EQUITY MARKET

DEFINITION

Equity market, or stock market, is a system through which company shares

are traded. Equity market is a public market for the trading of company
stock (shares) and derivatives at an agreed price; these are securities listed
on a stock exchange as well as those only traded privately. The equity
market offers investors an opportunity to participate in a company's success
through an increase in its stock price.

An equity market is a public market for the trading of company equity stock
and derivatives at an agreed price. The equity market which comprises of
primary market as well as secondary market is one of the most important
sources for companies to raise money. This allows businesses to be publicly
traded, or raise additional capital for expansion by selling shares of
ownership of the company in a public market. The liquidity that an exchange
provides affords investors the ability to quickly and easily sell securities.
This is an attractive feature of investing in stocks, compared to other less
liquid investments such as real estate.

The worldwide equity market grew rapidly in the late 20th century, rising
from $1 trillion in market capitalization in 1974 to $16 trillion in 1997. The
worldwide equity market benefited from freer markets, government
privatizations, and companies seeking an alternative to debt.
Indian Equity Market

The Indian Equity Market is more popularly known as the Indian Stock
Market. The Indian equity market has become the third biggest after
China and Hong Kong in the Asian region. According to the latest report
by ADB, it has a market capitalization of nearly $600 billion. As of March
2009, the market capitalization was around $598.3 billion (Rs 30.13 lakhs
crore) which is one-tenth of the combined valuation of the Asia region. The
market was slow since early 2007 and continued till the first quarter of 2009.

A stock exchange has been defined by the Securities Contract (Regulation)

Act, 1956 as an organization, association or body of individuals established
for regulating, and controlling of securities. The Indian equity market
depends on three factors -

 Funding into equity from all over the world

 Corporate houses performance
 Monsoons

The stock market in India does business with two types of fund namely
private equity fund and venture capital fund. It also deals in transactions
which are based on the two major indices - Bombay Stock Exchange (BSE)
and National Stock Exchange of India Ltd (NSE).

The equity market is also affected through trade integration policy. The
country has advanced both in foreign institutional investment (FII) and trade
integration since 1995. This is a very attractive field for making profit for
medium and long term investors, short-term swing and position traders and
very intraday traders.

The Indian market has 22 stock exchanges. The larger companies are
enlisted with BSE and NSE. The smaller and medium companies are listed
with OTCEI (Over The counter Exchange of India). The functions of the
Equity Market in India are supervised by SEBI (Securities Exchange Board
of India).

HISTORY

The history of the Indian equity market goes back to the 18th century when
securities of the East India Company were traded. Till the end of the 19th
century, the trading of securities was unorganized and the main trading
centers were Calcutta (now Kolkata) and Bombay (now Mumbai).

The Indian Equity Market was not well organized or developed before
independence. After independence, new issues were supervised. The timing,
floatation costs, pricing, interest rates were strictly controlled by the
Controller of Capital Issue (CII). For four and half decades, companies were
demoralized and not motivated from going public due to the rigid rules of
the Government. In the 1950s, there was uncontrollable speculation and the
market was known as 'Satta Bazaar'. Speculators aimed at companies like
Tata Steel, Kohinoor Mills, Century Textiles, Bombay Dyeing and National
Rayon. The Securities Contracts (Regulation) Act, 1956 was enacted by the
Government of India. Financial institutions and state financial corporation
were developed through an established network.

In the 60s, the market was bearish due to massive wars and drought.
Forward trading transactions and 'Contracts for Clearing' or 'badla' were
banned by the Government. With financial institutions such as LIC, GIC,
some revival in the markets could be seen. Then in 1964, UTI, the first
mutual fund of India was formed.

In the 70's, the trading of 'badla' resumed in a different form of 'hand

delivery contract'. But the Government of India passed the Dividend
Restriction Ordinance on 6th July, 1974. According to the ordinance, the
dividend was fixed to 12% of Face Value or 1/3 rd of the profit under
Section 369 of The Companies Act, 1956 whichever is lower.
This resulted in a drop by 20% in market capitalization at BSE (Bombay
Stock Exchange) overnight. The stock market was closed for nearly a
fortnight. Numerous multinational companies were pulled out of India as
they had to dissolve their majority stocks in India ventures for the Indian
public under FERA, 1973.

The 80's saw a growth in the Indian Equity Market. With liberalized policies
of the government, it became lucrative for investors. The market saw an
increase of stock exchanges, there was a surge in market capitalization rate
and the paid up capital of the listed companies. The 90s was the most crucial
in the stock market's history. Indians became aware of 'liberalization' and
'globalization'. In May 1992, the Capital Issues (Control) Act, 1947 was
abolished. SEBI which was the Indian Capital Market's regulator was given
the power and overlook new trading policies, entry of private sector mutual
funds and private sector banks, free prices, new stock exchanges, foreign
institutional investors, and market boom and bust. In 1990, there was a
major capital market scam where bankers and brokers were involved. With
this, many investors left the market. Later there was a securities scam in
1991-92 which revealed the inefficiencies and inadequacies of the Indian
financial system and called for reforms in the Indian Equity Market. Two
new stock exchanges, NSE (National Stock Exchange of India) established
in 1994 and OTCEI (Over the Counter Exchange of India) established in
1992 gave BSE a nationwide competition. In 1995-96, an amendment was
made to the Securities Contracts (Regulation) Act, 1956 for introducing
options trading. In April 1995, the National Securities Clearing Corporation
(NSCC) and in November 1996, the National Securities Depository Limited
(NSDL) were set up for demutualised trading, clearing and settlement.
Information Technology scripts were the major players in the late 90s with
companies like Wipro, Satyam, and Infosys. In the 21st century, there was
the Ketan Parekh Scam. From 1st July 2001, 'Badla' was discontinued and
there was introduction of rolling settlement in all scripts. In February 2000,
permission was given for internet trading and from June, 2000, futures
trading started.
CURRENT MARKET SCENARIO
Primary market

Introduction

Primary market is the market for First Time Issuance of shares and they
being listed on the major stock exchange. The company raises funds for their
development and expansion activities through Debt or Equity.

Primary Market also called the new issue market. It is the market for issuing
new securities. Many companies, especially small and medium scale, enter
the primary market to raise money from the public to expand their
businesses. They sell their securities to the public through an initial public
offering.

In the primary market securities are issued on an exchange basis. The

underwriters, that is, the investment banks, play an important role in this
market: they set the initial price range for a particular share and then
supervise the selling of that share.

Features of primary markets are:

 This is the market for new long term equity capital. The primary
market is the market where the securities are sold for the first time.
Therefore it is also called the new issue market (NIM).
 In a primary issue, the securities are issued by the company directly to
investors.
  The company receives the money and issues new security certificates
to the investors.
 Primary issues are used by companies for the purpose of setting up
new business or for expanding or modernizing the existing business.
 The primary market performs the crucial function of facilitating
capital formation in the economy.
 The new issue market does not include certain other sources of new
long term external finance, such as loans from financial institutions.
Borrowers in the new issue market may be raising capital for
converting private capital into public capital; this is known as "going
public."
 The financial assets sold can only be redeemed by the original holder.

Methods of issuing securities in the primary market are:

 Initial public offering;

 Rights issue (for existing companies)
 Preferential issue.

When private limited company was tapping the capital market for either
expansion or developmental reason then this company must be listed on any
one of the stock exchange.
Kinds of issues

The different kinds of issues which can be made by an Indian company in

India:

a) Public Issue
i. Initial Public Offer
ii. Further Public Offer

b) Right Issue
c) Bonus Issue
d) Private Placement

a) Public Issue

1) Initial Public Offer

when a company offers to sell its shares to the public for the very first time it
is referred to as an Initial Public Offering (IPO). The shares now available
for trading on the stock exchange where it is listed.

Reasons for IPO

1. Need for funds

 2. Disinvestments of public sector units
3. Banks to enhance their capital adequacy
4. Expansion or diversification
5. Finance specific projects for a specific objective

BENEFITS OF GOING PUBLIC:

The potential advantages that seem to prod companies to go public are as

follows:

1) Access to Capital – The principal motivation for going public is to

have access to larger capital. A company that does not tap the public
financial market may find it difficult to grow beyond a certain point
for want of capital.

2) Respectability – Many entrepreneurs believe that they have “arrived”

in some sense if their company goes public because a public company
may command greater respectability. Competent and ambitious
executives would like to work for growth. Other things being equal,
public companies offer greater growth potential compared to non-
public companies. Hence, they can attract superior talent.

3) Window of Opportunity – As suggested by Jay Ritter and others that

there are periods in which stocks are overpriced. Hence, when a non-
public company recognizes that other companies in its industry are
overpriced, it has an incentive to go public and exploit that
opportunity.

4) Benefit of Diversification – When a firm goes public those who have

investment in it – original owners, investors, managers, and others –
 can cash out of the firm and build a diversified portfolio.

5) Signals from the Market – Stock prices represent useful information

to the managers. Every day, investors render judgments about the
prospects of the firms. Although the market may not be perfect, it
provides a useful reality check.

6) Complements Product Marketing: Going public attracts media

attention. Newspapers and magazines are most likely to focus on
public companies on which information is readily available. This
publicity can be harnessed and used towards marketing the product of
the company.

7) Competitive position: Many companies use their increased

availability of capital as a public company to enhance their
competitive position. Additional capital available to a public company
permits greater market penetration.

8) Expands Business Relationship: Once a company is public

company, information on that company is readily available.
Prospective suppliers, distributors and partners could easily garner
information and forge a relationship with such company.

9) Ability to take advantage of market price fluctuations: Once

public, a company can take advantage of market price fluctuations to
sell stock when the markets are hot, buy back the stock when the
market is cold. This can often be an effective and low cost way to
raise significant capital.
 FLOW CHART OF IPO PROCESS

The issue of securities to members of the public through a prospectus

involves a fairly elaborate process, the principal steps of which are briefly
described below:

Approval of Board

An approval of the board of directors of the company is required for

raising capital from the public.

Appointment of Lead Managers

The lead manager is a merchant banker who orchestrates the issue in

consultation with the company. The lead manager must be selected
carefully.

Appointment of Other Intermediaries

Several intermediaries facilitate the public issue process. A cop-manager

is appointed to share the work of the lead manager and an advisor to
provide counsel. An underwriter is appointed who agrees to subscribe to
a given number of shares in the event the public does not subscribe to
them. The underwriter, in essence, stands guarantee for public
subscription in consideration for the underwriting commission. Bankers
are appointed to collect money on behalf of the company from the
applicants. Brokers are appointed to the issue to facilitate its subscription.
Only members of recognized Stock Exchanges can be appointed as
brokers. The number of brokers appointed has to bear a reasonable
relationship to the size of the issue. A company may, if such a need is
felt, appoint a principal broker to coordinate the work of brokers.
Registrars are appointed to the issue to perform a series of tasks from the
time the subscription is closed to the time the allotment is made. They
may be selected on the basis of experience, expertise, credibility, and
cost.

Filing of the Prospectus with SEBI

The prospectus or the offer document communicates information about
the company and the proposed security issue to the investing public. All
companies seeking to make a public issue have to file their offer
document with SEBI. If SEBI or the public does not communicate its
observations within 21 days from the filing of the offer document, the
company can proceed with its public issue. The prospectus and
application form (along with Articles and Memorandum of Association)
must be forwarded to the concerned stock exchange, where the issue is
proposed to be listed, for approval.

Filing of the Prospectus with the Registrar of Companies

Once the prospectus is approved by the concerned stock exchange and
consents obtained from the bankers, auditors, legal advisors, registrars,
underwriters, and others, the prospectus, signed by the directors, must be
filed with the Registrar of Companies, along with requisite documents as
required by the Companies Act, 1956.

Filing of Initial Listing Application

Within ten days of filing the prospectus, the initial listing application
must be made to the concerned stock exchanges, along with the initial
listing fees.

Promotion of the Issue

The promotional campaign typically commences with the filing of the

prospectus with the Registrar of Companies and ends with the release of
the statutory announcement of the issue. To promote the issue the
company holds conferences for brokers, press and investors.
Advertisements are also released in newspapers and periodicals to
generate interest among potential investors.

Statutory Announcement

The statutory announcement of the issue must be made after seeking the
approval of the lead stock exchange. This must be published at least ten
days before the opening of the subscription list.
Collection of Applications

The statutory announcement (as well as the prospectus) specifies when

the subscription would open, when it would close, and the banks where
the applications can be made. During the period the subscription is kept
open, the bankers to the issue collect application money on behalf of the
company and the managers to the issue, with the help of the registrars to
the issue, monitor the situation. Information is gathered about the number
of applications received in various categories, the number of shares
applied for, and the amount received.

Processing of Applications

The applications forms received by the bankers are transmitted to the

registrars of the issue for processing. This mainly involves scrutinizing
the applications, coding the applications, preparing a list of applications
with all relevant details.

Establishing the Liability of Underwriters

If the issue is under subscribed, the liability of the underwriters has to be

established.
 Allotment of Shares

According to SEBI guidelines, one-half of the net public offers have to

be reserved for applications up to 1000 shares and the balance one-half
for larger applications. For each of these segments, the “proportionate”
system of allotment is to be followed.

Listing of the Issue

The detailed listing application should be submitted to the concerned

stock exchanges along with the listing agreement and the listing fee. The
allotment formalities should be completed within 30 days after the
subscription list is closed or such extended period as permitted by the
lead stock exchange.

BOOK BUILDING

The principal parties involved in the Book Building Process are:

(1) The Company

(2) The Selling Shareholder
(3) The Book Running Lead Managers (BRLMs)
(4) The Syndicate Members, who are intermediaries registered with
SEBI and eligible to act as underwriters, appointed by the BRLMs.
(5) The Registrar to the office.
THE BOOK BUILDING PROCESS

 The Issuer who is planning an IPO nominates a lead merchant banker

as a ‘book runner’.
 The Issuer specifies the number of securities to be issued and the price
band for orders.
 The Issuer also appoints syndicate members with whom orders can be
placed by the investors.
 Investors place their order with syndicate members who input the
orders into the ‘electronic book’. This process is called ‘bidding’ and
is similar to open auction.
 A Book should remain open for a minimum period of at least three
working days and not more than seven working days which may be
extended to a maximum of ten working days in case the price band is
revised.
 Bids cannot be entered at less than the floor price
 Bids can be revised by the bidder before the issue closes.
 On the close of the book building period the ‘book runner evaluates
the bids on the basis of the evaluation criteria which may include.
o Price Aggression
o Investor quality
o Earliness of bids, etc.
 The book runner and the company conclude the final price at which
they are willing to issue and allocate of securities.
 Generally, the issue size gets frozen based on the price per shares
discovered through the book building process.
 Allocation of securities is made to the successful bidders.
2) Further public offer

When already listed company makes either a fresh issue of securities to the
public or an offer for sale to the public, it is called FPO.

b) Right Issue

A rights issue is a way in which a company can sell new shares in order to
raise capital. Shares are offered to existing shareholders in proportion to
their current shareholding, respecting their pre-emption rights. The price at
which the shares are offered is usually at a discount to the current share
price, which gives investors an incentive to buy the new shares — if they do
not, the value of their holding is diluted.

A rights issue to fund expansion can usually be regarded somewhat more

optimistically, although, as with acquisitions, shareholders should be
suspicious because management may be empire-building at their expense
(the usual agency problem with expansion).

The rights are normally a tradable security themselves (a type of short dated
warrant). This allows shareholders who do not wish to purchase new shares
to sell the rights to someone who does. Whoever holds a right can choose to
buy a new share (exercise the right) by a certain date at a set price.
Some shareholders may choose to buy all the rights they are offered in the
rights issue. This maintains their proportionate ownership in the expanded
company, so that an x% stake before the rights issue remains an x% stake
after it. Others may choose to sell their rights, diluting their stake and
reducing the value of their holding.

If rights are not taken up the company may (and in practice does) sell them
on behalf of the rights holder.

c) Bonus Shares

The term bonus means an extra dividend paid to shareholders in a joint

stock company from surplus profits. When a company has accumulated a
large fund out of profits - much beyond its needs, the directors may decide
to distribute a part of it amongst the shareholders in the form of bonus.
Bonus can be paid either in cash or in the form of shares. Cash bonus is paid
by the company when it has large accumulated profits as well as cash to pay
dividend. Many a time, a company is not in a position to pay bonus in cash
in spite of sufficient profits because of unsatisfactory cash position or
because of its adverse effects on the working capital of the company. In
such a position, the company pays a bonus to its shareholders in the form of
shares; a free share thus issued is known as a bonus share.

A bonus share is a free share of stock given to current/existing shareholders

in a company, based upon the number of shares that the shareholder already
owns at the time of announcement of the bonus. While the issue of bonus
shares increases the total number of shares issued and owned, it does not
increase the value of the company. Although the total number of issued
shares increases, the ratio of number of shares held by each shareholder
remains constant.

Whenever a company announces a bonus issue, it also announces a "Book

Closure Date" which is a date on which the company will ideally
temporarily close its books for fresh transfers of stock. Read "Book
Closure" for a better understanding.

An issue of bonus shares is referred to as a bonus issue.

Depending upon the constitutional documents of the company, only certain

classes of shares may be entitled to bonus issues, or may be entitled to
bonus issues in preference to other classes.

bonus share is free share in fixed ratio to the shareholders. for exp..reliance
ind. ltd. issue bonus share in 1:1 ratio and Rs.13.00 as dividend/share

Sometimes a company will change the number of shares in issue by

capitalising its reserve. In other words, it can convert the right of the
shareholders because each individual will hold the same proportion of the
outstanding shares as before. Main reason for issuance is the price of the
existing share has become unwieldy.

Purpose: Usually bonus shares are issued with the intent of rewarding the
investor, although having said that the ex-bonus (post bonus) price of the
share is adjusted to bonus ratio. So for e.g, if the price of a share before
bonus is Rs.100 and a bonus of 1:1 is issued, then ex-bonus share price
would adjust to Rs. 50, which means that the total market value will remain
the same. There is generally a case where the price of the share increases
after bonus effect is incorporated.

Ratios' Impact:

The main financial effect of bonus share is that it increases the number of
shares outstanding and reduces the earnings per share (EPS). Basic EPS =
(Net Profit after tax / no. of equity shares outstanding).

d) Private placement

Private placement occurs when a company makes an offering of securities

not to the public, but directly to an individual or a small group of investors.
Such offerings do not need to be registered with the Securities and Exchange
Commission (SEC) and are exempt from the usual reporting requirements.
Private placements are generally considered a cost-effective way for small
businesses to raise capital without "going public" through an initial public
offering (IPO).

"Although most business owners dream of taking their company public

someday, many have had to wait years for a traditional public offering,"
Gary D. Zeune and Timothy R. Baer explained in an article for Corporate
Cashflow Magazine. "For them, a private placement of equity or debt has
been a quicker, less expensive way to raise a limited amount of capital from
a limited number of investors. A private placement has been appropriate
when a company still lacks the financial strength or reputation to appeal to a
broad base of investors and cannot afford the expense of a public offering."

Advantages and Disadvantages

Private placements offer small businesses a number of advantages over

IPOs. Since private placements do not require the assistance of brokers or
underwriters, they are considerably less expensive and time consuming. In
addition, private placements may be the only source of capital available to
risky ventures or start-up firms. "With loan criteria for commercial bankers
and investment criteria for venture capitalists both tightening, the private
placement offering remains one of the most viable alternatives for capital
formation available to companies," Andrew J. Sherman wrote in his book
The Complete Guide to Running and Growing Your Business.

A private placement may also enable a small business owner to hand-pick

investors with compatible goals and interests. Since the investors are likely
to be sophisticated business people, it may be possible for the company to
structure more complex and confidential transactions. If the investors are
themselves entrepreneurs, they may be able to offer valuable assistance to
the company's management. Finally, unlike public stock offerings, private
placements enable small businesses to maintain their private status.
Of course, there are also a few disadvantages associated with private
placements of securities. Suitable investors may be difficult to locate, for
example, and may have limited funds to invest. In addition, privately placed
securities are often sold at a deep discount below their market value.
Companies that undertake a private placement may also have to relinquish
more equity, because investors want compensation for taking a greater risk
and assuming an illiquid position. Finally, it can be difficult to arrange
private placement offerings in multiple states.

Restrictions Affecting Private Placement

The SEC formerly placed many restrictions on private placement

transactions. For example, such offerings could only be made to a limited
number of investors, and the company was required to establish strict criteria
for each investor to meet. Furthermore, the SEC required private placement
of securities to be made only to "sophisticated" investors—those capable of
evaluating the merits and understanding the risks associated with the
investment. Finally, stock sold through private offerings could not be
advertised to the public and could only be resold under certain
circumstances.

In 1992, however, the SEC eliminated many of these restrictions in order to

make it easier for small companies to raise capital through private
placements of securities. The rules now allow companies to promote their
private placement offerings more broadly and to sell the stock to a greater
number of buyers. It is also easier for investors to resell such securities.
Although the SEC restrictions on private placements were relaxed, it is
nonetheless important for small business owners to understand the various
federal and state laws affecting such transactions and to take the appropriate
procedural steps. It may be helpful to assemble a team of qualified legal and
accounting professionals before attempting to undertake a private placement.

Many of the rules affecting private placements are covered under Section
4(2) of the federal securities law. This section provides an exemption for
companies wishing to sell up to $5million in securities to a small number of
accredited investors. Companies conducting an offering under Section 4(2)
cannot solicit investors publicly, and the majority of investors are expected
to be either insiders (company management) or sophisticated outsiders with
a preexisting relationship with the company (professionals, suppliers,
customers, etc.). At a minimum, the companies are expected to provide
potential investors with recent financial statements, a list of risk factors
associated with the investment, and an invitation to inspect their facilities. In
most respects, the preparation and disclosure requirements for offerings
under Section 4(2) are similar to Regulation D filings.

Regulation D—which was adopted in 1982 and has been revised several
times since—consists of a set of rules numbered 501 through 508. Rules
504, 505, and 506 describe three different types of exempt offerings and set
forth guidelines covering the amount of stock that can be sold and the
number and type of investors that are allowed under each one. Rule 504
covers the Small Corporate Offering Registration, or SCOR. SCOR gives an
exemption to private companies that raise no more than $1 million in any
12-month period through the sale of stock. There are no restrictions on the
number or types of investors, and the stock may be freely traded. The SCOR
process is easy enough for a small business owner to complete with the
assistance of a knowledgeable accountant and attorney. It is available in all
states except Delaware, Florida, Hawaii, and Nebraska.

Rule 505 enables a small business to sell up to $5 million in stock during a

12-month period to an unlimited number of investors, provided that no more
than 35of them are non-accredited. To be accredited, an investor must have
sufficient assets or income to make such an investment. According to the
SEC rules, individual investors must have either $1 million in assets (other
than their home and car) or $200,000 in net annual personal income, while
institutions must hold $5million in assets. Finally, Rule 506 allows a
company to sell unlimited securities to an unlimited number of investors,
provided that no more than 35of them are non-accredited. Under Rule 506,
investors must be sophisticated. In both of these options, the securities
cannot be freely traded

Sweat equity

The equity that is created in a company or some other asset as a direct result
of hard work by the owner(s). Sweat equity is a term used to describe the
contribution made to a project by people who contribute their time and
effort. It can be contrasted with financial equity which is the money
contributed towards the project. It is used to refer to a form of compensation
by businesses to their owners or employees. The term is sometimes used in
partnership agreements where one or more of the partners contributes no
financial capital. In the case of a startup company, employees might, upon
incorporation, receive stock or stock options in return for working for
below-market salaries (or in some cases no salary at all).[1]
The term is sometimes used to describe the efforts put into a start-up
company by the founders in exchange for ownership shares of the company.
This concept, also called "stock for services" and sometimes "equity
compensation" or "sweat equity" can also be seen when startup companies
use their shares of stock to entice service providers to provide necessary
corporate services in exchange for a discount or for deferring service fees
until a later date, see e.g. "Idea Makers and Idea Brokers in High
Technology Entrepreneurship" by Todd L. Juneau et al., Greenwood Press,
2003, which describes equity for service programs involving patent lawyers
and securities lawyers who specialize in start-up companies as clients.

The term can also be used to describe the value added to real estate by
owners who make improvements by their own toil. The more labor applied
to the home, and the greater the resultant increase in value, the more sweat
equity that has been used.

In a successful model used by Habitat for Humanity, families who would

otherwise be unable to purchase their own home (because their income level
does not allow them to save for a down payment or qualify for an interest-
bearing mortgage offered by a financial institution) contribute up to 500
hours of sweat equity to the construction of their own home, the homes of
other Habitat for Humanity partner families or by volunteering to assist the
organization in other ways. Once moved into their new home, the family
makes monthly, interest-free mortgage payments into a revolving "Fund for
Humanity" which provides capital to build homes for other partner families.

Secondary market
After the securities are issued in the primary market, they are traded in the
secondary market by the investors. The securities are traded, cleared and
settled within the regulatory framework prescribed by the Exchanges and the
SEBI

Definition

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

Role

For the general investor, the secondary market provides an efficient platform
for trading of his securities. For the management of the company, Secondary
equity markets serve as a monitoring and control conduit-by facilitating
value-enhancing control activities, enabling implementation of incentive-
based management contracts, and aggregating information (via price
discovery) that guides management decisions

Difference

In the primary market, securities are offered to public for subscription for the
purpose of raising capital or fund. Secondary market is an equity trading
venue in which already existing/pre-issued securities are traded among
investors. Secondary market could be either auction or dealer market. While
stock exchange is the part of an auction market, Over-the-Counter (OTC) is
a part of the dealer market.

Stock exchange

A stock exchange is an entity which provides "trading" facilities for stock

brokers and traders, to trade stocks and other securities. Stock exchanges
also provide facilities for the issue and redemption of securities as well as
other financial instruments and capital events including the payment of
income and dividends. The securities traded on a stock exchange include
shares issued by companies, unit trusts, derivatives, pooled investment
products and bonds.

The initial offering of stocks and bonds to investors is by definition done in

the primary market and subsequent trading is done in the secondary market.
A stock exchange is often the most important component of a stock market.
Supply and demand in stock markets is driven by various factors which, as
in all free markets, affect the price of stocks.

A stock exchange, securities exchange or (in Europe) bourse is a corporation

or mutual organization which provides "trading" facilities for stock brokers
and traders, to trade stocks and other securities. Stock exchanges also
provide facilities for the issue and redemption of securities as well as other
financial instruments and capital events including the payment of income
and dividends. The securities traded on a stock exchange include: shares
issued by companies, unit trusts and other pooled investment products and
bonds. To be able to trade a security on a certain stock exchange, it has to be
listed there. Usually there is a central location at least for recordkeeping, but
trade is less and less linked to such a physical place, as modern markets are
electronic networks, which gives them advantages of speed and cost of
transactions. Trade on an exchange is by members only. The initial offering
of stocks and bonds to investors is by definition done in the primary market
and subsequent trading is done in the secondary market. A stock exchange is
often the most important component of a stock market. Supply and demand
in stock markets is driven by various factors which, as in all free markets,
affect the price of stocks.There is usually no compulsion to issue stock via
the stock exchange itself, nor must stock be subsequently traded on the
exchange. Such trading is said to be off exchange or over-the-counter. This
is the usual way that bonds are traded. Increasingly, stock exchanges are part
of a global market for securities.

Stock exchange in India

EVOLUTION OF STOCK EXCHANGES IN INDIA

The origin of the stock market relates back to the year 1494, when the
Amsterdam Stock Exchange was set up. In India it dates back to the 18th
century, an era when the East India Company was a dominant Institution in
India.

"The Bombay Stock Exchange" (BSE) was founded in the year 1875. "The
Ahmedabad Shares and Stock Association" was formed in the year 1894.
The Calcutta Stock Exchange Association was formed by about 150 brokers
on 15th June 1908. In the year 1920, one stock exchange was established in
Northern India and one in Madras called "The Madras Stock Exchange".
"The Madras Stock Exchange Association Pvt. Ltd." was established in the
year 1941. On 29th April 1959, it was reorganized as a company limited by
guarantee under the name and style of "Madras Stock Exchange" (MSE).
The Lahore Stock Exchange was formed in the year 1934. However in the
year 1936 after the Punjab Stock Exchange Ltd. came into existence, the
Lahore Stock Exchange merged with it. In Calcutta, a second Stock
Exchange by name "The Bengal Share & Stock Exchange Ltd." was
established in the year 1937 and likewise once again in the year 1938,
Bombay also witnessed a rival Stock Exchange formed in the name of
"Indian Stock Exchange Ltd." The U.P. Stock Exchange was formed in
Kanpur and the Nagpur Stock Exchange Ltd. in Nagpur in the year 1940.
The Hyderabad Stock Exchange Ltd. was incorporated in the year 1944.
Two stock exchanges which came into being in Delhi by the name "The
Delhi Stock & Share Brokers Association Ltd." and "The Delhi Stocks &
Shares Exchange Association Ltd." were amalgamated into "The Delhi
Stock Exchange Association Ltd." in the year 1947. Subsequently the
Bangalore Stock Exchange was registered in the year 1957 and recognized
in the year 1963. The third stock exchange in the state of Gujarat the
"Vadodara Stock Exchange Ltd." was incorporated in 1990. The Over the
Counter Exchange of India (OTCEI) broadly based on the lines of NASDAQ
(National Association of Securities Dealers Automated Quotation) of the
USA was promoted and approved on August 1989. The National Stock
Exchange of India Ltd. was incorporated in November 1992.

Today there are 23 Stock Exchanges in India, including the 3 Stock

Exchanges in Mumbai - Bombay Stock Exchange (BSE), National Stock
Exchange (NSE) and Over the Counter Exchange of India (OTCEI).

Introduction

Stock Exchanges are structured marketplace where affiliates of the union

gather to sell firm's shares and other securities. India Stock Exchanges can
either be a conglomerate/ firm or mutual group. The affiliates act as
intermediaries to their patrons or as key players for their own accounts.

Stock Exchanges in India also assist the issue and release of securities and
other monetary tools incorporating the fortification of revenues and
dividends. The book keeping of the trade is centralized but the buying and
selling is associated to a particular place as advanced marketplaces are
mechanized. The buying and selling on an exchange is only open to its
affiliates and brokers
Bombay Stock Exchange

Bombay Stock Exchange is the oldest stock exchange in Asia What is now
popularly known as the BSE was established as "The Native Share & Stock
Brokers' Association" in 1875. Over the past 135 years, BSE has facilitated
the growth of the Indian corporate sector by providing it with an efficient
capital raising platform.Today, BSE is the world's number 1 exchange in the
world in terms of the number of listed companies (over 4900). It is the
world's 5th most active in terms of number of transactions handled through
its electronic trading system. And it is in the top ten of global exchanges in
terms of the market capitalization of its listed companies (as of December
31, 2009). The companies listed on BSE command a total market
capitalization of USD Trillion 1.28 as of Feb, 2010. BSE is the first
exchange in India and the second in the world to obtain an ISO 9001:2000
certification. It is also the first Exchange in the country and second in the
world to receive Information Security Management System Standard BS
7799-2-2002 certification for its BSE On-Line trading System (BOLT).
Presently, we are ISO 27001:2005 certified, which is a ISO version of BS
7799 for Information Security. The BSE Index, SENSEX, is India's first and
most popular Stock Market benchmark index. Exchange traded funds (ETF)
on SENSEX, are listed on BSE and in Hong Kong. Futures and options on
the index are also traded at BSE.

National Stock Exchange

The National Stock Exchange of India Limited has genesis in the report of
the High Powered Study Group on Establishment of New Stock Exchanges.
It 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.
The following years witnessed rapid development of Indian capital market
with introduction of internet trading, Exchange traded funds (ETF), stock
derivatives and the first volatility index - IndiaVIX in April 2008, by NSE.
August 2008 saw introduction of Currency derivatives in India with the
launch of Currency Futures in USD INR by NSE. Interest Rate Futures was
introduced for the first time in India by NSE on 31st August 2009, exactly
after one year of the launch of Currency Futures.With this, now both the
retail and institutional investors can participate in equities, equity
derivatives, currency and interest rate derivatives, giving them wide range of
products to take care of their evolving needs.

Trading at NSE

 Fully automated screen-based trading mechanism

 Strictly follows the principle of an order-driven market
 Trading members are linked through a communication network
 This network allows them to execute trade from their offices
 The prices at which the buyer and seller are willing to transact will
appear on the screen
 When the prices match the transaction will be completed
 A confirmation slip will be printed at the office of the trading
member

Advantages of trading at NSE

  Integrated network for trading in stock market of India
 Fully automated screen based system that provides higher degree of
transparency
 Investors can transact from any part of the country at uniform prices
 Greater functional efficiency supported by totally computerized
network

Over the counter exchange of India (OTCEI)

Traditionally, trading in Stock Exchanges in India followed a conventional

style where people used to gather at the Exchange and bids and offers were
made by open outcry. This age-old trading mechanism in the Indian stock
markets used to create many functional inefficiencies. Lack of liquidity and
transparency, long settlement periods and became transactions are a few
examples that adversely affected investors. In order to overcome these
inefficiencies.

OTCEI was incorporated in 1990 as a Section 25 company under the

Companies Act 1956 and is recognized as a stock exchange under Section 4
of the Securities Contracts Regulation Act, 1956. The Exchange was set up
to aid enterprising promoters in raising finance for new projects in a cost
effective manner and to provide investors with a transparent & efficient
mode of trading.
OTCEI is the first screen based nationwide stock exchange in India created
by Unit Trust of India, Industrial Credit and Investment Corporation of
India, Industrial Development Bank of India, SBI Capital Markets, Industrial
Finance Corporation of India, General Insurance Corporation and its
subsidiaries and Can Bank Financial Services.

Modeled along the lines of the NASDAQ market of USA, OTCEI

introduced many novel concepts to the Indian capital markets such as
screen-based nationwide trading, sponsorship of companies, market making
and scrip less trading. As a measure of success of these efforts, the Exchange
today has 115 listings and has assisted in providing capital for enterprises
that have gone on to build successful brands for themselves like VIP
Advanta, Sonora Tiles & Brilliant mineral water, etc.
Intrinsic Benefits

A successful market for technology & growth companies has to :

 demonstrate an understanding for new technology and concepts

 provide capital formation opportunities for young companies without
a track record
  be national in order to reach and service entrepreneurs and investors
 enable access to a wide spectrum of financial intermediaries
 be cost effective for issuers
 provide an exit route to venture capital & private equity funds for their
investments
 adopt state of art trading systems and practices in tune with
international norms
 be well regulated to promote transparent and fair market practices

OTCEI, by virtue of its unique position, is well suited to service the

requirements of these companies, making it the natural choice for the
emerging technology and growth stocks. In fact, consumer favourites
like VIP Advanta, Sonora tiles and Brilliant Mineral Water are made
by high growth companies that have benefited by listing on OTCEI.

Merchant Banking

Introduction

The merchant bankers are those financial intermediaries involved with the
activity of transferring capital funds to those borrowers who are interested in
borrowing.
  They guarantee the success of issues by underwriting them.
 Merchant Banks are popularly known as “issuing and accepting
houses”.
 Unlike in the past, their activities are now primarily non-fund based
(Fee based).
 They offer a package of financial services.

The basic function of merchant banks is marketing corporate and other

securities that are guaranteeing sales and distribution of securities and also
other activities such as management of customer services, portfolio
management, credit syndication, acceptance credit, counseling, insurance,
etc.

Definition of a Merchant Banker

The Notification of the Ministry of Finance defines merchant banker as

“Any person who is engaged in the business of issue management either by
making arrangements regarding selling, buying or subscribing to securities
as manager-consultant, advisor or rendering corporate advisory services in
relation to such issue management”

The Amendment Regulation specifies that issue management consist of

Prospectus and other information relating to issue, determining financial
structure, tie-up of financiers and final allotment and refund of the
subscriptions, underwriting and portfolio management services.

In the words of Skully “A Merchant Bank could be best defined as a

financial institution conducting money market activities and lending,
underwriting and financial advice, and investment services whose
organization is characterized by a high proportion of professional staff able
to able to approach problems in an innovative manner and to make and
implement decisions rapidly.”

Merchant banks offer consultancy services for mergers & acquisitions and
financial restructuring, and the associated financing (raising the necessary
funds). Merchant banks are banks that specialize in activities that facilitate
trade and commerce. This typically involves international finance, long term
loans to companies and underwriting. Merchant banks do not offer usual
banking services to the general public

The merchant banker helps in distributing various securities like equity

shares, debt instruments, mutual fund products, fixed deposits, insurance
products, commercial paper to name a few. The distribution network of the
merchant banker can be classified as institutional and retail in nature. The
institutional network consists of mutual funds, foreign institutional investors,
private equity funds, pension funds, financial institutions etc. The size of
such a network represents the wholesale reach of the merchant banker. The
retail network depends on networking with investors.

Merchant Banking in India

Merchant banking activity was formally initiated into the Indian capital
Markets when Grindlays bank received the license from reserve bank in
1967. Grindlays started with management of capital issues, recognized the
needs of emerging class of Entrepreneurs for diverse financial services
ranging from production planning and system design to market research.
Even it provides management consulting services to meet the Requirements
of small and medium sector rather than large sector. Citibank Setup its
merchant banking division in 1970. The various tasks performed by this
divisions namely assisting new entrepreneur, evaluating new projects,
raising funds through borrowing and issuing equity. Indian banks Started
banking Services as a part of multiple services they offer to their clients
from 1972. State bank of India started the merchant banking division in
1972. In the Initial years the SBI's objective was to render corporate advice
And Assistance to small and medium entrepreneurs. Merchant banking
activities is of course organized and undertaken in several forms.
Commercial banks and foreign development finance institutions have
organized them through formation divisions, nationalized banks have formed
subsidiaries companies and share brokers and consultancies constituted
themselves into public limited companies or registered themselves as private
limited Companies. Some merchant banking outfits have entered into
collaboration with merchant bankers abroad with several branches

Registration of Merchant bankers with SEBI

It is mandatory for a merchant banker to register with the SEBI. Without

holding a certificate of registration granted by the Securities and Exchange
Board of India, no person can act as a merchant banker in India.
1) Only a body corporate other than a non-banking financial company shall
be eligible to get registration as merchant banker.
2) The applicant should not carry on any business other than those connected
with the Securities market.
3) All applicants for Merchant Bankers should have qualification in Finance,
law or Business Management.
4) The applicant should have infrastructure like office space, equipment,
manpower etc.
5) The applicant must have at least two employees with prior experience in
merchant banking.
6) Any associate company, group company, subsidiary or interconnected
company of the applicant should not have been a registered merchant banker
7) The applicant should not have been involved in any securities scam or
proved guilt for
any offence
8) The applicant should have a minimum net worth of Rs.5 Crores.

The various categories for which registration can be obtained are:

1) Category I –To carry on the activity of issue management and to act

as adviser, consultant, manager, underwriter, portfolio manager.
 2) Category II - to act as adviser, consultant, co-manager, underwriter,
portfolio manager.

3) Category III - to act as underwriter, adviser or consultant to an issue.

4) Category IV – to act only as adviser or consultant to an issue

The capital requirement for carrying on activity as merchant banker:

The capital requirement depends upon the category. The minimum net worth
requirement
for acting as merchant banker is given below:
Category I – Rs. 5 crores
Category II – Rs. 50 lakh
Category III – Rs. 20 lakh
Category IV – Rs. Nil

Procedure for getting registration:

An application should be submitted to SEBI in Form A of the SEBI
(Merchant Bankers) Regulations, 1992. SEBI shall consider the application
and on being satisfied, issues a certificate of registration in Form B of the
SEBI (Merchant Bankers) Regulations, 1992.
Registration fee payable to SEBI:
Rs.5 lakhs which should be paid within 15 days of date of receipt of
intimation regarding grant of certificate. Validity period of certificate of
registration is three years from the date of issue. Three months before the
expiry period, an application along with renewal fee of 2.5 lakhs should be
submitted to SEBI in Form A of the SEBI (Merchant Bankers) Regulations,
1992. SEBI shall consider the application and on being satisfied renew
certificate of registration for a further period of 3 years.

Role of merchant banker in a primary market issue management

Merchant banker is the intermediary appointed by companies in the primary
market issue. It has to look at the entire issue management and work as the
Manager to the Public Issue.
Principal steps that Merchant bankers have to perform in a bringing up a
Public issue are as follows :

Vetting of Prospects: The prospectus is a document to communicate

information about the company and the proposed security issue to the
investing public. The draft prospectus containing the disclosures has to be
vetted by SEBI before a public issue is made.

Appointment of Underwriters: An underwriter agrees to subscribe to a

given number of shares in the event the public do not subscribe to them. The
underwriter, in essence, stands guarantee for public subscription in
consideration for the underwriting commission.
Appointment of bankers: The bankers to the issue collect money on behalf
of the company from the applicants.

Appointment of Registrars: The registrars to issue perform a series of tasks

from the time the subscription is closed to the time the allotment is made.

Appointment of Brokers and Principal Brokers: The brokers to the issue

facilitate its subscription. Filing of the Prospectus with the Registrar of
Companies

Printing and dispatch of prospectus and application form: After the

prospectus is filed with the Registrar of Companies, the company should
print the prospectus and the application form.

Filing of Initial Listing Application: Within ten days of filing the

prospectus, the initial listing application must be made to the concerned
stock exchanges, along with the initial listing fees.

Promotion of the Issue: The promotional campaign typically commences

with the filing of the prospectus with the Registrar of Companies and ends
with the release of the statutory announcement of the issue.

Statutory Announcement: The statutory announcement of the issue must

be made after seeking the approval of the lead stock exchange. This must be
published at least ten days before the opening of the subscription list
Collection of Applications: The statutory announcement (as well as the
prospectus) specifies when the subscription would open when it would
close, and the banks where the applications can be made.

Processing of Applications: The application forms received by the bankers

are transmitted to the registrars to the issue for processing.

Establishing the Liability Underwriters: If the issue is undersubscribed,

the liability of the underwriters has to be established.

Allotment of Shares: If the issue is under-subscribed or just fully

subscribed, the company may allot shares applied for by the applicants after
securing the formal approval of the concerned stock exchanges(s)

Listing of the Issue: The detailed listing application should be submitted to

the concerned stock exchanges along with the listing agreement and the
listing fee.

Costs of Public Issue: The cost of public issue is normally between 8 and
12 per cent depending on the size of the issue and the level of marketing
effort. The important expenses incurred for a public issue are Underwriting
Expenses, Brokerage, Fees to the Managers of the Issue, Fees for Registrars
to the Issue, Printing Expenses, Postage Expenses, Advertising and Publicity
Expenses, Listing fees, Stamp duty. In addition to the above procedural
matter, the most important issue relates to the pricing of the issue. The
merchant banker has to see that the issue is priced properly.
INTRODUCTION:

Canara Bank is also one of the leading Merchant Bankers in India,

offering specialized services to Banks, PSUs, State owned Corporations,
Local Statutory bodies and Corporate sector.We are SEBI registered
Category I Merchant Banker to render Issue Management (Public / Rights /
Private Placement Issues), Underwriting, Consultancy and Corporate
Advisory Services etc. We also hold SEBI registration Certificate to act as
"Bankers to an Issue" with network of exclusive Capital Market Service
Branches and over 100 designated CBS Branches to handle collecting /
Refund / Paying Banker assignments. We do undertake "project appraisals"
with linkage to resource raising plans from Capital Market / Debt Markets
and facilitate tie-ups with Banks / Financial Institutions and Potential
Investors.

Our uniqueness is extending services under single window concept covering

the following areas:

1. Merchant Banking
2. Commercial Banking
3. Investments
4. Bankers to Issue - Escrow Bankers
5. Underwriting
6. Loan Syndication

As leading Merchant Bankers in India, we have associated with issues

ranging from Rs.1 crore to Rs.1500 crores, involving various types of
industries, banks, statutory Bodies etc. and have an edge in handling Private
Placement issues – both retail & HNIs.

SPECTRUM OF SERVICES:
  Equity Issue (Public/Rights) Management
 Debt Issue Management
 Private Placements
 Project Appraisals
 Monitoring Agency Assignments
 IPO Funding
 Security Trustee Services
 Agriculture Consultancy Services
 Corporate Advisory Services
 Mergers and Acquisitions
 Buy Back Assignments
 Share Valuations
 Syndication
 ESOS Certification

ISSUE MANAGEMENT SERVICES:

 Project Appraisal
 Capital structuring
 Preparation of offer document
 Tie Ups (placement)
 Formalities with SEBI / Stock Exchange / ROC, etc.
 Underwriting
 Promotion /Marketing of Issues
 Collecting Banker / Banker to an issue
  Post Issue Management
 Refund Bankers
 Debenture Trusteeship
 Registrar & Transfer Agency (our Subsidiary)

We constantly update the list of Potential Investors - Institutions, Provident,

Pension & Gratuity Funds, High Net Worth Individuals and others and
continuously assess their investment appetites and help issuers in effective
marketing of the products.

CONCLUSION
 The merchant banker plays a vital role in channelising the financial
surplus of the society into productive investment avenues. Hence before
selecting a merchant banker, one must decide, the services for which he is
being approached. Selecting the right intermediary who has the necessary
skills to meet the requirements of the client will ensure success.
It can be said that this project helped me to understand every details
about Merchant Banking and in future how it’s going to get emerged in the
Indian economy. Hence, Merchant Banking can be considered as essential
financial body in Indian financial system.
Market development is predicted on a sound, fair and transparent regulatory
framework. To sustain the growth of the market and crystallize the growing
awareness and interest into a committed, discerning and growing awareness
and interest into an essential to remove the trading malpractice and structural
inadequacies prevailing in the market, and provide the investors an
organized, well regulated.

Innovative Financial instruments

A depositary receipt (DR) is a type of negotiable (transferable) financial
security that is traded on a local stock exchange but represents a security,
usually in the form of equity, that is issued by a foreign publicly listed
company. The DR, which is a physical certificate, allows investors to hold
shares in equity of other countries. One of the most common types of DRs is
the American depositary receipt (ADR), which has been offering companies,
investors and traders global investment opportunities since the 1920s.

Since then, DRs have spread to other parts of the globe in the form of global
depositary receipts (GDRs) (the other most common type of DR), European
DRs and international DRs. ADRs are typically traded on a U.S. national
stock exchange, such as the New York Stock Exchange (NYSE) or the
American Stock Exchange, while GDRs are commonly listed on European
stock exchanges such as the London Stock Exchange. Both ADRs and
GDRs are usually denominated in U.S. dollars, but can also be denominated
in Euros.

American Depositary Receipt

Introduction

ADR is a negotiable certificate issued by a U.S. bank representing a

specified number of shares (or one share) in a foreign stock that is traded on
a U.S. exchange. ADRs are denominated in U.S. dollars, with the underlying
security held by a U.S. financial institution overseas. ADRs help to reduce
administration and duty costs that would otherwise be levied on each
transaction.

American depositary receipt (ADR) was introduced in 1927 as a more

convenient way for investors to buy and sell shares of foreign corporations.
Put simply, ADRs represent a specific number (or fractions) of a share in a
company that doesn’t already have a stock listed on the US stock exchanges
and trade like a stock in the open market.

Background of ADR

Back in the days, it was very complicated to buy shares in different

countries, which involved dealing with tax and currency issues.
Subsequently, ADR was introduced to let U.S. banks buy shares from a
foreign company and re-issue them on the New York Stock Exchange
(NYSE), American Stock Exchange (AMEX) or the Nasdaq. During the
introduction, the bank will also determine how many shares will correspond
to each home country share. The reason why it isn’t a 1 to 1 relationship is
due to the fact that banks want to price shares of ADR high enough to
perceive substantial value and low enough for individual investors to take
advantage. For example, exchange rates can make certain stock look like a
penny stock, which will have a negative psychological effect on investors in
the U.S.
ADRs mean for us

ADRs provides investors a great way to diversify into foreign markets

because it’s highly liquid, easy to manage and it trades just like any other
stock. While there are brokerage firms like Etrade that will allow you to buy
stocks in foreign countries, ADRs are available for everyone provided that
the company you want to invest in has an ADR set up.

As an average investor who picks individual stocks, there is no reason why

you shouldn’t look into ADRs. If you haven’t taken advantage yet, you are
missing out since the additional diversification and ease of management is
well worth it.

Types of ADR program

When a company establishes an American Depositary Receipt program, it

must decide what exactly it wants out of the program, and how much time,
effort and resources they are willing to commit. For this reason, there are
different types of programs that a company can choose.

Unsponsored shares

Unsponsored shares are a form of Level I ADRs that trade on the over-the-
counter (OTC) market. These shares are issued in accordance with market
demand, and the foreign company has no formal agreement with a
depositary bank. Unsponsored ADRs are often issued by more than one
depositary bank. Each depositary services only the ADRs it has issued.

Due to a recent SEC rule change making it easier to issue Level I depositary
receipts, both sponsored and unsponsored, hundreds of new ADRs have
been issued since the rule came into effect in October 2008. The majority of
these were unsponsored Level I ADRs, and now approximately half of all
ADR programs in existence are unsponsored.

Level I (OTC)

Level 1 depositary receipts are the lowest level of sponsored ADRs that can
be issued. When a company issues sponsored ADRs, it has one designated
depositary who also acts as its transfer agent.

A majority of American depositary receipt programs currently trading are

issued through a Level 1 program. This is the most convenient way for a
foreign company to have its equity traded in the United States.

Level 1 shares can only be traded on the OTC market and the company has
minimal reporting requirements with the U.S. Securities and Exchange
Commission (SEC). The company is not required to issue quarterly or
annual reports in compliance with U.S. GAAP. However, the company must
have a security listed on one or more stock exchange in a foreign jurisdiction
and must publish in English on its website its annual report in the form
required by the laws of the country of incorporation, organization or
domicile.

Companies with shares trading under a Level 1 program may decide to

upgrade their program to a Level 2 or Level 3 program for better exposure in
the United States markets.

Level II (listed)
Level 2 depositary receipt programs are more complicated for a foreign
company. When a foreign company wants to set up a Level 2 program, it
must file a registration statement with the US SEC and is under SEC
regulation. In addition, the company is required to file a Form 20-F
annually. Form 20-F is the basic equivalent of an annual report (Form 10-K)
for a U.S. company. In their filings, the company is required to follow U.S.
GAAP standards or IFRS as published by the IASB.

The advantage that the company has by upgrading their program to Level 2
is that the shares can be listed on a U.S. stock exchange. These exchanges
include the New York Stock Exchange (NYSE), NASDAQ, and the
American Stock Exchange (AMEX).

While listed on these exchanges, the company must meet the exchange’s
listing requirements. If it fails to do so, it may be delisted and forced to
downgrade its ADR program.

Level III (offering)

A Level 3 American Depositary Receipt program is the highest level a

foreign company can sponsor. Because of this distinction, the company is
required to adhere to stricter rules that are similar to those followed by U.S.
companies.

Setting up a Level 3 program means that the foreign company is not only
taking steps to permit shares from its home market to be deposited into an
ADR program and traded in the U.S.; it is actually issuing shares to raise
capital. In accordance with this offering, the company is required to file a
Form F-1, which is the format for an Offering Prospectus for the shares.
They also must file a Form 20-F annually and must adhere to U.S. GAAP
standards or IFRS as published by the IASB. In addition, any material
information given to shareholders in the home market, must be filed with the
SEC through Form 6K.

Foreign companies with Level 3 programs will often issue materials that are
more informative and are more accommodating to their U.S. shareholders
because they rely on them for capital. Overall, foreign companies with a
Level 3 program set up are the easiest on which to find information.

ADRs' Special Risks

Of course, even though they trade in US dollars and can, at least on the
surface, closely mimic the look and feel of American stocks, ADRs come
with their own set of special considerations to keep in mind.

Currency risk: If the value of the US dollar rises against the value of the
company's home currency, a good deal of the company's intrinsic profits
might be wiped out in translation. Conversely, if the US dollar weakens
against the company's home currency, any profits it makes will be enhanced
for a US owner. For more information on how this could damage or inflate
your results, read The Danger of Investing in International Bonds.

Political risk: ADR status does not insulate a company's stock from the
inherent risk of its home country's political stability. Revolution,
nationalization, currency collapse or other potential disasters may be greater
risk factors in other parts of the world than in the US, and those risks will be
clearly translated through any ADR that originates in an affected nation.
Inflation risk: Countries around the globe may be more, or less, prone to
inflation than the US economy is at any given time. Those with higher
inflation rates may find it more difficult to post profits to an US owner,
regardless of the company's underlying health.

In other words, ADRs are just what they seem: a representation of a foreign
stock, rather than an actual holding in the company. Because of all of the
considerations listed above, an ADR of a foreign company in the US. may
trade a little ahead or a little behind the price the company commands in its
own currency in its own home base. But it's safe to say that buying an ADR
is the closest an American investor can come to participating directly in the
rest of the world's

GDR (Global Depository Receipts)

A GDR is issued and administered by a depositary bank for the corporate

issuer. The depositary bank is usually located, or has branches, in the
countries in which the GDR will be traded. The largest depositary banks in
the United States are JP Morgan, the Bank of New York Mellon, and
Citibank.

A GDR is based on a Deposit Agreement between the depositary bank and

the corporate issuer, and specifies the duties and rights of each party, both to
the other party and to the investors. Provisions include setting record dates,
voting the issuer’s underlying shares, depositing the issuer’s shares in the
custodian bank, the sharing of fees, and the execution and delivery or the
transfer and the surrender of the GDR shares.
A separate custodian bank holds the company shares that underlie the
GDR. The depositary bank buys the company shares and deposits the shares
in the custodian bank, then issues the GDRs representing an ownership
interest in the shares. The DR shares actually bought or sold are called
depositary shares.

The custodian bank is located in the home country of the issuer and holds
the underlying corporate shares of the GDR for safekeeping. The custodian
bank is generally selected by the depositary bank rather than the issuer, and
collects and remits dividends and forwards notices received from the issuer
to the depositary bank, which then sends them to the GDR holders. The
custodian bank also increases or decreases the number of company shares
held per instructions from the depositary bank.

The voting provisions in most deposit agreements stipulate that the

depositary bank will vote the shares of a GDR holder according to his
instructions; otherwise, without instructions, the depositary bank will not
vote the shares.

Advantages & disadvantages

GDRs, like ADRs, allow investors to invest in foreign companies without

worrying about foreign trading practices, different laws, or cross-border
transactions. GDRs offer most of the same corporate rights, especially
voting rights, to the holders of GDRs that investors of the underlying
securities enjoy.

Other benefits include easier trading, the payment of dividends in the GDR
currency, which is usually the United States dollar (USD), and corporate
notifications, such as shareholders’ meetings and rights offerings, are in
English. Another major benefit to GDRs is that institutional investors can
buy them, even when they may be restricted by law or investment objective
from buying shares of foreign companies.

GDRs also overcome limits on restrictions on foreign ownership or the

movement of capital that may be imposed by the country of the corporate
issuer, avoids risky settlement procedures, and eliminates local or transfer
taxes that would otherwise be due if the company’s shares were bought or
sold directly. There are also no foreign custody fees, which can range from
10 to 35 basis points per year for foreign stock bought directly.

GDRs are liquid because the supply and demand can be regulated by
creating or canceling GDR shares.

GDRs do, however, have foreign exchange risk if the currency of the issuer
is different from the currency of the GDR, which is usually USD.

The main benefit to GDR issuance to the company is increased visibility in

the target markets, which usually garners increased research coverage in the
new markets; a larger and more diverse shareholder base; and the ability to
raise more capital in international markets.

GRD Market

As derivatives, depositary receipts can be created or canceled depending on

supply and demand. When shares are created, more corporate stock of the
issuer is purchased and placed in the custodian bank in the account of the
depositary bank, which then issues new GDRs based on the newly acquired
shares. When shares are canceled, the investor turns in the shares to the
depositary bank, which then cancels the GDRs and instructs the custodian
bank to transfer the shares to the GDR investor. The ability to create or
cancel depositary shares keeps the depositary share price in line with the
corporate stock price, since any differences will be eliminated through
arbitrage.

The price of a GDR primarily depends on its depositary ratio (aka DR

ratio), which is the number of GDRs to the underlying shares, which can
range widely depending on how the GDR is priced in relation to the
underlying shares; 1 GDR may represent an ownership interest in many
shares of corporate stock or fractional shares, depending on whether the
GDR is priced higher or lower than corporate shares.

Most GDRs are priced so that they are competitive with shares of like
companies trading on the same exchanges as the GDRs. Typically, GDR
prices range from $7 - $20. If the GDR price moves too far from the
optimum range, more GDRs will either be created or canceled to bring the
GDR price back within the optimum range determined by the depositary
bank. Hence, more GDRs will be created to meet increasing demand or more
will be canceled if demand is lacking or the price of the underlying company
shares rises significantly.

Most of the factors governing GDR prices are the same that affects stocks:
company fundamentals and track record, relative valuations and analysts’
recommendations, and market conditions. The international status of the
company is also a major factor.
On most exchanges GDRs trade just like stocks, and also have a T+3
settlement time in most jurisdictions, where a trade must be settled in 3
business days of the trading exchange.

The exchanges on which the GDR trades are chosen by the company.
Currently, the stock exchanges trading GDRs are the:

1. London Stock Exchange,

2. Luxembourg Stock Exchange,
3. Dubai International Financial Exchange (DIFX),
4. Singapore Stock Exchange,
5. Hong Kong Stock Exchange.

Companies choose a particular exchange because it feels the investors of the

exchange’s country know the company better, because the country has a
larger investor base for international issues, or because the company’s peers
are represented on the exchange. Most GDRs trade on the London or
Luxembourg exchanges because they were the 1st to list GDRs and because
it is cheaper and faster to issue a GDR for those exchanges.

Many GDR issuers also issue privately placed ADRs to tap institutional
investors in the United States. The market for a GDR program is broadened
by including a 144A private placement offering to Qualified Institutional
Investors in the United States. An offering based on SEC Rule 144A
eliminates the need to register the offering under United States security laws,
thus saving both time and expense. However, a 144A offering must, under
Rule 12g3-2(b), provide a home country disclosure in English to the SEC or
the information must be posted on the company’s website.
Indian Depository Receipt (IDR)

Definition

According to Companies (Issue of Indian Depository Receipts) Rules, 2004,

IDR is an instrument in the form of a Depository Receipt created by the
Indian depository in India against the underlying equity shares of the issuing
company. In an IDR, foreign companies would issue shares, to an Indian
Depository (say National Security Depository Limited – NSDL), which
would in turn issue depository receipts to investors in India. The actual
shares underlying the IDRs would be held by an Overseas Custodian, which
shall authorize the Indian Depository to issue the IDRs.

The IDRs would have following features:

1) Overseas Custodian : It is a foreign bank having branches in India and

requires approval from Finance Ministry for acting as custodian and Indian
depository has to be registered with SEBI.

2)Approvals for issue of IDRs : IDR issue will require approval from SEBI
and application can be made for this purpose 90 days before the issue
opening date.

3)Listing : These IDRs would be listed on stock exchanges in India and

would be freely transferable.

Eligibility conditions for overseas companies to issue IDRs:

Capital : The overseas company intending to issue IDRs should have paid
up capital and free reserve of atleast $ 100 million.

Sales turnover : It should have an average turnover of $ 500 million during

the last three years.

Profits/dividend : Such company should also have earned profits in the last
5 years and should have declared dividend of at least 10% each year during
this period.

Debt equity ratio : The pre-issue debt equity ratio of such company should
not be more than 2:1.

Extent of issue : The issue during a particular year should not exceed 15%
of the paid up capital plus free reserves.

Redemption : IDRs would not be redeemable into underlying equity shares

before one year from date of issue.

Denomination : IDRs would be denominated in Indian rupees, irrespective

of the denomination of underlying shares.

Benefits : In addition to other avenues, IDR is an additional investment

opportunity for Indian investors for overseas investment

Indian Depository Receipt (IDR):

A Background

An IDR is an instrument denominated in Indian Rupees in the form of a

depository receipt created by a ‘Domestic Depository’ (custodian of
securities registered with SEBI) against the underlying equity of the issuing
company in order to enable foreign companies to raise funds from the Indian
securities markets. The receipts are based on a ratio of shares equivalent to
depository receipts.

Eligible companies resident outside India are allowed to issue IDRs through
a Domestic Depository pursuant to Circular No. SEBI / CFD / DIL / DIP /
20 /2006 / 3 / 4 dated April 3, 2006 and the provisions of Issue of Capital
and Disclosure Requirements (“ICDR”) Regulations 2009 (which replaced
the SEBI (Disclosure and Investor Protection) Guidelines, 2000). In
addition, the Circular and the ICDR Regulations 2009, permit persons
resident in India and outside India to purchase, possess, transfer and redeem
IDRs.

Qualifying companies resident outside India issue IDRs through a Domestic

Depository subject to compliance with the Companies (Issue of Depository
Receipts) Rules, 2004 and subsequent amendments made thereto and the
ICDR Regulations, 2009.

In addition, the regulations state that in the case of raising of funds through
the issuance of IDRs by financial/banking companies having a presence in
India, either through a branch or subsidiary, the approval of the sectoral
regulator(s) should be obtained before the issuance of IDRs.  Therefore, the
approval of the Reserve Bank of India (RBI) will need to be obtained for the
Standard Chartered IDR.

The SEBI guidelines permit only those companies listed in their home
market for at least three years and which have been profitable for three of
the preceding five years to make IDR issues.  As the issuance of the IDR by
SCP would be the first IDR ever undertaken, there will be a number of
challenges including the structure of the instrument, how one trades in it,
what kind of returns can be made on the instrument, and what are the risks
involved.

Benefits of IDRs for Indian Investors and Rights

No resident Indian individual can hold more than $200,000 worth of foreign
securities purchased per year as per Indian foreign exchange regulations.
However, this will not be applicable for IDRs which gives Indian residents
the chance to invest in an Indian listed foreign entity.

Additional key requisites for investing in foreign securities such as a

securities trading account outside India to hold foreign securities, know your
customer norms (KYC) with foreign broker and foreign bank account to
hold funds are generally too cumbersome for most Indian investors. Such
requirements are avoided in holding IDRs.

Whatever benefits accrue to the shares, by way of dividend, rights, splits or

bonuses would be passed on to IDR holders also, to the extent permissible
under Indian law.
Benefits for International Issuers

The main benefit would be in terms of branding, besides allowing foreign

companies to access Indian capital. IDRs also allow the creation of
acquisition currency and a management incentive tool. Issuers have the
option to reserve a proportion of the issue for their employees.

Challenges for IDRs

There is the possibility of IDR issues being undersubscribed if they are not
well marketed or fail to catch the imagination of investors.  In addition, the
challenges mentioned below are certain challenges with respect to the
issuance of IDRs.

1. Stringent eligibility norms: The stringent eligibility criteria,

disclosure and corporate governance norms (Although in the
investor’s interests, they compare unfavorably with listing norms on
other tier II global exchanges such as Luxembourg, London’s
Alternate Investment Market (AIM) and Dubai. This could result in
higher compliance costs for companies seeking to tap the Indian
capital markets).

2. Fungibility: Current regulations do not provide for the exchange of

equity shares into IDRs after the initial issuance i.e. reverse fungibility
is not allowed.

3. Tradability of IDRs:  How one trades in the instrument/how the

instruments are traded.
 4. Returns on IDRs: What kind of returns would be made on the
instrument.

5. Risks: What risks are involved given that the same shares would be
simultaneously trading in London and Hong Kong.

6. Taxation:  Lack of clarity on taxation.  It is not clear whether IDRs

are exempt from capital gains tax.

7. Voting Rights:  It is not entirely clear whether IDR holders will have
voting rights or not – the SEBI guidelines do not specifically mention
voting rights, it leaves that to the discretion of the issuer.

8. Market:  Indian financial markets are still considered volatile and

contain emerging market risk.

Tax issues:

Related to IDRs

Indian investors need to consider the tax implications of investment in the

IDRs. While Section 605A of the Companies Act, 1956 (the “Companies
Act”) discusses IDRs, there are no specific provisions regarding capital
gains taxation of IDRs in the Companies Act or in the Income Tax Act,
1961.  Therefore, the general rules relating to capital gains taxation apply
and no benefits for long term holders of IDRs (ie. if the Securities
Transaction Tax is paid, there is no capital gains tax on long term holders of
listed securities) are available.  It is possible that the upcoming Direct Tax
Code may clarify the issue but as of now the capital gains tax treatment of
IDRs is not favorable.