Secondary Market

Secondary Market

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SECONDARY MARKET

• Market in which securities already issued by companies are subsequently traded among investors.

• Continuous trading.• The secondary market is that market in which the

buying and selling of the previously issued securities is done.

• The transactions of the secondary market are generally done through the medium of stock exchange.

• The chief purpose of the secondary market is to create liquidity in securities.


• Under Securities Contract Regulation Act 1956, securities trading is regulated by Central Government;

• Takes place only in stock exchanges recognized.

• SEBI, Company Law Board and stock exchanges regulate secondary market.


Primary Vs Secondary Market

• Organisation

• Period

• Capital Contribution

• Ownership

• Liquidity

• Seller


STOCK EXCHANGE

• Market where securities of joint stock companies and govt, or semi-govt bodies are dealt in.

• Securities Contracts (Regulation) Act 1956

• Any body of individuals, whether incorporated or not constituted for the purpose of assisting, regulating or controlling the business of buying, selling or dealing in securities.


STOCK EXCHANGE

• First stock exchange in India- The Native Stock and Share Brokers Association (Bombay 1875)

• Ahmedabad 1894.

• SCRA 1956.

• G.S Patel Committee 1985

• L C Gupta Committee 1991

• Pherwani Committee 1991

• G S Patel committee 1995

• Varma Committee 1997

• Self regulatory role of Stock exchanges


THE ROLE OF STOCK EXCHANGES

• Raising capital for business.

• Mobilizing savings for investment.

• Facilitating companies growth.

• Profit sharing.

• Creating investment opportunities for small investors.

• Government capital- raising for development projects.

• Barometer of the economy.www.kanishgeorge.blogspot.in

Functions

• Liquidity and Marketability

• Helps in capital Formation

• Fixation of Prices

• Safety of Funds

• Supply of Long Term Funds

• Motivation for improved performance

• Motivation for investment

• Reflects the general state of economy


Listing of Securities

• Enrolment of name in the official trading list maintained in the stock exchange.

• SCRA rules, SEBI guidelines and rules and regulations of exchange prescribe the statutory requirements to be fulfilled by company for getting its shares listed.

• Sec 73(1) of Companies Act: should make an application to one or more recognised stock exchange for listing its securities within the prescribed time.

• After scrutiny of listing application, a listing agreement would be executed.


Objectives of Listing

• Provide ready marketability

• Provide liquidity and transferability

• Ensure proper supervision and control of dealings

• Protect the interest of shares.


Listing Obligations

• Annual Listing Fee

– Prescribed initial listing fee and annual listing fee on or before April 30 each year.

• Regulations of Stock Exchange

– Agrees to comply with rules, byelaws and regulations now and hereafter.

• Notice of Board Meetings

– Prior intimation at least seven days in advance.

• Book closure notice

– 42 days advance notice, specifying the purpose.


• Submission of reports

– Annual reports, B/S, P&L, and all periodical and special reports

– All notices, resolutions, and circulars relating to new issue

– Notices and call letters of all meetings.

– Proceedings of annual/general body meeting.

– Copies of all notices, circulars etc issued or advertised in the press.

• Publication of periodical interim statements

– In a form approved by exchange.

• Issue of shares

– Offer shares, securities, rights, benefits to subscribe pro rat a basis to equity share holders, unless approved in General meeting, 4 weeks time.


• Effecting changes in securities

– 21 days prior notice necessary to make changes and make application to stock exchange

• Circulation of Annual results

– Supply a copy of B/S, P&L and directors report to each share holder and up on application to any member of the exchange

• Information of events

– Inform about strikes, lockouts both at occurrence and cessation


• Take over conditions

– Take over regulations of SEBI should be fulfilled.

• Unaudited financial results

– Will be published within one month from the end of a quarter to the stock exchange

• Corporate governance

– Include separate section on corporate governance in annual reports


Advantages of Listing

• Provides liquidity to the securities of the company.

• Help investors to evaluate the company through periodic reports.

• Ensures free transferability of shares.

• Exceptions and concessions available to a widely held companies are available to listed companies.

• Transactions appear in news papers, provide information regarding market value of investments.


• Prices determined by demand and supply, ensures fair prices.

• By compulsory disclosure, the investing public get valuable information.

• Improves public image and reputation.

• Facilitates to mobilize more funds from public.

• Listed securities are treated as collateral securities for loans and advances.


Disadvantages of Listing

• Regulatory measures of the stock exchanges and SEBI.

• Sending notices of annual meeting, annual reports to a large number of shareholders will raise cost to the company.

• Submitted periodical reports and vital information might be used by competitors.

• Public offer itself is expensive.

• Listing does not guarantee price quotations.


Minimum Requirements/ Qualifications for Listing

• Minimum Issued capital– Ministry of finance & Department of

economic affairs: Minimum issued capital 3 crores and minimum public issue 75 Lakhs. BSE 10 crore

• Payment of excess application money– Allotment should be done within 30 days of

closure of public issue. 15% p.a interest rate applicable for further period.

• Listing on multiple exchanges– Paid up capital of the company above R 5

crores.


• The number of shareholders

– For every 1 lakh of fresh capital- at least 10 shareholders

– For sale of existing capital; 20 shareholders.

• Appointment of a market maker

– Paid up capital between ₹ 3 cr and ₹5 cr, to provide two way quotations for a minimum period of 18 months.

• Articles of Association

– If veto power to director to overrule majority decision, not qualified.


• Advertisement

– Issue over subscribed/ Thanks to the investing public for their overwhelming response

• Minimum Subscription

– Rs 5000 (500xRs.10) SEBI; reduced to Rs.2000. Should be given in Prospectus.

• Applying Mode

– Single name or joint name of not more than three. Can be made by Limited companies, corporations, or institutions not by trust or partnership.


• Cost of Public Issue

– Ceiling in the expenditure prescribed by SEBI

• Public Offer Size

– Size and value should be stated in prospectus. Whether at premium, preferential allotment etc should also be stated.


Listing Procedure

• Preliminary discussion

• Articles of association Approval

• Draft prospectus Approval


Delisting

• Voluntary delisting – Listing fee is prohibitive.– Business sick/ Suspended/ closed.– Capital base is small.– Mergers, amalgamations and takeovers.

• Conditions to be fulfilled:– Company must have incurred losses in the

preceding three years, with net worth less than the paid up capital.

– Securities have been infrequently traded.– Securities remain listed at least on the

regional stock exchange.


• Compulsory Delisting

– Failed to comply with requirements of listing agreement.

– Fails to redress the grievances of investors.

– Unfair trade practices of promoters or managers and malpractices such as issuing of fake shares by management.

– Thin / negligible shareholding base.

– Trading in securities of the company has been suspended for more than six months.


Trading System

• Floor Trading

– Trading took place through an open outcry system on the trading floor or ring of the exchange during official trading hours.

– Buyers and sellers transact business with broker.

– Brokers transact on behalf of investors.


• Screen based Trading

– Fully automated computer mode of trading.

– Distant participants can trade with each other.

– Greater transparency

– Quick trading

– Proper matching of orders to buy and sell

– Easy and paperless trading through demataccounts


Quote driven system

• Market maker inputs two way quotes into the system

– Bid price

– Offer price

• Participants place orders based on bid-offer quotes.

• These are automatically matched by the system according to certain rules.


Order driven system

• Clients place their buy and sell orders with the brokers.

• Orders feed in to the system.

• The buy and sell orders are automatically matched by the system according to predetermined rules.


Types of Orders

• Market Orders

– Broker is instructed by investor to buy or sell a stated number of shares immediately at the best prevailing price in the market.

– Buy order- lowest price obtainable

– Sell order- highest price obtainable

– Investor will be certain about execution; uncertain about price.


• Limit Orders

– Investor specifies the limit price.

– Limit buy order- maximum price that he will pay for the share; order executed at limit price or lower price.

– Limit sell order- minimum price he will accept for shares; order executed at limited price or higher price.

– Limit prices are away from the market price


• Stop orders (Stop loss order)

– To protect a profit or limit a loss.

– In sell order, stop price will be below the market price.

– Buy order, stop price will be above the market price.

– It is a conditional market order, it becomes a market order when the market price reaches or passes the stop price.


• Stop limit orders (Conditional limit order)

– The investor specifies two prices, a stop price and a limit price.

– When the market price reaches the stop price, the order becomes the limit order to be executed within the limit price.


• Day order

• Week order

• Month order

• Open orders ( GTC)

• Fill or Kill Orders (FoK)


Settlement

• Execution of orders

– Buy orders are matched with sell orders.

• Settlement of trade

– Delivery of security and payment of cash.

– Functioned by clearing house.

• Clearing house acts as counter party.

• “Account Period Settlement”

• “Compulsory Rolling Settlement”


• Trades executed on a particular day are settled after a specified number of business days.

• T + 5, T + 3, now T + 2.

• On the first business day (T+1) exchange generates delivery and receive orders for transactions done by member brokers along with a money statement.

• Can be downloaded by member brokers.


Secondary Market

Education

Transcript of Secondary Market