SECONDARY MARKET AND ITS MAIN PRODUCTS ...Jaiib

SECONDARY MARKET AND ITS MAIN PRODUCTS
Secondary market refers to a market where securities are traded after being initially offered to the
public in the primary market and/or listed on the Stock Exchange. Secondary market comprises of
equity markets and the debt markets. The secondary market provides an efficient platform for
trading of securities by the investors. For a company also, the secondary equity markets serve as a
monitoring and control mechanism through price information that guides management decisions.
Equity Market : Equity is the common ownership interest of shareholders in a company with
various kinds of equity shares as under:
Equity Shares: An equity share, commonly referred to as ordinary share also represents the form
of fractional ownership in which a shareholder, as a fractional owner, undertakes the maximum
entrepreneurial risk associated with a business venture. The holders of such shares are members
of the company and have voting rights. A company may issue such shares with differential rights as
to voting, payment of dividend, etc.
Rights Shares: The issue of new securities to existing shareholders in the ratio of their existing
holding of shares.
Bonus Shares: Shares issued by the companies to their shareholders free of cost by capitalization
of accumulated reserves from the profits earned in the earlier years.
Preferred Stock/ Preference shares: Owners of these kinds of shares are entitled to a fixed
dividend or dividend calculated at a fixed rate to be paid regularly before dividend can be paid in
respect of equity share. They also enjoy priority over the equity shareholders in payment of surplus.
But in the event of liquidation, their claims rank below the claims of the company's creditors,
bondholders / debenture holders.
Cumulative Preference Shares. A type of preference shares on which dividend accumulates if
remains unpaid. All arrears of preference dividend have to be paid out before paying dividend on
equity shares.
Cumulative Convertible Preference Shares: A type of preference share whera the dividend
payable on the same accumulates, if not paid. After a specified date, these shares will be converted
into equity capital of the company.
Participating Preference Share: The right of certain preference shareholders to participate in
profits after a specified fixed dividend contracted for is paid. Participation right is linked with the
quantum of dividend paid on the equity shares over and above a particular specified level.
Debt Market
Debentures: An instrument issued by a company bearing a fixed interest rate payable half yearly
on specific dates and principal amount repayable on particular date on redemption. Debentures are
normally secured/ charged against the asset of the company in favour of debenture holder.
Bond: A negotiable certificate evidencing indebtedness. It is normally unsecured issued by a
company, municipality or government agency. A bond investor lends money to the issuer and in
exchange, the issuer promises to repay the loan amount on a specified maturity date. The issuer
usually pays the bond holder periodic interest payments over the life of the loan. The various types
of Bonds are as follows :
Zero Coupon Bond: Bond issued at a discount and repaid at the face value. No periodic interest is
paid. The difference between the issue price and redemption price represents the return to the
holder. The buyer of these bonds receives only one payment, at the maturity of the bond
Convertible Bond: A bond giving the investor the option to convert the bond into equity at a fixed
conversion price.
Security Receipts: Security receipt means a receipt or other security, issued by a securitisation company or
reconstruction company to any qualified institutional buyer pursuant to a scheme, evidencing the purchase or
acquisition by the holder thereof, of an undivided right, title or interest in the fmancial asset involved in
securitisation.
INDIAN DEPOSITORY RECEIPTS (IDRs) As per the definition given in the Companies (Issue of Indian
Depository Receipts) Rules, 2004, IDR is an instrument in the form of a Depository Receipt created by the
Indian depository in India against the underlying equity ' shares of the issuing company. In an IDR, foreign
companies would issue shares, to an Indian Depository (say National Security Depository Limited — NSDL),
which would in turn issue depository receipts to investors in India. The actual shares underlying the IDRs
would be held by an Overseas Custodian, which shall authorise the Indian Depository to issue the IDRsil.
Overseas Custodian : It is a foreign bank having branches in India requiring approval from Govt. and
registration with SEBI.
Approvals for issue: It requires approval from SEBI and application can be made 90 days before
the issue opening date.
Listing : IDRs can be listed on Indian stock exchanges and would be freely transferable.
Eligibility conditions for overseas companies to issue IDRs: Capital : The overseas company
intending to issue IDRs should have paid up capital and free reserve of atleast $ 100 million.
Sales turnover : Average turnover of $ 500 million during the last three years. Profits/dividend :
Profits in the last 5 years and should have declared dividend of at least 10% each year during this
period. Debt equity ratio : The pre-issue debt equity ratio should not be more than 2:1. Size:
During a year should not exceed 15% of the paid up capital plus free reserves. Redemption :
IDRs would not be redeemable into underlying equity shares before one year from date of issue.
Denomination : IDRs would be denominated in Indian rupees, irrespective of the denomination of
underlying shares.
SEBI GUIDELINES ON IDRs : Overseas Companies should be listed in their home countries to
become eligible for issuing IDRs. Minimum size should be Rs.50 cr and minimum application
amount Rs.2 lac. Minimum subscription level should be 90%, otherwise amount has to be
refunded. Interest for delay beyond 8 days 15% p.a. Issue prices should be based on (a) earnings
per share pre-issue for last 3 years, (b) price by earnings ratio, (c) average return on net worth in
last 3 years and (d) net assets value per shares based on last balance sheet.
QUALIFYINGINSTITUTIONALBUYERSQFI is defined byRBI, tomean the non-resident investors, other
than SEBI registered FlIs and SEBI registered FVCIs, whomeet the KYCrequirements of SEBI.OnlyQFIs
fromcountrieswhich are FATF compliant and with which SEBI has signedMOUs under the TOSCO
framework, are eligible to invest in equity shares under this scheme.
Eligible instruments and transactions—QFIs can invest through SEBI registered Depository
Participants (DPs) only, in (a) equity shares of listed Indian companies through recognized brokers on
stock exchanges in India and (b) in equity shares of Indian companies which are offered to public in India
in terms, of the relevant and applicable SEBI guidelines/regulations (c) QFIs can also acquire equity
shares by way of rights shares, bonus shares or equity shares on account of stock split / consolidation or
equity shares on account of amalgamation, demerger or such corporate actions.
Limits - The individual and aggregate investment limits forQFIs shall be 5%and 10%respectively of paid up
capital of the Indian company (It is over and above FII and NRI investment ceilings under the Portfolio
Investment Scheme for' foreign investment in India. These limits forQFI investment shall be within such
overall FDI sectoral caps. The onus ofmonitoring and compliance of these limits shall remain jointly and
severally with respectiveQFIs, DPs and the respective Indian companies (receiving such investment).
Reporting—In addition to reporting to SEBI, DPswill also ensure reporting to RBI in amanner and format as
prescribed byRBI fromtime to time.
GLOBAL DEPOSITORY RECEIPTS & AMERICAN DEPOSITORY RECEIPTs
1. A GDR or ADR means any instrument in the form of a Depository receipt or certificate by
whatever name it is called, created by the Overseas Depository Bank (ODB) outside India and
issued to non-resident investors against the issue of ordinary shares or foreign currency convertible
bonds of issuing company.
2 These are negotiable instruments denominated in US $ representing a non-US company's
publicly traded, local currency equity shares.
3 The issue of such instruments involves the delivery of ordinary shares of an Indian company to a
domestic custodian bank in India, which in turn instructs an overseas depository bank to issue
Grig/ADR on a predetermined ratio.
4 The GDR/ADR can be sold outside India in their existing form. The underlying shares (arising
after redemption of GDR/ADR) can also be sold in India.
5 While ADRs are listed on the US stock exchanges, the GDRs are usually listed on a European
stock exchange.
6 A GDR/ADR may evidence one or more GDS/ADS. Each GDS/ADS represent underlying share of
Issuing company.
PARTICIPATORYNOTE : A Participatory note (also called Off-shore Derivative Instrument) is a
financial derivative instrument issued against an underlying security (shares). It allows its holder, to
get dividend or capital gains, earned from the underlying security, although some of the holders may
not be eligible to trade in stock markets in India. Other such instruments are equity-linked notes,
capped return note, participatory return notes and investment notes. The PNs are of two types i.e.
spot-based and future-based (i.e. off-shore derivative instruments).
Users of participatory notes : Participatory note is used by investors or hedge funds (risk taking
investment companies using high risk techniques to make huge profits and not eligible for
registration with SEBI as FlIs), which are not registered in India with SEBI, to invest in securites or
for trading on a stock exchange (say BSE or NSE). The hedge funds include the funds from US or
European countries.
MUTUAL FUNDS:Mutual funds are associations or trusts of members of public who wish to make
investments in the financial instruments or assets of the business sector or corporate sector for the
mutual benefit of its members.
The fund collects the money of these members from their savings and invests them in a diversified
portfolio of financial assets with a view to reduce the risks and to maximise their income and capital
appreciation for distribution to its members on a pro-rata basis.
They enjoy collectively the benefit of expertise in investment by specialists in the trust which single
individual himself could not. Mutual fund is thus a concept of mutual help of subscribers for
portfolio investment and management of these investments by experts in the field.
These funds are close ended with contributions collected during and for a definite time frame or
open ended under which the units are purchased and sold throughout the year and a member can
enter the scheme or walk out of it, any time. Funds can also be income funds, growth funds or tax
saving scheme funds. They can also be classified from deployment/investment aspect.
MUTUAL FUND TERMS :
Asset Management Company: A company formed and registered under the Companies Act 1956
and approved as such by the SEBI to manage the funds of a mutual fund. Under an agreement
(with the trustees of the Mutual Fund), an AMC undertakes to formulate mutual fund schemes,
distribute units, invest the funds in capital / money markets and distribute income as per
agreement.
Balanced fund: This fund invests in bonds and blue chip stocks to conserve capital. It pays
reasonable income capital appreciation.
Back-end load: A fee charged by a mutual fund from unit holders at the time of redemption of
units.
Close-ended scheme: A scheme where funds are raised for a fixed period. The scheme is wound
up after that period and funds are returned with capital appreciation to unit holders. Normally, a
close-ended scheme is listed on a stock exchange.
Discount/premium: The difference between the unit price and the net asset value expressed in
percentage terms. If the price is high than the NAV, the units stand at a premium and if the price is
lower than the NAV, the units are sold or purchased at a discount.
Expense ratio: The annual expenses of a fund, including the management fee, administrative
costs, divided by net assets.
Equity income fund: A portfolio whose focus is on stocks with high-dividend yields. Similar to
growth and income portfolios except that these funds usually place more emphasis on dividend
yield.
Fixed income funds: A mutual fund which primarily invests in fixed income securities like bonds
and debentures. The objective is to provide monthly or yearly income to investors.
Front end load : A sales fee charged at the time of purchase.
Growth and Income fund: A fund holding large, established companies offering the potential for
both appreciation and dividend income.
Growth fund: A growth fund aims at rapid capital appreciation of funds by making investments in
those securities which are expected to show large appreciation quickly.
Income fund: An income oriented fund aims at giving regular income to its investors so long as the
scheme is in operation.
Index fund: A mutual fund which mirrors the performance of a particular index. Such a fund
invests all or nearly all its funds in stocks listed on a particular exchange and included in the index
of that exchange (such as BSE sensex or National).
Management fees: The percentage charge for, portfolio management. This expense, which is
stated in the fund's prospectus, may decline proportionately as the fund's asset base increases.
Market capitalisation: The total market value of a firm used as a measure of size. It is determined
by multiplying the current price by the number of shares outstanding. .
Net asset value: The price or value of one share of a fund. It is calculated by summing the quoted
values of all the securities held by the fund, adding in cash and any accrued income and
subtracting liabilities and dividing the result by the number of shares outstanding. Fund companies
compute the NAV once a day based on closing market prices.
Net assets: The total value of fund's cash and securities less its liabilities or obligations.
Offshore fund: A fund established outside the country.
Open ended scheme: A scheme is the one which continuously offers its units and buys them back
from investors.
Portfolio manager: A professional investment manager who conducts securities business
according to stated objectives and by using sophisticated investment management
approach.
Pure no-load fund: A mutual fund that has neither front nor back load.
Rollover risk: A danger faced by holders of short term debt including money market funds. If
interest rates are falling, these investors must roll-over any maturing obligations into successively
lower-yielding instruments.
Tax saving schemes: A mutual fund scheme formulated under the Govt of India guidelines on
equity-linked savings schemes. Investors under this scheme are entitled for certain tax exemptions.
DEPOSITORY SYSTEM
Depository : A depository is an organisation which holds securities of investors in electronic form at the
request of the investors through a registered
Depository Participant: At present there are 2 Depositories viz. National Securities Depository
Limited (NSDL) and Central Depository Services (I) Limited (CDSL) are registered with SEBI. The
minimum net worth stipulated by SEBI for a
 Depository is Rs. 100 crore. Depositories provide services related to transactions in securities.It
can be compared with a bank, which holds the funds for depositors. Benefits of depository services
 A safe and convenient way to hold securities;Immediate transfer of securities;No stamp duty on
transfer of securities;Elimination of risks associated with physical certificates such as bad delivery,
fake securities, delays, thefts etc.;Reduction in paperwork involved in transfer of securities;
Reduction in transaction cost;No odd lot problem, even one share can be sold;Nomination facility; i
 Change in address recorded with DP gets
registered with all companies in which investor holds securities electronically eliminating the need to
correspond with each of them separately;
 Transmission of securities is done by DP eliminating correspondence with companies;
 Automatic credit into demat account of shares, arising out of bonus/split/consolidation/merger
etc.
DEMATERIALISATION (DEMAT)
An investor's portfolio of paper securities is subject to problems such as mutilation of share
certificates, loss of certificates, forged certificates, bad delivery etc. These problems can be taken
care of through the medium of `Depository' by providing paperless electronic or dematerialised
security transactions:What is dematerialization: Dematerialisation is a process by which the paper
certificates of an investor are taken back by the company/registrar and actually destroyed and an
equivalent number of securities are credited in electronic holdings of that investor.
Depository and its role: Depository is like a bank, where securities are held in electronic form,
scrips are collected and receipts and record of the account are given, to the investor.
Depository participants (DPs): DP are shareholders' representative (like brokers on SEs) and
provide a link between the depository and the client. The transactions for demat stock, with a
depository are carried by opening an account with and through the depository participant.
Rematerialisation: When the electronic holdings are converted back into paper certificates by
printing new certificates with a new certificate numbers, the process is called rernaterialisation.
Benefit : The system takes care of problems of bad deliveries, lost share certificates, postal delays
and transfer related problems, reduction in the incidence of fake certificates and forged transfer
deeds. It facilitates speedier settlements and increased efficiency at lower costs.