INVESTMENT AND SECURITIES MARKETS IN INDIA

INVESTMENT AND SECURITIES MARKETS IN INDIA

CONTENTS PART I SECURITIES MARKETS IN INDIA I 1-111 1. SECURITIES AND SECURITIES MARKETS 3-11 Introduction What are Securities? Mobilisation of Savings for Investment lous as Securities Characteristics of Securities Primary Issues and Derivative Securities Schematic Presentation of Emergence of Markets 2. LEGAL BASIS OF MARKETS 12-25 (A) Companies and Their Regulation New Issues Market Prospectus Instruments of Issue Powers and Delegation Despatch of Share Certificates Debenture Certificates Fixed Deposits Law Regarding Dividends 1988 Amendments in Companies Act (B) Law and Practice Relating to Contracts : What is a Contract? Brokers' Contracts Void Contracts Rights and Obligations Time and Place Penalties for Breach Agents and Sub Agents (C) Securities Contracts (Regulation) Act Objectives Coverage Recognised Stock Exchanges Options in Contracts Listing of Securities by Public Companies Restrictions on Transferability (D) Negotiable Instruments Act Blank Transfers Giving of Promissory Notes Negotiation Presentment Limitation Act Compensation > Penalties (E) Indian Stamp Act 3. INVESTMENT AVENUES 26-37 Objectives of Investor Characteristics of Investment Risk-Return Relationships Tax Benefits Marketability and Liquidity Safety vs. Riskiness Need for Tradability Classes of Instruments Investment Profile of Average Household Non-Corporate Investments Corporate Investments Deposits with Banks Instruments of Post Offices Public Provident Fund NSS 10-Year Social Security Certificate Indira Vikas Patra Kisan Vikas Patra Public Sector Bonds Drought Relief Bonds (Relief Patra) Conclusion 4. TAX PLANNING FOR INVESTMENT 38-42 Taxation of Dividend and Interest Income Brokerage Income and Business Profits Tax Treatment on Investments Income Tax and Corporation Taxes Capital Gains Taxation Postal Investments Wealth Tax Gift Tax Taxation of NRIs Taxation of Investment Business in India Taxation of FFIs in India 5. INVESTOR PROTECTION 43-50 Introduction Complaints against Members Grievances Cell Complaints against Companies Customers' Protection Fund Investors Beware.. Specific Goals Pre-requisites of Investor Preparing to Invest Balance Sheet Study Chojce of a Broker Protection in the New Issues Market Protection for Fixed Deposits Guidelines to Investors Legislative Protection to Investors CRISIL Rating and Investor Protection 6. THE SECURITIES AND EXCHANGE BOARD OF INDIA (SEBI) 51-58 Introduction Objectives SEBI and Free Pricing of Equity Shares SEBI Powers SEBI in the New Millennium

7. INSTITUTIONAL STRUCTURE IN CAPITAL MARKET 59-72 - Development and Investment Institutions UTI & Its Objectives Activities of UTI Investment Pattern Schemes Offered, by the UTI IDBI Schemes of IDBI Assistance Sources of Funds ICICI IFCI Functions I.R.B.I. Functions IIBI Insurance Companies Life Insurance Corporation (LIC) General Insurance Corporation (GIC) Public Sector Mutual Funds SFCs/ SIDCs SHCIL (Stock Holding Corporation of India Ltd.) Organisational Structure Functions Clearing Services Depository Services Support Services Management Information System Developmental Services CRISIL (Credit Rating and Information Services of India Ltd.) ICRA Factors Considered Ratings Advantages Care DPCR 8. GROWTH PROCESS SAVINGS AND INVESTMENT 73-80 Structure of the Economy What is Growth Process? Role of Savings Other Factors in Development Financial Intermediation Links of Real Economic System and Financial System Savings Rate Gross and Net Savings Household Savings Shifts within Industrial Sector Lead and Lag Industries Public Sector Enterprises Paradox of High Savings and Low Growth Role of Private Corporate Sector Conclusions 9. FINANCIAL SYSTEM IN INDIA 81-94 What Constitutes Financial Activity? RBI and the Financial System Money Market Characteristics Commercial Paper (C.P.) Certificate of Deposits (CD.) Discount and Finance House Operations of DFHI Stock Market Financial Institutions Savings and Investment Interest Rate Structure Primary and Secondary Markets Unorganised Financial System T Bullion Market Financial Sector Reforms RBI 10. CAPITAL MARKET REFORMS 95-111 Introduction Narasimham Committee Free Entry to Capital Market Liberalisation Measures New Instruments SEBI Guidelines Strengthening of SEBI Powers Stock Invest Changes in Listing Guidelines Guidelines for Takeovers Relaxation of Some Restrictions Details for Investor Protection More Recent Changes in New Issue Market Institutional Strengthening Electronic Trading Stock Exchange Reforms Market Makers BOLT System Badla Trading SEBI's Insider Trading Regulations Central Depository System Corporate Membership Pending Reforms SEBI Norms for Book Building SEBI Reforms on Stock Exchanges Takeover Code Critique of Bhagwati Committee's Report PART II PRIMARY MARKETS IN INDIA I 113-198 11. CAPITAL ISSUES 115-137 Objectives Procedures Stock Option Scheme Continuous Changes in, SEBI Policy Market Makers Role of Capital Issue Annexure I A. First. Issue of New Companies Clarifications B. First Issue By Existing Private/ Closely Held Companies Clarification C. Public Issue by Existing Listed Companies Clarification Issue of Shares through OTC Exchange of India (OTC) D. Underwriting Clarification E. Composite Issues F. Fully Convertible Debentures/Partially Convertible Debentures/Non-Convertible

Debentures Clarification G. New Financial Instruments Clarification H. Reservation in Issues Clarification I. Deployment of Issue Proceeds Clarification \J. Minimum Interval Time Between Two Issues Clarification K. Employee Stock Option Scheme L. Promoters' Contribution And Lock In Period Clarification M. Bonus Shares Clarification N. Guidelines for the Protection of the Interest of Debentureholders 1. Servicing of Debentures 2. Protection of Debentureholders' Interest Clarification Clarification 0. General Clarification 1. Preferential Allotments in Capital Issues of Companies (i) Indian Mutual Funds (ii) Firm Allotment to Financial Institutions Annexure II General Conditions for all Debenture Issues SEBI Guidelines & Clarifications on Disclosure & Investor Protection General General Conditions for Public Issue 12. GOVERNMENT REGULATION OF INDUSTRIES 138-145 Objectives of Industrial Policy Industries (Development and Regulation) Act, 1951 Major Provisions Licensing Policy Recent Slant in Licensing Policy Liberalisation New Industrial Policy Fiscal and Trade Policies Sick Industry Policy Backward Area Development Progress Returns ' Registration Policy on Foreign Investment and Collaboration Non-resident Investments 13. GOVERNMENT POLICIES AND INDUSTRIAL DEREGULATION 146-156 Introduction Industrial Policy Industrial Licensing Policies for PSUs Foreign Investment MRTP Control Nature of Control Major Policies Fiscal Policy Monetary and Credit Policy Trade Policy FERA Policy Facilities for Investment to NRIs Latest Reforms in the Economy 14. NEW ISSUES MARKET 157-168 Definition Methods of Floatation Offer Through Prospectus Offer of Sale Private. Placement Rights Issue Debt versus Equity Rights of Conversion of Debt into Equity Preference Shares Bonus Shares Cost of Floatation Magnitude of Funds Underwriting Activity Abuses in the New Issue Market Problems of the New Issue Market SEBI Regulations on New Issue Market Other Conditions for Listing of Companies Appointment of Intermediaries 15. MERCHANT BANKING 169-182 Introduction What is Merchant Banking? Issue Management Other Functions Offer of Sale Private Placement Services of Merchant Banks Why Merchant Banks? Functions Role of Merchant Banks Underwriting Type of Expertise Required Securities and Exchange Board of India (SEBI) Merchant Banking Role & Functions Reports Annexure 16. VENTURE CAPITAL FUNDS 183-189 What is Venture Capital? Venture Projects Indian Positjon Public Financing Agencies -r Private Agencies Policy Initiatives Difficulties in India Tax Treatment Need for Growth of Venture Capital Annexure 17. LEASE FINANCING 190-198 Concept of Leasing What is Lease? Finance Lease Operating Lease Lease and Hire Purchase Types of Finance Lease Cash Flow and Lease Finance Advantages of Leasing Advantages to Lessor Advantages to Lessee Leasing in India Sources of Funds Problems of Leasing

Companies Tax Problems Legal Aspects Legislation of Leases Accounting Problems Leasing vs. Buy Decision Banks and Leasing'. Commercial Banks and Leasing Use of ^Funds_ Marketing Aspects Lease Rentals RBI and NBFCs PART III SECONDRY MARKETS IN INDIA I 199-326 18. SECURITIES TRADING REGULATIONS 201-205 Objectives Coverage Recognised Stock Exchanges Options in Contracts. Regulation of Trading Restrictions on Transferability 19. INSTRUMENTS OF ISSUE AND TRADING 206-219 Issues of Securities Government Securities Corporate Securities Corporate Debentures Other Securities Company Deposits Commercial Paper Legaj Provisions Despatch of Share Certificates Debenture Certificates Fixed Deposits Law regarding Dividends New Companies Bill 1993 SEBI Guidelines Equity Shares Dividend Distribution Dividend Policy Other Instruments Bonus Shares Rights Shares Preference Shares CCP Govt. and Semi Go\rt. Bonds Equity Share3 Public Issue Cost of Issue Guidelines New Instruments Instruments of Foreign Borrowing 20. STOCK MARKETS IN INDIA 220-232 History of Stock Exchanges What is a Stock Exchange? Byelaws Regulation of Stock Exchanges Recognition by Government Licensed. ' Dealers Securities Contracts (Regulation) Rules, 1957 Present Recognised Stock Exchanges Qualifications for Membership Organisation Governing Body Functions of Stock Exchanges Listed Paid-up Capital Who Owns the Securities? Bombay: The Premier Exchange Patel Committee Regulations on Trading Investor Protection Measures to Promote Healthy Stock Markets ; : 21. OTCI, NSE AND ICSE 233-254 Securities Exchanges Structured Markets OTC Defined Investor Interests Practices Abroad OTC and New Issues Market OTC and Stock Exchange Advantages of OTC Structural Weaknesses in India Role of OTC Overthe-Counter Exchange of India (OTCEI) Objectives of OTCEI Establishment of OTC Listing on OTCEI Investors Benefitted Market Players Listing Procedure Trading on the OTCEI Conclusion Problems OTCEI and Dave Committee Report Dave Committee Recommendations Annexure Issue of Shares through OTC SEBI Guidelines National Stock Exchange National Market System Characteristics NSE Operations Central Depository System Listing of Securities Settlement System The National Securities Depository Limited (NSDL) What is a Depository? Rematerialisation Advantages of the Depository About the Depository Participants NSDL's First Participants Legal Aspects ICSE

22. LISTING ON THE STOCK EXCHANGES 255-262 Introduction Advantages of Listing Listing Requirements Eligibility Prospectus and Application Forms Regulations for Listed Companies Offer of Sale Regulations Relating to Underwriting The Schedule of Costs NRI Investment Capital Market Open to Foreign Funds Procedure for Listing Listing Agreement 23. STOCK MARKET OPERATIONS AND FUNCTIONS 263-272 Introduction Specified and Non-Specified Groups Customer's Orders Trading Ring Block Book (or the Sauda Book) Contract Note Drawing Up and Bills Cum and Ex-dividend Settlement in Specified List Badla Charges Factors Influencing Badla Rates Carry Forward Facilities Book Closure Badla Financing (BCBF) Settlement in Non-Specified Shares After the Badla Day Kinds of Delivery Hand Delivery Spot Delivery Special Delivery Delivery for Clearing Present Position of BADLA J.S. Varma Committee (July 1997) Dhanuka Committee Report 24. TRADING IN THE STOCK MARKET 273-286 Pattern of Trading Trading and Settlement Speculative Traders vs. Genuine Investors Types of Speculators Activities of Brokers Brokers' Charges Delivery/Payment Settlement Procedure Auctions Clearing Procedure Regulation National Market System Characteristics Objectives Study Group Recommendations Experience in Foreign Countries National Clearance and Depository System Present Settlement and Clearance System National Trade Comparison and Reporting System Emerging Role of Stock Exchanges 25. GOVERNMENT SECURITIES MARKET 287-297 Emergence of Public Debt External vs. Internal Debt Management of Public Debt Open Market Operations Banks vs. Gilt-edged Market Brokers and the Market RBI and the Gilt-edged Market Investment Criteria of Banks Reforms in the Guilt-edged Market Types of Loans Switch Deals Washed Sales Current Yield Redemption Yield Experience in Other Countries Principal Forms of Government Securities Role of Yields Maturity Pattern Ownership of Government Debt Trading in Secondary Market Operations of STCI Dematerialisation of Gilted Securities 26. SECURITY MARKET INDICATORS 298-310 Introduction Functions and Activity Segments of the Markets Segment of Government Securities Yield Curve Indicators Corporate Securities Section Main Indicators Security Price Indices RBI Index of Industrial Security Prices BSE Sensitive Index Scrip Selection Methods of Compilation Weightage Other Adjustments BSE National Index BSE 200 and Dollex Financial Express Series of Index Numbers Economic Times' Price Indices Other Indicators Other Indices 27. INTEREST RATES THEORY AND STRUCTURE 311-326 Introduction -* Role of Interest Income Relative Share of Interest Income Role of Interest Rates Theories of Interest Rate Structure of Interest Rates Factors Influencing Interest Rates Interest Rates in India Bank Rate and Refinance Rates Money Market Rates Rates in Gilt-edged Market Private and Government Bond Rates Rates of Borrowings and Lendings by

Commercial Banks Interest Rates on Small Savings Interest Rates on Non-resident Accounts Export Credit Level and Structure of Rates Level of Interest Rates Structure of Interest Rates -Reforms Recent Deregulation Measures The Yield Current Yield Redemption Yield Holding Period Yield (HPY) Real Yield Net Yield Maturity and Yields Yield Curve PART IV SECURITY AND INVESTMENT ANALYSIS I 327-517 28. SECURITY MARKET ANALYSIS 329-339 What is Security Analysis? Origin of Markets Information Flows Savings or Money Flows Factors Influencing the Market Behaviour Trading Instruments Players Intermediaries What is Market Analysis? Valuation Theoretical Framework Schematic Presentation of Theory Investment and Time Value of Money Present Value Method D.C F. (Discounted Cash Flows) 29. INVESTMENT ANALYSIS AND THEORY ' r 340-346 Introduction Flow of Funds Theory Price Formation Capital Assets Pricing Model Risk and Portfolio Efficient Market Theory Random Walk Theory Trend Walk Theory Capital Asset Pricing (CAP) Theory Modern Portfolio Theory Concept of Beta Fundamental School Intrinsic Value and Market Value Evaluation of Shares 30. SECURITY PRICING 347-357 Factors Influencing Valuation Security Valuation Constant Growth Model Book Value Liquidating Value (Breakdown Value) Replacement Value Intrinsic Value vs. Market Price (i) Bond Valuation, (ii) Equity Valuation Single-Period Valuation Models Multi-Period Share Valuation Model Dividend Capitalisation Earnings Capitalisation Use of P/E Ratio Security Pricing Models Other Models Valuation of Securities in India 31. FUNDAMENTAL ANALYSIS 358-375 Influence of the Economy Economy vs. Industry and Company Industry Analysis Qualitative Factors Petro-Chemicals Company Analysis Need for Forecast Guidelines for Investment Example of Company Analysis How to Pick Up Growth Shares? 32. CORPORATE FINANCE AND INDUSTRY STUDIES 376-384 Introduction Industrial Finance Industry Groups Ratio Analysis Fixed. Assets Ratios Current Assets Ratios Profitability Ratios Recent Industrial Policy Changes 33. BALANCE SHEET ANALYSIS AND BLUE CHIPS 385-395 Annual Reports Market Price and Corporate Performance Analysis of Financial Position Types of Shares in the Market Growth Shares Cyclical Shares Defensive Shares Discount Shares Net Financial Results and Profitability Corporate Performance How to Locate Emerging Blue Chips Established Blue Chips

34. TECHNICAL ANALYSIS OF THE MARKET 396-409 Importance of Timing in Investment Basic Tenets of Technical Analysis Tools of Technical Analysis Dow Theory Major Trends Chartist Method Breadth of the Market Volume of Trading Tripod of Technical Analysis Principles of Technical Analysis Charts and Trend Lines Moving Averages Advantages of Moving Averages Criticism of Dow Theory Charts Head and Shoulders Resistance and Support Lines Speculative Trading and Technical Analysis Elliot Wave Theory Operation of Wave Theory Oscillators (Rate of Change or ROC). '. 35. PORTFOLIO MANAGEMENT: CONSTRUCTION, 410-439 REVISION AND EVALUATION Fact Sheet Clients' Data Base Objectives of Investors Motives for Investment Tax Provisions Capital Gains Portfolio Construction Risk- Return Analysis Time Horizon of Strategy Types of Risk Efficient Portfolio Market Efficiency Theorem Diversification Portfolio. Management Elements of Portfolio Management Execution of Strategy Monitoring. Building of the Portfolio Portfolio Revision Security Pricing and Portfolio Management Markowitz Model of Portfolio Theory Risk Analysis Evaluation of Portfolio Performance Evaluation Criteria for Portfolios 36. MUTUAL FUNDS AND THEIR SCHEMES 440-467 Introduction Definition Types of^funds Unit Trust of India UTI Schemes for Resident Indians Off shore Funds SBI Mutual Fund India Magnum Fund N.V. Other Funds Overall Progress in India Investment Policy Steps to Popularise Mutual Funds Response of NRIs For All MFs Common Rules Advantages of Mutual Funds Progress in Nineties Regulation of Mutual Funds Authorisation of Existing Mutual Funds Money Market Mutual Funds (MMFs) Authorisation of New Mutual Funds Mutual Funds Present Status Annexure I Annexure II Annexure III 37. NON-RESIDENT INDIAN (NRI) INVESTMENTS 468-478 Who is an NRI? NRO Accounts NRE Accounts FCNR (B) Accounts Encouragement to NRI Investment Investment on Repatriation Basis Tax Benefits Other Benefits RBI Permission Ceilings on NRI Investments Personal Investment Avenues for NRIs NRI Investment NRIs Investments Direct Investment without Repatriation Benefits Direct Investment with Repatriation Benefits Other Investments Foreign Financial Institutions Who are FFIs? Foreign Institutional Investors Activities Allowed Portfolio Management Preferential Allotment of Flls 38. SELECTED MARKETS ABROAD 479-488 Introduction U.S. Stock Exchanges N.Y.S.E. Market Structure Listing NASDAQ OTC and NMS Inter Market Trading System (ITS) UK Stock Exchanges London Stock Market Role of Market Makers Can the Market Makers Influence the Market or Rig the Prices? Structure of Market Tokyo Stock Exchange Organisation and Membership Listing Stock Trading Outline of the System Trading Posts Bond Trading Settlement and Clearance Tokyo's Importance Stock Exchange of Singapore (SES)

39. LISTING IN SELECTED COUNTRIES ABROAD 489-496 Nyse and Listing Norms NYSE Listing and Registration with SEC Listing Guidelines for NYSE SEC Registration ^ Tokyo Stock Exchange Listing Requirements of TSE Listing Criteria Operating Time Before Listing Operating Assets and Profits Listing and Delisting Dividend Payouts Registration Statement Original Listing Two Sections for Listing Listing in Singapore (SES) London Stock Exchange Listing Requirements (L.S.E.) 40. SECURITIES MARKET REPORT (BSE) 497-514 Introduction Global Comparison Overview of BSE Market Report Globalisation Trend Daily Report Analysis Sensex Shows 5% Fall On Fll Selling Price Index Snapshots of the Market Trade Turnover Advance/ Decline Line Role of Institutional Agencies on the Market Trading Cycle Record Dates and Book Closure Circuit Band Hitters Speculative Positions Surveillance System Index Details BSE Stock Tables ET/BSE Indicators Face Value Market Macro Indicators Badla Statistics Derivatives Trading GLOSSARY OF STOCK MARKET TERMS, 515-517