Financial Markets Investment Management Lokanandha Reddy Irala 1

Financial Markets Investment Management Lokanandha Reddy Irala 1 Financial

FINANCIAL MARKETS Defined èCenters or Arrangements that provide facilities for buying and selling of financial claims and Services Lokanandha Reddy Irala 2 Financial

FINANCIAL MARKETS PRIMARY SECONDARY CAPITAL MONEY ORG. UN ORG. Lokanandha Reddy Irala 3 Financial

CAPITAL MARKET Defined An organized mechanism for effective and efficient transfer of capital from the Investor class ( a body of individual or institutional savers ) to the entrepreneur class( individuals or institutions engaged in industry , business or service) in the private and public sectors of economy Lokanandha Reddy Irala 4 Financial

CAPITAL MARKET MECHANISM Supply Side Middlemen Demand Side Individuals NIM Individuals Institutions Govt. Investors Lenders Sellers of Capital Lokanandha Reddy Irala Stock Exchanges Finance & Investment Corporations 5 Entrepreneurs Borrowers Buyers of Capital Financial

CAPITAL MARKET STRUCTURE Capital Marketable Securities Govt. Securities. PSU bonds Non Marketable Securities Bank Deposits Company Deposits Corp. Securities. Post Office Certificates & Deposits Mutual funds Loans & Advances of Banks&FIs Lokanandha Reddy Irala 6 Financial

MARKETABLE SECURITIES Marketable Securities NIM Players Original Promoters & directors Associates & Friends Employees FIs, Banks, MFs NRIs, Public Lokanandha Reddy Irala Secondary Mkt. Intermediaries Brokers, Jobbers, Dealers, Badla Financiers, Arbitrageurs, Invst. Advisors Portfolio Mgrs. Sub-brokers Floor Brokers 7 NIM Players For Issues Merchant. Bankers, Underwriters, Controlling Banks Collecting Banks Registrars & Transfer Agents Advt. Agencies, Printers Financial

NEW ISSUE MARKET The basic platform for raising Capital. It is the place where the ultimate Investor raises the funds from the ultimate Saver Lokanandha Reddy Irala 8 Financial

PUBLIC ISSUE THROUGH PROSPECTUS è The Maximum Limits of prior allotment è Promoters, Directors and Permanent è employees etc. , è Share holders of Promoting Company è Indian MFS è Financial Institutions è Foreign Players Lokanandha Reddy Irala 9 : 10% : : 10% 20% 24% Financial

PUBLIC ISSUE - PRE ISSUE ACTIVITIES èAppointing Lead Managers èIntimating to Stock Exchange (Listing Arrangements) èDrafting Prospectus èDrafting the Application form èUnderwriting Arrangements èAppointment of Intermediaries (Banker, Registrar, Brokers etc. , ) èTiming of the Issue èMarketing the Issue Lokanandha Reddy Irala 10 Financial

PUBLIC ISSUE - PRE ISSUE ACTIVITIES è Depositing With The Stock Exchange è 1% of the issue size --0. 5% cash &0. 5% Guarantee è Opening a/c s with Collecting Banks --At least 30 collection centers all over the country è Opening and Closing of Subscription --For a minimum of 2 Working days and a maximum of 10 working days when the issue is underwritten by All India FIs --The issue can be kept open for a maximum of 21 days when it is not so underwritten. Lokanandha Reddy Irala 11 Financial

PUBLIC ISSUE - POST ISSUE ACTIVITIES èConfirmation within seven days èpooling and processing of applications èAllotment / Refund decision èSubmission of 45 days report èAllotment / Refund èPayment of Issue expenses èListing èSubmission of 90 days report Lokanandha Reddy Irala 12 Financial

RIGHTS ISSUE : RIGHT OF PRE EMPTION èLetter of offer: Offer in proportion to the existing stock èIssue opened for not less than 4 weeks and a maximum of 60 days èThe Right can be split or renounced èNo call option èNo need of a MB when the issue size is less than 50 lacs Lokanandha Reddy Irala 13 Financial

BOOK BUILDING A Mechanism for placing securities with Institutional Investors. The price and size of the issue are based on orders received Lokanandha Reddy Irala 14 Financial

PROCESS OF BOOK BUILDING èNominate a book runner èForm a syndicate of brokers and underwriters èSubmit a draft prospectus to SEBI that does not state the price or coupon rate èInvite bids from the syndicate èDetermine the issue price according to the set algorithm èAllotment Lokanandha Reddy Irala 15 Financial

SECONDARY MARKET èSTOCK EXCHANGE An Association, organization or body of individuals , whether incorporated or not, constituted for the purpose of assisting, regulating or controlling the business of buying, selling or dealing in securities --SCRA 1956 Lokanandha Reddy Irala 16 Financial

FUNCTIONS OF STOCK EXCHANGE èCreating Liquidity and Marketability è Provides Indices of progress è Provides hedge against Inflation è Providing safety to the Investors è Evaluation of Securities è Mobilization of Savings Lokanandha Reddy Irala 17 Financial

THE HISTORY è 1875 - Native shares and stock brokers Association è 1894 - The Ahmedabad shares and stock brokers Association è 1908 - The Calcutta Stock exchange Association è 1930 - Indore è 1937 - Madras è 1943 - Hyderabad Lokanandha Reddy Irala 18 Financial

THE STRUCTURE OF STOCK EXCHANGE GOVERNING BODY OF SE MEMBER BROKERS IN THE NIM OPERATIONS MONITORING LISTING DIRECTORY WORK GROUP A / GROUP B RESEACH & PUBLICATIONS TRADING RING MEMBER BROKERS IN SEC’Y MKT. EDP SERVICES JOBBERS, DEALERS ARBITRATIONS & COMPLAINTS QUOTATIONS Lokanandha Reddy Irala 19 Financial

CLASSIFICATION OF SECURITIES èTYPE - A / CLEARED / SPECIFIED 1. Actively Traded 2. Less volatile 3. Less risky, 4. High liquid shares èTYPE - B / NON SPECIFIED Lokanandha Reddy Irala 20 Financial

TRADING THROUGH A BROKER èCustomer fills ‘Client registration form’ èCustomer & broker enter into ‘client member Agreement’ èCustomer gives his order in writing èCustomer’s order is recorded and sent to exchange (Broker receives ‘Order confirmation Slip) èThe order is matched by the computer as per the matching algorithm and a ‘trade confirmation slip’ is generated Lokanandha Reddy Irala 21 Financial

TRADING THROUGH A BROKER èCustomer will be given a ‘Contract note’, which spells out his obligation in terms of payment / delivery èThe customer will pay money / deliver the shares and receive the shares / the money on the specified day Lokanandha Reddy Irala 22 Financial

TYPES OF BROKERS èBULL : - The broker who keeps buying shares with an anticipation of price rises èBEAR : - The broker who keeps selling shares with an anticipation of price falls èJOBBER : - The broker who trades in shares for a smaller spread also. Located at a particular trading post takes up bidding and offering. Lokanandha Reddy Irala 23 Financial

TYPES OF BROKERS Also called as Market Maker in London Stock exchange Specialist in New York Stock exchange Taravanawallah in Indian stock exchanges BSE made it mandatory to appoint a Jobber for every company with a share capital of over Rs. 3 crores è JOBBER : - The broker who trades in shares for a smaller spread also. Located at a particular trading post takes up bidding and offering. Lokanandha Reddy Irala 24 Financial

TYPES OF BROKERS èARBITRAGEUR : - The broker dealing in two stock exchanges. Makes money by buying in the lower market and immediately selling it in the higher market èARBITRAJOR: -Person involved in settlement of disputed between brokers , clients etc. , èSTAG : - Subscribes to new issues with the intention of selling them in the secondary market soon after the allotment. Also called as premium hunter Lokanandha Reddy Irala 25 Financial

TRADING PATTERNS èCIRCULAR TRADING : - Trading amongst a set of brokers with an intention of either raising or decreasing prices. èRIGGING THE MARKET : - Accumulating and blocking of shares of select companies to raise the prices èCORNERING THE SHARES : - Entering into forward contracts without any actual purchases and intentionally with lower prices sending rumors to corner the rigging group Lokanandha Reddy Irala 26 Financial

MODES OF TRADING èSPOT BASIS : - Seller of the shares must deliver the share certificates within 48 hours to the buyer and the buyer to pay within 48 hours. èCASH BASIS : - The delivery and payment before the next settlement date. èSETTLEMENT BASIS / BADLA : - The delivery and payment can be postponed to next settlement period Lokanandha Reddy Irala 27 Financial

SETTLEMENT PERIOD èThe stock exchange year is divided into periods called accounts. è All the transactions during an account are allowed to be settled generally on the last day of the account, which is called the settlement day. Accounting period settlement Vs. Rolling Settlement Lokanandha Reddy Irala 28 Financial

TYPES OF ORDERS èMARKET ORDER : - An order without specifying the price at which a transaction is to be executed. The broker expected to use his judgement and give best possible price to the investor èNET ORDER : - The order specifying the net rate acceptable. Net rate = Mkt. Rate Broker’s commission. èDAY ORDER : - An order which is good only for the day it is placed. Lokanandha Reddy Irala 29 Financial

TYPES OF ORDERS èFILL OR KILL ORDER : - An order to buy or sell a particular share immediately. If the order is not executed at once, it should be treated as cancelled. èALL OR NONE ORDER : - An order that has to be executed in entirety. No partial execution is allowed. Lokanandha Reddy Irala 30 Financial

TYPES OF ORDERS èLIMIT ORDER : - An order with price limit specification. Incase of a buy order the Investor usually specifies the maximum limit beyond which he is not interested and in case of a sell order the minimum limit is specified below which the order need not be executed Lokanandha Reddy Irala 31 Financial

TRADING IN DEBT è Repo or Non Repo Trade è Each transaction is settled individually. Netting of transactions not allowed è Rolling Settlement è No active trading in Debt Lokanandha Reddy Irala 32 Financial

INITIATIVES FOR A VIBRANT DEBT MARKET è More individual participation in the place of Institutions. è Developing Trading Infrastructure è Introduction of Market Making è Encouraging Investors to trade in debt – changing Attitude è Introduction of settlement guarantee mechanism Lokanandha Reddy Irala 33 Financial

INDEX – HOW IS IT CONSTRUCTED ? èTYPE - B The Ratio of Market Capitalization in the Current Year to the Market Capitalization in the Base Year Market Capitalization = No. of Shares * Market Price of a Share Market Capitalization in the Current Year Index = ---------------------------Market Capitalization in the Base Year Lokanandha Reddy Irala 34 Financial

CARRY FORWARD TRADING (BADLA) èFORWARD TRADING “ B buys 100 shares of BPL from S at a price of Rs. 50/-per share. Shares to be delivered on Aug 20”. èOn Aug 20 The market price of BPL may be Situation A: Rs. 60/- ( i. e > Rs. 50/-) : B benefits and S looses or Situation B: Rs. 40/- ( i. e < Rs. 50/-) : S benefits and B looses Lokanandha Reddy Irala 35 Financial

Aug 20 Rs. 60/- Rs. 40/- S is ready to deliver shares but 1 S is ready to deliver shares but 3 B is not ready with the payment S is not ready to deliver shares 2 S is not ready to deliver shares 4 but B is ready with the payment Lokanandha Reddy Irala 36 Financial

S is ready to deliver shares but B is not ready with the payment 1 S pays B : Rs. 1, 000/- [(60 -50 ) * 100] B pays S : Rs. 75/- [ Badla Charge ]* * B needs to pay Rs. 5, 000/-. If Badla charge happen to be 3% per month, for 15 days it is 1. 5% of 5, 000/- which equals Rs. 75/** Badla charge is also called as Forwardisation charge or Cantago charges Lokanandha Reddy Irala 37 Financial

S is not ready to deliver shares but B is ready with the payment 2 S pays B : Rs. 1, 000/- [(60 -50 ) * 100] S pays B : Rs. 75/- [ Undha Badla charge ]* * S needs spend Rs. 5, 000/- more to buy shares if B insisted on delivery. If Badla charge happen to be 3% per month, for 15 days it is 1. 5% of 5, 000/- which equals Rs. 75/# Undha Badla charge is also called as Backwardisation charges Lokanandha Reddy Irala 38 Financial

S is ready to deliver shares but B is not ready with the payment B pays S : Rs. 1, 000/- [(50 -40 ) * 100] B pays S : Rs. 75/- 3 [ Badla Charge ]* * B needs to pay Rs. 5, 000/-. If Badla charge happen to be 3% per month, for 15 days it is 1. 5% of 5, 000/- which equals Rs. 75/# Badla charge is also called as Forwardisation charge or Cantago charges Lokanandha Reddy Irala 39 Financial

S is ready to deliver shares but B is not ready with the payment 4 B pays S : Rs. 1, 000/- [(60 -50 ) * 100] S pays B : Rs. 75/- [ Undha Badla Charge ]* * S needs spend Rs. 5, 000/- more to buy shares if B insisted on delivery. If Badla charge happen to be 3% per month, for 15 days it is 1. 5% of 5, 000/- which equals Rs. 75/# Undha Badla charge is also called as Backwardisation charges Lokanandha Reddy Irala 40 Financial

STOCK EXCHANGES IN INDIA -I S. E è 1. Hyderabad è 2. Gauhati è 3. Magadh è 4. Delhi è 5. Ahmadabad è 6. Vadodara è 7. Saurastra kutch Lokanandha Reddy Irala - REGION (JURISDICTION) Andhra Pradesh Assam / NE Bihar Delhi / Haryana Gujarat 41 Financial

STOCK EXCHANGES IN INDIA -II è 8. Mangalore è 9. Bangalore è 10. Kochi è 11. Indore è 12. Bombay è 13. Pune è 14. Bhubaneswar è 15. Himachal Ludhiana Punjab/ è 16. Jaipur Lokanandha Reddy Irala - Karnataka Kerala Madhya Pradesh Maharashtra/ Goa Orissa - / J&K Rajasthan 42 Financial

STOCK EXCHANGES IN INDIA - III è 17. Madras è 18. Coimbatore è 19. Calcutta è 20. NSE è 21. OTCEI è 22. ISE Lokanandha Reddy Irala - Tamil Nadu West Bengal All India 15 RSEs 43 Financial

CHANGING STRUCTURE OF INDIAN STOCK MARKET -I èTill 1991 -Monopoly of a few SEs èWith Liberalization - More participation of FPIs and FIIs èFollowing : G S Patel committee on “Stock Exchange Reforms” and Abid Hussain Committee on “Capital Market Reforms” èOTCEI was set up Lokanandha Reddy Irala 44 Financial

CHANGING STRUCTURE OF INDIAN STOCK MARKET - II èFollowing Pherwani Committee on “Establishmnet of New Stock exchanges” National Stock Market System was set up èNatioanal Market System èNSE èSHCIL èNCDS èISE Lokanandha Reddy Irala 45 Financial

BOMBAY STOCK EXCHANGE - I èEstablished in 1875 èAmounts to nearly 65% of all India equity trade èAvg. daily turnover : More than 250 crore èMore than 4, 000 listed companies èMore than Rs. 5, 000 crore Market Capitalization èHuge Investor base èLarge nation wide network of brokers Lokanandha Reddy Irala 46 Financial

BOMBAY STOCK EXCHANGE -II èLack of Transparency : Corporatization needed èLengthy settlement periods èClose club culture Lokanandha Reddy Irala 47 Financial

NATIONAL STOCK EXCHANGE èEstablished in 1994 by all India FIs èFair, efficient and transparent screen based trading èShorter settlement cycles è Capital &WDM segments Lokanandha Reddy Irala 48 Financial

OTCEI èOver the Counter Exchange of India èEstablished in 1990 èOn the lines of NASDAQ of US èAn exchange for Small & Medium Size Cos. èRing less, electronic trading through telephone lines and fax messages etc. , èCompulsory Market Making Lokanandha Reddy Irala 49 Financial

Financial Markets Thank You Questions? Lokanandha Reddy Irala 50 Financial