Capital Market: Presented By

Capital Market Presented By Helly Desai – 06 Vishal Kothari – 09 Sweety Desai – 15 Suchit Shah –

ROADMAP • Introduction to Capital Market • Primary Market • Secondary Market • Financial Terminology • Derivatives • Capital Market Trend

DEVELOPMENT OF CAPITAL MARKET  Established in 18th Century  19th Century, trading was unorganized  Bombay Stock Exchange was recognized in May 1927  In 1990, Liberalisation and globalization introduced  Major scams in 1990

SEBI  Introduction  Objectives  Functions  Power  Legal FrameWork

OBJECTIVES  Tries to develop the securities market  Promotes Investors Interest  Makes rules and regulations for the securities market.

FUNCTIONS  Regulates Capital Market  Checks Trading of securities  Checks the malpractices in securities market  Enhances investor's knowledge on market  Regulates the stockbrokers and sub-brokers  Promotes Research and Investigation

POWER  Discovery, Production & Inspection of any books of account, registers & other documents  To conduct inquiries & order audit of stock exchanges  Levy penalties, fees & other charges  Issue orders/directions in the interest of investors  Hear appeals  Suspend registration of any intermediary

LEGAL FRAMEWORK  Prohibition Against Market Manipulation

 Prohibition On Unfair Trade practice relating to securities

Central Listing Authority (CLA) • Introduction • Purpose • Need • Benefits

STOCK EXCHANGES IN INDIA  23 stock exchanges in India - 2 national level stock exchanges - 21 Regional Stock Exchanges

REGIONAL STOCK EXCHANGES IN INDIA Ahmedabad Stock Exchange

Madhya Pradesh Stock Exchange

Bangalore Stock Exchange

Madras Stock Exchange

Bhubaneshwar Stock Exchange

Magadh Stock Exchange

Calcutta Stock Exchange

Mangalore Stock Exchange

Cochin Stock Exchange

Meerut Stock Exchange

Coimbatore Stock Exchange

OTC Exchange Of India

Delhi Stock Exchange

Pune Stock Exchange

Guwahati Stock Exchange

Saurashtra Kutch Stock Exchange

Hyderabad Stock Exchange

Uttar Pradesh Stock Exchange

Jaipur Stock Exchange

Vadodara Stock Exchange

Ludhiana Stock Exchange

NATIONAL LEVEL STOCK EXCHANGES  National Stock Exchange (NSE)

 Bombay Stock Exchange (BSE)

National Stock exchange  In April 1993, it was recognized as a stock exchange under the Securities Contracts (Regulation) Act, 1956.  Largest stock exchange in India  Mutually-owned by a set of leading Financial Institutions, Banks, Insurance Companies and other Financial Intermediaries in India

National Stock exchange  2 Foreign Investors NYSE Euronext and Goldman Sachs

 Promoted by leading Financial institutions at the behest of the Government of India

 Established in 1875  Called the "BSE 30", is a widely used market index in India and Asia  Plays a pivotal role in the development of the country's capital market.  Managed professionally by Board of Directors.  Provides an efficient market for the trading in equity, debt instruments and derivatives.

COMMODITY EXCHANGE  Commodity : It is a product having commercial value which can be produced, bought, sold and used/consumed.Basically products of primary sector of the economy.

 Commodity Futures : Contracts to buy or sell a commodity at a specific price and on a specific delivery date, allows to lock into a fixed price & protect farmer & companies from a steep movement. Ex. - Cotton trading Commodity futures contracts have to specify the quality.

CLASSIFICATION OF COMMODITIES

COMMODITIES EXCHANGE IN INDIA  Multi Commodity Exchange (MCX)  National Multi-Commodity Exchange of India Ltd (NMCE)  National Commodity and Derivatives Exchange (NCDEX)

DEMAT ACCOUNT  Safe and convenient means of holding securities

 Opening Process

 Benefits

Bank Account Vs Demat Account S. No.

Basis Of Differentiation

Bank Account

Demat Account

1.

Form of Funds Holdings/Deposits

Securities

2.

Used for

Safekeeping of money

Safekeeping of shares

3.

Facilitates

Transfer of money (without actually handling money)

Transfer of shares (without actually handling shares)

4.

Where to open

A bank of choice

A DP of choice (can be a bank)

5.

Requirement of PAN Number

Mandatory

Mandatory (effective from April 01, 2006)

6.

Interest accrual on holdings

Interest income is subject to the applicable rate of interest

No interest accruals on securities held in demat account

7.

Minimum balance requirement

AQB* maintainance is specified for certain bank accounts

No such requirement

*AQB - Average Quarterly Balance

DEPOSITORY PARTICIPANTS  2 Agency in Depositories: 3. National Securities Depository Limited (NSDL) 5. Central Depository Service (India) Limited (CDSL)

Jinal Vira - 54

PRIMARY MARKET  What is primary market?  Features of primary market  Methods of issuing securities in the primary market

INITIAL PUBLIC OFFER(IPO) What is IPO? Reasons for going public - Raising funds to finance capital expenditure - Financing working capital - Debt refinancing - Exit route for existing investors

INITIAL PUBLIC OFFER(IPO) (contd)…..

MANAGEMENT OF IPO  Eligibility norms for an IPO  Pre – issue obligations – – – – –

MOU Inter se Allocation of Responsibilities Due Diligence Certificate Undertaking List of Promoter’s Group

Appointment of Investment Bankers & Other Intermediaries

PARTIES TO THE ISSUE  Registrar  Bankers  Debenture trustees  Underwriters  Brokers  Advertising agencies  Printers  Auditor  Legal advisor

Registrar to the issue – Registration with SEBI is mandatory & it provides administrative support to the issue process – Functions

Bankers – Each Banker to the issue designates one particular branch as the Controlling Branch – Functions

Debenture trustees – They have to obtain a Certificate of Registration from SEBI – Functions

Underwriters to the issue – Underwriters are exposed to the risk of under subscription – Commission is payable on the issue price of the security i.e. face value + premium

 Brokers to the issue – Any member of any recognized stock exchange can be appointed as Broker – Functions  Advertising agencies – The role of advertising agency is of crucial importance in determining the fate of the issue – Functions

 Printers of issue stationery – The primary criteria in selection of the printer are the cost factor & the quality of service – Functions  Auditor – Regular auditor of the company acts as the Auditor for the purpose of public offering – Functions

 Legal advisor to the issue – Appointed to ensure compliance of all legal & regulatory provisions – Functions

PRE – ISSUE ACTIVITIES Registration of the Offer Document Mandatory collection centre Marketing of the issue – – – –

Timing of the issue Retail distribution Reservation in the issue Advertising campaign

 Timing of the issue  The timing of the issue is important to ensure success of the issue  Prevailing market sentiments

 Retail distribution  It is done through a network of brokers.  It involves geographical area where the Lead manager expects the subscription flows.

 Reservation in the issue  A portion of the issue can be reserved for specific class of investors  Mutual Funds, Banks, Foreign Institutional Investors, etc.

 Advertising campaign  It provides wide publicity to the issue  The company decides the size of advertising budget

PRE – ISSUE ACTIVITIES

(Contd….)

Book – building – Meaning – Intermediaries involved in this process – Difference between IPO & Book – Building

Implications & consequences of– Underpricing – Overpricing

POST – ISSUE ACTIVITIES  Basis of allotment  Reservation for Small Investors  Dealing with undersubscription

Helly Desai - 06

SECONDARY MARKET  Stock Exchanges provide a platform to trade

 The securities are traded, cleared and settled

SOFTWARE USED IN TRADING  NEAT (National Exchange for Automated Trading NEAT system).  SEBI has also allowed trading through wireless medium or Wireless Application Protocol(WAP) platform  ODIN software is also used by some brokers for trading .

INDICES  Index: Measures the change in the prices of the underlying asset with respect to the prices in the base year  Major Indices :  Sensex  Nifty

SENSEX  In 1986 BSE came out with Stock Index-SENSEX  It consists of 30 largest stock in the market  Some of the companies Reliance, Bhel, Infosys, DLF

BSE 100  Formerly known as BSE NATIONAL INDEX  Launched in 1989  It consists of 100 companies  Some of them are :Cipla, Gail India, ICICI BANK LTD, HP Corp ltd

BSE 200  Launched in 1994  It comprises of 200 companies  Based on current market specialisation,market performance of the companies ,volumes of company turnover  Some of the companies Adlabs films, Bank of India, L & T Ltd

BSE 500  Launched in 2005  It comprises of 500 companies ,covering the entire market  Some of the companies are:Hindalco, M & M, Nestle Ltd

BSE MIDCAP AND SMALL CAP  Mid Cap - $2 billion to $10 billion  Small Cap - $300 million to $2 billion  Some of the companies are:Andhra Bank,Godrej ltd,Nirma Ltd

BSE TECK  BSE TECK index is composed of 21 quality stocks from the IT, Media and Telecom sectors.  Some of them are :Dish TV,HT media,Wipro Ltd

BSE PSU  Launched in 2004  It consists of major Public Sector Undertakings listed on BSE  Some of the companies are:BHEL, Bank of India, Shipping corp

BSE BANKEX  Launched to track the performance of leading banks  It comprises of 12 major banks  Some of them are :Allahabad Bank, Hdfc bank,SBI

BSE AUTO  Launched in 2004  Some of the companies are:M&M,Tata Motors, Appolo Tyres

BSE CONSUMER GOODS  It is a part of sectoral indices  Some of the companies are:Siemens Ltd, Bharat Bijli

BSE FMCG INDEX  Eatables, soft drinks, and cleaning materials falls in this category  Scrips having a minimum of 90% trading frequency in preceding six months are eligible to be included in the FMCG Index.  Some of them:Britannia ltd,Dabur Ltd,Marico Ltd

BSE HEALTH CARE  Tracks the performance of health care centre  Some of the companies :Cipla, Phizer ltd, Ranbaxy laboratories

BSE METAL INDEX  Launched in 2004  Some of the companies are:Jindal Steel,Sesa goa, Tata Steel

BSE OIL & GAS INDEX  Launched in 2004  Some of the companies:Bharat petroleum, Reliance petro,HP corp Ltd

NIFTY Launch of S&P CNX Nifty in April 1996 Owned & Managed by IISL (India Index Services and Products Ltd.) It consists of 50 companies Companies – Bharti Airtel, BHEL, RPL, Rcom, RIL

CNX Nifty Junior Launch of CNX Nifty Junior in Dec., 1996 It consists of 100 most liquid stocks Companies – Andhra Bank, GMR Infrastructure, Patni, Vijaya Bank

GROUPS  Classification of scripts in Equity Segments as A, B, S , T ,Z  Eligibility Criteria for A group: Scripts should be listed for 3 months  Eligibility Criteria for Z group: Scripts which fail to comply with its listing requirements

CLASSIFICATION OF SCRIPS IN GROUPS GROUPS

SCRIPS

A

RIL, HDFC Bank

B

Zee News, TVS Motors

S

Bajaj Elec., India Gelatin

T

Indiabull Retail

Z

Bagadia Colour, Anil Modi Oil

CLEARING AND SETTLEMENT  Introduction of T+2 Rolling settlement SR.NO 1

DAY T

2 T+1

3

TIME

T+2

DESCRIPTON OF ACTIVITY TRADE DAY

BY 11.00AM

Custodians conform the trades. However, there is a facility for late confirmations

BY 1.30 PM

Process and download obligation files to brokers/custodians

By 11.00 am

Pay-in of securities and funds

By 1.30 pm Pay-out of securities and funds

CONTINUE… Schedule for stock brokers in T+2 Rolling Settlements SR.NO 1

DAY

TIME

T 2 T+2

DESCRIPTON OF ACTIVITY TRADE DAY

Until 10.30 am

Accept pay-in instructions from investors into pool account

By 10.30 am

Submit final pay-in files to the depository and the clearing bank.

Suchit Shah - 27

RIGHTS ISSUE  Privilege To Existing Shareholders

 New Shares At Specific Time And At Specific Cost

 Eg. Avon Ltd

SPLIT SHARE  Dividing Existing Shares  Total Market Cap remains same  Gives Scope For Small Investors  Management Creates Confidence For Future Prospects  Eg. Unitech Ltd

BONUS  Free Share Given To Existing Shareholders

 EPS Reduces

 Eg. Unitech Ltd

BUYBACK  Firm Buybacks Its Own Share From Market

 EPS Increases

 Eg. Reliance Infra

DEBENTURE  A Unsecured Debt  Based On Credit Worthiness  No Collateral

TYPES OF DENEBTURE Non Convertible Debentures : TATA Capital Partly Convertible Debentures Fully Convertible Debentures

WARRANTS A Right To Purchase Security A Sweetener Warrants Vs Call Option

Eg.HCL Ltd

PARTICIPATORY NOTES  Issued By FII To Investors, But Are Not Registered  Identity Is Hidden  25-30% Of Foreign Investment Is Through P-Notes  Problems With The Instrument

BONDS  A Debt Security  A Source For Long - Term Finance  Bonds Vs Stocks  Terms: Principal, Issue Price, Maturity, Coupon Rate, Covenants

TYPES OF BONDS  Fixed Rate Bond  Zero Coupon Bond  Deep Discount Bonds:IDBI  Secured Premium Notes:TISCO  Floating Rate Bonds

FCCB  Bond Issued In Foreign Currency

 Coupon Rate are Fixed

IMPACT AS ON DECEMBER  Shares Values Have Reduced Drastically  Liability To Foreign Investors Have Accrued  Options To Overcome This Problem:  Dilute Promoters Holding  Redeem Bonds

SNAPSHOT OF VARIOUS COMAPNIES

ADR AND GDR  Trading Of Home Market Stocks In US Market  Bank Certificate Is Issued In More Than One Country  Approx. 81 Odd Companies Have Used This Route  Total Cumulative Mobilization Of Over 40,000 Cr  Many Restrictions In Early 90’s

INDIAN COMPANIES IN US MARKET

Mihir Vora - 55

DERIVATIVES  Derivative is a product whose value is derived from the value of the underlying asset.  Underlying asset can be equity, forex, commodity, or any other asset.

FEATURES  Centralization of Trading

 No counter party risk

 Standardization of contracts

TYPES OF DERIVATIVES  Futures

 Options

 Swap

FUTURES  Agreement between two parties to exchange an asset at a certain date in future at a certain strike price.

 It is a standardized forward contract that is traded on an exchange

EXAMPLE ON FUTURES On 15th Jan. : Buy RPL Futures Contracts : 100 (100 shares/contract) Strike Price : Rs. 80 Expirty Date : 29/1/09 Margin : 30% of value On 16th Jan. : Spot Price : Rs. 75 On 17th Jan, : Spot Price : Rs 82 On 18th Jan. : Spot Price : Rs 90 On 19th Jan. : Spot Price : Rs 100 On 29 Jan. : Spot Price : Rs 94 th

On 15th Jan. : Bought RPL Futures Contracts : 100 (100 shares/contract) Strike Price : Rs. 80 Expirty Date : 29/1/09 Margin : 30% of value On 29th Jan. : Spot Price : Rs. 94 Square Off the Position Buy at Rs. 80 and Sell at Rs. 94

Profit of Rs. 140000/-

FEATURES  Different lot size for shares

 Minimum investment

 MTM margining system

 Unlimited risk, unlimited profit

FUTURES • Hiren is bearish about ABC and sells 20 one-month ABC futures contracts at Rs. 304,000 (each contract consists of 100 shares). On the expiry date, ABC closes at Rs. 134. He makes a • Profit / Loss of Rs. 36000 ______

OPTIONS  Gives the buyer the right not the obligation to buy or sell a specified underlying asset at a set price on or before a specified date  Expiration Date – Last date for exercising the option or the date on which option expires.  Exercise Date – Date on which the option is actually exercised

FEATURES  Types - Call option - Put option  Low liquidity  Limited risk, Unlimited profit

CALL OPTION 

Buyer – Right to buy



Seller – Obligation to sell



Bullish / Bearish

PUT OPTION 

Buyer – Right to sell

 Seller – Obligation to buy  Bearish / Bullish

STRIKE PRICES  ITM (In The Money) – Profitable

 ATM (At The Money) – No Profit No Loss

 OTM (Out of The Money) - Loss

EXAMPLE-1 • An investor Buys one month Nifty 4160 Call Option for a Premium of Rs. 10 • Spot Value of Nifty = 4180 • Option ITM / ATM / OTM ??????

EXAMPLE-2 • An investor Buys one month Nifty 4160 Call Option for a Premium of Rs. 10 • Spot Value of Nifty = 4170 • Option ITM / ATM / OTM ??????

EXAMPLE-3 • An investor Buys one month Nifty 4160 Call Option for a Premium of Rs. 10 • Spot Value of Nifty = 4150 • Option ITM / ATM / OTM ??????

Example on Call Options I Bought

I Bought

100 Nifty Call ( 2 contracts)

100 Nifty Call ( 2 Contracts)

Strike Price 4060

Strike Price 4060

Premium Rs. 60

Premium Rs. 60

on 15-Jan

on 15-Jan

Index closed

Index closed

at 4160

at 3960

on 25-Jan

on 25-Jan

Payoff = ??

Payoff = ??

Profit of Rs. 4000/-

Loss of Rs. 6000/-

Example on Put Options I Bought

I Bought

100 Nifty Put ( 2 contracts)

100 Nifty Put ( 2 Contracts)

Strike Price 4060

Strike Price 4060

Premium Rs. 60

Premium Rs. 60

on 15-Jan

on 15-Jan

Index closed

Index closed

at 4160

at 3960

on 25-Jan

on 25-Jan

Payoff = ??

Payoff = ??

Loss of Rs. 6000/-

Profit of Rs. 4000/-

APPLICATION OF OPTIONS Options Call Option Buy

Put Option Sell

When Bullish

Buy When Bearish

Sell When Bearish

When Bullish

SWAP • Plain-Vanilla Swap • Exchange of Fixed v/s. Floating Rate • Types of Swaps : Interest Rate, Currency, Credit Default Swap

Vishal Kothari - 09

WHY FII ARE ATTRACTED TO INDIA??  GDP of trillion dollar  Growth rate of 8–9%  Huge man power, cost effectiveness  Fast emerging middle – class  Rate of return on investment  Cheaper valuation  Investment to GDP ratio = 35-40%

LIBERIZATION OF FDI CAP SECTORS

%

Telecom

74

Insurance

49

DTH & Cable T.V.

74

Aviation

100

Defence

26

Oil refinaries

49

Courier

49

Titanium bearing minerals

100

QUARTER RESULTS

JOURNEY FROM 03 -07

IPO

GDP

IIP

MERGERS & AQUISITION  $ 65bn transactions (JAN – SEPT 2007)  102 countries  CAGR of 30% (from 02 – 07)

2007

2007

Hindalco

Novelis

TATA Steel

Corus

Dr. Reddy

Betapharm

Ranbaxy

Terapia

Suzlon

Hansen

Videocon

Daewoo electric

HPCL

Kenya Petroleum Refinery

VSNL

Teleglobe

Mcloed Russel

Moran tea

Vodafone

Hutch

MARKET CAP – GDP

P - NOTES

MARCH 04

AUGUST 07

31000 CRORE

300000 crore

20% of net FII

51% of net FII

DATE

SENSEX

July 25, 1990

1000

January 3, 1992

2000

February 29, 1992

3000

March 30, 1992

4000

October 8, 1999

5000

February 11, 2000

6000

June 20, 2005

7000

September 8, 2005

8000

November 28, 2005

9000

February 6, 2006

10000

March 21, 2006

11000

April 20, 2006

12000

October 30, 2006

13000

December 5, 2006

14000

July 6, 2007

15000

September 19, 2007

16000

September 26,2007

17000

October 9, 2007

18000

October 15, 2007

19000

October 29, 2007

20000

January 8, 2008

21000

MARKET AT 21000  To touch 10000

20 years

 To touch 20000 from 10000

20 months

 Market cap touch 62 lakh crore  Short selling permission by SEBI & RBI  All indices were at high  Commodity price high

MARKET CRASH IN JAN 08  US market recession  Weakness in global market  FII turns net sellers  Crude prices high  R-Power IPO  Pre – Budget movement

FEB – 08 • Budget 08 – 09 • Short – term capital gain tax • Loan waiver of 60000 crore to farmers • No change in corporate tax

MARCH – APRIL 08  Sixth pay commission  5.5 mn government employees  Impact of 70% on profit  25000 crore outgo from balance sheet  Effective from Jan 1, 2006

OCTOBER 08  Collapse of investment bank  Liquidity crunch  Crisis of confidence

December Baltic index

FUND RAISING Debt

Rs. in crore

%

Domestic bond

91700

28

International bond

6492

-83

FCCB

42

-94

IPO

18300

-46

QIP

3700

-83

Right issue

29500

268

Equity

COLLAPSE FROM 21000 FREEFALL

DAYS TAKEN

DATE

Below 20K

4

Jan 16

Below 19k

2

Jan 18

Below 18k, 17k

1

Jan 21

Below 16k

1

Jan 22

Below 15k

37

Mar 17

Below 14k

64

June 24

Below 13k

5

July 1

Below 12k

67

Oct 6

Below 11k

2

Oct 8

Below 10k

6

Oct 17

Below 9k

5

Oct 24

FII INVESTMENTS Feb 09

-3990

Dec 08

-14800

Sept 08

-10700

June 08

-14032

March 08

-11431

Dec 07

20500

Sept 07

30800

June 07

12280

March 07

6650

Dec 06

13726

Sept 06

11200

June 06

-6000

March 06

17800

Dec 05

9400

Sept 05

17718

June 05

3231

March 05

11400

QUARTER RESULTS

ENTERING THE SLOWDOWN PHASE

TRENDS IN RESULTS

CURRENT

CURRENT SCENARIO  The Business Confidence Index has fallen to 5 year  Export order cancelled 1792  Production cut down by Indian companies  Commodity index to 6 years low  Hedge funds lose 170$ in 3rd quarter

 2 lakh SME may turn sick  IPO market dried  Unemployment of 6lakh people  GDP slowdown  Cut – down on Bank rates  Lowering of Inflation  Crude prices fallen down  Pledging of Shares