Stock Exchange and Market Introduction
Some stock exchanges in India are voluntary non-profit-making associations, while some others are joint stock companies limited by shares, while some others are companies limited by guarantee The government is now moving towards demutualization of all the stock exchanges.
Demutualisation would mean that the ownership and Management of the stock exchanges would be separated. It is decided that the stock exchanges will now be joint stock companies.
In NSE, this has already been done and BSE is expected to follow suit shortly. The BSE is likely to make ownership public by issue of shares, which can be listed and traded. Without an efficient stock exchange, the savings of the community, which are essential for economic progress would not be available for the business community. It provides for a mechanism for buying and selling the securities.
It assists in the reasonably correct evaluation of securities in terms of their real worth. In evaluating the prices on the exchange, the operators take into account all the relevant factors, present and prospective, concerning the particular enterprise and industry.
It is because of this the price of one company’s share is different than the other company’s share price. This price difference can be attributed to the difference between the profitability and the future prospects of the two companies.
Stock exchanges constitute a market for trading in the existing listed securities and they also facilitate the listing of new securities for trading. They also provide a reasonable degree of safety and fair dealings with the investors.
Stock exchanges constitute a market for trading in the existing listed securities and they also facilitate the listing of new securities for trading. They also provide a reasonable degree of safety and fair dealings with the investors. The stock markets are affected by practically anything, especially in India.
Mr. Armstrong, an authority on stock markets says, “The winds that play upon stock exchanges are as varying and inconsistent as those that blow upon the ocean. They are frequently just as disturbing.” Basically, two sets of factors affect the stock exchanges, one is known as the fundamental factors and other is the technical factor.
The fundamental factors are related to the industry and are economic and financial in nature. The technical factors are related to the techniques of stock evaluation methods.
The governing ‘body of a recognized stock exchange has wide powers and is the decision making the body of the exchange. It has the power, subject to governmental approval, to make, amend and suspend the operation of the rules, by-laws, and regulations of the exchanges.
It also has complete jurisdiction over all members and in practice, its power of management and control is almost absolute. The governing body has the power to admit and expel members, to warn, censure, fine and suspend members.
SEBI has over the years initiated many reforms in the working of the stock markets. We shall now take a quick look at some of these actions. It has initiated measures to prohibit unfair trade practices, manipulation of prices, misleading statements and other fraudulent practices to induce sales or purchases of securities with a view to influence the prices and make undue profits or gains out of such practices.
The lock-in period for preferential allotment was removed for all categories except for promoters. The disclosure norms and responsibilities of merchant bankers were tightened and revised guidelines were issued for ESOPs. The entry norms were tightened for companies who were making initial public offerings.
It was decided that a company should have a track record of dividend payment for a minimum of three years out of the immediately preceding five years, to be eligible for listing on the stock exchanges.
However, a manufacturing company, whose issue and project have been appraised by a public financial institution or a bank, which has also participated in its funding, may make a public issue to get its shares listed on a stock exchange.
It has been announced that the allotment process must be completed within 3-0, days. For any delay, the company has to pay interest @15% to the investors.
An aggregate investment of FIls, NRIs, and OCBs etc. was raised to 30%. It has since been revised to 40% is the AGM passes a resolution to this effect. The RBI has permitted the banks to invest in the capital market up to 5% of their incremental deposit4This ceiling of 5% also includes any loans to stockbrokers against shares grid debentures and advances to individuals against such securities.
IPOs through book building method were allowed and the public offering under this scheme was reduced from 25% to 10%. Recently, SEBI has allowed book building to the extent of 100%. The primary market advisory committee of the SEBI has suggested tightening norms for Initial Public Offerings. It should be noted that these are only suggestions as of now, and are yet to be approved and adopted by SEBI.
A discussion paper of this committee has said the company opting for an Id have the net worth of at least Rs. I crore in each of the preceding two years. It has also suggested that if the company has changed its name in the last one year then at least 50% of the company’s revenue for the preceding one year should be accounted for by the business, which the new name suggested is to ensure that companies do not change their name with the sole purpose the new name reflecting the latest sunrise sectors without actually having operations in that area.
It has also suggested that the proposed IPO size should not exceed times the pre-issue net worth of the company to prevent it from large amounts through initial offers. A company could make an initial offering, provided that it has net tangible assets of at least Rs. 3 crores in each of the immediately preceding two full years. However, more than 50% should be held in monetary assets (cash or cash equivalents such as securities).
If more than 50% of the assets are held in the form of monetary assets, the company should have firm commitments to deploy such excess money in its business or projects. The committee has also suggested that the minimum post-issue capital (face value) of the company should be Rs. 10 crops is to make sure that the listed capital is of a reasonable size so as to ensure liquidity.
There should be compulsory market making for at least two years from the date of listing of the shares to ensure liquidity in the counter
It has also said that even if any of the criteria suggested for IPO is not met, the company can still come out with an IPO provided the issue is only through the book-building process and at least 40% of the issue is allotted to Qualified Institutional Buyers (QIB).
Alternatively, the project should have at least 15% participation by financial institutions and scheduled commercial banks, of which at least 10% should come from the appraisers. The company also has to ensure there are at least 1,000 allotted in its issue in order to have a wider holding.
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