Role and Function of Capital Market and SEBI

Dear bankers,

As we all know that  isOverview of Capital Market; Stock Exchange; Commonly used Terms; Types of Capital Issues; Financial Products/ Instruments including ASBA, QIP; SEBI; Registration of Stock Brokers, Sub-brokers, Share Transfer Agents, etc. QIBs.  for JAIIB Exam. JAIIB exam conducted twice in a year. So, here we are providing the Role and Function of Capital Market and SEBI (Unit-5), Indian Financial system (Module A), Principle & Practice of Banking JAIIB Paper-1.

♦Capital Market

♠What is Capital Market?

• Capital Market, is used to mean the market for long term investments, that have explicit or implicit claims to capital. Long term investments refers to those investments whose lock-in period is greater than one year.
• In the capital market, both equity and debt instruments, such as equity shares, preference shares, debentures, zero-coupon bonds, secured premium notes and the like are bought and sold, as well as it covers all forms of lending and borrowing.

♠Functions of Capital Market

• Mobilization of savings to finance long term investments.
• Facilitates trading of securities.
• Minimization of transaction and information cost.
• Encourage wide range of ownership of productive assets.
• Quick valuation of financial instruments like shares and debentures.
• Facilitates transaction settlement, as per the definite time schedules.
• Offering insurance against market or price risk, through derivative trading.
• Improvement in the effectiveness of capital allocation, with the help of competitive price mechanism.

♠Types of Capital Market

• Primary Market
• Secondary Market

Primary Market: Otherwise called as New Issues Market, it is the market for the trading of new securities, for the first time. It embraces both initial public offering and further public offering. In the primary market, the mobilisation of funds takes place through prospectus, right issue and private placement of securities.

• Origination/ Initial Public Offerings: In a public offering, the issuer makes an offer for the new investor to enter is shareholding family. Origination is referred to as examine, evaluate, and process new project proposals in the primary market. It begins prior to an issue is present in the market. It is done with the help of commercial bankers.
• Further Public offering (FPO): An FPO is made when an already listed company makes either a fresh issue of securities to the public or an offer for sale to the public, through an offer document. An offer for sale in such a scenario is allowed.
• Distribution: For the success of issue, brokers and dealers are given job distribution who directly contact with investors.
• Right Issue (IR): Right Issue is when listed company propose to issue fresh securities to its existing shareholders as on a recoded data.

Secondary Market: Secondary Market can be described as the market for old securities, in the sense that securities which are previously issued in the primary market are traded here. The trading takes place between investors, that follows the original issue in the primary market. It covers both stock exchange and over-the-counter market.

The following are the main financial products/instruments dealt in the secondary Market:

• Equity: Equity is ownership of assets that may have debts or other liabilities attached to them. Equity is measured for accounting purposes by subtracting liabilities from the value of an asset.

Equity = Assets – Liabilities

Various type of Equity:

• Equity share
• Right Issue/Right Share
• Bonus share
• Preferred stock/Preference share
• Cumulative Preference share
• Cumulative Convertible preference share
• Participating Preference share

• Government securities: Popularly known as G-Secs, are issued by Reserve Bank of India (RBI) on behalf of the central or state governments. These securities are absolutely risk-free and guaranteed by the government. Generally, investors think that G-Secs are meant for banks, financial institutions and large corporations, but as small investors, every individual can also make an investment.
• Debentures: Debenture is a medium- to long-term (Half yearly) debt instrument used by large companies to borrow money, at a fixed rate of interest.
• Bond: A bond is a negotiable certificate evidencing indebtedness. It is normally unsecured. A Bond (debt security) security is generally issued by a company, municipality or a government agency. Different type of Bond:-
• (i)Coupon Bond: These are normal bonds on which the issuer pays the investor/holder interest at the predetermined rate (Known as coupon) at agreed intervals. Normally twice a year. The maturity if the bond is known by the period for which it is issued.
• (ii) Zero Coupon Bond: A bond issued at a discount and repaid at a face value is called a Zero Coupon Bond.
• (iii)Convertible Bond: A bond giving the investor the option to convert the bond into equity at a fixed conversion price is referred to as a Convertible Bond.

♦Applications Supported by Blocked Amount (ASBA)

♠What is ASBA?

• ASBA [Applications Supported by Blocked Amount] is a system of blocking the funds of applicants of IPOs in their respective accounts and release the funds to the Company from such blocked accounts only after the allotment to the extent of allotment made and unblock the remaining amount in the account

♠Features of ASBA

• ASBA IPO Applications will be received at the Designated Branches
• On receipt of ASBA applications, the Branches will mark lien in the specific account of the customer to the extent of amount applied for through the system.
• This amount gets blocked in the account and money will however continue to remain in the account of the customer till the date of allotment.
• The details of the IPO application and the amount blocked would be passed to the Exchange and Registrar through the system.
• The amount held in the account of the customer would continue to earn interest as applicable to the account.
• Any withdrawals or debits to the extent of blocked amount are not permitted in the account till the finalisation of allotment of shares. However, balance in the account over and above the blocked amount is free from any charge.
• When the Registrar completes the process of allotment, based on the instructions released from the Registrars, the system will debit the account to extent of the allotment and will unblock the account.

♠Advantages of ASBA

• No issue of Cheque / Purchase of DDs and hence no clearing
• Applicant can make 5 applications from a single deposit account
• Money lies in the a/c and earns interest
• Lien marked only to the extent of the bid amount
• Money to be appropriated on allotment to the extent of shares allotted
• No physical refund involved, no hassles of lost / delayed refunds
• Shorter turnaround time for entire IPO processing.

♦Qualified Institutional Placement (QIP)

• A Qualified Institutional Placement is a capital raising tool wherein a listed company can issue equity shares, fully and partly convertible debentures, or any security other than warrants that are convertible into equity shares. But unlike in an IPO or an FPO, only institutions or qualified institutional buyers can participate in a QIP.

♠Restrictions on Allotment

• Certain restrictions have been imposed wherein it is mentioned that in any whatsoever, the Qualified Institutional Placement cannot be made to the Promoter or any of his relatives or to any manner who may be related to the promoter in any way. Also a Minimum number of of QIBs to whom shares are allotted shall not be less than
• Two, in cases where the issue size is <= Rs.250 crores.
• Five, where the issue size is >= Rs.250 crores.

♠Advantages of a QIP

• This mode of qualified institutional placement is essentially the most expeditious method by which capital can be raised without undergoing any cumbersome process. Generally, by other methods like FPO and rights issues, it takes a lot of time and money to undergo the documentation and approval.
• It saves ancillary expenses which otherwise are involved when securities are issued by some any other mode.
• In cases where a company cannot directly buy from the market a large stake as it might create market volatility, in this way issuing shares by increasing capital is one of the ways to attract investors.
• Better bargains take place by means of QIP, as it gives the opportunity to raise and purchase as well at better-bargained costs.
• Finally, in case of QIP the formula to arrive at a floor price, is the average stock price of the last two weeks, but in case of preferential allotment, it is the average stock price of last six months from the cut-off date. The cut-off date for calculation of average stock price is the date which is 30 days prior to the date when shareholders‟ meeting is held and the decision of fresh equity issue is taken.

♦SEBI – Securities and Exchange Board of India

♠What is SEBI?

• SEBI is a statutory regulatory body established on the 12th of April, 1992 SEBI Act 1992. It monitors and regulates the Indian capital and securities market while ensuring to protect the interests of the investors formulating regulations and guidelines to be adhered to. The head office of SEBI is in Bandra Kurla Complex, Mumbai.

♠Functions of SEBI

• SEBI is primarily set up to protect the interests of investors in the securities market.
• It promotes the development of the securities market and regulates the business.
• SEBI provides a platform for stockbrokers, sub-brokers, portfolio managers, investment advisers, share transfer agents, bankers, merchant bankers, trustees of trust deeds, registrars, underwriters, and other associated people to register and regulate work.
• It regulates the operations of depositories, participants, custodians of securities, foreign portfolio investors, and credit rating agencies.
• It prohibits inner trades in securities, i.e. fraudulent and unfair trade practices related to the securities market.
• It ensures that investors are educated on the intermediaries of securities markets.
• It monitors substantial acquisitions of shares and take-over of companies.
• SEBI takes care of research and development to ensure the securities market is efficient at all times.

♠Authority and Power of SEBI

• Power of SEBI to Regulate or Prohibit Issue of Prospectus, offer Document or Advertisement Soliciting Money for issue of Securities: Without prejudice to the provisions of the Companies Act, 1956 (1 of 1956), SEBI may, for the protection of investors.
• Quasi-Judicial: SEBI has the authority to deliver judgements related to fraud and other unethical practices in terms of the securities market. This helps to ensure fairness, transparency, and accountability in the securities market.
• Quasi-Executive: SEBI is empowered to implement the regulations and judgements made and to take legal action against the violators. It is also authorised to inspect Books of accounts and other documents if it comes across any violation of the regulations.
• Quasi-Legislative: SEBI reserves the right to frame rules and regulations to protect the interests of the investors. Some of its regulations consist of insider trading regulations, listing obligation, and disclosure requirements. These have been formulated to keep malpractices at bay.
• Despite the powers, the results of SEBI’s functions still have to go through the Securities Appellate Tribunal and the Supreme Court of India.

♦Registration of stock brokers, sub-brokers, share transfer agents, etc.

• No stock broker, sub-broker, share transfer agent, banker to an issue, trustee of trust deed, registrar to an issue, merchant banker, underwriter, portfolio manager, investment adviser and such other intermediary who may be associated with securities market shall buy, sell or deal in securities except under, and in accordance with, the conditions of a certificate of registration obtained from the Board in accordance with the regulations made under this Act :
• Provided further that any certificate of registration, obtained immediately before the commencement of the Securities Laws (Amendment) Act, 1995, shall be deemed to have been obtained from the Board in accordance with the regulations providing for such registration.
• Provided that a person buying or selling securities or otherwise dealing with the securities market as a depository, participant, custodian of securities, foreign institutional investor or credit rating agency immediately before the commencement of the Securities Laws (Amendment) Act, 1995, for which no certificate of registration was required prior to such commencement, may continue to buy or sell securities or otherwise deal with the securities market until such time regulations are made under clause (d) of sub-section (2) of section 30.
• Provided that any person sponsoring or causing to be sponsored, carrying or causing to be carried on any venture capital funds or collective investment schemes operating in the securities market immediately before the commencement of the Securities Laws (Amendment) Act, 1995, for which no certificate of registration was required prior to such commencement, may continue to operate till such time regulations are made under clause (d) of sub-section (2) of section 30.

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