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C2
Stock Markets in India/Stock Exchanges in India
Chapter 2
Stock Markets in India/ Stock Exchanges in India
Copyright 2008, Sudhindra Bhat
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In every economic system, some units which may be individual or institutions are surplus-generating, others are deficit-generating. Surplus-generating units are called savers while deficit-generators are called spenders. In our country, at spectral level, households are surplus-generating while corporate and government are deficit generating. The financial assets are also called financial claims or financial securities or paper assets. These financial securities are issued by deficit-generating units in exchange for their savings. It is for this reason that surplus-generating units are called investors while deficit-generating units are called issuers. The third critical element of markets is the intermediaries who act as conduits between the investors and issue. Regulatory bodies, which regulate the functioning of the securities markets, constitute the last but very significant element of securities markets. Thus, there are four important elements of securities markets namely investors issuers, intermediaries and regulators. Now depending upon the nature of the relationship among these element of securities markets, the markets are classified as primary and secondary. Further, depending upon the main securities markets, the markets are classified as short-term and long-term and depending upon the issuers, these are classified government securities or industrial securities. Government securities are also called gilt-edged securities. Copyright 2008, Sudhindra Bhat
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It is a mechanism to facilitate the exchange of financial assets. Examples of capital market In India - BSE and NSE are the two capital markets. International - NYSE, LSE and TSE are the largest capital markets.
Classification
Primary market Secondary market It can also be classified on the basis of life span of the asset into:
Money market -Less than one year Capital market proper - More than one year.
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Stock Markets in India/Stock Exchanges in India
the markets.
Financing from capital markets; there are two ways a company can raise money from the financial markets: debt and equity.
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The Securities which are traded in the secondary market may be classified as follows:
1.On the basis of issuer, Securities may be classified as Industrial securities Government securities Financial intermediaries securities
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The stock exchange is really an essential pillar of the private sector corporate economy. It discharges essential functions in the process of capital formation and in raising resources for the corporate sector. First, the stock exchange provides a market place for purchase and sale of securities. Secondly, the stock exchange provides the linkage between the savings in the household sector and investment in corporate economy. Thirdly, by providing a market quotation of the prices of shares and bonds.
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The stock exchange rules, bye laws and regulations have identified eight major functional specialization the members. 1. 2. 3. Commission Broker Floor Broker Tataniwala
4.
5. 6. 7.
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Stock exchanges quotations and indices published in daily newspapers are the main source of information of the exchange traders and turnover.
The first traded price is the day's opening price. If only one such price is recorded, it is also the day's closing balance. If there are two prices recorded, then the first is the opening and the second the closing price. If there are three prices, then the middle quote is either the high or low price. If there are four prices, then one of the middle prices is the day's high and the other, the low. If there are no transactions in a company's share on any day, the previous day's closing price is presented in brackets. The EPS is the average net profit after tax per equity share and the CPS the average cash profit (after adding the depreciation) per share. The cash P/E is the ratio of the day's closing price to the cash earnings per share distinct form the P/E ratio which relates price to the net profit per share. PE values are not printed when earnings are either nil or negative. Copyright 2008, Sudhindra Bhat
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h)
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Cont.
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To introduce a uniform one-week settlement system in all stock exchanges and in all shares in order to unify the market on a national basis and, at the same time, to reduce the risk exposure of market participants to long settlement periods and also to counter the strong tendency towards excessive speculation and exempt the concentration of trading activity in a few shares only.
To replace the present margin system, because of its failure to prevent many defaults on several exchanges, by a system of "marketing to the market" on a daily basis (i.e., debiting the losses and credit gains daily to the members having outstanding positions).
2.
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To do away with the carry forward system which is incompatible with the recommendation of the study and shorten the settlement period, for which the whole rationale will disappear with the adoption of the system "marking to the market" daily, as suggested above. To insist that all the stock exchanges introduce formal market-marking arrangements in the best post manner in order to prevent exploitation of investors by market malpractices, and promote more orderly many all securities. To make the governing bodies of stock exchanges equally representative of the share brokers interest the one hand and the public and the users of stock market services on the other, and strengthen exchange management generally. To introduce in all stock exchanges a well-designed management information system (MIS), capital producing relevant information system which could be used by the authorities for restructuring and Copyright 2008, Sudhindra Bhat regulating the on proper lines.
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4.
5.
6.
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Listing of Securities
Listing means admission of the securities to dealings on a recognised stock exchange. The securities may be of any public limited company, central or state government, quasi governmental and other financial institutions/corporations, municipalities, etc.
The objectives of listing are mainly to: provide liquidity to securities; mobilize savings for economic development; protect interest of investors by ensuring full disclosures.
Cont.
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A company intending to have its securities listed on the Exchange has to comply with the listing requirements prescribed by the Exchange. Some of the requirements are as under: a) b) c) d) Minimum Listing Requirements for new companies Minimum Listing Requirements for companies listed on other stock exchanges Minimum Requirements for companies delisted by this Exchange seeking relisting of this Exchange Permission to use the name of the Exchange in an Issuer Company's prospectus
Cont.
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f)
g) h) i) j) k)
Allotment of Securities
Trading Permission Requirement of 1% Security Payment of Listing Fees Compliance with Listing Agreement Cash Management Services (CMS) - Collection of Listing Fees
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It trades on medium sized securities of equity shares and debt instruments. It is a separate ring altogether. For the first time in our country, debt instruments would be traded to become an active part in the secondary market of the nation. NSE made its debut with the debt market. The debt market is predominantly a market in government securities. The Central Government moving over to auctions at market-related rates of interest, the primary market has become active with the well-informed and fine-tuned bidding at the auctions.
It has the full support from the National Clearing and Settlement Divisions, SHCIL and the Securities Facilities Support Corporation. It uses modern computer technology for the clearance and settlement procedures.
Better transparency system for the securities.
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Investor Registration
Trading Mechanism
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OTC Exchange will help spread the stock exchange operation geographically and integrate capital investment into a national forum.
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Cont.
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single integrated national level solution with access to multiple markets for
providing high quality, low cost services to millions of investors across the country, a liquid and vibrant national level market for all listed companies in general and small capital companies in particular and providing trading,
clearing and settlement facilities to the traders and dealers across the country
at their doorstep with decentralised support system.
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Money market
A money market is a mechanism which makes it possible for borrowers and lenders to come together. Money market is the market in which shortterm funds are borrowed and lent. The money market does not deal in cash or money but in trade bills, promissory notes and government papers, which are drawn for short periods. These short-term bills are known as near money.
Importance of money market Dealing in bills of exchange and commercial papers
Cont.
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Cont.
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Features of a Developed Money Market Existence of an efficient and effective central bank
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Features and Weaknesses of the Indian Money Market Existence of unorganized money market Absence of integration Diversity in money rates of interests Seasonal stringency of money
Cont.
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Money Market Instruments Treasury Bills (T-Bills) Central Government Securities (gilt-edged securities) State Government and Public Sector Instruments Municipal Bonds Commercial Paper Certificates of Deposit Bills Rediscounting
Cont.
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Repurchase Agreements (Repos) Inter-bank Participation Bank Deposits Term Money Corporate Debentures and Bonds Bankers Acceptance Commercial Bills Fringe Market
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Sub Markets
Certificates of deposits
Commercial papers
Cont.
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The types of Central Government securities that have evolved recently include:
a) Issue of stock through auction ushering new treasury culture enabling development of bidding skills amongst market participants.
b)
c)
Issue of stock with pre-announced coupon rates (e.g. fixed rate bonds).
Issue of stock with variable coupon rates (e.g. floating rate bonds).
d)
e) f)
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Municipal Bonds
General Obligation Bonds (GOBs) Revenue Bonds (RBs)
4.
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Stock Markets in India/Stock Exchanges in India
Certificate of Deposit
The various features of CDs are as follows:
CDs can be subscribed by an individual, as well as by an institution. CDs are money market instruments in the form of Usance Promissory
Notes issued at a discount and are negotiable in character. There is a lock-in-period of 15 days, after which they can be sold.
The minimum size of the deposit is Rs. 5 lakhs and thereafter in multiples of Rs. 5 lakhs.
Cont.
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made on
the
No advance can be taken against the security of the CDs. There is no limit for investment in CDs by the banks. Due to the negotiable character of the CD, the same could be sold after the lock-in-period, thus enabling the investing bank to create liquidity. This instrument is useful to the corporates for parking their surplus short-term bonds. Cont.
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Rate of Interest on CDs As this instrument is issued at discount, the rate of interest is calculated as rear end rate on the basis of calculations as follows:
100 X R X No. of Days to Maturity
I= Where I = Rate of Interest R = Discounted value Issue price of CD = Face value Discounted value
365 X 100
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Commercial Paper
The commercial paper (CP) was introduced into the Indian money market during the year 1990, on the recommendations of the Vaghul Committee. CP is a form of usance promissory note, negotiable by endorsement and delivery. It is issued at a discount determined by the issuer company. The discount varies with the credit rating of the issuer company and the demand and supply position in the money market.
Advantages
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It does not create any lien on assets of the company. Tradability of CP provides investors with exit options. High credit ratings fetch a lower cost of capital. Wide range of maturities provide more flexibility.
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Cont.
Copyright 2008, Sudhindra Bhat
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Disadvantages A high degree of control is exercised on issue of CP. Stand-by credit may become necessary. Its usage is limited to only blue chip companies. Issuance of CP bring down the bank credit limits.
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The minimum period shall be 91 days with maximum of 180 days for
IBPC on risk sharing basis and in case of non-risk sharing basis, it is limited to 90 days.
The maximum participation in loan under IBPC would be 40% of the amount outstanding or the limit sanctioned, whichever is lower. However, participation should be only in 'standard asset'.
the issuing
banks, which shall include a clause that it should have liberty to shift at
its discretion, without notice to the borrower, of a part or portion of the outstanding to another participating bank.
Cont.
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Interest rates are determined between issuing bank and the participating bank.
The issuing bank and the participating bank have to enter into participation contracts in the prescribed format.
IBPCs are not transferable and they cannot be re-deemed before due date. the
On the date of maturity, the issuing Bank have to make payment of the IBPC along with agreed rate of interest to the participating bank.
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Bills Rediscounting
The formula for arriving at the discounted value of the bills for various unexpired usance period is given below: Discounted Value of the Bill D= Where,
Cont.
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Other Money Market Instruments Term Money Corporate Debentures and Bonds Bank Deposits Bankers Acceptance
Commercial Bills
Fringe Market
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Cont.
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