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MODULE III

REGULATION OF INDIAN
CAPITAL MARKETS
Genesis
• Spreading the investment risk and
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access to various source of capital by –
– Investor and
– Issuer of capital
• Price determination – reduce the cost of
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capital
• Volatility
Factors
• Lack of adequate instruments
3 • Inadequate financial disclosure
• Lack of developed secondary market
• Insiders trading menace
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• Price manipulation at new issue


• Abolition of CCI
• Unofficial trading
• Uncontrolled broking
• Lack of institutional support
Regulatory framework
• CIC –Capital Issues Control
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– Inadequate t control capital market
– Changing industrial environment
– Companies Act requirement
• Need of a larger body
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• Acting as unifying force


• Protecting investors and issuer of
capital
SEBI
5 • Securities and Exchange Board
of India
• Set up on April 12, 1988
• Non statutory body
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• To protect the interest of


investor, and
• Promoting and development of
the regulation of securities
market in India
Functions of SEBI
• Regulating stock exchanges
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• Registration and regulation of stock
brokers
• Protecting the interest of investors
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• Regulating the intermediaries


• Regulations of stock markets – both
primary and secondary
• Regulation of other parties to the
capital issue
SEBI Regulations
• Insider trading regulation –
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– Disclosure of books of accounts
– Publishing of price sensitivity
• Regulating portfolio managers
– Registration with SEBI
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– Capital adequacy norms – 50 lakhs


• Disclosure and investor protection
– Par issue – new company
– Draft prospectus – submitted to SEBI
– Free pricing – existing company
Contd..,
– FCDs – no conversion beyond 36 months
– Credit rating – mandatory for Debt issue
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– Debenture issue – mandatory disclosure of
debt ratio, service charges etc
– Reservation – not less than 20% to public
– Compulsory subscription – 20% by
promoters
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• Surveillance of stock exchanges


• Clearing house –
– SE’s to set up clearing house
– Provide trade guarantee
– Transacting through depositories
Regulations before SEBI
• Securities Exchanges Act 1934
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• Bombay Securities Control Act 1926
(BSCC Act)
• Defence of India Rule 1943
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• Capital Issue Control Act 1947 (CIC Act)


• Securities Contracts (Regulations) Rules
1957
Companies Act 1956
• Part I – constitution of CLB
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• Part II – Articles and Memorandum
• Part III – issues of capital activity i.e
capital markets
– Sec 55 – 68 – prospectus and material
information
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– Sec 77 – buy back of shares


• Part IV – share capital & debenture
• Part V – registration charges
• Part VI – general provisions of company
• Part VII – winding up of company
Committee on Regulatory
Framework
• The Malegam committee – 1995
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– Disclosure in prospectus
– Transparent accounting procedure
– Madatory disclosure – tech, mkt etc
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– Promoters group
– Disclosure of stock market data
– Justification for price
– Right issue
– Promoter issue
NIM
• New issue market – primary market
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• Performance of secondary market &
NIM
• Performance of NIM & secondary
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market
Services of NIM
• The transfer – resources
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• Investigative services –
– Technical analysis
– Economic analysis
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– Financial analysis
• Advisory services –
• The guarantee – underwriting
• Distribution – brokers and dealers
NIM vs Secondary market
• Issue of securities
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• Location
• Transfer of securities
• Entry of companies
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• Administration
• Regulation within the company
• Price movement in SE
• Aim
Methods of marketing new issue
• Pure Prospectus Method
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• Exclusive Subscription
• Issue Price
• Underwriting
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Methods of
new issue
General guidelines for New Issue

• New Company- At par


• Existing company- Issue price should
be justified as per Malegam
Committee’s recommendations
– EPS for last 3 years & comparison of pre-
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issue price to earning ratio to the P/E of


the industry
– Latest NAV
– Minimum return on increased net worth to
maintain pre-issue EPS.
• SEBI does not play any role in price
fixation
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Principal steps of a public issue
• Drafting, Printing of prospectus &
application forms
• Salient features of prospectus
• Initiating allotment procedure
• Brokers to the issue
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• Listing the issue


• Publication in news papers
• Allotment of shares
• Underwriters liability

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Private Placement
• A private placement is a direct private
offering of securities to a limited
number of sophisticated investors.
• It is the opposite of a public offering.
• Investors in privately placed securities
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include
– insurance companies,
– pension funds,
– mutual funds.

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Contd..,
• Securities issued as private
placements include debt, equity,
Preference shares.
• Advantages
– Cost effective
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– Time Effective
– Flexible

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Principal steps of private placement
• Terms & conditions - Value of the
instrument, Yield rate, Issue &
redemption details
• Credit rating- Mandatory
• Confidential information memorandum
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• Trustees to the issue ( Banks may be


appointed as trustees to the issue)
• Pre-launching formality
• Pricing of the issue
• Post-issue steps
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Bought out deals (Offer for sale)

• Process by which promoter places


shares with an investment bankers who
in turn offers to the public at a later
date
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• Bought out dealer decides the price


after analysing the viability, gestation
period, Promoters background & future
projections

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Contd..,
• Advantages-
– Quick money,
– Less cost of raising funds,
– Low risk for investors
• Disadvantage-
– Difficult for the promoters to
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project their image


• Steps In case of Offer for Sale
– Agreement with the merchant
banker
– Registration with stock exchange
– Default – Arbitration commitee
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Rights issue
• A rights issue is basically when a company
offers existing shareholders a right to
purchase additional shares of the company
at a given price, which is at a discount to
the prevailing market price of the stock, to
make the offer enticing for the
shareholder and to ensure that the rights
offer is fully subscribed to.
• Shareholder has the option of applying for
additional shares also i.e. over and above
what he is entitled to.
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Contd..,
• Conditions to rights issue
– Must be offered to the existing
shareholders
– Notice must be issued to specify the
number of shares issued
– Minimum of 15 days time must be gives to
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the investors to accept the rights.

• Advantages of a rights issue


– It leads to increased liquidity and
affordability of the stock owing to reduced
stock price and higher equity base.

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Bonus issue
• Issuing of securities to the existing
share holders as bonus
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• It may be issued as a mandatory or


statutory requirement or as voluntary
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act of company
Right issue vs. Bonus issue
• Payment
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• Privilege issue
• Paid up shares
• Minimum subscription
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• Separate account
Book Building
• Book Building is basically a capital
issuance process used in Initial Public
Offer (IPO) which aids price and
demand discovery.
• Its selling of the shares to the public at
an acceptable price through merchant
bankers
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• A book building process may mention the


floor price of the offer. The merchant
banker then records the number of
offers that have been received and the
offer prices along with the name of the
investor who is making the offer
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Contd..,
• The process aims at tapping both
wholesale and retail investors.
• The offer/issue price is then
determined after the bid closing date
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based on certain evaluation criteria.

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Stock option or ESOPS
• It is a voluntary scheme of company to
encourage its employees to participate
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in company
• It can also be offered as an incentive to
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the employees
• Useful to the company whose activity is
dominantly based on the talent of the
employees
SEBI guidelines
• Issue at discount – allowed
31 • Approval of shareholders through
special resolution
• Maximum limit – if more than 1% special
approval in AGM
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• Superintendence – compensation
committee of BOD
• Eligibility – all permanent employees but
not promoters
• Directors report
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