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Investor Guide

Navigating the Indian Securities Market

Release On Thursday, August 14, 2008   Download Pdf

Navigating the Indian Securities Market

 

Manoj K Singh

Singh & Associates

 

Recent developments in the Indian securities market support corporate initiatives, finance the exploitation of new ideas and facilitate management of financial risks. But they have also held out necessary momentum for growth, development and strength of the emerging market economy of India. Savers and investors are not constrained by their individual liabilities, but by the economy’s abilities to invest and save, which inevitably enhances savings and investment in the economy.

Market integrity is the essence of any financial market.Recent developments in the securities market support corporate initiatives, finance the exploitation of new ideas and facilitate management of financial risks, and hold out necessary momentum for growth, development and strength of the emerging market economy of India. Savers and investors are not constrained by their individual liabilities, but by the economy’s abilities to invest and save, which inevitably enhances savings and investment in the economy. The securities market has two interdependent and inseparable segments, the primary market and the secondary market.

Primary market

The primary market provides opportunity to issuers of securities to raise funds for investment or to discharge obligation. The issuers issue fresh securities in exchange for funds through public issues or private placements. They may issue the securities in the domestic market or international market through the American depository receipts (ADR), global depository receipts (GDR) or external commercial borrowings (ECB) route. The issues of capital to public by Indian Companies are governed by the Securities and

Exchange Bureau of India’s (SEBI) Disclosure and Investor Protection

Guidelines, which were issued in June 1992. The guidelines apply to all public issues, offer for sale and rights issues by listed and unlisted companies. A company making a public issue of securities has to file a draft red herring prospectus with SEBI, through an eligible merchant banker, at least 21 days prior to the filing of prospectus with the Registrar of Companies. The companies eligible to make issue can freely price their issue of shares. The promoter’s contribution in case of public issues by unlisted company should not be less than 20% of the post-issue capital. The minimum contribution of the promoters is locked in for a period of three years.

Demat Issues

As per SEBI mandate, all new initial public offerings (IPOs) are compulsorily traded in dematerialized form. The Companies Act, 1956 requires that every public listed company making an IPO of any security for Rs100 million (US$2.49 million) or more shall issue the same only in dematerialized form.

ADRs/GDRs

Indian companies are permitted to raise foreign currency resources through two main sources, the issue of foreign currency convertible bonds (FCCBs) more commonly known as Euro Issues, and the issue of ordinary equity shares through depository receipts, namely, GDRs or ADRs, from foreign investors. An ADR is a negotiable US Certificate representing ownership of shares in a non-US corporation. ADRs were specifically designed to facilitate the purchase, holding and sale of non-US securities by US investors, and to provide a corporate finance vehicle for non-US companies. GDRs may be defined as a global finance option that allows an issuer to raise capital simultaneously in two or more markets through a global offering.

Resource mobilization by Indian companies through Euro issues by the way of FCCBs, GDRs and ADRs have free convertibility outside India. In February 2002, the Reserve Bank of India (RBI) permitted two way fungibility for ADRs/GDRs, which means that investors in any company that has issued ADRs or GDRs can freely convert the ADRs or GDRs into underlying domestic shares. They can also reconvert the domestic shares into ADRs or GDRs, depending on the direction of price change in the stock.

FCEBs

Foreign currency exchangeable bonds (FCEBs) are bonds expressed in foreign currency, the principal and interest in respect of which is payable in foreign currency, issued by an issuing company and subscribed to by a person who is a resident outside India in foreign currency and exchangeable into equity share of another company, to be called the offered company, in any manner, either wholly, or partly or on the basis of any equity related warrants attached to debt instrument. The minimum maturity of the FCEB shall be five years for purpose of redemption. One of the differences between FCCBs and FCEBs is that FCCBs can be converted to the equity of the issuing firm. In the case of FCEBs, bonds can be converted into equity of a group company

Mutual Funds

Mutual funds can be defined as a trust that pools the savings and funds from a large number of investors who have a common financial goal. These are professionally managed on behalf of the shareholders and each investor holds a pro-rata share of the portfolio entitled to any profits when the securities are sold, but subject to any losses as well. The mutual fund industry in India is governed by the SEBI (Mutual Fund) Regulations, 1996. Mutual funds have been allowed, as per SEBI circular in April 2003, to invest in the equity of listed overseas companies which have shareholding of at least 10% in an Indian company listed on a recognized stock exchange in India. A mutual fund is allowed to issue open-ended and close-ended schemes under a common legal structure.

Regulatory framework

The four main pieces of legislation governing the securities market are the SEBI Act,1992, which establishes SEBI to protect investors and develop and regulate securities market; the Companies Act,1956, which sets out the code of conduct for the corporate sector in relation to issue, allotment and transfer of shares and disclosures to be made in public issues; the Securities Contracts (Regulation) Act, 1956, which provides for regulation of transactions in securities through control over stock exchanges; and the Depositories Act, 1996, which provides for the electronic maintenance and transfer of ownership of demat securities. With the object of improving market efficiency, enhancing transparency, preventing unfair trade practices and bringing the Indian market at par with the developed markets, a package of reforms were implemented including screen based trading, trading cycle of T+2 (since April 2003), the introduction of derivatives trading (since June 2000) and the globalization of trade with Indian companies being permitted to raise resources from abroad.

 

Undoubtedly, Asia will emerge as the preferred destination for listings. As per the S&P Emerging Stock Market Facebook, 2003, except for the United States, no other country has a higher turnover ratio than India, which stands 19th in terms of market capitalization and 17th in terms of total value traded in stock exchanges. These data, though quite impressive, do not reflect the full portrait of the recent growth of the Indian market. If the complete market is taken into consideration, India’s position with respect to other countries would look much healthier.

About the author

Manoj K Singh is the managing partner of New Delhi based Singh & Associates. He has extensive experience in the field of corporate laws and transactional intellectual property laws. His niche practice areas extend to corporate asset restructuring and he has been instrumental in advising some respected companies in asset restructuring worth millions of dollars. Singh has several memberships at international associations wherein he networks and counsels on these practice areas.

He can be reached at manoj@singhassociates.in.

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