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Capital Market

Chapter 1 - Capital Market in India


The capital market is the market for securities, where companies and
governments can raise long term funds. Selling stock and selling bonds
are two ways to generate capital and long term funds. Thus bond markets
and stock markets are considered capital markets. The capital markets
consist of the primary market, where new issues are distributed to
investors, and the secondary market, where existing securities are traded
.The Indian Equity Markets and the Indian Debt markets together form the
Indian Capital markets

Indian Equity Market at present is a lucrative field for investors. Indian

stocks are profitable not only for long and medium-term investors but also
the position traders, short-term swing traders and also very short term
intra-day traders. In India as on December 30 2007, market capitalisation
(BSE 500) at US$ 1638 billion was 150 per cent of GDP, matching well with
other emerging economies and selected matured markets.

For a developing economy like India, debt markets are crucial sources of
capital funds. The debt market in India is amongst the largest in Asia. It
includes government securities, public sector undertakings, other
government bodies, financial institutions, banks and companies.

Indian Capital Market

Equity Market Debt Market

Primary Seconda Primary Seconda

Market ry Market ry

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Capital Market

Equity market in India:-

Stock is the type of equity security with which most people are
familiar. When investors (savers) buy stock, they become owners of a
"share" of a company's assets and earnings. If a company is successful,
the price that investors are willing to pay for its stock will often rise and
shareholders who bought stock at a lower price then stand to make a
capital profit. If a company does not do well, however, its stock may
decrease in value and shareholders can lose money. Stock prices are also
subject to both general economic and industry-specific market factors.

The equity market is classified as :-

(a) Primary market

(b) Secondary market

(a) Primary market:-

The primary market provides the channel for creation of new
securities through the issuance of financial instruments by public
companies as well as government companies , bodies and agencies.

Features of primary markets are:

 This is the market for new long term 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 primary market issuance is done either through public issue or

private placement . A public issue does not limit any entity in investing
while in private placement , the issuance is done to select people. In
terms of Indian Companies Act , 1956 as issue becomes public if it

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Capital Market

results in allotment to more than 50 persons. This means an issue

resulting in allotment to less than 50 persons is private placement .

An IPO is the first sale of stock by a company to the public. In this market
company can raise money by issuing equity. If the company has never
issued equity to the public, it's known as an IPO. Mostly public companies
go for IPO. But large privately-owned companies may also go for an IPO to
become publicly traded. In an IPO the company offloads a certain
percentage of its total shares to the public at a certain` price In an IPO,
the issuer obtains the assistance of an underwriting firm, which helps it
determine what type of security to issue (common or preferred), best
offering price and time to bring it to market.. Most IPO’S these days do not
have a fixed offer price. Instead they follow a method called BOOK
BUILDIN PROCESS, where the offer price is placed in a band or a range
with the highest and the lowest value (refer to the newspaper clipping on
the page). The public can bid for the shares at any price in the band
specified. Once the bids come in, the company evaluates all the bids and
decides on an offer price in that range. After the offer price is fixed, the
company allots its shares to the people who had applied for its shares or
returns them their money in case of non allotment of shares.

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Capital Market

Advantages of going public

Increased Capital

A public offering will allow a company to raise capital to use for various
corporate purposes such as working capital, acquisitions, research and
development, marketing, and expanding plant and equipment.


Once shares of a company are issue through an IPO & traded on a public
exchange, those shares have a market value and can be resold. This
allows a company to attract and retain employees by offering stock
incentive packages to those employees. Moreover, it also provides
investors in the company the option to trade their shares thus enhancing
investor confidence.

Increased Prestige

Public companies often are better known and more visible than private
companies, this enables them to obtain a larger market for their goods or
services. Public companies are able to have access to larger pools of
capital as well as different types of capital.


Public trading of a company's shares sets a value for the company that is
set by the public market and not through more subjective standards set
by a private valuator. This is helpful for a company that is looking for a
merger or acquisition. It also allows the shareholders to know the value of
the shares.

Increased wealth

The founders of the company often have the sense of increased wealth as
a result of the IPO. Prior to the IPO these shares were illiquid and had a
more subjective price. These shares now have an ascertainable price and
after any lockup period these shares may be sold to the public, subject to
limitations of law.

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Capital Market

Disadvantages of going Public

Time and Expense

Conducting an IPO is time consuming and expensive. A successful IPO can

take up to a year or more to complete and a company can expect to
spend large amount of money on attorneys, accountants, and printers. In
addition, the underwriter's fees can range from 3% to 10% of the value of
the offering. Due to the time and expense of preparation of the IPO, many
companies simply cannot afford the time or spare the expense of
preparing the IPO.


Once a company goes public it comes under the purview of SEBI . It is

supposed to file quarterly results with SEBI and follow other regulations as
per SEBI guidelines. .

Decisions based upon Stock Price

Management's decisions may be affected by the market price of the

shares and the feeling that they must get market recognition for the
company's stock. They may give more consideration to market price of
the share and as a consequence may take a decision which is not prudent
& sound .

Regulatory Review

The Company will be open to review by the SEBI to ensure that the
company is making the appropriate filings with all relevant disclosures.

Falling Stock Price

If the shares of the company's stock fall, the company may lose market
confidence, decreased valuation of the company may affect lines of
credits, secondary offering pricing, the company's ability to maintain
employees, and the personal wealth of insiders and investors.


If a large portion of the company's shares are sold to the public, the
company may become a target for a takeover, causing insiders to lose
control. A takeover bid may be the result of shareholders being upset with
management or corporate raiders looking for an opportunity. Defending a
hostile bid can be both expensive and time consuming.

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Capital Market

Parameters to judge an IPO

Good investing principles demand that you study the minutes of details
prior to investing in an IPO. Here are some parameters you should


Is the company a family run business or is it professionally owned?

Even with a family run business what are the credibility and professional
qualifications of those managing the company? Do the top level managers
have enough experience (of at least 5 years) in the specific type of

Industry Outlook

The products or services of the company should have a good

demand and scope for profit.

Business Plans

Check the progress made in terms of land acquisition, clearances

from various departments, purchase of machinery, letter of credits etc. A
higher initial investment from the promoters will lead to a higher faith in
the organization.


Why does the company require the money? Is the company floating
more equity than required? What is the debt component? Keep a track on
the profits, growth and margins of the previous years. A steady growth
rate is the quality of a fundamentally sound company. Check the
assumptions the promoters are making and whether these assumptions or
expectations sound feasible.

Risk Factors

The offer documents will list our specific risk factors such as the
company’s liabilities, court cases or other litigations. Examine how these
factors will affect the operations of the company.

Key Names

Every IPO will have lead managers and merchant bankers. You can
figure out the track record of the merchant banker through the SEBI

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Capital Market


Compare the company’s PER with that of similar companies. With

this you can find out the P/E Growth ratio and examine whether its earning
projections seem viable.


You should have access to the brokers of the stock exchanges where
the company will be listing itself.

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Capital Market

Secondary market:-
Secondary market is the market for buying and selling securities of the
existing companies. Under this, securities are traded after being initially
offered to the public in the primary market and/or listed on the stock
exchange. The stock exchanges are the exclusive centres for trading of
securities. It is a sensitive barometer and reflects the trends in the
economy through fluctuations in the prices of various securities. It been
defined as, "a body of individuals, whether incorporated or not,
constituted for the purpose of assisting, regulating and controlling the
business of buying, selling and dealing in securities". There are 23 stock
exchanges in India. Listing on stock exchanges enables the shareholders
to monitor the movement of the share prices in an effective manner. This
assist them to take prudent decisions on whether to retain their holdings
or sell off or even accumulate further. However, to list the securities on a
stock exchange, the issuing company has to go through set norms and

Various aspects of secondary/ stock market in India :-

(a) Corporate Securities:

The stock exchanges are the exclusive centres for trading of securities.
Though the area of operation/jurisdiction of an exchange is specified at
the time of its recognition, they have been allowed recently to set up
trading terminals anywhere in the country. The three newly set up
exchanges (OTCEI, NSE and ICSE) were permitted since their
inception to have nation wide trading. The trading platforms of a
few exchanges are now accessible from many locations. Further,
with extensive use of information technology, the trading platforms
of a few exchanges are also accessible from anywhere through
the Internet and mobile devices. This made a huge difference in a
geographically vast country like India.

(b) Exchange Management:

Most of the stock exchanges in the country are organised as” Mutuals”
which was considered beneficial in terms of tax benefits and matters
of compliance. The trading members, who provide brokering services,
also own,control and manage the exchanges. This is not an effective
model for self -regulatory organisations as the regulatory and
public interest of the exchange conflicts with private interests.
Efforts are on to demutualise the exchanges whereby ownership,

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management and trading membership would be segregated from one

another. Two exchanges viz. OTCEI and NSE are demutualised
from inception, where ownership, management and trading are in the
hands of three different sets of people. This model eliminates
conflict of interest and helps the exchange to pursue market
efficiency and investor interest aggressively.

(c) Membership:

The trading platform of an exchange is accessible only to brokers. The

broker enters into trades in exchanges either on his own account or
on behalf of clients. No stock broker or sub-broker is allowed to buy, sell
or deal in securities, unless he or she holds a certificate of registration
granted by SEBI. A broker/sub-broker complies with the code of
conduct prescribed by SEBI. Over time, a number of brokers - proprietor
firms and partnership firms - have converted themselves into
corporates. The standards for admission of members stress on
factors, such as corporate structure, capital adequacy, track record,
education, experience, etc. and reflect a conscious endeavour to ensure
quality broking services.

(d) Listing:

A company seeking listing satisfies the exchange that at least 10% of the
securities, subject to a minimum of 20 lakh securities, were offered to
public for subscription, and the size of the net offer to the public
(i.e. the offer price multiplied by the number of securities
offered to the public, excluding reservations, firm allotment and
promoters' contribution) was not less than Rs. 100 crore, and the issue
is made only through book building method with allocation of 60%
of the issue size to the qualified institutional buyers. In the
alternative, it is required to offer at least 25% of the securities to

The company is also required to maintain the minimum level of non

- promoter holding on a continuous basis. 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. If they so wish, they can seek listing on other
exchanges as well. 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.
The basic norms for listing of securities on the stock exchanges are
uniform for all the exchanges. These norms are specified in the
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listing agreement entered into between the company and the concerned
exchange. The listing agreement prescribes a number of requirements to
be continuously complied with by the issuers for continued listing
and such compliance is monitored by the exchanges. It also
stipulates the disclosures to be made by the companies and the
corporate governance practices to be followed by them. SEBI has
been issuing guidelines/circulars prescribing certain norms to be
included in the listing agreement and to be complied with by the

A listed security is available for trading on the exchange. The

stock exchanges levy listing fees - initial fees and annual fees - from the
listed companies. It is a major source of income for many
exchanges. A security listed on other exchanges is also permitted
for trading. A listed company can voluntary delist its securities from
non-regional stock exchanges after providing an exit opportunity to
holders of securities in the region where the concerned exchange is
located. An exchange can, however, delist the securities compulsorily
following a very stringent procedure.

(e) Trading Mechanism:

The exchanges provide an on-line fully-automated Screen

Based Trading System (SBTS) where a member can punch into the
computer quantities of securities and the prices at which he likes to
transact and the transaction is executed as soon as it finds a
matching order from a counter party. SBTS electronically matches
orders on a strict price/time priority and hence cuts down on time,
cost and risk of error, as well as on fraud resulting in improved
operational efficiency. It allows faster incorporation of price sensitive
information into prevailing prices, thus increasing the informational
efficiency of markets. It enables market participants to see the full
market on real-time, making the market transparent. It allows a
large number of participants, irrespective of their geographical
locations, to trade with one another simultaneously, improving the
depth and liquidity of the market. It provides full anonymity by accepting
orders, big or small, from members without revealing their identity, thus
providing equal access to everybody. It also provides a perfect audit
trail, which helps to resolve disputes by logging in the trade
execution process in entirety.

(f) Trading Rules:

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Capital Market

Regulations have been framed to prevent insider trading as well as

unfair trade practices. The acquisitions and takeovers are permitted
in a well- defined and orderly manner. The companies are
permitted to buy back their securities to improve liquidity and enhance
the shareholders' wealth.

(g) Price Bands:

Stock market volatility is generally a cause of concern

for both policy makers as well as investors. To curb excessive
volatility, SEBI has prescribed a system of price bands. The price
bands or circuit breakers bring about a coordinated trading halt in
all equity and equity derivatives markets nation-wide. An index-based
market-wide circuit breaker system at three stages of the index
movement either way at 10%, 15% and 20% has been prescribed. The
movement of either S&P CNX Nifty or Sensex, whichever is
breached earlier, triggers the breakers. As an additional measure of
safety, individual scrip-wise price bands of 20% either way have been
imposed for all securities except those available for stock options.

(h) Demat Trading:

The Depositories Act, 1996 was passed to proved for

the establishment of depositories in securities with the objective of
ensuring free transferability of securities with speed, accuracy and
security by :-

(i) making securities of public limited companies freely transferable

subject to

certain exceptions;

(ii) dematerialising the securities in the depository mode; and

(iii) providing for maintenance of ownership records in a book entry


In order to streamline both the stages of settlement process, the

Act envisages transfer of ownership of securities electronically by book
entry without making the securities move from person to person. Two
depositories, viz. NSDL and CDSL, have come up to provide
instantaneous electronic transfer of securities. At the end of March
2002, 4,172 and 4,284 companies were connected to NSDL and
CDSL respectively. The number of dematerialised securities
increased to 56.5 billion at the end of March 2002. As on the same
date, the value of dematerialsied securities was Rs. 4,669 billion and

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Capital Market

the number of investor accounts was 4,605,588. All actively traded

scrips are held, traded and settled in demat form. Demat settlement
accounts for over 99% of turnover settled by delivery. This has almost
eliminated the bad deliveries and associated problems. To prevent
physical certificates from sneaking into circulation, it has been
mandatory for all new IPOs to be compulsorily traded in
dematerialised form. The admission to a depository for dematerialisation
of securities has been made a prerequisite for making a public or rights
issue or an offer for sale. It has also been made compulsory for public
listed companies making IPO of any security for Rs. 10 crore or more to do
the same only in dematerialised form.

(i) Charges:

A stock broker is required to pay a registration fee of Rs.5, 000

every financial year, if his annual turnover does not exceed Rs. 1
crore. If the turnover exceeds Rs. 1 crore during any financial year, he
has to pay Rs. 5,000 plus one-hundredth of 1% of the turnover in
excess of Rs.1 crore. After the expiry of five years from the date of
initial registration as a broker, he has to pay Rs. 5,000 for a block of
five financial years. Besides, the exchanges collect transaction charges
from its trading members. NSE levies Rs. 4 per lakh of turnover.

The maximum brokerage a trading member can levy in respect of

securities transactions is 2.5% of the contract price, exclusive of statutory
levies like SEBI turnover fee, service tax and stamp duty. However,
brokerage charges as low as 0.15% are also observed in the market.

(j) Trading Cycle:

Rolling settlement on T+3 basis gave way to T+2 from

April 2003. The market has moved close to spot/cash market.

(k) Risk Management:

To pre-empt market failures and protect investors,

the regulator/exchanges have developed a comprehensive risk
management system, which is constantly monitored and upgraded. It
encompasses capital adequacy of members, adequate margin
requirements, limits on exposure and turnover, indemnity insurance,
on-line position monitoring and automatic disablement, etc. They also
administer an efficient market surveillance system to curb excessive
volatility, detect and prevent price manipulations. A clearing corporation
assures the counterparty risk of each member and guarantees
financial settlement in respect of trades executed on NSE.

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Capital Market

Thus in a nutshell the following diagram explains what all is discussed

above –

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Capital Market

Debt Market in India:-

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Capital Market

For a developing economy like India, debt markets are crucial

sources of capital funds. The debt market in India is amongst the largest
in Asia. It includes government securities, public sector undertakings,
other government bodies, financial institutions, banks and companies. The
debt markets in India is divided into three segments, viz., Government
Securities, Public Sector Units (PSU) bonds, and corporate securities.

Debt – Market Segments

Government PSU Bonds Corporate

Securities Bonds
The market for
Government Securities comprises the Centre, State and State-sponsored
securities. Government securities (G-secs) or gilts are sovereign
securities, which are issued by the Reserve Bank of India (RBI) on behalf
of the Government of India (GOI). The GOI uses these funds to meet its
expenditure commitments. The PSU bonds are generally treated as
surrogates of sovereign paper, sometimes due to explicit guarantee and
often due to the comfort of public ownership. Some of the PSU bonds are
tax free, while most bonds including government securities are not tax-
free. The RBI also issues tax-free bonds, called the 6.5% RBI relief bonds,
which is a popular category of tax-free bonds in the market. Corporate
bond markets comprise of commercial paper and bonds. These bonds
typically are structured to suit the requirements of investors and the
issuing corporate, and include a variety of tailor- made features with
respect to interest payments and redemption.

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Capital Market


1. Central Government:-

Central government raises money through bond issuances, to fund


deficits and other short and long term funding requirements.

2. Reserve Bank of India:-

Reserve Bank Of India (RBI), the central bank of the country, acts as
investment banker to the government, raises funds for the government
through bond and T-bill issues, and also participates in the market through
open- market operations, in the course of conduct of monetary policy.

3. Primary dealers:-

Primary dealers are market intermediaries appointed by the Reserve Bank

of India who underwrite and make market in government securities

4. State Governments, municipalities and local bodies :-

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Capital Market

State governments , municipalities and local bodies issue

securities in the debt markets to fund their developmental projects, as
well as to finance their budgetary deficits.

5. Public sector units (PSU):-

Public Sector Units are large issuers of debt securities, for raising
funds to meet the long term and working capital needs.

6. Corporate treasuries:-

Corporate treasuries issue short and long term paper to meet the
financial requirements of the corporate sector.

7. Banks:-

Commercial banks are the largest investors in the debt markets,

particularly the treasury bill and G-sec markets. They have a statutory
requirement to hold a certain percentage of their deposits (currently the
mandatory requirement is 24% of deposits) in approved securities (all
government bonds qualify) to satisfy the statutory liquidity requirements.

8. Mutual funds :-

Mutual Funds have emerged as another important player in the debt

markets, owing primarily to the growing number of bond funds that have
mobilised significant amounts from the investors.

9. Foreign Institutional Investors:-

Foreign Institutional Investors are permitted to invest in Dated

Government Securities and Treasury Bills within certain specified limits.

10. Provident funds:-

Provident funds are large investors in the bond markets, as the prudential
regulations governing the deployment of the funds they mobilise,
mandate investments pre-dominantly in treasury and PSU bonds.

Primary market/ New Issue Market:-

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Capital Market

As in the case of equity primary market , this is the market in which

debt instruments – government securities, PSU Bonds & corporate bonds
are issued for the first time .

Government Securities:-

In case of government securities , it is the RBI which issues securities on

behalf of the government (both state as well as central government).
Thus RBI periodically conducts auction of GOI/SDL under Central/State
borrowing Treasury program as per the auction calendar and also under
MSS for GOI Securities.

The Primary issuance process involves:-


Yield-based auction Price-based auction.

In this, successful bids are decided In this, successful bids are filled up
by filling up the notified amount in terms of prices that are bid by
from the lowest bid upwards. participants from the highest price

This auction creates a new This auction facilitates the re-issue

security, every time an auction is of an existing security
completed & the name of the
security is the cut-off yield

For example, the G-sec 10.3% For example, in March 2001, RBI
2010 derives its name from the auctioned the 11.43% 2015
cut-off yield at the auction, which security. This was a G-sec, which
in this case was 10.3%, which also had been earlier issued and trading
becomes the coupon payable on in the market. The auction was for
the bond. an additional issue of this existing
security. The coupon rate and the
dates of payment of coupons and
redemption are already known.

The additional issue increases the

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cash flows only on these dates.

Capital Market

The two choices in treasury auctions, which are widely

known and used, are:

 Discriminatory Price Auctions (French Auction)

 Uniform Price Auctions (Dutch Auction)

In both these kinds of auctions, the winning bids are those that exhaust
the amount on offer, beginning at the highest quoted price (or lowest
quoted yield). In the Indian markets, discriminatory price auction as well
as uniform price auction is used for all bond issuances. Whether an
auction will be Dutch or French is announced in the notification of the

If all the successful bidders have to pay the cut-off price of Rs. 111.2, the
auction is called a Dutch auction, or a uniform price auction. If the
successful bidders have to pay the prices they have actually bid, the
auction fills up the notified amounts, in various prices at which each of
the successful bidders bid. This is called a French auction, or a
discriminatory price auction. Each successful bidder pays the actual price
bid by him.


1. Competitive Bid: Participants having SGL a/c & current a/c

2. Non-Competitive Bid: Participants not having SGL a/c & current



RBI announces the auction of G-sec through a press notification, and invites bids.

Front office takes a view about Bank's participation in the auction, taking into
consideration the market factors, Bank's
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of 56 and the existing portfolio.
Accordingly, proposal is placed before the Investment Committee
Capital Market

Investment committee consists of GM, AGM of different departments & CMD.

Proposal for investment is placed before the Investment Committee. Decision is

taken. NO

Bids are submitted through NDS_OM platform giving details of the quantum and
expected price/yield of securities. Report is generated.

Result of the auction is declared by RBI on the same day evening on NDS.

If bid is accepted either partially or fully, the same is entered and authorized in bank

Back-Office Operation:Duly authorized Deal Slip is verified by the back office. On

the day of allotment/settlement back office will settle the deal in the system &
Non-Competitive Bidding in Government Securities
categorising securities in HTM, AFS & HFT.

To enable medium and small investors to participate in the auction

process without taking the price risk in auctions, the Reserve Bank of India
has introduced a facility of non-competitive bidding in dated government
securities auctions for select set of investors. Non-competitive bidding
means that a person would be able to participate in the auctions of dated
government securities without having to quote the yield or price in the
bid. Thus, he will not have to worry about whether his bid will be on or off-
the-mark; as long as he bids in accordance with the scheme, he will be
allotted securities fully or partially.

Participants in the Scheme:

Participation in the Scheme of non-competitive bidding is open to any
person including firms, companies, corporate bodies, institutions,
provident funds, trusts and any other entity as prescribed by RBI. As the
focus is on the small investors lacking market expertise, the Scheme will
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be open to those who do not have current account (CA) or Subsidiary

General Ledger (SGL) account with the Reserve Bank of India. As an
exception, Regional Rural Banks (RRBs) and Urban Cooperative Banks
(UCBs) can also apply under this Scheme in view of their statutory

Amount offered for non-competitive bidding:

Non-competitive bids will be allowed up to 5 per cent of the notified
amount in the specified auctions of dated securities, within the notified
amount. That is, if the notified amount is Ra.1000 crore, the amount
reserved for non-competitive bidders would be Rs.50 crore and the
remaining Rs.950 crore will be put up for competitive auctions. The
minimum amount for bidding will be Rs.10, 000 (face value) and in
multiples in Rs.10,000.

Corporate Bonds :-
The corporate bond market has been in existence in India for a long time.
However, despite a long history, the size of the public issue segment of
the corporate bond market in India has remained quite insignificant.

Secondary Market :-
Like in the case of equity secondary market, the secondary debt
market involves buying and selling of debt instruments which are already
issued in the primary market or listed on the exchanges.

Government bonds are deemed to be listed as soon as they are issued.

Markets for government securities are pre-dominantly wholesale markets,
with trades done on telephonic negotiation. NSE WDM provides a trading
platform for Government bonds, and reports over 65% of all secondary
market trades in government securities.

Currently, transactions in government securities are required to be settled

on the trade date or next working day unless the transaction is through a
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broker of a permitted stock exchange in which case settlement can be on

T+2 basis. In NDS, all trades between members of NDS have to be
reported immediately. The settlement is routed through CCIL for all NDS

The lack of market infrastructure and comprehensive regulatory

framework coupled with low issuance leading to low liquidity in the
secondary market, narrow investor base, inadequate credit assessment
skills, high cost of issuance and lack of transparency in trades are some of
the major factors that hindered the growth of the private corporate debt

Factors affecting bond interest rates :

The key variables having a bearing on interest rate outlook are:-

 US 10 year government bond yields :

The correlation between Indian 10 yr G-sec has held reasonably well in

the recent past. Although, the correlation might not hold on a day to
day basis, but over a slightly longer period, the direction of the
movement of the Indian 10 yr bond is quite similar to that of the US 10
yr bond.

The yields of the bonds have increased as the green shoots of recovery
in the global economy has led to an increase in risk taking behaviour
among the investors who are selling bonds to enter other asset classes
which are relatively more risky and offers higher yields. The S&P’s
decision to lower ratings outlook on US sovereign debt to negative from
stable led to sell off in the US treasuries.

Similarly in India, the rally in equity markets since the election results
on 18th May might have led to some sell off in the bond markets
which have pushed the Indian 10 yr bond yields to 6.70% levels from
6.22% in Mid May, in line with the sharp rise in the US 10 yr bonds .

 Inflation / crude oil prices :

Inflation arises as the purchasing power of people increases, the

value of Rupee increases. To control the inflation and to suck excess
liquidity from the system the bonds are issued t higher yield.

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 Political stability / sovereign rating outlook :

The sense of political stability following election results has reduced

the risk of an outright sovereign rating downgrade by international
credit rating agencies in the near future . Although , the fiscal deficit
concerns remain, the continuity of the political regime will abate the
risk of runaway fiscal deficits. The reduced risk of sovereign rating
downgrade due to a stable government and a likely controllable
fiscal deficit scenario will therefore provide support to the bond
market sentiments.

 RBI policy stance / liquidity outlook:-

The bond interest rate is also affected by the RBI policy stance. If
the RBI goes for an expansionary monetary policy , then the bond
coupon rate will come down , as there will be ample liquidity in the
system which easily would meet the demand for the same. It is a
reverse situation when the RBI goes for a contractionary monetary
policy. This is because then the money supply in the economy would
be less as compared to the demand for the same and the
consequence would be hardening of the bond coupon rate.

Chapter 2- Frequently Asked Questions (FAQ’s)

1. What are the Sensex & the Nifty?

ANS:-The Sensex is an "index". An index is basically an indicator. It gives
you a general idea about whether most of the stocks have gone up or
most of the stocks have gone down. The Sensex is an indicator of all the
major companies of the BSE. The Nifty is an indicator of all the major
companies of the NSE. The sensex is calculated taking into consideration
the top 30 companies of Bombay Stock Exchange (BSE).In case of
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National Stock Exchange (NSE) , top 50 companies are taken into

consideration to calculating nifty.
If the Sensex goes up, it means that the prices of the stocks of most
of the major companies on the BSE have gone up. If the Sensex goes
down, this tells you that the stock price of most of the major stocks on the
BSE have gone down.
Just like the Sensex represents the top stocks of the BSE, the Nifty
represents the top stocks of the NSE.

2. Which are the top 30 companies of BSE & top 50

companies of NSE, which are used to calculate sensex &
nifty ?
ANS:- The following is the list of top 30 companies of BSE :-

The sensex 30 includes the following companies (As on 24th July


S. No. Name of the S. Name of the company

company No

1 Reliance Industies 16 Grasim Industries

2 Infosys Technologies 17 Maruti Suzuki

3 L &T 18 NTPC

4 ICICI Bank 19 Sterlite Industries

5 HDFC 20 Tata Power

6 ITC 21 Reliance Infrastructure

7 Reliance 22 Mahindra & Mahindra


8 Bharti Airtel 23 Jai Prakash Associates

9 HDFC Bank 24 Hero Honda

10 SBI 25 DLF

11 ONGC 26 Wipro

12 BHEL 27 Hindalco

13 Hindustan Unilever 28 Tata Motors

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14 Tata Consultancy 29 Sun Pharma

15 Tata Steel 30 ACC

The 30 companies that make up the Sensex are selected and reviewed
from time to time by an “index committee”. This “index committee” is
made up of academicians, mutual fund managers, finance journalists,
independent governing board members and other participants in the
financial markets.

The Nifty 50 Companies as on 24th July 2009 are as follows :-

S Name of the company S. Name of the company

.No No.

1 Reliance Industies 26 Hero Honda

2 Infosys Technologies 27 DLF

3 L &T 28 Wipro

4 ICICI Bank 29 Cipla

5 HDFC 30 Idea Celluar

6 ITC 31 Unitech

7 Bharti Airtel 32 Cairn

8 HDFC Bank 33 Hindalco

9 SBI 34 Reliance capital

10 ONGC 35 Tata Motors


12 Hindustan Unilever 37 Punjab National Bank

13 Tata Consultancy 38 Sun Pharma

14 Tata Steel 39 ACC

15 Grasim Industries 40 Ambuja Cement

16 Reliance Communication 41 ABB

17 Jindal Steel 42 Siemens

18 Axis Bank 43 Power Grid

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19 Maruti Suzuki 44 Reliance Power

20 NTPC 45 Suzlon Energy

21 Sterlite Industries 46 BPCL

22 Tata Power 47 HCL Technologies

23 Reliance Infrastructure 48 Ranbaxy Laboratories

24 Mahindra & Mahindra 49 Tata Communication

25 GAIL(I) 50 National Aluminium

3. What is market capitalisation ( Market cap ) ?

ANS:- Market cap or market capitalization is simply the worth of a
company in terms of it’s shares. To calculate the market cap of a particular
company, simply multiply the “current share price” by the “number of
shares issued by the company”. Thus,

Market Cap= Current Share Price X no. of shares issued

by the company.

Depending on the value of the market cap, the company will either be a
“mid-cap” or “large-cap” or “small-cap” company

4.What do we mean by ‘Free Float Market Capitalisation

ANS:- Many different types of investors hold the shares of a company.
These include government, founders( promoters ) or directors of the
company, FDI’s , retail investors, etc. Only the “open market” shares that
are free for trading by anyone, are called the “free-float” shares.A
particular company, may have certain shares in the open market and
certain shares that are not available for trading in the open market.

According the BSE, any shares that DO NOT fall under the following
criteria, can be considered to be open market shares:

 Holdings by founders/directors/ acquirers which has control element

 Holdings by persons/ bodies with "controlling interest"

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 Government holding as promoter/acquirer

 Holdings through the FDI Route

 Strategic stakes by private corporate bodies/ individuals

 Equity held by associate/group companies (cross-holdings)

 Equity held by employee welfare trusts

Locked-in shares and shares which would not be sold in the open market
in normal course.

A company has to submit a complete report about “who has how many of
the company’s shares” to the BSE. On the basis of this, the BSE will decide
the “free-float factor” of the company. The “free-float factor” is a very
valuable number. If you multiply the "free-float factor" with the “market
cap” of that company, you will get the “free-float market cap” ,which is
the value of the shares of the company in the open market

5.What is the criteria for selecting top 30 and 50 stocks

in case of BSE & NSE respectively ?
ANS:- The following are the criteria for selecting the top 30 and 50
Stocks for BSE &

NSE respectively:-

(a)Market capitalization: -The company should have a market

capitalization in the Top 100 market capitalization’s of the BSE. Also the
market capitalization of each company should be more than 0.5% of the
total market capitalization of the Index.

(b)Trading frequency: -The company to be included should have been

traded on each and every trading day for the last one year. Exceptions
can be made for extreme reasons like share suspension etc.

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(c) Number of trades: -The scrip should be among the top 150
companies listed by average number of trades per day for the last one

(d)Industry representation: -The companies should be leaders in their

industry group.

(e)Listed history:- The companies should have a listing history of at

least one year on BSE.

(f)Track record:- In the opinion of the index committee, the company

should have an acceptable track record.

6.How to calculate the value of sensex at a particular

point ?
ANS:- The following are the steps to calculate sensex at a particular point
of time:-

First: Find out the “free-float market cap” of all the 30 companies that
make up the Sensex.

Second: Add all the “free-float market cap’s” of all the 30 companies.

Third: Make all this relative to the Sensex base. The value you get is the
Sensex value. To understand the third step let us take an example .

Example:-Suppose, the free float market cap of all the 30 companies was
Rs. 100,000,000 at the end of one trading day and the value of sensex is
12500. The market cap at the end of next trading day becomes
Rs.120,000,000, then the sensex value at the end of that day is –

Sensex value = 120,000,000 x12500 = 15000


Thus the sensex value at the end of next trading day is 15000.
Please note that every time one of the 30 companies has a “stock split” or
a "bonus" etc. appropriate changes are made in the “market cap”
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7. What is price – earnings ratio ( P/E ratio) ?

ANS: - PE Ratio is a short form for Price to Earnings Ratio. This is the ratio
of the market price of a stock and its EPS. It is used to judge the valuation
of a company. This ratio shows how much the investors are willing to pay
for a company for each rupee of profit.

As a rule of thumb, companies in mature industries / markets having

stable growth have a low to moderate PE ratio. Companies in high-growth
industries / markets having rapid growth have a moderate to high PE ratio.

Price Earnings ratio = Market price per share
Earnings Per Share
Who are the participants in the capital market ?
ANS:- The following are the market participants in the capital market :-

(a) Foreign institutional Investors

(b) Non- Resident Indians

(c) Persons of Indian Origin

(d) Retail investors

(e) Venture capital funds

(f) Mutual Funds

(g) Private Equity

(h) High Net worth Individuals (HNIs)

(i)Financial Institutions

(j)Insurance companies

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(k) Pension funds , etc.

9. What are Mutual Funds, Pension Funds and Financial

Institutions ?
ANS:- The meaning of above terms is as follows:-

Pension Fund

A pension fund is a pool of assets forming an independent legal entity that

are bought with the contributions to a pension plan for the exclusive
purpose of financing pension plan benefits.

Mutual fund

A mutual fund is a professionally managed type of collective investment

scheme that pools money from many investors and invests it in stocks,
bonds, short-term money market instruments, and/or other securities. The
mutual fund will have a fund manager that trades the pooled money on a
regular basis. The net proceeds or losses are then typically distributed to
the investors annually.

Financial Institution

A financial institution is an institution that provides financial services for

its clients or members. Probably the most important financial service
provided by financial institutions is acting as financial intermediaries. Most
financial institutions are highly regulated by government bodies. Broadly
speaking, there are three major types of financial institution :-

1) Deposit-taking institutions that accept and manage deposits and

make loans (this category includes banks, credit unions, trust
companies, and mortgage loan companies);
2) Insurance companies and pension funds; and
3) Brokers, underwriters and investment funds.

10. What is the difference between FDI and FII? Which

Form of Investment is good for the economy ?
ANS:- Foreign Direct Investment (FDI ) is the investment made by the
foreign companies / investors in a company with a strategic perspective.
The investment is not only made to gain return but also made to have a
say in the management of the affairs of the company.

On the other hand, Foreign Institutional Investments (FIIs) , also called as

portfolio investments are made by foreign investors primarily to get a
healthy return on their investment.

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FDI is preferred over FII investments since it is considered to be the most

beneficial form of foreign investment for the economy as a whole. Direct
investment targets a specific enterprise, with the aim of increasing its
capacity/productivity or changing its management control. Direct
investment to create or augment capacity ensures that the capital inflow
translates into additional production. In the case of FII investment that
flows into the secondary market, the effect is to increase capital
availability in general, rather than availability of capital to a particular
enterprise. Translating an FII inflow into additional production depends on
production decisions by someone other than the foreign investor — some
local investor has to draw upon the additional capital made available via
FII inflows to augment production. In the case of FDI that flows in for the
purpose of acquiring an existing asset, no addition to production capacity
takes place as a direct result of the FDI inflow. Just like in the case of FII
inflows, in this case too, addition to production capacity does not result
from the action of the foreign investor – the domestic seller has to invest
the proceeds of the sale in a manner that augments capacity or
productivity for the foreign capital inflow to boost domestic production.
There is a widespread notion that FII inflows are hot money — that it
comes and goes, creating volatility in the stock market and exchange
rates. While this might be true of individual funds, cumulatively, FII inflows
have only provided net inflows of capital.

FDI tends to be much more stable than FII inflows. Moreover, FDI brings
not just capital but also better management and governance practices
and, often, technology transfer. The know-how thus transferred along with
FDI is often more crucial than the capital per se. No such benefit accrues
in the case of FII inflows, although the search by FIIs for credible
investment options has tended to improve accounting and governance
practices among listed Indian companies.

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The following graph shows the FDI & FII inflows in India during the last 5

Chapter 3- Capital Market in India - Impact & Factors

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Impact of capital market on Indian Economy:-

1. Long term finance for corporate and government :-

The capital market is the market for securities, where companies and
governments can raise long term funds. Selling stock and selling bonds
are two ways to generate capital and long term funds. It provides a new
avenue to corporate and government to raise funds for long term.

At present the central government has a large fiscal deficit of 6.8% of

GDP, which comes to around Rs. 4,00,000 cr. To finance this large deficit the
government would look to capital market . Corporates at the moment are
also looking at raising funds through capital market.

2. Helps to bridge investment – savings gap:-

It is seen mostly in case of developing countries that they suffer from

investment – savings gap . This gap means that funds available fall far
short of the amount needed to stimulate economic development.Thus this
gap hinders the economic growth of a developing country like India.In
such a situation capital market plays an important role . Capital market
expand the investment options available in the country , which attracts
portfolio investments from abroad. Domestic savings are also facilitated
by the availability of additional investment options. This enables to bridge
the gap between investment and savings and paves the way for economic
development .

India’s improving macroeconomic fundamentals, a sizeable skilled labour

force and greater integration with the world economy have increased
India’s global competitiveness, placing the country on the radar screens of
investors the world over. The global ratings agencies Moody’s and Fitch
have awarded India investment grade ratings, indicating comparatively
low sovereign risks. These positive dynamics have led to a sustained
surge in India’s equity markets since 2003 ,attracting sizeable capital from
foreign investors. The net cumulative portfolio flows from 2003-2006
( bonds & equities) amounted to $35 billion. In current year (from Jan to
July) the Foreign Institutional Investors have pumped in over $6 billion or
around Rs . 29,940 cr.

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3. Cost – effective mode of raising finance :-

Capital market in any country provides the corporate and government to

raise long term finance at a low cost as compared to other modes of
raising finance .Therefore capital market is important, more so for India
as it embarks on the path of becoming a developed country.

4. Provides an avenue for investors to park their surplus funds :-

Capital market provides the investors both domestic as well as foreign

,various instruments to invest their surplus funds. Not only it provides an
avenue to park surplus funds but it also helps the investors to reap decent
rewards on their investment. This realisation has resulted in increased
investments in capital market both from domestic as well as foreign
investors in Indian capital market.

Also there is an opportunity for investors to diversify their investment

portfolio, as wide range of instruments for investment are available in
capital market.

5. Conducive to implementation of Monetary Policy:-

Through open Market Operation (OMO), the Reserve Bank of India

controls the cost and availability of money supply in the Indian
economy.Thus when RBI follows expansionary monetary policy it
purchases government securities from the Bond market and when it
intends to contract the money supply in the economy it sells the securities
from the secondary bond market . Because of these operation there is also
an impact on the interest rates , which in turn impacts the cost of the
funds in the economy. Thus capital market helps the RBI to check the cost
and availability of funds in the economy.

6.Indicates the state of the economy:-

Capital market also indicate the state of the economy. It is said to be the
face of the economy. This is so because when capital market is stable ,
investments flow into capital market from within as well as outside the
country , which indicates that the future prospects of the economy are

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Factors affecting capital market in India :-

The capital market is affected by a range of factors . Some of the factors
which influence capital market are as follows:-

a)Performance of domestic companies:-

The performance of the companies or rather corporate earnings is

one of the factors which has direct impact or effect on capital market in a
country. Weak corporate earnings indicate that the demand for goods and
services in the economy is less due to slow growth in per capita income
of people . Because of slow growth in demand there is slow growth in
employment which means slow growth in demand in the near future.
Thus weak corporate earnings indicate average or not so good prospects
for the economy as a whole in the near term. In such a scenario the
investors ( both domestic as well as foreign ) would be wary to invest in
the capital market and thus there is bear market like situation. The
opposite case of it would be robust corporate earnings and it’s positive
impact on the capital market.

The corporate earnings for the April – June quarter for the current
fiscal has been good. The companies like TCS, Infosys,Maruti Suzuki,
Bharti Airtel, ACC, ITC, Wipro,HDFC,Binani cement, IDEA, Marico Canara
Bank, Piramal Health, India cements , Ultra Tech, L&T, Coca- Cola, Yes
Bank, Dr. Reddy’s Laboratories, Oriental Bank of Commerce, Ranbaxy,
Fortis, Shree Cement ,etc have registered growth in net profit compared
to the corresponding quarter a year ago. Thus we see companies from
Infrastructure sector, Financial Services, Pharmaceutical sector, IT Sector,
Automobile sector, etc. doing well . This across the sector growth indicates
that the Indian economy is on the path of recovery which has been
positively reflected in the stock market( rise in sensex & nifty) in the last
two weeks. (July 13-July 24).

b)Environmental Factors :-

Environmental Factor in India’s context primarily means- Monsoon . In

India around 60 % of agricultural production is dependent on monsoon.
Thus there is heavy dependence on monsoon. The major chunk of
agricultural production comes from the states of Punjab , Haryana &
Uttar Pradesh. Thus deficient or delayed monsoon in this part of the
country would directly affect the agricultural output in the country. Apart

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from monsoon other natural calamities like Floods, tsunami, drought,

earthquake, etc. also have an impact on the capital market of a country.

The Indian Met Department (IMD) on 24th June stated that India would
receive only 93 % rainfall of Long Period Average (LPA). This piece of news
directly had an impact on Indian capital market with BSE Sensex falling by
0.5 % on the 25th June . The major losers were automakers and consumer
goods firms since the below normal monsoon forecast triggered concerns
that demand in the crucial rural heartland would take a hit. This is
because a deficient monsoon could seriously squeeze rural incomes,
reduce the demand for everything from motorbikes to soaps and
worsen a slowing economy.

c)Macro Economic Numbers :-

The macro economic numbers also influence the capital market. It

includes Index of Industrial Production (IIP) which is released every month,
annual Inflation number indicated by Wholesale Price Index (WPI) which is
released every week, Export – Import numbers which are declared every
month, Core Industries growth rate ( It includes Six Core infrastructure
industries – Coal, Crude oil, refining, power, cement and finished steel)
which comes out every month, etc. This macro –economic indicators
indicate the state of the economy and the direction in which the economy
is headed and therefore impacts the capital market in India.

A case in the point was declaration of core industries growth figure. The
six Core Infrastructure Industries – Coal, Crude oil, refining, finished steel,
power & cement –grew 6.5% in June , the figure came on the 23 rd of July
and had a positive impact on the capital market with the sensex and
nifty rising by 388 points & 125 points respectively.

d)Global Cues :-

In this world of globalisation various economies are interdependent and

interconnected. An event in one part of the world is bound to affect other
parts of the world , however the magnitude and intensity of impact would

Thus capital market in India is also affected by developments in other

parts of the world i.e. U.S. , Europe, Japan , etc.

Global cues includes corporate earnings of MNC’s, consumer confidence

index in developed countries, jobless claims in developed countries, global
growth outlook given by various agencies like IMF, economic growth of

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major economies, price of crude –oil, credit rating of various economies

given by Moody’s, S & P, etc.

An obvious example at this point in time would be that of subprime crisis

& recession . Recession started in U.S. and some parts of the Europe in
early 2008 .Since then it has impacted all the countries of the world-
developed, developing , less- developed and even emerging economies.

e)Political stability and government policies:-

For any economy to achieve and sustain growth it has to have political
stability and pro- growth government policies. This is because when there
is political stability there is stability and consistency in government’s
attitude which is communicated through various government policies.
The vice- versa is the case when there is no political stability .So capital
market also reacts to the nature of government , attitude of government,
and various policies of the government.

The above statement can be substantiated by the fact the when the
mandate came in UPA government’s favour ( Without the baggage of left
party) on May 16 2009, the stock markets on Monday , 18th May had a
bullish rally with sensex closing 800 point higher over the previous day’s
close. The reason was political stability. Also without the baggage of left
party government can go ahead with reforms.

f)Growth prospectus of an economy:-

When the national income of the country increases and per capita
income of people increases it is said that the economy is growing . Higher
income also means higher expenditure and higher savings.This augurs
well for the economy as higher expenditure means higher demand and
higher savings means higher investment. Thus when an economy is
growing at a good pace capital market of the country attracts more
money from investors, both from within and outside the country and vice
-versa. So we can say that growth prospects of an economy does have an
impact on capital markets.

g)Investor Sentiment and risk appetite :-

Another factor which influences capital market is investor sentiment and

their risk appetite .Even if the investors have the money to invest but if
they are not confident about the returns from their investment , they may
stay away from investment for some time.At the same time if the
investors have low risk appetite , which they were having in global and
Indian capital market some four to five months back due to global
financial meltdown and recessionary situation in U.S. & some parts of
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Europe , they may stay away from investment and wait for the right time
to come.

Chapter 4 – Equity Reserarch

If a particular investor buy’s the same securities as other people, he will

have the same results as other people. It is impossible to produce a
superior performance unless that investor does something different from
the majority. To buy when others are despondently selling and to sell when
others are greedily buying requires the greatest fortitude and pays the
greatest reward. Bear markets have always been temporary. And so have
bull markets. Share prices usually turn upward from one to twelve months
before the bottom of the business cycle and vice versa. If a particular
industry or type of security becomes popular with investors, that
popularity will always prove temporary and, when lost, may not return for
many years.
Equity Research
The investor should bear in mind
that while he makes investment decision, he should have idea of the
company’s break-even point and company’s position in the stock
exchange. For this EQUITY RESEARCH is done. Equity Research does the
research of company’s income and growth. In the process, it uses the
various sources of financial information available in the country and
accordingly advises in which company an investor should invest.

Thus Equity Research Involves:-

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The investor while buying stock has the primary purpose of gain. If
he invests for a short period of time it is speculative but when he holds it
for a fairly long period of time the anticipation is that he would receive
some return on his investment. Fundamental analysis is a method of
finding out the future price of a stock, which an investor wishes to buy.
The method for forecasting the future behavior of investments and the
rate of return on them is clearly through an analysis of the broad
economic forces in which they operate. The kind of industry to which they
belong and the analysis of the company's internal working through
statements like income statement, balance sheet and statement of
changes of income. The fundamental analysis involves

Fundamental Technical
Analysis (a) Company Analysis

(b) Industry Analysis

(C) Economic
Company Economic
Analysis Analysis

(a) Company Analysis:-

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Company analysis is a study of the variables that influence the

future of a firm both qualitatively and quantitatively. It is a method of
assessing the competitive position of a firm earning and profitability, the
efficiency with which it operates and its financial position with respect to
the earning to its shareholders. The fundamental nature of this analysis is
that each share of a company has an intrinsic value, which is dependent
on the company's financial performance, quality of management and
record of its earnings and dividend. They believe that the market price of
share in a period of time will move towards its intrinsic value. If the
market price of a share is lower than the intrinsic value, as evaluated by
the fundamental analysis, then the share is supposed to be undervalued
and it should be purchased but if the current market price shows that it is
more than intrinsic value then according to the theory the share should be
sold. This basic approach is analyzed through the financial statements of
an organization. The basic financial statements, which are required as
tools of the fundamental analyst, are the income statement, the balance
sheet, and the statement of changes in financial position. These
statements are useful for investors, creditors as well as internal
management of a firm and on the basis these statements the future
course of action may be taken by the investors of the firm.

While evaluating a company, its statement must be carefully judged to

find out that they are:

i) Correct,

ii) Complete,

iii) Consistent and

iv) Comparable.

(b)Industry Analysis:-
The industry has been defined as homogeneous groups of people doing a
similar kind of activity or similar work. In India, the broad classification of
industry is made according to stock exchange list, which is published. This
gives a distinct classification to industry to industry in different forms such

 Engineering,

 Banking and Insurance,

 Textiles,

 Cement,
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 Steel Mills and Alloys,

 Chemicals and Pharmaceuticals,

 Retail,

 Sugar,

 Information Technology,

 Automobiles and Ancillary,

 Telecommunications,


 Miscellaneous.

Industry should also be evaluated or analyzed through its life cycle.

Industry life cycle may also be studied through the industrial life cycle

There are generally three stages of an industry. These stages are

pioneering stage, expansion stage and stagnation stage.


The industrial life cycle has a pioneering stage when the new inventions
and technological developments take place. During this time the investor
will notice great increase in the activity of the firm. Production will rise and
in relation to production, there will be a great demand for the product. At
this stage, the profits are also very high as the technology is new. Taking a
look at the profit many new firms enter into the same field till the market
becomes competitive. The market competitive pressures keep on
increasing with the entry of new-firms and the prices keep on declining
and then ultimately profits fall. At this stage all firms compete with each
other and only a few efficient firms are left to run the business and most
of the other firms are wiped out in the pioneering stage itself.


The efficient firms, which have been in the market now, find that it is time
to stabilize them. Although competition is there, the, number of firms
have gone down during pioneering stage itself and there are a large
number of firms left to run the business in the industry. This is the time
when each one has to show competitive strength and superiority. The
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investor will find that this is the best time to make an investment. At the
pioneering stage it was difficult to find out which of the firm to invest in,
but having waited for the stability period there has been a dynamic
selection process and a few of the large number of firms are left in the
industry. This is the period of security and safety and this is also called
period of maturity for the firm. This stage lasts from five years to fifty
years of a firm depending on the potential and productivity and also the
capability to meet the change in competition and rapid change in
customer habit.


During the stagnation stage the investor will find that although there
is increase in sales of an organization, this is not in relation to the profits
earned by the company. Profits are also there but the growth in the firm is
lower than it was in the expansion stage. The industry finds that it is at a
loss of power and cannot expand. During this stage most of the firms who
have realized the competitive nature of the industry , begin to change
their course of action and start on a new venture . Investor should make a
continuous evaluation of their investments. In firms in which investors
have received profits for large number of years and have reached
stagnation stage, they should sell off their investment in those firms and
find better avenues in those firms where the expansion stage has set in,
many be in another industry.


Investors are concerned with those forces in the economy, which
affect the performance of organizations in which they wish to participate,
through purchase of stock. A study of the economic forces would give an
idea about future corporate earnings and the payment of dividends and
interest to investors. Some of the broad forces within which the factors of
investment operate are:


Population gives an idea of the kind of labor force in a country. In

some countries the population growth has slowed down whereas in India
and some other third world countries there has been a population
explosion. Population explosion will give demand for more industries like
hotels, residences, service industries like health, consumer demand like
refrigerators and cars. Likewise, investors should prefer to invest in
industries, which have a large amount of labor force because in the future
such industries will bring better rates of return.

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The economic forces relating to investments would be depending on

the amount of resources spent by the government on the particular
technological development affecting the future. Broadly the investor
should invest in those industries which are getting a large amount of
share in the funds of the development of the country. For example, in India
in the present context automobile industries and spaces technology are
receiving a greater attention. These may be areas, which the investor may
consider for investments.


Another consideration of the investor should be the kind of

investment that a company makes in capital goods and the capital it
invests in modernization and replacement of assets. A particular industry
or a particular company which an investor would like to invest can also be
viewed at with the help of the economic indicators such as the place,
value and property position of the industry, group to which it belongs and
the year-to-year returns through corporate profits.


The natural resources are to a large extent are responsible for a country's
economic development and overall improvement in the condition of
corporate growth. In India, technological discoveries recycling of
materials, nuclear and solar energy and new synthetics should give the
investor an opportunity to invest in untapped or recently tapped resources
which would also produce higher investment opportunity.

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Technical analysis is simply the study of prices as reflected on price
charts. Technical analysis assumes that current prices should represent all
known information about the markets. Prices not only reflect intrinsic
facts, they also represent human emotion and the pervasive mass
psychology and mood of the moment. Prices are, in the end, a function of
supply and demand. However, on a moment to moment basis, human
emotions,fear, greed, panic, hysteria, elation, etc. also dramatically affect
prices. Markets may move based upon people’s expectations, not
necessarily facts. A market "technician" attempts to disregard the
emotional component of trading by making his decisions based upon chart
formations, assuming that prices reflect both facts and emotion. Analysts
use their technical research to decide whether the current market is a

Various aspects of Technical analysis


A stock chart is a simple two-axis (X-Y) plotted graph of price and time.
Each individual equity, market and index listed on a public exchange has a
chart that illustrates this movement of price over time. Individual data
plots for charts can be made using the CLOSING price for each day. The
plots are connected together in a single line, creating the graph. Also, a
combination of the OPENING, CLOSING, HIGH and/or LOW prices for that
market session can be used for the data plots. This second type of data is
called a PRICE BAR. Individual price bars are then overlaid onto the graph,
creating a dense visual display of stock movement. Stock charts can be
drawn in two different ways. An ARITHMETIC chart has equal vertical
distances between each unit of price. A LOGARITHMIC chart is a
percentage growth chart.


The stock chart is used to identify the current trend. A trend reflects the
average rate of change in a stock's price over time. Trends exist in all time
frames and all markets. Trends can be classified in three ways: UP, DOWN
or RANGEBOUND. In an uptrend, a stock rallies often with intermediate
periods of consolidation or movement against the trend. In doing so, it
draws a series of higher highs and higher lows on the stock chart. In an
uptrend, there will be a POSITIVE rate of price change over time. In a
downtrend, a stock declines often with intermediate periods of
consolidation or movement against the trend. In doing so, it draws a
series of lower highs and lower lows on the stock chart. In a downtrend,
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there will be a NEGATIVE rate of price change over time. Range bound
price swings back and forth for long periods between easily seen upper
and lower limits. There is no apparent direction to the price movement on
the stock chart and there will be LITTLE or NO rate of price change.

Trends tend to persist over time. A stock in an uptrend will continue to rise
until some change in value or a condition occurs. Declining stocks will
continue to fall until some change in value or conditions occur. Chart
readers try to locate TOPS and BOTTOMS, which are those points where a
rally or a decline ends. Taking a position near a top or a bottom can be
very profitable. Trends can be measured using TRENDLINES. Very often a
straight line can be drawn UNDER three or more pullbacks from rallies or
OVER pullbacks from declines. When price bars return to that trend line,
they tend to find SUPPORT or RESISTANCE and bounce off the line in the
opposite direction.


Volume measures the participation of the crowd. Stock charts display

volume through individual HISTOGRAMS below the price pane. Often these
will show green bars for up days and red bars for down days. Investors
and traders can measure buying and selling interest by watching how
many up or down days in a row occur and how their volume compares
with days in which price moves in the opposite direction. Stocks that are
bought with greater interest than sold are said to be under
ACCUMULATION. Stocks that are sold with great interest than bought are
said to be under DISTRIBUTION. Accumulation and distribution often LEAD
to price movement. In other words, stocks under accumulation often will
rise some time after the buying begins. Alternatively, stocks under
distribution will often fall some time after selling begins. It takes volume
for a stock to rise but it can fall of its own weight. Rallies require the
enthusiastic participation of the crowd. When a rally runs out of new
participants, a stock can easily fall. Investors and traders use indicators
such as ON BALANCE VOLUME to see whether participation is lagging
(behind) or leading (ahead) the price action. Stocks trade daily with an
average volume that determines their LIQUIDITY. Liquid stocks are very
easy for traders to buy and sell. Liquid stocks require very high SPREADS
(transaction costs) to buy or sell and often cannot be eliminated quickly
from a portfolio. Stock chart analysis does not work well on illiquid stocks.


Charts allow investors and traders to look at past and present price action
in order to make reasonable predictions and wise choices. It is a highly
visual medium. This one fact separates it from the colder world of value-
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based analysis. The stock chart activates both left-brain and right-brain
functions of logic and creativity. So it's no surprise that over the last
century two forms of analysis have developed that focus along these lines
of critical examination. The oldest form of interpreting charts is PATTERN
ANALYSIS. This method gained popularity through both the writings of
Charles Dow and Technical Analysis of Stock Trends, a classic book written
on the subject just after World War II. The newer form of interpretation is
INDICATOR ANALYSIS, a math-oriented examination in which the basic
elements of price and volume are run through a series of calculations in
order to predict where price will go next. Pattern analysis gains its power
from the tendency of charts to repeat the same bar formations over and
over again. These patterns have been categorized over the years as
having a bullish or bearish bias. Some well-known ones include HEAD and
and FLAGS. Also, chart landscape features such as GAPS and TRENDLINES
are said to have great significance on the future course of price action.
Indicator analysis uses math calculations to measure the relationship of
current price to past price action. Almost all indicators can be categorized
as TREND-FOLLOWING or OSCILLATORS. Popular trend-following indicators
oscillators include STOCHASTICS, RSI and RATE OF CHANGE. Trend-
following indicators react much more slowly than oscillators. They look
deeply into the rear view mirror to locate the future. Oscillators react very
quickly to short-term changes in price, flipping back and forth between
OVERBOUGHT and OVERSOLD levels. Both patterns and indicators
measure market psychology. The core of investors and traders that make
up the market each day tend to act with a herd mentality as price rises
and falls. This "crowd" tends to develop known characteristics that repeat
themselves over and over again. Chart interpretation using these two
important analysis tools uncovers growing stress within the crowd that
should eventually translate into price change.


The most popular technical indicator for studying stock charts is the
MOVING AVERAGE. This versatile tool has many important uses for
investors and traders. Take the sum of any number of previous CLOSE
prices and then divide it by that same number. This creates an average
price for that stock in that period of time. A moving average can be
displayed by re-computing this result daily and plotting it in the same
graphic pane as the price bars. In other words, if price starts to move
sharply upward or downward, it will take some time for the moving
average to "catch up". Plotting moving averages in stock charts reveals
how well current price is behaving as compared to the past. The power of
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the moving average line comes from its direct interaction with the price
bars. Current price will always be above or below any moving average
computation. When it is above, conditions are "bullish". When below,
conditions are "bearish". Additionally, moving averages will slope upward
or downward over time. This adds another visual dimension to a stock
analysis. Moving averages define STOCK TRENDS. They can be computed
for any period of time. Investors and traders find them most helpful when
they provide input about the SHORT-TERM, INTERMEDIATE and LONG-TERM
trends. For this reason, using multiple moving averages that reflect these
characteristics assist important decision making. Commons moving
average settings for daily stock charts are 20 days for short term, 50 days
for intermediate and 200 days for long-term. One of the most common
buy or sell signals in all chart analysis is the MOVING AVERAGE
CROSSOVER. These occur when two moving averages representing
different trends. For example, when a short-term average crosses BELOW
a long-term one, a SELL signal is generated. Conversely, when a short-
term crosses ABOVE the long-term, a BUY signal is generated. Moving
averages can be "speeded up" through the application of further math
calculations. Common averages are known as SIMPLE or SMA. These tend
to be very slow. By giving more weight to the current changes in price
rather than those many bars ago, a faster EXPONENTIAL or EMA moving
average can be created. Many technicians favor the EMA over the SMA.
Fortunately all common stock chart programs, online and offline do the
difficult moving average calculations but plot price perfectly.


The concept of SUPPORT AND RESISTANCE is essential to understanding

and interpreting stock charts. Just as a ball bounces when it hits the floor
or drops after being thrown to the ceiling, support and resistance defines
natural boundaries for rising and falling prices. Buyers and sellers are
constantly in battle mode. Support defines that level where buyers are
strong enough to keep price from falling further. Resistance defines that
level where sellers are too strong to allow price to rise further. Support
and resistance play different roles in up-trends and down-trends. In an
uptrend, support is where a pullback from a rally should end. In a
downtrend, resistance is where a pullback from a decline should end.
Support and resistance are created because price has memory. Those
prices where significant buyers or sellers entered the market in the past
will tend to generate a similar mix of participants when price again returns
to that level. When price pushes above resistance, it becomes a new
support level. When price falls below support, that level becomes
resistance. When a level of support or resistance is penetrated, price
tends to thrust forward sharply as the crowd notices the BREAKOUT and
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jumps in to buy or sell. When a level is penetrated but does not attract a
crowd of buyers or sellers, it often falls back below the old support or
resistance. This failure is known as a FALSE BREAKOUT. Support and
resistance come in all varieties and strengths. They most often manifest
as horizontal price levels. But trend lines at various angles represent
support and resistance as well. The length of time that a support or
resistance level exists determines the strength or weakness of that level.
The strength or weakness determines how much buying or selling interest
will be required to break the level. Also, the greater volume traded at any
level, the stronger that level will be. Support and resistance exist in all
time frames and all markets. Levels in longer time frames are stronger
than those in shorter time frames. The ideas of Charles Dow, the first
editor of the Wall Street Journal, form the basis of technical analysis today.
The behavior patterns that he observed apply to markets throughout the

Whatever analysis you do- technical or fundamental, it would not

guarantee an investor assured returns. We therefore give the following
principles which the investor should keep in mind before investing:-

Before going to equity analysis let’s see some of the basic investment or
rather investing principles:-

 Invest for Real Returns

 Keep an Open Mind

 Never Follow the Crowd

 Everything Changes

 Avoid the Popular

 Learn from your Mistakes

 Buy During Times of Pessimism

 Hunt for Value and Bargains

 Search Worldwide

 No-one Knows Everything

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Chapter -5 Other modes of raising finance

1. Foreign Currency Convertible Bond (FCCB):

A FCCB is a convertible bond which is a combination of debt and equity.
Owing to the equity option attached to this bond the coupon payments on
the bond are lower for the company, thereby reducing its debt-financing
costs. In a FCCB one has to make regular coupon and principal payments
however the bondholder also has the option to convert the bond into
equity where in the coupon and principal payment is waived off. Thus
though FCCB the investors not only receive guaranteed payments on the
bond but they can also take advantage of any large price appreciation in
the company’s stock as the Bonds are issued at a fixed price.

2. Fully convertible debentures:

It is a debt security which is fully convertible into equity shares at the
issuer’s notice. The conversion ratio is decided at the time of issuance
itself by the issuer. Post the conversion of such debentures the investors
enjoy the same status as ordinary shareholders of the company. The
differentiating factor between the FCDs and other convertible debentures
is that the issuer can compel conversion into equity, whereas in other
types of convertible securities, the owner of the debenture may have that

3. Warrants:
A warrant is a security issued by a company granting the holder of the
warrant the right to purchase a specified number of, shares at a specified
price any time prior to an expiry date. Warrants may be issued with
debentures or equity shares. The specific rights are already set out in the
warrant. An amount equivalent to at least twenty five percent of the price
fixed shall become payable for the warrant on the date of their allotment.

4. Qualified Institutional Placement:-

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The Securities and Exchange Board of India (SEBI) introduced the QIP
process in 2006, to prevent listed companies in India from developing an
excessive dependence on foreign capital. The complications associated
with raising capital in the domestic markets had led many companies to
look at tapping the overseas markets via Foreign Currency Convertible
Bonds (FCCB) and Global Depository Receipts (GDR) to fulfil their needs.
To keep a check on this process and to give a push to the domestic
markets, QIPs were launched.

The QIP guidelines of the securities and Exchange Board of India (SEBI)
cover any issue of equity shares / fully convertible debentures (FCDs) /
partly convertible debentures (PCDs) ,(nonconvertible debentures (NCDs)
with warrants or any securities (other than warrants)), which are
convertible into or exchangeable with equity shares at a later date
(hereinafter referred to as “specified securities”) made to Qualified
Institutional Buyers (QIBs) by a listed company.

Shareholders’ Resolution

Allotment of specified securities under the QIP route shall be completed

within twelve months from the date of passing of the resolution in terms
of sub-section (1A) of Section 81 of the Companies Act, 1956 or any other
applicable provision.

The resolution passed at the meeting of shareholders shall specify that

the allotment is proposed to be made to QIBs through the QIP route and
shall also specify the relevant date on the basis of which price of the
resultant shares shall be determined.

The placements made pursuant to authority of the same shareholders’

resolution shall be separated by at least six months between each

Investors in a QIP :-

 Only QIBs shall be eligible for allotment of specified securities issued

through QIP.

 QIBs would include Mutual funds, Foreign Institutional Investors ,

banks, Venture capital funds, Provident funds, pension funds.

 Minimum of 10 per cent of specified securities issued through shall

be allotted to mutual funds.

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 If no mutual fund is agreeable to take up the minimum portion (i.e.

10 %) or any part thereof, such minimum portion or part thereof
may be allotted to other QIBs.

 No allotment shall be made through the QIP route, either directly or

indirectly, to any QIB being a promoter or any person related to
promoter/s.For the purpose of QIP, QIB who has all or any of the
following rights shall also be deemed to be a person related to

(a) Rights under a shareholders’ agreement or voting agreement

entered into with promoters or persons related to the promoters;

(b) Veto rights; or

(c) Right to appoint any nominee director on the board of the issuer.

Provided that a QIB who does not hold any shares in the issuer and
who has acquired the aforesaid rights in the capacity of a lender
shall not be deemed to be a person related to promoter/s.

Where the specified security is NCD with warrant, an investor can

subscribe to the combined offering of NCDs with warrants or to the
individual instruments, i.e., either NCDs or warrants.

Pricing of a QIP

An issue of specified securities made under this Chapter shall be made at

a price not less than the average of the weekly high and low of the closing
prices of the related shares quoted on the stock exchange during the two
weeks preceding the relevant date.

"Relevant date" for the purpose of this clause means the date of the
meeting in which the Board of the company or the Committee of Directors
duly authorised by the Board of the company decides to open the
proposed issue.

"Stock exchange" for the purpose of this clause means any of the
recognised stock exchanges in which the equity shares of the issuer of the
same class are listed and in which the highest trading volume in such
shares has been recorded during the (two weeks) immediately preceding
the relevant date.

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Apart from preferential allotment, this is the only other method of private
placement. However, it scores over other methods, as it does not involve
many of the common procedural requirements such as the submission of
pre-issue filings to the market

5. Preferential Issue:-
The preferential issue of equity shares/ Fully Convertible Debentures
(FCDs)/ Partly Convertible Debentures (PCDs) or any other financial
instruments which would be converted into or exchanged with equity
shares at a later date, by listed companies whose equity share capital is
listed on any stock exchange, to any select group of persons under
Section 81(1A) of the Companies Act 1956 on private placement basis are
governed by the Securities and Exchange Board of India (SEBI) ,
Disclosure and Investor protection (DIP) guidelines,2000

Such preferential issues by listed companies by way of equity shares/ Fully

Convertible Debentures (FCDs)/ Partly Convertible Debentures (PCDs) or
any other financial instruments which would be converted into /
exchanged with equity shares at a later date, shall be made in accordance
with the pricing provisions mentioned below:

Pricing of the issue :-

Where the equity shares of a company have been listed on a stock

exchange for a period of six months or more as on the relevant date, the
issue of shares on preferential basis ( other than an issue of shares on
preferential basis to Qualified Institutional Buyers not exceeding five in
number) shall be made at a price not less than higher of the following:-

I) The average of the weekly high and low of the closing prices of the
related shares quoted on the stock exchange during the six months
preceding the relevant date;


II) The average of the weekly high and low of the closing prices of the
related shares quoted on a stock exchange during the two weeks
preceding the relevant date.

Where the equity shares of a company have been listed on a stock

exchange for a period of less than six months as on the relevant date, the
issue of shares on preferential basis (other than an issue of shares on
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preferential basis to Qualified Institutional Buyers not exceeding five in

number) can be made at a price not less than the higher of the following:

a) The price at which shares were issued by the company in its IPO or the
value per share arrived at in a scheme of arrangement under sections 391
to 394 of the Companies Act, 1956, pursuant to which the shares of the
company were listed, as the case may be. OR

b) The average of the weekly high and low of the closing prices of the
related shares quoted on the stock exchange during the period shares
have been listed preceding the relevant date. OR

c) The average of the weekly high and low of the closing prices of the
related shares quoted on a stock exchange during the two weeks
preceding the relevant date.”

"Relevant date" above means the date thirty days prior to the date
on which the meeting of general body of shareholders is held, in terms of
Section 81(1A) of the Companies Act, 1956 to consider the proposed

"Stock exchange" above means any of the recognised stock

exchanges in which the shares are listed and in which the highest trading
volume in respect of the shares of the company has been recorded during
the preceding six months prior to the relevant date.

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6. American Depository Receipts (ADRs) & Global

Depository Receipts (GDRs):-
To list on a foreign stock exchange, an Indian company has to
comply with the policies of those stock exchanges. Many times, the
policies of these exchanges in US or Europe are much more stringent
than the policies of the exchanges in India. This deters these companies
from listing on foreign stock exchanges directly. But many good
companies get listed on these exchanges indirectly.

The company deposits a large number of its shares with a bank

located in the country where it wants to list indirectly. The bank issues
receipts against these shares, each receipt having fixed number of
shares as an underlining ( usually 2 or 4 ). These receipts are then sold
to the people of this foreign country (these are issued to everyone who
is allowed to buy shares in that country).These receipts are listed on the
stock exchange. These receipts behave exactly like regular socks –the
prices fluctuate depending on their demand and supply, and depending
on the fundamentals of the underlying company. These receipts are
traded like ordinary stocks, and are called Depository receipts. The
issuing bank acts as a depository for these shares – that is, it stores the
shares on behalf of the receipt holders.

Both ADR & GDR are depository receipts and represent a claim on the
underlying shares . The only difference is the location where they are
traded. If the depository receipt is traded in the United States Of
America (USA), it is called an American Depository Receipt or an ADR. If
the depository receipt is traded in a country other than USA, it is called
as a Global Depository Receipt or a GDR .

Recently we had an ADR issue by Tata Steel & Suzlon and a GDR
issue of Tata Power.

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Capital Market

Securities and Exchange Board of India, (Disclosure and Investor

Protection) guidelines, 2000 (last updated 31st July 2009)

Debt market Module of NSE

Deutsche Bank Research on ‘India’s Capital market’s ‘, dated 14th

February 2007

Economic times – News paper


SEBI : Securities and Exchange Board of India

CCIL: Clearing Corporation of India

G-SEC: Government Securities

HTM: Held to Maturity

HFT: Held for Trading

AFS: Available for Sale

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