Secondary Market
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Transcript of Secondary Market
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.
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• 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.
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Primary Vs Secondary Market
• Organisation
• Period
• Capital Contribution
• Ownership
• Liquidity
• Seller
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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.
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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
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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
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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.
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Objectives of Listing
• Provide ready marketability
• Provide liquidity and transferability
• Ensure proper supervision and control of dealings
• Protect the interest of shares.
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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.
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• 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.
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• 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
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• 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
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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.
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• 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.
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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.
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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.
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• 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.
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• 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.
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• 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.
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Listing Procedure
• Preliminary discussion
• Articles of association Approval
• Draft prospectus Approval
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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.
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• 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.
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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.
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• 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
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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.
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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.
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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.
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• 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
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• 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.
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• 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.
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• Day order
• Week order
• Month order
• Open orders ( GTC)
• Fill or Kill Orders (FoK)
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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”
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• 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.
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