Capital markets and Securities laws Notes

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STUDY MATERIAL EXECUTIVE PROGRAMME CAPITAL MARKETS AND SECURITIES LAWS MODULE II PAPER 6 ICSI House, 22, Institutional Area, Lodi Road, New Delhi 110 003 tel 011-4534 1000, 4150 4444 fax +91-11-2462 6727 email infoicsi.edu website www.icsi.edu iEXECUTIVE PROGRAMME CAPITAL MARKETS AND SECURITIES LAWS The Indian Capital market has grown exponentially in terms of resource mobilization, number of listed stocks, market capitalization, trading volumes, and investors base. Along with this growth, the profiles of the investors, issuers and intermediaries have changed significantly. The market has witnessed a fundamental institutional change resulting in drastic reduction in transaction costs and significant improvement in efficiency, transparency and safety. The measures taken by SEBI such as, market determined allocation of resources, rolling settlement, sophisticated risk management and derivatives trading have greatly improved the framework and efficiency of trading and settlement, making the Indian capital market qualitatively comparable to many developed markets. This study material has been published to aid the students in preparing for the Capital Market and Securities Laws paper of the CS Executive Programme. It is part of the educational kit and takes the students step by step through each phase of preparation stressing key concepts, pointers and procedures. Company Secretaryship being a professional course, the examination standards are set very high, with emphasis on knowledge of concepts, applications, procedures, for which sole reliance on the contents of this study material may not be enough. Besides, as per the Company Secretaries Regulations, 1982, students are expected to be conversant with the amendments to the laws made upto six months preceding the date of examination. The material may, therefore, be regarded as the basic material and must be read alongwith the original Bare Acts, Rules, Regulations, Academic Guidance etc. This study has been updated upto July, 2014. The subject of Capital Market and Securities Laws is inherently complicated and is subject to constant refinement through new primary legislations, rules and regulations made thereunder. It, therefore becomes necessary for every student to constantly update himself with the various legislative changes made from time to time by referring to the Institutes journal Chartered Secretary as well as other professional journals. In the event of any doubt, students may write to the Directorate of Academics for clarification at academicsicsi.edu. Although care has been taken in publishing this study material yet the possibility of errors, omissions and/or discrepancies cannot be ruled out. This publication is released with an understanding that the Institute shall not be responsible for any errors, omissions and/or discrepancies or any action taken in that behalf. Should there be any discrepancy, error or omission noted in the study material, the Institute shall be obliged if the same is brought to its notice. This study material is based on those sections of the Companies Act, 2013 and the rules made there under which have been notified by the Government of India and came into force w.e.f. April 01, 2014 (Including amendments / clarifications / circulars issued there under upto June, 2014) . In respect of sections of the Companies Act, 2013 which have not been notified, applicable sections of Companies Act, 1956 have been dealt with in the Study Material. iiiSYLLABUS PAPER 6: CAPITAL MARKETS AND SECURITIES LAWS ( 100 Marks) Level of Knowledge: Expert Knowledge Objective: To acquire knowledge and understanding of securities laws and the regulatory framework of capital markets. Contents: Part A: Capital Markets (60 Marks) 1. Overview of Capital Market l Indian Capital Market l Authorities Governing Capital Markets in India l Profile of Securities Market l Securities Market Reforms and Regulatory Measures to Promote Investor Confidence l Features of Developed Capital Market: IOSCO l Overview of Depository System in India 2. Capital Market Instruments and Rating l Capital Market Instruments: Equity, Debentures, Preference Shares, Sweat Equity, Non-Voting Shares, Share Warrants l Pure, Hybrid and Derivatives l Rating and Grading of Instruments: Concept, Scope and Significance, Regulatory Framework l Rating Agencies in India, Rating Methodologies 3. Securities Market Intermediaries l Primary Market and Secondary Market Intermediaries: Role and Functions, Merchant Bankers, Stock Brokers, Syndicate Members, Registrars, Underwriters, Bankers to an Issue, Portfolio Managers, Debenture Trustees, Foreign Institutional Investors, Depositories, Depositories Participants, Custodians, Credit Rating Agencies, Venture Capitalists 4. Market Infrastructure Institutions - Stock Exchanges l Functions and Significance of Stock Exchanges l Operations and Trading Mechanism of Stock Exchanges l Settlement of Securities, Stock Market Indices, Risk Management, Surveillance Mechanism at Stock Exchanges, Straight through Processing l Demutualization of Stock Exchanges l SME Exchange ivCONTENTS PART A : CAPITAL MARKETS ( 60 MARKS) LESSON 1 OVERVIEW OF CAPITAL MARKET Introduction 2 Organisational Structure of Financial System 3 Constituents of Financial System 3 Financial Markets 3 Money Market 3 Capital Market 3 Need for Capital Market 4 Functions of the Capital Market 4 Securities Market 5 Primary Market 5 Secondary Market 5 Products and Market Participants 5 Functions of Securities Market 6 Securities Market and Economic Growth 7 Profile of Securities Market 8 Market Regulation 9 Securities Market Reforms & Regulatory Measures to Promote Investor Confidence 10 Features of Developed Capital Market: the International Organization of Securities Commissions ( I OSCO) 13 Background 13 IOSCO Objective of Securities Regulation 14 Membership 14 Multilateral Memorandum of Understanding Concerning Consultation and Co-Operation and Exchange of Information ( MMoU) 15 Over View of Depository System in India 15 Key Features of the Depository System in India 15 LESSON ROUND UP 16 GLOSSARY 16 SELF TEST QUESTIONS 17 xPage LESSON 2 CAPITAL MARKET INSTRUMENTS Introduction 20 Classification of Instruments 20 Equity Shares 20 Shares with Differential Voting Rights 21 Preference Shares 22 Cumulative Preference Shares 23 Non-Cumulative Preference Shares 23 Convertible Preference Shares 23 Redeemable Preference Shares 23 Participating Preference Shares 24 Non Participating Preference Shares 24 Fully Convertible Cumulative Preference Share (EQUIPREF) 24 Debentures 24 Types of Debentures 24 Categories of Debentures 25 Fully Convertible Debentures 25 Non Convertible Debentures (NCDs) 25 Partly Convertible Debentures ( PCDs) 25 Basic Features of Convertible Debentures 25 Advantages of Convertible Debentures 26 Distinction Between Fully Convertible and Partly Convertible Debentures 27 Fully Convertible Debentures with Interest ( OPTIONAL) 28 Sweat Equity Shares 28 Secured Premium Notes 28 Equity Shares with detachable warrants 29 Dual Option Warrants 29 Debt Instruments with Debt Warrants 29 Debt for Equity Swap 29 Indexed Rate Notes 29 Extendable Notes 29 Level Pay Floating Rate 30 xiPage Zero coupon convertible notes 30 Deep Discount Bond 30 Disaster Bonds 30 Option Bonds 30 Easy Exit Bonds 30 Pay in Kind Bonds 30 Split Coupon Debentures 31 Floating Rate Bonds and Notes 31 Clip and Strip Bonds 31 Dual Convertible Bonds 31 Stepped Coupon Bonds 31 Industrial Revenue Bonds 31 Commodity Bonds 31 Carrot and Stick Bond 31 Capital Indexed Bonds 32 Inflation Indexed Bonds or Inflation Indexed National Savings Securities 32 Tax Free Bonds 32 Global Depository Receipts 32 Foreign Currency Convertible Bond (FCCB) 33 Indian Depository Receipts 33 Benefits to the stakeholders 34 Tracking Stocks 34 Mortgage Backed Securities 35 Futures 36 Options 36 Hedge Funds 36 Domestic and Offshore Hedge Fund 38 Exchange Traded Funds 39 Fund of Funds ( FoFs) 39 LESSON ROUND UP 41 GLOSSARY 42 SELF TEST QUESTION 42 xiiPage LESSON 3 CREDIT RATING & IPO GRADING Introduction 46 Evolution of Credit Rating 46 Concept & Overview 46 Purposes 47 Uses of Credit Rating 47 Factors for Success of a Rating System 48 Important Issues in Credit Rating 48 Rating Methodologies 49 Rating Process 50 Regulatory Framework 51 SEBI ( Credit Rating Agencies) Regulations, 1999 51 Registration of Credit Rating Agencies 52 Promoter of Credit Rating Agency 52 Eligibility Criteria 52 Grant of Certificate 53 Procedure where Certificate is not granted 54 Effect of Refusal to Grant Certificate 54 Code of Conduct 54 Monitoring of Ratings 55 Procedure for Review of Rating 55 Appointment of Compliance Officer 56 Maintenance of Books of Accounts Records, etc. 56 Rating Process 57 Restrictions on Rating of Securities Issued by Promoter and Certain Entities, Connected with a Promoter, or Rating Agency 57 Obligations of Credit Rating Agency 58 Action in Case of Default 58 Transparency & Disclosure Norms for Credit rating agencies 59 Internal Audit of Credit Rating Agency 61 Rating Symbols and Definitions 62 Long Term Debt Instruments 62 xiiiPage Short Term Debt Instruments 63 Long Term Structured Finance Instruments 63 Short Term Structured Finance Instruments 63 Long Term Debt Mutual Fund Schemes 64 Short Term Debt Mutual Fund Schemes 64 IPO Grading 65 Procedure for IPO Grading 65 LESSON ROUND UP 66 GLOSSARY 66 SELF TEST QUESTION 67 LESSON 4 SECURITIES MARKET INTERMEDIARIES Introduction 70 Role of Capital Market Intermediaries 70 Merchant Bankers 71 Registrars and Share Transfer Agents 71 Pre-issue Activities 72 Activities during the Issue 72 Post Issue Activities 72 Share Transfer Agent Services 73 Underwriters 73 Bankers to an Issue 74 Debenture Trustees 74 Portfolio Managers 75 Syndicate Members 75 Stock Brokers & Sub-Broker 75 Custodians 76 Investment Adviser 76 Credit Rating Agency 77 Depository Participant 77 LESSON ROUND UP 78 GLOSSARY 78 SELF TEST QUESTIONS 78 xivPage LESSON 5 MARKET INFRASTRUCTURE INSTITUTIONS  ST OCK EXCHANGE TRADING MECHANISM Introduction 82 Stock Exchange Trading Mechanism 82 Types of Securities 82 Types of Delivery 83 Margins 83 Margin Trading 83 Book Closure and Record Date 84 Trading of Partly Paid Shares and Debentures 84 Trend Line 84 Trading Volume 84 Turnover and Outstanding Position 84 Market Making 84 Securities Lending 85 Securities Lending and Borrowing  85 Short Selling and Securities Lending and Borrowing 86 Settlement System Bombay Stock Exchange Ltd. 90 Trading at BSE 90 Basket Trading System 91 Settlement System at BSE 91 Compulsory Rolling Settlement 91 6a/7a 92 Pay-In and Pay-Out For A, B, T, C, F, G & Z Group of Securities 92 Demat Pay-In 92 Auto Delivery Facility 93 Pay-In of Securities in Physical Form 93 Funds Pay-In 93 Securities Pay-Out 93 Funds Payout 94 Surveillance at BSE 94 Market Abuse 94 xvPage National Stock Exchange of India Ltd. ( NSEIL) 98 Capital Market Segment 98 Wholesale Debt Market Segment 99 Contracts 99 Clearing and Settlement 100 Derivatives Segment 100 Trading and Settlement at NSE 100 National Securities Clearing Corporation Limited ( NSCCL) 100 Clearing Mechanism 100 Clearing & Settlement (Equities) 100 Clearing 101 Cleared and Non-Cleared Deals 101 Trading in Retail Debt Segment 101 Members Eligible for Trading in RDM Segment 101 Trading System 101 Trading Cycle 102 Settlement 102 Straight Through Processing 102 Advantages of Straight Through Processing 103 Direct Market Access (DMA) 103 Demutualization of Stock Exchanges 105 SME Exchange 106 Benefits of Listing on SME Exchange 106 Model Listing Agreement for SMEs 107 Certification to Practicing Company Secretary 108 Algorithmic Trading 108 LESSON ROUND UP 109 GLOSSARY 109 SELF TEST QUESTIONS 110 LESSON 6 DEBT MARKET Introduction 112 xviPage Debt Market Instruments 112 Corporate Debenture 112 Fixed Income Products 113 Interest Based Bonds 113 Coupon Bonds 113 Zero Coupon Bonds 113 Derived Instrument 113 Mortgage Bonds 113 Pass Through Certificates 113 Participation Certificates 113 Benchmarked Instruments 113 Floating Interest Rate 114 Inflation Linked Bonds 114 Money Market Instruments 114 Call Money 114 Treasury Bills 114 Term Money Market 114 Certificates of Deposits ( CDS) 114 Commercial Papers (CP) 114 Inter-Corporate Deposits 115 Commercial Bills 115 Investors in Debt Market 115 Debt Market Intermediaries/Participants 116 Debt Market  Regulatory Framework 116 SEBI ( Issue of Capital and Disclosure Requirements) Regulations, 2009 117 Credit Rating 117 Appointment of Debenture Trustee 118 Debenture Redemption Reserve 118 Redemption 118 Documents to be Submitted Before Opening of the Issue 118 Creation of Charge 118 Roll Over of Non Convertible Portion of Partly Convertible Debt Instruments 118 Conversion of Optionally Convertible Debt Instruments Into Equity Share Capital 119 xviiPage Offences 291 Composition of Certain Offences 292 Power to Grant Immunity 292 Offences by Companies 292 Certain Offences to be Cognizable 292 Cognizance of Offences by Courts 293 Establishment of Special Courts 293 Offences Triable by Special Courts 293 Rights of Investors 293 Entitlement of the Investors to Dividend Declared by the Company 293 Right to Receive Income From Collective Investment Scheme 294 Right to Receive Income From Mutual Fund 294 Power of Central Government to Delegate or to Make Rules 295 Power of SEBI to Make Regulations 296 Securities Contract ( Regulation) (Stock Exchange and Clearing Corporations) Regulations, 2012 296 Recognition of Stock Exchanges and Clearing Corporations 296 Networth Requirements 297 Ownership of Stock Exchanges 297 Ownership of Clearing Corporations 298 Governance of Stock Exchanges and Clearing Corporations 298 Listing of Securities 298 Securities Contracts (Regulation) Rules, 1957 298 Form of Recognition 299 Qualification Prescribed for Membership of A Recognised Stock Exchange 299 Corporate Membership 300 Regulation of Transaction in the Stock Exchange 302 Books and Documents to be Maintained and Preserved 302 Manner of Enquiry in the Affairs of Stock Exchange 303 Submission of Annual Reports and Periodical Returns by Stock Exchanges to SEBI 304 Requirements of Listing of Securities With Recognised Stock Exchanges 305 Conditions Precedent to Submission of Application for Listing by Stock Exchange 307 Application for Listing of New Securities 309 Suspension or Withdrawal of Admission to Dealings in Securities on Stock Exchange 309 xxviiPage Continuous Listing Requirement 310 Delisting of Securities 310 LESSON ROUND UP 311 GLOSSARY 311 SELF TEST QUESTION 312 LESSON 14 SECURITIES AND EXCHANGE BOARD OF INDIA Introduction 314 Objective of SEBI 314 SEBI Act, 1992 314 Composition of SEBI 314 Powers and Functions of SEBI 315 To Regulate or Prohibit Issue of Prospectus, Offer Document or Advertisement Soliciting Money for Issue of Securities 317 Power to Issue Directions 317 Investigations 318 Cease and Desist Proceedings 319 Registration of Intermediaries 320 Prohibition of Manipulative and Deceptive Devices, Insider Trading and 320 Finance, Accounts and Audit of SEBI 321 Penalties for Failures 321 Adjudications 324 Securities Appellate Tribunal ( SAT) 325 Procedure of Securities Appellate Tribunal 326 Powers of Securities Appellate Tribunal 326 Legal Representation 326 Appeal to Supreme Court 327 Powers of Central Government 327 Delegation of Powers 328 Appeal to the Central Government 328 Public Servants 329 Offences and Punishments 329 Power to Grant Immunity 329 Cognizance of Offences by Courts 329 xxviiiLesson 1 Overview of Capital Market 1 Lesson 1 Overview of Capital Market LESSON OUTLINE LEARNING OBJECTIVES  Introduction The Capital Market is a market for financial  Organisational Structure of Financial investments that are direct or indirect claims System to capital. It embraces all forms of lending and borrowing, whether or not evidenced by the  Functions of Securities Market creation of a negotiable financial instrument.  Securities Market and Economic Growth The Capital Market comprises the complex of  A Profile of Securities Market institutions and mechanisms through which intermediate term funds and long term funds  Market Regulations are pooled and made available to business,  Securities Market Reforms and government and individuals. The Capital Regulatory Measures to promote Investor Market also encompasses the process by Confidence which securities already outstanding are transferred.  International Organisation of Securities Commission ( IOSCO) This lesson will enable the students to understand the basics of Capital Market, the  Overview of Depository System in India major securities market reforms taken by SEBI,  Lesson Round Up the role of IOSCO in securities market regulation and the overview of depository system in India.  Glossary  Self Test Questions 12 EP-CM&SL INTRODUCTION Every modern economy is based on a sound financial system which helps in production, capital and economic growth by encouraging savings habits, mobilising savings from households and other segments and allocating savings into productive usage such as trade, commerce, manufacture etc. Financial system covers both credit and cash transactions. All financial transactions are dealt with by cash payment or issue of negotiable instruments like cheque, bills of exchanges, hundies etc. Thus a financial system is a set of institutional arrangements through which financial surpluses are mobilised from the units generating surplus income and transferring them to the others in need of them. The activities include production, distribution, exchange and holding of financial assets/instruments of different kinds by financial institutions, banks and other intermediaries of the market. In a nutshell, financial market, financial assets, financial services and financial institutions constitute the financial system. Various factors influence the capital market and its growth. These include level of savings in the household sector, taxation levels, health of economy, corporate performance, industrial trends and common patterns of living. The strength of the economy is calibrated by different economic indicators like growth in GDP (Gross Domestic Product), Agricultural production, quantum and spread of rain fall, interest rates, inflation, position on balance of payments and balance of trade, levels of foreign exchange reserves and investments and growth in capital formation. The traditional form of financing companies projects consist of internal resources and debt financing, particularly from financial institutions for modernisation, expansion and diversification. The upsurge in performance of certain large companies and the astounding increase of their share prices boost the market sentiment to divert the savings more and more into equity investments in companies. This lead to the growth of equity cult among investors to contribute resources not only for companies but even for financial institutions and banks. The functions of a good financial system are manifold. They are: ( a) regulation of currency ( b) banking functions (c) performance of agency services and custody of cash reserves ( d) management of national reserves of international currency ( e) credit control (f ) administering national, fiscal and monetary policy to ensure stability of the economy (g) supply and deployment of funds for productive use ( h) maintaining liquidity. Long term growth of financial system is ensured through: (a) education of investors ( b) giving autonomy to FIs to become efficient under competition (c) consolidation through mergers ( d) facilitating entry of new institutions to add depth to the market ( e) minimising regulatory measures and market segmentation.Lesson 1 Overview of Capital Market 3 ORGANISATIONAL STRUCTURE OF FINANCIAL SYSTEM Broadly, organisational structure of financial system includes various components i.e., Financial Markets, Products and Market Participants. Constituents of Financial System l Financial Markets l Products l Market participants Financial Markets Efficient transfer of resources from those having idle resources to others who have a pressing need for them is achieved through financial markets. Stated formally, financial markets provide channels for allocation of savings to investment. These provide a variety of assets to savers as well as various forms in which the investors can raise funds and thereby decouple the acts of saving and investment. The savers and investors are constrained not by their individual abilities, but by the economys ability, to invest and save respectively. The financial markets, thus, contribute to economic development to the extent that the latter depends on the rates of savings and investment. The financial markets have two major components; the money market and the capital market. Financial Markets Money Market Capital Market Securities Other forms of Market lending and borrowing New Issues Secondary Market Markets Money Market The money market refers to the market where borrowers and lenders exchange short-term funds to solve their liquidity needs. Money market instruments are generally financial claims that have low default risk, maturities under one year and high marketability. Capital Market The Capital Market is a market for financial investments that are direct or indirect claims to capital. It is wider than the Securities Market and embraces all forms of lending and borrowing, whether or not evidenced by the creation of a negotiable financial instrument. The Capital Market comprises the complex of institutions and mechanisms through which intermediate term funds and long term funds are pooled and made available to business, government and individuals. The Capital Market also encompasses the process by which securities already outstanding are transferred. The capital market and in particular the stock exchange is referred to as the barometer of the economy. Governments policy is so moulded that creation of wealth through products and services is facilitated and4 EP-CM&SL surpluses and profits are channelised into productive uses through capital market operations. Reasonable opportunities and protection are afforded by the Government through special measures in the capital market to get new investments from the public and the Institutions and to ensure their liquidity. NEED FOR CAPITAL MARKET  Capital market plays an extremely important role in promoting and sustaining the growth of an economy.  It is an important and efficient conduit to channel and mobilize funds to enterprises, both private and government.  It provides an effective source of investment in the economy.  It plays a critical role in mobilizing savings for investment in productive assets, with a view to enhancing a countrys long-term growth prospects, and thus acts as a major catalyst in transforming the economy into a more efficient, innovative and competitive marketplace within the global arena.  In addition to resource allocation, capital markets also provide a medium for risk management by allowing the diversification of risk in the economy.  A well-functioning capital market tends to improve information quality as it plays a major role in encouraging the adoption of stronger corporate governance principles, thus supporting a trading environment, which is founded on integrity.  Capital market has played a crucial role in supporting periods of technological progress and economic development throughout history.  Among other things, liquid markets make it possible to obtain financing for capital-intensive projects with long gestation periods. This certainly held true during the industrial revolution in the 18th century and continues to apply even as we move towards the so-called New Economy.  Capital markets make it possible for companies to give shares to their employees via ESOPs.  Capital markets provide a currency for acquisitions via share swaps.  Capital markets provide an excellent route for disinvestments to take place.  Venture Capital and Private Equity funds investing in unlisted companies get an exit option when the company gets listed on the capital markets  The existence of deep and broad capital market is absolutely crucial in spurring the growth our country. An essential imperative for India has been to develop its capital market to provide alternative sources of funding for companies and in doing so, achieve more effective mobilisation of investors savings. Capital market also provides a valuable source of external finance. For a long time, the Indian market was considered too small to warrant much attention. However, this view has changed rapidly as vast amounts of both international and domestic investment have poured into our markets over the last decade. The Indian market is no longer viewed as a static universe but as a constantly evolving one providing attractive opportunities to the investing community. FUNCTIONS OF THE CAPITAL MARKET The major objectives of capital market are:  To mobilize resources for investments.  To facilitate buying and selling of securities.  To facilitate the process of efficient price discovery.Lesson 1 Overview of Capital Market 5  To facilitate settlement of transactions in accordance with the predetermined time schedules. Securities Market The Securities Market, refers to the markets for those financial instruments/claims/obligations that are commonly and readily transferable by sale. The Securities Market has two inter-dependent and inseparable segments, the new issues (primary) market and the stock ( secondary) market. Primary Market The primary market provides the channel for sale of new securities, while the secondary market deals in securities previously issued. The issuer of securities sells the securities in the primary market to raise funds for investment and/or to discharge some obligation. In other words, the market wherein resources are mobilised by companies through issue of new securities is called the primary market. These resources are required for new projects as well as for existing projects with a view to expansion, modernisation, diversification and upgradation. The Primary Market (New Issues) is of great significance to the economy of a country. It is through the primary market that funds flow for productive purposes from investors to entrepreneurs. The latter use the funds for creating new products and rendering services to customers in India and abroad. The strength of the economy of a country is gauged by the activities of the Stock Exchanges. The primary market creates and offers the merchandise for the secondary market. Secondary Market The secondary market enables those who hold securities to adjust their holdings in response to changes in their assessment of risk and return. They also sell securities for cash to meet their liquidity needs. The price signals, which subsume all information about the issuer and his business including, associated risk, generated in the secondary market, help the primary market in allocation of funds. Secondary market essentially comprises of stock exchanges which provide platform for purchase and sale of securities by investors. The trading platform of stock exchanges are accessible only through brokers and trading of securities is confined only to stock exchanges. The stock market or secondary market ensures free marketability, negotiability and price discharge. For these reasons the stock market is referred to as the nerve centre of the capital market, reflecting the economic trend as well as the hopes, aspirations and apprehensions of the investors. This secondary market has further two components, First, the spot market where securities are traded for immediate delivery and payment, The other is futures market where the securities are traded for future delivery and payment. Another variant is the options market where securities are traded for conditional future delivery. Generally, two types of options are traded in the options market. A put option permits the owner to sell a security to the writer of the option at a pre-determined price before a certain date, while a call option permits the buyer to purchase a security from the writer of the option at a particular price before a certain date. Products and Market Participants Savings are linked to investments by a variety of intermediaries through a range of complex financial products called securities which is defined in the Securities Contracts (Regulation) Act, 1956 to include shares, scrips, stocks, bonds, debentures, debenture stock, or other marketable securities of like nature in or of any incorporate company or body corporate, government securities, derivatives of securities, units of collective investment scheme, security receipts, interest and rights in securities, or any other instruments so declared by the central government. There are a set of economic units who demand securities in lieu of funds and others who supply securities for6 EP-CM&SL funds. These demand for and supply of securities and funds determine, under competitive market conditions in goods and securities market, the prices of securities. It is not that the suppliers of funds and suppliers of securities meet each other and exchange funds for securities. It is difficult to accomplish such double coincidence of wants. The amount of funds supplied by the supplier of funds may not be the amount needed by the supplier of securities. Similarly, the risk, liquidity and maturity characteristics of the securities may not match preference of the supplier of funds. In such cases, they incur substantial search costs to find each other. Search costs are minimised by the intermediaries who match and bring these suppliers together. They may act as agents to match the needs of the suppliers of funds / securities, help them in creation and sale of securities or buy the securities issued by supplier of securities and in turn, sell their own securities to suppliers of funds. It is, thus, a misnomer that securities market disintermediates by establishing a direct relationship between the suppliers of funds and suppliers of securities. The market does not work in a vacuum; it requires services of a large variety of intermediaries like merchant bankers, brokers, etc to bring the suppliers of funds and suppliers of securities together for a variety of transactions. The disintermediation in the securities market is in fact an intermediation with a difference; it is a risk-less intermediation, where the ultimate risks are borne by the suppliers of funds/securities ( issuers of securities and investors in securities) , and not the intermediaries. The securities market, thus, has essentially three categories of participants, namely the issuers of securities, investors in securities and the intermediaries. The issuers and investors are the consumers of services rendered by the intermediaries while the investors are consumers of securities issued by issuers. Those who receive funds in exchange for securities and those who receive securities in exchange for funds often need the reassurance that it is safe to do so. This reassurance is provided by the law and custom, often enforced by the regulator. The regulator develops fair market practices and regulates the conduct of issuers of securities and the intermediaries so as to protect the interests of investors in securities. The regulator ensures a high standard of service from intermediaries and supply of quality securities and non-manipulated demand for them in the market. FUNCTIONS OF SECURITIES MARKET The Securities Market allows people to do more with their savings than they would otherwise could. It also provides financing that enables people to do more with their ideas and talents than would otherwise be possible. The peoples savings are matched with the best ideas and talents in the economy. Stated formally, the Securities Market provides a linkage between the savings and the investment across the entities, time and space. It mobilises savings and channelises them through securities into preferred enterprises. The Securities Market also provides a market place for purchase and sale of securities and thereby ensures transferability of securities, which is the basis for the joint stock enterprise system. The existence of the Securities Market makes it possible to satisfy simultaneously the needs of the enterprises for capital and the need of investors for liquidity. Takeaways Securities Market  l Is a link between investment & savings l Mobilises & channelises savings l Provides Liquidity to investors l Is a market place for purchase and sale of securities The liquidity, the market confers and the yield promised or anticipated on security ownership may be sufficientlyLesson 1 Overview of Capital Market 7 great to attract net savings of income which would otherwise have been consumed. Net savings may also occur because of other attractive features of security ownership, e.g. the possibility of capital gain or protection of savings against inflation. A developed Securities Market enables all individuals, no matter how limited their means, to share the increased wealth provided by competitive private enterprises. The Securities Market allows individuals who can not carry an activity in its entirety within their resources to invest whatever is individually possible and preferred in that activity carried on by an enterprise. Conversely, individuals who can not begin an enterprise, they can attract enough investment from others to make a start. In both cases individuals who contribute to the investment made in the enterprise share the fruits. The Securities Market, by allowing an individual to diversify risk among many ventures to offset gains and losses, increases the likelihood of long-term, overall success. SECURITIES MARKET AND ECONOMIC GROWTH A well functioning securities market is conducive to sustained economic growth. There have been a number of studies, starting from World Bank and IMF to various scholars, which have established robust relationship not only one way, but also the both ways, between the development in the securities market and the economic growth. The securities market fosters economic growth to the extent that it-( a) augments the quantities of real savings and capital formation from any given level of national income, ( b) increases net capital inflow from abroad, ( c) raises the productivity of investment by improving allocation of investible funds, and (d) reduces the cost of capital. It is reasonable to expect savings and capital accumulation and formation to respond favourably to developments in securities market. The provision of even simple securities decouples individual acts of saving from those of investment over both time and space and thus allows savings to occur without the need for a concomitant act of investment. If economic units rely entirely on self-finance, investment is constrained in two ways: by the ability and willingness of any unit to save, and by its ability and willingness to invest. The unequal distribution of entrepreneurial talents and risk taking proclivities in any economy means that at one extreme there are some whose investment plans may be frustrated for want of enough savings, while at the other end, there are those who do not need to consume all their incomes but who are too inert to save or too cautious to invest the surplus productively. For the economy as a whole, productive investment may thus fall short of its potential level. In these circumstances, the securities market provides a bridge between ultimate savers and ultimate investors and creates the opportunity to put the savings of the cautious at the disposal of the enterprising, thus promising to raise the total level of investment and hence of growth. The indivisibility or lumpiness of many potentially profitable but large investments reinforces this argument. These are commonly beyond the financing capacity of any single economic unit but may be supported if the investor can gather and combine the savings of many. Moreover, the availability of yield bearing securities makes present consumption more expensive relative to future consumption and, therefore, people might be induced to consume less today. The composition of savings may also change with fewer saving being held in the form of idle money or unproductive durable assets, simply because more divisible and liquid assets are available. International Linkage The securities market facilitates the internationalisation of an economy by linking it with the rest of the world. This linkage assists through the inflow of capital in the form of portfolio investment. Moreover, a strong domestic stock market performance forms the basis for well performing domestic corporate to raise capital in the international market. This implies that the domestic economy is opened up to international competitive pressures, which help to raise efficiency. It is also very likely that existence of a domestic securities market will deter capital outflow by providing attractive investment opportunities within domestic economy.

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