”

"Relevant date" above means the date thirty days prior to the date on which the meeting of general body of shareholders is held, in terms of Section 81(1A) of the Companies Act, 1956 to consider the proposed issue. "Stock exchange" above means any of the recognised stock exchanges in which the shares are listed and in which the highest trading volume in respect of the shares of the company has been recorded during the preceding six months prior to the relevant date.

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Capital Market Bibliography:-

6. American Depository Receipts (ADRs) & Global Depository Receipts (GDRs):To list on a foreign stock exchange, an Indian company has to comply with the policies of those stock exchanges. Many times, the policies of these exchanges in US or Europe are much more stringent than the policies of the exchanges in India. This deters these companies from listing on foreign stock exchanges directly. But many good companies get listed on these exchanges indirectly. The company deposits a large number of its shares with a bank located in the country where it wants to list indirectly. The bank issues receipts against these shares, each receipt having fixed number of shares as an underlining ( usually 2 or 4 ). These receipts are then sold to the people of this foreign country (these are issued to everyone who is allowed to buy shares in that country).These receipts are listed on the stock exchange. These receipts behave exactly like regular socks –the prices fluctuate depending on their demand and supply, and depending on the fundamentals of the underlying company. These receipts are traded like ordinary stocks, and are called Depository receipts. The issuing bank acts as a depository for these shares – that is, it stores the shares on behalf of the receipt holders.

Both ADR & GDR are depository receipts and represent a claim on the underlying shares . The only difference is the location where they are traded. If the depository receipt is traded in the United States Of America (USA), it is called an American Depository Receipt or an ADR. If the depository receipt is traded in a country other than USA, it is called as a Global Depository Receipt or a GDR . Recently we had an ADR issue by Tata Steel & Suzlon and a GDR issue of Tata Power.

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Capital Market Securities and Exchange Board of India, (Disclosure and Investor Protection) guidelines, 2000 (last updated 31st July 2009) Debt market Module of NSE Deutsche Bank Research on ‘India’s Capital market’s ‘, dated 14th February 2007 Economic times – News paper http://in.reuters.com http://www.raagvamdatt.com

Abbreviations SEBI : Securities and Exchange Board of India CCIL: Clearing Corporation of India G-SEC: Government Securities HTM: Held to Maturity HFT: Held for Trading AFS: Available for Sale

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