Financial market


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Financial market

  1. 1. 1. INTRODUCTIONToday’s global capital market developed after the major nations of the world abandoned the adjustable pegsystem rates in the early 1970s and eliminated their grid foreign exchange controls that wentwith them. Advances in technology that enables great capital mobility, coupled with lack offiscal discipline, mostly on the part the united states, made a quasi-fixed rate system unworkableand inefficient. In 20 years since abandonment, the resulting financial freedom and the boom inthe technology, have allowed profit seeking investors, issuers, and intermediaries to create anever expanding global market for financial instrument in all denominations. As trading volumessoared and the variety of instruments multiplied, this global market acquired considerable power.But the process is only help complete. While the markets for the money ,foreign exchange andbonds have already became global, the equities market share only in the process of globalizing.Moreover, as bank deposits continue to be securitized around the world, more and more of theflow of funds in the economies of the developed world will be in instruments which can betraded and there by linked directly to the global capital market. Finally, more and more of thedeveloping countries of the world are reforming there financial systems and, in the processlinking into the global capital market.As this process continues, the global capital market will continue to grow, becoming morepowerful and integrated, until it reaches maturity sometime in the next century. Worldwidecapital supply and demand will be intermediated through this market, which will be themechanism for capital pricing and allocation.The phenomenon of globalization began in a primitive form when humans first settled intodifferent areas of the world; however, it has shown a rather steady and rapid progress in therecent times and has become an international dynamic which, due to technologicaladvancements, has increased in speed and scale, so that countries in all five continents have beenaffected and engaged.The financial crisis and worldwide recession has abruptly halted a nearly three-decade-longexpansion of global capital markets. After nearly quadrupling in size relative to GDP since 1980,world financial assets including equities, private and public debt, and bank deposits fell by $16trillion last year to $178 trillion in 2008, the largest setback on record. MGI research suggeststhat the forces fueling growth in financial markets have changed. For the past 30 years, most ofthe overall increase in financial depth the ratio of assets to GDP was driven by rapid growth ofequities and private debt in mature markets. By 2007, the total value of global financial assetsreached a peak of $194 trillion, equal to 343 percent of GDP. But the upheaval in financialmarkets in late 2008 marked a break in this trend. 1
  2. 2. 2. GLOBALIZATIONGlobalization is defined as a process which, based on international strategies, aims to expandbusiness operations on a worldwide level and was precipitated by the facilitation of globalcommunications due to technological advancements, and socioeconomic, political andenvironmental developments. The goal of globalization is to provide organizations a superiorcompetitive position with lower operating costs, to gain greater numbers of products, servicesand consumers. This approach to competition is gained via diversification of resources, thecreation and development of new investment opportunities by opening up additional markets,and accessing new raw materials and resources. Diversification of resources is a businessstrategy that increases the variety of business products and services within various organizations.Diversification strengthens institutions by lowering organizational risk factors, spreadinginterests in different areas, taking advantage of market opportunities and acquiring companiesboth horizontal and vertical in nature. Globalization has become the buzz word of the newmillennium. It is viewed as the cause of many of the world’s problems as well as a panacea. Thedebate over globalization is manifest both in public demonstrations against the WTO in Seattle inthe Fall of 1999 and the IMF and World Bank earlier.Industrialized or developed nations are specific countries with a high level of economicdevelopment and meet certain socioeconomic criteria based on economic theory such as grossdomestic product, industrialization and human development index as defined by theInternational Monetary Fund, the United Nations and the World Trade Organization. Usingthese definitions, some industrialized countries in 2010 were: Austria, United Kingdom,Belgium, Denmark, Finland, France, Germany, Japan, Luxembourg, Norway, Sweden,Switzerland, and the United States. COMPONENTS OF GLOBALIZATIONThe components of globalization include GDP, industrialization and the Human DevelopmentIndex . The GDP is the market value of all finished goods and services produced within acountrys borders in a year and serves as a measure of a countrys overall economic output.Industrialization is a process which, driven by technological innovation, effectuates socialchange and economic development by transforming a country into a modernized industrial, ordeveloped, nation. Until three years ago the consensus view among economists on the issue ofthe international integration of financial markets was very positive. The benefits of open capitalmarkets stressed include: optimal international resource allocation; inter temporal optimization;international portfolio diversification and discipline on policy makersThe Human Development Index comprises three components. Specifically, a countrys populations life expectancy,(b) knowledge and education measured by the adult literacy and(c) income. 2
  3. 3.  THE ECONOMIC IMPACT ON DEVELOPED NATIONSGlobalization compels businesses to adapt to different strategies based on new ideological trendsthat try to balance rights and interests of both the individual and the community as a whole. Thischange enables businesses to compete world wide and also signifies a dramatic change forbusiness leaders, labor and management by legitimately accepting the participation of workersand government in developing and implementing company policies and strategies. Riskreduction via diversification can be accomplished through company involvement withinternational financial institutions and partnering with both local and multinational businesses.Globalization brings reorganization at the international, national and sub-national levels.Specifically, it brings there organization of production, international trade and the integration offinancial markets, thus affecting capitalist economic and social relations via multilateralism andmicroeconomic phenomena, such as business competitiveness, at the global level. Thetransformation of the production systems affects the class structure, the labor process, theapplication of technology and the structure and organization of capital. Globalization is now seenas marginalizing the less educated and low-skilled workers. Business expansion will no longerautomatically imply increased employment. Additionally, it can cause high remuneration ofcapital due to its higher mobility compared to labor. The phenomenon seems to be driven bythree major forces: globalization of all product and financial markets, technology andderegulation. Globalization of product and financial markets refers to an increased economicintegration in specialization and economies of scale, which will result in greater trade in financialservices through both capital flows and cross-border entry activity. The technology factor,specifically telecommunication and information availability, have facilitated remote delivery andprovided new access and distribution channels while revamping industrial structures for financialservices by allowing entry of non-bank entities such as telecoms and utilities .Deregulationpertains to the liberalization of capital account and financial services in products, markets andgeographic locations. It integrated banks by offering a broad array of services, allowed entry ofnew providers and increased multinational presence in many markets and more cross-borderactivities. In a global economy, power is the ability of a company to command both tangible andintangible assets that create customer loyalty, regardless of location. Independent of size orgeographic location, a company can meet global standards and tap into global networks, thriveand act as a world class thinker, maker and trader, by using its greatest assets: its concepts,competence and connections. 3
  4. 4.  BENEFICIAL EFFECTSSome economists have a positive outlook regarding the net effects of globalizationon economic growth. These effects have been analyzed over the years by severalstudies attempting to measure the impact of globalization on various nationseconomies using variables such as trade, capital flows and their openness, GDP percapita, foreign direct investment and more. These studies examined the effects ofseveral components of globalization on growing time series cross sectional data ontrade, FDI and portfolio investment. Although they provide an analysis ofindividual components of globalization on economic growth, some of the resultsare inconclusive or even contradictory. However, overall, the findings of thosestudies seem to be supportive of the economists positive position instead of theone held by the public and non-economist view. Trade among nations via the useof comparative advantage promotes growth, which is attributed to a strongcorrelation between the openness to trade flows and the affect on economic growthand economic performance. Additionally there is a strong positive relation betweencapital flows and their impact one economic growth. Foreign Direct Investmentsimpact on economic growth has had a positive growth effect in wealthy countriesand an increase in trade and FDI resulted in higher growth rates. Empiricalresearch examining the effects of several components of globalization on growthusing time series and cross sectional data on trade, FDI and portfolio investmentfound that a country tends to have a lower degree of globalization if it generateshigher revenues from trade taxes. Further evidence indicates that there is a positivegrowth-effect in countries which are sufficiently rich as are most of the developednations. The World Bank reports that integration with global capital markets canlead to disastrous effects without sound domestic financial systems in place.Furthermore globalized countries have lower increases in government out lays, aswell as taxes, and lower levels of corruption in their governments. One of thepotential benefits of globalization is to provide opportunities for reducingmacroeconomic volatility on output and consumption via diversification of risk. 4
  5. 5.  HARMFUL EFFECTSNon-economists and the wide public expect the costs associated with globalizationto outweigh the benefits, especially in the short-run. Less wealthy countries fromthose among the industrialized nations may not have the same highly-accentuatedbeneficial effect from globalization as more wealthy countries measured by GDPper capita etc. Free trade, although increases opportunities for international trade, italso increases the risk of failure for smaller companies that cannot competeglobally.Additionally it may drive up production and labor costs including higher wages formore skilled workforce. Domestic industries in some countries may been dangereddue to comparative or absolute advantage of other countries in specific industries.Another possible danger and harmful effect is the over use and abuse of naturalresources to meet the new higher demand in the production of goods. THE BOTTOM LINEOne of the major potential benefits of globalization is to provide opportunities forreducing macroeconomic volatility on output and consumption via diversificationof risk. The overall evidence of the globalization effect on macroeconomicvolatility of output indicates that, although in theoretical models the direct effectsare ambiguous, financial integration helps in a nations production basediversification, leads to an increase in specialization of production. However, thespecialization of production based on the concept of comparative advantage canalso lead to higher volatility in specific industries within an economy and societyof a nation. As time passes, successful companies, independent of size, will be theones that are part of the global economy. 5
  6. 6. 3. GLOBALIZATION OF FINANCIAL SERVICESIn this age of globalization, the key to survival and success for many financial institutions is tocultivate strategic partnerships that allow them to be competitive and offer diverse services toconsumers. In examining the barriers to - and impact of - mergers, acquisitions anddiversification in the financial services industry, its important to consider the keys to survival inthis industry:1.Understanding the individual clients needs and expectations2.Providing customer service tailored to meet customers needs and expectationsIn 2008, there were very high rates of mergers and acquisition in the financial services sector.Lets take a look at some of the regulatory history that contributed to changes in the financialservices landscape and what this means for the new landscape investors now need to traverse. Diversification Encouraged by Deregulation Because large, international mergers tend to impactthe structure of entire domestic industries, national governments often devise and implementprevention policies aimed at reducing domestic competition among firms. Beginning in the early1980s, the Depository Institutions Deregulation and Monetary Control Act of 1980 and the Garn-St. Germaine Depository Act of 1982 were passed. By providing the Federal Reserve with greater control over non-member banks, these two actswork to allow banks to merge and thrift institutions to offer checkable deposits. These changesalso became the catalysts for the dramatic transformation of the U.S. financial service markets in2008 and the emergence of reconstituted players as well as new players and service channels.Nearly a decade later, the implementation of the Second Banking Directive in1993 deregulatedthe markets of European Union countries. In 1994, European insurance markets underwentsimilar changes as a result of the Third Generation Insurance Directive of 1994.These two directives brought the financial services industries of the United States and Europeinto fierce competitive alignment, creating a vigorous global scramble to secure customers thathad been previously unreachable or untouchable.The ability for business entities to use the internet to deliver financial services to their client elsealso impacted the product-oriented and geographic diversification in the financial services arena. 6
  7. 7.  GOING GLOBALAsian markets joined the expansion movement in 1996 when "Big Bang" financial reformsbrought about deregulation in Japan. Relatively far- reaching financial systems in that countrybecame competitive in a global environment that was enlarging and changing swiftly. By 1999,nearly all remaining restrictions on foreign exchange transactions between Japan and othercountries were lifted. Following the changes in the Asian financial market, the United States continued to implementseveral additional stages of deregulation, concluding with the Gramm-Leach-Bliley Act of1999.This law allowed for the consolidation of major financial players, which pushed U.S.-domiciled financial service companies involved in M&A transactions to a total of $221 billionin2000.According to a 2001 study by Joseph Teplitz, Gary Apanaschik and Elizabeth Harper Briglia inBank Accounting & Finance, expansion of such magnitude involving trade liberalization, theprivatization of banks in many emerging countries and technological advancements has becomea rather common trend.The immediate effects of deregulation were increased competition, market efficiency andenhanced consumer choice. Deregulation sparked unprecedented changes that transformedcustomers from passive consumers to powerful and sophisticated players. Studies suggest thatadditional, diverse regulatory efforts further complicated the running and managing of financialinstitutions by increasing the layers of bureaucracy and number of regulations.Simultaneously, the technological revolution of the internet changed the nature, scope andcompetitive landscape of the financial services industry. Following deregulation, the new realityhas each financial institution essentially operating in its own market and targeting its audiencewith narrower services, catering to the demands of a unique mix of customer segments. Thisderegulation forced financial institutions to prioritize their goals by shifting their focus from rate-setting and transaction-processing to becoming more customer-focused. 7
  8. 8.  CHALLENGES AND DRAWBACKS OF FINANCIAL PARTNERSHIPS Since 1998, the financial services industry in wealthy nations and the United States has beenexperiencing a rapid geographic expansion; customers previously served by local financialinstitutions are now targeted at a global level. Additionally, according to Alen Berger and RobertDe Young in their Article” Technological Progress and the Geographic Expansion of the Banking Industry”of Journal of Money, Credit and Banking, September 2006, between1985 and 1998, the averagedistance between a main bank and its affiliates within U.S. multi bank holding companies hasincreased by more than 50%,from 123.4 miles to 188.9 miles. This indicates that the increasedability of banks to make small business loans at greater distances enabled them to suffer fewerdiseconomies of scale and boost productivity.Deregulation has also been the major factor behind this geographic diversification, andbeginning in the early 1980s, a sequence of policy changes implemented a gradual reduction ofintrastate and interstate banking restrictions.In the European Union, a similar counterpart of policy changes enabled banking organizationsand certain other financial institutions to extend their operations across the member-states. LatinAmerica, the transitional economies of Eastern Europe and other parts of the world also began tolower or eliminate restrictions on foreign entry, thus enabling multinational financial institutionsheadquartered in other countries to attain considerable market shares. Transactions without Boundaries, Borders: Recent innovations in communications andinformation technology have resulted in a reduction in diseconomies of scale associated withbusiness costs faced by financial institutions contemplating geographic expansion. ATMnetworks and banking websites has enabled efficient long-distance interactions betweeninstitutions and their customers, and consumers have become so dependent on their new foundability to conduct boundary-less financial transactions on a continuous basis that businesses loseall competitiveness if they are not technologically connected. An additional driving force for financial service firms geographic diversification has been theproliferation of corporate combination strategies such as mergers, acquisitions, strategicalliances and outsourcing. Such consolidation strategies may improve efficiency within theindustry, resulting in M&As, voluntary exit, or forced withdrawal of poorly performing firms.Consolidation strategies further empower firms to capitalize on economies of scale and focus onlowering their unit production costs. Firms often publicly declare that their mergers aremotivated by a desire for revenue growth, an increase in product bases, and for increasedshareholder value via staff consolidation, overhead reduction and by offering a wider array ofproducts. However, the main reason and value of such strategy combinations is often related tointernal cost reduction and increased productivityUnfavorable facts about the advantages and disadvantages of the major strategies used as a toolfor geographic expansions within the financial services sectors were obscured in 2008 by thevery high rates of M&As, such as those between Nations Bank and Bank of America, TravelersGroup and Citicorp, JP Morgan Chase and Bank One. Their dilemma was to create a balance thatmaximized overall profit. 8
  9. 9. 4. MERGERS AND ACQUISITIONSMergers and acquisitions is an aspect of corporate strategy, corporate finance and managementdealing with the buying, selling, dividing and combining of different companies and similarentities that can help an enterprise grow rapidly in its sector or location of origin, or a new fieldor new location, without creating a subsidiary, other child entity or using a joint venture. Thedistinction between a "merger" and an "acquisition" has become increasingly blurred in variousrespects, although it has not completely disappeared in all situations.An acquisition or takeover is the purchase of one business or company by another company orother business entity. Such purchase may be of 100%, or nearly 100%, of the assets or ownershipequity of the acquired entity. Consolidation occurs when two companies combine together toform a new enterprise altogether, and neither of the previous companies survives independently.Acquisitions are divided into "private" and "public" acquisitions, depending on whether theacquire or merging company is or is not listed on a public stock market. An additionaldimension or categorization consists of whether an acquisition is friendly or hostile.Achieving acquisition success has proven to be very difficult, while various studies have shownthat 50% of acquisitions were unsuccessful. The acquisition process is very complex, with manydimensions influencing its outcome.As you can see, an acquisition may be only slightly different from a merger. In fact, it may bedifferent in name only. Like mergers, acquisitions are actions through which companies seekeconomies of scale, efficiencies and enhanced market visibility. Unlike all mergers, allacquisitions involve one firm purchasing another - there is no exchange of stock or consolidationas a new company. Acquisitions are often congenial, and all parties feel satisfied with the deal.Other times, acquisitions are more hostile.In an acquisition, as in some of the merger deals we discuss above, a company can buy anothercompany with cash, stock or a combination of the two. An other possibility, which is common insmaller deals, is for one company to acquire all the assets of another company. Company X buysall of Company Ys assets for cash, which means that Company Y will have only cash. Ofcourse, Company Y becomes merely a shell and will eventually liquidate or enter another area ofbusiness.Another type of acquisition is a reverse merger, a deal that enables a private company to getpublicly-listed in a relatively short time period. A reverse merger occurs when a private companythat has strong prospects and is eager to raise financing buys a publicly-listed shell company,usually one with no business and limited assets. The private company reverse merges into thepublic company, and together they become an entirely new public corporation with tradableshares. 9
  10. 10.  Distinction between mergers and acquisitions Mergers AcquisitionsA merger involves the mutual decision A takeover, or acquisition, on the otherof two companies to combine and hand, is characterized by the purchase of abecome one entity; it can be seen as a smaller company by a much larger one.decision made by two “equal”. This combination of “unequal’s” can produce the same benefits as a merger, but it does not necessarily have to be mutual decision.The combined business, through A larger company can initiate a hostilestructural and operational advantages takeover of a smaller firm, whichsecured by the merger, can cut cost and essentially amounts to buying theincrease profits, boosting shareholders company in the face of resistance from thevalues for both groups of shareholders. smaller company’s management.A typical merger, in other words, Unlike in a merger, in an acquisition, theinvolves two relatively equal companies, acquiring firm’s usually offers a cash pricewhich combine to become one legal per share to the target firm’s shareholdersentity with the goal of producing a or the acquiring firm’s share’s to thecompany that is worth more than the sum shareholder of the target firm accordingof its parts. to a specified conversion ratio.In a merger of two corporations, the Either way, the purchasing companyshareholders usually have their shares in essentially finances the purchase of thethe old company exchanged for an equal target company, buying it outright for itsnumber of shares in the merged entity. shareholders 10
  11. 11.  Types of Mergers And acquisitions There are many types of mergers and acquisitions that redefine the business world with new strategic alliances and improved corporate philosophies. From the business structure perspective, some of the most common and significant types of mergers and acquisitions are listed below: o Horizontal Merger This kind of merger exists between two companies who compete in the same industry segment. The two companies combine their operations and gains strength in terms of improved performance, increased capital, and enhanced profits. This kind substantially reduces the number of competitors in the segment and gives a higher edge over competition.o Vertical Merger Vertical merger is a kind in which two or more companies in the same industry but in different fields combine together in business. In this form, the companies in merger decide to combine all the operations and productions under one shelter. It is like encompassing all the requirements and products of a single industry segment.o Co-Generic Merger Co-generic merger is a kind in which two or more companies in association are some way or the other related to the production processes, business markets, or basic required technologies. It includes the extension of the product line or acquiring components that are all the way required in the daily operations. This kind offers great opportunities to businesses as it opens a hue gateway to diversify around a common set of resources and strategic requirements.o Conglomerate Merger Conglomerate merger is a kind of venture in which two or more companies belonging to different industrial sectors combine their operations. All the merged companies are no way related to their kind of business and product line rather their operations overlap that of each other. This is just a unification of businesses from different verticals under one flagship enterprise or firm. 11
  12. 12.  Mergers and Acquisitions FailureDespite the goal of performance improvement, results from mergers and acquisitions are oftendisappointing compared with results predicted or expected. Numerous empirical studies showhigh failure rates of mergers and acquisitions deals. Studies are mostly focused on individualdeterminants. A book by Thomas Straub 2007 "Reasons for frequent failure in Mergers and Acquisitions"develops a comprehensive research framework that bridges different perspectives and promotesan understanding of factors underlying mergers and acquisitions performance in businessresearch and scholarship. The study should help managers in the decision making process.The first important step towards this objective is the development of a common frame ofreference that spans conflicting theoretical assumptions from different perspectives. On thisbasis, a comprehensive framework is proposed with which to understand the origins of mergersand acquisitions performance better and address the problem of fragmentation by integrating themost important competing perspectives in respect of studies on mergers and acquisitionsFurthermore according to the existing literature relevant determinants of firm performance arederived from each dimension of the model. For the dimension strategic management, the sixstrategic variables: market similarity, market complementarities, production operation similarity,production operation complementarities, market power, and purchasing power were identifiedhaving an important impact on mergers and acquisitions performance. For the dimensionorganizational behavior, the variables acquisition experience, relative size, and culturaldifferences were found to be important. Finally, relevant determinants of mergers and acquisitions performance from the financial fieldwere acquisition premium, bidding process, and due diligence. Three different ways in order tobest measure post mergers and acquisitions performance are recognized: Synergy realization,absolute performance and finally relative performance.Employee turnover contributes to mergers and acquisitions failures. The turnover in targetcompanies is double the turnover experienced in non-merged firms for the ten years followingthe merger. 12
  13. 13. 5. CREDIT RATING AGENCYThe credit rating agency of debt securities began in USA in 1841.At present credit rating agencyare operating throughout the globe. Credit rating agency can be define as the opinion expressedby an independent rating agency about the credit quality of the issuer of the debt instrument.A credit rating agency (CRA) are the company’s that assigns credit ratings for issuers of certaintypes of debt obligations as well as the debt instruments themselves. In some cases, the servicersof the underlying debt are also given ratings.In most cases, the issuers of securities are companies, special purpose entities, state and localgovernments, non-profit organizations, or national governments issuing debt-like securities thatcan be traded on a secondary market. A credit rating for an issuer takes into consideration theissuers credit worthiness and affects the interest rate applied to the particular security beingissued.The value of such security ratings has been widely questioned after the 2007-09 financial crisis.In 2003, the U.S. Securities and Exchange Commission submitted a report to Congress detailingplans to launch an investigation into the anti-competitive practices of credit rating agencies andissues including conflicts of interest. More recently, ratings downgrades during the Europeansovereign debt crisis of 2010-11 have drawn criticism from the EU and individual countries.A company that issues credit scores for individual credit-worthiness is generally called a creditbureau or consumer credit reporting agency . The rating agencies respond that their adviceconstitutes only a "point in time" analysis, that they make clear that they never promise orguarantee a certain rating to a tranche, and that they also make clear that any change incircumstance regarding the risk factors of a particular tranche will invalidate their analysis andresult in a different credit rating.Credit ratings are used by investors, issuers, investment banks, broker-dealers, and governments.For investors, credit rating agencies increase the range of investment alternatives and provideindependent, easy-to-use measurements of relative credit risk; this generally increases theefficiency of the market, lowering costs for both borrowers and lenders. This in turn increasesthe total supply of risk capital in the economy, leading to stronger growth. It also opens thecapital markets to categories of borrower who might otherwise be shut out altogether: smallgovernments, startup companies, hospitals, and universities.Credit rating agencies may also play a key role in structured financial transactions. Unlike a"typical" loan or bond issuance, where a borrower offers to pay a certain return on a loan,structured financial transactions may be viewed as either a series of loans with differentcharacteristics, or else a number of small loans of a similar type packaged together into a seriesof "buckets". Credit ratings often determine the interest rate or price ascribed to a particulartranche, based on the quality of loans or quality of assets contained within that grouping.Credit rating agency do not involve in any recommendation to purchase, sell or hold thatSecurity. 13
  14. 14.  Credit Rating Agencies Of The WorldAgencies that assign Credit Ratings for Corporations include:- A. M. Best (U.S.) Baycorp Advantage (Australia) Bulgarian Credit Rating Agency (Bulgaria, European Union) Capital Intelligence (Cyprus) Capital Standards Rating (Kuwait) CARE Ratings (India) Credo line (Ukraine) Creditsiren (European Union) Credit Rating Information and Services Limited(CRISL), (Bangladesh) CRISIL (India) Dagong Global (Peoples Republic of China) Dominion Bond Rating Service (Canada) Egan-Jones Rating Company (U.S.) First Afghan Credit Risk Ratings (Afghanistan)FACRR First Report, (UK) Fitch Ratings (Dual-headquartered U.S./UK), 80% of which is owned by FIMALAC, a French firm. Global Credit Ratings Co. (Africa) ICRA Limited (India) SMERA INDIA Japan Credit Rating Agency, Ltd. (Japan) Kroll Bond Rating Agency (U.S.) Moodys Investors Service (U.S.) Muros Ratings (Russia alternative rating agency) Rapid Ratings International (U.S.) Standard & Poors (U.S.) Weiss Ratings (U.S.) 14
  15. 15. Credit Rating Agencies Of The World1. Standard & PoorsStandard & Poors is an American financial services company. It is a division of The McGraw-Hill Companies that publishes financial research and analysis on stocks and bonds. It is wellknown for its stock market indices, the U.S.-based S&P 500, the Australian S&P/ASX 200, theCanadian S&P/TSX, the Italian S&P/MIB and Indias S&P CNX Nifty. The company is one ofthe Big Three credit-rating agencies, which also include Moodys Investor Service and FitchRatings. Its head office is located on 55 Water Street in Lower Manhattan, New Yor Thecompany traces its history back to 1860, with the publication by Henry Varnum Poor of Historyof Railroads and Canals in the United States. This book was an attempt to compilecomprehensive information about the financial and operational state of U.S. railroad companies.Henry Varnum went on to establish H.V. and H.W. Poor Co. with his son, Henry William, andpublished annually updated versions of this book.In 1906, Luther Lee Blake founded the Standard Statistics Bureau, with the view to providingfinancial information on non-railroad companies. Instead of an annually published book,Standard Statistics would use 5" x 7" cards, allowing for more frequent updates.In 1941, Poor and Standard Statistics merged to become Standard & Poors Corp. In 1966, thecompany was acquired by The McGraw-Hill Companies, and now encompasses the FinancialServices d he company issues credit ratings for the debt of public and private corporations. It isone of several CRAs that have been designated a nationally recognized statistical ratingorganization by the U.S. Securities and Exchange Commission.S&P issues both short-term and long-term credit ratings. 15
  16. 16. 2. MODDY’SMoody’s is the oldest credit rating agency. It is also the first rating agency to be recognized byNationally Recognized Statistical Rating Organizations (NRSRO) in 1975. The companybecame public in 2000. It has been earning huge profits. Average profit margin was 53% from2000 to 2007. Structured finance products was its top source of revenue by 2000.Moodys, is the bond credit rating business of Moodys Corporation, representing the companystraditional line of business and its historical name. Moodys Investors Service providesinternational financial research on bonds issued by commercial and government entities and,with Standard & Poors and Fitch Group, is considered one of the Big Three credit ratingagencies.The company ranks the creditworthiness of borrowers using a standardized ratings scale whichmeasures expected investor loss in the event of default. Moodys Investors Service rates debtsecurities in several market segments related to public and commercial securities in the bondmarket. These include government, municipal and corporate bonds; managed investments suchas money market funds, fixed-income funds and hedge funds; financial institutions includingbanks and non-bank finance companies; and asset classes in structured finance.[1] In MoodysInvestors Services ratings system securities are assigned a rating from Aaa to C, with Aaa beingthe highest quality and C the lowest quality.Moodys was founded by John Moody in 1909 to produce manuals of statistics related to stocksand bonds and bond ratings. In 1975, the company was identified as a Nationally RecognizedStatistical Rating Organization (NRSRO) by the U.S. Securities and Exchange Commission.Following several decades of ownership by Dun & Bradstreet, Moodys Investors Servicebecame a separate company in 2000; Moodys Corporation was established as a holdingcompany. 16
  17. 17. 3.Fitch GroupThe Fitch Group is a jointly owned subsidiary of FIMALAC and Hearst Corporation. On April12, 2012, Hearst increased their stake in the Fitch Group to 50%.[2] Fitch Ratings and FitchSolutions are part of the Fitch Group.Fitch Ratings, dual-headquartered in New York and London, was one of the three NationallyRecognized Statistical Rating Organizations designated by the U.S. Securities and ExchangeCommission in 1975, together with Moodys and Standard & Poors. It is considered one of the"Big Three credit rating agencies"The firm was founded by John Knowles Fitch on December 24, 1913 in New York City as theFitch Publishing Company. It merged with London-based IBCA Limited in December 1997. In2000 Fitch acquired both Chicago-based Duff & Phelps Credit Rating Co. and ThomsonFinancial BankWatch Fitch Ratings is the smallest of the "big three" NRSROs, covering a morelimited share of the market than S&P and Moodys, though it has grown with acquisitions andfrequently positions itself as a "tie-breaker" when the other two agencies have ratings similar, butnot equal, in scale.In September 2011, Fitch Group announced the sale of Algorithmics to IBM for $387 million.The deal closed on October 21, 201Credit rating agencies such as Fitch Ratings have been subject to criticism in the wake of largelosses in the collateralized debt obligation market that occurred despite being assigned topratings by the CRAs. For instance, losses on $340.7 million worth of collateralized debtobligations issued by Credit Suisse Group added up to about $125 million, despite being ratedAAA by Fitch. However, differently from the other agencies, Fitch has been warning the marketon the constant proportion debt obligations with an early and pre-crisis report highlighting thedangers of CPDOs 17
  18. 18. Sebi orders operational audit of credit rating agenciesThe Securities and Exchange Board of India (Sebi) has said all credit rating agencies have to getan internal audit done every six months.The market regulator, in a note, said: “It (internal audit) shall cover all aspects of CRAoperations and procedures, including the investor grievance redressal mechanism.”The audit will be conducted by chartered accountants, company secretaries or cost andmanagement accountants who are in practice and do not have any conflict of interest with thecras.“The report shall state the methodology adopted, deficiencies observed and consideration ofresponse of the management on the deficiencies,” the note added.Sebi said the report should comment on the adequacy of systems adopted by the CRA forcompliance with the regulations issued by it and for investor grievance redressal.Roopa Kudva, managing director & CEO, Crisil, and Region Head, South Asia, Standard &Poor’s, said: “Crisil welcomes the move by Sebi to strengthen the control function at creditrating agencies. We are fully compliant with the Sebi Regulations, 1999. These internal auditsare conducted by an independent chartered accountant firm, and cover compliance with Sebiguidelines.”“The way our business is growing, we had appointed a firm to undertake internal audit. But therole was limited to doing a financial check. This year onwards, our board has already asked us toundertake operational audit. We have appointed an internal auditor to do the same,” said Care’sManaging Director, D R Dogra.Agencies must get the internal audit report within two months from the end of the half-year.Then, their board will have to consider the report and take steps to rectify any deficiencies, andsend an action taken report to Sebi within two months.The move follows a review of the regulatory architecture initiated by the financial sectorregulators in 2008. The exercise, initiated by the high-level committee on capital markets, whichis headed by the Reserve Bank of India Governor, was spurred by international developmentsand the debate over the role played by rating agencies before the global financial crisis.The committee had reviewed the functioning of the agencies last month, based on a paperprepared by Sebi and feedback from the agencies themselves. 18
  19. 19. 6.Emerging marketsEmerging markets are nations with social or business activity in the process of rapid growth andindustrialization. The economies of China and India are considered to be the largest. Accordingto The Economist many people find the term outdated, but no new term has yet to gain muchtraction. Emerging market hedge fund capital reached a record new level in the first quarter of2011 of $121 billion. The seven largest emerging and developing economies by either nominalGDP or GDP are China, Brazil, Russia, India, Mexico, Indonesia, and Turkey.The ASEAN–China Free Trade Area, launched on January 1, 2010, is the largest regionalemerging market in the worldN the 1970s, "less economically developed countries" was the common term for markets thatwere less "developed" than the developed countries such as the United States, Western Europe,and Japan. These markets were supposed to provide greater potential for profit, but also morerisk from various factors. This term was felt by some to be not positive enough so the emergingmarket label was born. This term is misleading in that there is no guarantee that a country willmove from "less developed" to "more developed"; although that is the general trend in the world,countries can also move from "more developed" to "less developed".Originally brought into fashion in the 1980s by then World Bank economist Antoine vanAgtmael, the term is sometimes loosely used as a replacement for emerging economies, butreally signifies a business phenomenon that is not fully described by or constrained to geographyor economic strength; such countries are considered to be in a transitional phase betweendeveloping and developed status. Examples of emerging markets include Indonesia, Iran, somecountries of Latin America, some countries in Southeast Asia, South Korea, most countries inEastern Europe, Russia, some countries in the Middle East, and parts of Africa. Emphasizing thefluid nature of the category, political scientist Ian Bremmer defines an emerging market as "acountry where politics matters at least as much as economics to the markets".[6]The research on emerging markets is diffused within management literature. While researchersincluding C. K. Prahalad, George Haley, Hernando de Soto, Usha Haley, and several professorsfrom Harvard Business School and Yale School of Management have described activity incountries such as India and China, how a market emerges is little understood.In the 2008 Emerging Economy Report, the Center for Knowledge Societies defines EmergingEconomies as those "regions of the world that are experiencing rapid information nalizationunder conditions of limited or partial industrialization." It appears that emerging markets lie atthe intersection of non-traditional user behavior, the rise of new user groups and communityadoption of products and services, and innovations in product technologies and platforms. 19
  20. 20. Newly industrialized countries as of 2010. This is an intermediate category between fullydeveloped and developing.The term "rapidly developing economies" is being used to denote emerging markets such as TheUnited Arab Emirates, Chile and Malaysia that are undergoing rapid growth.In recent years, new terms have emerged to describe the largest developing countries such asBRIC that stands for Brazil, Russia, India, and China, along with BRICET i.e BRIC + EasternEurope and Turkey, BRICS i.e BRIC + South Africa, BRICM i.e BRIC + Mexico, BRICK i.e.BRIC + South Korea, Next Eleven Bangladesh, Egypt, Indonesia, Iran, Mexico, Nigeria,Pakistan, Philippines, South Korea, Turkey, and Vietnam and CIVETS i.e. Colombia, Indonesia,Vietnam, Egypt, Turkey and South Africa. These countries do not share any common agenda,but some experts believe that they are enjoying an increasing role in the world economy and onpolitical platforms.It is difficult to make an exact list of emerging markets; the best guides tend to be investmentinformation sources like ISI Emerging Markets and The Economist or market index makers suchas Morgan Stanley Capital International. These sources are well-informed, but the nature ofinvestment information sources leads to two potential problems. One is an element of historicity;markets may be maintained in an index for continuity, even if the countries have since developedpast the emerging market phase. Possible examples of this are South Korea and Taiwan. Asecond is the simplification inherent in making an index; small countries, or countries withlimited market liquidity are often not considered, with their larger neighbours considered anappropriate stand-in.In an Opalesque.TV video, hedge fund manager Jonathan Binder discusses the current and futurerelevance of the term "emerging markets" in the financial world. Binder says that in the futureinvestors will not necessarily think of the traditional classifications of "G10" versus "emergingmarkets". Instead, people should look at the world as countries that are fiscally responsible andcountries that are not. Whether that country is in Europe or in South America should make nodifference, making the traditional "blocs" of categorization irrelevant.The Big Emerging Market economies are : Brazil, China, Egypt, India, Indonesia, Mexico,Philippines, Poland, Russia, South Africa, South Korea and Turkey.Newly industrialized countries are emerging markets whose economies have not yet reached firstworld status but have, in a macroeconomic sense, outpaced their developing counterparts.Individual investors can invest in emerging markets by buying into emerging markets or globalfunds. If they want to pick single stocks or make their own bets they can do it either through adrsor through exchange traded funds. The exchange traded funds can be focused on a particularcountry or region . 20
  21. 21. 7.GLOBAL EQUITY MARKETA stock market or equity market is a public entity for the trading of company stock andderivatives at an agreed price; these are securities listed on a stock exchange as well as thoseonly traded privately.The size of the world stock market was estimated at about $36.6 trillion at the beginning ofOctober 2008. The total world derivatives market has been estimated at about $791 trillion faceor nominal value, 11 times the size of the entire world economy.[3] The value of the derivativesmarket, because it is stated in terms of notional values, cannot be directly compared to a stock ora fixed income security, which traditionally refers to an actual value. Moreover, the vast majorityof derivatives cancel each other out (Many such relatively illiquid securities are valued asmarked to model, rather than an actual market price.The stocks are listed and traded on stock exchanges which are entities of a corporation or mutualorganization specialized in the business of bringing buyers and sellers of the organizations to alisting of stocks and securities together. The largest stock market in the United States, by marketcapitalization, is the New York Stock Exchange (NYSE). In Canada, the largest stock market isthe Toronto Stock Exchange. Major European examples of stock exchanges include theAmsterdam Stock Exchange, London Stock Exchange, Paris Bourse, and the Deutsche Börse. InAfrica, examples include Nigerian Stock Exchange, JSE Limited, etc. Asian examples includethe Singapore Exchange, the Tokyo Stock Exchange, the Hong Kong Stock Exchange, theShanghai Stock Exchange, and the Bombay Stock Exchange. In Latin America, there are suchexchanges as the BM&F Bovespa and the BMV.Market participants include individual retail investors, institutional investors such as mutualfunds, banks, insurance companies and hedge funds, and also publicly traded corporationstrading in their own shares. Some studies have suggested that institutional investors andcorporations trading in their own shares generally receive higher risk-adjusted returns than retailinvestors.A few decades ago, worldwide, buyers and sellers were individual investors, such as wealthybusinessmen, usually with long family histories to particular corporations. Over time, marketshave become more "institutionalized"; buyers and sellers are largely institutionsThe rise of the institutional investor has brought with it some improvements in marketoperations. There has been a gradual tendency for "fixed" fees being reduced for all investors,partly from falling administration costs but also assisted by large institutions challenging brokersoligopolistic approach to setting standardized fees. 21
  22. 22. The equity market have been slower to globalize than the foreign exchange or thebond markets. Price linkages remain weak across equity markets. Significantdifferences in valuation still exist across different national equity market even forcomparable companies in identical industries. Equity market have been difficultand slow to globalize for many reasons. Unlike foreign exchange and governmentbonds, equities and not pure commodities. The valuation of the equity of acompany is highly unique to the particular circumstances of that company and thetotal amount of market value being traded can also be relatively small. As a resultof both of these factors, these markets are less liquid and the full transaction costssuch as equities, research, commission, etc. are higher than in the other markets.While the total daily volume of the global foreign exchange markets is on themarket is on the order of $1 trillion a day and the total daily trading volume of thegovernment bonds is on the order of $200 billion a day, the total daily volumeof all the world’s stock exchanges is only $23 billion a day 22
  23. 23. DAILY TRADING VOLUME OF FOREIGN EXCHANGE, GOVERNMENTBONDS AND EQUITES 1992 Estimate based on U.S daily transaction volumeStrictly speaking there is no international equity market in the sense that there areinternational bond and international currency market. Rather many countries havetheir own domestic equity market in which stock are traded. The largest of thesedomestic equity market are to be found in the United States, Great Britain, Japanand Germany. Although each domestic equity market is still dominated byinvestors who are citizens of that country and companies incorporated in thatcountry, development are internationalizing the world equity market. Investors areinvesting heavily in foreign equity markets to diversify the portfolio.One of the greatest limitations to the globalization of the equity markets has beenthe lack of any agent to drive the process. The illiquidity and volatilityof individual equity prices makes it prohibitively risky for the highly leveraged,multinational commercial banks to hold equities in volume for even a short periodof time. As a result, multinational banks have historically been reluctant to try tomake money by trading or investing in international equities, and therefore, havenot driven the globalization of equity. 23
  24. 24. 8.STOCK EXCHANGESA stock exchange is an entity that provides services for stock brokers and traders to trade stocks,bonds, and other securities .Stock exchanges also provide facilities for issue and redemption ofsecurities and other financial instruments, and capital events including the payment of incomeand dividends. Securities traded on a stock exchange include shares issued by companies, unittrusts, derivatives, pooled investment products and bonds.To be able to trade a security on a certain stock exchange, it must be listed there. Usually, thereis a central location at least for record keeping, but trade is increasingly less linked to such aphysical place, as modern markets are electronic networks, which gives them advantages ofincreased speed and reduced cost of transactions. Trade on an exchange is by members only.The initial offering of stocks and bonds to investors is by definition done in the primary marketand subsequent trading is done in the secondary market .A stock exchange is often the mostimportant component of a stock market. Supply and demand in stock markets is driven byvarious factors that, as in all free markets, affect the price of stocks.There is usually no compulsion to issue stock via the stock exchange itself, norms stock besubsequently traded on the exchange. Such trading is said to be off exchange or over-the-counter.This is the usual way that derivatives and bonds are traded. Increasingly, stock exchanges arepart of a global market for securities.Stock is basically part ownership of a business. A person invests his or her money in the businesswhich the business uses to better the company. When the company does well, the person whoinvested in the company gets a certain percentage of the profits of the company. Depending onhow well the business is doing, a percent of that business is worth a certain amount of moneythat can change either decreasing the money in the stockholders pocket or increasing it. Tradingstocks is a way for people to make money by investing money in companies.There is usually no compulsion to issue stock via the stock exchange itself, nor must stock besubsequently traded on the exchange. Such trading is said to be off exchange or over-the-counter.This is the usual way that bonds are traded. Increasingly, stock exchanges are part of a globalmarket for securities.A stock exchange, share market or bourse is a corporation or mutual organization which provides"trading" facilities for stock brokers and traders, to trade stocks and other securities. Stockexchanges also provide facilities for the issue and redemption of securities as well as otherfinancial instruments and capital events including the payment of income and dividends. Tradeon an exchange is by members only. The initial offering of stocks and bonds to investors is bydefinition done in the primary market secondary market. A stock exchange is often the mostimportant component of a stock market. Supply and demand in stock markets is driven byvarious factors which, as in all free markets, affect the price of stocks . And subsequent trading isdone. 24
  25. 25.  The Role Of Stock Exchangeso Mobilizing saving for investmentWhen people draw their savings and invest in shares, it leads to a more rational allocation ofresources because funds, which could have been consumed, or kept in idle deposits with banks,are mobilized and redirected to promote business activity with benefits for several economicsectors such as agriculture, commerce and industry, resulting in a stronger economic growth andhigherproductivity levels and firmso .Facilitating company growthCompanies view acquisitions as an opportunity to expand product lines, increase distributionchannels, hedge against volatility, increase its market share, or acquire other necessarybusinessassets. A takeover bid or a merger agreement through the stock market is one of thesimplest and most common ways for a company to grow by acquisition or fusion.o Redistribution of wealthStocks exchanges do not exist to redistribute wealth. However, both casual andprofessional stock investors, through dividends and stock price increases that may resultin capital gains, will share in the wealth of profitable businesses.o Corporate governanceBy having a wide and varied scope of owners, companies generally tend to improve ontheirmanagementefficiency in order to satisfy the demands of these shareholders and the morestringent rules for public corporations imposed by public stock exchanges and the government.Consequently, it is alleged that public companies tend to have better management recordsthan privately-held companiescorporate governance on the part of some public companies.However, some well-documented cases are known where it is alleged that there has beenconsiderable slippage ino Gives the right to shareholders to vote in the general meetingsIt permits for the investor to have a political power in the companies in which he investsits savings due that the acquisition of ordinary shares gives him the right to vote in the generalshareholders meetings of the company in question 25
  26. 26. o Creating investment opportunity of small investorAs opposed to other businesses that require huge capital outlay, investing in shares is open toboth the large and small stock investors because a person buys the number of shares they canafford. Therefore the Stock Exchange provides the opportunity for small investors to own sharesof the same companies as large investors.o Govt. capital- raising for development projectGovernments at various levels may decide to borrow money in order to finance infrastructureprojects such as sewage and water treatment works or housing estates by selling another categoryof securities known as bonds. These bonds can be raised through the Stock Exchange wherebymembers of the public buy them, thus loaning money to the government. The issuance of suchbonds can obviate the need to directly tax the citizens in order to finance development, althoughby securing such bonds with the full faith and credit of the government instead of with collateral,the result is that the government must tax the citizens or otherwise raise additional funds to makeany regular coupon payments and refund the principal when the bonds mature.o Barometer of the economyAt the stock exchange, share prices rise and fall depending, largely, on market forces. Shareprices tend to rise or remain stable when companies and the economy in general show signs ofstability and growth. An economic recession, depression, or financial crisis could eventually leadto a stock market crash. Therefore the movement of share prices and in general of the stockindexes can be an indicator of the general trend in the economy.o To provide liquidity to the investors.The investor can recover the money invested when needed. For it, he has to go to the stockexchange market to sell the securities previously acquired. This function of the stock market isdone on the secondary market. It offers liquidity to the security investments, through a place inwhich to sell or buy securitieso TransparencyInvestor make informed and intelligent decision about the particular stock based on information.Listed companies must disclose information in timely, complete and accurate manner to theExchange and the public on a regular basis. Required information include stock price, corporateconditions and developments dividend, mergers and joint ventures, and management changes etc. 26
  27. 27. 9..MAJOR STOCK EXCHANGES Market Trade ValueRank Economy Stock Exchange Headquarters Capitalization (USD Billions) (USD Billions) United States NYSE Euro next (US & New York1 14,242 20,161 Europe Europe) City United States NASDAQ OMX (US & New York2 4,687 13,552 Europe North Europe) City3 Japan Tokyo Stock Exchange Tokyo 3,325 3,972 London Stock4 United London 3,266 2,837 Exchange Kingdom Shanghai Stock5 China Shanghai 2,357 3,658 Exchange Hong Kong Stock6 Hong Kong Hong Kong 2,258 1,447 Exchange Toronto Stock7 Canada Toronto 1,912 1,542 Exchange8 Brazil BM&F Bovespa São Paulo 1,229 931 Australian Securities9 Australia Sydney 1,198 1,197 Exchange10 Germany Deutsche Börse Frankfurt 1,185 1,75811 Switzerland SIX Swiss Exchange Zurich 1,090 887 Shenzhen Stock12 China Shenzhen 1,055 2,838 Exchange BME Spanish13 Spain Madrid 1,031 1,226 Exchanges Bombay Stock14 India Mumbai 1,007 148 Exchange South15 Korea Exchange Seoul 996 2,029 Korea National Stock16 India Mumbai 985 589 Exchange of India17 Russia MICEX-RTS Moscow 800 514 South18 JSE Limited Johannesburg 789 372 Africa 27
  28. 28. 1. NASDAQThe NASDAQ Stock Market, also known as simply the NASDAQ, is an American stockexchange. "NASDAQ" originally stood for "National Association of Securities DealersAutomated Quotations". It is the second-largest stock exchange by market capitalization in theworld, after the New York Stock Exchange. As of January 25, 2011, there are 2,711 listings, witha total capitalization of over $4.5 trillion. The NASDAQ has more trading volume than any otherelectronic stock exchange in the world. The exchange is owned by NASDAQ OMX Group,which also owns the OMX stock exchange network.NASDAQ was founded in 1971 by the National Association of Securities Dealers, who divestedthemselves of it in a series of sales in 2000 and 2001. It is owned and operated by the NASDAQOMX Group, the stock of which was listed on its own stock exchange beginning July 2, 2002,under the ticker symbol NASDAQ: NDAQ. It is regulated by the Financial Industry RegulatoryAuthority the successor to the NASD. When the NASDAQ stock exchange began trading onFebruary 8, 1971, it was the worlds first electronic stock market. At first, it was merely acomputer bulletin board system and did not actually connect buyers and sellers. The NASDAQhelped lower the spread but somewhat paradoxically was unpopular among brokerages becausethey made much of their money on the spread.NASDAQ was the successor to the over-the-counter system of trading. As late as 1987, theNASDAQ exchange was still commonly referred to as the OTC in media and also in the monthlyStock Guides issued by Standard & Poors Corporation.Over the years, NASDAQ became more of a stock market by adding trade and volume reportingand automated trading systems. NASDAQ was also the first stock market in the United States tostart trading online. Nobody before them had ever done this, highlighting NASDAQ-tradedcompanies and closing with the declaration that NASDAQ is "the stock market for the nexthundred years." Its main index is the NASDAQ Composite, which has been published since itsinception. However, its exchange-traded fund tracks the large-cap NASDAQ-100 index, whichwas introduced in 1985 alongside the NASDAQ 100 Financial Index. 28
  29. 29. 2. BOMBAY STOCK EXCHANGE SENSEXThe Bombay Stock Exchange (BSE) is a stock exchange located on Dalal Street, Mumbai and isthe oldest stock exchange in Asia. The equity market capitalization of the companies listed onthe BSE was US$1 trillion as of December 2011, making it the 6th largest stock exchange inAsia and the 14th largest in the world. The BSE has the largest number of listed companies in theworld.As of March 2012, there are over 5,133 listed Indian companies and over 8,196 scripts on thestock exchange, the Bombay Stock Exchange has a significant trading volume. The BSESENSEX, also called "BSE 30", is a widely used market index in India and Asia. Though manyother exchanges exist, BSE and the National Stock Exchange of India account for the majority ofthe equity trading in India. While both have similar total market capitalization, share volume inNSE is typically two times that of BSE.The Phiroze Jeejeebhoy Towers house the Bombay Stock Exchange since 1980.The BombayStock Exchange is the oldest exchange in Asia. The location of these meetings changed manytimes, as the number of brokers constantly increased. The group eventually moved to DalalStreet in 1874 and in 1875 became an official organization known as The Native Share & StockBrokers Association. In 1956, the BSE became the first stock exchange to be recognized by theIndian Government under the Securities Contracts Regulation Act. The Bombay Stock Exchangedeveloped the BSE SENSEX in 1986, giving the BSE a means to measure overall performanceof the exchange. In 2000 the BSE used this index to open its derivatives market, tradingSENSEX futures contracts. The development of SENSEX options along with equity derivativesfollowed in 2001 and 2002, expanding the BSEs trading platform. Historically an open outcryfloor trading exchange, the Bombay Stock Exchange switched to an electronic trading system in1995. It took the exchange only fifty days to make this transition. This automated, screen-basedtrading platform called BSE On-line trading currently has a capacity of 8 million orders per day.The BSE has also introduced the worlds first centralized exchange-based internet tradingsystem, to enable investors anywhere in the world to trade on the BSEplatform. The BSE is currently housed in Phiroze Jeejeebhoy Towers at Dalal Street, Fort area.The BSE Index, SENSEX, is Indias first and most popular Stock Market benchmark index.Exchange traded funds on SENSEX, are listed on BSE and in Hong Kong. Futures and optionson the index are also traded at BSE. 29
  30. 30. 3. NATIONAL STOCK EXCHANGEThe National Stock Exchange (NSE) is Indias leading stock exchange coveringvarious cities and towns across the country. NSE was set up by leading institutionsto provide a modern, fully automated screen-based trading system with nationalreach. The Exchange has brought about unparalleled transparency, speed &efficiency, safety and market integrity. It is the 9th largest stock exchange in theworld by market capitalization and largest in India by daily turnover and number oftrades, for both equities and derivative trading.NSE has a market capitalization of around US$1.59 trillion and over 1,552listingsas of December 2010. The NSEs key index is the S&P CNX Nifty,known as the NSE NIFTY it means National Stock Exchange Fifty, an index offifty major stocks weighted by market capitalization.There are at least 2 foreign investors NYSE Euro next and Goldman Sachs whohave taken a stake in the NSE. As of 2006, the NSEVSAT terminals, 2799 in total,cover more than 1500 cities across India. NSE is the third largest Stock Exchangein the world in terms of the number of trades in equities.It is the second fastest growing stock exchange in the world with a recorded growthof 16.6%. 30
  31. 31. 4. HANG SENGThe Hang Seng Index is a free float-adjusted market capitalization-weighted stock market indexin Hong Kong. It is used to record and monitor daily changes of the largest companies of theHong Kong stock market and is the main indicator of the overall market performance in HongKong. These 43 constituent companies represent about 60% of capitalization of the Hong KongStock Exchange.HSI was started on November 24, 1969, and is currently compiled andmaintained by Hang Seng Index’sCompany Limited, which is a wholly owned subsidiary of Hang Seng Bank, one of the largestbank registered and listed in Hong Kong in terms of market capitalization. It is responsible forcompiling, publishing and managing the Hang Seng Index and a range of other stock indexes,such as Hang Seng China Enterprises Index, Hang Seng China A Index Series, Hang Seng ChinaH-Financials Index, Hang Seng Composite Index Series, Hang Seng China A Industry TopIndex, Hang Seng Corporate Sustainability Index Series and Hang Seng Total Return IndexSeries.There are four sub-indices established in order to make the index clearer and to classifyconstituent stocks into four distinct sectors. There are 43 HIS constituent stocks in total under thesub indices:1) Hang Seng Finance Sub-index.2) Hang Seng Utilities Sub-index.3) Hang Seng Properties Sub-index.4) Hang Seng Commerce& Industry Sub-index.On 12 November 1999, the Tracker Fund of Hong Kong, created by government interventionduring the 1997 Asian financial crisis, had its introduction on the exchange.25 November 1999,two companies were jointly listed on the newly created Growth Enterprise Market .On 6 March2000, The Stock Exchange, Futures Exchange and the Hong Kong Securities Clearing Companyall became wholly owned subsidiaries of HKEx, which was in turn listed on 27 June 2000.On 23October 2000, AMS/3 was implemented on the exchange. 31
  33. 33. 10.CROSS LISTINGThe listing of a companys common shares on a different exchange than its primary and originalstock exchange. In order to be approved for cross-listing, the company in question must meet thesame requirements as any other listed member of the exchange, such as basic requirements forthe share count, accounting policies, filing requirements for financial reports and companyrevenues.Some of the advantages to cross-listing include having shares trade in multiple time zones and inmultiple currencies. This gives issuing companies more liquidity and a greater ability to raisecapital. Most foreign companies that cross-list in the U.S. markets do so via American depositaryreceipts.The term often applies to foreign-based companies that choose to list their shares on U.S.-basedexchanges like the New York Stock Exchange. But firms based in the U.S. may choose to cross-list on European or Asian exchanges, a strategy that may become more popular if the U.S. dollarstruggles against major foreign currencies for a lengthy period of time. The adoption ofSarbanes-Oxley requirements in 2002 made cross-listing on U.S. exchanges more costly than inthe past; the requirements put a heavy emphasis on corporate governance and accountability.This, along with generally accepted accounting principles accounting, makes for a challenginghurdle for many companies whose "home" exchange may have laxer standards.Cross listing of shares is when a firm lists its equity shares on one or more foreign stockexchange in addition to its domestic exchange. Examples include: American Depository Receipt,European Depository Receipt , International Depository Receipt (IDR) and Global RegisteredShares .Generally such a companys primary listing is on a stock exchange in its country of corporation,and its secondary listing is on an exchange in another country. Cross-listing is especiallycommon for companies that started out in a small market but grew into a larger market. Forexample, numerous large Canadian companies are listed on the New York Stock Exchange orNASDAQ as well as the Toronto Stock Exchange such as Enbridge and Research In Motion.Some organizations, such as Liberty Media, Comcast and Viacom, have multiple listingsreflecting different voting rights.A questionnaire asking managers of international companies has shown that firms cross-list inthe US mainly because of specific US business reasons, liquidity and status of US capitalmarkets, and industry specific reasons. Meeting SEC disclosure requirements and preparing US-GAAP reconciliations were cited as the most important disadvantages. Officials of ADRcompanies without an official listing perceived the expansion of the US shareholder base as theprincipal benefit followed by specific US business reasons. On the question of what deters themfrom an official US listing, they mentioned the time-consuming and expensive US-GAAPreconciliations as well as listing fees as the hardest impediments. Additional disclosurerequirements were cited as less difficult to overcome. 33
  34. 34.  Motivations for cross-listingThe academic literature has identified a number of different arguments to cross-list abroad inaddition to a listing on the domestic exchange. Roosenboom and van Dijk in 2009 distinguishbetween the following motivations: Market segmentationThe traditional argument for why firms seek a cross-listing is that they expect to benefit from alower cost of capital that arises because their shares become more accessible to global investorswhose access would otherwise be restricted because of international investment barriers. Market liquidityCross-listings on deeper and more liquid equity markets could lead to an increase in the liquidityof the stock and a decrease in the cost of capital. Information disclosureCross-listing on a foreign market can reduce the cost of capital through an improvement of thefirm’s information environment. Firms can use a cross-listing on markets with stringentdisclosure requirements to signal their quality to outside investors and to provide improvedinformation to potential customers and suppliers (for example, by adopting US GAAP). Also,cross-listings tend to be associated with increased media attention, greater analyst coverage,better analysts’ forecast accuracy, and higher quality of accounting information. Investor protectionRecently, there is a growing academic literature on the so-called "bonding" argument. Accordingto this view, cross-listing in the US acts as a bonding mechanism used by firms that areincorporated in a jurisdiction with poor investor protection and enforcement systems to committhemselves voluntarily to higher standards of corporate governance. In this way, firms attractinvestors who would otherwise be reluctant to invest. Other motivationsCross-listing may also be driven by product and labor market considerations .for example, toincrease visibility with customers by broadening product identification, to facilitate foreignacquisitions, and to improve labor relations in foreign countries by introducing share and optionplans for foreign employees. 34
  35. 35. 11. DEPOSITARY RECEIPTA depositary receipt is a negotiable financial instrument issued by a bank to represent a foreigncompanys publicly traded securities. The depositary receipt trades on a local stock exchange butrepresents a security, usually in the form of equity, which is issued by a foreign publicly listedcompany. The depositary receipt, which is a physical, allows investors to hold shares in equity ofother countries, which has been offering companies, investors and traders global investmentopportunities since the 1920sDepositary receipts make it easier to buy shares in foreign companies because the shares of thecompany dont have to leave the home state. Depositary receipts are created when a brokerpurchases the companys shares on the home stock market and delivers those to the depositaryslocal custodian bank, which then instructs the depositary bank, such as the bank of new york, toissue depositary receipts. Depositary receipts may trade freely, just like any other security, eitheron an exchange or in the over-the-counter market and can be used to raise capital.When the depositary bank is in the u.s., the instruments are known as American depositaryreceipts. European banks issue European depositary receipts, and other banks issue globaldepositary receiptsDepositary receipts facilitate cross-border trading and settlement, minimize transaction costs andmay broaden a non- us. companys potential investor base, particularly among institutionalinvestors. Investors gain benefits of diversification while trading in their own market underfamiliar settlement and clearance condition .more importantly, depositary receipt investors willbe able to reap the benefits of these usually higher risk, higher return equities, without having toendure the added risks of going directly into foreign markets, which may pose lack oftransparency or instability resulting from changing regulatory procedures.A depositary receipt typically requires a company to meet a stock exchange’s specific rulesbefore listing its stock for sale. For example, a company must transfer shares to a brokeragehouse in its home country. Upon receipt, the brokerage uses a custodian connected to theinternational stock exchange for selling the depositary receipts. This connection ensures that theshares of stock actually exist and no manipulation occurs between the foreign company and theinternational brokerage house.The depositary receipt functions as a means to increase global trade, which in turn can helpincrease not only volumes on local and foreign markets but also the exchange of information,technology, regulatory procedure as well as market transparency. Thus, instead of being facedwith impediments to foreign investment, as is often the case in many emerging markets, thedepositary receipt investors and company can both benefit from investment abroad.A company may option to issue a depositary receipt to obtain greater exposure and raise capitalin the world market. issuing depositary receipt has the added benefit of increasing the sharesliquidity while booting the company’s prestige on its local market. 35
  36. 36. Types Depositary ReceiptsAmerican Global Indian European LuxembourgDepositary Depositary Depository Depositary Depositary Receipts Receipt Receipt Receipt Receipt Unsponsored Sponsored Level1 Level2 Level3 Restricted SEC Sec Rule 144-A Regulation S 36
  37. 37.  American Depositary Receipts An American depositary receipts is a negotiable security that represents securitiesof a non-us company that trade in the us financial markets. Securities of a foreign company thatare represented by an American depositary receipt are called American depositary shares.Shares of many non-us companies trade on us stock exchanges through American depositaryreceipts. American depositary receipts are denominated and pay dividends in us dollars and maybe traded like regular shares of stock.The first American depositary receipts was introduced by j.p. morgan in 1927 for the Britishretailer Selfridges.The regulation of American depositary receipts changed its form in 1955, when the u.s. securitiesand exchange commission established the from s-12, necessary to register all depositary receiptprograms. The form s-12 was replaced by form f-6 later, but the principles remained the same tilltoday. An American depositary receipt representing shares of a foreign company not directlyinvolved in issuance of the adr. Unsponsored adrs are originated by a bank that independentlypurchases the foreign firms shares, holds the shares in trust, and sells the adrs through brokeragefirms. The depositary bank rather than holders of the adrs retains the right to vote shares held intrust. Compare sponsored American depositary receipt.O Type American Depositary Receipt: Unsponsored American Depositary Receipt Unsponsored shares trade on the over-the-counter market. These shares areissued in accordance with market demand, and the foreign company has no formal agreementwith a depositary bank. Unsponsored American depositary receipts are often issued by morethan one depositary bank. Each depositary services only the American depositary receipts ithas issued.Due to a recent sec rule change making it easier to issue level i depositary receipts, bothsponsored and unsponsored, hundreds of new American depositary receipts have been issuedsince the rule came into effect in October 2008. The majority of these were unsponsored level iAmerican depositary receipts, and now approximately half of all American depositaryreceipts programs in existence are unsponsored.An American issued without the knowledge or cooperation of the company whose stock backsit. Unlike other sponsored adrs, which are treated just like common shares denominated inthe u.s. Dollar, an unsponsored adr simply gives the monetary benefits of ownership. That is,the bank issuing the adr pays out dividends as if it were common stock, but the adr does not carryvoting rights. Unsponsored adrs may not be traded on the new York stock exchange, and areusually traded over-the-counter. 37
  38. 38.  Sponsored Levels Particular Level1 Level2 Level3 Trading pattern Only on over the Listing allowed on Listing allowed on counter stock exchange in stock exchange in usa usa Registration with American American depositary American depositary securities & depositary receipt receipt and share receipt and share exchange are registration and both are registrated both are registrated commission share are not registrated Generally accepted Only nominally full Partial full fill Full applicable accounting policy fill Disclosure Very less Medium disclosure Full disclosure disclosure Capital raising No public issue Public issue without Public issue with faculties private placement fresh capital fresh capitalO RESTRICTED PROGRAMS Foreign companies that want their stock to be limited to being traded by onlycertain individuals may set up a restricted program. There are two sec rules that allow this typeof issuance of shares in the u.s.: rule 144-a and regulation s. Privately Placed (Sec Rule 144a) American Depositary ReceiptsSome foreign companies will set up an American depositary receipts program under sec rule144a. This provision makes the issuance of shares a private placement. Shares of companiesregistered under rule 144-a are restricted stock and may only be issued to or traded by qualifiedinstitutional buyers . Sec Regulation S American Depositary ReceiptsThe other way to restrict the trading of depositary shares to us public investors is to issue themunder the terms of sec regulation s. This regulation means that the shares are not, and will not beregistered with any united states securities regulation authority. 38
  39. 39.  Global Depositary Receipt A global depository receipt or global depositary receipt is a certificate issued by adepository bank, which purchases shares of foreign companies and deposits it on the account.Global depository receipt represent ownership of an underlying number of shares. globaldepository receipts facilitate trade of shares, and are commonly used to invest in companies fromdeveloping or emerging markets. prices of global depositary receipt are often close to values ofrelated shares, but they are traded and settled independently of the underlying shares. severalinternational banks issue gdrs, such as JPMorgan chase, city group, deutsche bank, bank of newYork. Gdrs are often listed in the Frankfurt stock exchange, Luxembourg stock exchange and inthe London stock exchange. Normally 1 gdr = 10 shares, but not always. It is a negotiableinstrument which is denominated in some freely convertible currency.  Indian Depository Receipt An Indian depository receipt is an instrument denominated in Indian rupees in the form ofa depository receipt created by a domestic depository against the underlying equity of issuingcompany to enable foreign companies to raise funds from the Indian securities markets. theforeign company idrs will deposit shares to an Indian depository. The depository would issuereceipts to investors in India against these shares. The benefit of the underlying shares wouldaccrue to the depository receipt holders in India the ministry of corporate affairs of thegovernment of India, in exercise of powers available with it under section 642 read with section605a had prescribed the companies issue of Indian depository receipts rules, 2004 issue of Indiandepository receipts rules vide notification number gsr 131(e) dated February 23, 2004.standardchartered plc became the first global company to file for an issue of Indian depository receipts inIndia.  EUROPEAN DEPOSITARY RECEIPT A European depositary receipt represents ownership in the shares of a non-European company that trades in European financial markets. The stock of many non-Europeancompanies trade on European stock exchanges like London through the use of europeandepositary receipt. European depositary receipt enable European investors to buy shares inforeign companies without the hazards or inconveniences of cross-border & cross-currencytransactions. Edrs carry prices in euro, pay dividends in euro, and can be traded like the shares ofEuropean-based companies.  LUXEMBOURG DEPOSITORY RECEIPTS A Luxembourg depository receipts is a certificate which represents the purchase, orownership, of foreign assets which are deposited in a Luxembourg-based account. An ldrfunctions in much the same way as a global depositary receipt . Ldrs may represent ownership ofeither an underlying number of shares or a notional amount of bonds. Luxembourg depositoryreceipts are particularly useful where an institution wants to ensure safe keeping of assets, i.e.,in Luxembourg, but needs a specific national or regional banks expertise in handling a variety oftransactions. prices of ldrs are often close to the value of the real. 39
  40. 40. 12. BOND MARKETThe environment in which the issuance and trading of debt securities occurs. The bond marketprimarily includes government-issued securities and corporate debt securities, and facilitates thetransfer of capital from savers to the issuers or organizations requiring capital for governmentprojects, business expansions and ongoing operations. Most trading in the bond market occursover-the-counter, through organized electronic trading networks, and is composed of the primarymarket and the secondary market. Although the stock market often commands more mediaattention, the bond market is actually many times bigger and is vital to the ongoing operation ofthe public and private sector. A bond is a negotiable certificate that acknowledges the indebtedness of the bond issuer to theholder. It is negotiable because the ownership of the certificate can be transferred in thesecondary market. It is a debt security, in which the authorized issuer owes the holders a debtand, depending on the terms of the bond, is obliged to pay interest to use and/or to repay theprincipal at a later date, termed maturity. A bond is a formal contract to repay borrowed moneywith interest at fixed intervals.Thus a bond is like a loan or IOU: the holder of the bond is the lender, the issuer of the bond isthe borrower, and the coupon is the interest. Bonds provide the borrower with external funds tofinance long-term investments, or, in the case of government bonds, to finance currentexpenditure. Certificates of deposit or commercial paper are considered to be moneymarket instruments and not bonds.Bonds and stocks are both securities, but the major difference between the two is thatstockholders have an equity stake in the company , whereas bondholders have a creditor stake inthe company Another difference is that bonds usually have a defined term, or maturity, afterwhich the bond is redeemed, whereas stocks may be outstanding indefinitely. An exception isa consol bond, which is a perpetuity .In the UK, "bond" is also used to refer to a time deposit with a bank or building society, which ingeneral is not marketable and is subject to different tax treatment from the bondsBonds are issued by public authorities, credit institutions, companies supranational institutions inthe primary markets. The most common process of issuing bonds is through underwriting. Inunderwriting, one or more securities firms or banks, forming a syndicate, buy an entire issue ofbonds from an issuer and re-sell them to investors. The security firm takes the risk of beingunable to sell on the issue to end investors. Primary issuance is arranged by book runners whoarrange the bond issue, have direct contact with investors and act as advisers to the bond issuer interms of timing and price of the bond issue. The book runners willingness to underwrite must bediscussed prior to opening books on a bond issue as there may be limited appetite to do so.In the case of government bonds, these are usually issued by auctions, called a public sale, whereboth members of the public and banks may bid for bond. Since the coupon is fixed, but the priceis not, the percent return is a function both of the price paid as well as the coupon.Because the cost of issuance for a publicly auctioned bond can be cost prohibitive for a smallerloan, it is also common for smaller bonds to avoid the underwriting and auction process throughthe use of a private placement bond. In the case of a private placement bond, the bond is held bythe lender and does not enter the large bond market. 40
  41. 41. 13. GLOBAL BOND MARKET Asset-Backed securitiesAsset-backed securities are bonds that are based on underlying pools of assets. A specialpurpose trust or instrument is set up which takes title to the assets and the cash flows are"passed through" to the investors in the form of an asset-backed security. The types ofassets that can be "securitized" range from residential mortgages to credit cardreceivables.All assets are usually illiquid and private in nature. A securitization occurs to make theseassets available for investment to a much broader range of investors. The "pooling" ofassets occurs to make the securitization large enough to be economical and to diversifythe qualities of the underlying assets. asset-backed securities are securities which arebased on pools of underlying assets. Convertible BondA convertible bond is a bond that gives the holder the right to "convert" orexchange the par amount of the bond for common shares of the issuer at somefixed ratio during a particular period. As bonds, they have some characteristics offixed income securities. Convertible bonds are bonds. They have a couponpayment and are legally debt securities, which rank prior to all equity securities ina default situation. Their value, like all bonds, depends on the level of prevailinginterest rates and the credit quality of the issuer. The exchange feature of aconvertible bond gives the right for the holder to convert the par amount of thebond for common shares a specified price or "conversion ratio". For example, aconversion ratio might give the holder the right to convert $100 par amount of theconvertible bonds of Insolvents Corporation into its common shares at $25 pershare. This conversion ratio would be said to be " 4:1" or "four to one". Corporate BondsThe creditworthiness of corporate bonds are tied to the business prospects and financial capacityof the issuer.The business prospects of companies are dependent on the economy and thecompetitive situation of industries. Issuers are grouped by industry, for example real estate,resource and retail bonds. Industries with stable revenues and earnings are called "non-cyclicals",where as those whose revenues and earnings rise and fall with the economy and commodityprices are called "cyclicals".Issuers are also grouped by their credit ratings. Companies that havefinancial risk because of high levels of debt and variable revenues and earnings are called "belowinvestment grade" or "junk" bonds because of their speculative nature. Higher quality bonds areconsidered "investment grade". 41