D oe s it m e a n t ha t SEBI recom m ends an issue?

SEBI does not r ecom m end any issue nor does t ake any r esponsibilit y eit her
for t he financial soundness of any schem e or t he pr oj ect for w hich t he issue
is pr oposed t o be m ade or for t he cor r ect ness of t he st at em ent s m ade or
opinions expr essed in t he offer docum ent . SEBI m ainly scr ut inizes t he issue
for seeing t hat adequat e disclosur es ar e m ade by t he issuing com pany in t he
pr ospect us or offer docum ent .

Does SEBI t a g m a k e one’s m one y sa fe ?

The invest ors should m ake an inform ed decis ion pur ely by t hem selv es based
on t he cont ent s disclosed in t he offer docum ent s. SEBI does not associat e
it self w it h any issue/ issuer and should in no w ay be const r ued as a
guar ant ee for t he funds t hat t he inv est or pr oposes t o inv est t hr ough t he
issue. Howev er , t he inv est or s ar e gener ally adv ised t o st udy all t he m at er ial
fact s per t aining t o t he issue including t he r isk fact or s befor e consider ing any
inv est m ent . They ar e st r ongly w ar ned against r ely ing on any ‘t ips’ or new s
t hr ough unofficial m eans.

3 .2 For e ign Ca pit a l I ssua nce

Can com panies in I ndia raise foreign currency resources?

Yes. I ndian com panies ar e per m it t ed t o r aise for eign cur r ency r esour ces
t hr ough t w o m ain sour ces: a) issue of for eign cur r ency conv er t ible bonds
m or e com m only k now n as ‘Euro’ issues and b) issue of or dinar y shar es
t hr ough deposit or y r eceipt s nam ely ‘Global Deposit or y Receipt s
( GDRs) / Am er ican Deposit or y Receipt s ( ADRs) ’ t o for eign invest or s i.e. t o t he
inst it ut ional inv est or s or indiv idual inv est or s.

W hat is an Am erican Deposit ory Receipt ?

An Am er ican Deposit ar y Receipt ( " ADR" ) is a phy sical cer t ificat e ev idencing
ow ner ship of Am er ican Deposit ar y Shar es ( " ADSs" ) . The t er m is oft en used
t o r efer t o t he ADSs t hem selv es.

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W hat is an ADS?

An Am er ican Deposit ar y Shar e ( " ADS" ) is a U. S. dollar denom inat ed for m of

equit y ownership in a non- U.S. com pany . I t r epr esent s t he for eign shar es of
t he com pany held on deposit by a cust odian bank in t he com pany 's hom e
count r y and car r ies t he cor por at e and econom ic r ight s of t he for eign shares,
subj ect t o t he t er m s specified on t he ADR cer t ificat e.

One or sev er al ADSs can be r epr esent ed by a phy sical ADR cer t ificat e. The
t er m s ADR and ADS ar e oft en used int er changeably .

ADSs pr ov ide U.S. inv est or s w it h a conv enient w ay t o inv est in ov er seas
secur it ies and t o t r ade non- U.S. securit ies in t he U.S. ADSs are issued by a
deposit ory bank , such as JPMor gan Chase Bank . They ar e t r aded in t he
sam e m anner as shar es in U.S. com panies, on t he New Yor k St ock Exchange
( N YSE) and t he Am er ican St ock Ex change ( AM EX) or quot ed on N ASD AQ
and t he ov er- t h e- count er ( OTC) m ar ket .

Alt hough ADSs ar e U.S. dollar denom inat ed secur it ies and pay div idends in
U. S. dollar s, t hey do not elim inat e t he cur r ency r isk associat ed w it h an
invest m ent in a non- U.S. com pany.

W hat is m eant by Global Deposit ory Receipt s?

Global Deposit or y Receipt s ( GDRs) m ay be defined as a global finance

v ehicle t hat allow s an issuer t o r aise capit al sim ult aneously in t w o or
m arket s t hrough a global offering. GDRs m ay be used in public or privat e
m ar ket s inside or out side US. GDR, a negot iable cer t ificat e usually
r epr esent s com pany ’s t r aded equit y / debt . The under ly ing shar es cor r espond
t o t he GDRs in a fixed rat io say 1 GDR= 10 shar es.

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4. SECON D ARY M ARKET

4 .1 I nt r oduct ion

W hat is m eant by Secondar y m a r k e t ?

Secondar y m ar k et r efer s t o a m ar k et w her e secur it ies ar e t r aded aft er being

init ially offer ed t o t he public in t he pr im ar y m ar k et and/ or list ed on t he
St ock Ex change. Maj or it y of t he t r ading is done in t he secondar y m ar k et .
Secondar y m ar k et compr ises of equit y m ar k et s and t he debt m ar k et s.

W hat is t he role of t he Secondary Market ?

For t he gener al inv est or , t he secondar y m ar k et pr ov ides an efficient

plat for m for t r ading of his secur it ies. For t he m anagem ent of t he com pany ,
Secondar y equit y m ar ket s ser v e as a m onit or ing and cont r ol conduit —by
facilit at ing v alue- enhancing cont r ol act iv it ies, enabling im plem ent at ion of
incent iv e- based m anagem ent cont r act s, and aggr egat ing infor m at ion ( v ia
pr ice discover y) t hat guides m anagem ent decisions.

W hat is t he difference bet w een t he Prim ary M ark et and t he

Secondary M ark et ?

I n t he pr im ar y m ar k et , secur it ies ar e offer ed t o public for subscr ipt ion for

t he pur pose of r aising capit al or fund. Secondar y m ar k et is an equit y t r ading
v enue in w hich alr eady ex ist ing/ pre - issued secur it ies ar e t r aded am ong
inv est or s. Secondar y m ar k et could be eit her auct ion or dealer m ar k et . While
st ock ex change is t he par t of an auct ion m ar k et , Ov er- t h e- Count er ( OTC) is
a par t of t he dealer m ar k et .

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4 .1 .1 St ock Ex cha nge

W hat is t he role of a St ock Exchange in buying and selling

sha res?

The st ock ex changes in I ndia, under t he ov er all super v ision of t he r egulat or y

aut hor it y , t he Secur it ies and Ex change Boar d of I ndia ( SEBI ) , pr ov ide a
t r ading plat for m , w her e buy er s and seller s can m eet t o t r ansact in
secur it ies. The t r ading plat for m pr ov ided by NSE is an elect r onic one and
t her e is no need for buy er s and seller s t o m eet at a phy sical locat ion t o
t r ade. They can t r ade t hr ough t he com put er ized t r ading scr eens av ailable
w it h t he NSE t rading m em ber s or t he int er net based t r ading facilit y pr ov ided
by t he t rading m em bers of NSE.

W hat is Dem ut ualisat ion of st ock exchanges?

Dem ut ualisat ion r efer s t o t he legal st r uct ur e of an ex change w her eby t he

ow ner ship, t he m anagem ent and t he t r ading right s at t he ex change ar e
segr egat ed fr om one anot her .

H ow is a dem ut ualised exchange different from a m ut ual

exchange?

I n a m ut ual ex change, t he t hr ee funct ions of ow ner ship, m anagem ent and

t r ading ar e concent r at ed int o a single Gr oup. Her e, t he br ok er m em ber s of
t he exchange ar e bot h t he ow ner s and t he t r ader s on t he exchange and
t hey fur t her m anage t he ex change as w ell. This at t im es can lead t o conflict s
of int er est in decision m ak ing. A dem ut ualised ex change, on t he ot her hand,
has all t hese t hr ee f unct ions clear ly segr egat ed, i.e. t he ow ner ship,
m anagem ent and t r ading ar e in separ at e hands.

Current ly are t here any dem ut ualised st ock exchanges in

I ndia?

Cur r ent ly , t w o st ock ex changes in I ndia, t he Nat ional St ock Ex change ( NSE)
and Over t he Count er Ex change of I ndia ( OTCEI ) ar e dem ut ualised.

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4 .1 .2 St ock Tr a din g

W hat is Screen Based Trading?

The t r ading on st ock ex changes in I ndia used t o t ak e place t hr ough open

out cr y w it hout use of infor m at ion t echnology for im m ediat e m at ching or
r ecor ding of t r ades. This w as t im e consum ing and inefficient . This im posed
lim it s on t r ading v olum es and efficiency . I n or der t o pr ov ide efficiency ,
liquidit y and t r anspar ency , NSE int r oduced a nat ionw ide, on- line, fully -
aut om at ed scr een based t r ading sy st em ( SBTS) w he r e a m em ber can punch
int o t he com put er t he quant it ies of a secur it y and t he pr ice at which he
w ould lik e t o t r ansact , and t he t r ansact ion is ex ecut ed as soon as a
m at ching sale or buy or der fr om a count er par t y is found.

W hat is N EAT?

NSE is t he fir st ex change in t he w or ld t o use sat ellit e com m unicat ion

t echnology for t r ading. I t s t r ading sy st em , called Nat ional Ex change for
Aut om at ed Tr ading ( NEAT) , is a st at e of- t h e- ar t client ser ver based
applicat ion. At t he ser v er end all t r ading infor m at ion is st ored in an in-
m em or y dat abase t o achiev e m inim um r esponse t im e and m ax im um sy st em
av ailabilit y for user s. I t has upt im e r ecor d of 99.7% . For all t r ades ent er ed
int o NEAT syst em , t her e is unifor m r esponse t im e of less t han one second.

How t o place orders w it h t he broker?

You m ay go t o t he broker’s office or place an or der on t he phone/ int er net or

as defined in t he Model Agr eem ent , w hich ev er y client needs t o ent er int o
wit h his or her broker.

H ow does an invest or get access t o int ernet based t rading

fa cilit y?

Ther e ar e m any br ok er s of t he NSE w ho pr ov ide int er net based t r ading

facilit y t o t heir client s. I nt er net based t r ading enables an inv est or t o buy / sell
secur it ies t hr ough int er net w hich can be accessed from a com put er at t he
invest or’s residence or any w her e else w her e t he client can access t he
int er net . I nv est or s need t o get in t ouch w it h an NSE br ok er pr ov iding t his
ser v ice t o av ail of int er net based t r ading facilit y .

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W hat is a Cont ract N ot e?

Con t r act Not e is a confir m at ion of t r ades done on a par t icular day on behalf
of t he client by a t r ading m em ber . I t im poses a legally enfor ceable
r elat ionship bet w een t he client and t he t r ading m em ber w it h r espect t o
purchase/ sale and set t lem ent of t r ades. I t also helps t o set t le
disput es/ claim s bet w een t he inv est or and t he t r ading m em ber . I t is a
pr er equisit e for filing a com plaint or ar bit r at ion pr oceeding against t he
t rading m em ber in case of a disput e. A valid cont ract not e should be in t he
pr escr ibed for m , cont ain t he det ails of t r ades, st am ped w it h r equisit e value
and duly signed by t he aut hor ized signat or y . Cont r act not es ar e k ept in
duplicat e, t he t r ading m em ber and t he client should k eep one copy each.
Aft er v er ify ing t he det ails cont ained t her ein, t he client k eeps one copy and
r et ur ns t he second copy t o t he t r ading m em ber duly ack now ledged by him .

W hat det ails are required t o be m ent ioned on t he cont ract

not e issued by t he st ock broker?

A br ok er has t o issue a cont r act not e t o client s for all t r ansact ions in t he
for m specified by t he st ock ex change. The con t r act n ot e in t er- alia should
hav e follow ing:

§ Nam e, addr ess and SEBI Regist r at ion num ber of t he Mem ber br oker .
§ Nam e of par t ner / pr opr iet or / Aut hor ised Signat or y .
§ Dealing Office Addr ess/ Tel. No./ Fax no., Code num ber of t he m em ber
giv en by t he Ex change.
§ Cont r act num ber , dat e of issue of cont r act not e, set t lem ent num ber
and t im e per iod for set t lem ent .
§ Const it uent ( Client ) nam e/ Code Num ber .
§ Or der num ber and or der t im e cor r esponding t o t he t r ades.
§ Tr ade num ber and Tr ade t im e.
§ Quant it y and kind of Secur it y bought / sold by t he client .
§ Br ok er age and Pur chase/ Sale r at e.
§ Ser v ice t ax r at es, Secur it ies Tr ansact ion Tax and any ot her char ges
levied by t he br oker .
§ Appr opr iat e st am ps hav e t o be affix ed on t he cont r act not e or it is
m ent ioned t hat t he consolidat ed st am p dut y is paid.
§ Signat ur e of t he St ock br ok er / Aut hor ized Signat or y .

W hat is t he m axim um brokerage t hat a broker can charge?

The m ax im um br ok er age t hat can be char ged by a br ok er fr om his client s as

com m ission cannot be m or e t han 2 . 5 % of t he v alue m ent ioned in t he
r espect iv e pur chase or sale not e.

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W hy should one t ra de on a recognized st ock ex cha nge only for
buying/ selling shares?

An inv est or does not get any pr ot ect ion if he t r ades out side a st ock
ex change. Tr ading at t he ex change offer s inv est or s t he best pr ices
pr ev ailing at t he t im e in t he m ar k et , lack of any count er- part y risk which is
assum ed by t he clear ing cor por at ion, access t o inv est or gr iev ance and
r edr essal m echanism of st ock ex changes, pr ot ect ion upt o a pr escr ibed lim it ,
fr om t he I nv est or Pr ot ect ion Fund et c.

How t o know if t he broker or sub broker is regist ered?

One can confir m it by v er ify ing t he r egist r at ion cer t ificat e issued by SEBI . A
br ok er 's r egist r at ion num ber begins w it h t he let t er s ‘I NB’ and t hat of a sub
br ok er w it h t he let t ers ‘I NS’.

W hat precaut ions m ust one t ak e before invest ing in t he st ock

m a r k e t s?

Her e ar e som e useful point er s t o bear in m ind befor e y ou inv est in t he

m ar k et s:

§ Make sure your broker is r egist er ed w it h SEBI and t he ex changes and

do not deal w it h unr egist er ed int er m ediar ies.

§ Ensur e t hat y ou r eceiv e cont r act not es for all y our t r ansact ions fr om
y our br ok er w it hin one w or k ing day of ex ecut ion of t he t r ades.

§ All inv est m ent s car r y r isk of som e k ind. I nv est or s should alw ay s
k now t he r isk t hat t hey ar e t ak ing and inv est in a m anner t hat
m at ches t heir r isk t oler ance.

§ Do not be m isled by m ar k et r um our s, lur ing adv er t isem ent or ‘hot

t ips’ of t he day .

§ Tak e infor m ed decisions by st udy ing t he fundam ent als of t he

com pany . Find out t he business t he com pany is int o, it s fut ure
pr ospect s, qualit y of m anagem ent , past t r ack r ecor d et c Sources of
k now ing about a com pany ar e t hr ough annual r epor t s, econom ic
m agazines, dat abases av ailable w it h v endor s or y our financial
advisor.

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 § I f y our financial adv isor or br ok er adv ises y ou t o inv est in a com pany
y ou hav e nev er hear d of, be caut ious. Spend som e t im e check ing out
about t he com pany befor e inv est ing.

§ Do not be at t r act ed by announcem ent s of fant ast ic r esult s/ new s

r epor t s, about a com pany . Do y our ow n r esear ch befor e inv est ing in
any st ock.
§ Do not be at t r act ed t o st ock s based on w hat an int er net w ebsit e
pr om ot es, unless y ou hav e done adequat e st udy of t he com pany .

§ I nv est ing in v er y low pr iced st ock s or w hat ar e k now n as penny

st ock s does not guar ant ee high r et ur ns.

§ Be caut ious about st ocks w hich show a sudden spur t in pr ice or

t r ading act iv it y .

§ Any adv ise or t ip t hat claim s t hat t her e ar e huge r et ur ns ex pect ed,
especially for act ing quickly, m ay be r isky and m ay t o lead t o losing
som e, m ost , or all of your m oney.

4 .2 Pr odu ct s in t he Seconda ry M a rk et s

W hat are t he product s dealt in t he Secondary M ark et s?

Follow ing ar e t he m ain financial pr oduct s/ inst r um ent s dealt in t he Secondar y

m arket w hich m ay be divided broadly int o Shares and Bonds:

Sh a r e s:

Equ it y Shares: An equit y shar e, com m only r efer r ed t o as or dinar y

shar e, r epr esent s t he for m of fr act ional ow ner ship in a business
v ent ur e.

Right s I ssue/ Right s Shar es: The issue of new secur it ies t o exist ing
shar eholder s at a r at io t o t hose alr eady held, at a pr ice. For e.g. a
2: 3 r ight s issue at Rs. 125, w ould ent it le a shar eholder t o r eceiv e 2
shar es for ever y 3 shar es held at a pr ice of Rs. 125 per shar e.

Bonus Shar es: Shar es issued by t he com panies t o t heir shar eholder s
fr ee of cost based on t he num ber of shar es t he shar eholder ow ns.

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 Pr efer ence shar es: Ow ner s of t hese k ind of shar es ar e ent it led t o a
fixed dividend or dividend calculat ed at a fixed rat e t o be paid
r egular ly befor e div idend can be paid in r espect of equit y shar e. They
also enj oy priorit y over t he equit y share holder s in pay m ent of
surplus. But in t he event of liquidat ion, t heir claim s rank below t he
claim s of t he com pany’s cr edit or s, bondholder s / debent ur e holder s.

Cum ulat iv e Pr efer ence Shar es: A t y pe of pr efer ence shar es on w hich
div idend accum ulat es if r em ained unpaid. All ar r ear s of pr efer ence
div idend hav e t o be paid out befor e pay ing div idend on equit y
shares.

Cum ulat iv e Conv er t ible Pr efer ence Shar es: A t y pe of pr efer ence
shar es w her e t he div idend pay able on t he sam e accum ulat es, if not
paid. Aft er a specified dat e, t hese shar es w ill be conv er t ed int o
equit y capit al of t he com pany .

Bond: is a negot iable cer t ificat e ev idencing indebt edness. I t is nor m ally
unsecur ed. A debt secur it y is gener ally issued by a com pany , m unicipalit y or
gov er nm ent agency . A bond invest or lends m oney t o t he issuer and in
ex change, t he issuer pr om ises t o r epay t he loan am ount on a specified
m at ur it y dat e. The issuer usually pay s t he bond holder per iodic int er est
pay m ent s ov er t he life of t he loan. The v ar ious t y pes of Bonds ar e as
follows:

Zer o Coupon Bond: Bond issued at a discount and r epaid at a face

v alue. No per iodic int er est is paid. The differ ence bet w een t he issue
pr ice and r edem pt ion pr ice r epr esent s t he r et ur n t o t he holder . The
buy er of t hese bonds r eceiv es only one pay m ent , at t he m at ur it y of
t he bond.

Convert ible Bond: A bond giv ing t he inv est or t he opt ion t o conv er t
t he bond int o equit y at a fix ed conv er sion pr ice.

Tr easur y Bills: Shor t - t er m ( up t o one y ear ) bear er discount secur it y

issued by gov er nm ent as a m eans of financing t heir cash
r equir em ent s.

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4 .2 .1 Equit y I nve st m e nt

W hy should one invest in equit ies in part icular?

When y ou buy a shar e of a com pany y ou becom e a shar eholder in t hat

com pany. Shar es ar e also know n as Equit ies. Equit ies hav e t he pot ent ial t o
incr ease in v alue ov er t im e. I t also pr ov ides y our por t folio w it h t he gr ow t h
necessary t o reach your long t erm invest m ent goals. Research st udies have
pr ov ed t hat t he equit ies hav e out per for m ed m ost ot her for m s of
inv est m ent s in t he long t er m . This m ay be illust r at ed w it h t he help of
follow ing ex am ples:

a) Over a 15 year per iod bet w een 1990 t o 2005, Nift y has given an
annualised r et ur n of 17 % .

b) Mr . Raj u inv est s in Nift y on Januar y 1, 2000 ( index v alue 1592.90) .

The Nift y v alue as of end Decem ber 2 0 05 w as 2836.55. Holding t his
inv est m ent ov er t his per iod Jan 2000 t o Dec 2005 he get s a r et ur n of
7 8 . 0 7 %. I nv est m ent in shar es of ONGC Lt d for t he sam e per iod
gave a ret urn of 465.86% , SBI 301.17% and Reliance 281.42% .

Ther efor e,

§ Equit ies ar e consider e d t he m ost challenging and t he r ew ar ding,

w hen com par ed t o ot her inv est m ent opt ions.
§ Resear ch st udies hav e pr ov ed t hat inv est m ent s in som e shar es w it h
a longer t enur e of inv est m ent hav e y ielded far super ior r et ur ns t han
any ot her inv est m ent .

However, t his does not m ean all equit y inv est m ent s w ould guar ant ee sim ilar
high r et ur ns. Equit ies ar e high r isk inv est m ent s. One needs t o st udy t hem
car efully befor e invest ing.

W hat has been t he average ret urn on Equit ies in I ndia?

Since 199 0 t ill dat e, I ndian st oc k m arket has ret urned about 17 % t o
inv est or s on an av er age in t er m s of incr ease in shar e pr ices or capit al
appr eciat ion annually . Besides t hat on av er age st ock s hav e paid 1.5%
div idend annually . Div idend is a per cent age of t he face v alue of a shar e t hat
a com pany r et ur ns t o it s shar eholder s fr om it s annual pr ofit s. Com par ed t o

34
m ost ot her for m s of inv est m ent s, inv est ing in equit y shar es offer s t he
highest r at e of r et ur n, if inv est ed ov er a longer dur at ion.

W hich are t he fact ors t hat influence t he price of a st ock ?

Br oadly t her e ar e t w o fact or s: ( 1) st ock specific and ( 2) m ar k et specific. The

st ock- specific fact or is r elat ed t o people’s ex pect at ions about t he com pany ,
it s fut ur e ear nings capacit y, financial healt h and m anagem ent , level of
t echnology and m a r ket ing skills.

The m ar k et specific fact or is influenced by t he inv est or ’s sent im ent t ow ar ds

t he st ock m ar k et as a w hole. This fact or depends on t he env ir onm ent r at her
t han t he per for m ance of any par t icular com pany . Ev ent s fav our able t o an
econom y , polit ical or r egulat or y env ir onm ent lik e high econom ic gr ow t h,
fr iendly budget , st able gov er nm ent et c. can fuel euphor ia in t he inv est or s,
r esult ing in a boom in t he m ar ket . On t he ot her hand, unfavour able event s
lik e w ar , econom ic cr isis, com m unal r iot s, m inor it y gov er nm ent et c. depr ess
t he m ar k et ir r espect iv e of cer t ain com panies per for m ing w ell. How ev er , t he
effect of m arket - specific fact or is gener ally shor t - t erm . Despit e ups and
dow ns, pr ice of a st ock in t he long r un get s st abilized based on t he st ock-
sp ecific fact or s. Ther efor e, a pr udent adv ice t o all inv est or s is t o analy se and
inv est and not speculat e in shar es.

W hat is m eant by t he t erm s Grow t h St ock / Value St ock?

Gr ow t h St ocks :

I n t he inv est m ent w or ld w e com e acr oss t er m s such as Gr ow t h st ock s, Value

st ock s et c. Com panies w hose pot ent ial for gr ow t h in sales and ear nings ar e
ex cellent , ar e gr ow ing fast er t han ot her com panies in t he m ar k et or ot her
st ock s in t he sam e indust r y ar e called t he Gr ow t h St ock s. These com panies
usually pay lit t le or no div idends and inst ead pr efer t o r einv est t heir pr ofit s
in t heir business for fur t her ex pansions.

V a lu e St ock s:

The t ask her e is t o look for st ock s t hat hav e been ov er look ed by ot her
inv est or s and w hich m ay hav e a ‘hidden v alue’. These com panies m ay hav e
been beat en dow n in pr ice because of som e bad ev ent , or m ay be in an
indust r y t hat 's not fancied by m ost inv est or s. How ev er , ev en a com pany
t hat has seen it s st ock pr ice decline st ill has asset s t o it s nam e - buildings,
r eal est at e, inv ent or ies, subsidiar ies, and so on. Many of t hese asset s st ill
hav e v alue, y et t hat v alue m ay not be r eflect ed in t he st ock 's pr ice. Value

35