CHAPTER - I

INTRODUCTION

1
 INTRODUCTION TO CAPITAL MARKET

The Capital market is a market for financial assets which have a long or indefinite
maturity. Generally, it deals with long term securities which have a maturity period of
above one year. Capital market may be further divided into three types i.e., Industrial
securities market, Government securities market and Long term loans market.
Industrial securities market is further divided into two types i.e., primary market or
new issue market and secondary market or stock exchange. Government securities
market is also called as Gilt-Edged securities market. It is the market where
Government securities are traded. Long term loans market is divided into three types
Term loans market, Mortgages market and financial guarantees market.

Absence of capital market instruments acts as a deterrent to capital formation and

economic growth. Resources would remain idle if finances are not funneled through
the capital market.
a) The capital market instruments serves as an important source for the productive
use of the economys savings. It mobilizes the savings of the peoples for further
investment and thus avoids their wastage in unproductive uses.
b) It provides incentives to saving and facilitates capital formation by offering
suitable rates of interest as the price of capital.
c) It provides an avenue for investors, particularly the household sector to invest in
financial assets which are more productive than physical assets.
d) It facilitates increase in production and productivity in the economy and thus,
enhances the economic welfare of the society. Thus, it facilitates the movement
of stream of command over capital to the point of highest yield.
e) A healthy capital market instrument consisting of expert intermediaries promotes
stability in values of securities representing capital funds.

OBJECTIVES OF THE STUDY

To study about the Capital Market Instruments.
To study about Dematerialization or Demit in the stock exchange for easy transfer
and error prone system.
Knowing about the latest and future developments is the stock exchange system.

2
 Recent development in derivatives market.

NEEDS & IMPORTANCE

Capital market deals with long term funds. These funds are subject to uncertainty and
risk. It supplies long term funds and medium term funds to the corporate sector. It
provides the mechanism for facilitating capital fund transactions. It deals with
ordinary shares, debentures and stocks and securities of the governments. In this
market the funds flow will come from savers. It converts financial assets in to
productive physical assets. It provides incentives to savers in the form of interest or
dividend to the investors.

The following factors plays an important role in the growth of capital market:
A strong and powerful government
Financial dynamics
Speedy industrialization
Attracting foreign investments
Investments from NRIS
Speedy implementation of policies
Globalization
Development of financial theories
Sophisticated technological advices

RESEARCH & METHODOLOGY

The data collection methods include both the Primary and Secondary
Collection methods.
1. Primary Collection Methods:
This method includes the data collected from the personal discussions with the
authorized clerks and members of the Exchange.
2. Secondary Collection Methods:
The Secondary Collection Methods includes the lectures of the superintend of the
Department of Market Operations, EDP etc, and also the data collected from the
News, Magazines of the NSE and different books issues of this study.

3
SCOPE OF THE STUDY
The current study involves a variety of work in economics, accounting and finance in
this. Valuation of stocks and functions of the stock markets, valuation of bonds
convertible debentures and market for debt, issue market and merchant banking,
market efficiency, dividends, bonus and right issues rates of return and regulations.

LIMITATIONS OF THE PROJECT

Forty five days were insufficient to go on with the study since the time constraint
was not enough.
Most of the implementation and strategies studied were not properly used.
Improper communication channel with speculators.
A small difference makes feel difficult about theory and practices.
An improper absence of information about technology.

4
 CHAPTER - II

INDUSTRY PROFILE
AND
COMPANY PROFILE

5
 RELIGARE ENTERPRISES LIMITED

Religare Enterprises Limited (REL) is a global financial services group with a

presence across Asia, Africa, Middle East, Europe and the Americas. In India, RELs
largest market, the group offers a wide array of products and services ranging from
insurance, asset management, broking and lending solutions to investment banking
and wealth management. The group has also pioneered the concept of investments in
alternative asset classes such as arts and films. With 10,000 plus employees across
multiple geographies, REL serves over a million clients, including corporates and
institutions, high net worth families and individuals, and retail investors. REL is part
of a family of companies that fall under the broader Religare brand, which includes
other global businesses such as diagnostics, aviation and travel, wellness retail, and IT
products and solutions.

Vision - To build Religare as a globally trusted brand in the financial services domain.

Mission - Providing complete financial care driven by the core values of diligence
and transparency.

Brand Essence - Core brand essence is Diligence and Religare is driven by ethical
and dynamic processes for wealth creation

Religare Enterprises Limited

Religare Securities Limited Religare Finvest Limited
Equity Broking Lending and Distribution business
Online Investment Portal
Religare Insurance Broking Limited
Portfolio Management Services Life Insurance
Depository Services General Insurance
Reinsurance
Religare Commodities Limited
Commodity Broking
Religare Realty Limited
In house Real Estate Management Company
Religare Arts Initiative Limited
Religare Capital Markets Limited

6
 Corporate Broking Business of Art
Institutional Broking Gallery launched - arts-i
Derivatives Sales
Religare Venture Capital Limited
Corporate Finance Private Equity and Investment Manager

Religare Asset Management*

Name
Religare is a Latin word that translates as 'to bind together'. This name has been
chosen to reflect the integrated nature of the financial services the company offers.

Symbol
The Religare name is paired with the symbol of a four-leaf clover. Traditionally, it is
considered good fortune to find a four-leaf clover as there is only one four-leaf clover
for every 10,000 three-leaf clovers found.
For us, each leaf of the clover has a special meaning. It is a symbol of Hope. Trust.
Care. Good Fortune.

For the world, it is the symbol of Religare.

The first leaf of the clover represents Hope. The aspirations to succeed. The dream
of becoming. Of new possibilities. It is the beginning of every step and the
foundation on which a person reaches for the stars.
The second leaf of the clover represents Trust. The ability to place ones own faith
in another. To have a relationship as partners in a team. To accomplish a given
goal with the balance that brings satisfaction to all, not in the binding, but in the
bond that is built.
The third leaf of the clover represents Care. The secret ingredient that is the
cement in every relationship. The truth of feeling that underlines sincerity and the
triumph of diligence in every aspect. From it springs true warmth of service and
the ability to adapt to evolving environments with consideration to all.

7
 The fourth and final leaf of the clover represents Good Fortune. Signifying that
rare ability to meld opportunity and planning with circumstance to generate those
often looked for remunerative moments of success.

Hope. Trust. Care. Good Fortune. All elements perfectly combine in the emblematic
and rare, four-leaf clover to visually symbolize the values that bind together and form
the core of the Religare vision.

Central Leadership Team

Mr. Sunil Godhwani
Chief Executive Officer & Managing Director, Religare Enterprises Limited
Mr. Shachindra Nath
Group Chief Operating Officer, Religare Enterprises Limited
Mr. Anil Saxena
Group Chief Finance Officer, Religare Enterprises Limited
Mr. Martin Newson
Chief Executive Officer, Religare Capital Markets

Religare Capital Markets plc (RCM) is a part of Religare Enterprises Limited

(REL) a leading integrated financial services group out of India. The REL group
now envisions establishing RCM as a globally scalable business of excellence. RCM
intends to introduce an improved array of investment products backed by innovation
and broaden its reach across several other geographies.
RCM is an authorised and regulated broker for companies traded on the AIM
Market, a Plus Markets Corporate Advisor and a member of NASDAQ Dubai.
Currently, the principal areas of activity for RCM are - institutional broking and
sales, corporate broking, corporate finance and contracts for difference.

Trading in Equities with Religare truly empowers you for your investment needs. We
ensure you have a superlative trading experience through -
A highly process driven, diligent approach
Powerful Research & Analytics and

8
 One of the "best-in-class" dealing rooms
Further, Religare also has one of the largest retail networks, with its presence in 1837*
locations across 498* cities & towns. This means, you can walk into any of these
branches and connect to our highly skilled and dedicated relationship managers to get
the best services.

The Religare Edge

Pan India footprint
Powerful research and analytics supported by a pool of highly skilled research
analysts
Ethical business practices
Offline/Online delivery models
Single window for all investments needs through you unique Customer
Relationship Number

Religare Capital Markets:

Religare Capital Markets plc (RCM) is a part of Religare Enterprises Limited
(REL) a leading integrated financial services group out of India. The REL group
now envisions establishing RCM as a globally scalable business of excellence. RCM
intends to introduce an improved array of investment products backed by innovation
and broaden its reach across several other geographies.
RCM is an authorized and regulated broker for companies traded on the AIM
Market, a Plus Markets Corporate Advisor and a member of NASDAQ Dubai.

9
 CHAPTER III
REVIEW OF LITERATURE

10
Capital Market:
A capital market is a market for securities (debt or equity), where business
enterprises (companies) and governments can raise long-term funds. It is defined as a
market in which money is provided for periods longer than a year, as the raising of
short-term funds takes place on other markets (e.g., the money market). The capital
market includes the stock market (equity securities) and the bond market (debt).
Financial regulators, such as the UK's Financial Services Authority (FSA) or the U.S.
Securities and Exchange Commission (SEC), oversee the capital markets in their
designated jurisdictions to ensure that investors are protected against fraud, among
other duties.

Capital markets may be classified as primary markets and secondary markets. In

primary markets, new stock or bond issues are sold to investors via a mechanism
known as underwriting. In the secondary markets, existing securities are sold and
bought among investors or traders, usually on a securities exchange, over-the-counter,
or elsewhere.

INDIAN CAPITAL MARKET

The Indian Capital Market is one of the oldest capital markets in Asia which
evolved around 200 years ago.

Chronology of the Indian capital markets:

1830s: Trading of corporate shares and stocks in Bank and cotton Presses in Bombay.

1850s: Sharp increase in the capital market brokers owing to the rapid development of
commercial enterprise.

1860-61: Outbreak of the American Civil War and ' Share Mania ' in India.

1894: Formation of the Ahmadabad Shares and Stock Brokers Association.

1908: Formation of the Calcutta Stock Exchange Association.

A market is any one of a variety of different systems, institutions, procedures, social
relations and infrastructures whereby persons trade, and goods and services are
exchanged, forming part of the economy. It is an arrangement that allows buyers and

11
sellers to exchange things. Markets vary in size, range, geographic scale, location,
types and variety of human communities, as well as the types of goods and services
traded. Some examples include local farmers markets held in town squares or parking
lots, shopping centers and shopping malls, international currency and commodity
markets, legally created markets such as for pollution permits, and illegal markets
such as the market for illicit drugs.

In mainstream economics, the concept of a market is any structure that allows buyers
and sellers to exchange any type of goods, services and information. The exchange of
goods or services for money is a transaction. Market participants consist of all the
buyers and sellers of a good who influence its price. This influence is a major study of
economics and has given rise to several theories and models concerning the basic
market forces of supply and demand. There are two roles in markets, buyers and
sellers. The market facilitates trade and enables the distribution and allocation of
resources in a society. Markets allow any tradable item to be evaluated and priced. A
market emerges more or less spontaneously or is constructed deliberately by human
interaction in order to enable the exchange of rights (cf. ownership) of services and
goods.

Historically, markets originated in physical marketplaces which would often develop

into or from small communities, towns and cities.

Types of markets
Although many markets exist in the traditional sense - such as a marketplace - there
are various other types of markets and various organizational structures to assist their
functions. The nature of business transactions could define markets.

Financial markets
Financial markets facilitate the exchange of liquid assets. Most investors prefer
investing in two markets, the stock markets and the bond markets. NYSE, AMEX,
and the NASDAQ are the most common stock markets in the US. Futures markets,
where contracts are exchanged regarding the future delivery of goods are often an
outgrowth of general commodity markets.

12
Currency markets are used to trade one currency for another, and are often used for
speculation on currency exchange rates.

The money market is the name for the global market for lending and borrowing.

Prediction markets
Prediction markets are a type of speculative market in which the goods exchanged are
futures on the occurrence of certain events. They apply the market dynamics to
facilitate information aggregation.

Organization of markets
A market can be organized as an auction, as a private electronic market, as a
commodity wholesale market, as a shopping center, as a complex institution such as a
stock market, and as an informal discussion between two individuals.

Markets of varying types can spontaneously arise whenever a party has interest in a
good or service that some other party can provide. Hence there can be a market for
cigarettes in correctional facilities, another for chewing gum in a playground, and yet
another for contracts for the future delivery of a commodity. There can be black
markets, where a good is exchanged illegally and virtual markets, such as eBay, in
which buyers and sellers do not physically interact during negotiation. There can also
be markets for goods under a command economy despite pressure to repress them.

Mechanisms of markets
In economics, a market that runs under laissez-faire policies is a free market. It is
"free" in the sense that the government makes no attempt to intervene through taxes,
subsidies, minimum wages, price ceilings, etc. Market prices may be distorted by a
seller or sellers with monopoly power, or a buyer with monopsony power. Such price
distortions can have an adverse effect on market participant's welfare and reduce the
efficiency of market outcomes. Also, the level of organization or negotiation power of
buyers, markedly affects the functioning of the market. Markets where price
negotiations meet equilibrium though still do not arrive at desired outcomes for both
sides are said to experience market failure.

13
Study of markets
The study of actual existing markets made up of persons interacting in space and
place in diverse ways is widely seen as an antidote to abstract and all-encompassing
concepts of the market and has historical precedent in the works of Fernand Braudel
and Karl Polanyi. The latter term is now generally used in two ways. First, to denote
the abstract mechanisms whereby supply and demand confront each other and deals
are made. In its place, reference to markets reflects ordinary experience and the
places, processes and institutions in which exchanges occurs. Second, the market is
often used to signify an integrated, all-encompassing and cohesive capitalist world
economy. A widespread trend in economic history and sociology is skeptical of the
idea that it is possible to develop a theory to capture an essence or unifying thread to
markets.. For economic geographers, reference to regional, local, or commodity
specific markets can serve to undermine assumptions of global integration, and
highlight geographic variations in the structures, institutions, histories, path
dependencies, forms of interaction and modes of self-understanding of agents in
different spheres of market exchange Reference to actual markets can show capitalism
not as a totalizing force or completely encompassing mode of economic activity, but
rather as a set of economic practices scattered over a landscape, rather than a
systemic concentration of power.

C. B. Macpherson identifies an underlying model of the market underlying Anglo-

American liberal-democratic political economy and philosophy in the seventeenth and
eighteenth centuries: Persons are cast as self-interested individuals, who enter into
contractual relations with other such individuals, concerning the exchange of goods or
personal capacities cast as commodities, with the motive of maximizing pecuniary
interest. The state and its governance systems are cast as outside of this framework.).
This model came to dominant economic thinking in the later nineteenth century, as
economists such as Ricardo, Mill, Jevons, Walras and later neo-classical economics
shifted from reference to geographically located marketplaces to an abstract market.
This tradition is continued in contemporary neoliberalism, where the market is held
up as optimal for wealth creation and human freedom, and the states role imagined as
minimal, reduced to that of upholding and keeping stable property rights, contract,
and money supply. This allowed for boilerplate economic and institutional
restructuring under structural adjustment and post-Communist reconstruction.
14
Similar formalism occurs in a wide variety of social democratic and Marxist
discourses that situate political action as antagonistic to the market. In particular,
commodification theorists such as Georg Lukcs insist that market relations
necessarily lead to undue exploitation of labour and so need to be opposed in toto. ,).
Pierre Bourdieu has suggested the market model is becoming self-realizing, in virtue
of its wide acceptance in national and international institutions through the 1990s. ).
The formalist conception faces a number of insuperable difficulties, concerning the
putatively global scope of the market to cover the entire Earth, in terms of penetration
of particular economies, and in terms of whether particular claims about the subjects
(individuals with pecuniary interest), objects (commodities), and modes of exchange
(transactions) apply to any actually existing markets.

A central theme of empirical analyses is the variation and proliferation of types of

markets since the rise of capitalism and global scale economies. The Regulation
School stresses the ways in which developed capitalist countries have implemented
varying degrees and types of environmental, economic, and social regulation, taxation
and public spending, fiscal policy and government provisioning of goods, all of which
have transformed markets in uneven and geographical varied ways and created a
variety of mixed economies. Drawing on concepts of institutional variance and path
dependency, varieties of capitalism theorists (such as Hall and Soskice) identify two
dominant modes of economic ordering in the developed capitalist countries,
coordinated market economies such as Germany and Japan, and an Anglo-
American liberal market economies. However, such approaches imply that the
Anglo-American liberal market economies in fact operate in a matter close to the
abstract notion of the market. While Anglo-American countries have seen
increasing introduction of neo-liberal forms of economic ordering, this has not lead to
simple convergence, but rather a variety of hybrid institutional orderings.. Rather, a
variety of new markets have emerged, such as for carbon trading or rights to pollute.
In some cases, such as emerging markets for water, different forms of privatization of
different aspects of previously state run infrastructure have created hybrid private-
public formations and graded degrees of commodification, commercialization and
privatization

15
Problematic for market formalism is the relationship between formal capitalist
economic processes and a variety of alternative forms, ranging from semi-feudal and
peasant economies widely operative in many developing economies, to informal
markets, barter systems, worker cooperatives, or illegal trades that occur in most
developed countries. Practices of incorporation of non-Western peoples into global
markets in the nineteenth and twentieth century did not merely result in the quashing
of former social economic institutions. Rather, various modes of articulation arose
between transformed and hybridized local traditions and social practices and the
emergence world economy. So called capitalist markets in fact include and depend on
a wide range of geographically situated economic practices that do not follow the
market model. Economies are thus hybrids of market and non-market elements

Helpful here is J. K. Gibson-Grahams complex topology of the diversity of

contemporary market economies describing different types of transactions, labour,
and economic agents. Transactions can occur in underground markets (such as for
marijuana) or be artificially protected (such as for patents). They can cover the sale of
public goods under privatization schemes to co-operative exchanges and occur under
varying degrees of monopoly power and state regulation. Likewise, there are a wide
variety of economic agents, which engage in different types of transactions on
different terms: One cannot assume the practices of a religious kindergarten,
multinational corporation, state enterprise, or community-based cooperative can be
subsumed under the same logic of calculability (pp. 5378). This emphasis on
proliferation can also be contrasted with continuing scholarly attempts to show
underlying cohesive and structural similarities to different markets.

A prominent entry point for challenging the market models applicability concerns
exchange transactions and the homo economics assumption of self-interest
maximization. There are now a number of streams of economic sociological analysis
of markets focusing on the role of the social in transactions, and the ways transactions
involve social networks and relations of trust, cooperation and other bonds..
Economic geographers in turn draw attention to the ways in exchange transactions
occur against the backdrop of institutional, social and geographic processes, including
class relations, uneven development, and historically contingent path dependencies. A
useful schema is provided by Michel Callons concept of framing: Each economic act
16
or transaction occurs against, incorporates and also re-performs a geographically and
cultural specific complex of social histories, institutional arrangements, rules and
connections. These network relations are simultaneously bracketed, so that persons
and transactions may be disentangled from thick social bonds. The character of
calculability is imposed upon agents as they come to work in markets and are
formatted as calculative agencies. Market exchanges contain a history of struggle
and contestation that produced actors predisposed to exchange under certain sets of
rules. As such market transactions can never be disembedded from social and
geographic relations and there is no sense to talking of degrees of embeddedness and
disembeddeness.

An emerging theme worthy of further study is the interrelationship, interpenetrability

and variations of concepts of persons, commodities, and modes of exchange under
particular market formations. This is most pronounced in recent movement towards
post-structuralist theorizing that draws on Foucault and Actor Network Theory and
stress relational aspects of personhood, and dependence and integration into networks
and practical systems. Commodity network approaches further both deconstruct and
show alternatives to the market models concept of commodities. Here, both
researchers and market actors are understood as reframing commodities in terms of
processes and social and ecological relationships. Rather than a mere objectification
of things traded, the complex network relationships of exchange in different markets
calls on agents to alternatively deconstruct or get with the fetish of commodities.
Gibson-Graham thus read a variety of alternative markets, for fair trade and organic
foods, or those using Local Exchange Trading Systems as not only contributing to
proliferation, but also forging new modes of ethical exchange and economic
subjectivities.

Most markets are regulated by state wide laws and regulations. While barter markets
exist, most markets use currency or some other form of money.

A security is a fungible, negotiable instrument representing financial value. Securities

are broadly categorized into debt securities (such as banknotes, bonds and debentures)
and equity securities, e.g., common stocks; and derivative contracts, such as forwards,
futures, options and swaps. The company or other entity issuing the security is called
17
the issuer. A country's regulatory structure determines what qualifies as a security. For
example, private investment pools may have some features of securities, but they may
not be registered or regulated as such if they meet various restrictions.

Securities may be represented by a certificate or, more typically, "non-certificated",

that is in electronic or "book entry" only form. Certificates may be bearer, meaning
they entitle the holder to rights under the security merely by holding the security, or
registered, meaning they entitle the holder to rights only if he or she appears on a
security register maintained by the issuer or an intermediary. They include shares of
corporate stock or mutual funds, bonds issued by corporations or governmental
agencies, stock options or other options, limited partnership units, and various other
formal investment instruments that are negotiable and fungible.

Classification
Securities may be classified according to many categories or classification systems:
Currency of denomination
Ownership right
Term to maturity
Degree of liquidity
Income payments
Tax treatment
Credit rating
Industrial sector or "Industry". ("Sector" often refers to a higher level or broader
category, such as Consumer Discretionary, whereas "industry" often refers to a lower
level classification, such as Consumer Appliances. See Industry for a discussion of
some classification systems.)
Region or country (such as country of incorporation, country of principal
sales/market of its products or services, or country in which the principal securities
exchange on which it trades is located)
Market capitalization
State (typically for municipal or "tax-free" bonds in the U.S.)

18
By type of issuer
Issuers of securities include commercial companies, government agencies, local
authorities and international and supranational organizations (such as the World
Bank). Debt securities issued by a government (called government bonds or sovereign
bonds) generally carry a lower interest rate than corporate debt issued by commercial
companies. Interests in an assetfor example, the flow of royalty payments from
intellectual propertymay also be turned into securities. These repackaged securities
resulting from a securitization are usually issued by a company established for the
purpose of the repackagingcalled a special purpose vehicle (SPV). See
"Repackaging" below. SPVs are also used to issue other kinds of securities. SPVs can
also be used to guarantee securities, such as covered bonds.

New capital
Commercial enterprises have traditionally used securities as a means of raising new
capital. Securities may be an attractive option relative to bank loans depending on
their pricing and market demand for particular characteristics. Another disadvantage
of bank loans as a source of financing is that the bank may seek a measure of
protection against default by the borrower via extensive financial covenants. Through
securities, capital is provided by investors who purchase the securities upon their
initial issuance. In a similar way, the governments may raise capital through the
issuance of securities (see government debt).

Repackaging
In recent decades securities have been issued to repackage existing assets. In a
traditional securitization, a financial institution may wish to remove assets from its
balance sheet in order to achieve regulatory capital efficiencies or to accelerate its
receipt of cash flow from the original assets. Alternatively, an intermediary may wish
to make a profit by acquiring financial assets and repackaging them in a way which
makes them more attractive to investors. In other words, a basket of assets is typically
contributed or placed into a separate legal entity such as a trust or SPV, which
subsequently issues shares of equity interest to investors. This allows the sponsor
entity to more easily raise capital for these assets as opposed to finding buyers to
purchase directly such assets.

19
By type of holder
Investors in securities may be retail, i.e. members of the public investing other than by
way of business. The greatest part in terms of volume of investment is wholesale, i.e.
by financial institutions acting on their own account, or on behalf of clients. Important
institutional investors include investment banks, insurance companies, pension funds
and other managed funds.

Investment
The traditional economic function of the purchase of securities is investment, with the
view to receiving income and/or achieving capital gain. Debt securities generally offer
a higher rate of interest than bank deposits, and equities may offer the prospect of
capital growth. Equity investment may also offer control of the business of the issuer.
Debt holdings may also offer some measure of control to the investor if the company
is a fledgling start-up or an old giant undergoing 'restructuring'. In these cases, if
interest payments are missed, the creditors may take control of the company and
liquidate it to recover some of their investment.

Collateral
The last decade has seen an enormous growth in the use of securities as collateral.
Purchasing securities with borrowed money secured by other securities or cash itself
is called "buying on margin." Where A is owed a debt or other obligation by B, A may
require B to deliver property rights in securities to A, either at inception (transfer of
title) or only in default (non-transfer-of-title institutional). For institutional loans
property rights are not transferred but nevertheless enable A to satisfy its claims in the
event that B fails to make good on its obligations to A or otherwise becomes
insolvent. Collateral arrangements are divided into two broad categories, namely
security interests and outright collateral transfers. Commonly, commercial banks,
investment banks, government agencies and other institutional investors such as
mutual funds are significant collateral takers as well as providers. In addition, private
parties may utilize stocks or other securities as collateral for portfolio loans in
securities lending scenarios.

20
On the consumer level, loans against securities have grown into three distinct groups
over the last decade: 1) Standard Institutional Loans, generally offering low loan-to-
value with very strict call and coverage regimens; 2) Transfer-of-Title (ToT) Loans,
typically provided by private parties where borrower ownership is completely
extinguished save for the rights provided in the loan contract; and 3) Enhanced
Institutional Loan Facilities - a marriage of public and private entities in the form of
fully regulated, institutionally managed brokerage financing supplemented
("enhanced") by private capital where the securities remain in the client's title and
account unless there is an event of default. Of the three, transfer-of-title loans
typically allow the lender to sell or sell short at least some portion of the shares (if not
all) to fund the transaction, and many operate outside the regulated financial universe
as a private loan program. Institutionally managed loans, on the other hand, draw loan
funds from credit lines or other institutional funding sources and do not involve any
loss of borrower ownership or control thereby making them more transparent.

Debt and equity

Securities are traditionally divided into debt securities and equities

Debt
Debt securities may be called debentures, bonds, deposits, notes or commercial paper
depending on their maturity and certain other characteristics. The holder of a debt
security is typically entitled to the payment of principal and interest, together with
other contractual rights under the terms of the issue, such as the right to receive
certain information. Debt securities are generally issued for a fixed term and
redeemable by the issuer at the end of that term. Debt securities may be protected by
collateral or may be unsecured, and, if they are unsecured, may be contractually
"senior" to other unsecured debt meaning their holders would have a priority in a
bankruptcy of the issuer. Debt that is not senior is "subordinated".

Corporate bonds represent the debt of commercial or industrial entities. Debentures

have a long maturity, typically at least ten years, whereas notes have a shorter
maturity. Commercial paper is a simple form of debt security that essentially
represents a post-dated check with a maturity of not more than 270 days.

21
Money market instruments are short term debt instruments that may have
characteristics of deposit accounts, such as certificates of deposit, and certain bills of
exchange. They are highly liquid and are sometimes referred to as "near cash".
Commercial paper is also often highly liquid.

Euro debt securities are securities issued internationally outside their domestic
market in a denomination different from that of the issuer's domicile. They include
eurobonds and euronotes. Eurobonds are characteristically underwritten, and not
secured, and interest is paid gross. A euronote may take the form of euro-commercial
paper (ECP) or euro-certificates of deposit.

Government bonds are medium or long term debt securities issued by sovereign
governments or their agencies. Typically they carry a lower rate of interest than
corporate bonds, and serve as a source of finance for governments. U.S. federal
government bonds are called treasuries. Because of their liquidity and perceived low
risk, treasuries are used to manage the money supply in the open market operations of
non-US central banks.

Sub-sovereign government bonds, known in the U.S. as municipal bonds, represent

the debt of state, provincial, territorial, municipal or other governmental units other
than sovereign governments.

Supranational bonds represent the debt of international organizations such as the

World Bank, the International Monetary Fund, regional multilateral development
banks and others.

Equity
An equity security is a share of equity interest in an entity such as the capital stock of
a company, trust or partnership. The most common form of equity interest is common
stock, although preferred equity is also a form of capital stock. The holder of an
equity is a shareholder, owning a share, or fractional part of the issuer. Unlike debt
securities, which typically require regular payments (interest) to the holder, equity
securities are not entitled to any payment. In bankruptcy, they share only in the
residual interest of the issuer after all obligations have been paid out to creditors.
22
However, equity generally entitles the holder to a pro rata portion of control of the
company, meaning that a holder of a majority of the equity is usually entitled to
control the issuer. Equity also enjoys the right to profits and capital gain, whereas
holders of debt securities receive only interest and repayment of principal regardless
of how well the issuer performs financially. Furthermore, debt securities do not have
voting rights outside of bankruptcy. In other words, equity holders are entitled to the
"upside" of the business and to control the business.

Hybrid
Hybrid securities combine some of the characteristics of both debt and equity
securities.

Preference shares form an intermediate class of security between equities and debt.
If the issuer is liquidated, they carry the right to receive interest and/or a return of
capital in priority to ordinary shareholders. However, from a legal perspective, they
are capital stock and therefore may entitle holders to some degree of control
depending on whether they contain voting rights.

Convertibles are bonds or preferred stock which can be converted, at the election of
the holder of the convertibles, into the common stock of the issuing company. The
convertibility, however, may be forced if the convertible is a callable bond, and the
issuer calls the bond. The bondholder has about 1 month to convert it, or the company
will call the bond by giving the holder the call price, which may be less than the value
of the converted stock. This is referred to as a forced conversion.

Equity warrants are options issued by the company that allow the holder of the
warrant to purchase a specific number of shares at a specified price within a specified
time. They are often issued together with bonds or existing equities, and are,
sometimes, detachable from them and separately tradable. When the holder of the
warrant exercises it, he pays the money directly to the company, and the company
issues new shares to the holder.

23
Warrants, like other convertible securities, increases the number of shares outstanding,
and are always accounted for in financial reports as fully diluted earnings per share,
which assumes that all warrants and convertibles will be exercised.

The Securities Markets

Primary and secondary market
In the U.S., the public securities markets can be divided into primary and secondary
markets. The distinguishing difference between the two markets is that in the primary
market, the money for the securities is received by the issuer of those securities from
investors, typically in an initial public offering transaction, whereas in the secondary
market, the securities are simply assets held by one investor selling them to another
investor (money goes from one investor to the other). An initial public offering is
when a company issues public stock newly to investors, called an "IPO" for short. A
company can later issue more new shares, or issue shares that have been previously
registered in a shelf registration. These later new issues are also sold in the primary
market, but they are not considered to be an IPO but are often called a "secondary
offering". Issuers usually retain investment banks to assist them in administering the
IPO, obtaining SEC (or other regulatory body) approval of the offering filing, and
selling the new issue. When the investment bank buys the entire new issue from the
issuer at a discount to resell it at a markup, it is called a firm commitment
underwriting. However, if the investment bank considers the risk too great for an
underwriting, it may only assent to a best effort agreement, where the investment
bank will simply do its best to sell the new issue.

In order for the primary market to thrive, there must be a secondary market, or
aftermarket which provides liquidity for the investment security, where holders of
securities can sell them to other investors for cash. Otherwise, few people would
purchase primary issues, and, thus, companies and governments would be restricted in
raising equity capital (money) for their operations. Organized exchanges constitute the
main secondary markets. Many smaller issues and most debt securities trade in the
decentralized, dealer-based over-the-counter markets.

24
In Europe, the principal trade organization for securities dealers is the International
Capital Market Association. In the U.S., the principal trade organization for securities
dealers is the Securities Industry and Financial Markets Association, which is the
result of the merger of the Securities Industry Association and the Bond Market
Association. The Financial Information Services Division of the Software and
Information Industry Association (FISD/SIIA) represents a round-table of market data
industry firms, referring to them as Consumers, Exchanges, and Vendors.

Public offer and private placement

In the primary markets, securities may be offered to the public in a public offer.
Alternatively, they may be offered privately to a limited number of qualified persons
in a private placement. Sometimes a combination of the two is used. The distinction
between the two is important to securities regulation and company law. Privately
placed securities are not publicly tradable and may only be bought and sold by
sophisticated qualified investors. As a result, the secondary market is not nearly as
liquid as it is for public (registered) securities.

Another category, sovereign bonds, is generally sold by auction to a specialized class

of dealers.

Listing and OTC dealing

Securities are often listed in a stock exchange, an organized and officially recognized
market on which securities can be bought and sold. Issuers may seek listings for their
securities in order to attract investors, by ensuring that there is a liquid and regulated
market in which investors will be able to buy and sell securities.

Growth in informal electronic trading systems has challenged the traditional business
of stock exchanges. Large volumes of securities are also bought and sold "over the
counter" (OTC). OTC dealing involves buyers and sellers dealing with each other by
telephone or electronically on the basis of prices that are displayed electronically,
usually by commercial information vendors such as Reuters and Bloomberg.

25
There are also eurosecurities, which are securities that are issued outside their
domestic market into more than one jurisdiction. They are generally listed on the
Luxembourg Stock Exchange or admitted to listing in London. The reasons for listing
eurobonds include regulatory and tax considerations, as well as the investment
restrictions.

Market
London is the centre of the eurosecurities markets. There was a huge rise in the
eurosecurities market in London in the early 1980s. Settlement of trades in
eurosecurities is currently effected through two European computerized
clearing/depositories called Euroclear (in Belgium) and Clearstream (formerly
Cedelbank) in Luxembourg.

The main market for Eurobonds is the EuroMTS, owned by Borsa Italiana and
Euronext. There are ramp up market in Emergent countries, but it is growing slowly.

Physical Nature of Securities

Certificated securities
Securities that are represented in paper (physical) form are called certificated
securities. They may be bearer or registered.

Bearer securities
Bearer securities are completely negotiable and entitle the holder to the rights under
the security (e.g. to payment if it is a debt security, and voting if it is an equity
security). They are transferred by delivering the instrument from person to person. In
some cases, transfer is by endorsement, or signing the back of the instrument, and
delivery.

Regulatory and fiscal authorities sometimes regard bearer securities negatively, as

they may be used to facilitate the evasion of regulatory restrictions and tax. In the
United Kingdom, for example, the issue of bearer securities was heavily restricted
firstly by the Exchange Control Act 1947 until 1953. Bearer securities are very rare in
the United States because of the negative tax implications they may have to the issuer
and holder.
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Registered securities
In the case of registered securities, certificates bearing the name of the holder are
issued, but these merely represent the securities. A person does not automatically
acquire legal ownership by having possession of the certificate. Instead, the issuer (or
its appointed agent) maintains a register in which details of the holder of the securities
are entered and updated as appropriate. A transfer of registered securities is effected
by amending the register.

Non-certificated securities and global certificates

Modern practice has developed to eliminate both the need for certificates and
maintenance of a complete security register by the issuer. There are two general ways
this has been accomplished.

Non-certificated securities
In some jurisdictions, such as France, it is possible for issuers of that jurisdiction to
maintain a legal record of their securities electronically.

In the United States, the current "official" version of Article 8 of the Uniform
Commercial Code permits non-certificated securities. However, the "official" UCC is
a mere draft that must be enacted individually by each of the U.S. states. Though all
50 states (as well as the District of Columbia and the U.S. Virgin Islands) have
enacted some form of Article 8, many of them still appear to use older versions of
Article 8, including some that did not permit non-certificated securities.

In the U.S. today, most mutual funds issue only non-certificated shares to
shareholders, though some may issue certificates only upon request and may charge a
fee. Shareholders typically don't need certificates except for perhaps pledging such
shares as collateral for a loan.

Global certificates, book entry interests, depositories

In order to facilitate the electronic transfer of interests in securities without dealing
with inconsistent versions of Article 8, a system has developed whereby issuers
deposit a single global certificate representing all the outstanding securities of a class
or series with a universal depository. This depository is called The Depository Trust
27
Company, or DTC. DTC's parent, Depository Trust & Clearing Corporation (DTCC),
is a non-profit cooperative owned by approximately thirty of the largest Wall Street
players that typically act as brokers or dealers in securities. These thirty banks are
called the DTC participants. DTC, through a legal nominee, owns each of the global
securities on behalf of all the DTC participants.

All securities traded through DTC are in fact held, in electronic form, on the books of
various intermediaries between the ultimate owner, e.g. a retail investor, and the DTC
participants. For example, Mr. Smith may hold 100 shares of Coca Cola, Inc. in his
brokerage account at local broker Jones & Co. brokers. In turn, Jones & Co. may hold
1000 shares of Coca Cola on behalf of Mr. Smith and nine other customers. These
1000 shares are held by Jones & Co. in an account with Goldman Sachs, a DTC
participant, or in an account at another DTC participant. Goldman Sachs in turn may
hold millions of Coca Cola shares on its books on behalf of hundreds of brokers
similar to Jones & Co. Each day, the DTC participants settle their accounts with the
other DTC participants and adjust the number of shares held on their books for the
benefit of customers like Jones & Co. Ownership of securities in this fashion is called
beneficial ownership. Each intermediary holds on behalf of someone beneath him in
the chain. The ultimate owner is called the beneficial owner. This is also referred to as
owning in "Street name".

Among brokerages and mutual fund companies, a large amount of mutual fund share
transactions take place among intermediaries as opposed to shares being sold and
redeemed directly with the transfer agent of the fund. Most of these intermediaries
such as brokerage firms clear the shares electronically through the National Securities
Clearing Corp. or "NSCC", a subsidiary of DTCC.

Other depositories: Euroclear and Clearstream

Besides DTC, two other large securities depositories exist, both in Europe: Euroclear
and Clearstream.

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Divided and undivided security
The terms "divided" and "undivided" relate to the proprietary nature of a security.
Each divided security constitutes a separate asset, which is legally distinct from each
other security in the same issue. Pre-electronic bearer securities were divided. Each
instrument constitutes the separate covenant of the issuer and is a separate debt.

With undivided securities, the entire issue makes up one single asset, with each of the
securities being a fractional part of this undivided whole. Shares in the secondary
markets are always undivided. The issuer owes only one set of obligations to
shareholders under its memorandum, articles of association and company law. A share
represents an undivided fractional part of the issuing company. Registered debt
securities also have this undivided nature.

Fungible and non-fungible security

The terms "fungible" and "non-fungible" relate to the way in which securities are
held.

If an asset is fungible, this means that if such an asset is lent, or placed with a
custodian, it is customary for the borrower or custodian to be obliged at the end of the
loan or custody arrangement to return assets equivalent to the original asset, rather
than the specific identical asset. In other words, the redelivery of fungibles is
equivalent and not in specie In other words, if an owner of 100 shares of IBM
transfers custody of those shares to another party to hold them for a purpose, at the
end of the arrangement, the holder need simply provide the owner with 100 shares of
IBM which are identical to that received. Cash is also an example of a fungible asset.
The exact currency notes received need not be segregated and returned to the owner.

Undivided securities are always fungible by logical necessity. Divided securities may
or may not be fungible, depending on market practice. The clear trend is towards
fungible arrangements.

The primary market is that part of the capital markets that deals with the issuance of
new securities. Companies, governments or public sector institutions can obtain
funding through the sale of a new stock or bond issue. This is typically done through a
29
syndicate of securities dealers. The process of selling new issues to investors is called
underwriting. In the case of a new stock issue, this sale is an initial public offering
(IPO). Dealers earn a commission that is built into the price of the security offering,
though it can be found in the prospectus.

Features of primary markets are:

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

Methods of issuing securities in the primary market are:

Initial public offering;
Rights issue (for existing companies);
Preferential issue.

The secondary market, also known as the aftermarket, is the financial market
where previously issued securities and financial instruments such as stock, bonds,
options, and futures are bought and sold.. The term "secondary market" is also used to
refer to the market for any used goods or assets, or an alternative use for an existing
product or asset where the customer base is the second market (for example, corn has

30
been traditionally used primarily for food production and feedstock, but a "second" or
"third" market has developed for use in ethanol production). Another commonly
referred to usage of secondary market term is to refer to loans which are sold by a
mortgage bank to investors such as Fannie Mae and Freddie Mac.

With primary issuances of securities or financial instruments, or the primary market,

investors purchase these securities directly from issuers such as corporations issuing
shares in an IPO or private placement, or directly from the federal government in the
case of treasuries. After the initial issuance, investors can purchase from other
investors in the secondary market.

The secondary market for a variety of assets can vary from loans to stocks, from
fragmented to centralized, and from illiquid to very liquid. The major stock exchanges
are the most visible example of liquid secondary markets - in this case, for stocks of
publicly traded companies. Exchanges such as the New York Stock Exchange, Nasdaq
and the American Stock Exchange provide a centralized, liquid secondary market for
the investors who own stocks that trade on those exchanges. Most bonds and
structured products trade over the counter, or by phoning the bond desk of ones
broker-dealer. Loans sometimes trade online using a Loan Exchange.

Function
Secondary marketing is vital to an efficient and modern capital market. In the
secondary market, securities are sold by and transferred from one investor or
speculator to another. It is therefore important that the secondary market be highly
liquid (originally, the only way to create this liquidity was for investors and
speculators to meet at a fixed place regularly; this is how stock exchanges originated,
see History of the Stock Exchange). As a general rule, the greater the number of
investors that participate in a given marketplace, and the greater the centralization of
that marketplace, the more liquid the market.

Fundamentally, secondary markets mesh the investor's preference for liquidity (i.e.,
the investor's desire not to tie up his or her money for a long period of time, in case
the investor needs it to deal with unforeseen circumstances) with the capital user's
preference to be able to use the capital for an extended period of time.
31
Accurate share price allocates scarce capital more efficiently when new projects are
financed through a new primary market offering, but accuracy may also matter in the
secondary market because: 1) price accuracy can reduce the agency costs of
management, and make hostile takeover a less risky proposition and thus move capital
into the hands of better managers, and 2) accurate share price aids the efficient
allocation of debt finance whether debt offerings or institutional borrowing.

Related usage
Term may refer to markets in things of value other than securities. For example, the
ability to buy and sell intellectual property such as patents, or rights to musical
compositions, is considered a secondary market because it allows the owner to freely
resell property entitlements issued by the government. Similarly, secondary markets
can be said to exist in some real estate contexts as well (e.g. ownership shares of time-
share vacation homes are bought and sold outside of the official exchange set up by
the time-share issuers). These have very similar functions as secondary stock and
bond markets in allowing for speculation, providing liquidity, and financing through
securitization.

Private Secondary Markets

Partially due to increased compliance and reporting obligations enacted in the
Sarbanes-Oxley Act of 2002, private secondary markets began to emerge. These
markets are generally only available to institutional or accredited investors and allow
trading of unregistered and private company securities.

In private equity, the secondary market (also often called private equity secondarys
or secondarys) refers to the buying and selling of pre-existing investor commitments
to private equity funds. Sellers of private equity investments sell not only the
investments in the fund but also their remaining unfunded commitments to the funds.

32
EQUITY SHARES:
They are also called as common stock. The common stock holders of a
company are its real owners, the own the company and assume the ultimate risk
associate with ownership. Their liability, how ever is restricted to the amount of their
investment in the event of liquidation, these stock holders have a residual claim on the
assets of the company after the claims of all creditors and preferred stock holders, are
settled in full. Common stock like preferred stock, as no maturity date.NSE started
trading in the equities segment (Capital Market segment) on November 3, 1994 and
within a short span of 1 year became the largest exchange in India in terms of
volumes transacted. Trading volumes in the equity segment have grown rapidly with
average daily turnover increasing from Rs.17 crores during 1994-95 to Rs.14,148
corers during FY 2007-08. During the year 2007- o8,NSE reported a turnover of
Rs.3,551,038 crores in the equities segment. The Equities section provides you with
an insight into the equities segment of NSE and also provides real-time quotes and
statistics of the equities market. In-depth information regarding listing of securities,
trading systems & processes, clearing and settlement, risk management, trading
statistics etc are available here.

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AUTHORIZED, ISSUED AND OUTSTANDING SHARES:
An authorized shares is the maximum no. of shares that the articles of
association (AOA) of the company permit it to issue in the market. A company can
however amend its AOA to increase the number. The number of shares that the
company has actually issued out these authorized shares is called as issued shares. A
company usually likes to have a number of shares that a authorized but un-issued.
These un-issued allow flexibility in granting stock options, pursuing merger targets
and splitting the stock. Outstanding shares refer to the number of shares issued and
actually held by public. The corporation can buy back part of its issued stock and hold
it as a treasury stock. Par value, book value and liquidating value. The par value of a
share of stock is merely a recorded figure in the corporate charter and is of little
economic significance. A company should not, however, issue common stock at a
price less than par value, because any discount from par value (amount by which the
issuing price is less than the par value) is considered a contingent liability of the own
wrest to the creditors of the company. In the event of liquidation, the share holders
would be legally liable to creditors of any discount from par value.

Example: suppose that xyz inc. is ready to start business for the first time and sold
10000 shares rupees 10 each . the share holders equity portion of the balance sheet
would be common stock @ 10 each at par value:10000 shares issued and outstanding
RS100000 Total shares holders equity RS100000.The book value per share of
common stock is the shareholders equity total assets minus liabilities and preferred
stocks as listed on the balance sheet- dividing by the number of shares outstanding
.suppose that xyz is now 1 year old has generated RS 500000 after- tax profits, but
pays number dividing. Thus, retained earnings are RS 50000. the share holders equity
is now RS 100000+ RS 50000 =150000 and the book value per share is rs
1500000/10000=RS 25.Although one might expect the book value per share of stock
to correspond to the liquidating value (per share) of the company, most frequently
does not. Often assts are sold for less than their values, particularly when liquidating
costs are involved.

34
Market value
Market value per share is the current price at which the stock is traded. For
actively traded stocks, market price quotations are readily available. For the many in
active stocks that have thin markets, price are difficult to obtain. Even when
obtainable, the information may reflect only the sale of a few shares of stock of
common stock and not typify the market value of the firm as the whole. The market
value of a share of common stock will usually differs from its book value and its
liquidating value. Market value per share of common stock is a function of the current
and expected future dividends of the company and the perceived risk of the stock on
the part of investors.

Rights of common share holders:

1. Rights of income:
If the company fails to pay contractual interest and principle and payments to
creditors, the creditors are able to take legal action to insure that principle payments
are made of company is liquidated. Common share holders, on the other hand, have
legal recourse to a company for not distributing profits. only if management, the
board of directors, or both engaged in fraud may share holders take their case to court
and possibly force the company to pay dividends.

2. Voting rights:
The common shares of a company are its owners and they are entitled to elect a board
of directors. In a large corporations shares holders usually exercise only indirect
control through the board of directors they elect. The board, in turn, select the
management, and the management actually controls the operations of the company. In
a sole proprietorship, partnership, or small corporation, the owners usually control the
operation of the business directly.

3. Proxies and proxy contests:

Common share holders are entitled to one vote for each share of stock that they own .
it is usually difficult, both physically and financially, for the most share holders to
attend a corporations annual meetings. Because of this, many share holders vote of
means of a proxy, a legal document by which share holders assign their right to vote
to another person.
35
4. Voting procedures:
Depending on the corporate charter, the board of directors is elected under either
Majority rule voting system or a cumulative voting system. Under the majority rule
system, stock holders have one for each share of stock that they own, and they must
vote for each director position that is open. Under cumulating voting system, a stock
holder is able to accumulate votes and cast them for less than the total number of
directors being elected. The total number of votes of each share holders is equal to the
number of shares the stock holder times the number of directors being elected.

ISSUE MECHNISM:
The success of an issue depends, partly, on the Issue Mechanism.

The methods by, which new issues are made of

1. Public issue through prospectus.
2. Offer for sale.
3. Placement.
4. Rights issue.

1. Public Issue Through Prospectus :

Under this method, the issuing companies themselves offer directly to general public
a fixed number of shares at a stated price, which in the case of new companies is
invariably the face value of the securities, and in the case of existing companies, it
may something include a underwritten to ensure arising out of unsatisfactory public
response. Transparency and wide distributions of shares are its important and
advantages. The foundation of the public issue method is a prospectus, the minimum
contents of which are prescribed by the Companies Act 1956. It also provides both
civil and criminal liabilityfor any misstatement in the prospectus. Additional
disclosure requirements are also mandated by the SEBI.

The content of the prospectus, inter aria, include:

Name and registered office of the issuing company.
Existing and proposed activities.
Board of directors.
Location of the industry.

36
 Authorized, subscribed and proposed issued of capital to public.
Dates of opening and closing of subscription list.
Names of broker, underwriter, and other from whom application forms along with
copies
Prospectus can be obtained.
Minimum subscription.
Names of underwriter, if any, along with a statement that in the opinion of the
directors.
Resources of the underwriter are sufficient to meet the underwriting obligation.
A statement that the company will make an application stock exchange for the
permission to deal in or for a quotation of its and so on.

2. Offer for Sale:

Broker to their own client of securities which have been previously purchased or
subscribed. Under this method, securities are acquired by the issue houses, as in offer
for sale method, but instead of being subsequently offered to the public, they are
placed with the client of the issue houses, both individual and institutional investors.
Each issue house has a prepared to subscribe to any securities which are issued in this
manner. Its procedure is the same with the only Difference of ultimate investors. In
this method, no formal underwriting of the issue is required as the placement itself
Amount to underwriting since the houses agree to place the issue with their clients.
The main Advantages of placing, as a method issuing new securities, are its relative
cheapness. There is a cost cutting on account of underwriting commission, expense
relating to applications, allotment of shares and the stock exchange requirements
relating to contents of the prospectus and its advertisement. This method is generally
adopted by small companies with unsatisfactory financial performances. Its weakness
arises from the point of distribution of securities. As the securities are offered only to
a select group of investors, it may lead to the concentration of shares in to a few hands
that may create artificial scarcity of scripts in times of hectic dealings in such shares
in the market.

3. Rights Issue:
Only the existing companies can use this method. In the case of companies whose
shares are already listed and widely-held , shares can be offered to the existing
shareholders. This is called right issue. Under this method, the existing shareholders.

37
Are offered the right to subscribed to new shares in proportion to the number of
shares they already hold. This is made by circular to existing shareholders only.
In India, section 81 of the companies act 1956 provides that where a company
increases its subscribed capital by the issue of new shares, either after two years of its
formation or after one year of first issue of shares whichever is earlier, these have to
be first offered to the existing shareholders with this requirement by passing a special
resolution to the same effect. The chief merit of rights issues is that it is an
inexpensive method.

Sweat equity shares:

Under section 9Aof the companies Act, 1956, a company can issue sweat equity
shares to its employees or directors at discount or for consideration other than cash for
providing know-how making available rights in the nature of intellectual property
rights or value additions etc on the following.

Conditions:
1. The issue of sweat equity share is authorized by a special resolution passed by the
company in the general meeting.
2. The resolution specifies the number of shares, current market, Price, resolution, if
any, and the class or classes of directors or employees to whom such equity shares
are to be issued.
3. The company is entitled to issue sweat equity shares after completion of one year
from the date of Commencement Of business.
4. The equity shares of the company must be listed on a recognized stock exchange.
5. The issue of sweat equity shares must be listed on a accordance with the
regulations made by the SEBI in the behalf.
6. An unlisted company can issue sweat equity shares in accordance with the
prescribed guidelines made for this purpose.
7. All the limitations, restrictions and provision relating to equity shares shall be
applicable to sweat equity shares.

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PREFERENCE SHARES:
Preference shares are a hybrid security because it has both ordinary shares and bonds.
Preference shareholders have preferential rights in respect of assets and dividends. In
the event of winding up the preference share holders have a claim on available assets
before the ordinary shareholders. In addition, preference shareholders get their stated
dividend before equity shareholders can receive any dividends.

TYPES OF PREFERENCE SHARES:

1. Cumulative and Non-cumulative preference shares: The cumulative preference
gives rights to demand the unpaid dividends of any year, during the subsequent ears
when the profits and ample. All preference dividends arrears must be paid before any
dividends can be paid to equity shareholders. The non cumulative preference share
carry a right to a fixed dividend out of the profits to any year. In case profits are not
available in a year, the holders get nothing, nor can they claim unpaid dividends in
subsequent years.

2. Cumulative convertible preference shares:

The cumulative convertible preference (CCP) share is an instruments that embraces
features of both equity shares and shares and preference shares, but which essentially
is a preference shares. Since the CCP shares capital would constitute a class of shares,
distinct from purely equity and purely preferences share capital, the rights of the
instrument holders must be stated either in a general body resolution or in the articles
or in the terms of issues in the offer documents viz., prospectus /letter of offer.

3. Participating and non participating preference shares:

Participating preference shares are those shares which are entitled to a fixed
preferential dividend and. in addition, carry a right to participate in the surplus profits
along with equity shares holders after dividend at a certain rate has been paid to
equity share holders. Again in the event of winding up, if after paying back both
preference and equity share holders, there is still any surplus left, then the
participating preference share holders get additional shares in the surplus assets of the
company. Unless expressly provided, preference share holders get only the fixed
preference dividends and return on capital in the event of winding up out of realized
values of assets after meeting all external liabilities and nothing more. The rights to
participate may be given either in the memorandum or articles or by virtue of terms of
issue.

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4. Redeemable and Irredeemable preference shares:
Subjects to an authority in the articles of association, a public limited company may
issue redeemable preference shares to be redeemed either at a fixed date or after a
certain period of time during the life time of the company. The companies act, 1956
prohibits the issue of any preference share which is irredeemable or is redeemable
after the expiry of a period of twenty years from the date issue.

Power to Issue Redeemable Preference Shares:

Section 80 of the companies act 1956 permits a company to issue Redeemable
preference shares if:
The company is limited by shares.
Its article of association authorizes the issue of redeemable preference shares.
Those shares are redeemable at the option of the company.

A company is allowed to issue redeemable preference shares in the following

circumstances:
Such preference shares shall be redeemed only out of profits of the company,
which would otherwise be available for dividend.
Such redemption can also be made out of the proceeded of fresh issues of shares
made of the purpose of redemption.
Before redemption, such shares must be fully paid up. The premium on
redemption shall be provided out of profits of the company or out of securities
premium account, before the share are redeemed.
Where shares are redeemed out of profits to a separate account called capital
The redemption of preference shares under this section shall not be taken as
reducing the authorized capital of the company.
The capital redemption reserve account may used for issue of fully paid bonus
shares. Companies are not allowed to issued irredeemable preference shares or
preference shares which are redeemable after the expire of a period of 20 years
from the date of its issue. In case of default, the company and every officer of the
company who is in default shall be punishable with a fine which may extend to
Rs.10000.

40
Deferred/ Founders shares:
A private company any issue what are known as deferred or founders shares. Such
shares are normally held by promoters and directors of the company. That is why they
are usually called of a smaller denomination, say on rupee each. How ever they are
generally given. equal voting rights with equity shares, which may be of higher
denomination, say Rs10 each. Thus, by investing relatively lower amounts, the
promoter may gain control over the management of the company. As regards the
payment of dividends have been declared on the preference and equity shares. It is
because of this deferment of the dividend payment that these shares are also called
deferred shares. The promoters, founders and directors tend to have direct interest in
the success of the company they will receive dividends on these shares only if the
profits are high enough to leave a balance of after paying dividends to preference an
equity shareholders. Besides greater the profits of the company , the higher will be
dividends paid on these shares.

Issued share at a premium:

When a company issues shares at a premium, whether or cash or consideration other
than cash, the premium collected on those shares shall be transferred to a separate
account called securities premium account. The provision of the act relating
reduction of shares capital shall also apply to the securities premium account may be
applied by the company in the following ways:

In paying up un issued shares of the company to be issued to members of the

company as fully paid up shares.
In writing off the preliminary expenses of the company.
In writing off the expenses of, or the commission paid or discount allowed on, any
issue of shares debentures of the company.
In providing for the premium payable on redemption of any preference shares or
debentures.

41
Issued share at a Discount:
The issued of shares at a discount must be of a class of shares issued by the company.
1. The issue of shares at a discount must be authorized by a resolution passed in the
general meeting and sanctioned by the central government.
2. The resolution shall specify the maximum rate of Discount at which the shares are
to be issued.
3. The maximum rate of discount must not exceed 10% unless the central
government is of the Opinion that higher percentage of discount may be allowed
in special circumstances.
4. The shares must be issued within two months from the date of sanction by the or
within such extended time as the central government may allow.
5. The issue of shares at a discount can be done by a company only a year after the
Commencement of the business by the company.
6. In case of revival and rehabilitation of sick industry companies under chapter
VIA, the issue of shares at discount shall be sanctioned by the Tribunal instead
of central government.
7. Every prospectus relating to issue of shares shall contain the details of discount
allowed on the issue of shares or the unwritten off amount f discount at the date of
issue of prospectus.
8. In case of default, the company and every officer of the company who is in default
shall be punishable with fine which may extend to Rs.500.Shares issued for
consideration other than cash
9. To the underwriters of shares and promoters by way of payment remuneration or
for Expenses incurred.
10. To the vendor from whom the running business is purchased, as purchase price or
Consideration.
11. Issued of bonus shares out of the reserves to the existing shareholders of the
company.

DEBENTURES:
Acknowledge of debt, given under the seal of the company and containing a
contract for the repayment of the principal sum at a specified date and for repayment
of the principal sum at a specified date and for the payment of interest at fixed rate
percent until the principal sum is repaid, and it may or may not give the charge on the
assets to the company as security of the loan.

42
Kind of debentures:
1. Bearer debentures: Bearer debentures are similar to share warrants in that too are
negotiable instruments, transferable by delivery. The interest on bearer debentures
is paid by the means of attached coupons. On maturity, the principal sum is paid to
the bearers.
2. Registered debentures: These are debentures which are payable to the registered
holders i.e. persons whose names appear in the register of debenture holders. Such
debentures are transferable in the same way as shares.
3. Perpetual or Irredeemable debentures: A debenture which contains no clause as
to payment or which contains a clause that it shall not be paid back is called a
perpetual or : irredeemable debenture. These debentures are redeemable only on
the happening of a contingency on the expiration of a period, however long. It
follows that debentures can be made perpetual, i.e. the loan is repayable only on
winding up or after a long period of time.
4. Redeemable debentures : These debentures are issued for a specified period of
time. On the expiry of the specified time the company has the right to pay back
the debenture holders and have its properties released from the mortgage or
charge. Generally, debentures are redeemable.
5. Debentures Issued as Collateral Security for a Loan: The term collateral
security or secondary security means, a security which can be realized by the party
holding it in the event of the loan being not paid at the proper time or according to
the agreement of the parties. At times, the lenders of money are given debentures
as a collateral security for loan. The nominal value of such debentures is always
more than the loan. In case the loan is repaid, The debentures issued as collateral
security are automatically redeemed.

1. Naked debentures: Normally debentures are secured by a mortgage or a

charge on the companys assets. However debentures may be issued without
any charge on the assets of the company. Such debentures are naked or
unsecured debentures. They are mere acknowledgment of a debt due from the
company, creating no rights beyond those secured creditors.
2. Secured debentures: when any particular or specified property of the
company is offered as security to the debenture holders and when the company
can deal with it only subject to the prior right of the debenture holders, fixed
43
 charge on the undertaking of the company i.e.. whole of the property of the
company, both present and future, an when it can deal with the property in the
ordinary course of business until the charge crystallized i.e.. when the
company goes in to liqudation or when a receive is appointed, the charge is
said to be floating charge. When the floating charge crystallizes, the
debentures holder have right to be paid out of the assets subjects to the right of
the preferential creditor but prior to making any payment to unsecured
creditors.

Methods of redemption of debentures:

A company may issue redeemable as well as irredeemable debentures.
There are two important ways of redeeming the debentures according to the terms of
the issue.
Redemption of debentures on a fixed date:
In this method payment to the debenture holders is made at the expiry of the stated
period. A sinking fund account is created by debiting the profits and loss
appropriation account. The amount so credited in the sinking fund account is invested
in the gilt edged securities. The securities are sold at the date of redemption of
debentures.

Redemption of debentures by periodical drawings:

In this method, payment is made year after of a certain portion of the total debentures
by drawing. A such the revenue account is debited with the annual drawings and the
redemption fund account are credited.

Convertible debentures (CDs):

A company may also issue CDs in which case an option is given to the debenture
holders to covert them in to equity or preference shares at stated rates of exchange,
after a certain period. Such debentures once converted in to shares cannot be
reconverted in to debentures. CDs may be fully or partly convertible. In case of fully
convertible debentures, the inter face values converted in to shares at the expiry of
specified period(S). In case of partly convertible debenture only convertible portion is
redeemed at the end of specified period. Non convertible debenture do not confer any

44
option on the holder to the debenture in to shares and are redeemed at the expiry of
specified period (s).CDs, whether fully or partly convertible, may be converted in to
shares at the end of specified periods in one or more stages. The company should get a
credit rating of debenture done by credit rating agency. CDs are listed on stock
exchanges. The partly convertible debenture (PCDs) offer more flexibility to both
companies and investors. It has been claimed to be better than fully convertible
debenture as it does not automatically entail large equity base, particularly in case of
new companies. Experience shows that servicing of large base of capital is not easy in
case of new projects, especially if the company runs in to rough weather due to
marketing difficulties. As such, the non-convertible portion of the debenture keeps the
equity of a company within manageable l

American Depository Receipts (ADR):

An American depository receipt (ADR) is a negotiable receipt which represents one or
more depository shares held by a US custodian bank, which in turn represent
underlying shares of non- issuer held by a custodian in the home country. ADR is an
attractive investment to US investors willing to invest in securities of non US issuers
for following reasons:

ADR provide a means to US investors to trade the non US

company shares in US dollars ADR negotiable receipt (which represents the non
US share) issued in US capital market and is traded in dollars. The trading in
ADR effectively means trading in underlying shares.
ADR facilitates share transfers. ADRs are negotiable and can
be easily transferred among the investors like any other negotiable instrument.
The transfer of ADRs automatically transfers the underlying share.
The transfer of ADRs does not involve any stamp duty and
hence the transfer of underlying share does not require any stamp duty. The
dividends are paid to the holders of ADRs in US dollars.

45
ADR OFFERINGS:
A public offering provides access to the broadest US investor base and most
liquid US securities market. The compliance requirements in public offerings are the
strictest and comprise of Registration of underlying security under the Act (From F1)
Registration of ADR under the 1993Act (From F6) Registration under the 1934 Act (if
the company is not already Regulation act under the 1934 Act).

Global Depository Receipt (GDR):

With the growth in international equity issuance, together with growth in the
underlying secondary market investment, an increasing need has been felt for better
fungibility. The investors demand stocks that trade freely on an international basis
without restrictions. The depository receipts have be used as a partial solution to this
problem. American depository receipt shave been the favored forms of investments by
US investors in foreign equities. A number of international equity offers, particularly
some Asian markets have increasingly used global depository receipts
(GDR),particularly where legal restrictions and closed markets have prevented the
world wide circulation of underlying security on a freely trade basis. The GDRs
continue to have value in liquid or restricted markets and are frequently used by
project companies to raise equity funds.

CHARACTERISTICS OF A GDR:
Depository receipts are negotiable certificates with publicly traded equity of the
issuer as underlying security.
An issue of depository receipts would involve the issuer, issuing agent to a foreign
depository.
The depository, in turn, issues GDRs evidencing their rights as share holders.
Depository receipts are denominated in foreign currency and are listed of
international exchange such as London or Luxembourg.
GDRs enable investors trade a dollar denominated instrument on an international
stock exchange and yet have rights in foreign shares.
The principle purpose of the GDR is to provide international investors with local
settlement.

46
 The issuer issuing the shares has to pay dividends to the depository in the
domestic currency.
The depository has to then convert the domestic currency into dollars for onward
payment to receipt holders. GDRs bear no risk of capital repayment.

DERIVATIVES:
It is a contract whose value depends on or value depends on or derives from
the value of an underlying asset [say a share, forex, commodity or an index]. In its
broadest sense a derivative attempts to hedge against the variability of any economic
variable. Thus exposures or perceived risks to a firm arising from the variation in
interest rates, exchange rates, commodity prices and equity prices can be hedged
through an appropriate derivative structure. Such a derivative structure covers a wide
variety of financial contracts viz. futures, forwards, options, swaps and different
variations thereof. These contracts can be traded on the various exchanges in a
standardized manner or by custom designed for individual requirements. The history
of derivatives can be traced to the middle ages when farmers and traders in grains and
other agricultural products used certain specific types of futures and forwards to
hedge, the risks. Essentially the farmer wants to ensure that he receives a reasonable
price for the grain that he would harvest [say] three to four months later. An over
supply hurt him badly. For the grain merchant, the opposite is true. A fall in the
agricultural product will push up the prices. It made sense therefore both of them to
fix a price for the future. These was how the future market first developed in
agricultural commodities such as cotton, coffee, petroleum, soya bean, sugar and then
to financial products such at interest rates, foreign exchange and shares. In 1995 the
Chicago board of trade commenced trading derivatives. For the derivatives market to
develop three kinds of participants are necessary .They are the hedgers, the
speculators and the arbitrageurs. All three must co-exist.

Participation Hedger:
A hedger is a risk averse. Typically in India he may be a treasurer in a public
sector company who wants to know with certainty his interest costs for the year 2002.
therefore based on current information he would enter into a future contracts and lock
up his interest rate four years henceBut in doing so he consciously ignores what is

47
called the upside potential-here the possibility that the interest rate may be lower in
the year 2002 than what he had contract four years earlier. A hedger plays it safe. For
a hedging transaction to be completed there must be another person willing to take
advantage of the price movements. That is the speculator.

Speculators:
Contrary to the hedger who avoids uncertainties the speculator thrives on
them. The Speculator may lose plenty of money if his forecast goes wrong but stands
to gain enormously if he is proved correct. The risk taking associated with speculation
is an integral part of a derivatives market.

ARBITRAGEUR:
The third category of participant is the arbitrageur, who looks at risk less profit
by simultaneously buying and selling the same or similar financial products in
different markets. Markets are seldom perfect and there is a possibility to take
advantage of time or space differentials that exits. Arbitrage evens out the price
variation with the government of India permitting futures trading in several
commodities and with futures trading have arrived in the stock markets, index based
derivative trading has finally arrived in India. For smooth functioning of derivative
trading the government of India has commenced the process of dematerialization of
shares, short sale facility, electronic fund transfer facility and rolling settlements in
stock markets. This will hopefully bring transparency in the process of price
discovery of the derivative and also attract a board spectrum of the hedgers and
speculators from out of professionally managed corporate that not only must have a
good balance sheet but also significant trading and risk management skills. The stock
holding corporation of India has commenced discussions with the premier stock
exchanges of India about setting up a clearing house for derivatives transactions.

Futures:
A futures contract is an exchange traded agreements between two parties to
buy or sell an asset at a specified time in the futures at the agreed price. In the case of
stock index futures contracts the underlying asset is the specified stock index. To
facilitate n the futures contracts, the exchange specifies certain standard features of
the contracts the standards contracts once bought can be sold at any time to square off
48
the position till the date of expiry of the contract. Similarly, once a futures contract is
sold, it can be bought back at any time to square off the position. Thus a futures
contract may be off set prior to maturity by entering into an equal and opposite
transaction. More than 99% of futures transactions are off set this way.

FURTURE TERMINOLOGY:
SPOT PRICE:
The price at which an asset trades in the spot market.

FURTURE PRICE:
The price at which the future contract trades in the futures market.

CONTRACT CYCLE:
The period over which a contract trades. The index futures contracts on the NSE as
well as BSE have one-month and two-month and three-month expiry cycles, which
expire on last Thursday of the month. Thus a July expiration contract would expire on
the last Thursday of July. On the Friday following the last Thursday, a new contract
having a three - months expiry would be introduced for trading. More generally we
can say, on the first trading day after the day of the expiry of the months future
contract a new contract having a three - months expiry would be introduced for
trading.

EXPIRY DATE:
It is the date specified in the future contract. This is the last day on which the contract
will be traded. I will cease to exist by the end of that day.

CONTRACT SIZE:
The amount of asset that has to be delivered under one contract. The contract size of
the stock index futures on NSE nifty is 200 and the contract size of the stock index
futures on BSE Sensex is 50.

BASIS:
Basis is usually defined as the spot price minus the futures price. There will be a
different basis for each delivery month for same asset at any point in time. On 19 th
49
June 2001 nifty closed at 1206.65. August 2001 nifty futures closed at 1208.90.
Therefore the basis for the August nifty futures is -2.25 index points. In a normal
market, basis will be negative. This reflects the fact that the underlying asset is to be
carried at a cost for delivery in the future.

COST OF CARRY:
The relationship between futures prices can be summarized in terms of what is
known as the cost of carry. These measures the Storage cost plus the interest that is
paid to finance the asset less the income earned on the asset. In the case of stocks,
dividend will be the income earned on the asset. The storage cost will be negligible.

INITIAL MARGIN:
The amount that must be deposited in the margin account kept with the broker at the
time a futures contract is first entered into is known as initial margin. Margins are to
be strictly collected in the future and options markets by brokers as per the exchange
regulations. Otherwise the exchange cannot guarantee the trades to all participants in
the market.

MARKING TO MARKET
In the futures market, at the end of each trading day, the margin account is a adjusted
to reflect the investors gain or loss depending upon the futures closing price or
settlement price. This is called Marking-to-Market.

MAINTENANCE MARGIN:
If the balance in the margin account falls below the maintenance margin, the investor
receives a margin call and is expected to top up the margin account to the initial
margin level before trading commences on the next day.

BETA:
Beta is a concept to be used futures and options for hedging. Beta measures the
sensitivity of a share or a portfolio to that of the index. Beta of a share is found out by
relating the daily price changes of a share to the daily changes in a stock price index.
If a graph is drawn with daily changes of the share price on y axis and daily changes
in the index on x axis the slope of the straight line fitted will be the value of beta.
50
mathematically it is found by regression method. If the beta of Tisco is found to
bel.23,it implies if the index increases by 10% in a period, price of Tisco will increase
by 12.3%. Beta of the portfolios is found by weighted average of the betas of the
shares in the portfolios. For example, an investors portfolio has equal value in Tisco
and Infosys. Tisco has a beta of 1.23 and Infosys has a beta 1.37. the portfolio beta is
the average of 1.23 and 1.37 which is 1.3.NSE website is providing values of beta for
a large number of shares.

SPECULATORS AND HEDGERS IN FUTURES:

Speculators buy and sell derivatives to make profit, while hedgers buy and sell
derivatives to reduce risk. Speculators are vital to derivatives markets. They facilitate
hedging and provide liquidity. It is highly unlikely that hedger wishing to buy futures
will precisely match hedgers selling futures in terms of contracts to be traded. If
hedgers are net sellers there will be tendency for futures prices to fall. Speculators
will buy such under period futures. Such purchases by speculators allow net sales on
the part of hedgers. In so doing, they tend to maintain price stability since they are
buying into a falling market. Proper speculation thus provides stability to prices in
markets.In a liquid market, hedgers can make their transactions with ease and with
little impact costs. Speculative transactions add to market liquidity. speculators by
definition do a lot of information search and processing to forecast future behavior of
prices. Therefore they make markets more information ally efficient. In the stock
index futures markets speculators have two alternative strategies. If they are bullish
on the index they can go long on index Futures. If the spot prices go up, future prices
follow them along with their carry premiums and the speculators make the profits.If
the speculator is bearish he can go short on the index futures. If the spot Index goes
down, futures price also will go down and speculator makes a profit. The two
speculative strategies can be summarized as:

Bullish market, long index futures

Bearish market, short index futures

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ARBITRAGE IN FUTURE AND SPOT MARKET:
Future prices and spot prices are tightly linked by the fair price formula. Also on the
day of the expiry, the final settlement price of the future is made equal to the spot
index price. thus at the end , the spot and futures prices converge. Any deviation
between the fair price and actual price of a future can be utilized for earning risk less
profits by agents who are willing to buy in the spot market and deliver in future at
expiry. Such operations are called as arbitrage operations. Buying in the spot and
delivering in the future market is resorted to when actual futures price in the market is
higher than the fair price. if the actual future price is lower than the fair, then futures
are bought and shares are sold in the spot market to carry out the arbitrage operations.

Introduction to options:
Options give the holder or buyer of the option the right to do something. If the option
is called option, the buyer or holder has the right to buy the number of shares
mentioned in the contract at the agreed strike price. if the option is a put option, the
buyer of the option has the right to sell the number of shares mentioned in the contract
at the agreed strike price. the holder or the buyer does not have to exercise this right.
Thus on the expiry of day of the contract the option may or may not be exercised by
the buyer. In the contrast, in a futures contract, the two parties to the contract have
committed themselves to doing something at future date. To have this privilege of
doing the transaction at a future only if it is profitable, the buyer of options has to a
premium to the seller of options.

HISTORY OF OPTIONS:
In 1983 trading on stock index options contracts started. Since 1983, trading on
options of individual options decreased as most of the trading shifted to index options.
One of the reasons is that volatilities of the individual scripts is high and therefore
premiums on individual scripts is also high. In India stock index options were
introduced in june 2001.

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OPTION TERMINOLOGY:
INDEX OPTION:
An option having the index as the underlying asset. Like index futures contracts,
index option contract are also called cash settled.

STOCK OPTIONS:
Stock options are options on individual stocks. A contract gives the holder the right to
buy or sell shares at the specified price.

AMERICAN OPTIONS:
American options are options that can be exercised any time up to the expiration date.
This name is only a classification and does not imply that they are available only in
America.

EUROPEAN OPTIONS:
European options are options that can be exercised only on the expiration date.
European options areeasier to analyze than American options, and properties of
American options are frequentlydeducted from those of its European counter part.

CALL OPTIONS:
A call option gives the holder the right but not the obligation to buy an asset by a
certain date for a certain price.

PUT OPTIONS:
A put option gives the holder the right but not the obligation to sell an asset by a
certain date for a certain price.

BUYER OF OPTIONS:
The buyer of the option, either call or put, pay the premium and buys the right but not
the obligation to exercise his option on the seller/writer.

WRITER OF AN OPTION:
The writer of a call/put option is the one who receives the option premium and is
thereby obliged to sell/buy the asset if the buyer exercises on him. Option writer is the
seller of the option contract.

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STRIKE PRICE:
The price specified in the option contract at which buying or selling will take place is
known as the strikeprice or the exercise price.

OPTIONS PRICE:
Option price is the premium, which the option buyer pays to the option seller or
writer. Black and scholes formula is widely used for determining the fair value of
share.

EXPIRATION DATE:
It is the date on which the European option is exercised. It is also called as exercise
date, strike date or maturity date.

INTRINSIC VALUE OF AN OPTION:

The option premium cab be broken down into two components- intrinsic value and
time value. The intrinsic value of an option is the amount, which the holder will get
by exercising his option and immediately selling or buying the acquired shares in the
spot market. For example, if the strike price of a call option on Reliance shares is
Rs.325 and current market price is Rs.350. The holder of the option can buy the
Reliance share at Rs.325 by exercising the option and can make a profit of Rs.25 by
immediately selling them in the market. In this case the intrinsic value of the call
option is Rs.25.

TIME VALUE OF THE OPTIONS:

The time value of an option is the difference between its premium and its intrinsic
value.

AT-THE-MONEY:
An option is called at-the-money option when the strike price equals, or nearly equals,
the spot price of the share. For example, if the strike price of stock index option on
Nifty index is also at 1080, the option is called at-the-money option.

54
SPOT PRICE > STRIKE PRICE
IN-THE-MONEY:
A call option is in the money when the underlying asset price is greater than the strike
price. For example, if the strike price in the case of Nifty stock index option is 1050
and Nifty is at 1080, the option is in-the-money option.

SPOT PRICE = STRIKE PRICE

OUT-OF-THE-MONEY:
A call option is out-of-the-money if the strike price is greater than the underlying asset
price. For example, if the strike price in the case of Nifty stock index option is 1200
and Nifty is at 1080, the option is out-of-the-money option.

SPOT PRICE < STRIKE PRICE

USES OF OPTIONS:
Like futures options are also used for hedging and speculations. Arbitrageurs can look
for Mispricing between spot, option and futures markets and do transactions whenever
they find miss pricing.

TRADING OR SPECULATING WITH OPTIONS:

Options provide multiple opportunities for trading. Options premiums are determined
by volatility of the underlying asset, time to expiration of the option and the risk free
interest rate .Changes in any of these variables changes option premiums even though
the price of the underlying asset remains constant. Thus a speculator who analyses
multiple dimensions has a lot more opportunity in options to strategize and act.

ARBITRAGE WITH OPTIONS:

Arbitrage involves making risk less profits from miss pricing; relatively under priced
options are bought and relatively overpriced are sold. Pure arbitrage requires that
none of the arbitragers own capital is used. He should be able to borrow all the capital
required. If the arbitrager uses his own capital, the process is called quasi-arbitrage.
There will be number of situations providing arbitrage opportunity as three markets,
spot, futures and options are involved

55
SUMMING UP:
Options are used by hedgers and speculators. Options provide a variety of ways in
which they can be used to attain the hedging and speculative objectives. Thus trading
interest comes from different participants with different motives. Arbitrageurs will
have opportunities whenever option premiums are out of line with the fair prices. A
fully developed option market provides a good market for traders to display their
trading expertise and hedgers an alternative-hedging medium.

FORWARD CONTRACTS:
In order to avoid this risk one way could be that the farmer may sell his crop at an
agreed-upon rate now with a promise to deliver the asset, i.e., crop at a pre-
determined date in future. This will at least ensure to the farmer the input cost and a
reasonable profit. Thus, the farmer would sell wheat forward to secure himself against
a possible loss in future. It is true that by this way he is also foreclosing upon him the
possibility of a bumper profit in the event of wheat prices going up steeply. But the,
more important is that the farmer has played safe and insured himself against any
eventuality of closing down his source of livelihood altogether. The transaction which
the farmer has entered into is called a forward transaction and the contract which
covers such a transaction is called a forward contract.

QUICK AND LOW COST TRANSACTIONS:

Futures contracts can be created quickly at low cost to facilitate exchange of money
for goods be delivered at future date. Since these low cost instruments lead to a
specified delivery of goods at a specified price on a specified date, it becomes easy for
the finance managers to take optimal decisions in regard to production, consumption
and inventory. The costs involved in entering into future contracts in significant as
compared to the value of commodities being traded underlying these contracts.

Price discovery function:

The price of futures contracts incorporates a set of information based on which the
producers and the consumers can get a fair idea of the future demand and supply
position of the commodity and consequently the futures spot price. This is known as
the price discovery function of futures.

56
Advantage of informed individuals:
Individuals, who have superior information in regard to factors like commodity
demand supply, market behavior, technology changes etc., can operate in futures
markets and impart efficiency to the commoditys price determination process. This in
turn leads to a more efficient allocation of resources.

Hedging Advantage:
Adverse price changes, which may lead to losses, can be adequately and efficiently
hedged against through futures contracts. An individual who is exposed to the risk of
an adverse change while holding a position, either long or short a commodity will
need to enter into a transaction which could protect him in the event of such an
adverse change. For example a trader who has imported a consignment of copper and
the shipment is to reach within a fortnight may sell copper futures if he foresees fall in
copper prices. In case copper prices actually fall, the trader will lose on sale of copper
but will recoup through futures. On the contrary if copper prices rise, the trader will
honour the delivery of the futures contract through the imported copper stocks already
available with him.

Employee stock option plans:

Employees stock options means the options given to the whole-time directors,
officers or employees of accompany, which gives such directors, officers or
employees the benefit or right to purchase or subscribe at a future date, the securities
offered by the company at a pre-determined price. Stock option is defined as the
right to buy a designated stock at an option of the holder at any time within a
specified period at a determinable price. it can also represents the right to sell
designated stock within an agreed period at a determinable price.

Benefits of ESOPs:
The ESOPs will benefit the organization in the following ways:
It is used as a HRD tool by the management in connection with restriction of higher
turnover of the employees and retaining the best talents with the organization.
The plan is used as a technique of corporate financing modernization, expansion,
spin-off a division, acquisition etc.

57
 Issuing share, alternative to cash, have no immediate effect until they are
converted into cash Affecting new monetary supply into the real company.
Employees stock ownership plans in USA is used to avoid hostile takeover.
Without any financial strains the employees are rewarded by printing of share
certificated only.
Studies undertaken in USA on ESOPs suggest that they tend to out perform their
traditionally organized counterparts in variety of ways, better survival rates,
higher productivity, a better employment and sales growth and higher net
operating margins.

List of Bond:
1. Zero Interest Bond:
It refers to those bonds which are sold at a discount from their eventually maturity
value and have zero interest rate. These certificates are sold to the investors for
discount the difference between the face value of the certificates and the acquisition
cost is the gain to the investors. The investors are not entitled to any interest and are
entitled to only repayment of principle sum of the maturity period. The individual
prefers ZIB because of lower investment cost and low rate of conversion to equity if
ZIBs are fully or partly convertible bonds. This is also a means of tax planning
because the Bond doesnt carry any interest, which otherwise taxable. Company also
find ZIB quite attractive because there is no immediate commitment. On maturity the
bond can be converted into equity share or convertible debentures depending on the
requirement of capital structure of a company.

2. Deep Discount Bond (DDB):

The IDBI for the first time issued DDB for a deep discount price of Rs 2700/- an
investor gets bond with a face value of Rs 100000/-. The DDB appreciates to its face
value over the maturity period of 25 Years. The unique advantage of DDB is the
elimination of investment risk. It allows an investor to lock in the yield to maturity or
keep on withdrawing from the scheme periodically after 5 years by returning the
certificate.The main advantage of DDB is that the difference between the sell price
and the original cost of acquisition will be treated as Capital gain, if the investor sends
the bonds on stock exchange. The DDB is safe, solid and liquid instrument. nvestors
can take advantage of these new instruments in balancing their mix of securities to
minimize the risk and maximize returns.

58
3. Callable Bonds:
A callable bonds is a bond which the issuer has the right to call in and payoff at a
price stipulated in the bond contract. The price the issuer must pay to retire a callable
bond when it is called is termed as call price. The main advantage in callable bond is
the issuers have an incentive to call their existing bonds if the current interest rate in
the market is sufficiently lower than the bonds coupon rate. Usually the issuer cannot
call the bond for a certain period after issue.

4. Option tender bonds:

The option tender bonds are bonds with put option which give the bond holders the
right to sell back their bonds to the issuers normally at par. Issuers with put are aimed
both at investors who are pessimistic about the ability of interest rates to decline over
the long term and at those who simply prefer to take cautious approach to their bond
buying.

5. Guaranteed Debentures:
Some businesses are able to raise long term money because their debts are
guaranteed, usually by their parents companies. In some instances the state
governments guaranteed the bonds issued by the state government undertaking and
corporation like electricity supply board, irrigation corporation etc.

6. subordinated debentures:
A subordinated debenture is an unsecured debt, which is junior to all other debts i.e.
other debt holders must be fully paid before the subordinated debenture holders
receive anything. This type of debt will have a higher interest rate than more senior
debt and will frequently have rights of conversion into ordinary shares. Subordinated
debt is often called mezzanine finance because it ranks between equity and standard
debt.

7. Floating rate bond:

The interest paid to the floating Rate bondholders changes periodically depending on
the market rate of Interest payable on thegilt-edged securities these bonds are called
adjustable interest bond or variable rate bonds.

59
8. Junk bond:
Junk bonds are a high yield security which because a widely used source of finance in
take overs and leveraged buyouts. Firms with low credit ratings willing to pay 3 to 5
% more than the high grade corporate debt to compensate for the greater risk.

9. Indexed bonds:
Fixed income are fixed sum repayments are uneconomic in times of rapid inflation.
Indexed bond is financial instrument which retain the security and fixed income of the
debenture but which also provides some safeguard against inflation.

10. Inflation adjusted bond:

IABs are bonds which promise to repay both the principal and interest, by floating
both these amounts upwards in line with the movements in the value of the specific
index of commodity prices.

60
 CHAPTER IV

DATA ANALYSIS
AND
INTERPRETATION

61
STOCK MARKET
Stock Prices
Company : REIAGRO ( 532106 )
Period ( 01-Jan-2013 to 31-Jan-2013)
Close Total
Open High Low No. of No. of
Date WAP Turnover
Price Price Price Shares Trades
Price (Rs.)
1-01-13 43.20 43.60 42.85 43.10 43.25 1,82,106 1,046 78,76,672
2-01-13 43.20 44.50 43.20 44.10 43.84 1,87,107 1,464 82,03,362
3-01-13 44.55 45.85 44.35 45.00 45.22 3,88,564 2,278 1,75,71,610
4-01-13 45.10 45.15 43.90 44.10 44.55 1,27,734 1,130 56,90,920
7-01-13 44.40 44.95 44.10 44.35 44.55 92,155 912 41,05,228
8-01-13 44.50 46.50 44.45 46.05 45.67 3,86,437 2,565 1,76,47,452
9-01-13 45.95 47.85 45.50 47.45 46.82 7,65,524 3,796 3,58,45,260
12-01-13 47.95 49.60 47.40 49.20 48.61 12,59,808 5,915 6,12,41,940
12-01-13 49.90 50.25 46.70 47.20 48.81 10,53,496 4,830 5,14,25,510
14-01-13 47.20 47.20 46.05 46.20 46.56 2,10,233 1,451 97,40,861
15-01-13 46.40 46.40 44.00 44.85 45.46 4,49,893 1,684 2,04,49,899
16-01-13 44.30 45.80 43.65 44.95 45.03 5,00,218 2,340 2,25,24,008
17-01-13 45.00 45.60 44.55 44.90 44.98 3,59,191 1,805 1,61,58,133
18-01-13 43.25 45.00 43.25 43.95 44.42 3,65,120 1,387 1,62,19,480
21-01-13 43.50 47.20 43.50 46.10 46.10 9,55,648 4,612 4,40,53,990
22-01-13 46.50 49.85 46.15 48.85 48.56 20,38,617 8,107 9,90,02,539
23-01-13 48.95 49.80 47.60 48.50 48.75 8,25,921 4,218 4,02,66,363
24-01-13 48.60 48.90 47.20 48.00 48.14 3,49,513 2,139 1,68,26,351
29-01-13 47.95 50.50 47.05 50.00 49.32 6,93,983 3,303 3,42,26,632
30-01-13 50.25 50.80 48.80 49.15 50.05 6,63,300 3,810 3,32,01,019
31-01-13 49.50 49.65 48.05 48.65 48.95 2,45,452 1,348 1,20,14,941

62
CHART

INTERPRETATION:
On 1st Jan open value has decreased to 43.10 than compared to lower value of EPS
41.25. Then coming to higher price to 49.29 wholly the conclusion is 43.67.

Then coming to the volume on the same dates or days volume are increased. Because
totally this month REIAGRO. EPS value is decreased i.e. percentage 03.52%.

63
Stock Prices
Company : FEDBANK ( 500469 )
Period ( 01-Jan-2013 to 31-Jan-2013 )
Total
Open High Low Close No. of No. of
Date WAP Turnover
Price Price Price Price Shares Trades
(Rs.)
1/01/13 235.35 243.50 235.35 242.45 240.68 45,995 847 1,10,70,120
2/01/13 250.00 250.00 243.50 248.05 246.87 1,06,279 1,296 2,62,37,525
3/01/13 250.00 252.50 241.10 244.25 248.61 64,766 1,051 1,61,01,503
4/01/13 244.00 247.50 241.10 242.65 244.38 18,523 527 45,26,643
7/01/13 244.85 246.10 242.00 242.30 243.61 23,010 467 56,05,125
8/01/13 241.25 249.00 241.25 248.00 245.22 36,680 545 89,94,518
9/01/13 250.00 251.50 245.00 248.75 248.68 74,775 1,288 1,85,94,943
10/01/13 251.00 251.00 246.00 248.65 248.55 42,812 797 1,06,40,995
12/01/13 250.80 252.00 244.00 246.00 246.86 42,870 597 1,05,82,682
14/01/13 248.00 248.00 244.05 244.90 246.32 51,843 491 1,27,70,058
15/01/13 245.50 246.40 235.00 236.05 239.98 93,850 697 2,25,22,218
16/01/13 237.00 240.00 233.10 237.25 234.79 5,39,359 661 12,66,36,232
17/01/13 239.50 241.50 237.15 240.05 239.22 29,893 506 71,50,961
18/01/13 243.00 243.00 237.50 239.35 238.75 43,269 325 1,03,30,482
21/01/13 239.90 241.95 238.00 239.20 239.57 38,505 379 92,24,706
22/01/13 240.80 242.00 240.00 241.00 240.98 25,454 218 61,33,910
23/01/13 243.50 244.80 241.15 242.25 242.99 21,337 325 51,84,704
24/01/13 244.90 245.00 239.05 241.55 241.79 32,042 435 77,47,452
29/01/13 245.90 245.90 237.30 238.35 241.36 50,514 582 1,21,92,205
30/01/13 239.30 240.70 235.00 237.45 237.33 1,75,678 1,020 4,16,93,769
31/01/13 239.25 243.00 233.70 235.75 239.37 98,196 719 2,35,05,522

64
CHART

INTERPRETATION:

On 1st Jan open value has increased to 242.45 than compared to higher value of EPS
285.63. Then coming to higher price to 296.32 wholly the conclusion is 245.23.

Then coming to the volume on the same dates or days volume are increased. Because
totally this month FEDBANK OF INDIA. EPS value is increased i.e. percentage
10.37%.

65
Stock Prices
Company: ADANIENTE (512599)
Period ( 01-Jan-2013 to 31-Jan-2013 )
Total
Open High Low Close No. of No. of
Date WAP Turnover
Price Price Price Price Shares Trades
(Rs.)
1/01/13 834.20 834.20 818.00 821.10 822.72 21,149 845 1,73,99,664
2/01/13 830.00 830.00 815.15 816.50 822.30 19,502 748 1,60,36,556
3/01/13 821.10 825.50 816.05 819.25 820.12 26,791 661 2,19,71,937
4/01/13 820.00 848.00 816.00 830.70 834.16 64,938 2,179 5,41,68,683
7/01/13 755.00 868.00 755.00 840.30 840.39 35,163 1,478 2,95,50,751
8/01/13 842.45 857.50 833.00 842.10 848.55 93,793 2,445 7,95,87,862
9/01/13 840.00 858.00 831.00 844.85 845.94 78,128 2,381 6,60,91,496
10/01/13 397.00 432.70 397.00 429.00 427.94 84,570 1,607 3,61,91,037
12/01/13 433.00 437.00 424.70 425.60 430.76 39,960 1,157 1,72,13,330
14/01/13 430.10 433.00 423.10 424.55 426.69 24,724 734 1,05,49,479
15/01/13 428.00 429.00 415.10 418.25 420.40 21,599 582 90,80,121
16/01/13 417.00 425.00 415.45 423.70 422.45 25,043 652 1,05,79,386
17/01/13 420.00 427.90 420.00 424.80 425.37 13,562 443 57,68,806
18/01/13 420.40 429.85 419.95 424.20 425.71 23,750 446 1,01,10,614
21/01/13 424.25 425.75 418.20 422.85 422.89 42,108 512 1,78,02,848
22/01/13 424.00 425.80 416.00 418.60 421.30 47,142 541 1,98,60,828
23/01/13 419.00 427.00 419.00 426.15 423.28 42,925 575 1,81,69,379
24/01/13 426.80 431.25 422.60 430.05 427.42 38,796 658 1,65,82,347
29/01/13 437.90 437.90 428.00 429.35 432.10 23,978 531 1,03,60,971
30/01/13 431.00 444.40 427.25 434.25 435.93 7,81,162 2,916 34,05,33,964
31/01/13 437.40 441.80 432.00 436.15 438.57 3,38,999 964 14,86,74,349

66
CHART

INTERPRETATION:
On 1st Jan open value has decreased to 821.10 than compared to higher value
of EPS 868.00. Then coming to higher price to 865.21 wholly the conclusion is
863.58.

Then coming to the volume on the same dates or days volume are decreased.
Because totally this month ADANIENTE. EPS value is decreased i.e. percentage
06.38%.

67
Stock Prices
Company : UNITECH ( 507878 )
Period ( 01-Jan-2013 to 31-Jan-2013 )
Open High Low Close No. of No. of Total Turnover
Date WAP
Price Price Price Price Shares Trades (Rs.)
1/01/13 80.00 89.60 79.60 88.75 85.51 3,30,51,471 99,763 2,82,61,17,251
2/01/13 90.35 92.00 88.25 88.85 90.01 1,79,13,758 63,156 1,61,24,12,787
3/01/13 89.75 91.90 89.00 90.00 90.73 1,30,55,731 45,750 1,18,46,10,419
4/01/13 89.00 89.90 85.10 88.25 88.25 1,12,24,608 35,607 98,17,68,166
7/01/13 88.05 89.65 86.30 86.90 87.98 75,40,276 25,835 66,34,06,523
8/01/13 86.80 91.80 86.05 91.05 89.22 1,13,56,295 39,010 1,01,32,29,410
9/01/13 85.00 91.80 85.00 89.55 90.21 1,57,27,989 50,638 1,41,88,55,277
10/01/13 89.00 90.20 88.20 88.55 89.05 97,14,125 33,159 86,50,55,972
12/01/13 89.20 90.30 85.30 86.65 87.95 92,71,850 32,275 81,54,66,196
14/01/13 87.50 88.25 86.00 86.45 87.06 73,50,436 26,695 63,99,23,604
15/01/13 86.55 87.90 84.30 85.60 86.67 1,04,53,061 30,200 90,59,27,927
16/01/13 85.20 85.70 83.55 84.40 84.65 77,19,497 27,376 65,34,31,576
17/01/13 84.40 85.05 81.45 82.55 82.78 1,44,32,912 41,045 1,19,48,24,023
18/01/13 82.40 82.40 79.55 80.05 80.92 1,34,03,534 45,899 1,08,46,04,898
21/01/13 80.00 80.95 78.00 78.35 79.63 1,05,40,888 33,644 83,94,01,276
22/01/13 78.90 80.35 78.50 79.60 79.60 68,59,464 23,724 54,60,14,064
23/01/13 80.10 82.40 80.00 81.90 81.32 85,56,695 32,473 69,58,15,750
24/01/13 82.50 83.50 81.35 82.00 82.48 91,69,702 32,472 75,63,31,547
29/01/13 81.45 82.85 81.45 81.95 82.23 44,73,304 17,569 36,78,20,331
30/01/13 82.60 83.70 81.45 82.65 82.85 72,52,440 27,832 60,08,34,458
31/01/13 82.90 84.10 82.10 82.30 83.03 45,81,377 16,610 38,03,74,122

68
CHART

INTERPRETATION:
On 1st Jan open value has increased to 88.75 than compared to higher value of EPS
91.80 Then coming to higher price to 89.36 wholly the conclusion is 86.58.

Then coming to the volume on the same dates or days volume are increased. Because
totally this month UNITECH. EPS value is increased i.e. percentage 19.32%.

69
 CHAPTER V

FINDINGS
AND
SUGGESTIONS

70
FINDINGS & SUGGESTIONS
There must be prohibition on disposal of promoters share holding, and also
restrictions and the expansion without prior approval of the financial institutions
for declaration of higher amount/ rate.
The availability of derivative products in eluding index futures, index options,
individual stock futures and individual stock options re-enforces the overall
attractiveness of this market to foreign and domestic investors.
Volume of paper work is small but it is very complicated to maintain data in
system so tries to reduce that by regular audit and updating data.
Most of the DPs do not have the necessary infrastructure to handle the high work
load of transactions leading to may error by DPs, so by giving full infrastructure
information to every DO can avoid this problem.
The pool account doesnt know the true owner of the share and hence dividends
are paid to the broker instead of owners by this the broker can do any
manipulation or any fraud with the owner, for this the owner can loose his
dividend.
Hence for this try to pay the dividend directly to the owner.
If the shares are fake/forged which delivery by the broker the share holder can
loose that shares an have to receive another lot of issued shares from the broker in
21 days, this system stands abused.
So minimize that waiting days are deliver the issued shares to the share holder as
soon as Possible.

71
 CHAPTER - VI

CONCLUSIONS

72
CONCLUSION
The comprehensive study of capital market instrument at RELIGARE Connected
stock exchange has been an enlightening experience stressing on the positive
aspects on Dematerialization.
And settlement of shares, derivative market and capital instruments has done in
whole lot of good to the issuer, investor companies and country.
The depository systems has reduced the lag in delivery and settlement of securities
but also supported the cause of providing more liquidity to the security holder, the
need for setting up of a depository paper less trading.
Through online trading system and settlement became inevitable and unavoidable
for the smooth and the efficient functioning of the capital market.
This system has proved its worthiness by increasing in the speed of transactions
within T+3 days which are earlier T+5 days.
Now there is a proposal that the settlement will be done within T+1days in near
future which is in it an indication of a boon in the system of demat and capital
market instruments.
It has been fairly long since derivative trading started off on the Indian Indexes.
Actively has failed to really take off with low figures being transacted in terms of
value and volumes.
The introduction of derivative trading was hailed by the punters in the capital
markets but has not really brought about a wave so as to speak.
There are several factors, which impede the growth of the derivative markets in
India.
Of these factors the absence of clear guidelines on tax-related issues and the high
cost of transactions are the most prominent.
Now it is T+2days started from 1 April 2003.

73
 BIBLIOGRAPHY

Web sites Referred:

Religare .com
Sebi.com
Nseindia.com
Yahoo.com
Economywatch.com

Referred Text Book:

V.K. Balla Financial Investment
Gordon & Natarajan Financial Markets and Services

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