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INVESTMENTAND

SECURITIESMARKETS IN INDIA

INVESTMENTAND

SECURITIESMARKETS IN INDIA

(Late) Dr. V.A. AvadhaniM.A., Ph.D. (U.S.A.), M.A., L.L.B., C.A.I.I.B.

* Retired Adviser in the Reserve Bank of India* Former Director of Research and Training in Bombay Stock Exchange* Former Adviser in Hyderabad Stock Exchange

ISO 9001:2008 CERTIFIED

First Edition : 1991 Sixth Revised Edition : 2003Second Revised Edition : 1993 Reprint : 2005Third Revised Edition : 1996 Seventh Revised Edition : 2007Fourth Revised Edition : 1998 Eighth Revised Edition : 2008Fifth Revised Edition : 2000 Nineth Revised Edition : 2011Reprint : 2014 Tenth Revised Edition : 2017

© AuthorNo part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by anymeans, electronic, mechanical, photocopying, recording and/or otherwise without the prior written permission ofthe publishers.

Published by : Mrs. Meena Pandey for Himalaya Publishing House Pvt. Ltd.,“Ramdoot”, Dr. Bhalerao Marg, Girgaon, Mumbai - 400 004.Phone: 022-23860170/23863863, Fax: 022-23877178E-mail: [email protected]; Website: www.himpub.com

Branch Offices :

New Delhi : “Pooja Apartments”, 4-B, Murari Lal Street, Ansari Road, Darya Ganj,New Delhi - 110 002. Phone: 011-23270392, 23278631; Fax: 011-23256286

Nagpur : Kundanlal Chandak Industrial Estate, Ghat Road, Nagpur - 440 018.Phone: 0712-2738731, 3296733; Telefax: 0712-2721216

Bengaluru : Plot No. 91-33, 2nd Main Road Seshadripuram, Behind Nataraja Theatre,Bengaluru-560020. Phone: 08041138821, 9379847017, 9379847005

Hyderabad : No. 3-4-184, Lingampally, Besides Raghavendra Swamy Matham, Kachiguda,Hyderabad - 500 027. Phone: 040-27560041, 27550139

Chennai : New-20, Old-59, Thirumalai Pillai Road, T. Nagar, Chennai - 600 017.Mobile: 9380460419

Pune : First Floor, "Laksha" Apartment, No. 527, Mehunpura, Shaniwarpeth(Near Prabhat Theatre), Pune - 411 030. Phone: 020-24496323/24496333;Mobile: 09370579333

Lucknow : House No. 731, Shekhupura Colony, Near B.D. Convent School, Aliganj,Lucknow - 226 022. Phone: 0522-4012353; Mobile: 09307501549

Ahmedabad : 114, “SHAIL”, 1st Floor, Opp. Madhu Sudan House, C.G. Road, Navrang Pura,Ahmedabad - 380 009. Phone: 079-26560126; Mobile: 09377088847

Ernakulam : 39/176 (New No.: 60/251) 1st Floor, Karikkamuri Road, Ernakulam, Kochi – 682011.Phone: 0484-2378012, 2378016; Mobile: 09387122121

Bhubaneswar : 5 Station Square, Bhubaneswar - 751 001 (Odisha).Phone: 0674-2532129, Mobile: 09338746007

Kolkata : 108/4, Beliaghata Main Road, Near ID Hospital, Opp. SBI Bank,Kolkata - 700 010, Phone: 033-32449649, Mobile: 7439040301

DTP by : HPH, Editorial Office, Bhandup

Printed at : Geetanjali Press Pvt. Ltd., Nagpur. On behalf of HPH.

PREFACE TO THE TENTH REVISED EDITION

In the Indian Economy since 2014, when the new Government took over at the Centre, therewas marked change in political and economic conditions. The GDP growth rate was higher ataround 7% to 8%. The inflation rate was kept low at 4% FDI and FFI were encouraged to flow inmore freely. A number of new schemes were initiated via the Make in India in vibrant economy.Public sector banks were allowed to tap the market for additional funds and to consolidate themselvesto make banking sector more strong with lower NPAs and higher lending. The scheme of ‘Makein India’ and other similar schemes were tuned to longer production and higher productivity in themanufacturing and service sectors.

The tenor of monetary policy is to further tighten the interest rate structure but encouragegreater inflow of FDI into banking and insurance and service industries. The policy was made toreduce the liquidity in the banking system and longer productivity.

During the period after 2009, there was however a revival and stock and capital markets sawrecovery, due to strong fundamentals of the corporate sector, expected higher growth rates of GDPand control on inflation in the Eleventh Plan Period. The foreign inflows were also considerablyboosted due to depressed dollar and uncertain prospects of the U.S. economy. The FIIs and FDIflows reached new peaks during 2007-08, due to optimistic expectations of the Indian economy.

It is in the above background that this revision of the book was undertaken. Many chaptershave been drastically changed. The basic structure of the book has been, however, kept in tact.But the usefulness of the book to the students has been enhanced by removing the errors, andbringing the facts and figures up-to-date to the extent possible. This is our constant endeavour tomake this book more popular among the student community. Some repetitions and restatementsare unavoidable to make each chapter self-contained, and are student-friendly.

A separate chapter is added in this edition on the Problems in Hire Purchase and Leasing.This is in addition to case studies and examples in the chapters, where they are needed.

The author acknowledges gratefully the suggestions for improvement. His immense thanks aredue to Himalaya Publishing House Pvt. Ltd. for their constant encouragement and co-operation.

AUTHOR

CONTENTS

PART ISECURITIES MARKETS IN INDIA 1 - 112

1. SECURITIES AND SECURITIES MARKETS 3 - 11Introduction —What are Securities? — Mobilisation of Savings for Investment — IOUsas Securities — Characteristics of Securities — Primary Issues and Derivative Securities— Schematic Presentation of Emergence of Markets

2. LEGAL BASIS OF MARKETS 12 - 26(A) Companies and Their Regulation — New Issues Market — Prospectus — Instrumentsof Issue — Powers and Delegation — Despatch of Share Certificates — Debenture Certificates—Fixed Deposits — Law Regarding Dividends — 1988 — Amendments in Companies Act— (B) Law and Practice Relating to Contracts — What is a Contract? — Brokers’ Contracts— Void Contracts — Rights and Obligations — Time and Place — Penalties for Breach —Agents and Sub Agents —(C) Securities Contracts (Regulation) Act — Objectives —Coverage — Recognised Stock Exchanges — Options in Contracts — Listing of Securitiesby Public Companies — Restrictions on Transferability — (D) Negotiable Instruments Act— Blank Transfers — Giving of Promissory Notes — Negotiation — Presentment —Limitation Act — Compensation — Penalties — (E) Indian Stamp Act

3. INVESTMENT AVENUES 27 - 38Objectives of Investor — Characteristics of Investment — Risk-Return Relationships —Tax Benefits — Marketability and Liquidity — Safety vs. Riskiness — Need for Tradability— Classes of Instruments — Investment Profile of Average Household — Non-CorporateInvestments — Corporate Investments — Deposits with Banks — Instruments of PostOffices — Public Provident Fund — NSS — 10-Year Social Security Certificate — IndiraVikas Patra — Kisan Vikas Patra —Public Sector Bonds — Drought Relief Bonds (ReliefPatra) — Conclusion

4. TAX PLANNING FOR INVESTMENT 39 - 43Taxation of Dividend and Interest Income — Brokerage Income and Business Profits —Tax Treatment on Investments — Income Tax and Corporation Taxes — Capital GainsTaxation — Postal Investments — Wealth Tax — Gift Tax — Taxation of NRIs —Taxation of Investment Business in India — Taxation of FFIs in India

5. INVESTOR PROTECTION 44 - 51Introduction — Complaints against Members — Grievances Cell — Complaints againstCompanies — Customers’ Protection Fund — Investors Beware — Specific Goals — Pre-requisites of Investor — Preparing to Invest — Balance Sheet Study — Choice of a Broker— Protection in the New Issues Market — Protection for Fixed Deposits — Guidelinesto Investors — Legislative Protection to Investors — CRISIL Rating and Investor Protection

6. THE SECURITIES AND EXCHANGE BOARD OF INDIA (SEBI) 52 - 59Introduction — Objectives — SEBI and Free Pricing of Equity Shares — SEBI Powers— SEBI in the New Millennium

7. INSTITUTIONAL STRUCTURE IN CAPITAL MARKET 60 - 73Development and Investment Institutions — UTI & Its Objectives — Activities of UTI— Investment Pattern — Schemes Offered by the UTI — IDBI — Schemes of IDBIAssistance — Sources of Funds — ICICI — IFCI — Functions — I.R.B.I. — Functions— IIBI — Insurance Companies — Life Insurance Corporation (LIC) — General InsuranceCorporation (GIC) — Public Sector Mutual Funds — SFCs/SIDCs — SHCIL (StockHolding Corporation of India Ltd.) — Organisational Structure —Functions — ClearingServices — Depository Services — Support Services — Management Information System— Developmental Services — CRISIL (Credit Rating and Information Services of IndiaLtd.) — ICRA — Factors Considered — Ratings — Advantages — Care — DPCR

8. GROWTH PROCESS — SAVINGS AND INVESTMENT 74 - 81Structure of the Economy — What is Growth Process? — Role of Savings — OtherFactors in Development — Financial Intermediation — Links of Real Economic Systemand Financial System — Savings Rate — Gross and Net Savings — Household Savings— Shifts within Industrial Sector — Lead and Lag Industries — Public Sector Enterprises— Paradox of High Savings and Low Growth — Role of Private Corporate Sector —Conclusions

9. FINANCIAL SYSTEM IN INDIA 82 - 95What Constitutes Financial Activity? — RBI and the Financial System — Money Market— Characteristics — Commercial Paper (C.P.) — Certificate of Deposits (C.D.) —Discount and Finance House — Operations of DFHI — Stock Market —FinancialInstitutions — Savings and Investment — Interest Rate Structure — Primary and SecondaryMarkets — Unorganised Financial System — Bullion Market — Financial Sector Reforms— RBI

10. CAPITAL MARKET REFORMS 96 - 112Introduction — Narasimham Committee — Free Entry to Capital Market — LiberalisationMeasures — New Instruments — SEBI Guidelines — Strengthening of SEBI Powers —Stock Invest — Changes in Listing Guidelines — Guidelines for Takeovers — Relaxationof Some Restrictions — Details for Investor Protection — More Recent Changes in NewIssue Market — Institutional Strengthening — Electronic Trading —Stock Exchange Reforms— Market Makers — BOLT System —Badla Trading — SEBI’s Insider Trading Regulations— Central Depository System — Corporate Membership — Pending Reforms — SEBINorms for Book Building — SEBI Reforms on Stock Exchanges — Takeover Code —Critique of Bhagwati Committee’s Report

PART IIPRIMARY MARKETS IN INDIA 113 - 218

11. CAPITAL ISSUES 115 - 137Objectives — Procedures — Stock Option Scheme — Continuous Changes in SEBI Policy— Market Makers — Role of Capital Issue — Annexure I — A. First Issue of NewCompanies —Clarifications — B. First Issue By Existing Private/Closely Held Companies— Clarification — C. Public Issue by Existing Listed Companies — Clarification — Issueof Shares through OTC Exchange of India (OTC)— D. Underwriting — Clarification —E. Composite Issues — F. Fully Convertible Debentures/Partially Convertible Debentures/Non-Convertible Debentures —Clarification — G. New Financial Instruments — Clarification—H. Reservation in Issues — Clarification — I. Deployment of Issue Proceeds —

Clarification — J. Minimum Interval Time Between Two Issues — Clarification — K.Employee Stock Option Scheme — L. Promoters’ Contribution And Lock In Period —Clarification — M. Bonus Shares — Clarification — N. Guidelines for the Protection ofthe Interest of Debentureholders — 1. Servicing of Debentures — 2. Protection ofDebentureholders’ Interest — Clarification — Clarification — O. General — Clarification— 1. Preferential Allotments in Capital Issues of Companies — (i) Indian Mutual Funds— (ii) Firm Allotment to Financial Institutions — Annexure II — General Conditions forall Debenture Issues — SEBI Guidelines & Clarifications on Disclosure & Investor Protection— General —General Conditions for Public Issue

12. GOVERNMENT REGULATION OF INDUSTRIES 138 - 145Objectives of Industrial Policy — Industries (Development and Regulation) Act, 1951 —Major Provisions — Licensing Policy — Recent Slant in Licensing Policy — Liberalisation— New Industrial Policy — Fiscal and Trade Policies — Sick Industry Policy — BackwardArea Development — Progress Returns — Registration — Policy on Foreign Investmentand Collaboration — Non-resident Investments

13. GOVERNMENT POLICIES AND INDUSTRIAL DEREGULATION 146 - 156Introduction — Industrial Policy — Industrial Licensing —Policies for PSUs — ForeignInvestment — MRTP Control —Nature of Control — Major Policies — Fiscal Policy —Monetary and Credit Policy — Trade Policy — FERA Policy — Facilities for Investmentto NRIs — Latest Reforms in the Economy

14. NEW ISSUES MARKET 157 - 168Definition — Methods of Floatation — Offer Through Prospectus — Offer of Sale —Private Placement — Rights Issue — Debt versus Equity — Rights of Conversion of Debtinto Equity — Preference Shares — Bonus Shares — Cost of Floatation — Magnitudeof Funds — Underwriting Activity — Abuses in the New Issue Market — Problems ofthe New Issue Market — SEBI Regulations on New Issue Market — Other Conditionsfor Listing of Companies — Appointment of Intermediaries

15. MERCHANT BANKING 169 - 182Introduction — What is Merchant Banking? — Issue Management — Other Functions— Offer of Sale — Private Placement —Services of Merchant Banks — Why MerchantBanks? —Functions — Role of Merchant Banks — Underwriting — Type of ExpertiseRequired — Securities and Exchange Board of India (SEBI) — Merchant Banking — Role& Functions — Reports — Annexure

16. VENTURE CAPITAL FUNDS 183 - 189What is Venture Capital? — Venture Projects — Indian Position — Public FinancingAgencies — Private Agencies — Policy Initiatives — Difficulties in India — Tax Treatment— Need for Growth of Venture Capital — Annexure

17. LEASE FINANCING 190 - 198Concept of Leasing — What is Lease? — Finance Lease —Operating Lease — Lease andHire Purchase — Types of Finance Lease — Cash Flow and Lease Finance — Advantagesof Leasing — Advantages to Lessor — Advantages to Lessee —Leasing in India — Sourcesof Funds — Problems of Leasing Companies — Tax Problems — Legal Aspects —Legislation of Leases — Accounting Problems — Leasing vs. Buy Decision —Banks andLeasing — Commercial Banks and Leasing — Use of Funds — Marketing Aspects —Lease Rentals — RBI and NBFCs

18. HIRE PURCHASE AND LEASING — PROBLEMS 199 - 218Finance Lease Features — Operating Lease Accounting — Problems of Lease and HirePurchase — Hire Purchase Alternative — Factors to be Considered from Lessee’s Pointof View — Take the Buying Option — Hire Purchase and Instalment Credit — Break evenLease Rental — BELR Calculation — Negotiation — IRR Based pricing — Gross YieldBased Pricing — Tables

PART III

SECONDRY MARKETS IN INDIA 219 - 349

19. SECURITIES TRADING REGULATIONS 221 - 225Objectives — Coverage — Recognised Stock Exchanges —Options in Contracts — Regulationof Trading — Restrictions on Transferability

20. INSTRUMENTS OF ISSUE AND TRADING 226 - 239Issues of Securities — Government Securities — Corporate Securities — CorporateDebentures — Other Securities —Company Deposits — Commercial Paper — LegalProvisions —Despatch of Share Certificates — Debenture Certificates —Fixed Deposits— Law regarding Dividends — New Companies Bill 1993 — SEBI Guidelines — EquityShares — Dividend Distribution — Dividend Policy — Other Instruments — Bonus Shares— Rights Shares — Preference Shares — CCP — Govt. and Semi Govt. Bonds — EquityShares — Public Issue — Cost of Issue Guidelines — New Instruments — Instrumentsof Foreign Borrowing

21. STOCK MARKETS IN INDIA 240 - 252History of Stock Exchanges — What is a Stock Exchange? —Byelaws — Regulation ofStock Exchanges — Recognition by Government — Licensed Dealers — Securities Contracts(Regulation) Rules, 1957 — Present Recognised Stock Exchanges — Qualifications forMembership — Organisation — Governing Body — Functions of Stock Exchanges —Listed Paid-up Capital — Who Owns the Securities? — Bombay: The Premier Exchange— Patel Committee — Regulations on Trading — Investor Protection — Measures toPromote Healthy Stock Markets

22. OTCI, NSE AND ICSE 253 - 274Securities Exchanges — Structured Markets — OTC Defined —Investor Interests —Practices Abroad — OTC and New Issues Market — OTC and Stock Exchange —Advantages of OTC —Structural Weaknesses in India — Role of OTC — Over-the-Counter Exchange of India (OTCEI) — Objectives of OTCEI —Establishment of OTC —Listing on OTCEI — Investors Benefitted — Market Players — Listing Procedure —Trading on the OTCEI — Conclusion — Problems — OTCEI and Dave Committee Report— Dave Committee Recommendations — Annexure —Issue of Shares through OTC —SEBI Guidelines — National Stock Exchange — National Market System — Characteristics— NSE Operations — Central Depository System — Listing of Securities — SettlementSystem — The National Securities Depository Limited (NSDL) — What is a Depository?—Rematerialisation — Advantages of the Depository — About the Depository Participants— NSDL’s First Participants — Legal Aspects — ICSE

23. LISTING ON THE STOCK EXCHANGES 275 - 282Introduction — Advantages of Listing — Listing Requirements — Eligibility — Prospectusand Application Forms — Regulations for Listed Companies — Offer of Sale — RegulationsRelating to Underwriting — The Schedule of Costs — NRI Investment —Capital MarketOpen to Foreign Funds — Procedure for Listing — Listing Agreement

24. STOCK MARKET OPERATIONS AND FUNCTIONS 283 - 292Introduction — Specified and Non-Specified Groups —Customer’s Orders — Trading Ring— Block Book (or the Sauda Book) — Contract Note — Drawing Up and Bills — Cumand Ex-dividend — Settlement in Specified List — Badla Charges — Factors InfluencingBadla Rates — Carry Forward Facilities — Book Closure Badla Financing (BCBF) —Settlement in Non-Specified Shares — After the Badla Day — Kinds of Delivery —HandDelivery — Spot Delivery — Special Delivery — Delivery for Clearing — Present Positionof BADLA — J.S. Varma Committee (July 1997) — Dhanuka Committee Report

25. TRADING IN THE STOCK MARKET 293 - 309Pattern of Trading — Trading and Settlement — Speculative Traders vs. Genuine Investors— Types of Speculators — Activities of Brokers — Brokers’ Charges — Delivery/Payment — Settlement Procedure — Auctions — Clearing Procedure —Regulation —National Market System — Characteristics — Objectives — Study Group Recommendations— Experience in Foreign Countries — National Clearance and Depository System —Present Settlement and Clearance System — National Trade Comparison and ReportingSystem — Emerging Role of Stock Exchanges

26. GOVERNMENT SECURITIES MARKET 310 - 320Emergence of Public Debt — External vs. Internal Debt — Management of Public Debt— Open Market Operations —Banks vs. Gilt-edged Market — Brokers and the Market— RBI and the Gilt-edged Market — Investment Criteria of Banks —Reforms in the Guilt-edged Market — Types of Loans — Switch Deals — Washed Sales — Current Yield —Redemption Yield —Experience in Other Countries — Principal Forms of GovernmentSecurities — Role of Yields — Maturity Pattern — Ownership of Government Debt —Trading in Secondary Market —Operations of STCI — Dematerialisation of Gilted Securities

27. SECURITY MARKET INDICATORS 321 - 333Introduction — Functions and Activity — Segments of the Markets — Segment ofGovernment Securities — Yield Curve — Indicators — Corporate Securities Section —Main Indicators — Security Price Indices — RBI Index of Industrial Security Prices —BSE Sensitive Index — Scrip Selection — Methods of Compilation — Weightage — OtherAdjustments — BSE National Index — BSE 200 and Dollex — Financial Express Seriesof Index Numbers — Economic Times’ Price Indices — Other Indicators — Other Indices

28. INTEREST RATES — THEORY AND STRUCTURE 334 - 349Introduction — Role of Interest Income — Relative Share of Interest Income — Role ofInterest Rates — Theories of Interest Rate — Structure of Interest Rates — FactorsInfluencing Interest Rates — Interest Rates in India — Bank Rate and Refinance Rates —Money Market Rates — Rates in Gilt-edged Market —Private and Government BondRates — Rates of Borrowings and Lendings by Commercial Banks — Interest Rates on

Small Savings — Interest Rates on Non-resident Accounts — Export Credit — Level andStructure of Rates — Level of Interest Rates — Structure of Interest Rates — Reforms— Recent Deregulation Measures — The Yield — Current Yield — Redemption Yield —Holding Period Yield (HPY) — Real Yield — Net Yield —Maturity and Yields — YieldCurve

PART IV

SECURITY AND INVESTMENT ANALYSIS 351 - 544

29. SECURITY MARKET ANALYSIS 353 - 363What is Security Analysis? — Origin of Markets — Information Flows — Savings orMoney Flows — Factors Influencing the Market Behaviour — Trading — Instruments —Players —Intermediaries — What is Market Analysis? — Valuation —Theoretical Framework— Schematic Presentation of Theory — Investment and Time Value of Money — PresentValue Method — DCF. (Discounted Cash Flows)

30. INVESTMENT ANALYSIS AND THEORY 364 - 370Introduction — Flow of Funds Theory — Price Formation — Markowitz Model — Riskand Portfolio — Efficient Market Theory — Random Walk Theory — Trend Walk Theory— Capital Asset Pricing (CAP) Theory — Modern Portfolio Theory — Concept of Beta— Fundamental School — Intrinsic Value and Market Value — Evaluation of Shares

31. SECURITY PRICING 371 - 381Factors Influencing Valuation — Security Valuation — Constant Growth Model — BookValue — Liquidating Value (Breakdown Value) — Replacement Value — Intrinsic Valuevs. Market Price — (i) Bond Valuation, (ii) Equity Valuation — Single-Period ValuationModels — Multi-Period Share Valuation Model — Dividend Capitalisation — EarningsCapitalisation — Use of P/E Ratio — Security Pricing Models — Other Models —Valuation of Securities in India

32. FUNDAMENTAL ANALYSIS 382 - 400Influence of the Economy — Economy vs. Industry and Company — Industry Analysis— Qualitative Factors — Petro-Chemicals — Company Analysis — Need for Forecast— Guidelines for Investment — Example of Company Analysis — How to Pick UpGrowth Shares?

33. CORPORATE FINANCE AND INDUSTRY STUDIES 401 - 409Introduction — Industrial Finance — Industry Groups — Ratio Analysis — Fixed AssetsRatios — Current Assets Ratios —Profitability Ratios — Recent Industrial Policy Changes

34. BALANCE SHEET ANALYSIS AND BLUE CHIPS 410 - 421Annual Reports — Market Price and Corporate Performance —Analysis of FinancialPosition — Types of Shares in the Market — Growth Shares — Cyclical Shares —Defensive Shares — Discount Shares — Net Financial Results and Profitability —CorporatePerformance — How to Locate Emerging Blue Chips — Established Blue Chips

35. TECHNICAL ANALYSIS OF THE MARKET 422 - 435Importance of Timing in Investment — Basic Tenets of Technical Analysis — Tools ofTechnical Analysis — Dow Theory — Major Trends — Chartist Method — Breadth ofthe Market — Volume of Trading — Tripod of Technical Analysis — Principles ofTechnical Analysis — Charts and Trend Lines — Moving Averages — Advantages ofMoving Averages — Criticism of Dow Theory — Charts — Head and Shoulders —Resistance and Support Lines — Speculative Trading and Technical Analysis — ElliotWave Theory — Operation of Wave Theory —Oscillators (Rate of Change or ROC)

36. PORTFOLIO MANAGEMENT: CONSTRUCTION, 436 - 465REVISION AND EVALUATIONFact Sheet — Clients’ Data Base — Objectives of Investors — Motives for Investment— Tax Provisions — Capital Gains —Portfolio Construction — Risk-Return Analysis —Time Horizon of Strategy — Types of Risk — Efficient Portfolio — Market EfficiencyTheorem — Diversification — Portfolio Management — Elements of Portfolio Management— Execution of Strategy — Monitoring — Building of the Portfolio — Portfolio Revision— Security Pricing and Portfolio Management — Markowitz Model of Portfolio Theory— Risk Analysis — Evaluation of Portfolio Performance — Evaluation Criteria forPortfolios

37. MUTUAL FUNDS AND THEIR SCHEMES 466 - 493Introduction — Definition — Types of Funds — Unit Trust of India — UTI Schemesfor Resident Indians — Off shore Funds — SBI Mutual Fund — India Magnum Fund N.V.— Other Funds — Overall Progress in India — Investment Policy — Steps to PopulariseMutual Funds — Response of NRIs — For All MFs Common Rules — Advantages ofMutual Funds — Progress in Nineties — Regulation of Mutual Funds — Authorisationof Existing Mutual Funds — Money Market Mutual Funds (MMFs) — Authorisationof New Mutual Funds — Mutual Funds Present Status — Annexure I — Annexure II —Annexure III

38. NON-RESIDENT INDIAN (NRI) INVESTMENTS 494 - 505Who is an NRI? — NRO Accounts — NRE Accounts — FCNR (B) Accounts —Encouragement to NRI Investment — Investment on Repatriation Basis — Tax Benefits— Other Benefits — RBI Permission — Ceilings on NRI Investments — PersonalInvestment Avenues for NRIs — NRI Investment — NRIs Investments — Direct Investmentwithout Repatriation Benefits — Direct Investment with Repatriation Benefits — OtherInvestments — Foreign Financial Institutions — Who are FFIs? — Foreign InstitutionalInvestors — Activities Allowed — Portfolio Management — Preferential Allotment of FIIs

39. SELECTED MARKETS ABROAD 506 - 515Introduction — U.S. Stock Exchanges — N.Y.S.E. — Market Structure — Listing —NASDAQ — OTC and NMS — Inter Market Trading System (ITS) — UK StockExchanges — London Stock Market — Role of Market Makers — Can the Market MakersInfluence the Market or Rig the Prices? — Structure of Market — Tokyo Stock Exchange— Organisation and Membership — Listing — Stock Trading — Outline of the System— Trading Posts — Bond Trading — Settlement and Clearance — Tokyo’s Importance— Stock Exchange of Singapore (SES)

40. LISTING IN SELECTED COUNTRIES ABROAD 516 - 523NYSE and Listing Norms — NYSE — Listing and Registration with SEC — ListingGuidelines for NYSE — SEC Registration — Tokyo Stock Exchange Listing Requirementsof TSE — Listing Criteria — Operating Time Before Listing — Operating Assets andProfits — Listing and Delisting — Dividend Payouts — Registration Statement — OriginalListing — Two Sections for Listing — Listing in Singapore (SES) — London StockExchange Listing Requirements (LSE)

41. SECURITIES MARKET REPORT (BSE) 524 - 544Securities Market and Investment — Global Comparison — Overview of BSE MarketReport — Globalisation Trend — Daily Report Analysis — Sensex Shows 5% Fall OnFII Selling — Price Index Snapshots of the Market — Trade Turnover — Advance/DeclineLine — Role of Institutional Agencies on the Market — Trading Cycle — Record Datesand Book Closure — Circuit Band Hitters — Speculative Positions — Surveillance System— Index Details — BSE Stock Tables — ET/BSE Indicators — Face Value — MarketMacro Indicators — Badla Statistics — Derivatives — Trading Patterns

GLOSSARY OF STOCK MARKET TERMS 545 - 547

PART I

SECURITIES MARKETS IN INDIASECURITIES MARKETS IN INDIASECURITIES MARKETS IN INDIASECURITIES MARKETS IN INDIASECURITIES MARKETS IN INDIA

IntroductionThe issue of securities by corporate units in India is as old as the introduction of joint-stock

enterprises by the British Government. The 18th and 19th centuries saw the emergence of cotton andjute textiles, tea and plantation industries in India. Many companies were set up as joint-stock enterpriseswith liability limited by shares. A vast number of businessmen in major cities purchased these sharesand trading started in them early in the 19th century, thanks to their enterprising spirit. In those days,although many of these companies were financed by the issue of shares to the public, they mainlydepended on the joint-stock British banks in India and borrowals from abroad. British enterprise andthe British Government have thus helped the emergence of the securities markets in India. Thecorporate securities have come to have a market first. So far as the Government securities are concerned,the British India Government borrowed mostly in London by issue of Sterling consols. Only later inthe 19th century, the Government issued treasury bills and Government securities in rupees. This ledto the emergence of the Government securities market also in India.

What is Securities Market?Securities markets are markets in financial assets or instruments and these are represented as

IOUs (I owe you) in financial form. These are issued by business organisations, corporate units andthe Governments, Central or State. Public sector undertakings also issued these securities. Thesesecurities are used to finance their investment and current expenditure. These are thus sources of fundsto the issuers.

Securities and SecuritiesSecurities and SecuritiesSecurities and SecuritiesSecurities and SecuritiesSecurities and SecuritiesMarketsMarketsMarketsMarketsMarkets

11111

4 Investment and Securities Markets in India

There are different types of business organisations in India, namely, partnership firms,co-operative societies, private and public limited companies and joint sector organisations etc.The more frequently organised method is the company, registered under the Indian CompaniesAct 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) companieswhich are public limited companies - limited by shares paid up. Under the Act, the private limitedcompanies can have 50 members and their shares are not transferable freely. These companies reservethe right to refuse any transfer of shares and as such trading in them is restricted. Due to theseinhibitive features, private limited companies do not have easy access to the securities markets. Onlypublic limited companies are largely popular as they can raise funds from the public through the issueof shares. The methods of raising funds used by the corporate sector are to issue securities, either inthe form of ownership instruments or debt instruments.

What are Securities?Securities are claims on money and are like promissory notes or IOU. Securities are a source

of funds for companies, government, etc.The external sources of funds of the companies are as follows:(A) Long-term Funds

(i) Ownership capital � equity and preference capital and variants of them.(ii) Debt Capital � debentures or bonds and long-term borrowings in the form of deposits

from public or loans and advances from banks and financial institutions, etc.

(B) Short-term Funds(i) Borrowings from banks.

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

Of the above sources, the most popular are those which are tradable and transferable. They havea market and their liquidity is ensured, as in the case of equity shares, preference shares, debentures andbonds. Of these the ownership instruments, particularly the equity shares, are generally the most liquidas 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.

Mobilisation of Savings for InvestmentThe issue of securities can be looked at from various angles. These may be set out as follows:(i) From the point of view of issuers, these are the sources of finance for long-term capital

investment and for working capital. They can thus invest more than their own resources;(ii) From the point of view of investors, these are IOUs or promissory notes, giving an income

or a return to their investment. They provide a channel to their savings and cater to the assetpreferences of the public with varying characteristics of risk, income, maturity, etc.;

(iii) From the point of view of the nation, these issues mobilise the savings for investment andcapital formation in the country. They promote the growth of output and income by amultiplier leading to a rise in the output by a multiple of the original investment over aperiod of time;

(iv) From the point of view of the financial intermediaries like banks, financial institutions, etc.,these issues are a source of income to them for the management of these issues, placing themwith the public, providing liquidity and marketability to them.

Securities and Securities Markets 5

Thus, the securities markets comprise all the above players, namely, issuers, savers, investors,intermediaries, etc. and the major activity is the mobilisation of funds from saving and theirchannelisation into investment.

IOUs as SecuritiesIn the securities markets, the securities dealt with are equity shares, preference shares, debentures

and bonds. These securities being financial claims are issued as IOUs or Promissory Notes. In theprimary market, the issues are made to the primary or original savers. The other forms of holdingdebt or borrowings such as public deposits or bank owned IOUs are not securitised and hence nottradable. In certain cases like the P.O. Certificates, bank deposits, LIC policy certificates etc., theyare not transferable by endorsement, but they have a primary market as these primary issues are IOUs,used to mobilise the savings of the public. The market for such primary securities is limited to onestage and there is no secondary market for them. The UTI units and the instruments of many mutualfunds in India belong to a hybrid category, as these are not securities according to the strict definitionof the term under the Indian Companies Act. But as they can be sold back to the issuing institutionor sold in the market if they are quoted on the Stock Exchange, they enjoy liquidity. These are deemedsecurities under the SC(R) Act. Thus, UTI units under the 1964 scheme for example can be repurchasedby the UTI, which provides liquidity to these instruments. The master shares of UTI and the stocksof many of the mutual funds like Kotak Gold can also be traded as they are quoted on the StockExchanges. These are called exchange traded funds.

The securities markets emerge out of the two characteristics of financial instruments: (a) mobilisingprimary savings from the public to serve as sources of funds for the issuing authority; and (b)providing liquidity to these instruments through regular quotations in the financial markets and thustraded. The primary markets exist only if the first condition is satisfied. The secondary market alsooperates if both the conditions are satisfied.

The pattern of corporate financing and the extent of their dependence on the external sourcesof funds, as opposed to the internally generated cash flows, would thus determine the creation of newsecurities. The retained earnings are the internally generated funds which have an opportunity cost butwhose issue costs are zero. There are, however, issue costs for equity and preference shares, convertibleand non-convertible debentures etc. The capital market and stock market do provide the facilities fornew issues and conversion of issues into money and vice versa, so that investors are assured of liquidityfor their investments so as to induce them to enter these markets.

Characteristics of SecuritiesThe major characteristics of securities are their transferability and marketability. These help the

process of trading and investment in them.Under the Indian Companies Act, Sections 82 and 111 deal with the transfer of shares. In the

case of public limited companies, the objective of the Companies Act as also of the Listing Agreementwith the Stock Exchanges is to ensure free and unfettered transfer of shares. Under Section 82 of theCompanies Act, shares are treated as any movable property. As any right to property, these are freelytransferable. By one amendment in 1985, Section 22(A) of the Securities Contracts (Regulation) Acthas denied the right to refuse to transfer shares by a listed public limited company except on technicalgrounds. The other grounds on which the transfer can be refused are specifically laid down under theAct and the company has to specify the reasons for such refusal to transfer and reference has to bemade to the Company Law Board whose decision to refuse or not to refuse the transfer of shares will


be final. Thus, the essential characteristic of transferability of shares is well preserved which gives themthe market which in turn extends liquidity to these shares. This has led to the emergence of securitiesmarkets in India.

Primary Issues and Derivative SecuritiesPrimary issues are those issued by the companies, Governments and financial institutions. Derivative

issues are those which are based on the original primary issues. There are a number of derivativeinstruments which are used to generate a market for the primary issues. Thus, in many developedmarkets abroad, there are warrants, options, futures, index linked instruments etc. which have well-established markets and they are based on some primary instruments. In India, options were notpermitted but some form of futures trading exists in Group A securities on the stock exchanges asthey are permitted to be carried forward from settlement to settlement without taking delivery ofshares. Since January 1995, options and futures and other derivative tradings have been permitted.

More recently, new instruments have been developed in India, namely, warrants, Zero couponbonds, conversion options, rights options etc. But in many cases these are not well developed andsecondary markets for these instruments do not exist and trading does not take place as in the caseof listed shares and particularly those on the specified group (Group A) of stock exchanges.

Reference is made in the subsequent chapters to many new instruments which are introducedboth in the capital market and the money market in India. Besides, the RBI has also recently permittedthe securitisation of bank debts in the sense that the debit balances on companies� accounts can betransferred to other banks and financial institutions which are willing to discount them or purchasethem at a price but the market in many new instruments of corporate debt is yet to be developed inIndia.

Schematic Presentation of Emergence of MarketsA schematic presentation of the emergence of markets through the flow of cash, credit and

savings of the public is made in Charts 1.1 to 1.5. It will be seen from Chart 1.1 that money flowslead to claims on financial assets and physical assets and financial assets in turn when issued assecurities result in trading in markets. The money and capital markets are shown separately as short-term and long-term wings of the markets. The components of capital market are shown as primaryand secondary markets whose details are explained in terms of instruments traded, institutions involvedand operations undertaken in Charts 1.3 and 1.4 respectively. Chart 1.2 explains the savings flows ofthe household sector into physical assets invested by the household sector, namely, currency, depositsof banks, etc. Chart 1.5 presents the interrelations of the various institutions and markets, namely, thestock exchange, brokers, banks, financial institutions, etc. Finally, the investor clients and corporateclients and the various services rendered to them by these markets are briefly depicted in this chartas constituting the totality of the markets.


Chart 1.1 Broad Contours of Money Flows

BROAD CONTOURS OF MONEY FLOWS

MONEYCASH + CREDIT

CREATED BY CREATED BY INCOME MINUSR.B.I. CASH BANKS — CREDIT EXPENDITURE =

SAVINGS

INVESTMENTS FUTURE CLAIMS PHYSICALON MONEY ASSETS

FINANCAL ASSETS = INSTRUMENTS

A. SHORT-TERM — DDS, MTS, CHEQUES, TBs, etc.

B. LONG-TERM — SECURITIES, SHARES, DEBENTURES(CAPITAL MARKET) — DEPOSITS, BORROWINGS, ETC.

SECONDARY MARKETPRIMARY MARKET OR STOCK MARKET

TRADING IN OLD SHARESOR SECURITIES

INSTRUMENTS ASSETS TRADED

NEW ISSUES, GOVERNMENT SECURITIES,ALLOTMENT LETTERS, CORPORATE SHARES,

RIGHTS BONDS, DEBENTURES, UNITS, etc.VOUCHERS,

RENUNCIATIONS, etc.


Form of Assets 2012-13 Percentage of Gross Financial Assets

1. Currency 10.2 12.52. Deposits of Banks 51.3 54.93. Deposits of Non-Bank Companies 1.9 1..84. LIC, Insurance, PF and Pension Funds 31.0 29.55. Claims on Govt. (Postal Savings, Government Securities, etc.) �0.6 � 3.16. Shares and Debentures & MFs 3.1 2.67. Others 3.4 1.8

Total 100 100

TOTAL SAVINGS OFHOUSEHOLD SECTOR

FINANCIAL ASSETS PHYSICAL ASSETS36% 64%

STRUCTURE OF FINANCIAL ASSETSGROSS SAVINGS IN FINANCAL FORM AS IN 2013

Chart 1.2 Saving Profile of Macro Household

Source: RBI Annual Reports, 2013

SAVINGS PROFILE2012-13


Chart 1.3 Primary Market

CORPORATE SHARES, DEBENTURES, RIGHTS, ETC. ARE THE INSTRUMENTS.

BASIS:

1. ENABLING LEGISLATION, PRACTICES, PROCEDURES

2. PATTERN OF CORPORATE FINANCING - STRUCTURE

A. INTERNAL FINANCE, RETAINED INCOMEB. EXTERNAL SOURCES — METHODS

EQUITY, DEBT DEBENTU- FOREIGN PUBLIC INTER-ORDINARY, BORROWINGS RES SOURCES DEPOSITS CORPO-PREFERE- FROM BANKS CONVERTIBLE EQUITY OF RATE

NCE, & FIs NON-CONV- DEBT VARIOUS INVEST-ETC. ERTIBLE MATURITIES MENT

FIs -IDBI - IFCI - ICICI - UTI - LIC - GIC - ETC.

UNDERWRITING PLANNINGSAGENCY WORK, CONSULTANCY,LEAD MANAGING AGENCY,

MERCHANT BANKING. BROKING, ETC.

3. PRIMARY MARKET OPERATIONS

PROJECT PLANNING, FINANCE PLANNING, CONSULTANCY, FINANCIAL MANAGEMENT,TAX PLANNING, GOVT. REGULATIONS, DEALINGS IN THE PRIMARY MARKET – ISSUESTO THE HOUSEHOLDS, ETC.PROSPECTUS, ALLOTMENT, LISTING, ETC.


Chart 1.4 Secondary Market

SECONDARY MARKET PROFILE

SEBI-Securities Appellate Tribunal (Securities and Exchange Board of India)

GOVT. STOCK EXCHANGESCOMPANIES –-PSUs

BROKER DEPTSJOBBER FUNCTIONS

OWN BUSINESS (WHOLESALE) — JOBBERCLIENT BUSINESS (RETAIL) — BROKERS

CUSTOMERS

INDIVIDUALS, COMPANIES, FIs, MUTUAL FUNDS ETC.

TRADING BID - OFFER/PURCHASE & SALE

SPECIFIED SHARES PASSING OF SOUDAS –NON-SPECIFIED VANDAS ETCSHARES, ETC.

CLEARING HOUSESETTLEMENT,

O.T.C. OPTIONS DELIVERY PAYMENT ETC.AND DERIVATIVES

GOVT. SECTOR FINANCING — CENTRAL — STATELOCAL BODIES AND SEMI-GOVT. ORGANISATIONS

GILT - EDGED MARKET, RBI AS UNDERWRITER, PRIMARY DEALERS,JOBBER, DEALERS, BANKS, PF, FIs — BROKERS ETC.

CORPORATE SECTOR FINANCING —EQUITIES, PREFERENCE SHARES, DEBENTURES, BONDS ETC.

REGISTRATION, CONSOLIDATION, SUB-DIVISIONFLOW OF INFORMATION ON COMPANY AFFAIRS ETC.


Chart 1.5 Inter-relations

GOVT. INVESTOR PROTECTIONSEBI ENCOURAGEMENT TO FLOW OF

SAVINGS + INVESTMENT —FAIR TRADING PRACTICESGRIEVANCES REDRESSAL ETC.

F.Is, GIC, LIC FINANCIAL SUPPORT TO BOTHMUTUAL PRIMARY AND SECONDARYFUNDS, MARKETS — INSURANCEBANKS, COVERAGE — INVESTMENT —CHIT FUNDS, PORTFOLIO MANAGEMENT —COMPANIES CONSULTANCY — BROKINGETC. BUSINESS, UNDERWRITING ETC.

BANKERS, P.Ds, INDIVIDUALS CORPORATEM.Fs AND AS CLIENTS UNITS AS CLIENTSDEALINGSIN GILT-EDGED INVESTMENT BANKING

INVESTMENTS MERCHANTADVICE & BANKING,CONSULTANCY, NEW ISSUESPORTFOLIO PLANNING PROJECTMANAGEMENT, REPORT FINANCIALTAX PLANNING MANAGEMENT

ACCOUNTACY& AUDIT

CORPORATE FINANCE STUDY —RATIO ANALYSIS, BALANCE SHEET —INCOME-EXPENDITURE ANALYSIS ETC.

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