Issuing securities procedure and regulations
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The document outlines the different types of securities, including debt, equity, and hybrid securities, as well as derivatives, and the procedures for issuing securities. It details the steps required for issuance, including regulatory approvals and the role of the Securities and Exchange Board of India (SEBI). Additionally, it highlights the current state of corporate bonds in India compared to other countries, indicating a low percentage relative to GDP.
Issuing securities procedure and regulations
- 2. INTRODUCTION • A financial instrument that represents: an ownership position in a publicly-traded corporation (stock), a creditor relationship with governmental body or a corporation (bond), or rights to ownership as represented by an option. TYPES OF SECURITY DEBT SECURITY – E.g.. Banknotes, Bonds ,Debentures EQUITY SECURITY – E.g.. Common Stocks HYBRID SECURITY – E.g.. Preference shares DERIVATIVES SECURITY – E.g. Forwards, Futures, Options and Swaps
- 3. DEBT SECURITIES Debt securities are any debt instrument that can be bought or sold between two parties and has basic terms defined. The original buyer of the debt security lends the issuer money in exchange for the security. 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.
- 4. TYPES OF DEBT SECURITIES Government Securities Corporate Bonds Debentures Certificate of Deposits
- 5. EQUITY SECURITIES 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
- 6. HYBRID SECURITIES Hybrid securities combine some of the characteristics of both debt and equity securities. E.g. Preference Shares 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. 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.
- 7. Derivative security “A security derived from a debt instrument, share, loan, risk instrument or any other form”. “A contract which derives its value from price of underlying securities”. WHAT IS THE USE OF DERIVATIVE ? Hedging Speculation & Arbitrage
- 8. TYPES OF DERIVATIVES & ITS MEANING • OTC (Over the Counter) - contracts that are privately negotiated and traded directly between two parties, without going through an exchange or other intermediary • Exchange traded Derivative - derivatives products that are traded via specialized derivatives exchanges or other exchanges • Derivative includes forward, future, options, etc.
- 9. • Future contract ? • It is legally binding agreement to buy or sell the underlying security at future date. • Option contract ? • It is contract for purchase or sale of securities in future which includes put & call in securities. • Option to buy is called as call option. • Option to sell is called as put option.
- 10. SECURITIES MARKETS • There are two types of security market Primary and Secondary market. • In the primary market, the money for the securities is received by the issuer of the securities from investors, typically in an Initial Public Offering (IPO) • In the secondary market, the securities are simply assets held by one investor selling them to another investor, with the money going from one investor to the other.
- 11. Procedure for Issuing Securities The basic steps for issuing securities are – 1. Approval from the Board of Directors. 2. The Firm must file a Registration Statement with the SEBI. This statement contains financial information, financial history and plans for future. 3. The SEBI studies the registration statement during a waiting period. During this time the firm may distribute copies of a preliminary prospectus of the potential investors. This is called Red Herring because bold red letters are printed on the cover. The company cannot sell the securities during the waiting period.
- 12. 4. A registration statement will become effective on the 20th day after its filing unless the SEBI sends a letter of comment suggesting changes. 5. On the effective date of the registration ,a price is determined and a full fledged selling effort starts. 6. A final prospectus must accompany the delivery of securities or confirmation of sale whichever comes first.
- 13. REGULATORYFRAMEWORK The SEBI has framed regulations under these acts for registration and regulation of the market intermediaries and for prevention of unfair trade practices. The responsibility for regulating the securities market is shared jointly by Department of Economic Affairs (DEA), Department of Company Affairs (DCA), Reserve Bank of India (RBI) and SEBI. The four main legislations governing the securities market are : • (a) The SEBI Act, 1992 - The SEBI Act, 1992 was enacted to empower SEBI with statutory powers for protecting the interests of investors in securities, promoting the development of the securities market, and regulating the securities market
- 14. (b) The Companies Act, 1956 - It deals with issue, allotment and transfer of securities and various aspects relating to company management. It provides for standards of disclosure in the public issues, particularly in the fields of company management and projects, information about other listed companies under the same management. (c) The Securities Contracts (Regulation) Act, 1956 - It gives the Central Government regulatory jurisdiction over (a) stock exchanges through a process of rrecognition and continued supervision, contracts in securities, and listing of securities on stock exchanges. (d) The Depositories Act, 1996 – It provides for the establishment of depositories for securities to ensure transferability of securities with speed, accuracy and security. This it provides for electronic maintenance and transfer of ownership of demat securities.
- 15. Present scenario of bonds & securities RBI (2011) observed that listed corporate debt forms are only 2% of GDP. Very low as compare to Malaysia, Korea and China. Follows chart shows that corporate bonds are not highly appreciable: