Indian Capital Market

Indian Capital Market

Organized Indian Financial System Regulators

Financial Instruments

Forex Market

Financial Markets Capital Market

Money Market

Primary Market Secondary Market

Money Market Instrument

Capital Market Instrument

Financial Intermediaries Credit Market

Money Market Vs Capital Market • •

•

•

•

It is for short term Supplies funds for WC Instruments are Tbill, CM, etc Each single instrument is of large amount Central bank and Commercial banks are major.

• •

•

•

•

It is for long term Supplies funds for fixed capital requirement Instruments are shares, debentures, etc. Each single instrument is of small amount Development bank and insurance

Conti.. •

•

•

These instruments do not have secondary market. Transactions are on over phone and no formal place Transaction

•

•

•

These instruments have secondary market. Transactions are at formal place. Eg stock market. Transaction have to be conducted with the help of

Why Capital Markets Exist •

•

•

Capital markets facilitate the transfer of capital (i.e. financial) assets from one owner to another. They provide liquidity. – Liquidity refers to how easily an asset can be transferred without loss of value. A side benefit of capital markets is that the transaction price provides a measure of the value of the asset.

Role of Capital Markets • • • • • •

Mobilization of Savings & acceleration of Capital Formation Promotion of Industrial Growth Raising of long term Capital Ready & Continuous Markets Proper Channelisation of Funds Provision of a variety of Services

• •

•

• •

Functions of a capital market Disseminate information efficiently Enable quick valuation of financial instruments –both equity and debt Provide insurance against market risk or price risk Enable wider participation Provide operational efficiency through -simplified transaction procedure - lowering settlement timings and - lowering transaction costs

•Develop integration among -real sector and financial sector -equity and debt instruments -long term and short term funds -Private sector and government sector and -Domestic funds and external funds •Direct the flow of funds into efficient channels through -investment -disinvestment -reinvestment

Factors contributing to growth of Indian Capital Market •

• •

Establishment of Development banks & Industrial financial institution. Legislative measures Growing public confidence

•

Increasing awareness of investment opportunities

•

Growth of underwriting business Setting up of SEBI Mutual Funds Credit Rating Agencies

• • •

Indian Capital Market Historical perspective •

Stock Market was for a privileged few

•

Archaic systems - Out cry method

•

Lack of Transparency - High tones costs

•

No use of Technology

•

Outdated banking system

•

Volumes - less than Rs. 300 cr per day

•

No settlement guarantee mechanism - High risks

Indian Capital markets Chronology • • • • • • • •

1994-Equity Trading commences on NSE 1995-All Trading goes Electronic 1996- Depository comes in to existence 1999- FIIs Participation- Globalisation 2000- over 80% trades in Demat form 2001- Major Stocks move to Rolling Sett 2003- T+2 settlements in all stocks 2003 - Demutualisation of Exchanges

Capital Markets - Reforms • • • • • • • •

Each scam has brought in reforms - 1992 / 2001 Screen based Trading through NSE Capital adequacy norms stipulated Dematerialization of Shares - risks of fraudulent paper eliminated Entry of Foreign Investors Investor awareness programs Rolling settlements Inter-action between banking and exchanges

CAPITAL MARKET REFORMS IN INDIA •

•

The 1990s have witnessed the emergence of the securities market as a major source of finance for trade and industry in India. A growing number of companies have been accessing the securities market rather than depending on loans from financial institutions / banks.

Reforms / Initiatives post 2000 • • •

• • • •

Corporatisation of exchange memberships Banning of Badla / ALBM Introduction of Derivative products - Index / Stock Futures & Options Reforms/Changes in the margining system STP - electronic contracts Margin Lending Securities Lending

MARKET STRUCTURE (JULY 31, 2005)

• 22 Stock Exchanges, • Over 10000 Electronic Terminals at over 400 locations all over India. • 9108 Stock Brokers and 14582 Sub brokers • 9644 Listed Companies • 2 Depositories and 483 Depository Participants • 128 Merchant Bankers, 59 Underwriters • 34 Debenture Trustees, 96 Portfolio Managers • 83 Registrars & Transfer Agents, 59 Bankers to Issue • 4 Credit Rating Agencies

Indian Capital Market

Market

Primary

Instruments

•Brokers •Investment Bankers •Stock Exchanges •Underwriters

Secondary

Equity

CRA

Intermediaries Regulator

Hybrid

Corporate Intermediaries

Individual

SEBI

Debt

Banks/FI

Players

FDI /FII

Stock Exchanges in INDIA • • • • • • • • • • • •

Mangalore Stock Exchange Hyderabad Stock Exchange Uttar Pradesh Stock Exchange Coimbatore Stock Exchange Cochin Stock Exchange Bangalore Stock Exchange Saurashtra Kutch Stock Exchange Pune Stock Exchange National Stock Exchange OTC Exchange of India Calcutta Stock Exchange Inter-connected Stock Exchange (NEW)

• •

•

•

• • •

• •

•

Bombay Stock Exchange Madhya Pradesh Stock Exchange Vadodara Stock Exchange The Ahmedabad Stock Exchange Magadh Stock Exchange Gauhati Stock Exchange Bhubaneswar Stock Exchange Jaipur Stock Exchange Delhi Stock Exchange Assoc Ludhiana Stock

Growth Pattern of the Indian Stock Market

Sl.N o.

As on 31st December

1

No. of Stock Exchanges

2

1946

1961

1971

1975

1980

1985

1991

1995

7

7

8

8

9

14

20

22

No. of Listed Cos.

1125

1203

1599

1552

2265

4344

6229

8593

3

No. of Stock Issues of Listed Cos.

1506

2111

2838

3230

3697

6174

8967

11784

4

Capital of Listed Cos. (Cr. Rs.)

270

753

1812

2614

3973

9723

32041

59583

5

Market value of Capital of Listed Cos. (Cr. Rs.)

971

1292

2675

3273

6750

25302

11027 9

47812 1

6

Capital per Listed Cos. (4/2) (Lakh Rs.)

24

63

113

168

175

224

514

693

86

107

167

211

298

582

1770

5564

7

Market Value of Capital per Listed Cos. (Lakh Rs.) (5/2) Appreciated value of Capital per

358

170

148

126

170

260

344

803

8

Primary Market •

• •

Market for new issues/fresh capital (IPO’s) New issues mkt. Participants issuer investors intermediaries

Mobilization of funds -

Prospectus Right issues and Private placement

Free pricing regime •

Before 1992,Regulator of new issues was CCI (Controller of Capital Issues)

•

Approval from CCI for raising funds in primary mkt.

•

Timing, quantum ,and pricing of the issue were decided by the controller

•

New co.s can issue shares only at par

•

Existing companies with substantial reserves could issue shares at premium

•

Fixed price mechanism resulted in under pricing of many issues

•

After 1992, promoter and merchant banker together decide the price of the issue.

Fixed price mechanism of new issue • • • • •

•

CCI regime To offer share at a fixed price Firm and merchant banker decide an offer price Investor opinion wasn’t considered while setting offer price Long time lag among the date of pricing, the date the issue opens ,and the date when trading commences Raises possibility of price fluctuations in intervening period

Book Building-A new issue mechanism in India •

•

mechanism through which an offer price for IPOs based on investor’s demand is determined . Auction of shares

Book building process 1. 2.

3.

4.

5.

Appointment of book runner i.e. merchant banker Preparation and submission of draft documents to SEBI and obtaining of an acknowledgement card. A specified price band (range) is to be determined by issuer and book runner Different price levels are invited from syndicate members .Adv. Should mention opening and closing dates for the bids Issuer arrives at a final cut-off rate & final allocation in consultation with book runner and lead manager

Contd….. 6.Issuer and book runner may impose restrictions on number of shares that can be allotted to each client 7. Final prospectus is filed with the (ROC) along with procurement agreement 8.Placement portion opens for subscription 9.Placement portion closes a day before the opening of public issue portion

Book building options 75% book building Issue can be categorized into -placement portion - Public portion (net offer to the public) • 100% book building •

Limitations of book building method • • • • • • • • •

No road shows done Still dependent on good faith No. of investors invited to apply are limited Lack of transparency Not proved to be good price discovery mechanism Lag time of more than 60 days between issue pricing and listing Issuer may have to sell cheap due to collective bargaining High institution holding may affect stock’s liquidity Volatility may increase due to bulk offloading

• • •

Distinction between Primary and Secondary Market

Functional differences Organizational differences Nature of contributions to industrial finance

Secondary Market

Secondary/Stock market!!!!

JARGON OF EQUITY MARKET: •

SECURITY

•

BOND

•

STOCK 1)COMMON STOCKS 2)PREFERRED STOCKS

•

SHARE

•

MUTUAL FUNDS.

•

PAR VALUE vs. MARKET VALUE

•

BULLISH vs. BEARISH

How does the stock market function? •Stock exchanges •Brokers •Registrars •Depositories and their participants •Securities and Exchange Board of India (SEBI) Financial Regulators •SEBI •RBI •Ministry of finance

The role of the stock exchange •

Corporate governance

•

Creates investment opportunities for small investors

•

Government raises capital for development projects

•

Barometer of the economy

Functions Of SEBI •

Regulates Capital Market.

•

Checks Trading of securities.

•

Checks the malpractices in securities market.

•

It enhances investor's knowledge on market by providing education.

•

It regulates the stockbrokers and sub-brokers.

•

To promote Research and Investigation

Functions Of RBI Monetary Authority: Issuer of currency: Regulator and supervisor of the financial system: Authority On Foreign Exchange:

Developmental role: Related Functions:

WHY STOCK PRICE RISES? The price of every stock increases or decreases for the following possible reasons: • News about company. • News about the country. • Exchange rate regime. • Depends on demand and supply for that stock.

DRAWBACKS OF INDIAN STOCK MARKET: •Unethical practices. •Big irrational greed, excessive speculation. •Lack of protection to interests of the genuine and small investors . •Trading is extremely thin and restricted. •Structural and organisational imbalance in the growth of the stock market. •Volatility of the market has increased over the years.

HOW TO MAKE MONEY FROM CAITAL MARKET? patience, profound knowledge. Best guess. Diversification . Portfolio management.

Indian Capital Market deficiencies • • • • •

Lack of transparency Physical settlement Variety of manipulative practices Institutional deficiencies Insider trading