Sharemarket basics

1. Debt vs Equity
2. OFCD
3. How is SENSEX
calculated?
4. Types of companies:
public ltd, pvt.ltd,PSU
Corporate scams:
1. Sahara, NSEL, MCX,
Bhave CBI PE?
2. regulatory sector-
reforms?

Corporate Taxation
1. Vodafone CGT,
Transfer pricing,
Netherland BIPA,
DTC, GAAR?
2. Nokia Royalty tax?
India Finland DTAA?
Microsoft Deal?
1
Todays Topics
Share Market Basics
2
Debt
Rs. 1000 @8%; 10 years
Fixed income;
Irrespective of profit
Bonds, debentures, loan,
ECB
Creditor to company
First claim during
liquidation

3
Equity
Securities: Debt vs Equity
4
Equity
*** % of shares out of
100%
Dividend from profit
IPO, Shares, VCF,
Angel Investor
Ownership
Last claim during
liquidation
5
Securities: Debt vs Equity
Debt =Interest
6
Equity = Dividend
Securities: Debt vs Equity
Slowdown Boom
Optionally fully-convertible debentures
(OFCD)

7
OFCD
Debenture
Shares
Company (Maalik)
Interest Paymentx
Only profit share
No profit= no dividend
Higher profit=> Bigger
dividend
8
Investor (Juntaa)
OFCD
Debenture Shares (Equity)
Debenture holders of a company are its:
A.Shareholders
B.Directors
C.Debtors
D.Creditors

9
UPSC 2003
Right answer
1. Skip 2. Attempt 3. Mark n Review
SENSEX calculation?
10
11
SENSEX calculation: 1979
30k with
Mallya
70k with
public
Free float Market cap
(FFMC)
=Price of each share x
total # of shares with
public.
=10 x 70,000
=7,00,000 Rs. (1
st
Jan
1986)
12
Shares with public (1986)
13
Bull
Hopes that prices will
rise,
Hence purchases.
Fears that prices will
fall,
Hence sells.
14
Bear
Types of investors
Free float Market cap
(FFMC)
=Price of each share x
total # of shares with
public.
=2000 x 70,000
=14,00,00,000 Rs.
(2014)
=14 crore. (2014)
15
Shares with public (2014)
(FFMC @Present / @base year) x 100
(@2014 /@1986) x 100
(14 Crore/ 7 lakh) x 100
20,000 = SENSEX
In real SENSEX: total FFMC of thirty
companies.
16
BSE-SENSEX Formula
1. Axis Bank
2. Bajaj Auto
3. Bharat Heavy Electricals
4. Bharti Airtel
5. Cipla
6. Coal India
7. Dr.Reddy's Laboratories
8. GAIL (India)
9. HDFC Bank
10. Hero MotoCorp
11. Hindalco Industries
12. Hindustan Unilever
13. HDFC
14. ICICI Bank
15. Infosys
1. ITC
2. Larsen & Toubro
3. Mahindra and Mahindra
4. Maruti Suzuki India
5. NTPC
6. ONGC
7. Reliance Industries
8. Sesa Goa
9. State Bank of India
10. Sun Pharmaceutical Industries
11. Tata Consultancy Services
12. Tata Motors
13. Tata Power Company
14. Tata Steel
15. Wipro
17
BSE-30 companies
Sensex =Sensitive + Index.
ASIA oldest: Bombay Stock Exchange
(1875)
Worlds Oldest: Amsterdam Stock exchange
(1602) Netherlands

18
BSE-SENSEX Formula
Paper share
delivery problem.
Fear of theft.
Transfer delay
Dematerialization (mid-90s)

19
Dematerialization: DEMAT
CSDL
NSDL
Depository
SBI
HDFC
ICICI
Dep.
Participant
You
Customer
20
Demat System
Financial
inclusion
#PAN
#DEMAT
Company
Public Ltd.
7-unlimited
Min.paidup 5 lakh
Private ltd.
2-50
1 lakh
21
Types of companies
Company
Public Ltd.
Listed
Vodafone India.
Unlisted
Nokia India
Private ltd.
22
Types of companies
Listed
Shares, IPO, Bonds,
Debentures traded
@Stock Exchange
Public offer/
Issue=>SEBI
Offer OPEN
Equity (IPO)=> 15-30
days
Debt (Bond/OFCD)=> 3-
10 days

Private offer (2-50)
=>Corporate Affairs
SC: >50
investors=>Public Offer
=> SEBI.

23
unlisted
Public ltd. Companies: Listed vs Unlisted
24
Infosys
Reliance
industries Ltd
(Holding)
Delight protein
Ltd. (Subsidiary)
Gujarat Urja Vikas
Nigam Ltd. (GUVNL)
(earstwhile GEB)
Gujarat State
Electricity
Corporation Limited
(subsidiary)=>Ukai,
GNR, Kadana,
Dhuvaran thermal
plants
25
Holding Vs Subsidiary
Government
companies
ONGC, SAIL, Coal India
ltd.
Registered under
Companies Act
Government owns >50%
shares
Majority BoD.
Employees Not public
Govt.
CAG appointed pvt.
auditors
LIC, Air India, IDBI, UTI
Act of Parliament / State
Legislature
Wholly financed by
Government
all BoD.
Employees Not public
Govt.
Directly by CAG (some
exception)


26
Public Corporation
PSU = RTI applies
commercial activity such as engineering,
manufacturing etc.
directly controlled by the government, just like
any other department
Indian Railways, postal Department.
not registered as companies under the
companies act
Employees = Government servant
Directly CAG
RTI applies.



27
Dept.undertaking =NOT PSU
SEBI Sahara
OFCD
28
Sahara Housing Investment Corporation
(unlisted)
Sahara India Real Estate Corporation
(unlisted)
Issue OFCD for more than TWO Years (3-
10 days)
>2 crore people (50 people)
>24,000 crores
29
2008-11: Game begins
SEBI (2011)
Stop OFCD
Refund $$ + 15% interest
Give proof of Refund
Untraceable Account=>Govt.

SAT (2011)
Upheld SEBI order

SC (2012)
Upheld SEBI order
SAHARA
- Only refunded ~5k
- Refused to give details
(TRUCK)
- contempt
30
Case begins
SEBI act: All CIS,
Except
1. Nidhi
2. Chit Funds
3. Co-operatives


SAHARA arguments
Unlisted companies
Under Corp. Affairs
SEBI= only listed Co.
Need time to Refund
31
Arguments
32
MONEY LAUNDERING
33
Before KYC norms (2002)
2002 KYC
34
REFUND??
Untraceable
Only 5000 cr.
=to Govt.
2013=> March 2014
Raid, attach,
Arrest for non-compliance
Fund gathered >100 Cr. = under SEBI. 50
investors, CIS
Fast track court, info.-exchange with foreign
agencies


35
SEBI Ordinance
1992: Securities and Exchange board of
India (Statutory Body)
1999: Amendment- CIS brought under SEBI.
(Except Nidhi, Chit fund a and cooperatives)
2002: powers of search and seizure.
2005: Patil Committee
SEBI = corporate bond
RBI = Repo and Reverse repo
(Government securities)

36
SEBI: a Brief History
PAN card
PAN: 10 digit
alphanumeric number
By Income Tax
department
12 digit unique number
By Unique
Identification Authority
of India (UIDAI)
37
UID number
cards
PAN card
All residents
Doesnt change with
address
Same.
38
UID number
cards
PAN card
No minimum /
maximum age limit.
No biometric data
except photo.
~Rs100 fees

Less 3 years=>
biometric infoX
Eye, photo, finger-print
No fees.
39
UID number
cards
PAN card
individual, firm, joint
venture
all residents and NRI
Only individual
all residents and NRI
40
UID number
cards
NSEL Crisis
1. What is commodity trading?
2. Why NSEL Crisis?
3. Steps taken?
4. Long term solution?
1. METAL: Aluminum, gold, silver
2. AGRI: castor seeds, cotton, wheat, basmati,
jeera
3. ENERGY: Oil, coal
Commodity Market
2 Month Rent: Rs. 200
LOAN
2 Month Rent: Rs. 200
T+1 = Rs. 1000/Qt.
T+35 = Rs. 1800/Qt.
2 Month Rent: Rs. 200
T+35 = Rs. 1800/Qt.
2 Month Rent: Rs. 200
Broker
Investors
2 Month Rent: Rs. 200
Broker
Investors
Profit
Collateral / Guarantee T+35 ; T+45
Broker
Investors
Profit
Collateral / Guarantee
2008:
Govt. Permitted
T+20 ; T+30
Dematerialized form
Broker => warehouse receipt =>Contract
Brokerage
NSEL commission: 2,000 Cr (2009) => 3
lakh Cr. (2013)
E-series
Broker
Investors
Profit
FMC
T+10
Inflation, irregularity
July 2013
FMC orders T+10
NSEL directed all brokers / investors to settle
T+10
Brokers: Motilal Oswal, Indian Infoline => Rs 700
crore.
>Rs.5000 crore contracts
>15000 Investors
Crisis beings: July 2013
NSEL: weekly settlement of dues
Will auction from warehouses
Weekly Rs.100 Cr. (Auction)
Total 5600 Cr.
Not enough stock, fake receipt
Crisis : August 2013
Government banned E-series system
FMC investigation
Arvind Mayaram Panel (PM)
FMC (Consumer Affairs)=> Finance Ministry
IT Dept. => NSEL allied companies
Steps Taken
FMC => give more teeth
Hand over to SEBI
Reforms necessary?
CBI PE against Bhave
MCX-SX
Jignesh Shah

FTIL
NSEL
Commodity Exchange
NAFED
License
2008
MCX-SX
Stock Exchange
Currency Deri.
CB Bhave (2008-13) SEBI Chairman
KM Abraham: SEBI board member
2007: Jignesh Shah IT raid (MCX, FTIL)
2008: Jignesh Shah (FTIL) applies for MCX-
SX license (SEBI)
Finance ministry 2SEBI dont until
investigation over
August 08: Bhave (SEBI) gives license
CBI Preliminary inquiry (PE)
Fit and Proper
SEBI
Insolvent
Not Convicted
Character- reputation
.
IT Raid = Not Fit and
proper
Jignesh Shah / MCX-
SX..dont.

CBI
FIT and Proper
1. NSE dominant player in Currency Der.
2. BSE unable to compete
3. Needed competition
4. Wrote letter to IT about Status
5. IT replied: no merit in case.
6. SEBI legal team: no conviction
7. NSEL crisis @FMC
8. MCX-SX running separately.
9. Character certi. From Vinod Rai, GK Pillai.
10.PE inquiry should not be released in media.
CB Bhaves Defense
(FMC order): Jignesh +
FTIL not fit & proper
to run any exchange
SEBI ordered FTIL to
sell shares of MCX-SX
SEBI can cancel
license.
Future of MCX-SX?
After thoughts
SEBI-Sahara-OFCD
NSEL Crisis
Banking Finance(SEBI) Insurance(IRDA) NPS
In house SCORES Inhouse NSDL
B.Om SEBI I.Om PFRDA
Consumer
court
SAT
Consumer
court
Consumer
Court
Court Supreme court Court Court
Delays
6 primary regulators
RBI, SEBI, IRDA, PFRDA, EPFO, and FMC
NABARD, SIDBI, NHB are also involved in
regulation
6 Central ministries + State Govt.
Consumer courts also involved.
Lack of coordination, loopholes
Lack of coordination
FSLRC (FinMin) 11-13
Nachiket Mor (RBI) 13-
14
Regulatory Reforms: Committees
FSLRC: Present vs Future Agencies
RBI
RBI
Debt Mgmt
SEBI
FMC
IRDA
PFRDA
UFA
SAT
FSAT
FRA
Financial Redress Agency (FRA)
For all six regulator RBI, SEBI, IRDA,
PFRDA, EPFO, and FMC
FRA: not an individual
Board of directors
Powers of Consumer courts
Similar body @State level:
MFI-NGO, Chit-fund, Local moneylender.
Nachiket
Customer complaints against bank
From UK => India 1995
RBIs general managers => 3 years => No
reappointment
Except J&K
68
Banking ombudsman
69
Jurisdiction of BO?
Loan giving
Only matters
upto Rs.10
lakh
Abad BO
Guj + Diu,
Daman,
Haveli
(Bombay)
1. Saradha Chitfund scam?
2. Gujarat (Abhay Gandhi, Zahir Rana, Ashok
Jadeda)? [Fin.inclusion, education?]
3. Jignesh Shah=> Ketan Parekh, Harshad
Mehta
4. what lessons we learnt from these crisis?
5. what steps should be taken to avoid repetition
of such crisis in the future?
6. Do you existing Indian laws and regulators
are capable enough of handling such crisis in
the future?
7. FMC should be merged with SEBI?

Assignment