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Securities Analysis

K. J. Somaiya College Of Science And Commerce

Bachelor of Commerce ( Financial Markets )

Semester IV ~ Year 2013 - 2014

S. Y. B. F. M. Students Details
I. Introduction

II. Constitution of SEBI

III. Functions Of SEBI

IV. Powers of SEBI

V. SEBI Guidelines

VI. Registration of Intermediaries

VII. Types of Issue of Shares in Indian Capital Market

VIII. Role of SEBI in Primary and Secondary Market

IX. Reference

The Securities and Exchange Board of India was established on April

12, 1992 in accordance with the provisions of the Securities and
Exchange Board of India Act, 1992.

The Preamble of the Securities and Exchange Board of India describes

the basic functions of the Securities and Exchange Board of India as:

" ..... to protect the interests of investors in securities and to promote

the development of, and to regulate the securities market and for
matters connected therewith or incidental thereto"

The major objective of the SEBI may be summarized as follows:

i. To provide a degree of protection to the investors and safeguard

their rights and to ensure that there is a steady flow of funds in
the market.

ii. To promote fair dealings by the issuer of securities and ensure a

market where they can raise funds at a relatively low cost.

iii. To regulate and develop a code of conduct for the financial

intermediaries and to make them competitive and professional.

iv. To provide for the matters connecting with or incidental to the

Constitution Of SEBI

The Central Government has constituted a Board by the name of SEBI

under Section 3 of SEBI Act. The head office of SEBI is in Mumbai.
SEBI may establish offices at other places in India.

SEBI consists of the following members, namely:

i. a Chairman;

ii. two members from amongst the officials of the Ministry of the
Central Government dealing with Finance and administration of
Companies Act, 1956;

iii. one member from amongst the officials of the Reserve Bank of

iv. five other members of whom at least three -shall be whole time
members to be appointed by the Central Government.
The general superintendence, direction and management of the
affairs of SEBl vests in a Board of Members, which exercises all
powers and do all acts and things which may be exercised or done by

The Chairman also have powers of general superintendence and

direction of the affairs of the Board and may also exercise all powers
and do all acts and things which may be exercised or done by the

The Chairman and members referred to in (a) and (d) above shall be
appointed by the Central Government and the members referred to
in (b) and (c) shall be nominated by the Central Government and the
Reserve Bank respectively.

The Chairman and the other members are from amongst the persons
of ability, integrity and standing who have shown capacity in dealing
with problems relating to securities market or have special
knowledge or experience of law, finance, economics, accountancy,
administration or in any other discipline which, in the opinion of the
Central Government, shall be useful to SEBl.
Functions Of SEBI

SEBl has been obligated to protect the interests of the investors in

securities and to promote and development of, and to regulate the
securities market by such measures as it thinks fit.

The measures referred to therein may provide for :

1. Regulating the business in stock exchanges and any other

securities markets;

2. Registering and regulating the working of stock brokers, sub-

brokers, share transfer agents, bankers to an issue, trustees of
trust deeds, registrars to an issue, merchant bankers,
underwriters, portfolio managers, investment advisers and such
other intermediaries who may be associated with securities
markets in any manner;

3. Registering and regulating .the working of the depositories,

participants, custodians of securities, foreign institutional
investors, credit rating agencies and such other intermediaries
as SEBl may, by notification, specify in this behalf;
4. Registering and regulating the working of venture capital funds and
collective investment schemes including mutual funds;

5. Promoting and regulating self-regulatory organizations;

6. Prohibiting fraudulent and unfair trade practices relating to securities


7. Promoting investors' education and training of intermediaries of

securities markets;

8. Prohibiting insider trading in securities;

9. Regulating substantial acquisition of shares and take-over of


10.Calling for information from, undertaking inspection, conducting

inquiries and audits of the stock exchanges, mutual funds, other
persons associated with the securities market, intermediaries and self-
regulatory organizations in the securities market;
11. Calling for information and record from any bank or any other
authority or board or corporation established or constituted by or
under any Central, State or Provincial Act in respect of any
transaction in securities which is under investigation or inquiry by the

12. Performing such functions and exercising according to Securities

Contracts (Regulation) Act, 1956, as may be delegated to it by the
Central Government;

13. Levying fees or other charges for carrying out the purpose of this

14.Conducting research for the above purposes;

15. Calling from or furnishing to any such agencies, as may be specified

by SEBI, such information as may be considered necessary by it for
the efficient discharge of its functions;

16.Performing such other functions as may be prescribed .

Powers of SEBI

1. SEBI can compel a public company to list its shares in any stock
exchange .

2. SEBI can call for periodic returns from stock exchanges.

3. SEBI has power to appoint any person to make inquiries into the
affairs of the stock exchange.

4. SEBI has power of amending bye-laws related to stock exchange.

5. SEBI has power to call upon the stock exchange or any member of the
stock exchange to furnish the relevant information.
SEBI Guidelines

The Guidelines, 2000 deals with the following areas:

1. Eligibility norms for companies issuing securities,

2. Pricing of securities by companies,

3. Promoters contribution and lock-in requirements,

4. Pre-issue obligations of the merchant bankers,

5. Contents of the prospectus / abridged prospectus letter of offer,

6. Post issue obligation, of merchant bankers,

7. Green shoe option,

8. Guidelines on advertisements,

9. Guidelines for issue of debt instruments,

10.Guidelines for book building process'

11. Guidelines on public offer through stock exchange on-line system,

12. Guidelines for issue of capital by financial institutions,

In order to regulate and control and to provide a code of conduct
for the merchant bankers, other participants of capital market, and
other matters relating to trading of securities, SEBI has issued
several Rules and Regulations. These are related to Bankers to the
issues, Buy back of securities, Collective Investments
Schemes, Delisting of securities, Depositors, Derivatives,
Employee stock options, Foreign Institutional
Investors(FII's), Insider Trading, Lead Manager, Market
Makers, Merchant Bankers, Mutual Funds, Ombudsman,
Portfolio Manager, Registrars and Share Transfer Agents,
Securities Lending Scheme, Sweat Equity, Stock Brokers and
sub-brokers, Takeover Regulations, Transfer of Shares,
Underwriters, unfair Trade Practices, venture capital Funds,
Annual Reports, etc.
Registration of Intermediaries

The intermediaries and persons associated with securities market

shall buy, sell or deal in securities after obtaining a certificate of
registration from SEBI, as required by Section 12 :

1. Stock-broker,

2. Sub- broker,

3. Share transfer agent,

4. Banker to an issue,

5. Trustee of trust deed,

6. Registrar to an issue,

7. Merchant banker,

8. Underwriter,

9. Portfolio manager,
10. Investment adviser

11. Depository,

12. Participant

13.Custodian of securities,

14. Foreign institutional investor,

15. Credit rating agency,

16. Collective investment schemes,

17. Venture capital funds,

18. Mutual fund, and

19. Any other intermediary associated with the securities

Types of Issue of Shares in
Indian Capital Market

Under the Securities and Exchange Board of India ( SEBI ) :

Guidelines, the securities can be offered for sale in the primary market
in different ways. Each method of issue has got its procedure and
mechanism. The methods of issues of securities are:

1. Public Issue through Prospectus

This method is the most common and popular method of issue of

securities. The securities are offered to the investors through a
detailed statement of terms and conditions known as prospectus. The
prospectus is also known as the offer document. The contents of a
prospectus are as per the requirements given in the Chapter VI of the
SEBI Guidelines, 2000. These requirements are in respect of Name of
the Company; Board of Directors; Existing and Proposed activities of
the issuer; Authorized, Issued and Paid-up Capital; Names of the
Merchant Bankers, Lead Manager, Advisors, Registrar, Bankers,
Underwriters; Minimum Subscription; Different Disclaimer Clauses;
Terms of the Present Issue: Utilization of Issue Proceeds; Analysis of
Financial Conditions and Result of Operations; Financial Information
of Group Companies; Issues Price and basis for that; Risk Factors;
Other general and financial information. The issue by prospectus
method is adopted when the company wants to issue fixed number of
securities at a fixed price (which may be equal to, less than or more
than the face value). The application forms together with the copy of
prospectus are distributed among the public investors who offer to the
company to buy a specific number of securities. In case of over-
subscription, the securities are allotted to the investors, in
consultation with the stock exchange where the securities are
proposed to be listed.

One of the shortcomings of this method is that it is an expensive

method. High cost of advertisement, flotation) brokerage and
underwriting are involved. In order to save the high cost of issue by
prospectus, the companies are allowed to issue the securities through
an abridged prospectus also. The contents of the abridged prospectus
are less than the regular prospectus.
2. Offer for Sale

In certain cases, the companies do not offer the securities directly to

the investors. Instead, the securities are issued to an issue house or a
merchant banker who will subsequently offer the securities for sale
to the investors. Sometimes, the existing shareholder(s) (a holding
company or a foreign parent company) may offer to offload their
holding to the investors. The difference between the issue price by
the company and the offer price by the issue house is the gain to the
latter. Disinvestment of shares in PSU by the Government is offer
for sale. Contents of the Letter of Offer for Sale are given in Chapter
VI (Section III) of the SEBI Guidelines, 2000.
3. Issue through Private Placement of Securities

In this case, the issuing company does not offer the securities to
investors in general. Instead, the securities are offered to selected
big institutional clients only. The institutional investors may be
selected in conformity with the merchant banker. The terms and
conditions are agreed between the company and the institutional
buyer. SEBI Guidelines, 2000 are not applicable in case of private
placement, because there is no public offer involved. Unlisted
companies may also adopt this method. Even listed companies may
adopt private placement method for raising of funds through debt
4. Offer through Book-building Process

Public issue of securities through the book-building process is a

relatively new concept for Indian capital market. In case of book-
building, the company decides the funds to be raised. The number
of securities and issue price are decided by the demand and supply
forces. In this case, offers are invited from the public, stating the
price as well as the number of shares, the investors are ready to buy.
On the basis of bids received from the investors, the issue price is
decided by the company. At the price, all the eligible investors are
issued securities. It may be noted that in case of normal public issue,
the issue price of securities is known to the investors in advance. But
in case of book-building, the issue price is decided after the closure
of the book. The order book remains open for a minimum period of
5 days and the securities are issued at the same price under the
placement portion and net offer to public. Companies issuing
securities through book building process declare a price band (price
limit of highest and minimum price) within which the final price is
decided. There are specific guidelines issued by SEBI in respect of
book-building issues. Company issuing securities through book-
building process is required to issue a red herring prospectus.
5. Public Offer through Stock Exchange On-line System

Securities' and Exchange Board of India (SEBI) has also allowed to

offer shares through the on-line systems of stock exchanges. In this
case, the issuing company has to fulfill the general requirements of
public offer as well as some other conditions. The company has to
enter into an agreement with a stock exchange which has an on-line
system. It has to appoint the requisite merchant bankers. The
company shall announce the process of application and allotment,
opening and closing dates of the subscription, etc. The applications
are to be submitted through stock brokers. The brokers enter the
application in the on-line system as a buy order. On the closure of the
issue, the stock exchange and the merchant banker ensure that there
is a fair and proper allotment of shares. The successful applicants may
get the shares in physical form or dematerialized form.
Role of SEBI in Primary and
Secondary Market
Role of SEBI in Primary Market

1. SEBI has provided new guidelines for the issue of prospectus.

The company has to give detailed information about the company in
the prospectus.

2. As per Companies Act, 1956 there is no need of attaching copy of

prospectus along with the share application form. But SEBI has
instructed the company's to attach the abstract stating the important
features of prospectus with the share application form so that the
investors at the time of investment will have brief idea about the
company and its working.

3. SEBI has instructed to State the 'Risk Factors' involved in the' project
for which the shares are issued to the public. For eg :

i. Pending approvals for the necessary authorities till the Issue.

ii. Problems in the supply of material required for the production.

iii.Difficulties in the marketing of the product.

iv. Fluctuations in the demand for the product at domestic level or

international level.

v. Factors which may cause delay in the implementation of project.

4. It is essential for the merchant bankers to register for playing in the
primary market. The merchant bankers manage new issue. SEBI has also
made them responsible for delay in issue of allotment letters or refund.

5. SEBI has instructed to all stock exchanges for demanding deposit of

1% of issued capital from every company which will be refunded only when
no mistake is committed by the company in case of allotment of shares,
refund or listing of shares etc.

6. Investors can report directly to the SEBI in case of any discrepancy.

The grievance redressal rate of the SEBI has been increasing through the

The reasons for the improvement in the rate of investor grievances

redressal in the year under review included effective follow up with
the companies, tightening of the procedure for issuing the No
Objection Certificate for release of the 1% security deposits kept by
the companies with the stock exchanges and periodic meetings held
with the recalcitrant companies. Further, the SEBI also sent reply
paid post cards to those investors whose complaints were pending as
per the SEBI database asking them to confirm whether the resolution
as reported by the companies is correct or not. Based on the
confirmation received, the SEBI updated the Investor Grievances
7. SEBI is also issuing books or printed guidelines to educate the

8. SEBI has introduced "Stock Invest Scheme". It was like an

account payee cheque where investors actually could buy them from
an issuing bank that was participating in a primary market issue. The
money remained in the investors account until the allotments were
made and only then were the investors' accounts debited. Now, this
scheme was put in place to prevent promoters from delaying
allotments or refunds. While that is not the case in the market in the
current scenario, the regulator is hoping that this scheme perhaps
will make the primary market more efficient and transparent.

9. Registration of important institutions like underwriters, Issuer

Banker, Issue manager etc, is essential.

10. The SEBI has reviewed its policy related to the registration of
Investor's Association.
Role of SEBI in Secondary Market

Section 3 of SEBI Act protects the interests of the investors in

securities and also promotes the development of, and regulates, the
securities market and related matters.

1. Market Intermediaries Registration and Supervision department

(MIRSD) of SEBI takes care of Registration, supervision,
compliance monitoring and inspections of all market
intermediaries in respect of all segments of the markets viz.
equity, equity derivatives, debt and debt related derivatives.

2. Market Regulation Department (MRD) of SEBI takes care of

formulation of new policies and supervising the functioning and
operations (except relating to derivatives) of securities
exchanges, their subsidiaries, and market institutions such as
Clearing and settlement organizations and Depositories
(Collectively referred to as 'Market SROs'.)

3. Derivatives and New Products Departments (DNPD) of SEBI

Supervises trading at derivatives segments of stock exchanges,
introducing new products to be traded, and consequent policy
4. SEBI has made essential the registration of brokers and sub-

5. One of the key functions of the Board is to supervise and monitor

the activities of the exchanges, clearing houses and the
settlement system, strengthen market infrastructure and ensure
that appropriate risk management systems are in place.

6. Registration of Portfolio managers is necessary as per SEBI

guidelines. A portfolio manager is a body corporate who,
pursuant to a contract or arrangement with a client, advises or
directs or undertakes on behalf of the client (whether as a
discretionary portfolio manager or otherwise), the management
or administration of a portfolio of securities or the funds of the
client. The SEBI has prescribed the qualification, resources and
other infrastructure requirement for portfolio managers. The
portfolio manager is required to have a minimum networth of Rs.
2 crore. The certificate of registration remains valid for three
years. The portfolio manager has to apply for renewal of its
registration certificate to SEBI, 3 months before the expiry of the
validity of the certificate, if it wishes to continue as a registered
portfolio manager.
7. FH registration and investment are mainly governed by SEBI (FH)
Regulations, 1995. FH means an entity established or incorporated
outside India which proposes to make investment in India.
Pension Funds, Mutual Funds, Insurance Companies
/Reinsurance Company, Investment Trusts, Banks are eligible to
get registered as FH.

8. Insider Trading an illegal activity in which persons in a company

having confidential information, such as expansion plans,
financial results, takeover bids, etc., take advantage of such
information to make a profit on the stock exchange by buying or
selling shares. SEBI has made rules to control Insider Trading.

9. SEBI has made rules and regulations to be followed by mutual

funds. The purpose is to maintain effective supervision on their
operations & avoid their unfair & anti- investor activities.
10. SEBI has the following advisory committees to provide advice
and to solve the problems of the investors in both primary and
secondary market.

i. Technical Advisory Committee.

ii. Committee for review of structure of market infrastructure


iii. Members of the Advisory Committee for the SEBI

iv. Investor Protection and Education Fund.

v. Takeover Regulations Advisory Committee.

vi. Primary Market Advisory Committee (PMAC).

vii. Secondary Market Advisory Committee (SMAC).

viii. Mutual Fund Advisory Committee.

ix. Corporate Bonds & Securitization Advisory Committee.

x. Takeover Panel.

xi. SEBI Committee on Disclosures and Accounting Standards


xii. High Powered Advisory Committee on consent orders and

compounding of offences.

xiii. Derivatives Market Review Committee.

xiv. Committee on Infrastructure Funds.

11. In December 1996, the SEBI had taken a policy decision, in
public and trade interest, that grant of recognition to new stock
exchanges. Till today 23 stock exchanges has been set up.

12. Under the SEBI Act, 1992, the SEBI has been empowered to
conduct inspection of stock exchanges. The SEBI has been inspecting
the stock exchanges once every year since 1995-96. During these
inspections, a review of the market operations, organizational
structure and administrative control of the exchange is made to
ascertain whether:

i. The exchange provides a fair, equitable and growing market to


ii. The exchange's organization, systems and practices are in

accordance with the Securities Contracts (Regulation) Act
(SC(R) Act), 1956 and rules framed there under.

iii. The exchange has implemented the directions, guidelines and

instructions issued by the SEBI from time to time.

Based on the observations / suggestions made in the inspection

reports, the exchanges are advised to send a compliance report to
SEBI within one month of the receipt of the inspection report by the
exchange and thereafter quarterly reports indicating the progress
made by them in implementing the suggestions contained in the
inspection report.
The SEBI (Prohibition of Fraudulent and Unfair Trade
Practices relating to the Securities Market) Regulations, 2003.

It enable SEBI to investigate into cases of market manipulation and

fraudulent and unfair trade practices. The regulations specifically
prohibit market manipulation, misleading statements to induce sale
or purchase of securities, unfair trade practices relating to securities.
SEBI can conduct investigation, suo moto or upon information
received by it, by an investigating officer in respect of conduct and
affairs of any person dealing, buying / selling / dealing in securities.
Based on the report of the investigating officer, SEBI can initiate action
for suspension or cancellation of registration of an intermediary.
The term "fraud" has been defined by Regulation 2(1)(c).

Fraud includes any act, expression, omission or concealment committed

whether in a deceitful manner or not by a person or by any other person or
his agent while dealing in securities in order to induce another person with
his connivance or his agent to deal in securities, whether or not there is
any wrongful gain or avoidance of any loss, and shall also include:

a) A knowing misrepresentation of the truth or concealment of material

fact in order that another person may act to his detriment;

b) The .suggestion as to a fact which is not true by one who does, not
believe it to be true;

c) An active concealment of a fact by one having knowledge or belief of the


d) A promise made without any intention of performing it;

e) A representation made in a reckless and careless manner whether it be
true or false;

f) Any such act or omission as any other law specifically declares to be


g) Deceptive behavior by a person depriving another of informed consent

or full participation;

h) A false statement made without reasonable ground for believing to be


i) The act of an issuer of securities giving out misinformation that affects

the market price of the security, resulting in investors being effectively
misled even though they did not rely on the statement itself or anything
derived from it other than the market price.
And "fraudulent" shall be construed accordingly:

Nothing contained in this clause shall apply to any general comments

made in good faith in regard to:

a) The economic policy of the Government;

b) The economic situation of the country;

c) Trends in the securities market;

d) Any other matter of a like nature;

Whether such comments are made in public or in private. The

regulation prohibits :

a) . Dealings in securities in a fraudulent manner,

b) Market manipulation,

c) Misleading statements to induce sale or purchase of

securities, and

d) Unfair trade practice relating to securities.

Prohibition of certain dealings in securities :

" No person shall directly or indirectly"

a) Buy, sell or otherwise deal in securities in a fraudulent manner .

b) Use or employ, in connection with issue, purchase or sale of any

security listed or proposed to be listed in a recognized stock exchange,
any manipulative or deceptive device or contrivance in contravention
of the provisions of the Act or the rules or the regulations made there

c) Employ any device, scheme or artifice to degrade in connection

with dealing in or issue of securities which are listed or proposed to be
listed on a recognized stock exchange.

d) Engage in any act, practice, course of business which operates or

would operate as fraud or deceit upon any person in connection with
any dealing in or issue of securities which are listed or proposed to be
listed on a recognized stock exchange in contravention of the act,
rules and regulations. (Regulation 3).
Prohibition against Manipulative, fraudulent and unfair
trade practices :

Regulation 4 provides that no person shall indulge in a fraudulent or an

unfair trade practice in securities. Further any dealing in securities
shall be deemed to be fraudulent or an unfair trade practice if it
involves fraud and may include all or any of the following:

a. Indulging in an act which creates false or misleading appearance

of trading in the securities market.

b. Dealing in a security not intended to effect transfer of beneficial

ownership but intended to operate only as a device to inflate, depress
or cause fluctuations in the prices of such security for wrongful gains or
avoidance of loss.

c. Advancing or agreeing to advance any money to any person

thereby inducing any other person to offer to buy any security in
any issue only with the intention of securing the minimum
subscription to such issue.

d. Paying, offering or agreeing to pay or offer, directly or

indirectly, to any person any money or money's worth for inducing
such person for dealing in any security with the object of inflating,
depressing, maintaining or causing fluctuation in the price of such

e. Any act or omission amounting to manipulation of the price of

a security.
f. Publishing or causing to publish or reporting or causing to
report by a person dealing in securities any information which is
not true or which he does not believe to be true prior to or in the
course of dealing in securities.

g. Entering into a transaction in securities without intention of

performing it or without intention of change in ownership of such

h. Selling, dealing or pledging of stolen or counterfeit security

whether in physical or dematerialized form.

i. An intermediary promising a certain price in respect of buying

or selling of a security to a client and waiting till a discrepancy
arises in the price of such security and retaining the difference in
prices as profit for himself.

j. An intermediary providing his clients with such information

relating to a security as cannot be verified by the clients before
their dealing in such security.

k. An advertisement that is misleading or that contains

information in a distorted manner and which may influence the
decision of the investors.
l. An intermediary reporting trading transactions to his clients
entered into on their behalf in an inflated manner in order to
increase his commission and brokerage.

m. An intermediary not disclosing to his client transactions entered

into on his behalf including taking an option position.

n. Circular transactions in respect of a security entered into between

intermediaries in order to increase commission to provide a false
appearance of trading in such security or to inflate, depress or cause
fluctuations in the price of such security.

o. Encouraging the clients by an intermediary to deal in securities

solely with the object of enhancing his brokerage or commission.

p. An intermediary predating or otherwise falsifying records such as

contract notes.

q. An intermediary buying or selling securities in advance of a

substantial client order or whereby a futures or option position is
taken about an impending transaction in the same or related futures
or options contract.

r. Planting false or misleading news which may induce sale or

purchase of securities.

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