capital mca=arket hdfc new

8/9/2019 Capital Mca=arket Hdfc New

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INTRODUCTION

The Capital market is a market for financial assets which have a long or indefinite

maturity. Generally, it deals with long term securities which have a maturity period of above one year.

Capital market may be further divided into three types Industrial securities market, Government

securities market and Long term loans market. Industrial securities market is further divided into two

types primary market or new issue market and secondary market or stock echange. Government

securities market is also called as Gilt!"dged securities market. It is the market where Government

securities are traded. Long term loans market is divided into three types Term loans market, #ortgages

market and financial guarantees market.

$bsence of capital market instruments acts as a deterrent to capital formation and

economic growth. %esources would remain idle if finances are not funneled through the capital market.

a& The capital market instruments serves as an important source for the productive use of the

economys savings. It mobili'es the savings of the peoples for further investment and thus

avoids their wastage in unproductive uses.

b& It provides incentives to saving and facilitates capital formation by offering suitable rates of

interest as the price of capital.

c& It provides an avenue for investors, particularly the household sector to invest in financial assets

which are more productive than physical assets.

d& It facilitates increase in production and productivity in the economy and thus, enhances the

economic welfare of the society. Thus, it facilitates (the movement of stream of command over

capital to the point of highest yield) .

e& $ healthy capital market instrument consisting of epert intermediaries promotes stability in

values of securities representing capital funds.

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SCOPE OF THE STUDY

The present study involves an analysis of various Capital #arket Instruments that are available in

the market, analysis of +emateriali'ation and limited lists of securities that are available fortrading in corporate

METHODOLOGY

The data collection methods include both the rimary and -econdary Collection methods.

*. rimary Collection #ethods

This method includes the data collected from the personal discussions with the authori'ed

clerks and members of the "change. /. -econdary Collection #ethods

The -econdary Collection #ethods includes the lectures of the superintend of the

+epartment of #arket 0perations, "+ etc, and also the data collected from the 1ews, #aga'ines

of the 1-", 2-" and different books issues of this study.

OBJECTIVES OF THE STUDY

To study about the Ca!ta" Ma#$et I%st#u&e%ts'

To study about De&ate#!a"!(at!o% o# De&at !% the sto)$ e*)ha%+e ,o# easy t#a%s,e# a%d

e##o# #o%e syste&'

-%o.!%+ about the "atest a%d ,utu#e de/e"o&e%ts !s the sto)$ e*)ha%+e syste&'

Re)e%t de/e"o&e%t !% de#!/at!/es &a#$et'

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LIMIT0TIONS OF THE PROJECT

! Time constraint was a ma3or limiting factor. 4orty five days were insufficient to

even grasp the theoretical concepts.

! -everal other strategies that could have been studied were not done.

! Lack of knowledge with the brokers.

! +ifference of theory from practice.

! $bsence of re5uired knowledge and technology.

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COMPANY PROFILE

COMPANY PROFILE

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The Hous!%+ De/e"o&e%t F!%a%)e Co#o#at!o% L!&!ted82+4C& was amongst the first to receive

an 'in principle'approval from the %eserve 9ank of India 8%9I& to set up a bank in the private sector, as

part of the %9I:s liberali'ation of the Indian 9anking Industry in *;;7. The bank was incorporated in

$ugust *;;7 in the name of :2+4C 9ank Limited:, with its registered office in #umbai, India. 2+4C

9ank commenced operations as a -cheduled Commercial 9ank in >, the Corporation has maintained a

consistent and healthy growth in its operations to remain the market leader in mortgages. Its

outstanding loan portfolio covers well over a million dwelling units. 2+4C has developed significant

epertise in retail mortgage loans to different market segments and also has a large corporate client base

for its housing related credit facilities. ?ith its eperience in the financial markets, a strong market

reputation, large shareholder base and uni5ue consumer franchise, 2+4C was ideally positioned to

promote a bank in the Indian environment.

2+4C 9ank:s mission is to be a ?orld!Class Indian 9ank. The ob3ective is to build sound customer

franchises across distinct businesses so as to be the preferred provider of banking services for target

retail and wholesale customer segments, and to achieve healthy growth in profitability, consistent with

the bank:s risk appetite. The bank is committed to maintain the highest level of ethical standards,

professional integrity, corporate governance and regulatory compliance. 2+4C 9ank:s business

philosophy is based on four core values ! 0perational "cellence, Customer 4ocus, roduct Leadership

and eople.

Ca!ta" St#u)tu#e12

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$s on 6*st #arch, /@*/ the authori'ed share capital of the 9ank is %s. ==@ crore. The paid!up capital as

on the said date is %s. 7A;,66,>A,=7@ 8/67,AA,BB,/>@ e5uity shares of %s. /! each&. The 2+4C Group

holds /6.*=D of the 9ank:s e5uity and about *>./; D of the e5uity is held by the $+- G+%

+epositories 8in respect of the bank:s $merican +epository -hares 8$+-& and Global +epository

%eceipts 8G+%& Issues&. [email protected] D of the e5uity is held by 4oreign Institutional Investors 84IIs& and the

9ank has 7,7>,;/7 shareholders

The shares are listed on the 9ombay -tock "change Limited and The 1ational -tock "change of

India Limited. The 9ank:s $merican +epository -hares 8$+-& are listed on the 1ew Eork -tock

"change 81E-"& under the symbol :2+9: and the 9ank:s Global +epository %eceipts 8G+%s& are

listed on Luembourg -tock "change under I-I1 1o F-7@7*=4/@@/.

FIN0NCI0L RESULTS1

P#o,!t 3 Loss 0))ou%t1 4ua#te# e%ded Ju%e 567 8698

The 9anks total income for the 5uarter ended ,@;B.@

crores for the 5uarter ended


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2+4C 9ank offers a wide range of commercial and transactional banking services and treasury

products to wholesale and retail customers. The bank has three key business segments

:ho"esa"e Ba%$!%+ Se#/!)es

The 9ank:s target market ranges from large, blue!chip manufacturing companies in the Indian

corporate to small H mid!si'ed corporates and agri!based businesses. 4or these customers, the

9ank provides a wide range of commercial and transactional banking services, including working

capital finance, trade services, transactional services, cash management, etc. The bank is also a

leading provider of structured solutions, which combine cash management services with vendor

and distributor finance for facilitating superior supply chain management for its corporate

customers. 9ased on its superior product delivery service levels and strong customer orientation,

the 9ank has made significant inroads into the banking consortia of a number of leading Indian

corporates including multinationals, companies from the domestic business houses and prime

public sector companies. It is recognised as a leading provider of cash management and

transactional banking solutions to corporate customers, mutual funds, stock echange members

and banks.

Reta!" Ba%$!%+ Se#/!)es

The ob3ective of the %etail 9ank is to provide its target market customers a full range of financial

products and banking services, giving the customer a one!stop window for all hisher banking

re5uirements. The products are backed by world!class service and delivered to customers through

the growing branch network, as well as through alternative delivery channels like $T#s, hone

9anking, 1et9anking and #obile 9anking.

The 2+4C 9ank referred program for high net worth individuals, the 2+4C 9ank lus and the

Investment $dvisory -ervices programs have been designed keeping in mind needs of customers

who seek distinct financial solutions, information and advice on various investment avenues. The

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9ank also has a wide array of retail loan products including $uto Loans, Loans against

marketable securities, ersonal Loans and Loans for Two!wheelers. It is also a leading provider of

+epository articipant 8+& services for retail customers, providing customers the facility to hold

their investments in electronic form.

2+4C 9ank was the first bank in India to launch an International +ebit Card in association with

I-$ 8I-$ "lectron& and issues the #astercard #aestro debit card as well. The 9ank launched

its credit card business in late /@@*. 9y #arch /@*@, the bank had a total card base 8debit and

credit cards& of over *7 million. The 9ank is also one of the leading players in the (merchant

ac5uiring) business with over ;@,@@@ oint!of!sale 80-& terminals for debit credit cards

acceptance at merchant establishments. The 9ank is well positioned as a leader in various net

based 9/C opportunities including a wide range of internet banking services for 4ied +eposits,

Loans, 9ill ayments, etc.

T#easu#y

?ithin this business, the bank has three main product areas ! 4oreign "change and +erivatives,

Local Currency #oney #arket H +ebt -ecurities, and "5uities. ?ith the liberalisation of thefinancial markets in India, corporates need more sophisticated risk management information,

advice and product structures. These and fine pricing on various treasury products are provided

through the bank:s Treasury team. To comply with statutory reserve re5uirements, the bank is

re5uired to hold /=D of its deposits in government securities. The Treasury business is

responsible for managing the returns and market risk on this investment portfolio.

Ma%a+e&e%t12#r. C.#. asudev has been appointed as the Chairman of the 9ank with effect from Ath


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including 4inance -ecretary, Government of India, "ecutive +irector, ?orld 9ank and Government

nominee on the 9oards of many companies in the financial sector.

The #anaging +irector, #r. $ditya uri, has been a professional banker for over /= years, and before

3oining 2+4C 9ank in *;;7 was heading Citibank:s operations in #alaysia.

The 9ank:s 9oard of +irectors is composed of eminent individuals with a wealth of eperience in

public policy, administration, industry and commercial banking. -enior eecutives representing 2+4C

are also on the 9oard.

-enior banking professionals with substantial eperience in India and abroad head various businesses

and functions and report to the #anaging +irector. Given the professional epertise of the management

team and the overall focus on recruiting and retaining the best talent in the industry, the bank believes

that its people are a significant competitive strength.

C#ed!t Rat!%+

The 9ank has its deposit programs rated by two rating agencies ! Credit $nalysis H %esearch Limited

8C$%"& and 4itch %atings India rivate Limited. The 9ank:s 4ied +eposit programme has been rated

:C$%" $$$ 84+&: JTriple $K by C$%", which represents instruments considered to be of the best

5uality, carrying negligible investment risk. C$%" has also rated the bank:s Certificate of +eposit

8C+& programme PR 9; which represents superior capacity for repayment of short term promissory

obligations. 4itch %atings India vt. Ltd. 8*@@D subsidiary of 4itch Inc.& has assigned the $$$

8 ind & rating to the 9ank:s deposit programme, with the outlook on the rating as stable. This rating

indicates highest credit 5uality where protection factors are very high

The 9ank also has its long term unsecured, subordinated 8Tier II& 9onds rated by C$%" and 4itch

%atings India rivate Limited and its Tier I perpetual 9onds and Fpper Tier II 9onds rated by C$%"

and C%I-IL Ltd. C$%" has assigned the rating of C$%" $$$ for the subordinated Tier II 9onds

while 4itch %atings India vt. Ltd. has assigned the rating $$$ 8ind& with the outlook on the rating

as stable. C$%" has also assigned C$%" $$$ JTriple $K for the 9anks erpetual bond and Fpper

Tier II bond issues. C%I-IL has assigned the rating $$$ -table for the 9ank:s erpetual +ebt

;


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programme and Fpper Tier II 9ond issue. In each of the cases referred to above, the ratings awarded

were the highest assigned by the rating agency for those instrumentsM

Co#o#ate Go/e#%a%)e Rat!%+

The bank was one of the first four companies, which sub3ected itself to a Corporate Governance and

alue Creation 8GC& rating by the rating agency, The Credit %ating Information -ervices of India

Limited 8C%I-IL&. The rating provides an independent assessment of an entity:s current performance

and an epectation on its balanced value creation and corporate governance practices in future. The

bank has been assigned a :C%I-IL GC Level *: rating which indicates that the bank:s capability with

respect to wealth creation for all its stakeholders while adopting sound corporate governance practices

is the highest.

0n #ay /6, /@@;, the amalgamation of Centurion 9ank of un3ab with 2+4C 9ank was formallyapproved by %eserve 9ank of India to complete the statutory and regulatory approval process. $s per

the scheme of amalgamation, shareholders of C9o received * share of 2+4C 9ank for every /; shares

of C9o.

The merged entity will have a strong deposit base of around %s. *,//,@@@ crore and net advances of

around %s. B;,@@@ crore. The balance sheet si'e of the combined entity would be over %s. *,A6,@@@

crore. The amalgamation added significant value to 2+4C 9ank in terms of increased branch network,

geographic reach, and customer base, and a bigger pool of skilled manpower.

In a milestone transaction in the Indian banking industry, Times 9ank Limited 8another new private

sector bank promoted by 9ennett, Coleman H Co. Times Group& was merged with 2+4C 9ank Ltd.,

effective 4ebruary /A, /@@@. This was the first merger of two private banks in the 1ew Generation

rivate -ector 9anks. $s per the scheme of amalgamation approved by the shareholders of both banks

and the %eserve 9ank of India, shareholders of Times 9ank received * share of 2+4C 9ank for every

=.>= shares of Times 9ank.

HDFC Ba%$ Ltd'89-" =@@*B@,1E-" 2+9& is a commercial bankof India, incorporated in $ugust

*;;7, after the %eserve 9ank of India allowed establishing private sector banks. The 9ank was

promoted by the 2ousing +evelopment 4inance Corporation, a premier housing finance company 8set

up in *;>>& of India. 2+4C 9ank has *,7*/ branches and over 6,/;= $T#s, in =/B cities in India, and

*@
http://en.wikipedia.org/wiki/Bombay_Stock_Exchangehttp://www.bseindia.com/stockreach/stockreach.htm?scripcd=500180http://en.wikipedia.org/wiki/New_York_Stock_Exchangehttp://www.nyse.com/about/listed/hdb.htmlhttp://en.wikipedia.org/wiki/Commercial_bankhttp://en.wikipedia.org/wiki/Indiahttp://en.wikipedia.org/wiki/Reserve_Bank_of_Indiahttp://en.wikipedia.org/wiki/Housing_Development_Finance_Corporationhttp://www.bseindia.com/stockreach/stockreach.htm?scripcd=500180http://en.wikipedia.org/wiki/New_York_Stock_Exchangehttp://www.nyse.com/about/listed/hdb.htmlhttp://en.wikipedia.org/wiki/Commercial_bankhttp://en.wikipedia.org/wiki/Indiahttp://en.wikipedia.org/wiki/Reserve_Bank_of_Indiahttp://en.wikipedia.org/wiki/Housing_Development_Finance_Corporationhttp://en.wikipedia.org/wiki/Bombay_Stock_Exchange


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establishments. The 9ank is well positioned as a leader in various net based 9/C opportunities

including a wide range of internet banking services for 4ied +eposits, Loans, 9ill ayments, etc.

T#easu#y

?ithin this business, the bank has three main product areas ! 4oreign "change and +erivatives, Local

Currency #oney #arket H +ebt -ecurities, and "5uities. These services are provided through the

bank:s Treasury team. To comply with statutory reserve re5uirements, the bank is re5uired to hold /=D

of its deposits in government securities. The Treasury business is responsible for managing the returns

and market risk on this investment portfolio.

D!st#!but!o% Net.o#$

HDFC9ank is head5uartered in #umbai. The 9ank has a network of *,>/= branches spread in >>*

cities across India. $ll branches are linked on an online real!time basis. Customers in over =@@ locations

are also serviced through Telephone 9anking. The 9ank has a presence in all ma3or industrial and

commercial centres across the country. 9eing a clearingsettlement bank to various leading stock

echanges, the 9ank has branches in the centre where the 1-"9-" has a strong and active member

base.

The 9ank also has 6,B;B networked $T#s across these cities. #oreover, 2+4C 9ank:s $T# network

can be accessed by all domestic and international isa#asterCard, isa "lectron#aestro, lusCirrus

and $merican "press CreditCharge cardholders.

Hous!%+ De/e"o&e%t F!%a%)e Co#o#at!o% L!&!ted or HDFC 89-" =@@@*@&, founded *;>> by

Ra/! Mau#yaand Has&u$hbha! Pa#e$h, is an Indian194C, focusing on homemortgages. 2+4C:s

distribution network spans /76 outlets that include 7; offices of 2+4C:s distribution company, 2+4C

-ales rivate Limited. In addition, 2+4C covers over ;@ locations through its outreach programmes.

2+4C:s marketing efforts continue to be concentrated on developing a stronger distribution network.

2ome loans are also -harcket through 2+4C -ales, 2+4C 9ankLimited and other third party +irect

-elling $gents 8+-$&.

*/
http://en.wikipedia.org/wiki/Bombay_Stock_Exchangehttp://www.bseindia.com/stockreach/stockreach.htm?scripcd=500010http://www.bseindia.com/stockreach/stockreach.htm?scripcd=500010http://en.wikipedia.org/w/index.php?title=Ravi_Maurya&action=edit&redlink=1http://en.wikipedia.org/wiki/Hasmukhbhai_Parekhhttp://en.wikipedia.org/wiki/Indiahttp://en.wikipedia.org/wiki/NBFChttp://en.wikipedia.org/wiki/Mortgageshttp://en.wikipedia.org/wiki/Mortgageshttp://en.wikipedia.org/wiki/HDFC_Bankhttp://en.wikipedia.org/wiki/Bombay_Stock_Exchangehttp://www.bseindia.com/stockreach/stockreach.htm?scripcd=500010http://en.wikipedia.org/w/index.php?title=Ravi_Maurya&action=edit&redlink=1http://en.wikipedia.org/wiki/Hasmukhbhai_Parekhhttp://en.wikipedia.org/wiki/Indiahttp://en.wikipedia.org/wiki/NBFChttp://en.wikipedia.org/wiki/Mortgageshttp://en.wikipedia.org/wiki/HDFC_Bank


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To cater to non!resident Indians, 2+4C has an office in Londonand +ubaiand service associates in

Ouwait,0man, Patar,-har3ah, $bu +habi, $l Ohobar,


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Se#/!)es )ate+o#y

4orbes Top /@@@ Companies Ou# Ba%$ at 58%d os!t!o% a%d a&o%+ 956 G"oba" H!+h

Pe#,o#&e#s

4inancial "press ! "rnst H

Eoung -urvey /@@;!*@ Best Ne. P#!/ate Se)to# Ba%$

Best !% G#o.th

Best !% st#e%+th

$sian 9anker "cellence $wards

/@*@ Best Reta!" Ba%$ !% I%d!a

E*)e""e%)e !% 0uto&ob!"e Le%d!%+

Best M30 I%te+#at!o%

Te)h%o"o+y I&"e&e%tat!o%

The $sset Triple $ $wards Best Cash Ma%a+e&e%t Ba%$ !% I%d!a

"uromoney rivate 9anking and

?ealth #anagement oll /@*@

9> Best Lo)a" Ba%$ !% I%d!a =se)o%d yea# !% a #o.> 8> Best

P#!/ate Ba%$!%+ Se#/!)es o/e#a"" =&o/ed u ,#o& No' 8

"ast yea#>

4inancial Insights Innovation

$wards /@*@

I%%o/at!o% !% B#a%)h Oe#at!o%s 2 Se#/e# Co%so"!dat!o%

P#oe)t

Global 4inance $ward Best T#ade F!%a%)e P#o/!de# !% I%d!a ,o# 8696

/ 9anking Technology $wards

/@@;

9> Best R!s$ Ma%a+e&e%t I%!t!at!/e a%d 8> Best Use o,

Bus!%ess I%te""!+e%)e'

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17/87

-urvey

Re/!e. O, L!te#atu#e

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18/87

C0PIT0L M0R-ETS

The market where investment funds like bonds, e5uities and mortgages are traded is known as the

capital market. The primal role of the capital market is to channeli'e investments from investors

who have surplus funds to the ones who are running a deficit. The capital market offers both long

term and overnight funds. Capital market is the @barometer of the economy and represents the

smacroeconomic affairs of the country. Capital market discounts the future and it is reflection of

future of the economy. In the long run it is a true measure of the health of any economy.

In the capitalistic economy, the capital market plays a pivotal role by bring the common investor to

invest in corporate securities. The global trend is that even the socialist countries like China and

%ussia are moving towards capitalistic economy by inviting the private investments into the

industry.

$mong the instruments, mutual funds, bonds and derivative instruments are more active which have

grasped a substantial share in resource mobili'ation giving a challenge to traditional monetary

assets such as bank deposits. -imilarly, instruments like deep discount bonds, 'ero coupon bonds

and other bonds with very long maturity period compete with traditional term saving instruments.

The Capital #arkets are relatively for long!term 8greater than one year maturity& financial

instruments 8e.g. bonds and stocks&. Their role can be summari'ed as follows

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19/87

The Capital #arket is the indicator of the inherent strength of the economy.

It is the largest source of funds with long and indefinite maturity for companies and thereby

enhanced the capital information in the country.

It helps in channeling the savings pool in the economy towards optimal allocation of capital in

the country.

STRUCTURE 0ND SIE OF THE M0R-ET1

Today India has two national echanges, the 9ombay -tock "changes 89-"& and the 1ational

-tock "change 81-"&. "ach has fully electronic trading platforms with around ;7@@ participating

broking outfits. 4oreign brokers account for /; of these. There are some ;A@@ companies listed on

the respective echanges with a combined market capitali'ation near Q*/=.=bn. $ny market that has

eperienced this sort of growth has an e5ually substantial demand for highly efficient settlement

procedures, In India ;;.;D of the trades, according to the 1ational -ecurities +epository, are settled

in demateriali'ed form in a TR/ rolling settlement environment. In addition, trades are guaranteed

by the 1ational Clearing Corporation of India Ltd 81-CCL& and 9ank of India -hareholding Ltd

890I-L&, Clearing Corporation houses of 1-" and 9-" respectively.

GLOB0LIS0TION IN C0PIT0L M0R-ET1

?ith the sweeping economic changes witnessed globally towards more market!oriented economies,the government of India too has embarked upon radical economic policy measures to revitali'e its

economy. The Indian Capital #arkets, which have attained a remarkably high degree of growth in

the last decade, are poised for a further leap forward over the net ten years ?ith the opening of the

economy to multinational and the adoption of more liberal economic policies, the economy is more

driven more towards the free market economy. Two ma3or reasons why Indian securities are now

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20/87

increasingly regarded as attractive to international investors are the relatively high returns compared

with more developed global markets as well as the low correlation with world markets. 2owever

until the early ;@s, the foreign investors only way of accessing the Indian Capital markets was

through listed country funds. 7;B 4oreign Institutional Investors who hold *6/= sub!accounts with a

net investment of approimately Q*=bn.

$t present the stock market consists of /6 regional stock echanges and two 1ational -tock

"changes known as 1-" and 0TC"T 80ver the Counter "change of India&.

SCEN0RIO OF INDI0 C0PIT0L M0R-ET1

%eforms in the securities market, particularly the establishment and empowerment of -"9I, market

determined allocation of resources, screen based national wide trading, demateriali'ation and

electronic transfer of securities, rolling settlement and ban on deferral products, sophisticated risk

management and derivatives trading, have greatly improved the regulatory frame work and

efficiency of trading and settlement. Indian market is now comparable to many developed market in

terms of a number of 5ualitative parameters.

-ecurities market are markets in financial assets or instruments. 9usiness organi'ations, corporateunits and the Governments, Central or state issues these ublic sector undertakings also issue these

securities. These are thus sources of funds to the issuers.

-ecurities are the claims on money and are like promissory notes. -ecurities are sources of fund for

companies, Govt. etc. The eternal sources of funds of the companies are as follows

Lo%+ te#& ,u%ds1

0wnership capital!e5uity and preference capital.

+ebt capital!debentures and long term borrowings in the form of deposits from

public or credit limits or advances from banks and financial institutions.

Sho#t te#& ,u%ds1

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9orrowings from banks.

Trade credits and suppliers credits.

The -ecurities #arket can again be classified into

PRIM0RY M0R-ET1 $ primary market is a market is a where securities are issued to the

public for the first time. 1ew issues are dealt within this market. The new issues has three functions

to perform origination, underwriting and distribution. There are three ways by which a company

may raise capital in primary market.

ublic issue

%ight issue

rivate lacement

Intermediate in the rimary market are merchant bankers, collecting bankers, registrants and

transfer agents, broker underwriters, advertising agencies, printers, stock!brokers and solicitors and

mailing agents.

SECOND0RY M0R-ET -econdary market is a market where securities, which have

already issued in the primary market, are traded. This market consists of all stock echanges

recogni'ed by the Govt. of India, and is regulated under the securities contract8regulation&

act*;=A.The 9-" is principal stock echange in India, which sets the other stock markets.

Intermediate in the -econdary market are brokers, 3obbers, dealers, arbitrators, investment advisors,

portfolio managers and sub!brokers.

EVOLUTION OF INDI0N SECURITIES M0R-ET1

The origination of the Indian -ecurities #arket may be traced back to *B>=, when //enterprising

brokers under a 9anyan tree established the 9ombay -tock "change 89-"&. 0ver the last

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22/87

*/=years, the Indian securities markets in $sia. Today, India markets conform to international

standards both in terms of structure and in terms of operating efficiency.

TR0DITION0L TR0DING SYSTEM1

The traditional system of trading involved lots of hue and cry. The traders of the share used to shout

in the trading arena and the buyer used to shout and 5uote his rates. If the rates matched the deal

was prepared for the buyer and the seller and one for the echange. 9y the end of the day the broker

gets the daily volume sheet consisting of the list of all the transactions entered into by member. $ny

discrepancies were reported to the echange. The client did the confirmation at the end of the day.

The whole scene made a common man scared of the stock market and due to its uncertainities it was

considered as highly risky and high!risk takers only used to invest their money in the share ba'aar.

PRESENT TR0DING MECH0NISM1

The 1ational -tock #arket -ystem provides a single, nation wide securities. It enables an investor

in one part of the country to trade at the best 5uotes with an investor located in other part of the

country through the members of the stock echanges and subse5uently clear and settle the trade in

an efficient and cost effective manner. The primary ob3ective of the stock market is to provide clear

opportunity to the investors throughout the country to trade any security irrespective of the si'e of

the order or the broker through whom the order is routed. This provides the facility to eecute the

buy order at the lowest price in the stock market located anywhere in the country without any!etra

cost to the investors.

There will be no trading floor in the echange. Instead, each trading member will have a computer

at his own office any where in India which will be connected to the central computer system at the

1-" through leased lines or -$T-8ery small $perture Terminals&, for an interim transition

period of si months and subse5uently by satellite link. -$T s are very relatively smaller dishes

similar to dish antenna for cable T and have the benefit of not being very epensive. This mode of

trading is known as ( 01LI1" T%$+I1G (.

OBJECTIVES OF PRESENT TR0DING SYSTEM1

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23/87

To reduce and eliminate operational inefficiencies inherent in manual systems to increased trading

capacity in stock echange.

Improve market transparency, eliminate unmatched trades and delayed reporting.

rovide for on line H off!line monitoring, control H surveillance of the market.

romote fairness H speedy matching.

-mooth market operations using technology while retaining the fleibility of conventional trading

practices.

-et up various limitations, rules and controls centrally.

Consolidate the trades data on electronic media to interface with the brokers back office system.

rovide public information on scrip prices, indices for all users of the system.

rovide analytical data for use of stock echange.

THE MECH0NISM1

The broker of stock trading gets the membership at the stock echange after full filling a set of

conditions. The broker is connected on line with the stock echange. 0n the system he constantly

gets the real 5uotes in the market, there position, the demand and supply rates, number of buyers

and sellers at various rates.

The customer drops in the office of the broker or gives him a call regarding the sale or purchase ofthe particular number of shares. The broker takes his order and inputs that in his online system. If a

proper match regarding that price is available in the market that is if both the buy and sale rates

match, then it implies that the deal is stuck. If the suitable match is not found the order gets stacked

in the system till a suitable counter order emerges and the transaction is closed at that point of time.

RECOGNIED STOC- ECH0NGES1

There are // stock echanges in India. These were founded at different times, in different places,

under different laws. 2owever, all of them have been recogni'ed and regulated under single law,

namely the securities contracts 8%egulation& $ct, *;=A. 1o person is, in principle, allowed to

organi'ed stock echanges other than the recogni'ed once Jsection *;8*& of the -C8%& $ct, *;=AK.

/6


24/87

INDI0N C0PIT0L M0R-ET

The I%d!a% Ca!ta" Ma#$et is one of the oldest capital markets in $sia which evolved

around

/@@ years ago.

Ch#o%o"o+y o, the I%d!a% )a!ta" &a#$ets 1

956s1 Trading of corporate shares and stocks in 9ank and cotton resses in 9ombay.

9@6s1-harp increase in the capital market brokers owing to the rapid developmentof commercial enterprise.

96291 0utbreak of the 0&e#!)a% C!/!" :a# and : Sha#e Ma%!a : in India.

9?1 4ormation of the 0h&adabad Sha#es a%d Sto)$ B#o$e#s 0sso)!at!o% .

9614ormation of the Ca")utta Sto)$ E*)ha%+e 0sso)!at!o%'

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25/87

Ca!ta" Ma#$et I%st#u&e%ts

The capital markets are relatively for long term 8greater than one year maturity& financial

nstruments e.g bonds and stocks&. It is the largest source of funds with long and indefinite maturity

for companies are there by enhances the capital formation in the country. It offers a investment

avenues to investors. The capital market instruments are the vehicles between the companies and

the investors. The financial instruments that have short or medium term maturity periods are dealt in

the money market whereas the financial instruments that have long maturity periods are dealt in the

capital market. The different types of financial instruments that are traded in the capital markets are

e5uity instruments, credit market instruments, insurance instruments, foreign echange instruments,

hybrid instruments and derivative instrument -tock market is the capital and -"9I is the driver.

These instruments are of two types

rimary market

-econdary market

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26/87

$ part from derivative instruments, the following is the ma3or mediums of

approaching capital markets

"5uity shares

reference shares

+ebentures bonds

$merican +epository %eceipts 8$+%&

Global +epository %eceipts 8G+%&

+erivatives

"mployee stock option plan.

E4UITY SH0RES1

They are also called as common stock. The common stock holders of a company are its real

owners, the own the company and assume the ultimate risk associate with ownership. Their liability,

however is restricted to the amount of their investment in the event of li5uidation, these stock

holders have a residual claim on the assets of the company after the claims of all creditors and

preferred stock holders,are settled in full. Common stock like preferred stock, as no maturity

date.1-" started trading in the e5uities segment 8Capital #arket segment& on 1ovember 6, *;;7

and within a short span of * year became the largest echange in India in terms of volumes

transacted.Trading volumes in the e5uity segment have grown rapidly with average daily turnover

increasing from %s.*> crores during *;;7!;= to %s.*7,*7B corers during 4E /@@;!*@. +uring the

year /@@;! *@,1-" reported a turnover of %s.6,==*,@6B crores in the e5uities segment.The "5uities

section provides you with an insight into the e5uities segment of 1-" and also provides real!time

5uotes and statistics of the e5uities market. In!depth information regarding listing of securities,

trading systems H processes,clearing and settlement, risk management, trading statistics etc are

available here.

0UTHORIED7 ISSUED 0ND OUTST0NDING SH0RES

/A


27/87

$n authori'ed shares is the maimum no. of shares that the articles of association 8$0$& of

thecompany permit it to issue in the market. $ company can however amend its $0$ to increase

the number. The number of shares that the company has actually issued out these authori'ed shares

is called as issued shares. $ company usually likes to have a number of shares that a authori'ed but

un!issued. These un!issued allow fleibility in granting stock options, pursuing merger targets and

splitting the stock. 0utstanding shares refer to the number of shares issued and actually held by

public. The corporation can buy back part of its issued stock and hold it as a treasury stock.ar

value , book value and li5uidating value The par value of a share of stock is merely a recorded

figure in the corporate charter and is of little economic significance. $ company should not,

however, issue common stock at a price less than par value, because any discount from par value

8 amount by which the issuing price is less than the par value& is considered a contingent liability

of the own wrest to the creditors of the company. In the event of li5uidation, the share holders

would be legally liable to creditors of any discount from par value.

E*a&"e1suppose that y' inc. is ready to start business for the first time and sold *@@@@ shares

rupees *@ each . the share holders e5uity portion of the balance sheet would be common stock S

*@ each at par value*@@@@ shares issued and outstanding %-*@@@@@ Total shares holders e5uity

%-*@@@@@.The book value per share of common stock is the shareholders e5uity N total assets

minus liabilities and preferred stocks as listed on the balance sheet! dividing by the number of

shares outstanding .suppose that y' is now * year old has generated %- =@@@@@ after! ta profits,

but pays number dividing. Thus, retained earnings are %- =@@@@. the share holders e5uity is now %-

*@@@@@R %- =@@@@ *=@@@@ and the book value per share is rs *=@@@@@*@@@@%- /=.$lthough

one might epect the book value per share of stock to correspond to the li5uidating value 8per share&

of the company, most fre5uently does not. 0ften assts are sold for less than their values, particularly

when li5uidating costs are involved.

Ma#$et /a"ue

#arket value per share is the current price at which the stock is traded. 4or actively traded stocks,

market price 5uotations are readily available. 4or the many in active stocks that have thin markets,

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28/87

price are difficult to obtain. "ven when obtainable, the information may reflect only the sale of a

few shares of stock of common stock and not typify the market value of the firm as the whole. The

market value of a share of common stock will usually differs from its book value and its li5uidating

value. #arket value per share of common stock is a function of the current and epected future

dividends of the company and the perceived risk of the stock on the part of investors.

R!+hts o, )o&&o% sha#e ho"de#s1

9'R!+hts o, !%)o&e1

If the company fails to pay contractual interest and principle and payments to creditors,

the creditors are able to take legal action to insure that principle payments are made of company is

li5uidated. Common share holders, on the other hand, have legal recourse to a company for not

distributing profits. only if management, the board of directors, or both engaged in fraud may

share holders take their case to court and possibly force the company to pay dividends.

9' /ot!%+ #!+hts1

The common shares of a company are its owners and they are entitled to elect a board of

directors. In a large corporations shares holders usually eercise only indirect control through theboard of directors they elect. The board, in turn, select the management, and the management

actually controls the operations of the company. In a sole proprietorship, partnership, or small

corporation, the owners usually control the operation of the business directly.

8' #o*!es a%d #o*y )o%tests1

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29/87

common share holders are entitled to one vote for each share of stock that they own . it is

usually difficult, both physically and financially, for the most share holders to attend a corporations

annual meetings. 9ecause of this, many share holders vote of means of a proy, a legal document

by which share holders assign their right to vote to another person.

5' /ot!%+ #o)edu#es1

+epending on the corporate charter, the board of directors is elected under either

ma3ority rule voting system or a cumulative voting system. Fnder the ma3ority rule system, stock

holders have one for each share of stock that they own, and they must vote for each director position

that is open. Fnder cumulating voting system, a stock holder is able to accumulate votes and cast

them for less than the total number of directors being elected. The total number of votes of each

share holders is e5ual to the number of shares the stock holder times the number of directors being

elected.

ISSUE MECHNISM

The success of an issue depends, partly, on the Issue #echanism.

The methods by, which new issues are made of

9' ub"!) !ssue th#ou+h #ose)tus'

8' O,,e# ,o# sa"e'

5' P"a)e&e%t'

?' R!+hts !ssue'

9' Pub"!) Issue Th#ou+h P#ose)tus 1

Fnder this method, the issuing companies themselves offer directly to general public a fied

number of shares at a stated price, which in the case of new companies is invariably the face

value of the securities, and in the case of eisting companies, it may something include a

/;


30/87

underwritten to ensure arising out of unsatisfactory public response. Transparency and wide

distributions of shares are its important and advantages.

The foundation of the public issue method is a prospectus, the minimum contents of

which are prescribed by the Companies $ct *;=A. It also provides both civil and criminal liability

for any misstatement in the prospectus. $dditional disclosure re5uirements are also mandated by

the SEBI.

The content of the prospectus, inter aria, include

1ame and registered office of the issuing company.

"isting and proposed activities.

9oard of directors.

Location of the industry.

$uthori'ed, subscribed and proposed issued of capital to public.

+ates of opening and closing of subscription list.

1ames of broker, underwriter, and other from whom application forms along with copies of

prospectus can be obtained.

#inimum subscription.

1ames of underwriter , if any, along with a statement that in the opinion of the directors, the

resources of the underwriter are sufficient to meet the underwriting obligation.

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31/87

$ statement that the company will make an application stock echange for the permission to

deal in or for a 5uotation of its and so on.

8' O,,e# ,o# sa"e1

9roker to their own client of securities which have been previously purchased or

subscribed). Fnder this method, securities are ac5uired by the issue houses, as in offer for sale

method, but instead of being subse5uently offered to the public, they are placed with the client of

the issue houses, both individual and institutional investors. "ach issue house has a prepared to

subscribe to any securities which are issued in this manner. Its procedure is the same with the only

difference of ultimate investors.

In this method, no formal underwriting of the issue is re5uired as the placement itself

amount to underwriting since the houses agree to place the issue with their clients.The main

advantages of placing, as a method issuing new securities, is its relative cheapness. There is a cost

cutting on account of underwriting commission, epense relating to applications, allotment of

shares and the stock echange re5uirements relating to contents of the prospectus and its

advertisement. This method is generally adopted by small companies with unsatisfactory financial

performances.

Its weakness arises from the point of distribution of securities. $s the securities are

offered only to a select group of investors, it may lead to the concentration of shares in to a few

hands that may create artificial scarcity of scripts in times of hectic dealings in such shares in the

market.

5'R!+hts Issue 1

6*


32/87

0nly the eisting companies can use this method. In the case of companies whose shares

are already listed and widely!held , shares can be offered to the eisting shareholders. This is

called right issue. Fnder this method, the eisting shareholders. $re offered the right to subscribed

to new shares in proportion to the number of shares they already hold. This is made by

circular to eisting shareholders only.

In India, section B* of the companies act *;=A provides that where a company

increases its subscribed capital by the issue of new shares, either after two years of its formation

or after one year of first issue of shares whichever is earlier, these have to be first offered to the

eisting shareholders with this re5uirement by passing a special resolution to the same effect. The

chief merit of rights issues is that it is an inepensive method.

S.eat eu!ty sha#es 1

Fnder section ;$of the companies $ct , *;=A, a company can issue sweat e5uity shares to its

employees or directors at discount or for consideration other than cash for providing know!how

making available rights in the nature of intellectual property rights or value additions etc on the

following.

)o%d!t!o%s1

*. The issue of sweat e5uity share is authori'ed by a special resolution passed by the company in

the general meeting.

/. The resolution specifies the number of shares, current market,

rice, resolution, if any, and the class or classes of directors 0r employees to whom such

6/


33/87

e5uity shares are to be issued.

6. The company is entitled to issue sweat e5uity shares after completion of one year from the

date of Commencement 0f business.

7. The e5uity shares of the company must be listed on a recogni'ed stock echange.

=. The issue of sweat e5uity shares must be listed on a accordance with the regulations made by

the -"9I in the behalf.

A. $n unlisted company can issue sweat e5uity shares in accordance with the prescribed

guidelines made for this purpose.

>. $ll the limitations, restrictions and provision relating to e5uity shares shall be applicable to

sweat e5uity shares.

PREFERENCE SH0RES

reference shares are a hybrid security because it has both ordinary shares and bonds.

reference shareholders have preferential rights in respect of assets and dividends. In the event of

winding up the preference share holders have a claim on available assets before the ordinary

shareholders. In addition, preference shareholders get their stated dividend before e5uity

shareholders can receive any dividends.

TYPES OF PREFERENCE SH0RES1

9' Cu&u"at!/e a%d No%2)u&u"at!/e #e,e#e%)e sha#es

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34/87

The cumulative preference gives rights to demand the unpaid dividends of any year,

during the subse5uent ears when the profits and ample. $ll preference dividends arrears must be

paid before any dividends can be paid to e5uity shareholders. The non cumulative preference share

carry a right to a fied dividend out of the profits to any year. In case profits are not available in a

year, the holders get nothing, nor can they claim unpaid dividends in subse5uent years.

8' Cu&u"at!/e )o%/e#t!b"e #e,e#e%)e sha#es1

The cumulative convertible preference 8CC& share is an instruments that embraces

features of both e5uity shares and shares and preference shares, but which essentially is a preference

shares. -ince the CC shares capital would constitute a class of shares, distinct from purely e5uity

and purely preferences share capital, the rights of the instrument holders must be stated either in a

general body resolution or in the articles or in the terms of issues inhe offer documents vi'.,

prospectus letter of offer.

5' Pa#t!)!at!%+ a%d %o% a#t!)!at!%+ #e,e#e%)e sha#es1

articipating preference shares are those shares which are entitled to a fied

preferential dividend and . in addition , carry a right to participate in the surplus profits along

with e5uity shares holders after dividend at a certain rate has been paid to e5uity share holders.

$gain in the event of winding up, if after paying back both preference and e5uity share holders,

there is still any surplus left, then the participating preference share holders get additional shares in

the surplus assets of the company. Fnless epressly provided, preference share holders get only the

fied preference dividends and return on capital in the event of winding up out of reali'ed values of

assets after meeting all eternal liabilities and nothing more. The rights to participate may be given

either in the memorandum or articles or by virtue of terms of issue.

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35/87

?' Redee&ab"e a%d I##edee&ab"e #e,e#e%)e sha#es1

-ub3ects to an authority in the articles of association, a public limited

company may issue redeemable preference shares to be redeemed either at a fied date or after a

certain period of time during the life time of the company. The companies act, *;=A prohibits the

issue of any preference share which is irredeemable or is redeemable after the epiry of a period of

twenty years from the date issue.

Po.e# to Issue Redee&ab"e P#e,e#e%)e Sha#es1

-ection B@ of the companies act *;=A permits a company to issue

redeemable preference shares if

The company is limited by shares.

Its article of association authoriese the issue of redeemable preference shares.

Those shares are redeemable at the option of the company.

0 )o&a%y !s a""o.ed to !ssue #edee&ab"e #e,e#e%)e sha#es !% the ,o""o.!%+ )!#)u&sta%)es

-uch preference shares shall be redeemed only out of profits of the company, which would

otherwise be available for dividend.

6=


36/87

-uch redemption can also be made out of the proceeded of fresh issues of shares made of

the purpose of redemption.

9efore redemption, such shares must be fully paid up.The premium on redemption shall be

provided out of profits of the company or out of securities premium account, before the share are

redeemed.

?here shares are redeemed out of profits to a separate account called Ucapital

The redemption of preference shares under this section shall not be taken as reducing the

authori'ed capital of the company.

The capital redemption reserve account may used for issue of fully paid bonus

shares.Companies are not allowed to issued irredeemable preference shares or preference shares

which are redeemable after the epire of a period of /@ years from the date of its issue.In case of

default, the company and every officer of the company who is indefault shall be punishable with a

fine which may etend to %s *@@@@.

De,e##ed Fou%de#s sha#es1

$ private company any issue what are known as deferred or founders shares.

-uch shares are normally held by promoters and directors of the company. That is why they are

usually called of a smaller denomination, say on rupee each. 2ow ever they are generally given.

e5ual voting rights with e5uity shares, which may be of higher denomination, say %s*@ each.

Thus, by investing relatively lower amounts, the promoter may gain control over the management

of the company. $s regards the payment of dividends have been declared on the preference and

e5uity shares. It is because of this deferment of the dividend payment that these

shares are also called deferred shares. The promoters, founders and directors tend to have direct

interest in the success of the company they will receive dividends on these shares only if the profits

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are high enough to leave a balance of after paying dividends to preference an e5uity shareholders.

9esides greater the profits of the company , the higher will be dividends paid on these shares.

Issued sha#e at a #e&!u&1

?hen a company issues shares at a premium, whether or cash or

consideration other than cash, the premium collected on those shares shall be transferred to a

separate account called Usecurities premium account.The provision of the act relating reduction of

shares capital shall also apply to the securities premium account may be applied by the company

in the following ways

In paying up un issued shares of the company to be issued to members of the company as fully

paid up shares.

*. In writing off the preliminary epenses of the company.

/. In writing off the epenses of, or the commission paid or discount allowed on, any issue of

shares debentures of the company.

6. In providing for the premium payable on redemption of any preference shares or debentures.

Issued sha#e at a D!s)ou%t

The issued of shares at a discount must be of a class of shares issued by the

company.

*. The issue of shares at a discount must be authori'ed by a resolution passed in the general

meeting and sanctioned by the central government.

/. The resolution shall specify the maimum rate of +iscount at which the shares are to be

issued.

6. The maimum rate of discount must not eceed *@D unless the central government is of the

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opinion that higher percentage of discount may be allowed in special circumstances.

7. The shares must be issued within two months from the date of sanction by the or within such

etended time as the central government may allow.

=. The issue of shares at a discount can be done by a company only a year after the

commencement of the business by the company.

A. In case of revival and rehabilitation of sick industry companies under chapter I$, the issue

of shares at discount shall be sanctioned by the UTribunal instead of Ucentral government.

>. "very prospectus relating to issue of shares shall contain the details of discount allowed on

the issue of shares or the unwritten off amount f discount at the date of issue of prospectus.

B. In case of default , the company and every officer of the company who is in default shall be

punishable with fine which may etend to %s.=@@.-hares issued for consideration other than

cash

;. To the underwriters of shares and promoters by way of payment remuneration or for

epenses incurred.

*@. To the vendor from whom the running business is purchased, as purchase price or

consideration.

**. Issued of bonus shares out of the reserves to the eisting shareholders of the company

DEBENTURES

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($cknowledge of debt , given under the seal of the company and containing a contract for the

repayment of the principal sum at a specified date and for repayment of the principal sum at a

specified date and for the payment of interest at fied rate percent until the principal sum is

repaid,and it may or may not give the charge on the assets to the company as security of the

loan).

-!%d o, debe%tu#es1

9' Bea#e# debe%tu#es 9earer debentures are similar to share warrants in that too are

negotiable instruments, transferable by delivery. The interest on bearer debentures is paid by

the means of attached coupons. 0n maturity, the principal sum is paid to the bearers.

8' Re+!ste#ed debe%tu#es These are debentures which are payable to the registered

holders i.e.. persons whose names appear in the register of debenture holders. -uch debentures

are transferable in the same way as shares.

5' Pe#etua" o# I##edee&ab"e debe%tu#es $ debenture which contains no clause as

to payment or which contains a clause that it shall not be paid back is called a perpetual or

irredeemable debenture. These debenture are redeemable only on the happening of a contingency

on the epiration of a period, however long. It follows that debentures can be made perpetual,

i.e.. the loan is repayable only on winding up or after a long period of time.

?' Redee&ab"e debe%tu#es These debentures are issued for a specified period of

time. 0n the epiry of the specified time the company has the right to pay back the debenture

holders and have its properties released from the mortgage or charge. Generally, debentures

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are redeemable. @' Debe%tu#es Issued as Co""ate#a" Se)u#!ty ,o# a Loa% The term collateral security

or secondary security means, a security which can be reali'ed by the party holding it in the event of

the loan being not paid at the proper time or according to the agreement of the parties. $t times,

the lenders of money are given debentures as a collateral security for loan. The nominal value of

such debentures is always more than the loan. In case the loan is repaid, The debentures issued as

collateral security are automatically redeemed.

9' Na$ed debe%tu#es 1ormally debentures are secured by a mortgage or a

charge on the companys assets. 2owever debentures may be issued without any charge on the

assets of the company. -uch debentures are naked or unsecured debentures. They are mere

acknowledgment of a debt due from the company, creating no rights beyond those secured

creditors.

8' Se)u#ed debe%tu#es when any particular or specified property of the company

is offered as security to the debenture holders and when the company can deal with it only

sub3ect to the prior right of the debenture holders, fied charge on the undertaking of the

company i.e.. whole of the property of the company, both present and future, an when it can deal

with the property in the ordinary course of business until the charge crystalli'ed i.e.. when the

company goes in to li5udation or when a receive is appointed, the charge is said to be floating

charge. ?hen the floating charge crystalli'es, the debentures holder have right to be paid out of

the assets sub3ects to the right of the preferential creditor but prior to making any payment to

unsecured creditors.

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Methods o, #ede&t!o% o, debe%tu#es1

$ company may issue redeemable as well as irredeemable debentures.

There are two important ways of redeeming the debentures according to the terms of the issue.

Rede&t!o% o, debe%tu#es o% a ,!*ed date1

In this method payment to the debenture holders is made at the epiry of the stated

period. $ U sinking fund account is created by debiting the profits and loss appropriation

account. The amount so credited in the sinking fund account is invested in the gilt edged

securities. The securities are sold at the date of redemption of debentures.

Rede&t!o% o, debe%tu#es by e#!od!)a" d#a.!%+s1

In this method, payment is made year after of a certain portion of the total debentures

by drawing. $ such the revenue account is debited with the annual drawings and the (redemption

fund account) are credited.

Co%/e#t!b"e debe%tu#es =CDs>1

$ company may also issue C+s in which case an option is given to the debenture

holders to covert them in to e5uity or preference shares at stated rates of echange, after a

certain period. -uch debentures once converted in to shares cannot be reconverted in to

debentures. C+s may be fully or partly convertible. In case of fully convertible debentures, the

inter face values converted in to shares at the epiry of specified period8-&. In case of partly

convertible debenture only convertible portion is redeemed at the end of specified period. 1on

convertible debenture do not confer any option on the holder to the debenture in to shares and are

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redeemed at the epiry of specified period 8s&.C+s, whether fully or partly convertible, may be

converted in to shares at the end of specified periods in one or more stages. The company should

get a credit rating of debenture done by credit rating agency. C+s are listed on stock

echanges. The partly convertible debenture 8C+s& offer more fleibility to both companies and

investors. It has been claimed to be better than fully convertible debenture as it does not

automatically entail large e5uity base, particularly in case of new companies. "perience shows

that servicing of large base of capital is not easy in case of new pro3ects, especially if the

company runs in to rough weather due to marketing difficulties. $s such, the non!convertible

portion of the debenture keeps the e5uity of a company within manageable limits.

0&e#!)a% Deos!to#y Re)e!ts =0DR>

$n $merican depository receipt 8$+%& is a negotiable receipt which represents one or more

depository shares held by a F- custodian bank, which in turn represent underlying shares of

non! issuer held by a custodian in the home country. $+% is an attractive investment to F-

investors willing to invest in securities of non F- issuers for following reasons

$+% provide a means to F- investors to trade the non F- company shares in F- dollars $+%

V negotiable receipt 8which represents the non F- share& issued in F- capital market and is

traded in dollars. The trading in $+% effectively means trading in underlying shares.

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$+% facilitates share transfers. $+%s are negotiable and can be easily transferred

among the investors like any other negotiable instrument. The transfer of $+%s automatically

transfers the underlying share.

The transfer of $+%s does not involve any stamp duty and hence the transfer of

underlying share does not re5uire any stamp duty. The dividends are paid to the holders of

$+%s in F- dollars.

0DR OFFERINGS1

$ public offering provides access to the broadest F- investor base and most li5uid F-

securities market. The compliance re5uirements in public offerings are the strictest and comprise

of %egistration of underlying security under the $ct 84rom 4*& %egistration of $+% under the

*;;6$ct 84rom 4A& %egistration under the *;67 $ct 8if the company is not already %egulation actunder the *;67 $ct&.

G"oba" Deos!to#y Re)e!t =GDR>

?ith the growth in international e5uity issuance, together with growth in the underlying

secondary market investment, an increasing need has been felt for better fungibility. The investors

demand stocks that trade freely on an international basis without restrictions. The depository

receipts have be used as a partial solution to this problem. $merican depository receiptshave been

the favored forms of investments by F- investors in foreign e5uities. $ number of international

e5uity offers, particularly some $sian markets have increasingly used global depository receipts

8G+%&,particularly where legal restrictions and closed markets have prevented the world wide

circulation of underlying security on a freely trade basis. The G+%s continue to have value in

li5uid or restricted markets and are fre5uently used by pro3ect companies to raise e5uity funds.

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CH0R0CTERISTICS OF 0 GDR1

+epository receipts are negotiable certificates with publicly traded e5uity of the issuer as

underlying security.

$n issue of depository receipts would involve the issuer, issuing agent to a foreign

depository.

The depository, in turn, issues G+%s evidencing their rights as share holders.

+epository receipts are denominated in foreign currency and are listed of international

echange such as London or Luembourg.

G+%s enable investors trade a dollar denominated instrument on an international stock

echange and yet have rights in foreign shares.

The principle purpose of the G+% is to provide international investors with local

settlement.

The issuer issuing the shares has to pay dividends to the depository in the domestic

currency.

The depository has to then convert the domestic currency into dollars for onward

payment to receipt holders. G+%s bear no risk of capital repayment.

DERIV0TIVES

It is a contract whose value depends on or value depends on or derives from the value of an

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underlying asset Jsay a share, fore, commodity or an indeK. In its broadest sense a derivative

attempts to hedge against the variability of any economic variable. Thus eposures or perceived

risks to a firm arising from the variation in interest rates, echange rates, commodity prices and

e5uity prices can be hedged through an appropriate derivative structure. -uch a derivative structure

covers a wide variety of financial contracts vi'. futures, forwards, options, swaps and different

variations thereof. These contracts can be traded on the various echanges in a standardi'ed manner

or by custom designed for individual re5uirements. The history of derivatives can be traced to the

middle ages when farmers and traders in grains and other agricultural products used certain specific

types of futures and forwards to hedge, the risks. "ssentially the farmer wants to ensure that he

receives a reasonable price for the grain that he would harvest JsayK three to four months later. $n

over supply hurt him badly. 4or the grain merchant, the opposite is true. $ fall in the agricultural

product will push up the prices. It made sense therefore both of them to fi a price for the future.

These was how the future market first developed in agricultural commodities such as cotton,

coffee, petroleum, soya bean, sugar and then to financial products such at interest rates, foreign

echange and shares' In *;;= the Chicago board of trade commenced trading derivatives. 4or the

derivatives market to develop three kinds of participants are necessary .They are the hedgers, the

speculators and the arbitrageurs. $ll three must co!eist.

Pa#t!)!at!o% Hed+e#1

$ hedger is a risk averse. Typically in India he may be a treasurer in a public sector

company who wants to know with certainty his interest costs for the year /@@/. therefore based

on current information he would enter into a future contracts and lock up his interest rate four years

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hence9ut in doing so he consciously ignores what is called the upside potential!here the possibility

that the interest rate may be lower in the year /@@/ than what he had contract four years earlier. $

hedger plays it safe. 4or a hedging transaction to be completed there must be another person willing

to take advantage of the price movements. That is the speculator.

Se)u"ato#s1

Contrary to the hedger who avoids uncertainties the speculator thrives on them. The

-peculator may lose plenty of money if his forecast goes wrong but stands to gain enormously if

he is proved correct. The risk taking associated with speculation is an integral part of a derivatives

market.

0RBITR0GEUR1

The third category of participant is the arbitrageur, who looks at risk less profit by

simultaneously buying and selling the same or similar financial products in different markets.

#arkets are seldom perfect and there is a possibility to take advantage of time or space differentials

that eits. $rbitrage evens out the price variation with the government of India permitting futures

trading in several commodities and with futures trading have arrived in the stock markets, inde

based derivative trading has finally arrived in India. 4or smooth functioning of derivative trading

the government of India has commenced the process of demateriali'ation of shares, short sale

facility, electronic fund transfer facility and rolling settlements in stock markets. This will hopefully

bring transparency in the process of price discovery of the derivative and also attract a board

spectrum of the hedgers and speculators from out of professionally managed corporate that not only

must have a good balance sheet but also significant trading and risk management skills. The stock

holding corporation of India has commenced discussions with the premier stock echanges of India

about setting up a clearing house for derivatives transactions.

Futu#es1

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$ futures contract is an echange N traded agreements between two parties to buy or sell

an asset at a specified time in the futures at the agreed price. In the case of stock inde futures

contracts the underlying asset is the specified stock inde. To facilitate n the futures contracts, the

echange specifies certain standard features of the contracts the standards contracts once bought can

be sold at any time to s5uare off the position till the date of epiry of the contract. -imilarly, once a

futures contract issold, it can be bought back at any time to s5uare off the position. Thus a futures

contract may be off set prior to maturity by entering into an e5ual and opposite transaction. #ore

than ;;D of futures transactions are off set this way.

FURTURE TERMINOLOGY1

SPOT PRICE:

The price at which an asset trades in the spot market.

FURTURE PRICE1

The price at which the future contract trades in Nthe futures market.

CONTR0CT CYCLE1

The period over which a contract trades. The inde futures contracts on the 1-" as well as 9-"

have one!month and two!months and three!months epiry cycles, which epire on last Thursday of

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CONTRACT SIZE:

The amount of asset that has to be delivered under one contract. The contract si'e of the stock inde

futures on 1-" nifty is /@@ and the contract si'e of the stock inde futures on 9-" -ense is =@.

B0SIS1

9asis is usually defined as the spot price minus the futures price. There will be a different basis for

each delivery month for same asset at any point in time. 0n *; th


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investors gain or loss depending upon the futures closing price or settlement price. This is called

#arking!to!#arket.

M0INTEN0NCE M0RGIN1

If the balance in the margin account falls below the maintenance margin, the investor receives a

margin call and is epected to top up the margin account to the initial margin level before trading

commences on the net day.

BET01

9eta is a concept to be used futures and options for hedging. 9eta measures the sensitivity of a shareor a portfolio to that of the inde. 9eta of a share is found out by relating the daily price changes of

a share to the daily changes in a stock price inde. If a graph is drawn with daily changes of the

share price on y ais and daily changes in the inde on ais the slope of the straight line fitted will

be the value of beta. mathematically it is found by regression method. If the beta of Tisco is found

to bel./6,it implies if the inde increases by *@D in a period, price of Tisco will increase by */.6D.

9eta of the portfolios is found by weighted average of the betas of the shares in the portfolios. 4or

eample, an investors portfolio has e5ual value in Tisco and Infosys. Tisco has a beta of *./6 and

Infosys has a beta *.6>. the portfolio beta is the average of *./6 and *.6> which is *.6.1-" website

is providing values of beta for a large number of shares.

SPECUL0TORS 0ND HEDGERS IN FUTURES1

-peculators buy and sell derivatives to make profit, while hedgers buy and sell derivatives to reduce

risk. -peculators are vital to derivatives markets. They facilitate hedging and provide li5uidity. It is

highly unlikely that hedger wishing to buy futures will precisely match hedgers selling futures in

terms of contracts to be traded. If hedgers are net sellers there will be tendency for futures prices to

fall. -peculators will buy such under period futures. -uch purchases by speculators allow net sales

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on the part of hedgers. In so doing, they tend to maintain price stability since they are buying into a

falling market. roper speculation thus provides stability to prices in markets.In a li5uid market,

hedgers can make their transactions with ease and with little impact costs. -peculative transactions

add to market li5uidity. speculators by definition do a lot of information search and processing to

forecast future behavior of prices. Therefore they make markets more information ally efficient. In

the stock inde futures markets speculators have two alternative strategies. If they are bullish on the

inde they can go long on inde 4utures. If the spot prices go up, future prices follow them along

with their carry premiums and the speculators make the profits.If the speculator is bearish he can go

short on the inde futures. If the spot Inde goes down, futures price also will go down and

speculator makes a profit. The two speculative strategies can be summari'ed as

9ullish market, long inde futures

9earish market, short inde futures

0RBITR0GE IN FUTURE 0ND SPOT M0R-ET1

4uture prices and spot prices are tightly linked by the fair price formula. $lso on the day of the

epiry, the final settlement price of the future is made e5ual to the spot inde price. thus at the end ,

the spot and futures prices converge. $ny deviation between the fair price and actual price of a

future can be utili'ed for earning risk less profits by agents who are willing to buy in the spot

market and deliver in future at epiry. -uch operations are called as arbitrage operations. 9uying in

the spot and delivering in the future market is resorted to when actual futures price in the market is

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higher than the fair price. if the actual future price is lower than the fair, then futures are bought and

shares are sold in the spot market to carry out the arbitrage operations.

I%t#odu)t!o% to ot!o%s1

0ptions give the holder or buyer of the option the right to do something. If the option is called

option, the buyer or holder has the right to buy the number of shares mentioned in the contract at the

agreed strike price. if the option is a put option, the buyer of the option has the right to sell the

number of shares mentioned in the contract at the agreed strike price. the holder or the buyer does

not have to eercise this right. Thus on the epiry of day of the contract the option may or may not

be eercised by the buyer. In the contrast, in a futures contract, the two parties to the contract have

committed themselves to doing something at future date. To have this privilege of doing the

transaction at a future only if it is profitable, the buyer of options has to a premium to the seller of

options.

HISTORY OF OPTIONS1

In *;B6 trading on stock inde options contracts started. -ince *;B6, trading on options of

individual options decreased as most of the trading shifted to inde options. 0ne of the reasons is

that volatilities of the individual scripts is high and therefore premiums on individual scripts is also

high. In India stock inde options were introduced in 3une /@@*.

OPTION TERMINOLOGY1

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INDE OPTION

$n option having the inde as the underlying asset. Like inde futures contracts, inde option

contract are also called cash settled.

STOC- OPTIONS1

-tock options are options on individual stocks. $ contract gives the holder the right to buy or sell

shares at the specified price.

0MERIC0N OPTIONS1

$merican options are options that can be eercised any time up to the epiration date. This name is

only a classification and does not imply that they are available only in $merica.

EUROPE0N OPTIONS

"uropean options are options that can be eercised only on the epiration date. "uropean options

areeasier to analy'e than $merican options, and properties of $merican options are fre5uently

deducted from those of its "uropean counter part.

C0LL OPTIONS1

$ call option gives the holder the right but not the obligation to buy an asset by a certain date for a

certain price.

PUT OPTIONS1

$ put option gives the holder the right but not the obligation to sell an asset by a certain date for a

certain price.

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BUYER OF OPTIONS1

The buyer of the option, either call or put, pay the premium and buys the right but not the obligation

to eercise his option on the sellerwriter.

:RITER OF 0N OPTION1

The writer of a callput option is the one who receives the option premium and is thereby obliged to

sellbuy the asset if the buyer eercises on him. 0ption writer is the seller of the option contract.

STRI-E PRICE1

The price specified in the option contract at which buying or selling will take place is known as the

strikeprice or the eercise price.

OPTIONS PRICE1

0ption price is the premium, which the option buyer pays to the option seller or writer. 9lack and

scholes formula is widely used for determining the fair value of share.

EPIR0TION D0TE

It is the date on which the "uropean option is eercised. It is also called as eercise date, strike date

or maturity date.

INTRINSIC V0LUE OF 0N OPTION1

The option premium cab be broken down into two components! intrinsic value and time value.The

intrinsic value of an option is the amount, which the holder will get by eercising his option and

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immediately selling or buying the ac5uired shares in the spot market. 4or eample, if the strike

price of a call option on %eliance shares is %s.6/= and current market price is %s.6=@. The holder of

the option can buy the %eliance share at %s.6/= by eercising the option and can make a profit of

%s./= by immediately selling them in the market. In this case the intrinsic value of the call option is

%s./=.

TIME V0LUE OF THE OPTIONS1

The time value of an option is the difference between its premium and its intrinsic value.

0T2THE2MONEY

$n option is called at!the!money option when the strike price e5uals, or nearly e5uals, the spot price

of the share. 4or eample, if the strike price of stock inde option on 1ifty inde is also at *@B@, the

option is called at!the!money option.

SPOT PRICE STRI-E PRICE

IN2THE2MONEY1

$ call optio

capital mca=arket hdfc new

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