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Mr. Mohd. Arif Sunayana gupta

MBA-CM(3rd sem)

Roll no. 42

Date
Security market
According to Dr. V A Avadhani, Securities markets are markets in
financial assets or instruments and these are represented as I.O.Us (I
owe you) in financial form. These are issued by business
organizations, corporate units and the Governments, Central
or State. Public sector undertakings also issue these securities. These
securities are used to finance their investment and current
expenditure. These are thus sources of funds to
the issuers. There are different types of business organizations in
India, namely, partnership firms, cooperative societies, private and
public limited companies and joint and public sector, organizations etc.
the more frequently organized method is the company, registered
under the Indian Companies Act 1956. Under this Act, there are three
types of companies: (a) companies limited by guarantee; (b)
companies which are private limited companies –limited by shares
paid up; and (c) companies private limited companies can have 50
members and their shares are not transferable freely. These
companies reserve the right to refuse any transfer of shares and as
such trading in them is restricted. Due to these inhibitive features,
private limited companies do not have easy access to the securities
markets. Only public limited companies are largely popular as
they can raise funds from the public through the issue of shares. The
methods of raising funds used by the corporate sector are to issue
securities, either ownership instruments or debt instruments.

A Securities market is an exchange where sale and purchase


transactions of securities are conducted on the base of demand and
supply. A well-functioning securities market should be able to provide
timely and accurate information on the past transactions, liquidity, low
transaction costs (internal efficiency) and securities prices that rapidly
adjusted to all available information (external efficiency).
What is securities
Securities are claims on money and are like promissory notes or
I.O.U. Securities are a source of funds for companies, Govt. etc.
There are two types of sources of funds namely internal and external
and securities emerge when funds are raised from external sources.

The external sources of funds of the companies are as follows:

(A) Long-term Funds

(i) Ownership capital –equity and preference capital, and Non-voting


Shares.

(ii) Debt Capital –debentures and long-term borrowings in the form of


deposits from public or credit limits or advances from banks and
financial institutions, etc.

(B) Short-term Funds

(i) Borrowings from banks, and other corporates.

(ii) Trade credits and suppliers‘ credits, etc.

Of the above sources, the most popular are those which are tradable
and transferable. They have a market and their liquidity is ensured, as
in the case of equity shares, preference shares, debentures and
bonds. Of these the ownership instruments, particularly the equity
shares, are generally the most liquid as they are not only tradable
in the securities markets but also enjoy the prospects of capital
appreciation, in addition to dividends. The market for these has thus
grown much faster than for others.

Role of securities market


A securities market has three principal functions to which all others
are subservient:

1. Initially, a securities market is created to help finance


growing, or sometimes new, corporations. A securities market
finances directly when its principals or members invest or lend
their own funds. Because this source of funds is obviously
limited, customers must inevitably be recruited to participate in
financing operations.
2. The second important function of a securities market meshes
with the first. A securities market, while providing industry with
new capital, must simultaneously help investors and lenders to
locate securities which meet their objectives.
3. The third function of a securities market is as crucially
important as the first two, though rarely as appreciated. A
securities market provides liquidity, to varying degrees, for the
securities traded within its domain. Full liquidity would mean
ready saleability or purchasability of any reasonable quantity
of a particular security at or near its latest current market
price. Full liquidity is rarely achieved. All securities contain
degrees of liquidity. American Telephone and Telegraph en-
joys a high degree of liquidity. Most over-the-counter stocks
do not.

FUNCTIONS OF SECURITIES MARKET :


The Securities Market allows people to do more with their savings
than they would otherwise could. It also provides financing that
enables people to do more with their ideas and talents than would
otherwise be possible. The people’s savings are matched with the
best ideas and talents in the economy. Stated formally, the
Securities Market provides a linkage between the savings and the
investment across the entities, time and space. It savings and
channelises them through securities into preferred enterprises.
The Securities Market also provides a market place for purchase and
sale of securities and thereby ensures transferability of securities,
which is the basis for the joint stock enterprise system. The existence
of the Securities Market makes it possible to satisfy simultaneously
the needs of the enterprises for capital and the need of investors for
liquidity.

The liquidity, the market confers and the yield promised or anticipated
on security ownership may be sufficiently great to attract net savings
of income which would otherwise have been consumed. Net savings
may also occur because of other attractive features of security
ownership, e.g. the possibility of capital gain or protection of savings
against inflation.

A developed Securities Market enables all individuals, no matter how


limited their means, to share the increased wealth provided by
competitive private enterprises. The Securities Market allows
individuals who can not carry an activity in its entirety within their
resources to invest whatever is individually possible and preferred in
that activity carried on by an enterprise. Conversely, individuals who
can not begin an enterprise, they can attract enough investment from
others to make a start. In both cases individuals who contribute to the
investment made in the enterprise share the fruits. The Securities
Market, by allowing an individual to diversify risk among many
ventures to offset gains and losses, increases the likelihood of long-
term, overall success.

Conditions
A securities market is a system of interconnection between all
participants (professional and nonprofessional) that provides effective
conditions:

 to attract new capital by means of issuance new security


(securitization of debt)
 to transfer real asset into financial asset
 to invest money for short or long term periods with the aim of
deriving profitability
 commercial function (to derive profit from operation on this
market)
 price determination (demand and supply balancing, the
continuous process of prices movements guarantees to state
correct price for each security so the market corrects mispriced
securities)
 informative function (market provides all participants with market
information about participants and traded instruments)
 regulation function (securities market creates the rules of trade,
contention regulation, priorities determination)
 Transfer of ownership (securities markets transfer existing stocks
and bonds from owners who no longer desire to maintain their
investments to buyers who wish to increase those specific
investments
 Insurance (hedging) of operations though securities market
(options, futures, etc.)

Levels of securities market


There are two level of securities markets:

 Primary Market is the market for new securities issues and is


facilitated by underwriting groups. The companies sell their
securities to the public directly to the investors through the
underwriters (normally investment banks for stock and bond
issuance). When the firm is issuing shares for the very first time,
it is called Initial Public Offering (IPO). New shares issued by
firms whose shares are already trading in the market are called
seasoned or secondary issues. Issuing company receives cash
from the sale and uses it to expand or fund the operations. After
the initial sale, the securities trading will be conducted on the
secondary market.
 Secondary market, also known as the aftermarket, is the
market where the trading of the previous issued securities is
conducted. On a secondary market, an investor buys securities
from another investor instead of the issuer. It is important that
the secondary market provides liquidity and therefore provides
continuous information about the market price of the securities.

Secondary markets are mainly organized in two ways. One is to form


a centralized and organized exchange where all buyers and sellers (or
their representative agents) meet and conduct trading. The more
investors participate in a market, the greater the centralization of that
market, and the more liquid the market. Some examples of this form of
secondary markets are New York Stock Exchange (NYSE) and
American Stock Exchange (AMEX). The other way is Over-the-
counter (OTC) market which a secondary market where securities
are traded directly between two parties. Trading occurs via dealers
who carry inventories of securities and contact each other by
computer, telephone or other electronic network instead of a physical
trading floor. Over-the-counter dealers quote a bid price at which they
would buy, and an ask price at which they would sell. An example of
an over-the-counter securities market is the National Association of
Securities Dealers Automated Quotations System (Nasdaq).

Primary market
Primary market also known as New Issues Market (NIM) is a market
for raising fresh capital in the form of shares and debentures.
Corporate enterprises, which are desirous of raising capital funds
through the issue of securities, approach the primary market. Issues
Exchange financial securities for long-term funds. The primary market
allows for the formation of capital in the country and the accelerated
industrial and economic development.

The primary market is that part of the capital markets that deals with
the issue of new securities. Companies, governments or public sector
institutions can obtain funding through the sale of a new stock or bond
issue. This is typically done through a syndicate of securities dealers.
The process of selling new issues to investors is called underwriting.
In the case of a new stock issue, this sale is a public offering. Dealers
earn a commission that is built into the price of the security offering,
though it can be found in the prospectus. Primary markets create long
term instruments through which corporate entities borrow from capital
market.

Features of primary markets are:

 This is the market for new long term equity capital. The primary
market is the market where the securities are sold for the first
time. Therefore, it is also called the new issue market (NIM).
 In a primary issue, the securities are issued by the company
directly to investors.
 The company receives the money and issues new security
certificates to the investors.
 Primary issues are used by companies for the purpose of setting
up new business or for expanding or modernizing the existing
business.
 The primary market performs the crucial function of facilitating
capital formation in the economy.
 The new issue market does not include certain other sources of
new long term external finance, such as loans from financial
institutions. Borrowers in the new issue market may be raising
capital for converting private capital into public capital; this is
known as "going public."

In Indian capital market, there are two main ways of floating new issues:

(a) Public issues, and

(b) Rights issues.

(a) Public Issues:


The most popular method for floating securities in the New Issue Market is through a legal
document called the “Prospectus”. It is an open invitation to the public to subscribe to the issue
at par or at premium.

(b) Right Issues:


This method of the sale of stock is normally used by existing companies whose shares are
already listed in the Stock Exchange. Right issue represents an invitation to the existing
shareholders to subscribe to a part or the whole of the new issue in a fixed proportion to their
shareholding.

Initial Public Offer (IPO):


IPO or Initial public offer is the first issue of shares by a corporate company to the general
public to raise capital for expansion of its business. IPO is followed by a listing of its shares in
the stock market. The issue of IPO by the Indian companies and the price of share that is fixed is
regulated by SEBI. IPOs may be issued through the “Fixed Price Method” or through the book
Building Procedure.

Private Placement:
An unlisted company which wants to raise equity funds but is not yet prepared to make an IPO
may place privately its equity or equity related instruments with one or more sophisticated
investors such as financial institutions, mutual funds, venture capital funds, banks etc.

The private placements can be made by a company to the investors at any agreed price and
quantity as such private equity issues are not regulated by SEBI. The Securities and Exchange
Board of India (SEBI) has effected several reforms in the New Issue Market. These reforms seek
improved disclosure standards, prudential norms and simplification of issue procedures.

Secondary market
The secondary market, also known as the aftermarket, is the financial market where previously
issued securities and financial instruments such as stock, bonds, options, and futures are bought
and sold. The term "secondary market" is also used to refer to the market for any used goods or
assets, or an alternative use for an existing product or asset where the customer base is the
second market (for example, corn has been traditionally used primarily for food production and
feedstock, but a "second" or "third" market has developed for use in ethanol production). Stock
exchange and over the counter markets.

With primary issuances of securities or financial instruments, or the primary market, investors
purchase these securities directly from issuers such as corporations issuing shares in an IPO or
private placement, or directly from the federal government in the case of treasuries. After the
initial issuance, investors can purchase from other investors in the secondary market.

The secondary market for a variety of assets can vary from loans to stocks, from fragmented to
centralized, and from illiquid to very liquid. The major stock exchanges are the most visible
example of liquid secondary markets - in this case, for stocks of publicly traded companies.
Exchanges such as the New York Stock Exchange, Nasdaq and the American Stock Exchange
provide a centralized, liquid secondary market for the investors who own stocks that trade on
those exchanges. Most bonds and structured products trade “over the counter,” or by phoning the
bond desk of one’s broker-dealer. Loans sometimes trade online using a Loan Exchange.

The Secondary Market of Securities in


India functions through its following two
segments:
(a) Stock Exchange;

(b) Over-the-Counter Market.

Stock Exchange:
Stock Exchange is an organised market for the purchase and sale of second hand listed
industrials and financial {i.e., shares and debentures of corporate companies). Listed securities
are those securities which appear on the approved list of a Stock Exchange. Only listed securities
are traded on the floor of the Stock Exchange. It is to be noted that an organised Stock Exchange
is an ‘auction’ type of market, where the prices of traded securities are settled by open bids and
offers on the floor of the exchange.

In a Stock Exchange, the transactions in stocks can be classified into two types:

(a) Investment transactions; and

(b) Speculative transactions.


Investment Transactions:

An investment transaction in securities is that transaction which is concerned with the purchase
of securities, with a view to investing funds to get an income as annual dividends from these
securities and gain from the sale of these securities. The basic feature of an investment
transaction is that it involves the actual delivery of the security and payment of its full price. An
investment transaction is motivated by the considerations of safety of investment and security of
income.

Speculative Transactions:

The speculative transaction in securities is that transaction which is concerned with the purchase
or sale of securities for the sake of capital appreciation. The basic feature of a speculative
transaction is that the delivery of securities or the payment of the full price are rare.

The speculator neither takes delivery of the securities sold by him; instead he only receives or
pays the difference between the purchase and sale prices, as the case may be. The trading in
securities, without the intention of taking delivery or making payment, is called forward trading.
Under the Securities Contract (Regulation) Act. 1956 forward trading was perfectly legal till it
was suspended in 1969 along with all the regulatory and penal measures.

The suspension of forward trading created a real vacuum in the stock market. The stock brokers
devised the extra-legal badla system to fill up this vacuum. Under this badla system, securities
contract was turned into a carry-forward instrument merely by closing the contract on the 14th
day and replacing it by a new hand-delivery contract between the same buyer and seller in
respect of the same securities.

Thus, only the difference between the ‘contract price’ and the ‘market price’ would change
hands between the buyer and the seller. Badla transactions became the predominant form of
Stock Exchange transactions. Since real transactions involving the transfer of securities became a
microscopic minority, serious problem of excessive speculation developed in the stock market.
In short, the badla system led to excessive speculation and short-selling often amounting to
gambling. The Securities and Exchange Board of India (SEBI) banned the badla system in
December 1993.

There was an increasing demand for the legitimate forward trading to give boost to the stock
market. Since stock market quotations are often considered as the barometers of a country’s
economy, the SEBI and the Government should stimulate stock market. The SEBI, therefore,
reintroduced badla (forward trading) on July 27, 1995. Now, with the introduction of derivatives
in stock market the same purpose is served by the derivatives called futures as the old badla
system.

The Bombay Stock Exchange is one of the 15 recognized Stock Exchanges in India. This Stock
Exchange is popularly known as Dalal Street Stock Market. It handles around three-fourth of the
total trading in securities in India.
Establishment of National Stock
Exchange:
An important step to provide efficient and transparent stock market culminated into the
establishment of National Stock Exchange of India (NSEI) in July 1994. The NSEI opened
membership to 13 cities, including Bombay, the commercial capital of India. The NSEI operates
in its two segments: (i) Wholesale Debt Market (WDM) and (ii) Capital Market (CM): In the
Wholesale Debt Market. Government Securities, Treasury Bills, Public Sector Undertaking
(PSU) bonds, Certificates of Deposits, Commercial Papers and Corporate Debentures are traded
in.

The main participants in this market are banks., financial institutions and large corporate firms.
The RBI has directed banks to use only the NSEI for all transactions in debt securities instead of
using the services of brokers so as to ensure transparent and regulated deals.

In the capital market, segment of NSEI, equities are traded in. In the capital market segment of
NSEI, the number of securities admitted to trading has expanded from 200 to start with to 525 by
December 1994. Thus, the National Stock Exchange of India (NSEI), with its scrip-less trading
system, can be regarded as a milestone in the development of stock market in India.

In short, stock exchanges, as secondary market in industrial securities, furnish an important


mechanism of imparting liquidity in Indian capital market. Of late, SEBI has evolved certain
guidelines of rules and regulations to make stock exchanges to function in accordance with the
principle of safety of the market, transparency and investor protection. The liberalisation,
privatization and globalisation (LPG) of Indian economy has led to the increase in volume of
business in industrial securities in both the New Issue Market and Secondary Market (stock
exchange) of Indian capital market.

Government Securities Market:


The term ‘gilt edged’ means the ‘best quality’. Since Government Securities are of best quality in
the sense of liquidity and zero degree of the risk of default, so these are called gilt-edged
securities. In the Gilt-edged Market, the securities of the Government of India and of the State
Governments are traded in. The securities guaranteed (as to both principal and interest) by the
Government are also traded in this market.

The importance of Government Securities Market, that is, Gilt-edged Market, as a segment of the
capital market, emanates from the fact that this market provides a mechanism for the
management of public debt and open market operations to the Reserve Bank of India (RBI). It is,
therefore, imperative to emphasize that this market has a strong bearing on the formulation of the
fiscal policy of the Government of India and the monetary policy of RBI. The Gilt-edged Market
has two segments: Treasury Bill Market and Government Bond Market.
The Treasury Bill Market is a source of short term funds for the Government. A Treasury Bill is
a promissory note, that is, a liability of the Government of India. The Treasury Bills are of the
maturity period of 91 days, 182 days and 364 days. The RBI sells Treasury Bills on behalf of the
Government of India. It is important to point out that RBI is the chief holder of these bills.
Outside it, commercial banks hold these bills. Thus, the Treasury Bills Market is a captive
market.

The Indian Treasury Bills Market is underdeveloped as compared to U.S.A. and U.K. However,
recently RBI has initiated certain reforms in the Treasury Bill Market to transform its captivity
character to broad-based market character. The RBI reduces its holdings of Treasury Bills by
converting them into dated-Government Securities at market-related interest rates.

The 364 days Treasury Bills are entirely held by the market. The Government of India’s
borrowings from RBI through Treasury Bills to cover budget deficit is called monetisation of
deficit.

The Government Bond Market is a source of long-term funds to the Government of India and
State Governments. The Government bonds are dated securities which are floated to raise
medium and long-term loans in the open market. It is significant to note that it is generally the
institutions, instead of individuals, that are the buyers of Government bonds.

It is due to relatively lower interest rate, long maturity period and face value in high
denominations that the individuals are found to be reluctant to invest their funds in Government
bonds. The institutions like commercial banks, LIC and G1C buy the Government bonds to build
up their asset portfolio.

These institutions invest in Government bonds as they are required by law to invest a certain
minimum proportion of their total funds in these bonds. Left to themselves, they would not like
to buy these bonds owing to low interest rate on them. The RBI, as a manager of public debt,
operates on the supply side of the Government bond market. At the end of the subscription
period, RBI holds the stock of unsold Government bonds and keeps them selling on its own
account.

The Government bond market is a captive market. The RBI is launching a system of primary
dealers for deepening and expanding the Government bond market. The Securities Trading
Corporation of India was set up in 1993-94 to develop the secondary market in Government
securities.

OVER THE COUNTER EXCHANGE OF


INDIA
Over the Counter Exchange of India was started in 1992 after the role
models of NASDAQ (National Association of Securities Dealers
Automated Quotation) and JASDAQ (Japanese Association of
Securities Dealers Automated Quotation). The OTCE! was started
with the objective of providing a market for the smaller companies
that could not afford the listing fees of the large exchanges and did not
fulfill the minimum capital requirement for listing. It aimed at
creating a fully decentralised and transparent market. Over the
counter means trading across the counter in scrips. The counter refers
to the location of the member or dealer of the OTCEI where the deal
or trade takes place. Every counter is treated as a trading floor for the
OTCEI where the investor can buy and sell. The members or dealers
of OTCEI counters are linked to the central OTCEI computer. The
member should have the computer and telecommunication facility.

The promoters
OTCEI is incorporated as a company under sec. 25 of the Indian
Companies Act 1956. As per the registration norms, OTCEI will be
obliged to plough back all its profits and will not be allowed to declare
dividends on its share capital. The promoters are as follows

UTI GIC
ICICI SBI
CAPITAL MARKETS IDBI
IFCI CANBANK FINANCIAL
SERVICES

Players in the OTCEI market


The players on the OTCEI exchange are the members and dealers.
The activities of the members and dealers are:

1.Act as brokers, buy and sell securities according to the instructions


of the investors.
2.Market Makers in securities, they quote the prices at which
members are willing to buy and sell the specified number of securities.
Members can be the public financial institutions, scheduled banks,
mutual funds, SEBI approved merchant bankers, banking subsidiaries,
venture capital funds and other non-banking financial companies with
mini mum net worth of Rs 2.5 crores. Members pay a one time non-
refundable admission fee of Rs 10 lakh and Rs 5 lakh after one year.
The annual subscription fee is Rs 1 lakh.

The dealers are: individuals, partnership firms and corporate entities


with a minimum net worth of Rs 5 lakh. They should have adequate
office space and telecommunication facilities. They have to pay one
time non-refundable admission fee of Rs 2 lakh and annual
subscription fee of Rs 5,000. OTCEI may collect additional security
deposit if it considers necessary, depending upon the business
experience of the applicant.

Scrips to be traded Guidelines are issued


for the companies whose scrips have to
be traded in the OTCEI by the
Government. As per the guidelines

1.The minimum capital requirement for a company to be listed on the


OTCEI is Rs 3 crores and the maximum is Rs 50 crores.

2.For companies with an issued capital of more than Rs 30 lakhs but


less than 300 lakhs, the minimum public offer should be 25 per cent of
the issued capital or 20 lakhs worth of shares in face value, whichever
is higher.

3.Companies with an issued capital of more than Rs.30 Cr seeking to


be listed have to comply with listing requirements and guidelines that
are applicable to such companies in other stock exchanges.