Stock Mkt in India NCR02

8/3/2019 Stock Mkt in India NCR02

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3 . To do away with the carry forward system which is incompatible with therecommendation of the study and shorten the settlement period, for which the whole rationale will disappear with the adoption of the system"marking to the market" daily, as suggested above.

4. To insist that all the stock exchanges introduce formal market-marking

arrangements in the best post manner in order to prevent exploitation of investors by market malpractices, and promote more orderly many allsecurities.

5. To make the governing bodies of stock exchanges equally representativeof the share brokers interest the one hand and the public and the users

of stock market services on the other, and strengthen exchangemanagement generally.

6. To introduce in all stock exchanges a well-designed managementinformation system (MIS), capital producing relevant informationsystem which could be used by the authorities for restructuring and

regulating the on proper lines.


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Listing of SecuritiesL isting means admission of the securities to dealings on a recognisedstock exchange. The securities may be of any public limited company,central or state government, quasi governmental and other financial

institutions/corporations, municipalities, etc.

The objectives of listing are mainly to:

provide liquidity to securities;

mobilize savings for economic development;

protect interest of investors by ensuring full disclosures.

Cont.


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A company intending to have its securities listed on the Exchange has tocomply with the listing requirements prescribed by the Exchange. Some of the requirements are as under:

a) Minimum L isting Requirements for new companies

b) Minimum L isting Requirements for companies listed on other stockexchanges

c) Minimum Requirements for companies delisted by this Exchangeseeking relisting of this Exchange

d) Permission to use the name of the Exchange in an Issuer Company's

prospectus

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e) Submission of L etter of A pplication

f) A llotment of Securities

g) Trading Permission

h) Requirement of 1% Security

i) Payment of L isting Fees

j) Compliance with L isting A greement

k) Cash Management Services (CMS) - Collection of L isting Fees


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Na tion al Stock Ex ch a nge of Indi a Ltd.Fe a tures

N SE is promoted by financial institutions, mutual funds, and financedon a self-sustaining basis through levy of membership fees. The

capital outlay of 30 crores of rupees could be financed by admitting 1, 000members with an entry fee of Rs. 1 0 lakhs each. Fees for corporate andinstitutional members could be pegged at a higher level of Rs. 25 lakhs.

N SE is a company incorporated under the Companies A ct of 1956. It isconstituted by the Board of Directors (Board) and managed by it. 5 0 % of

the Managing Board of the Exchange should comprise of professionalswho are not members. These professionals must be from a cross-sectionof finance and industry, and must actively contribute to ensuring that thestock exchange functions in a balanced and fair manner.

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It trades on medium sized securities of equity shares and debtinstruments.

It is a separate ring altogether. For the first time in our country, debtinstruments would be traded to become an active part in thesecondary market of the nation.

N SE made its debut with the debt market. The debt market ispredominantly a market in government securities. The CentralGovernment moving over to auctions at market-related rates of interest, the primary market has become active with the well-informedand fine-tuned bidding at the auctions.

It has the full support from the N ational Clearing and SettlementDivisions, SHCI L and the Securities Facilities Support Corporation. Ituses modern computer technology for the clearance and settlementprocedures.

Better transparency system for the securities.


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Ov er The Counter Ex ch a nge of Indi a ( O TC EI)The unique features of OTCEI are as under:.

Ringless Trading

N ational N etwork

Totally Computerized

Exclusives list of Companies

Two ways of Making a Public Offer

Faster Transfers and Trading without Shares

Investor Registration

Trading Mechanism


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The benefits which O TC Ex ch a nge wi ll offer a re:F or companies

It will provide a method of raising funds through capital market instrumentswhich are priced fairly. In OTC, the company will be able to negotiate the

issue price with the sponsors who will market the issue.F or Investor

Investment in stocks will become easier.

F or F inancial Environment

OTC Exchange will help spread the stock exchange operationgeographically and integrate capital investment into a national forum.


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Inter-connected Stock Ex ch a nge of Indi aInter-connected Stock Exchange of India L imited (ISE), has been promoted by15 regional stock exchanges to provide trading linkage/connectivity to all theparticipating exchanges to widen their market. Thus, ISE is a national level

exchange providing trading, clearing, settlement, risk management andsurveillance support o the Inter-Connected Market System (ICMS). ISE aimsto address the needs of small companies and retail investors with the guidingprinciple of optimising the infrastructure and harnessing the potential of regional markets to transform these into a liquid and vibrant market through

the use of technology and networking.

Cont.


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Core objectives of the Inter-connected Stock Exchange include creation of

single integrated national level solution with access to multiple markets for

providing high quality, low cost services to millions of investors across the

country, a liquid and vibrant national level market for all listed companies in

general and small capital companies in particular and providing trading,clearing and settlement facilities to the traders and dealers across the country

at their doorstep with decentralised support system.


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D emutu al is a tion of Stock Ex ch a ngesDemutualisation of exchanges means segregating the ownership frommanagement. This move was necessitated by the fact that brokers in themanagement of the stock exchange were misusing their position for personal gains. Demutualisation would bring in transparency and preventconflict of interest in the functioning of the stock exchanges.

There would be various benefits of demutualisation, a few of which arenarrated herein below:

Division of ownership between members and outsiders can lead to abalanced approach, remove conflicts of interest, create greater management accountability, and take into consideration the interest of other players.

Cont.


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To cope with competition, stock exchanges require funds. Whilemember owned stock exchanges have limitations in raising funds,

publicly owned stock exchanges can tap capital markets.

Publicly owned stock exchanges can be more professional when

compared to member-owned organisations.

This would enhance management flexibility. Further, a company can

spin off its subsidiaries, get into mergers and acquisitions, raise funds,

etc.


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M oney m a rket A money market is a mechanism which makes it possible for borrowersand lenders to come together. Money market is the market in which short-term funds are borrowed and lent. The money market does not deal incash or money but in trade bills, promissory notes and governmentpapers, which are drawn for short periods. These short-term bills areknown as near money.

Importance of money market

Dealing in bills of exchange and commercial papers

A cting as an outlet for the excess short-term funds of commercialbanks

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Dealing in treasury bills and short dated government securities

Guiding central banking policies

Making central banking policies effective

Reduction of disparities in interest rates

Influencing the capital market

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F eatures of a Developed Money Market

Existence of an efficient and effective central bank

Well organized commercial banking system

Existence of specialized sectors

Free flow of funds between the various sub-marketsA dequate facilities for transfer of funds

Uniformity in interest rates

A vailability of ample funds

Availability of ample short-term credit instruments

Sensitiveness to internal and external events

Existence of specialized financial institutions

Cont.


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Cont.

F eatures and Weaknesses of the Indian Money Market

Existence of unorganized money market

A bsence of integration

Diversity in money rates of interests

Seasonal stringency of money

Highly volatile call money market

A bsence of the bill market

A bsence of well organized banking system

A vailability of credit investments


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Money Market Instruments

Treasury Bills (T-Bills)

Central Government Securities (gilt-edged securities)

State Government and Public Sector Instruments

Municipal Bonds

Commercial Paper

Certificates of Deposit

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What is Commercial Paper?

Acorporation may issue bonds or equity to fulfill their long term capital needs; however, corporations are also in

need of short term funds as well. A s an alternative to bank borrowing, corporations may issue commercial paperwhich are basically short term, unsecured notes issued in

the open market for immediate financing needs. Themajority of commercial paper issuances are done throughlarge corporations with solid credit ratings ; however, inmore recent history we have seen corporations with lower credit worthiness entering the marketplace. Thesecorporations with sub-par credit quality will obtain creditsupport from a firm with a higher credit rating thanthemselves..


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Repurchase A greements (Repos)

Inter-bank Participation

Bank Deposits

Term Money

Corporate Debentures and Bonds

Commercial Bills


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Composition of the Indi a n M oney M a rket

Indi a n M oney M a rket

Unorg a nized Ba nking Sector

SubM a rkets

O rg a nized Ba nking Sector

Call M oney M a rket

364 d a ys tre asury Bills m a rket

Short-term bi lls m a rket

Certific a tes of deposits

Commerci alp apers

Bills of

exch a nge

Tre a sury Bills

Cont.


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Cont.

C entral Government Securities (Gilt-edged Securities)The types of Central Government securities that have evolved recentlyinclude:

a) Issue of stock through auction ushering new treasury cultureenabling development of bidding skills amongst market participants.

b) Issue of stock with pre-announced coupon rates (e.g. fixed ratebonds).

c) Issue of stock with variable coupon rates (e.g. floating ratebonds).

d) Issue of zero coupon bonds (issued at discount).e) Issue of capital index bonds (to hedge against inflation).

f) Issue of stock in conversion of maturing treasury bill/datedsecurities (converted stocks).


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State Government/Public Sector/Municipality Issued Securities

1. Municipal Bonds

2. General Obligation Bonds (GOBs)

3. Revenue Bonds (RBs)

4. State Government and Public Sector


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Certific a te of D epositThe various features of CDs are as follows:

CDs can be subscribed by an individual, as well as by an institution.

CDs are money market instruments in the form of Usance PromissoryN otes issued at a discount and are negotiable in character. There isa lock-in-period of 15 days, after which they can be sold.

The minimum size of the deposit is Rs. 5 lakhs and thereafter inmultiples of Rs. 5 lakhs.

The rate of interest is determined freely by the parties to thetransaction.

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The instrument is to be stamped according to the rates prescribed bythe Indian Stamp A ct.

Premature closure of CDs is not permitted and buy-back of the CDs isprohibited.

The CDs should fall due for payment on a working day. In case, thedue date falls on a holiday, the payment is to be made on theprevious working day.

N o advance can be taken against the security of the CDs.

There is no limit for investment in CDs by the banks.

Due to the negotiable character of the CD, the same could besold after the lock-in-period, thus enabling the investing bank tocreate liquidity. This instrument is useful to the corporates for parking their surplus short-term bonds. Cont.


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R ate of Interest on C Ds

A s this instrument is issued at discount, the rate of interest iscalculated as rear end rate on the basis of calculations as follows:

I =Where I = Rate of Interest

R = Discounted value

Issue price of CD = Face value Discounted value

100 X R X N o. of D a ys to M a turity

365 X 100


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Commerci al Pa per The commercial paper (CP) was introduced into the Indian money marketduring the year 199 0 , on the recommendations of the Vaghul Committee. CPis a form of promissory note, negotiable by endorsement and delivery. It is

issued at a discount determined by the issuer company. The discount varieswith the credit rating of the issuer company and the demand and supplyposition in the money market.

A dvantages

It does not create any lien on assets of the company.

Tradability of CP provides investors with exit options.

High credit ratings fetch a lower cost of capital.

Wide range of maturities provide more flexibility.Cont.


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Disadvantages

A high degree of control is exercised on issue of CP.

Stand-by credit may become necessary.

Its usage is limited to only blue chip companies.

Issuance of CP bring down the bank credit limits.


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Call M oney M a rketCall money refers to that transaction which is received or delivered by theparticipants in the call money market and where the funds are returnablenext day. The call money transactions are also referred to as overnightfunds.


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Repurch a se Agreements (R epos )Repurchase agreements are simply known as 'repos' and arise when oneparty sells a security to another party with an agreement to buy it back at aspecified time and price. Repos are active between commercial banks.Basically it is pledge transaction, with the bank committing itself to buyback the security, therefore, paying back the amount borrowed on pledgeat a mutually agreed price after a specified period. This period rangesbetween one and 14 days. Repo is a risk-free short-term instrument for balancing short-term liquidity needs.

Cont.


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Inter-Bank Participation C ertificate

The minimum period shall be 91 days with maximum of 18 0 days for

IBPC on risk sharing basis and in case of non-risk sharing basis, it is

limited to 9 0 days.

The maximum participation in loan under IBPC would be 4 0 % of theamount outstanding or the limit sanctioned, whichever is lower.

However, participation should be only in 'standard asset'.

Documents to be executed by the borrowers in favour of the issuing

banks, which shall include a clause that it should have liberty to shift atits discretion, without notice to the borrower, of a part or portion of the

outstanding to another participating bank.

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Interest rates are determined between issuing bank and theparticipating bank.

The issuing bank and the participating bank have to enter intoparticipation contracts in the prescribed format.

IBPCs are not transferable and they cannot be re-deemed before thedue date.

On the date of maturity, the issuing Bank have to make payment of theIBPC along with agreed rate of interest to the participating bank.


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Bills Rediscounting The formula for arriving at the discounted value of the bills for variousunexpired usance period is given below:

Discounted Value of the Bill

D =Where,

D = Discounted value of bills I = Effective rate of interest per annum

F = Face value of bills n =N

umber of days of the usanceperiod

Cont.


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O ther Money Market Instruments

Term Money

Corporate Debentures and Bonds

Bank Deposits

Bankers A cceptance

Commercial Bills


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Emergence of risks of different nature in money markets on account of freeing of interest rates, removal of entry barriers and integration with

the international financial markets. The total impact of interest rate

deregulation has exposed the banks to greater vulnerability in trying to

cope with money market related risks.

Stimulation of the government securities market due to decision of the

government to borrow at market related rates on the lines suggested

by the N arasimham Committee. Taking into consideration the risk

factor, there is no doubt that government securities including treasury

bills offer a good return to the investor.


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Stock Mkt in India NCR02

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