All about capital market Credit:Whomsoever it may concern

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INTRODUCTION TO CAPITAL MARKET,INTRODUCTION TO CAPITAL MARKET,
CONCEPT & TERMINOLOGYCONCEPT & TERMINOLOGY
ByBy
D.K. GuptaD.K. Gupta
Head – TrainingHead – Training
Inter-connected Stock Exchange of India Ltd.Inter-connected Stock Exchange of India Ltd.

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Inter-connected Stock Exchange of
India Ltd. (ISE)
• promoted by 13 regional stock exchanges to provide cost-
effective linkage/ connectivity to their members
• over 750 trading members across 131 cities in 26 states.
• regional officers at Delhi, Kolkata, Coimbatore, Nagpur
• Bhubaneshwar, Patna, Guwahati, Ahemadabad &
Hyderabad
• is a national level stock exchange and provides
• -- provides trading, clearing & settlement
• -- listing of securities
• -- depository participant (DP) demat services
• -- training & research
• -- investor’s grievances and redressal

3. Importance of Financial Markets
• Secor-wise share in GDP
• Agriculture 17.2%
• Industry 26.4%
• Services 56.4%
• Financial markets are grouped in Services.

4. Financial Markets
• Financial markets comprises of
• Money Market (short term Market of less than
one year)
• Capital Market (long term market of more than
one year)

5. Why capital market are long term
• Because business houses raises their resources
for a long term perspective (infinitive)
• They can raise their resources either by raising
own sources (equity) or by borrowing or by
both.
• Proprietary - partnership -company

6. Capital Market
• Reliance Industries Ltd. were pioneers for
development of retail investors in stock market.
• Capital appreciation from 10,000 to over 400
crores – Guess the company.

7. Growth in number of shares
• 1981 Bonus 1:1 200 shares
• 1985 Bonus 1:1 400 shares
• 1986 Share split to Rs.10 4000 shares
• 1987 Bonus 1:1 8000 shares
• 1989 Bonus 1:1 16000 shares
• 1992 Bonus 1:1 32000 shares
• 1995 Bonus 1:1 64000 shares
• 1997 Bonus 1:2 192000 shares
• 1999 Share split to Rs.2 960000 shares
• 2004 Bonus 1:2 2880000 shares
• 2005 Bonus 1:1 5760000 shares
• 2010 Bonus 2:3 9600000 shares

8. Capital appreciation
• Company’s performance, good profits earnings,
dividend declaration, bonus, rights, stock splits,
buy-back.
• Investors are willing to pay more for good
companies shares.
• Other reasons for price rise or decline are govt.
policies, import export policies, foreign treaties
budget proposals etc.

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STOCK MARKETSTOCK MARKET
WHY SHOULD WE HAVE ?WHY SHOULD WE HAVE ?
• Stock Market facilitates transfer of resourcesStock Market facilitates transfer of resources
from savers/investors to borrowersfrom savers/investors to borrowers
• Deregulated economy requires an efficient
stock market system for capital formation
Instruments – Shares, equity, stock, preferential shares, / debentures, bonds, etc.Instruments – Shares, equity, stock, preferential shares, / debentures, bonds, etc.Instruments – Shares, equity, stock, preferential shares, / debentures, bonds, etc.

10. PARTICIPANTSPARTICIPANTS
• Issuers ( corporate Private / Public, Govt., )Issuers ( corporate Private / Public, Govt., )
• Investors ( individuals, you, me, housewives,Investors ( individuals, you, me, housewives,
firms, companies, govt. etcfirms, companies, govt. etc
• Intermediaries ( stock exchangesIntermediaries ( stock exchanges
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How companies raise capitalHow companies raise capital
– EquityEquity
• Venture Capital / Private EquityVenture Capital / Private Equity
• Initial Public Issue (IPO)Initial Public Issue (IPO)
• Further Public Offers / Rights IssuesFurther Public Offers / Rights Issues
• Qualified Institutional Placements / PrivateQualified Institutional Placements / Private
PlacementsPlacements
• GDR / ADR / FCCB IssuesGDR / ADR / FCCB Issues
– DebtDebt
• Financial InstitutionsFinancial Institutions
• BanksBanks
• External BorrowingsExternal Borrowings
• Mutual FundsMutual Funds
• NBFCsNBFCs
• Unorganized / Private MarketsUnorganized / Private Markets

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CAPITAL MARKET INSTRUMENTSCAPITAL MARKET INSTRUMENTS
• Equity Share or ordinary SharesEquity Share or ordinary Shares
• Preference SharesPreference Shares
- Cumulative Preference Share- Cumulative Preference Share
- Non Cumulative Preference Share- Non Cumulative Preference Share
• DebenturesDebentures
- Convertible debenture- Convertible debenture
- Non convertible debenture- Non convertible debenture
• BondsBonds
-- Income bondsIncome bonds
- Tax-free bonds- Tax-free bonds
- Capital gains bonds- Capital gains bonds
- Deep discount bonds- Deep discount bonds
- Infrastructure bonds- Infrastructure bonds

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ShareShare
A share represents fractional ownership in aA share represents fractional ownership in a
company.company.
If a company issues 1 lac shares of Rs.10.00 eachIf a company issues 1 lac shares of Rs.10.00 each
shareholder will represent ownership in theshareholder will represent ownership in the
company in proportion of his holdings.company in proportion of his holdings.
Shareholders are entitled to respective portions ofShareholders are entitled to respective portions of
the companies profit or loss to the extent of histhe companies profit or loss to the extent of his
holdings. He can increase or decrease his holding.holdings. He can increase or decrease his holding.
Company keeps its shareholders informed throughCompany keeps its shareholders informed through
convening Annual General Body meeting andconvening Annual General Body meeting and
Annual reports.Annual reports.

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Savings and Investments
• Investment
• Motives of Investment
- return on ideal resources
- to generate specified amount for a specific purpose
- provision for uncertain futures.
- inflation impact
• Time for investment
-- Invest early
-- Invest regularly
-- investment for long term and not short term

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Different options for investment
-- physical assets – real estate –house, shops, plot, land,
gold, silver / commodities – Copper, oil, crude etc.
-- financial assets – fixed deposits in banks / post office
deposits / insurance / provident funds / pension funds, etc.
-- Securities like shares / bonds & Debentures
Short term investments – which are for less than 1 year
-- SB accounts, Money market, short term fixed deposit
Long term investments – which are more than 1 year
-- Post Office deposits, PPF, Company Fixed Deposits,
Bonds and Mutual Funds investment, shares

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Principles of InvestmentPrinciples of Investment
• Is the investment safe ?Is the investment safe ?
• Is the investment liquid ?Is the investment liquid ?
• Will it yield income and if so, how muchWill it yield income and if so, how much
will it yield ?will it yield ?
• Will its value appreciate ?Will its value appreciate ?

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Why one should invest in Shares ?Why one should invest in Shares ?
• Profits or GrowthProfits or Growth
• Minimal OutlayMinimal Outlay
• LiquidityLiquidity
• Decisions can be changedDecisions can be changed
• Hedge against inflationHedge against inflation
• SafetySafety
• Wide optionsWide options
• Tax advantageTax advantage
• Collateral facilityCollateral facility
• Ownership of a large companyOwnership of a large company
• The gameThe game

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Safety – Risk involve in stock marketSafety – Risk involve in stock market
• Your expectations of income and / or growth
may not materialised
• Realisation of the values of the investments of
an equity holder is only in the share market.
Thus the investment may not be liquid.
• Disinvestment may also result in capital losses.

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Why should we know Capital MarketWhy should we know Capital Market
– Common man is dam afraid of investing in StockCommon man is dam afraid of investing in Stock
Market.Market.
– While few of the middle class persons have madeWhile few of the middle class persons have made
money in stock market, most of them have sufferedmoney in stock market, most of them have suffered
losses in this market mainly because of lack oflosses in this market mainly because of lack of
knowledge.knowledge.
– They have burnt their fingers in 1992 and again inThey have burnt their fingers in 1992 and again in
2008.2008.

21. ContinueContinue
• For middle class and common man, it is for long termFor middle class and common man, it is for long term
investment say for 10 to 15 years horizon which are quiteinvestment say for 10 to 15 years horizon which are quite
safe in stock marketsafe in stock market
• The share market index say Nifty has grown by 12% overThe share market index say Nifty has grown by 12% over
the last 14.5 years climbing from 1000 to 5000 or sothe last 14.5 years climbing from 1000 to 5000 or so
currently.currently.
• Long term inflation is about 8% during the same period.Long term inflation is about 8% during the same period.
• In fact, we are earning less than Post Tax returns byIn fact, we are earning less than Post Tax returns by
investing in Banks & post offices.investing in Banks & post offices.
• A majority of us thus have chosen to remain middle classA majority of us thus have chosen to remain middle class
or poor by investing where money grows at a lower rate.or poor by investing where money grows at a lower rate.
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ContinueContinue
• Equity Market takes care of inflation–Equity Market takes care of inflation–
• Foreign Institutional Investors (FIIs) areForeign Institutional Investors (FIIs) are
investing in India their pension funds seeing theinvesting in India their pension funds seeing the
trend in stock market while Indian Pensiontrend in stock market while Indian Pension
funds do not invest in Stock Market althoughfunds do not invest in Stock Market although
they are permitted by Government & SEBIthey are permitted by Government & SEBI
considering that they are risky.considering that they are risky.
• Not taking risk is safe but not taking risk is also aNot taking risk is safe but not taking risk is also a
biggest risk.biggest risk.

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continuecontinue
• Outsiders (Foreign Investors) have made moneyOutsiders (Foreign Investors) have made money
in India. Even Govt. is making money in thisin India. Even Govt. is making money in this
market by selling PSUs shares. Even Banks andmarket by selling PSUs shares. Even Banks and
Insurance companies are making money.Insurance companies are making money.
• Then why not small investors also make moneyThen why not small investors also make money
here for which it is necessary that he learns stockhere for which it is necessary that he learns stock
market and its concepts.market and its concepts.

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• Lot of money came in this market when sensexLot of money came in this market when sensex
rose from 17,000 t0 21,000 and maximum moneyrose from 17,000 t0 21,000 and maximum money
went out when it hovered around 8,000. One canwent out when it hovered around 8,000. One can
not become rich in this heard mentality.not become rich in this heard mentality.
• Similar thing happened in 1992 during HarshadSimilar thing happened in 1992 during Harshad
Mehta’ time.Mehta’ time.

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continuecontinue
• In the name of learning, some agencies tell youIn the name of learning, some agencies tell you
about short term trading or “DAY TRADING”about short term trading or “DAY TRADING”
where money moves fast. But the experiencewhere money moves fast. But the experience
says that in this type of trade most of thesays that in this type of trade most of the
investors lost their money and only brokers andinvestors lost their money and only brokers and
speculators make money.speculators make money.
• As such one must learn systematically in an outAs such one must learn systematically in an out
of the market. He should try to make wealthof the market. He should try to make wealth
than money.than money.

26. Some GuidanceSome Guidance
• Investments in shares (stock) is high risk withInvestments in shares (stock) is high risk with
high gain businesshigh gain business
• One should expertise in judging theOne should expertise in judging the
performance of companies and the marketperformance of companies and the market
• Investment differs from speculationInvestment differs from speculation
• Never put all the money in one investmentsNever put all the money in one investments
• Keep invested for a long term to make goodKeep invested for a long term to make good
returns.returns.
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STOCK EXCHANGESTOCK EXCHANGE
• Centralised marketplace where issuers raiseCentralised marketplace where issuers raise
capital and investors buy and sell securitiescapital and investors buy and sell securities
• OffersOffers
– Real/virtual market for buyers and sellersReal/virtual market for buyers and sellers
– Getting best prevailing price for tradesGetting best prevailing price for trades
– Settlement of Trades as per settlement cycle.Settlement of Trades as per settlement cycle.
– Receiving shares or money out of trade as the case mayReceiving shares or money out of trade as the case may
be.be.
– Protection against counter-party riskProtection against counter-party risk
– Efficient dissemination of pre-trade, trading and post-Efficient dissemination of pre-trade, trading and post-
trade informationtrade information
– Reasonable enforcement of rules against unscrupulousReasonable enforcement of rules against unscrupulous
market activities – resolution of disputes.market activities – resolution of disputes.

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Functions of a Stock ExchangeFunctions of a Stock Exchange
• Listing of securities (equities, debentures, bonds,Listing of securities (equities, debentures, bonds,
derivatives and debt)derivatives and debt)
• Providing a trading platform for listed and permittedProviding a trading platform for listed and permitted
securitiessecurities
• Settlement of securities, directly or through ClearingSettlement of securities, directly or through Clearing
CorporationCorporation
• Monitoring of compliance by companies with respectMonitoring of compliance by companies with respect
to listing regulationsto listing regulations
• Regulation of marketRegulation of market
• Redressal of investor grievances and provision ofRedressal of investor grievances and provision of
arbitration mechanismarbitration mechanism
• Education and training of investorsEducation and training of investors

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GROWTH OF CAPITAL MARKETGROWTH OF CAPITAL MARKET
Capital Mobilised through Public & Right IssuesCapital Mobilised through Public & Right Issues
1999-001999-00 93 issues93 issues Rs. 7817 croreRs. 7817 crore
2003-042003-04 57 issues57 issues Rs. 23,272 croreRs. 23,272 crore
2007-082007-08 124 issues124 issues Rs. 87,029 croreRs. 87,029 crore
2008-092008-09 47 issues47 issues Rs. 16,220 croreRs. 16,220 crore
2009-102009-10 76 issues76 issues Rs. 57,555 croreRs. 57,555 crore
2010-112010-11 91 issues91 issues Rs. 67,608 croreRs. 67,608 crore
2011-122011-12 71 issues Rs. 48,480 crore71 issues Rs. 48,480 crore

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MARKET CAPITALISATIONMARKET CAPITALISATION
Year – endYear – end BSEBSE NSENSE
March 2004March 2004 12,01,206 crore12,01,206 crore 11,20,976 crore11,20,976 crore
March 2008March 2008 51,38,014 crore51,38,014 crore 48,58,122 crore48,58,122 crore
March 2009March 2009 30,86,075 crore30,86,075 crore 28,96194 crore28,96194 crore
March 2010March 2010 61,65,619 crore 60,09,173 crore61,65,619 crore 60,09,173 crore
March 2011March 2011 63,56,697 crore63,56,697 crore 62,33,250 crore62,33,250 crore
March 2012March 2012 62,14,941 crore62,14,941 crore 60,96,518 crore60,96,518 crore

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TURNOVERTURNOVER
CASH SEGNENT
1999-001999-00 15,25,480 Crore15,25,480 Crore
2007-082007-08 51,29,895 Crore51,29,895 Crore
2008-092008-09 38,52,097 Crore38,52,097 Crore
2009-102009-10 55,16,832 crore55,16,832 crore
2010-112010-11 46,82,437 crore46,82,437 crore
DERIVATIVESDERIVATIVES
2000-012000-01 4038 Crore4038 Crore
2005-062005-06 48,24,256 Crore48,24,256 Crore
2007-082007-08 1,33,32,787 Crore1,33,32,787 Crore
2008-092008-09 1,10,22,557 Crore1,10,22,557 Crore
2009-102009-10 1,76,63,899 Crore1,76,63,899 Crore
2010-112010-11 2,92,48,375 Crore2,92,48,375 Crore

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Trend in FIIsTrend in FIIs
YearYear Net Inv.Net Inv. Net Inv.Net Inv. CummulativeCummulative
Rs. CroreRs. Crore In US mn $ In US mn $In US mn $ In US mn $
2004-052004-05 45,88145,881 10,17210,172 35,92635,926
2005-062005-06 41,46741,467 9,3329,332 45,26045,260
2007-082007-08 66,17966,179 16,04016,040 68,00768,007
2008-09 - 45,811 -11,3502008-09 - 45,811 -11,350 59,08159,081
2009-10 1,42,6582009-10 1,42,658 30,25230,252 89,33389,333
2010-11 1,46,438 32,226 121,5592010-11 1,46,438 32,226 121,559

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Mutual Funds InvestmentsMutual Funds Investments
YearYear EquityEquity Debt Total Asset underDebt Total Asset under
ManagementManagement
(Rs. In Crore)(Rs. In Crore)
2004-052004-05 448448 16,987 17,435 1,49,60016,987 17,435 1,49,600
2005-06 14,3032005-06 14,303 36,801 51,10436,801 51,104 2,31,8622,31,862
2007-08 16,306 73,790 61,6052007-08 16,306 73,790 61,605 3,26,2923,26,292
2008-092008-09 6,985 81,803 88,787 4,17,2996,985 81,803 88,787 4,17,299
2009-10 -10,512 180,588 170,076 6,13,9792009-10 -10,512 180,588 170,076 6,13,979
2010-11 -19,802 249,154 229,352 5,92,2502010-11 -19,802 249,154 229,352 5,92,250

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MARKET SEGMENTSMARKET SEGMENTS
Primary MarketPrimary Market
– Channel for sale of new securitiesChannel for sale of new securities
Secondary MarketSecondary Market
– Platform for buying and selling ofPlatform for buying and selling of
securities already issuedsecurities already issued

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TYPES OF ISSUESTYPES OF ISSUES
• Public IssuesPublic Issues
– Any person can subscribe for the securitiesAny person can subscribe for the securities
– Allotment to at least 50 persons (Indian Cos.Allotment to at least 50 persons (Indian Cos.
Act)Act)
• Private PlacementPrivate Placement
– Issue made to select personsIssue made to select persons
– Allotment to less than 50 personsAllotment to less than 50 persons

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TYPES OF ISSUERSTYPES OF ISSUERS
• CorporateCorporate
– Domestic issuesDomestic issues
• Equities, Debentures, BondsEquities, Debentures, Bonds
– Overseas issuesOverseas issues
• ADRs, GDRs, External Commercial BorrowingsADRs, GDRs, External Commercial Borrowings
• GovernmentGovernment
– Central GovernmentCentral Government
– State GovernmentsState Governments

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Market IntermediariesMarket Intermediaries
Market Intermediaries (SEBI) March
1999
April
2012
Stock Exchanges (Cash Market) 23 19
Stock Exchanges (Derivatives Market) NA 2
Stock Exchanges (Currency Derivatives) NA 4
Brokers (Cash Segment) 9,069 10264
Sub-brokers (Cash Segment) 4,589 76566
Brokers (Derivatives) NA 2339
Brokers (Currency Derivatives) NA 2179
Foreign Institutional Investors 450 1765
Depositories 2 2
Depository Participants 96 856
Merchant Bankers 415 201
Bankers to an Issue 66 57
Underwriters 17 3
Credit Rating Agencies NA 6
Venture Capital Funds NA 215
Foreign Venture Capital Investors NA 177
Registrars to an Issue & Share Transfer
Agents
251 74
Portfolio Managers 18 249
Mutual Funds 41 49
Source: SEBI

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A person intend to invest in stock market, isA person intend to invest in stock market, is
required to take the following stepsrequired to take the following steps
• He has to earmark a certain amount to invest inHe has to earmark a certain amount to invest in
shares.shares.
• He has to obtain (1) a PAN card, (2) open a DematHe has to obtain (1) a PAN card, (2) open a Demat
account with a Depository Participant and (3) Bankaccount with a Depository Participant and (3) Bank
Account (savings or current) with a BankAccount (savings or current) with a Bank
• He can acquire shares from 2 sources – PrimaryHe can acquire shares from 2 sources – Primary
Market or Secondary MarketMarket or Secondary Market

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• In primary market shares are issued by theIn primary market shares are issued by the
company directly to the investors. He can applycompany directly to the investors. He can apply
when the Initial Public Offer is made by thewhen the Initial Public Offer is made by the
Company.Company.
• In secondary market, an investor can purchaseIn secondary market, an investor can purchase
shares from other investors through a broker orshares from other investors through a broker or
sub-broker who is a member of a recognizedsub-broker who is a member of a recognized
Stock Exchange.Stock Exchange.
• For buying shares directly from market anFor buying shares directly from market an
investor has to approach a Broker or Sub-brokerinvestor has to approach a Broker or Sub-broker
who should be registered with SEBI.who should be registered with SEBI.

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• Once broker or sub-broker is selected, anOnce broker or sub-broker is selected, an
investor is required to registered himself withinvestor is required to registered himself with
that broker or sub-broker through “Know Yourthat broker or sub-broker through “Know Your
Client” (KYC) registration Form. He can beClient” (KYC) registration Form. He can be
registered with more than one broker or sub-registered with more than one broker or sub-
brokerbroker
• Once these formalities are completed, anOnce these formalities are completed, an
investor can purchase or sell shares in stockinvestor can purchase or sell shares in stock
market by placing an order with the broker.market by placing an order with the broker.

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• Orders are placed on “Online Trading System” of aOrders are placed on “Online Trading System” of a
broker or sub-broker of the recognized Exchange.broker or sub-broker of the recognized Exchange.
Orders are placed for a specific quantity of shares of aOrders are placed for a specific quantity of shares of a
particular company at specific price for either to buy orparticular company at specific price for either to buy or
sell. Orders are generally matched in 2 seconds and aresell. Orders are generally matched in 2 seconds and are
confirmed by the broker or sub-broker. There are manyconfirmed by the broker or sub-broker. There are many
features of online trading screen, most important arefeatures of online trading screen, most important are
stop loss order, change in orders, current price, laststop loss order, change in orders, current price, last
traded price, total buy orders at different price levels astraded price, total buy orders at different price levels as
well as total sell orders at different price levels depictingwell as total sell orders at different price levels depicting
the demand or supply of the shares in the market at athe demand or supply of the shares in the market at a
given point of timegiven point of time

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• Trades are done on T+2 trading system. In otherTrades are done on T+2 trading system. In other
words, a trade for buy or sell done on Monday will bewords, a trade for buy or sell done on Monday will be
settled at Broker level on Wednesday and at client levelsettled at Broker level on Wednesday and at client level
on Thursday. Immediately on purchase of shares,on Thursday. Immediately on purchase of shares,
cheque of the required amount is to be paid to thecheque of the required amount is to be paid to the
Broker or shares are to be delivered to the Broker’sBroker or shares are to be delivered to the Broker’s
Demat account from the investor’s Demat account, inDemat account from the investor’s Demat account, in
case of sale.case of sale.
• Selection of a Company for investment – KnowledgeSelection of a Company for investment – Knowledge
about balance sheet interpretation, different financialabout balance sheet interpretation, different financial
ratios, Company Analysis , Industry Analysis.ratios, Company Analysis , Industry Analysis.

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Regulatory PyramidRegulatory Pyramid
• Apex RegulatorsApex Regulators
– SEBI, DEA, DCA, RBISEBI, DEA, DCA, RBI
– Activities coordinated by a High Level Committee onActivities coordinated by a High Level Committee on
Capital MarketsCapital Markets
• Self Regulatory OrganisationsSelf Regulatory Organisations
– Stock Exchanges, Depositories, AMFI, etc.Stock Exchanges, Depositories, AMFI, etc.
• RegulateesRegulatees
– Stock Brokers, Sub-brokers, DPs, Merchant Bankers,Stock Brokers, Sub-brokers, DPs, Merchant Bankers,
FIIs, VC Investors, Mutual Funds, Portfolio Managers,FIIs, VC Investors, Mutual Funds, Portfolio Managers,
RTIs & STAs, Underwriters, etc.RTIs & STAs, Underwriters, etc.

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Regulatory FrameworkRegulatory Framework
• SEBI Act, 1992SEBI Act, 1992
• Securities Contracts (Regulation)Securities Contracts (Regulation)
Act, 1956Act, 1956
• Depositories Act, 1996Depositories Act, 1996
• Companies Act, 1956Companies Act, 1956

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SEBI Act, 1992SEBI Act, 1992
• Empowers SEBI with statutory powers forEmpowers SEBI with statutory powers for
– Protecting the interests of investors in securitiesProtecting the interests of investors in securities
– Promoting the development of the securities marketPromoting the development of the securities market
– Regulating the securities marketRegulating the securities market
• Provides regulatory jurisdiction over corporate issuingProvides regulatory jurisdiction over corporate issuing
capital and all intermediaries & persons associated with thecapital and all intermediaries & persons associated with the
securities marketsecurities market
• Empowers SEBI to conduct enquiries, audits andEmpowers SEBI to conduct enquiries, audits and
inspections of all market participants, adjudicate offencesinspections of all market participants, adjudicate offences
and impose penalties in case of offencesand impose penalties in case of offences

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SCRA, 1956SCRA, 1956
• Provides for direct and indirect control over allProvides for direct and indirect control over all
aspects of securities tradingaspects of securities trading
• Gives regulatory jurisdiction to Central Govt. /Gives regulatory jurisdiction to Central Govt. /
SEBI overSEBI over
– Stock exchanges (recognition and continuedStock exchanges (recognition and continued
supervision)supervision)
– Contracts in securitiesContracts in securities
– Listing of securities on stock exchangesListing of securities on stock exchanges
• Specifies the minimum listing criteria on the basisSpecifies the minimum listing criteria on the basis
of which stock exchanges can frame listingof which stock exchanges can frame listing
regulationsregulations

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Depositories Act, 1996Depositories Act, 1996
• Provides for establishment of depositoriesProvides for establishment of depositories
for securitiesfor securities
• Provisions deal withProvisions deal with
– Making securities of public limited companiesMaking securities of public limited companies
freely transferablefreely transferable
– Dematerializing securities in the depositoryDematerializing securities in the depository
modemode
– Maintenance of ownership records in book entryMaintenance of ownership records in book entry
formform

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Companies Act, 1956Companies Act, 1956
• Deals with issue, allotment and transfer ofDeals with issue, allotment and transfer of
securities and aspects related to companysecurities and aspects related to company
managementmanagement
• Lays down standards for disclosure in public issuesLays down standards for disclosure in public issues
and all information related theretoand all information related thereto
• Prescribes regulations for underwriting, use ofPrescribes regulations for underwriting, use of
premium and discounts in public/rights/bonuspremium and discounts in public/rights/bonus
issues, payment of interest and dividendsissues, payment of interest and dividends
• Lays down norms for disclosure of quarterly resultsLays down norms for disclosure of quarterly results
and annual performance, as well as other relatedand annual performance, as well as other related
informationinformation

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Stock Market ReformsStock Market Reforms
• Enactment ofEnactment of SEBI ActSEBI Act kick-starts reforms (1992)kick-starts reforms (1992)
• Screen-based tradingScreen-based trading ushers transparency, efficiency and speedushers transparency, efficiency and speed
(1994-96)(1994-96)
• Demat settlementDemat settlement through the depositories eliminates paper-through the depositories eliminates paper-
based risks (1996)based risks (1996)
• Shrinkage ofShrinkage of settlement cyclesettlement cycle enhances liquidity (1995-2000)enhances liquidity (1995-2000)
• DIP GuidelinesDIP Guidelines raises the bar for public issues (2000)raises the bar for public issues (2000)
• Introduction ofIntroduction of derivatives tradingderivatives trading broadens the market andbroadens the market and
offers scope for hedging (2000)offers scope for hedging (2000)
• Implementation ofImplementation of advanced risk managementadvanced risk management practices havepractices have
reduced systemic and operational risks (since 1995)reduced systemic and operational risks (since 1995)
• Establishment ofEstablishment of Investor Grievance CellsInvestor Grievance Cells by stock exchangesby stock exchanges
(1994) and(1994) and Investor Education and Protection FundInvestor Education and Protection Fund by Centralby Central
Govt. (2001) provide greater safety to investorsGovt. (2001) provide greater safety to investors
• Demutualization of stock exchangesDemutualization of stock exchanges aims to prevent conflict ofaims to prevent conflict of
interest among owners, users and managers of stock exchangesinterest among owners, users and managers of stock exchanges
(2005)(2005)

50. 01/29/15 50
REFORMS IN TRADINGREFORMS IN TRADING
• Transition from open outcry to screen-basedTransition from open outcry to screen-based
systemsystem
– 1994 to 19961994 to 1996
• Transformation from person-dependent toTransformation from person-dependent to
anonymous systemanonymous system
• Single city to nation-wide operationSingle city to nation-wide operation
– Trading from over 900 citiesTrading from over 900 cities
• Evolution of share shops – sub-brokers andEvolution of share shops – sub-brokers and
franchiseesfranchisees
• Expansion of trading capacityExpansion of trading capacity
– 1 lakh to 80 lakh trades1 lakh to 80 lakh trades
– volume from 150 cr. per day to 1,00,000 cr.volume from 150 cr. per day to 1,00,000 cr.
Use of internet technology for tradingUse of internet technology for trading
– 16% of total volume16% of total volume

51. 01/29/15 51
Reforms In Clearing and SettlementReforms In Clearing and Settlement
• Establishment of depositories and depositoryEstablishment of depositories and depository
participantsparticipants
– NSDL in 1996 and CDSL in 1997NSDL in 1996 and CDSL in 1997
• Changeover from physical to dematChangeover from physical to demat
settlementsettlement
– Elimination of paper-based risksElimination of paper-based risks
• Clearing corporations/clearing houses asClearing corporations/clearing houses as
counter parties to tradescounter parties to trades
– Novation eliminates settlement riskNovation eliminates settlement risk
• Shrinkage in post-trade cycleShrinkage in post-trade cycle
– A30 to A15 to A7 to T+5 to T+3 to T+2A30 to A15 to A7 to T+5 to T+3 to T+2

52. 01/29/15 52
Demat advantagesDemat advantages
• Reduction in the settlement cycle.Reduction in the settlement cycle.
• Reduction in share transfer time to the buyer.Reduction in share transfer time to the buyer.
Immediate transfer and registration of SecuritiesImmediate transfer and registration of Securities
• No stamp duty on transfer of securities.No stamp duty on transfer of securities.
• Instant disbursement of non-cash benefits likeInstant disbursement of non-cash benefits like
bonus and rights into client’s account.bonus and rights into client’s account.
• No odd lot problem.No odd lot problem.
• Handling and safekeeping of huge paper share isHandling and safekeeping of huge paper share is
reduced.reduced.
• Elimination of risks associated with physicalElimination of risks associated with physical
certificates such as bad delivery, fake securities,certificates such as bad delivery, fake securities,
etc.etc.
• Nomination facility.Nomination facility.

53. 01/29/15 53
SETTLEMENT TYPESSETTLEMENT TYPES
• Account periodAccount period
– Monthly, Fortnightly, Weekly, 3-dayMonthly, Fortnightly, Weekly, 3-day
• Rolling-Rolling- End day position results inEnd day position results in
payment/delivery after n days.payment/delivery after n days.
– T+5, T+3, T+2, T+1T+5, T+3, T+2, T+1
• Trade for tradeTrade for trade
– Each trade settled individuallyEach trade settled individually
Limited Physical MarketLimited Physical Market

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Rolling SettlementRolling Settlement
• In a rolling settlement, each trading day isIn a rolling settlement, each trading day is
considered as a trading period and tradesconsidered as a trading period and trades
executed during the day are settled based on theexecuted during the day are settled based on the
net obligations for the day.net obligations for the day.
• Currently, trades in rolling settlement areCurrently, trades in rolling settlement are
settled on a T+2 basis i.e. on the 2nd workingsettled on a T+2 basis i.e. on the 2nd working
day. Typically trades taking place on Mondayday. Typically trades taking place on Monday
are settled on Wednesday, Tuesday's tradesare settled on Wednesday, Tuesday's trades
settled on Thursday and so on.settled on Thursday and so on.

55. 01/29/15 55
Types of TradesTypes of Trades
SpeculationSpeculation – An approach to investing that relies more– An approach to investing that relies more
on chance and therefore entails a greater risk.on chance and therefore entails a greater risk.
Speculation is driven by an expectation of a high rate ofSpeculation is driven by an expectation of a high rate of
return over a very short timereturn over a very short time
HedgingHedging – Hedgeing is a mechanism to reduce– Hedgeing is a mechanism to reduce
investment risk using derivative instruments like futuresinvestment risk using derivative instruments like futures
& options. A hedge can help lock in existing profit. Its& options. A hedge can help lock in existing profit. Its
purpose is to reduce the volatility of a portfolio, bypurpose is to reduce the volatility of a portfolio, by
reducing the risk of loss.reducing the risk of loss.

56. 01/29/15 56
HedgingHedging
• Crude Oil Futures (Example) - Case:Crude Oil Futures (Example) - Case:
• In January 11, Oil Co. has negotiated a salesIn January 11, Oil Co. has negotiated a sales
contract to sell 1 lac Ltrs of oil. The price Oil Co.contract to sell 1 lac Ltrs of oil. The price Oil Co.
will receive is the spot price of oil on June 30,will receive is the spot price of oil on June 30,
2011.2011.
– Spot price of crude oil in January = Rs. 50.00 per Ltr.Spot price of crude oil in January = Rs. 50.00 per Ltr.
– June Oil futures price = Rs. 51.50 per Ltr.June Oil futures price = Rs. 51.50 per Ltr.
– Futures contract is for delivery of 1 lac Ltrs.Futures contract is for delivery of 1 lac Ltrs.
• Hedging strategyHedging strategy
– January 11: Sell 1 lac Ltrs. June Oil futures contractsJanuary 11: Sell 1 lac Ltrs. June Oil futures contracts
– June 30: Close out futures positionJune 30: Close out futures position

57. 01/29/15 57
Hedging Contd.Hedging Contd.
• In JuneIn June : Spot price of oil is Rs. 53.00 per Ltr.: Spot price of oil is Rs. 53.00 per Ltr.
– Company receives Rs. 53.00 per Ltr. under the sales contract.Company receives Rs. 53.00 per Ltr. under the sales contract.
– Company has a short futures position at Rs. 51.50 per Ltr.Company has a short futures position at Rs. 51.50 per Ltr.
– Company Lose Rs. 1.50 per Ltr. from the futures contract.Company Lose Rs. 1.50 per Ltr. from the futures contract.
– Net price received is Rs. 51.50 (Rs.53.00 – 1.50 loss)Net price received is Rs. 51.50 (Rs.53.00 – 1.50 loss)
• In JuneIn June : Spot price of oil is 49.00 per Ltr.: Spot price of oil is 49.00 per Ltr.
– Company receives Rs. 49.00 per Ltr. from the sales contract.Company receives Rs. 49.00 per Ltr. from the sales contract.
– Company has a short futures position at Rs. 51.50Company has a short futures position at Rs. 51.50
– Company gains Rs.2.50 per Ltr. on the short futures position.Company gains Rs.2.50 per Ltr. on the short futures position.
– Net price received is Rs. 51.50 (Rs.49.00 + 2.50 gain)Net price received is Rs. 51.50 (Rs.49.00 + 2.50 gain)
• In either caseIn either case, the company receives Rs. 51.50 per Ltr., the company receives Rs. 51.50 per Ltr.

58. 01/29/15 58
Hedging Contd.Hedging Contd.
• Gold Futures Case(Example)Gold Futures Case(Example)
• Oct 2011 - A manufacturer needs Gold in December 2011 toOct 2011 - A manufacturer needs Gold in December 2011 to
make cutting tool. Current price of Gold Rs. 26000 per 10make cutting tool. Current price of Gold Rs. 26000 per 10
gms. (one unit)gms. (one unit)
• Fears price of Gold will rise to a level of Rs. 27,000 in Dec.Fears price of Gold will rise to a level of Rs. 27,000 in Dec.
2011.2011.
• Buys December 2011 Gold Futures @ Rs. 27000Buys December 2011 Gold Futures @ Rs. 27000

59. Hedging contd.Hedging contd.
• Dec. 11: Gold spot market price is Rs. 28,000Dec. 11: Gold spot market price is Rs. 28,000
• Manufacturer makes a profit of Rs. 1,000 per unit in GoldManufacturer makes a profit of Rs. 1,000 per unit in Gold
Futures contractFutures contract
• Now spends Rs. 27,000 of his own money & Rs.1000/- profitNow spends Rs. 27,000 of his own money & Rs.1000/- profit
from futuresfrom futures
• Dec. 11: Gold spot market price is Rs. 25,500Dec. 11: Gold spot market price is Rs. 25,500
• Manufacturer suffers a loss of Rs. 1,500 per unit in GoldManufacturer suffers a loss of Rs. 1,500 per unit in Gold
FuturesFutures
• Now pays Rs.1,500 as loss in futures and buys gold at Rs.Now pays Rs.1,500 as loss in futures and buys gold at Rs.
25,500 the total cost to him being 25500 cost of gold + 150025,500 the total cost to him being 25500 cost of gold + 1500
loss in futures.loss in futures.
• In either case he pays Rs.27,000/- per unit .In either case he pays Rs.27,000/- per unit .
01/29/15 59

60. 01/29/15 60
Hedging Contd.Hedging Contd.
• Currency Futures (Example)Currency Futures (Example)
• Case : October 07 - An exporter will receive US $Case : October 07 - An exporter will receive US $
1 million in Jan 08. (presently, US $ 1 = Rs. 31)1 million in Jan 08. (presently, US $ 1 = Rs. 31)
• Fears US $ will fall in valueFears US $ will fall in value
• Sells Currency Futures : USDINR $ 1 mill.Sells Currency Futures : USDINR $ 1 mill.
Futures @ Rs. 31Futures @ Rs. 31
• Jan ‘08 RBI reference rate US $ 1 = Rs. 28Jan ‘08 RBI reference rate US $ 1 = Rs. 28
• Jan 08 : Exporter receives US $ 1 mill. which isJan 08 : Exporter receives US $ 1 mill. which is
now valued at Rs. 28 mill.now valued at Rs. 28 mill.
• USDINR futures will be settled at Rs. 28USDINR futures will be settled at Rs. 28
– Short position @ Rs. 31Short position @ Rs. 31

61. 01/29/15 61
• Gain from Futures= Rs. 3 millionGain from Futures= Rs. 3 million
– Short position US $ 1 mill.Short position US $ 1 mill.
• ``
• Exporter earns Rs. 31 mill.Exporter earns Rs. 31 mill.

62. 01/29/15 62
Type of Trade Contd:Type of Trade Contd:
• Arbitrage –Arbitrage – Simultaneous purchase and sale transactions in aSimultaneous purchase and sale transactions in a
share undertaken in 2 different markets to profit from priceshare undertaken in 2 different markets to profit from price
difference.difference.
• Cash MarketCash Market - Shares are purchased or sold against cash or- Shares are purchased or sold against cash or
shares – delivery based transactions - T+2 systemshares – delivery based transactions - T+2 system
• Day TradingDay Trading – Taking a position ( Buy or Sell) with the– Taking a position ( Buy or Sell) with the
object to off set the same by opposite transaction before end ofobject to off set the same by opposite transaction before end of
the day. A day trader may enter into one or more transactionsthe day. A day trader may enter into one or more transactions
during the trading period but all his o/s transactions are to beduring the trading period but all his o/s transactions are to be
closed out by end of the day.closed out by end of the day.

63. 01/29/15 63
MarginsMargins
• Margins are collected to safeguard against any adverseMargins are collected to safeguard against any adverse
price movement. Margins are quoted as a percentage of theprice movement. Margins are quoted as a percentage of the
value of the transaction.value of the transaction.
Margins for Cash SegmentMargins for Cash Segment
• Value at Risk (VaR) marginValue at Risk (VaR) margin
9999thth
percentile estimate that computed margin would be adequate topercentile estimate that computed margin would be adequate to
meet T+1 price riskmeet T+1 price risk
• Extreme Loss MarginExtreme Loss Margin
-- To cover the losses outside the coverage of VaR marginTo cover the losses outside the coverage of VaR margin
• Mark-to-Market (MTM) marginMark-to-Market (MTM) margin
– Represents actual or notional loss suffered by broker at client-levelRepresents actual or notional loss suffered by broker at client-level
end of day; payable by T+1end of day; payable by T+1

64. 01/29/15 64
• Margins on Futures & OptionsMargins on Futures & Options
• Initial Margin -Initial Margin - SPAN Software used – depending mainlySPAN Software used – depending mainly
upon Value of Future & Option, price and volatility of securityupon Value of Future & Option, price and volatility of security
in cash market.in cash market.
• Exposure Margin –Exposure Margin – Index futures, Stock futures and sellIndex futures, Stock futures and sell
positions of Index and stock Options are collected.positions of Index and stock Options are collected.
• On OptionsOn Options
• Premium Margin –Premium Margin – In addition to initial margins, premiumIn addition to initial margins, premium
margin is charged from buyers of options.margin is charged from buyers of options.
• Assignment Margin –Assignment Margin – Collected from sellersCollected from sellers

65. 01/29/15 65
Order TypesOrder Types
• Limit OrderLimit Order
– Order for execution at specified price or betterOrder for execution at specified price or better
• Market OrderMarket Order
– Order for execution at the best prevailing priceOrder for execution at the best prevailing price
• Stop Loss OrderStop Loss Order
– Order taken up for execution when triggerOrder taken up for execution when trigger
prices is reachedprices is reached

66. 01/29/15 66
MarketMarket SessionsSessions
• Pre-openingPre-opening
– 0955 to 1000 hrs.0955 to 1000 hrs.
• OpeningOpening
– 1000 hrs.1000 hrs.
• ContinuousContinuous
– 1000 to 1530 hrs.1000 to 1530 hrs.
• Post-closingPost-closing
– 1530 to 1535 hrs.1530 to 1535 hrs.

67. 01/29/15 67
Bulls, Bears and StagsBulls, Bears and Stags
• BullBull
– Operator who buys a security at a certainOperator who buys a security at a certain
level, anticipating a price rise, so that he canlevel, anticipating a price rise, so that he can
square-up (sell) at a profitsquare-up (sell) at a profit
• BearBear
– Operator who sells a security at a certainOperator who sells a security at a certain
level, anticipating a price fall, so that he canlevel, anticipating a price fall, so that he can
cover-up (buy) at a profitcover-up (buy) at a profit
• StagStag
– Person who subscribes to a new issue withPerson who subscribes to a new issue with
the primary objective of selling at a profit onthe primary objective of selling at a profit on
allotment of the securitiesallotment of the securities

68. 01/29/15 68
SafetySafety ProvisionsProvisions
• Settlement Guarantee FundSettlement Guarantee Fund
– Protection against counterparty defaultProtection against counterparty default
– Corpus created out of initial contribution fromCorpus created out of initial contribution from
the stock exchange and its members, basethe stock exchange and its members, base
capital deposits of trading members andcapital deposits of trading members and
ongoing accruals from transaction chargesongoing accruals from transaction charges
• Investor Protection FundInvestor Protection Fund
– Protection to investors against default ofProtection to investors against default of
membersmembers
– Corpus created out of initial contributionsCorpus created out of initial contributions
from the stock exchange and ongoing accrualsfrom the stock exchange and ongoing accruals
from transaction chargesfrom transaction charges

69. 01/29/15 69
CORPORATISATION &CORPORATISATION &
DEMUTUALISATIONDEMUTUALISATION
• Demutualisation segregates ownership, tradingDemutualisation segregates ownership, trading
and management rights on stock exchangeand management rights on stock exchange
• Uniform model of corporatisation andUniform model of corporatisation and
demutualisation for all exchangesdemutualisation for all exchanges
– Conversion to companies limited by sharesConversion to companies limited by shares
– Change from not-for-profit companies to for-profitChange from not-for-profit companies to for-profit
companiescompanies
• Exchange could prescribe ceiling on votingExchange could prescribe ceiling on voting
rights of different shareholder groupsrights of different shareholder groups

70. 01/29/15 70
PUBLIC ORIENTATIONPUBLIC ORIENTATION
• Wider media coverage – print and electronicWider media coverage – print and electronic
• On-line, round-the-clock coverage of stock marketsOn-line, round-the-clock coverage of stock markets
• Evolution of equity researchers, company analysts, etc.Evolution of equity researchers, company analysts, etc.
• Capital market now included in the curriculum ofCapital market now included in the curriculum of
colleges/institutescolleges/institutes
• Establishment of investor forumsEstablishment of investor forums

71. 01/29/15 71
Corporate benefitsCorporate benefits
• Dividend – is a percentage of the face value of a
share that a company returns to its shareholders
from its annual profits
• Dividend yield - Dividend yield gives the
relationship between the current price of a stock
and the dividend paid by its’ issuing company
during the last 12 months. It is calculated by
aggregating past year's dividend and dividing it by
the current stock price.

72. 01/29/15 72
• Bonus issue – A bonus issue is the issue of
shares to the existing shareholders by the
company in proportion to the number of shares
held, by capitalizing reserves.
• Right issue – A right issue of shares to the
existing shareholders by the company in
proportion to the number of shares held at a
certain price.
• One to One – This means that if bonus sharesOne to One – This means that if bonus shares
are declared than one bonus share will beare declared than one bonus share will be
issued to every one share held.issued to every one share held.

73. 01/29/15 73
Stock Split -
A stock split is a corporate action which splits the
existing shares of a particular face value into
smaller denominations so that the number of
shares increase, however, the market
capitalization or the value of shares held by the
investors post split remains the same as that
before the split. It is done to increase the liquidity
of the stock whose price has gone very high.

74. 01/29/15 74
• Buyback of SharesBuyback of Shares A buyback can be seen asA buyback can be seen as
a method for company to invest in itself bya method for company to invest in itself by
buying shares from other investors in thebuying shares from other investors in the
market. Buybacks reduce the number of sharesmarket. Buybacks reduce the number of shares
outstanding in the market. Buy back is done byoutstanding in the market. Buy back is done by
the company with the purpose to improve thethe company with the purpose to improve the
liquidity in its shares and enhance theliquidity in its shares and enhance the
shareholders’ wealth. Under the SEBI (Buy Backshareholders’ wealth. Under the SEBI (Buy Back
of Securities) Regulation, 1998, a company isof Securities) Regulation, 1998, a company is
permitted to buy back its share from:permitted to buy back its share from:
a) Existing shareholders on a proportionatea) Existing shareholders on a proportionate
basis through the offer document.basis through the offer document.
b) Open market through stock exchanges usingb) Open market through stock exchanges using
book building process.book building process.
c) Shareholders holding odd lot shares.c) Shareholders holding odd lot shares.

75. 01/29/15 75
THANK YOUTHANK YOU
- D.K. Gupta
Head, ISE TRC