Stock Market

1. Function of SEBI and Stock Exchanges

• Function of SEBI:
  • HQ: Mumbai; 4 Regional offices; 1 office in every state.
  • Investors: Well-being of people.
  • Issuers: Help designing financial products (Global standard).
  • Intermediaries: Ensure that intermediaries are there in the country.
• STOCK EXCHANGE:
  • Place to buy and sell financial products.
  • BOMBAY STOCK EXCHANGE (BSE): Trading at 11–12.
  • BSE Departments: Listing dept, Operations department, EDP (Electronics data processing) department, Inspection & audit department, Monitoring department, Investor service department, Function department.
• Departments of Stock Exchange
  • Listing Department
  • Operations Department
  • Audit & Inspection Department
  • EDP Department
  • Monitoring Department
  • Investor service Department
  • Function Department
• Functions of Stock Exchange:
  • Ideal meeting place for financial transactions.
  • Mobilization of savings.
  • Providing safety to investors.
  • Distribution of new securities.
  • Ready market for financial products.
  • Liquidity of financial products.
  • Capital formation.
  • Speculative trading.
  • Sound price setting for securities.
  • Economic Barometer.
  • Dissemination of market data.
  • Achieve perfect capital market.
  • Platform for public data.
  • Investor education.

2. Market Entities and Intermediaries

• NSE (National Stock Exchange): Inclusiveness in global financial products; can sell financial products not sold in BSE.
• OTCEI: Over the Counter Exchange of India.
• SHIL: Stock Holding Corporation of India. Demat account required to trade shares; monitored by SHIL.
• NCDS: National Clearing & Depository System.
• ISE (Interconnected Stock Exchange of India): Hyderabad.
• Brokers:
  • Individuals who buy & sell shares on behalf of a client who is a non-member (general public).
  • To become a broker, you need to get an approval and get a registration number:
    • Clear NSE exam.
    • Financial background (1 Cr deposit – BSE; 70 L for NSE; 10 L for OTCEI).
    • Knowledge of online trading.
    • Understanding with SEBI for following regulations.
  • Codes: INB (Registration), INS (Sub-broker), INF (Derivative products).
• Jobbers: People who execute the orders of buyers and sellers.
• International Stock Exchanges: London (oldest) (Birmingham, Liverpool, Manchester, Dublin); NYSE (largest); AMEX (American Stock Exchange) (Finance products not qualified in NYSE); NASDAQ (National association of securities dealers automated quotation system) (3rd largest); Tokyo (2nd largest).

3. Indices and Market Capitalization

• BSE Index (Sensex):
  • List of BSE 30 companies (e.g., HDFC Bank).
  • Indicators: Economic growth, Financial strength/stability, Industrial investment opportunities, Market growth.
  • Base year: 1978–1979 = ₹100.
• Promoter’s Shares - Represents the percentages of company’s equity owned by its founders and key management.
• Calculations:
  • Market Capitalization = Market price of the shares × No. of shares issued.
  • Free Float Mkt Capitalisation = (Total shares – Promoters) × Mkt price of shares.
  • Index/Sensex = (Free float market capitalization (today) / Free float market capitalization (base year)) × Sensex (base year).
  • Alternative: (FF Mkt (today) / FF Mkt (yesterday)) × Sensex prev. day.
  • Sensex Divisor: FF Mkt (today) / Sensex.
  • Note: Index is calculated every 30 min.

    - **Current Market Cap Totals:**
        - 3,27,50,000
        - 6,05,00,000
        - 3,67,50,000
        - **Total = 46,17,50,000**
    
    - - .
    - **Base Market Cap Total:** **44,10,00,000**
    - .
    - **Calculation:**
        - Index=44,10,00,00046,17,50,000​×80,238=84,013
    - - .
    - _Note: Index is calculated every 30 seconds_
    _._
    

4. Capital Market and Issuance of Shares

• Capital Market: A market to meet financial requirements for various business activities, industrial activities and the economic development activities from domestic to international sector.
• Types:
  • Ownership Based Product (SHARES): Primary (New issued money; direct drawing) and Secondary (Already issued shares; b/w buyers and sellers).
  • Primary - New issued money flows from investors to company through IPO
  • Secondary - Already issued shares flows from investor A to investor B
  • Creditorship (Debt Instruments).
• Rights of Ownership:
  • Right to income
  • Right to manage
  • Limited liability
  • Right to voting
  • Preemptive rights
• IPO (Initial Public Offering) & FPO (Follow on Public Offer).
  • IPO is a private company’s first-time sale of shares to the public.
  • FPO is s subsequent issuance of shares by a company who’s shares are already publicly traded.

• Merchant Bank: Org that takes care of consultancy, issue mgmt, capital restructuring, advisory for mergers, underwriters etc.

  • Consultancy
  • Issue management
  • Underwriters

  • Advisory for mergers

  • Requires Draft Red Herring Prospectus (DRHP) or RHP Prospectus.

  • Income: Commission, max (2.5%).
  • Categories: C1 (>5 Cr capital), C2 (>2 Cr capital), C3 (>50 L capital), C4 (No specific - only advisory).

DRHP vs RHP

The prospectus is the operating manual of an IPO, informing investors everything about company’s finances, risks, plans etc. DRHP - FIled with SEBI for review, contains all business and financial details but excludes share price and number of shares. RHP - Filed after SEBI gives its observations. It includes everything except the final price.

• Pricing of Shares: Fixed price, @ Premium (e.g., @ ₹15 for ₹10 par value), @ Discount (Not permitted), or Book Building process (Floor price, Cap price, Cutoff price).

→ Fixed Price Issue - The company and banker set a specific price before the IPO opens. → Book Building Process - - IPO Process Steps: (1) IPO Issue, (2) FPO issue, (3) Offer for sale, (4) Borrow issue, (5) Rights issue, (6) Pvt. placements, (7) Green shoe option, (8) IPO Grading. - Book Building Calculation: A Dutch auction method to find the cutoff price based on bids (e.g., bids at 16, 14, 12, 10). - Offer for sale - The existing major shareholders will sell their personal shares to public - Bonus Issue - A Bonus Issue involves a company giving free additional shares to existing shareholders. The company will convert its premium to these shares. Market prices will decrease - Rights Issue - This is an invitation to existing shareholders to buy additional new shares, at discounted price |Feature|Option A: Buy (Exercise)|Option B: Sell (Renounce)|Option C: Surrender (Ignore)| |---|---|---|---| |Action Taken|Pay 1,000 for 10 shares.|Sell the 10 "Rights" @ 50.|Do nothing.| |Cash Outflow|- 1,000|0|0| |Cash Inflow|0|+ 500|0| |New Share Count|110|100|100| |Share Price|145.45|145.45|145.45| |Portfolio Value|16,000|14,545|14,545| |Net Wealth|16,000 (Value)|15,045 (Value + Cash)|14,545 (Value)|

• Private Placement - Instead of going ahead with the general public, the company sells a large block of shares to a select group of investors.
• Green Shoe Option (Over-allotment option) - Sometimes after an IPO, the price can crash due to heavy selling. The company can issue up-to 15% additional shares than originally planned. The underwriter can buy those over-allotted shares when the price falls the IPO price and buy them back if the demand is high.
• IPO Grading - The IPO have to be graded by credit rating agencies.

5. Special Share and Debt Instruments

• Bonus Issue: Instead of cash, shares are given as a bonus. No money comes to company; No. of shares increases; EPS and Market Price (MP) decrease.
  • It uses the surplus to stabilize market; Equity capitalization increases.
• Rights Issue: Additional issue to existing shareholders. They can exercise, transfer, or surrender the right (which is then reissued to general public).
• Green Shoe Policy: Stability act for reasonable pricing. Merchant bank borrows promoter shares when demand is high to increase MP. Extra shares issued should not be > 15% of capital.
• IPO Grading: Credit rating for the IPO.
• Preference Shares (PS) vs Equity (EQ):
  • EQ: Owner, No % return, Profit = dividend, Voting, In management, Last preference in liquidation.
  • PS: Owner/Creditor, Fixed % return, Loss = -%, No voting, Not in management, Additional preference just before liquidation.
• Types of PS: Cumulative vs non-cumulative, Voting & non-voting, Convertible vs non-convertible, Redeemable vs non-redeemable, Participant vs non-participant. -|Type|Key "Power"| |---|---| |Cumulative|Back-dividends must be paid.| |Participating|Gets "Extra" profit after everyone is paid.| |Convertible|Can turn into Equity (Ownership upside).| |Redeemable|Capital is returned after a fixed time.| |Voting|Can vote in General Body meetings (Rare).|
• Debt Instruments: Debentures and Bonds. Requires credit rating.
  • Types of Debentures: Naked (unsecured), Secured (mortgage), Guaranteed (third party), Registered & Bearer, Redeemable & non-redeemable, Convertible (Fully or partially).
• Zero Coupon Bonds / Deep Discounted Bonds (DDB): Deeply discounted (e.g., Price ₹500 for ₹2.5 Lakhs Face Value).
• Rule 72: (72 / interest rate) = years for money to double.
• Secured Premium Note (SPN): Principal redeemed after a gap (e.g., 4th–7th year) with a redemption premium.

6. International Funding and Mutual Funds

• Raising Funds from Outside India:
  • Ownership based: ADR (American Depository Receipts) and GDR (Global Depository Receipts).
  • GBM → MB → Indian Bank with international branch → Listing done with NYSE (Roadshow) → US depository (Converting indian shares to USD)
  • Debt based: FCCB (Foreign Currency Convertible Bonds) and ECB (External Commercial Borrowings).
  • Note: American shares of Indian company cannot be transferred to India.
• Buy Back of Shares: Since 1998; Buy Back Price (BBP) > Market Price (MP).
• Mutual Funds (MF):
  • Entities: (1) Sponsor, (2) Trust, (3) Mutual fund company (min. 100 Cr net worth).
  • NAV (Net Asset Value) = (Value of assets – Expenditure) / No. of units. Published every day at 4 PM.
  • Classification: Closed-ended (cannot surrender until end), Open-ended (open throughout), Interval funds (time window each year).
  • Schemes: Equity (Large cap > 10,000 Cr, Mid cap 2000–10,000 Cr, Small cap < 2000 Cr) and Debt funds (Overnight, Liquid, GILT/Govt, etc.).

Mutual Fund Entities

Mutual funds are an instrument that involves pooling of investor’s money to buy diversified assets / securities 1. Sponsor: The Founder. 2. Trust: The Legal Owner of assets (Safety). 3. AMC: The Manager (Min Net Worth ₹100 Cr).

Market Cap Categories

• Large Cap: > ₹10k Cr (Stability).
• Mid Cap: ₹2k - ₹10k Cr (Growth).
• Small Cap: < ₹2k Cr (High Alpha/Risk).

NAV Calculation

• Updated daily post-market.
• Represents the unit price.

7. Derivatives

• Derivatives: Financial instruments whose value is determined from an underlying asset (commodity, shares, bonds).
• Options: Exchange contract between an option holder (buyer) and option writer (seller).
  • European Option: Transaction takes place only on the expiration date (followed in India).
  • American Option: Holder can buy any date from date of contract to expiration.
  • Status: ITM (In the Money - favorable), ATM (At the Money - no difference), OTM (Out of Money).
• SWAP: Exchange of interest rates (e.g., Fixed 10% for LIBOR rate).
• Forward Contract: Contract b/w buyer (long position) and seller (short position) for a future date with contingent obligations.

• Futures: Forward contract prepared in the presence of stock exchange through official channel; exchange takes advance amount from both parties to ensure contract is valid.

• Forwards: Private, customisation contracts to buy/sell at a future date. High risk of the other person backing out.

• Futures: Standardised "Forwards" traded on an Exchange. Very safe because the exchange guarantees the deal.
• Options: Gives you the Right but not the Obligation to buy or sell. If the deal is bad, you can just walk away (losing only your premium).
• Swaps: Private agreements to exchange cash flows (like swapping a fixed interest rate for a floating one).

Credit Rating Agencies - Evaluate the worthiness of corporate and government debentures. SMERA, CRISIL, CARE, etc.