SECURITY MARKET IN INDIA
- Securities are financial instruments issued to raise funds via issue of bonds, debentures, mutual funds etc.
- Security market is a component of the wider financial market where securities can be bought and sold on the basis of demand and supply
- The primary function of the securities market is:
- To enable to flow of capital from those that have it to those that need it.
- To help in transfer of resources from those with idle resources to others who have a productive need for them.
- To provide channels for enhancing savings and investment in the economy.
|DIFFERENCE BETWEEN DEBT AND EQUITY|
|Meaning||Invest in loans. E.g. – Bonds, debentures.||Invest in shares of the company.eg-shares.|
|Ownership||NO, they are creditors of the company.||YES, they have an ownership interest.|
|Risk||Low risk||High risk|
|Return Type||Pay Interest||Share Dividends.|
|Nature Of Return||Fixed and Regular||Irregular (based on company performance)|
|Market||Debt market||Capital market|
|Claim During Liquidation||First Claim||Last Claim.|
|Tax Benefit||Interest is tax deductible||Dividend is not tax deductible.|
|Capital Gains Tax||CGT is levied on the sale of equity||Repayment of loans doesn’t attract CGT.|
|Convertibility||Debt can be converted into equity.||Equity can’t be converted into debt.|
|Attractive||In slowdown period||In Boom period.|
|TYPES OF FINANCIAL MARKETS|
|BASED ON TENURE
• MONEY MARKET
Maturity of less than one
Maturity of more than a year.
|BASED ON FRESHNESS
• PRIMARY MARKET SECONDARY MARKET
|BASED ON SETTLEMENT
•FUTURE MARKET Contract is made to buy/sell at specific price on a future date.
•SPOT MARKET-brough and sold for immediate delivery.
|BASED ON ASSET
Important Terms Related To Financial Market
|The money market is a component of the economy which provides short-term funds. The money market deals in short-term loans, generally for a period of less than or equal to 365 days.|
|A capital market is a financial market in which long-term debt (over a year) or equity-backed securities are bought and sold.|
|A financial market is a market in which people trade financial securities and derivatives at low transaction costs.|
|Broker is a registered member of a stock exchange who buys or sells shares/securities on his client’s behalf and charges a commission on the gross value of the deal – such brokers are also known as commission brokers. Brokers who offer services such as investment advice, clients’ portfolio planning, credit when a client is buying on margin other than their traditional commission job are known as full service brokers.|
|A jobber is a broker’s broker or one who specialises in specific securities catering to the need of other brokers. A jobber is located at a particular trading post on the floor of the stock exchange and does buying and selling for small price differences, called the spread. He has no contact with the investing public.|
|Functions as an intermediary in the market ready to buy and sell securities. He simultaneously quotes two-way rates – like a jobber basically with the only difference that he quotes two-way rates, for buying and selling at the same time.|
Important Terms Related To Security Market
|A share given to the existing shareholders without any charge—also known as bonus share.|
|The transactions of stocks which take place outside the stock exchanges—unofcially and take place after the normal trading hours.|
|The difference between the buying and selling prices of a share is called spread. Higher the liquidity of a share lower its spread and vice versa. Also known as Jobber’s Turn or Margin or Haircut.|
|The share which remains low-priced at a stock exchange for a comparatively longer period.|
|Sweet share||A share given to the employees of the company without any charge.|
|An important reform measure started in the Indian stock market in mid-2001 under which all commitments of sale and purchase result into payment/delivery at the end of the ‘X’ days later.|
|When the buyers want postponement of the transaction—in Western world called contango.|
|When the sellers want postponement of the transaction—also known as the reverse badla or backwardation|
|PRIMARY AND SECONDARY MARKET|
|PRIMARY MARKET/ NEW ISSUE MARKET||SECONDARY MARKET/ STOCK EXCHANGE|
|Here, issuers raise capital by issuing securities to investors for the first time.||It facilitates trade in already-issued securities only.|
|The primary market creates financial assets.||The secondary market makes the assets marketable.|
|Securities are sold by the company directly or through an intermediary.||Company is not involved at all. Ownership of existing securities is exchanged between investors.|
|The primary market promotes capital formation directly- as the flow of funds is directly from savers to investors.||This promotes capital formation indirectly by enhancing the liquidity of the shares.|
|Only buying of securities takes place here, securities can’t be sold here.||Both buying and selling takes place here.|
|Prices are decided and determined by the company||Prices are determined by the demand and supply of the security.|
|There is no fixed geographical location.||Located at specified places.|
|INITIAL PUBLIC OFFER|
- IPO is the selling of securities to the public in the primary market.
- Through an IPO, an unlisted company can get listed on the stock exchange.
- It is a process by which a privately held company becomes a publicly-traded company by offering its shares to the public for the first time.
|ISSUERS IN THE INDIAN SECURITY MARKET|
- Issuers are organizations that raise money by issuing securities. They issue securities based on their need, their ability to service the securities.
- Some of the common issuers in the Indian Securities Markets are:
- A Stock Exchange is a marketplace, where financial securities issued by companies are bought and sold, after they have been issued in the primary market.
- In India BSE and NSE are two main stock exchanges:
|BOMBAY STOCK EXCHANGE (BSE)||NATIONAL STOCK EXCHANGE (NSE)|
|It is Asia’s first stock exchange established in 1875||NSE is the biggest stock exchange in India established in 1992|
|The benchmark index for BSE is the Sensex.||The benchmark index for the NSE is the Nifty|
|The BSE’s Sensex comprises of 30 companies||NSE’s Nifty comprises of 50 companies|
|ROLE OF STOCK EXCHANGES|
- Providing Liquidity and Marketability for the securities which are traded.
- Responsible for evaluation of stock prices- based on demand and supply of stock.
- Safeguards investors- There is a proper checks and balance in the exchange.
- Contributes to Economic Growth.
- Acts as barometer for a country’s economy.
- Broader range of investment avenues.
- Providing Scope for Speculation within the provisions of law
- Commodity exchanges trade in futures contracts in commodities such as food, energy or metals
- They are risky investment as their market is impacted by uncertainties such as unusual weather, epidemics, and disasters etc.
|National Commodity And Derivatives Exchange Limited (NCDEX)||· NCDEX is an online commodity exchange, dealing primarily in agricultural commodities in India under the regulatory authority of the SEBI.|
Multi Commodity Exchange (MCX)
|SPOT EXCHANGE/CASH/PHYSICAL MARKET|
- The spot market is a commodity/security market where goods are sold for cash and delivered immediately or within a short span of time. E.g.- Oil, coal etc.
- Enables trading in a transparent way and better price discovery.
- Trades are completed on spot.
- It eliminates the scope of cartelization.
|TYPES OF FOREIGN INVESTMENT|
|FOREIGN DIRECT INVESTMENT||FOREIGN PORTFOLIO INVESTOR||FOREIGN INSTITUTIONAL INVESTORS|
|What?||FDI is when a company takes controlling ownership in a business entity in another country.||FPI is an investment by non-residents in Indian securities like shares, government bonds, etc.
FPI is more liquid and less risky than FDI.
|When a foreign company buys equity in a company through stock market.|
|Where they invest?||Invests in physical assets||Invests in financial assets||Invests in financial assets|
|Ownership||Active ownership is there in FDI||FPI consists of passive ownership.||No control of the company.|
|Nature||Brings long term capital, knowledge, skills and technology||Brings short term capital.||Brings short term capital|
|Aim to increase enterprise capacity or productivity or change management control||Aim to increase capital availability||Aim to increase capital availability|
|Where they flow?||In primary market||In secondary market||In secondary market|
|Scope of speculation||Does not tend to be speculative||Tends to be speculative||Tends to be speculative|
|Entry and exit||Relatively difficult||Relatively easy||Easy|
|What are they eligible for?||Profits of the company||Capital gains||Capital gains|
|Reflected in||In the capital account of balance of payment (BOP)||In the capital account of BOP.||In the capital account of BOP.|
|FOREIGN DIRECT INVESTMENT (FDI)|
- Foreign investment was introduced in 1991 under Foreign Exchange Management Act (FEMA).
- There are two routes for FDI –
- Automatic route: FDI is allowed without prior approval by Government/ RBI.
- Government route: With Govt. approval
- Investment is permitted through government route only in the following cases:
- An entity situated in a country which shares a land border with India.
- Where the owner of investment into India is situated in or is a citizen of any such country.
- Any transfer of ownership of any FDI in an entity in India leading in beneficial ownership falling within the purview of the above restrictions.
- The Foreign Investment Facilitation Portal (FIFP), administered by the Department for Promotion of Industry and Internal Trade (DPIIT) UNDER MINISTRY OF COMMERCE facilitates the single window clearance of applications which are through approval route.
SECTORS WHERE FDI IS BANNED:
- India (2019-20) received the maximum FDI equity inflow from:
|CREDIT DEFAULT SWAP|
CDS is a credit derivative that can be used to transfer credit risk from the investor exposed to the risk (called protection buyer) to an investor willing to take risk (called protection seller).
|PROTECTION BUYERS||PROTECTION SELLERS|
|Hedge their credit exposure by making periodic payments to the protection seller.||Participate in credit risk without owning the asset.|
|Transfer risk without transferring the underlying asset.||Diversify his/her portfolio.|
- Securitization is a process by which a company clubs its different financial assets/debts to form a consolidated financial instrument which is issued to investors.
- In return, the investors in those securities get interest.
- This helps them get liquid cash out of assets that otherwise would be stuck on their balance sheets.
- Derivates are generated by the process of securitization.
A derivative is a financial security with a value that is derived from an underlying asset like stocks, bonds, commodities, currencies, interest rates, and market indexes.
|TYPES OF DERIVATIVES
|FORWARD CONTRACT||FUTURE CONTRACT|
|In this, buyer agrees to buy the underlying asset at a future date on a price agreed upon today.||It obligates the buyer to purchase an asset or the seller to sell an asset at a predetermined future date and price|
|Risk of Default||No risk of default.|
|Customized contract||Standard contract|
|Not traded in the exchange||Traded in the exchange|
|Low liquidity||High liquidity|
|Physical or cash settlement||Only cash|
This contract grants the right, but not the obligation to buy or sell an underlying asset at a set price on or before a certain date. Two types of options:
- Call option– gives the holder the right to buy a stock
- Put option– gives the holder the right to sell a stock.
Swaps are derivative instruments that represent an agreement between two parties to exchange a series of cash flows over a specific period of time.
|TYPES OF SWAP
|PARTICIPATORY NOTES/ P-NOTES|
- P-notes are Offshore Derivative Instruments (ODIs) issued by registered Foreign Portfolio Investors (FPIs) to overseas investors who wish to be a part of the Indian stock markets without registering themselves directly.
- P-notes have Indian stocks as their underlying assets.
- Though P-note holders have less stringent registration requirements, they have to go through a proper due diligence process of the Securities and Exchange Board of India (SEBI).
|DEBT INSTRUMENTS- BONDS|
- In finance, a bond is an instrument of indebtedness of the bond issuer to the holders.
- The bond is a debt security, under which the issuer owes the holders a debt and (depending on the terms of the bond) is obliged to pay them interest (the coupon) or to repay the principal at a later date, termed the maturity date.
- Bonds are fixed income instrument that represents a loan made by an investor to a borrower.
- These bonds have a maturity date and when once that is attained, the issuing company needs to pay back the amount to the investor along with a part of the profit.
- Bond prices are inversely correlated with interest rates: when rates go up, bond prices fall and vice-versa.
|TYPES OF BONDS||DESCRIPTION|
|Fixed Interest Bonds||
|Floating Interest Bonds||
|Perpetual Bonds/Consol Bonds||
|Zero Coupon Bonds||
Inflation Indexed Bonds
Sovereign Gold Bonds-
Negative Yield Bonds-
Special Zero-Coupon Recapitalisation Bonds
What Are Bonds Yields?
- The yield of a bond is the effective rate of return that it earns. But the rate of return is not fixed — it changes with the price of the bond.
What Is Yield Curve ?
- A yield curve is a graphical representation of yields for bonds (with an equal credit rating) over different time horizons. Typically, the term is used for government bonds — which come with the same sovereign guarantee. So the yield curve for US treasuries shows how yields change when the tenure (or the time for which one lends to the government) changes.
- Yield inversion happens when the yield on a longer tenure bond becomes less than the yield for a shorter tenure bond.
- A yield inversion typically portends a recession. An inverted yield curve shows that investors expect the future growth to fall sharply; in other words, the demand for money would be much lower than what it is today and hence the yields are also lower.
|ISSUER||BORROWING FROM||IN CURRENCY||CALLED AS|
|NON- AUSTRALIAN||AUSTRALIAN||AUSTRALIAN DOLLAR||KANGAROO BONDS|
|INDIAN OR NON-INDIAN ON BEHALF OF INDIANS||OUTSIDE INDIA||RUPEE||MASALA BONDS|
|Basis||Mutual Funds||Real Estate Investment Trust (REITS)/ Infrastructure Investment Trust (INVIT)|
|A mutual fund is an asset management company that brings together money from many people and invests it in stocks, bonds or other assets.||Is like a mutual fund, which enables direct investment of small amounts of money in infrastructure/real estate to earn a small portion of the income as return.|
|Investment in||Securities of listed entities||Real estate property or infrastructure project.|
|Stock||Securities||Income generating projects.|
|Period||Continuous buying and selling, relatively short period.||Investments for long period of time say 10-15 years.|
|Exit||Can be redeemed anytime, easy exit.||On closure of scheme can be sold at stock exchange at quoted value.|
Bharat Bond Electronic Traded Fund-
|• Aim- to create an additional source of funding for PSUs
• First corporate Bond ETF in India.
• Fixed maturity period.
• No Lock in period.
|Hedge Funds||An investment company that invests its clients’ money in alternative investments to either beat the market or provide a hedge against unforeseen market changes.|
Alternative Investment Funds
|• Securities and Exchange Board of India (Alternative Investment Funds) Regulations, 2012, define AIFs as any privately pooled investment fund, (whether from Indian or foreign sources), in the form of a trust or a company or a body corporate or a Limited Liability Partnership (LLP).
• AIF are classified as under by SEBI:
Ø Category I– AIF which invest in areas Govt. considers economically and socially viable like Venture capital funds (Including Angel Funds), Social Venture Funds, Infrastructure funds. SEBI norms are lighter.
Ø Category II– Private equity funds or debt funds
Ø Category III – AIF such as hedge funds or funds which trade with a view to make short term returns and take excessive risk. SEBI norms are much stricter.
|Sovereign Wealth Fund
|• It is a State-owned investment fund, where in central bank/govt. park their surplus fund. Pooled/parked money is used for investment.
• E.g. Singapore’s GIC sovereign wealth fund Etc.
|VENTURE CAPITAL FUNDS|
- VCF is an investment fund that manages money from different investors seeking to provide capital in Startup and small and medium-size enterprises that have strong growth potential.
- According to SEBI, VCF is a fund established in the form of a trust/company including a body corporate and registered with SEBI. The VCF will have dedicated pool of capital, raised in the specified manner and invested by following regulations of SEBI.
- The objective of the venture capital financing is to invest in high-risk projects with the anticipation of high returns.
|SOCIAL VENTURE FUND:|
- The National Innovation Council, in partnership with the Ministry of Micro, Small and Medium Enterprises (MSME), launched the India Inclusive Innovation Fund (IIIF), an impact investment fund that will invest in ventures catering to the country’s poor.
- The Rs 500-crore fund, which will be registered under market regulator SEBI’s Alternative Investment Fund regulations as a Category –I venture capital fund, will invest in social ventures operating in areas such as healthcare, food, nutrition, agriculture, education and skill development, energy, financial inclusion, water, sanitation and employment generation.
Liquid Alternative Investments.
Funds which operate similarly to hedge funds but are regulated similarly to mutual funds are available and known as liquid alternative investments.
|ANGEL INVESTORS||VENTURE CAPITALIST|
|ESG (ENVIRONMENT, SOCIAL AND GOVERNANCE) FUNDS|
- It is a kind of mutual fund. Its investing is used synonymously with sustainable investing or socially responsible investing.
- While selecting a stock for investment, the ESG fund shortlists companies that score high on environment, social responsibility and corporate governance, and then looks into financial factors.
- The fund is regulated by Securities and Exchange Board of India (SEBI).
- The first ESG mutual fund was launched by the State Bank of India – SBI Magnum Equity ESG Fund.
|VIX- MEASURE OF MARKET VOLATILITY|
- VIX (Volatility index) is an index used to measure the near term volatility expectations of the markets.
- Volatility signifies the rate and magnitude of change in the stock price or index value.
- India VIX- was launched by National Stock Exchange (NSE) in 2010.
- India VIX indicates the Indian market’s volatility from the investor’s perception.
- Volatility and the value of India VIX move parallel. i.e. a spike in the VIX value means the market is expecting higher volatility in the near future and vice versa.
- Depository Receipts are negotiable financial instrument issued by a company in a foreign jurisdiction.
- It is a mechanism for raising funds by tapping foreign investors who otherwise may not be able to participate in the domestic market.
|TYPES OF DEPOSITORY RECEIPTS:|
|PARAMETERS||GLOBAL DEPOSITORY RECEIPT (GDR)||INDIAN DEPOSITORY RECEIPT(IDR)||AMERICAN DEPOSITORY RECEIPT(ADR)|
|Negotiability||GDR is negotiable all over the world.||IDR is negotiable only within India.||An American depositary receipt (ADR) is a certificate issued by a U.S. bank that represents shares in foreign stock. ADRs are denominated in U.S. dollars|
|Issued in||European countries||India||America|
|Purpose||Helps companies to acquire resources all over the world.||To help the foreign companies to acquire the resources of India.||ADRs represent an easy, liquid way for U.S. investors to own foreign stocks.|
|Listed in||A GDR is listed in LSE||An IDR will be listed in NSE.||ADR is listed on American stock exchanges.|
|Application||GDR will be applied by companies all over the world including India.||The Indian companies will not apply for Indian Depository Receipt.||The companies located in foreign countries can get registered on American Stock Exchange.|
|SOME TERMS RELATED TO SECURITY MARKET|
- SOCIAL STOCK EXCHANGE– A SSE is a platform where social enterprises can raise funds from the public under the regulatory ambit of SEBI.
- OPERATION TWIST– RBI’s simultaneous sales and purchases of government securities, sale of short-term securities to buy long-term government debt instruments, to bring long term yields lower.
- Under this mechanism, the short-term securities are transitioned into long-term securities.
- Operation Twist was first used in 1961 by the US Federal Reserve (central bank) as a way to strengthen the U.S. dollar and stimulate cash flow into the economy.
- Impact– people can avail long-term loans (such as buying houses, cars or financing projects) at lower rates. This will lead to a boost in consumption and spending in the economy which in turn will revive the growth.
- PUBLIC CREDIT REGISTRY–
- PCR is a database of credit information for India that is accessible to all stakeholders.
- Helps banks in credit assessment and pricing and making risk-based provisioning.
- Y M Deosthalee committee suggested PCR.
- INSIDER TRADING- It is a malpractice where trade of securities is done based on non-public information/confidential information. It is illegal.
- UNDERWRITER- An individual or an institution who undertakes the risk associated with investment/loan in lieu of a premium.
- HEDGING- It is a financial strategy for risk management to offset/minimize/reduce the losses in investments due to adverse price movements.
- DATED SECURITIES – Long term securities or bonds of the government that carries a fixed or floating coupon (interest rate). Securities are issued by the government (centre or state) for mobilizing funds. The interest payment is fixed and is a percentage of the face value of the security. Interest is paid at regular intervals (usually half-yearly). The tenor of dated securities can be up to 30 years. But the most common tenure is five year and ten year.
- GILT EDGED SECURITIES– Government securities are instruments issued by the government to borrow money from the market. They are also known as gilts or gilt edged securities. “Government security” means a security created and issued by the Government. They have zero income default. There is high rate of return. There is cent per cent liquidity.
- Short term government securities are Treasury bills. They have a maturity of less than one year. There are three main treasury bills in India – 91 day, 182 day and 364 day.
- Long term government securities are known as government bonds or dated securities. They have a maturity period of five years, ten years, fifteen years etc.
- SOVEREIGN BONDS – A sovereign bond is a specific debt instrument issued by the government. They can be denominated in both foreign and domestic currency. Just like other bonds, these also promise to pay the buyer a certain amount of interest for a stipulated number of years and repay the face value on maturity. The Yield of the bonds are dependent on primarily 3 factors:
- Creditworthiness– the issuing countries’ perceived ability to repay their debts; this can be obtained from rating agencies
- Country risk– external/internal factors like unrest and wars tend to jeopardize a country’s ability to pay off their debts
- Exchange rates– in cases where bonds are issued in foreign currency, fluctuations in exchange rate may lead to increased pay out pressure on the issuing government
- REDEEMABLE BOND – A callable bond, also known as a redeemable bond, is a bond that the issuer may redeem before it reaches the stated maturity date. A callable bond allows the issuing company to pay off their debt early.
- SOCIAL IMPACT BONDS – A Social Impact Bond is also called pay-for-success bond or pay-for-success financing. A Social Impact Bond is basically a contract with public sector authority where it pays for better social outcomes. It is a form of outcome-based contracting. It aims at improving social outcomes for a specific group of citizens.
|Authorised Capital||It is the maximum number of shares a company is legally allowed to issue|
|Issued Capital||Shares that have actually been issued by the company to the shareholders.|
|Subscribed Capital||A portion of the authorized capital that potential shareholders have agreed to purchase from the company’s treasury.|
|Paid Up Capital||Portion of the subscribed capital for which the company has received payment from the subscribers.|
|• Statutory body established in accordance with SEBI Act, 1992.
• To protect the interests of investors, regulate the market.
• It is a quasi-legislative and quasi-judicial body
• SEBI Act grants wide discretion to SEBI for subordinate legislation.
Financial Stability And Development Council (FSDC)
|• It is a non-statutory apex council under the Ministry of Finance.
• The Raghuram Rajan committee (2008) on financial sector reforms proposed the creation of FSDC.
• Composition- It is chaired by finance minister.
• Members are:
Ø Chairperson of IBBI
Ø Heads of all Financial Sector Regulators – RBI, SEBI, PFRDA & IRDA
Ø Minister of State for the Department of Economic Affairs
Ø Secretary of Finance, DEA, Revenue Secretary etc.
Ø Chief Economic Adviser
Financial Action Task Force (FATF)
|• Inter-governmental body established in 1989 during G7 summit.
• To set standards and promote implementation of legal, regulatory and operational measures for combating money laundering, terrorist financing and other related threats to the integrity of the international financial system.
• Secretariat: OECD headquarters in Paris.
• India became member in 2010.
• FATF has two list:
Ø Grey List: Countries that are considered safe haven for supporting terror funding and money laundering. EX: Pakistan
Ø Black List: Countries known as Non-Cooperative Countries or Territories (NCCTs) are put here. These countries support terror funding and money laundering activities. EX: Iran, North Korea
|Financial Stability Board||• Brainchild of G20. FSB promotes international financial stability by coordinating national financial authorities and international standard-setting bodies.
|International Organisation Of Securities Commissions (IOSCO)
|• An international body that brings together the world’s securities regulators.
• IOSCO develops, implements and promotes adherence to internationally recognized standards for securities regulation.
• It works with the G20 and the Financial Stability Board (FSB) on the regulatory reform globally.