Unit - 1 -Structured Markets (1).pptx presentation

Structured

1. UNIT – 1 Structured Markets 1

2. Books Recommended TextBook : Punithavathy Pandian , Security Analysis and Portfolio Management, Vikas Publishing House, New Delhi, 2010 References: Dr. V.A. Avadhani , Security Analysis and Portfolio Management, Himalaya Publishing House, Mumbai, 2010 2

3. UNIT-I Sock Exchange – Introduction History of BSE, NSE – SCRA,1957 SEBI Act – Guidelines – Functions Emerging role of SEBI Departments and Amendments Dhanuka Committee Report Recent amendments in the Capital market 3

4. Primary and Secondary Markets The universal definition of Market is that ‘A market is a place where buyers and sellers meet and exchange products’. Capital market is a place, where capital of different types is exchanged. Often individuals like you are lenders or suppliers of capital. Companies and various other institutions are borrowers or receivers of capital. At a very broad level, the capital market is divided into: (a) Short-term Capital Market (money market), and (b) Long-term capital market (also, called stock market). Markets are also classified as Primary markets and Secondary markets . Primary market is one in which the company approaches investors to raise capital. They can approach for debt capital or equity capital or combination of both. It is the segment in which new issues are made whereas secondary market is the segment in which outstanding issues are traded. It is for this reason that the Primary Market is also called New Issues Market and the Secondary Market is called Stock Market . In the primary market, new issues may be made in three ways namely, public issue, rights issue and private placement. 4

5. Primary and Secondary Markets 5

6. Primary and Secondary Markets Public Issues involves sale of securities to members of public. Rights issue involves sale of securities to the existing shareholders/debenture holders in proportion to their current holding. Private placement involves selling securities privately to a selected group of investors. In the primary market, equity shares, fully convertible debentures (FCD), partially convertible debentures (PCD), and non-convertible debentures (NCD) are the securities commonly issued by non-government public limited companies. Government companies issue equity shares and bonds. Secondary market is a place where an investor sells to another investor by making use of Information and Communication Technologies (ICT). Since there are large number of sellers and buyers, this market is dynamic. Securities prices change depending on the demand and supply of the securities. Secondary market exists for different types of securities like debt, equity and others. 6

7. Introduction to Sock Exchanges The expression ‘Stock Exchange’, has two words: One is ‘Stock’ which means a part or fraction of the capital of a company, and the other is ‘Exchange’ which means a market for purchasing and selling. Thus, a stock exchange is a market or a place where different types of securities are bought and sold. It not only deals in shares and debentures but also in various other types of securities issued by central, state and local governments as well as institutions like Unit Trust of India, Steel Authority of India, National Thermal Power Corporation, etc. Therefore, it is also called ‘securities market’ or ‘securities exchange’. It is a secondary market of securities because only the securities already issued are allowed to be dealt with on the floor of a stock exchange. 7

8. Definition of a Sock Exchange The Securities Contracts (Regulation) Act, 1956 has defined stock exchange as an ‘association, organisation or body of individuals, whether incorporated or not, established for the purpose of assisting, regulating and controlling business of buying, selling and dealing in Securities’. According to Pyle, ‘security exchanges are market places where securities that have been listed thereon may be bought and sold for either investment or speculation’. K.L. Garg has described the stock exchange as ‘an association of persons engaged in the buying and selling of stocks, bonds and shares for the public on commission and guided by certain rules and usages’. 8

9. Characteristics of Sock Exchanges Stock exchange is an organised market. Securities (shares, debentures, bonds, etc.) issued by central, srate and local governments, municipalities, port trusts, public utility concerns, joint stock companies and public corporations are bought and sold on the floor of a stock exchange. In a stock exchange, transactions take place between members or their authorised agents on behalf of the investors. In a stock exchange all transactions are regulated by the rules and bye -laws of the concerned stock exchange. The fourteen stock exchanges in India function in accordance with the provisions of the Securities Contracts (Regulation) Act, 1956. 9

10. Role of Sock Exchanges Raising capital for businesses: The Stock Exchange gives facilities to companies to raise capital for expansion by selling shares to investors. Mobilizing Savings for Investment: By investing money, more rational allocation of resources for promotion of business activity happens as funds. Otherwise these funds could have been consumed or kept as idle deposits with banks. Facilitating Company Growth: Company’s go for acquisitions by buying shares of other companies. They can thus expand their product lines and increase their market share and assets. Corporate Governance: By having a wide and varied type of owners, companies generally tend to improve on their management standards and efficiency in order to satisfy the demands of the shareholders and comply with more stringent rules for public limited companies imposed by the stock exchanges and the government. Creating Investment Opportunities for Small Investors: People think to invest in shares which are open both for large and small stock investors. Thus, the stock exchange provides opportunity for small investors to have ownership right in the companies. 10

11. Role of Sock Exchanges Facilitates raising capital by the Government: Governments needs money for development projects such as infrastructure projects, water treatment and sewage projects. It can raise money by selling bonds which are then traded in the stock exchanges. Barometer of the economy: Stock exchanges act as barometer of the economy based on the rise and fall of the share prices. Share prices tend to rise or remain stable when companies and economy show positive symptoms of stability and growth. Sifting process: Investors can pick and choose from among different securities and make investment decisions on a sound basis. Mobility of capital: Stock exchanges provide mobility to capital and facilitate sound investment and economic growth. Safeguards to investors: Every stock exchange has its own rules and regulations for the control of operations of the exchange. Only members are allowed to deal in securities and make transactions. As the members have to transact their business strictly according to the rules, the investors’ interests are safeguarded against dishonesty or malpractices 11

12. Constituents of Stock Exchanges The two major stock exchanges in India are: National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE). The constituents of a stock exchange are: 12

13. Constituents of Stock Exchanges Depositories and Depository Participants (DP) When investors hold shares in a company, they should have proof of the ownership. Before the 90’s the shareholders were holding physical share certificates to signify their ownership. However, presently it has been converted to a digital/dematerialization (DEMAT) format. The depositories are the entities that handle the digital ownership of the investors. The two major depositories in our country namely National Securities Depository Limited (NSDL) and Central Depository Services Limited (CDSL). However, we cannot open an account with these depositories directly. We will have to reach out to an agent, also known as Depository Participant (DP) to provide us with an account. The depositories are governed by the Securities Exchange Board of India (SEBI) 13

14. Constituents of Stock Exchanges Broker: Investors cannot directly transact in the stock exchange. They will have to transact through the agents of the stock exchange who are called brokers. An individual, partnership firm, a company, or a bank can perform as a broker in a stock exchange. Further, one broker can provide trading services to investors in multiple stock exchanges. These brokers are registered in the individual stock exchanges and regulated by the SEBI. 14

15. Constituents of Stock Exchanges Clearing house: A clearing corporation (clearing house) is responsible for clearing and settling all transactions including shares and funds executed in the stock market. It also provides a financial guarantee for all transactions executed on the exchange. The major clearing houses in India are: a) India International Clearing Corporation (IFSC) Ltd b) Indian Clearing Corporation Ltd. c) Metropolitan Clearing Corporation of India Ltd. d) Multi Commodity Exchange Clearing Corporation Ltd. e) National Commodity Clearing Ltd. f) National Securities Clearing Corporation Ltd. g) NSE IFSC Clearing Corporation Ltd 15

16. Stock Exchanges – Types of Dealings Basically three types of dealings (contracts) in stock exchanges – Spot, Ready delivery and Forward delivery contracts. Spot delivery contracts: Such contracts are settled on the spot i.e., the delivery and payment are made on the day of the transaction itself or latest by the following day. It is not a common practice now -a- days. Ready delivery contracts: Such contracts are settled within a short period of time. Usually the period allowed is twelve days and the settlement takes place on the following settlement day. No postponement is allowed in case of ready delivery contracts. Forward Delivery Contracts: Such contracts are also due for settlement on the following settlement day but they can be postponed to the next settlement day, if so desired. This facility is provided by the stock exchange only in those scrips which are included in the specified list (List A). Such transactions are meant for speculation where the buyer has no intention to take delivery and make payment. He simply covers it by another transaction and earns or loses the difference in prices. 16

17. Stock Exchanges – Trading and Transactions Securities Trading and Transaction Process 17

18. Stock Exchanges – Trading and Transactions Trade settlement is completed once purchased securities of a listed company are delivered to the buyer and the seller receives the money. India became the second country in the world to start the T+1 settlement cycle in top-listed securities after China . The T+1 cycle means trade-related settlements happen within 24 hours of the actual transactions. Securities and Exchange Board of India ( SEBI ) has recently adopted a roadmap towards making trade settlements instantaneous . Settlements can be done from the range of one day to one hour to instantaneous is the roadmap. The faster settlements are optional and investors can opt out. 18

19. Stock Exchanges – Trading and Transactions 19

20. BSE and NSE . 20

21. History of BSE At present there are 23 stock exchanges recognized under the securities contracts (regulation), Act, 1956. The only stock exchanges operating in the 19th century were those of Mumbai setup in 1875 and Ahmedabad set up in 1894. Bombay Stock Exchange (BSE) is Asia’s first stock exchange. It was established in the year 1875 as “The Native Share and Stock Brokers Association”. Popularly known as BSE, the bourse was established as ‘The Native Share & Stock Brokers' Association’ in 1875. In 2017 BSE become the 1st listed stock exchange of India. It is the oldest one in Asia, even older than the Tokyo Stock Exchange, which was established in 1878. It is a voluntary non-profit making Association of Persons (AOP). It is the first Stock Exchange in the Country to have obtained permanent recognition in 1956 from the Govt. of India under the Securities Contracts Act. It has various indices, and one of the famous indices is the BSE Sensex. 21

22. History of BSE (Continued…) A Governing Board having 20 directors is the apex body, which decides the policies and regulates the affairs of the Exchange. The Governing Board consists of nine elected directors, who are from the broking community (one third of them retire ever year by rotation), three SEBI nominees, six public representatives and an Executive Director & Chief Executive Officer (CEO). BSE is also home to several prominent indices, including the BSE Sensex, which is a benchmark index of the top 30 companies listed on the exchange. As per the latest information from the BSE website, there are 18,143 securities listed on March 31, 2021. BSE operates on an electronic trading platform, similar to NSE, which enables investors to trade securities from anywhere in India through a network of brokers. BSE had said it has became the world's fastest stock exchange clocking a median trade speed of six micro seconds(2015). BSE offers a platform for trading in equities, equity derivatives, debt instruments, currencies, and 41 mutual funds. 22

23. National Stock Exchange (NSE) The National Stock Exchange (NSE) was established in 1992 and is headquartered in Mumbai, India. It is the leading stock exchange in India in terms of market capitalization and trading volumes. It comprises various indices, and one of the famous indices is the Nifty 50 Index. The Nifty 50 Index comprises 50 entities listed on the NSE. As of March 31, 2021, there are 1920 firms listed on the National Stock Exchange. The Nifty 50 index is nothing but an average of the top 50 companies listed on the National Stock Exchange. NSE offers a platform for trading in equities, equity derivatives, debt instruments, currencies, and exchange-traded funds (ETFs). The exchange operates on an electronic trading platform, which enables investors to trade securities from anywhere in India through a network of brokers. 23

24. National Stock Exchange (NSE) NSE has played a significant role in the development of the Indian capital markets, introducing new products and services, and adopting best practices in technology and regulation. NSE has also been instrumental in popularizing equity investments among retail investors in India through initiatives like the National Stock Exchange’s Certification in Financial Markets (NCFM) program, which provides education and training in financial markets. NSE is regulated by the Securities and Exchange Board of India (SEBI), which sets the rules and regulations governing the exchange. The exchange is also a member of the World Federation of Exchanges (WFE), which represents the interests of the global exchange industry 24

25. Securities Contract Regulations Act, 1956 Securities Contracts (Regulation) Act 1956 and the rules made there under, namely in Securities Contracts (Regulation) Rules, 1957 are the main laws governing stock exchanges in India. The preamble to the Securities Contracts (Regulation) Act states that it is “an act to prevent undesirable transactions in securities by regulating the business of dealing therein, by prohibiting options and by providing certain other matters connected therewith”. The Act prohibits the existence of other than recognized stock exchanges and provides the mechanism of recognizing stock exchanges. This Act provides for the direct and indirect control of virtually all aspects of securities trading and the running of the stock exchanges. The Act makes every transaction in securities in any notified State or area illegal and punishable by fine and or imprisonment if it is not entered into between or with members of a recognized stock exchange in the state or area. After it recognizes a stock exchange, the Central Government exerts regulatory control over it. The Central Government retains control over the stock exchange’s bye-laws and its rule amendments. 25

26. Securities Contract Regulations Act, 1956 The Central Government, furthermore, has the power to direct stock exchange to amend its rules; and if it fails to do so, the Government may directly amend such rules. The SCRA grants the Central Government power to supercede governing body of a recognized exchange. The suspension of business may be complete or subject to conditions. The Central Government may supercede the governing body of any exchange by declaration and then appoint any person or group of persons to exercise and perform all the power and duties of the governing body. Other powers granted to the Central Government include the ability to stop further trading in specified securities for the purpose of preventing undesirable speculation, and the power to compel a public company “ in the interest of the trade or in the public interest” to list its securities on any of the recognized exchanges 26

27. SEBI ACT, 1992 The Central Government, furthermore, has the power to direct stock exchange to amend its rules; and if it fails to do so, the Government may directly amend such rules. SEBI Act 1992 is an Act to provide for the establishment of a Board 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. This Act extends to the whole of India. It shall be deemed to have come into force on the 30th day of January, 1992. Based on the SEBI Act 1992, the Central Government established a Board by the name of the Securities and Exchange Board of India(SEBI). The Board shall be a body corporate by the name aforesaid, having perpetual succession and a common seal, with power subject to the provisions of this Act, to acquire, hold and dispose of property, both movable and immovable, and to contract, and shall, by the said name, sue or be sued. The head office of the Board shall be at Bombay. 27

28. Securities and Exchange Board of India (SEBI) The Central Government, furthermore, has the power to direct stock exchange to amend its rules; and if it fails to do so, the Government may directly amend such rules. The management of SEBI vests in the Board which consists of the following members, namely:- a Chairman; two Members from amongst the officials of the Ministries of the Central Government dealing with Finance and Law; one Member from amongst the officials of the Reserve Bank of India Five other members will be nominated by the Union Government of India.. 28

29. Structure of SEBI 29

30. Structure of SEBI SEBI has a corporate framework comprising of various departments each managed by a department head. There are about 20 departments under SEBI. Some of these departments are corporation finance, economic and policy analysis, debt and hybrid securities, enforcement, human resources, investment management, commodity derivatives market regulation, legal affairs, and more.  30

31. Departments of SEBI 31

32. Securities & Exchange Board of India Act of 1992 (SEBI Act) SEBI is provided with statutory powers for: protecting the interests of investors in the securities market; promoting the development of the securities market; regulating the securities market, such as issue and transfer of securities, insider trading, futures and options trading, etc. to protect investors’ interests; promote awareness among investors; training of intermediaries about the safety of the market; k 32

33. Securities & Exchange Board of India Act of 1992 (SEBI Act) SEBI brings out circulars, including master circulars, regulations, rules, etc., from time to time. A few of such regulations are: SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 (ICDR Regulations) SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (LODR Regulations) SEBI (Substantial Acquisition of Shares and Takovers ) Regulations, 2011 (Takeover Regulations) SEBI (Prohibition of Insider Trading) Regulations, 2015 (PIT Regulations) SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Market) Regulations, 2003 (FUTP Regulations) SEBI (Investment Adviser) Regulations, 2013 (IA Regulations) 33

34. Functions of SEBI SEBI plays a dual role by adopting regulatory functions as well as playing an important developmental role . Its functions include :- To deal with all matters relating to development and regulation of the securities market. To administer various legislations affecting securities market. Regulation of the market intermediaries viz : stock exchanges, stock brokers, merchant bankers, mutual funds, etc. To provide adequate investor protection. Since inception, SEBI has issued a number of guidelines, rules, draft regulations, consultative papers, etc., in order to regulate and develop the securities market and protect investors interest. 34

35. Authority and Power of SEBI The SEBI has three main powers:  Quasi-Judicial:  SEBI has the authority to deliver judgements related to fraud and other unethical practices in terms of the securities market. This helps to ensure fairness, transparency, and accountability in the securities market.  Quasi-Executive:  SEBI is empowered to implement the regulations and judgements made and to take legal action against the violators. It is also authorised to inspect Books of accounts and other documents if it comes across any violation of the regulations.  Quasi-Legislative:  SEBI reserves the right to frame rules and regulations to protect the interests of the investors. Some of its regulations consist of insider trading regulations, listing obligations, and disclosure requirements. These have been formulated to keep malpractices at bay.  35

36. Guidelines Issued by SEBI Rules regarding registration of intermediaries such as share transfer agents, bankers to the issue, debenture trustees to the trust deeds, registrars to an issue, underwriters, portfolio managers and investment advisors, stock brokers and sub-brokers associated with the securities market. Guidelines regarding purchase of non-convertible part of debentures ( khokhas ) from the subscribers. Regulation for registrars and share transfer agents Regulation on insider trading Guidelines for mutual funds and asset management companies. Guidelines on issue of securities by Development Financial Institutions. 36

37. Guidelines Issued by SEBI Rules regarding registration of intermediaries such as share transfer agents, bankers to the issue, debenture trustees to the trust deeds, registrars to an issue, underwriters, portfolio managers and investment advisors, stock brokers and sub-brokers associated with the securities market. Guidelines regarding purchase of non-convertible part of debentures ( khokhas ) from the subscribers. Regulation for registrars and share transfer agents Regulation on insider trading Guidelines for mutual funds and asset management companies. Guidelines on issue of securities by Development Financial Institutions. 37

38. Dhanuka Committee Report In 1997, SEBI established a committee under former Justice D.R. Dhanuka to examine areas of deficiency in the SEBI Act 1992, the Depositories Act 1996, and the SCRA Act 1956. Justice Dhanuka Committee report submitted in 1998 exhaustively deals with the amendments which are required in securities laws. Based on that review, the Dhanuka Committee concluded that the number of authorities regulating the Indian securities market should be limited. The committee found that the existence of multiple authorities might create confusion and inconsistent results. The Dhanuka Committee recommended that SEBI become the single regulatory authority. The committee suggested consolidation of the SCRA with the SEBI Act. The Dhanuka Committee also made recommendations on consolidating Indian securities laws. The committee recommended that the SCRA Act and the SEBI Act be consolidated into a single act  38

39. Dhanuka Committee Report Committee constituted by SEBI under the Chairmanship of Justice D.R. Dhanuka , recommended, inter alia, that SEBI should be the regulatory agency for regulating the securities market and in relation to certain provisions of the Companies Act. Some of the recommendations of the Committee have been given effect by suitable amendments through the Securities Laws (Amendment) Act, 1999, Securities Laws (Second Amendment) Act, 1999 and the Companies (Amendment) Act, 2000 39

40. Recent amendments in the Capital market (i) With effect from October 1, 2023, India’s top 100 listed entities (based on market capitalisation ) would have to mandatorily confirm, deny, or clarify market rumours to the stock exchanges, and this requirement extends to the top 250 listed entities with effect from April 1, 2024. The Securities and Exchange Board of India (“SEBI”), by way of notifying amendments to the LODR Regulations on June 14, 2023 (“LODR Amendments ”, Listing Obligations and Disclosure Requirements ), has introduced this mandatory requirement under Regulation 30 read with Schedule III of the LODR Regulations (referred to below as the “Market Rumours Amendment ”). (ii) The Securities and Exchange Board of India (“SEBI”) has recently introduced significant changes to the governance framework for listed companies through an amendment to the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (“LODR Regulations ”). 40

41. Recent amendments in the Capital market The amendments are largely effective from July 14 and broadly seek to enforce higher disclosure and governance standards for listed entities. The changes materially alter key provisions of the LODR Regulations, including the: ( i) disclosure framework, by inter alia introducing objective criteria for determining material events/ information, reducing the timeline for making disclosures and mandating additional disclosures (including in relation to agreements binding listed entities and addressing market rumours ), ( ii) disclosure and approval requirements for special rights granted to shareholders , ( iii) approval requirements for business transfer agreements undertaken outside the scheme of arrangement route, and ( iv) validity of permanent board seats and timelines for filling vacancies of directors and KMPs. 41

42. Recent amendments in the Capital market (iii) In December 2022, SEBI’s Board approved certain amendments to the Securities and Exchange Board of India (Buy-Back of Securities) Regulations, 2018 (the “Existing Regulations”). These amendments were published on February 7, 2023, pursuant to the Securities and Exchange Board of India (Buy-Back of Securities) (Amendment) Regulations, 2023 (“Amendment Regulations and with the Existing Regulations the “Buyback Regulations”). The Amendment Regulations come into force from the 30th day of their publication in the official gazette, i.e. on March 9, 2023. The emphasis of several of the amendments was on simplifying the buyback process, by eliminating certain methods of buyback and reducing overall timelines . (iv) Capital markets regulator Sebi on Tuesday said it has sought public views on the  proposed amendments to the master circulars for REITs (Real Estate Investment Trust) and InvITs (Infrastructure Investment Trusts) . In a consultation paper, Sebi said these amendments will provide clarity on the   nomination rights of directors to the boards of REIT and InvIT managers . 42

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