KMM INSTITUTE OF P.G STUDIES A PROJECT REPORT ON STUDY ON CAPITAL MARKET OF INDIA AND COMPARISON BETWEEN ONLINE TRADING V/S OFFLINE TRADING AT
BY T. Swetha FOR PARTIAL FULFILLMENT OF POST GRADUATE IN MANAGEMENT SUBMITTED TO KMM INSTITUTE OF PG STUDIES, TIRUPATHI
TABLE OF CONTENT
CHAPTER :1 EXECUTIVE SUMMARY OBJECTIVE OF THE STUDY SCOPE OF THE STUDY SIGNIFICANCE OF THE STUDY LIMITATIONS NEED OF THE STUDY COMPANY PROFILE CHAPTER:2 ONLINE TRADING
HISTORY TIME FRAME TYPES OF BROKERS CONSIDERATIONS BENEFITS TRADING TODAY
CHAPTER:3 INTRODUCTION
CAPITAL MARKET IN INDIA
ADVANTAGES
DISADVANTAGES
PARAMETERS TO JUDGE IPO
FREQUENTLY ASKED QUESTIONS
CHAPTER:4
CAPITAL MARKET IN INDIA : IMPACT AND FACTORS
IMPACTS OF CAPITAL MARKET IN INDIA
FACTORS AFFECTING CAPITAL MARKET IN INDIA
ONLINE TRADING AND OFFLINE TRADING
EXECUTIVE SUMMARY As per the title suggest the project report has been prepared regarding the study on capital market and comparison between online trading v/s offline trading. Online trading was initiated by NSE in india and soon after the other exchanges also followed it. There was a major boom in year 2000 when lots of online trading companies came with a bang but only few were survived because of lack of computer knowledge and low internet penetration. There are two types of online trading trading companies one is the banking banking online trading companies and the other is non-banking trading. Today online trading contributes are about 8-10%. It is continuosly growing and has a huge market potential. Major findings indicates that out of a survey of 100 respondents it was seen that most of the investors prefer online trading because of few major factors such as time saving , convenience etc. although during my research project I have seen that most of the respondents feel online trading , a secure way of investing into stock market still a few of them feel it unsafe and a bit complicated but they posses information about online trading. Today the online trading companies having cut throat competition in our offering whose brokerage discounts lower margin money and zero balance accounts. Due to rising education awareness and use of internet there is a huge potential for online trading in future and companies must come pu with innovative offerings in capture the untapped market.
OBJECTIVE OF THE STUDY
The main objective of this study is doing an in depth study of capital market and online V/s offline trading by taking sample of investors view . To know that which trading is good for investors : online or offline trading .
To asses an awareness of online trading and offline trading.
Which of the parties involved in capital market.
To determine the growth and development of online and offline trading.
To understand the customer perception of online trading and offline trading.
SCOPE OF THE STUDY Since the year 2000 a big boom has been witnessed in the Indian Stock Market when the market showed the coming up of Online Trading System. Many online stock trading companies came but initially due to lack of online trading some companies vanished and some survived. The companies which survived are getting the handsome returns also
attracting the foreign Investment Companies. Now a days this sector is facing cut-throat competition and also provides huge growth prospects. The study then goes to evaluate and analyze the findings so as to present a clear picture of the trends in the online trading sector.
SIGNIFICANCE OF THE STUDY The 100 people have been interviewed through various sources and their responses have been analyzed. This data can be explorated to take in the trends all Indian online and offline stock trading industry. The significance for the industry lies in studying the growth trends that emerge from the study. It is one of the fastest growing and evolving sectors.
LIMITATIONS The various limitations of the study are : There is a lack of awareness among people about investing in stock market . so the people who are aware of such things were found in specific areas for survey purposes.
Most people are comfortable with traditional system in small towns and like to trade from their respective brokers , hence not providing a true opinion of theirs.
Some of the respondents who did not do online trading were able to respond to only some questions.
The survey was done in Hyderabad and may not truly express the opinion of whole country.
NEED OF THE STUDY During my studies I knew something about the company, but now I have specialized in a particular department for gaining industrial knowledge about financial department for further continuation of my studies. Because all departments will not give overall up to date knowledge about industry, if we went for particular department overall functioning of department will come to know. This company is one of the leading and professionally managed stock broking firm involved in quality services and research.
COMPANY PROFILE
Indiabulls Group is one of India’s top business houses with businesses spread over Real Estate, Infrastructure, Financial Services, Securities, Retail, Multiplex and Power sectors. The group companies are listed on important Indian and Overseas markets. Indiabulls has been conferred the status of a “Business Super brand” by The Brand Council, Super brands India.
To be the largest and most profitable financial services organization in Indian retail market and become one stop shop for all non banking financial products and services for the retail customers.
Rapidly increase the number of client relationships by providing a broad array of product offering to emerge as a clear market leader.
Indiabulls Group has five separately listed companies with subsidiaries which contributed in enhancing scope and profile of the business.
Top Indiabulls Financial Services Limited
Indiabulls Financial Services Limited was incorporated on January 10, 2000 as M/s Orbis Infotech Private Limited at New Delhi under the Companies A ct, 1956. The name of company was changed to M/s. Indiabulls Financial Services Private Limited on March 16, 2001. In the year 2004, Indiabulls came up with it own public issue & became a public limited company on February 27, 2004. The name of company was changed to M/s. Indiabulls Financial Services Limited. The company was promoted by three engineers from IIT Delhi, and has attracted more than Rs.700 million as investments from venture capital, private equity and institutional
investors and has developed significant relationships with large commercial banks such as Citibank, HDFC Bank, Union Bank, ICICI Bank, ABN Amro Bank, Standard Chartered Bank and IL&FS.
Mr. Rajiv Rattan Co-Founder & Vice Chairman (Indiabulls Group)
Mr. Sameer Gelhaut Chairman (Indiabulls Group)
Mr. Saurabh K Mittal Director (Indiabulls Group)
The company headquarters are co-located in Mumbai and Delhi, allowing it to access the two most important regions for Indian financial markets, The marketing and sales efforts are headquartered out of Mumbai, with a regional headquarter in Delhi. Back office, risk management, internal finances etc. are headquartered out of Delhi/NCR allowing the company to scale these processes efficiently for the nationwide network.
Company is listed on: National Stock Exchange Bombay Stock Exchange Luxemburg Stock Exchange Market capitalization:
Over 7 Billion USD Net worth
Over 2.5 Billion USD Highest Ratings from CRISIL CRISIL is India's leading ratings, research, risk and policy advisory company
Broad array of product offering 1. Consumer Finance 2. Housing Finance 3. Commercial Loans 4. Life Insurance 5. Asset Management 6. Advisory Services Top Strategic Updates Indiabulls Financial Services Limited (IBFSL) completed the de-merger of its real estate business into a separate publicly traded company, (IBREL) unlocked over Rs. 10000 crore of shareholder wealth. De-merger: De-merger of Indiabulls Securities Limited from Indiabulls Financial Services Limited. Each shareholder of Indiabulls Financial Services Limited received a share of Indiabulls Securities Limited. SARFAESI Act Notification: Indiabulls Housing Finance Limited, a wholly owned subsidiary of Indiabulls Financial S ervices Limited has been notified as a ‘Financial Institution’ for the purpose of SARFAESI Act, 2002. This notification is being effectively used by the company to yield positive results in speedy recoveries of delinquent mortgage loans. New Business Venture Updates:
Life Insurance Venture: Indiabulls Financial Services Limited (IBFSL) has entered into an MOU with Sogecap, the insurance arm of Societe Generale (SocGen) for its upcoming life insurance joint venture. Sogecap will invest Rs 150 crore to subscribe to 26% of the paid up capital in the joint venture. Commodities Exchange (ICEX) : a screen based on-line derivatives exchange for commodities and has established a reliable, time tested, and a transparent trading platform. It is also in the process of putting in place robust assaying and warehousing facilities in order to facilitate deliveries. ICEX is promoted by Indiabulls Financial Services and MMTC.
Asset Management Business: Indiabulls Financial Services Limited proposes to set up an asset management company to manage mutual funds and has applied to SEBI for its approval and the same is awaited.
Indiabulls Real Estate Limited
Indiabulls stepped into the real estate market as Indiabulls Real Estate Limited (IREL) in 2005. A joint venture between Indiabulls and a US based investment major Farallon Capital Management LLC resulted in bringing FDI (Foreign Direct Investment) for the first time in the Indian real estate market. Another joint venture amongst Indiabulls and DLF, Kenneth Builders and Developers (KBD), has brought up projects for development of residential apartments. Our Projects: Indiabulls is currently evaluating many large-scale projects worth several hundred million dollars. 1. One Indiabulls Centre 2. Indiabulls Central Park 3. Central Park Madurai 4. Central Park Hyderabad 5. Castlewood 6. Indiabulls Finance Center 7. HighStreet Vadodara 8. Central Park Vadodara 9. Indiabulls Greens 10. Centrum Park 11. Indiabulls Riverside 12. Gurgoan Housing 13. Sonepat Township 14. Chennai Township 15. Indiabulls Greens Panvel 16. Mumbai Township 17. Nashik SEZ 18. Raigarh SEZ 19. Goa Luxury Resort
Indiabulls Power Limited
Indiabulls Power Limited was established in 2007 to capitalize on emerging opportunities in the Indian power sector. It develops and intends to operate and maintain power projects in India. Indiabulls is currently developing five thermal power projects with an aggregate capacity of approximately 6600 MW. These projects include: - Amravati Phase-I (1320 MW) - Amravati Phase-II (1320 MW) - Nasik (1335 MW) in Maharashtra - Bhaiyathan Thermal Power Project (1320 MW) - Chhattisgarh Power Project (1320 MW) In addition to the above Indiabulls is also developing four medium size Hydro Power Projects in Arunachal Pradesh aggregating to 167 MW.
Indiabulls Securities Limited Indiabulls Securities Limited is the jewel in the crown of Indiabulls group. Indiabulls Securities Limited is India’s leading capital markets company with All -India presence and an extensive client base. Indiabulls Securities is the first and only brokerage house in India to be assigned the highest rating BQ – 1 by CRISIL. Indiabulls Securities Limited is listed on NSE, BSE & Luxembourg stock exchange. Indiabulls also provide commodity brokerage services under Indiabulls Commodities
Limited (ICL). It deals in research work and formation of reports on agri-commodites and metals. ICL has one of the largest retail branch networks in the country.
Products offered Equities and Derivatives
Offers purchase and sale of securities (stock, bonds, debentures etc.) Broker assisted trade execution Automated online investing Access to all IPO's
Equity Analysis Helps to build ideal portfolio Satisfies need by rating stocks based on facts-based measures Free of cost for all securities clients Depository Services
Depository participant with NSDL and CDSL Helps in trading and settlement of dematerialized shares Performs clearing services for all securities transactions Offers platform to execute trade and settle transactions Top Sales Team Structure
Sales force in Indiabulls Securities Limited is divided into two groups. i.e. Online & Offline Mentioned below are the names of EVP's managing respective regions EVP's Name Vijay Babbar Amiteshwar Chaudhay Prasenjeet Mukherjee (Online) Managing Mahrashtra and Managing NCR and UP, Managing West Bengal, Goa, Kerala, Karnataka, Region Punjab,Haryana,Uttranchal, Orissa, Bihar and Andhra Pradesh Rajasthan and Gujarat Jharkhand and Tamil Nadu EVP's Name (Offline) Region
Hemanshu Anirban Manoj Kamdar Bhattacharya Srivastava Managing NCR Managing Bengal, Managing Mumbai, Managing and Haryana Andhra Pradesh ,Tamil Pune and other Rajasthan, , Punjab, Uttar Nadu, Karnataka and surrounding regions part of Gujarat Nirdosh Gaur
Pradesh and part of Mumbai and and Mumbai Madhya Pradesh Gujarat Top Customer Care Department Providing solution to the queries of customers as well as branches from a centralized location based out of gurgaon Clients Client Helpline Number
0124 - 4572444 39407777 (Local dialing from 25 cities)
Securities client can E-mail at
[email protected]
Available from 25 cities: Ahmedabad, Bangalore, Bhopal, Chandigarh, Chennai, Coimbatore, Delhi, Ernakulam, Hyderabad, Jaipur, Jalandhar, Kolkata, Kozhikode, Ludhiana, Lucknow, Mumbai, Mangalore, Nashik,Pune, Salem, Surat, Vadodra, Vadodra - Alkapuri, Vishakhapatnam. Branch Branch Helpline Number
0124-3989444
Queries
E-mail at
Funds related
[email protected]
Reallocation related
[email protected]
Documents related
[email protected]
Other queries except above
[email protected]
Milestones Achieved
Developed one of the first internet trading platforms in India Amongst the first to develop in-house real-time CTCL (computer to computer link) with NSE Introduction of integrated accounts with automatic gateways to client bank accounts Development of products such as Power Indiabulls for high volume traders Indiabulls Signature Account for self-directed investors Indiabulls Group Professional Network for information and trading service
ONLINE TRADING The birth of online trading came with the debut of the Internet. Prior to this, everyone who traded placed their order through a broker who greatly influenced their purchase decisions. As a matter of fact, only large businesses had access to the web before 1979. Today, however, daily investments are made by individuals through the Internet as online trading continues to remain one of society's most popular ventures. History Online trading began in the 1900s with the advent of the Internet. Where traders once had to physically call in their transactions, online trading opened a new window of opportunity. Traders were able to place their transactions independent of an external broker. Online brokerage firms became the new way to conduct business. CompuServe came on the scene in 1969 as the first major online service company. By the mid-1980s, it was considered a giant in its field. Time Frame By the end of the 1900s other brokerage firms began to establish themselves. First Omaha Securities, Inc. was one of the first. This company went through a period of transformation and eventually became TD Ameritrade in 2005. Another company, TradePlus, ma de its first stock trade in 1983. It offered the public the opportunity to conduct business with America Online as well as CompuServe. Business grew rapidly and nine years later, TradePlus became a reputable firm. Today, TradePlus (now known as the E-Trade Group) remains a leader in the industry. Types of Brokers There are several types of online brokers and it is pertinent to choose a reputable company. Some things to consider when choosing an online broker include the minimum investment needed to begin trading; amount of inactivity fees; trading support; commissions and whether the broker is involved in other businesses. Carefully weigh the answers to these questions before settling on an online broker. As this broker has access to your financial information , you need to make sure that they have a secure system in place. Some well-known brokers are Fidelity, TDAmeritrade, E*Trade and Scottrade.
Considerations By the 1900s online investing had exploded. Internet access became affordable, making the use of the Internet widespread. The idea of being self-sustained as a trader was appealing. There was no need to get a broker involved and business could be conducted around the clock. By January of 1996, the first e-broker was developed and hundreds opened accounts online brokers. If an individual was able to conduct appropriate preparatory research and had reasonable management skills, he was able to succeed online. Benefits The benefits of online trading outweighs offline by a great margin. Perhaps the greatest benefit is the ability to take control of your own future. Online trading eliminates the "middleman," those sales agents who don't really have your best interests at heart. Online stock trading allows you to call your own shots. It is you that places the trade. By trading online you can also save on trading commissions. Online trading also makes good use of day trading. Day trading is not a viable option in offline trading because of the high costs of broker assisted trades. Trading Today Online trading has developed tremendously since its inception in 1994. Today practically anyone with the means can invest with a reputable company, such as Forex. The Forex company became a new major contender to the control of the trading market. The modern online Forex company offers new investment options for online traders, such as the ability to use margin account as a leverage to investments. This means a trader can purchase a large sum of foreign currency with paying the full price. Margin trading allows for greater buying power and larger profits.
INTRODUCTION Capital Market in India The capital market is the market for securities, where companies and governments can raise long term funds. Selling stock and selling bonds are two ways to generate capital and long term funds. Thus bond markets and stock markets are considered capital markets. The capital markets consist of the primary market, where new issues are distributed to investors, and the secondary market, where existing securities are traded .The Indian Equity Markets and the Indian Debt markets together form the I ndian Capital markets Indian Equity Market at present is a lucrative field for investors. Indian stocks are profitable not only for long and medium-term investors but also the position traders, short-term swing traders and also very short term intra-day traders. In India as on December 30 2007, market capitalisation (BSE 500) at US$ 1638 billion was 150 per cent of GDP, matching well with other emerging economies and selected matured markets. For a developing economy like India, debt markets are crucial sources of capital funds. The debt market in India is amongst the largest in Asia. It includes government securities, public sector undertakings, other government bodies, financial institutions, banks and companies.
Equity market in India:Stock is the type of equity security with which most people are familiar. When investors (savers) buy stock, they become owners of a "share" of a company's assets and earnings. If a company is successful, the price that investors are willing to pay for its stock will often rise and shareholders who bought stock at a lower price then stand to make a capital profit. If a company does not do well, however, its stock may decrease in value and shareholders can lose money. Stock prices are also subject to both general economic and industry-specific market factors. The equity market is classified as :(a) Primary market (b) Secondary market
(a) Primary market:The primary market provides the channel for creation of new securities through the issuance of financial instruments by public companies as well as government companies , bodies and agencies. Features of primary markets are: This is the market for new long term capital. The primary market is the market where the securities are sold for the first time. Therefore it is also called the New Issue Market (NIM). In a primary issue, the securities are issued by the company directly to investors. The company receives the money and issues new security certificates to the investors. Primary issues are used by companies for the purpose of setting up new business or for expanding or modernizing the existing business. The primary market performs the crucial function of facilitating capital formation in the economy. The primary market issuance is done either through public issue or private placement . A public issue does not limit any entity in investing while in private placement , the issuance is done to select people. In terms of Indian Companies Act , 1956 as issue becomes public if it results in allotment to more than 50 persons. This means an issue resulting in allotment to less than 50 persons is private placement . An IPO is the first sale of stock by a company to the public. In this market company can raise money by issuing equity. If the company has never issued equity to the public, it's known as an IPO. Mostly public companies go for IPO. But large privately-owned companies may also go for an IPO to become publicly traded. In an IPO the company offloads a certain percentage of its total shares to the public at a certain` price In an IPO, the issuer obtains the assistance of an underwriting firm, which helps it determine what type of security to issue (common or preferred), best offering price and time to bring it to market.. Most IPO’S these days do not have a fixed offer price. Instead they follow a method called BOOK BUILDIN PROCESS, where the offer price is placed in a band or a range with the highest and the lowest value (refer to the newspaper clipping on the page). The public can bid for the shares at any price in the band specified. Once the bids come in, the company evaluates all the bids and decides on an offer price in that range. After the offer price is fixed, the company allots its shares to the people who had applied for its shares or returns them their money in case of non allotment of shares.
Advantages of going public Increased Capital A public offering will allow a company to raise capital to use for various corporate purposes such as working capital, acquisitions, research and development, marketing, and expanding plant and equipment. Liquidity Once shares of a company are issue through an IPO & traded on a public exchange, those shares have a market value and can be resold. This allows a company to attract and retain employees by offering stock incentive packages to those employees. Moreover, it also provides investors in the company the option to trade their shares thus enhancing investor confidence. Increased Prestige Public companies often are better known and more visible than private companies, this enables them to obtain a larger market for their goods or services. Public companies are able to have access to larger pools of capital as well as different types of capital. Valuation Public trading of a company's shares sets a value for the company that is set by the public market and not through more subjective standards set by a private valuator. This is helpful for a company that is looking for a merger or acquisition. It also allows the shareholders to know the value of the shares. Increased wealth The founders of the company often have the sense of increased wealth as a result of the IPO. Prior to the IPO these shares were illiquid and had a more subjective price. These shares now have an ascertainable price and after any lockup period these shares may be sold to the public, subject to limitations of law.
Disadvantages of going Public Time and Expense Conducting an IPO is time consuming and expensive. A successful IPO can take up to a year or more to complete and a company can expect to spend large amount of money on attorneys, accountants, and printers. In addition, the underwriter's fees can range from 3% to 10% of the value of the offering. Due to the time and expense of preparation of the IPO, many companies simply cannot afford the time or spare the expense of preparing the IPO. Disclosure Once a company goes public it comes under the purview of SEBI . It is supposed to file quarterly results with SEBI and follow other regulations as per SEBI guidelines. . Decisions based upon Stock Price Management's decisions may be affected by the market price of the shares and the feeling that they must get market recognition for the company's stock. They may give more consideration to market price of the share and as a consequence may take a decision which is not prudent & sound . Regulatory Review The Company will be open to review by the SEBI to ensure that the company is making the appropriate filings with all relevant disclosures. Falling Stock Price If the shares of the company's stock fall, the company may lose market confidence, decreased valuation of the company may affect lines of credits, secondary offering pricing, the company's ability to maintain employees, and the personal wealth of insiders and investors.
Vulnerability If a large portion of the company's shares are sold to the public, the company may become a target for a takeover, causing insiders to lose control. A takeover bid may be the result of shareholders being upset with management or corporate raiders looking for an opportunity. Defending a hostile bid can be both expensive and time consuming.
Parameters to judge an IPO Good investing principles demand that you study the minutes of details prior to investing in an IPO. Here are some parameters you should evaluate:Promoters Is the company a family run business or is it professionally owned? Even with a family run business what are the credibility and professional qualifications of those managing the company? Do the top level managers have enough experience (of at least 5 years) in the specific type of business? Industry Outlook The products or services of the company should have a good demand and scope for profit. Business Plans Check the progress made in terms of land acquisition, clearances from various departments, purchase of machinery, letter of credits etc. A higher initial investment from the promoters will lead to a higher faith in the organization. Financials Why does the company require the money? Is the company floating more equity than required? What is the debt component? Keep a track on the profits, growth and margins of the previous years. A steady growth rate is the quality of a fundamentally sound company. Check the assumptions the promoters are making and whether these assumptions or expectations sound feasible. Risk Factors The offer documents will list our specific risk factors such as the company’s liabilities, court cases or other litigations. Examine how these factors will affect the operations of the company. Key Names Every IPO will have lead managers and merchant bankers. You can figure out the track record of the merchant banker through the SEBI website. Pricing Compare the company’s PER with that of similar companies. With this you can find out the P/E Growth ratio and examine whether its earning projections seem viable. Listing You should have access to the brokers of the stock exchanges where the company will be listing itself.
Secondary market:Secondary market is the market for buying and selling securities of the existing companies. Under this, securities are traded after being initially offered to the public in the primary market and/or listed on the stock exchange. The stock exchanges are the exclusive centres for trading of securities. It is a sensitive barometer and reflects the trends in the economy through fluctuations in the prices of various securities. It been defined as, "a body of individuals, whether incorporated or not, constituted for the purpose of assisting, regulating and controlling the business of buying, selling and dealing in securities". There are 23 stock exchanges in India. Listing on stock exchanges enables the shareholders to monitor the movement of the share prices in an effective manner. This assist them to take prudent decisions on whether to retain their holdings or sell off or even accumulate further. However, to list the securities on a stock exchange, the issuing company has to go through set norms and procedures. Various aspects of secondary/ stock market in India :(a) Corporate Securities: T he stock exchanges are the exclusive centres for trading of securities. Though the area of operation/jurisdiction of an exchange is specified at the time of its recognition, they have been allowed recently to set up trading terminals anywhere in the country. The three newly set up exchanges (OTCEI, NSE and ICSE) were permitted since their inception to have nation wide trading. The trading platforms of a few exchanges are now accessible from many locations. Further, with extensive use of information technology, the trading platforms of a few exchanges are also accessible from anywhere through the Internet and mobile devices. This made a huge difference in a geographically vast country like India. (b) Exchange Management: Most of the stock exchanges in the country are organised as” Mutuals” which was considered beneficial in terms of tax benefits and matters of compliance. The trading members, who provide brokering services, also own,control and manage the exchanges. This is not an effective model for self -regulatory organisations as the regulatory and public interest of the exchange conflicts with private interests. Efforts are on to demutualise the exchanges whereby ownership, management and trading membership would be segregated from one another. Two exchanges viz. OTCEI and NSE are demutualised from inception, where ownership, management and trading are in the hands of three different sets of people. This model eliminates conflict of interest and helps the exchange to pursue market efficiency and investor interest aggressively.
(c) Membership: The trading platform of an exchange is accessible only to brokers. The broker enters into trades in exchanges either on his own account or on behalf of clients. No stock broker or sub-broker is allowed to buy, sell or deal in securities, unless he or she holds a certificate of registration granted by SEBI. A broker/sub-broker complies with the code of conduct prescribed by SEBI. Over time, a number of brokers - proprietor firms and partnership firms - have converted themselves into corporates. The standards for admission of members stress on factors, such as corporate structure, capital adequacy, track record, education, experience, etc. and reflect a conscious endeavour to ensure quality broking services. (d) Listing: A company seeking listing satisfies the exchange that at least 10% of the securities, subject to a minimum of 20 lakh securities, were offered to public for subscription, and the size of the net offer to the public (i.e. the offer price multiplied by the number of securities offered to the public, excluding reservations, firm allotment and promoters' contribution) was not less than Rs. 100 crore, and the issue is made only through book building method with allocation of 60% of the issue size to the qualified institutional buyers. In the alternative, it is required to offer at least 25% of the securities to public. The company is also required to maintain the minimum level of non - promoter holding on a continuous basis. In order to provide an opportunity to investors to invest/trade in the securities of local companies, it is mandatory for the companies, wishing to list their securities, to list on the regional stock exchange nearest to their registered office. If they so wish, they can seek listing on other exchanges as well. Monopoly of the exchanges within their allocated area, regional aspirations of the people and mandatory listing on the regional stock exchange resulted in multiplicity of exchanges. The basic norms for listing of securities on the stock exchanges are uniform for all the exchanges. These norms are specified in the listing agreement entered into between the company and the concerned exchange. The listing agreement prescribes a number of requirements to be continuously complied with by the issuers for continued listing and such compliance is monitored by the exchanges. It also stipulates the disclosures to be made by the companies and the corporate governance practices to be followed by them. SEBI has been issuing guidelines/circulars prescribing certain norms to be included in the listing agreement and to be complied with by the companies. A listed security is available for trading on the exchange. The stock exchanges levy listing fees - initial fees and annual fees - from the listed companies. It is a major source of income for many exchanges. A security listed on other exchanges is
also permitted for trading. A listed company can voluntary delist its securities from non-regional stock exchanges after providing an exit opportunity to holders of securities in the region where the concerned exchange is located. An exchange can, however, delist the securities compulsorily following a very stringent procedure. (e) Trading Mechanism: The exchanges provide an on-line fully-automated Screen Based Trading System (SBTS) where a member can punch into the computer quantities of securities and the prices at which he likes to transact and the transaction is executed as soon as it finds a matching order from a counter party. SBTS electronically matches orders on a strict price/time priority and hence cuts down on time, cost and risk of error, as well as on fraud resulting in improved operational efficiency. It allows faster incorporation of price sensitive information into prevailing prices, thus increasing the informational efficiency of markets. It enables market participants to see the full market on real-time, making the market transparent. It allows a large number of participants, irrespective of their geographical locations, to trade with one another simultaneously, improving the depth and liquidity of the market. It provides full anonymity by accepting orders, big or small, from members without revealing their identity, thus providing equal access to everybody. It also provides a perfect audit trail, which helps to resolve disputes by logging in the trade execution process in entirety. (f) Trading Rules: Regulations have been framed to prevent insider trading as well as unfair trade practices. The acquisitions and takeovers are permitted in a well- defined and orderly manner. The companies are permitted to buy back their securities to improve liquidity and enhance the shareholders' wealth. (g) Price Bands: Stock market volatility is generally a cause of concern for both policy makers as well as investors. To curb excessive volatility, SEBI has prescribed a system of price bands. The price bands or circuit breakers bring about a coordinated trading halt in all equity and equity derivatives markets nation-wide. An index-based market-wide circuit breaker system at three stages of the index movement either way at 10%, 15% and 20% has been prescribed. The movement of either S&P CNX Nifty or Sensex, whichever is breached earlier, triggers the breakers. As an additional measure of safety, individual scrip-wise price bands of 20% either way have been imposed for all securities except those available for stock options. (h) Demat Trading:
The Depositories Act, 1996 was passed to proved for the establishment of depositories in securities with the objective of ensuring free transferability of securities with speed, accuracy and security by :(i) making securities of public limited companies freely transferable subject to certain exceptions; (ii) dematerialising the securities in the depository mode; and (iii) providing for maintenance of ownership records in a book entry form. In order to streamline both the stages of settlement process, the Act envisages transfer of ownership of securities electronically by book entry without making the securities move from person to person. Two depositories, viz. NSDL and CDSL, have come up to provide instantaneous electronic transfer of securities. At the end of March 2002, 4,172 and 4,284 companies were connected to NSDL and CDSL respectively. The number of dematerialised securities increased to 56.5 billion at the end of March 2002. As on the same date, the value of dematerialsied securities was Rs. 4,669 billion and the number of investor accounts was 4,605,588. All actively traded scrips are held, traded and settled in demat form. Demat settlement accounts for over 99% of turnover settled by delivery. This has almost eliminated the bad deliveries and associated problems. To prevent physical certificates from sneaking into circulation, it has been mandatory for all new IPOs to be compulsorily traded in dematerialised form. The admission to a depository for dematerialisation of securities has been made a prerequisite for making a public or rights issue or an offer for sale. It has also been made compulsory for public listed companies making IPO of any security for Rs. 10 crore or more to do the same only in dematerialised form. (i) Charges: A stock broker is required to pay a registration fee of Rs.5, 000 every financial year, if his annual turnover does not exceed Rs. 1 crore. If the turnover exceeds Rs. 1 crore during any financial year, he has to pay Rs. 5,000 plus one-hundredth of 1% of the turnover in excess of Rs.1 crore. After the expiry of five years from the date of initial registration as a broker, he has to pay Rs. 5,000 for a block of five financial years. Besides, the exchanges collect transaction charges from its trading members. NSE levies Rs. 4 per lakh of turnover. The maximum brokerage a trading member can levy in respect of securities transactions is 2.5% of the contract price, exclusive of statutory levies like SEBI turnover fee, service tax and stamp duty. However, brokerage charges as low as 0.15% are also observed in the market. (j) Trading Cycle: Rolling settlement on T+3 basis gave way to T+2 from April 2003. The market has moved close to spot/cash market.
(k) Risk Management: To pre-empt market failures and protect investors, the regulator/exchanges have developed a comprehensive risk management system, which is constantly monitored and upgraded. It encompasses capital adequacy of members, adequate margin requirements, limits on exposure and turnover, indemnity insurance, on-line position monitoring and automatic disablement, etc. They also administer an efficient market surveillance system to curb excessive volatility, detect and prevent price manipulations. A clearing corporation assures the counterparty risk of each member and guarantees financial settlement in respect of trades executed on NSE.
Thus in a nutshell the following diagram explains what all is discussed above –
Debt Market in India:For a developing economy like India, debt markets are crucial sources of capital funds. The debt market in India is amongst the largest in Asia. It includes government
securities, public sector undertakings, other government bodies, financial institutions, banks and companies. The debt markets in India is divided into three segments, viz., Government Securities, Public Sector Units (PSU) bonds, and corporate securities.
Debt – Market Segments
The Corporate Bonds mar ket for Government Securities comprises the Centre, State and State-sponsored securities. Government securities (G-secs) or gilts are sovereign securities, which are issued by the Reserve Bank of India (RBI) on behalf of the Government of India (GOI). The GOI uses these funds to meet its expenditure commitments. The PSU bonds are generally treated as surrogates of sovereign paper, sometimes due to explicit guarantee and often due to the comfort of public ownership. Some of the PSU bonds are tax free, while most bonds including government securities are not tax-free. The RBI also issues tax-free bonds, called the 6.5% RBI relief bonds, which is a popular category of tax-free bonds in the market. Corporate bond markets comprise of commercial paper and bonds. These bonds typically are structured to suit the requirements of investors and the issuing corporate, and include a variety of tailor- made features with respect to interest payments and redemption.
Government Securities
PSU Bonds
PARTICIPANTS IN THE DEBT MARKETS 1. Central Government:Central government raises money through bond issuances, to fund budgetary deficits and other short and long term funding requirements. 2. Reserve Bank of India:Reserve Bank Of India (RBI), the central bank of the country, acts as investment banker to the government, raises funds for the government through bond and T-bill issues, and also participates in the market through open- market operations, in the course of conduct of monetary policy. 3. Primary dealers:Primary dealers are market intermediaries appointed by the Reserve Bank of India who underwrite and make market in government securities
4. State Governments, municipalities and local bodies :State governments , municipalities and local bodies issue securities in the debt markets to fund their developmental projects, as well as to finance their budgetary deficits. 5. Public sector units (PSU):Public Sector Units are large issuers of debt securities, for raising funds to meet the long term and working capital needs. 6. Corporate treasuries:Corporate treasuries issue short and long term paper to meet the financial requirements of the corporate sector. 7. Banks:Commercial banks are the largest investors in the debt markets, particularly the treasury bill and G-sec markets. They have a statutory requirement to hold a certain percentage of their deposits (currently the mandatory requirement is 24% of deposits) in approved securities (all government bonds qualify) to satisfy the s tatutory liquidity requirements. 8. Mutual funds :Mutual Funds have emerged as another important player in the debt markets, owing primarily to the growing number of bond funds that have mobilised significant amounts from the investors. 9. Foreign Institutional Investors:Foreign Institutional Investors are permitted to invest in Dated Government Securities and Treasury Bills within certain specified limits. 10. Provident funds:Provident funds are large investors in the bond markets, as the prudential regulations governing the deployment of the funds they mobilise, mandate investments predominantly in treasury and PSU bonds.
Primary market/ New Issue Market:As in the case of equity primary market , this is the market in which debt instruments – government securities, PSU Bonds & corporate bonds are issued for the first time . Government Securities:In case of government securities , it is the RBI which issues securities on behalf of the government (both state as well as central government). Thus RBI periodically conducts auction of GOI/SDL under Central/State borrowing Treasury program as per the auction calendar and also under MSS for GOI Securities.
The Primary issuance process involves:AUCTION TYPE:
Yield-based auction In this, successful bids are decided by filling up the notified amount from the lowest bid upwards. This auction creates a new security, every time an auction is completed & the name of the security is the cut-off yield
Price-based auction. In this, successful bids are filled up in terms of prices that are bid by participants from the highest price downward. This auction facilitates the re-issue of an existing security
For example, the G-sec 10.3% 2010 derives its name from the cut-off yield at the auction, which in this case was 10.3%, which also becomes the coupon payable on the bond.
For example, in March 2001, RBI auctioned the 11.43% 2015 security. This was a G-sec, which had been earlier issued and trading in the market. The auction was for an additional issue of this existing security. The coupon rate and the dates of payment of coupons and redemption are already known. The additional issue increases the gross cash flows only on these dates.
The two choices in treasury auctions, which are widely known and u sed, are: Discriminatory Price Auctions (French Auction) Uniform Price Auctions (Dutch Auction) In both these kinds of auctions, the winning bids are those that exhaust the amount on offer, beginning at the highest quoted price (or lowest quoted yield). In the Indian markets, discriminatory price auction as well as uniform price auction is used for all bond issuances. Whether an auction will be Dutch or French is announced in the notification of the auction. If all the successful bidders have to pay the cut-off price of Rs. 111.2, the auction is called a Dutch auction, or a uniform price auction. If the successful bidders have to pay the prices they have actually bid, the auction fills up the notified amounts, in various prices at which each of the successful bidders bid. This is called a French auction, or a discriminatory price auction. Each successful bidder pays the actual price bid by him.
BID TYPE 1. Competitive Bid: Participants having SGL a/c & current a/c 2. Non-Competitive Bid: Participants not having SGL a/c & current a/c
COMPETITIVE BIDDING PROCESS:
RBI announces the auction of G-sec through a press notification, and invites bids.
Front office takes a view about Bank's participation in the auction, taking into
consideration the market factors, Bank's liquidity and the existing portfolio. Accordingly, proposal is placed before the Investment Committee
Investment committee consists of GM, AGM of different departments & CMD. Proposal for investment is placed before the Investment Committee. Decision is taken. NO
s e Y
Bids are submitted through NDS_OM platform giving details of the quantum and expected price/yield of securities. Report is generated.
Result of the auction is declared by RBI on the same day evening on NDS. If bid is accepted either partially or fully, the same is entered and authorized in bank system.
Non-Competitive Bidding in Government Securities
Back-Office Operation: Duly authorized Deal Slip is verified by the back office. On
the day of allotment/settlement back office will settle the deal in the system & categorising securities in HTM, AFS & HFT.
End
To enable medium and small investors to participate in the auction process without taking the price risk in auctions, the Reserve Bank of India has introduced a facility of noncompetitive bidding in dated government securities auctions for select set of investors. Non-competitive bidding means that a person would be able to participate in the auctions of dated government securities without having to quote the yield or price in the bid. Thus, he will not have to worry about whether his bid will be on or off-the-mark; as long as he bids in accordance with the scheme, he will be allotted securities fully or partially.
Participants in the Scheme: Participation in the Scheme of non-competitive bidding is open to any person including firms, companies, corporate bodies, institutions, provident funds, trusts and any other entity as prescribed by RBI. As the focus is on the small investors lacking market expertise, the Scheme will be open to those who do not have current account (CA) or Subsidiary General Ledger (SGL) account with the Reserve Bank of India. As an exception, Regional Rural Banks (RRBs) and Urban Cooperative Banks (UCBs) can also apply under this Scheme in view of their statutory obligations. Amount offered for non-competitive bidding: Non-competitive bids will be allowed up to 5 per cent of the notified amount in the specified auctions of dated securities, within the notified amount. That is, if the notified amount is Ra.1000 crore, the amount reserved for non-competitive bidders would be Rs.50 crore and the remaining Rs.950 crore will be put up for competitive auctions. The minimum amount for bidding will be Rs.10, 000 (face value) and in multiples in Rs.10,000. Corporate Bonds :The corporate bond market has been in existence in India for a long time. However, despite a long history, the size of the public issue segment of the corporate bond market in India has remained quite insignificant.
Secondary Market :Like in the case of equity secondary market, the secondary debt market involves buying and selling of debt instruments which are already issued in the primary market or listed on the exchanges. Government bonds are deemed to be listed as soon as they are issued. Markets for government securities are pre-dominantly wholesale markets, with trades done on telephonic negotiation. NSE WDM provides a trading platform for Government bonds, and reports over 65% of all secondary market trades in government securities. Currently, transactions in government securities are required to be settled on the trade date or next working day unless the transaction is through a broker of a permitted stock exchange in which case settlement can be on T+2 basis. In NDS, all trades between members of NDS have to be reported immediately. The settlement is routed through CCIL for all NDS members. The lack of market infrastructure and comprehensive regulatory framework coupled with low issuance leading to low liquidity in the secondary market, narrow investor base, inadequate credit assessment skills, high cost of issuance and lack of transparency in trades are some of the major factors that hindered the growth of the private corporate debt market. Factors affecting bond interest rates : The key variables having a bearing on interest rate outlook are:US 10 year government bond yields : The correlation between Indian 10 yr G-sec has held reasonably well in the recent past. Although, the correlation might not hold on a day to day basis, but over a slightly longer period, the direction of the movement of the Indian 10 yr bond is quite similar to that of the US 10 yr bond. The yields of the bonds have increased as the green shoots of recovery in the global economy has led to an increase in risk taking behaviour among the investors who are selling bonds to enter other asset classes which are relatively more risky and offers higher yields. The S&P’s decision to lower ratings outlook on US sovereign debt to negative from stable led to sell off in the US treasuries. Similarly in India, the rally in equity markets since the election results on 18 th May might have led to some sell off in the bond markets which have pushed the Indian 10 yr bond yields to 6.70% levels from 6.22% in Mid May, in line with the sharp rise in the US 10 yr bonds .
Inflation / crude oil prices : Inflation arises as the purchasing power of people increases, the value of Rupee increases. To control the inflation and to suck excess liquidity from the system the bonds are issued t higher yield.
Political stability / sovereign rating outlook : The sense of political stability following election results has reduced the risk of an outright sovereign rating downgrade by international credit rating agencies in the near future . Although , the fiscal deficit concerns remain, the continuity of the political regime will abate the risk of runaway fiscal deficits. The reduced risk of sovereign rating downgrade due to a stable government and a likely controllable fiscal deficit scenario will therefore provide support to the bond market sentiments.
RBI policy stance / liquidity outlook:The bond interest rate is also affected by the RBI policy stance. If the RBI goes for an expansionary monetary policy , then the bond coupon rate will come down , as there will be ample liquidity in the system which easily would meet the demand for the same. It is a reverse situation when the RBI goes for a contractionary monetary policy. This is because then the money supply in the economy would be less as compared to the demand for the same and the consequence would be hardening of the bond coupon rate.
Offline and online Trading The introduction of the Internet has surprisingly changed our way of life as a society. It has defined the way we do business and the way we correspond. The Internet has opened many opportunities for online trading. The financial industry revolves around the Internet. Every thing is just a few clicks away. This makes online trading most convenient. But there are still investors who prefer the old fashion way of offline trading and they mainly prefer offline trading for security reasons. Internet has introduced a way for consumers to manage their money online. Not to mention, Internet has transformed the way investment companies operate their business and has made it easy for private investors to gain straight access to a range of different markets and online tools that were at one point only reserved by the use of investment professionals. Consumer investing and online trading has dramatically changed over the last decade. Online trading dynamically continues to be redefined. Services have expanded to include integrated management of additional financial accounts. Not to mention, it has subsequently expanded in conjunction with ground-breaking improvements to the traditional trading interface, such as telephone interface systems. Of course, online trading has many pros. There are several wonderful reasons to invest online and consider online trading. 1. Money saving opportunities The amount of money you save depends primarily on the online brokerage firm that you choose. No two firms are the same. There may be different regulations, similar to bank regulations. There are minimum deposits required that must be maintained. As mentioned above, this will depend on the online brokerage firm. 2. Instant online access You can gain instant access to your account, the value of your portfolio updates immediately before your eyes. 3. Enter online trades at anytime You can enter online trades at anytime and from anywhere. This is very convenient if you live in a different time zone than the country you are trading in. Not to mention, it is especially fit for investors with busy schedules. 4. With online trading you are in charge You are in control of your investments. No sales pitches and no hassle. You decide where to invest your money. Nevertheless, with all the convenience of online trading there are still investors who prefer the old fashion way of offline trading. Offline trading has lost some popularity but it is still the main form of investing. Offline trading offers many benefits as well.
