CAPITAL MARKET MANAGEMENT

CAPITAL MARKET MANAGEMENT CAPITAL MARKET MANAGEMENT V.A. AVADHANI M.A., Ph.D. (Neb), LL.B., C.A.I.I.B. RETIRED ADVISER IN THE RESERVE BANK OF INDIA FORMER DIRECTOR OF RESEARCH AND TRAINING IN BOMBAY STOCK EXCHANGE FORMER ADVISER IN HYDERABAD STOCK EXCHANGE VISITING FACULTY IN FINANCE Fourth Revised Edition: 2011 MUMBAI NEW DELHI NAGPUR BENGALURU HYDERABAD CHENNAI PUNE LUCKNOW AHMEDABAD ERNAKULAM BHUBANESWAR INDORE KOLKATA GUWAHATI

CAPITAL MARKET MANAGEMENT Author No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording and/or otherwise without the prior written permission of the publishers. First Edition : 1995 Second Revised Edition : 2001 Third Revised Edition : 2007 Reprint : 2009 Fourth Revised Edition : 2011 Published by : Mrs. Meena Pandey for Himalaya Publishing House Pvt. Ltd., Ramdoot, Dr. Bhalerao Marg, Girgaon, Mumbai - 400 004. Phone: 022-23860170/23863863, Fax: 022-23877178 E-mail: himpub@vsnl.com; Website: www.himpub.com Branch Offices : New Delhi : Pooja Apartments, 4-B, Murari Lal Street, Ansari Road, Darya Ganj, New Delhi - 110 002. Phone: 011-23270392, 23278631; Fax: 011-23256286 Nagpur : Kundanlal Chandak Industrial Estate, Ghat Road, Nagpur - 440 018. Phone: 0712-2738731, 3296733; Telefax: 0712-2721215 Bengaluru : No. 16/1 (Old 12/1), 1st Floor, Next to Hotel Highlands, Madhava Nagar, Race Course Road, Bengaluru - 560 001. Phone: 080-32919385; Telefax: 080-22286611 Hyderabad : No. 3-4-184, Lingampally, Besides Raghavendra Swamy Matham, Kachiguda, Hyderabad - 500 027. Phone: 040-27560041, 27550139; Mobile: 09848130433 Chennai : No. 85/50, Bazullah Road, T. Nagar, Chennai - 600 017. Phone: 044-28144004/28144005 Pune : First Floor, "Laksha" Apartment, No. 527, Mehunpura, Shaniwarpeth (Near Prabhat Theatre), Pune - 411 030. Phone: 020-24496323/24496333 Lucknow : Jai Baba Bhavan, Church Road, Near Manas Complex and Dr. Awasthi Clinic, Aliganj, Lucknow - 226 024. Phone: 0522-2339329, 4068914; Mobile: 09305302158, 09415349385, 09389593752 Ahmedabad : 114, SHAIL, 1st Floor, Opp. Madhu Sudan House, C.G. Road, Navrang Pura, Ahmedabad - 380 009. Phone: 079-26560126; Mobile: 09327324149, 09314679413 Ernakulam : 39/104 A, Lakshmi Apartment, Karikkamuri Cross Rd., Ernakulam, Cochin - 622011, Kerala. Phone: 0484-2378012, 2378016;Mobile: 09344199799 Bhubaneswar : 5 Station Square, Bhubaneswar - 751 001 (Odisha). Mobile: 09861046007 Indore : Kesardeep Avenue Extension, 73, Narayan Bagh, Flat No. 302, IIIrd Floor, Near Humpty Dumpty School, Indore - 452007 (M.P.). Mobile: 09301386468 Kolkata : 108/4, Beliaghata Main Road, Near ID Hospital, Opp. SBI Bank, Kolkata - 700 010, Phone: 033-32449649; Mobile: 09910440956 Guwahati : House No. 15, Behind Pragjyotish College, Near Sharma Printing Press, P.O. Bharalumukh, Guwahati - 781009 (Assam). Mobile: 09883055590, 09883055536 DTP by : HPH, Editorial Office, Bhandup (Priyanka) Printed by : A to Z Printers, New Delhi. PREFACE TO THE FOURTH REVISED EDITION Capital Market Management is a specialised subject in the area of the Financial Management. Capital Market is envisaged here as comprising of the money market and gilt-edged market and Primary and Secondary markets and accompanying ancillary functions like merchant banking, registrar s functions, etc. and stock broker s functions and investment management and portfolio management etc. The management means here the macro management by the authorities of the infrastructure of the markets, their instruments and their architecture, including their origin and development. The book also covers the micro management by Finance Manager or the corporate treasurer of the operations in these markets and the ancillary functions in them. The objective of this book is to keep the management students abreast of the functions and operations in the capital market as defined here and keep them prepared to take over the responsibilities of these finance functions and treasury operations. This book takes the subject from the basics to higher level of research and analysis. Wherever possible case study material and examples are provided from the real world. Although more emphasis is given to the macro study, the principles are the same and can be applied to the micro level operations at the firm level or corporate level. The book integrates management function with the finance function on the one hand and on the other hand, micro level function with the macro level function of the Finance manager. Starting with the Financial system of which capital markets is a part, the book delineates the money market functions and operations followed by primary market and then the secondary market and lastly investment management and portfolio management and other ancillary and incidental functions in the capital markets. The developments since the reforms of 1991-92 were started were given special attention. These changes in environment were very relevant to management as he operates with environments to achieve his goals and objectives. In making this revision, the author was guided by the comments and suggestions of the teaching faculty, to whom the grateful acknowledgements were due. The author also acknowledges the cooperation and help of the Himalaya Publsihing House. AUTHOR

CONTENTS CAPITAL MARKET MANAGEMENT PART I MANAGEMENT AND FINANCIAL SERVICES 1. Management Theory and Financial Services 3-10 2. Capital Market Management 11-19 3. Financial Services and Management 20-25 4. Growth of Non-bank Financial Services 26-32 5. Lease, Hire Purchase and Housing Finance 33-59 6. Economy and Capital Market 60-67 PART II MONEY MARKET MANAGEMENT 7. Cash Management 71-77 8. Credit Management 78-86 9. Management of Money Market 87-101 10. Management of Government Securities Market 102-118 PART III PRIMARY MARKET MANAGEMENT PART IV SECONDARY MARKET MANAGEMENT 16. Management of Stock Exchanges 199-211 17. Stock Exchanges Emerging Role 212-229 18. Management of Broker Firms 230-263 19. Activity and Recording of Broker Accounts 264-277 20. Options Trading 278-295 PART V INVESTMENT AND PORTFOLIO MANAGEMENT 21. Investment Management 299-305 22. Financial Analysis of Companies 306-315 23. Fundamental Analysis of Market 316-343 24. Basics of Portfolio Management 344-353 25. Management of Mutual Funds 354-391 Epilogue 392-398 Bibliography 399 11. Capital Issues and Listing 121-129 12. Management of New Issues 130-162 13. Problems of New Issues Market 163-169 14. Merchant Banking Management 170-181 15. Management of Issue Houses 182-195

BRIEF CONTENTS CAPITAL MARKET MANAGEMENT PART I MANAGEMENT AND FINANCIAL SERVICES 1. Management Theory and Financial Services 3-10 Riches Come Rather from Management than From Revenues Michael De Montaigne, 1588 Customer-oriented Services Crisis Management Principles of Management Features of Capital Market Management 2. Capital Market Management 11-19 Capital Market Structure Money Management 3. Financial Services and Management 20-25 Macroeconomic Management Activity Analysis 4. Growth of Non-bank Financial Services 26-32 Institutions in the Non-bank Financial Sector Financial Sector vs. Non-bank Financial Sector 5. Lease, Hire Purchase and Housing Finance 33-59 Hire Purchase Housing Finance Housing Industry Banks and Housing Finance RBI on leasing and Finance Companies RBI and NBFCs 6. Economy and Capital Market 60-67 Economy Money Flows Financial Reforms PART II MONEY MARKET MANAGEMENT 7. Cash Management 71-77 Features of Cash Surpluses of Cash Matching Cash Flows RBI Concepts of Money 8. Credit Management 78-86 Objectives of Management Special Features of Finance Companies Measure of Efficiency 9. Management of Money Market 87-101 Institutional Structure Discount and Finance House of India (DFHI) New Money Market Instruments Management in Money Market 10. Management of Government Securities Market 102-118 Emergence of Public Debt Management of Public Debt Investment Criteria of Banks Experience in Other Countries Maturity Pattern Operations of STCI PART III PRIMARY MARKET MANAGEMENT 11. Capital Issues and Listing 121-129 Capital Issues as a Mode of Raising Resources Planning of a Capital Issue Companies to Comply with SEBI Guidelines OTCEI and Listing Preferential Allotment and SEBI Directions

CAPITAL MARKET MANAGEMENT 12. Management of New Issues 130-162 Flotation of New Issues Factors to be Considered for Investment in Primary Market Actual Mobilisation of Funds Macro and Micro New Issues Management Annexure I Annexure II 13. Problems of New Issues Market 163-169 Cost of Capital Issues Wasteful Procedures on Public Issue 14. Merchant Banking Management 170-181 Incorporation Environmental Factors Borrowing and Acceptance of Deposits SEBI Authorisation 15. Management of Issue Houses 182-195 Activity of Registrars Inefficiencies and Malpractices Registration with SEBI General Obligations of Registrars Annexure I PART IV SECONDARY MARKET MANAGEMENT 16. Management of Stock Exchanges 199-211 Listing Function Management Aspects of Inspection and Audit Performance Budgeting in Stock Exchanges Returns to the SEBI 17. Stock Exchanges Emerging Role 212-229 Evolution Experience Abroad Public Service Institutions Communication Technology Interconnected Stock Exchange of India (ICSEI) National Stock Exchange 18. Management of Broker Firms 230-263 Client's Choice of Brokers Annexure I Preliminary Registration of Stock Brokers Registration of Sub-brokers General Obligations and Responsibilities Procedure for Inspection Procedure for Action in Case of Default 19. Management of Brokers' Accounts 264-277 Brokers' Accounts Client Orders Execution Internet Trading by Investors Audit of Accounts of Members Accounts to be Maintained Rule 15(2) Accounts 20. Derivatives and Options Trading 278-295 Report on Derivatives Trading Patterns in the Markets Bibliography PART V INVESTMENT AND PORTFOLIO MANAGEMENT 21. Investment Management 299-305 Art and Science of Investment Market Analysis Role of Indicators in Management of Investment in Stock Market

CAPITAL MARKET MANAGEMENT 22. Financial Analysis of Companies 306-315 Analysis and Interpretation Proforma Ratio Analysis Fund Flow Analysis Trend Analysis 23. Fundamental Analysis of Market 316-343 Example of an Industry Analysis Fundamental Analysis of Finolex Industries The Fundamentals of Reliance (RIL) 24. Basics of Portfolio Management 344-353 SEBI Guidelines for Portfolio Managers Some Aspects of Portfolio Management Portfolio Strategy 25. Management of Mutual Funds 354-391 SBI Mutual Fund Investment Policy Response of NRIs Progress in Nineties Money Market Mutual Funds (MMFs) Annexure I RBI Guidelines on Mutual Funds Annexure II SEBI Guidelines for Mutual Funds Annexure III Scheme for Money Market Mutual Funds Guidelines (RBI) Epilogue 392-398 Bibliography 399

CAPITAL MARKET MANAGEMENT CHAPTER 1 MANAGEMENT THEORY AND FINANCIAL SERVICES PART - I MANAGEMENT AND FINANCIAL SERVICES RICHES COME RATHER FROM MANAGEMENT THAN FROM REVENUES MICHAEL DE MONTAIGNE, 1588 Introduction The basic principles of management by objectives hold good for capital market management also. The objectives of management in financial services are efficiency in service, cost-effectiveness and profitability. This is a service industry where quality counts more than quantity. In this process, costs and profitability cannot be sacrificed. In the name of social obligations, banks have sacrified the productivity and profitability which should not happen for non-bank finance companies. Thus, management in capital market requires a combination of talents in finance area and marketing area and in personnel management (HRD). The knowledge required for this purpose is sought to be covered in this book in a basic but exhaustive manner. This book is intended for those students of management who have some exposure to both finance and marketing or are students of MBA. As an area of specialisation with employment orientation and practical bias, the subject of capital market management is ideally suited to MBA students or M.Com. students. This gives an exposure to practices and procedures in capital market and the institutions and agencies operating in it. Capital market deals with arranging for loans, raising of funds, dealings in capital and securities which are claims on money. But being a service-oriented market, human element or management component is an all important and vital part of its operations.

4 CAPITAL MARKET MANAGEMENT 5 Objectives of Management The management of all capital market institutions should aim at quality of service, timeliness and efficiency, cost control and profitability. The above objectives can be achieved through collaborative efforts of a host of intermediaries like merchant bankers, underwriters, registrars brokers, etc. The managers of these agencies have to bear a vital responsibility and should have inter alia the expertise in human relations and personnel management and coordinate the activities of various experts and teams in their activities. With the spread of Computer usages and application of Information Technology in all areas of service, the subject of computer applications has to be an adjunct of Capital Market Management. Besides, in this service industry, of non-bank financial activity, men and human relations matter, on top of practices and procedures. In addition to men, the other inputs that management deals with are money, monetary instruments, capital, plant and machinery involved in projects of companies etc. The sinews of all industrial activity being finance and financial services, the management in capital market assumes vital importance to the economy. Besides, the fastest growing industry in the years to come is financial services and the largest scope for employment and self-employment lies in this line. It is thus important for the capital market and for the economy to be assured of who are the future managers heading these institutions and how competent are they. The managers of these finance companies, mutual funds, merchant banks etc., are so far bankers, CAs, and finance graduates etc., but a new professional breed of capital market managers through specialisation in capital market is the need of the hour. It is for this elite professionals that this book is meant for. Fine-tuning Managers to Financial Services: Timeliness Any manager or management graduate will not fit into the area of capital market. The work involved is a combination of practical and theoretical ideas put into a capsule of sale of services. It thus requires all the management tools plus something more a practical bias, a bent of mind and a behaviour. All the institutions in capital market are serviceoriented related to money and finance. But more importantly, a knowledge of law, a time schedule to follow as per rules and resultoriented actions are needed. Decision Making Capacity to take decisions and right decisions, and in time is an essential part of capital market management. After gathering information, classifying and analysing the data and information which is fast growing and put them into alternatives available, he has to chose the one with least cost, timely and most profitable. The manager has to help the companies save time and money to be able to stand competition. In the present-day globalisation environment, competition and survival of the fittest will be the watchword and managers in the capital market have to face this reality. Analytical Power Corporate data is plenty and information flows in like Niagara falls and it is the manager s competency to pick up the correct information, analyse it and come to correct conclusions. Investment analysis and market analysis requires an expert financial manager. But the suitable manager for capital market should combine in himself the expertise involved in the following areas: (a) Personnel management with a special bent for coordination of expert manpower with capacity for better human relations. (b) Finance management with an expertise in analysis and interpretation of financial data of companies. (c) Expertise in law and practices of capital market and knowledge of rules and regulations relating to the capital market institutions, including SEBI and RBI. (d) Marketing management with a flair for sales promotion to meet the competition of other institutions and increasing the market share in the services rendered by him. (e) Knowledge of banking law, rules and practices relating to the money market and Forex Market to enable him to make proper investment management in these markets, which are closely connected to capital market. (f) Knowledge of all non-bank financial services rendered by these institutions and they are all interrelated, as hire purchase, lease finance, venture capital, and expertise in dealing in such diverse areas. CUSTOMER-ORIENTED SERVICES Some capital market services which are to be managed by the capital market manager are individualised and customer-oriented. In such cases, the manager has to take note of that individual's assets, income and expenditure and his preferences for risk and return. He has to plan the targets according to his needs and preferences. This is highly

6 CAPITAL MARKET MANAGEMENT 7 prevalent in management of investments, consultancy, and investment advice, and portfolio management. In financial services sector, these types of services for individuals are quite common for retail investment, appeals to contribute to the IPOs Demat form of holding of shares and stock market trading and related subjects. In many segments of the capital market, the customised services are quite common and are governed by mutual agreement oral or written between the broker and the client. In portfolio management and consultancy services, the individualised and customer-oriented services, are frequently noticed in the real world. Therefore, this type of service in financial sector is to be well understood and appreciated. CRISIS MANAGEMENT An efficient manager is one who can get things done in time and by the right persons in the most cost-effective manner so as to maximise the profits of the firm. Such managers also do know how well to plan in advance for all inputs and targets to be achieved. In any activity, there are possibilities of the emergence of crisis situations. In the Financial sector, there are many occasions when suddenly there is a crash in the market, sharp fall in prices, change in the situation of the investor, sudden withdrawal of the FFI and FIIs from the market. Besides there are occasions when rumours and news and insider trading will upset the demand-supply equilibrium in any of the scrips or in any group of scrips like shipping or cement, etc. An efficient manager has to plan well in advance for any such contingencies and face them well without much disturbances to the plan of action or the path of movement of investments. He has a long-term plan of action and the targets fixed are flexible and alternative venues are already ingrained in the plan of action. He is well equipped to meet any such crisis situations. PRINCIPLES OF MANAGEMENT Right Person in Right Place The leader makes all the difference. It is the management talent to pick the right persons to be leaders in each division/department. The leader should be able to think, plan and execute the plan promptly and cost-effectively. To keep ahead of competitors, he has to keep contact with information sources of competitors, make the SWOT (Strengths, Weaknesses, Opportunities and Threats) analysis and to see the strengths and weaknesses of staff and use the manpower resource optimally. Effective communication, good drafting, creativity and innovation are the qualities of good managers. The leaders or top management has to set the goals for each department and plan to make it a profit centre. Targets and responsibilities are earmarked for each team who along with leader will achieve the optimum results with limited resources in terms of inputs and finance. Actual activity-wise responsibilities are set for each man and team. Men are the best assets. The manager has to manage them effectively. 1. Encourage capable and committed men. 2. Train the less capable ones and motivate uncommitted men. 3. Develop self-management ideas and help them to be cultivated by delegation of authority and responsibility. Time is another valuable asset. Time is money. Develop a sense of timeliness. Good management has time sense and plans all activities in a time-bound fashion. Finance The manager has to use miserly principle of economising in all possible ways, but should not be pound foolish and penny wise. The management has to find methods of growing two blades of grass where only one blade grows. He has to use innovative ideas to save on costs and money. Management of Men 1. Make them thinkers, innovators and motivated. 2. Manage them well by encouraging but not criticising, by correcting but not by humiliating. 3. Motivated and committed people, even if they commit occasional mistakes are assets to a firm. Management of Time 1. Eliminate time spent on inessentials. 2. Reduce time spent on less-essential and have the capacity to discriminate between the essentials and non-essentials. 3. Plan the time daily, weekly and monthly. 4. Time and objective fulfillment have to be synchronised. 5. Delegate authority and activity so as to optimise time. Management of Finance Finance is a scarce resource. It has alternative uses in daily transactions in working capital investment for raw materials and

8 CAPITAL MARKET MANAGEMENT 9 inventories and fixed capital investment in buildings, plant, machinery etc. The sources of finance are many, namely borrowing from banks, FIs, and other companies. Capital can be raised from capital market from public as equity (ownership) or bonds and debentures (debt). Even foreign capital market is now open to companies with credit standing. Each of these methods has its own cost in the form of raising the money, servicing it and repayment of it. Even for equity which need not be repaid it has a cost in the form of expected yields in the minds of investors, based on what they get in other and similar companies. Thus, the manager has to weigh these costs and design a capital structure with the least cost combination of these components. Being scarce resource, even cash has a cost in the form of alternative income lost. Thus, management of cash in an optimal manner involves some talent in reducing costs and increasing profitability, for which the manager is responsible. Thus, management of finance is vital responsibility of manager in non-bank financial services. Capital market management gives crucial role to this job. Interviews and Plant Visits Managers in capital market require to meet people, in different grades and levels. Communication, clarity of thinking and analytical power, arduous homework and ability to deal with different types of people differently and with tact would be the needed qualities of manager. He has to visit factory managers, go around the sites of plant, visit the various departments, communicate with collaborators, suppliers, distributors etc. This is particularly important for project appraisal, investment analysis and research in all capital market intermediaries and players in the markets. Managers have to have a team spirit, capacity to get along with equals, superiors and subordinates and ability to communicate effectively and elicit the right information. The work involves the coordination with various experts, solicitors, accountants, auditors, finance managers, technicians, engineers etc. Being equals, the team requires the managers who possess leadership qualities to throw their innovative and creative ideas into action and lead the team of experts. Interviewing and meeting people and asking right questions to elicit correct information are the arts of a manager in capital market. FEATURES OF CAPITAL MARKET MANAGEMENT Finance is the product in its diverse forms that is traded in the capital market. The managers dealing with capital market have to aim at the objective of minimisation of cost of capital and maximisation of return through achieving increased capital productivity. Besides, capital market management is a specialised branch of Financial Management, where financial risk is more prominent. Managers here have to face greater financial risk than other types of managers. Management of risk and techniques of risk reduction should be part of their day-to-day work for capital market managers. Capital market comprises many financial markets and sub-markets, whose characteristics and risk-return features vary and as such market risk is more for managers operating in the Capital Market than in other activities of the economy. Rupees and other currencies are the standard of measurement of their activities and results and as such purchasing power risk is another major factor to be reckoned with. The above risks namely financial risk, market risk and purchasing power risk are common to all managers but they are more for capital market managers as capital or finance is both an input and output for them. Like IT, it is a knowledge-based industry or service, where human skills, expertise, technology, intuition and manpower performance levels count, for the results. Both money and information flows are major factors influencing the operations in the capital market. Thus, liquidity in the economy, government and RBI policies on money, credit and banking influence the operations in the capital market. The laws and regulations of the Government, RBI and SEBI have a major role in the operations of managers here. The subject of capital market management is different even from banking. The functions of capital market intermediaries are different from those of banks and governed by a wide range of legislative enactments unlike banking. Non-bank finance companies and non-banking intermediaries operate in the capital market and provision of financial and non-financial services constitute the core part of the activity of the capital market managers. The managerial function involves forecasting, planning, organising, staffing, directing the staff, coordinating, decision making, controlling and audit. Planning and Forecasting depends on the vision and intuition of the management and this is a difficult process in capital market operations. The staff expertise required is different in that a multidisciplinary approach will succeed better due to diversity of activities involved and multiplicity of laws and regulations governing these activities. Among the styles of management which are more suitable to capital market management, the styles of management by leadership, creativity and consensus or coordination are better suited than the traditional types of management of centralised decision making or family type. Professional and highly specialised personnel will better fit in for capital market management.

10 CAPITAL MARKET MANAGEMENT Specialities in Capital Market Management One might ask that what has been discussed is relevant to any effective manager. Then what is so special about capital market management? Every body agrees that bank management is a speciality and there are special examinations of professional competence conducted by the Institute of Bankers and IBA. There are professional organisations like NIBM, B.T.C., and other training institutions of public sector banks. If banking is a specialised service regulated by Banking Law and Practice and RBI Act, non-banking financial services are more specialised as they are governed by a variety of Acts, such as Companies Act, SC (R) Act, Indian Contract Act, SEBI Act, etc. Besides, the expertise needed here is more diverse, as the functions carried on by them are many and interrelated such as activities in stock market, new issues market, gilt-edged and money markets, foreign capital market, etc. Capital market management involves various disciplines, much more than in banking. For example, various laws, requires legal expertise, funding business requires banking knowledge, hire purchase and leasing requires a different expertise. Mutual funds, brokerage firms, portfolio managers and a host of other agencies require knowledge and expertise in personal management, marketing management, funds management, investment management etc. In short, capital market management is different and more specialised than banking. It requires a different cadre of specialists to man the increasing work of financial institutions. It is more practical and operational and the expertise needed is different, but allied to that of banking. Conclusion This book gives the background information for managers in capital market to function more effectively. The basic principles of management are assumed to be known to readers. On this premise, what is presented in coming chapters is only the superstructure, involving the capital market institutions, operations and practices. The word Capital Market is used in a wide sense including new issues market, stock market, money market, government securities market etc. The information about these markets and their operations would hopefully sharpen the tools of management as they are down-to-earth, practical and operational. o o o