UNIT IV SECURITY MARKETS Features of capital markets

UNIT – IV SECURITY MARKETS: Features of capital markets. Functioning - capital markets. New issues market, IPO’s, valuation of issues fundamental and technical considerations Role of SEBI. STOCK EXCHANGES: role and importance, Trading procedures in securities, brokers and Jobbers, Impact of certain economic indicators on the stock market.

A PRESENTATION ON IPO, BOOK BUILDING PROCESS, BASIS OF ALLOTMENT

THE NECESSITY FOR AN IPO ¬ ¬ ¬ EXPANSION ACTIVITIES ACQUISITIONS / MERGERS ENTRY INTO NEW BUSINESS AVENUES WORKING CAPITAL REQUIREMENTS TO PROVIDE LIQUIDITY TO THE EXISTING SHAREHOLDERS LISTING OF EXISISTING SHARES

MODES OF RAISING MONEY ¬ INITIAL PUBLIC OFFER ¬ RIGHTS ISSUE ¬ PRIVATE PLACEMENT ¬ PREFERENTIAL ALLOTMENT ¬ ADR/GDR/FCCB ISSUES

THE METHODS OF RAISING MONEY ¬FIXED PRICE METHOD ¬BOOK BUILDING

FIXED PRICE METHOD ¬ THIS IS THE NORMAL WAY OF RAISING FUNDS THROUGH PUBLIC ISSUE ¬ THE SHARES OF THE COMPANY ARE EVALUATED MUCH BEFORE THE IPO AND THE SHARES ARE OFFERRED AT THE PRE-FIXED PRICE ¬ TIME TAKEN IS LONGER THAN THE BOOK BUILDING PROCESS

WHAT IS BOOK BUILDING? ¬ IT IS A PROCESS WHEREIN THE INVESTORS DETERMINE THE PRICE OF THE SHARES ¬ OPTION IS GIVEN TO INVESTORS TO SUBSCRIBE AT THE FLOOR PRICE OR ABOVE AT THEIR DISCRETION ¬ IT IS A PROCESS USED FOR MARKETING A PUBLIC OFFER OF EQUITY SHARES OF A COMPANY.

FEATURES OF BOOK BUILDING ¬THE ISSUER COMES OUT WITH AN ISSUE WITHOUT FINALISING THE ISSUE PRICE ¬THE FLOOR PRICE AND THE CAP PRICE ARE ANNOUNCED JUST BEFORE THE OPENING OF THE ISSUE ¬THE ISSUER HAS THE LIBERTY TO REVISE THE OFFER PRICE

FEATURES OF BOOK BUILDING ¬ THE ALLOTMENT IS NORMALLY ON PROPORTIONATE BASIS TO THE RETAIL INVESTORS ¬ ABOUT 15% TO RETAIL INVESTORS ¬ 15% TO NON-INSTITUTIONAL BIDDERS and. , ¬ 50% TO QUALIFIED INSTITUTIONAL BIDDERS

FEATURES OF BOOK BUILDING ¬ RETAIL INDIVIDUAL BIDDERS COULD BID AT CUT OFF PRICE IF THE TOTAL VALUE OF SECURITIES APPLIED IS LESS THAN Rs. 1, 000/¬ RETAIL BIDDERS TO PAY THE BID MONEY ALONG WITH APPLICATION ¬ TO REGISTER THE BID THROUGH AN ONLINE TERMINAL OF NSE OR BSE AT AN AUTHRISED BID CENTER

PRICE DISCOVERY ¬ IT IS LARGELY BASED ON THE TOTAL SUBSCRIPTIONS RECEIVED ¬ THE PRICE AT WHICH THE ISSUE GETS SUBSCRIBED ATLEAST ONE TIME ¬ THE BOOK RUNNING LEAD MANAGERS IN CONSULTATION WITH THE ISSUER WOULD DETERMINE THE PRICING OF THE SHARES

THE PROCESS OF BIDDING ¬ THE ISSUER TO APPOINT A BOOK RUNNER (NORMALLY A MERCHANT BANKER) ¬ THE ISSUER ANNOUNCES THE PRICE BAND BID SHARES ¬ THE ISSUER APPOINTS SYNDICATE MEMBERS WITH WHOM THE INVESTORS COULD REGISTER THEIR BIDS

THE PROCESS OF BIDDING ¬ INVESTORS’ BIDS ARE ENTERED INTO THE ELECTRONIC BOOK – THE PROCESS IS CALLED BIDDING (IT IS SIMILAR TO OPEN AUCTION) ¬ BIDS LESS THAN FLOOR PRICE NOT ACCEPTED ¬ BIDS COULD BE REVISED FOR ANY NUMBER OF TIME BEFORE THE ISSUE CLOSES

IPO PROCESSING AND ALLOTMENT ¬ AS PER SEBI REGULATIONS AND OTHER GOVERNING CORPORATE LAWS ¬ RECONCILIATIONS OF AMOUNTS AND NO. OF SHARES APPLIED ¬ ONLY VALID APPLICATIONS ¬ INVERSE WRITING OF THE APPLN. No.

IPO PROCESSING AND ALLOTMENT ¬ PREPARATION OF BASIS OF ALLOTMENT ¬ DRAWAL OF LOTS IN THE PRESENCE OF PUBLIC REPRESENTATIVE APPOINTED BY STOCK EXCHANGE ¬ ALLOTMENT OF SHARES AND NECESSARY CERTIFICATION BY MERCHANT BANKER/BOOK RUNNER

REJECTIONS ¬ APPLICATION BY UNAUTHORISED PERSONS ¬ APPLICATIONS WITH OUT DP ID/CLIENT ID ¬ UNSIGNED APPLICATIONS ¬ INCOMPLETE APPLICATIONS ¬ APPLICATIONS FOR SHARES AT LESS THAN THE FINAL PRICING DETERMINED

KEY FACTORS Escrow Account Red Herring Prospectus Book Building Process Categories of Investors Price Band & Cut-off Price

Bidding Period & Bidding Centers Minimum Lot size Margin Amount Book Building Process Basis of Allotment Revision of Bids

Key Players The Investors The Issuer Book Running Lead Managers Syndicate Members Bidding Centers Escrow Bankers Registrars With the support of The stock exchanges The Depositories The Postal System

Process of Bidding

Process of Allotment

Escrow Account In a book building process, since the margin amount collected is not the application money, the same will be deposited in an escrow account. After the discovery of the price, the money lying in the escrow account is transferred on the designated date either in full or to the extent of the shares proposed to be issued to the public issue account before allotment / allocation of shares by the Board of Directors of the issuer

Red Herring Prospectus In a book building process, the issue price and on some occasions even the quantum of shares proposed to be issued is / are not known. Hence the document prepared to invite / solicit subscription is referred to as Red Herring Prospectus

Categories of Investors Qualified Institutional Investors Non Institutional Investors Retail Individual Investors Employees of promoter companies Existing shareholders of the issuer

Price Band ¬The lower end of the price band is the floor price and the upper end of the price band is the cap price. ¬ The cap price is the price band should not be more than 20% of the floor price. ¬The investors can opt to bid at any of the prices (including the floor price and ceiling price) in multiples of Rs. 1 within the price band. ¬The issuer in consultation with the BRLMs can revise the price band (upward or downward) during the period the bid is open subject to keeping the bidding period open for a minimum of 3 days after the revision.

Cut-off Price Retail individual bidders can bid at “cut off” price. In which case, they need not indicate the price as the specific number and yet become eligible to be considered for allotment irrespective of the issue price finally decided through the price discovery process. They must pay the margin amount calculated at the ceiling price. The other categories of investors (QIBs and non-institutional bidders) are forbidden from applying at cut off price

Minimum Lot Size The minimum lot size of the shares that can be bid shall be determined in such a manner that the amount payable at the floor price and cap price shall be in the range of Rs. 5000 to 7000. Bids should be for the minimum lot size or multiples there of.

Bidding Period The bid shall be open for a period of 5 – 10 days (recently revised to 3 to 7 working days). However, if there is a revision in price band the period shall be extended by three days from the date of revision subject to ensuring that the total period does not exceed 13 days (10 days if the recent guidelines are applicable)

Bidding Centers Bidding centers are essentially broking outfits associated with the Book Running Lead Managers / Syndicate Members. They have on-line connectivity to either or both BSE and NSE. Investors desirous of participating in the bidding process should submit their bid cum application forms to any of the designated bidding centers

Revision of Bids 1. Book building process provides for revision of the “options” 2. Revision is possible both in respect of the quantum of shares and / or the bid price 3. Revision is possible for any number of times before the closure of the issue. 4. Bidders are required to go to the same bidding center where the original bid earlier revision was registered along with the transaction registration slip issued by the bidding center.

Margin Amount The money collected along with the application is referred to as margin amount and need not necessarily be the total amount payable for the option exercised. The syndicate members are generally vested with powers to decide on the quantum / percentage of margin payable along with the bid-cumapplication. However, the current practice is to stipulate 100% margin to retain ad non-institutional investors ad no margin for QIBs.

Basis of Allotment The allotment shall be made on proportionate basis to the investors. The number of shares allotted shall not be less than minimum lot prescribed and thereafter in multiples of one share. Where the shares available for allotment to any category is less than the minimum lot prescribed, on the basis of drawal lots the successful investors in that category shall be identified.

Role of the Bidding Centers ¬ Accept bid-cum-application forms from investors along with cheque/ demand draft ¬ Register bids (for all options) through on-line / off-line terminals ¬ Generate transaction registration slips for each of the options ¬ Lodge bid-cum-applications with an escrow banker and obtain acknowledgement on a daily basis

Timelines Activity Time Days after closure Deposit of application forms from Bidding centres to Escrow Bank 1 T+1 Processing at Banks before despatch to Registrars 3 T+4 Transit time 2 T+6 Processing at Registrars till preparation of basis of allotment 5 T+11 Scrutiny and approval by Stock Exchange 2 T+13 Despatch of refunds and uploading of credits 2 T+15 Total 15

Manpower required Sl No. Activity Man days 1 DEOs @ one for every 200 applications 5000 2 Verification of data entered (check list) 4000 3 Updating correction check list 500 4 Verification of corrections 400 5 Beneficiary account validation 100 6 Reconciliation 100 7 Technical rejections 100 8 Miscellaneous system / admn support 200 9 Supervisors & Managerial work 100

Illustration of Book Building and Price Discovery Process ¬Bidders can bid at any price within the price band ¬For instance, assume a price band of Rs. 20 to Rs. 24 per share, issue size of 3, 000 equity shares and receipt of five bids from bidders, details of which are shown in the table below

The illustrative book as shown below shows the demand for the shares of the company at various prices and is collated from bids from various investors Bid Quantity Bid Price (Rs. ) Cumulative Quantity Subscription 500 24 500 16. 67% 1, 000 23 1, 500 50. 00% 1, 500 22 3, 000 100. 00% 2, 000 21 5, 000 166. 67% 2, 500 20 7, 500 250. 00%

Illustration of Book Building and Price Discovery Process ¬The price discovery is a function of demand at various prices. The highest price at which the issuer is able to issue the desired number of shares is the price at which the book cuts off, i. e. , Rs. 22 in the above example. ¬The issuer, in consultation with the book running lead managers, will finalise the issue price at or below such cut off price, i. e. , at or below Rs. 22.

Stock Exchanges p p p Secondary market is a market for secondary sale of securities. In other words, securities, which have already passed through the new issue market, are traded in this market. Generally such securities are quoted in the stock exchange and it provided a continuous and regular market for buying and selling of securities.

origin p p p The origin of the stock market in India goes back to the end of the 18 th century when long-term negotiable securities were first issued. But the real beginning occurred in the middle of the 19 th century after enactment of the companies act in 1850, which introduced the feature of the limited liabilities and generated investor interest in the corporate securities. NATIVE SHARE AND STOCK BROKERS ASSOCIATIONS at BOMBAY in 1875, which is at present called BOMBAY STOCK EXCHANGE was formed.

STOCK EXCHANGES IN INDIA There are 20 Recognized stock exchanges under the securities contracts (regulation) act, 1956. p And 1 OTCEI p And 1 NSE Currently under the supervision of SEBI p This market consists of all stock exchanges recognized by the government of India. p p p The stock exchanges in India are regulated under the securities contracts (Regulations) Act, 1956. The Bombay stock exchange is the principal stock exchange in India, which sets the tone of the other stock markets.

Key stock exchanges p AHAMADABAD STOCK EXCHANGE 1894 p CULCUTTA STOCK EXCHANGE 1908 p MADRAS STOCK EXCHANGE 1937 p BANGALORE STOCK EXCHANGE

Bombay Stock Exchange Limited (BSE) p Bombay Stock Exchange Limited (BSE) which was founded in 1875 with six brokers has now grown into a giant institution with over 874 registered Broker-Members spread over 380 cities across the country. p Today, BSE's Wide Area Network (WAN) connecting over 8000 BSE Online Trading (BOLT) System Trader Work Stations (TWS) is one of the largest of its kind in the country.

List of India indices current value, Previous value and % change. On 7 -feb 08 Name Current Previous Close % Change SENSEX 17301. 8 17, 526. 93 -1. 28 BSE_100 9210. 58 9, 381. 13 -1. 82 BSE_200 2174. 37 2, 217. 44 -1. 94 BSE_500 6976. 63 7, 126. 87 -2. 11 BSE_IT 3850. 92 3, 705. 30 3. 93 BSE_FMCG 2127. 45 2, 125. 37 0. 10 BSE_CG 15675. 5 16, 120. 62 -2. 76 BSE_CD 4679. 71 4, 893. 78 -4. 37 BSE_H 3609. 83 3, 639. 95 -0. 83 BSE_PS 8164. 45 8, 350. 80 -2. 23 BSE_TECK 3346. 54 3, 296. 01 1. 53 BANKEX 10036. 6 10, 384. 77 -3. 35 AUTO 4707. 33 4, 783. 80 -1. 60 METAL 14990. 62 15, 528. 84 -3. 47 OIL &GAS 10547. 48 10, 668. 66 -1. 14 MIDCAP 7537. 92 7, 781. 12 -3. 13 SMLCAP 9839. 8 10, 202. 63 -3. 56 DOL 30 3592. 5 3, 638. 79 -1. 27 DOL 100 2409. 79 2, 454. 11 -1. 81 DOL 200 915. 55 933. 57 -1. 93 9599. 02 10, 030. 33 -4. 30 3688. 1 3, 782. 74 -2. 50 BSE REALTY BSE Power

NATIONAL STOCK EXCHANGE p The National Stock Exchange of India Limited has genesis in the report of the High Powered Study Group on Establishment of New Stock Exchanges, which recommended promotion of a National Stock Exchange by financial institutions (FIs) to provide access to investors from all across the country on an equal footing. p Based on the recommendations, NSE was promoted by leading Financial Institutions at the behest of the Government of India and was incorporated in November 1992 as a tax-paying company unlike other stock exchanges in the country. p On its recognition as a stock exchange under the Securities Contracts (Regulation) Act, 1956 in April 1993, NSE commenced operations in the Wholesale Debt Market (WDM) segment in June 1994. The Capital Market (Equities) segment commenced operations in November 1994 and operations in Derivatives segment commenced in June 2000.

NATIONAL STOCK EXCHANGE List of India indices current value, Previous value and % change. Live Indices Name Current Previous Close % Change Bank Nifty 8694. 95 8960. 45 -2. 96 CNX 100 4941. 85 5022. 25 -1. 60 S&P CNX 500 4264. 80 4354. 20 -2. 05 S&P CNX Defty 4433. 60 4497. 65 -1. 42 CNX IT 3972. 35 3846. 25 3. 28 CNX Midcap 7068. 35 7282. 05 -2. 93 NIFTY (S&P CNX) 5067. 00 5133. 25 -1. 29 CNX Nifty Junior 9622. 10 9968. 15 -3. 47

INTERNATIONAL STOCK MARKETS p p p In United Kingdom, dealings in stocks and share began with the merchant ventures in the 17 th century. Gradually informed market developed around the coffee houses in the city of LONDON. In 1773 new Jonathans coffee houses became the stock exchange though it was not formally constituted until 1802, with some 550 subscribers and 100 clerks. Earlier to this also there were share dealings on the AMSTERDAN STOCK EXCHANGE as early as 1602. In the 19 th century global co-operation has shown its inevitable influence on the securities trade with the establishment of international federation of stock exchanges.

Major stock exchanges in the world.

Asian Stock Exchanges p p p p Sydney Futures Exchange, Australian Stock Exchanges, Australia Shenzhen Stock Exchange, China Stock Exchange of Hong Kong, Hong Kong Futures Exchange, Hong Kong National Stock Exchange of India, India Bombay Stock Exchange, India Jakarta Stock Exchange, Indonesia NET Exchange, Indonesia Nagoya Stock Exchange, Japan Osaka Securities Exchange, Japan Tokyo Grain Exchange, Japan Tokyo International Financial Futures Exchange (TIFFE), Japan Tokyo Stock Exchange, Japan Korea Stock Exchange, Korea Kuala Lumpur Stock Exchange, Malaysia

European Stock Exchanges p p p p Vienna Stock Exchange, Austria EASDAQ, Belgium Zagreb Stock Exchange, Croatia Prague Stock Exchange, Czech Republic Copenhagen Stock Exchange, Denmark Helsinki Stock Exchange, Finland Paris Stock Exchange, France Les. Echos: 30 -minute delayed prices, France Nouveau. Marche, France MATIF, France Frankfurt Stock Exchange, Germany Athens Stock Exchange, Greece Budapest Stock Exchange, Hungary

p p p p p Italian Stock Exchange, Italy National Stock Exchange of Lithuania, Lithuania Macedonian Stock Exchange, Macedonia Amsterdam Stock Exchange, The Netherlands Oslo Stock Exchange, Norway Warsaw Stock-Exchange, Poland Lisbon Stock Exchange, Portugal Bucharest Stock Exchange, Romania Russian Securities Market News, Russia

American Stock Exchanges p p p p p Alberta Stock Exchange, Canada Montreal Stock Exchange, Canada Toronto Stock Exchange, Canada Vancouver Stock Exchange, Canada Winnipeg Stock Exchange, Canada Canadian Stock Market Reports, Canada Stockwatch, Canada Mexican Stock Exchange, Mexico AMEX, United States New York Stock Exchange (NYSE), United States NASDAQ, United States The Arizona Stock Exchange, United States Chicago Board Options Exchange, United States Chicago Board of Trade, United States Chicago Mercantile Exchange, United States Kansas City Board of Trade, United States Minneapolis Grain Exchange, United States Pacific Stock Exchange, United States Philadelphia Stock Exchange, United States

Major index of the world List of Global indices from various countries with index value, net change and % change. World Indices Country Nasdaq Net Change % Change Date Index United States 08 -Feb 08 2, 293. 03 14. 28 0. 63 DJIA United States 08 -Feb 08 12, 247. 0 0 46. 90 0. 38 S&P 500 United States 08 -Feb 08 1, 336. 91 10. 46 0. 79 Hang Seng Hong Kong 06 -Feb 08 23, 469. 4 6 -1, 339. 24 -5. 40 Nikkei 225 Japan 08 -Feb 08 13, 017. 2 4 -189. 91 -1. 44 Straits Times Singapore 06 -Feb 08 2, 931. 97 -106. 45 -3. 50 1, 696. 57 6. 44 0. 38 Seoul South Korea 05 -Feb-

How does the Stock Market/ Exchange work? p The stock market might seem mysterious, but the inner workings of the market are no big secret. p Have you ever attended an auction? When you buy an object at auction, you aren't buying from the auctioneer. p It's the auctioneer's job to match buyers with sellers, and to get the best price possible for the seller. p Since there's no fixed price for any auction item, the selling price is set by the amount that a buyer is willing to pay. p The stock market works in similar fashion. It's an auction-based market, and a stockbroker is an intermediary who serves to match buyers and sellers of stocks.

DEMAT p p De – Materalisation of shares It is an account facility offered by a depository participant Compulsory for trading It is like your savings bank account, where shares are deposited and withdrawn

How a stock's price is set? p p Rule of Demand Supply The price of a stock trade depends upon how little the seller will accept and how much the buyer is willing to pay. So what are all those prices you see in the stock tables in the newspaper? The prices you see are the prices of the trades of the prior day. You can also find the best price that buyers will pay for a share at the current time, as well as the best price that sellers will accept. If you're buying, the price you pay for shares may be worse or it might be better than the most recent quoted price -- by a little or a lot.

What is electronic trading? p p Brokers can trade from their offices, using fully automated screen-based processes. Electronic trading eliminates the need for physical trading floors. Their workstations are connected to a Stock Exchange's central computer via satellite using Very Small Aperture Terminus (VSATs). The orders placed by brokers reach the Exchange's central computer and are matched electronically.

How many Exchanges are there in India? The Stock Exchange, Mumbai (BSE) and the National Stock Exchange (NSE) are the country's two leading Exchanges. p There are 20 other regional Exchanges, connected via the Inter-Connected Stock Exchange (ICSE). p The BSE and NSE allow nationwide trading via their VSAT systems. p

What is an Index? p p p An Index is a comprehensive measure of market trends, intended for investors who are concerned with general stock market price movements. An Index comprises stocks that have large liquidity and market capitalization. Each stock is given a weightage in the Index equivalent to its market capitalization. At the NSE, the capitalization of NIFTY (fifty selected stocks) is taken as a base capitalization. Similarly, BSE Sensitive Index or Sensex comprises 30 selected stocks. The Index value compares the day's market capitalization vis-àvis base capitalization and indicates how prices in general have moved over a period of time.

NATIONAL STOCK EXCHANGE List of India indices current value, Previous value and % change. Live Indices Name Current Previous Close % Change Bank Nifty 8694. 95 8960. 45 -2. 96 CNX 100 4941. 85 5022. 25 -1. 60 S&P CNX 500 4264. 80 4354. 20 -2. 05 S&P CNX Defty 4433. 60 4497. 65 -1. 42 CNX IT 3972. 35 3846. 25 3. 28 CNX Midcap 7068. 35 7282. 05 -2. 93 NIFTY (S&P CNX) 5067. 00 5133. 25 -1. 29 CNX Nifty Junior 9622. 10 9968. 15 -3. 47

How does one execute an order? p Select a broker of your choice and enter into a brokerclient agreement and fill in the client registration form. p Place your order with your broker preferably in writing. p Get a trade confirmation slip on the day the trade is executed and ask for the contract note at the end of the trade date.

Contract Note p It is a trade document which specifies n n n the number of shares brought, the price, date and time and total Debit or credit to your account. DP ID, DEMAT NO. and terms and conditions of settlement and disputes juridiction. p It is mandatory that DPs has to provide such document as per the SEBI rules. p It is generated immediately after the days trading hours.

Why does one need a broker? p As per SEBI (Securities and Exchange Board of India. ) regulations, only registered members can operate in the stock market. p One can trade by executing a deal only through a registered broker of a recognized Stock Exchange or through a SEBI-registered subbroker.

What is a contract note? p p A contract note describes the rate, date, time at which the trade was transacted and the brokerage rate. A contract note issued in the prescribed format establishes a legally enforceable relationship between the client and the member in respect of trades stated in the contract note. These are made in duplicate and the member and the client both keep a copy each. A client should receive the contract note within 24 hours of the executed trade. Sample contract note

What is a book-closure/record date? p p Book closure and record date help a company determine exactly the shareholders of a company as on a given date. Book closure refers to the closing of register of the names or investors in the records of a company. Companies announce book closure dates from time to time. The benefits of dividends, bonus issues, rights issue accruing to investors whose name appears on the company's records as on a given date, is known as the record date. An investor might purchase a share-cum-dividend, cum rights or cum bonus and may therefore expect to receive these benefits as the new shareholder.

What is the difference between book closure and record date? p In case of a record date, the company does not close its register of security holders. p Record date is the cut off date for determining the number of registered members who are eligible for the corporate benefits. p In case of book closure, shares cannot be sold on an Exchange bearing a date on the transfer deed earlier than the book closure. This does not hold good for the record date.

What is a no-delivery period? p p Whenever a company announces a book closure or record date, the Exchange sets up a no-delivery (ND) period for that security. During this period only trading is permitted in the security. However, these trades are settled only after the nodelivery period is over. This is done to ensure that investor's entitlement for the corporate benefit is clearly determined.

What is an ex-dividend date? p The date on or after which a security begins trading without the dividend included in the contract price.

What is an ex-date? p The first day of the no-delivery period is the exdate. If there any corporate benefits such as rights, bonus, dividend announced for which book closure/record date is fixed, the buyer of the shares on or after the ex-date will not be eligible for the benefits.

What is Earnings Per Share? p Earnings Per Share (EPS) is the net profit earned per share of the company. It can be obtained by dividing the Profit after Tax (PAT) by the outstanding equity shares of the company. EPS indicates the profitability of the company in relation to its share capital.

What is a Bonus Issue? p p p While investing in shares the motive is not only capital gains but also a proportionate share of surplus generated from the operations once all other stakeholders have been paid. But the distribution of this surplus to shareholders seldom happens. Instead, this is transferred to the reserves and surplus account. If the reserves and surplus amount becomes large, the company may transfer some amount from the reserves account to the share capital account by a mere book entry. This is done by increasing the number of shares outstanding and every shareholder is given bonus shares in a ratio called the bonus ratio and such an issue is called bonus issue. If the bonus ratio is 1: 2, it means that for every two shares held, the shareholder is entitled to one extra share. So if a shareholder holds two shares, post bonus he will hold three. However, one should note that the price of the share may adjust downwards once it becomes ex-bonus.

What is a Split? p p p A Split is book entry wherein the face value of the share is altered to create a greater number of shares outstanding without calling for fresh capital or altering the share capital account. For example, if a company announces a two-way split, it means that a share of the face value of Rs 10 is split into two shares of face value of Rs 5 each and a person holding one share now holds two shares. This may also result in the price of the stock adjusting downwards ex -split.

Old FV 10 New FV 2 Year : 2008 Split Date 25 -02 -2008 GBN Triton Corp 10 2 2 1 21 -02 -2008 18 -02 -2008 Kulkarni Power Phoenix Mills 10 5 14 -02 -2008 10 2 13 -02 -2008 GVK Power Sanwaria 10 1 08 -02 -2008 2 1 04 -02 -2008 Company Walchan dnagar

What is a Buy Back? p p As the name suggests, it is a process by which a company can buy back its shares from shareholders. A company may buy back its shares in various ways: from existing shareholders on a proportionate basis; n n through a tender offer from open market; through a book-building process; from the Stock Exchange; or from odd lot holders. A company cannot buy back through negotiated deals on or off the Stock Exchange, through spot transactions or through any private arrangement. Clearing and Settlement? .

What is an auction? p p An auction is conducted for those securities that members fail to deliver/short deliver during pay-in. Three factors primarily give rise to an auction: n n n short deliveries, un-rectified bad deliveries, un-rectified company objections

Is there a separate market for auctions? p The buy/sell auction for a capital market security is managed through the auction market. As opposed to the normal market where trade matching is an on-going process, the trade matching process for auction starts after the auction period is over.

What is bad delivery? p SEBI has formulated uniform guidelines for good and bad delivery of documents. Bad delivery may pertain to a transfer deed being torn, mutilated, overwritten, defaced, or if there are spelling mistakes in the name of the company or the transfer. Bad delivery exists only when shares are transferred physically. In "Demat" bad delivery does not exist.

What happens if the shares are not bought in the auction? p p If the shares are not bought at the auction i. e. if the shares are not offered for sale, the Exchange squares up the transaction as per SEBI guidelines. The transaction is squared up at the highest price from the relevant trading period till the auction day or at 20 per cent above the last available Closing price whichever is higher. The pay-in and pay-out of funds for auction square up is held along with the pay-out for the relevant auction.

What is Book Value? p p Book Value is also called as Net Asset Value per share. It indicates the assets backing per share of the company. The ratio can be computed as follows: Book Value = Paid-up Equity Capital + Reserves & Surplus - Fictitious Assets -----------------------------------Number of Equity Shares Outstanding Book Value can be regarded as the liquidation value of the share. In case the company is liquidated immediately, the book value is the amount likely to be available per share (unless all the assets and liabilities are not stated at their realizable value in the balance sheet - which is often the case.

What is a settlement cycle? p The accounting period for the securities traded on the Exchange. n n On the NSE, the cycle begins on Wednesday and ends on the following Tuesday, and on the BSE the cycle commences on Monday and ends on Friday. At the end of this period, the obligations of each broker are calculated and the brokers settle their respective obligations as per the rules, bye-laws and regulations of the Clearing Corporation. If a transaction is entered on the first day of the settlement, the same will be settled on the eighth working day excluding the day of transaction. However, if the same is done on the last day of the settlement, it will be settled on the fourth working day excluding the day of transaction.

What is a rolling settlement? p p The rolling settlement ensures that each day's trade is settled by keeping a fixed gap of a specified number of working days between a trade and its settlement. At present, this gap is five working days after the trading day. The waiting period is uniform for all trades. p When does one deliver the shares and pay the money to broker? p As a seller, in order to ensure smooth settlement you should deliver the shares to your broker immediately after getting the contract note for sale but in any case before the pay-in day. Similarly, as a buyer, one should pay immediately on the receipt of the contract note for purchase but in any case before the pay-in day.

What is short selling? p Short selling is a legitimate trading strategy. It is a sale of a security that the seller does not own, or any sale that is completed by the delivery of a security borrowed by the seller. Short sellers take the risk that they will be able to buy the stock at a more favourable price than the price at which they "sold short. "

Membership rules p Introduction: The rising demand of stock broking is in turn increasing the demand for trained professionals who can meet the requirements of the investors. Qualifications: The minimum qualification required to be a stock broker is a graduation with at least 2 years of experience in a stock broking firm. A sub-broker, the previous stage of being a broker needs to have passed the XIIth standard to be eligible for his job. p The p n n courses on stock broking in India are - Post-graduate membership course in capital market and financial services. One-year Post-Graduate Diploma in fundamentals of capital market development. Certificate Courses Chartered Financial Analyst Equity Research

Major Institutes offering Courses on Stock Broking n n n n Bombay Stock Exchange's BSE Training Institute, Mumbai Institute of Capital Market Development, 1965 Arya Samaj Road, Karol Bagh, New Delhi - 05 All India Centre for Capital market Studies, J. D. C Bytce Institute of Management Studies and Research, Nashik 05 Institute of Company Secretaries of India, New Delhi Institute of Financial and Investment Planning, B/303, Ventex Vikas, M. V. Road, Andheri(E) Mumbai 69 Institute of Chartered Financial Analysts of India (ICFAI), Road No. 3, Banjara Hills, Hyderabad 34 The Orion Institute of Capital Market, S- 11, Adarshini Plaza, 91, Adchini, Aurobindo Marg, New Delhi The UTI Insitute of capital Market, Plot 82, Sector - 17, Vashi, Navi Mumbai 400 705

After completing the course p p p one has to register with the Securities and Exchange Board of India (SEBI) to become a broker. Benefits: Previously no formal course was required to enter into the business of stock broking. But with growing competition the scenario has changed. The courses on stock broking today, equips a person with a prior knowledge of dealing with stocks and the kinds of transactions that takes place in a stock market. This makes him more competent to enter the business.

p Scope in India: Careers in Stock Broking are not frowned upon any more today. Stock Broking is providing youngsters with varied scopes. A person who has done a Stock Broker course can find jobs in the following areas – p Business Houses Stock Broking Firms Investment Banks One can work as a dealer or an analyst (to be an analyst one needs to be be a M. B. A or a C. A) p p p Scope Abroad: Stock Broking provides ample opportunities outside India also. Though the job profile remains the same, i. . e. of a broker, dealer or analyst, the remunerations are higher. Becoming a Stock Broker in NASDAQ obviously implies far greater monetary gains.

Stock Broker p p p A stock broker is a person or a firm that trades on its clients behalf, you tell them what you want to invest in and they will issue the buy or sell order. Some stock brokers also give out financial advice that you a charged for. There are three different types of stock brokers. 1. Full Service Broker - A full-service broker can provide a bunch of services such as investment research advice, tax planning and retirement planning. 2. Discount Broker – A discount broker let’s you buy and sell stocks at a low rate but doesn’t provide any investment advice. 3. Direct-Access Broker- A direct access broker lets you trade directly with the electronic communication networks (ECN’s) so you can trade faster. Active traders such as day traders tend to use Direct Access Brokers

Types of Brokers Commission Broker p Jobber p Floor Broker p Tarawaniwalla p Odd lot dealers p Budliwalla p

Grouping of Shares "A" p "B 1, p “B 2" p "C" p "Z" are from the equities p and "F" is from debt market. . p

'A' Group p 'A' Group is a category where there is a facility for carry forward (Badla) to the next settlement cycle. p These are companies with fairly good growth record in terms of dividend and capital appreciation. p The scrips in this group are classified on the basis of equity capital, market capitalisation, number of years of listing on the exchange, public share holding, floating stock, trading volume etc.

'B 1, B 2' p 'B 1, B 2'Group is a subset of the other listed shares that enjoy higher market capitalizations and liquidity than the rest. p It is categorized on its trading volumes and delivery

'C' group p 'C' group covers the odd lot securities in 'A', 'B 1' & 'B 2' groups p Odd Lot In the stock market shares are generally bought and sold in MARKET LOTS, which are easy to trade. p Any number of shares less than the market lot makes an odd lot. p Odd lots typically arise from BONUS or RIGHTS issues. Apart from the difficulty in buying or selling odd lots, there is another disadvantage: you may have to sell an odd lot at a considerably lower price than that quoted for a market lot. p The government has now advised all listed companies to form a trust to deal in odd lot shares. The trustee will sell shares only of that company, through brokers, and not indulge in independent trading. The company will send the rights and bonus shares of the scrip to the trustee, and when the trustee has consolidated them into marketable lots he will go to a recognized broker dealing in the shares of the company. The holder of the scrip will pay a small service charge and the usual brokerage.

p p 'T'' Also termed as the trade to trade group this category comprises of shares which have to be settled in delivery for all buys and sells and square off of bought and sold positions during the day is not permitted. This is a part of the survelience from the BSE to counter any ackward unwarranted movements in such scrips 'Z' Group category comprises of shares of the companies which does not comply with the rules and regulations of the Stock Exchange and are at times suspended from trading due to the above said reasons The trading cycle for the above scrips is from monday to friday and starting sat(carry forward for A scrips) the settlement by payment of money and delivery of securities in the following week. p 'F' Group represents the debt market segment The trading cycle for scrips under this group starting thursday ending next wednesday and then the settlement by friday. Hope this helps u in ur doubt.

Functions of Stock Exchange p p p p Liquidity and Marketability Safety of funds Long term supply of funds Ensures Flow of capital in the economy Motivation for improved performance Promotion of investments Reflects the Business cycle Platform of new issues.

Bull Markets and Bear Markets p The stock market moves up and down every day, but when movements continue downwards for a period of time the market is referred to as a 'bear market'. p Upward moving markets are 'bull markets'. If a particular stock is doing well, it is said to be bullish. If it is losing value it is bearish. p Bull and Bear are the terms to describe the general conditions of the stock market. These do not refer to short term fluctuations – a bear market is commonly understood as one where prices of key stocks have fallen in price by 20% or more over a period of at least 2 months. p Even during a bear market, however, prices may increase temporarily. Bull markets are the opposite of bear markets – they are indicated by a rise in prices of key stocks over a certain period of time.

Eligibility to be DP p p p p p As per Regulation 19(a) of SEBI (Depositories & Participants) Regulations, following are the categories that are eligible to become DPs: A public financial institution as defined in section 4 A of the Companies Act, 1956 (1 of 1956) A bank included for the time being in the Second Schedule to the Reserve Bank of India Act, 1934 (2 of 1934) A foreign bank operating in India with the approval of Reserve Bank of India A state financial corporation established under the provisions of section 3 of the State Financial Corporations Act, 1951 (63 of 1951) An institution engaged in providing financial services, promoted by any of the institutions mentioned in sub clause (i), (iii), (iv), jointly or severally A custodian of securities who has been granted a certificate of registration by the Board under sub-section (1 A) of section 12 of the Act A clearing corporation or a clearing house of a stock exchange A stock broker who has been granted certificate of registration by the Board under sub-section (1) of section 12 of the Act:

p p p Provided that the stock broker shall have a minimum net worth of rupees 50 lakhs and the aggregate value of the portfolio of securities of the beneficial owners held in dematerialised form in a depository through him shall not exceed 100 times of the net worth of the stock broker. Provided further that if the stock broker seeks to act as a participant in more than one depository , he shall comply with the criteria specified in the first proviso separately for each such depository. A non-banking finance company, having a net worth of not less than rupees fifty lakh Provided that such company shall act as a participant only on behalf of itself and not on behalf of any other person Provided further that a non-banking finance company may act as a participant on behalf of any other person, if it has a networth of Rs. 50 crore in addition to the networth specified by any other authority. A registrar to an issue or share transfer agent who has a minimum net worth of Rs. 50 lakhs and who has been granted a certificate of registration by the board under sub-section (1) of section 12 of the Act.

p p p The Regulations empower NSDL to set its own selection criteria in the Bye Laws. Therefore, the applicants must also adhere to the following admission criteria stated in NSDL Bye Laws: The applicant should have a minimum Networth of Rs. 1 crore. The applicant should not have been convicted in any of the five years immediately preceding the filing of the application in any manner involving misappropriation of funds & securities, theft, embezzlement of funds, fraudulent conversion or forgery. p The applicant should not have been expelled, barred or suspended by SEBI, self regulatory organisation or any stock exchange. p The applicant shall be required to furnish information and details of his business history for a minimum period of three years; provided that the Depository may , if it is satisfied that it would be in the interest of the investors and the applicant is otherwise eligible to become a participant, waive this requirement of three years.