Capital Markets
©2010 BSE Training Institute Limited 1
What is Stock Exchange
• It is a platform where buyers and sellers meet
• It provides a place to buy and sell shares
• It ...
Participants
• Govt.
• Companies
• Institutions
• Retail Investors
• Mutual Funds
©2010 BSE Training Institute Limited 3
History of Stock Exchanges
• BSE first stock exchange started on 9th July
1875
• Known as “Native Shares and Stock Broking...
Major reforms in capital Market
• 1992 FII were allowed in india
• 1993 Private Sector Mutual Funds were
launched
• 1996 F...
Reforms cont
• 1996 Depository act passed
• 2000 Derivatives markets gets going
• 2003 Commodities Market started
• 2008 C...
Current scenario
• Today 23 stock exchanges in India
• Major ones BSE (Bombay Stock Exchange )
and NSE (National Stock Exc...
Daily Turnover of stock markets
• BSE Cash segment Rs. 4000 crores
• NSE cash segment Rs. 15000 crores
• NSE FO Rs. 1,00,0...
Financial Markets
• Financial Markets are the capital markets that
is stock market
• Stock market is known as “Barometer o...
Stock market Barometer
• It is indication that net profit of companies
rises or falls
• This means that sales have either ...
Financial Markets Classification
• Capital Market is market for long term source
of funds
• Market having maturity of more...
Capital market and Economic Growth
• US,UK,Japan have high economic growth due
to developed Capital markets
• Fund raising...
Money Markets
• It is a market for short term source of funds
• The maturity of these instruments is less than
one year
• ...
Call Money Market
• Liquidity management main object
• 2007 Call money rate 0.25 %
• 2008 call money rate 21 %
• Currently...
What is IPO ?
• It refers to Initial Public Offering
• The company for the first time goes to public
to raise the money
• ...
Why companies raise money
through IPO ?
• Money raised through IPO is ownership
money
• It need not be returned to shareho...
Process of IPO
• The company first goes to Merchant Banker
Category I who has licence from SEBI
• Merchant banker has the ...
Process Cont
• The Merchant Banker will prepare project
report of the company
• They will do two types of analysis
• Quant...
Process cont.
• Based on both types of analysis the price
range is decided by the Merchant Banker
• For instance Coal Indi...
IPO process cont
• SEBI would give answer within 21 days
• If no comment comes from SEBI within 21
days then IPO is said t...
IPO process
• Once the IPO gets SEBI approval the
Merchant Banker goes for marketing of the
issue
• At least 90 % of the i...
IPO process
• In order to avoid failure of IPO
• Companies also appoint Underwriter
• Underwriter is also a company who gi...
What is FPO ?
• It is Follow on Public Offer
• It refers to company is already listed and for
second time goes for raising...
Secondary Market
• It is known as the Stock Market
• Companies trade on the stock market
• On BSE 6500 companies are liste...
Regulation of Stock Market
• It is regulated by SEBI (Securities and
Exchange Board of India)
• All the stock exchanges of...
Relationship between Primary
and Secondary market
• Both are inter related
• If there is bull run in secondary market more...
Years of IPO
• 2007 saw maximum IPO as the market was in
bull mode
• 2008 there were no IPO after Reliance Power
failure
•...
Classification of stocks
• Large Cap stocks which have market cap
greater than Rs. 9000 crore
• Mid cap stocks which have ...
Another classification
• A – Blue Chip stocks which are fundamentally
very sound
• B1 B2 which are sound but they are smal...
Another classification
• S group stocks are small companies which are
listed on Indonext exchange but traded on
BSE
• Z gr...
Global markets
• US
• Dowjones
• NASDAQ (National Association of securities Dealer
Automated Quotations)
• EUROPE
• FTSE (...
Cont..
• ASIAN MARKET
• Nikkie 225 – Tokyo (Japan)
• Strait Times – Singapore
• SGX Nifty - Singapore
• Hangsang – Hongkon...
Cont..
• Shanghai Composite – China
• KOSPI – Korea Composite Stock Price Index
• Sensex - India
• S&P CNX Nifty - India
©...
What is neeed to Open trade in the equity
market ?
• 3 types of accounts required to trade in stock
market
• 1. Trading Ac...
How to open Demat Account ?
• Documents Required
• Pan card
• Address Proof (Voter id, passport, bank
statement, driving l...
Use of Trading & Demat Account ?
• Trading account is used to actually put the buy
and sell transaction
• A code is genera...
How Exactly does trading take place ?
• Once trading and demat accounts are opened.
• The client will call the broker or s...
How many types of trading are there ?
• Two types of trading
• Intraday trading
• Delivery base trading
• Intraday trading...
Delivery base trading
• Here the entire payment is made by the client
• The securities are then transferred to the
demat a...
Settlement Process
• The payin and payout of funds and securities
takes place on T + 2 basis
• T is Monday so plus two wor...
Equity as Asset Class
• Equity fulfills “Wealth Creation” Objective
• Sensex has given 17.25 % CAGR return from
1979 to 20...
Stock Markets
• Primary
• Secondary
©2010 BSE Training Institute Limited 42
Stock Markets Regulatory Framework
• Self Regulatory Bodies
• SCRA 1956 & SCR Rules 1957
• Activities supervised by MoF
• ...
S E B I
• SEBI act passed in April 4,1992.
Functions
• To protect the interest of investors
• To promote the development o...
Role of SEBI
• Regulate the Business in SE’s
• Register & Regulate intermediaries, collective
investment schemes (incl. MF...
Role of SEBI……. contd
• Regulate substantial acquisition of shares &
take over of companies
• Inspection/Audit of intermed...
Measures initiated by SEBI
• Capital Adequacy norms for Brokers
• Intra day trading limits
• Gross Exposure limits
• Margi...
…..contd
• Client Broker relationship
• KYC
• Registration of Sub brokers & brokers
• Increasing trading hours
• Introduct...
….contd
• Computerization of Exchanges
• Internet trading
©2010 BSE Training Institute Limited 49
Role of exchanges
• To promote develop & maintain a well regulated
market for dealing in securities
• To safe guard intere...
Instruments available
• Equity
• Debt
• Derivatives
• Mutual Funds
• Commodities
©2010 BSE Training Institute Limited 51
Equity
• Preference Shares
• Equity shares
©2010 BSE Training Institute Limited 52
Debt
• Debentures
• Bonds
©2010 BSE Training Institute Limited 53
Derivatives
• Futures- Index / Stock
• Options- Call / Put
©2010 BSE Training Institute Limited 54
Risk Return Profile
Risk Return
Equity High High
Debt Low Low
Derivatives Moderate High
©2010 BSE Training Institute Limit...
Conclusion
• Need for market regulator
• SEBI regulates the markets to help them
modernize & grow
• Exchanges bring on bes...
Other Regulatory Bodies
• Indian Financial system governed by various
regulatory bodies
• RBI
• AMFI
• IRDA
• PFRDA
• FMC ...
RBI
• Reserve Bank of India
• Apex body for regulation of Banking Sector
• GTL merged with OBC by RBI for protection of
de...
AMFI
• AMFI – Association of Mutual Funds of India
• Advisory body for mutual funds
• Represents MF industry before the
Go...
IRDA
• IRDA – Insurance Regulatory Development
Authority
• Controls the Insurance sector
• ULIP issue taken up by IRDA
©20...
FDSC
• FSDC – Financial Stability Development
Council
• Chairman is Finance Minister Himself
• It solves the Inter-Regulat...
Japan and UK Model
• Japan has Financial Services Agency
• UK has FSA – Financial Service Authority
• Both have single reg...
Debt Market
• Debt Instruments are those who have fixed
rate of return
• They create financial obligation on the issuer
• ...
Debt Equity Ratio – The CRUX
• This ratio shows the DEBT component in the
capital structure of the company
• Higher Debt a...
SUB PRIME CRISIS
• In 2001, WTC attack
• USA was to face recession as no one wanted
to go to USA
• FEDRAL RESERVE reduces ...
SUB PRIME CRISIS Cont..
• In 2007, time of Repayment
• Huge defaults
• Large number of houses came for auction
• Reduced t...
Debt Equity Ratio
• Most important ratio after Global Recession
• Sub Prime taught best lesson that debt should be
under c...
Types of Debt Instruments
• Fixed Deposits
• Bonds
• Debentures
• NSC
• KVP
• PPF
©2010 BSE Training Institute Limited 68
Risk in Debt Market
• Credit Risk
• Inflation Risk
• Interest Rate Risk
©2010 BSE Training Institute Limited 69
Credit Rating
• CRISIL 1987
• ICRA 1991
• CARE 1993
• IPO Grading has also been started
• R power issue classic case
©2010...
Global Credit Rating Agencies
• Standard and Poor
• Fitch
• Moody
©2010 BSE Training Institute Limited 71
Forex Markets
• Currency Trading has now started in india
• Participants
• Banks
• MNCs
• NSE and MCX offer trading platfo...
Exchange Rates
• Exchange Rate lot more than an mere number
• Currency appreciates and Depreciates
• Appreciation refers t...
Types of Exchange Rate
• 1. Demand Supply Method (Most transparent
method – India, US, Uk, Japan)
• 2. Fixed rate method (...
Appreciation of Rupee
• 1 $ = 45 Rs
• 1$ = 40 Rs
• This is Appreciation of Rupee.
• Economy becomes strong
• FII buys so R...
Depreciation of Rupee
• 1$ = 45 Rs.
• 1$ = 50 Rs.
• This is Depreciation of Rupee.
• Economy becomes weak.
• FII sells so ...
Example of Aviation industry
• Indian Aviation industry is worth $ 10 billion to
$ 12 billion
• Crude oil above $ 95 creat...
SROs
• Association of Merchant Bankers of India
(AMBI)
AMBI was granted recognition to set up professional standards
for p...
SROs
• Association of Mutual Funds of India
(AMFI)
• SEBI undertakes regular consultations with
members of AMFI on various...
SROs
• Association of Custodial Agencies of India
(ACAI)
• Following the notification of the SEBI (Custodians of Securitie...
SROs
• Registrars Association of India
(RAIN)
• The Registrars Association of India (RAIN) is a
self regulatory organisati...
Merits of Single Regulatory model
• Given the spate of these changes in the financial services sector,
great value may be ...
Demerits of Single Regulatory Model
• Inadequate Legal and Regulatory Foundations to support it
• Merger-related difficult...
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Gfm capital markets evolution

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Gfm capital markets evolution

  1. 1. Capital Markets ©2010 BSE Training Institute Limited 1
  2. 2. What is Stock Exchange • It is a platform where buyers and sellers meet • It provides a place to buy and sell shares • It acts as a bridge between demanders of fund and suppliers of fund • Channelize savings into investments ©2010 BSE Training Institute Limited 2
  3. 3. Participants • Govt. • Companies • Institutions • Retail Investors • Mutual Funds ©2010 BSE Training Institute Limited 3
  4. 4. History of Stock Exchanges • BSE first stock exchange started on 9th July 1875 • Known as “Native Shares and Stock Broking Association” • Membership fees was Rs. 1 • There were 318 members ©2010 BSE Training Institute Limited 4
  5. 5. Major reforms in capital Market • 1992 FII were allowed in india • 1993 Private Sector Mutual Funds were launched • 1996 First time SEBI came out with Guidelines for MF industry ©2010 BSE Training Institute Limited 5
  6. 6. Reforms cont • 1996 Depository act passed • 2000 Derivatives markets gets going • 2003 Commodities Market started • 2008 Currency futures market launched ©2010 BSE Training Institute Limited 6
  7. 7. Current scenario • Today 23 stock exchanges in India • Major ones BSE (Bombay Stock Exchange ) and NSE (National Stock Exchange) • NSE formed in 1994 ©2010 BSE Training Institute Limited 7
  8. 8. Daily Turnover of stock markets • BSE Cash segment Rs. 4000 crores • NSE cash segment Rs. 15000 crores • NSE FO Rs. 1,00,000 crores ©2010 BSE Training Institute Limited 8
  9. 9. Financial Markets • Financial Markets are the capital markets that is stock market • Stock market is known as “Barometer of the Economy” • Let us understand this statement • Companies listed on stock market represent corporate india • When there profit rises or falls ©2010 BSE Training Institute Limited 9
  10. 10. Stock market Barometer • It is indication that net profit of companies rises or falls • This means that sales have either gone up or down • This indicates demand has increased or decreased in economy • It has direct impact on stock market • Stock market ultimately reflects the sentiment in the economy ©2010 BSE Training Institute Limited 10
  11. 11. Financial Markets Classification • Capital Market is market for long term source of funds • Market having maturity of more than one year • Instruments like • Shares • Preference shares • Debentures • Bonds ©2010 BSE Training Institute Limited 11
  12. 12. Capital market and Economic Growth • US,UK,Japan have high economic growth due to developed Capital markets • Fund raising very easy activity ©2010 BSE Training Institute Limited 12
  13. 13. Money Markets • It is a market for short term source of funds • The maturity of these instruments is less than one year • Instruments like • T- Bills • Commercial Paper • Inter-corporate Deposit • Certificate of Deposit ©2010 BSE Training Institute Limited 13
  14. 14. Call Money Market • Liquidity management main object • 2007 Call money rate 0.25 % • 2008 call money rate 21 % • Currently call money rates 7.25 % to 7.5 % ©2010 BSE Training Institute Limited 14
  15. 15. What is IPO ? • It refers to Initial Public Offering • The company for the first time goes to public to raise the money • IPO market is also known as Primary market • Ex:- Coal India raised the money for Rs. 15000 crore ©2010 BSE Training Institute Limited 15
  16. 16. Why companies raise money through IPO ? • Money raised through IPO is ownership money • It need not be returned to shareholder unless company closes down • No interest is to be paid on this amount • No mortgage of property is required on this amount ©2010 BSE Training Institute Limited 16
  17. 17. Process of IPO • The company first goes to Merchant Banker Category I who has licence from SEBI • Merchant banker has the ability to raise the money from the market • Merchant banker are those who have networth of Rs. 1 crore • Eg:- karvy consultants, ENAM, SBI Cap ©2010 BSE Training Institute Limited 17
  18. 18. Process Cont • The Merchant Banker will prepare project report of the company • They will do two types of analysis • Quantitative • Qualitative ©2010 BSE Training Institute Limited 18
  19. 19. Process cont. • Based on both types of analysis the price range is decided by the Merchant Banker • For instance Coal India had price band of Rs. 225 to Rs. 245 • If promoters agree then the Prospectus is submitted to SEBI ©2010 BSE Training Institute Limited 19
  20. 20. IPO process cont • SEBI would give answer within 21 days • If no comment comes from SEBI within 21 days then IPO is said to be approved • If any comment comes then new prospectus is to be filled again ©2010 BSE Training Institute Limited 20
  21. 21. IPO process • Once the IPO gets SEBI approval the Merchant Banker goes for marketing of the issue • At least 90 % of the issue should be subscribed then only issue is considered as successful • If less than 90 % is collected then issue is considered as Fail and money has to be refunded ©2010 BSE Training Institute Limited 21
  22. 22. IPO process • In order to avoid failure of IPO • Companies also appoint Underwriter • Underwriter is also a company who gives the guarantee to buy the shares if the public does not buy • Eg:- Infosys IPO had failed but ENAM consultants were the underwriter who purchased the stocks and made the issues successful ©2010 BSE Training Institute Limited 22
  23. 23. What is FPO ? • It is Follow on Public Offer • It refers to company is already listed and for second time goes for raising money • For ex:- Power Grid raised Rs. 7000 crore from the market ©2010 BSE Training Institute Limited 23
  24. 24. Secondary Market • It is known as the Stock Market • Companies trade on the stock market • On BSE 6500 companies are listed • On NSE 2500 companies are listed ©2010 BSE Training Institute Limited 24
  25. 25. Regulation of Stock Market • It is regulated by SEBI (Securities and Exchange Board of India) • All the stock exchanges of the country are regulated by SEBI • All the matters related to scams in the stock market are looked after by this agency ©2010 BSE Training Institute Limited 25
  26. 26. Relationship between Primary and Secondary market • Both are inter related • If there is bull run in secondary market more IPO will come in Primary Market • If there is bear run in the secondary market then less IPO will come in Primary market ©2010 BSE Training Institute Limited 26
  27. 27. Years of IPO • 2007 saw maximum IPO as the market was in bull mode • 2008 there were no IPO after Reliance Power failure • 2009 again saw many IPO as stock market recovered ©2010 BSE Training Institute Limited 27
  28. 28. Classification of stocks • Large Cap stocks which have market cap greater than Rs. 9000 crore • Mid cap stocks which have market cap between Rs. 2500 to 9000 crore • Small Cap stocks which have market cap between Rs. 250 cr to 2500 Crores • Micro cap less than Rs. 250 crores ©2010 BSE Training Institute Limited 28
  29. 29. Another classification • A – Blue Chip stocks which are fundamentally very sound • B1 B2 which are sound but they are small in size. Normally known as Mid cap • T group refers to Trade to Trade and most risky as only delivery base trade allowed. These stocks have abnormal volatility ©2010 BSE Training Institute Limited 29
  30. 30. Another classification • S group stocks are small companies which are listed on Indonext exchange but traded on BSE • Z group stocks are those which are very risky as they may get delisted or suspended anytime by SEBI. ©2010 BSE Training Institute Limited 30
  31. 31. Global markets • US • Dowjones • NASDAQ (National Association of securities Dealer Automated Quotations) • EUROPE • FTSE (Financial Times Stock exchange) - London • DAX (Deutscher Action Index) - Germany • CAC (Cotation Assistee Qn Continu) - France ©2010 BSE Training Institute Limited 31
  32. 32. Cont.. • ASIAN MARKET • Nikkie 225 – Tokyo (Japan) • Strait Times – Singapore • SGX Nifty - Singapore • Hangsang – Hongkong • Taiwan Index – Taiwan ©2010 BSE Training Institute Limited 32
  33. 33. Cont.. • Shanghai Composite – China • KOSPI – Korea Composite Stock Price Index • Sensex - India • S&P CNX Nifty - India ©2010 BSE Training Institute Limited 33
  34. 34. What is neeed to Open trade in the equity market ? • 3 types of accounts required to trade in stock market • 1. Trading Account • 2. Demat Account • 3. Saving account in bank ©2010 BSE Training Institute Limited 34
  35. 35. How to open Demat Account ? • Documents Required • Pan card • Address Proof (Voter id, passport, bank statement, driving license) • Bank Statement • Photo pass port size • Cancelled cheque (if required) ©2010 BSE Training Institute Limited 35
  36. 36. Use of Trading & Demat Account ? • Trading account is used to actually put the buy and sell transaction • A code is generated and transactions are punched into that code • Demat accout is used to store the securities which are purchased. • Demat account is also a number which is known as Client ID. ©2010 BSE Training Institute Limited 36
  37. 37. How Exactly does trading take place ? • Once trading and demat accounts are opened. • The client will call the broker or sub broker • He will tell his trading code in which the transaction has to be kept • Once the transaction is done, the broker or sub broker will give confirmation to client about the trades done ©2010 BSE Training Institute Limited 37
  38. 38. How many types of trading are there ? • Two types of trading • Intraday trading • Delivery base trading • Intraday trading refers to doing buy and sell transaction in one day itself • In intraday, the profit or loss is settled by the way of difference only ©2010 BSE Training Institute Limited 38
  39. 39. Delivery base trading • Here the entire payment is made by the client • The securities are then transferred to the demat account of the client after the client makes full payment. • If client does not pay then securities are lying in pool account of broker. ©2010 BSE Training Institute Limited 39
  40. 40. Settlement Process • The payin and payout of funds and securities takes place on T + 2 basis • T is Monday so plus two working days means on Wednesday the payin of funds and securities will take place in the morning • Also on Wednesday the payout of funds and securities will take place in afternoon ©2010 BSE Training Institute Limited 40
  41. 41. Equity as Asset Class • Equity fulfills “Wealth Creation” Objective • Sensex has given 17.25 % CAGR return from 1979 to 2009. • Rs. 9500 invested in Infosys in 1993 has converted into Rs. 2 crore in 2007. ©2010 BSE Training Institute Limited 41
  42. 42. Stock Markets • Primary • Secondary ©2010 BSE Training Institute Limited 42
  43. 43. Stock Markets Regulatory Framework • Self Regulatory Bodies • SCRA 1956 & SCR Rules 1957 • Activities supervised by MoF • Perception that rights & Interests of Investors were ignored. ©2010 BSE Training Institute Limited 43
  44. 44. S E B I • SEBI act passed in April 4,1992. Functions • To protect the interest of investors • To promote the development of & regulate the securities market. ©2010 BSE Training Institute Limited 44
  45. 45. Role of SEBI • Regulate the Business in SE’s • Register & Regulate intermediaries, collective investment schemes (incl. MF’s) • Promote & regulate SRO’s • Prohibit unfair & fraudulent trade practices • Promote investor education & Training • Prohibit Insider trading ©2010 BSE Training Institute Limited 45
  46. 46. Role of SEBI……. contd • Regulate substantial acquisition of shares & take over of companies • Inspection/Audit of intermediaries & SRO’s • Any other function as provided under the SCRA 1956, as delegated by the govt. ©2010 BSE Training Institute Limited 46
  47. 47. Measures initiated by SEBI • Capital Adequacy norms for Brokers • Intra day trading limits • Gross Exposure limits • Margins • Surveillance systems at SE’s • Circuit Filters • Inspection of Stock Exchanges ©2010 BSE Training Institute Limited 47
  48. 48. …..contd • Client Broker relationship • KYC • Registration of Sub brokers & brokers • Increasing trading hours • Introduction of Derivatives Trading • Rolling Settlements • Dematerialistaion ©2010 BSE Training Institute Limited 48
  49. 49. ….contd • Computerization of Exchanges • Internet trading ©2010 BSE Training Institute Limited 49
  50. 50. Role of exchanges • To promote develop & maintain a well regulated market for dealing in securities • To safe guard interest of members & investing public having dealings on SE • Promote industrial development through efficient resource mobilization by way of investment in corporate securities • Establish & promote honourable & just practices in securities transactions. ©2010 BSE Training Institute Limited 50
  51. 51. Instruments available • Equity • Debt • Derivatives • Mutual Funds • Commodities ©2010 BSE Training Institute Limited 51
  52. 52. Equity • Preference Shares • Equity shares ©2010 BSE Training Institute Limited 52
  53. 53. Debt • Debentures • Bonds ©2010 BSE Training Institute Limited 53
  54. 54. Derivatives • Futures- Index / Stock • Options- Call / Put ©2010 BSE Training Institute Limited 54
  55. 55. Risk Return Profile Risk Return Equity High High Debt Low Low Derivatives Moderate High ©2010 BSE Training Institute Limited 55
  56. 56. Conclusion • Need for market regulator • SEBI regulates the markets to help them modernize & grow • Exchanges bring on best practices • Various Investments products available according to the risk appetite of investor. ©2010 BSE Training Institute Limited 56
  57. 57. Other Regulatory Bodies • Indian Financial system governed by various regulatory bodies • RBI • AMFI • IRDA • PFRDA • FMC - Forward Markets Commission • FSDC - Financial Stability and Development Council ©2010 BSE Training Institute Limited 57
  58. 58. RBI • Reserve Bank of India • Apex body for regulation of Banking Sector • GTL merged with OBC by RBI for protection of depositors • CAR of 9 % compulsory ©2010 BSE Training Institute Limited 58
  59. 59. AMFI • AMFI – Association of Mutual Funds of India • Advisory body for mutual funds • Represents MF industry before the Government ©2010 BSE Training Institute Limited 59
  60. 60. IRDA • IRDA – Insurance Regulatory Development Authority • Controls the Insurance sector • ULIP issue taken up by IRDA ©2010 BSE Training Institute Limited 60
  61. 61. FDSC • FSDC – Financial Stability Development Council • Chairman is Finance Minister Himself • It solves the Inter-Regulatory Tussle between the various bodies • Recently SEBI and IRDA had tussel ©2010 BSE Training Institute Limited 61
  62. 62. Japan and UK Model • Japan has Financial Services Agency • UK has FSA – Financial Service Authority • Both have single regulatory model ©2010 BSE Training Institute Limited 62
  63. 63. Debt Market • Debt Instruments are those who have fixed rate of return • They create financial obligation on the issuer • The issuer has to repay the principal and the interest amount ©2010 BSE Training Institute Limited 63
  64. 64. Debt Equity Ratio – The CRUX • This ratio shows the DEBT component in the capital structure of the company • Higher Debt always creates problem • SUB PRIME Crisis is the best example that high debt has led to Recession in the world ©2010 BSE Training Institute Limited 64
  65. 65. SUB PRIME CRISIS • In 2001, WTC attack • USA was to face recession as no one wanted to go to USA • FEDRAL RESERVE reduces the interest rates from 5 % to 1 % • Banks gave $ 3.3 trillion in loans • NINJA loans means No Income No Job No Asset ©2010 BSE Training Institute Limited 65
  66. 66. SUB PRIME CRISIS Cont.. • In 2007, time of Repayment • Huge defaults • Large number of houses came for auction • Reduced the prices of houses more than 70 % • 108 banks filed for Bank Ruptcy • FII went to sell off mode due to liquidity crisis ©2010 BSE Training Institute Limited 66
  67. 67. Debt Equity Ratio • Most important ratio after Global Recession • Sub Prime taught best lesson that debt should be under control • Ideal ratio not more than 2:1 • DLF, Unitech had ratio of 8:1 • Aban offshore had 16:1 • Wockhart also had same problem • It should always be low ©2010 BSE Training Institute Limited 67
  68. 68. Types of Debt Instruments • Fixed Deposits • Bonds • Debentures • NSC • KVP • PPF ©2010 BSE Training Institute Limited 68
  69. 69. Risk in Debt Market • Credit Risk • Inflation Risk • Interest Rate Risk ©2010 BSE Training Institute Limited 69
  70. 70. Credit Rating • CRISIL 1987 • ICRA 1991 • CARE 1993 • IPO Grading has also been started • R power issue classic case ©2010 BSE Training Institute Limited 70
  71. 71. Global Credit Rating Agencies • Standard and Poor • Fitch • Moody ©2010 BSE Training Institute Limited 71
  72. 72. Forex Markets • Currency Trading has now started in india • Participants • Banks • MNCs • NSE and MCX offer trading platforms ©2010 BSE Training Institute Limited 72
  73. 73. Exchange Rates • Exchange Rate lot more than an mere number • Currency appreciates and Depreciates • Appreciation refers to strengthening of currency that is economy is strong • Depreciation refers to weakening of rupee that is economy is weak • Currency futures now traded on Stock market ©2010 BSE Training Institute Limited 73
  74. 74. Types of Exchange Rate • 1. Demand Supply Method (Most transparent method – India, US, Uk, Japan) • 2. Fixed rate method (China) • 3. Snake in the tunnel (European union) • 4. Dirty Float Method (Central bank) • 5. Hybrid method (Central bank along with demand supply method) ©2010 BSE Training Institute Limited 74
  75. 75. Appreciation of Rupee • 1 $ = 45 Rs • 1$ = 40 Rs • This is Appreciation of Rupee. • Economy becomes strong • FII buys so Rupee becomes strong • IT, Textile and Exports get harm due to appreciation of rupee ©2010 BSE Training Institute Limited 75
  76. 76. Depreciation of Rupee • 1$ = 45 Rs. • 1$ = 50 Rs. • This is Depreciation of Rupee. • Economy becomes weak. • FII sells so Rupee becomes weak • IT, Textile and Exports benefit due to depreciation of rupee • Oil we import 73 % ©2010 BSE Training Institute Limited 76
  77. 77. Example of Aviation industry • Indian Aviation industry is worth $ 10 billion to $ 12 billion • Crude oil above $ 95 creates big problem for the aviation industry • It starts making losses in big way • When rupee depreciates it creates further problem as we import crude oil • Industry debt equity is 5:1 ©2010 BSE Training Institute Limited 77
  78. 78. SROs • Association of Merchant Bankers of India (AMBI) AMBI was granted recognition to set up professional standards for providing efficient services and establish standard practices in merchant banking and financial services. It was promoted for healthy business practice and to exercise overall supervision over its members in the matters of compliance with statutory rules and regulations pertaining to merchant banking and other activities. AMBI in consultation with SEBI is working towards improving disclosures standards in the offer document as well as meeting the statutory requirement in a systematic manner. ©2010 BSE Training Institute Limited 78
  79. 79. SROs • Association of Mutual Funds of India (AMFI) • SEBI undertakes regular consultations with members of AMFI on various issues affecting mutual funds. • In February 1997, SEBI held a meeting with trustees of all mutual funds to discuss with them their responsibilities for prudential oversight of mutual funds in the light of SEBI (Mutual Funds) Regulations, 1996. ©2010 BSE Training Institute Limited 79
  80. 80. SROs • Association of Custodial Agencies of India (ACAI) • Following the notification of the SEBI (Custodians of Securities) Regulations, 1997, custodians of securities registered an association, ACAI. • To streamline custodial practices and to ensure that custodians do not function in isolation from the clearing and settlement systems. • ACAI has also highlighted to SEBI from time to time difficulties encountered by custodians on behalf of their clients who are mainly foreign institutional investors, domestic mutual funds, financial institutions, corporates and high net worth individuals. ©2010 BSE Training Institute Limited 80
  81. 81. SROs • Registrars Association of India (RAIN) • The Registrars Association of India (RAIN) is a self regulatory organisation set up for registrars to an issue and share transfer agents ©2010 BSE Training Institute Limited 81
  82. 82. Merits of Single Regulatory model • Given the spate of these changes in the financial services sector, great value may be obtained by having a single financial sector regulator that has the wide remit to cover prudential regulation, conduct of business rules, market regulation and consumer protection. • The traditional regime of multiple regulators suffers the significant drawback of duplication of functions, roles, responsibilities leading to conflicting treatments for indistinguishable products and services, regulatory gaps and black-holes and reduced efficiency in regulating financial markets and their participants. • Efficiency • Single entity benefits • Matching accountability with resources ©2010 BSE Training Institute Limited 82
  83. 83. Demerits of Single Regulatory Model • Inadequate Legal and Regulatory Foundations to support it • Merger-related difficulties • Spread As Opposed to Depth – while multiple regulatory model will have more focus the single regulatory model will have broader objectives • Diluted Regulatory Capacity • Lack of Regulatory competition ©2010 BSE Training Institute Limited 83
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