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CHAPTER III
INDUSTRY PROFILE
INDUSTRY PROFILE

INTRODUCTION TO SECURITIES MARKET

SECURITIES

The definition of ‘Securities’ as per the Securities Contracts Regulation Act

(SCRA), 1956, includes instruments such as shares, bonds, scrip’s, stocks or other
marketable securities of similar nature in or of any incorporate company or body
corporate, government securities, derivatives of securities, units of collective
investment scheme, interest and rights in securities, security receipt or any other
instruments so declared by the Central Government.

TYPES OF SECURITIES ONE CAN INVEST:

Investors can invest in securities like Shares, Government Securities (Debt

Instruments), Derivative products and Units of Mutual Funds etc.

SECURITIES MARKET:

Securities Markets is a place where buyers and sellers of securities can enter into
transactions to purchase and sell shares, bonds, debentures etc... Further, it
performs an important role of enabling corporate, entrepreneurs to raise resources
for their companies and business ventures through public issues. Transfer of
resources from those having idle resources (investors) to others who have a need
for them (corporate) is most efficiently achieved through the securities market.
Stated formally, securities markets provide channels for reallocation of savings to

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investments and entrepreneurship. Savings are linked to investments by a variety

of intermediaries, through a range of financial products, called ‘Securities’.

SEGMENTS OF SECURITIES MARKET

The securities market has two interdependent segments the primary (new issues)
market and the secondary market. The primary market provides the channel for
sale of new securities while the secondary market deals in securities previously
issued.

PRIMARY MARKET

The primary market is where securities created (by means of an IPO – initial public
offer) in other words provide the channel for sale of new securities. Primary
market provides opportunity to issues of securities; Government as well as
corporate, to raise resources to meet their requirements of investment and/or
discharge some obligation.

Corporate may issue the securities at face value, or at a discount/premium and

these securities may take a variety of forms such as equity, debt etc… they may
issue the securities in domestic market and/or international market.

SECONDARY MARKET

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
Majority of trading is done in the secondary market. Secondary market comprises
of equity markets and the debt markets.

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DERIVATIVES MARKET

A variant of secondary market is the forward market, also known as derivatives

market, where securities are traded for future delivery and payment. Pure forward
is however not in practice in actual derivatives market, the versions of forward that
are traded in derivatives market are futures and options.

In Futures market, standardized securities are traded for future delivery and
settlement. These futures can be on a individual securities or the index itself. In
case of options, securities are traded for conditional future delivery.

STOCK EXCHANGE

Most stocks are traded on exchanges, which are places where buyers and sellers
meet and decide on a price. Exchanges are physical locations, where transactions
are carried out on a trading floor. You’ve probably seen pictures of a trading floor,
on which traders are wildly throwing their arms up, waving, yelling, and signaling
to each other. This is a old practice which is now obsolete. The other type of
exchange is a virtual kind, composed of a network of computers where traders are
made electronically which is widely used every where now.

The purpose of a stock market is to facilitate the exchange of securities between

buyers and sellers, thus reducing the risk.

The stock markets consist of primary and secondary market. New securities are
issued in primary market. Existing securities are traded in secondary market and
they are traded through stock exchanges.

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STOCK EXCHANGES IN INDIA

The secondary markets in India consist of 24 stock exchanges, recognized by

Government. The principal bourses amongst them are the National Stock Exchange
(NSE) and Bombay Stock Exchange (BSE), accounting for the bulk of the trading
on the Indian Stock Market.

NATIONAL STOCK EXCHANGE (NSE)

The National Stock Exchange of India Limited (NSE), is a Mumbai-based stock

exchange. It is the largest stock exchange in India in terms daily turnover and
number of trades, for both equities and derivative trading. Though a number of
other exchanges exist, NSE and the Bombay Stock Exchange are the two most
significant stock exchanges in India, and between them are responsible for the vast
majority of share transactions.

The S&P CNX Nifty also called as the “Nifty 50” is a widely used market index in
Indian and Asia.

NSE is mutually-owned by a set of leading financial institutions, banks, insurance

companies and other financial intermediaries in India but its ownership and
management operate as separate entities.

It has two segments, Capital Market Segment and Wholesale Debt Market.

In NSE script is known by Symbol For example Infosys Tech. – NSE Symbol –
INFOSYSTCH and its index is Nifty.

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BOMBAY STOCK EXCHANGE (BSE)

The Bombay Stock Exchange is the oldest stock exchange in Asia. It was
established in 1875. It is also the biggest stock exchange in the world in terms of
listed companies with 4,800 listed companies as of August 2007. It is located at
Dalal Street, Mumbai, India.

The BSE SENSEX, also called the “BSE 30”, is a widely used market index in
India and Asia. Though many other exchanges exist, BSE and National Stock
Exchange of India account for most of the trading in Shares in India.

In BSE script is known by Code No. For Example, BSE Code of Infosys Tech is
5002009.

SECURITIES AND EXCHANGE BOARD OF INDIA

The Securities and Exchange Board of India (SEBI) was constituted on 12 April
1988 as a non-statutory body through an Administrative Resolution of the
Government for dealing with all matters relating to development and regulation of
the securities market and investor protection and to advise the government on all
these matters. SEBI was given statutory status and powers through an Ordinance
promulgated on January 30 1992. SEBI was established as a statutory body on 21
February 1992. The Ordinance was replaced by an Act of Parliament on 4 April
1992. The preamble of the SEBI Act, 1992 enshrines the objectives of SEBI – to
protect the interest of investors in securities market and to promote the
development of and to regulate the securities market. The statutory powers and
functions of SEBI were strengthened through the promulgation of the Securities
Laws (Amendment) Ordinance on 25 January 1995, which was subsequently
replaced by an Act of Parliament.

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INTRODUCTION TO IPO

The most common way of investing in shares is buying them on the stock
exchange. This is referred to as the secondary market.

But there are companies those are not listed. This means, their shares are privately
held and they are not available for buying and selling on the stock exchange.

When these companies decide to issue more shares and list them in the stock
exchange, it is referred to as an Initial Public Offering. This is the first time their
shares will be available to the public for buying and selling.

WHY COMPANIES ISSUE SHARES TO THE PUBLIC?

Most companies are usually started privately by their promoter(s). However, the
promoter’s capital and the borrowings from banks and financial institutions may
not be sufficient for setting up or running the business over a long term. So
companies invite the public to contribute towards the equity and issue shares to
individual investors. The way to invite share capital from the public is through a
‘public issue’. Simply stated, a public issue is an offer to the public to subscribe to
the share capital of a company. Once this is done, the company allots shares to the
applicants as per the prescribed rules and regulations laid down by SEBI. IPO is
offered either by new companies or already existing companies who want to
become public. Depending on the asset and the valuation of the company and the
number of stocks they are offering, the issue price of shares is decided.

Generally these calculations are done by the underwriters engaged by the company
for issuing the IPO.

The market for IPOs is referred to as the primary market.

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Sometimes, companies that are already listed come out with a fresh lot of shares.
Tata Steel is a recent example from Tata Group of Companies and subsidiaries. In
such cases, the issue is not referred to as an IPO (since they already have shares
trading in the secondary market); it is called a Follow-on Public Offer (FPO).

On 19th June 2007, the country’s second largest lender ICICI Bank, opened its
follow-on public or FPO with a price band of Rs. 885 to Rs. 950 to mop up nearly
Rs. 8750 Crore. This was the largest ever share sale by an Indian entity at home
and abroad. The funds were raised from both Indian and US markets by issuing
fresh shares.

In most cases the investors have to pay the face value of the stock along with the
premium price to get the share in IPO. In most cases you have to pay full amount
up front and in some cases a part of the total value of the shares applied in the IPO
is to be paid, and once the shares are allotted, you have to pay the remaining
amount.

If the stocks are not allotted, you get the refund order or if you are allotted less
quantity than you have applied, you will get the cheque for the balance amount.

Shares are then listed on the stock exchange and you can then sell or hold the
stocks according to your wish. Though there is more risk in investing in IPO as
you will have hardly any information regarding the company. So while investing in
any IPO you need to be all the more careful and do as much research as possible on
the company and the sector as well.

You should also take a note of the time of the IPO as well. If the general market
trend is good and optimistic then it is most likely that the issue will perform well at
time of listing. So take your investment decisions wisely for better results.

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Other details like how to select the IPO for investing, factors to watch before
investing in IPO, etc., are given in coming chapters.

ADVANTAGES OF GOING PUBLIC:

1. going public will result in increased capital for the issuer.

2. going public also creates a type of currency in the form of its stock that the
business can use to make acquisitions. In addition, the company will likely have
access to capital markets for future financing needs.

3. Generally, a company’s debt-to-equity ratio improves after an initial public

offering, which means that the company may be able to obtain more favorable loan
terms from lenders.

4. Going to public will generally result in the ability to better promote the
company. Publicity traded businesses are usually better known than the non –
publicly traded businesses. The company can gain publicity and an image of
stability by trading publicly.

5. Along with prestige and the ability to better promote the company, going public
may allow the company to attract better personnel, including high-level executives
and officers.

6. Additional incentive for employees in the form of the companies stocks. This also
helps to attract potential employees.

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DISADVANTAGES OF GOING TO PUBLIC:

1. going public is an expensive process. Typical expenses associated with a public

offering include legal and accounting fees, filing fees, travel costs, printing costs
and underwriter’s expense allowance.

2. A listed company is required to comply with the disclosure norms under the
Companies Act 1956, SEBI Guidelines and Regulations and the Listing Agreement
of Stock Exchange, which is a costly affair. A publicly owned company must file
quarterly reports with the Securities and exchange Board of India (SEBI) and the
stock exchanges. These reports can be costly especially for small firms.

3. The prospectus reveals substantial information about the company including

transactions with management, executive compensation & prior violations of
securities laws. This may be information the company would rather not reveal.

4. In additional, the decision-making process must become more formal and less
flexible when there are shareholders. Instead of making instinctual, unilateral
decisions, shareholders must be considered and it may be necessary to consult with
the board of directors. This may be hardest for companies that previously were run
by a small number of individuals who made decisions as they wished.

5. Public companies are also at risk of takeover attempts. It is generally advisable

for the company to implement certain anti-takeover measures such as a staggered
board of directors.

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COST OF PUBLIC ISSUE:

The cost of public issue is normally between 8 and 12 percent depending on the
size of the issue and the level of marketing efforts. The important expenses
incurred for a public issue are as follows:

1. UNDERWRITING EXPENSES: The underwriting commission is fixed at

around 2.5% of the nominal value (including premium, if any) of the equity capital
being issued to public.

2. FEES TO THE MANAGERS TO THE ISSUES: the aggregate amount

payable as fees to the managers to the issue was previously subject to certain
limits. Presently, however, there is no restriction on the fee payable to the
managers of the issue.

3. FEES FOR REGISTRATION TO THE ISSUE: The compensation to the

registrars typically depends on the number of applications received, number of
allotters, and the number of unsuccessful applicants.

4. PRINTING EXPENSES: These relate to the printing of the prospectus,

application forms, brochures, share certificate, allotment/refund letters, envelopes,
etc.

5. POSTAGE EXPENSES: These pertain to the mailing of application forms,

brochures, and prospectus to investors by ordinary post and the mailing of the
allotment/refund letters and share certificates by register posts.

6. ADVERTISING AND PUBLICITY EXPENSES: These are incurred

primarily towards statutory announcements, other advertisements, press
conferences, and investor’s conferences.

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7. LISTING FEES: This is the fee payable to concerned stock exchange where
the securities are going to list. It consists of two components: initial listing fees and
annual listing fees.

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