Module: 2 - Capital Markets of India - Primary Market - Public Issues - Regulatory-cum-Promotional
Role of SEBI - Salient provisions of DIP Guidelines
(Page: 3 of 5)

• All issues by a new company has to be made at par and for existing companies the issue price should be justified as per Malegam Committee recommendations.

• The earnings per share (EPS) for the last three years and comparison of pre-issue price to earnings (P/E) ratio to the P/E ratio of the Industry.

• Latest Net Asset Value.

• Minimum return on increased net-worth to maintain pre-issues EPS. A Company may also raise finance from the international markets by issuing GDR's and ADR's.

• Vetting of prospectus by SEBI: A draft prospectus is prepared giving out details of the Company, promoters background, Management, terms of the issue, project details, modes of financing, past financial performance, projected profitability and others;

• Appointment of underwriters: The underwriters are appointed who commit to shoulder the liability and subscribe to the shortfall in case the issue is under-subscribed. For this commitment they are entitled to a maximum commission of 2.5 % on the amount underwritten;

• Appointment of Bankers: Bankers along with their branch network act as the collecting agencies and process the funds procured during the public issue;

• Appointment of Registrars: Registrars process the application forms, tabulate the amounts collected during the issue and initiate the allotment procedures

;

• Appointment of the brokers to the issue: Recognized members of the Stock exchanges are appointed as brokers to the issue for marketing the issue. They are eligible for a maximum brokerage of 1.5%;

• Filing of prospectus with the Registrar of Companies: The draft prospectus along with the copies of the agreements entered into with the Lead Manager, Underwriters, Bankers, registrars and Brokers to the issue is filed with the Registrar of Companies of the state where the registered office of the company is located;

• Printing and dispatch of Application forms: The prospectus and application forms are printed and dispatched to all the merchant bankers, underwriters, brokers to the issue;

• Filing of the initial listing application: A letter is sent to the Stock exchanges where the issue is proposed to be listed giving the details and stating the intention getting the shares listed on the Exchange. The initial listing application has to be sent with a fee of Rs. 7,500/-;

• Statutory announcement: An abridged version of the prospectus and the Issue start and close dates are published in major English dailies and vernacular newspapers;

• Processing of applications: After the close of the Public Issue all the application forms are scrutinized, tabulated and then shares are allotted against these application;

• Establishing the liability of the underwriter: In case the Issue is not fully subscribed to, then the liability for the subscription falls on the underwriters who have to subscribe to the shortfall, incase they have not procured the amount committed by them as per the Underwriting agreement;

• Allotment of shares: after the issue is subscribed to the minimum level, the allotment procedure as prescribed by SEBI is initiated;

• Listing of the Issue: The shares after having been allotted have to be listed compulsorily in the regional stock exchange and optionally at the other stock exchanges;

The rights issue involves selling of securities to the existing shareholders in proportion to their current holding. When a company issues additional equity capital it has to be offered in the first instance to the existing shareholders on a pro-rata basis as per Section 81 of the Companies Act, 1956. The shareholders may by a special resolution forfeit this right, partially or fully by a special resolution to enable the company to issue additional capital to the public or alternatively by passing a simple resolution and taking the permission of the Central Government.

A private placement results from the sale of securities by the company to one or few investors. The distinctive features of private placement are that there is no need for a formal prospectus as well as underwriting arrangement. The terms of the issue are negotiated between the company and the investors. The issuers are normally the listed public limited companies or closely held public or private limited companies which cannot access the primary market. The securities are placed normally with the institutional investors, mutual funds or other financial institutional.

The stock exchanges are the exclusive centers for trading of securities. At present, there are 23 operative stock exchanges in India. Most of the stock exchanges in the country are incorporated as 'Association of Persons' of Section 25 companies under the Companies Act. These are organized as 'mutuals' and are considered beneficial in terms of tax benefits and matters of compliance. However after the corporate model of National Stock Exchange successfully out performing the rest of the stock exchanges, it has been decided by SEBI to permit stock exchanges to reconstitute and Corporatise themselves.

Until recently, the area of operation/jurisdiction of an exchange was specified at the time of its recognition, which in effect precluded competition among the exchanges. These are called regional exchanges. In order to provide an opportunity to investors to invest/ trade in the securities of local companies, it is mandatory for the companies, wishing to list their securities, to list on the regional stock exchange nearest to their registered office. Monopoly of the exchanges within their allocated area, regional aspirations of the people and mandatory listing on the regional stock exchange resulted in multiplicity of exchanges. As a result, we have 24 exchanges (The Capital Stock Exchange, the latest in the list, is yet to commence trading) in the country recognized over a period of time to enable investors across the length and breadth of the country to access the market.

The Stock Exchange, Mumbai, popularly known as "BSE" was established in 1875 as "The Native Share and Stock Brokers Association", as a voluntary non-profit making association. It has evolved over the years into its present status as the premier Stock Exchange of the country. It may be noted that this Stock Exchange is the oldest one in Asia, even older than the Tokyo Stock Exchange, which was founded in 1878.

A Governing Board comprising of 9 elected directors (one third of them retire every year by rotation), three Government nominees, a Reserve Bank of India nominee and five public representatives, is the apex body, which regulates the Exchange and decides its policies. The Executive Director as the Chief Executive Officer is responsible for the day-to-day administration of the Exchange.

The Exchange has obtained permission from Securities and Exchange Board of India (SEBI) for expansion of its BSE-On-Line-Trading (BOLT) network to locations outside Mumbai. In terms of the permission granted by SEBI and certain modifications announced later, the members of the Exchange are free to install their trading terminals at any place in the country. This resulted in the rapid expansion of BSC far and wide in the country. To quote Mr.Manoj Vaish, Dy.Executive Director of BSE:

"The BSE entered the technology race in 1995 with the introduction of screen based trading. It switched over from the open outcry system in just about 50 days. Considered a rare feet at that time. Two years later it extended its presence nationwide through BSE On-line Trading (BOLT) which now covers about 400 cities. The network now runs on a fault tolerant TANDEM, s74016 which is connected through LAN, WAN and VSAT and has capacity for 20 Lakh trades a day with order execution time being less than a second. Complementing the equity trading platforms are trading platforms for debt, derivatives and Internet trading, which makes BSE a bourse that is technology savvy".

In order to expand the BOLT network to centres outside Mumbai and support the smaller regional Stock Exchanges, the Exchange has admitted subsidiary companies formed by 13 regional Stock Exchanges as its members as on November 30, 2001. The members of these regional Stock Exchanges work as sub-brokers.

Before establishment of NSE in November 1992, BSE remained a virtual monopoly organisation in the Indian Stock Market. It adapted to the new situation of the emerging market and continues to remain as one of the premier Stock Exchanges of India.

BSE's On Line Trading System (BOLT) which commenced on March 14, 1995, was essentially meant to create an automated trading environment with the following objectives:

• Transparent deals;

• Improvement in Liquidity;

• Increase the market depth through continuity of quote and orders;

• Eliminate mismatches and mitigate settlement risks;

• Instantaneous dissemination of information through various data-feed channels;

• Structured MIS reports for analysis;

• Provide a robust and scalable trading system for growing volumes.

With the emergence of electronic trading, the entire capital market scenario has changed. The securities market then opened out to the end investor through the member-brokers or the sub-brokers situated in far-flung areas in the country. The Exchange, recognizing the opportunities prevalent in the ever-changing scenario, embraced the latest technology and came up with an electronic trading system. The floor used for open-out cry trading was entirely closed down in 50 trading days in March 1995 and the means of conducting business in the capital markets changed forever.

Technology is driving the re-structuring of markets worldwide, shifting focus from a supply-driven approach to customer-centric strategies. This has lead to the emergence of the 'borderless enterprise' which thrives on the creation of new business models, new products and new markets.

The National Stock Exchange of India Limited has genesis in the report of the High Powered Study Group on Establishment of New Stock Exchanges, which recommended promotion of a National Stock Exchange by financial institutions (FIs) to provide access to investors from all across the country on an equal footing. Based on the recommendations, NSE was promoted by leading Financial Institutions at the behest of the Government of India and was incorporated in November 1992 as a tax-paying company unlike other stock exchanges in the country.

On its recognition as a stock exchange under the Securities Contracts (Regulation) Act, 1956 in April 1993, NSE commenced operations in the Wholesale Debt Market (WDM) segment in June 1994. The Capital Market (Equities) segment commenced operations in November 1994 and operations in Derivatives segment commenced in June 2000.

NSE's mission is setting the agenda for change in the securities markets in India. The NSE was set-up with the main objectives of:

• establishing a nation-wide trading facility for equities, debt instruments and hybrids,

• ensuring equal access to investors all over the country through an appropriate communication network,

• providing a fair, efficient and transparent securities market to investors using electronic trading systems, enabling shorter settlement cycles and book entry settlements systems, and

• Meeting the current international standards of securities markets.

• The standards set by NSE in terms of market practices and technology have become industry benchmarks and are being emulated by other market participants. NSE is more than a mere market facilitator. It's that force which is guiding the industry towards new horizons and greater opportunities.

NSE is one of the first de-mutualised stock exchanges in the country, where the ownership and management of the Exchange is completely divorced from the right to trade on it. Though the impetus for its establishment came from policy makers in the country, it has been set up as a public limited company, owned by the leading institutional investors in the country.

From day one, NSE has adopted the form of a demutualised exchange - the ownership, management and trading is in the hands of three different sets of people. NSE is owned by a set of leading financial institutions, banks, insurance companies and other financial intermediaries and is managed by professionals, who do not directly or indirectly trade on the Exchange. This has completely eliminated any conflict of interest and helped NSE in aggressively pursuing policies and practices within a public interest framework.

Stock exchanges today have to rely increasingly on information technology to stay competitive in delivering services. This is primarily because of newer trading channels used for communicating and transacting like Internet and On-line security trading. The IT department of NSE employs 150 IT professionals forming a third of its total staff strength. The exchange has invested close to Rs.400 Crore in computers, software and communication equipment. It is therefore recognized as one of "Top IT User" organization when it was established. In line with global trends NSE is structured and operates much like an information technology company. It has the largest VSAT network in this part of the world with a huge and complex web of hardware and software. It has a detailed disaster recovery site that mirrors all operating systems.

The modern stock exchange trading technology does not need the traditional type of brokers to match investors' orders as they used to do on the physical-trading floor. The automated Trading screens can match buy and sell orders without the intervention of brokers. Today brokers are needed only for settlement responsibilities. NSE introduced a nation-wide VSAT driven screen based trading system. Operations commenced in Mumbai and rapidly spread all over India. NSE today offers investors trading facilities in over 280 cities and town through 4000 terminals. For the first time NSE introduced in India screen based trading with automated matching. The system conceals the identity of the parties to an order or trade. This help better functioning of the market as disclosures of identity would put most members at a disadvantage. The trading system operates on price time priority. This means given the same set or orders, the orders that come first receive priority in matching. When an order does not find an immediate match in remains in the system and is displayed to the whole market, till a fresh order comes in or the earlier order is modified or cancelled. The market screens at any point of time give the members complete information on the total order depth in a security, the high price, the low price, the last traded price and other related information.

Nationwide trading system of NSE has immensely benefited investors in all places, which do not have a stock exchange nearby. Earlier their orders took three days for confirmation. This time lag is now a thing of the past, as the orders and prices are visible and instantly available to all investors across the country, representing a dramatic change in investor access and protection. "This has served to unify the earlier fragmented market into a single national order book, bringing with it unprecedented increases in liquidity and transparency." (Mr.R.H.Patil, former MD of NSE)