Capital Market Services

Content

Introduction Merchant Banking Underwriters Stock Brokers Credit Rating Conclusion

Introduction to Capital Market Meaning & concept of Capital Market Capital Market is one of the significant

market of every financial market. Broadly speaking Capital Market is a

market for financial assets which have long or identified maturity.

Unlike Money Market Instruments the capital market instruments become mature for the period above one year.

It is an institutional arrangement to borrow and lend money for a long period of time.

It consist of financial institution like IDBI, ICICI,UTI,LIC. etc.

These institutions play the role of lenders in the capital market.

Business Units and the Corporate are the borrowers in the capital market.

Capital Market provides long term debt and equity finance for the government and the corporate sector.

Capital Market mainly covers four services.

Merchant Banking Underwriters Stock Brokers Credit Rating Agencies

Merchant Banking

Meaning & Concept of Merchant Banking

Merchant Banking is a combination of Banking and consultancy services.

Consultancy means to provide advice, guidance and services for fee.

It provides consultancy to its clients, for financial, marketing,managerial and legal matters.

It helps a business man to start a business. It helps to raise finance

It helps to expand and modernise the business. It helps to restructuring of business. It helps to revive sick business units.

It also helps companies to register, buy and sells shares at the stock exchange.

In short Merchant Banking provides wide range of services for starting until running a business.

It act as Financial engineer of business.

Historical Background (13th century)

The word “Merchant Banking” oriented with Dutch and Scottish businessmen.

Merchant Banking developed and professionalized only in Britain.

In the 13th century family owned firms engage in costal trade and finance were spread through the European Continent.

These firms besides their commercial activity were engaged in Banking activities also.

The another activities of merchant banks was the rising capital for foreign government.

The merchant banks trading in countries had gained confidence of the governments and they entrusted with the issuing of bonds in the London Markets.

Statutory provisions of Merchant Banking

A merchant Banker has been defined by SEBI (Merchant Bankers) Rules 1992 as “Any person who is engaged in the business of issuing management either by making arrangement regarding selling, buying or subscribing rendering corporate advisory services in relation to such issue management”

Regulatory Frame-work

Merchant banking was first started in India in 1967 by Grindlays Bank. It has made rapid progress since 1970.

The Merchant Banking activity is governed by SEBI (Merchant Bankers) Regulations 1992.

Registration with SEBI is mandatory to carry out the business of Merchant Banking in India.

An applicant should comply with the following norms:

The applicant should be a corporate body.

The applicant should not carry on any business other than those connected with the security market.

The applicant should have necessary infrastructure like office, space, equipment and manpower etc.

The applicant must have at least two employees with prior experience in merchant banking.

Any associate company, group company, subsidiary or inter connected company of the applicant should not have been registered a merchant banker.

The applicant should not have been involved in any securities scam or proved guilt for any offence.

The applicant should have a minimum net worth of Rs. 50 million

Functions of Merchant Banking

Underwriters

Meaning & Concept of Underwiting

Underwriting is an agreement, entered into a company with a financial agency, in order to ensure that the public will subscribe for the entire issue of shares or debentures made by the company.

The financial agencies known as “Underwriter” and it agrees to buy that part of the company issues which are not subscribed to by the public in consideration of a specified underwriting commission.

The underwriting agreement, among others must provide for the period during which the agreement is in force, the amount of underwriting obligations, the period within which the underwriter has to subscribe to the issue after being intimated by the issuer, the amount of commission and details of agreements.

The underwriting commission may not exceed 5% on shares and 2.5% in case of debentures.

Underwriters get their commission irrespective of whether they have to buy a single security or not.

Historical Background

According to Mr. A.K.Sur, underwriting had its beginning in India only in 1912.

When M/S O.Batliwala and Karni underwrote the shares of the Central India Spinning and Weaving co. ltd. It was only after world war 1 when a few firms took up underwriting job.

Underwriting gained popularity after 1955 particularly after the setting of the ICICI in January 1955.

In the year of 1964 two financial institutions IDBI and UTI were formed.

Functions of Underwriters

Purchase of securities Distribution of securities Supplying information of companies Exchange in securities

Statutory Provision of Underwriters

Underwriter under 2(g) has been defined SEBI (underwriters) rules and regulations 1993 as, “an agreement with or without conditions to subscribe to the securities of a body corporate when the existing shareholders of such body corporate or the public do not subscribe to the securities offered to them.”

Regulatory Framework [SEBI (Underwriters) Regulation 1993]

Application for grant of certificate (sec.3) Furnishing of further information, clarification etc. (sec.

4) The Board, If require the applicant to appear before the

board (Sec.4(b)) Application to confirm the requirements (sec. 5) Capital Adequacy of underwriters should be exceed Rs.

20 Lakhs (Sec.5(d) Consideration of application (sec.6) Grant of certificate of initial registration (sec. 8) The board issued certificate in one month 8(1) Validity of initial Certificate is 5 years 8(2) Applicant has to apply for Permanent Certificate 8(4) Grant of certificate of permanent registration (sec. 8A)

Types of Underwriting

Syndicate Underwriting:- is one in which, two or more agencies or underwriters jointly underwrite an issue of securities. Such an arrangement is entered into when the total issue is beyond the resources of one underwriter or when he does not want to block up large amount of funds in one issue.

Sub-Underwriting:- is one in which an underwriter gets a part of the issue further underwritten by another agency. This is done to diffuse the risk involved in underwriting.

Firm Underwriting:- is one in which the underwriters apply for a block of securities. Under it, the underwriters agree to take up and pay for this block of securities as ordinary subscribers in addition to their commitment as underwriters. The underwriter need not take up the whole of the securities underwritten by him. 

Stock Brokers

Meaning of Stockbroker

A stockbroker is an individual who is especially trained and certified to participate in the securities markets on behalf of clients.

The stock broker has a dual role, that of principal and agent.

When stockbroker acts as an agent for the buyers and sellers of the securities,

A commission is charged for this service.

As an agent, the stock broker does not own the securities but is merely performing a service for the investor.

This means that the broker will buy for the buyer and sell for the seller, each time making sure that the best price is obtained for the client.

In the capacity as the principal, the stockbroker owns the securities and trade from this stock.

Stockbrokers in India

India infoline ICICI direct Share Khan India bulls Angel Broking HDFC Reliance Money Religare etc….

Statutory provision

Under, (Stock broker & Sub brokers) (2nd Amendment) Regulations 2006 stockbroker has been defined under sec 3(gb) as “stockbroker” means a member of a stock exchange and stock exchange has been defined under clause (ga) “stock exchange” means a stock exchange which is for the time being recognized by the central government or by the board.

Under Sec. 4 of the Securities Contract (Regulation) Act 1956 (42 of 1956) stockbroker is a member of recognised stock exchange who buys or sells or deals in securities.

To work as a stockbroker registration with SEBI is mandatory.

SEBI is empowered to imposed conditions while granting the certificate of registration.

Procedure of registration of broker and Sub-broker

Application for registration of stockbroker (Sec. 3) Furnishing of information, clarification (Sec.4) Consideration of Application (Sec.5) Eligible to be admitted as a member of stock exchange

5(1) Conditions of registration (Sec.6A) Member of stock exchange 6(1) He shall be abide by rules & regulations of stock

exchange which are applicable to him 6(2) Change in constitution sec 6 (3) then prior permission

from stock exchange is required by paying prescribed fees sec6 (4)

Conditions of registration of sub broker (Sec.11) Get certificate from stock exchange Sec 11(1)

Credit Ratting

Meaning & Concept

The term “Credit Rating” comprise two words.”Credit” and “Rating”.

“Credit” is trust in a person’s ability and intention to pay or reputation of solvency and honesty.

“Rating” means estimating worth or value of; or to assign value or to classifying person’s position with reference to particular subject matter.

Credit rating is a symbolic indicator of the current opinion of the ability of the issuer to the service debt obligations in a timely fashion with reference to the instrument being rated.

Historical Background

Credit rating had its origin in the financial crisis of the U.S in 1837.

The first mercantile agency was set up in 1841 in New York to rate the ability of merchants to pay financial obligations.

In 1916, Poor’s publication published their first rating. This was followed by standard statistics company in 1922.

These two were merged in 1941 to form “Standard & Poor’s” which was subsequently taken over by “McGrow Hill” in 1966.

A number of Credit Agencies were set up in 1970s.

These included the Canadian Bond Rating Services. Thompson Bankwatch, Japanese Bond Rating Institute, McCrathy Cristani and Maffei.

Credit Rating Agencies inIndia CRISIL, Credit Rating Information Services

of India Ltd. From a pioneering step taken in 1987, to playing an integral role in India’s Development Milestones.

CRISIL has emerged as India’s Leading Ratings, Research Risk and Policy Advisory company.

CRISIL has rated over 750 debt instrument issued by 557 companies.

It has started rating the debt instruments of banks and has already rated four public sector banks and one private sector bank, IDBI & EX-IM bank

CARE, Credit Analysis & Research Ltd. (CARE) incorporated in April 1993, is a Credit Rating, Information & advisory services company promoted by IDBI, Canara Bank, UTI and other leading banks and financial services companies.

ICRA, Investment Credit Rating Agencies of India Ltd.(An Associate of Moody’s investor’s service) was incorporated in 1991 as an ideppendent and professional company.It also rates long term and short term instruments.

Procedure of Registration of Credit Rating Agency. SEBI (credit rating agencies) Regulation 1999

Application for grant of certificate (Sec.3) Promoter of credit rating agency. (Sec.4) Eligibility criteria (Sec.5) Furnishing of information, clarification and

personal representation (Sec.7) Grant of certificate of initial registration

(Sec.8) Grant of certificate of Permanent registration

(Sec.8A) Conditions of certificate and validity period

(Sec.9)

Conclusion

After discussing the main capital market services and their regulations its concluded that the capital market services played significant role in driving economic of our country and made our presence felt in international arena.

Our regulatory framework has effectively controlled the functions of intermediaries like Merchant Banking, Underwriters, Stock Brokers and CRA through transparent procedure.

The market structure of our country is very vibrant and is founded on strong economic principles. This has enabled us to find a place of respect in International Market.